F-Secure Oyj — Interim / Quarterly Report 2023

Apr 26, 2023

F-Secure Interim Report 1 January-31 March 2023: Strategy execution continues

F-Secure Interim Report 1 January-31 March 2023: Strategy execution continues

F-Secure Corporation | Stock Exchange Release | April 26, 2023 at 07:45:00 EEST

F-Secure Interim Report 1 January–31 March 2023: Strategy execution continues

Highlights of January–March (Q1 2023)

• Revenue increased by 1.6% to EUR 27.8 million (EUR 27.4 million).
  • Revenue from Partner Channel increased by 1.7% to EUR 22.0 million (EUR 21.7 million)
  • Revenue from Direct Channel increased by 1.2% to EUR 5.8 million (EUR 5.7 million)
• Adjusted EBITA was EUR 10.2 million (EUR 12.7 million), 36.7% of revenue (46.3%)
• Items affecting comparability (IAC) for Adjusted EBITA were EUR -1.3 million (EUR -0.8 million).
• Earnings per share (EPS) was EUR 0.04 (EUR 0.05)
• Cash flow from operating activities before financial items and taxes was EUR 9.3 million (EUR 10.8 million)
• After the review period, On 26 April 2023, F-Secure announced the planned acquisition of Lookout Life, US-based consumer focused mobile security business arm of Lookout Inc. The planned acquisition strengthens F-Secure’s position as a leading consumer security company in the fast-growing US market. More information is provided under Significant events after the review period.

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.

Outlook for 2023

After the review period, on 26 April 2023, F-Secure announced the planned acquisition of Lookout Life. Subject to the closing of the acquisition, the transaction will have a financial impact on F-Secure. At this point, F-Secure will keep its 2023 outlook unchanged until the schedule for the completion of the transaction is confirmed. Financial outlook for 2023 published in the financial statement release 2022 on 17 February 2023, does not incorporate the impact of the now disclosed acquisition on the company’s revenue or adjusted EBITA for 2023. Implications on financial outlook for 2023 will be announced later when a reasoned estimate can be made.

Financial outlook for 2023 published on 17 February 2023 is as follows:

F-Secure expects the global demand for cyber security solutions to grow while our operating environment has turned more challenging and consumer confidence remains unstable in the face of rising inflation, causing higher risk for weaker development on new business sales in the direct channel. 

We have made a number of growth-related investments in 2022 and continue to do so in 2023. There is a level of uncertainty when these will have a concrete effect on our financial performance.

F-Secure expects revenue to grow by 4-8% year-on-year.

Adjusted EBITA for the full year 2023 is expected to be within 38-41%.

Financial targets (updated on 26 April 2023)

Subject to the closing of the transaction, the acquisition will significantly accelerate revenue and absolute EBITA growth and will thus have an impact on mid-term targets of F-Secure. In addition, F-Secure introduced a new financial target regarding leverage. New mid-term financial targets by 2026 are:

