F-Secure Corporation Half Year Financial Report 1 January–30 June 2023

F-Secure Corporation Half Year Financial Report 1 January–30 June 2023

Major progress through an acquisition while business continues to operate amid adverse conditions

Highlights of April–June (Q2 2023)

• Revenue increased by 11.1% to EUR 30.5 million (EUR 27.5 million). In addition to organic growth of 2.2%, the acquisition of Lookout consumer security business contributed to the figures for June.
  • Revenue from Partner Channel increased by 12.8% to EUR 24.5 million (EUR 21.7 million), organic growth was 3.1%
  • Revenue from Direct Channel increased by 4.8% to EUR 6.0 million (EUR 5.7 million), organic growth was -1.4%
• Adjusted EBITA was EUR 9.9 million (EUR 10.1 million), 32.4% of revenue (36.7%)
• Items affecting comparability (IAC) for Adjusted EBITA were EUR -4.6 million (EUR -3.0 million), following the acquisition of the Lookout consumer security business. Purchase price allocation (PPA) amortizations were EUR -0.7 million.
• Earnings per share (EPS) was EUR 0.04 (EUR 0.03).
• Cash flow from operating activities before financial items and taxes was EUR -0.1 million (EUR 9.2 million)
• On 26 April 2023, F-Secure announced the acquisition of Lookout consumer mobile security business, which was completed on 1 June 2023. Consequently F-Secure updated its outlook 2023 to reflect the impact of the acquisition. The financial figures of the acquired business unit have been consolidated with F-Secure figures starting from 1 June 2023. To finance the acquisition, F-Secure entered into a new facilities agreement with Danske Bank A/S and OP Corporate Bank plc.
• On 1 June 2023, changes in the executive leadership team of F-Secure were announced.

Highlights of January–June (H1 2023)

• Revenue increased by 6.4% to EUR 58.3 million (EUR 54.8 million). Organic growth was 1.9%.
  • Revenue from Partner Channel increased by 7.3% to EUR 46.6 million (EUR 43.4 million), organic growth was 2.4%
  • Revenue from Direct Channel increased by 3.0% to EUR 11.8 million (EUR 11.4 million), organic growth was -0.1%
• Adjusted EBITA was EUR 20.1 million (EUR 22.7 million), 34.4% of revenue (41.5%)
• Items affecting comparability (IAC) for Adjusted EBITA were EUR -5.9 million (EUR -3.8 million), following the acquisition of the Lookout consumer security business.
• Earnings per share (EPS) was EUR 0.08 (EUR 0.08).
• Cash flow from operating activities before financial items and taxes was EUR 9.3 million (EUR 20.0 million)
• Net debt amounted to EUR 191.3 million (-1.8) and leverage was 3.5x. 1)
• On 23 March 2023, the Annual General Meeting of F-Secure resolved that a dividend of EUR 0.07 per share will be paid for the financial year 30 June 2022–31 December 2022. The dividend was paid on 4 April 2023.

1) Leverage (Net debt/Adjusted EBITDA) for the last 12 months includes Lookout consumer business unit EBITDA on an illustrative basis as if the acquisition had been made on the first day of the period in question.

F-Secure Corporation formed a separate legal group as of June 30, 2022. The financial information presented in this half-year financial report is based on actual figures as an independent group after the consummation of the partial demerger and carve-out figures prior to the consummation of the partial demerger. Figures in brackets refer to the corresponding period in the previous year, unless otherwise stated. Percentages and figures presented herein may include rounding differences and therefore may not add up precisely to the totals presented. Figures in the half-year financial report are unaudited.

As announced on 1 June, 2023 F-Secure completed the acquisition of Lookout consumer security business, US-based consumer focused mobile security business arm of Lookout Inc. The enterprise value of USD 223 million (approx. EUR 202 million) was paid in cash, for which F-Secure had secured debt financing. The financial figures of the acquired business unit have been consolidated with F-Secure figures starting from 1 June 2023. Information related to the acquisition is presented on note 3 of the half-year financial report.

Outlook for 2023 (updated June 1, 2023)

Financial outlook for 2023, including the acquisition of Lookout consumer business is as follows:

Growth: In 2023, F-Secure expects revenue to exceed EUR 134 million.

Profitability: The group’s adjusted EBITA is expected to exceed EUR 45 million. The adjusted EBITA margin is estimated to temporarily decrease in 2023 due to acquisition related additional OPEX investments of more than EUR 3 million to ensure successful integration and drive revenue synergies.

Background for the outlook:

• F-Secure expects the cyber security market to grow in 2023 and the global demand to remain stable, in the face of a challenging operating environment.
• Lookout consumer BU included from June to December (7 months).
• Pro forma revenue growth of Lookout consumer BU expected to be around 10% (previously: above 10%) on a standalone basis and therefore contributing to F-Secure growth positively (FY 1 February 2023–31 January 2024).
• Lookout consumer BU has received payments in advance related to part of its revenue. Such payments are recognized as deferred revenue. As part of the acquisition, F-Secure fair values the deferred revenue according to IFRS reporting for the purposes of acquisition balance sheet, thus the revenues recognized post-acquisition related to deferred revenue balances will be lower compared to revenue recognized by Lookout consumer BU for those advance payments. The preliminary negative revenue impact included in the outlook is estimated to be approximately EUR 3.2 million in 2023, and negative EBITA-level impact in the outlook approximately EUR 2.6 million, respectively.

