Pexip Holding ASA

OSE:PEXIP

Earnings Call Transcript 2021-Q1

[Odd Sverre Østlie, Chief Executive Officer]

Ladies and gentlemen, welcome to Pexip's First Quarter 2021 Earnings Presentation. My name is Odd Østlie, and I'm the CEO of Pexip. For today's presentation, I'll be joined by our CFO, Øystein Hem; and also our Chief Commercial Officer and Co-Founder, Tom Erik Lia.The presentation will last for approximately 30 minutes, followed by a Q&A session, and the presentation is webcasted on our web page under the IR section, and a recording will be published after the presentation. Questions can be submitted by e-mail to [e-mail]. So with that, let's begin and get this started.So first, the highlights for Q1 can again be arranged on 2 dimensions. First, we are delivering record results, keeping us in line with our growth ambitions. We delivered a Q1 ARR of $87 million. That's a 54% year-on-year growth. In terms of recognized revenues, NOK 180 million for Q1. And we're also executing on our growth strategy, which, as communicated, also resulted in a negative EBITDA margin. However, also a positive NOK 13 million in operating cash flow, providing well also for an investment basis for the future.Second, we are delivering on the acceleration plan, really readying us for the future. We have launched and had our first commercial success with Pexip Health. In terms of industry recognition, we have received a reward from Frost & Sullivan. We'll hear from them also in this earnings report. And we're expanding our technology partnerships now with NVIDIA, which we also will talk a bit about later in the presentation.Last but not least, we are continuing also then to invest in people, both when it comes to sales and R&D. And despite the pandemic, we're also able to onboard and keep our culture, partly proven by, for instance, this Best Place to Work award that we again got in Q1.So with that, as usual, a bit of an overview of Pexip, again, both for new and existing owners. First and foremost, we -- since Pexip's inception, we have shown that we can grow strongly. That has been further accelerated by the pandemic. And as our market and customers are global, so are we, when it comes to users, partners and employees across the globe. And in terms of our business, it's a recurring revenue business, and we often use annual recurring revenue as one of the most important metrics of what we do.In terms of geographical distribution, since we're based in Europe and started in Europe, no surprise, that's the lion's share of our business. However, a very, also, strong foothold in North America and an emerging business in Asia-Pac.Now in terms of what is Pexip and what do we want to deliver to our end customers? In a sentence, it's about video communications as it should be. That's a pretty bold statement. So what do we mean by that? Well, what we mean by that is that for end users, with Pexip, you should get a better way to meet, that means high-quality audio and video, a rich, immersive experience of being in a meeting, and also things like an unparalleled reach. So when you are invited to a Pexip meeting, you should feel certain that more or less anyone on the planet can join whatever technology they might be joining from.For the IT buyers and the IT admins, they should feel comfortable that with the platform of Pexip, they can customize to the needs that they have. That might be the various parts of integrations, but also, for instance, getting full control of data privacy, data sovereignty and also compliance with their choice of data security standards. Because of these things, typically, we are preferred by larger organizations, be it enterprise or public sector.In terms of what these organizations use Pexip for, a bit simplified. It can be described as a 3 main use cases, where these organizations can use one or several or all of these use cases. And #1 and most important to us, what we're doing, to some extent, now with knowledge worker meetings and the high quality that we provide there is near and dear to us. And for our customers, many of those also expand this into I want to do more of an integrated workflow with my customers and partners. That's what we call a vertical market for us, where, for instance, in health care, you can embed a video into your workflow, be it doctor-patient interaction, remote care, but also other applications like, for instance, virtual justice. As we talked about before, most of the virtual court hearings in the U.K., for instance, is now being run on Pexip.Last but not least, we -- through our work with Microsoft and Google, we can also help customers bring non-Microsoft or non-Google devices into their meetings.Now the differentiated customer offering we have at Pexip is underpinned by our unique technology, and it can be simplified into 2 sides of this coin. On the one side, Pexip uses transcoding, which is completely different technical architecture than our competitors. This is the way we implement it in the infrastructure and allows us to receive, optimize and send video to each participant in the cloud as opposed to doing this on each client. This proprietary real-time video engine of ours is a source of some of Pexip's unique capabilities and intra-operability, and it allows us to take advantage of, for instance, AI in the cloud, not being constrained by PCs or video room devices calling in. This leads to a very rich end-user experience.On the other hand, Pexip is cloud agnostic. What we mean by that is that Pexip can be consumed as a Software as a Service, like many of our competitors, but also as a self-hosted software, which can be run in your own premise or in a cloud provider of your choice like GCP, Azure or Azure -- or Amazon web services, sorry. And this gives our customers unique control of data privacy and security and makes our platform more flexible to fit their unique needs. In summary, this leads to a very flexible IT admin experience.Now we and I have also been asked, so the pandemic has made video mainstream. What will happen when the pandemic is over? What's kind of next step? Will there still be need for