Pexip Holding ASA
OSE:PEXIP

Watchlist Manager
Pexip Holding ASA Logo
Pexip Holding ASA
OSE:PEXIP
Watchlist
Price: 44 NOK -1.35% Market Closed
Market Cap: 4.5B NOK
Have any thoughts about
Pexip Holding ASA?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2021-Q3

from 0
Øystein Dahl Hem
Interim CEO & CFO

Hello, everyone, and welcome to the Q3 presentation of Pexip and welcome both of you here physically and those on the webcast. Today, you will hear from myself as well as Åsmund Fodstad on some of our recent customer wins, from Tom-Erik Lia on our recent acquisition of Skedify, as well as from our Chair of the Board, Michel Sagen, on Pexip strategy and future outlook. And to kick off, I'll give the word to you, Michel.

M
Michel Asbjørn Sagen
Independent Chairman of the Board

Thank you, Øystein. Good afternoon, good morning and good evening, whichever time zone you may be in. Like Øystein said, my name is Michel Sagen, and I'm the Chair of the Board of Pexip. I'm also one of the co-founders of the company. Since we held our last quarterly presentation, we have continued to execute on our business plan. We have added new customers. We have welcomed new employees, and we have acquired a company. At the same time, we are noting that the company's market capitalization has been reduced despite the fact that the video communication industry is at a historical point where adoption of video is now widespread. We believe that Pexip has a unique position in the market. And during this session, we will try and explain why we believe that is the case. Let me start by taking a big step back. When we founded this company in -- back in 2011, 2012, the video conferencing market was very different from now. The large vendors were hardware companies like Cisco, Polycom and Lifesize. The customers were mostly large organizations that use video internally. There was no software-based infrastructure. There was no cloud. Pexip saw the opportunity to provide these customers with software and cloud-based solutions that would make their video installations work much better on an unprecedented scale and at a lower cost. And that strategy has worked well for us, and we have seen steady revenue growth since the beginning. The original company funding was a mere USD 25 million, which took us to being cash flow positive and grow profitably from 2016. For example, we grew 32% in 2019 with an EBITDA margin of 21%. So we believe we have a solid history of executing well, and that is what spurred us to IPO in 2020 where we raised USD 120 million to accelerate further. In 2020, COVID hit and the video communication market exploded. Everybody had to use video, and it was widely embraced. And the range of applications of video was varied from internal meetings to customer or investor meetings, for virtual doctors' appointments to customer service on video. Post COVID, we think that these trends will continue to evolve, and all organizations will need to include video as an integral part of their communication strategy and their workflows. As a result, we believe that Pexip's technology is more relevant than ever. And at the heart of Pexip's technology platform are 2 unique and deep differentiators that I will talk you through now. The first is what we call core transcoding on the left. Most of our competitors do what is referred to as switching of the media, which means that they relay each video stream individually from all participants to all participants. Pexip instead takes in all the streams, can do advanced processing on the collection of streams in the network and sends a single individual stream back to each participant. So what does this really mean you may ask? Well, essentially, it enables us to optimize the meeting experience for everybody who joins, regardless of the type of equipment they have, whether it's old or new. There are also environmental benefits here as the end user devices use less processing power and consume less energy. The processing is done in the network. Also, the lifetime of all the equipment can be prolonged since the features are created in the network, which in addition to the environmental benefits, provides investment protection for our customers. This architecture is the very reason why we are so good at interoperability. And this is why we can apply artificial intelligence to the entire conference. And this is why we have an R&D collaboration with Nvidia. So again, deeply unique. Second, on the right, we offer an unrivaled deployment flexibility, which again is due to our core architecture. Customers can run our platform on the cloud of their choice or even on-premise, which is a big deal for customers who have specific requirements when it comes to privacy and data sovereignty. Our competitors have built their technology on the Internet, but some customers require things to run off the Internet simply and on their own networks. And thanks to our unique technology, we are finding success in 3 core markets. So what defines these markets and what are their needs? First, we have video infrastructure. That is all about supporting the ecosystem of video systems that these customers already have or are planning to acquire, which quite often are in the thousands of units from a variety of vendors. Video infrastructure has been a huge growth driver for us the last 18 months, serving customers such as LinkedIn, Shell, Nvidia and others, where no one else serves the number of endpoint providers or the number of platforms that we do. Second, we have what we call critical video meetings, which is about meetings where there are specific requirements on security, privacy or quality. This is where we have customers such as DISA, the U.S. Defense Information Systems Agency, and the European Commission. This is already important to governments, but we are hearing that also large private enterprises are asking questions about data sovereignty and privacy. And third, we have what we refer to as the video enablement market, which is about enabling organizations for business to consumer or government to citizen communication. This is where our recent Skedify acquisition fits in.For video enablement, we serve the largest telehealth providers globally, the largest retailers, huge government agencies and a number of financial institutions. Our view is that these and future applications allow Pexip to be well positioned for a massive opportunity. Our core markets of today will be USD 5 billion in 2024. But with innovation on Pexip's core technology that we just talked about, we believe that we can address many future applications and be a strong player in the USD 20 billion video-centric unified collaboration market. Finally, I'd like to end where I began. The time for video communication is now. In 2019, when we started preparing for our IPO, the end-user video adoption in the Western world was at 13%, on the right. During COVID, it grew to 70%. While it may not be likely that video users will remain at these levels post COVID, we find it unlikely that it will revert to what it was before. In summary, the market has evolved. But what Pexip is offering is different than the likes of Microsoft Teams and Zoom, and we believe that solving the complex needs of large organizations is more relevant than ever. Before I hand things over to Øystein and team, I would like to give you a brief update on the recruitment process to find a permanent CEO. As you know, Øystein is currently both CFO and interim CEO. The process to find a permanent CEO is progressing well. We are looking for someone who has a proven track record from relevant industries with international reach. We are working efficiently and thoroughly, but the most important thing is to find the right person. In the meantime, I'm happy to say that Øystein is leading the company with a steady hand and has the full backing of the Board. So with that, I'm going to hand things back to you, Øystein and team. Thank you very much.

