WithSecure Oyj (WITH) Earnings Call Transcript & Summary

Hello and welcome to WithSecure. This is our Second Quarter 2024 Results Release. My name is Laura Viita. I am responsible for the Investor Relations of WithSecure. Today we will have our CEO, who is no longer interim CEO but the real CEO, Antti Koskela, and he will talk about the business highlights of the second quarter. He will also do a little bit of diving into our product launches and how we look at our Elements Cloud software and services portfolio today and that includes this little helper. After Antti, our CFO, Tom Jansson, will go through the second quarter financials. After these 2 sets, we will take questions and answers. If you're watching us on the webcast today, please put in questions any time, I will take them up at the end. Now with that, I'm handing over to the President and CEO of WithSecure, Antti Koskela.

So thank you, Laura, so much. And I'll start first with the SPHERE. So quarter 2 for us was a quarter of our SPHERE event and the many product launches we did over there. So we had over 800 people here in Finland together with us, 600-plus customers and we had the opportunity to meet many of our partners and customers of course during the event. We got really good feedback on our direction for becoming a European alternative for midsize companies together with our partners. I will go a little bit deeper into this when I talk about the portfolio. One of the things which I really enjoyed during the event was that we had nonstop queues to the demo booths and so there was a good interest for everything we have made for our customers. And I'm happy to report we have first customer agreements for every single new product we launched. So we have deals for Exposure, we have deals for identity security, we have deals for WithSecure Managed Detection and Response and 1 of these contracts was done right at the event when we did. So in a way there's a positive vibe among us all post SPHERE. And I'm also with this with Luminen here and it's important to note what we did is that we embedded Luminen into our whole Elements Cloud and it's now activated to 200-plus customers. We believe it's key for customer retention as going forward. So when I look at then the results. So we grew Elements Cloud ARR growth 13% and this was the fourth quarter of growth in ARR terms in a row. The following previous quarter ARR, our revenue landed -- Cloud revenue at 10% growth and we were able to have a slight pickup on the Elements Cloud net revenue retention during the quarter. The Elements Company, as a whole, the revenue grew 4%. This was driven slightly down by planned on-premise decline, but there was also a decline in the nonrecurring incident response projects. So that's important to notice. So Elements Cloud is clearly the -- the Elements Cloud software is the growth driver in this business and we are relatively pleased with the uptake now during Q2. Our managed services, i.e., the Countercept, is slightly below last year level as the transition of the sales to midmarket is ongoing. And managed services and the Countercept is part of the cloud ARR as we calculate it. So the 2 top regions for us this quarter were DACH, which is the German speaking Europe, and then France. And U.K. and Japan were below previous year level. In U.K., we are rebuilding the partner channel as we have talked about and in Japan, Tom will talk about it more, we were little bit hit by the currency rate topics. So WithSecure Elements proactive modular made for co-security. I start little bit from the distance first. Why are we doing the things we do? So we have researched quite a bit the midmarket security needs. We even look at some of the World Economic Forum papers and what can be said is that small to midsize companies are universally losing their digital confidence and at the same time, attackers and criminals are not losing confidence. They operate at an industrial fashion and that's what we need to work towards. When we look at the large companies and what they have been doing at the same time. So cybersecurity has been developed for the large companies by the large manufacturers and it has led to a quite human-centric view on the cybersecurity. So people do the work. So this is incrementally safer absolutely, but it comes with a certain cost as well. So we have looked at these midsize companies are left a little bit without affordable and meaningful choices for them and that's what we need to work on. So we researched this as well in the past quarters and we went out to 1,500 people in the cyber landscape and their answers come in 3 categories; they talk about resiliency, they talk about trust and efficiency; and with those 3 things, we formed the basis for the new cyber playbook. And now when we look at what we actually released now at the event so we start with resiliency. So with our extended detection and response, we introduced identity security. These small to midsize companies have a digital infrastructure today. They have a lot of SaaS and cloud assets, different identity systems. So it's important to have identity security and detect problems from there as well. So we cover cloud, we cover Entra ID and those kind of topics. Endpoint security includes here endpoint protection and detection and response and that continues to be important. And we had a really good