Yubico AB

STO:YUBICO

Earnings Call Analysis

Strong Growth and Stable Margins

The company reported a robust 36% growth in net sales, driven mainly by perpetual sales, with subscription sales remaining stable. The gross profit margin held steady at 80%. Bookings grew by 65%, with significant contributions from the financial sector, major tech firms, and the defense sector. The European market showed particularly strong growth. EBIT increased to SEK 131 million, maintaining a 21% margin. The long-term incentive program added a new cost of SEK 6 million. Cash and cash equivalents at the end of the period were SEK 678 million, with net cash at SEK 645 million .

Impressive Growth in Bookings and Revenue

Yubico reported a stellar increase in bookings, achieving 65.5% year-over-year growth, reaching SEK 673 million. This growth continues to stem from a diversifying customer base, with strong contributions from the financial sector and major technology companies. The company noted that subscription bookings grew even more dramatically, increasing by 136% year-over-year to SEK 142 million, reflecting a larger share of overall bookings at 21%, up from 15% a year ago. This substantial uptick is a testament to Yubico's expanding relevance in the cybersecurity market.

Solid Revenue Performance

Net sales also saw a commendable rise, growing by 36% to match the commendable booking figures. It was noted that Yubico’s strong perpetual sales significantly influenced this growth. The subscription sales, constituting 9.7% of net sales, remained at the same levels as the previous year. This raises the prospect for future growth as the company enhances its subscription offerings alongside its perpetual sales.

Maintaining Profitability and Margins

Yubico has demonstrated remarkable stability in its gross profit margins, maintaining a level of 80%, which is an enviable position within the industry. The Earnings Before Interest and Taxes (EBIT) margin stood at a consistent 21%, equating to SEK 131 million from SEK 97 million. This stability in profitability underscores the operational efficiency and effective cost management strategies that Yubico has in place, even amid increasing sales expenses driven by significant order bookings.

Subscription Growth and Future Guidance

Annual Recurring Revenue (ARR) has also seen a favorable increase of 18% year-over-year, growing by SEK 11 million since the last quarter. The management expressed optimism about the growth trends, especially from recent long-term contracts and high-volume renewals within the financial sector. However, they indicated that the full effects of recent deals are still to materialize. Yubico's guidance suggests continued robust growth potential, particularly as existing customers are likely to renew their subscriptions, leading to predictable revenue streams.

Improved Cash Flow and Financial Health

The company generated an operating cash flow of approximately SEK 120 million during the quarter. Yubico effectively reduced its inventory-to-net sales ratio from 30% to 29%, demonstrating improved efficiency in managing working capital. As of the end of the reporting period, Yubico had cash and cash equivalents amounting to SEK 678 million, contributing to a net cash position of SEK 645 million. This strong liquidity provides Yubico with ample resources to invest in growth opportunities.

Geopolitical and Market Expansion Risks

Yubico's expansion into international markets like EMEA is progressing well, aided by a strengthened sales team. However, the executives acknowledged that the macroeconomic environment poses ongoing challenges. Understanding that hackers target financial institutions due to their data sensitivity allows Yubico to position its diversified offerings effectively; yet, competition in cybersecurity will remain a notable consideration. The firm is aware of the potential for dual-sourcing strategies among larger clients, aiming to mitigate risks posed by single-vendor dependency.

Strategic Initiatives Moving Forward

Yubico emphasized its commitment to innovation, having released a new firmware update that enhances product functionality. Although there may have been minor impacts on sales cycles due to this update, the long-term benefits are anticipated to bolster Yubico's market position further. The company plans to invest in boosting its product development capabilities and geographical market penetration, indicating a forward-thinking strategy focusing on sustainable growth.

Outlook and Growth Opportunities

Despite the impressive growth figures, Yubico cautioned against expectation of these rates continuing indefinitely. However, the management is confident in their diverse product offering and strong customer retention strategies, which are critical for sustained growth. As cybersecurity remains a top priority across all industries, Yubico’s unique positioning as a renowned provider places it in a favorable scenario for capitalizing on market trends.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Yubico Q2 2024 report presentation. [Operator Instructions]

Now I will hand the conference over to CEO, Mattias Danielsson; and CFO, Camilla Oberg. Please go ahead.

[Mattias Danielsson, executive]

Good morning, everybody. We had a great start to the day. Sitting with me is Camilla Oberg, the CFO of Yubico. We're going to do a short presentation related to today's release of the interim report. And as usual, we'll start with an overview of the company. And I know that several of you have heard us present this before, but for those that are new to the table, we figured we should start and explain a little bit what we do. So I apologize if you've heard that part before. Then I will hand over to Camilla, who will talk about the Q2 report. It's all news in that section, so save the best for last, and then we'll do a quick wrap up and open up for questions.

