Pexip Holding ASA

OSE:PEXIP

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to this presentation of Pexip's second quarter results. My name is Trond Johannessen, and I'm the CEO. Together with me here in our studio at Lysaker, I have Åsmund Fodstad, our Chief Revenue Officer; and Oystein Hem, our CFO. Together, we will take you through the highlights of the second quarter and what we are focusing on going forward.

Standard disclaimers apply as usual. Before going into the details of Q2 and specifically for new viewers, let me give you an overview of what Pexip is all about. We were founded in 2011 and currently, we operate with just below 300 employees that are located in 25 countries around the globe.

We are a niche video conferencing player focusing on interoperability and secure and custom meetings. We do software only delivered as a software or as a [indiscernible]. We have unique partnerships with the leading companies in our industry, and we generally do not compete with them, but we work with them to complement their services.

Our customers are generally large organizations that have complex needs when it comes to collaboration, and they're both in the private sector and the public sector. Our annual recurring revenue base has now reached USD 107 million.

Now to the highlights of the second quarter. Our ARR base increased with $2.3 million during the quarter and is now at $107 million. Revenues amounted to NOK 266 million, which is 14% up year-over-year. EBITDA ended at NOK 36 million, which is an increase of NOK 27 million compared to the second quarter last year. Cash flow was NOK 68 million in the second quarter, which leaves us with a cash position of NOK 587 million leaving the quarter, and this is after we have paid NOK 112 million in dividends during the quarter.

Both Connected Spaces and Securing Customer Spaces contributed by ARR growth in the quarter, and we saw some major wins, both in the private and public sectors. We continue to work closely with Microsoft. And this quarter, Microsoft announced the new functionality that embeds Pexip on the Microsoft Teams rooms and enables interoperability from an NTR. With this, Pexip has a relevant offering to the more than 1 million Teams rooms out there.

As you know, we also work with Zoom, and a new solution that enables Zoom Rooms to join teams meetings with excellent quality is now available, and we have signed our first customers already. On financial targets, we are lifting our 2024 growth outlook to 8% to 10% ARR growth and our EBITDA, 2024 EBITDA margin outlook to 16% to 20%. Our medium-term financial targets remain unchanged for now.

Pexip's mission is to make seamless video communication available to all organizations regardless of technology platforms and security requirements. We have 2 main solution areas: Connected Spaces and Securing Customer Spaces. Let me say a few words about recent developments in both these areas, first Connected Spaces.

At Pexip, our goal is to make sure that when people use meeting rooms, they don't have to think about what kind of equipment is in the room or what type of meeting they are joining. We want everything to work just seamlessly no matter what. We call it any to any. To make this happen, we partner with all the big names in the video conferencing world to create solid, reliable solutions.

In Q2, we worked closely with Microsoft to introduce a new interrupt solution for Microsoft Teams Rooms, MTRs, and we worked with Zoom to launch a new solution that lets Zoom Rooms join Teams meetings with great quality. Let me share a few more details about the new Microsoft solution that was officially launched at InfoComm in Las Vegas in June.

Microsoft has received feedback from their customers that the current built-in interop solution known as Direct Guest Join often doesn't meet their needs. In response, Microsoft teamed up with Pexip to deliver a more robust embedded interop solution for Microsoft Teams rooms. This solution will be available very soon as Microsoft is currently finalizing the remaining development on their side.

We see this as a massive opportunity for Pexip. With over 1 million Microsoft Teams rooms installed in the market, and that number is growing, there is a significant potential for Pexip to expand our reach with this product. And the first orders are already received.

In the secure meetings area, we continue to see that concept of having more than 1 meeting platform is increasingly gaining momentum in the market. The notion that public clouds are great but maybe not for everything is spreading quickly. And large organizations are looking to complement their primary cloud-based meeting platform with a self-hosted or private cloud-based platform. New regulations like NIS 2 are also helping to drive attention around the need for redundancy in IT infrastructure and services.

Pexip provides a secure meeting alternative that also works as a backup solution if the primary solution is down. We are constantly developing our secure meeting products, including how we go to market with our solutions. Sovereign deployments are emerging in many places also in Nordics.