• Growth (updated): Total revenue of more than EUR 200 million by 2026
• Profitability (unchanged): After initial growth investments, adjusted EBITA margin of above 42%
• Dividend Yield (unchanged): Around or above 50% of net profit on an annual basis.
• Leverage (new): 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	1−3/2023	1−3/2022	Change %	1–12/2022
Revenue	27.8	27.4	1.6%	111.0
Partner channel	22.0	21.7	1.7%	88.1
Direct channel	5.8	5.7	1.2%	23.0
Cost of revenue	-2.5	-2.1	18.4%	-9.3
Gross Margin	25.3	25.2	0.2%	101.7
% of revenue	90.9%	92.2%		91.6%
Other operating income	0.2	0.2	-1.8%	1.1
Operating expenses 1)	-15.0	-12.8	17.9%	-58.3
Sales & Marketing	-7.3	-7.3	0.0%	-29.3
R&D	-4.6	-3.9	16.3%	-15.1
Administration	-3.1	-1.5	109.0%	-13.9
Adjusted EBITDA 1)	10.5	12.7	-17.6%	44.5
% of revenue	37.6%	46.4%		40.1%
Adjusted EBITA 1)	10.2	12.7	-19.4%	43.9
% of revenue	36.7%	46.3%		39.6%
Items affecting comparability (IAC) 2)	-1.3	-0.8	62.8%	-3.8
Depreciation & amortization	-0.8	-0.4	114.2%	-2.0
EBIT	8.3	11.5	-27.6%	38.8
% of revenue	30.0%	42.1%		34.9%
Adjusted EBIT 1)	9.7	12.3	-21.6%	42.5
% of revenue	34.7%	45.0%		38.3%
Earnings per share (EUR) 3)	0.04	0.05	-26.9%	0.17
Shareholders' equity per share, EUR	0.11			0.14
Operating cash flow	7.3	8.3	-11.9%	36.4
Cash conversion %	78.8%	86.1%		96.2%
Deferred revenue	21.2	20.2	4.7%	20.9
Net debt (+) / Net cash (-) 4)	-24.2	0.2		-19.3
Gearing, %	-108.2%			-63.0%
Equity ratio, %	26.5%	23.7%		39.6%
Personnel at the end of the period 5)	414	255	62.4%	376

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 for other periods.

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) Prior to the demerger on 30 June 2022, the figure consisted of personnel directly employed by the consumer security business and did not include the share of personnel in shared group functions. At the end of Q1 2023, the figure comprises all personnel employed by F-Secure.

Timo Laaksonen, President and CEO

The first quarter of 2023 was colored by a challenging market environment. Performance in the partner business continued on a solid track with retail partners doing well, while eCommerce experienced strong headwinds in new sales. Consumer sentiment, which continued to be soft, has resulted in a significant decline in device sales globally and it played a central role in the new sales development during the quarter. Overall, the demand for security solutions remained rather good, with the operating environment still impacted by continued high inflation and weaker consumer confidence across the board.

First quarter revenue increased by 1.6% with slightly positive impact from the US dollar. Revenue in the Direct Channel increased by 1.2%, with lower consumer sentiment impacting especially new business sales, following the trend of declining device sales. This was seen even in markets where the underlying market demand was relatively good. Partner Channel revenue increased by 1.7%. All in all, the first quarter’s development was not satisfactory, but we expect the situation to improve already in the second quarter. The adjusted EBITA for the first quarter was EUR 10.2 (12.7) million, with an adjusted EBITA margin of 36.7% (46.3%). Ramp-up investments for future growth continued to burden our profitability.

Our journey to become the number one security experience company in the world proceeds. During the first quarter, we signed up with 3 new partners for F-Secure Total, and 8 existing partners signed up for F-Secure Total upgrade. This accelerates ARPU development as we convert existing customers from standalone products to all-in-one security suite. We expect a significant number of Total launches during Q2. The renewal performance continued on a solid level. The launch of the new generation F-Secure Total, enabling users to protect themselves from cyber threats with one simple solution, started in the Direct Channel in mid-February. The brand-new F-Secure Total includes all the security, privacy and identity protection features in one single app. The launch gained positive visibility, but the lower consumer confidence amid inflationary pressures as well as challenges in optimizing direct business performance contributed to lower new sales activity than expected.

During the first quarter, we launched F-Secure Sense with two new operators, one in Denmark and the other one in the Netherlands. At the end of 2022, we launched a new complementary product business cell called ‘Embedded Security’, and during the first quarter we signed up the second partner for these new solutions; a leading Fintech company in Asia with go-live at the end of Q2/2023. This partnership is not only significant from a business perspective, but it also represents a new vertical partnership, being therefore strategically relevant for F-Secure.