So let's dive straight into it. I hope you can see the presentation, if you're not able -- if we're not able to see each other and just a high level of what Yubico is as a company. We typically highlight 2 things that we're very proud of. One is our core product, the YubiKey and the important security issue that it addresses and mitigates.

It's about securing logins, which is one of the key problems when it comes to cybersecurity, stolen login credentials, depending on what study you look at represents -- is a major factor in somewhere between 80% and 90% of all the hacks being reported.

So it's a critical problem, and our product offers a very clear solution to that problem, and we're very proud to talk about the fact that for those customers that have implemented our product with the new protocols, they've experienced exactly 0 account takeovers, and we want to keep it that way and keep investing having the leading product, staying ahead of the hackers and the competition.

So since the inception of the company about 16 years ago, we've sold and deployed about 32 million YubiKeys. I hope you've all seen what they look like pretty, much like USB stick, but they're about securing logins.

We have had a focus, and that's the second part that we typically like to highlight, on selling into major enterprises and government and public sector. This means that we have a very impressive list of customers. Some 30% of the Fortune 500s are already using our products to some extent. And if you look at the Global 2000, the share is about 28%. We'll get back to that.

And so with this focus, we've focused on larger customers. In total, we have about 4,500 business customers and millions of individual users, but the bulk of the volume is to internal enterprise use within public sector and large enterprises.

In terms of size of the business today, we're 459 employees, so little bit more than 400 employees, posting revenues about SEK 2.1 billion during the last 12 months.

And despite the fact that we're a proud hardware-based company, most of our investment and most of our focus is on developing software, and this has enabled us to maintain healthy gross margins pretty consistently in excess or in the range of 80% throughout the years. And that's Yubico in a snapshot.

Diving down a little bit more about our product and the product that we're so proud of. Fundamentally, it's about getting YubiKeys into the hands of users. What needs to be remembered is that we're offering fundamentally a key. There always needs to be a lock at the other end.

And when we started the business 16, 17 years ago, we had a pretty basic key that only fit into one type of locks. Since then we've invested a lot in building a more versatile key, a Swiss Army type -- Army knife type key that fits into all the relevant blocks. And this means that today, users within an enterprise environment can use our YubiKey to authenticate and log in to all relevant enterprise solutions.

This is partly about the functionality on the actual key and the firmware that goes on there, and it's partly about integrations that we have made into other systems. It used to be us doing all the heavy lifting there, making sure that our keys fit into more locks. And now we find out oftentimes afterwards that someone has built support for the YubiKeys in their platform. And that's, of course, very encouraging.

So we established a -- we've been part of building an open standard with the FIDO Alliance, which is now growing very rapidly, that type of authentication. But we've also created a little bit of a standard in saying, "Oh, if you want to log in securely as an enterprise, what to use? Well, you use the YubiKey. So that's the foundation of our success and what success looks like.

If we flip to the next slide, please. Well, these are highlighted -- on the next slide, we highlight some of the brands that are willing to be public references for us, some of our major customers. You can see that it starts with a lot of tech companies, and that's where we started our growth. But lately, the fastest-growing sectors has been financial services, public sector, manufacturing, et cetera. So it's a pretty broad based.

It's still -- the majority of our sales is still in the U.S., but now sales are really picking up, especially in Europe and to some extent in Asia Pac. And we're very proud of our customer list, and we work very closely with them with our biggest customers to understand their needs as we develop our products.

If you look at a more statistical look at the customers, it's -- the next slide illustrates an important part, which is -- which I already mentioned, which is that we have this focus on big customers, i.e., a large share of our revenue is from the biggest companies in the world.

One way of measuring that is, okay, so how many of the biggest companies have started using our products. And it's encouraging to see that we have growth there. If we look 5 years back, about 12% of the Global 2000 were existing customer of ours in '23, as we exited '23 it was about 28%. So there's growth back.

I should say, though, that in most cases, it starts with a small deployment for high security users or a specific user case, for instance, within call centers, where they can't use their own cell phones, et cetera, for authentication. So we -- that's typically how we start and how we get our foot in the door and then it's about expanding from there. So we have a very high repurchase rates.

As we talk about the numbers and as we analyze them, it's important to note that we have 2 different business models. One, which we call the perpetual sales, which is essentially a one-off sale where you buy the hardware with a perpetual license to use any associated software. And it's a very durable product, so that means that it's a one-off.

We also have a subscription model or a service model where you instead -- where we commit to delivering a working authentication solution for our customers. And then it's typically a 3-year license to use our products to securely authenticate for the customers.

Even before we launched the subscription product, which was launched about 4.5 years ago, we saw a lot of repeat purchases. We've looked at this in different ways. And one way to illustrate it is that, if you look at our biggest customers in 2018, our 50 biggest customers -- sorry, our 25 biggest customers, what did their repurchase rate look like on a yearly basis for the next 5 years.

