Helsinki, Finland -
July 30, 2003
SSH INTERIM REPORT January 1 - June 30, 2003
SSH COMMUNICATIONS SECURITY CORP STOCK EXCHANGE RELEASE
July 30, 2003 at 9:00 a.m.
SSH INTERIM REPORT January 1 - June 30, 2003
- Net sales for January-June totaled EUR 7.7 million, down 9.9
percent over the previous year (EUR 8.5 million in 2002). Compared
to the first quarter of 2003, net sales developed favorably and
grew by 14.6 percent.
- Operating loss shrank 67 percent, year-on-year, to EUR -3.2
million (EUR -9.7 million). In 2002, the year-on-year operating
result was burdened by non-recurring expenses of EUR 4.8 million
caused by company restructuring.
- SSH continued its successful cost-cutting, the reported total
costs falling by 43 percent, to EUR 9.3 million (EUR 16.1 million).
- During the report period, the company concluded nine customer
agreements (five during the second quarter) that were worth over
EUR 100,000 each.
- SSH concluded a major distributor agreement for its products with
iGov.com, a US company, and secured their first major US Government
sale through this channel.
KEY FIGURES
4-6/ 4-6/ 1-6/ 1-6/ 1-12/
2003 2002 2003 2002 2002
Net sales, EUR million 4.1 4.1 7.7 8.5 16.8
Net sales, change % -1.2 0.0 -9.9 -19.2 -15.4
Operating profit/loss, -1.3 -6.9 -3.2 -9.7 -14.1
EUR million
% of net sales -31.2 -168.4 -42.1 -115.0 -83.7
Operating profit/loss, 81.7 -210.1 67.0 -317.8 -109.3
change %
Profit/loss before -1.0 -7.4 -3.1 -9.8 -13.6
extraordinary items and
taxes, EUR million
% of net sales -24.6 -178.9 -41.0 -115.9 -80.6
Number of employees, 133 166 133 166 147
period-end
Earnings/share, EUR -0.11 -0.35 -0.49
Equity/share, EUR 1.18 1.45 1.30
NET SALES
Consolidated net sales for January-June totaled EUR 7.7 million
(EUR 8.5 million), down by 9.9 percent, year-on-year.
However, compared to the first quarter of 2003, net sales grew by
14.6 percent, from EUR 3.6 million to EUR 4.1 million. This
favorable trend mainly resulted from several large-scale sales to
end-user companies.
Second-quarter net sales of EUR 4.1 million were at the same level
as those of the corresponding period in 2002, although the US
dollar has gone down by nearly 17 percent compared to euro. SSHs
invoicing is mostly in US dollar terms.
RESULTS AND EXPENSES
SSH was successful in continuing to trim its costs during January-
June while reducing its operating loss to one third of the 2002
level. The companys operating loss for the period amounted to EUR
-3.2 million (EUR -9.7 million), while its net loss for the same
period totaled EUR -3.1 million (EUR -9.8 million). Considering the
overall market conditions, this favorable trend in performance was
attributable to SSHs improved second-quarter net sales and the
companys strong sales efforts. In 2002, the year-on-year operating
result was burdened by non-recurring expenses of EUR 4.8 million
caused by company restructuring.
The companys second quarter operating loss amounted to EUR -1.3
million (EUR -6.9 million), while its net loss totaled EUR -1.0
million (EUR -7.4 million).
SSHs cost-cutting measures yielded positive results during the
report period, and fixed costs continued to fall, decreasing by
approximately EUR 2.1 million year on year, excluding non-recurring
expenses caused by the company restructuring. Cost-cutting measures
applied to payroll and other operating costs, on a fifty-fifty
basis.
Research and development expenses for January-June totaled EUR 2.9
million (EUR 5.0 million). Sales and marketing expenses for the
period were EUR 4.8 million (EUR 8.5 million), while administrative
expenses were EUR 1.6 million (EUR 2.6 million).
R&D expenses for the second quarter were EUR 1.2 million, compared
to the EUR 3.0 million a year ago. Sales and marketing expenses
were EUR 2.3 million (EUR 5.3 million), while administrative
expenses were EUR 0.7 million (EUR 1.2 million).