video? Will there still be need for Pexip? I think most analysts, industry analysts, technology analysts, business analysts agree with us. But also, when I talked to many of our customers, they're all resounding that they will continue to need video and also evolve the needs for video as they return to the office.A big part of that is this new normal being hybrid working. When I talk to customers, they said that if it's 3 days at work and 2 days at home or some combination thereof or flexibility, they reckon that in the future for them, every meeting will continue to be a video meeting because you won't know where the participants will be when you invite to the meeting itself. And for the offices, they will also have new needs there because every room de facto will need to have a video device more than the traditional boardrooms that might have some equipment. Also, in huddle rooms, smaller 1- to 2-person rooms but also these mid-sized rooms, maybe with now 2 screens and a table facing the screens being more of a video-centric meeting experience.Whatever kind of the configuration, there will be a need to connect everything from browser to the boardroom and also across networks internally and externally. And this is also well fitting with Pexip's capabilities, given we are stellar at PC to PC, but we really shine when you bring in more devices, more complexity across different networks and connectivity.There's also another aspect of this in terms of IT organizations coming back. And what a lot of IT departments are telling us is that they feel they have also been in some sort of, call it, pandemic, if not crisis, mode, at least [ slumber ] mode as well. And as they get back to some sort of normal operations, as they always will be doing, they will have to reevaluate what they're doing across their IT portfolio.Now with video being so critical, given the new normal, we are also thinking about, are then our needs covered? Do we have the right solution relative to use cases? Do we cover quality, privacy and security? And also are there opportunities to further digitalize our video workflows with our customers and partners? And for this, we think our technology is really uniquely positioned to meet some of these new customer needs.And the same way, Pexip's product is designed for large organizations. So it's our go-to-market model. And our own sales and marketing team is augmented by the sales teams of our channel partners, which include leading system integrators, AV specialists as well as service providers. And these partnerships are an important source of leads that we jointly work with partners to close. And importantly, after customers have chosen Pexip, our partners provide great installation and support services. And as such, we had great AV specialist partners. We also have a range of global system integrators. And some of them, like, for instance, NTT and [ Tata ] is now recently really starting to step up their game with us. And on service providers, beyond telcos, we also have specialized health care service providers, like, for instance, American Well, Modality and Caregility betting on Pexip.And these partnerships ensure our customers get the full advantage of the Pexip technology and is an important reason for -- where more than 15% of the Fortune 500 have deployed Pexip and also several of the largest public sector organizations on the planet.Now in summary, in terms of the equity story of Pexip, it can be done like this. One, we are in a very interesting market, video for now, no doubt, and in this market, we have a pretty unique position towards larger organizations in the industry, although not as a consumer brand, maybe not the most known, but in this industry, we are a very recognized video communication platform that has some unique technology. And our, I would say, exceptional R&D team have delivered a lot of, what we call, industry-first innovation over the last years. We believe they will continue to be able to do that.And despite the relatively young age of the company, we have been able to attract and get the trust of quite a lot of few high-demanding customers and government organizations. And that, combined with a very scalable business model, including gross margins [indiscernible], gives us a lot of confidence for this growth plan of ours to reach $300 million in ARR by the end of 2024.Now beyond ARR being part of what we are targeting, we are also no stranger when it comes to profitability and built our company based on that also prior to the IPO. So while we expect to be a negative EBITDA in this year and also in 2022, we expect to get to neutral to positive territory in 2023. And in 2025, we aim to have an EBITDA of plus 25% as well as plus 25% revenue growth. And then reaching these targets, they depend upon but also enable us to be a recognized leader in the meeting solutions within the next 3 to 4 years.And I would also like to say something about ESG, which we clearly are committed to, and as such, we're also proud to say we now have submitted our first sustainability report. And in that report, we have identified the material topics that is most impactful and relevant for Pexip. Of those, of course, we have gas emissions and energy use. It's found out, hopefully, that video can help reduce travel a lot and, as such, is key to many of our customers. And it's also important criteria in assessing Pexip as a vendor and, as such, we have also done a thorough review of our existing business and suppliers and documented the Scope 1 and 2 emissions from those. And together with our own efforts on our own emissions as well as purchasing some carbon credits, we have now become carbon neutral within Scope 1 and Scope 2. And building upon this, we will also further set ambitions to further reduce in line with the Paris Agreement and also industry commitments.So with that and to help us do a Q1 start -- at least on the Q1 operational update, I'm happy to introduce Tom Erik Lia, our Chief Commercial Officer and a long-standing member of the industry and one of the reasons I started in video many years ago. Hello, Tom Erik.

