F-Secure Financial Statement Release 2023: Ending the year on a positive note
Highlights of October-December 2023 (Q4)
- Revenue increased by 30.6% to EUR 36.9 million (EUR 28.3 million). Organic growth was 2.9%.
- Revenue from Partner Channel increased by 33.6% to EUR 30.1 million (EUR 22.5 million), organic growth was 4.2%
- Revenue from Direct Channel increased by 19.1% to EUR 6.8 million (EUR 5.7 million), organic growth was -2.6%
- Adjusted EBITA was EUR 11.7 million (EUR 9.8 million), 31.7% of revenue (34.6%)
- Items affecting comparability (IAC) for Adjusted EBITA were EUR -1.9 million (EUR 0.0 million) and almost entirely consisted of costs related to restructuring and change negotiation activities announced in October 2023.
- Purchase price allocation (PPA) amortizations were EUR -2.0 million.
- Earnings per share (EPS) was EUR 0.02 (EUR 0.04). Earnings per share excluding PPA amortization was EUR 0.03 (EUR 0.04) 1).
- Cash flow from operating activities before financial items and taxes was EUR 17.4 million (EUR 13.0 million).
- During the quarter F-Secure conducted group-wide change negotiations to restructure the company's global operating model and personnel. As a result of the change negotiations and other measures, 56 employments in F-Secure would to be terminated, of which 39 in Finland.
Highlights of January-December 2023
- Revenue increased by 17.4% to EUR 130.4 million (EUR 111.0 million). Organic growth was 1.7%.
- Revenue from Partner Channel increased by 19.4% to EUR 105.1 million (EUR 88.1 million), organic growth was 2.6%
- Revenue from Direct Channel increased by 9.9% to EUR 25.2 million (EUR 23.0 million), organic growth was -1.7%
- Adjusted EBITA was EUR 44.6 million (EUR 43.9 million), 34.2% of revenue (39.6%).
- Items affecting comparability (IAC) for Adjusted EBITA were EUR -8.0 million (EUR -3.8 million), following the acquisition of the Lookout consumer security business and one-off costs related to the restructuring and change negotiation activities.
- Purchase price allocation (PPA) amortizations were EUR -4.7 million.
- Earnings per share (EPS) was EUR 0.13 (EUR 0.17). Earnings per share excluding PPA amortization was EUR 0.15 (EUR 0.17) 1).
- Cash flow from operating activities before financial items and taxes was EUR 37.6 million (EUR 44.4 million).
- Net debt amounted to EUR 177.4 million (-19.3) and leverage was 3.6x.2)
- The Board of Directors proposes a dividend of EUR 0.07 per share (55% of the group January- December 2023 net profit), to be paid in two instalments.
1) From the third quarter of 2023, F-Secure has reported 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 30 June 2022. The financial information presented in this financial statement release 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 financial statement release 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 report.
Outlook for 2024
Growth: F-Secure estimates that revenue for 2024 will be in the range of EUR 142-152 million.
Profitability: The group's adjusted EBITA is expected to be in the range of EUR 48-54 million.
Background for the outlook:
- F-Secure expects the consumer cyber security market to grow mid-single digit CAGR between 2024-2026*. The growth may be moderated due to uncertainties we see around consumer sentiment in certain markets resulting also Service Providers, especially Communication Service Providers being cautious in their investment priorities.
- Biggest organic growth driver is Total and Total conversion within the partner channel; within Direct Business focus will be on retention, and marketing investments for paid customer acquisition will be lower than previously.
- F-Secure continues investing (both OPEX and CAPEX) in Embedded Security capabilities including Tier 1 capabilities and - relationships, which are expected to boost growth in medium term.
- Lookout consumer BU is now included for the full year, compared to June to December (7 months) in 2023.
- Lookout consumer BU post-acquisition related deferred revenue is fair valued according to IFRS reporting and will be lower compared to revenue recognised by Lookout consumer BU for those advance payments. The negative revenue impact included in the outlook is estimated to be approximately EUR 1.5 million in 2024, and negative EBITA-level impact in the outlook approximately EUR 0.5 million, respectively.
* Industry analyst views such as Gartner and IDC, and F-Secure management estimates.
