Pexip Holding ASA

OSE:PEXIP

Earnings Call Transcript 2021-Q2

[Odd Sverre Østlie, Chief Executive Officer]

Ladies and gentlemen, welcome to Pexip's Second Quarter Earnings Presentation. My name is Odd Sverre Østlie, and I'm the CEO of Pexip. For today's presentation, I will be joined by our CFO, Øystein Hem; and our Head of Global Sales and Asia Pac, Åsmund Fodstad. This presentation will last for approximately 40 minutes, followed by a Q&A session. 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 through e-mail to [e-mail]. So with that, let's get into this. We have for you a quick primer, refresher on Pexip. We have an operational update where myself and Åsmund will share some perspectives on market development and those impacts on Pexip and also how we are working on scaling our sales capacity. We'll then have a financial update with Øystein before we close with outlook and a Q&A. The first, some headlines on Q2. Well, the highlights for Q2 can be arranged on 2 dimensions. First, on top, we are delivering financial results, taking us towards our growth ambitions, this informs -- in the form of ARR growth, revenue growth and also investments in line with our growth strategy and thus a negative EBITDA margin. Second, we are delivering on the acceleration plan, readying us for the future. We're doing a lot of work on products, including some launch in Q2 with the Pexip Control Center. This helps organizations and partners manage their video deployments. We have Direct Peering out in beta, allowing customers to get high-quality and secure private direct connections to our cloud services. And we have also added Avaya video endpoints to our capabilities, which is helpful for some of our customers in South Europe and North America. We're also continuing our work in verticals and health care, notably getting praised this quarter from MedTech in their Breakthrough Awards for 2021. And while back to the office is taking some more time than we had expected, that's also impacting a bit new ARR in Q2, we continue to serve customers and in some cases then with initial smaller deployments. But we see continued traction definitely with large organizations and also in the Fortune 500 space. And we'll cover a bit more about customers later in the operational review, of course. So next, let's do a quick primer or refresh for some of you on Pexip. Starting with our business, we are primarily a subscription-based business. And we measure that in annual recurring revenue, ARR. Since Pexip's inception, we have shown that we can grow strongly, which was further accelerated by the pandemic. As our market and customers are global, so are we when it comes to users, partners and employees across the world. And in terms of geographical distribution, having our base and origin in Europe, we have 56% of our ARR here, but also 34% in North America and 10% in Asia Pac. In terms of what we are, Pexip is at the core a videoconferencing company targeting large organizations. And we aspire to give our users video communications as it should be. How can we say that? What do we mean with that? Well, we aspire to provide our end users with a better way to meet with business-quality audio and video but also a secure way to join from anywhere across multiple technologies. For our IT and channel partners, we offer unprecedented customization in terms of our platform and the way that can meet whatever unique needs the organization and the IT department has. Since Pexip can be delivered from a pure cloud solution to a fully self-hosted solution, we offer full control of data privacy, data serenity as well as compliance with data security standards. Due to this combined fit for both end users and IT, Pexip is typically preferred by larger organizations but also other advanced video users. So in terms of our customers, what they typically choose Pexip for is one or a combination of 3 main use cases, which all makes us differentiated in this market. When it comes to meetings, customers tend to list high-quality video/audio, the ability to join from anywhere, taking care of privacy and security as important for why they choose Pexip. When it comes to vertical applications, Pexip is a leader in integrating video into workflows such as telehealth or video banking as well as government use cases like virtual justice. And third, we provide access for high-quality video room devices into Microsoft Teams or Google Meet. And these platforms do not natively work with standard space video equipment, and Pexip helps bridge that gap. Next, in terms of what we have at the core of Pexip is 2 unique technology differentiators, which our competitive advantage is coming from. On the one side, Pexip uses transcoding, which is a very -- we have a fly in the system, sorry, which is a very different technical architecture than our competitors. This allows Pexip to receive, optimize and send video to each participant in the cloud as opposed to the list on [ this chart ]. This proprietary real-time video engine is the source of Pexip's unique capabilities when it comes to interoperability, and it allows us to take advantage of artificial intelligence in the cloud not constrained by the TVs or video room devices [ starting in ]. And this in combination 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 or as a self-hosted software being run on-premise or in a cloud provider such as GCP or Azure. This gives our customers unique control of data privacy and security and makes our platform more flexible to fit their needs. In summary, this leads to a very flexible IT admin experience. So in summary, the investment case and the story on Pexip can be organized around 6 elements. One, with no doubt, we are in a massive high-growth market when it comes to video overall. And in this market, we have a pretty unique position towards large organizations. Second, in the industry, even though we not are a big consumer brand, but within the industry, we are a well-recognized video communication platform with some unique technology. And this technology is built by an exceptional R&D team with a history of doing a lot of innovation. We believe we'll continue to do that in the future with this team. And that is then further augmented by -- even though we are a relatively young company, we are already trusted by some of the most demanding both enterprise customers as well as government organizations on the planet. That, when you add on a very scalable business when it comes to high margins but also a business which has a significant sustainability impact on our customers, we believe we have a very solid growth path to reach a $300 million target of ARR by the end of 2024. So this target of $300 million is a main strategic target for Pexip in the midterm. And to reach this ambition, we need to invest in building our capacity for growth, meaning that we're building our sales and marketing team as well as our R&D team. On long-term growth and profitability, we aim for revenue growth and EBITDA to be above 25% in '25. On the journey towards 2025, we plan to invest up to 70% of net proceeds from our recent IPO in these growth initiatives. And this means that we expect negative EBITDA in 2021 and 2022 for the revenue growth post-EBITDA to be positive during 2023. Ultimately, reaching these targets, they both depend upon and enable us to be a recognized leader in the meeting solutions market. Now moving to the operational update. I thought I'd begin here this operational review with reflecting a bit on the wider market context for Pexip and some of the changes that has happened since our IPO about 15 months ago. First, since the IPO, there has been a significant adoption of video. The market has really exploded, not only in the way knowledge workers in private and public sector all have been using video meeting on a scale never seen before but also in the way personal services have been rendered on video. Health care providers are meeting patients on video, and banks and customer service organizations have been offering advice and help through the screen. We believe this is a trend that will last well beyond COVID, which is echoed in our conversations with our customers. And we're also seeing attitudes in society changing in a deep way. Working from home or from a different location is no longer frowned upon, and people and companies everywhere are planning the new hybrid work of -- way of working, office and at home or [ another ] location. And also the environmental benefits, I mean, last -- as recent as this week with the United Nations reports, and it has never been understood by more people than ever. And I think it's safe to say that there's many people that will never again take a plane to a different city just to do a single 2-hour meeting. Second, Pexip has clearly benefited from this transition, and we saw ARR in 2020 soaring. At the same time, the competitive pressure has increased in particular on cloud-based meetings. And many large brand name players have seen phenomenal success, Zoom and Microsoft Teams, for example. A known brand has been a significant advantage towards buyers with urgency. So has a pure working-from-home scenario where meetings happen exclusively on PC to PC versus the Pexip meeting platform, while good on PC to PC, really showing some more complex scenarios involving office meeting rooms and different video systems. Third, at the beginning of this year, before the rollout of the vaccines and before we heard about the Alpha and Delta variants of the virus, we were thinking that the return to the office was going to start in April or May and that we would start to see the end of the pure work-from-home scenarios. But the return to the office have been delayed, which we for Pexip also saw in Q2, where we achieved somewhat less new ARR than we had expected due to some customers postponing purchases or still buying but -- though with the smaller starter packages. Now while we're adapting to the environment we are in, as we also are ready to adapt to future changes, we see some developments going in Pexip's favor. So let's talk about those and put them in context of what we refer to as our main customer use cases. And to help me do that, please welcome on the stage Åsmund, our President of Global Sales and Asia Pac.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Thank you, Odd Sverre. Thank you.