Øystein Dahl Hem
Interim CEO & CFO

Thank you, Michel. Now on to the operational update. In Q3, Pexip grew 37% year-on-year in ARR and reached a milestone of USD 100 million in ARR. This is a huge milestone for Pexip. That also is reflected in our revenue growth, reaching NOK 183 million and growing 34% year-on-year. We're continuing to execute on our growth strategy, investing in growth, both in sales and marketing as well as in R&D. This is reflected in our EBITDA margin, which is at minus 22% for Q3. We are now starting to see the impact of those investments. And as I will show later, we are starting to see the cohorts that we have hired in terms of sales reps are starting to deliver good and consistent numbers. In Q3, those investments are also reflecting into our market presence, and we were named a Challenger in the Gartner Magic Quadrant for Meeting Solutions. We've also acquired Skedify, which you will hear from Tom-Erik later, which really enhances our capabilities within video enablement. And to take us through some of the wins that we did in Q3, I welcome Åsmund Fodstad to go through some of the customer examples and why Pexip wins. Åsmund, the stage is yours.

Åsmund Olav Fodstad
President of Global Sales & Marketing

Thank you, Øystein . Like Michel just both showed and were talking about the relevant markets opportunity for Pexip is pretty huge already, but it's growing really, really fast. So where do you actually let Pexip play? Let me try to exemplify that for you with 3 different use cases where it's not about the generic video meeting, but it's about how Pexip are leading the way with establishing new workflows, where video is becoming the driving engine in these flows and fueling the opportunity for future growth for these companies. Let me start with what we like to call video infrastructure and BMW. Pexip is already a leader in this segment with the best in drop solution to any other technology in this space. We're still the only one that can do Microsoft certification for Skype for business on-prem server, and I will get back to that; also, the self-hosted solution with Microsoft Teams; and also on the Google side. Pexip is still the only one 10 years later. BMW is a great example of this, and they are replacing old technology, specifically in this case, Cisco. They have chosen both to have Skype for Business and Microsoft Teams on their desktops, but they want seamless integration with existing technologies in their meeting rooms. The Pexip solution is unique for these exact reasons. Another BMW solution is actually their event services. They want to sell and demonstrate their own cars and products online. Pexip unique browser interoperability with any web browser with 0 downloads that support any kind of solution out there is also a major reason why BMW is choosing the Pexip technology. We can do this because of the transcoding that Michel was talking about, and we are the only one in this space that can do exactly that. In addition, to the interop solution, BMW choose Pexip for security reasons. For BMW, no data should leave Germany or for that sake, the BMW facilities. To have full control, BMW have therefore chosen both the Skype for Business solution and the Teams solution in combination with the Pexip technology to make the solution as secure as possible. Again, no other vendor are certified by Microsoft on this and is of the highest importance for BMW when they're choosing a technology vendor. Further on, BMW is, of course, concerned around what they like to call industrial espionage and therefore, running the Pexip technology on 2 different networks, in, again, combination with what Microsoft is offering and what we are offering on the interop upside. The most secure one, they are running on-prem in their own data centers is basically locked down for high-level meetings and when they need the best security ever. For the second solution, they are using Microsoft Teams deployed it in markets of Azure cloud. So it is a cloud solution, but is the BMW's ownership. The data doesn't go anywhere else. It's theirs. This is again -- we're the only one being certified, and it's truly important for BMW when they are developing new products. Thirdly, Pexip also wins BMW because of the ease of use. We have solutions like the One-Touch Join. They just simply want to have their meetings. They don't want to think about whether it's on this network, that network, what is in the meeting room and so forth. Further on, we are already talking to both BMW Bank and the BMW Health Insurance side for video enablement cases, again, enabling business to consumer solutions, so again, shows that the video infrastructure part of it is almost like a door opener for us to get further in on these large clients. And with that in mind, let's move to exactly video enablement. This time, I've chosen to bring forward 3 use cases. We'll mostly speak about one of them. Last quarter, if you remember, and we're following, we were talking about how IKEA chose Pexip because they want to basically enable remote consultancy when you want to buy a kitchen, basically buy a complete kitchen online instead of being hours and hours in an IKEA store on a Saturday. But the really cool thing here is that we're opening up new ways to market for IKEA. That's the main reason for them doing it. Video enablement represents a huge potential for Pexip. And we have always had a strong position in this market from day 1 because of our unique transcoding and because of open APIs. So basically, these customers can integrate and tailor make their own solution. It's not only about video. It's about how they work and do business and video becomes a major engine in that. In Q3, we saw like Department of Veterans Affair, Kaiser Permanente, which I know some of you have heard about before, but I still have to mention it, they did more than 60,000 doctor patients consultancies each every day in Q3 or actually over the last rolling 12 months. I've been almost 30 years in this industry. It must be a world record. It never happened before, and Pexip is enabling that. In addition, we know that 50% to 60% almost every doctor patient consultancies taking place in North America is based on the Pexip technology. Again, opening