And the median customer had an annual repurchase rate of almost 120%, i.e., they bought 10,000 keys in 2018, they bought 11,900 in 2019, another 11,900 in 2020, et cetera. And there are 2 reasons for that. One is what I just mentioned, land and expand strategy. So even if it's our biggest customers, typically, there's a lot of room for growth within the user base.

As we start with the high security users, then we expand into a broader population, in some cases reaching 100% of the employees, depending on the type of the business. So that's one part.

The other part is that, there's the kind of inherent, even on an installed base with a perpetual model, people would typically repurchase 25%, 30% on an annual basis, partly because of customer -- sorry, employee attrition, people losing their keys, but as importantly, to get the latest functionality by buying the latest version of the product.

So we see a lot of repeat business, and this is something which is important for maintaining our growth that we work closely with the customers and see that growth.

And finally, to highlight -- summarize to you what the customer base looks like. As I mentioned, we started working primarily with high-tech companies in the U.S. Today, we see a much broader set of customers. So it used to be that we could only sell into high-tech companies. Now with a more versatile key, we can be useful to a much broader set of customers.

The next step, of course, would be to expand not just to the biggest companies in public sector, but also to get into the hands of smaller and midsized companies and consumers to a much larger extent.

Great. I think with that, I'm going to hand over -- no, before I hand over to Camilla, I should do some highlights from the quarter -- summary, and Camilla will go into details. We're very pleased to see that we saw another quarter with strong order bookings growth at about 66%, so very close to the pattern we saw in Q1.

It's also encouraging to see that now we're translating that order bookings to a larger extent into revenue, i.e. we're delivering to our customers, so we can recognize the revenue for most order bookings.

It was important for us that we released a new firmware version in May that always comes with some risk in terms of customer acceptance. It was a successful release and it's important as it enables new functionality that we can develop further. One example would be the Okta Pre-reg that we've launched, but we're also working closely with Microsoft to make sure that it works. Our product is more easy to deploy and use within their environment.

On the more formal side of things, we had our first AGM as a publicly listed company. The 2 major items I'd like to highlight there was the election of Jaya Baloo as a new member of the Board. Jaya brings in a vast experience as a security professional, working in commercial and public organizations in the U.S. and Europe. And so I think she will be really helpful for us as we think about how we can improve our product offering. And also we had an approval of the long-term incentive program that was proposed by the Board.

Final thing, we're proud to be setting standards and kind of setting the bar for what strong authentication should look like. And of course, within our niche or within our segment, we're a well-recognized company. But it was interesting to see that we were recognized as one of the most influential companies in the world by Time Magazine, which means -- I think that highlights 2 things. One, the importance of cybersecurity and second, that we've established a really strong position in an important segment of that market.

Yes, with that -- with those highlights at the risk of stealing thunder from Camilla, she will go into the details of the quarter.

[Camilla Oberg, executive]

Thank you very much, Mattias. And just to perhaps remind some of you or also for you who are new on this call or to the company, remind you that Yubico is very much a U.S. dollar-based company in our business, but we are reporting Swedish krona, so that is good to be aware of or have in mind. And also that we transitioned into IFRS accounting, reporting and also changed to a functional-based P&L format as of the Q1 report. So that is what we have with us still here.

So as Mattias said, we had a strong quarter on the growth side and a solid profitability. On the bookings, we grow with the 65.5% to SEK 673 million. There is also a large share of renewals in that light blue subscription bookings. You see there is a growth year-over-year on 136% of the subscription bookings. But reminder that it's a large share of renewals. We'll come back on that.

On the net sales, we see now also that the good order bookings the last quarters also fall through into the net sales. So the growth is now picking up to 36%. And it is driven by the perpetual sales. As you can see that the subscription sales is quite much in the same level as it was a year ago. The gross profit margin stable on 80%. And this then is including the entry costs as in the gross margin related to functional based P&L that we are using now.

And on the profit side, the EBIT is also stable. We are running on around 21% EBIT margin from SEK 97 million, up to SEK 131 million and very similar to the profitability last year. And then we will deep dive into the booking. There we go. Into the booking side. And we have this quarter -- last quarter, we didn't have any effects from local currencies. But in this quarter, we see that we had the 65% bookings growth turns into the 63% in local currency. So quite still small -- still a quite small difference there.

The bookings growth was driven by the diverse customer base, as said, good momentum in the financial sector, major tech companies where we see the largest orders coming from. But also we see that European defense sector is still very relevant and also that Europe as such is growing faster.

The subscription booking amounted to SEK 142 million compared to the SEK 60 million last year. And also then becoming a larger share of the total bookings, 21% this quarter compared to 15% last year.

And we also see then that in these subscription bookings, we have a large share of renewals. The largest among them are a large financial customer, where we have a renewal with an expansion. And then we also had a renewal with large U.S. government agency on the same level to say.

