WithSecure Oyj (WITH) Earnings Call Transcript & Summary

Very good afternoon from the very, very warm and sunny Helsinki, and welcome to WithSecure. My name is Laura Viita. I am the Investor Relations Director of WithSecure. And happy to wish you welcome to the second quarter of 2025 results release. Today, we will first have our CEO, Antti, talk through the business highlights, especially the breakthroughs made in the proactive threat management with our new tools and other things, of course. After Antti, there's going to be the CFO, Tom, talking through the financials of the quarter. We will have questions and answers at the end. If you have questions, you can send them over the webcast all the time. I will take them up with the presenters at the end. So warmly welcome. And with this, I'm handing over to the President and CEO of WithSecure, Antti Koskela.

So thanks, Laura. So first, I would like to go through the strategy, and then I go to the financials, so that it has been a very busy quarter for us. And what has really happened during the second quarter is that digital sovereignty discussion accelerated in Europe. And this was quite a lot intensified by the removal of the email from ICC judge by Microsoft and following the U.S. administration decision. And a lot of discussions started on becoming more European, ever since it was not only us talking about it. So it's a theme that is in the market. And it's clearly influencing already technology choices done by the partners. And we met many of our partners and customers in our SPHERE event here in Finland in May. So we had around 400 customers and partners here, and majority of them were new ones, first time with us and clearly signaling the increased trend for new partners coming to work WithSecure. And we will have more -- a smaller marketing session, SPHERE2YOU, through the rest of '25, we actually have already had one in Germany, and we will have one in Japan and France through the rest of the year. And what we launched in -- at SPHERE event, so we launched extensions to our Elements Cloud and Co-security Services as everything we do evolves around elements. So we took exposure management to new level by expanding the scope to various cloud platforms and also identities. And then we extended coverage of our extended detection and response to cover well the Azure cloud environments. And then we packaged all our managed services and software into easily purchasable bundle, Elements Infinite, that we also launched to the market. But what Laura was suggesting in the beginning, this zero-day vulnerability detection, this is quite groundbreaking. So we are able to use telemetry from our EDR tools and the behavioral data and use that with AI model so we can detect vulnerabilities that nobody knows exists currently. This has usually been work for security consultants, and it takes rigorous weeks and weeks of work. We have been able to do breakthroughs with the use of AI. So this gets to the new level of proactive threat management, and this technology will, of course, be integrated to our exposure management products, as we move further. But the combination of exposure and XDR and the whole element is here the key. That's why it's so powerful. We are also busy during the quarter, so we did add 2 transactions. We closed 2 transactions during quarter 2. So we closed consulting, which is now called Reversec. So that divestment was closed on 1st of June. And we also divested our Malaysian entity, and we transferred that to the buyer, LS Systems, and who became the preferred distributor for WithSecure in the region. And the start has been quite rapid. And we are looking positively towards the work with LS System in the region. And it's also a very effective way for us to do marketing and sales in the region without having own feet in the ground. And then our key strategy is to work on these mid-market customers and the partners serving them because most of our pipeline comes with the partner development, how we extend the scope with the partners. So we have extended our partnerships in Japan. So we are launching Elements MDR in Japan. We are extending many historical Endpoint Protection only partners to EDR to access the Japanese mid-market. In Netherlands, we have a quite broad spectrum of managed service providers. And we signed -- after SPHERE, actually, I met the CEO at the event and had a handshake as they take WithSecure as the #1 supplier because they need a European solution. So that was done. And also in Finland, you may have seen that we launched partnership with DNA. So DNA is going heavily to the IT part on the cybersecurity in collaboration of WithSecure and Google so that these form a combination. So a lot of groundwork is done. And unfortunately, not all the groundwork is in the numbers yet, but we made -- what we are doing with the partners creates a good path for the funnel for the second half, and that's where our confidence comes from how we are talking here. We grew Elements Cloud and Co-security services 13%. And this growth is increasingly driven by the new products, Exposure Management, Elements MDR, partners going with the mid-market playbook with a wide portfolio. And of course, the deal size is with the wider portfolio or higher than with just selling Endpoint Protection. And then the negative part. So unfortunately, like we said in the Investor Day, so we had certain enterprise customers that are at -- that form a revenue concentration. And as our focus is very much on the mid-market, there's been always a risk that some of this will turn to more in-house security operation centers and the tools around them. And that has happened with one very large enterprise customer in the U.K. during Q2. And with the earlier Managed Service churn, and this one, our Managed Services part, declined 22%. So this basically offsetted the good work in the Elements side, and our ARR growth landed at 3%. And of course, that's the single topic driving the NRR number. Tom will talk about the net revenue retention on Elements software and Managed Services separately in his part. And then like we announced, so we have reorganized -- we're in the process of reorganizing our partner and customer-facing activities to accelerate our strategy of becoming European flagship. And what we are doing here essentially is that we are focusing our sales and marketing efforts to a very globally aligned model, where we have certain teams focusing on the mid-market expansion and certain teams focusing on revenue retention and consolidation of the more long-tail channel partner environment. And so it's very important for our strategy. And we could have done this earlier, but I think we have been quite busy with some of the other projects at -- during first half. So we thought this would be the right time that we did it right after this transaction from -- of Malaysia and consulting. And we also align the cost structure in Managed Services to reflect the business reality so that we commented on that one when we announced the reorganization program. So these -- so Tom, correct me if I'm wrong, but these cost structure changes will have Q3 onwards impact so that they don't yet impact Q2, just for everybody to notice, but despite investing in SPHERE, despite this revenue churn from Managed Services, we managed to do adjusted EBITDA positive, which is a material difference from the previous year at the same time, if you remember that. So maybe with this one, I invite Tom as well to talk about how we are progressing with Cloud Protection.