up huge opportunity for us but also enabling what they like to refer to as RPMs, remote patient monitoring in basically most of North America. The monitoring part of it is not only having video. It's also using all kind of instruments and so on that is needed to actually do a good medical consultation. In Q3, then that's the main reason for mentioning just these 3. We also saw an increase in several of these customers who already have a video enablement solution from us, like Queensland Health, like the Kaiser Permanente and also American Well, which upped the game with almost 30% with us. They all bought more Pexip licenses due to major increase in usage of their solution where Pexip is the core engine of that. By utilizing the Pexip [ telehealth ], customers like Amwell, have the ability to do the RPMs and making sure that their workforce becomes digital. In addition, it's crucial for these kind of customers to integrate the digital solution with not only patient files, but patient workflows, like waiting rooms, multiple experts transferred to other expertise and is one of the main reasons why Pexip is chosen above other technology vendors, which are, of course, also in the space. Any large organization, I like to claim at least, that wants to speak and need to speak to their customers are quickly now integrating video into their workflows. And we see this with contact centers, support desks, and it's typically within health care, retail, bank, finance and insurance organizations. I wanted to throw in one more thing for Amwell as an example. Taking care of the employees security is also important to them. Protect personnel data is of the highest importance. And because Pexip do this in a different way than the other vendors out there, we win and we increase our footprints with these kind of customers. With then security in aspect to economy in mind, let's move on to critical meetings. And you have heard about this said before, we made an announcement on that as well. But for critical video meetings, we won DISA. DISA provides IT and communication support to the President, to the Vice President, Secretary of Defense, the military service, commands any individual or system contributing to the defense of the United States. DISA is the communication provider for the entire Department of Defense. it's, of course, a huge win both in dollars, but also from a prestige standpoint from Pexip. Critical meetings is a prime market for Pexip. So why do we then win customers like DISA? Again, DISA want to move to the latest technology, replacing old one and therefore are inserting Pexip. But because we both have a unique and specific solution in this segment, because our ability to deploy on different kind of networks and making those as secure as possible, whether that is on-prem, on classified networks or even on special networks, what I heard as Michel said, that not even have a connection to the Internet. This is, of course, important to defense and Army, but we see this increasingly also at Fortune 500 customers. It's on their radar. Cybersecurity is probably one of the biggest threats that they need to handle. In Q3, again, I think we demonstrate our unique position by winning major logo and customer like DISA. It also states that when doing this, we do that in fierce competition from Cisco, from Microsoft, from Zoom and Google, but they still choose Pexip in that fight. Security is, of course, the highest importance to these guys, but we passed all their security tests, including something called DTIC, which is a specific solution and certification for the North American market. Pexip passed all of them and, of course, a damn good stamp proof of our technology. They will use it -- they will use our -- what we like to call VMRs, or video meeting room solution, so they're not only using it for the interop different technologies. They will use that to enable everyone in Department of Defense having video as their main collaboration tool. Of course, they will integrate it with Microsoft and Cisco and other technologies. And it does actually support more than 65,000 desktops and 7,500 video systems in addition to a mobility solution, again, based on the interop solution that Pexip have with any browser. Those are the 3 things being supported. Deployed on 2 different networks, on-premises and in Amazon Cloud, but it's the Amazon Government Cloud, which is a specific one. And again, we are unique to be able to do exactly that. Then DISA, North America for me is just one example. The opportunity is much, much bigger. Pexip is finding great success in ultra-secure meetings globally. In Americas, we find success in delivering highly secured private platforms to military and government. We were also now becoming FedRAMP certified to be able to deliver to a sovereign cloud service as service that is only for federal organizations in the U.S. In Europe, we see the same opportunity as we do see in North America. But in addition, we see an increase from the Fortune 500 customers that has concerns around security, privacy, where the mine data go. And we used Shell last time and BMW this time as well as good examples of this. In APAC, we continue to win and be strong in the military sector in multiple countries. Let me try to move on a bit faster. In Q3, we kept on winning major deals. You see some of the logos here, but again, in our key segments where we go after these customers. We are not a generic video conferencing solution even though we have that service as well. So not only did we win DISA, we won Department of Labor, U.S. Department of Homeland Security, U.S. Department of Commerce and the European Parliament alongside the BMW and also Air Asia, where we teamed up with Google to win them back from a Zoom solution they bought last year. So it exemplifies also how we are working with some of these big technology vendors. These wins fuels that impact in Q3. Pexip had the most growth in our key segment with large organizations making the portion where above $100,000 in annual recurring revenue is the -- with the highest growth for us as a company, and that's exactly the way we want it to be and where we should be playing. With that, I will hand it back to you, Øystein. Thank you.Øystein Hem.

