Let’s open a new forum thread for the new consumer cybersecurity-focused F-Secure.
Our initiation of coverage report on the company can be found here:
Key themes from the report in video format can be viewed here:
F-Secure’s CEO was also interviewed by Verneri before the demerger:
Here are also the recording and slides from the Capital Markets Day in early June:
There are now only a couple of weeks to go until we get to dissect F-Secure’s first Q2 report on July 20th. At that time, a video interview with the CEO will also be available.
Thanks @Atte_Riikola for a well-explained investment case through analysis, video, and forum!
I hadn’t looked into the old F-Secure at all yet, because it didn’t really interest me initially (I started investing in 01/2020, and haven’t had time to digest all HEX companies yet).
Now, after the demerger, there are two immediately interesting companies, and I’ve delved into them with the new reports. I took a small initial position in the new F-Secure, and if conviction grows, I’ll add more.
A couple of questions for the wiser ones regarding this.
If Inderes’ forecasts hold, the stock seems quite cheap in my opinion. 7-8% dividend + single-digit growth. Is it possible that the current IMO low share price is due to the spin-off situation, where some owners sell because they don’t want to be involved in the spin-off? (I remember hearing something like this, but I’m busy with everyday life and don’t really have time to delve into the matter)
Or is it that the market expects less from the future than Inderes’ forecasts? Is this a so-called value trap? What would be the risks that even reduce the earnings level?
Or is this just pressure on the share price due to low liquidity in the summer, and a neutral/slightly low valuation for a mature company?
Do you see the company’s small balance sheet as a risk? Would a larger one be of any benefit? The company is, however, net debt-free. By traditional Graham’s metric, this is not cheap, but is P/B at all relevant?
I like 1. the continuous revenue base, 2. high profitability, and 3. good cash flow profile.
I’m concerned about 1. the share of the largest partners, I think it was 5 companies/25% of revenue, 2. long-term technology risks / speed of industry change, and 3. large competitors.
The share price has probably fallen since the spin-off, in line with the general market.
In my opinion, the stock has relatively small risks. The biggest risk lies in a few large partnerships, but I think the risk of a spin-off is quite small.
Isn’t the company’s cash flow continuous and strong? The company distributes most of its earnings as dividends, so the balance sheet cannot be overly large. The company therefore doesn’t need a large cash reserve, as it doesn’t need to invest large amounts in, for example, product development/marketing/facilities/acquisitions, and thus the earnings are distributed to the owners.
It is possible. In this situation, however, there are not as obvious reasons for such sales to occur as there might be in many other cases. Roughly speaking, these sales occur in spin-off situations because
The spun-off “new company” is so small in terms of market capitalization that it does not fit, for example, the investment policy of some funds, which forces them to sell the shares they receive.
The new company’s business does not meet, for example, the fund’s ESG criteria or other “qualitative” criteria, leading to the sale of shares.
Investors simply do not want to own the business as an independent piece, so they sell.
The first of these is unlikely to be a very relevant reason, as two companies of roughly similar market capitalization were formed here, both of which are quite sizable in the context of the Finnish stock market. As for the second reason… Well, if a cybersecurity company split into enterprise and consumer cybersecurity companies, there was probably no dramatic change, and both stand on their own very well. The third reason remains, which I believe is the biggest reason for the initial strong selling eagerness. Consumer cybersecurity is simply not attractive enough for some to own as a business.
I have bought a couple of tranches myself, and the intention is to add more every 20 cents, even down to zero, if the business rolls along as usual. I even see this as a somewhat telecom operator-like business in terms of its stability and dullness. The multiples just move at slightly different figures, which is why it has ended up in my own portfolio.
I’m currently considering F-Secure for my portfolio, but the slowness (or perhaps even lack) of growth makes me a bit hesitant. Cybersecurity is a field where things certainly won’t run out in the future, but this kind of endpoint consumer business could be challenging, for example, if Microsoft takes on a bigger role?
In itself, I have nothing bad to say about F-Secure’s products, but when I think about my own usage, I don’t use antivirus on any device (Windows/macOS/Android). For example, Bitwarden is an excellent (free) password manager for all platforms, and there are many VPN providers as well. Finnishness is a plus, but things like this make the company look bad in this field:
A no-log policy would be more clearly on the user’s side.
