WithSecure Corporation's Half-year report January-June 2023: Market uncertainty reflected in the new outlook; new products launched to strengthen Co-security approach

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WithSecure Corporation, Half-year report January - June 2023, 14 July 2023 at 8:00 EEST

Half-year report 1 January – 30 June 2023

MARKET UNCERTAINTY REFLECTED IN THE NEW OUTLOOK; NEW PRODUCTS LAUNCHED TO STRENGTHEN CO-SECURITY APPROACH

Highlights of April – June 2023 (“second quarter”)

• Annual Recurring Revenue (ARR)¹ for cloud products² increased by 21% to EUR 81.9 million (EUR 67.5 million)
• ARR growth from previous quarter was 0.5%
• Net Revenue Retention for cloud products was 107%
• Revenue from cloud products increased by 20% to EUR 20.3 million (EUR 16.8 million)
• Revenue from on-premise products decreased by 8% to EUR 6.2 million (EUR 6.7 million)
• Revenue from cyber security consulting decreased by 6% to EUR 8.4 million (EUR 8.9 million)
• Adjusted EBITDA was EUR -7.9 million (EUR -8.0 million – Estimated comparable EBITDA³)
• Items affecting comparability (IAC) of EBITDA were EUR +1.4 million (EUR -0.8 million). Of this, EUR +1.3 million related to valuation of earn-out from previously divested business

Highlights of January – June 2023 (“first half”)

• Revenue from cloud products increased by 25% to EUR 40.2 million (EUR 32.1 million)
• Revenue from on-premise products decreased by 10% to EUR 12.5 million (EUR 13.9 million)
• Revenue from cyber security consulting decreased by 8% to EUR 17.3 million (EUR 18.9 million)
• Adjusted EBITDA was EUR -14.1 million (EUR -13.2 million – Estimated comparable EBITDA³)
• Items affecting comparability (IAC) of EBITDA were EUR -3.2 million (EUR -5.3 million). Of this, EUR -4.3 million related to restructuring activities of the first quarter, and EUR +1.4 million to valuation of earn-out from previously divested business

(1) Annual recurring revenue (ARR) of cloud products is calculated by multiplying monthly recurring revenue of last month of quarter by twelve.  Monthly recurring revenue includes recognized revenue within the month excluding non-recurring revenues

(2) Cloud products are Elements, Cloud Protection for Salesforce and Managed Services
(3) Estimated comparable EBITDA is used for previous periods to ensure comparability. For explanation, see Note 6 (Reconciliation of alternative performance measures)

WithSecure completed the separation of its Consumer security business into an independent company F-Secure through a partial demerger on 30 June 2022. In this report, WithSecure is presenting consumer security business until its demerger in 2022 as Discontinued operations under IFRS 5. Previous income statements are restated accordingly. For full disclosure of demerger-related presentation, please refer to Note 7 (Discontinued operations).

Figures in this report are unaudited. Figures in brackets refer to the corresponding period in the previous year, unless otherwise stated. Percentages and figures presented may include rounding differences and might therefore not add up precisely to the totals presented.

Outlook for 2023 (updated)

Annual recurring revenue (ARR) for cloud products will grow by 18 – 24% from the end of 2022. At the end of 2022, cloud ARR was EUR 80.2 million.

Revenue from cloud products will grow by 18 – 24% from previous year. Previous year revenue from cloud products was EUR 68.7 million.

Total revenue of the group will grow by 6 – 12% from previous year. Previous year revenue was EUR 134.7 million.

Adjusted EBITDA will improve from previous year. Previous year’s Adjusted EBITDA (Estimated comparable EBITDA for two first quarters) was EUR -23.2 million. Adjusted EBITDA of fourth quarter of 2023 will be between EUR –4 million and EUR +1 million.

Outlook for 2023 (previous)

Annual recurring revenue (ARR) for cloud products will grow by 28 – 34% from the end of 2022. At the end of 2022, cloud ARR was EUR 80.2 million.

Revenue from cloud products will grow by 28 – 34% from previous year. Previous year revenue from cloud products was EUR 68.7 million.

Total revenue of the group will grow by 12 – 20% from previous year. Previous year revenue was EUR 134.7 million.

Adjusted EBITDA will improve from previous year. Previous year’s Adjusted EBITDA (Estimated comparable EBITDA for two first quarters) was EUR -23.2 million. Adjusted EBITDA of fourth quarter of 2023 will be positive.

