Yubico AB (YUBICO) Earnings Call Transcript

Welcome to Yubico Q2 2025 Report Presentation. [Operator Instructions] Now, I will hand the conference over to CEO, Mattias Danielsson; and CFO, Camilla Oberg. Please go ahead.

Good morning, everybody. Welcome to this analyst call for -- connected to the Q2 report for Yubico. Beautiful day here in Stockholm. Next to me is Camilla Oberg. I'm Mattias Danielsson, I'm the CEO of Yubico. And several of you may know us already, but we -- and I know -- I expect that there will be a lot of questions related to the just released interim reports, but we'd like to start off with a quick introduction to the company. So looking at Yubico high level, we typically like to highlight 2 things. First thing is the important mission that we have. Our mission is to make the Internet safer for everyone, and we're targeting to do so by offering the most secure multifactor authentication out there. What does that mean? Well, it means that customers using our product can be sure that their accounts don't get hacked. We've actually had 0 account takeovers for customers, who have implemented our product, something we're extremely proud of. And we, of course, work very hard to keep it that way. Since the start of the company, we've sold and deployed some 40 million YubiKeys, protecting accounts worldwide. For the other thing that we're really proud of, which is our customer list. We've been focused on working with some of the largest organizations and companies in the world. We have about 5,000 professional customers overall and millions of consumers using our products. But the focus has been on working with the world's largest companies and the public sector. And this includes some of the most prestigious companies in the world, very security conscious, but we're also very happy to see that to an increasing extent, more -- and it started out with tech companies, but to an increasing extent, we're seeing a very wide adoption of our technology because it offers that strong protection, which is needed by everyone today. In terms of the company, we were started in Sweden, about 2/3 of the business and the employees are currently in the U.S. In total, there's about 520 employees in the company. And during the last 12 months, we had sales of approximately SEK 2.3 billion, so about $250 million. We're a hardware company. Fundamentally, our YubiKey is a hardware product. We're proud of that. And in spite of being a hardware company, we've been able to maintain healthy gross margins, pretty consistently in the vicinity of 80%, and that has enabled us to continue to invest in building the best product out there for multifactor authentication. That's a real quick overview into the company, and we'll talk a little bit more just about the product and the market before talking about the quarter. So what's the market we're in? Well, in a broader sense, we're part of the identity access management market. And specifically, we're in the multifactor authentication market, MFA. And there are several different ways to do multifactor authentication. And just to step back, the most common way to log in is still username and password, where the username is the identity and the password is how you authenticate. Everyone knows today that password doesn't really offer good protection, even if it's a very complex password that you're using. So you want to have an additional factor for authentication, not just something that you know, a password, something that you have or something that you are. And over the past decade or so, it's been popular to implement different software solutions for MFA, including phone apps. However, if you want the highest level of security, you need -- there's a growing consensus that you need a hardware-backed multifactor authentication. And we are the leader in the segment for modern multifactor authentication. The existing products out there in this segment for advanced authentication are typically Smartcard implementations. That's the biggest direct competition that we're seeing. And our unique offering is that we offer at least the same level of security as a Smartcard implementation, but we offer it in a more convenient way, which is more user-friendly and perhaps even more importantly, with the form factor, which makes you -- enables you to use the strong MFA across platforms and across devices. So the market we're in, the addressable market is estimated to be at about $5 billion today -- $5 billion. It's growing at about 14% per year, and we're consistently gaining -- winning market share in that market. So if we then move on to talk a little bit about our -- a little bit more about our product, what I highlighted before was that it offers a unique combination of good usability with the highest level of security. And what's extremely important to understand as you think about our product is that fundamentally, what we're selling is a key. It's only as relevant and as good as its ability to unlock locks in a secure way. And we've invested a lot in making sure that you can use the YubiKey in a wide variety of locks, i.e., that it can be used in all the different environments and with all the different applications that you see in a typical enterprise environment. So that's where we've spent a lot of time over the past 15 years developing this ecosystem. Talk a little bit more about our customers. I mentioned earlier on that we initially started selling primarily into tech companies and that we have been very focused on selling into large accounts. Already today, some 25% to 30% of the Global 2000 are existing customers of ours, however -- and we're very proud of that. However, for most of those customers, they're only using our product for a subset of their users. So our sales strategy is one of land and expand, i.e., to get it, start working with an account, protecting their most sensitive users. And as the customers realize that this is -- doesn't offer just great security, but also is very user-friendly, that's when we start a