F-Secure Oyj

OMXH:FSECURE

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Timo Laaksonen, executive]

Good morning, good afternoon, everybody. Welcome to F-Secure's Quarter 1 Interim Report session. My name is Timo Laaksonen, and I'm the President and CEO of F-Secure, and I will be joined a bit later on by our Chief Financial Officer, Sari Somerkallio. Good to have you with us.

Let's get started. So as the header says, we had a solid start to the year. Our revenue grew clearly, 31%, very much thanks to the company acquisition or business acquisition of Lookout Life we made last year, but also thanks to organic growth in our partner business.

Also our direct business was performing well, specifically on the billing side, thanks to strong renewals and increasing average revenue per user. So that was good. I'll get to some of the details a bit later on. What was something where we were not happy was that our gross margin was burdened by certain items that Sari will talk more about. These were related to our transitional service agreements ending with F-Secure at the end of the year and now us taking those on in the first quarter. But more about that by Sari as said.

We were focusing, as we've stated earlier, more heavily on the partner business in new business development. And as an endorsement to that effort, we signed a massive partner, a communication service provider, in the month of March. And that's something that we believe clearly indicates that the acquisition of Lookout Life is actually bearing fruit.

This is based on embedded security capabilities that we have developed and are developing further. And that is going to be something that will show more significantly in our numbers in the years to come. But naturally, there are some initial start-up fees also that are helping us already this year.

Then in our direct business, we are focusing -- continuing to focus, actually, on consumer experience. We are doing improvements on that front that make it smoother and easier for our customers to go through our journey as well as what we've done already in the first quarter, driving retention and upsell, thereby increasing the average revenue per user even further.

Now we announced already at our previous quarterly results session that we've now integrated the organizations fully. what used to be F-Secure and the Lookout Life team that joined us in the beginning of June last year. And that's -- that new organization is now fully up and running, including the changes we implemented in our change negotiations in the fourth quarter.

That is now accompanied by our renewed corporate culture, which is in the rollout phase. Also a little bit more about that later on. But that's in a snapshot.

Looking good in terms of revenue growing and signing up Tier 1 partnerships precisely as we have stated in our strategy, where we want to put more focus on and direct business holding the fort very well.

Now there's a lot of text on the slide. This is not a Gartner slide. This is an F-Secure slide. So first of all, we're driving more value through rollout of Total. And on that front, we didn't sign many new agreements. We signed some. But even so, we were actually already in a phase where we can see how the partners we've signed up in '22 and '23 are now getting more and more of their customers moving on to Total. We almost tripled our billings from Total compared to last year's first quarter. So very good development over there.

We also have some of our more important partners who are now converting all of their base of users, the ones who have been using separate F-Secure applications in the past into the all-in-one app Total, and that is bringing hundreds of thousands of users into Total from these individual apps.

In direct business, I've already mentioned that retention and average revenue per user have been going up. And on that front, we've been driving, for instance, improvements in the subscription journey.

And other things that we've done is that we've actually done away with, in a way, entry-level discounts to customers who are joining us. So when somebody is now renewing the service, they see that it's fair that they're paying the same price as new customers. There is no benefits that we're giving to new customers as opposed to renewal customers. Both are equally important.

Also, we've made sure that our pricing is now on a level playing field between our partners and retail partners and direct business, and that also represents a fair pricing policy from customers' point of view. And what has naturally helped us boost total business is that our Net Promoter Score, NPS has now reached a new high at 50. So that certainly helps when we are asking people to renew their subscriptions. But that's all on the Total side that I would like to comment here.

Then in terms of expanding our market coverage and increasing the size of our accessible market. So especially going after Tier 1 partners, the biggest service providers in the world will over time allow us to address tens of millions, if not hundreds of millions more consumers out there with our services than what we're currently doing. We're aiming for at least 1 billion addressable consumers behind our partners by the year 2026.

Now the deal that we signed is actually for embedded security. And that means that we are providing 5 different capabilities to this partner, who develops this application that they're going to bring to the market and launch to the market towards the end of quarter 3. They develop the application, we provide the -- in a way, the engines so that they can create that service.

Why we are so quiet about the name of the partner is that they naturally operate under competition, and they want to keep it close to their chest at this point in time what they are building and with whom. So we hope to be able to disclose the name once they launch the service.

