Yubico AB (YUBICO) Earnings Call Transcript

Welcome to Yubico's Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Mattias Danielsson; and CFO, Snejana Koleva. Please go ahead.

Good morning, everybody, and welcome to Yubico's Q3 report call. I'm Mattias, CEO of Yubico. And with me today is Snejana Koleva, our new Chief Financial Officer, and we'll take you through the material. And several of you have probably been attending these calls before. But as always, we'll start with a quick overview of the company and before we get into news and details of the financial report. So in terms of the agenda, we'll start with the company overview. So Yubico is a proud hardware company, and our core product is the YubiKey. And what we typically like to stress when we talk about our growth today is the fact that we are the world leader in modern multifactor authentication. And our customers who have deployed our keys and a modern protocols on the keys have experienced 0 account takeovers. And of course, we want to keep that way. So that's the basis of our success. We're a hardware company. But in spite of that, we've been able to maintain healthy gross margins pretty consistently in the 80% range over the past number of years. Second thing we'd like to brag about is the customers that we're working with. We've been selling to about 5,000 different business customers, but our focus has been on selling into the largest companies in the world. And as we get back to, we cover almost 30% of the Global 2000, so almost 30% of the Global 2000 companies are existing customer of ours. In most cases, they've only deployed YubiKeys to a subset of their employees. And of course, our journey is to make sure that they protect all of their users using YubiKeys. We've been growing at a pretty consistent rate. Our average growth rate over the past 5 years has been 4% a year, but it's been variable year-by-year, but we've experienced a healthy long-term growth. Since the start of the company, we've sold and deployed about 40 million YubiKeys. And today, and last 12 months' sales amount to about SEK 2.3 billion. And today, there are approximately 520 people working for Yubico, about 2/3 of them in the U.S., about 1/4 in Stockholm or in Sweden, and the remainder in different sales positions across the world. So that's Yubico in a snapshot. Okay. I mentioned very briefly the market we're in, which is multifactor authentication. What does that mean? Well, the most common way to access any online service or system, or device is still using a password, where the password is the identity and the -- sorry, where the user name is the identity and the password is how you authenticate that you're the user. And everyone knows that username and password is not a safe way to authenticate. So what you want to have is MFA, multifactor authentication, not just something you know a password, but something that you are, biometrics, something that you have, like an app or a device. And we're in the most advanced form of MFA, the highest level of authentication. And that market for multifactor authentication is estimated to amount to about $5 billion per year. How can we claim that we're the leader in that market? Well, we're the leader when it comes to modern advanced authentication. There are -- is a lot of legacy technology out there, but gradually, modern forms of MFA is taking over, and we're the market leader in that segment. This market of advanced authentication is estimated to grow at about 14% per year over the next couple of years. So it's a big market where we have only so far a very limited market share, and it's growing quite rapidly. What the UK has as its unique features is a unique combination of achieving the highest level of security together with its being very easy for user to use, which sets it apart from other ways, which are much more cumbersome when it comes to advanced authentication. And another key feature, pun intended of the YubiKey is that it's a key that fits into all the relevant locks. Fundamentally, what we're selling is a key, the YubiKey, and it's only as usable as the number of locks where it fits. And we've invested a lot in making sure that we have this Swiss Army-type of key that fits into all the relevant locks. It used to be us doing all the heavy lifting in terms of building support for different systems, but now increasingly, instead systems realizing that their customers want to authenticate in the most safe way and therefore, provide support for YubiKeys. Part of it is the software that goes on the key, and part of it is how it gets integrated into different environments, which is something we'll have a reason to get back to later in the presentation. Now talking then a little bit about customers. As I mentioned, we're actually in excess of 30% of G2000 companies in terms of coverage today. So if you look 6 years back, we worked with 14% of the Global 2000. Now we're at the full 32%. So that's growing. We're adding new customers continuously. What's also very encouraging is that we see a very high loyalty and repurchase rate from our customers. We have 2 different business models, one, which is an outright sale of YubiKey, and the other one is a subscription model where you instead sign up for the use of YubiKey to ensure that your users are protected with the best technology, and then you instead pay on a recurring annual basis. No matter the business model, we see a very high repurchase rate. We've been measuring this over different periods of time, but you typically would see an annual repurchase rate among our biggest customers in excess of 100%. How can it be that high? Well, a lot of it is about the fact that we typically land and expand with customers. We win a new customer, and it's typically a limited set of users within that enterprise or government organization that use our keys. And then as people realize that it offers the best protection, it's also very convenient for the user. That's when we start a conversation about expanding into more groups so that the entire organization gets protected. We started out within tech, and it's still a very important sector for us, but now we have a pretty diverse customer base working across a lot of different geographies and a lot of different industries. So on a very high level, our sales strategy is to land accounts and then to expand within those accounts. That was it for kind of the overview. Some highlights for the quarter. As we reported, as we released early, or what's called an early press release or profit warning, we see -- we saw softness in terms of order bookings. So year-over-year, we saw a decline in order bookings by 17%, 9% of that -- 8% of that was attributable to FX, but an underlying order booking decline of about 9%. A little comment on that. What we see and what we highlighted in the quarter was that we saw a decline when it came to the larger orders. We saw good -- continued good momentum and winning new customers, and doing smaller sales. So small and midsized orders grew quite nicely, but the large orders, which are important for making sure that we meet our numbers, we saw softness there. High level, it should be noted that we saw some currency headwinds. We had year-over-year about 10% appreciation of Swedish krona, which is our reporting currency, compared to the U.S. dollar, which is the currency where we conclude the vast majority of our deals, about 80% and the remainder is in euro, where we also see an increase in the Swedish krona. Another thing that we highlight is the fact that we are making steady progress when it comes to our product road map, and that was made even more specific as we released new functionalities, which are planned to be released at Authenticate in California in mid-October. One is targeting digital signatures, making sure that you can sign transactions using YubiKey, not just use it for authentication. And the other one, which is a little bit more long-term, so it won't be released next quarter or anything, is the ability to run post-quantum cryptography on the YubiKey, which is important as we want to make sure that we have the most resilient authentication solution even when quantum computers are a reality. So high level, we continue to expand our market reach, expanding new geographies, setting up a new office in Singapore, and continuing focusing on recurring revenue through our subscription model. And we feel that this and the underlying growth in small and mid-sized deals puts us in a good position to continue growing this market and delivering long-term sustainable growth. One thing that we could highlight in particular is the fact that we've now -- we've been available on Best Buy online stores in the past. But in Q3 -- sorry, at the start of Q4, I think, we announced that we're now actually even in the physical stores of Best Buy, which means that we can get access to a new set of consumer uses with a different set of packaging and simplifying that they can protect the digital sales using YubiKeys. However, the vast majority of our sales goes into large companies and government organizations, and that remains unchanged. So that forms the basis of our revenue base still. With that, I'll hand it over to Snejana, who will talk more about the numbers for the quarter. Over to you.