conversation about rolling it out to a broader set of users within the organization. Because of that, we've seen a very high repurchase rate. If you look at our biggest customers, any given year, it's -- we'll consistently see yearly average repurchase rate in excess of 100%. Just to be clear, a big part of that is explained by the fact that we start with a small footprint and then expand within the organization. And a final comment on our customers. It used to be very tech focused. Last year was the first year when the tech sector was only our second biggest industry segment. Our biggest one was financial services. And the 3 biggest sectors that we have are tech, financial services and then public sector. We can move on to the next slide, please. So how do we think about growth going forward? We have communicated long-term growth targets of, on average, 25% growth per year and attaining a 20% EBIT margin. Well, it's about expanding our offering, it's about simplifying it and it's about evolving it. Another way to cut it is to talk about what do we do in terms of our product. Well, what we've been really good at and what we've been very focused at is making sure that if you use our product, your logins don't get compromised. So we're protecting logins. However, what our customers -- most of our customers are really interested in is protecting users. So to make that tie between login -- between a key and a user that's a critical link. And we see a lot of opportunity for growth there, not just offering more users YubiKeys so that they can login securely, but tying in a safe way their identity to that login solution. The other part is, which is very exciting is, on the go-to-market side. As I mentioned, we have been focused on large companies, and our typical sales model is a direct sales model, where we interact directly with large accounts. We're increasingly now working with channel partners and with partners driving sales. And it's both cybersecurity specialists and broader IT consultants now including the use of YubiKeys in their offering. Next step there is making sure that we have better programs for partners to sell and also to be able to sell to some of our customers' end users, including banks and tech companies. So we feel that there's a lot of room for growth, and we have a unique market position, which sets us up well for the long-term growth targets that we have. Next slide, please. Turning then to the quarter. When we communicated the Q1 numbers, the financial numbers were quite okay, but we did highlight that we saw a drop in sales activity or specifically that we saw that larger deployments and larger orders were taking longer than is usually the case. Essentially, that we saw a good momentum with small and mid-sized deals, initial deployments. But when a big customer was going to push the button and make a larger deployment, that's where things have slowed down. And this was visible towards the end of Q1 and during the first half of Q2. And we're very happy to report that during the second half of Q2, i.e., from end of May onwards, we saw a return to that sales momentum. Because of the slow start to the quarter, we only saw an increase measured in local currencies of 3%, but if you look at the composition of the quarter, most of that -- vast majority of that growth happened during the second half of the quarter. And we carry that momentum into Q3, so we feel that the underlying sales momentum is back. As you look at the numbers, you also want to keep in mind as with many other Swedish companies that for once the Swedish krona has appreciated quite strongly to the U.S. dollars -- to the U.S. dollar. Almost more than 80% of our sales is in U.S. dollars, and the remaining parts are in euros. So there is a considerable FX impact on top line and an impact even on EBIT because of the krona appreciation during the quarter. The final part to consider when looking at the financial numbers is that we saw a breakthrough in our subscription offering. Worth mentioning before we get to there is that we do have 2 different business models. One is what we call a perpetual sale, which is an outright sale of the hardware and all associated software on a perpetual license at no additional cost. So then you recognize all the revenue upon delivery of the physical product. The other model that we introduced a couple of years ago is a subscription model, what we call YubiKey-as-a-Service. And in that case, the customer instead buys for protecting a set of users over a time period, typically a 3-year period. And in that case, we report the order bookings, i.e., the value of the order during the quarter when the order gets placed, but the revenue gets typically recognized over the next 12 quarters. And this quarter, we saw some big wins when it comes to YubiKey-as-a-Service, meaning that we saw a higher number for order bookings than revenue. Of course, over time, that will translate into revenue, but the short-term impact is negative for revenue and EBIT. So in terms of specific successes, we highlighted already that we were very pleased to see that we saw a significant increase in subscription during the quarter, i.e., YubiKey-as-a-Service. And looking forward into the second half of the year, we see that a substantial part of our -- of the biggest opportunities for the second half of the year is also in that fold, i.e. subscription or YubiKey-as-a-Service opportunities. And nothing worth mentioning is that we have been working with some of the traditional tech companies for a long time, and it seems like the next wave when it comes to technology companies, i.e., the AI companies, are also realizing the value of using YubiKeys. So we see large customers, both on the services and on the hardware side, using YubiKeys, which is to us a great indication that even in the world of AI, you need a hardware route of trust, and YubiKey offers the best protection there is. With that, I'll hand it over to Camilla to talk a little bit more about the financial numbers for the quarter.