Financial targets (updated April 26, 2023)

Medium term financial targets of F-Secure by 2026 are:

• Growth: Total revenue of more than EUR 200 million by 2026
• Profitability: After initial growth investments, adjusted EBITA margin of above 42%
• Dividend Yield: Around or above 50% of net profit on an annual basis.
• Leverage: Net debt/adjusted EBITDA ratio below 2.5x, excluding temporary impact from acquisitions.

F-Secure Corporation follows the Rule of 40 metric as internal performance measurement and guiding principle, according to which the combined revenue growth rate and profitability margin should be equal to or greater than 40%.

Financial performance

The key figures and other financial information are presented on an actual basis for the income statement after July 2022 and for financial position after 30 June 2023, and on a carve-out basis for the prior periods. Refer to Note 1, Basis of Preparation.

1) Excluding Items Affecting Comparability (IAC) and depreciation and amortization.
2) A reconciliation of items affecting comparability is presented at the end of this report.
3) Based on the average number of shares after 30 June 2022 and on the number of shares upon formation of F-Secure on 30 June 2022.
4) Prior to the demerger on 30 June 2022, no cash or certain lease liabilities, such as lease liabilities related to business premises or machinery and equipment, were allocated to F-Secure. From 30 June 2022 onwards, the figure includes F-Secure's interest-bearing liabilities, less interest-bearing receivables and cash and cash equivalents.
5) Net debt/Adjusted EBITDA for the last 12 months includes Lookout consumer business unit EBITDA on an illustrative basis as if the acquisition had been made on the first day of the period in question.

Timo Laaksonen, President and CEO

In the second quarter we announced the acquisition of Lookout consumer security business, which was a significant step in expanding our business in the US with 1st tier Communication Service Providers (CSP) and in strengthening our position in the global CSP segment. With the acquisition, we have a significantly increased scale, strengthened footprint in the US as well as a complementary mobile optimized software product portfolio. The acquisition was completed at the beginning of June and the integration has started according to our plans. Some integration areas are already well on the way, while other areas related to, for example, portfolio management will require more time. I am very happy to welcome the strong team and our new fellows to F-Secure.

The second quarter developed in line with the trend seen in the first quarter, with continued high inflation resulting in lower than normal consumer confidence and volatility in demand. This was clearly reflected in revenue performance, in our eCommerce business. Second quarter revenue increased by 11.1% to EUR 30.5 million. Organic revenue growth was 2.2% for the second quarter. Revenue from Lookout consumer security business was consolidated starting from the beginning of June. In the Direct Channel, organic revenue growth was -1.4% amid strong headwinds, especially in new sales while renewal performance was flat. Partner Channel revenue was on a slightly better track, with organic growth of 3.1% for the second quarter. The adjusted EBITA for the second quarter was EUR 9.9 (10.1) million, with an adjusted EBITA margin of 32.4% (36.7%). Ramp-up investments for future growth and Lookout consumer security business integration continue to burden our profitability until the end of the year and then start gradually evening out to more regular level.

We continued to execute our strategy during the quarter by signing up with three new partners for F-Secure Total. In addition, five existing partners signed up for F-Secure Total upgrade and we made 12 new Total launches with partners that had been signed up for the service in previous quarters. This was a record number of launches but less than expected due to delivery delays, resulting in lower than forecasted revenue growth. The postponed launches are planned to go live in July. All of these launches are expected to result in gradual revenue growth in the upcoming quarters.

We made good progress with other key products, for example by signing up an Asian CSP for F-Secure Sense with the service expected to go live by the beginning of 2024, and with that, all in all we have now signed up eight CSP partners for Sense. We signed up three new router partners for Sense, one of which will start providing the service also to their retail customers towards the end of 2023. Furthermore, during the quarter we signed our first deal within Network Security with a new European CSP partner, based on our DNS (Domain Name System) security technology partnership. This service is due to be launched in July. The benefit of DNS layer security is that it requires no application to be installed by the end user yet still provides protection from a number of common threats, for instance, phishing attacks. The new F-Secure Total, enabling users to protect themselves from cyber threats with one simple solution, was launched in the Direct Channel during the first quarter, but resulted in lower new sales activity than originally expected. However, as a result of a number of eCommerce improvements we have started to see slightly better performance late in the quarter compared to last year’s figures but we remain cautious until we see a longer positive trend. During the quarter, we strengthened our position in new vertical partner channel by launching Total with one insurance company and two banks we had signed in the previous quarters.

Following the acquisition of Lookout consumer security business, we updated both our medium term financial targets and outlook for 2023. Given the ongoing challenging operating environment, we expect the overall consumer cyber security market to grow in low single digit figures in 2023 while some solution areas may experience higher growth. We expect revenue to exceed EUR 134 million and the adjusted EBITA to exceed EUR 45 million. Acquisition-related OPEX investments of more than EUR 3 million are estimated to temporarily decrease the adjusted EBITA in 2023. 

