Helsinki, Finland -
October 19, 2005
SSH's interim report for January 1- September 30, 2005
- Net sales for January-September totaled EUR 5.2 million, down 18.1
percent year on year (EUR 6.3 million in Q1-Q3/2004).
- Third-quarter net sales came to EUR 2.4 million, up 93 percent on
the previous quarter and 11.9 per cent on a year earlier.
- Operating loss for January-September amounted to EUR 3.7 million (a
loss of EUR 4.7 million). Third-quarter operating loss was EUR 0.2
million, while net profit totaled EUR 0.05 million.
- Thanks to growth in tenders, new customers and new products, the
second half is expected to continue to show a markedly better
performance than that reported in the first half.
- Deliveries of products SSH launched this year have begun, and the
company secured in September the first major deals for the new Tectia
IBM mainframe and secure application connectivity products.
KEY FIGURES
7-9/ 7-9/ 1-9/ 1-9/ 1-12/
2005 2004 2005 2004 2004
Net sales (MEUR) 2.4 2.1 5.2 6.3 8.2
Net sales, change % 11.9 -37.1 -18.1 -42.5 -40.6
Operating profit/loss -0.2 -0.9 -3.7 -4.7 -6.4
(MEUR)
% of net sales -7.8 -41.6 -71.2 -74.1 -77.8
Operating profit/loss, 79.1 3.2 21.2 -15.3 -223.7
change %
Profit/loss before 0.05 -0.6 -3.0 -4.2 -5.9
extraordinary items and
taxes (MEUR)
% of net sales 2.1 -30.8 -58.7 -66.1 -71.2
Number of employees 79 102 79 102 105
at period end
Earnings per share (EUR) -0.11 -0.15 -0.21
Shareholders equity per 0.86 1.33 1.26
share (EUR)
NET SALES
Consolidated net sales for January-September totaled EUR 5.2 million
(EUR 6.3 million), down by 18.1 percent, year on year. Year 2004 net
sales are not fully comparable with those recorded this year because
they include sales generated by SSH Certifier product, which was
licensed to Instasec Oy in November 2004.
Third-quarter net sales were EUR 2.4 million, showing a year-on-year
improvement of 11.9 percent.
During the report period, SSH continued the systematic implementation
of its strategy based on the SSH Tectia solution, primarily aimed at
large enterprises, financial institutions, and government agencies,
with almost all of its sales reported for the period stemming from
these customer categories.
Since the majority of SSHs invoicing is based on the U.S. dollar, the
dollars exchange rate has a fundamental effect on consolidated net
sales. During the report period, the U.S. dollars average exchange
rate was 3 percent weaker than during the same period a year ago.
RESULTS AND EXPENSES
Operating loss for January-September amounted to EUR 3.7 million
(Q1-Q3/2004: a loss of EUR 4.7 million), with net loss totaling EUR
3.0 million (a loss of EUR 4.2 million).
Operating loss for the third quarter amounted to EUR 0.2 million (a
loss of EUR 0.9 million), while net profit improved to EUR 0.05
million (a loss of EUR 0.6 million).
SSHs fixed costs reported for the period continued their year-on-year
decline, as evidenced by the reduction of approximately about EUR 2.1
million in fixed costs from the January-September 2004 level. The
relocation of companys headquarters from Helsinki city center to
Pitäjänmäki reduced annual rental costs EUR 0.3 million beginning in
the third quarter. 30 percent of the overall reduction resulted from
cuts in payroll costs and 70 percent from decreases in other operating
expenses.
Research and development expenses for the report period totaled EUR
2.6 million (EUR 3.0 million), while sales and marketing expenses came
to EUR 4.9 million (EUR 6.3 million) and administrative expenses EUR
1.5 million (EUR 1.8 million).
Third-quarter research and development expenses totaled EUR 0.7
million, compared with EUR 0.8 million a year earlier. Sales and
marketing expenses in Q3 came to EUR 1.4 million (EUR 1.9 million),
and administrative expenses totaled EUR 0.4 million (EUR 0.5 million).
Since early 2005, SSH has applied IFRS 2 (Share-based Payment) to all
of its stock options granted since November 7, 2002, and to which the
rights had not accrued prior to January 1, 2005. No expenses for prior
stock options are included on the income statement.
