WithSecure Oyj (WITH) Earnings Call Transcript & Summary

Hello, everyone, and welcome to F-Secure's Q3 interim result presentation. I'm Henri Kiili, responsible for Investor Relations at F-Secure. And today, I'm joined here with our CEO, Juhani Hintikka; and CFO, Tom Jansson. But now without further ado, Juhani, stage is yours.

Thank you, Henri. Good morning, good afternoon on my behalf as well. Good to be back here. This is a hybrid session. So we have lots of people online and then people also here at our offices in [indiscernible] in Helsinki. Solid growth in corporate security products, that's the headline we have for this session, and I will now talk through quarter 3. And then later on, I will be joined by Tom, who will be also covering financials, and then we'll do a joint Q&A after that. So some of the key takeaways for Q3. So as the headline said, we had solid growth in corporate security products. Group revenue grew by 8%, and that combined everything. And of course, here, we see also the impacts from our scalable business model that started to materialize and also was evident in our adjusted EBITDA margin of 19%. Corporate Security products, specifically, which, in our case, means the business security products, Managed Detection and Response business. We saw strong demand for our cloud native solutions. As you may recall, we have been talking earlier about our transition from on-premise to natively cloud products. And this shift is as expected happening, and we're happy to see the positive development there. In Managed Detection and Response, which is our business where we -- as the name says, we manage detection and response, we manage the technology platform on behalf of our customers, we act as an extended team for their IT and security team. There our focus has been on key verticals, and we have been quite successful now in landing several deals with new customers. In cybersecurity consulting, we saw a smaller revenue growth. And this, as you may recall, is a business which is geographically, fairly divided in many different locations, and there are regional variations. Partly, we have seen impact still from COVID in certain areas, which in practice, for example, has meant that there's been limited access to customer premises. And then in some cases, the problems have been a little bit different. So we have seen attrition. And of course, we have also kind of seen the sometimes challenging situation of matching the skill sets with the demand. This is not a unique situation. This is, we believe, fairly common in our industry at the moment. There's quite a lot of movement happening there. But of course, the good news is that our value proposition seems solid, and we seem to be attracting also good talent into our company as a result of our recruiting. Consumer security continued on a growth path. So we saw revenue growth of 6%, and that has -- you have seen throughout the year has been a steady business in terms of its performance. And there, of course, Q3, again, was similar in nature. As we mentioned during our last time, we had the session. We are at present conducting a strategic review regarding our company structure to enable optimal capital allocation within the consumer and B2B side. And that work is ongoing, and we will be coming back to that when we have more to report. As a reminder, this is what our portfolio looks like from the business, so the B2B perspective, as we call it for short. So we have the software side of things, which is very much centered around our ELEMENTS portfolio, which was launched at the end of May, and we have been very happy with the response we have seen in the market. Clearly, the things we're doing seem to resonate not only being a question of the offering itself, but also the way we do business with our customers and partners. We have specifically developed partner programs. We have automated order processing, and we have added new business models such as consumption-based pricing, and all of these combined are making our offering attractive in the marketplace. Specifically, outside of the ELEMENTS portfolio, we have our cloud protection business, cloud protection for Salesforce especially. And here, we have seen also quite good traction now in Q3. And that, of course, is very promising. We believe that we are in a good position to further develop this business and have the growth that goes with it. Then there's the solutions side of things. And of course, this is also an organizational designation as we have announced that we are combining our consulting and our Managed Detection and Response units under a single roof, and our plan is to start operating from January onwards with that entity. And the logic there has been that both of these businesses approach the market and the customer from the -- from a kind of a problem-solving perspective. So it's outcome-based as we like to call it. And that makes it very similar in terms of the engagement. We have also seen synergies between these businesses. We have a fairly strong presence in certain sectors, for example, in consulting in large companies, and that hopefully more and more will help us also open doors for our Managed Detection and Response offering. So coming back to numbers. So if we look at the corporate security products, in Q3, the revenue growth accelerated to 13%. And as said, we saw good demand for our cloud-native products and also a good demand for EDR on a stand-alone basis that we have been talking previously. Now we are seeing that also materializing. And as said, also the cloud protection for Salesforce. Overall, positive traction and also good renewal performance, which always is important in our kind of business. In Managed Detection and Response, the key verticals that I mentioned earlier that we made entries into and our new customers won in these sectors were manufacturing technology and then financial service industries. Our position remains strong overall in the financial services sector, especially since many of the leading financial institutions are already our consulting customers. And I would like to point especially that the new sales in Germany were particularly strong in Q3, which is, of course, important for us being such a key market for us and a key market in general in Europe. Also, at the same time, we were able to land new deals in the U.S. and U.K., and that, of course, pays way for good further positive development there. As I mentioned, we had saw regional variations in consulting, and that continued. Some of the COVID-19-related restrictions were there. And as said already, there is a quite a bit of movement in terms of the people in this industry. The highly specialized experts are in demand. And of course, we always need to kind of find the right resources for the right customer case. Overall, also good demand for our subscription-based services, and that is something that we want to develop further. We want to see more and more of this business also becoming more recurring business in nature. And we see a quite positive demand for -- especially at our customer base for the -- those strategies are especially technology driven, for example, when our customers are moving to cloud environment or they're doing some other kind of changes that usually creates good opportunities for us as our consulting is very technical in nature. Consumer Security. Growth was driven by the sales of our whole portfolio. Of course, as mentioned before, we have been especially focusing on the growth that has been related to our sense, our router product and also ID PROTECTION offering, which have been, in many cases, spearheads to kind of enter new customer cases, and that has developed favorably. Also, our overall partnership approach has worked well with the existing services providers, allowing us to sign new deals and add more products to their offering. And as you may recall, we are serving about 200 telecom operators around the world and going to market, to market with them in addition to our direct business. Direct business, we saw increasing share of the bundled solution, the F-Secure TOTAL, where the advantage is that instead of downloading several applications for several purposes, you can now download one application called F-Secure TOTAL, underneath that you can then activate the different services as per your needs. And there also, the important metric, the renewal performance continued to be on a good level. So a few words about the ID PROTECTION and what does it mean in practice? So consumer behavior and changes in operative landscape create business opportunities. And of course, this in plain English means that we need to understand what are the needs that the consumers have, we need to stay tuned. Even though we are, of course, very much working through partners, we need to also understand the end customers. And of course, these are some of the drivers that we see, especially at this present time, what are the different type of things that are currently discussed. There are questions related to identity theft. For example, according to a survey, 80% of consumers believe they're at risk of identity theft. Overall, I think there is an increasing awareness of this topic, and this is also especially now in areas outside of the U.S. And many of the high-profile cases that we read about in the newspapers, of course, are also supporting the demand for this kind of solutions. We have earlier on also talked about the other verticals in consumer that we are addressing. And of course, we're seeing also quite interesting opportunities in those verticals such as the insurance sectors, specifically where you have similar challenges, and we have the opportunity of working together with some of these partners and being part of their solution that they present to their customer base. So coming back to numbers. So this is a look at F-Secure up until this moment, so the periods 1 to 9. So how does it look compared to last year? First of all, on the left-hand side, you see the revenue numbers. This time last year, we were at EUR 162.3 million. We now have a year-on-year growth of 8%. So being at EUR 174.6 million to be precise. And here, you can also see that what has been the growth in these different areas. And as you can see, all of the 3 areas have grown some more than others, but still there is -- the overall tendency has been growth. In the middle part, you see the revenue split. How is that divided between the different geographies. Nordics continues, obviously, to be a strong market, important market for us, and then the rest of Europe that provides the bulk of our business and then the rest Americas and other regions. Also, I think regionally, you could say that we saw across the board, growth. And then finally on the right-hand side, you have the EBITDA, how is that developing year-to-date and we are roughly at the same level as we did last year. With that, I would like to hand over to Tom Jansson. Tom, our recently appointed CFO. The floor is yours.