[Odd Sverre Østlie, Chief Executive Officer]

How are you?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Pleasure to be here. Thanks. I'm great.

[Odd Sverre Østlie, Chief Executive Officer]

Good.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Very optimistic about this call and the future...

[Odd Sverre Østlie, Chief Executive Officer]

Taking some precious time out of you from selling, but we hope this will be informative for our audience.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

That also.

[Odd Sverre Østlie, Chief Executive Officer]

Good. And if we start with the first, hybrid working we talked about is a combination of home and office. And safe to say, I think to say that we feel the tool from customers, it's coming, it's being planned for, and purchases are increasingly being made. And this is positive to all our use cases, but that's, here, major on the value for customers with Microsoft Teams as we are strong in bringing Teams to work with various meeting rooms, as illustrated on the right-hand side on this chart. So Åsmund, can you give us some color on this?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Sure. Thank you, OS. And video meetings now have become commodity for almost everyone in the world, both privately and professionally, which was actually not the case just 17 months ago, so just reflecting a bit on that. We understand that it might be difficult to really understand where the different vendors play and why we are successful. Pexip continues to win large opportunities and is strong in our focused markets, which are high-quality meetings with large enterprises, vertical market applications or I would call them business-to-consumer solutions. I like that word better. Integrations with other applications and technologies and, of course, in the public and government sector. So let me take you through a few recent wins from Q2 to hopefully make it easier to understand where do actually Pexip win. So looking at the high-quality meetings, integrations and so forth. In Q2, we won Shell, a Fortune 500 company, one of the oil and gas supermajors and, if I have the right information, the fifth largest company in the world. Shell is moving to the newest technology, basically replacing their old technology, make sure that everyone are video-enabled and have the latest technology, work seamless with other technologies they already have, like their Cisco meeting rooms, like Microsoft on their desktops. And it's also important with Shell that it should be easy to book, easy to join and easy to have meetings and no matter where you are. They also have high concerns around secure solutions and where the data is going. So what they're doing is basically replacing Cisco technology, integrate any of their Microsoft workflows like Microsoft Teams and Office 365. They will roll out Pexip Virtual Meeting Rooms, integrating what we call Pexip One-Touch Join, which then makes it easier to join any video meeting, integrate it with Outlook, which makes video meetings easy to book, join and use no matter if you are in the office, at home or anywhere in the world. How they're doing it is they currently have an on-premise solution in their own data centers but moving it to that Pexip self-hosted secure solution, deployed in that -- in Microsoft Azure Cloud, which is actually a Pexip unique solution. So we are the only one who can do that.Pexip are enabling Shell to move from on-prem to a Shell-only solution but in the cloud. They are, in addition, adding trusted devices like video endpoints, home office connections to this solution. And we do also know that they will expand this to include Cisco endpoints to register on the Pexip technology for simplicity and seamless integration with their other solutions they have. So how do Pexip actually win a customer like Shell, which is actually pretty unique? So it is our unique integration with Microsoft. You talked about also us being able to do that with Google, with Cisco and Avaya and others as well as our high secure and privacy solutions. Our ability to transition from on-prem to the cloud or self-hosted solutions in the cloud, combined with easy-to-use features, makes Pexip a chosen solution for Shell and these large enterprises.