Medium-term financial targets (unchanged)

WithSecure medium-term financial targets:

• Growth Target: To double revenue organically by the end of 2025 (from year 2021 comparable revenue of EUR 122.8 million)
• Profitability Target: Adjusted EBITDA break-even by the end of 2023 and adjusted EBITDA margin of some 20% by 2025

WithSecure annual strategy process will be completed by end of third quarter. Medium-term financial targets will be reviewed as part of the process.

CEO Juhani Hintikka

In the second quarter of 2023, slowness in some areas of the cyber security market continued and impacted also WithSecure product revenue. The market also continues to be very competitive. In some markets, the first half performance deviated significantly from our plans, while others are performing according to previous estimates. Cloud ARR grew by 21% year-on-year. Cloud revenue grew by 20 % and was EUR 20.3 million (EUR 16.8 million).

Cyber security consulting revenue declined by 6 % and was EUR 8.4 million (EUR 8.9 million). The financial sector customers, especially in the UK, are still recovering from the reductions of spending first reported in the first quarter of 2023, and the new customer acquisition was not sufficient to cover for the gap. In other geographies, consulting performed according to expectations. Demand for consulting services continues, especially demand for offensive services such as red teaming.

Overall, the revenue performance was disappointing in the first half of 2023, compared to our own plans, but reflects the current trend in the cyber security market. We will continue to strengthen our strategy and focus, to ensure we can return to the growth levels we expect in our selected target markets. We have also identified areas for operational improvements in the company.

In the second quarter, the cost saving measures were partly offset by one-off expenses related to salaries and marketing. We expect to see the full impact of the earlier cost saving measures in Q3. Reaching profitability continues to be a high priority for WithSecure. Due to the uncertainties in the market, impacting the second quarter result, we lowered our financial outlook for 2023.

Highlight of the quarter was our annual marketing event SPHERE ’23 in May. We spent two days with over 500 customers and partners, sharing insights into todays’ cyber security environment and hosted almost 50 journalists from worldwide media outlets.

At SPHERE’23, we introduced new products and services, complementing our portfolio that focuses on resolving essential security operations needs for mid-market companies.  We complemented the Elements platform with a fifth module, Cloud Security Posture Management (CSPM) that provides automated identification and remediation of risks related to cloud infrastructures. This is an important additional step in supporting our customers’ transition to cloud environments.

Co-security – working together with our partners to ensure the best possible security outcomes to the end customers – is becoming even more relevant in the fast-changing cyber security environment. To further strengthen our partners’ offering we introduced a new co-monitoring service, where part of the monitoring of network alerts can be transferred to the WithSecure team. This enables a cost effective, around the clock managed detection and response solution, built on the Elements Endpoint Detection and Response.

We also introduced the Incident Readiness Retainer service, making WithSecure expertise available to mid-market customers through a standardized offering. The traction in these new products and services has been very good in the first weeks after their release.

Financial performance

(mEUR)	4-6/2023	4-6/2022	Change %	1-6/2023	1-6/2022	Change %	1-12/2022
Revenue	34.8	32.5	7 %	70.1	64.8	8 %	134.7
Cloud-based security products	20.3	16.8	20 %	40.2	32.1	25 %	68.7
On-premise security products	6.2	6.7	-8 %	12.5	13.9	-10 %	27.2
Cyber security consulting	8.4	8.9	-6 %	17.3	18.9	-8 %	38.8
Cost of revenue	-10.8	-11.7	8 %	-21.6	-22.8	5 %	-47.0
Gross Margin	24.0	20.7	16 %	48.4	42.0	15 %	87.7
of revenue, %	68.9 %	63.9 %		69.1 %	64.9 %		65.1 %
Other operating income 1)	0.1	0.5	-74 %	0.6	0.9	-41 %	2.3
Operating expenses 1)	-32.0	-30.9	4 %	-63.3	-59.6	6 %	-116.7
Sales & Marketing	-19.9	-20.5	3 %	-37.3	-39.3	5 %	-79.1
Research & Development	-9.2	-8.0	16 %	-20.9	-15.9	32 %	-28.4
Administration	-2.9	-2.5	16 %	-5.1	-4.5	15 %	-9.2
Adjusted EBITDA 2)	-7.9	-9.7	19 %	-14.1	-16.6	15 %	-26.7
of revenue, %	-22.6 %	-29.9 %		-20.1 %	-25.6 %		-19.8 %
Items affecting comparability (IAC)
Divestments	1.3			1.4	-3.1	-144 %	-1.5
Restructuring	0.3			-4.3
Other items	-0.2			-0.3
Demerger		-0.8	100 %		-2.1	100 %	-1.8
EBITDA	-6.4	-10.5	39 %	-17.2	-21.9	21 %	-29.9
of revenue, %	-18.5 %	-32.4 %		-24.6 %	-33.8 %		-22.2 %
Depreciation & amortization, excluding PPA 3)	-2.5	-2.4	4 %	-5.1	-4.9	4 %	-10.1
PPA amortization	-0.6	-0.6	1 %	-1.2	-1.2	6 %	-2.5
EBIT	-9.6	-13.5	29 %	-23.5	-28.1	16 %	-42.6
of revenue, %	-27.5 %	-41.7 %		-33.6 %	-43.4 %		-31.6 %
Estimated comparable EBITDA	-7.9	-8.0	2 %	-14.1	-13.2	6 %	-23.2
of revenue, %	-22.6 %	-24.7 %		-20.1 %	-20.4 %		-17.3 %
Adjusted EBIT 2)	-10.4	-12.1	14 %	-19.1	-21.6	11 %	-36.8
of revenue, %	-29.8 %	-37.3 %		-27.3 %	-33.3 %		-27.3 %
Result for the period (Discontinued operations)		459.2	100 %		468.5	100 %	468.5