Moving over to the net sales. We see now that we are increasing the growth rate to -- with -- to 36%. Looking in local currencies it's quite small difference to 35%. The subscription represents 9.7% of the net sales, which I said is the same level as last year. So our net sales is very much driven by perpetual sales right now.

And also, as said, we have also on the net sales side, we see that EMEA or Europe is growing faster than the other regions. That is really nice to see.

On the ARR side, we have increased with 18% since a year ago and adding around SEK 11 million in ARR -- net ARR, I would say, versus Q1. Good to see is that we are turning ARR trend positively again as we had a short -- a small dip in Q1. Adding to the ARR for this quarter is a new long-term contract, which was closed in Q1 and also this higher volume renewal within the financial sector. Though we can also say that for this quarter, there is not the full effect from those deals. So we will see more coming from that in the future.

Looking at the EBIT side, we have a stable profitability as said. The gross profit grew to SEK 493 million, and we are running on very stable on 80%, have done so for quite some time, if you look also historically. The EBIT is growing to SEK 131 million with the same level of margin as we had a year ago. The cost side is driven a bit about from sales expenses. And that's, of course, due to that we have a very good order bookings. So that is directly paid out and is a cost on our P&L.

The long-term incentive program which was approved in May, where we granted these PSUs in June. There is a cost for that in the P&L, even if it would be paid by shares. But for 1 month, it was a cost of SEK 6 million. And that is also that we will keep with us now the coming 36 months as well, just to be aware of that as that is a new cost.

We had some unrealized currency effects from our balance sheet, affecting the profit negatively, minus SEK 7 million this quarter, minus SEK 5 million comparable quarter last year. So not so much to say that, I think.

And then we go over to the cash flow. We had a good cash flow this quarter. Operating cash flow of close to SEK 120 million. We have broken the trend for our inventory buildup. As you can see, if you recall, last year, we had invested quite much in building up our inventory, both from securing components and also securing our ability to deliver to the increased demand, being capable to deliver large shipments to large customers when we receive the orders.

We are in good shape. And you see now that we have big decline in this ratio between inventory and 12-month rolling net sales. So a small reduction from 30% to 29% now versus Q1. We still had a negative cash flow effect from the inventory on minus SEK 29 million. But in total, the net change in working capital was very close to plus minus 0. So that is good.

Cash and cash equivalents at the end of the period was SEK 678 million. So we have really built up the cash. And net cash at the end of period was SEK 645 million. That meaning that we had interest-bearing liabilities of close to SEK 60 million, whereof leases is SEK 27 million. And thereby saying that real loan, so to speak, interest bearing loan, is currently on SEK 32 million.

Yes, I think that is on the cash flow and the numbers, and I hand over to you again, Mattias.

[Mattias Danielsson, executive]

Thank you, Camilla. Sorry about the noise. Hopefully, we can pause the construction work going on for a short while, but that was what happened in the background there, not a cybersecurity attack.

But the importance of good cybersecurity and the threat remains very high and continues to grow. And I'm very happy that we are able to provide one of the most effective and cost-effective mitigations to that threat. So that is, of course, the underlying -- well, that's the foundation for our growth.

As it impacts different sectors, we can see now that the financial sector has been growing in importance to us, and I think it's kind of an obvious -- the obvious reason for that is that hackers go -- some types of hackers go where the money is and banks and other financial sector actors are an obvious target for that.

We have historically been very U.S. focused. And the U.S. continues to be our biggest market, but it's very encouraging to see that it's not just our product isn't just applicable to the U.S. market and its customers, but it's actually something which is -- there is demand for worldwide. We have had a very successful quarter in the EMEA region. We have a strong sales team there now, which sets us up for continued growth.

Of course, the most important thing is that we can have a positive impact for our customers and to have a positive impact, our product needs to get out and deployed to the users. So that's why we're investing so much in making it an easier experience to both deploy and use our products.

And there's much more to come and to say about that in future quarters, about the technical development that we're doing. But one of the important foundations was the thing that we highlighted earlier about releasing a new firmware version in May, which sets us up for new functionality and a better customer experience fundamentally.

And again, it is very encouraging to see that we're becoming more known outside of just the cybersecurity experts. It's an important market. It's an important segment that we're in. And I think the Time Magazine recognition is just one indication of the fact that we have a product which is of interest and applicable to a very broad set of users. So we're only at the cusp of making sure that we can have -- realize our vision of making the Internet securing for everyone. Started with the high-tech companies now going more broadly with big enterprises and public sector and over time, impacting even individuals. That's what we aim for.

With that, we'd like to wrap up the presentation part of this meeting and open up for questions. If I remember right, we should start with the phone questions in terms of order.

[Operator]

[Operator Instructions] The next question comes from Predrag Savinovic from Carnegie.