[Odd Sverre Østlie, Chief Executive Officer]

Very good. Thanks for that. And it's an excellent example, I think. And if we move to the left-hand side here, when it comes to meetings and meeting platforms. As we go forward, we don't believe that all organizations will be using only one big brand name for sort of their -- sort of for all their meeting needs, right? As such, we also don't believe that the public cloud-based solutions, I mean, Webex, Teams, Zoom, that they will be for everyone for everything. So many organizations have decided to take control of their meeting platforms. As a recent example, with, for example, the Swedish local government has shown. So what is your read on this?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

No. Absolutely, I think we've been saying in Pexip since day 1 that we have actually not seen anyone actually really standardize on one technology. As you are a large organization, you have already multiple technologies, and it's hard to change them and you rather want to integrate. So in this -- as an example here, in Q2, we won the U.S. Army. We continue to see that privacy and security are important to large enterprises and, of course, especially public and government sector. We've also seen an increase in consciousness around where does actually my data go, how to make sure that our meetings are as secure as possible. And we see that new rules and regulations, like you just spoke about, OS, kind of restrict certain technology solutions to be applicable for these customers. The last product launch, which we heard about as well, from Pexip like the control center, which actually enables an IT admin to have full control of their setup within the collaboration network system and Direct Peering fits very well into the Pexip product offering and story around high-security solution. So again, back to U.S. Army. They have chosen Pexip for these exact reasons. What are you looking for? Security; privacy; data storage, where is my data being stored; integrations with other existing solutions; and of course, being able to have video meetings that are both unclassified and classified since they are the U.S. Army; usability and flexibility for all the employees of the organization. What are they doing? Again, another large organization moving to the newest technology, making sure to have video as their primary collaboration solution for all soldiers and officers, basically ensuring that -- the video-enabled entire organization with the Pexip technology, including the Pexip Virtual Meeting Rooms. How are they doing it? They will stay on-prem. They will stay in their own data centers. They will have 2 separate secure networks, again, both classified and unclassified. They are super high on security. Competition again here has been mainly Cisco, and we're doing a technology replacement. At the same time, they do want to do integrations with Microsoft, Cisco endpoint systems and other workflows in the U.S. Army. So how can actually Pexip win a customer like U.S. Army? Of course, security being the main driver, which is very understandable, for the U.S. Army to choose the Pexip technology but also ease of use, the ability to give every soldier a Pexip Virtual Meeting Room has been important to them as well as having integration with existing technologies. And I want to add, as we see, military and public sector are very concerned with security, but we do see this more and more also from large organizations that have concerns about who they are sharing their data with and how easy it could be to tap into their private information. On-prem or self-hosted solutions, which are dedicated to these organizations only, are a Pexip unique and a preferred solution among these companies and organizations for those exact reasons as well.

[Odd Sverre Østlie, Chief Executive Officer]

Very good. And I think with that, we can talk about, call it, the centerpiece here, which is video in businesses' workflows with their customers and their partners, verticals or B2C, which should we call it. And we believe this is a large opportunity for, well, the market but also for -- specifically for Pexip with our flexible video engine. And we fit really well with customers that want to have their own tailored solution, right, which we talked about, both in terms of what they can do with it, they'll continue, but also data privacy, et cetera. So do we have anything to say there in terms of recent market developments or focus?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Yes. Moving to then vertical markets or again, business-to-consumer solutions, Pexip has actually been a big player here since we started. And if I recall correctly, I think that more than 50% -- or we said that more than 50% of all daily doctor-patient meetings in North America is being fueled by Pexip technology. You also see the same thing happening in Australia, in Germany, in U.K., Scandinavia and so forth. Besides health care, other vertical markets for Pexip is typically bank finance and increasingly also now in retail. We see that video is now moving beyond the internal meetings and move into becoming the default for communication in any B2C setup. In Q2, we saw that one of the largest retailers in the world, IKEA, chose to build their retail solution using Pexip technology at work. IKEA wants to enable remote advisory calls for kitchen and eventually [ wardrobe ] planning, mainly driven by adapting to market trends, enabling increased sales but also motivation around the threat to potentially get out of business in selected countries if they only have physical stores. I think the whole COVID-19 has shown how this can quickly change. What they are doing is deploying then a B2C solution to enable online consultancies and sales. The solution is being currently rolled out in 17 countries and increasing from, I believe, just shy of 20 to now daily 1,500 consultant appointments per day.