BALANCE SHEET AND FINANCIAL POSITION
The financial position of SSH remained at a healthy level during the
report period. The consolidated balance sheet total on September 30,
2005 stood at EUR 26.2 million (EUR 39.6 million), of which liquid
assets accounted for EUR 22.9 million (EUR 37.8 million), or 95.7
percent of the balance sheet total. The company has no long-term
liabilities.
In May 2005, SSH paid out EUR 8.1 million in dividends.
On September 30, 2005, gearing, or the ratio of net liabilities to
shareholders equity, was -94.3 (-88.0) and the equity ratio stood at
95.9 percent (95.5 percent).
The reported gross capital expenditure for the period totaled EUR 0.1
million (EUR 0.4 million), consisting mainly of equipment purchases.
Reported financial income came mainly from capital gains on fund
shares. Financial income and expenses totaled EUR 0.7 million,
compared with EUR 0.5 million a year ago.
During January-September, SSH reported a negative cash flow of EUR 2.7
million from business operations, whereas investments showed a
positive cash flow of EUR 0.4 million, stemming mainly from capital
gains on investments. Cash flow from financing, EUR -8.1 million,
comprised dividends paid in May. The total cash flow during the period
was EUR 10.5 million negative.
MARKET DEVELOPMENTS
The number of invitations to tender from, and projects pending among,
SSHs customers - large enterprises, financial institutions and
government agencies - continued significant growth in the report
period.
Legislative reforms concerning data confidentiality and secure data
communication are occurring in the United States, Japan and Europe.
Customers are facing an ever greater challenge in terms of information
security management due to deperimeterization, or the gradual
disappearance of boundaries between companies internal and external
information networks. Recent surveys conclude that large enterprises
are finding it more difficult to protect their networks and businesses
from sophisticated worms and backdoor-based network attacks. The SSH
Tectia solutions features and management capabilities align well with
this trend, and SSH is confident that the reforms are beginning to
have favorable impact on customers planning secure remote management
of their information systems and solutions for protecting their file
transfers and business applications.
In SSHs main market area, North America, demand focused primarily on
solutions for secure remote management of network servers and various
kinds of data communication equipment. SSH Tectia Manager is now
included in practically all new major SSH Tectia installations and
upgrades of earlier installations. In addition, rules in Section 404
of the Sarbanes-Oxley Act in the U.S. have begun to increase SSHs
target customers 2005 and 2006 data security plans and the related
investment plans and budgets.
From SSHs viewpoint, the European market is currently the most
challenging, since European customers continue to pursue a very
cautious investment policy. Product launches made by SSH in early 2005
have attracted growing interest in the SSH Tectia solution in Europe,
with Germany, the U.K., and the Nordic countries continuing to be the
most promising market areas for SSH.
In Japan, a new law on the distribution and storage of personal data
is expected to increase both public and private sector investments in
data security.
There were no major changes in competition in the market for secure
remote management solutions during the report period.
SALES PERFORMANCE
SSHS NET SALES
EUR million 7-9/ 4-6/ 1-3/ 10-12/ 7-9/ 1-12/
2005 2005 2005 2004 2004 2004
BY SEGMENT*
AMER 1.8 0.8 0.9 1.4 1.4 5.7
APAC 0.2 0.1 0.2 0.2 0.1 0.6
EROW 0.3 0.3 0.5 0.3 0.6 2.0
SSH Group total 2.4 1.2 1.6 1.9 2.1 8.2
SSH TECTIA BUSINESS
Net sales / license 1.7 0.8 1.0 1.4 1.5 6.2
Sales
Net sales / 0.7 0.5 0.6 0.5 0.6 2.0
maintenance
SSH Tectia total 2.4 1.2 1.6 1.9 2.1 8.2
* The 2004 net sales are not fully comparable because they include
sales generated by sales of SSH Certifier as a standalone product.
The sales process for a system-level product for major customers is a
long one. In line with its strategy, SSH aims at a major increase in
the average size of contracts. Due to sales processes with major
customers being particularly slow and substantial growth occurring in
the size of future contracts, the future is likely to see major
fluctuations in sales from quarter to quarter.
The Americas, the Asia Pacific region, and the Europe and Rest of the
World market area accounted for 68.0 percent (67.9 percent), 10.2
percent (6.1 percent) and 21.9 percent (26.0 percent) of reported net
sales, respectively.
During the report period, SSH concluded a number of new customer
agreements, seven of which were each worth more than EUR 100,000, with
four completed in the third quarter. The ten largest customers
accounted for 47.0 percent of reported net sales, with the largest
single customer accounting for approximately 7.9 percent.