Thank you, Mattias. Let's start first with the key figures for the quarter. So net sales nominally declined with 7%, but the entire change was actually driven by negative currency impact, as Mattias mentioned. 80% of our sales are in dollars, the rest is in euro, and the SEK, our reporting currency, has depreciated year-over-year. So excluding currency effect, our sales are flat versus last year, and our subscription sales are actually growing very nicely. Gross profit nominally has decreased with 10%, but gross profit margin is relatively stable. It has some effect from currency as well. Looking at the EBIT, it has decreased with 4 percentage points versus last year Q3, primarily as our gross margin is relatively stable, then the rest of the sort of the decline in the EBIT margin comes from increased expenses, as our growth ambition, we are increasing somewhat our headcount to meet and deliver on our growth ambitions. ARR is increasing very nicely, 32% versus last quarter or last year's quarter. very much driven by adding new customers in subscription in our subscription model and renewing our existing installed base. Also, it shows that there is an increasing demand and adoption of our subscription model. So the pages are moving a little bit. Now let's take a look at -- a little bit closer look at the bookings. The bookings declined 17% year-over-year, whereof 9% was the -- actually the underlying change, and the rest was a negative currency impact. It came -- the order bookings came a bit short of expectations, which we have as well announced in our earlier communications. We've seen fewer high-value perpetual bookings. We had a very strong Q3 2024, where we have multiple large public sector contracts, which we didn't see coming to fruition in Q3 2025. Subscription bookings, however, develop well. We see a decline -- nominal decline of 3.2% versus Q3 2024, very much driven by currency. Now it corresponds to a larger share of the bookings, 17% versus 15% in Q3 2024. We see that the overall subscription activity and demand and adoption continues to increase. So we see that reflected in both the bookings and then further on in the net sales. From a net sales perspective, as I mentioned, 7% nominal, but actually flat in -- if we disregard the currency impact, increasing share of subscription sales, now it's 16% of the total net sales for the quarter versus 12% in Q3 2024, total SEK 87 million of subscription sales in the quarter. From a geographical perspective, Americas is now 64%, while EMEA and Asia are increasing somewhat in the mix with 25% and 10%, respectively. From an ARR perspective, as I mentioned, 32% increase versus 2023, driven by good renewal rates and adding new customers to the portfolio of subscriptions. When we look at EBIT, as I mentioned, gross profit is -- has decreased 10% nominally, margin-wise, somewhat decreased versus quarter 3 2024. Overall margin decrease is 4 percentage points versus last year. We see that the costs in the quarter are driven by higher personnel costs, reflecting our continued expansion ambition. Of course, we are very mindful how we grow, but we see that impact versus last year. The LTIP program costs this quarter were about SEK 30 million. Last year, they were SEK 23 million. And we have very small currency effects in the EBIT this quarter, only SEK 0.3 million, while last quarter, it was about SEK 9 million. From a cash flow perspective, the cash flow for the quarter from operating activities was SEK 32 million. Overall, good cash flow before the changes in working capital of SEK 105 million. The changes in working capital were about SEK 17 million. The majority of that came from changes in inventory, where we have received the last order for our security component. now in Q3. The cash and cash equivalents for -- at the end of the quarter are SEK 875 million, which is an increase versus last year. And excluding the interest-bearing liabilities, the net cash at the end of the period is SEK 835 million. Our interest-bearing liabilities are primarily leases. Inventory has increased as a percentage of the last 12 months' sales to 33%, again, primarily driven by the last shipment, as I mentioned, for our security chip in the quarter. And with that, Mattias, back to you.