[Odd Sverre Østlie, Chief Executive Officer]

1,500?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

1,500, as per the...

[Odd Sverre Østlie, Chief Executive Officer]

On current agents working?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Exactly. And working on selling kitchens for IKEA. So what are they doing? They're building IKEA-specific solution, but with Pexip at core, utilizing the Pexip APIs to meet IKEA-specific needs like integration with the contact center and all the workflows that they already have and that are important to them. So they don't want to change this -- everything upside down. And again, having it deployed in a secure self-hosted solution, IKEA, I believe, is going to go with Amazon or in AWS and not Azure, which many do. To protect employee information and control where the data is going has been essential to them. The solution is being hosted by Pexip Partners, so they don't necessarily need to host this themselves. We have the partner community, which we'll come back to. We will also provide this. So again, why do we win? IKEA needed a secure solution. They have restrictions on data going to other companies, and employees security has been the main reason for IKEA to choose Pexip over other manufacturers. In addition, our integration to other systems through Pexip's open APIs, interoperability but this time with any kind of a browser, not having any downloads, which makes it easy for any customer to connect with IKEA from any kind of technology, has also been super important to them. And I'm glad to see that as the project rolls out, currently, they're tracking with a 97% satisfaction rate with the operators or the consultants actually sitting on the IKEA side and 99% customer satisfaction rate for those customers that's using this solution. IKEA to me is a great example for -- from a customer who has strong requirements around the new hybrid working. And I'd like to call it shopping trends or habits, restrictions around data flows, secure employee solutions and easy to use for the customers, all being fueled and met with the Pexip technology. No other vendor can actually offer this combination in the market today. It's a Pexip unique.

[Odd Sverre Østlie, Chief Executive Officer]

Very good. I think with that, maybe we also can talk about Q2 more in general and when it comes to customers.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Yes. Let's do that. So looking at some of the other great wins for Q2, again, Pexip keeps on winning major logos and organizations in the key markets for our solutions. We stay focused there. We're adding another 400 to 500 new customers and now having more than 15% of them as our customers or I'd like to say, as a salesperson, [ high in the bank ]. It's actually quite impressive. Other recent Q2 wins for us, London Stock Exchange, Foreign & Commonwealth Office, Regeringskansliet. We've seen Honda Motors, TDX, Boston Consulting Group and 2 of the largest technology companies in the world, LinkedIn and NVIDIA, stand rising on the Pexip technologies. So that's more references in Q2. On the right-hand side, here, you will see that these wins and large organizations, of course, drive growth for Pexip. It also results in an increased share of our ARR, the annual recurring. Large contracts above $100,000 now represents 54% of our business, so that's also increasing.

[Odd Sverre Østlie, Chief Executive Officer]

Good stuff. So we have a good customer traction. We are often being asked then, how do we actually sell and deliver to these customers? And maybe you can give a perspective on that and maybe double-clicking on a channel partner or 2.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Yes, happy to do so. In the same way as the Pexip product is designed for large organizations, so is actually our go-to-market model and, again, keeping in mind, that's where we play and where we play the best. So how do we actually have done -- do work sales at Pexip? Very extremely focused on sales and run with what we like to call a high-touch sales and sales engineering organization, meaning that we actively make sure that we prospect and work opportunities in all our key segments, making sure they are aware of our solution and ensure that they evaluate the Pexip technology when they are making their collaboration strategy. We have heavily invested, like you just said, in sales over the last year with more than additional hundreds of salespeople and then some. Over the last year, we also have had an increased focus on inside sales and customer success team, basically doubling down on the investments and efforts to make these teams a success for us and, of course, making our customers successful as they purchase the Pexip technology. This is, in addition, being fueled by marketing, channel sales and lease generation. We have channel partners as part of our go-to-market strategy, which we call an indirect business model. And this business model with the channel partners gives us market access in our market segments and in our focus video deals. We see that 60% to 70% of our leads come from our partner community who already have many of these target customers in their customer portfolios. This gives us fast access to the customers and the prospects that we are looking for. In addition, we see that our channel partners are now integrating the Pexip technology with their new and existing customers. And they are building services and solutions around our technology, meaning that Pexip becomes a strategic technology in these channel partners' offering. We also now see in our organization -- as people are slowly moving back to the office and hybrid working environments, we see that these channel partners have started developing new approaches and solutions with high-quality video meetings at core for both office, home office and work-from-anywhere kind of environments. We have started seeing that large organizations are now revisiting their whole collaboration strategy. Last year, they needed to kind of take whatever they had and deploy that to every employee in the company. Now they're revisiting, what are we doing around collaboration? What kind of technologies and solutions should we have? We've also seen a large pickup over the last, I would say, almost 2 years with some of the largest system integrators in our space. Dimension Data are now NTT, which I believe is the fourth largest telecom company in the world. And Tata Consultancy Services, it is the same as the car manufacturer, but they are also the biggest IT service company in the world and now certifying themselves on the Pexip technology and are the ones that are delivering our solution to more and more of their and our largest customers. So it's good to see that we now have much bigger traction with some of the largest system integrators. Basically, it is a verification that Pexip is an important and strategic technology vendor for their success and for some of the larger customers in the world.