Financial targets
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 | 10-12/2023 | 10-12/2022 | Change % | 1-12/2023 | 10-12/2022 | Change % |
| Revenue | 36.9 | 28.3 | 30.6% | 130.4 | 111.0 | 17.4% |
| Partner channel | 30.1 | 22.5 | 33.6% | 105.1 | 88.1 | 19.4% |
| Direct channel | 6.8 | 5.7 | 19.1% | 25.2 | 23.0 | 9.9% |
| Cost of revenue | -5.1 | -2.4 | 115.1% | -16.0 | -9.3 | 71.5% |
| Gross Margin | 31.8 | 25.9 | 22.9% | 114.3 | 101.7 | 12.5% |
| % of revenue | 86.2% | 91.6% | 87.7% | 91.6% | ||
| Other operating income | 0.1 | 0.3 | -49.6% | 0.8 | 1.1 | -22.9% |
| Operating expenses1) | -20.0 | -16.1 | 24.3% | -69.6 | -58.3 | 19.5% |
| Sales & Marketing | -9.3 | -6.9 | 36.0% | -33.6 | -29.3 | 14.8% |
| R&D | -7.1 | -3.5 | 101.0% | -23.2 | -15.1 | 54.2% |
| Administration | -3.6 | -5.7 | -37.2% | -12.8 | -13.9 | -8.2% |
| Adjusted EBITDA1) | 12.0 | 10.0 | 19.3% | 45.7 | 44.5 | 2.6% |
| % of revenue | 32.4% | 35.5% | 35.0% | 40.1% | ||
| Adjusted EBITA1) | 11.7 | 9.8 | 19.7% | 44.6 | 43.9 | 1.5% |
| % of revenue | 31.7% | 34.6% | 34.2% | 39.6% | ||
| Items affecting comparability (IAC)2) | -1.9 | -8.0 | -3.8 | 111.4% | ||
| Depreciation & amortization, excl. PPA amortization | -1.0 | -0.6 | 68.0% | -3.5 | -2.0 | 79.2% |
| PPA amortization | -2.0 | -4.7 | ||||
| EBIT | 7.1 | 9.4 | -24.9% | 29.5 | 38.8 | -23.9% |
| % of revenue | 19.1% | 33.3% | 22.6% | 34.9% | ||
| Earnings per share (EUR)3) | 0.02 | 0.04 | -53.5% | 0.13 | 0.17 | -25.9% |
| Earnings per share, excluding PPA amortization (EUR)3) | 0.03 | 0.04 | -30.2% | 0.15 | 0.17 | -13.6% |
| Shareholders' equity per share, EUR | 0.19 | 0.14 | ||||
| Operating cash flow | 13.2 | 10.7 | 23.1% | 30.1 | 36.4 | -17.2% |
| Cash conversion % | 141.2% | 108.1% | 81.2% | 96.2% | ||
| Deferred revenue | 25.6 | 20.9 | 22.3% | |||
| Net debt (+) / Net cash (-) | 177.4 | -19.3 | ||||
| Net debt/Adjusted EBITDA4) | 3.6 | -0.4 | ||||
| Gearing, % | >100% | -63.0% | ||||
| Equity ratio, % | 12.0% | 39.6% | ||||
| Personnel at the end of the period | 524 | 376 | 39.4% |
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
The year 2023 was the second consecutive year of big changes for F-Secure. We completed a major overhaul of our application offering by combining it all into one app: F-Secure Total. Our connected home security service, F-Secure Sense, reached a new level of simplicity in terms of ease and speed of integration and deployment. We took significant strides forward in technology, product, brand, consumer experience as well as in serving partners and customers. The acquisition of Lookout consumer security business almost tripled our business in North America, strengthened our position among Tier 1 partners and enhanced capabilities in mobile-first service design and mobile offering.
Under the hood, the year 2023 has been about developing and assuming full control of our core technology platforms and business infrastructure following the demerger. These projects were completed on schedule as a result of almost two years of consistent work. We also dedicated significant effort to upgrading F-Secure customers and partners onto the latest generation of our client and cloud backend services. As a result, we can now focus support and maintenance efforts on a single service platform thus freeing up more resources to new product creation.
It is fair to say that we entered 2023 with higher expectations and ambitions for growth and profitability. Our consumer cyber security business had experienced consistent revenue growth in previous years, a record number of new partner acquisitions in 2022, renewed offering and brand launches scheduled for early 2023, along with increased marketing investments. However, these were not enough to counter weak consumer sentiment and service provider reticence to expand into new security services amidst consumer challenges and higher interest rates.
Fourth quarter revenue increased by 30.6% amounting to EUR 36.9 million. Revenue growth was mainly attributable to the acquisition of Lookout consumer business. Organic revenue growth was 2.9%. Adjusted EBITA was EUR 11.7 (9.8) million for the quarter. EBITA margin, despite strict cost control especially during the second half of the year, remained below comparison period and was 31.7% (34.6%), higher cost of revenue being the key reason. Group revenue in January-December amounted to EUR 130.4 million, growing by 17.4% year-on-year. Adjusted EBITA for the full year was EUR 44.6 (43.9) million, or 34.2% (39.6%) of revenue.
Partner Business continued on a steady path during the fourth quarter, with three new partner signings and nine agreements with existing partners. Among others, two Nordic Communications Service Providers (CSP) signed up for Total conversion, as well as two Central European CSPs. Two CSPs were signed up for Network Security (DNS) and new partner, Celcom Digi, which is the largest CSP in Malaysa agreed to adopt Total as their consumer security offering. Focus in the Partner Business has been on the conversion of existing partners and their customers from separate F-Secure apps to Total, simplifying our partners' - and F-Secure's - offering and go-to-market activities, acting as a profitability driver for both parties. All in all, 34 existing partners signed up for F-Secure Total upgrade and 38 Total launches were made during the year 2023. The total amount of existing partners who have signed for Total deployment during 2022 and 2023 is around 70. F-Secure Embedded security business has become a significant part of our revenue following the Lookout Life acquisition. Overall, despite the positive effect that Total converted partners generated in 2023 we fell short of our growth targets. There were two primary reasons for this: We did not convert as many partners to Total as planned and partners that took on Total promoted it to their new customers only, leaving existing customer base untouched.