Thank you very much, and good afternoon from my part as well. So on the Cloud Protection for Salesforce, on a comparable note, we still are growing very strongly, so 54%. Of course, compared to previous quarter, this was a slower quarter for us and very back-end loaded in many ways. But if you look commenting a little bit behind the numbers, we still won quite a few customers. But then unfortunately, we were also hit by a pretty large FX effect on CPSF because we have a fairly sizable operation in U.S. So that had a negative impact on the ARR, and then, there were some timings and so on. So net together, only a slight increase from the previous quarter, but still on track to do well on during this year. And of course, from this also then the NRR for CPSF was going a bit lower. So it was still a very good number though, 122%. But compared to the first quarter, it was slightly down. So as said, the largest foreign exchange effect was from the dollars, then we have quite a bit of Australian business as well and so on. So those would be impacted as well. Altogether, our ARR negative was about EUR 400,000. So -- and -- but the numbers are -- in terms of customers are increasing quite well and so on as well. Of course, the big thing is that as many of you who follow Salesforce know, they are pushing very hard the Agentforce and the AI tool applications on that. So we have also now part of that, we are on the forefront of protecting that activity. So Agentforce will be also protected by a new app by Salesforce during -- very soon, and we see that as, of course, a great expansion to the Salesforce opportunity itself. And at the same time, to remind you, everybody, that as we have said, CPSF, we continue to develop it. And then we will see in the future what strategic options we will look at that. But we have a very good track and phase at the moment going, and we have patience to continue to develop. But then maybe going to the numbers a little bit. So here, you can see the cloud ARR for the Elements company and the development of that. So Element software and Co-security growing 13%. So quite solid growth continues and good traction there and so on. And, of course, the NRR and so on are also on a quite good level for this part of the business, as Antti already mentioned. Then, on the Managed Services, we see a decline year-over-year in the 22 -- over 20%. And this is because of the large -- as said, large enterprises going into their own way forward and not based on the mid-market offering that we are providing. And this is particularly for the U.K. and has been there -- that already for some quarters. Then another picture. So our Cloud ARR grew 3% and the combined NRR, net revenue retention, was 99%. Of course, the software part was quite higher, but then the net was driven down by the Managed Services. The on-premise revenue declined, and this is very much as planned and expected. And we continue to see that in this way as well, but for some time in the future, but this was no really big news for those who have been following us. From a profitability point of view, as said, we did a positive result despite our -- as always, our Q2 for the past years has been a big investment in marketing and the SPHERE event. But despite that then, we were on a positive result in Q2. And here, again, the CPSF numbers, Cloud Protection of Salesforce numbers, strong ARR growth continues. Some foreign exchange impact from that and the NRR at 122%. And the revenue, of course, follows the ARR. So good progress on the revenue side as well, as expected, when the ARR also goes well. From a profitability point of view, as we have said before and continue, we are not expecting this -- or we don't want to do -- this to do a profit at this stage. We want to invest everything we generate to further growth. So this business will be breakeven, approximately breakeven and has been so in the past as well. And we will continue to invest in growth as much as we can in terms of not though harming the overall cash flow for the company. Then here is the combined numbers for us. So 3% revenue increase in the quarter, and our OpEx continues to reduce. And this is, of course, part of our efficiency measures that we have done before, and we, of course, do this continuously. And we've done some investments in the sales and marketing to new customers and partners, though. And of course, in R&D, we continue to optimize our cloud environments and so on. And the NAV, as we have also said, we expect that to scale with the business, and we keep that under control. So we have a very diligent continuous efficiency measures in place and continue to watch our spend and try to improve on the efficiency. And then, of course, as Antti mentioned in the beginning, the newly launched restructuring that will have also an impact on our cost structure in the future. So at the moment, we are estimating that to reduce our structure annually about EUR 6.5 million on an annual basis, our cost in the future and those will come gradually, Q3, Q4 and into our numbers. Then on outlook, no change to the outlook. So we're going into all of our businesses with a good pipeline for the second half, and there's no need to change our guidance. And we expect the ARR to grow for elements for 10% to 20% this year. And then for the CPSF, we are -- our outlook is to grow 20% to 35%, and then, on the profitability for Elements company, we expect the EBITDA to be between 3% and 7% of our revenue. With that, I will invite back -- and this is just to -- maybe to recap then, we are determined to hold on to our medium-term financial targets and be a Rule of 30-plus company in a couple of years' time. But with that, now I invite back Laura, and then, we can go to the Q&A section.