Thank you, Snejana. So just to sum it up then, we fell short of expectations when it comes to order booking in this quarter, and what fell short was really the large orders, i.e., orders in excess of $1 billion. About half of the shortfall is attributable to the U.S. public sector, where the government shutdown definitely had an impact. We saw renewals of subscriptions, but we didn't see any new orders really towards the end of the quarter. The reason why we -- and then we had a number of private sector orders. So outside of the U.S. public sector, there were also some -- we also saw a shortfall in large orders from the private sector. There's not a common theme there, but what's promising is that with one exception, they remain in the pipeline, and it's continuous conversations about taking that expansion from a small segment of the company into a broader use case. And also combining that with the good activity that we see for small and mid-sized orders, that means that we remain optimistic about the position we have in the market. We continue to see growth in subscription. And I think that's good because that will provide more predictability and more stable development of net sales over time. We're excited about the collaboration we have initiated with Best Buy. And I think this is a good test for us to see not just how many customers are interested in buying YubiKeys online, but going and buying it in traditional shops, where they can also get support from the local representatives in how they actually deploy the key. We continue to invest in innovation and future growth. I think the biggest highlight there was really when it comes to our core product during the quarter, highlighting new functionality, which is in the immediate product road map. Finally, if you're interested in learning more about the company and get to learn more about our upcoming product releases, but also a run-through of our go-to-market and also understanding the difference between the 2 business model, perpetual subscription, I recommend and you're quarterly invited to attend our Investor Day, which will be held in Stockholm next week on Wednesday, starting at 3:00 p.m. local time. It will be recorded, so it will be accessible online afterwards. But if you want to be there and ask questions, you are welcome to join our Investor Day. So I hope to see you there. And with that, we'll hand over for any questions.

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

Just a couple of questions from me. So I want to start on the quarter here. You mentioned seeing a high share of smaller and mid-sized orders in the quarter. I mean, is it fair to say that more customers are active and ordering compared to a year ago? And is it possible to disclose sort of what growth you're seeing in the number of orders and the number of customers? I'll start there.