[Tom Erik Lia, Chief Commercial Officer, Co]

Okay. Thank you, Odd Østlie. You just made me feel old. But happy to give you a quick update of some of the more operational side of Q1. So if you bring up the presentation slide up, let's start with the most important part, and that is, of course, our customers. I think we saw also in Q1 that we continue to win trust within our target segments, being the large enterprises with Honeywell, an American Fortune 100 company, actually, with the government here represented by the U.K. foreign office and, of course, within the verticals represented now with New South Wales Health in Australia. So all of them are good examples of our target segment and that we landed now in Q1.And these organizations, these large deals really drive the growth. As you can see on the right-hand side, the amount and increased share of ARR from these customers that brings us more than $100,000 in annual recurring revenue grew to 53% now in Q1. So very happy about that. But of course, next one is around how can we be even more relevant for these customer segments? We're doing a lot of things. We are obtaining a lot of products, but I just want to highlight a couple of segments that are important for all of these 3 categories that we talked about.So first, I want to just start with telehealth. You mentioned it briefly, Odd Østlie. I think telehealth in itself is a growing demand and a huge opportunity for Pexip. According to Gartner, they say that 30% of all the patients' interactions will be virtual in 2022. So that's only 1 year ahead. So there's huge opportunities for us to ensure that we are a part of that virtual care. And building upon our long-standing work that we've already done in the health care space, where we today power more than 600,000 virtual visits per week in North America alone, we launched Pexip Health, which is really demonstrating leadership and commitment that we have within the telehealth area.And as a part of that as well, we launched a strategic integration with EPIC, which probably doesn't say a lot to a lot of people, but it is actually the world's largest electronic health care record system, where serving more than 250 million patients. And why is that important? Well, because a lot of these telehealth solutions are actually built around the electronic health record systems. So when we are able to integrate with EPIC, as an example, we can create a much better and seamless join experience for patients, for doctors, as they are using kind of our solution integrated into their workflow and what they normally use. And it was launched, enabled in Q1, and we already have a couple of active customers with San Antonio Hospital in the Netherlands and actually the Norwegian Health Network here in Norway. And on top of that, recently kind of hot from the press, we just were awarded the best telehealth -- if you go back one more, best telehealth platform by a market intelligence company, Medtech Breakthrough. So that was also a good recognition of our technology platform enabling into telehealth. So the second part of what we did was, of course, you talked about it, Odd Østlie, but we launched what we call the Pexip private cloud in the end of Q4, so in December last year, which is really a unique offering to target these large enterprises and these governments that have specific needs around control of your data, control of your privacy, compliances, still want to have an easier way to manage the solution and scale quickly, of course, but, at the same time, being able to customize the solution for your need and for your workflow.So actually, the Pexip private cloud takes the software platform that we have, combine it with the service that we do have and give the customer the best of both worlds. So we truly believe in that great kind of opportunity for us in the future. Of course, these sales cycles are long, but I'm happy to say that we closed our first customers now in Q1 and -- which is a big public sector organizations, and we have a pipeline that is growing within this segment.Now the next one, Odd Østlie, is, of course, we need to be visible in our target segment. And normally, a lot of these large organizations, a lot of these public sectors, when they go out, they do a lot of research. And what they usually use are these global industry analysts, companies like Gartner and like Frost & Sullivan. And we are extremely proud that we now have been recognized as a leading challenger on the Frost Radar for Cloud Meetings and Team Collaboration Services. And this is truly an independent benchmark report from Frost & Sullivan. And there's probably thousands of companies within this space, and it's only a handful of companies that have been identified based on their innovation, based on their growth that has been nominated on the Radar. And I think we're really proud that we've kind of been so prominent place together with Facebook, Slack and Google.And together with the Gartner Magic Quadrant, a similar report, independent report about the meeting services, I think these reports really validate Pexip, our platform and it builds trust with the IT buyers that are researching solutions for maybe getting our solutions but also for the current solution or current customers we have that, yes, they actually -- they chose the right force to [ put it that way ].So to give you the Frost's perspective about why we ended up so prominent in the Frost Radar, we have -- did an interview with Roopam Jain. She is a Senior Analyst in Frost & Sullivan, which has been following this industry for more than 25 years, and she's been following us since actually the beginning of the company. So let's hear what she has to say.

[Roopam Jain]

Without a doubt, we do see Pexip as the leading innovator, and you are a high-growth companies, and we look at all the financial metrics, revenue, revenue growth rate, customer retention rate. Those numbers were solid. Also, all the work that Pexip has done in terms of expanding the portfolio, and your portfolio is a broad portfolio. Self-hosted private deployment to public cloud based on the Infinity platform, private hybrid. We place a lot of importance on the strength of the platform in terms of how easy it is for business to join meetings across different platforms.So the gateway interop services, also the enhancements that you have made on security, scalability, all of those emerged as key strengths. And the UI itself, it has to be natural. It has to be an engaging meeting experience. We liked, particularly, the AI-based adaptive composition feature that Pexip introduced. And those sort of features really differentiate Pexip in the market. And as I said earlier, solid revenue growth, strong numbers, all of those factors combined are primarily reasons why we put Pexip as a top company.