All right. So we will start with the questions from the room, please.

Felix Henriksson from Nordea. I have a few questions. Starting off with Managed Services, what's the decline and the magnitude of the decline in Q2 sort of in line with what you had budgeted into your guidance? And should we expect the pace of the decline to remain broadly similar for the second half of the year as well?

We -- as we mentioned before, we were always aware of potential large customer enterprise risks in here. So we have taken that into account, and as said, we are holding our guidance for the rest of the year.

And the growth model really happens through the mid-market and the partners. And that's where I think we have a belief on the partner momentum. So we have been signaling that also to you in this call and previous calls. And I think we have a very healthy funnel for Elements Company also that, of course, we need to do a lot of work to, of course, get everything over the finish line, but I think pipeline is there.

Got it. Because I guess what I'm trying to get to is that do you expect a sort of headwind from the Managed Services decline to diminish or intensify in the second half of the year because that also impacts how much you need to close on the software side?

Yes. That is correct. Fully understood.

And regarding the sort of Software and Co-security part of your Elements Cloud business, can you sort of describe the pipeline a bit more in detail? Is this mainly related to the new partners that you've signed? Sort of what gives you the confidence to get to the guidance? And could you just describe your visibility a bit more?

I think the key topic is that there is a wide understanding is that you don't do modern cybersecurity with end protection only -- endpoint protection only so that we see increasing trend that existing partners and customers are upgrading to other modules. But I think the more interesting partners, other partners, for instance, Reliance in Netherlands and who basically sell as a Managed Service Security by themselves, and we are white labeling, and they sell it at the same time to their entire fleet so that we don't sell to individual end customers one by one, but we're also able to package it to the partner and upgrade the entire fleet as well so that those give confidence that this opportunity can be turned.

Got it. And then lastly, you mentioned the EUR 6.5 million savings target related to the new change negotiations. Is that a net savings number? Or do you expect to invest part of that -- reinvest part of that into the business?

That is net saving.

Yes, that is a net saving.

And we have -- underneath the number, we have, of course, investment. But the key thing is here is that we are departing from quite independent regional sales structure into globally aligned one, where we have team focused on the mid-market and teams focused on the small to medium-sized or the smaller customers and partners serving them. They would require a different mode of operation. And this is what we have in the plans because we have not finalized consultation in every country.

