WithSecure Oyj (WITH) Earnings Call Transcript & Summary

Good afternoon. I'm Henri Kiili, responsible for Investor Relations of F-Secure. So welcome to F-Secure Q4 audiocast. CEO, Samu Konttinen and CFO, Eriikka Söderstrom will now walk you through the presentation. Samu, So please go ahead.

Thank you, Henri. So I will go through the Q4 2019 interim reports, the highlights, and then we will open it for questions at the end. So the key takeaways from Q4 is that our corporate security products grew by 5% compared to same quarter a year ago. That corporate security domain, in this case, includes our managed detection and response solution. And also our endpoint protection solution, practically combining endpoint protection and our endpoint detection and response solutions. So the suite consisting of both of these. So that grew by 5%, and I will dig into more details at the -- later on in the presentation. Cyber security consulting, we had a quite good quarter. We are definitely pleased with the 16% growth there. The consumer business continued at the previous year's level, and on the profitability side, the adjusted EBITDA, very much according to our expectations, resulting to a 12% margin. And definitely one of the key events within Q4 was that we completed the restructuring of the F-Secure as we completed the MWR InfoSecurity acquisition-related integration. We reorganized most parts of F-Secure to best reflect the varying customer segments, different value creation and operating model across our different businesses, and to have an improved focus on serving those different customer segments optimally. Now going to some of the key financial highlights. So the revenue grew to -- the revenue for the quarter was EUR 56.1 million and 4% change compared to a year ago and the full year resulted to EUR 217.3 million revenues and having a 14% change compared to the year before. Consumer security on the Q4, EUR 23.4 million and 2% negative compared to a year ago, whereas the full year was at the previous year's level, resulting to EUR 94.8 million. And then the corporate security grew 10% in Q4, landed EUR 32.7 million. And for the full year, EUR 95.9 million and 28% growth year-on-year. On the adjusted EBITDA, on the Q4, we delivered EUR 6.6 million, which is a 36% improvement from the year before. And for the full year, we delivered EUR 23.2 million, which is a 33% improvement from the year before. So these are the key financial metrics of the quarter. Now bit more details about the corporate security. So I'm very pleased with the endpoint protection suite renewal performance. So that speaks very highly of our product quality, on the services quality and overall, the customer satisfaction as we are tracking really well against our targets. How do we -- how are we renewing our existing customer base? On the challenging side, so on the new sales, this was a bit below our expectations. And mainly, we are seeing softness in 2 of our main markets in Finland and Japan. So that's something that we are looking at very closely, and we have sufficient action plans in place to mitigate the challenges. But the softness in the new sales is also partly explained through the termination of nonstrategic products. So we haven't disclosed the exact euro value of the size of this discontinued businesses, but we've mentioned them representing a couple of percentage points of the total. So just to give you an idea on the ballpark. On the managed detection and response solutions. So we continue witnessing a very good traction in the market. We are very happy with our competitiveness. We are repeatedly winning against many of the other most recognized and reputable vendors in this industry with F-Secure Countercept. We are winning customers in many very demanding industry verticals such as finance, logistics, critical infrastructure and professional services. And so -- and on the [ GR ], mix-wise, the new deals were mainly originated in this quarter from Belgium, Germany, Finland and France, whereas throughout the whole year, we are seeing a very good coverage as we have landed managed detection and response service deal across most of our geographies around the world. So that's the managed detection and responses in short and definitely continues being one of our key investment areas, and in areas where we expect to see -- continuing a good growth basically that we are already witnessing. On the cyber security consulting, our revenue grew 16% compared to the same quarter year before, so we are quite happy with the performance. A couple of highlights there, definitely would be a very strong performance that we see in Singapore. So we are really performing exceptionally well in that market. And just overall, not only Singapore but across other significant financial hubs worldwide, London and New York. So we continue expanding our footprint with many of the largest finance organizations in the world and overall, just the consulting performance in the U.K., U.S. in the Nordics was definitely meeting the mark for Q4. What comes to the overall kind of a competitiveness and working closely with the customers. High level, the utilization rates were somewhat soft in Q4, which was one of the reasons as we previously lowered our guidance for the Q4 B2B revenue growth. And this is something that we are looking how to get back on track on 2020. And as we've said before, our view going forward is to continue seeing this as a growth opportunity, a growth market, and we are -- we fully believe that we have the capabilities and the delivery teams in place to continue growing