SSH will continue to increase the effectiveness of its operations
and pursue a tight cost control policy. Together with strong sales
and marketing activities SSH aims to safeguard its successful
performance once the markets rebound and customer organizations
seize their investment opportunities.
BALANCE SHEET AND FINANCIAL POSITION
SSHs financial position remained solid and strong during January-
June. The consolidated balance sheet total on June 30, 2003 stood
at EUR 36.9 million (EUR 46.7 million), of which the liquid assets
accounted for EUR 29.6 million (EUR 36.8 million), or 80.2 percent
(78.9 percent) of the balance sheet total. Except for the
subordinated loan of EUR 0.2 million granted by the National
Technology Agency (Tekes), the company has no other long-term
liabilities.
Gearing, or the ratio of net liabilities to shareholders equity,
was -89.8 (-91.2) at the end of the second quarter. The equity
ratio developed favorably and was 92.6 percent (88.9 percent) on
June 30, 2003.
The reported gross capital expenditure totaled EUR 0.5 million (EUR
0.3 million), consisting mainly of software investments for
business purposes. The reported financial income consisted of
interest income and investment income. Financial income and
expenses totaled EUR 0.1 million, whereas a year ago they were EUR
-0.1 million. The increase in the value of bond funds, worth EUR
0.2 million, has not been recognized as income.
MARKET DEVELOPMENTS
SSHs business environment remained challenging during the report
period. In the companys main market areas - the USA, Europe, and
Asia - the first half of 2003 was characterized by the threat of
war between the USA and Iraq, the outbreak of the war and its rapid
end.
By and large, SSHs customers pursued a cautious investment policy,
focusing only on the most necessary purchases. Sales cycles also
continued to be long, with all of the companys market areas
following the same kind of pattern.
Since the end of the war, US customers in particular have shown an
increasing interest in data security. End-user companies and
public-sector organizations IT budgets have grown slightly, and
new investments have also been made in data security. Furthermore,
US equity investors have allocated somewhat more risk capital to
selected hardware and software start-ups, while larger hardware and
software manufacturers have gradually re-started their development
projects in the USA during the second quarter. Europe and Asia have
not yet shown similar positive market signals.
In the USA, on the contrary, there were signs that end-user
companies purchasing Secure Shell software have come to realize the
benefits of commercial versions over the competing free ones. When
it comes to the US markets for IPSec and Secure Shell Toolkit
products, there were no substantial changes in the competitive
arena.
Similarly, no geographical area experienced major competitive
changes in the VPN (Virtual Private Network) and PKI (Public Key
Infrastructure) software markets; however, competition remained
stiff.
As the worlds leading developer of IPSec and Secure Shell
technologies, SSH holds a strong position in its main market areas,
despite fiercer competition. The company considers that it has
maintained its market share in this field.
SALES PERFORMANCE
SSHS NET SALES
EUR million 4-6/ 1-3/ 10-12/ 7-9/ 4-6/ 1-12/
2003 2003 2002 2002 2002 2002
BY SEGMENT
AMER 1.8 2.0 2.0 1.5 1.9 7.1
APAC 0.7 0.3 0.8 0.5 0.4 2.2
EROW 1.6 1.3 1.6 1.9 1.9 7.5
SSH Group total 4.1 3.6 4.4 3.9 4.1 16.8
BY PRODUCT*
Enterprise Security 3.0 2.0 3.2 2.5 2.2 10.4
Products
OEM products 1.1 1.6 1.2 1.4 1.9 6.4
SSH Group total 4.1 3.6 4.4 3.9 4.1 16.8
* Due to changes in the product portfolio, the figures for 2002 are
not completely comparable with those for 2003.
SSHs sales for the first half of 2003 showed a favourable trend
from the beginning of the year. However, due to the overall
economic development, customers continued to split their
investments into smaller wholes, while reducing the size of their
one-time purchases. Companies tended to deliberate long about large-
scale investments and postpone their final decision-making until a
later date. SSH continued its dedicated sales efforts and despite
the challenging market situation succeeded in raising its net sales
by 14.6 percent on the previous quarter.
During the first half, the USAs position as SSHs most important
market area strengthened. This was particularly due to the more
marked increase in end-user product sales in the US than in other
regions. Americas, Asia Pacific, and Europe and Rest of the World
accounted for 49.6 percent (42.3 percent), 12.7 percent (10.2
percent) and 37.7 percent (47.5 percent) of reported net sales,
respectively.