Waltteri Rossi from Danske Bank. About the planned cost cuts, how much would you say it's coming from a structural change in your business model switching from the large customers in the mid-market? In other words, is it more of a response to the lower demand in large customers or a proactive shift in line with your strategy?

This is 100% aligned with our strategy, and there's so much as a leadership team we can do at the same time. As you might have noticed that we have been busy with consulting transaction and the Malaysian transaction. So we finalized those end of May, and then, we could start getting to our plan and which we announced then in June. So that we took 30 days. I think that's pretty decent for that one. But this has been always the plan. If you remember from Investor Day, so the key thing is that we focus on the partners serving the mid-market Managed Service providers, kind of IT Managed Service providers, and that's the scaling effect, and they have access to the mid-market. Then we have a lot of channel partners from WithSecure history, those we are consolidating largely under distributors like we have done with the likes of F9 in Finland, Ingram Micro and Infinigate. And we continue to do so. Another -- I guess, the efficiencies come 2 ways. So that partly is adjusting the cost structure to the Managed Services business reality, but big part comes from that actually us resourcing for the strategy, and then, there are synergies consequently from that one.

All right. Then also about the MDR decline, you mentioned that there was one large customer that partially churned. Can you specify what that means? And do you expect the same client still to continue churning?

There is, of course, also some part that potentially churns in the future, so -- but then that has been taken into account in our forecast. And this was a significant part from a single customer that happened in Q2.

Then still a few questions. You also say that the FX impact was a big reason why the cloud protection for Salesforce growth was quite slow in Q2. Can you give at least a ballpark number on what the FX-neutral growth was this quarter in that segment?

We -- did we announce the number there in our...

So you said in the -- you said EUR 400,000.

EUR 400,000, so that's about the FX effect that -- what we...

Of ARR.

Of ARR.

Of ARR.

Yes. Without that, of course, it would have been higher that amount.

So just explain once more, EUR 400,000. What do you mean by it?

ARR.

Our ARR reduced EUR 400,000 compared to Q1 because of FX.

All right. Got it. Then you also say that the discussion around the Digital Sovereignty accelerated in Europe this quarter. Do you expect this to actually materialize in increased demand still this year?

We already see increased demand from the partners, and that's why companies like DNA in Finland are launching with us. You saw the release 12th of June. So we are launching with DNA to bring a European and Finnish alternative to the Finnish market from the telco. I think that's a big step forward. And I think we have been doing quite groundbreaking work in Netherlands. You have heard Ictivity in our Investor Day. We have a big client talking publicly, Reliance. Reliance is a family office that has acquired 7 Managed Service providers into the group. They are standardizing on WithSecure and upgrading that to the entire fleet, and we see more partners like this coming so that this gives me the confidence.

All right. One last one related to the cost savings. You said that from Q3 onwards, it will benefit your margins gradually. But how much will it actually benefit this year's results?

Now, as we said, it will be EUR 6.5 million in net savings on annual basis. I would say that a large portion of that probably depending on how now the process goes. Of course, we will start to come into play in -- from -- at some point in Q4 and onwards.

It's Atte Riikola from Inderes. Maybe first now about the change negotiations. Do you have any estimate how much nonrecurring items is going to come from those in Q3?

We will launch -- we will tell when we are done with the processes.

And then still about the ARR guidance. Now you seem like you have confidence that ARR growth will pick up in the H2, but should we already see some improvement in Q3? Do you already have the pipeline that now in Q3, there is going to be improvement?

Absolutely, we need to increase the tempo in Q3 and definitely in Q4, but I expect this to be quite back-end loaded any which way like our business usually is.

So it's, again, Q4, when we're going to see what's going to happen. Maybe still about that, it's -- if you calculate, you have to like get in like -- roughly like EUR 7 million ARR to get it like in the lower end of your guidance, so -- and if there's still going to be some churn from the Managed Services? So it sounds like a lot compared to your history. So what gives the confidence, I just want to know?

I guess it's important to understand is that when -- that's the reason why I mentioned this Reliance example is that when you sell into a partner that is Managed Service provider, you are not -- they are not actually selling the technology to their end customers because they are providing a service. They switch on the technology, and we get the full benefit quite quickly. And I think that's -- that gives me the confidence on that one. But there's a lot to do. I think it's that funnel supports it, and the funnel supports it, and there's no reason to be pessimistic about it. So that would be guesswork.