As a concrete response to the increasing need for sovereign alternatives to public cloud services, Pexip, together with Orange Business Service Kinley, are in the process of launching sovereign meetings as a service in the Nordics. This means that customers will have the opportunity to run video meetings on a trusted compliant Nordic service while keeping all data within the defined geographical area. This service will be easy to consume and without the investment in hardware and infrastructure that is required for a fully self-hosted solution. Launch is planned later this fall.

The product that takes up deliveries in this area is a modern user-friendly videoconferencing solution that is tailored for secure meetings. This includes meeting classification labeling, as you can see on the slide here, user authentication features and various other tools that the users and admin can take advantage of. Oystein will talk more about financial performance in a bit, but just a couple of comments from me.

The positive development on growth and profitability improvements has continued also in the second quarter. Our ARR has grown 8.5% since the end of Q2 last year and is at an all-time high. The underlying ARR has grown 12%. Our 12-month rolling EBITDA has reached NOK 170 million, which corresponds to a 16% EBITDA margin.

And finally, our free cash flow for the last 12 months was NOK 190 million. We take this performance as evidence that we are operating in attractive markets with relevant products and a strong market position. Let me hand it over to Åsmund to give you some more flavor on the commercial side of the business.

[Åsmund Fodstad, executive]

Thank you, Trond. Absolutely seeing relevant products in growing markets. Happy to announce that we have had yet another strong quarter in Connected Spaces with a 10% year-over-year growth. Pexip is gaining market share in this space, and the growth is driven by product differentiation and increased momentum from our strategic partnerships, especially the one with HP Poly. Let me emphasize a few important highlights.

By winning additional Fortune 500 logos this quarter, Pexip confirms leadership position. Users simply want to meet on any meeting platform in any room. Pexip products have an unmatched user experience with universal interoperability and is recognized as the trusted solution. Governments and large enterprise organization must enable seamless operations across technology platforms to enable hybrid work, and Pexip delivers.

In June, we launched the new products that address critical needs in the growing Teams rooms and Zoom rooms markets. Customers are already embracing new technology that helps them scale their Zoom and Teams journeys. This validates Pexip's unique technology and market position. The fact that these tech giants, like Microsoft, HP Poly, Zoom and Google, choose to partner with Pexip rather than competing to increase their own market footprint is a testament to our technology and our market position. Needless to say, with our unique position, we are optimistic for further growth in this space market going forward. Now let's have a look at the secure and custom.

Secure and custom are growth segments for Pexip, and we're happy to see that they are growing according expectation. A few highlights. Number one, our continued investment in these markets are paying off with a 15% growth year-over-year. Secondly, Pexip is growing a stronger position in these markets, and we see it especially in defense and public sector. Our recent wins with the world's largest defense organization, intelligent services in the U.S.A. and other government agencies across the world proves that a secure and dedicated communication platform is in high demand.

Like Trond demonstrated, Pexip's secure technology easily integrates into your daily workflow by simply being another meeting button in Outlook. With your definition of access control, branding and automated features that makes the meeting both private and compliance, these simplified workflows for users as well as sovereign meeting solutions as a service, like the one we now see from Orange, will make it even easier for both large enterprises and public sector customers to choose secure meeting platform as their main or complementary meeting solution.

The geopolitical situation and increasing regulatory compliance demand meeting privacy, user access and data control. This is not going stop, and Pexip see further growth in demand as well.

And with that, I will actually hand it over to Oystein for the financial details.

[Øystein Hem, executive]

Thanks, Åsmund. Let me, as I usually do, start off with the development ARR. As Trond mentioned in the highlights, we grew the ARR base with $2.3 million in Q2 to $107.1 million. This is an 8.5% growth year-on-year. And I'm also happy to see the growth in underlying ARR now reached 12% with legacy areas now being minimal, this trend supports our ambition to have growth of 10% plus per year from 2025 and onwards. As legacy areas are now just above $2 million, we plan to include this in Connected Spaces in terms of reporting from 2025.

Europe had a strong quarter, together with the U.S. in Q2, so both of our largest geographies are contributing to our growth. In terms of technology, we continue to see somewhat stronger growth in Software as a Service, which is now 50% of our annual recurring revenues.