Thank you very much, Mattias. Yes. And as said, the quarter as such is, of course, somewhat disappointing to us also from earnings perspective, although that we see this underlying momentum coming back on the sales side. And there are a couple of factors I would like just to mention before we go into the numbers to understand the mechanics in the numbers. And we see the lower revenue that we have here is affecting all the way down to the EBIT, as we have a very high or a very good gross margin. We are around this 85% approximately when it comes to the direct gross margin, the one that is directly related to the volumes. So, of course, that has a major impact. We also saw the lower bookings in Q1, then, of course, that we said at that time also, we have not so much with us into the second quarter, and the strong SEK, Swedish krona, that we have had throughout the full quarter here, which also puts pressure on the gross margin. And, of course, it's very visible in the -- when comparing the year-over-year growth in Swedish krona. On the positive note, though, when it comes to the numbers is the ARR development due to the subscription breakthrough that we have seen whether order bookings was more than 30% of the total order books bookings related to subscription and the negative effect of that, as Mattias mentioned also, is that it directly has a declining effect on the net sales, as it takes longer for the net sales to be realized in the P&L, which we see also the effects of now this quarter. So those are the big factors to have in mind when looking at the numbers you see here on the slide. So the net sales, perpetual and subscription, came in on SEK 499 million, and that was a decline to close to 19%. Measured in local currencies, a decline of 11% year-over-year. The gross margin, you see is 79% compared to the last year of 80%. Though it's a small pickup versus the first quarter in this. On the EBIT, you see a more drastic drop from the 21.3% margin to the 4.2% margin, which is then totally related to the large effect we see when we have a drop in net sales. And the ARR development of plus 37% up to close to SEK 400 million now then. So then ARR is the value of the subscription portfolio measured on a yearly basis for the contracts that we have at the end of the period of the contracts we have in our books as per 30th of June. And thereby also, we have contracts thereby who has not yet started to fully affect the net sales. So -- and then going into the bookings, which is an interesting metrics this time. We see a sequential growth also, so not the only that we see a small growth in local currencies compared to last year. But we see the pickup from Q1 here with close to 19%. And you also see the large share of the subscription, the green part of the chart, where we have a significant growth. So year-over-year, we grow the subscription booking by 41% and now then represented 32% of the bookings. The perpetual bookings, though, it was declined year-over-year in value, but we saw also during the quarter that a number of deals are increasing, but the size is smaller. And thereby, we saw fewer large deals related to this, what we talked about in Q1, with the delays of larger deals and more coming back now rather. So that is also affecting then the bookings in Q2. We also see that the EMEA region is where we see the largest gap percentage-wise year-over-year although the EMEA is not the biggest contributor to the group. But there, we have had the more effect of the turbulence and also some macroeconomic challenges in that region, specifically that region or even Germany to be even more specific. The subscription bookings, the largest part of the subscription bookings are the new contracts and add-on contracts. So of the large part of subscription booking, close to SEK 200 million, it's only SEK 43 million, which are renewals. And if you remember that the renewals part that we see of subscription bookings, it's not really adding to our ARR and not adding to new net sales. So the largest part very much is the new contract and add-on. So that is really good for the future. And we will see continued interest from the hi-tech from finance and public sector. And also we see now in the IA space and in the European defense industry a lot of interest going forward. Looking at the net sales, where we had the decline, as you see here, we saw on the net sales side, a subscription growth of 32.5%, which now then represents 15.9% of the total net sales and comparing that to the 9.7% last year. So we here see -- already see a good effect from the subscription development. And of course, what we have seen in the ARR development also during last year, we see this, what do you say, growth. Why then on the perpetual side, there is where we also see the decline related to the net sales, so that's related to perpetual. Due to that, we didn't have those large deals what we have from time to time. They were lacking in this quarter from the perpetual side, but we saw on the other side them coming in as subscriptions. And the low bookings in Q1 is also, of course, impacting here, yes. And also just to mention the subscriptions, that we have been