[Odd Sverre Østlie, Chief Executive Officer]

Good stuff. So then we have discussed how we sell and how we work with customers and partners and an instrumental part of building our growth capacity, scaling our sales coverage and best people. And in general, in Q2, we have continued to hire from engineering to sales to drive future growth. And overall, we're still targeting 550 to 600 employees by the year-end, which will conclude the major ramp-up phase of our acceleration plan as we expect to continue definitely to hire in 2022 and beyond, though at a more, relatively speaking, moderate pace. Specifically when it comes to sales, and previously, we have been talking about how this is an upfront investment, we have about a year to achieve normal new ARR contribution for new hires. As we see here in the chart, we're starting to hit the 1-year mark for the hires following the IPO now in H2. So Åsmund, how are we working with recruiting and onboarding of these sales? And more importantly, are we seeing any effects of this?

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Yes, we do. So how do you we [ kind of -- well, to say ], how do we actually enable the sales team in Pexip to become successful? Well, number one, we have been building sales capacity, right, according to our business plan, which is market coverage and video deal coverage and so on in new markets. We have systematically the Pexip way of recruiting. We are very focused on sales and are hiring senior sales executives, SaaS and industry experts with a hunter profile that are systematically going after named targeted accounts. We have a very thorough onboarding program, ensuring that we get them quickly -- or as quickly up to speed as possible. It's new hire training. It's sales fundamentals. It's effective way of selling, effective way of coaching, mentor programs, all the training real time and virtual training but, most importantly, start building pipeline immediately. So our business case, which is built on a 12-month ramp-up for salespeople, this is because we have long sales cycle with our customers. Why is that? I've heard that question several times. Because where Pexip play in the best, there are already multiple and complex technologies deployed within these organizations. They have a need and a wish for integration and building out specific solutions. In addition, they also have a high concern around security and data storage. And these things take time with our customers and prospects and often require several technical workshops and so on to design the best solution for these customers. So it takes time. Still, we, of course, have salespeople who sell in their first month, some sell in month 3 and so on and so on. For pipeline, though, which is maybe the big question, we do see a strong increase in pipeline, and it's not only linear to the amount of salespeople we have hired. We see an increase in both experienced and new salespeople in their pipeline development. So at Pexip, we work very seriously with sales, sales enablement. In addition, we have extended focus on inside sales and qualifying sales leads and turning them into Pexip customers as well as major expansions and efforts around customer success, enabling successful deployments, usage, happy customers and eventually expansion and renewals with our installed base. And I believe that is Pexip sales in a nutshell.

[Odd Sverre Østlie, Chief Executive Officer]

Very good. Thanks for that, Åsmund. I think we both actually will have to leave the scene for Øystein Hem, our CFO.

[Åsmund Olav Fodstad, Executive VP of Sales & BD]

Okay, excellent. Okay.

[Øystein Dahl Hem, Chief Financial Officer]