[Tom Erik Lia, Chief Commercial Officer, Co]

Thank you, Roopam. Very nice of you. But it is very important for us that we are participating in and are a part of these research papers.So a couple of other things we did in Q1. So technology partnerships are very important for us and make sure that we can leverage and grow in a bigger ecosystem. And you already mentioned, Odd Østlie, Microsoft and Google. We -- in January, we launched also a collaboration with Logitech, where we can actually put the Pexip app on Logitech conference rooms devices so that we can bring in the Pexip experience into the conference room. That is still not available. So that's something that we will make available now in Q2. So that is going as planned. But then lately in March, we launched an R&D collaboration with NVIDIA. And for a lot of people, I think, NVIDIA is about GPUs, and it's about gaming. It's the graphics cards that you have in your computer when you play games, but they are big on AI, and they are expanding very quickly into data centers and Internet of Things and just demonstrated by their desire to buy Arm for $40 billion, which is one of the biggest tech acquisitions out there right now.So as part of that, they're building the next-generation data centers, where you have centralized compute with a lot of advanced features available in the cloud, like, artificial intelligence and deep learning. And this is a perfect match for Pexip because as we talked about, our kind of architecture allows for a centralized way of processing data and processing media. So that, as an example, we talked about adaptive composition, which looks at the media streams. It looks at the people in the room. It counts the people in the room. It zooms the pictures, and it actually creates a great experience for the participant in the conference, fully automated using our artificial intelligence technology.Now the benefit is, of course, when you do it centrally, we can support anyone that calls into the meeting. They will all have the best possible experience. So we see this together with NVIDIA that we are able to then -- if you are able to utilize their advanced AI, deep learning technology service side, we will be able to allow kind of using that and create some ground-breaking features to improve the meeting experiences, whether it's improving on the audio side, the video side, features and functions that you would like to have during the meeting or after the meeting, where we can do everything centrally with no need to upgrade any terminals, any conference rooms on anyone that want to be a part of that meeting.So I think this partnership is really about positioning Pexip as kind of a bundle that can take really, really good advantages of these new technologies as they are built out into the next-generation of cloud offerings.So -- but with that, there is nothing here possible without the people. So over to you, Odd Østlie.

[Odd Sverre Østlie, Chief Executive Officer]

Thanks for that, Tom Erik, and you are definitely right, [ and I'm sharing again, I hope ], when it comes to people. And before we go on to operational expenses, a quick look at the main driver of costs, but also future growth, namely strengthening and scaling the Pexip team.We continue to execute on our acceleration plan, and thus, the team from engineering to sales to drive future growth. We are thrilled by a lot of the new hires we have signed on, but also the recruiting pipeline we have.Equally important to adding new people is to scale the culture and making sure we take advantage of the diverse talent that we have onboarded. So as such, we invest a lot in training and culture development, all done virtually in 2020, with the latest events being our virtual company kickoff in January. And this was a highly successful event and provide -- proving that while social distancing requires us to do things differently, we can still create great experiences that bring people together and create energy and a common direction. And that we are successful in this. We see proven, for instance, in winning the Best Place to Work award for the second year in a row as recognized by the Washington Business Journal. So with that, let's get into some of the financials and no better man to do that than our CFO, Øystein Hem. Welcome, Øystein. And I'll socially distance myself a little bit out.

[Øystein Dahl Hem, Chief Financial Officer]