Thank you very much, Juhani, and welcome, everybody, also from my part. So as you can see, our Q3 was the best performance in terms of profitability this year. And we obviously are very happy about that. Maybe a few words still about the numbers. So the quarter represents the same revenue increase as the year-to-date. So 8%, as Juhani mentioned, and the breakdown that we went through here already. Adjusted EBITDA on very similar levels as last year, some improvement but slightly. Maybe a few other points to note here is that the net debt position has now moved to a negative number, which is obviously positive, so we have more assets than debt at the moment. And even though the cash flow in Q3 wasn't particularly strong and EPS is improving from last year's level of being, EUR 0.07 so far this year against the EUR 0.06. The deferred revenue that has been used here, so continues to show excellent growth, especially on the current portion that has been having a steady growth throughout the year and in the previous quarters. So this is obviously mirroring also the business performance that we have seen. On the operative expenses, those have also gone up partially because of the COVID restrictions last year, but also, we are continuing to invest in R&D and also then the sales and marketing has gone up. A element in that, among many, is the sales commissions that, obviously, increases as we sell more. And then we have seen in some market -- bucket of markets also the requirement for salary inflation. And as we -- this is a lot dependent on different -- certain skill sets. So we obviously need to react to those pressures also. So that has impacted somewhat on the OpEx development for the company. And here is the reconciliation from the EBIT to the adjusted EBITDA. And as you can see, our main reason for the difference continues to be the strategic review that we mentioned here before -- Juhani mentioned before and the expenses related to that. Our cash flow, as said, wasn't particularly strong in Q3. There's a few elements that impacted that. First of all, we had some quite large vendor payments in the third quarter. This is more timing than anything. But then also in terms of comparability to last year, there was some precautionary measures done last year in terms of moving some of the holiday bonus payments that this scheme in Finland that was moved to Q4, which was now in this year, paid on a normal Q3 schedule. So that impacted the quarter-to-quarter comparison somewhat. But nothing unusual other than these two in the cash flow, but continues to be a focus, as always, for any company. And then lastly, we have left the outlook for this year as before and no changes to that. So we continue with this outlook for now. So maybe with that short addition to Juhani's section, we could move over to Q&A and see what other questions there might be.