Thank you, Odd Sverre and Åsmund. Let me start off with giving an introduction into our growth in annual recurring revenue. For Q2, we landed at $93 million in annual recurring revenue, which is 41% up from Q2 of last year. If you look at Q2 stand-alone, our subscription base increased with $5.5 million. This is down from $9.1 million in Q2 of last year, which was at the start of COVID-19, and it's a bit more than double the growth if we compare to the same period in 2019. Overall, as Åsmund and OS have talked about, we see a lot of high-profile wins, demonstrating our ability to win the most competitive accounts in the market. If we look at geographies and product, the development in Q2 was overall in line with what we've seen in previous quarters. EMEA is still the largest sales leader both overall and in additional ARR for the quarter. In Q2, EMEA delivered somewhat less additional ARR than in Q1, which is a bit different than the normal seasonality we tend to see. This reflects that most of Europe was still in a lockdown state in Q2. Both the Americas and Asia Pacific teams delivered more in Q2 than they did in Q1. In terms of product, the growth of Pexip-as-a-Service, which is our SaaS offering, and our self-hosted software offering, which is built on subscription software licenses, was about the same if you measure it in absolute dollars, adding $2.9 million to our self-hosted software area and $2.6 million to our Pexip-as-a-Service. This takes the growth rate to 62% for Pexip-as-a-Service and 29% for self-hosted software. We continue to see that offering that flexibility between Software-as-a-Service and self-hosted software is a competitive advantage for Pexip, allowing us to meet a variety of customer needs. On this page, we show the split of growth from new and existing customers. The majority of growth over the last 12 months is from net new customers, which has also been the case in the past and is now at 40% year-on-year. That means that $26.5 million of Pexip ARR is from customers that were not customers of ours 12 months ago. The net retention rate is at 101%, showing that on average, upsell amongst some of our customers balance out the churn of the customers that have left Pexip. 101% is somewhat above the net retention rate of 2018 and 2019, however, down from 2020 where we saw extraordinary upsell due to COVID-19. Churn is up 10% year-on-year, which is a similar level compared to 2020. Moving on then to the P&L. In terms of recognized revenue, Pexip delivered NOK 177 million in Q2 of 2021 compared to NOK 163 million in Q2 of last year. Starting with Pexip-as-a-Service, the revenue is recognized over the time of the contract and so which follows ARR development quite closely. For Q2, it's grown to NOK 75 million, giving a growth of 68% compared to Q2 of last year. Also in the self-hosted software area, ARR growth is the main driver of revenue growth. There are, however, quarterly variations due to when contracts are delivered and renewed. And software license revenues are mainly recognized when the license is delivered. This impacted the recognized revenue growth for Q2 as it also did for Q1 as some of the upsell done at the start of the pandemic was renewed in Q4 2020 with the main subscription. A consequence is that revenue of the renewal was recognized in Q4 as opposed to now in Q2. This is the main driver behind the reduction in quarterly revenue if you compare it to Q2 of 2020. In addition, for Q2, the currency conversion rate from U.S. dollars to Norwegian kroner impacted us by the lower exchange rate. And for self-hosted software, this effect is around 15%. In terms of gross margin, our cost of goods sold is at NOK 21 million for Q2. The main driver of the increase is higher revenues and, with that, higher usage from the Pexip-as-a-Service area. We've also modernized our service platform to more cloud-based compute, which is contributing to the higher cost of goods sold. Some of that move is more of a one-off increase as opposed to solely a function of more usage. And as such, we expect cost of goods sold to grow somewhat less than as-a-Service revenues going forward as some of the costs related to the platform organization are fixed and not volume-driven. This upfront investment in the new platform, together with lower self-hosted software revenues, are the main drivers for the lower gross margin for the quarter at 88%. Moving on to operating expenses. The main cost item for Pexip is salary and personnel expenses. In Q2, this was NOK 149 million. We have split out on this chart the costs related to share options as it varies from quarter-to-quarter as cost accruals for future employer tax costs reflects the accumulated gains. Hence, it varies with the share price, and you can see it fluctuate. Excluding share option costs, other salary and personnel expenses were NOK 147 million for Q2, developing in line with the number of employees. For 2021, we have shifted the periodization of holiday pay to Q3 to better correspond to when employees are taking most of their vacation. This is different than last year when that was recognized in Q2. This effect is roughly NOK 10 million for 2021. The increase in other operating expenses reflect an increase in marketing spend as well as an overall increase in activity. Travel expenses remain low due to COVID-19 and is contributing to other operating expenses growing less than employee expenses. We're also doing less physical marketing events than we were planning to do at the start of the year. Hence, as the world opens up, we do expect that other operating expenses will increase in those 3 areas. In total, Pexip delivered an EBITDA of minus NOK 41 million or minus 23% of revenue for Q2. Reduction in EBITDA is reflecting a significant investment that we have been doing and we'll continue to do in building our growth capacity and organization. We are now past the peak growth rate in terms of number of people, which is the main driver of cost, with the year-on-year growth dropping from 98% in 2020 to 80% year-on-year at the end of Q2. We expect these investments will continue to drive revenue growth and a return to profitability, which is reflected in our target of negative 25% to 35% EBITDA margin in '21 and '22 before we target a neutral EBITDA in '23 and positive from there on. We're seeing very good results from these growth investments both in terms of sales, pipeline generation and innovation and R&D contributions. This gives us confidence in reaching our target of $300 million in ARR by the end of 2024. In terms of capitalized investments. Investments in fixed and intangible assets are in line with Q2 of last year and down from the previous quarters. This is due to lower spend on computer equipment and office equipment as well as no spend on customer base acquisitions compared to Q4 and Q1. Capitalization of software development is overall in line with Q2 of last year. Lastly from me on cash flow. Pexip had a negative operational cash flow, reflecting a negative EBITDA, also adjusted for noncash share-based costs. We also had a neutral net working capital development. Investment capital was a negative NOK 12 million, as we just discussed. The largest impact on cash flow for the quarter was that in Q2, Pexip bought back shares for a total of NOK 88.2 million. This amount is just below the NOK 88.8 million that Pexip raised from employee share issues in Q1 and Q2 of this year. The buyback of shares was done to reduce the dilution from those share issues to the underlying net dilution. In total, this has given us a net cash flow in 2021 of NOK 0.6 million from share issues and share buybacks combined and minus NOK 72 million for Q2 isolated. We exit the quarter with a cash balance of NOK 1 billion, which is a very robust cash position, which will fund our acceleration plan. And with that, I give the word back to you, OS.