The F-Secure Total launch came alongside the new F-Secure brand identity, which signals who we are today: a globally operating consumer security company, with a vision to become the number one security experience company in the world. The new brand identity is all about Total, Sense and our Embedded Security solutions, and the seamless, simple experiences they deliver.

In March 2023 we joined forces with Allianz Partners, world leader in B2B2C insurance and assistance, to develop a comprehensive cyber security suite, combining cyber security prevention, protection and insurance, delivered through Allianz, F Secure and our partners. Through this partnership, which will roll out in the second half of 2023, Allianz Partners and F-Secure are responding to growing cyber security concerns faced by consumers today. This partnership aims to offer a comprehensive package of cyber security and cyber care insurance.

In line with our strategy, we continue to seek opportunities to grow in consumer cyber security also through M&A. After the review period, on 26 April 2023, we announced the planned acquisition of Lookout Life, the US-based consumer focused mobile security business arm of Lookout Inc. The planned acquisition of Lookout Life strengthens our position as a leading consumer security company in the fast-growing US market, the world’s largest consumer cyber security market and a strategic focus country for F-Secure. The planned acquisition of Lookout Life is a significant step in expanding our business with 1st tier Communication Service Providers (CSP) and it further strengthens F-Secure’s leadership position in the global CSP segment. Together with our fellows, I warmly welcome our new Lookout Life colleagues to the F-Secure fellowship.

Significant events after the review period

Acquisition of Lookout Life

On 26 April 2023, F-Secure announced the planned acquisition of Lookout Life, US-based consumer focused mobile security business arm of Lookout Inc. The acquisition will nearly triple F-Secure market presence in the United States and expand its diverse range of consumer security products. The acquisition is also a significant step in expanding F-Secure business with 1st tier Communication Service Providers and will further strengthen F-Secure leadership position in the global CSP segment.

The enterprise value is USD 223 million (approx. EUR 202 million). The acquisition will be financed with debt for which a new facilities agreement has been entered into with Danske Bank A/S and OP Corporate Bank plc. The new financing package consists 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 existing undrawn revolving credit facility, procured in conjunction with the demerger from WithSecure, will be cancelled concurrently with closing of the transaction.

The transaction is subject to customary closing conditions and is expected to be completed in the second quarter of 2023. The closing of the transaction does not require approval from the competition or other authorities and is not subject to any financing conditions. Read more about the transaction from the Stock Exchange Release published on 26 April 2023.

Updated mid-term financial targets

At this point, F-Secure will keep its 2023 outlook unchanged until the schedule for the completion of the transaction is confirmed. Implications on financial outlook for 2023 will be announced later when a reasoned estimate can be made.

Subject to the closing of the transaction, the acquisition will significantly accelerate revenue and absolute EBITA growth and will thus have an impact on mid-term targets of F-Secure. In addition, F-Secure introduced a new financial target regarding leverage. New mid-term financial targets by 2026 are:

• Growth (updated): Total revenue of more than EUR 200 million by 2026
• Profitability (unchanged): After initial growth investments, adjusted EBITA margin of above 42%
• Dividend Yield (unchanged): Around or above 50% of net profit on an annual basis.
• Leverage (new): 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%.

Change of responsible auditor

On April 21 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. 

Additional information

This is a summary of F-Secure Corporation’s Interim Report January 1–March 31 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.

Financial calendar in 2023

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

• Half-Year Financial Report for January-June 2023, Thursday, July 20, 2023
• Interim Report for January-September 2023, Wednesday, October 25, 2023

Webcast

F-Secure will host a combined first quarter 2023 results webcast and press conference today at 10:00 am EEST. The event can be followed at: https://fsecure.videosync.fi/q1-2023-results/.

Media representatives and analysts covering F-Secure are invited to the event at the company headquarters, Tammasaarenkatu 7, Helsinki, Finland.

For further information, please contact:

Sari Somerkallio, Chief Financial Officer

tel. +358 40 3569251

investor.relations@f-secure.com

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 ~180 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.

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