Earnings call transcript: Yubico Q3 2025 sees revenue dip, stock rises

Yubico AB reported its third-quarter 2025 financial results, revealing a decline in net sales and gross profit. However, the company's stock price rose by 3.63% in pre-market trading, reflecting investor optimism due to strong growth in subscription sales and annual recurring revenue. The company continues to innovate with new product functionalities and strategic partnerships.

Key Takeaways

• Net sales declined by 7%, but subscription sales increased to 16% of total net sales.
• Annual Recurring Revenue (ARR) grew by 32% year-over-year.
• Stock price increased by 3.63% in pre-market trading.
• Yubico plans to introduce new functionalities for its YubiKey and expand its passkey technology.

Company Performance

Yubico's overall performance in Q3 2025 showed a mixed picture. While net sales and gross profit declined, the company maintained its position as a leader in the multifactor authentication market. The increase in subscription sales and ARR indicates a shift towards a more sustainable revenue model. The company's focus on innovation and strategic partnerships, such as the collaboration with Best Buy, positions it well for future growth.

Financial Highlights

• Revenue: Declined by 7% nominally, flat when adjusted for currency effects.
• Gross profit: Decreased by 10% nominally.
• Subscription sales: Grew to 16% of total net sales, up from 12% in Q3 2024.
• Annual Recurring Revenue (ARR): Increased by 32% year-over-year.
• Cash and cash equivalents: 875 million SEK.
• Inventory: Increased to 33% of last twelve months' sales.

Market Reaction

Yubico's stock price rose by 3.63% in pre-market trading, reflecting positive investor sentiment despite the decline in sales. The stock's movement is likely driven by the company's strong growth in ARR and subscription sales, as well as its continued innovation in product offerings. The stock is trading above its 52-week low of 85 and below its high of 295, indicating room for growth.

Outlook & Guidance

Looking forward, Yubico aims for a 50/50 split between perpetual and subscription models. The company plans to continue investing in innovation and market expansion, with a focus on advanced authentication solutions. An Investor Day is scheduled for November 22nd, which may provide further insights into Yubico's strategic direction.

Executive Commentary

CEO Matthias Danielson emphasized Yubico's leadership in the multifactor authentication market, stating, "We are the world leader in modern multifactor authentication." He also highlighted the company's strong customer loyalty and zero account takeovers among users of Yubico's products. Danielson noted the high repurchase rate from customers, underscoring the company's competitive advantage.

Risks and Challenges

• Inventory Levels: The increase to 33% of last twelve months' sales could indicate potential challenges in inventory management.
• Market Competition: Yubico faces competition from traditional smart card vendors, which may impact market share.
• Order Predictability: Softness in large order bookings presents a risk to future revenue stability.
• Economic Conditions: Macroeconomic pressures could affect customer spending and market growth.
• Technological Advancements: Rapid changes in technology, such as AI, could impact product development and market needs.

Q&A

During the earnings call, analysts inquired about the softness in large order bookings and the reasons behind the inventory build-up. Yubico explained that the increase in inventory was due to secure element procurement. The company also addressed the potential impact of cloud-synced passkeys and AI on authentication needs, indicating a proactive approach to evolving market demands.

Full transcript - Yubico AB (YUBICO) Q3 2025:

Conference Moderator: Welcome to Ubico's Q3 twenty twenty five Report Presentation. For the first part of the presentation, participants will be in listen only mode. During the questions and answers session, participants are able to ask questions by dialing 5 on their telephone keypad. Now I will hand the conference over to CEO Matthias Danielson and CFO Snehanah Koliva. Please go ahead.

Matthias Danielson, CEO, Yubico: Good morning, everybody, and welcome to Ubico's Q3 report call. I'm Matthias, CEO of Yubico, and with me today is Nizhana Kaliava, our new chief financial officer, and, will take you through the material. And several of you have probably been attending these calls before, but as always, we'll start with a quick overview of the company and before we get into news and details of the financial report. So in terms of the agenda, we'll start with a company overview. So Yubico is a proud hardware company, and our core product is the YubiKey.

And it what we typically like to stress when we talk about our growth today is the fact that we are the world leader in modern multifactor authentication. And our customers who have deployed our keys and the modern part protocols on the keys have experienced zero account takeovers. And, of course, we wanna keep it that way. So that's the basis of our success. We're a hardware company, but as part of that, we've been able to maintain healthy gross margins, pretty consistently in the 80% range over the past number of years.

Second thing we'd like to brag about is the customers that we're working with. We're we've been selling to about 5,000 different business customers, but our focus has been on selling into the largest companies in the world. And as we get back to, we cover almost 30% of the Global two thousand. So almost 30% of the Global two thousand companies are existing customer of ours. In most cases, they've only deployed YubiKeys to a subset of their employees.

And, of course, our journey is to make sure that they protect all of their users using YubiKeys. We've been growing at a pretty consistent rate. Our average growth rate over the past five years has been 40% a year, but it's been variable year by year. But we've experienced a healthy long term growth. Since the start of the company, we've sold and deployed about 40,000,000 Yubikis.

And today, last twelve months sales amount about SEK 2,300,000,000.0. And today, there are approximately five twenty people working for Yubico, about two thirds of them in The U. S, about a quarter in Stockholm or in Sweden, and and the remainder in different sales positions across the world. So that's you become a snapshot. Okay.