[Predrag Savinovic, analyst]

Big congrats, very impressive figures again. I think we could start maybe if you could discuss a bit more on the bookings level. You're, obviously, executing really well. And I understand that 65% growth is not something we should extrapolate. So if we look a little bit on Q1 and Q2 for this year, it's been growing substantially. It will be helpful if you could give any comments to how Q3 has been the start of the third quarter? And if there is potentially an element of orders that you expected maybe to land in Q3 or Q4, which ended up landing now in the second quarter or the first. Any more clarity there would be super helpful.

[Mattias Danielsson, executive]

Sure, Predrag. Thanks for attending and for a good question here. Of course, when it comes to Q3, I'll have to get back to you on that as we release the Q3 numbers. But talking about the first half of the year, what's really encouraging to me is that it's not dependent on one single order or one single customer or even one single industry. It's pretty much across the board, both when it comes to industries and geographies.

And also, it's not that we saw a very high growth up until April and then it kind of tapered off. It's pretty consistent throughout the first half of the year, which is also encouraging.

I think, I know where your question originated from, if we saw some early orders being pulled in earlier than what was the case. And I think I highlighted that as we presented Q4 last year that we were then able to pull in a few things that we didn't anticipate would happen until '24. I don't see a lot of that during these first 2 quarters. It's been pretty much -- things have developed organically, and it's been broad-based growth.

[Predrag Savinovic, analyst]

Okay. That's very clear. And then the new firmware update, which you rolled out this quarter, can you see any specific patterns with customers ordering more in anticipation of this release or holding off purchase until it was live. Is there anything of that sort?

[Mattias Danielsson, executive]

Great. So that's something that I think we talked about at an earlier quarter. It's hard to predict how a new firmware release will hit because there's some effect of some customers don't wanting to place an order or get deliveries if there's an upcoming release, because they want to make sure that they get the latest version.

And for us, other customers, they tested and validated a certain version and then you want to make sure that they get the version that they tested. So instead, they will want to order as much as possible and get delivery of as much as possible of the old version.

Those 2 effects pretty much netted out for this release. I didn't see a strong move either direction, i.e., that we had lower or higher orders because of the firmware release. The only place where there was a small impact, which always happens is on e-com sales, especially e-com sales through Amazon platforms where there's kind of some natural delays in stocking up as we release a new version, which means that we were out of stock for a short period of time because of this release. So a really small overall impact, but a little bit of an impact on the e-com sales, i.e., some lower sales for a period of time because of the firmware release.

[Predrag Savinovic, analyst]

Okay. And then just a final question then on -- you made a restatement on -- regarding subscription revenues historically. If you can go through what triggered this? What is this, what happened and -- yes, basically that.

[Camilla Oberg, executive]

Yes. This is related to a couple of old sales orders and typical accounting error. So we found that there were a couple of old sales orders that we had closed and moved over to new sales orders. But unfortunately, the revenue continued to build up in the background and during a long period. So as you have seen, this is actually as far back as 2022 and has been running up till when we found it now during Q2.

[Mattias Danielsson, executive]

And this is, of course, very embarrassing, but I think we've contained the problem and made sure that we don't repeat that mistake. And to clarify, those were related to a few older subscription orders that have moved to a newer version, but because of an accounting error, we were still recognizing revenue erroneously on those.

[Camilla Oberg, executive]

Yes.

[Operator]

The next question comes from Erik Lindholm-Rojestal from SEB.

[Erik Lindholm-Rojestal, analyst]

Yes, couple of questions from me. I have to echo Predrag, congratulations for the strong quarter. And then starting on perhaps the ARR here. Can you break down the growth here in the quarter, around SEK 11 million sequentially?

I believe you had that a small customer churning out, buying perpetually instead of subscription and then there was some renewals and increased ordering with some customers. But I mean, can you give some sense on how you see growth in ARR going forward?

[Mattias Danielsson, executive]

So what's important to note there is that when we report ARR, we reported on contracts that -- where we started recognizing revenue. So we don't report ARR based on the customer has signed the contract, but it's that delivery of the service has started. Just a clarification there.

As you mentioned, the -- and as Camilla also highlighted, the biggest bookings in terms of subscriptions during the quarter were from all already existing customers that renewed and also made expansions of their use of user audience. And I think, in one case, also upgrading the version of subscription that they had. And so that in terms of dollar value, that's the most important contributor to the growth there.

And of course, we continue to sign on new customers on this, and that's important for future growth. But in terms of dollar value, the largest impact was from these -- from renewals and expansions among existing customers.

[Erik Lindholm-Rojestal, analyst]

Perfect. And I mean, you have previously discussed sort of creating the capability for your customers to provide utilities to their respective customers as a big area of potential. I think it sounds sort of very promising. Can you talk about the investments needed to do this? And any sort of potential timeline on when we should start to see this driving your orders and sales?

[Mattias Danielsson, executive]

Yes. I'll speak some of it, and then we'll have to get back to with the actual proof in the pudding, i.e., the numbers. But as you say, we are seeing some encouraging development when it comes to getting to our customers -- end customers and users. We've highlighted the financial sector as a one which has been growing rapidly for us. And we're now in several early stages with the banks, both in America, Europe and APJ looking to deploy it with their customers, i.e., banking customers.