Europe increased its share of SSHs net sales slightly compared to
the first quarter. This was mainly due to new agreements concluded
in PKI product markets. However, year on year, Europes share of
consolidated net sales for the report period fell by almost 10
percent. A license fee for SSHs VPN hardware technology, received
during the second quarter, contributed to the slight increase in
Asia Pacifics share of the companys net sales.
In line with its strategy, SSH focused its sales on Enterprise
Security Products targeted at end-user companies, their share of
the companys net sales showing a strong growth. Accounting for
64.5 percent (55.6 percent) of reported net sales, Enterprise
Security Products consist of the end-user versions of the SSH
Secure Shell product, the SSH Certifier product family and IPVia
hardware technology license fees. Similarly, OEM products for
hardware and software manufacturers accounted for 35.5 percent
(44.4 percent) of reported net sales. The OEM product group
includes Toolkit and SSH Sentinel products. US hardware and
software manufacturers business recovery during the second quarter
has not yet been reflected in SSHs sales.
During the report period, SSH concluded nine customer agreements
(five during the second quarter) that were worth over EUR 100,000
each. The share of SSHs ten largest customers of the company's net
sales rose a little from the first quarter's 35.9 percent to 38.6
percent during the first half of 2003. However, none of the
customers represents over 10 percent of the net sales, i.e. the
company does not depend on a single customer.
During the second quarter, SSH concluded a major distributor
agreement for its products with iGov.com, a US company providing
basically the US government sector with a broad range of SSHs
products. During the same quarter, SSH also signed an agreement for
the SSH Certifier(TM) product family with Siemens Oy, thereby
enabling Siemens to provide authentication services for the Finnish
Defense Forces SAP environment. In addition, SSH announced that it
had concluded a major licensing agreement for SSH QuickSec(TM)
Toolkit for Access Networks and SSH TLS Toolkit products with
Taicom Data Systems, a Taiwanese company. These SSHs products will
enable Taicom to integrate encryption and remote management
features with its new router products.
PRODUCTS AND MARKETING
In line with its strategy, SSH focused its marketing and sales
efforts during the first half of 2003 on serving large companies,
financial institutions, and government agencies, as well as
selected hardware and software manufacturers in the USA, Europe,
and Asia.
As part of this refocused strategy, the company announced in May
that it would discontinue the manufacture, sales, and marketing of
its SSH Secure Shell for Handhelds product designed for wireless
terminal equipment. By focusing on its core business and the needs
of its main customer groups, SSH is determined to allocate its
resources more effectively for projects in line with its strategy.
The aim is to strengthen its leading position as a provider of
managed security middleware. Also in May this year, SSH signed a
licensing agreement with a major Japanese hardware manufacturer for
licensing its VPN hardware technology.
SSHs marketing and sales efforts in its selected customer and
market segments were given a boost during the second quarter, as
the crypto module used in many of SSHs products passed the product
tests required for FIPS 140-2 certification by NIST, the National
Institute of Standards and Technology, a US standardization
organization. The FIPS (Federal Information Processing Standards)
140-2 certification is vital for selling data security software to
the US government sector, in particular. The final certification is
expected to be complete this summer.
During the second quarter, SSHs products were also once again
successful in international product reviews. This was the third
time in a row when SSH Secure Shell, designed for secure remote
connections, won the highly recognized"Best Communications
Security Solution" award by SC Magazine.
RESEARCH AND DEVELOPMENT
January-June R&D expenses totalled EUR 2.9 million (EUR 5.0
million), accounting for 37.3 percent of net sales (59.4 percent).
The main reason for decreased R&D expenses is the discontinuation
of VPN hardware development and the focusing of R&D resources to
software products according to company's new business strategy.
SSH has adopted an accounting principle complying with the IAS
standard for its R&D expenditure since the beginning of 2003.
According to this standard, SSH will only capitalize product
development expenses caused by the commercialization of new
products at the end of R&D processes. During the first half of
2003, the company did not have such product development expenses.
SSH will continue to record the majority of R&D expenses as direct
expenses.
At the end of June, SSH held four patents while 35 were pending.