this business, whereas we will be looking how to drive more profitability view across some of the locations where we already have bigger teams. Whereas in some of the smaller sites, we will continue focusing on growing the business and growing them to that size, ballpark that will allow us to get the needed profitability later on. So a bit of a mixed bag guidance going forward. So some countries expecting to continue growing really fast and some countries expecting to continue growing, but more, much more emphasis on the profitability than before. The consumer. So overall, the consumer security was at the previous year's level. So we are very happy with the stability and the resilience of this business. So definitely a positive sentiment is in the operator channel, which is really the unique ecosystem that we at F-Secure have in this industry. So a positive sentiment there around our Identity Protection that we announced that we would be shipping during 2020. So we've started to talk about that solutions with many of our operator partners through -- during 2019. And by the year-end, we now have practically 7 partners committed to launch out in the protection with F-Secure in Asia, in Europe and in U.S. So we are really getting a broad acceptance across different geographies and different operators with this upcoming item in the protection service. One of the highlights that's also what -- that the F-Secure SENSE, which is a router security, so we had the first partner going live with F-Secure SENSE, which obviously marks a very special kind of a milestone for F-Secure. So overall, we are looking this business very positively and expect it to continue delivering for F-Secure going forward and is a very important part of our our overall strategy. In direct consumer business, the Q4 was definitely the strongest quarter of the year. So we had some performance hiccups earlier in the year. But I was very glad to see that Q4, we now are back on protect and this gives a very good starting point for 2020. And then a little bit of a more complicated topic, talking about the positive one-off impact -- impacting our profitability on our EBIT. So here, on this slide, you see as a starting point, what is the adjusted EBITDA that we delivered 2019 and how the IFRS 16 impacts that. And then you take into account the depreciations and amortizations. And then continuing with this page, you are looking at the other operating income, EUR 12.5 million; and then deducting components impairment, EUR 3.6 million; and restructuring costs, EUR 4.6 million; and purchase price allocation ammortization, EUR 4.1 million; and at the end, resulting to EUR 7.2 million EBIT. So at the end, if you look at the checksum of these components, as highlighted on the header of this slide, overall, you can see that there is a EUR 1.6 million positive impact on this kind of extraordinary items impacting our EBIT for 2019. And then on the deferred revenue, which is one of the components that we've been reporting in the past, so this is something that we are are still reporting now. We are evaluating whether we continue reporting this, in this format going forward for 2020. So -- but overall, deferred revenues is at the previous year's level. But the big change is that we say that a bigger part of our business is now coming from consulting business that is not yielding deferred revenue. Also, the operator channel consumer business is not yielding deferred revenues. So we start to have quite big components of the F-Secure overall business mix that are not commanding this deferred revenue. And then on those areas where the deferred revenue in the past has been very important to reflect the performance, we now see an increasing change that the customers are moving to monthly billing, which, obviously, revenue-wise is neutral. But if you move from acquiring a 1-year license or 2-year license or 3-year license to a monthly subscription, obviously, there is a very negative impact on the deferred revenue, whereas on the actual recognized revenue, the impact is 0. But having said that, so what we commented already earlier. So we have also seen during the year, somewhat slower growth with our endpoint protection, which is the main source of deferred revenue, and that, of course, impacts negatively here on the deferred revenue as well. Then a bit more on the F-Secure Countercept, which is our managed detection and response solution. So an area that we are very focused on and very excited about the opportunity and very excited about the traction that we've seen in the marketplace already. So just looking at the markets first. So 2019 some results easy to expect that only about 5% of companies have deployed a managed detection and response solutions. And this is expected to grow fivefolds by the end of 2024. So a very good market demand expected there. So I think more important for F-Secure is that estimations suggest that up to 40% of mid-sized enterprises will use managed detection and response. And really, the reason is that for those midsized enterprises, ramping up their own capabilities, having the needed skill sets in place for what comes to trade hunting or for what comes to incident response is very difficult. And secondly, it easily gets very, very expensive to build your own 24/7 SOC capabilities. So that quickly goes out of proportion for what comes to costs that the company can carry to protect themselves. And therefore, many, many companies will be looking into how -- what would be the more affordable yet better way to achieve the same end result, thus having that capability