Thank you, Odd Østlie. And let me start with the development in our subscription base, which we measure in annual recurring revenues. We exited Q1 with $87 million in annual recurring revenues. That is up $5.4 million in Q1 as a stand-alone quarter and up 54% year-on-year. The growth of $5.4 million is somewhat down from the $9.5 million that we delivered in Q1 of 2020, which was an extraordinary quarter in many respects.As we reported last year, in Q1 of 2020, we saw a quarterly growth of $4 million to $5 million from existing customers needing to increase their capacity as a result of COVID-19 at the start of pandemic. And in addition, we had a $2 million partner contract, which is quite extraordinary for Pexip. That puts the underlying growth around USD 2.5 million to USD 3.5 million, which was substantially up from the $2 million that we delivered in Q1 of 2019. As such, the $5.4 million that we added in Q1 is a positive development of that good underlying growth trend, also considering that Q1 tends to be a slower quarter in enterprise sales. That growth came from strong contributions from all of our geographies and product lines.Looking at geographies first, EMEA, which is the largest sales area in Pexip, is growing the most, with 61% growth in annual recurring revenues followed by the Americas at 48%. These are the 2 largest geographies for Pexip, the areas where we both have invested the most and where we will continue to focus.On product categories, Pexip has 2 main product categories: Pexip as a Service, which is our public cloud offering for customers that just want to consume a video service and want Pexip to handle the operations; and Pexip self-hosted software for customers that prefer to handle the operations themselves and host this either on-premise in their data center or in a cloud of their choice, giving them more control, more privacy and more customizations.Both product categories are based on a recurring revenue model with annual subscriptions. Both of these are growing strongly, with the self-hosted software, which is the largest, contributing with 39% year-on-year growth and Pexip-as-a-Service contributing with 82% year-on-year growth. The strong growth from both of these product areas show the importance of Pexip's cloud agnostic flexibility and that we are unique in offering in the market.Another perspective on growth is looking at what is from new customers and what is from existing customers. New customers are contributing the most with 50 percentage points of our overall growth. That means that NOK 28 million of Pexip's ARR is from customers that were not Pexip customers 12 months ago. Existing customers have been growing at 4% year-on-year with a net retention rate of 104% that is including net upsells of 13% and churn of customers that have left Pexip at minus 9%. Churn is also at a similar level as it was end of 2020, previously at 10%, now at 9%.Moving on to the P&L. And in terms of recognized revenue, Pexip delivered NOK 180 million in Q1 of 2021. This is compared to NOK 150 million in Q1 of 2020. Starting with the as-a-service area. The revenue is recognized over the time of the contract. And so it follows ARR development quite closely, with 88% growth in revenue.Also, for the self-hosted software area, ARR growth is the main driver of revenue growth on a yearly basis. There are, however, quarterly variations due to when contracts are delivered and renewed. Software license revenues are mainly recognized when the contract is delivered, even when Pexip's model is based on recurring subscriptions that are typically on a 12-month basis. This has impacted the revenue growth in Q1, as some of the upsell done in Q1 of last year tied to the pandemic was renewed in Q4 of 2020, together with the main subscription. The consequence of that is that the revenue of the renewal was recognized in Q4 as opposed to now in Q1. Now it is the main driver behind the reduction in quarterly revenue compared to Q1 of 2020 in addition to the currency exchange rate between U.S. dollars and weakened kroner, which has been impacted by lower exchange rate. We expect to see some of the same effect on early renewals in Q2, but to a very limited degree in Q3 and Q4.In terms of gross margins, our cost of goods sold is up year-on-year due to higher cloud service revenues and usage. The level of cost of goods sold is on the same level more or less as in Q4. We have moved some of the cloud service operations from our own servers to cloud compute during Q4 and Q1. This gives us a better operation and more stability and flexibility. This is also then contributing to the higher level of cost of goods sold, and it will benefit us by requiring lower investments in own servers going forward. Some of that usage is a one-off as we've moved some of the fixed workloads from own servers to cloud, meaning that it's not only a function of more usage.In terms of operating expenses, the increase in headcount that we add on to drive future growth is also driving an increase in employee expenses, as you would expect.For Q1, salary and personnel expenses were NOK 176 million. Of this, NOK 33 million was related to share option expenses and accruals for related employer tax. In Q4, those costs were low due to a reduction in the share price, which led to reduced accruals on gains and employer tax and lower cost of around NOK 10 million compared to Q3. That means that the underlying salary cost is roughly NOK 10 million lower in Q1 and roughly NOK 10 million higher in Q4.The increase in other operating expenses reflect the increase in marketing as well as an overall higher activity level in the company. Travel expenses remained low due to COVID-19, and that is also contributing to other operating expenses growing less than both ARR and employee expenses.The growth investments that we're doing in building growth capacity and building our organization are impacting EBITDA in the shorter. In Q1, we delivered EBITDA of minus NOK 53 million. As we invest due to the ramp-up time of both new sellers and new engineers that build new products, cost will increase before the revenue impact. As we move forward and see the full impact on growth, this will drive revenue growth and a return to profitability. That is the background of Pexip's targets of negative 25% to 35% EBITDA in 2021 and 2022 before we target a neutral EBITDA in 2023 and returning to a positive EBITDA from thereon. These investments are important and those investments that will enable us to reach our target of $300 million in ARR by the end of 2024.As such, I'm satisfied to see the quality and early results of the hires that we have brought on, as this gives us additional confidence in reaching our long-term targets.In terms of CapEx. Spend on PPE and intangibles is related to servers and office fittings as well as payments related to the announced customer-based acquisition of customers that were transferred at the end of Q4. The increase in capitalization on software development is reflecting a higher level of R&D activity.Lastly, for me, on cash flow, Pexip had a positive operational cash flow in Q1. This is due to the strong working capital development following the strong sales in Q4 of 2020. We also had a positive cash flow of NOK 72 million from the employee option share issue that we did in March, which takes our total cash position close to NOK 1.15 billion out of Q1 of 2021. This gives us a very solid position to fund our growth strategy and acceleration plan. With that, I give the word to you, Odd Østlie.

[Odd Sverre Østlie, Chief Executive Officer]