HUMAN RESOURCES AND ORGANIZATION
At the end of the report period, the Group had 133 employees on its
payroll. The number of employees decreased by 33 over the previous
year (-19.9 percent). At the end of the period, 44.4 percent of the
personnel worked in R&D, 42.1 percent in sales and marketing, and
13.5 percent in administration.
In June, SSH completed its project for the definition of corporate
values, which are Select, Solve, and Honor, i.e. SSH.
Select" refers to specifying and analyzing corporate goals, and
selecting the right goals."Solve" refers to listening to
customers, understanding and solving their problem."Honor" refers
to integrity and professionalism, as well as respect for customers,
partners, and colleagues.
SHARES AND SHAREHOLDING
The reported trading volume of SSH Communications Security Corp
shares totaled 2,310,761 (valued at EUR 1,702,946), i.e. 8.3
percent of the shares changed hands. The highest quotation was EUR
0.93 and the lowest EUR 0.61. The trade weighted average price for
the period amounted to EUR 0.74, and the share closed at EUR 0.67
(on June 30, 2003).
There were no substantial changes in SSH Communications Security
Corps shareholding during the period. Applied Computing Research
(ACR) Oy still holds 61.2 percent of the companys shares.
SHARE CAPITAL AND BOARD AUTHORIZATIONS
SSHs AGM of April 29, 2003 authorized the Board to decide to
increase share capital through a rights issue and/or grant stock
options or issue bonds with warrants, or convertible bonds, in such
a way that the resultant share capital may exceed by a maximum of
EUR 120,000.
The AGM approved SSHs new stock-option schemes. On the basis of
the stock-option scheme I/2003, the company may offer its personnel
a maximum of 625,000 stock options. Each stock option entitles the
holder to subscribe for one SSH Communications Security Corp share,
at a nominal value of 3 cents. Depending on the type of warrant,
the subscription period will begin in several trenches, on May 1,
2004, May 1, 2005, May 1, 2006, and end on May 1, 2009, for all
stock options. The share subscription price is the closing price of
SSH shares, as quoted in continuous trading on the Helsinki
Exchanges on May 6, 2003, plus 10 percent, and rounded upwards to
the nearest ten cents (EUR 0.87). As a result of these
subscriptions, the companys share capital may rise by a maximum of
EUR 18,750.
On the basis of the II/2003 stock-option scheme, SSH may offer its
personnel in the USA a maximum total of 75,000 stock options. Each
stock option entitles the holder to subscribe for one SSH
Communications Security Corp share, at a nominal value of 3 cents.
Depending on the type of warrant, the subscription period will
begin in several trenches, on May 1, 2004, May 1, 2005, May 1, 2006
and May 1, 2007, and end on April 29, 2013, for all stock options.
The share subscription price is the closing price of SSH shares, as
quoted in continuous trading on the Helsinki Exchanges on May 6,
2003, plus 10 percent, and rounded upwards to the nearest ten cents
(EUR 0.87). As a result of these subscriptions, the companys share
capital may rise by a maximum of EUR 2,250.
At the end of the report period, on June 30, 2003, SSHs share
capital came to EUR 831,793.05, totalling 27,726,435 shares at a
nominal per-share value of EUR 0.03.
PROSPECTS
SSHs management estimates that the market situation and customers
purchasing behaviour will remain very challenging during the latter
half of the year. The company will continue to invest in well-
targeted sales of its SSH Secure Shell product for large end-user
companies and government agencies. Growth in sales will be
bolstered by the SSH Secure Shell products widening application
areas. Also, the SSH Certifier and SSH Sentinel products are
expected to support the upward trend in sales.
If SSH succeeds well in improving its sales and achieving the
targeted EUR 18 million net sales, it is still well positioned to
show a profit on the latter half of the year. The cessation of the
payment of agreement-based royalty fees at the end of Q3, which
have been entered as material and services costs, thereby
constituting a burden on SSHs profit since 2000, will also
contribute strongly to this improvement in the bottom line.