I mentioned very briefly the market we're in, which is multifactor authentication. What does that mean? Well, the most common way to access any online service or system or or device is still username and password where the password is the identity and the sorry, where the username is the identity and the password is how you authenticate that you're the legit user. And everyone knows that username and password is not a safe way to authenticate, so what you wanna have is MFA, multifactor authentication, not just something you know, a password, but something that you are biometrics, something that you have, like a an app or a device. And we're in the most advanced form of MFA, the highest level of authentication, and that market for multi factor authentication is estimated to amount about $5,000,000,000 per year.

How can we claim that we're the leader in that market? Well, we're the leader when it comes to modern advanced authentication. There are there's a lot of legacy technology out there, but gradually, modern forms of MFA is taking over, and we're the market leader in that segment. This market of advanced authentication is estimated to grow at about 14% per year over the next couple of years. So it's a big market, where we have only so far a very limited market share, and it's growing quite rapidly.

What the Unity has as its unique features is a unique combination of achieving the highest level of security together with its being very easy for user to use, which sets it apart from other ways which are much more cumbersome when it comes to advanced authentication. And another key feature, pun intended, of the YubiKey is that it's a key that fits into all the relevant blocks. Fundamentally, what we're selling is a key, the YubiKey, and it's only as usable as the number of locks where it fits. And we've invested a lot in making sure that we have this Swiss Army knife type of key that fits into all the relevant locks. It used to be us doing all the heavy lifting in terms of building support for different systems, but now increasingly, it's instead systems realizing that their customers wanna authenticate in the most safe way and therefore provide support for you the keys.

Part of it is the the software that goes on the key, and part of it is how it's get integrated into different environments, which is something we'll have a reason to get back to later in the presentation. Now talking then a little bit about our customers. As I mentioned, we're actually in excess of 30% of of g 2,000 companies in terms of coverage today. So if you look six years back, we work with 14% of the global 2,000. Now we're at the full 32%, so that's growing.

We're adding new customers continuously. What's also very encouraging is that we see a very high loyalty and repurchase rate from our customers. We have two different business model. One, which is an outright sale of YubiKey, and the other one is a subscription model where you instead sign up for the use of YubiKey to ensure that your users are protected with the best technology, and then you instead pay on a recurring annual basis for the. No matter the business model, we see a very high repurchase rate.

We've been measuring this over different periods of time, but you typically would see an annual repurchase rate among our biggest customers in excess of a 100%. How can it be that high? Well, a lot of it is about the fact that we typically land and expand with customers. We win a new customer, and it's typically a limited set of users within that within that enterprise or a government organization that use our keys. And then as people realize that it offers the best protection, it's also very convenient for the user, that's when we start a conversation about expanding into more grow groups so that the entire organization gets protected.

We started out within tech, and it's still a very important sector for us. But now we have a pretty diverse, customer base working across a lot of different geographies and a lot of different industries. So on a very high level, our sales strategies to land accounts and then to expand within those accounts. That was it for kind of the overview. Some highlights for the quarter.

As we reported, as we released early, what's called an early press release or profit warning, we see we saw softness in terms of order bookings. So year over year year, we saw a decline in order bookings by 17%, 9% of that 8% of that was attributed to FX, but an underlying order booking decline of about 9%. Little comment on that, what we see and what we highlighted in the quarter was that we saw a decline when it came to the larger orders. We saw good continued good momentum and winning new customers and doing smaller sales. So small and midsized orders grew quite nicely, but the large orders, which are important for making sure that we meet our numbers, we saw softness there.

High level, it should be noted that we saw some currency headwinds. We had year over year about 10% appreciation of Swedish krona, which is our reporting currency compared to the US dollar, which is the currency where we conclude the vast majority of our deals. About 80% of the remainder is in euro, where we also see an increase in the Swedish krona. Another thing that we highlight is the fact that we are making steady progress when it comes to our product road map, and that was made even more specific as we released new functionalities, which are planned to be released at authenticate in California in mid October. One is targeting digital signatures, making sure that just I can sign transactions using the YubiKey, not just use it for authentication.

And the other one, which is a little bit more long term, so it won't be released next quarter or anything, is the ability to run post quantum cryptography on the YubiKey, which is important as we wanna make sure that we have the most resilient authentication solution even when quantum computers are a reality. So high level, we continue to expand our market reach, expanding new geographies, setting up a new office in Singapore, and continuing focusing on recurring revenue through our subscription model. And we feel that this, the underlying growth in small and midsized deals puts us in a good position to continue growing this market and delivering long term sustainable growth. One thing that we could highlight in particular is the fact that we've now we've been available on Best Buy online stores in the past, but in q three, sorry, at the start of q four, I think, we, announced that we're now actually even in the physical stores of Best Buy, which means that we can get access to a new set of consumer users with a with a different set of patching and simplifying the that you can they can protect their digital cells using YubiKeys.

However, the vast majority of our sales goes into large companies and government organization, and remains unchanged. So that forms the basis of our revenue base still. With that, I'll hand it over to Snezana, who will talk more about the numbers for the quarter. Over to you.

Snehanah Koliva, CFO, Yubico: Thank you, Matthias. Let's start first with the key figures for the quarter. So net sales, nominally declined with 7%, but the the entire, change was actually driven by negative currency impact, as Matthias mentioned. 80 of our sales are in dollars, the rest is in euro, and the SEC, our reporting currency, has depreciated year over year. So, in excluding, currency effect, our sales are, flat, versus the last, versus last year, and our subscription sales are actually growing very nicely.