What this deal is helping us do, first of all, is that we are enhancing our embedded product portfolio in areas that are super relevant for major partners out there. And secondly, we also develop our own maturity and capabilities related to serving Tier 1s, such as service levels, uptime, delivery capabilities, partner care, security operations and so forth. So this is a company-wide exercise that we're embarking on here that is moving along well.

We have a pipeline of more Tier 1 partners, both extensions with current ones as well as completely new ones. And hopefully, as the year progresses, we'll be able to once again, disclose more information about those as we sign up new business.

We have come out in the fourth quarter of the year with something we call trusted shopping or shopping protection, and that's been received very, very well in the market. So initially, we launched it for Windows and Mac users. But in this fourth quarter, it's going to be available also for iOS and Android users.

So that provides you information on how reliable and trustworthy is the shopping site that you're about to enter. And in line with our #1 security experience, we've made it a very elegant one, the experience, how people will be notified if they should be proceeding with that site or if they should be thinking twice.

We've also launched artificial intelligence-powered messaging security, which means that SMS messages on iOS and Android platforms will be scanned for potential threats. And what I can say as an interesting snippet of information is that when people receive SMS messages that are potentially malicious, what we tend to think is that the only way that you can recognize if it's good or bad is to look at the link that is part of -- forming part of this message.

But that is no longer enough. There may be messages that have no link whatsoever, but they're asking you to do something. And 59% of the malicious SMS or text messages that we have stopped at the gate, 59% of them can only be recognized by using AI. There is no link or the link is so new that there is no known information about it. So AI is actually super crucial in making sure that we protect the users.

Finally, the -- expanding into new channels and new verticals. The work has continued pretty much on -- or actually, on plan, where we are aiming at signing up more insurance companies, banks, payments providers as our partners the same way as we've typically done with communication service providers. We signed one new partner on that front, and we did a conversion to Total with a partner in Denmark, Tryg Insurance. So that's what we've achieved on the business front in the first quarter.

A few words about the new -- completely new capability that we have now -- just now launched in F-Secure Total. You may remember that we've had what we call Internet security, that's the endpoint protection. Many years ago, that was called AV. We've had VPN. We've had password management. We've had identity monitoring, parental controls or family rules as we call it. Now we're coming up with a completely new module we call scam protection. And that will be a constantly growing group of capabilities, how we keep people safe from scams. And this is just the beginning. So we start with 6, and we're going to be adding more every single quarter.

So I already mentioned the SMS scam protection on messaging. I mentioned shopping protection. Banking protection is something -- it's the one we've had longest. But then there are browser plug-ins that will keep you safe in the native environment when you're using either Chrome or Safari.

There's WiFi protection. So if you would be connecting to a WiFi, let's say, in a coffee shop or a mall or an airport, you actually get notified if that WiFi is trustworthy or not. A little bit the same as we do with shopping protection, but this is for the WiFi that you're connecting to, and we have an ad blocker.

These capabilities are now -- all of them are available, either on all of the operating system platforms or some, and they are going to be fully available on all 4 platforms, Windows, Mac, iOS and Android by the end of this year, but all of it is already out there. So this is tangible new value that we're providing in Total that comes at a separate fee to users.

Finally, we have now launched our new corporate culture in March of 2024. So as I've stated a couple of times, we acquired the Lookout Life business last year, 2 years ago roughly, we demerged from WithSecure. So now was high time for us to actually come up with our own identity as the new independent F-Secure, having joined forces with Lookout Life.

And these are the 4 values and related behaviors that we are now driving in the company, keeping focus on the right things, making each individual making a difference, empowered, just doing it. We're not referring to a sneaker brand here. We're referring to the attitude that we want to get things done quickly.

And finally, daring to care, which refers to the fact that through a feedback culture, we should be all giving both positive and constructive feedback continuously to our fellows so that we develop faster.

So as you can see, quite a lot of this has to do with increasing our pace. The world is not waiting for us, and we definitely realize that we have to not only stay -- stay at the same pace as the world, but even go forward. So this is what we believe will be one of those 3 fundamentals, strong strategy, excellent competencies and a culture within which we perform successfully.

I believe that's all from me at this point in time. We'll get to the questions later on, but I'll now hand over to Sari Somerkallio, our Chief Financial Officer.