Thanks for that, Øystein. And I'll close it off before we go to questions. So in summary, Q1, in brief, number one, strong top line growth, continued ARR growth and also NOK 180 million in recognized revenue. Number two, we have continued to execute on our acceleration plan. We announced the Pexip Health and the NVIDIA collaboration. We have continued to build sales and R&D capacity. We reached a north of 400 employees by the end of Q1. And we had a negative EBITDA, but in line with the announced strategy. And as I mentioned lastly here, we have a solid cash position to invest in further growth.So in terms of the future and the outlook on a high level, we maintain our very positive outlook when it comes to video communications and Pexip's role in that. We see a majority of enterprises and large organizations shifting to hybrid working. As we talked about, we also see that organizations will be looking more and more to embed video into their workflow toward their customers. And Pexip's technology is uniquely positioned to meet a lot of these new customer needs.Number two here, we will continue to execute on our growth plan. We will continue to invest in people, sales and marketing as well as R&D. We're targeting between 550 and 600 employees by the end of 2021. And while we then plan to have a continued negative EBITDA in 2021 and also 2022 and neutral to positive EBITDA in 2023 before we, in 2024 and/or 2025, target a plus 25% EBITDA as well as plus 25% revenue growth.And lastly, but not least, we are confident and really expect still to reach our long-term target of $300 million in ARR by the end of 2024.With that, before we go to questions, a couple of logistical points, I think, a reminder on the Annual General Meeting. It's on May 20th, in a couple of weeks. We have -- we are scheduled to do an update on our annual recurring revenue on July 8. And on August 12, we'll have our Q2 quarterly presentation.So with that, I think we'll go to Q&A, and I will pull down the presentation.

[Mirza Koristovic, Director of Investor Relations]

Thank you, Odd Østlie, Øystein and Tom Erik, for your presentations. We will now go into the Q&A session, where we are pleased to welcome 3 of the analysts covering Pexip. We have Oliver Pisani from Carnegie, Kristian Spetalen from Arctic; and Kristoffer Hagevik from Pareto. We will begin with the questions from the analysts before we take on the ones we have received an e-mail. So let's start with Oliver. Do you have any questions for us?

[Oliver Schüler Pisani, Research Analyst]

Yes. Sure. I mean just looking at your churn number of 9% this quarter and that having hovered around 10% or so in the previous quarters, what do you perceive as the main reasons for customers churning when they do?

[Øystein Dahl Hem, Chief Financial Officer]

Yes. I think there's no one area that stands out clearly, although there are 2 trends that I would point to. One is that we have lower churn the larger the customer is, which, to some extent, is natural because the more you are committed to Pexip, the more you tend to use us and then you are a larger customer. And also, we tend to see that we have a higher churn in the first year cohort, meaning that we still have some work to do on making sure that we deliver on customer success and that first year onboarding, which is a crucial time.On customer success, we have done quite a lot of initiatives during 2020, which we have now launched and that have been operational during 2021. And we expect to see impact of that as those customers mature and are up for renewal towards the end of this year and the years to come.

[Oliver Schüler Pisani, Research Analyst]

Okay. Could you give some examples of those initiatives?

[Øystein Dahl Hem, Chief Financial Officer]

It's really on, I would say, 2 areas. One is that we have strengthened our customer success methodology, meaning that we have enabled them with a lot more data to pick up on cues on where onboarding hasn't gone as well as it should and making sure that we track the customers' usage to a much better degree than we did before. And we've also started that function, both with customer success representatives, meaning that we have more eyes on our existing customers as well as professional services engineers. That, together with our partners, make sure that the customer is set up in the right way and where we have a partner, which doesn't have the necessary expertise in Pexip that we can step in and do that work.

[Oliver Schüler Pisani, Research Analyst]

That's very clear. And then as a second question or topic perhaps, could you remind us of your product development pipeline? And sort of what the key initiatives that you highlighted in your tech seminar, for example, will be in the coming, say, 4 to 6 months?

[Odd Sverre Østlie, Chief Executive Officer]

Yes. I can at least do what you will see this quarter. And when it comes to this quarter, you will see us actually launch the announced Logitech software for the Logitech room devices. You'll see us launch the, what you call, they might have the other name, but the Pexip portal for IT admins and for our partners to kind of administer and manage our cloud-based deployments. And number three, you will also see us launch more of our -- the new Pexip meeting experience. And that's what you will see this quarter at least. And it will always be 3 things, right? So those are the 3.

[Oliver Schüler Pisani, Research Analyst]

Fair enough and looking forward. And by the way, just as an add-on to that, was that -- Logitech partnership or software, was that delayed? Because my impression was that it was supposed to launch in Q1.

[Odd Sverre Østlie, Chief Executive Officer]

No. I think it's -- we have always intended to get the software out when there is more availability of their hardware kits. And also -- Logitech also announced it a bit before actually being able to ship a lot of production systems. So we are on track relative to our plan with that, and we are starting to take orders as of now.

[Mirza Koristovic, Director of Investor Relations]

Thank you, Oliver. We can continue with Kristian from Arctic, please.

[Kristian Spetalen]

Sure. So my first question is if you see any opportunity in that Skype for Business is retiring this summer. And if so, how large is this opportunity in terms of ARR?

[Odd Sverre Østlie, Chief Executive Officer]

In terms of Skype for Business, that means that a lot of customers will think what will I be doing? And quite a few of those customers are customers that, call it, want to have control of their deployment. And as such, it is an important opportunity for us. And I think -- I mean, everyone, of course, follows the Swedish news, but also in Sweden, there has been a new story around public sector looking to retire. They're not wanting to retire Skype for Business because they want to have more control of their deployments. And Sweden is an example of a country where we are making inroads in those type of accounts. And of course, we hope that it will be more of that international, and we see all of those trends in both Europe and in North America.