Gross profit nominally has decreased with 10%, but gross profit margin is relatively stable. It has some effect from currency as well. Looking at the EBIT, it has decreased with four percentage points versus last year q three. Primarily, as our gross margin is relatively stable, then the rest of the sort of the decline in the EBIT margin comes from increased expenses. As our growth ambition, we are increasing somewhat our headcount to to meet and deliver on our growth ambitions.

ARR is increasing very nicely, 32% versus last quarter or the last year's quarter, very much driven by adding new customers in subscription in our subscription model and renewing our existing installed base. Also, it shows that there is an increased increasing demand and adoption of our subscription model. So the pages are moving a little bit. Now let's take a look at, a little bit closer look at the bookings. They the bookings declined 17% year over year, whereof 9% was the actually, underlying change, and the rest was a negative currency impact.

It came the order bookings came a bit short of expectations, which we have as well announced in our earlier communications. We've seen few high value perpetual bookings. We had a very strong q three twenty twenty four, where we have multiple large public sector contracts, which we didn't see coming in coming to fruition in q three twenty twenty five. Subscription bookings, however, develop develop well. We see a decline, nominal decline of 3.2% versus q three twenty twenty four, very much driven by currency.

Now it corresponds to the larger share of the booking 17% versus 15% in q three twenty twenty four. We see that the overall subscription activity and demand and adoption is continues to to be to increase. So we see that reflected in both the bookings and then further on in the net sales. From net sales perspective, as I mentioned, 7% nominal, but actually flat in if we disregard the currency impact, increasing share of subscription sales. Now it's 16% of the total net sales for the quarter versus 12% in Q3 twenty twenty four.

Total SEK 87,000,000 of subscription sales in the quarter. From a geographical perspective, Americas is now 64%, while EMEA and Asia are increasing somewhat in the mix with 2510% respectively. From an AR perspective, as I mentioned, 32% increase versus twenty twenty four q three, driven by good renewal rates and adding new customers to the portfolio of, subscriptions. When we look at EBIT, as I mentioned, gross profit is, has decreased 10%, nominally. Margin wise, some somewhat decreased versus quarter three twenty twenty four.

Overall margin decrease is four percentage points versus last year. We see that the cost in the quarter are driven by higher personnel cost, reflecting our continued expansion ambition. Of course, we're very mindful how we grow, but, we see that impact versus versus last year. The LTIP program cost this quarter were about 30,000,000 SEK. Last year, they were 23,000,000 SEK.

And we have very small currency effects in the EBIT this quarter, only SEK 300,000.0, while last quarter, it was about SEK 9,000,000. From a cash flow perspective, the cash flow for the quarter, from operating activities was 32,000,000. Overall, good cash flow before the changes, in working capital of a 105,000,000 SEK. The changes in working capital were about 17,000,000 SEK. The majority of that came from, changes in inventory, where we have received the last order for our security component, now in q three.

The cash and cash equivalents for, at the end of the quarter, are 875,000,000 SEK, which is an increase versus last year. And excluding the interest bearing liabilities, the net cash at the end of the period is $835,000,000. Our interest bearing liabilities are primarily leases. Inventory has increased as a percentage of the, last twelve months sales to 33%, again, primarily driven by the the last shipment, as I mentioned, for our security chip in the quarter. And with that, Matthias, back to you.

Matthias Danielson, CEO, Yubico: Thank you, Snezana. So to sum it up then, we fell short of expectations when it comes to order books in this quarter and what fell short was really the larger orders, I. E. Orders in excess of a billion dollars. About half of the shortfall is attributable to The US public sector where the government shut shutdown definitely had an impact.

We saw renewals of subscriptions, but we didn't see any new orders for you towards the end of the quarter. The reason why we and then we had a number of private sector orders. There's some background noise. I'm not sure where it comes from. Can you hear me?

Yeah. Good. So outside of The US public sector, there were also some we also saw a shortfall in large orders from the private sector. There's not a common theme there, but what's promising is that with one exception, they remain in the pipeline and it's continuous conversations about taking that expansion from a small segment of the company into a broader use case. And also combining that with the good activity that we see for small and midsized orders, that means that we remain optimistic about position we have in the market.

We continue to see growth in subscription, and I think that's good because that will provide more predictability and more stable development of net sales over time. We're excited about the collaboration we have initiated with Best Buy, and I think this is a good test for us to see, not just how many customers are interested in buying UP keys online, but going and buying it in traditional shops where they can also get support from the local, representatives in how they actually deploy the key. We continue to invest in innovation and future growth. I think the biggest highlight there was really when it comes to our core product during the quarter, highlighting new functionality which is in the immediate product roadmap. Finally, if you're interested in learning more about the company and get to learn more about our upcoming product releases, but also a a run through of our go to market and also understanding the difference between the two business model perpetual subscription, I recommend and you're quarterly invited to attend our Investor Day, which will be held in Stockholm next week on Wednesday starting at three p.

M. Local time. It will be recorded and so it will be accessible online afterwards but if you want to be there and ask questions you are cordially welcomed to join our Investor Day. So hope to see you there and with that we'll hand it over for any questions. We'll start with live questions.

Conference Moderator: The next question comes from Erik Lindholm, Rojestle from SEB. Please go ahead.

Erik Lindholm, Analyst, SEB: Yes. Good morning and good afternoon for you in California. Just a couple of questions for me. So I want to start on the quarter here. You mentioned seeing a high share of smaller and mid sized orders in the quarter.

I mean, it fair to say that more customers are active and ordering compared to a year ago? And mean, it's possible to disclose sort of what growth you're seeing in the number of orders and the number of customers? I'll start there. Thank you.