[Odd Sverre Østlie, Chief Executive Officer]

Thanks a lot for that, Øystein. We'll soon have you back for questions. But to give a quick summary, Q2 in brief then, a solid top line growth, continued ARR growth as well as revenue growth. When it comes to executing on our control plan, we launched the Pexip Control Center. We have also betas of Direct Peering and also done this collaboration with Avaya on their video endpoints. We have continued to build sales and R&D capacity. We reached 451 million employees end of Q2. We have a negative EBITDA but in line with our announced strategy to invest and, as Øystein said, also very then solid cash position to invest in further growth. Next, when it comes to outlook, we have a very positive outlook for communications in general but also specifically for Pexip. It's driven by several things, amongst them, the majority of enterprises and organizations shifting to hybrid working but also organizations looking to embed video into their workflows towards customers. We believe Pexip's technology is uniquely positioned to meet these customer needs. As we discussed as well, our sales pipeline for the second half is strong. We will continue to execute on our growth plan. We are continuing our investments on the sales and marketing as well as R&D, targeting 550 to 600 employees by the end of this year and also then plan for a negative EBITDA, 25% to 35% in '21/'22, neutral to positive in 2023 before we aim 2025, aim to have a plus 25% EBITDA as well as revenue growth. Last but not least, we expect to reach our long-term target of $300 million in ARR by the end of 2024. So then quickly before questions, a couple of upcoming dates. We expect to do our update on annual recurring revenue following Q3, October 7, and then our Q3 presentation on November 11. And with that, I thank you for your attention, and I believe we will open up for questions. Øystein, can you come back to the floor?

[Mirza Koristovic, Director of Investor Relations]

Thank you, Odd Sverre, Øystein and Åsmund 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 Øystein Lodgaard from ABG. We will begin with the questions from the analysts and followed by the questions received from e-mail. So let's start with Kristian. Do you have any questions for us, please?

[Kristian Spetalen]

Yes. So my -- I have 2 questions first relating to the pipeline. So the first is, given the spread of the Delta virus now, do you believe there will be further delays of customers reassessing their video solutions and then affecting the Q3 sales as well?

[Odd Sverre Østlie, Chief Executive Officer]

That's a good question. I think this is an area of uncertainty. And we believe that most countries will lift restrictions once a material share of adults are vaccinated, as we've seen in the U.K. However, that remains to be seen. If businesses delay their plans to return to the office to 2021 -- to 2022, that will have a negative influence on Pexip as we have seen in Q2, but that's not what we're expecting as of now.

[Kristian Spetalen]

And then my second question is if you could provide some color on the pipeline in terms of account sizes, is there any differences compared to pre-COVID?

[Øystein Dahl Hem, Chief Financial Officer]

I think what we have seen in terms of account sizes, not looking necessarily just on the average but also looking at where the majority of business is coming from, we do see a slight increase in pipeline and wins from larger accounts. You can see that also in how our split in ARR has developed across those categories, as we've discussed earlier in the presentation. We also see that, if you just look at the high watermark in terms of the size of our largest accounts, which is at a higher level now than it was pre-pandemic.

[Kristian Spetalen]

Should I do my final question now or wait until the end?

[Mirza Koristovic, Director of Investor Relations]

You can go ahead and ask the final question from your end, please.

[Kristian Spetalen]

Okay. So I saw that Microsoft and Teladoc is doing a collaboration on unified practice on telehealth. And I was wondering if this is an opportunity for you in terms of CVI end points.

[Odd Sverre Østlie, Chief Executive Officer]

Absolutely. I think as we know, a lot of the medical sector in the U.S. are using videoconferencing devices. And then we have already today many successful partnerships with Microsoft in the health care space, both you're seeing in CVI and teams [ interop ] and Pexip for their video meetings. I think -- that said, for our target health care customers, they are more looking for the core Pexip platform to build their B2C offering even though they might have Microsoft Teams as an internal collaboration tool. But both scenarios can come up.

[Mirza Koristovic, Director of Investor Relations]

Thank you, Kristian. Let's move on to Øystein from ABG.

[Øystein Elton Lodgaard, Research Analyst]

Yes. So to start off with this IKEA contract, which is really exciting, first of all, is I guess this is something that could maybe turn into a larger contract size over time if this is a -- turns out to be a success for IKEA? Second question, are this -- are you in talks with other retailers for similar types of collaborations? Or is IKEA first mover here?

[Odd Sverre Østlie, Chief Executive Officer]

I would -- short answer is yes and yes.

[Øystein Elton Lodgaard, Research Analyst]

Great. Then I can take next one. Of course, we will become a lot more accustomed to use video over the last years, and a lot of organizations already have some sort of video systems. Are you seeing now a change in how organizations think about this, that it's becoming more verticalized, that they see that they have a specific need and therefore need a more specialized video software? Do you see like this as more of a verticalization of the market going forward?

