F-Secure Interim Report 1 January–30 September 2023
F-Secure Corporation | Stock Exchange Release | 25 October, 2023 at 08:00 AM EEST
F-Secure Interim Report 1 January–30 September 2023
Focus on integration of people, technology and product convergence
Highlights of July–September (Q3)
- Revenue increased by 25.8% to EUR 35.1 million (EUR 27.9 million). Organic growth was 0.3%.
- Revenue from Partner Channel increased by 28.7% to EUR 28.5 million (EUR 22.1 million), organic growth was 1.4%
- Revenue from Direct Channel increased by 14.6% to EUR 6.7 million (EUR 5.8 million), organic growth was -3.8%
- Adjusted EBITA was EUR 12.8 million (EUR 11.4 million), 36.4% of revenue (40.8%)
- Earnings per share (EPS) was EUR 0.03 (EUR 0.05). Earnings per share excluding PPA amortization was EUR 0.04 (EUR 0.05) 1).
- Cash flow from operating activities before financial items and taxes was EUR 10.9 million (EUR 11.4 million)
- On 8 September 2023, F-Secure issued a profit warning and lowered its outlook for the year 2023 revenue and adjusted EBITA. The revised outlook can be found on page 3 of this interim report.
Highlights of January–September
- Revenue increased by 12.9% to EUR 93.5 million (EUR 82.8 million). Organic growth was 2.3%.
- Revenue from Partner Channel increased by 14.5% to EUR 75.1 million (EUR 65.5 million), organic growth was 3.3%
- Revenue from Direct Channel increased by 6.9% to EUR 18.4 million (EUR 17.2 million), organic growth was -1.7%
- Adjusted EBITA was EUR 32.9 million (EUR 34.2 million), 35.2% of revenue (41.3%)
- Items affecting comparability (IAC) for Adjusted EBITA were EUR -6.1 million (EUR -3.8 million), following the acquisition of the Lookout consumer security business. Purchase price allocation (PPA) amortizations were EUR -2.7 million.
- Earnings per share (EPS) was EUR 0.11 (EUR 0.13). Earnings per share excluding PPA amortization was EUR 0.12 (EUR 0.13) 1).
- Cash flow from operating activities before financial items and taxes was EUR 20.1 million (EUR 31.4 million)
- Net debt amounted to EUR 187.7 million (-10.8) and leverage was 3.6x. 2)
1) From the third quarter of 2023, F-Secure reports also earnings per share excluding purchase price allocation amortization (PPA) due to amortization following the acquisition of Lookout Life.
2) 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 interim 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 this interim 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 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 this interim report.
Outlook for 2023 (updated September 8, 2023)
Growth: F-Secure estimates that revenue for 2023 will be in the range of EUR 128–132 million.
Profitability: The group’s adjusted EBITA is expected to be in the range of EUR 41–45 million. The adjusted
EBITA margin is estimated to temporarily decrease in 2023 due to acquisition related additional OPEX investments of about 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, although we see strong price sensitivity among the consumers, in the face of a challenging operating environment.
- Lookout consumer BU included from June to December (7 months).