Matthias Danielson, CEO, Yubico: Thank you, Adrian. So to respond to that, yes, we did see an increased number of both new customers placing orders and existing customers doing follow-up orders. We debated some before we released this report whether we should report order value by order size, and we conclude that if we start that, then, of course, we'd need to continue doing so and it may add confusion on on rather than adding clarity. I think the compromise that we'll go for is that we'll try to share at the Investor Day what the composition of orders by deal size look like, because then if you look at the orders below a million dollars, you can see that's much more predictable, and there's a long term positive trend there, whereas you see that big volatility when it comes to the bigger orders quarter by quarter and even year by year. So hopefully, that will add some context to understand what the order composition looks like.

Erik Lindholm, Analyst, SEB: Okay. That's great. I'm looking forward to that at the Sundalen. Then just on I mean, you speak about sort of evolving your platform to protect digital identities and not just secure ball games. And I wanted to ask, is this more of an organic effort that you're developing and aiming to reach with partners perhaps?

Or do you think you have to make acquisitions here to sort of fully reach your goals in this area? Thanks.

Matthias Danielson, CEO, Yubico: It's more a matter of speed, honestly. It's a very good question, but I'll have to get back to you on that. But if you look at two of the critical areas where we need to supplement our current product offering, it's within identity verification and credentials management. And when it comes to IDD, it's a pretty complex business in itself. So you it's more about providing a framework so that customers either could fall back on a solution that we offer or that there's a good integration with the IDD identifier that they're using.

That can be developed internally or we could seek a partnership or a merchant acquisition, but we'll we'll we'll we'll have to get back to you on that. The other one, credential management, we do have some of those pieces in place already, but when it comes to expanding those, it's a matter of either of partnerships or acquisitions. I don't think you should expect if we go down the acquisition route, I don't think you should expect a large acquisition, which is targeting, say, market access. It's more about then critical technology that would be relevant for us.

Erik Lindholm, Analyst, SEB: Okay, perfect. And then just a final question. I mean, you mentioned most of the sort of large enterprise orders still being active opportunities, the public sector as well perhaps. I mean, do you feel like there has been any changes to the competitive landscape at all? Are you losing any deals to competition?

Thanks.

Matthias Danielson, CEO, Yubico: I would say if there's one general change in the competitive landscape is that when we looked at the biggest competition outside of username and password, say, a couple of years back, then it was different software apps, authentication apps on on your cell phone. Today, we increasingly see CloudSync pass keys being deployed and that is both a threat and an opportunity because we are one of the founders behind the pass keys technology and we know that technology better than arguably anyone and analysts like Gartner agree on that cloud sync pass keys as is a giant leap from passwords, but if you want the highest level of security, highest level of of security and also the biggest flexibility, then you need to go with hardware based passkey switches to you the key. So the the competitive landscape is changing a little bit in terms of technology and use, but we don't see a major shift there. But that's a long term trend that we that we need to explore.

Conference Moderator: The next question comes from Predrag Savinovic from Carnegie.

Predrag Savinovic, Analyst, Carnegie: Hi. Good morning, Matthias, Nezhana and Alexander. Thanks for taking my questions. Let me start by the US government. You did unpack a bit on the size of it.

But in terms of a catch up effect, can this be, for example, a delay where you see accelerated order momentum Q4, Q1, Q2 due to these budget shutdowns in The U. S?

Matthias Danielson, CEO, Yubico: So I mentioned that for all the with one exception for all the larger opportunities, they continue into Q4. Honestly, we have very little visibility into the federal conversations, there's essentially no one responding to phone calls there. So we'll have to see as the government opens up again, what the spend mandate is and and and what the plans are going forward within the federal sector, and that actually has precautions also for state and local since they also depend on a lot of federal funding in this space. I think it's too early to tell whether there will be catch up from them. I think that the need is definitely there, it's more a question will the budgets be there within The US public sector.

Predrag Savinovic, Analyst, Carnegie: All right. And then another question on the competitive landscape. Do you have any visibility or any expectations for how it might change in the future considering how the capacity in new threats are increasing, becoming more complex and software is becoming potentially slightly too fragile. Do you see or hear discussions on some of your partners in Silicon Valley and so on in terms of either partnering further with you or developing something themselves?

Matthias Danielson, CEO, Yubico: One trend that we see I mean, everyone's talking about how AI will impact the threat landscape with more sophisticated attacks and more scalable and industrialized attacks based on harvesting information to make very targeted attacks attacking digital identities. And another aspect of that when it comes to AIs with agentic AI then you really want to make sure that someone that if you authorize an AI to represent you at different transactions, well, then definitely you need strong authentication. I think this will be a something that will work in our favor in the sense that there's an even greater need for strong authentication in securing the digital identities that are being out there, whether they're Identica AI or you doing it yourself, so to speak. What's interesting there is that if you look at the people that are probably have the most insight into what this will mean, it's arguably some of the leading AI companies that we see a very strong market share Almost all AI companies, at least in The US, use YubiKeys internally today. That to me is a good indication that we're offering something which is very robust when it comes to AI enabled attacks.

Of course, AI companies today are relatively small when it comes to internal use, but as that insight and as that threat becomes more pervasive, I'm optimistic that there's an ever growing realization that you need a hardware root of trust.

Predrag Savinovic, Analyst, Carnegie: It sounds very interesting. Finally, in terms of inventory levels, if you can comment on what you think in absolute numbers, but also percentage of sales for 2026?

