F-Secure - cheap and highly profitable cybersec stock
After the Q2 the setup looks still attractive from a risk reward perspective.
F-Secure $FSECURE is a Finnish cybersecurity company selling consumer endpoint security services primarily through partners (mainly MNOs). F-Secure relies on its partners to distribute its branded or white-labeled cybersecurity product. Its partners (i.e. customers/distributors) include companies such as AT&T, Telia and Orange.
I wrote an analysis on a Finnish investing media, Sijoitustieto.
If you are not familiar with the company, I encourage you to read the article with Google Translate or similar as an introduction.
F-Secure investor relations website.I wanted to share the investment case with international investing community. Instead of rewriting the article, here are my notes and thoughts on F-Secure after a profit warning and Q2-results. The setup looks very attractive from risk and reward perspective.
Key figures
Valuation multiples
Thesis & highlights
F-Secure is highly profitable (adjusted EBITA margin of 35%) but stagnant cybersecurity company in the competitive consumer cybersecurity segment.
The valuation does not take into account the opportunity for growth in 2-3 years stemming out of its renewed focus and strategy.
In 2023, F-Secure acquired American company called Lookout, which resulted in significant amount of debt but also an enhanced its (potential) access to Tier 1 MNOs (mobile network operators).
Currently, net debt to EBITDA ratio stands at 2.9x. F-Secure nearly halved its dividend in order to prioritize debt repayment. Current annaul dividend is €0.04 per share yielding 2.4%.
The acquisition and the dividend cut has likely led to a changing investor base. Earlier, F-Secure was expected to become a dividend machine churning out its excess cash flow as dividends. Now, the narrative is about growth, which is yet to materialize.
The emphasis on larger MNOs and so called embedded services will lead to lower margin profile but presumably to higher volumes.
Furthermore, ramping up partnerships with large MNOs require front loaded expenses and investments, which pressure financial in the short-term.
Above mentioned developments create an opportunity, where downside is limited by low valuation and steady and sticky on-going business. Upside comes from low growth expectations. Growth has strong likelihood to appear, sooner or later, due to announced partnerships that are ramping up and on-going negotiations will likely lead to new partnerships in the near future.
The deals that F-Secure makes are not one-time deals but will generate revenue after a long period of implementation, ramp-up and marketing and sales efforts.
Unsurprising profit warning
Recently, F-Secure issued a profit warning blaming the slow progress of projects with large customers. In my original analysis, I named one of the headlines “The slow partner channel has a chance to surprise”. So in that sense, the profit warning was not so surprising. Its is not surprising that large corporations take a lot of iterations with their product development projects.
The share price retracted close to its earlier bottom providing potentially an attractive entry point.
Furthermore, since a third of the revenue comes out of North America, the weak dollar is estimated to have a €3 million negative impact on revenue. The R&D costs were 15% higher in Q2 than the year before.
F-Secure needs to show growth
Embedded Security is the growth area that F-Secure is betting on. It means cybersecurity services that are integrated to MNO’s own product under the customer’s own brand. Promisingly, the revenue of embedded security was growing at a higher rate than in the Q1, but not fast quite fast enough. The direction is correct, especially considering the negative FX-impact.
Due to the lower than expected growth in Embedded Security, the decline in Direct channel is offsetting the modest growth. F-Secure is not using paid marketing to promote its direct sales in order to showcase commitment to partner channel. The strategy also leads to lower marketing spend.
It is partly speculation, but the impact of two new partnerships could be visible in the Rest of the world revenue, which grew 23% in Q2. In October 2024 F-Secure announced a partnership with “one of the largest and most respected mobile service providers in Asia”. In February, F-Secure announced a partnership with Softbank. This is an indication of the ramp-up times with Tier 1 MNOs and their immediate but preliminary impact on revenue.
Scam protection - a free option
F-Secure pursues to create value and revenue from a scam protection product. It is difficult to assess F-Secures chance of success of the initiative realistically. Online scams are a big problem, getting more sophisticated and growing rapidly. At least there’s a problem to be solved. Scam protection module (as a part of F-Secure’s so called Total-offering) can increase the attractiveness of F-Secure’s offering and sell as an individual product too.
In May, we took a significant stride in our mission to become the world’s #1 scam protection provider with the launch of a standalone Scam Protection product. It offers consumers greater flexibility and access in the face of rising online scams. We’re making our best-in-class tools more accessible and giving consumers the flexibility to stay safe on their own terms.
Target price
Share price today: ~€1.7
EV/EBITDA: ~9x
In the past 12 months F-Secure has generated approximately 50-53 million of EBITDA. Its indebtedness is higher than the range in the valuation table below. However, the company is reducing the debt rather fast, approximately 0.1x-0.2x per quarter. F-Secure should meet its target of 2.5x latest next year. Lower leverage combined with sales growth should lead to higher EBIT(DA) and justify higher multiples.