thing actually last Friday that made my day. So we had a prestigious AV test, advanced EDR test and we got stellar results from that one. So we were able to capture every single method with our detection with our Elements EDR. So there was a press release made on that one by WithSecure. So really good work from our teams. And it just speaks to the point is that we are not having a human-centric view that we are having a very AI and automation-driven solution that solves your problems and the proof is there. So when we then look at the Exposure Management, that has been the key thing. Of course that includes what we have; capabilities from vulnerability and cloud protection, cloud posture management. But what is the problem we are really solving? So when you have a digital infrastructure that is open and the open infrastructure is exposed in the Internet and you need to understand through the lenses of attacker how you might be attacked. That's why we have attack path modeling in the Exposure Management. Then you are able to understand secondly, what is the digital risk I'm having and what do I need to do about it? And that's the Exposures quote on remediation. And we believe that type of preemptive mechanism to work on your IT hygiene is critical for small to midsize companies that they can restore their digital confidence. In the past this may have been endpoint protection on firewalls. But in the open era, that's not the way to go. You need to do that together with extended detection. And the cool thing, this Luminen here. So many of you have used ChatGPT and know the copilots of the world and they are separately priced and what have you. So we thought it's important to put Generative AI as an integral part of our user experience so that this Luminen icon is inside the products when you use it. For instance you see a long laundry list of events; you click, you get a summary what's relevant, you get actionable insights so that it just makes the workflow more efficient and that's what the midmarket companies need. But then trust was the last one what I had in my list. So when we look at the cosecurity services here, so many of our partners and end customers, they might not have the cybersecurity skills as a large enterprise might have. They don't have teams of 30 to 50 people to run security operation centers. So we have a simple mechanism. So the single item you can elevate to us so that we can solve one by one. Then if you work 8 to 5 with your service offer as a partner, we can co-monitor. And now we released Managed Detection and Response. So we have been doing Countercept for our direct customers. But what we do today, we have now managed detection available with Elements Cloud through our partners to all the midmarket customers. So that should increase our reach quite a bit. Then we have packaged incident response as a cosecurity service. We are introducing Exposure Management services as well as we move on and the Countercept here is the direct -- the premium Managed Detection and Response service we have. So hopefully, this is the modeling we are going to use to describe our portfolio going forward because it explains better what the customers are actually buying from us. So the summary is a data and AI-driven solution. There are tools for Exposure Management, Detection and Response and the services are packaged in a subscription model from one place, which is Elements. So hopefully, you found this useful and little bit describes what we do. And so we made many introductions to this in SPHERE. So summarizing: Exposure Management was launched, Identity Security was launched, Managed Detection and Response was launched for Elements and Luminen as the digital AI assistant embedded into the experience. So it was quite a bit of things that we got into the market. So then moving on. So Cloud Protection for Salesforce. ARR growth 5%, revenue at the previous year level and NRR at 88%. And last time when we spoke here, we talked about a few large customers contributing to the NRR. And what I'm not saying here, but I am in a positive optimistic outlook on the Cloud Protection for Salesforce, the quarter-on-quarter performance and the ARR growth was beating the levels we were thinking about internally. And we have had a good pipeline here and that good pipeline development continues and we are working with the team to realize the potential of this one. So we are continuing the strategic review and I know both from consulting and cloud protection, you would like to hear more details on that one. But I think for both of the businesses, we say the review continues and the focus is on increasing operative independence, which is naturally a part of the strategic review. So when we look at consulting then so the revenue growth was 12% year-on-year and Nordics financial sector and large U.S. accounts were performing well. And like I said, we continue the strategic review and we focus on increasing operating independence. And finally, I was appointed the CEO of WithSecure 1st of July. I'm humbled and I'm excited to lead the next phase of WithSecure. With all the things we have launched with SPHERE and the positive vibe we have in the company, I'm cautiously optimistic on what's ahead of us and in this business, working close to customer and doing continuous innovation is the key. So thank you for my part and over to Tom.