able to close during the quarter, has, of course, been closed fairly late in the quarter, and thereby, we see minor contribution to the net sales, which if we go over to the ARR, then you see a big step-up in the ARR. So there is also then forecasting for some further increase of subscription net sales for the coming quarters. So quite much of this big improvement in the ARR will come to be through the P&L in the future. And just looking at the ARR, we had a growth of 37.1% year-over-year. And the growth we see in the quarter, the SEK 49 million -- close to SEK 50 million, that relates to several new deals, and of course, among them, this major contract we signed with a hi-tech company, which Mattias mentioned earlier as well. And then, a few words on the profit side. And as I mentioned, the drop in net sales has a significant impact on profit due to this high gross margin we have. And thereby, we see these fluctuations, and the EBIT, the profit and the margin is very sensitive to the fluctuations we have in our net sales related to bigger perpetual deliveries. The gross margin, as I said, was -- came in at 79%, slightly lower than last year, but slightly higher than Q1. We see still a negative impact from the currency exchange rates. So the strong Swedish krona is putting pressure on the gross margin because we have 80% of the revenue, at least 80% is U.S. dollar and the rest is euro. While we -- in the direct cost and also the indirect costs for COGS, we have a mix of U.S. dollar and Swedish krona. So we see an impact there on that margin. On the EBIT side, we see a margin of 4.2% decline as said. We're still investing in our continued growth and our strategic journey. It's important for us. We have the buildup of sales and marketing, engineering, investing in marketing activities. We have done that also continuously since last Q2. And thereby, we see a head count growth of 15% versus last year. At the same time, we see that the personnel expenses only grew with 8%, but that is underlying, yes, our cost base is growing in line with how we expand the organization and grow that. Here, it's a bit odd because we then see a positive effect, so to speak, of the U.S. dollar depreciation. Yes, we have a large part of our people in U.S., and thereby comparing the cost year-over-year in Swedish krona, then you see here the depreciation of the U.S. dollar around 10% versus last year, 9% -- 9.5% to be exactly in here. So it's a bit odd, but underlying, we are growing the organization -- have been growing. Going forward, continue to be cautious on spending, but focus on the marketing and sales side and our product journey going forward. The LT programs, as you remember, we have a couple of PSU programs in the AGM in May. We had a new program approved by the AGM and which was launched in June. So we have some more costs also for that program in Q2. But just for 1 month is the new one. Comparing to last year, we have the similar effect there. So 2024, we also launched a new program in June, which is now then, of course, in Q2 2025, we have a full cost on that. And we have our unrealized currency effects, which are related to working capital items in the balance sheet for the parent company as also Yubico AB, which is reporting and have a functional currency in Swedish krona, has, of course, mostly U.S. dollar and euro balance sheets related to customers, and also, to some extent to a supplier debt and also some intercompany transaction studies in there or balances, which are in there. So this is items, they're going up and down. But within the group, it's not a real exposure, but we have to report them in this way, as it's for the parent company. Going over to the cash flow and our financial position, we had a working capital -- positive effects from the working capital of SEK 81 million, and this is as we had a good ending of the Q1 from net sales perspective and billing perspective. So we have received, of course, good inflow from customer payments from Q1 in net sales and also some subscription billing, which has been received. We also see some positive effects actually from a reduction in inventory, which also gives a positive effect on the cash flow. I'll come back to that further down. So the operating cash flow is then SEK 123 million. We have cash and cash equivalents at the end of the period of SEK 945 million, net cash of SEK 900 million. Our interest-bearing liabilities are still only related to our office leases, SEK 43 million this period. And then coming back to the inventory, and you also see the KPI we are measuring. Regarding to our inventory in relation to our rolling 12 months net sales, and we are striving for reducing that, we are, this time, despite we have actually reduced inventory in absolute terms, we have a slight increase compared to first quarter, so from 29% to 29.5% of the rolling 12 months net sales. And then, that is related to the decrease in the net sales rather than anything else. So we see that when we -- anything -- anyway, looking to continued growth going forward, we see that this will also, in the future, continue to go downwards again. With that said, I leave over to you again, Mattias.