[Sari Somerkallio, executive]

Thank you, Timo. Hello, everybody, and good to see you again. Let's have a look at the financials and go through some background here. As Timo said, so revenue grew by 31%, which is thanks to the Lookout Life acquisition. And organically, it was a bit higher than 3% and currency neutrally closer to 4%.

And about the currency, so Japan had some headwind from the currency. So that's where we have the biggest difference. And also in the U.S., the local performance was better than the reported one, but this time, not as big difference as earlier.

Looking at the geographies, so the same story from last year continues. So of course, in the U.S. Lookout Life had the biggest impact. And then in Asia and it's Japan, where it's really significant. And there you see that the difference between the reported and currency neutral is really big. That was quite significant market for Lookout Life on top of U.S.

Looking at the organic world. So there also Asia grew nicely. And Japan, Singapore, Hong Kong were the growing markets. And in Europe, Holland continues to grow. Then challenges, similar story, what we've been telling. So in Poland, we continue to face headwinds. It started from the regulation change already some time ago, which has sort of had an impact on the whole market dynamics in the country. And Germany is in the partner business, another challenging market, but that's more related to a customer who is not yet the total customer and development has not been positive there.

In direct channel, revenue is still -- revenue development is still negative. But as Timo said, so the nice trend from Q4 continues. So billings are actually developing positively. And that's, of course, like money, money in the bank. So the deferred revenue from the direct channel is growing, and that will be then reflected in the future performance.

And here, here you see again the channel split numbers. So partner channel growing faster than the direct side, and the direct side growth is sort of waiting for the future. And in deferred revenue, you see from year-end 9% growth, and that comes actually even more from partner side. So with this new CSP Tier 1 partner that Timo told about and what we've had the press release about.

So even if the service is not launched, there is quite a significant start-up fee that boosts the deferred revenue in the partner channel. And that's something that is a normal way of working even in the old F-Secure, but normally smaller numbers, that we get the compensation for what we are building for them. And then also on Direct side, the deferred revenue growth.

Looking at the cost side, Here, of course, OpEx is higher than last year because the company is bigger. But I think the positive thing is that it grows clearly less than the company size. So we have been able to improve the OpEx efficiency. And it's a sort of scale benefit of being a bigger company than before. You see that the admin cost went down from earlier, being 11% of revenue. So now it's 10%.

So with the Lookout Life acquisition, we didn't get any admin type of people, and it was very limited recruitment that we had to make. So some efficiency indeed there. Then you see that the R&D part continues to be on the same level in terms of percentages as before. So this is really the focus and investments in the future.

And not being in this picture, but you also see that CapEx numbers are up, and those are also from the R&D and technology area. So that's really showing the investments in future growth. And in sales and marketing, so there is growth, but still it's less of the whole revenue. In that number, also actually marketing share is lower because we have discontinued the paid acquisition in the direct business numbers.

Then a couple of words about the TSAs. So you see that now the WithSecure TSA column is out of this picture. So we don't have any TSAs with WithSecure anymore. It's only the Lookout side. And the number is a little bit smaller than we had last year TSAs with Secure, a little bit different structure.

And basically, we have 2 main contracts remaining and one of them will be discontinued now during Q2 when it's 1 year from the acquisition. So in Q2, these numbers should be already a little bit smaller, but will still continue existing. But as such, these are -- we are buying services, which we could also do internally or from somewhere else. So this doesn't really change the profitability or you should not expect like big changes because of this.

Then looking at the profitability, if we start from the gross margin picture, and these are all the history is the revised numbers. We changed the way how we look at gross margin and cost of revenue during Q1. And these are now based on the new methodology, and it's clear that the trend has been down from last year.

And the main factor there is Lookout Life acquisition. Lookout Life had lower gross margin percent but also they had lower OpEx cost. So it's a little bit different structure, and it's related to the product mix when we are in the embedded business like lookout was to a big extent. So it is a little bit lower profitability. So that's the main explaining factor.

Then there is also this fair value adjustment that has a small impact. And then there is an impact also from our technology autonomy. And now we've had -- we've gotten some benefit from being in the WithSecure platform. And now when we are on our own, so we lost some of that benefit, and this should be the base on which we are building the future.

And if you are asking if this number was a surprise to ourselves. So yes, we definitely had the ballpark correct. We knew that we would lose some of these synergies, and we knew, of course, what the lookout level was. But maybe there are some decimal points that we would like to be higher, and we are definitely working on that.