INCOME STATEMENT
EUR million 4-6/ 4-6/ 1-6/ 1-6/ 1-12/
2003 2002 2003 2002 2002
Net sales 4.1 4.1 7.7 8.5 16.8
Materials and services -1.3 -1.8 -2.0 -2.6 -4.6
Gross margin 2.8 2.3 5.7 5.9 12.2
Expenses
R&D -1.2 -3.0 -2.9 -5.0 -8.2
Sales and marketing -2.3 -5.3 -4.8 -8.5 -14.7
Administration -0.7 -1.3 -1.6 -2.6 -4.3
Other operating income +0.2 +0.3 +0.3 +0.5 +0.9
Operating profit/loss -1.3 -6.9 -3.2 -9.7 -14.1
Financial income and +0.2 -0.5 +0.1 -0.1 0.5
expenses
Profit/loss before -1.0 -7.4 -3.1 -9.8 -13.6
extraordinary items and
taxes
Profit/loss before -1.0 -7.4 -3.1 -9.8 -13.6
taxes
Taxes* 0.0 0.0 0.0 0.0 0.0
Net profit/loss for the -1.0 -7.4 -3.1 -9.8 -13.6
period
* Taxes are proportionate to the net profit for the period, and no
deferred tax assets are recorded for the accrued loss.
1-6/ 1-6/ 1-12/
2003 2002 2002
Earnings per share, EUR -0.11 -0.35 -0.49
Earnings per share -0.11 -0.35 -0.49
(diluted), EUR
BALANCE SHEET
EUR million June 30, June 30, Dec. 31,
2003 2002 2002
ASSETS
Fixed and other non-
current assets
Intangible assets 1.3 0.5 1.0
Tangible assets 0.4 1.4 0.5
Inventories and current
assets
Inventories 0.6 0.8 0.8
Short-term receivables 5.0 7.2 5.0
Short-term investments 20.6 20.0
Cash in hand and at 9.0 16.8 34.7
bank
Total assets 36.9 46.7 42.0
LIABILITIES AND
SHAREHOLDERS EQUITY
Shareholders equity 32.9 40.3 36.2
Obligatory provisions 1.7 1.5
Liabilities 4.0 4.7 4.3
Total liabilities and 36.9 46.7 42.0
shareholders equity
CASH FLOW STATEMENT
EUR million 1-6/ 1-6/ 1-12/
2003 2002 2002
Cash flow from business operations -4.5 -7.7 -9.5
Cash flow from investments -0.5 -0.1 -0.4
Cash flow from financing 0.0 0.0 0.0
Change in liquid assets/increase -5.0 -7.8 -9.9
(+), decrease (-)
Liquid assets at period-start 34.7 44.6 44.6
Liquid assets at period-end* 29.6 36.8 34.7
* Liquid assets consist of cash in hand and at bank, as well as
other securities.
STATEMENT ON
CHANGES IN
SHARE-
HOLDERS
EQUITY
EUR million Share Issue Retained Net Subord Total
capital premium profit profit inated
fund /loss /loss loan
for
the
period
Shareholders 0.8 54.6 -5.5 0 0.2 50.1
equity
January 1,
2002
Shareholders 0.8 54.6 -5.5 -9.8 0.2 40.3
equity June
30, 2002
Shareholders 0.8 54.6 -5.9 -13.6 0.2 36.2
equity
December 31,
2002
Shareholders 0.8 41.0* -6.0* -3.1 0.2 32.9
equity June
30, 2002
* = According to the decision made by the Annual General Meeting on
April 29, 2003, the loss shown in the balance sheet has been
covered by reducing the issue premium fund.
NET SALES BY SEGMENT
EUR million 4-6/ 4-6/ 1-6/ 1-6/ 1-12/
2003 2002 2003 2002 2002
AMER 1.8 1.9 3.8 3.6 7.1
APAC 0.7 0.4 1.0 0.9 2.2
EROW 1.6 1.9 2.9 4.0 7.5
SSH Group total 4.1 4.1 7.7 8.5 16.8
EBIT BY SEGMENT
EUR million 4-6/ 4-6/ 1-6/ 1-6/ 1-12/
2003 2002 2003 2002 2002
AMER -0.4 -4.1 -0.4 -5.7 -6.6
APAC -0.3 -0.5 -0.4 -0.9 -0.9
EROW 0.9 0.3 1.3 2.2 2.8
Common Group Expenses* -1.5 -2.8 -3.7 -5.5 -9.4
SSH Group total -1.3 -6.9 -3.2 -9.7 -14.1
* Common Group Expenses include Groups administration expenses
(e.g. Management, Finance) and headquarters Product Management and
R&D expenses.