Undoubtedly, the big money circulates in the corporate sector, as the potential damages there are so immense.
I dug up opinions on F-Secure’s products from Reddit, but similar good/bad discussions were found for other manufacturers as well. I didn’t find anything mind-blowing or a showstopper. Perhaps the company’s products have a target audience in Europe that they appeal to most? More deeply immersed enthusiasts rarely need these products.
And as commented above; in a slowing economy, cybersecurity might be a good area to cut back on.
The Sense product personally interests me, but it doesn’t seem to have gained much traction yet.
So, the company interests me, but I find it difficult to envision (dividend) growth and sustainability.
Now we’ll probably see if that’s the case, I don’t really believe it will have a significant impact. Looking at it now, the F-Secure Total package is on offer on F-Secure’s own website for €59.90 / 1-3 devices / 2 years. So the monthly cost is about 2.5 euros. Perhaps it might slow down the acquisition of entirely new users, but for a large number of people to start canceling their existing cybersecurity, moving their potential password managers, etc., to save a few euros a month… Well, it’s possible, I don’t claim to be a great expert on the subject.
Somehow, my gut feeling is that cybersecurity is more something that just “is” there in the background for its user, rather than something that would greatly benefit from a strong economy or suffer from a weak one in such a way that people would invest in it according to economic cycles.
This is unlikely to become an organically rocketing growth story, but it will be interesting to see if even more can be squeezed out of the machine now that consumer cybersecurity can flourish independently. Previously, it has been somewhat in the role of a financier and cash cow for corporate cybersecurity. Qualitatively speaking, F-Secure seems to be one of the Helsinki Stock Exchange’s highest operating profit margin, net debt-free, and very high return on invested capital generating machine. And if something sensible to buy were found, debt leverage could probably be taken for 100 million euros with these specs. For my taste, there are quite interesting opportunities here, and a larger downside would require some dramatic change. Like a completely botched acquisition.
I became interested in this new-old F-Secure precisely because of the numbers. It’s a suitably boring target, from which modest growth is expected, and the valuation doesn’t chafe. An excellent cash cow with the potential to use money wisely or distribute it generously to owners. Now, of course, we still need to see if the management is capable of this.
A few things that concern me are how many expenses the new F-Secure will incur now that the synergy between the companies has ended. How much product development requires resources and how much building up the management adds to costs.
On the other hand, this case also has a few interesting positive options. For example, potential agreements with insurance companies. Regulation could enable new growth opportunities.
I personally feel that in the current global situation, many consumers would be willing to invest in cybersecurity. It’s a bit like insurance; many cannot afford to take the risk of having their money stolen from online banking or their refrigerator being hacked and starting to spy on them… or whatever other threats the media has actively painted .
Still wondering about Sense. From the report and F-Secure’s own communication, I understood that the sale of the physical product has been discontinued and the intention is to sell devices to customers through operators, into which Sense will be integrated. The router itself was apparently a small flop and didn’t generate much enthusiasm. However, Sense was highlighted quite a lot in the report, in my opinion, given its apparent role? Or is its significance really as big as the report suggests?
The only news about Sense’s integration I found was this press release with Zyxel. In addition, the report mentions that the feature is available through 9 operators, while there are a total of 170 channel partners. So, it’s likely still quite small with that product.
In addition, the company states that the geopolitical situation has increased demand for cybersecurity services, which is in line with the comments we have heard from IT service companies.
I’ve been using the Sense router for years. I was very disappointed to hear that they are discontinuing the product. The router has been like a tank. No junk on the internal network since I started using it. All devices on its network, starting from TVs. And it never crashes or freezes. A good device.
KEY EVENTS IN APRIL–JUNE (Q2)
• Revenue grew by 4.3% to EUR 27.5 million (EUR 26.3 million).
o Revenue from the partner channel grew by 4.3% to EUR 21.7 million (EUR 20.8 million).
o Revenue from the direct sales channel grew by 4.1% to EUR 5.7 million (EUR 5.5 million).