Looking closer to development in the 2 business areas. We see that Connected Spaces and legacy combined grew $0.4 million. The dynamics is similar to previous quarters, with growth coming from strong new sales despite having a net retention rate below 100%. Secure and Custom also had strong new sales this quarter, taking net growth to $1.9 million with several large accounts being brought on. We also had good upsells on a number of accounts with a lower net upsell due to a loss of a large telehealth customer.

Churn in Secure and Custom continues to be very low, giving a growth of 5.3% in the quarter, which is on our ambition to have 20% growth year-on-year within Secure and Custom.

Moving over to the P&L. Revenue continued to grow. And in Q2, they were NOK 266 million, up 14% from Q2 last year, driven by growth in ARR as well as some realized currency benefits. We continue to convert most of the revenue growth into profits. And with a stable cost base compared to Q2 of last year. This is despite of the inflation, NOK 33 million increased revenues flows through the P&L to NOK 21 million in increased profitability, which is a margin improvement of 10 percentage points compared to Q2 of last year.

On costs, operational improvements offset the impact of inflation as well as the adverse currency impacts from a weaker Norwegian currency, leading to a stable cost base compared to Q2 of last year. We have a slightly lower headcount than last year, leading to a reduction in fixed salary. However, this impact in Q2 was balanced out by higher variable salary from higher target achievements. Other operating expenses are fairly stable with the improvement compared to last year, mainly being in external consultant costs in line with Q1 of this year.

Looking at cash flow. Q2 saw a solid operating cash flow of NOK 79 million. This is a result of a stronger EBITDA as well as seasonal working capital improvements. Together with lower investment and leasing cash flows, this resulted in a free cash flow of NOK 68 million. Our cash position is still somewhat down due to the -- from the end of Q1 due to the dividend paid out in Q2, but it is still NOK 79 million above the cash position if we compared with Q2 of last year.

To summarize the main points, revenues are up 14%. And with costs being in line with Q2 of last year, this gives a substantial improvement in EBITDA. Depreciation is stable and in line with Q1. And neutral net financial gives an EBIT result of NOK 13 million. With that, I give the word back to Trond, who will finish the presentation with our outlook and targets.

[Trond Johannessen, executive]

Thank you, Oystein. We continue to see a positive market outlook in both Connected Spaces and Secure and Custom Spaces. With attractive markets, solid market position and very relevant product offerings, combined with the partnerships we already have and the new ones we have signed up, we are quite confident that this will continue to drive growth.

Looking into Q3, our best estimate is that we will end the third quarter with an ARR in the range of USD 108 million to USD 110 million, and that is compared to the USD 107 million we had leaving the second quarter. We also increased our 2024 full year outlook for ARR growth to 8% to 10%. Previously, we had 5% to 10%. And we increased our EBITDA margin outlook to a range from 16% to 20%, where the previous range was 13% to 18%.

On the midterm targets of constantly delivering an ARR growth above 10% and above 20% EBITDA margin, we keep them unchanged for now. Finally, before we go to Q&A, November 7 is the date that we present our third quarter results. Yes. I guess I'm inviting my friends back into the studio to see if there is potentially some guests.

[Øystein Hem, executive]

Thanks, Trond. So we'll start off with Q&A. We'll start off with Jorgen Weidemann from Pareto. Jorgen, are you with us?

[Jørgen Weidemann, analyst]

Yes. Congratulations on a strong quarter. So I do have a few questions. Maybe first, could you elaborate a little on the momentum you see in Secure Spaces? And what do you see in terms of market interest? And what are the -- the larger clients within Security Spaces, what are they focused on? What are they using as criteria for choosing your or other people's services?

[Trond Johannessen, executive]

I can start and then you can fill in. But in general, there is -- there used to be a movement that everything was going to the cloud. Cloud only was a strategy for many large organizations, both in the public and private sector. And then that Pelon has sort of come back a little bit to organizations having a bit more wholly diverse view on their IT infrastructure.

The cloud is great, but not for everything. So seeing that certain data, certain services, organizations are not comfortable having 100% of that in the cloud. So there is a need for something that is either on a sovereign level within the national boundaries. I need to know where my data is, or actually on the server in the basement. And this trend has basically, as many of these security trends, started in the defense area. So we see defense organizations and the defense of many countries moving in this direction. We see that government organizations, government entities focused really that handle sensitive data, that handle national interests, to a large extent, is sort of moving in this direction. And the other organizations are following. Defense contractors that work closely with the government and other organizations that are involved in this ecosystem are moving in the same direction.