Thank you, Camilla. We should start by saying -- when we summarize the quarter, we should start by saying, yes, we recognize that this -- the financial numbers for this quarter were not satisfactory. Of course, we're not happy about seeing a decrease in net sales and the profit is off. But what is satisfactory though is that we see a return to sales momentum. So compared to Q1, we had decent financial numbers, but we were concerned about the sales momentum. And now, as we report Q2, well, the weak start -- the weak end of Q1 and the weak start to Q2 bleeds into the financial numbers that are reported for this quarter, but we see an underlying -- a return to the underlying sales momentum, which is very encouraging. And as we mentioned, the reignition of our sales momentum happened towards the second half of the quarter, which -- and when you look forward-looking, we can see that we have a strong pipeline, and we are seeing a good start to Q3. So we're happy to see that what the slowdown that we saw towards the end of Q1 and going into Q2 seems to have been a temporary one. There's still a lot of macroeconomic uncertainty, but it seems like we're back on a growth track. So that's -- we're very happy about that. The second part is, yes, we are pleased to see an increasing share of subscription sales, YubiKey-as-a-Service. And in particular, that we're now able to attract hi-tech companies to purchase in this mode. This is something that we've been trying to achieve over a number of years, and it seems like we now have a product design, which means that this offers value for big tech companies and for existing customers. We're pleased to see that. Short term, though, a transition over to more subscription sales has a negative impact on both top line and bottom line, as Camilla has explained. Just to keep in mind, if we continue to see this high share of subscription and a fast transition, short term, that will have a negative impact on the top line and the bottom line. But over the 3-year period, the revenue and the margin is actually a little higher for our subscription customers, so it's good for the longer run. We're very happy to see that we -- the renewed momentum in sales is coming from growth sectors. We seem to be relevant for the most security-conscious organizations even in the brave new world and the value of having hardware-backed multifactor authentication is visible to the thought leaders, not just in tech, but in AI and across public sector. So that's very encouraging. We mentioned that we feel that we have a strong pipeline going into the second half of the year. However, we are aware that there was a big gap between the numbers and the analyst consensus. So clearly, we haven't done a great job in setting expectations and the impact of, say, a slow order booking's quarter like Q1, what impact would that have on Q2 or what's the impact of the FX effects. So we take that upon us, and we want to make sure that we can explain both the market, the product and also how the business operates in a better way. So we're inviting everyone to an Investor Day on November 19. It will be held in Stockholm, but it would be in hours that will permit Americans to participate, too. We'll get back to you with the details on that. And hopefully, that will mean that there's more transparency and more understanding of what our business model looks like. Finally, as you may have noticed, I want to highlight that this is not in the quarterly report, right before the markets opened, we issued a press release that the Board today has resolved to use its mandate to repurchase shares or a buyback. As you may recall, we got them, the AGM approved buyback of up to 5% of the outstanding equity in May, and now the Board has resolved to use that mandate to purchase up to SEK 200 million worth of shares in the market. And that will set us up to -- that will enable us to finance future acquisitions through shares, and also, give flexibility when it comes to our balance sheet. So it's not related to the quarter, but since we released it in the morning, I think it's worth mentioning. With that, we'll hand it over to the Q&A session.