Matthias Danielson, CEO, Yubico: Yes. I think I've learned to be a little careful when it comes to short term forecasts. But as as mentioned, the driver between the for the buildup in inventory in q three was that we took final delivery of all second half deliveries committed deliveries of secure elements in already in q three, that meant that there was a short term peak and since we don't buy any more of those in q four that should by nature means that the inventory levels drop when it comes to components. We're a little high now in inventory levels and it's mostly about components where we secured enough secure elements to maintain production and that should come down. Another thing which could be commented on is that the deliveries of secured elements that we took now in q three were actually the last ones of the ones that we committed already three year back.

So now we're in a position that where we can set new inventory sorry, purchase levels, meaning that we can reduce inventory level. How fast that will happen? I'm afraid I can't commit to that right now, but that's definitely something that will because we are a little too high in inventory levels, particularly when it comes to raw components right now.

Conference Moderator: The next question comes from Simon Granath from ABG. Please go ahead.

Simon Granath, Analyst, ABG: Hi, Matthias, Manjana and Alexandra. Thanks for having my questions. And I'd like to continue on the inventory topic because, as you point out, cash flow was weighted by that. And there have been lots of questions on this on previous calls as well. But can you help us unpack why it's necessary to have this, at least in my view, big inventory levels?

Is this competitive edge that you see that your customers really appreciate, I. E, that you have short deliveries? Or could this change markedly over time?

Matthias Danielson, CEO, Yubico: There are two reasons for why you want to have a certain level of inventory really. Fundamentally, it's about our ability one part is fundamentally about our ability to deliver on short notice in the different form factors to customers, because even if typically a deployment is planned and takes at least a large deployment, some quarters to do, in some cases, the customer urgently needs to have a a a need satisfied. And then it's we need to have inventories levels that are sufficient of the different versions in the different geographies that we're serving. The other part is more about business continuity, and that's on the component side, making sure that the critical components where we essentially have a single point of failure that we're not put in a position where we're we run out of stock on those. There was a scare, I think, broadly in the market when it comes to a shortage of of it's getting later in California.

I'm losing the words. Secure elements and and more broadly in silicon. Sorry. Circuits for some time, and that made us realize that we can't go for a just in time delivery there. So we've made sure that we secured at least a year of inventory of critical components, which would, if needed, even permit us to transition over to a different different technical platform.

So that's more kind of a business continuity. On that part of the inventory, we're a little too high right now because of the volumes that we secured already three years back, and that's something that should come down. So we think that the if to to satisfy those two requirements, the target industry level should be the 23 to 25% range measured against the last twelve months. It's not an official target we have, but that's kind of a rule of thumb we have. So that's the level we should be targeting going forward.

Simon Granath, Analyst, ABG: Thank you so much. Appreciate the color here. And then I also had a question on net recruitments because as you highlight, the momentum from medium sized customers is good, while there have been slower progress with the larger customers. And does this, call it, change in dynamics? And assuming that this continues as well, incrementally require more sales resources?

Or do you see scale effects kicking in here? And in connection to that, how should we think about net recruitments in 2026? Should it be in line with 2025 or slightly slower pace given the current market dynamics and outlook?

Matthias Danielson, CEO, Yubico: So we're still in a situation where most of the demand is generated in a one to one direct sales relationship. Even though a lot of delivery happens through channel, I. E, resellers and distributors, most of the larger deals are settled in a one to one direct relationship where we are account executives engaged directly with the customer. One of the ambitions and one of the big investments that we're making on the go to market side is making sure that we have more channel and partner generated sales and we're making some good progress there, but that takes time. That's an area where we'll continue to invest in which means again kind of rule of thumb we're seeing some scalability when it comes to winning orders, which aren't generated by our demand generation, but by partners and channel.

At the other hand, we need to invest in building that capacity. So I don't see a big change in the spend sales and marketing spend compared to revenue in the short term. But longer term, we want to build more leverage in that model. So I'm not going be able to provide good guidance for '26, but we don't anticipate any major changes there.

Simon Granath, Analyst, ABG: That's all fair. And a final question from me. Can you refresh us on your view around buybacks, especially now when the share has continued to drop while the balance sheet remains very robust in value?

Matthias Danielson, CEO, Yubico: Yes. We got a as a reminder, we got a mandate to repurchase up to 2% of the outstanding shares. Sorry, we got a mandate to I think the board got a mandate from the AGM to repurchase up to 5% of the outstanding shares and then we had a board decision to buy up to 2% of the outstanding shares in mid Q3, if I remember correctly. And as is reported in the interim report, we've used about half of that mandate, but there hasn't been a and of course, since late September, we haven't used any more of them and they've since we then could be argued that that we're leveraging inside information while purchasing shares. It's really subject to a separate board decision whether we we should resume that, but we'll have to get back to you on that question.

But there's still room for the mandate, both the mandate granted by the AGM and the Board decision on how much to repurchase. Thank you.

Conference Moderator: The next question comes from Georg Atling from Pareto Securities. Please go ahead.

Georg Atling, Analyst, Pareto Securities: Good morning, and thanks for taking my questions. Can we just start on the subscription bookings? Because most of the decline was obviously less renewals subscription bookings this quarter. So I'm just thinking in Q4, what's the sort of the size of the upcoming renewals? Is it in line with last year?

Or will this be a drag on subscription booking growth in Q4?

Matthias Danielson, CEO, Yubico: I'm not quite sure I got the question there. Could you repeat the first half? Because I missed it. Maybe Snevzana, maybe you got it. I'm not sure I got the question.