And then there is regulation like NIS 2, which is demanding a certain redundancy for some organizations on the IT side that requires them to have something in addition to a cloud service that could be an on-prem or sovereign service. So I guess the answer is it's a trend. It starts up with defense. It moves into government. It moves into the private sector. And we see that there is the momentum is increasing.

[Åsmund Fodstad, executive]

Yes. And just to piggyback on that, with the large -- especially the large enterprises, they have combined regulations and so on, just like any defense organization has or anyone that has to do with defense. But we also do see that now with artificial intelligence, the NIS 2 and so forth, that even maybe an HR meeting should not be in per cloud et cetera, et cetera. So this is becoming more and more relevant also for public sector, starting for enterprise sector.

[Jørgen Weidemann, analyst]

Great. And if I could ask some of the same question for video innovation, which is not growing in the same way. Do you see any changes in the trends and then the demands from customers there? .

[Øystein Hem, executive]

I think what we're seeing in video innovation is that a fair number of customers that have chosen a platform, they are -- new customers are usually starting a bit smaller, and then they're growing as they expand from that thereon. I think the needs are the same in terms of data control.

What we are seeing is that with the massive deployments that those really large, especially telehealth deployments are, but also in the government space, there is a need for customers to have some of the operation of that platform managed by a vendor. And so that's one of the reasons why we have talked about our beta platform right now, video platform as a service, where we take on a fair amount of that operations from the customer, but leave them in control of all of their data and have that geofenced and not give out any of that data to us.

So I think within video innovation, we see that the complexity of operating it, as these platforms grow in scale, is an increasing need that we also need to have a good answer.

[Åsmund Fodstad, executive]

And then reminding everyone that those are long sales cycles. So even though this quarter was not the strongest one, we still see great momentum in these markets.

[Jørgen Weidemann, analyst]

Okay. Great. And then a final question, if I may. When you increase guidance now for 2024, you increased both ARR and EBITDA adjusted margin. Should we -- or have you changed your assumptions when it comes to the cost base? Or is the EBITDA adjusted margin mostly a reflection of the higher growth?

[Øystein Hem, executive]

I think it's mostly a reflection of the higher growth that we see. And part of the guidance increase is also narrowing the band somewhat as we are now 2 quarters into the full year. But on EBITDA, in particular, we see somewhat higher revenue growth than both our ARR targets and our internal assumptions.

And so we see perhaps some of the currency impact hitting us on the -- or having a positive impact on the revenue side, while we've mitigated most of that impact on the cost side by lowering the underlying cost base.

Thanks, Jorgen. I think we'll give the word to Oliver Pisani from Carnegie. Oliver, are you with us?

[Oliver Schüler Pisani, analyst]

Yes. Congratulations for that report. So I don't have that many questions, but the first one was the cash flow was very strong in this quarter, driven by net working capital. Is that to be considered a structural improvement or the result of structural improvements to the working capital profile? Or is it something that is more related to timing and seasonality that may reverse in the second half?

[Øystein Hem, executive]

I think the answer is a bit of both. So I think what you will see is that with stronger growth in Software as a Service, in particular, we see more deferred revenues or contract liabilities. That will have a structural improvement on working capital. Then there's also a positive impact this quarter from lower trade receivables. That's more seasonal.

So for Pexip, we invoiced quite a lot in Q4 and Q1, which gives good cash flows in Q1 and Q2, and that's more of a seasonal impact. So I do expect lower sort of net cash flow in Q3 and Q4, which is in line with the same seasonality we saw in 2023.

[Oliver Schüler Pisani, analyst]

Very clear. I think you mentioned the loss of a large telehealth customer in this quarter. Was that a new event? Or -- and what -- how much of an impact did that have in that case?

[Øystein Hem, executive]

So it's a partial loss. They're continuing with Pexip on their video infrastructure. So it's still a more than $0.5 million to Pexip on an ARR base. But then the impact on the telehealth side is that they are now moving forward with a different provider. That had a net impact of close to $1 million to Pexip. So obviously, it hits the net retention rate quite significantly once you have a sort of single event like that.