This has not had a big impact so far on our revenue. But given the size of that opportunity, I think if we play this well, this could be a significant business for us and also a really tangible way to help individuals in protecting their assets, not just banks, but individuals, of course.

And in terms of investment, it's a very different type of user scenario than internal enterprise use. It comes with making sure that the on boarding is very seamless and very easy. It comes with ensuring that the bank's customer support can respond to customer questions, comes with ensuring that the entire experience for the customer is a smooth and a positive one, also in identifying where you start, what type of user segments do you start, and essentially providing a solution for these banks that are our customers.

And this will require a bit of investment in terms of developing collateral, in terms of developing best practices, in terms of hiring people who can support this effort. And of course, it's all -- that all will be charged as cost, so that will potentially drive some sales cost in the future. But I think that's a very viable investment to make. So I think we can have a real impact in this area.

Still, it's very small. It's test phases and some smaller deployments, but it's an area where we see a lot of interest. So yes, I'm excited about that.

[Erik Lindholm-Rojestal, analyst]

And then from questions on the cash flow here in the quarter. So -- I mean, you mentioned the inventory as a percentage of sales, perhaps coming down slightly, but still having some inventory buildup. How should we sort of think about inventories to sales going forward?

And also, I wanted to ask on CapEx. CapEx was quite high in this quarter. I mean, is it anything -- any one-offs in this? And how should we -- is all of the cash flow from investing activities related to CapEx? Or is there anything else in that number?

[Camilla Oberg, executive]

So firstly on the inventory, we -- as we have had -- the reason why we did it, you know it by now, and we think that we are on a good level and that we are now more on growing into the customers, I used to say. We will continue to probably use some more cash also during the second half. But I mean, we should continue to grow top line more than we continue -- then we continue to grow the inventory. That is our ambition. So that's how we are thinking on that. And so it should continue to go down. How long it will take -- but we are on a too high level right now for a long-term target.

On the CapEx side, we have -- when we introduced IFRS that were a couple of consequences of that. One is, of course, this with leases, our office leases, but also that we are activating or capitalizing commission costs for large subscription contracts. And this is what happened. So what you see in the cash flow for the quarter, you can say half of half is -- half is actually real investments, so to speak, where we are continuing to ramp up and investing in our production capabilities and also -- so partly it has been taking some here in Q2.

We are continuing investing. It's nothing that is a huge amount and it's more something that you can see we will continue to gradually increase our capacity. As each expansion is not a very big investment, so this will be a fairly smooth investment journey. Although, of course, some quarters might be higher.

And the other part in what you see in Q2 is then related to contract assets or costs for acquiring contract assets, as we call it, in a tangible asset in the balance sheet now as a result of the IFRS transition. So that will be when we see large subscription contracts, then we would see an effect in this as well.

[Mattias Danielsson, executive]

So to be very explicit we have set a bar of --

[Camilla Oberg, executive]

USD 5 million, it's the bar for when we actually look into the subscription contract and catch the commission for that contract. And the depreciation of that asset will be the same then as the contract.

[Mattias Danielsson, executive]

And to be even more explicit, that apply to one order during the quarter.

[Camilla Oberg, executive]

Yes.

[Operator]

The next question comes from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So can you perhaps just -- I mean, in light of the stellar bookings numbers seen in recent quarters, can you say anything about when you would see your current production or manufacturing setup become a bottleneck or is there still considerable room to grow with the current setup with contract manufacturers and your own provisioning?

[Mattias Danielsson, executive]

Yes. Given how we structured our manufacturing, I don't see huge bottlenecks when it comes to the production. We have a cell-by-cell approach when it comes to the molding and we have good capacity when it comes to the electronics mounting. So, of course, there is some time to get new cells up and running, typically a 6-month period, because we typically want to upgrade our automation and make improvement. As we said, get a new cell up and running. But this is a modular and very scalable approach. I don't see an issue there.

I should mention that we -- as I think I've highlighted before, we had a scare when it comes to the component supply in the past. And that's one of the reasons why we built up the inventory for components ensuring that critical components, semiconductors could -- so we don't run out of stock.

Now we have a buffer there, which would, worst case, even enable us to switch to a different platform, if needed. But on the macro level, the squeeze for semiconductors have eased somewhat. And also we have good inventory levels, so that shouldn't be holding us back to scale up manufacturing either.

[Joachim Gunell, analyst]

And could you also just comment a bit on the current levels of sales force productivity, go-to-market efficiencies and basically the opportunities to further scale your sales initiatives going forward?