Øystein Dahl Hem
Interim CEO & CFO

Thank you, Åsmund. In Q3, we continue to invest in strengthening our organization and really investing for growth. And if you compare us to the company we were 12 months ago, we have grown 60% year-on-year in terms of number of people and mainly invested in sales and marketing.Now going forward, we -- as we have communicated earlier, will have a more normal investment level. And next year, we expect to add between 100 and 150 employees, which implies a growth rate between 18% and 25%. That means that from the start of 2022, we will have a significantly higher growth in ARR than we have in people and with people cost. This is going to start our journey back to profitability and our ambition to have profitable growth from 2023. I'm also very happy to announce that we are now named a Challenger in the Gartner Magic Quadrant. And just to signal sort of the significance of that, I want to bring you back into 2018 when Pexip together with hundreds of other companies in our industry was not even on the map. In 2019, we made our debut into the Gartner Magic Quadrant as one of the visionaries together with BlueJeans, StarLeaf and Lifesize. We maintained that position in 2022 -- sorry, in 2020, before we were the first to enter the Challenger quadrant now in 2021. This is a significant recognition of Pexip's standing in the industry, and it also reflects our growing impact that we're having now that we have invested in strengthening our capacity, both in sales and marketing and in R&D. We are happy to be seen as one of the challengers to the 3 leaders together with companies such as Google, Huawei and GoToMeeting. With that, we are going to continue to claim an even bigger space in our industry, and that's one of the core reasons why we have acquired the technology company, Skedify. To give you an introduction to that, I give over to Tom-Erik.

T
Tom Erik Lia
Co

So I think Michel and Åsmund already addressed the core focus areas we have. And obviously, Skedify is going to help us succeed in the video enablement space. More specifically, if you talk about new financial services, retail, governmental type of services where you need a customer to connect with the right expert, with the right adviser, at the right time, whether it's a physical meeting or it's a virtual meeting. And of course, in our world, we all believe that meeting people face-to-face, whether it's physical or on video, is what really help bring productivity up. And this is exactly what Skedify is helping us do, and they already have a good track record with some large enterprise wins. And you can actually see some of the proof point in the calls that we provided, with how they enable and increase productivity with these customers that they already deployed. And there are examples like AXA, the multinational finance institutions, where they enable AXA Bank with more than 2,000 financial advisers in Belgium alone, connecting with the customers, scheduling calls and make sure that they get kind of the first hand and the best possible experience from the AXA website. The same with Tryg that you know, the second largest insurance company in the Nordics where they enabled more than 350 insurance agents in Denmark alone, connecting with their customers. So bringing their services up to a completely new level. So -- and they have a good track record of 100% retention rate and very, very high customer satisfaction, as you can see. So why was it a good match for us? Well, basically, because they are complementary to what we provide, and we talked about how we won video-enable customers. With Skedify, it provides an end-to-end solution enabling us to have more control of what's happening before the meeting. That might be scheduling. It's integration into your sales force and how you work with customers to the actual meeting, where, of course, you can use all of the best things from Pexip that we just talked about with security, customization and so forth to post meetings where you can actually analyze what's going on, what's your productivity or with salespeople, how were your sales calls compared to a phone compared to video compared to in location. So basically, what Skedify solution provide us with is a complete end-to-end solution to address some of these verticals that we talked about in the video enablement space. So I won't read all of the details. You can have it on the slides, and you already saw the press release. But basically, we're closing this in November, and we are, as we speak, integrating this into the Pexip team.