[Kristian Spetalen]

Okay. And next question a bit on the underlying margins. So you're saying that you're targeting plus 25% EBITDA margin in 2025 when you reach enough scale given the onboarding plans. But you had 20% EBITDA margin in 2019 with only $40 million in recurring revenues. So could you try to pinpoint where the underlying margin is? For example, what is the running cost base for -- to support the current top line or current customers?

[Øystein Dahl Hem, Chief Financial Officer]

That's a very, very good question. And I think for Pexip, as we get to 2025 and beyond, we are planning to also add substantial growth investments as we did back in 2019, where we had solid positive EBITDA, but still grew our top line substantially. And that is our plan as we get into 2025, as pure, call it, maintenance mode isn't really something that we have on the plan as of yet. So that's -- the underlying assumption for the 25% plus EBITDA margin is that, that includes growth investments to also drive further top line growth.

[Kristian Spetalen]

But you have no estimate of what the running cost base would be to support a number -- a certain number of customers because, as you say, in 2019, you grew your revenues by 30% and the OpEx base was up 6%, and it was still positive EBITDA.

[Øystein Dahl Hem, Chief Financial Officer]

One way to think of it was that in 2019, we had a customer lifetime value to customer acquisition cost ratio of 5.8. So if you inverse that, that gives -- just to maintain that customer base, gives, call it, a cost add-on of somewhat below 20%. Then if you take our gross margins in the mid-90s and then you add some cost for R&D and other services in a scenario where Pexip [ is working to ] just protect our top line, you would be able to expect that we could defend a EBITDA margin of, say, 50% or so. But as I said initially, that's not really something that we plan for at least in the coming years.

[Kristian Spetalen]

Yes. And on the -- a question on the verticals. So could you elaborate a bit on which verticals you consider most mature and which do you expect to drive the growth going forward?

[Odd Sverre Østlie, Chief Executive Officer]

Sure. I think health care is what we're doing most now and also is where we see as the most interesting because it's a lot -- I mean it is a clear compelling use case. There is high value of the interactions that are happening. There is an advanced need for video. Sometimes it's just 2 persons, but also sometimes you need an expert coming in, maybe from a hospital on some sort of a physical equipment as well. And in general, there's a lot of focus on privacy and security.I mean, you don't want to know -- to have a third-party maybe know who is talking to the psychiatrist on Mondays, right? So that's kind of an obvious market for us. But having said that, a lot of the things we're learning on workflows and how to kind of make us a platform for this vertical, we can apply in others. And I mean we have the examples of virtual justice we have talked about. We have talked about financial adviser-type of settings, which I definitely think we will continue to explore.But telehealth is our first attempt on taking our very scalable platform, but then package it a bit more, both in terms of how -- help in terms of how we can fit it into those workflows as well as some product source, which is not applicable for each customer, but it's more generic, like, for instance, EPIC integration, helping to integrate with health care systems.

[Kristian Spetalen]

And if I may, I have 2 more questions. Is that fine?

[Odd Sverre Østlie, Chief Executive Officer]

Yes...

[Øystein Dahl Hem, Chief Financial Officer]

That is fine. Go ahead.

[Kristian Spetalen]

So I'm wondering if we should expect the growth -- the ARR growth to accelerate in the second half of the year given that is then 1 year since we've kind of started the heavy onboarding process.

[Odd Sverre Østlie, Chief Executive Officer]

I mean, yes, in terms of absolute dollars ARR, that's our expectation that we have more and more sellers. We will -- and we expect -- as you make a fixed amount of delta annual recurring revenue capacity per seller, also our absolute growth should increase. And also when it comes to the end of the quarter, it's also a fact that Øystein talked about, there is some seasonality in both enterprise and large public sector buying, Q1 probably being the weakest. Q3, including -- I mean you have summer in Europe, but you also have the federal season in the U.S. And Q4, in general, being a good quarter when it comes to both at least non-American public sector as well as most enterprises have their calendar year being the financial year coinciding.So both of those 2 affected by it for the second half of the year. So both -- more people being [indiscernible] as well as general seasonality.

[Kristian Spetalen]

And then my last question on -- a bit on prices, which you don't talk so much about. So there is a wide span in what your customers are paying due to the different offerings and services and so on. But could you try elaborating a bit more on what the typical customer post-corona is? And what is the average price point per customer going to be?

[Odd Sverre Østlie, Chief Executive Officer]

I think -- I'll try to do this relatively short. I think what we see is that we continue to grow in this segment above $100,000 in spend with us per year. And as such, you will see that the average price per customer or cost per customer will be increasing.

[Mirza Koristovic, Director of Investor Relations]

Thank you,. Let's move on to Kristoffer from Pareto.

[Kristoffer Hagevik, Research Analyst]

First, on employees, you've obviously been very successful so far in getting new employees. Do you think that you'll manage to keep up at the current pace? Or are you seeing some obstacles from now on?