[Mattias Danielsson, executive]

Yes. It's -- if you look over a long period of time, we've had a pretty consistent percentage -- so the cost of sales and marketing has been pretty consistent over a long period of time compared to our revenue. It's been about the same proportion. How we can scale better there is by getting more leverage in our go-to-market, by getting more channel generated sales, by working with partners, by getting sales to end users through some of our biggest customers.

However, in the short run, making those improvements or scale or reach further will short term most likely incur some extra costs. So it's going to be a while until we can see a better scaling in terms of the percentage spent on sales and marketing compared to revenue, but there's room for improvement there.

Then if you look quarter-by-quarter, of course, there are swings. Compared to revenue we had a higher sales and marketing costs this quarter because of that except for the really huge orders, we incurred the cost of commission when we booked the order. And then revenue takes some time to come through, especially for subscription bookings, but even for larger perpetual orders. And those are more kind of quarterly bookings. But long term, we need to work on getting more [indiscernible]

[Joachim Gunell, analyst]

Understood Mattias. And then I mean, with free cash flow used to be the choke point, but now that will also -- now it will also tick that box basically here in Q2. Can you talk just a bit about how you think about your capital allocation framework now that you are accumulating net cash in a quite considerable fashion?

[Mattias Danielsson, executive]

Yes. As Camilla mentioned, one of the principal uses of our free -- of the free cash flow we had in the past year, 1.5 years has been to build up inventory levels, both of components and ready products or ready-to-ship products. And now that area of investment is -- well, we've reached the level where we want to be there. And of course, as we scale the business, there will be some continued growth there, but it's not going to be a kind of a proactive, bigger investment.

So the 2 areas where we see the best use of our money going forward internally would be within product where we have some interesting product development opportunities that we want to invest in. Some of that will materialize as cost instantly and potentially some will have to be put on the balance sheet. But in any case, that will require some cash to make sure that we can invest in the product development that we're looking to do. And that's the bigger area.

And then as I mentioned, we are both establishing ourselves in some certain new geographical markets. So that's a smaller cost and use of cash before it starts generating revenue. And then more structurally, we'll be investing a little bit in making sure that we can get a more leveraged sales model, as I mentioned, working with channels, working with sell-through.

So those are the 2 main areas of usage for our cash flow in the short run. Longer term -- and we feel that we have good returns of investment given the strong growth we're seeing within the company and hence, the guidance that we won't be paying dividends for the time being. Longer term, the money belongs to the shareholders, and we will, of course, act accordingly.

[Joachim Gunell, analyst]

That's clear. And the final one from me relates to -- I mean this is not an apples-to-apples perhaps a question when it comes to you at Yubico. But I mean the global disruption caused by CrowdStrike outage here. Do you think that could potentially hinder organizations' willingness to consolidate also MFA solutions to the one vendor? And then, I mean, with you as the category leader in this space, could you see a risk that we increasingly see some sort of like dual sourcing when it comes to -- and also competition as well.

[Mattias Danielsson, executive]

Sorry, I missed the last part of the question. Do you see some risk and then there was a word that I missed, if you could just repeat the last part of the question, so I don't get it wrong.

[Joachim Gunell, analyst]

Yes. No, sure. I mean do you think that -- I mean the disruption caused by CrowdStrike, and they have this, I mean, very strong position as, call it, single platform and vendor for a whole lot of organizations. Do you think that organizations will increasingly start dual source cybersecurity solutions and could that also impact your position if the dual-source MFA?

[Mattias Danielsson, executive]

Yes. For our biggest customers, there is -- for our biggest tech customers, I should say, we already see some of that risk that they don't want to be dependent on a single supplier, and they think they can do everything themselves. So they test the waters on developing their own solutions -- without mentioning any names. We've come across that. For more -- for companies that are not in the high-tech industry, developing their own solution is not really an option in most cases.

In those cases, I would rather point to another trend, which is that the cybersecurity market today is -- it's a very complex threat, the threat vectors are very complex, and you see a large amount of different players in the industry, hundreds or even thousands of companies. And at a macro level, it's not unreasonable to think that there's going to be some consolidation.

We want to make sure that we don't become in such a small segment that someone goes for a platform provider then instead. So we want to make sure that we expand our product offering to remain very relevant because we -- again -- and also that we work well across all different systems. So we don't create a bubble where our use case gets more limited. So it's kind of a dual thing. There's some potentially among bigger customers wanting to dual source to mitigate risk. But on the other hand, there is this macro trend of consolidation that I think we'll see over the next 5 years or so in the cybersecurity market.

[Operator]

[Operator Instructions]

[Mattias Danielsson, executive]

I'm not sure if we have any more phone questions. I'm hoping you can hear me, we have received only one written question so far.

And the question is, it seems to be a very strong increasing interest for cybersecurity that can lead to new competition. Do you see any new players yet?

That's a great question and a little bit along the lines of what Joachim just asked. I would say this that the biggest competition that we always see out there is what we call good enough security. The challenge that we're always facing and the challenge for customers to deploy our products is the fact that it is hardware-based. There's some complexity involved in that. You need to get it out into the hands of the users.