[Oliver Schüler Pisani, analyst]

Makes sense. And with respect to the partnerships with Zoom and Microsoft. Can you say something about the sort of initial customer response to the interop offerings that you've launched there.

[Trond Johannessen, executive]

Do you want to go first?

[Åsmund Fodstad, executive]

I can try. Yes. Very positive, I guess, is the headline. We -- this is something that has been driven by customer feedback into both Microsoft and Zoom, so from some pretty large organizations. So those organizations will be pretty quick in implementing these new solutions as they are available in the market, and the Zoom solution is now available. The Microsoft solution will be available very soon. And of course, talking about pipeline is always a bit difficult, but we see quite significant sales pipeline for both the Zoom product and the Microsoft product today. So our sales people are quite busy talking to customers about it. So we are quite optimistic.

[Øystein Hem, executive]

I think another very important part of this is that it keeps Pexip's relevance also to those customers that are moving to Microsoft Teams Rooms or Zoom Rooms. So in the past, you would have customers who, even though they were very satisfied with the Pexip product and support that we give, we weren't relevant to them if they move from segment points over to Microsoft Team Rooms. Now we have a product which is relevant also for those customers, which I think we'll see a positive impact of in terms of churn for those customers that are in that movement.

[Åsmund Fodstad, executive]

I think it's also a very good example on how let's call the traditional SIP interrupt kind of a story 5, 10 years back in time and how introp now had developed, even with new players, large players, the Pexip is still very relevant in this space. .

[Øystein Hem, executive]

And it's clear that it's going to be a multi-platform game out there. It's not going to be Teams for all or Zoom for all or Google for all or Cisco for all, it's going to be a mix out there, and that makes the need for interoperability higher than ever.

Thanks, Oliver. Lastly, I think we have Oystein Lodgaard from ABG on the call as well. Hi, Oystein.

[Øystein Lodgaard, analyst]

Congrats on a good quarter. I have many questions, but I'll try to keep it a bit short. Can you -- of course, you commented on the Poly partnership being a positive contributor to Connected Space in this quarter. But can you say what is the development? Are you seeing the pipeline kind of increasing there? What should we think for, yes, next 6 and 12 months?

[Åsmund Fodstad, executive]

Well, number one, the Poly partnership actually just as well contributing on the secured side. It's very often on-premise installations with their Clarity solutions. So contribute on both, just commented on that.

We have the first year now under the belt with Poly and with good traction. I don't think we're going to comment on the exact numbers. But we just came out of a good cube bar with that partner. And we do see the increase in both the pipeline and also the momentum for the next 12 to 18 months. So that kind of keeps us optimistic about the partnership.

It is, of course, also replacing a large player in this space to begin with. So therefore, as well, it's a good installed base to tap into.

[Øystein Lodgaard, analyst]

And it's going into sunset in mid-2026. Again, now we really should start to see customers beginning to think about replacing. Do you see -- or do you still think that the potential is as large? Or do you have -- have you seen customers switch to other providers? Or do you still think you'll take a fair share of being able to migrate the fair share of the port customers to the new solutions?

[Åsmund Fodstad, executive]

Without speaking specific numbers, yes, we'll keep on taking a fair share of Yes, some of them are, of course, moving to different solutions. So we won't get 100% out of it. But again, we see the next 12 to 18 months as it's a good period with this partnership.

[Øystein Lodgaard, analyst]

And in terms of costs, do you think the -- you should be able to keep the level you are now? Or do you see that wage inflation, et cetera, or should drive higher costs into 2025? Just think how should we think about cost increase from '24 to '25?

[Øystein Hem, executive]

I think what we're seeing is we are seeing impact from wage inflation. I think we see that on a sort of per unit level as any other company. Then I think for Pexip, it's -- we'll continue to do operational improvements and to reduce costs in certain areas. Then perhaps more over the next 12 months than the previous 12 months, we'll also see that we're doing some investments and adding some costs behind teams that are doing really well.

And So I do expect still a fairly flat cost base, perhaps some increase compared to the last 12 months.

[Trond Johannessen, executive]

And just a comment, as you see it from the numbers, the business is scaling quite well, and we have said many times that we believe that the current cost base is able to sort of absorb quite a lot of growth.