Thank you very much, Antti, and good afternoon for my part as well. So if we look at a little bit more detail on our numbers. As said, our Elements Cloud ARR grew 13% and specifically software were doing well in the second quarter. The managed services stayed pretty much at last year's level at this point. From a geographical point of view, we continue to have strong performance in France and DACH. Japan also on a local currency point of view did quite well, but unfortunately, the yen development during the year and over the last 12 months has been quite significantly negative for them. So that of course impacts our euro numbers for Japan. And as said, in the U.K. there has been some churn with the larger Countercept accounts as we have been discussing in the previous quarters and we are rebuilding that and of course are also targeting now more the midsize market for this and that is progressing quite well. As said, we had slight improvement in our Elements Cloud NRR up to 103% this quarter. And then our on-premise revenue declined as we have been planning and communicating also in our previous quarters. And as we also mentioned, this quarter 2 was as expected also a heavy cost quarter for us with the SPHERE investment, which is our largest and biggest marketing event that we do every year and therefore, also our adjusted EBITDA for Elements Company was then slightly negative. So that's about the Elements Company. Then if we look at the Cloud Protection for Salesforce, we had a good quarter with this business and we could show a good ARR growth year-on-year, even a better one quarter-to-quarter. So we are quite happy with the performance and we clearly can see a break in the trend in this quarter. And as also Antti mentioned, we have a pretty strong pipeline and we look quite favorably on this going forward. Net revenue retention here, as has been in the previous quarters, was really low related to a few large customers that we have seen reducing the value over the last -- in Q4 last year and Q1 this year. But other than that, we see very good retention with the customers for those and we of course assume this will also improve going forward. Adjusted EBITDA, slightly negative. This was very much planned, but it also from a comparable point have improved quite a bit and of course this last year's measures have also impacted Cloud Protection for Salesforce. Then cybersecurity consulting. We got pretty good growth in our revenue in second quarter and specifically in the Nordics and financial sector in the U.S., we did quite well. We have also in the first half got quite a bit of new logos into this business. So we are quite happy about that and so on. And we have a good level of backlog going into the second half of this year. Adjusted EBITDA here slightly negative. We had some onetime payroll impacts in second quarter on this one. But other than that, we are of course working on the profitability all the time for this business. Then overall, company grew 6% and then gross margin also improved. This is of course an item that we have discussed many times before and it's an item that we continuously work on to get more efficient with all our costs related to data and also delivery and so on. OpEx was down EUR 3.9 million. Good to note that in our comparable numbers we had some TSA income still from last year and so the total OpEx reduction year-on-year is about EUR 5.7 million. We had some additional adjustments in this quarter, which impacts the comparability as well. So we are on track to fulfill all the cost savings and measures that we implemented last year still also in this quarter and going forward. Then the last slide, outlook is unchanged. So we're expecting the ARR for Elements Cloud to grow 10% to 20% this year and the revenue for Elements Cloud products and services will grow between 10% and 16% and total revenue 6% to 12%. And we do expect the adjusted EBITDA on a full year basis to be positive. So with that, I would invite questions and answers. And Laura, maybe you can come here next to us with the questions.

All right. Maybe we'll start with questions from the room. So Atte, please.

It's Atte Riikola from Inderes. First about your outlook. If you look at the overall growth 4% for the first half and so you're expecting 6% to 12% growth for the full year. So I'm just trying to figure out what are your planning assumptions behind it? Are you expecting growth to improve in every area on the H2?

So it was 6% year-on-year growth on the company level and 4% for the Elements Company segment. And after SPHERE, we have a positive vibe on the ARR development and the sales development and that's what we are planning to do.

All right. You mentioned that you have been doing pretty well in sales in France and DACH region. So is there any particular reason behind that?

I think we have strong teams. We have good partners over there that we work well with them and that is exactly what we are sort of rebuilding in the U.K., similar things and also in all the other regions that we work. So for us, it's quite important to have partners that grow with us and so that's what we are continuously developing in the market.

And then what kind of feedback you have received about Exposure Management? We know that it's very early, but like the initial feedback from your partners or customers.