In the second half of 2023 we dedicated significant bandwidth to upgrade our partners' services to run on our latest technology platforms, operating systems and app versions. During the fourth quarter we implemented an agile product creation process that will drive faster value creation in the form of, for instance, novel scam protection capabilities and advances in customer experience. Finally, we strengthened our capabilities across the line to win and serve Tier 1 partners - investments that continue in the new year, especially during the first half of the year, and are expected to bear fruit starting during the latter part of 2024.
Already towards the end of the third quarter we saw some early signs of demand recovery and increased market activity in Direct Business, and I am happy to confirm that this positive trend continued during the remainder of the year, powered by strong renewals. In the third quarter of 2023 we decreased paid customer acquisition investments in Direct Business as those were not generating expected returns. Subsequently, in the fourth quarter we took several steps to boost sales, such as price adjustments, launch of free tools, and content driven activities across non-paid channels. While new sales continues to face a headwind in Direct Business, we will apply the same principle in 2024 - i.e. limited paid acquisition while boosting organic demand creation.
In October we initiated change negotiations to enable continued growth investments while securing a solid financial position. The change negotiations were completed in mid-December with 56 roles terminated globally. Alongside change negotiations we reorganized our global operating model and made some group Leadership Team appointments. Mikko Kestilä was appointed Senior Vice President, Services and member of the F-Secure Leadership Team. Firas Azmeh, previously Chief Commercial Officer assumed a new position as Chief Revenue Officer while continuing as a member of the Leadership Team.
The market sentiment remains volatile, with some variation across geographies. The market demand in Europe is cautiously improving, whereas consumer sentiment in the United States remains subdued. Demand in the Asia Pacific region continues on a solid level.
F-Secure operations rely heavily on our vision to become the number one security experience company in the world. The most crucial enabler in achieving this target is our ability to attract and retain a highly capable and inspired team of people. I want to express my warmest thanks to all F-Secure fellows for their passion, commitment and excellent work - both the ones who left the company as well as the ones who will continue to carry the torch going forward.
Significant events during the review period
Change negotiations
On 12 December 2023, F-Secure completed the change negotiations that were started in October. The change negotiations were initiated as part of measures to restructure F-Secure global operating model and personnel to align with the strategic priorities and financial targets of the company. The change negotiations concerned the entire F-Secure personnel globally. As a result of the change negotiations and other measures, 56 employments in F-Secure would be terminated, of which 39 in Finland.
The estimated annual cost savings of around EUR 9 million will be achieved through personnel reductions, as well as savings in operating costs like marketing, subcontracting and other external purchases. One-off costs related to the changes amounted to EUR 1.8 million, which were recorded as items affecting comparability (IAC) in the fourth quarter of 2023.
Changes in the leadership team
On 13 December 2023, F-Secure announced the following Leadership Team appointments effective 1 January 2024: Mikko Kestilä was appointed Senior Vice President, Services and member of the F-Secure Leadership Team. Firas Azmeh was appointed Chief Revenue Officer while continuing as a member of the Leadership Team.
Significant events after the review period
On 9 February 2024, F-Secure announced that Kitta Virtavuo, Chief People Officer and a member of F-Secure Leadership Team, has decided to leave F-Secure to pursue other career opportunities outside the company. Virtavuo will continue in her current role until April 2024, ensuring smooth handover of her duties.
Board of Directors' proposal for the distribution of profit
According to the company's dividend policy F-Secure aims to pay around or above 50% of net profit as dividend on an annual basis. On 31 December 2023 distributable funds of F-Secure Corporation were EUR 15.9 million. The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 0.07 per share be paid. The dividend shall be paid in two instalments. Earnings per share (EPS) for the period January-December 2023 was EUR 0.13, and the proposed dividend is 54.7% of the group January-December earnings.
No material changes have occurred in the company's financial position since the end of the financial year.
Additional information
This is a summary of F-Secure Corporation's Financial Statement Release January 1-December 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.
Webcast
F-Secure will organize a webcast today, 16 February 2024 a 14:00. In the webcast, F-Secure President and CEO Timo Laaksonen and CFO Sari Somerkallio will present the results and after the presentation there will be time for questions. The event can be followed at: https://fsecure.videosync.fi/q4-2023
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:
- Interim Report for January-March 2024 on Friday 26 April 2024
- Half-year Financial Report for January-June 2024 on Thursday 18 July 2024
- Interim Report for January-September 2024 on Thursday 24 October 2024
F-Secure will publish its 2023 Annual Report, including financial statements and Report by the Board of Directors for 2023, the Corporate Governance Statement, the Remuneration Report for Governing Bodies, and sustainability statement on 16 February 2024 on its website at https://investors.f-secure.com/en.
The Annual General Meeting planned to be held on 13 March 2024.
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 ~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.