Øystein Dahl Hem
Interim CEO & CFO

Thank you. Then in terms of our sales and financial performance. And as usual, I'll start with the development in our annual recurring revenue. We exited Q3 with $100 million in ARR, which is a huge milestone for Pexip. This is up 37% year-on-year compared to where we were last year. This is in line with what we did in Q3 of last year. Overall, we see a lot of high-profile wins that is really driving that growth. We are also seeing higher competition, especially within video infrastructure that has had some impact on both our pipeline conversion and our average deal size. We are, however, having several initiatives to address this, both on the go-to-market side as well as on the R&D side. Both Q2 of last year -- sorry, Q3 of last year and Q3 of this year has been positively impacted by service provider conversions. We continue to look for win-win opportunities with our partners that are currently hosting video services themselves. In Q3 of 2021, that constituted roughly 20% of our gross new sales. In terms of geographies and product areas, we see that the majority of the growth continues to come from EMEA and the Americas, where the Americas was in particular for Q3 positively impacted by a strong federal quarter. In terms of product, we continue to see Pexip-as-a-Service growing the most, which is a huge opportunity for Pexip since as we deliver cloud service can deliver more value to the customer, and hence, both get a higher margin as well as a higher revenue from that customer. Still, having the capability of delivering both self-hosted software and a cloud service continues to be very important in terms of our competitiveness. Looking at what is coming from new customers and existing customers. We see that new customers continue to be the main driver of growth for Pexip, contributing the full 37% of our year-on-year growth. In terms of our net retention rate, that is at 100%, which is somewhat higher than it was in 2019 and 2018, although somewhat down from where we were in 2020, where COVID upsell helped us push that to 114%. We do see higher churn outside of our core focus areas, where a minority of our revenue is coming from. We also see that there are differences in churn compared to what is coming from large customers and small customers, with churn in large customers, so those paying us more than $100,000 per year, constitutes 5% churn compared to 11% overall. These are good structural reasons for why we believe that we can push our churn numbers down in the midterm. In terms of the impact for the P&L. Pexip delivered NOK 183 million in revenue for Q3. This is up 34% with the year before and as such, correlates fairly well with the ARR growth. In terms of Pexip-as-a-Service, that grew 31% year-on-year, which is somewhat down from the previous quarters, both due to currency and the fact that many of these sales that were closed at the end of Q3 are going to be delivered during Q4. In terms of self-hosted software, that grew at 37% year-on-year. And different from Q1 and Q2, did not really see a significant impact of renewal timings in this quarter. That helped the revenue growth compared to previous quarters. In terms of our gross margin, that remains at 88%, and we continue to see a higher cost of goods sold compared to last year due to higher growth in Pexip-as-a-Service and higher growth. In terms of our operating expenses, they continue to be driven by our investments in people, both on sales and marketing and in R&D. And we see in Q3 a lower cost related to share options that we have split out separately if you compare us to Q3 of last year. In Q3, we were also positively impacted by holiday pay, which reduced Q3 salary and personnel expenses by roughly 10 million compared to what it would otherwise have been. In terms of other operating expenses, that remains at a fairly consistent level with the previous quarters. Going forward, we do expect to see some uptake in travel expenses as we now in Q4 are able to travel again, which means that we are running sales kickoffs. We are running trade shows, and we are running customer meetings. Then in terms of the overall impact on EBITDA. We have an increase in revenue and an increase in gross margin, although our investments in people and in other OpEx means that we have a higher negative EBITDA now for Q3 of this year compared to the previous year. Still, our year-to-date EBITDA at 25% is in line with our 2021 guidance. In terms of our cash flow bridge, we have both then a negative EBITDA, which is contributing to our cash flow. In addition, we had a negative impact on net working capital for Q3. This is in part driven by our account receivables due to high billings towards the end of the quarter as well as a lower level of outstanding payments to suppliers. Still, if you compare our net working capital of Q3 of 2021 with the same position of last year, we have had a positive development, especially on accounts receivables. Overall, we have a cash position of NOK 923 million and a solid position to fund our future growth, and we do not foresee any reason to raise capital in the future. I also want to share our perspective on our underlying profitability. Although it's difficult to be scientific in terms of illustrating this, we have tried in terms of what is a normal growth rate for Pexip in line with our midterm guidance. Over the last 12 months, we had NOK 769 million in revenue, which is a growth of 36% year-on-year compared to the period before. We have a gross margin of 90%. And in terms of our operating expenses, if you have assumed a growth rate on people from Q1 of 2020 of 25%, in line with our long-term ambitions, that would make out roughly NOK 500 million in OpEx in a normal growth scenario. That leaves an underlying growth and underlying EBITDA of roughly 25%. That also means that we have invested some NOK 276 million in growth investments over the past year. And those investments we do expect will continue to drive growth in the years to come. That leads us with a net EBITDA of minus NOK 85 million over the past 4 quarters or minus 11%. As I mentioned earlier, we are starting to see the impact of new hires in terms of sales to new customers. On this chart, we show the average sales to new customers on a year-to-date basis. And we have split that out by cohort, meaning that you have the sales reps hired in Q1, hired in Q2, et cetera. Here, we see the hires from Q1 being on a consistent level compared to the more experienced sales reps on a year-to-date basis. We're also seeing that the Q2 cohort and the Q3 cohort are starting to deliver good results as well as the Q4. As these sales reps become more experienced in Pexip, this gives us a solid underlying growth potential as 60% of our sales staff is not fully ramped up since they have been hired in Q3 of 2020 or later. We do, however, see that we have a ramp-up time of between 4 and 5 quarters, which is about one quarter more than what we saw in 2020. We believe that this is due to a combination of: one, a higher ramp-up pace and as such, somewhat less time to follow up the new hires; as well as the difficulties during COVID to have fewer customer meetings, fewer marketing events and fewer sales meetings so that experienced sales reps can mentor and teach the less experienced ones. This we are now addressing in Q4, although we are continuing to see the same ramp-up pattern now in Q4. We are now approaching the next phase of our investment plan. We were in 2019 in a situation where we had profitable growth, as Michel spoke to earlier. We have during 2020 and 2021 invested heavily in accelerating that growth even further. And during 2022, we are now starting the path towards profitability and expect to have profitable growth from 2023 and onwards. Then in terms of summary and outlook, we continue to have solid top line growth, both in terms of ARR and in terms of revenue, and it's really driven by our ability to win large customers, both in the government space and in the large enterprises. We continue to execute on our acceleration plan in terms of building our capacity for growth, both organically and now having acquired Skedify to enhance our video enablement product portfolio. We continue to have a negative EBITDA as we have expected, but we have a solid cash position to fund that future growth. In terms of outlook, we have a very positive outlook for the video communication industry as a whole and of Pexip's position within it. And we will continue to execute on our growth plan due to that. We are nearing the end of the accelerated investment phase. And so going forward from 2022, we do expect ARR growth substantially above the growth in people, both for 2022 and the years to come. We continue to plan for a negative EBITDA margin next year before returning to profitability in 2023. In the midterm, we target having an EBITDA margin and a growth rate of above 25% from 2025 and onwards, and we do expect to reach our mid-term target of $300 million in ARR by the end of 2024. I also want to give a quick advertisement for our upcoming events. We will have a Capital Markets Day on December 9, so in about a month's time here in Oslo, where you will hear more about why we win, our uniqueness in terms of our technology and some of the exciting things that are to come. We also have our Q4 ARR update on January 10 before we have our quarterly presentation and year-end presentation on February 10 next year. With that, I thank you for the attention, and I believe we are open for questions.