And for example, so we have now when we have bigger volumes, we've been able to make new contracts, and there is one significant one which is starting from April, that will give us then better discounts now that we have the bigger volumes. And then when part of these lookout DSAs will be terminated, so that further increases the volume that we have in our own hands. So we are now on a learning curve to take things in our own control and really monitoring the volumes in a completely different way compared to how it was earlier.

And on EBITDA, lower level than same quarter last year, and the gross margin definitely has an impact on that. Then -- well, one new picture based on, of course, the numbers that you've seen, but I think it is quite significant how F-Secure has changed. If you look at the cost structure that we have since the Lookout Life acquisition. So we talked about EBITDA percent and the gross margin, so that you see on the top. So cost of revenue is a bigger chunk of our costs and OpEx is a smaller chunk.

And then there are totally new items, the depreciation, amortization, those have gone up. Of course, there are the PPA amortizations, but that is not cash flow, which is, of course, good from the cash flow generation point of view. And then the financial items, of course, with the bank loan, that's quite significant.

So all in all, the blue part on the bottom, which is the net profit. So it is both in terms of percentages and absolute numbers, it is smaller than it was. But if we think about the cash side, so despite the fact that we are paying so much interest rate, so the cash impact is still positive in this picture. But quite a big change when we compare to last year.

And talking about the cash flow. So cash flow generation was lower in this first quarter compared to last year's corresponding quarter. And the main factor is the dividend payment. Last year, we paid the whole dividend in Q2. There were also some other challenges with our receivables process, which we mentioned, I think, in the report.

But -- and then we paid the whole dividend and now it's half of the dividend in the first quarter, but that's the main explanation. And of course, quarter 4 was extremely good in terms of cash flow. So not a benchmark, but something, of course, that is a nice thing when it happens, but you cannot expect the 140%, obviously.

And about some other KPIs, the leverage, which is a new KPI that we are following since the acquisition. So that went up a little bit. And there, again, the dividend is the reason. And equity ratio similarly went down from the year-end. And there as well, it is a dividend payment that is explaining that.

And then in terms of the outlook for this year, so yes, a solid start to the year and not changing the outlook, but continuing towards this and message holds that, of course, we are aiming for the higher end, but still so many uncertainties on the market that we didn't want to change the promise yet.

So that was our presentation, and now we are happy to take questions.

[Atte Riikola, analyst]

It's Atte Riikola from Inderes. First about this new Tier 1 customer. I think you mentioned in the report that it's -- that contract already accelerated growth in Q1. So is that related to those start-up fees? Because I think the contract was announced in the -- just in the end of quarter. So was it a big impact from that?

[Sari Somerkallio, executive]

Yes. There is an impact that is -- yes, we don't disclose the number, but as you saw that the partner deferred revenue went up. So that's mainly explained by this. But it is a significant amount that we get, and it's for the whole contract duration, so several years, and it is then just recognized over the longer period. But in Q1, there was already an impact.

[Atte Riikola, analyst]

Okay. And if we think about the revenue potential in this kind of client and especially now in the embedded security, so can you give any ballpark what kind of expectations you have for in the midterm?

[Timo Laaksonen, executive]

I think I opened the can a little bit earlier when we talked about potential values of Tier 1 partnerships. And I mentioned that when things are in full swing, they could clearly be somewhere in the EUR 5 million to EUR 10 million per year range. If we have a very, very narrow scope in a case to begin with, for instance, it may be less. It may be clearly less. If we have a massive scope, it may be a multiplier of this EUR 5 million to EUR 10 million. I can't go and comment anything more detailed at this point in time, but that's the kind of range that we're talking about.

[Atte Riikola, analyst]

All right. Then about the gross margin, you mentioned that you believe that you are able to get it improving again in the coming quarters. But do you think you are able -- let's say, in a couple of years, do you think the levels that we saw in, let's say, Q4 or Q3, is that still achievable in the future? Or are we now on a lower level?

[Sari Somerkallio, executive]

Yes. I think we can get to those levels where we were end of last year, but the level where we were a year ago, which is mostly based on the security suite type of gross margin. So that is a bit remote because we want the embedded side to grow. This is about the product mix very much.