So we did earlier launches of the concept back in November, we had the collateral already in February. And we actually launched this together with 4 partners on stage so that there were 4 partners launching it together with us and then we had close to 30 partners developing it together with us. So there's an absolute need what you have in the market. So we have a good pipeline of opportunities now both from the partner side and from end customer side that we are now working on and it's up to us to accelerate that growth. So positive is quite feedback. It is a problem that needs to be solved.

You haven't opened up yet at least the pricing of Exposure Management or other new products. So can you say anything about the upsell opportunity for example for like a classical EPP EDR customer if they take also the Exposure Management and other new models?

So we have pricing exposure based on kind of subscription pricing and also based on the Cloud accounts you would connect and what identities would you connect to the exposure. And in general, we look Elements Cloud as almost like a total package so that all the pricing models need to be consistent with each other. So it's a subscription-based pricing within the Elements.

All right. And then you mentioned the MDR revenue was little bit down because of those lost big clients. But when do you expect those new sales in midmarket to like pick up the growth again?

Actually the midmarket growth is picking up so the fact that it stays quite -- there's a slight decline, but it's relatively flattish. But if you have a churn, then of course it needs to come from somewhere. So we are winning new in the midmarket with Countercept.

Yes. But when was the -- if you think about the churn impact of those big clients, was it like end of last year when those...?

Yes, end of last year, during last year. And I think generally I think we have got our portfolio more competitive for the midmarket during the past 12 months and with the launches and I think we are optimistic with opportunities that arise from there.

And then last question from me. If you think about your new this Luminen AI assistant and from cost wise if you think about most of your customers start to utilize it, will it have like some kind of impact on your costs there?

So that's where the beauty of it is at. So we have not retrained a large language model. That's what many analysts should be worried about. So we are using Generative AI models that are available. We are using technology called AWS Bedrock. It's a cutting-edge technology for software organizations. So basically we are able to securely run our data set against available alternative algorithms and we are embedding the prompt in our code. So we work slightly differently, bit technical answer. But we don't retrain our own LLMs, but we use Generative AI for the purpose of getting end customer results and it's working for us because we are in control on the prompt.

So moving to the questions on the chat now. There are a couple of questions from our audience today. So first, WithSecure's cash flow was negative significantly in Q2 '24. Do you expect the cash flow to be positive in Q3 '24?

Okay. So of course we knew always that our first half is quite cash burning part of the year because in Q1, we have a lot of the previous year payouts and then in Q2 we have SPHERE and a lot of activities. But this is of course an item that we continuously work on and we expect that to improve in the future over time.

EBITDA result is still negative. Which quarter can we expect WithSecure to reach positive EBITDA figures?

I would refer to our guidance that we expect our full year to be positive EBITDA.

What would you say is the most significant risk for WithSecure's business during the rest of the year 2024?

That's a good question. I'm more looking at the point of view that we have opportunity now enhanced with the new portfolio and working with a partner. So that's a positive side. In a SaaS business if you don't have a customer-centric where you're working and work relentlessly with the customer success, that can cause surprises. So that I would see as a risk, but I think we are proactively working on that, that we are improving our customer partner success.

Very good. Would you consider doing M&A transactions during the rest of the year 2024? If so, what kind of targets?

So we have 1 thing what we have in the pipeline of obviously, we are looking at the strategic reviews and we actually did 1 small divestment so that's also an M&A transaction. So we did that now in Q2. And then we are continuing the strategic review of both of the businesses. But M&A on the buying to WithSecure, that's always an option. But I think we have quite a bit of work to do now in getting our offering to the market and focusing on that.

Okay. Then questions from Waltteri Rossi, our analyst. Are you expecting Cloud ARR growth to be more at 5% during the second half or at current levels?

So 5% quarter-on-quarter or year-on-year?

I think year-on-year.

So our guidance -- so stick to our guidance, I think it was between 10% to 20% year-on-year Cloud revenue growth.

And what's the biggest challenge you currently face in tough competitive market?

What is really good in the recent quarters is that we have a positive sentiment now in the company post SPHERE and there's in a way people are getting out to the customers, people are getting out with the customers because we have something new to say that is genuinely meeting the customer things. So that's always if you watch too much on the competition and you don't focus on the value you bring to the customer, that can be a problem itself. So that I'm more getting the teams to get out there, compete and deliver the value of what we do because I think we need to get the part that belongs to us in the midmarket.