Operator

[Operator Instructions] We will first take on the questions from the audience here in Oslo before we round off with the ones received on ir@pexip.com and on the webcast. So let's begin. [Operator Instructions]

O
Oliver Schüler Pisani
Research Analyst

Oliver Pisani from Carnegie. Could you give us some additional color on the OpEx development? Because you're adding about 50 -- almost 50 FTEs Q-on-Q, but OpEx is basically flat Q-on-Q. So were there any particular elements, except for the holiday pay that we should be aware of in the OpEx development?

Øystein Dahl Hem
Interim CEO & CFO

Not particularly. So I think on the underlying salary cost, you have -- which we've split out in the presentation. There's no -- the only significant impact there is the impact of the salary pay. Of course, there is a currency mix given that the Norwegian currency has strengthened compared to Euros and U.S. dollars. That has the impact since Pexip has the majority of our team in -- outside of Norway. Otherwise, we continue to see a lower impact of share options, especially if you compare to Q3 of last year, which obviously has an impact on -- a positive impact for Q3 of this year. which is a bit more related to the share price and as such, is more variable.

O
Oliver Schüler Pisani
Research Analyst

And just to clarify that. I think I'm looking at your graph here on Slide 26, the share option costs 1.7 in Q3 2020, I think, now 2.9?

Øystein Dahl Hem
Interim CEO & CFO

Correct. But if you compare us to Q3 of last year, it was significantly down from Q3 of last year when it was 14.7.