Snehanah Koliva, CFO, Yubico: I can just

Georg Atling, Analyst, Pareto Securities: clarify. This quarter yes, so this quarter, we had SEK 43,000,000 of subscription renewals, compared to 62,000,000 in Q3 last year. So just wondering in Q4, if this continues to be a drag or if the size of the upcoming renewals in q four are roughly the similar size of q four twenty four?

Snehanah Koliva, CFO, Yubico: I can take more sort of a general sort of comment on that. The the duration of our subscriptions is, you know, on average three years. So every quarter, you know, the subscriptions that that come for for renewal will be basically the ones that we take, you know, three years back in the same quarter. So I I wouldn't be able to comment kind of on the exact amount, but as, you know, as we have grown out the subscription bookings, you know, lately, like, if we look three years back, probably sort of the size of the renewals is is, you know, will start increasing as we go forward.

Georg Atling, Analyst, Pareto Securities: Yep. Okay. On my second question, I'm just wondering about the personnel costs per employee here. So I understand that FX is moving just a little bit, but even excluding that, we see the cost per head coming down here in Q3. Just wondering if you could add some more color to why that is?

Snehanah Koliva, CFO, Yubico: Yes. We have two effects in the personnel cost this quarter. One, correctly, as you say, is the FX movement as we have quite large share of our personnel cost in The US. And then on on that note, then we'll have a sort of a positive impact in, SEC translation. That's one.

And then the other one is that we have two, development projects that are quite advanced, and we have started this quarter actually capitalizing part of the time that we are putting into, advancing these projects. The total sort of capitalized development cost is about SEK 6,000,000. So these are the two effects.

Georg Atling, Analyst, Pareto Securities: Yes. Okay. And that capitalized expenses in personnel costs R and D, I guess?

Snehanah Koliva, CFO, Yubico: Yes.

Georg Atling, Analyst, Pareto Securities: That's why that's down. Okay. Just final question on the Q4 here. Wondering first, what's your visibility on the larger order bookings? And then generally speaking, is Q4 more towards large orders than Q3 or roughly similar?

Matthias Danielson, CEO, Yubico: So I can talk some of course, we have visibility in the sense that we any large deal, is expected to close in q four, is already in our pipeline for some time, and we have visibility into how the conversations are going. So we definitely see that there's progress and activity on them, but in turn as I mentioned before, the volatility when it comes to whether an order actually closes before or after quarter end is is very hard to predict. So that that's just generally speaking. There's much more visibility as mentioned on smaller and midsize order where the velocity is typically much higher and where they're just kind of by the law of numbers, you you have more predictability on the on the aggregate since it it's thousands of orders instead of instead of a handful of orders. When it comes to comp deal composition, I can see that there's a clear trend across quarters when it comes to the deal composition.

However, q four is typically a very, let's say, broad based quarter where you see orders across all geographies and all types of industries. For instance, normally q three is a is a quarter where you see low activity in Europe because of vacation, and you see high activity in US public sector because of the end of the federal fiscal year. This year, we didn't see that. We saw pretty good traction in Europe, and and we saw very limited activity for for US federal orders. So there was a bit of an anomaly.

But q three is that's how q three typically look. We don't see any pattern like that in q four other than it being typically a strong quarter, probably because of people wanting to spend their budgets or close business before the end of the year. But nothing really in terms of deal size that you that can be discern discern there.

Georg Atling, Analyst, Pareto Securities: Okay. That's all that's all my questions. Thank you very much.

Matthias Danielson, CEO, Yubico: Thank you.

Conference Moderator: There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Matthias Danielson, CEO, Yubico: We'll start with a question from David. And the first one is how does UBIKY as a Service enable faster deployment within organizations and accelerate the land and expand strategy. Now that's one of our key selling points really to this statement. There's to date relatively limited specific product functionality in the UPK Serve offering. It's just quote, unquote, just about making sure that we're that partner when it comes to deployment.

So I'll give two examples of that. One is that we actually help train the customer based on our experience working with other customers on how you execute a good rollout. So then, of course, based on our experience there, that that that would typically quicken up the deployment. The other one is more when it comes to the sales process Because with YubiKey as a service, the customer doesn't need to know exactly how many keys they will deploy in what location and what time and what type of YubiKey they wanna have, USB a, USB c, Lightning, and whatnot. Because it's commitment more on protecting users, and then they have flexibility on the form factors, and that typically speeds up that particular feature typically speeds up the sales process.

Those would be two examples how of how Ubike as a service is a enabler for faster deployment. Second question from Dave is as passkey adoption grows and syncing becomes seamless through Apple, Google, and Microsoft ecosystems, how do you anticipate this will impact YubiKey demand among SMB and enterprise customers? A really insightful question because as we talked about before, there are two types of PAS keys. One which is cloud synced and is typically tied well, it is tied to a platform like Apple's or Google's or Microsoft's, and then there are passkeys that are hardware bound like the ones that are on the YubiKeys. Now the market for passkey is growing quite rapidly and a lot of that and a lot of the effort from the platform provider is on promoting the Cloud Sync passkeys.

However, they're tied to that platform and it's actually often very complicated to move it across platforms, so not only is a hardware bound passkey more secure, but it's also more flexible and you're not tied down to that platform, So there are two different motions impacting that. One is, okay, for convenience, it could be good if you're only using one platform to use cloud based cloud synced task keys. However, if you wanna maintain flexibility and more robust recovery, well, that you probably want to go for a hardware bound one. So it's we'll we'll we have a very strong, of course, opinion about what would be what's the best solution, and ours is always hardware root of trust even if you can use it for convenience for applications where cloud sync pass keys are deemed safe enough. But I think this is long term something that will actually foster a type of user behavior realizing that it's really good to have that separate harbor rule of trust.