KEY FIGURES
1-6/ 1-6/ 1-12/
2003 2002 2002
Net sales, EUR million 7.7 8.5 16.8
Operating profit/loss, EUR -3.2 -9.7 -14.1
million
Operating profit/loss, % of net -31.2 -115.0 -83.7
sales
Profit/loss before extraordinary -3.1 -9.8 -13.6
items and taxes, EUR million
Profit/loss before extraordinary -24.6 -116.0 -81.0
items and taxes, % of net sales
Profit/loss before taxes, EUR -3.1 -9.8 -13.6
million
Profit/loss before taxes, -24.6 -116.0 -81.0
% of net sales
Return on investment, % -30.6
Return on equity, % -31.7
Interest-bearing net -29.3 -36.5 -34.5
liabilities, EUR million
Equity ratio, % 92.6 88.9 88.7
Net gearing, % -89.8 -91.2 -95.8
Gross capital expenditure, 0.5 0.3 0.4
EUR million
% of net sales 6.6 3.1 2.6
Investments, EUR million 0.5 0.3 0.4
% of net sales 6.6 3.1 2.6
R&D expenses, EUR million 2.9 5.0 8.2
% of net sales 37.3 59.4 49.0
Personnel, on average 137 175 166
Personnel, period-end 133 166 147
PER-SHARE DATA
1-6/ 1-6/ 1-12/
2003 2002 2002
Earnings/share, EUR (undiluted) -0.11 -0.35 -0.49
Earnings per share, EUR -0.11 -0.35 -0.49
(diluted)
Equity/share, EUR 1.18 1.45 1.30
Volume of shares, period-end, 27 726 27 696 27 702
1000
Share performance, in EUR
Average price 0.74 3.00 1.66
Low 0.61 1.69 0.60
High 0.93 3.65 3.70
Share price, period-end 0.67 1.90 0.75
Market capitalization, period- 15.2 52.6 20.8
end, EUR million
Volume of shares traded, 2.3 1.7 4.3
million
Volume of shares traded, 8.3 6.3 15.5
% of total
Value of shares traded, EUR 1.7 4.8 7.1
million
Price-earnings ratio (P/E) -1.6
CONTINGENT LIABILITIES
EUR million June 30, June 30, December 31,
2003 2002 2002
Assets pledged
Rental liabilities 0.8 1.2 0.8
Leasing liabilities 0.3 0.2 0.3
The social overhead expense on option rights exercisable in the
future would be EUR 9,403 calculated on the closing price of the
companys share at EUR 0.67.
The figures are unaudited.
SHAREHOLDERS
The companys ten largest shareholders, excluding nominee-
registered shareholders, were on June 30, 2003:
Applied Computing Research (ACR) Ltd. 61.2%
Ylönen Tatu 3.7%
Nixu Oy 1.9%
Ilmarinen Mutual Pension Insurance Company 1.7%
Promotion Capital I Ky 1.7%
Grahn Juha 1.4%
Kaukonen Kalle 1.3%
Markula Jussi 0.9%
Kaleva Mutual Pension Insurance Company 0.8%
Mattila Samuli 0.7%
Total 75.5%
FINANCIAL REPORTING
A briefing on this interim report for analysts and the media will
be presented at the auditorium on the 1st floor of the SSH head
office at Fredrikinkatu 42, Helsinki, today, Wednesday, July 30,
2003, starting at 11:00 a.m. Access from the corner of
Fredrikinkatu and Malminkatu.
SSH Communications Security Corps next interim report for January
1-September 30, 2003 will be published on October 22, 2003. Further
information will be available on the companys website closer to
that date.
Helsinki, July 30, 2003
SSH COMMUNICATIONS SECURITY CORP
Board of Directors
Arto Vainio
CEO
CEO
Arto Vainio
Tel: +358 20 500 7400
Investor Relations/CFO
Mika Peuranen
Tel: +358 20 500 7419
E-mail: 
© 2003 SSH Communications Security Corp. All rights reserved. ssh® is a registered trademark of SSH Communications Security Corp in the United States and in certain other jurisdictions. All other names and marks are property of their respective owners.