O
Oliver Schüler Pisani
Research Analyst

Right. I think you're -- now I see it. And then on -- the third question would be, I mean, you say now that the sales ramp-up takes about a quarter longer than you had expected and that you see some competition in video infrastructure, but you maintained the targets and think you will reach it at the same time as previously. So how do you bridge those 2 -- those dynamics?

Øystein Dahl Hem
Interim CEO & CFO

I think the -- in terms of the ramp-up of sales reps, I think now that we are able to meet again, I think that will help us to also mentor the new sales reps even better. I think going forward, we have the ability to do more marketing events, which especially for those that are new and new to the industry, helps in terms of building that customer relationship. And we also, now going forward, we will have a more normal investment level and a more normal level of additions of people, which will help us to spend even more time on helping those that we have added find success in Pexip. I think that is the underlying and most important thing. We are continuing to see good productivity. But I think we -- so while we are open about having higher competition, we do not use that as an excuse for not meeting our targets.

K
Kristian Mørk Spetalen
Analyst

Kristian from Arctic Securities. So I just wonder if you could elaborate a bit on the growth rates in your 3 core markets, how it has been in the last 12 months and the way forward.

Øystein Dahl Hem
Interim CEO & CFO

I think we continue to see strong growth within video infrastructure, and that has been at least an absolute number as the main driver of growth for us in over the last year. Critical meetings is somewhat more lumpy but was very strong now in Q3, both with this size, as well as some of the other federal logos that we won. In terms of video enablement, that was strong, particularly in 2020 and in the start of this year. But even with the -- in Q3, we didn't have that many new big wins, although we did see significant upsell on the existing ones. But in terms of absolute growth rate, we continue to see video infrastructure as being the main driver of our growth, and that is also now more than half of our total ARR.

M
Mirza Koristovic
Director of Investor Relations

Thank you, Kristian. Any more questions from the audience in Oslo? All right. We can move on to some of the questions we have received on the webcast. So the first question from Sweden. What is the biggest -- what are the biggest challenges in post-COVID world going forward for Pexip in regards to current competition?

Øystein Dahl Hem
Interim CEO & CFO

I think one of the -- what the post-COVID world gives us is an even bigger relevance in terms of our core differentiators. So where Pexip really shines is in the meeting room. So when you have meeting rooms that want to connect to various meeting platforms, there, we are really strong. And I think now that is becoming a more and more frequent use case for us in a post-COVID world. Then we continue to see that the importance of critical meetings continues to be high. And we strongly believe that video enablement in terms of using video as a core tool for how you basically do customer care and sales will continue to stay on. So in a post-COVID world, we're confident in all of those 3 core areas. We continue to see that during COVID, the opportunity for us as a video platform, as a Teams substitute is less now than it was perhaps in 2019 prior to COVID. So while COVID certainly made some markets more competitive, it has also opened a lot of opportunities for us.

M
Mirza Koristovic
Director of Investor Relations

And we have a few questions from Øystein Lodgaard from ABG. First one is how much do you think that the ARR growth could increase in first half of 2022 compared to first half of 2021?

Øystein Dahl Hem
Interim CEO & CFO

That's a complex question. I think I'll try and answer that more in general terms. We have seen that our ARR growth is fairly steady. I mean we are getting to a point where no single deal makes a tremendous difference. And so I do expect that to continue to be a steady increase in the quarters to come.

M
Mirza Koristovic
Director of Investor Relations

All right. Thank you. Another one from Øystein is how has Q4 developed so far? Are you starting to see the full effect of your newly hired sales people?

Øystein Dahl Hem
Interim CEO & CFO

We continue to do -- to compete well in Q4, but we won't go into details on the ongoing quarter.

M
Mirza Koristovic
Director of Investor Relations

All right. And there is one more here from [ Kristian Falnes ], do you see a churn level of 10% as a normal level? Or should we expect higher or lower churn in 2022?

Øystein Dahl Hem
Interim CEO & CFO

I think that's a good question. It's certainly been the level we have been at. So if you look back, we've been between 8% and 10%. So that's certainly our normal, and we're somewhat higher now. But also after a year, that was an explosion, both in terms of new customers and existing customers scaling up. We do expect going forward since we have -- want to strengthen our customer success approach. We continue to see the impact of noncore areas be less and less because we have higher churn and less growth in those areas. And we have also lower churn amongst our larger customers that are also becoming a bigger and bigger share of our base. So those 3 things in total makes me confident and there should be an ability for us to reduce our churn. Although for now, what we have seen is that between 8% and 10%, has been the level that we have been at over the past few years.

M
Mirza Koristovic
Director of Investor Relations

All right. A question from [ Axel Albrecht ]. Please explain how you can compete against Microsoft UC solutions, SharePoint, Outlook and cloud solutions.