Third question, and I'll have to ask you, Neshan, but I'll read out the question. Which LTIP program incurred the costs in the quarter?

Snehanah Koliva, CFO, Yubico: So we have three active LTIP programs, 2023, the 2024, and the 2025. And all three of them have running costs because they are three years, long. And the 2023 program has the lowest cost because it's a different program, but 2024 and the 2025 program incurred the highest, you know, higher share of the cost because they are performance based. And according to IFRS, they are sort of different rules how we account for that. But it includes the cost of the program plus the social cost that that we will be that we will need to pay as as as an employer based on this benefit.

Matthias Danielson, CEO, Yubico: So it's really all three programs that impacted the cost in the quarter then?

Simon Granath, Analyst, ABG: Yes. Great.

Matthias Danielson, CEO, Yubico: Another question for you, Juan. It would be very helpful if you could, in a bit more detail, explain towards a subscription model and how long this journey will take. Are we talking about number of quarters or a large number of years or something in between? As in Q3 net sales subscription percentage was 15.8 nine months stage nine months stage, okay, the full nine months The

Snehanah Koliva, CFO, Yubico: year to date. Yeah,

Matthias Danielson, CEO, Yubico: year to date. The optical impression is that this precision is pretty slow. Could you please develop this topic, please? Yeah. It is we have an ambition to where we think that the natural mix between perpetual and subscription is probably fifty fifty, but it's gonna be a journey to get there.

Part of that will be in terms of how how we can impact that is really about functionality. We had a breakthrough we felt in q two when we, for the first time, saw that high-tech companies were interested in buying on subscription basis, and then it was not so much about what we talked earlier, deployment support or implementation support because they're longtime customers and they're pretty qualified. There was more about commitments on our road map and our functionality, in particular when it comes to PQC because they're pretty advanced when it comes to thinking about that and and knowing what what's in the in in the plans there. So and for other industries, it's perhaps not either about deployment but more about business continuity. So I think we need to work pretty much sector by sector to figure out how we have the right offering so that we support our customers not just with a one off delivery, but with a commitment from our end.

But it is, as you say, a transition that will take a number of years. Next question is from Alex. How locked are your bookings? Typically, how long does it take for booking to flow into revenue? I'm not sure I get the first part of the question, but how long does it typically take for booking to flow into revenue?

For a perpetual sale, actually, I'll hand this over to you, Snezano, since you have some excellent preparation on this.

Snehanah Koliva, CFO, Yubico: Actually, I mean, how locked are your bookings? I would say pretty locked. I mean, it's a it's a, you know, a contract and a sales order. So, yeah, my it is pretty locked. Typically, how long it takes?

So for larger for smaller orders, the shipment takes, quite fast. The larger orders, it could take some time in terms of, shipment both from actually primarily from a customer side, as they are planning the deployment. So it takes some it can take some time, typically, you know, a few months. There are some very large perpetual orders that could take up to a year. But now we're talking about, you know, the above, the large orders that that Matthias is talking about, above, like, you know, 1 or $3,000,000.

For the subscription bookings, in the order bookings, we, report the total contract value. So on the subscription orders, we will see, again, typically a three year contract value. And then, we recognize the revenue on a linear basis. So, you know, the next quarter, it will be, like, one twelfth of the contract value, on average. So that's how how it flows.

I hope this gives a bit more clarity. The next question, inventory increased 19% between September 25 versus last year, September 24. How do you see this trending? Think we commented Matthias already as well commented. We had some final shipments of the secure element both in Q2 and Q3 this year.

Now, these these were the final shipments on on this contract. So, and we are a bit high. We we would be working on kind of having a bit more optimal inventory. Anything else you would like to comment, Matthias?

Matthias Danielson, CEO, Yubico: No. I think you covered it. And the final question there, how do you improve cash conversion? And, again, I'll I'll ask you to comment first on that, Najan.

Snehanah Koliva, CFO, Yubico: Exactly. I mean, from operating, point of view, we we have quite good cash conversion before the changes in the working capital. Think, again, the biggest driver to improve that would be the the inventory. From AR perspective, we have quite quite stable percentage of of revenue. So again, it's it's about working on the inventory.

Matthias Danielson, CEO, Yubico: Great. Then we have an anonymous question. Who are your biggest competitors within hardware based keys? So if you talk about all types of hardware based keys, the biggest competitors are the smart card vendors, and that's the traditional solution. And that includes companies like HID owned by Assamboy, Gemalto owned by Thales, RSA, OneSpan used to be called something different than other OneSpan.

Those would be the trip biggest traditional competitors we have within hardware based keys. When you talk about pass keys that are hardware based, security keys, it's actually the same companies that I just mentioned because they've now come to realize that this is where the market is moving in terms of strong MFAs, so they've all introduced security keys that look surprisingly much like YubiKeys And they are of course, they're they're good about security, so they're definitely competitors that we respect. Good. Next question is from Anders at the. You mentioned AI effects earlier.

Is there any other changes in the market that could change increase demand? Well, I think the biggest thing is is the how the development continues when it comes to pass keys. It is a much better way than username and password. So we really encourage everyone to consider implementing pass keys to up their game when it comes to MFA. And I think when we enter into customer conversations, they're all aware of this development, and then it's more about, okay.