[Operator Instructions] But now we'll start here from the room. We have a couple of analysts present here.

Atte Riikola from Inderes. About your outlook that you kept intact. So what is going to happen to your profitability in Q4? Because if you look at your Q3 profitability and try to approximate Q4 adjusted EBITDA, it has to drop quite significantly. So what is going to happen in Q4?

You want to take that, Tom?

Sure. I mean at the moment, we see that the business cycle mirrors somewhat last year as well on this one. So from that perspective, we are not changing it for the time being.

Okay. And the same question about corporate security products growth. It's also -- it looks like if we believe your guidance, it's going to -- the growth is going to slow down in Q4.

So if we look at the -- it looks very strong at the moment, but we have to also remember that in Q4, we still have to convert quite some new sales into revenue. So we need to look at also against the revenue recognition on those deals. So for the time being, we are maintaining that outlook.

All right. And then about the consulting, you said that the outlook is improving, but the growth rates have been quite different in Q2 and Q3. So is it going to be better in Q4 or...

So it's a bit of a mixed bag, to be honest. And like I said, it's not kind of one reason. I think we're partly still impacted by the COVID and partly, there are some different challenges. And then there are those markets where actually we are performing better than expected. So kind of that's the combination. But of course, ultimately, of course, we seek to accelerate the growth also in the consulting business, but that's the outlook we have for now.

Matti Riikonen, Carnegie. A couple of questions. First, regarding the Consulting business. Have you lost actually consultants lately if you are not able to kind of fulfill the demand?

Yes. I think reality is that I think all of the companies are facing certain churn in terms of the people and us included. So yes, I think the answer is yes. At the same time, we've been quite successful in recruiting people. But of course, there is -- sometimes also in this situation, there's the lag between taking somebody in and having somebody else as available consultant, there can be a bit of a gap in between those cases. But overall, it seems that there's a lot of movement in the industry at the moment.

Right. And then when you mentioned the salary inflation, what kind of numbers are we talking about?

So we haven't given out specific numbers regarding that one, and it would actually be difficult because I think the markets are also different in this regard. I think it's a general observation that all of us here are seeing in the -- by the industry.

But basically, we think that the normal pay increases would be in the range of, let's say, between 1% and 2%. And if you're saying that it's accelerated, then it must be higher than that. So...

Yes, that would be correct.

Yes. Should we assume that it would be closer to 5% than 2%?

I would rather not give a generic number because, like I said, I think this happens in pockets and having one number would give easily the wrong impression...

Now looking forward in the Consulting business, do you think that in those areas where consultants are free to go to customers' premises, do you think that in those areas, you can basically start growing again and you would have the resources?

Yes, I think so. And I think the move that we have made in consolidating our, as we call it, kind of outcome-based businesses under the solutions banner and under the same roof having in the future common sales organization for these 2 units, I think that will help, I think, create new business. And of course, we understand that in consulting, you need to continuously also hire consultants if you want to grow. And that, I think, is well understood. At the same time, all of our businesses are also based to a degree on our technology, also consulting where we have tools that help us become more effective and work in a more automated manner and that we believe sets us apart from many of the competitors in the marketplace. And also finally, and maybe most importantly, there is really deep expertise within our consulting organization. That is also the reason why we're getting a lot of business and a lot of inquiries. I think the question also of finding the right customer group and finding the right niche, where we provide something which I think could be characterized as solving very complex problem and having a very premium type of offering.

Right. And then are there any other places in the world in addition to Singapore that you mentioned that you are still kind of not capable of going to customer premises, so the COVID restrictions basically prevent doing part of the consulting work?