in place to detect the most advanced target that even those keep -- and some keyboard attacks and equally importantly. So having that tooling, that technology and that expertise in place to start responding to those incidents once they occur. So it's a very, very interesting and fast-moving market, and definitely a very strategic way of F-Secure. We also today announced having really, again, one very significant multiyear contract from one globally operating logistics and engineering firm based in Belgium. So just find one data point out of the many deals we have under our belt in this industry. And then a few points on the upcoming F-Secure Identity Protection that we will be selling through our operator partners worldwide and later also directly to consumers. So the market driver there, definitely, is that a vast majority, more than 80% of consumers worry about loss of personal information in a breach. And we all know that these breaches happen every day. There is an announcement of this and that large internet service provider or some other type of an actor being a victim of breach and having lost millions or tens of millions user credentials. So this is a big worry that vast majority of the consumer share. And also very many consumers seem to be finding alerts on this leaked or stolen personal information very attractive. So this is definitely a demand and the key use case that we will be tapping into with F-Secure Identity Protection. So making sure that our customers will be alerted when the breach has happened and when such breach has happened where your personal credentials, your very own username and password are leaked and then guiding you with F-Secure password manager, so how do you create strong passwords? And how do you make sure that you are not unnecessarily using the one and only, same password across multiple different services, which kind of exposes you to unnecessary risks. So definitely, our consumer demand there, definitely a growing market, and we are very happy with our approach there that the solution is soon shipping. And we are very happy that we already have like 7 of our service provider partners committed on launching that service with F-Secure. And then starting to close off. So just looking at the F-Secure 2019 in brief, so here, you see what is the revenue split and growth by business. So you have there the consumer security, which today carries a bit less than half of F-Secure overall revenue. And then we have the corporate security, where we have the split in products and cyber security consulting, both growing very clearly, clear double digits and the overall company landing at EUR 217 million revenues. The revenue split per geography. So we continue growing across all our geographies. The fastest being in other regions, which is like Asia or South Africa. So they definitely have contributed a lot to our growth during 2019. But we are very, very happy with the growth of our biggest regions, which is Europe, which is a significant part of our overall business and business mix and overall Europe growth split in the Nordics, 8%, and in the rest of Europe, 14%. So very happy with that. And then last but not the least, that North America although still the smallest region on F-Secure, a bit less than 10% of our total revenue, but grew 15% last year. So that's a good pace and definitely the right direction. And then -- and here, you also see how the adjusted EBITDA has changed compared to 2008 -- has changed 2019 compared to 2018, and this includes also the IFRS 16 impact, so -- which is important, so that one can compare kind of our numbers as apples-to-apples. And then one of the last pieces in this presentation. So just showing that overall journey that the F-Secure has been doing the last few years. So we have our consumer business, which is very robust, very strong. We have that incredible engine of almost 200 telecom operators, providing our consumer security solution to their customers. So that's there, and that is profitability-wise, the real strength of F-Secure and allows us to invest in the fast growth areas in the corporate security, in the areas like detection and response, either as a managed service or as a pure-play software, similarly as consulting. So that's a great growth story. So if you go to 2015 and compare it to 2019, so from those 5 years, our corporate security has more than doubled. So that's a great achievement with the team. And overall, the compound annual growth in the corporate security across the last 5 years has been 20% to 24%. So that's a good pace. And then finishing off is -- looking at our outlook, our financial guidance for 2020. And the guidance is that the organic revenue growth in corporate security is expected to continue, although slower than 2019, and the negative impact of terminated nonstrategic products in growth rate is estimated to be in a few percentage points. Revenue from consumer is expected to be approximately at the same level as in 2019, and the adjusted EBITDA is expected to clearly increase compared to 2019. And we disclosed this outlook already on the 12th of December, and it replaced the previously disclosed forecast and forward-looking statements. And we have not changed that ever since so this has stayed as before. So that's all we had for today, and thank you for your time. We have time to take some questions, if any. So I'm turning it over back to Henri if there are any questions.

[Operator Instructions]

Do we have any question from the line? Well, I guess that's all. Thanks a lot for listening.

All right. Thank you. Bye-bye.

Bye-bye.