Do I wanna get the highest level of security? And perhaps even more importantly, do I wanna have that robustness in my solution and not cross the big platform providers to depend on them on my digital identities? And then it turns into a con a conversation. Okay. Then everyone needs a UniKey.

Do you need to use it for every type of authentication? Probably not. Do you wanna use it for very sensitive transactions? Yes. Do you want to have it as the way that you switch between platforms and as effectively the hardware room trust?

Yes. So I think that the development of passkeys is one of those bigger trends that will impact demand. And then it's it's about getting that knowledge out there and in some cases also regulation driving the need for deployment of strong MSA. I think we have one more question here. Yes.

Sorry to circle back. Maybe you wanna take this, miss Michelle.

Snehanah Koliva, CFO, Yubico: It's a follow-up on the LTIP cost. So let me let me try to explain again. The the LTIP for, 2023 program is based on total return for shareholders. So we have, like, thresholds for the share price, that determines whether the, the, our series will will vest. However, so we take the cost, basically at the time of granting.

It is option based, approach or, valuation. And the cost royalty 2023 is, is quite low, because of this this valuation method. But we take the full cost and we spread it out throughout the the duration of the program. And since we have a catch up effect in, you know, at the end of the program for all the programs, then we take the full cost. For '24 and '25, we take the cost, again, at the time of granting, the full cost for the for the full program, so three years ahead.

But then we spread it out again, you know, throughout the the the months and, the quarters. And, again, because we have a catch up effect in both programs, when they end, basically, at this point, we calculate or we take the cost with the assumption that, you know, a 100% of the of the shares will vest at the end of the of the program period. So that's that's really kind of what what lies behind. I hope it became more clear. Basically, take the full cost for all the three years, and we spread it out throughout the years.

Matthias Danielson, CEO, Yubico: Great. Then we have a question from Magnus. After several consecutive profit warrants, do you think management now has a credibility issue around communications? I'm not sure we have several consecutive profit warnings, but to reel back the tape there, what happened when we released the Q1 report was that we said that we saw a drop in demand towards the end of Q1 spilling into Q2. So we provided some negative guidance there and then we followed up in we released the Q2 report, yes, that materialized into lower sales in Q2 as in net revenue.

However, we did see a recovery towards the end of Q2, so the order bookings were unusually weighted towards the end of the quarter and we saw strong momentum into going into Q3 and that's the profit warning now. That positive forecast that we made or the positive comment that I made in my CEO statement about the good velocity going into Q3 didn't actually materialize into the larger orders materializing in Q3 and hence the profit warning. Looking in the rearview mirror, well, even without the rearview mirror perspective, I should know I've taken enough econometrics to know that it's very difficult to make strong predictions based on only a handful of deals that could be correlated. So I definitely realized that I should have been even more sure before putting this positive statement like that out. So I understand if that introduces a credibility issue.

It was all in earnestly, but I can understand if that means that there's some doubt on on our predictability. And that's one of the reasons why we, during the Investor Day, we wanna show, so what does the typical deal composition look like over a quarter to give some more confidence in what's predictable and what's not predictable when it come to order bookings. Next an anonymous question, is Ubike do better than other hardware competitors? I would put it into two things. One is usability, where we've, as explained earlier, have invested in all making sure that our key actually fits in all to other relevant to outside, that it's integrated in systems.

The other one is about security. And, of course, we're using when it comes to passkey and open protocol and open standard, so it's no difference there, but it's security isn't only about cryptography. It's about the integrity of the product. It's about the integrity even about for of the organization. So I think we've had a very holistic perspective and a thought through perspective when it comes to security, ranging from everything that we source our components from trusted suppliers that we only manufacture in control environments in Western Europe and in Europe and in The US, to the fact that we have very rigorous peer control on how new software gets deployed.

And I think we have earned a recognition as having the highest level of security. I'm not going to talk that about anything competitors do, but at least our our our our competitors that I just mentioned, but I think that that combination of usability and security puts us at the top. We'll have to wrap it up shortly, but we'll take two or three more questions. Do you see a threat of the other hardware based competitors taking market share from Mubeco by launching PASKY similar to UveKeys? Well, all of them already have and there's definitely competition out there.

If there's no competition, there's no market. But the cost of the combination of usability and security, I feel that we have an edge. We just need to maintain that edge by launching and and pursuing new product features and functionality over time. Given that the Ubikos business is largely based on USB support, how do you see the company's future false prospective device manufacturers follow-up as example of removing physical parts as they did with a headphone jack? What is Ubikos plan b in such a scenario?

Well, I should mention that most Ubikeys, excluding those really small ones, the Nanos, also support NFC. So I think we will make sure that we cover the different protocols for transmitting data that are out there. So I don't see a change in USB support or the migration from USB A to USB C has a big impact. And final question: which two to three parameters do you consider most insightful to evaluate when thinking about Hubeco's intrinsic value? That's a really good question.

I'll have to take a minute to think about it but but let me put it like this: I think we need to get comfortable with the total addressable market and what you think about how that will evolve over time. That kind of sets the potential and then it comes down to our product market fit, which is a little more difficult to put a number on, but I think you can find indications in terms of how well positioned a company is by looking at what kind of users they have, what position they have within those, and then finally, of course, parameters, of course, the financial numbers are how do we deliver on that opportunity, and that's down to execution. Great. I think that actually sums up the both live and written questions. So with that, we'll end the q and a.

And again, repeat that you're all welcome to attend our investor day in Stockholm next week, Wednesday, November 19 starting at 3PM. Hoping to see as many of you as possible there. Thanks so much. Have a great day.

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