Yes. There are few. Of course, it would be wrong to characterize it that, that being across the board, but it's here and there, I think that we have this. And they also change. So it's kind of a dynamic moving target at the moment. On a positive side, also many customers have now become more accustomed to remote delivery so that we can actually kind of address them remotely and solve those problems remotely.

Is it more driven by the customer rules or by the country rules where the customer sits?

Well, in many cases, they're the one and the same. So that -- actually that starts with the country and the kind of rules they have in terms of the restrictions in place.

Right. Then jumping on to the corporate products or Corporate business. You have said for many quarters that you are lending quite many new MDR deals. So what is the average deal size that you normally planned into? Are we talking about more than EUR 0.5 million a piece or are they smaller?

It varies. And we probably are not able to disclose that number. But what I could say is that there -- yes, there are deals that are over EUR 0.5 million in size. That's true.

Okay. And then one question regarding the ID PROTECTION product, how do you actually get paid? Is it true that if you distribute it through operators, then they pay you and the customer doesn't do anything?

That's correct. Of course, we have hasten to add that we have the direct sales to consumers also through our online presence.

Right. Then finally, kind of another attempt to test your EBITDA guidance for this year. So I was just wondering that, are you really sure that you can add so much costs that you would not be able to meet last year's EBITDA? Or is it that you are expecting a sudden drop in top line that would kind of make it more difficult to achieve it?

Well, that is our current guidance, and it's, of course, reflects our best understanding of what it will look like. If there is a reason to change, we will then change it.

Next, we'll continue with the questions that we have received in the portal. We have quite a few coming up. First one from SEB, Jaakko Tyrvainen, asking, your deferred revenue liability is up 13% year-over-year. And you have previously stated that the order book outgrowth currently reported revenue growth. Is still -- is this still valid comment?

Yes, that's still a valid comment.

Next one from Veikkopekka Silvasti from Danske. Is the SaaS portion of corporate products business growing faster than the annual/multiyear licenses business?

Well, I don't think we have offered the breakdown, but -- and off the top of my head, I don't remember exact figures, but I would say that clearly, the emphasis is now on the cloud native growth that we are seeing.

And maybe I can add. We have seen some strong growth there. How it compares exactly, we don't know, but -- or don't on top of my head know.

All right. So all in all, let's say it's practically along those same lines as the normal subscription business to growth. Then one question going back to Capital Markets Day. Over there, you showed a 30% growth in corporate products, if you count MDR and business security software order books. So year-over-year of 30% growth. But now in deferred revenue, that growth did not exceed revenue growth. So could you please describe the trends that affect the order book growth specifically in Q3 now.

Well, I think, of course, it's hard to kind of mention a kind of one trend that would drive it. I think there is, clearly, for example, this trend of our customers moving to more cloud native solutions, that is something that is evident in the market. There's another trend regarding MDR, which is about the increased complexity and the need for additional resources to complement our customer security team. That trend continues to be there. Those are maybe some of those things that we are seeing. And maybe there's a third one, which is maybe not so much of a trend, but I think the launch of our ELEMENTS portfolio at the end of May is clearly kind of creating traction in the marketplace, and we're benefiting from that one.

All right. Then coming back to the ELEMENTS. So could you give a little bit more color on the first half year sales of ELEMENTS? So has it delivered according to your expectations?

Yes. In broadly -- broadly speaking, the answer is yes.

All right. And we can already agree that the numbers are meaningful on a group level?

Yes.

Then hooping to consulting and the staffing situation there. Could you give an indication about the number of employees versus a year ago and versus 2019 in Consulting business?

We don't provide those breakdowns typically. But I would say that, of course, in Consulting, the headcount, of course, is very much tied into the revenue and vice versa. So if you compare those numbers, I think you get a quite a good picture, which is essentially saying that we have been able to backfill open positions and being our recruitment machine has worked quite well.

And also adding here is that we communicated that the gross margin performance in Consulting has been better than a year ago when we were hit by COVID-19.

There's been good cost management also in Consulting that clearly is something to be recognized.

Yes. And then a follow-up on this one still. So what is the rough annual recruitment capacity of consulting domain? And how easy is it to find these talents?

Okay. Very detailed questions. Annual recruitment capacity, I would say that, of course, the way I would look at it is that we build our recruitment pipeline based, of course, on our revenue expectations and our order book expectations. And so far, I think we've been quite nicely able to manage that and match these two things. I don't think the capacity is a limitation in there and also the fact that we are present in so many different markets, it helps us in this regard. But like I mentioned earlier on, it's a kind of a puzzle in a way that you're putting together, which is about matching the demand with the right skill sets and at the same time also having some attrition that you're compensating with the recruitment and how quickly you can get then the new recruits billable and visible in the numbers. That is the kind of question. So this is something that we are doing both on a country level and the regional level, but also, of course, being a global organization. We are looking at it from a global supply-demand perspective. And we are able to, for example, flexibly allocate resources over country borders. And that, of course, makes it different compared to many of the purely local players.