Very good. Are there any new cost saving or efficiency programs expected for the rest of the year 2024?

So costs is something we work on continuously. So we continue to work on that and I think that is a continuous work that we do relentlessly all the time and of course try to improve the situation.

All right. Then another set of questions from our audience today. So strategic reviews, is there anything new that you're able to comment at this point?

So we're able to comment at this point is that we are in a way building strong independence for both businesses and then we come back to the strategic review later.

What about are you happy with the current group capital structure or could we expect any significant changes in the capital structure during 2024?

At the moment we are happy where we are.

Nothing else to say. All right. And is the current negative cash flow sustainable in the long run? Will there be needs for new capital in near future?

As we said earlier, we are working on our cash flow continuously and over time we expect that to improve of course and that's what we can say at this point about that.

Yes. There's another one saying that the cash flow worries me, are there initiatives in place to turn it positive in the near future?

I would maybe repeat the answer we said earlier that this is something we are working on and of course, as said, we are assuming that to be improving in the future.

Good. Then I'm moving on to questions from Jaakko Tyrvainen, our analyst. Countercept, in 2023 you had challenges with enterprise segment customers. Has there still been new churn in that large corporate segment or are you referring to churn seen in 2023?

There has been churn last year and there has been also new churn, which is in our ARR numbers. And then we have been winning new in the midmarket segment, which is also in the same ARR numbers. So that it's really about that we are scoping the company to be a midmarket-centric company.

All right. And then about consulting. How much of the strong performance seen in Q2 was thanks to projects postponed from Q1?

There was a portion of that, but there was also a portion of new things that we won during Q2. So there was a mixture of both.

And you said you started the year with a strong order book. What is the situation with current order book and what is your visibility in general to this business?

We have a quite good order backlog, at this point we have higher than last year and that gives us some flexibility of course to the rest of the year. So I guess that's where we are at this point.

All right. Was the SPHERE cost fully allocated to Elements Company or were there some allocations to consulting and sales force as well?

It was an Elements Company cost.

Very good. Then moving to questions from Felix Henriksson, our analyst. First, your guidance implicitly calls for positive EBITDA for the second half. Is achieving this purely a top line game or do you have any levers to pull to lower costs beyond not having the SPHERE again in the second half?

I think it's both the top line development for the ARR growth, getting the consulting revenue and of course being prudent with the cost is a combination of all of that and that's in the plans.

How would you describe your visibility on the demand outlook for second half now versus 3 months ago? Have you noticed any change in customer behavior?

Yes. I think like I mentioned in my beginning part, it is a big change when you are at the SPHERE event this year compared to last year and we have nonstop queues at the booths looking at the new things we have done. I think the portfolio speaks better for the small to midsize companies that have a digital infrastructure, a lot of cloud and SaaS and identity-based assets. And I think we are positive with the outlook of those opportunities that emerge from therein.

Good. Your cash position has halved from last year. Can you elaborate on your thoughts regarding the company's liquidity situation for the foreseeable future?

As said previously, it is of course an item that we continuously work on and we expect that to improve over time.

All right. And then back to Jaakko Tyrvainen. How much sales the divested unit was generating? Does it move a needle?

So it's not part of the -- what's the term? It's not a discontinued operation and that gives you a framework so that it's not material from that point of view.

And maybe I can comment. So it's included in the Elements Company other section of the financials, which is quite small in itself. And then back to Waltteri Rossi really sorry and back to the question about ARR growth. So this was quarter-on-quarter growth that was meant. But I guess we answered hopefully the question already.

Yes, the guidance is 10% to 20% and so we had a 10% quarter 1, now 13%. Now we have SPHERE below our belt and all the excitement and opportunity so that I have a reason to be optimistic on that.

All right. That was actually all the questions on the chat. Now do we have any more questions in the room? No. And the chat seems to be going quiet. So I think we are ready to wrap it up.

So thank you so much.

Thank you very much and we're back in October.