Can you say anything about what kind of numbers we're talking about, if that kind of MSSP partner takes your technology and takes it to all of its clients?

Better not to comment, I think we said. But I think we have said -- we shared in the Investor Day about the opportunity at how the -- if you move from EPP to wider -- did we share that one?

Yes. I mean, if it -- yes, so it's, of course, multiple x.

It's like 12x endpoint protection easily per seat.

And you already mentioned that there is like growing interest towards European cybersecurity vendors. But is it now only seen from the partner perspective because now, of course, the ARR growth wasn't that fast in Q2? So...

I think it's fair -- it's true because our business model is about we sell into the partners, then we get the multiplication effect. We are not selling into the end-user. We are selling into the partner. And together with partners, we then sell into the customer. So it's -- that's why this progress in setting up the partnerships, that's the foundational work that is so critical.

And if you look at the competitive landscape in Europe, has there been any changes this year?

This has been the biggest change, this digital sovereignty. I think I've seen RFQs where only Europe vendors are eligible. And so that we have 3 main contenders in business; ESET, Bitdefender and WithSecure in Europe. And -- but we start to see those kind of trends. Denmark has taken very drastic actions to remove U.S.-based technologies. I think they're moving Office 365 and moving to open-source systems, and they are doing systematic actions so that this is a big undercurrent, and it will not happen overnight, but it's a big undercurrent, and it's a part of the European defense as well. So if you look at this NATO spending 5% -- this 1.5%, cyber is part of the 1.5% and the sovereignty part there.

All right. One more question from the room.

Yes. Just a couple of housekeeping items. Just on working capital, it was quite a meaningful release in the quarter. So could you explain that a bit? Was that something structural? Or is that something that will reverse in the back half of the year?

That's probably mostly related to when we did the consulting divestment and so on. So that had a big impact on the numbers as well.

Okay. And then just another one related to SPHERE. I think you disclosed last year that the cost related to the event was roughly EUR 1.2 million. Can you disclose how much it was this year?

EUR 750,000. It was in some slide so that we had a significantly lower spend on that one. We had a very focused session for the right audience, customers and partners, less of an industry event .

All right. Moving to the questions from the chat. And Jaakko, our analyst, is online today and asks, given the talk around digital sovereignty in Europe, are you seeing especially good opportunities in the European public sector? You touched on it already, but maybe let's hear again.

Yes. I think that's definitely an upside for us is the public sector, and there are increasing items on that one. So that, of course, there's a whole notion how we as a nation support Ukraine. I think that's a big part of the opportunity and so forth.

All right. Then, again, from Jaakko, after the churn of the large client in Managed Services in Q2, could you comment the remaining at risk customers in the Managed Services portfolio?

Of course, unfortunately, when these churn things happened, the risk reduces somewhat. And as Antti said, there is also a part of Managed Services actually, which is growing. It just doesn't come through when large customers are...

A number of our end customers in Managed Services is higher in this quarter than it was previous quarter.

So, I guess, the answer is that once the churn happened, the risk reduces.

Absolutely.

All right. Then there's Jaakko and a member of the audience who both asked about the Cloud ARR guidance. We talked about it already, but let's talk about it once more, so the guidance implies rather steep acceleration in the second quarter. What gives you the confidence for such a change in the trading?

So the work we have done with the partners in the first half and the quality of the partnerships and, of course, having access to our sales funnel. And I think sales funnel is the basis of our ARR guidance.

All right. And actually, it looks like people are on their holiday because there's no more questions in the chat. Is there anything still?

Yes. But if I still comment, I think this AR topic is that -- it is really about that we have a good funnel, we have good partners. I think now it's us to prove and execute on that one. I think that's what we need to do. And it's a -- that's why we put the focused operational model as well in place for sales that we are able to capture these opportunities.

Thank you, Antti, for recapping. Any questions in the room? No. None in the chat either. So I think we are ready to wrap up and go back to the sunny city. So thanks for being with us today, and have a nice summer, and thanks for following us in the future as well. Bye-bye.

And thank you for and happy holidays from my part.

Thank you very much.