Thank you. So, to respond to that, yes, we did see an increased number of both new customers placing orders and existing customers doing follow-up orders. We debated some before we released this report, whether we should report order value by order size. And we conclude that if we start that, then, of course, we need to continue doing so and may add confusion on -- rather than adding clarity. I think the compromise that we'll go for is that we'll try to share at the Investor Day what the composition of orders by deal size look like because then if you look at orders below $1 million, you can see that's much more predictable, and there's a long-term positive trend there, whereas you see that big volatility when it comes to the bigger orders quarter-by-quarter and even year-by-year. So hopefully, that will add some context to understand what the order composition looks like.

And looking forward to that at the CMD. Then just on -- I mean, you speak about sort of evolving your platform to protect digital identities and not just secure log-ins. And I wanted to ask, is this more of an organic effort that you're developing and aiming to reach with partners, perhaps? Or do you think you have to make acquisitions here to sort of fully reach your goals in this area?

It's more a matter of speed, honestly. It's a very good question, but I'll have to get back to you on that. But if you look at 2 of the critical areas where we need to supplement our current product offering, it's within identity verification and credentials management. And when it comes to IDB, it's a pretty complex business in itself. So it's more about providing a framework so that customers either could fall back on a solution that we offer or that there's a good integration with the IDB identity verifier that they're using. That can be developed internally, or we could seek a partnership or a merchant acquisition, but we'll have to get back to you on that. The other one, credential management. We do have some of those pieces in place already. When it comes to expanding those, it's a matter of either of partnerships or acquisitions. I don't think you should expect -- if we go down the acquisition right, I don't think you should expect a large acquisition, which is targeting, say, market access. It's more about the critical technology that would be relevant for us.

And then just a final question. I mean, you mentioned most of these sort of large enterprise orders still being active opportunities, the public sector as well, perhaps. I mean, do you feel like there has been any changes to the competitive landscape at all? Are you losing any deals to competition?

I would say if there's one general change in the competitive landscape, is that when we looked at the biggest competition outside of using the password, say, a couple of years back, then it was different software apps, authentication apps on your cell phone. Today, we increasingly see CloudSync passkeys being deployed. And that is both a threat and an opportunity because we are one of the founders behind the Passkeys technology, and we know that technology better than arguably anyone. And analysts like Gartner agree on that CloudSync Passkeys is a giant leap from passwords, but if you want the highest level of security, highest level of security and also the biggest flexibility, then you need to go with hardware-based passkeys, which is YubiKey. So the competitive landscape is changing a little bit in terms of technology and use, but we don't see a major shift there. But that's a long-term trend that we need to explore.

The next question comes from Predrag Savinovic from Carnegie.

Let me start by the U.S. government. You did unpack a bit on the size of it. But in terms of a catch-up effect, can this be, for example, a delay where you see accelerated order momentum Q4, Q1, Q2 due to these budget shutdowns in the U.S.

So I mentioned that for all the with one exception for all the larger opportunities, they continue into Q4. Honestly, we have very little visibility into the federal conversations. There's essentially no one responding to phone calls there. So we'll have to see, as the government opens up again, what the spend mandate is and what the plans are going forward within the federal sector. And that actually has also for state and local, since they also depend on a lot of federal funding in the space. I think it's too early to tell whether there will be a catch-up from them. I think that the need is definitely there. It's more a question, will the budgets be there within the U.S. public sector?

And then another question on the competitive landscape, do you have any visibility or any expectations for how it might change in the future, considering how the capacity in new threats are increasing, becoming more complex, and software is becoming potentially slightly too fragile. Do you see or hear discussions on some of your partners in Silicon Valley and so on in terms of either partnering further with you or developing something themselves?

One trend that we see, I mean, everyone is talking about how AI will impact the threat landscape with more sophisticated attacks and more scalable and industrialized attacks based on harvesting information to make very targeted attacks attacking digital identities. And another aspect of that, when it comes to AI, is with agentic AI, then you really want to make sure that someone that if you authorize an AI to represent you in different transactions, well, then definitely you need strong authentication. I think this will be something that will work in our favor in the sense that there is an even greater need for strong authentication in securing the digital identities that are being out there, whether they're agentic AI or you doing it yourself, so to speak. What's interesting there is that if you look at the people that are -- probably have the most insight into what this will mean, it's arguably some of the leading AI companies, and we see a very strong market share; almost all AI companies, at least in the U.S., use YubiKeys internally today. That to me is a good indication that we're offering something which is very robust when it comes to AI-enabled attacks. Of course, AI companies today are relatively small when it comes to internal use. But as that insight and as that threat becomes more pervasive, I'm optimistic that there's an ever-growing realization that you need a hardware with good trust.