Øystein Dahl Hem
Interim CEO & CFO

So I think within collaboration, Pexip does not actively compete. So for most enterprises, they will typically have Teams as their main collaboration platform or to some extent, WebEx, Google Meet, Zoom and others. There, Pexip is a side-by-side solution, making sure that all meeting rooms and all noncompatible video systems can still join those meetings. So in that segment, that is our core strategy. Then you have some customers that have super high requirements for security and privacy. They do not choose cloud solutions. And as such, they are not really a -- Teams is not really a competitor in that space. Then within video enablement, we beat Microsoft due to the fact that we are more flexible. It's easier to integrate. And we can also there be more sensitive to the needs in terms of personal data, especially in sectors such as finance and health care.

M
Mirza Koristovic
Director of Investor Relations

All right. And one last question that has just kicked in is also from the analyst at ABG, Øystein Lodgaard. Do you have an assessment of the market growth rates for each of your 3 market segments?

Øystein Dahl Hem
Interim CEO & CFO

Great question. We do believe that in terms of the market opportunity, we expect the biggest growth within video enablement. I think that is a market that we already are seeing today that has had explosive growth, both with Pexip and with others. And it's an area where we continue to find a lot of success. But I think in terms of the 3 focus areas, that is the area where we have strongest growth. In terms of video infrastructure, we know that there are roughly 4 million video rooms that are enabled today out of a total meeting room population of close to 50 million rooms. So while there, we obviously believe that there is an expansion opportunity, although how big that is remains to be seen.

M
Mirza Koristovic
Director of Investor Relations

All right. Thank you, Øystein. I do -- well, I see some more questions from the audience in Oslo. Should we start with Oliver, you were first.

O
Oliver Schüler Pisani
Research Analyst

I think in Q2, you commented a bit on sort of pipeline and outlook for the next quarter at least. But now you're saying that the pipeline conversion was below expectations to my understanding. Is that something that you expect will affect Q4 as well?

Øystein Dahl Hem
Interim CEO & CFO

I think it's too early to say for Q4, to be honest. But we did see that in Q3, which is also one of the reasons why we have -- despite having a significantly stronger pipeline than in Q3 of last year, we sold roughly the same level of sales. But we continue to close a lot of the pipeline, and we don't really see that we are losing that many more deals now than we did a year ago. So in that respect -- but we see them taking somewhat longer. That is due part to competition, but we also see that just decision-making processes do seem to take somewhat longer now than they did a year ago.

O
Oliver Schüler Pisani
Research Analyst

And why do you think that is the decision-making processes?

Øystein Dahl Hem
Interim CEO & CFO

We don't really have a good answer to why that is happening. We also see that from others in -- both in our industry and in software in general. But I don't have a clear answer to what has sort of driven that shift.

O
Oliver Schüler Pisani
Research Analyst

Yes, just to elaborate on that because you also spoke about sort of the return-to-office dynamic being a positive that you expected to sort of benefit you from, say, Q4 2022 or so. Do you think that is an explanation for why you see sort of a slow decision-making process?

Øystein Dahl Hem
Interim CEO & CFO

It could be. We also see that just getting new room systems is a source of delays. So from ordering a new room system now to you actually have it delivered, you're looking at 4 to 6 months of delivery time. It varies somewhat between vendors, but it's obviously impacting them. And as such, that impacts us as well because you don't really need an interoperability solution if you don't have the endpoints already up and going.

K
Kristian Mørk Spetalen
Analyst

Kristian from Arctic here again. I think you showed on one slide that it was the smaller accounts that have churned a bit more in the last 12 months. Could you elaborate a bit on which core markets are churning the most?

Øystein Dahl Hem
Interim CEO & CFO

So I think the area where we are seeing the largest churn on for Q3, roughly half of the total churn was really outside of those 3 core areas. So within Pexip, we have video infrastructure, critical meetings and video enablement is our 3 core areas. But we also have a relevantly big business within cloud-based meeting rooms, which constitute roughly $5 million in ARR [ gross ]. That is a service which is more exposed to competition from Teams and Zoom and as such is seeing more churn.

M
Mirza Koristovic
Director of Investor Relations

Øystein, we have time for one last question and that is, can you please elaborate further on the increased competition in video infrastructure?

Øystein Dahl Hem
Interim CEO & CFO

So I think the competitiveness that we see continues to be from the core players and mainly Cisco. I think when we go head to head in video infrastructure and the large enterprises really Cisco that is our core competitor. And with Cisco, that's really the competitor Pexip was built to beat. And so we are confident in our ability to beat them, although they are a fierce competitor, especially in the large enterprise space.

M
Mirza Koristovic
Director of Investor Relations

Thank you. So I don't see any more questions. That concludes our Q&A session.

Øystein Dahl Hem
Interim CEO & CFO

Thank you, everyone.