[Timo Laaksonen, executive]

And also in the beginning, when we are going and acquiring new Tier 1 partnerships that might require a bit more aggressive terms. But as we move on, it will stabilize. Naturally, multiplier is way bigger than what we've seen in the past. Sari referred to the fact that what we've seen in the total business or security suite are clearly smaller volumes, but very high ARPUs. Now it's the other way around, massive volumes and slower ARPUs -- sorry, lower.

[Atte Riikola, analyst]

All right. Then last question from me. The investment level in Q1 was clearly higher than what we saw in the previous quarters. So is this like a new normal? Or was there something special in Q1?

[Sari Somerkallio, executive]

What is new here is that these Tier 1 deals require some development work, which is also then done for the lifetime of the contract. So that is increasing. So it is directly products that we are delivering to the customer.

[Timo Laaksonen, executive]

If these are, to a certain extent, finite projects that we are working on in terms of product development, we do foresee that as we win more business and continue extending the portfolio, those resources don't go away, at least not wholly. We will be more than glad to hold on to the resources that are now in these projects and dedicate them then into new ones that we plan to win.

[Matti Riikonen, analyst]

Matti Riikonen, Carnegie. I continue with the large CSP customer that you got. I understand that you don't want to comment the revenue potential as such more than the bracket that you gave. But could you talk about the revenue model? How does it work?

[Timo Laaksonen, executive]

Yes. So the revenue model is that there is, in a way, you could call it a start-up fee, as we've mentioned earlier. which is a fixed number. If there are change requests during the project and implementation, that will potentially go further up. But that's a fixed amount and only change requests then cause changes in it. And then the ongoing revenue that we're going to be making from this deal is related to the number of people that our partner manages to sign up for the service. So it is a monthly subscription fee per user.

[Sari Somerkallio, executive]

Very similar to most of our business.

[Timo Laaksonen, executive]

I was just going to say the same that very much like we do in total. So it's a monthly subscriber-based fee. And when our partner is successful, we are successful.

[Matti Riikonen, analyst]

So it's a continuous fee not related to how much this person who subscribes to the service is using the service. So is it based on just kind of monthly individuals doing more or less in the service, not kind of transaction related, it would be [indiscernible]

[Timo Laaksonen, executive]

Usage or transaction related. It's a fixed fee independent of the amount of use of the service.

[Matti Riikonen, analyst]

All right. Good.

[Sari Somerkallio, executive]

The number of subscribers.

[Timo Laaksonen, executive]

Yes. Yes.

[Matti Riikonen, analyst]

Okay. That's very clear. And then you started to discuss a bit about the kind of future margin profile from this type of business. Could you go a bit deeper I mean, I understand that in the first phase when you are kind of doing work to develop the service, it probably -- I would imagine that it doesn't cover all your costs. So it will be a short-term investment that is in your profitability numbers.

But then when this development work has been done and it doesn't continue, at least not in a large extent, are you earning more from this type of customers or this type of service than you are earning from regular total clients?

[Sari Somerkallio, executive]

Yes. The development phase does not have an impact really, on the gross margin because there is no hosting cost. So actually, now we get some of this start-up fee, which is recognized over the months. And the costs are either in OpEx or CapEx. That's the beginning.

And then when we get into the production phase, so then there is the gross margin, which would be a bit lower than maybe the company average. And then it is basically the SG&As in that related to that customer are very like fixed. So whatever you need in the beginning, it will not grow based on the number of subscribers that the customer, the partner has. So it is like a scalable business when volumes go over a certain threshold, it becomes really profitable. And so in terms of the contribution or sort of customer profitability, if it gets big, it is very profitable.

[Timo Laaksonen, executive]

You could think of very similar ballpark as we do in total business.

[Sari Somerkallio, executive]

Not gross margin level, but the contribution on customer level.

[Matti Riikonen, analyst]

Okay. And does it include any kind of clauses where if the penetration of the service or the number of users for the service increases up to a certain point, then your share of per customer comes down. I mean that historically, there has been that kind of clauses as well. But is this -- does it follow the same logic? Or is it fully scalable so that the more you get, you always get the same amount per person, whatever the number then eventually is?

[Timo Laaksonen, executive]

So this depends on the Tier 1 agreement we make. There may be volume discounts in some and no volume discounts in others. So both scenarios are possible. But we definitely make sure in our business case calculations that the business rationale is sound in all cases, but it can be either.