During the quarter we announced changes in the F-Secure leadership team to support growth after the acquisition of Lookout consumer security business. TL Viswanathan, previously Vice President for Embedded Security since November 2022, was appointed Chief Product Business Officer. In addition, Firas Azmeh, who joined F-Secure through the acquisition of Lookout consumer security business was appointed Chief Commercial Officer.

One key highlight of the second quarter was F-Secure SPECIES, our annual global partner conference held in Amsterdam, Netherlands. In addition to interesting partner presentations this year’s theme was centered around what to expect from Generative AI from both service development and threat perspectives. This year’s conference was yet another great success according to the feedback, and it was a pleasure to meet a record number of our partners from across the world.

The end of June marked our first year as an independent company. The past year has been exceptional with external factors impacting our business, while building and ramping up our operations as a company. I am happy to see the strong commitment to our strategy and the resilience and dedication of our fellows. Our Employee Net Promoter Score (eNPS) reached an exceptionally high level in the second quarter acting as proof that we are appreciated as an employer. Likewise, our customer, partner and product NPS have remained at very high levels. All of this gives us confidence in delivering on our strategy to build an accelerating growth business.

Significant events during the review period

Acquisition of Lookout consumer security business

On 26 April 2023, F-Secure announced the acquisition of Lookout consumer security business, US-based consumer focused mobile security business arm of Lookout Inc. The agreed enterprise value was USD 223 million (approx. EUR 202 million) on a cash and debt-free basis. With the acquisition F-Secure has a significantly increased scale, strengthened footprint in the US and in the communication service provider channel as well as a complementary mobile optimized software product portfolio.

The acquisition was completed on June 1, 2023 and EUR 5.9 million of transaction costs were booked as IACs during the first half of the year. The acquired business was consolidated as part of F-Secure from 1 June 2023 onwards. The acquired business has 65 employees, and they became employees of F-Secure after the completion of the acquisition. The transaction is expected to deliver at least EUR 12 million of revenue synergies and incremental EBITA level synergies of EUR 10 million per annum in 2027.

The acquisition was financed with debt for which a new facilities agreement was entered into with Danske Bank A/S and OP Corporate Bank plc. The new financing package consisted of two facilities, (i) a EUR 202 million amortising term loan to finance the acquisition, and (ii) a EUR 20 million revolving loan facility to be used for general corporate purposes of the combined group. Both facilities hold a maturity of 3 years with two 1-year extension options. The previous undrawn revolving credit facility, procured in conjunction with the demerger from WithSecure, was cancelled concurrently with closing of the transaction.

More information on the transaction can be found from the Stock Exchange Release published on 26 April 2023.

Updated outlook 2023

Following the completion of the acquisition of the mobile consumer security business of Lookout Inc, F-Secure updated its financial outlook for 2023 on 1 June 2023. The updated outlook can be found on page 3 of the half year financial report.

Updated medium term financial targets

In connection with the signing of the acquisition of the mobile consumer security business of Lookout Inc on 26 April 2023, F-Secure updated its medium term financial targets by 2026. The updated financial targets can be found on page 3 of the half year financial report.

Change of responsible auditor

On 21 April 2023, F-Secure announced that PricewaterhouseCoopers Oy, the firm of authorised public accountants acting as the auditor of F-Secure Corporation, has informed F-Secure Corporation that it has appointed APA Samuli Perälä as the responsible auditor of F-Secure Corporation to replace the previously appointed responsible auditor APA Janne Rajalahti. The change concerns the financial year 2023. 

Changes in the Leadership Team of F-Secure Corporation

On 1 June 2023, F-Secure announced changes to its executive leadership team. More information about the changes can be found on page 10 of the report.

Additional information

This is a summary of F-Secure Corporation’s Half Year Financial Report 1 January–30 June 2023. The full report is a PDF file attached to this stock exchange release. Full report is also available on the company website.

Webcast

F-Secure will organize a webcast today at 14:00. In the webcast, F-Secure’s CEO Timo Laaksonen and CFO Sari Somerkallio will present the results and after the presentation there will be time for questions. The presentation can be followed live as a webcast at: https://fsecure.videosync.fi/q2-2023-results.

Analysts following F-Secure are invited to the presentation at the company headquarters, Tammasaarenkatu 7, Helsinki, Finland.

Financial calendar in 2023

In 2023, F-Secure Corporation will publish financial information as follows:

• Interim Report for January-September 2023, Wednesday, October 25, 2023

For further information, please contact:

Sari Somerkallio, Chief Financial Officer
tel. +358 40 3569251
[email protected]

F-Secure in brief
F-Secure is Finland headquartered and globally operating consumer cyber security company. F-Secure offers award-winning security and privacy products and services that make every digital moment more secure, for everyone. F-Secure operates in over 100 countries, has ~200 Service Provider partners and is the global leader providing security through Communication Service Providers. F-Secure Corporation is listed on Nasdaq Helsinki Ltd. Read more: www.f-secure.com.