And then there is a question of how much growth will we see, and how is that going to impact our sort of desire to invest into the areas that are most attractive. So I guess it's -- the answer is relatively flat, but we are opportunistically assessing areas that we believe we should invest in.

[Øystein Lodgaard, analyst]

And video innovation, which you still split out as a part of Secure and Spaces, that showed a negative development now in Q2. Can you say -- do you -- what is your view on the outlook for that part of the business? Do you see that starting to pick up? Or is that -- do you have a view on the market outlook there?

[Øystein Hem, executive]

I think we're seeing a -- as I mentioned earlier on the question from Oliver, the decline this quarter is due to a single customer. So it's a bit of a one-off event. We do see quite a lot of traction from an end customer discussion point of view. Yes, I think it's still a very relevant product and a relevant business area that we expect to grow. But then I think most of the momentum that we see on Secure and Custom with regards to higher needs for security, higher needs for compliance benefits the secure meeting side of the business more than the video innovation side.

[Øystein Lodgaard, analyst]

And last question from me on. You have a pretty nice cash position. Should we expect that to be paid out? Or do you see any other use for that cash, M&A or other types of investments you would like to do?

[Trond Johannessen, executive]

I mean we have a dividend policy in place that was communicated last year. We haven't changed that one. We are -- so I guess that's the answer for now. There are no immediate sort of plans to pay out the whole cash reserve, but sticking with the dividend policy, I guess that's the plan. And if there's M&A opportunities coming up, there are certain opportunities in the market. We will, of course, assess them as they come along. But it's difficult to answer that more precisely here.

[Øystein Hem, executive]

Thanks a lot, Oystein. I also have a few questions come in by video -- I'm sorry, by e-mail. And from Kristian Spetalen petal, who needed to field another call. I have the following question. So the growth implied in the Q3 ARR guidance seems slightly soft given the past 3 quarters, as well as additional drivers in Q3 from the MTR Zoom and Cisco partnerships. Can you please shed some more light on this?

If I take that one, I would say that our guidance for the next quarter of $108 million to $110 million implies a pretty consistent growth with what we have done in Q1 and Q2. So about $2 million and sort of the mid-range of that guidance. And then I think we're hopeful for the impact from both the MTR product, the Zoom product as well as the Cisco partnership. But I don't want to -- we haven't incorporated that in the guidance until we actually see some -- we want to see that impact before with sort of components. I think that's the honest answer to that. So that's pretty much in line with what we see, knowing also that realizing the sales impact of new launches does take a bit of time.

So it's not like it will have a dramatic impact the month after, but it's definitely 3 things that we see will support our growth going forward.

[Trond Johannessen, executive]

But we don't necessarily agree that it's a soft guidance. We'll see these words.

[Øystein Hem, executive]

Second question, do you consider legacy churn as finalized at $2 million? And do you expect the development in the legacy area to continue on a sort of relative basis? So percentage-wise decline will continue. As we're not reinvesting in that area and we're not doing a lot of sales activities to support it as that time is better spent on moderate. But of course, that impact will be quite significantly smaller as a result of legacy areas now being $2 million.

So even if that was to half over the next 12 months, that still will have a net impact of around $1 million.

[Trond Johannessen, executive]

And we will, at some point, include legacy areas in the other business areas, so we will stop reporting on legacy areas. But we haven't really decided exactly when, or have we?

[Øystein Hem, executive]

From 2025.

[Trond Johannessen, executive]

Next year, yes.

[Øystein Hem, executive]

Final question from Kristian. You added some headcount quarter-on-quarter for the first time since Q1 of 2022. How should we expect overall account to develop over the next 12 months?

I think there are some timing reasons for sort of headcount growing quarter-on-quarter this quarter. It's not impossible that, that trend is sort of back to how it was already at the end of Q3. I do think that the majority of, as we have said before, of the headcount reductions are behind us. And while we'll continue to drive for continued operational improvement, we also see areas where we think that by adding another person, we can increase our growth.

[Trond Johannessen, executive]

Don't expect any dramatic change to the headcount going forward, quite stable.

[Øystein Hem, executive]

Do a final check if there are any last questions coming in. I don't see any. And with that, we thank both the analysts for their questions and to all of you for listening in. Thanks a lot.

[Trond Johannessen, executive]

Thank you very much. Thank you.