[Odd Sverre Østlie, Chief Executive Officer]

I think we do. And it's both in terms of how we use video internally, I mean between knowledge workers in an organization, like we have different tools for different type of scenarios. We do it in different meeting rooms for this and for that. I think we'll have that on video as well. But for sure, there is a lot of, I think, now thinking on how organizations can apply video into their normal, call it, their customer workflows. And in particular there, there is a growing desire to make it more theirs, right? Like when you invite customers to your meeting facilities, you have it branded, you have nice coffee, you have -- it is kind of welcome to my house, and you want to make it yours. I think that is a key driver also in what we call B2C, at least in larger organizations that are keen on putting their stamp on their video solution.

[Øystein Elton Lodgaard, Research Analyst]

And in terms of now going into the second half of the year, you noted that you see a strong pipeline. This is for both Q3 and Q4? Or will you expect more of like a back-end loaded year as typically Q4 is the strongest quarter for you guys?

[Odd Sverre Østlie, Chief Executive Officer]

I think the -- again, short answer, both Q3 and Q4 looks healthy. But also, as you said, we have seen that Q4 is stronger than Q3. And with what we know now, we would expect the same.

[Mirza Koristovic, Director of Investor Relations]

Thank you, Øystein. And then let's move on to Oliver from Carnegie.

[Oliver Schüler Pisani, Research Analyst]

Yes. Yes, I think you discussed it slightly before, Øystein, but your gross margin was down this quarter, down to 88%. Could you again elaborate a bit on that dynamic? And as I understood it, you also guide for gross margin expansion going forward now, right?

[Øystein Dahl Hem, Chief Financial Officer]

I think there are 2 drivers for why cost of goods sold are up and then gross margins down. One is, of course, that quarters with lower self-hosted software revenues will tend to have lower gross margins because there is some quarterly seasonality in terms of in which quarter we see the highest revenue. We saw that in Q2. The other driver, which is more the underlying factor, is that we've upgraded our Pexip-as-a-Service platform, moved that over to cloud compute, which is a shift that has happened partly Q1 but now especially in Q2. With that platform migrate, there's both a fixed component and also there's a factor of having both a new platform and an existing one that we're winding down at the same time.

[Oliver Schüler Pisani, Research Analyst]

Got it. Okay. That makes sense. And then I was looking at your number of employees at 451, I think it was. That is -- that represents a slowdown in your pace of hiring now to about 35 new employees on average in this quarter. I mean do you have problems finding enough skilled staff? And sort of what do you -- how do you think about the significant acceleration in hiring that your 550 to 600 employee targets imply for H2?

[Odd Sverre Østlie, Chief Executive Officer]

That's a good question. I do think that we are able to find the talent that we're searching for. But to your point, it is more challenging than in a normal environment to get people through the pipeline, not least get them onboarded and taken care of by our organization. But so far, I think we're doing well. So we believe also for H2 that we'll be able to get to that within that target range. And if we are a little bit short on the top end of it, we can move that into the next year as well. Most important for us is that we hire the right people and that we are able to onboard them in the best possible way. It's quite expensive to hire the wrong people, that is.

[Oliver Schüler Pisani, Research Analyst]

Yes, for sure. Good. I guess -- no, I guess you semi answered that already. But as the last question perhaps, with respect to the Logitech offering, do you see any sort of revenue generation from that in this quarter? And how do you see that sort of demand developing for that offering?

[Odd Sverre Østlie, Chief Executive Officer]

I think the whole concept of our Pexip rooms, right, which is related to that, I think that will more follow Pexip meetings in general. And specifically for rooms, it will be more of a back-to-the-office wave than whatever is seen now. But we are seeing traction in terms of interest for the product. But I think where we'll see it more shine is in combination with our meetings platform plus getting back to the office as we move forward.

[Mirza Koristovic, Director of Investor Relations]

A big thank you to all the analysts participating today. We have received one question on the e-mail. And that is the following: the video markets -- the video meeting market is crowded with Microsoft Teams, Zoom and Webex. How will you find space for the USD 300 million in ARR in your ambition?

[Odd Sverre Østlie, Chief Executive Officer]

Yes, I guess that's mine to answer. I think first, while it is crowded in terms of this public cloud meeting area, we believe there is meaningful ARR for us here as well, of course, because we believe that as we have talked about, there are maybe some cases for running entirely on Pexip meetings, but it's definitely a market to have Pexip in addition to other meeting solutions when it comes to specific users, use cases or meeting rooms. That said, maybe to give you some color on how we're thinking about this, if we focus on just 2 of our core segments, notably the -- maybe the market for large government and for military type of organizations, that segment alone, we believe, in the next 3 to 4 years is order of magnitude $100 million opportunity for Pexip. Similarly, we think that this B2C market has a similar $100 million order of magnitude opportunity for us in the same time frame. So just with those 2 segments alone, we could achieve our $300 million target.

[Mirza Koristovic, Director of Investor Relations]

Great. Thank you. So no more questions on the e-mail. So that concludes our Q&A session.

[Odd Sverre Østlie, Chief Executive Officer]

Then I'll say thank you all for listening, and see you soon.