[Odd Sverre Østlie, Chief Executive Officer]

When it comes to recruiting, we are -- what you maybe see generally, right, which we also see a bit, is that during the pandemic, people are a bit more, call it, risk averse, right? So I want to hunker down and be where I am. But so far, we are extremely happy with our recruiting and also the pipeline that we had. And what we are really looking forward to because we do think we're actually doing a pretty good job on on-boarding people and getting people into the culture, but we're definitely looking forward to also being together in person. That is, I think, what we and most companies are listening the most when it comes to actually onboarding people.

[Kristoffer Hagevik, Research Analyst]

Yes. And on the COVID side, I guess, the lockdowns have been more severe and longer compared to what most would expect going into the year. So have the talking points with potential new customers changed during the quarter and also so far in Q2 maybe because of delayed investment decisions and so on?

[Odd Sverre Østlie, Chief Executive Officer]

Yes, I think they have. I mean I think we also -- in Q1, the quarter we are talking about, there was a bit of this, oh, we are not going back to the office yet, so we can maybe wait a bit with this investment. And -- which I think is that type of delayed investment and I also think, in general, I mean, most enterprises are a bit more hurt than the video companies, so being careful with their expenditure. And -- but we are seeing signs now that customers are definitely also planning and acting accordingly when it comes to getting back in the office.I think the full effect of the new normality, I think, we'll see when people actually get actually into working in this new normal. And you might be right, that might be sometime second half, hopefully, we'll all be vaccinated and not too much mutations.

[Kristoffer Hagevik, Research Analyst]

And just a last one, if I may. Revenues in this quarter was negatively affected by FX. Do you have a figure on what the growth would have been adjusted for this?

[Øystein Dahl Hem, Chief Financial Officer]

Given that most of our revenues are invoiced in U.S. dollars and the U.S. dollar to Norwegian kroner has gone down 15% or so in the quarter, in terms of self-hosted software, that impact is more or less 15%. On the cloud service, it's more gradual because it's typically recognized over 12 months, but over there -- as well on Pexip-as-a-Service, it has an impact, but there it's somewhat less.

[Mirza Koristovic, Director of Investor Relations]

A big thank you to all the analysts for participating and for your good questions. We will now take on the ones from our audience sent through e-mails. So the first question is on the sustainability report. Can you say a little bit more about your carbon neutrality plans, if you have any?

[Odd Sverre Østlie, Chief Executive Officer]

Do you want to do that?

[Øystein Dahl Hem, Chief Financial Officer]

Yes, happy to. So on -- in our sustainability report, we, for the first time, documented our carbon emissions, specifically in Scope 1 and Scope 2, meaning, our -- both direct emissions ourselves as well as energy-related emissions. There, we have already now both making sure that we source energy from low-carbon sources as well as buying carbon quotas achieved carbon neutrality as of now. That being said, I think, for us, sustainability around carbon emissions will be as much about sort of the Scope 3, making sure that we really look into our vendors, both on the data center side, travel and others to make sure that we also contribute on our Scope 3 emissions.

[Mirza Koristovic, Director of Investor Relations]

All right. And the next one is on -- Computerworld in Sweden reported that government sector organizations are not moving to Microsoft Teams due to American surveillance laws. How does this affect Pexip?

[Odd Sverre Østlie, Chief Executive Officer]

Yes. I think it affects Pexip. And yes, I can mention it also that in Sweden, as a case in point, we are engaged with and continue to be engaging more and more of the Swedish government organizations. I think from customers, this is something we are hearing, not only in Sweden, but also across Europe and, to some extent, also in North America and in Asia. So what we are here to do is, of course, to help because we do think we have a solution that allows customers to have their choice of privacy and security, of course, [indiscernible] software, but also it's an important thing for us on our cloud services.

[Mirza Koristovic, Director of Investor Relations]

Thank you. And we are closing on the 1-hour mark. So one last question. What gives you confidence that you will reach your ARR target of $300 million in 2024?

[Odd Sverre Østlie, Chief Executive Officer]

I think mainly from 2 things that is giving me the confidence. I mean, number one, that's what we see in the market that this new normal also of sorts is going to speak to the unique capabilities of Pexip being a hybrid working but also IT kind of getting into reassess what they have. Security and privacy might be part of that. It might be quality. It might be other things, which fit us well.And number two is really what we have the most control of, which is our own ability to execute and what we are doing as a company. And on that end, I feel very confident on how we are executing both with the people we have and what we are doing, how we are selling, how we are making products, but also on the most important aspect of growing, getting in the best possible people and get them onboard.And those 2 things combined bode very well for us. And I think in terms of getting people on board, we're seeing that, that is working well in terms of how new sellers are starting to generate pipeline. And no surprise, we have the biggest pipeline ever as of now, and that bodes also well for not only Q2 but also for definitely the second half of the year.

[Mirza Koristovic, Director of Investor Relations]

Thank you. That concludes our Q&A session.

[Odd Sverre Østlie, Chief Executive Officer]

Thanks a lot. So thanks, everyone, for joining. And I think we'll be back here then in August.