- Lookout consumer BU has received payments in advance related to part of its revenue. Such payments are recognised 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 recognised post-acquisition related to deferred revenue balances will be lower compared to revenue recognised 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 (unchanged)
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
| EUR million | 7−9/2023 | 7−9/2022 | Change % | 1−9/2023 | 1−9/2022 | Change % | 1–12/2022 |
| Revenue | 35.1 | 27.9 | 25.8% | 93.5 | 82.8 | 12.9% | 111.0 |
| Partner channel | 28.5 | 22.1 | 28.7% | 75.1 | 65.5 | 14.5% | 88.1 |
| Direct channel | 6.7 | 5.8 | 14.6% | 18.4 | 17.2 | 6.9% | 23.0 |
| Cost of revenue | -4.8 | -2.2 | 117.3% | -10.9 | -7.0 | 56.7% | -9.3 |
| Gross Margin | 30.3 | 25.7 | 17.9% | 82.5 | 75.8 | 8.9% | 101.7 |
| % of revenue | 86.2% | 92.0% | 88.3% | 91.6% | 91.6% | ||
| Other operating income | 0.2 | 0.4 | -41.2% | 0.7 | 0.8 | -14.4% | 1.1 |
| Operating expenses1) | -17.5 | -14.5 | 20.8% | -49.6 | -42.1 | 17.6% | -58.3 |
| Sales & Marketing | -8.3 | -6.2 | 33.3% | -24.3 | -22.4 | 8.3% | -29.3 |
| R&D | -5.8 | -3.3 | 77.0% | -16.1 | -11.5 | 39.8% | -15.1 |
| Administration | -3.3 | -4.9 | -32.9% | -9.2 | -8.2 | 12.0% | -13.9 |
| Adjusted EBITDA1) | 13.1 | 11.7 | 12.1% | 33.7 | 34.5 | -2.3% | 44.5 |
| % of revenue | 37.2% | 41.7% | 36.0% | 41.7% | 40.1% | ||
| Adjusted EBITA 1) | 12.8 | 11.4 | 12.1% | 32.9 | 34.2 | -3.7% | 43.9 |
| % of revenue | 36.4% | 40.8% | 35.2% | 41.3% | 39.6% | ||
| Items affecting comparability (IAC) 2) | -0.2 | -6.1 | -3.8 | 62.0% | -3.8 | ||
| Depreciation & amortization, excl. PPA amortization | -0.9 | -0.6 | 43.5% | -2.5 | -1.4 | 84.3% | -2.0 |
| PPA amortization | -2.0 | -2.7 | |||||
| EBIT | 10.0 | 11.1 | -9.7% | 22.4 | 29.4 | -23.6% | 38.8 |
| % of revenue | 28.4% | 39.6% | 24.0% | 35.5% | 34.9% | ||
| Earnings per share (EUR) 3) | 0.03 | 0.05 | -38.2% | 0.11 | 0.13 | -17.7% | 0.17 |
| Earnings per share, excluding PPA amortization (EUR) 3) | 0.04 | 0.05 | -15.5% | 0.12 | 0.13 | -9.2% | 0.17 |
| Shareholders’ equity per share, EUR | 0.19 | 0.10 | 0.14 | ||||
| Operating cash flow | 6.0 | 10.3 | -41.7% | 16.9 | 25.7 | -34.0% | 36.4 |
| Cash conversion % | 66.1% | 82.5% | 59.9% | 92.8% | 96.2% | ||
| Deferred revenue | 22.8 | 19.8 | 15.1% | 20.9 | |||
| Net debt (+) / Net cash (-) | 187.7 | -10.8 | -19.3 | ||||
| Net debt/Adjusted EBITDA 4) | 3.6 | -0.2 | -0.4 | ||||
| Gearing, % | > 100% | -37.8% | -63.0% | ||||
| Equity ratio, % | 11.7% | 32.4% | 39.6% | ||||
| Personnel at the end of the period | 516 | 361 | 42.9% | 376 |
The key figures and other financial information are presented on a carve-out basis for January-June 2022 and on an actual basis after that. 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 during the reporting period.
4) 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
During the third quarter, we continued to firmly implement our strategy whilst protecting our profitability. Our performance was still burdened by the low consumer confidence in most of our key markets and our partners’ tightened cost control. However, we saw some signs of demand recovery and slightly increased market activity in Direct Business towards the end of the quarter.
Third quarter revenue increased by 25.8% to EUR 35.1 million, organic revenue growth being 0.3%. Direct Business continued to face challenges and revenue declined organically by 3.8%. Partner Business revenue grew marginally, with organic growth at 1.4%. The development of partner business was burdened by postponed launches and delayed deliveries which reflects partners’ tight resourcing and budget control status. The adjusted EBITA for the third quarter was EUR 12.8 (11.4) million, with an adjusted EBITA margin of 36.4% (40.8%). The lower cost level typical for the third quarter resulted in better profitability.
The development of our strategically important initiatives continued during the quarter. We signed up with three new partners for F-Secure Total, whereas three existing partners signed up for F-Secure Total upgrade. In total six new Total launches were made with partners during the quarter. Within Embedded Security we launched My CyberShield service with Touch’n Go Digital, an eWallet provider, in Malaysia. We have continued actively working on new Tier1 partnerships with a solid pipeline of prospects. Also, progress has been made with F-Secure Sense with the launch of Sense 4.0 to partners – the first fully packaged and industrialized version of the solution that partners can use to integrate Sense onto their platforms quickly and easily. We launched our first DNS (Domain Name System) Security service with a European CSP partner during the quarter and signed another one with go-live planned for later this year.