[Operator Instructions] The next question comes from Erik Lindholm-Rojestal from SEB.

I wanted to ask on the accelerated shift towards subscription bookings here. You speak of an accelerated order momentum and a healthy pipeline into H2. I mean, how would you say that this pipeline looks? Is it mainly composed of subscription deals? Or do you have sort of larger perpetual orders that you hope to close here in the second half as well? I'll come back with another question.

Thank you, Erik. Yes, it's right. When you look into the pipeline and the opportunities for the second half of the year, there is an increasing share of subscription opportunities in there, especially for the larger opportunities. In the U.S., it's actually a majority. In aggregate, I don't think it's yet at a majority. But if you look at the biggest opportunities, especially in the American markets, across several industries, the majority of the larger opportunities are in the YubiKey-as-a-Service fold, which is our subscription offering.

Right. That's very helpful. Yes, exactly. That's helpful. And just -- I mean, taking into account this new momentum in subscription, I mean, is it fair to say that you should see sort of negative sales growth here in H2 and you hope that this accelerates into '26 and beyond then given that you reiterate your financial targets?

Could you repeat the question because I got lost somewhere midway? Sorry. Would you mind repeating it?

Sorry. I'm just thinking of the accelerated momentum in subscription. I mean, is it fair to say that you should see negative sales growth here in H2 and that you hope that sales growth then accelerates into 2026 given that you repeat your financial targets?

Yes. Okay. So then, again, I got lost there. You talk about how order bookings translate into net sales. We don't -- as you know, we don't provide individual guidance for quarters and years. We feel confident that we -- so we remain confident in our long-term growth targets. But as you say, with an increasing share of subscription, there is a negative pressure on net sales growth. And if we see a fast transition, it could well be that, that means that you see a strong growth in order bookings, but even a decline in net sales. It's really too early to tell whether that will be the case. But just to reiterate, over the contract period, which is typically a 3-year period, the revenue from a YubiKey-as-a-Service customer on average is a little higher than if they were to outright buy on a perpetual basis per user. So longer term, it should be good. And after some time of the transition, you see net sales catching up because then you bring in a kind of a "backlog" of ARR that you live off every quarter.

Okay. Perfect. That's helpful. And I just wanted to ask you on your sort of investment plans here. You mentioned that headcount is up 15% year-over-year. You continue to invest here clearly. But have you made any sort of changes to these plans given the weaker momentum that you saw heading into the quarter? Or -- I mean, have you made any decisions to sort of protect your margins? Or is it full steam ahead?

I'll put the hiring in 3 different buckets just to simplify. One is on sales and marketing. And there, the hiring plan was very front-loaded. So most of the planned hiring for the years have already happened during the first half of the year, so there will be very limited hiring in that arena during the second half of the year, and this is all according to plan, even the plan going into the year. The second part -- second bucket would be R&D or product and engineering. That's not as front-loaded. So it's more kind of a continuous hiring over the year. And in that arena, we also continue to stick to the plan. The third one is what we call G&A, general and admin. And there, we are seeing a reduction compared to original hiring plan. So we're hiring a little bit more slowly there being mindful that we invest in the right areas. And given that we need to -- since we have such high gross margin, our business is very volume-dependent, and we want to make sure that we don't sit with a big overhead, of course.

The next question comes from Thomas Nilsson from Nordea.

What do you think is the reason for the sharp rise in subscriptions and sharp bookings in Q2? Have you made any changes to this offering? Or are there other circumstances driving this shift?

Thank you, Thomas. It's an interesting one, especially since we're seeing now subscription orders from segments that previously haven't bought on a subscription basis. I'm talking about tech companies. I think -- and it's not about a change in pricing or anything. I think it is that we've figured out what is really important to these customers that they see a partnership. If there are -- if there's new technology coming out, if there are new threats appearing, how do we partner with the customer to make sure that their implementation of YubiKey is the most secure way to authenticate. So it's that partnership that has been evolved. And that's not really a different piece of hardware, which is being supplied or a different price, which is being charged, it's about having that partnership so that they have direct contact with some of our best and brightest making sure that we can support them, as they implement and use our technology. So I think it's really about us having figured out what does it take to succeed in segments out of the ones -- outside of the ones where we've seen success in the past. Because historically, as I think I've mentioned, most of the subscription sales has been to financial services and public sector. And now it seems like, we've figured out how to make this offering relevant and compelling to other industry segments. So it's not just -- it's not a silver bullet, it's more on figuring out how do we build a partnership with other industry segments where this is a product, which makes sense.

Okay. And as a follow-up to that, there was a multiyear agreement with one large tech customer in Q2 in terms of subscriptions. Could you give some indication of the magnitude of that deal?