[Matti Riikonen, analyst]

Okay. So you don't want to comment this particular customer, what the deal will look like, but...

[Timo Laaksonen, executive]

No. No. No.

[Matti Riikonen, analyst]

Okay. When you mentioned that the additional Tier 1 partnerships might require more aggressive terms. So it means that if there's competition, you will cut your price to get the volumes and interesting kind of reference cases, which you can then use for other types of customers. Is that the correct way to think that you might be kind of in a situation where you need to price it a bit lower just to get in and then future will show whether you can do something with that price level or not?

[Timo Laaksonen, executive]

We never sign deals that don't follow a certain level of profitability for us, a good level of profitability. So that to begin with. But every single case that we go for, there is heavy competition. So nothing is handed out easily to anybody.

And there's typically an existing partner that this service provider has used in the past, maybe a standard product, something that is available to consumers out there readily from the manufacturer, if you so wish. But now the Tier 1 partners are oftentimes looking at building completely a unique proposition for them, their own application that, in a way, competes against the standard apps out there that are available from vendors.

And the pricing is then naturally dependent on competitive situation, but we will never go for deals, even to begin with, to get our shoe in the door or foot in the door. We will not go for deals that, for instance, would be loss-making for us. And we have our good financier controlling that in the longer term, these are always at the level of profitability that we expect. It may be just differing if it's in year 2 or if it's in year 3, for instance, when we really want to get to the target level.

[Sari Somerkallio, executive]

But the nature of the business is that as they are typically large, there's a large number of subscribers behind the partner. So it is lower profitability or lower price per subscriber, but because there are so many. So that's why it's different to the total business.

[Matti Riikonen, analyst]

All right. And then if -- how much of that work, which you are doing now for this particular customer, how much of that will be reusable for other customers? Is it kind of straightforward that once it's done, it can be used for others? Or is it so customer-specific that it's difficult to replicate? What's the kind of moving space?

[Timo Laaksonen, executive]

95% is replicable.

[Matti Riikonen, analyst]

95%?

[Timo Laaksonen, executive]

Yes. So we -- this is standard product development, but there are certain interfaces and packaging-related matters that need to be built in a certain way so that it fits their environment, but that's minor. So we are doing precisely the kind of development we want to do in this case that will benefit all.

[Matti Riikonen, analyst]

All right. So...

[Timo Laaksonen, executive]

Including, by the way, Total. So the new capabilities that we're developing here can later on be functioning as engines to expand the Total capabilities.

[Matti Riikonen, analyst]

Right. And is it so that the IPR belongs to you so that nobody can say that you can't use it because it's done for us.

[Timo Laaksonen, executive]

Yes. Yes. Correct.

[Matti Riikonen, analyst]

Okay. That explains that the investment is probably wise to take because if you can multiply it, then it's worth.

[Timo Laaksonen, executive]

It's a product investment.

[Matti Riikonen, analyst]

Right. Good. Just one question related to the deal. I remember some earlier times when you talked about this embedded security market and the opportunity, and you were I think, at least suggesting that you were working with maybe a couple of customers or one customer already earlier. And now this announcement came this year. So was there already some kind of talk much earlier, which might have been in the discussions, but not yet concrete proof that you will actually get this kind of deal, if I remember right.

[Timo Laaksonen, executive]

So very close. So we've had several embedded security customers before. One -- or sorry, 2, we had signed up in the old days of F-Secure, a fintech and an operator group. And we gained more through the Lookout Life acquisition. For instance, AT&T and NTT DOCOMO are both embedded security partners to us. And the one that we have signed up now is new. We haven't referred to that in any way except that we have a prospect pipeline.

[Sari Somerkallio, executive]

And what -- when we earlier talked about the embedded business, so we can do that also with smaller partners, and that's what we did during the -- like the old F-Secure. And the new thing here was that it is in this Tier 1 space and not the smaller one like our old customer base typically was.

[Matti Riikonen, analyst]

Right. And yes, you have discussed and mentioned these names and they have been at your CMDs. I was just thinking that are we talking about the same thing, but maybe it's the same kind of inventions, but the scale is just no different.

[Timo Laaksonen, executive]

The AT&T scale is massive for us. So is the new one. So nothing more really to comment there.