Next, I have a follow-up here.

Matti Riikonen, Carnegie, again. I was thinking about the attrition levels in the consulting business. So in general terms, in many IT services companies, you tend to have a 10% churn on people. And now when we see that there's clearly a shortage of personnel, it would be logical to assume that it would be significantly higher. But what would you say? Is it kind of clearly above 10% in your case? And is it even above 15%?

Yes. So without giving a specific number on this, what I can confirm, it's above 10%.

Atte Riikola from Inderes. Maybe one follow-up about the corporate security products. You said that the growth is coming from the EDR and cloud protection products. So is it mostly that you are upselling to your existing customer base? Are you winning...

No, there are completely new customers as well. And I think regarding cloud protection, that, of course, is -- as the name says, it is protecting in a way the Salesforce platform in terms of the third-party content. And there we have been clearly winning completely new customers. And of course, we are present at the AppExchange, that is a global marketplace for that, the world's largest software ecosystem where we are operating.

Can you say anything about those deal sizes in those cloud protection?

Yes, they vary, but I would maybe characterize them being hundreds of thousands in nature.

Then we have Felix Henriksson from Nordea asking, when can we expect to get more information on the brand -- new brand launch for B2B security?

So our current plan is to disclose the new brand name and the related content internally in November, and the most likely time for going public with the new B2B brand will be February.

All right. Then coming back to consulting. How far is the consulting activity from pre-pandemic levels now comparing against 2019?

Okay. I can't remember off the top of my head what the comparison point would be. But on a year-on-year basis, of course, you see that in the reports. Before that, I don't fully recall. We did, at the beginning of a pandemic, I think we had quite a dip in terms of the volume, and then while we have been gradually building our way up again. But I think on the comparison point at least to last year's was relatively low, regarding the earlier part of the year.

Yes. Still continuing on consulting. How is your visibility for Q4, given that you continue to highlight the uncertainty regarding growth for 2021?

Of course, Q4 is so close that I would say that the visibility is reasonably good at the moment in terms of the business at hand.

Okay. Next, Tom, going to numbers, again. Could you provide an estimate level of the IACs for the coming quarters that relate to the strategic reviews?

Well, I don't think we can disclose that, but the activity continues and until -- as we also have said in the announcement.

Matti Riikonen, Carnegie. One question related to the products. When you mentioned that EDR sales has improved, is it coming from kind of stand-alone EDR sales to new customers? Or is it more like EDR sold as a package with EPP? So how do you find the split...

Yes. So the reason I mentioned it specifically is because we have seen new stand-alone cases in EDR. So I think there was an assumption some time ago, before my time, that the growth would come from these packages of if you had EPP, then you [ took ] EDR. But that seems not to be the case. So we have been able to deploy EDR also on top of other vendors, EPP solutions. And I think that has been quite an important achievement and maybe even a change in what was earlier the common understanding in the market.

Yes. Next, going to the cost side again. So our operating expenses were above Q3 2019 levels. So should we expect a similar pattern for Q4 as well with the OpEx going above Q4 in 2019?

Maybe I can start just to maybe comment that we have, of course, now seen costs coming back to pre-pandemic levels, and we talked about it earlier in this year. We remain growth-oriented in terms of our business. All of our businesses are growing at the moment, and we have also made plans in terms of the investments that are required in order to support this growth. And of course, that is reflected in our understanding of the development of the profitability of the company.

Next question related to the potential demerger of Consumer business. Which one of these do you see as more probable, the IPO of Consumer business or you will split the company into 2 separate entities with no equity market transactions?

So as I said, or as we have said, the evaluation is ongoing, and we have nothing to report. But of course, you have listed possible scenarios there, and we need to kind of come to a conclusion which one is the right one for us. But of course, we have emphasized the IPO in our communication.

Then going back to corporate security product growth of 13% now in Q3. Given the visibility that we could see in the order book in Capital Markets Day and also now in deferred revenue, do you expect this growth rate of 13% to be sustainable?

Well, if you look at the overall market growth and what is being said about that, I think what we're seeing is trailing also that opportunity we see in the marketplace. And Tom?

Yes. And I think also in the CMD, there was a guidance on midterm, and that's still also believe in that.

We're still testing on our guidance for this year. But do we get any more questions? That was the last one. So thank you all. Thank you for Q3.

Thank you for joining.

Thank you all.