In April we announced the acquisition of Lookout consumer security business, and the integration has been progressing mainly as planned. As stated earlier, Lookout Life growth has been pushed forward due to longer sales cycles and challenges in our own execution capability in the first months after the acquisition. All in all, our teams and fellows have been working together intensively to combine the best of F-Secure and Lookout Life into a strong, differentiated product portfolio and to refresh our business strategy to become a leading company in our industry. We shared the latest status of these plans at our Investor Day on September 20th, watch the recording here: Investor Day.
During the past year and a half, F-Secure has gone through a major journey of change. We have demerged, grown organically as an independent company, and acquired Lookout Life consumer business. Throughout, we have been vigilant in making necessary changes to the business to keep F-Secure in good financial health.
This morning we announced that we are conducting a company-wide reorganization to align our operating model, people resources and investments with our strategic priorities and financial framework. We pursue stronger focus on profitable growth in the partner business incl. Tier 1 partners, agile product creation process, unique IPR in scam protection and providing the best customer experience. The reorganization will result in the removal of a number of roles across F-Secure, including reducing layers and increasing span of control. The planned changes are estimated to generate annual cost savings of around EUR 9 million.
Our core business model is resilient, and our fellows are competent. We remain on track to achieve our stated financial objectives and make every digital moment more secure, for everyone.
Significant events during the review period
Revised outlook for 2023
On 8 September 2023, F-Secure issued a negative profit warning. F-Secure lowered its outlook for the year 2023 revenue and adjusted EBITA due to weaker than expected business performance during the third quarter. Slower than anticipated conversion to enhanced F-Secure Total offering as well as some delays in deliveries in partner business have had a negative impact on the revenue development in the second half of 2023. Lookout Life growth has been pushed forward due to longer sales cycles and challenges in execution capability in the first months after the acquisition. The revised outlook can be found on page 3 of this interim report.
Significant events after the review period
Change negotiations
On 25 October 2023, F-Secure announced that F-Secure Corporation and its subsidiaries initiate group-wide statutory change negotiations to restructure its global operating model and personnel to align with the strategic priorities and financial targets of the company. The change negotiations concern the entire F-Secure personnel globally. According to the initial estimate, the change negotiations could result in a reduction of a maximum of 70 positions, of which maximum of 50 are expected to be in Finland.
The planned changes are estimated to generate annual cost savings of around EUR 9 million versus current run rate. One-off costs related to the planned changes are expected to be recorded as items affecting comparability (IAC), and more information about these will be disclosed once the negotiations are concluded. The change negotiations do not affect financial outlook for 2023 or medium term financial targets of F-Secure.
In Finland, the change negotiations will begin on October 30, 2023 and the negotiations will last an estimated six weeks unless otherwise agreed. All applicable processes will be conducted in accordance with local legislations in each country. F-Secure is committed to communicating openly with its employees throughout the negotiation process and will report the outcome once the negotiations are concluded, which is estimated by mid December. More information about the process can be found in the stock exchange release published on October 25, 2023.
Additional information
This is a summary of F-Secure Corporation’s Interim Report 1 January–30 September 2023. The full report is a PDF file attached to this stock exchange release. Full report is also available on the company website at www.investors.f-secure.com.
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/q3-2023-results/register.
Analysts following F-Secure are invited to the presentation at the company headquarters, Tammasaarenkatu 7, Helsinki, Finland.
Financial calendar in 2024
In 2024, F-Secure Corporation will publish financial information as follows:
- Financial Statements Release and Annual Report 2023 on Friday February 16, 2024
- Interim Report for January–March 2024 on Friday April 26, 2024
- Half-year Financial Report for January–June 2024 on Thursday July 18, 2024
- Interim Report for January–September 2024 on Thursday October 24, 2024
The Annual General Meeting is scheduled for Wednesday, March 13, 2024.
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.