[Unknown Attendee]

Let's take some questions from the chat. Could you give us any color on Lookout's organic growth alone in Q1?

[Sari Somerkallio, executive]

Yes. We have not disclosed those numbers explicitly because they are a little bit -- they are quite illustrative and indicative, but it's possible when you dig into this, there are numbers for this fair value adjustment. So it is possible to calculate them. But I will not give explicit numbers here.

[Unknown Attendee]

Can you remind us about your plans for amortizing your debt facility and the outlook for financial expenses for the coming quarters?

[Sari Somerkallio, executive]

Yes. You can see it from the balance sheet that there is EUR 30 million in the short-term debt. So that's what we amortize every year, and it is always in Q2 and Q4, so EUR 15 million each. And I think while you -- what you see in the financial items for this quarter, so you can -- and looking at the interest rate level, so that's how you can calculate what it would be.

[Unknown Attendee]

What are the key levers for driving OpEx efficiency further going forward?

[Sari Somerkallio, executive]

Growth is, of course, the key one for us because when we grow, OpEx will not grow with the same pace. And even if gross margin is lower than it historically was, so that definitely will improve the profitability. We have right now, a new organization after the change negotiations during Q4. So like no big changes to be expected there, but now we are taking really trying to optimize the world with this organization.

[Timo Laaksonen, executive]

A couple of things I could add is that we've had more fixed term style cloud costs, for instance, when we've been counting on WithSecure back-end services, that doesn't necessarily inspire you to do a whole lot of optimization in the cloud consumption of your services and products. We're now actively looking into that as one area to drive down our relative costs that are related to running the services and operating the services.

[Sari Somerkallio, executive]

That's, of course, in the cost of revenue part and not in OpEx.

[Timo Laaksonen, executive]

Yes. That's right. Good.

[Unknown Attendee]

Investments for 2024, should we assume the run rate seen in Q1?

[Sari Somerkallio, executive]

Now Q1 is quite high. We have projects that last for the first half of this year. So I think that the full year should be lower than what Q1 looks like.

[Unknown Attendee]

And then final question. How have total rollouts continued and developed in partner channel and on direct channel? Report seems to highlight the direct channel in that sense.

[Timo Laaksonen, executive]

Direct channel has done well. It's gone slightly above expectations. So that's been good. On the partner business side, we moved from -- as I mentioned earlier, we moved on signing lots of partners on to Total into a phase where they are now driving their new users and in some cases, already the base of existing users into Total. And that has gone, I would say, on par with our expectations.

[Unknown Attendee]

Those were all the questions from the line.

[Atte Riikola, analyst]

Still one question about your guidance. If you look at -- you had like a very solid start for the year. And if you look at the lower end of the guidance range, it starts to look quite cautious. So what would need to happen that you end up in the lower end of the, let's say, net sales range and EBITDA range?

[Sari Somerkallio, executive]

Yes. I think that's a fair question. Of course, we don't know how the direct business, we've seen the negative revenue development. And of course, we now have some money in the bank. So -- but that's one area. And then we have -- even if now the partner business looks very good. So I think we want to see a few more good months because it is a mix of countries that are not doing well and countries that are doing very well.

[Atte Riikola, analyst]

You look at in the partner channel, like the absolute revenue levels on a quarterly basis, is there any seasonality? Or should we expect now when you have gotten those total rollouts in that the absolute level should increase like every quarter? Or is there some variation?

[Sari Somerkallio, executive]

Yes. Basically, the run rate of existing customers, it is fairly stable. There are some customers who have not updated to total who are actually declining and to whom we, of course, try to sell more. And then with those customers that are doing fine, it can be growing. But unless you do an upgrade or something, it doesn't suddenly jump. So typically, the moves are not very fast.

[Timo Laaksonen, executive]

And quarter-to-quarter, no major changes typically.

[Sari Somerkallio, executive]

Yes. Yes. Our seasonality is basically that for direct business, Q4 tends to be better. There is a small Christmas impact. And on cost side, Q3 tends to be the lower cost quarter. But otherwise, there is no like annual seasonality.

Thank you to everybody. And of course, our Investor Relations are available if you have more questions afterwards.

[Timo Laaksonen, executive]

Thanks for joining. Bye, now.

[Sari Somerkallio, executive]

Bye.