(mEUR)	4-6/2023	4-6/2022	Change %	1-6/2023	1-6/2022	Change %	1-12/2022
Performance indicators
Earnings per share, (EUR) (continuing operations) 4)	-0.10	-0.07	39 %	-0.04	-0.14	73 %	-0.22
Deferred revenue (continuing operations)				69.2	67.7	2 %	68.6
Cash flow from operations before financial items and taxes5)	-8.2	-0.0	n/a	-13.5	1.1	n/a	-14.1
Cash and cash equivalents				28.8	92.3	-69 %	55.1
ROI, %	-29.7 %	-35.2 %	15 %	-23.9 %	-37.4 %	36 %	-30.5 %
Equity ratio, %				79.0 %	74.7 %	6 %	79.0 %
Gearing, %				-28.1 %	-50.7 %	45 %	-39.9 %
Personnel, end of period				1,195	1,264	-5 %	1,295

¹⁾ Excluding Items Affecting Comparability (IAC) and depreciation and amortization. Q3 2022 onwards excludes also costs of services provided to F-Secure under TSA and equivalent income charged for TSA services. 

²⁾ Adjustments are material items outside normal course of business associated with acquisitions, integration, restructuring, gains or losses from sales of businesses and other items affecting comparability. For reconciliation and a breakdown of adjusted costs, see Note 6 (Reconciliation of alternative performance measures)

³⁾ Amortization of intangible assets from business combinations (PPA, purchase price allocation, related amortizations). 

⁴⁾ Based on the weighted average number of outstanding shares during the period 175,309,037 (1-6/2023). Earnings per share has been recalculated for comparative periods using average weighted share amount after share issues.

⁵⁾ Comparative periods of Q2 2022 and H1 2022 include both continuing operations (WithSecure) and discontinued operations (F-Secure).

Events after period-end

In July 2023, Chief Customer Officer Juha Kivikoski announced that he will leave the company. His successor has not yet been appointed. CEO Juhani Hintikka will assume the CCO role in interim.

On 11 July 2023, WithSecure announced a revised financial outlook for 2023.

Additional information

This is a summary of WithSecure’s half-year 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

WithSecure’s CEO Juhani Hintikka and CFO Tom Jansson will present the results in a webcast starting at 14.00 EEST. The webcast will be held in English and can be accessed at

https://withsecure.videosync.fi/2023-07-14-wsq2ir

Questions in written format are requested in the webcast portal. Presentation material and the webcast recording will be available on the company website

https://www.withsecure.com/en/about-us/investor-relations/materials

Financial calendar

WithSecure will publish its financial information in 2023 as follows:

• 18 October 2023: Interim Report for January–September 2023

WithSecure observes at least a three-week (21 days) silent period prior to publication of financial reports, during which it refrains from engaging in discussions with capital market representatives or the media regarding WithSecure’s financial position or the factors affecting it.

Contact information

Tom Jansson, CFO

Laura Viita, VP, Controlling, investor relations and sustainability
+358 50 487 1044
[email protected]

Attachment

• Half-year report Q2 2023_EN_vF