So from a deployment perspective, a software solution is typically easier. Software solutions are easier, but they don't -- they're not at the highest level of security that we offer. So we definitely see a lot of new solutions and new attempts in the broader authentication space with software-based solutions. I think among various security conscious individuals and organizations, it's still established that we are the -- we offer the highest level of security.

Within the open protocol that we've been part of establishing the -- what's being promoted as Passkeys FIDO Alliance standards, we do see new competitors in that space. That's typically within a single protocol use case. What I mean by that is, that it's a key that only fits into one type of locks. So as a customer or as a user, you need then to have a very straightforward IT infrastructure for that to be relevant.

So yes, for particular use cases, we see new competitors popping up within the open protocol. But when it comes to covering the typical enterprise use case, yes, we -- of course, there's competition, but in particular, for more kind of legacy-based solutions like different smart card vendors. So we don't see a huge shift there at this point.

Long-winded answer to a short question. And during that time, we've received a new question that I'll turn to.

This SEK value sales, which are recurring is down 4.3% year-over-year and 3.5%, Q4 despite the SEK value booking, which are currently nearly doubling. How have you had -- have you had cancellations here?

The biggest part of that is that -- as we -- I mean, the overall sales number is growing. So in terms of absolute numbers, there has been a little drop, but not as significant as 4.3 percentage points. But the big thing there is that subscription sales is based on contracts that are up and running and start producing revenue. So there is definitely a lag between before that 21% share of order bookings, being in the subscription category, before that translates into revenue.

We did highlight in Q1 that there was a big customer that made a renewal, but with a more limited -- no, sorry, that was after the end of Q4. At the end of Q4, there was a big customer -- subscription customers that did a renewal. But for a smaller population base. They had essentially let several employees off and therefore they reduced that number. And since it was such a big customer that had the effect that the ARR, which is based on revenue, i.e. contracts that are up and running, not bookings only. That dropped in Q1, and now it started growing again in Q2.

[Camilla Oberg, executive]

Yes. And also remembering when we see these large subscription contracts, when there is a renewal, of course, it's very visible in the booking. But if it's still the same volume, it actually doesn't affect the ARR. If we'd not received that renewal, it would have caused drop in ARR instead. We're happy for those renewals, absolutely.

And also when we see large bookings, as we are talking about in the subscription, we have -- you see the booking, and that is for 3 years and we had even one for 5 years, meaning that it will take a long time before this booking is actually also totally turned into revenue. So there is a quite big lag on the subscription bookings.

[Mattias Danielsson, executive]

Thank you. The next question is, a good margin [ print ] this quarter. Is there anything seasonal or one-off? Should we assume it remains around this level for the back half all things being equal?

The way I interpreted it is, the net margin which was at remind me, at 21%.

[Camilla Oberg, executive]

20%.

[Mattias Danielsson, executive]

Yes, there's nothing seasonal in the sense, but it swings in Q2 because of seasonality there. If anything -- the only thing I'd highlight to, which is really little bit more of a one-off is -- but you should keep in mind as you look at the margin that since most of the commission gets recognized as cost based on order value, the sales cost as a percentage was a little higher than this quarter than what would have been the case if bookings and revenue grew at the same rate. But nothing really seasonal in there.

And the next one, are you able to share the SEK value of commissions, which was capitalized in the quarter? I can't find the summary in your interim report.

So it's not in the interim report. I think the closest we can get there is what Camilla just mentioned that of the capitalized -- the exact term is investing activities amounted to SEK 15.9 million. I think you mentioned that about half was related to investment in manufacturing and half of it approximately was related to the commission cost being capitalized for that big subscription order. I don't have a more exact figure than that.

Great. The next one, if subscription bookings that last 3 years reflect the gradual rollout of keys across an organization and expand, is it fair to assume that after 3 years, customers are likely to renew at lower volumes because their staff already have keys? So the only renewals are that need for headcount growth or lost key.

No, that's not the case. When the 3 years expire, they need to renew for all their users, not just added users. The right to the service expires after 3 years.

[Camilla Oberg, executive]

Exactly. So it's important to remember that the subscription services and the prices for that is not related to number of keys explicitly, but it's related to a number of users. So that is -- so when you still have the same number of users or hopefully, you have been growing even, then that is reflected in the subscription.

[Mattias Danielsson, executive]

Renewal, yes.

[Camilla Oberg, executive]

Yes.

[Mattias Danielsson, executive]

Yes, we're reaching the top of the hour, and I think we've covered the written questions. So unless there are any last-minute takers, we'd like to wrap up this call.

Thank everyone for attending. And of course, you're welcome to contact our Investor Relations with any additional questions or comments. And we'll be back in about 3 months, if not before. Looking forward to that. Have a great day.

[Camilla Oberg, executive]

Thank you.