Finally, in terms of inventory levels, if you can comment on what you think in absolute numbers, but also percentage of sales for 2026?

Yes. I think I've learned to be a little careful when it comes to short-term forecasts. But as Snejana mentioned, the driver between -- for the buildup in inventory in Q3 was that we took final delivery of all second half deliveries -- committed deliveries of secure elements in -- already in Q3. So that meant that there was a short-term peak. And since we don't buy any more of those in Q4, that should, by nature, mean that the inventory levels drop when it comes to components. We're a little high now in inventory levels, and it's mostly about components where we secured enough secure elements to maintain production, and that should come down. Another thing which could be commented on is that the deliveries of secure elements that we took now in Q3 were actually the last ones of the ones that we committed already 3 years back. So now we're in a position where we can set new inventory -- sorry, purchase levels, meaning that we can reduce inventory level. How fast that will happen? I'm afraid I can't commit to that right now, but that's definitely something that will -- because we are a little too high in inventory levels, particularly when it comes to raw components right now.

The next question comes from Simon Granath from ABG.

And I'd like to continue on the inventory topic because, as you point out, cash flow was weighted by that, and there have been lots of questions on this on previous calls as well. But can you help us unpack why it's necessary to have this, at least in my view, big inventory levels? Is this a competitive edge that you see that your customers really appreciate, i.e. that you have short deliveries? Or could this change markedly over time?

There are 2 reasons for why you want to have a certain level of inventory, really. Fundamentally, it's about our -- one part is fundamentally about our ability to deliver on short notice in the different form factors to customers because even if typically, a deployment is planned and takes at least a large deployment, some quarters to do. In some cases, the customer urgently needs to have a need satisfied. And then it's -- we need to have inventories levels that are sufficient of the different versions in the different geographies that we're serving. The other part is more about business continuity. And that's on the component side, making sure that the critical components, where we essentially have a single point of failure that we're not put in a position where we run out of stock on those. There was a scare, I think, broadly in the market when it comes to a shortage of -- it's getting later in California, I'm losing the words, of secure elements and more broadly in silicon circuits for some time. And that made us realize that we can't go for just-in-time delivery there. So we've made sure that we secured at least a year of inventory of critical components, which would, if needed, even permit us to transition over to a different technical platform. So that's more kind of a business continuity. On that part of the inventory, we're a little too high right now because of the volumes that we secured already 3 years back, and that's something that should come down. So we think that the -- to satisfy those 2 requirements, the target inventory level should be in the 23% to 25% range measured against the last 12 months. It's not an official target we have, but that's kind of a rule of thumb we have. So that's the level we should be targeting going forward.

And then I also had a question on net recruitment because, as you highlighted, the momentum from medium-sized customers is good, while there have been slower progress with the larger customers. And does this, call it, change in dynamics? And assuming that this continues as well, incrementally require more sales resources? Or do you see scale effects kicking in here? And in connection to that, how should we think about net recruitment in 2026? Should it be in line with 2025 or slightly slower pace, given the current market dynamics and outlook?

So we're still in a situation where most of the demand is generated in a one-to-one direct sales relationship. Even though a lot of delivery happens through channel, i.e., resellers and distributors, most of the larger deals are settled in a one-to-one direct relationship where we are account executives engaged directly with the customer. One of the ambitions and one of the big investments that we're making on the go-to-market side is making sure that we have more channel and partner-generated sales. And we're making some good progress there, but that takes time. That's an area where we'll continue to invest in, which means, again, kind of rule of thumb, we're seeing some scalability when it comes to winning orders which aren't generated by our demand generation, but by partners and channel. At the other hand, we need to invest in building that capacity. So I don't see a big change in the spend -- sales and marketing spend compared to revenue in the short term. But longer term, we want to build more leverage in that model. So I'm not going to be able to provide good guidance for '26, but we don't anticipate any major changes there.