• Adjusted EBITA decreased by 14.6% to EUR 10.1 million (EUR 11.8 million) and was 36.7%
of revenue (44.8%).
• Adjustments to EBITA were EUR -3.0 million (EUR -2.4 million).
• Earnings per share were EUR 0.03 (EUR 0.04).
• Cash flow from operations before financial items and taxes was EUR 9.2 million (EUR 10.9 million)
A surprisingly unsurprising report, guidance reiterated and a bit short of Ate’s forecasts.
Exactly. At least not yet, it didn’t seem like consumers were cutting back on their cybersecurity as uncertainty grew; instead, moderate growth continued. The expense side has consistently been communicated as higher than normal for this year and next, as operations are partly run with “double costs” due to commitments made with WithSecure. By the beginning of 2024 at the latest, we’ll get to see F-Secure’s combat readiness “organically.”
What do other investors think about the growing trend that cybersecurity software is already pre-installed on the latest computers, thus eliminating the need for antivirus software like F-Secure? Do you believe this weakens F-Secure’s future prospects?
Antivirus and firewall protection are handled very well by Windows. On the other hand, F-Secure’s products also offer other useful features, such as VPN and identity theft support.
It’s hard to guess how many will opt for the free alternative in the future.
And how about this partner selling then? Does the salesperson tell the customer: “Here, Windows’ free antivirus and firewalls are already built-in, so you don’t have to worry about them!”? Or do they try to sell some F-Secure alongside it? F-Secure also has a pretty impressive online banking protection or something, which I’ve seen sometimes, where big placards pop up saying it’s safe to transact now. It might still be somehow safer and more important for the older population to have separate antivirus software on their computer.
This is what I was thinking too, that antivirus software is probably rarely a subject of competitive bidding. If it was taken with some offer tied to it, then switching would still be considered a slightly bigger deal than, for example, an electricity contract. We’re talking about cybersecurity, which as a term alone is a pretty big deal. If computer use is limited to internet usage, the idea of removing working software and installing new might seem very difficult.
The extensive report also discussed, for example, Windows’s own security and how it hasn’t killed off these separate products. Over time, this could change. For instance, F-Secure might have the opportunity to create more versatile products than Defender. And that’s probably why Total is primarily marketed – to create added value with those other products. Buying such a package is easier for the average person than figuring out separate solutions. Furthermore, the product family exists cross-platform; Defender is not available on Android, for example.
In reality, Windows Firewall + Defender and common sense are enough for a reasonable person in the PC world.
This is definitely flying under the radar. I’m surprised the forum’s fundamental gurus haven’t discovered it yet. Perhaps there’s just so much happening in the market, people are debating whether the bottom is behind us or if this is just a traditional bear market rally. Maybe people are just looking for high-risk/high-reward targets these days?
At the same time, F-Secure’s excellent software products are finally available on the stock market without Withsecure dragging down profitability. Nearly 98% of the company’s revenue is recurring, and development work doesn’t tie up significant working capital. Consumers pay for licenses in advance, and money flows in monthly from partner channels. Business development is therefore highly predictable.
The adjusted EBIT % for 2019-21 was between 39-45%. There’s no risk here of the company failing to become profitable. It’s already highly profitable. The risk one bears at the current 2022e P/E of 13 is that the company might not grow at the forecasted ~5% annual rate, but instead stagnates at its historical 2-3% growth. After the demerger, 6-7% dividend yields are expected for the coming years. Even in my weaker scenario, this can’t be considered expensive if the company can continue to distribute dividends so generously.
Doesn’t this interest anyone with these numbers, just because it’s a so-called “mature-stage” software company? Of course, there are other potential value creation opportunities for shareholders. I could theorize that F-Secure as an independent company might also be an interesting acquisition target for a larger player in the market.
We also haven’t seen how the company succeeds in growing as an independent entity. Remote work is here to stay, and steady growth is expected in the cybersecurity market. Global geopolitical tensions certainly don’t reduce the need.
I even see this as a somewhat telecom operator-like business in terms of its stability and dullness. The multiples just move at slightly different figures, which is why it has ended up in my own portfolio.