PRODUCTS AND MARKETING
During the report period, SSH focused its sales and marketing efforts
on large enterprises, financial institutions, and government agencies
in the U.S., Europe, and Asia, in line with its long-term strategy.
The company strengthened its sales organization by reinforcing its
partner network complementing the SSH Tectia solution.
SSH started to deliver the new-generation Secure Shell products
launched earlier this year. The companys new Tectia Secure Shell
product for the IBM mainframe environment made SSH Tectia the most
extensive integrated Secure Shell-based solution on the market. In
September, SSH secured the first major deal comprising the new IBM
mainframe products.
This year marks the 10th anniversary of the Secure Shell technology
developed by SSH - Tatu Ylönen launched the first version of the
Secure Shell protocol on July 12, 1995. The Secure Shell protocol is
the basis of the SSH Tectia solution.
RESEARCH AND DEVELOPMENT
Research and development expenses for January-September totaled EUR
2.6 million (EUR 3.0 million), the equivalent of 50.5 percent of net
sales (46.9 percent).
R&D expenses capitalized during the report period totaled EUR 0.05
million. These expenses related to the commercialization of the SSH
Tectia Server (M) solution.
At the end of September, the company held 10 patents, and 14 were
pending.
HUMAN RESOURCES AND ORGANIZATION
At the end of September, the Group had 79 employees on its payroll,
down 23 from the previous years number, a decrease of 22.5 percent.
At the end of the period, 45.0 percent of the employees worked in R&D,
41.3 percent in sales and marketing, and 13.8 percent in corporate
administration.
BOARD AND AUDITORS
The Annual General Meeting (AGM) on April 26, 2005, re-elected Tapio
Kallioja, Tomi Laamanen, Timo Ritakallio and Tatu Ylönen to SSH
Communications Security Corp.s Board of Directors, with Laamanen re-
elected as chairman.
The AGM again elected to have PricewaterhouseCoopers Oy, authorized
public accountants, as the companys auditor, with Henrik Sormunen,
authorized public accountant, acting as the principal auditor.
SHARES, SHAREHOLDING AND CHANGES IN GROUP STRUCTURE
The reported trading volume of SSH Communications Security Corp.
shares totaled 7,410,495 (valued at EUR 9,649,530.99); i.e. 26.27
percent of the shares changed hands. The highest quotation was EUR
1.78 and the lowest EUR 0.97. The trade-weighted average share price
for the period was EUR 1.30, and the share closed at EUR 0.98
(September 30, 2005).
There were no substantial changes in SSH Communications Security
Corp.s shareholding information during the report period. Tatu Ylönen
and Tero Kivinen are the largest shareholders. The former holds,
directly and through his company, Tatu Ylönen Oy, 53.5 percent of the
companys shares, and Kivinen holds 8.2 percent.
SHARE CAPITAL AND BOARD AUTHORIZATIONS
The companys registered share capital on September 30, 2005 was EUR
843,323.73, consisting of 28,204,309 shares. During the report period,
SSH increased its share capital once, based on subscription to the new
shares under SSHs stock-option plan. In total, 82,500 and 11,018 new
SSH shares were subscribed to under the 1999 and 2003 stock-option
plan, respectively, with the result that the companys share capital
increased by EUR 2,805.54.
The SSH Annual General Meeting of April 26, 2005 authorized the Board
of Directors to decide by April 26, 2006, to increase the share
capital through a rights issue and/or convertible bonds, in such a way
that the resultant share capital may increase by a maximum of EUR
165,000. The Board has not yet exercised this authorization.
Due the companys withdrawal from the VPN-hardware business, the sale
of its OEM business, and stopping its Certifier business, the Board of
Directors decided, February 9 2005, to start preparations for the
potential reduction of the tied equity and the distribution of part of
its assets to shareholders. There are no technical obstacles in this
matter and the Board of Directors will make the final proposal still
during this year.
CORPORATE GOVERNANCE
The company complies with the corporate governance recommendations for
listed companies issued by HEX Ltd., the Central Chamber of Commerce
of Finland, and the Confederation of Finnish Industry and Employers in
December 2003. More information on corporate governance is available
on the companys Web site (www.ssh.com).
PROSPECTS
Thanks to growth in tenders, new customers and new products, the
second half is expected to continue to show a markedly better
performance than that reported in the first half.
Due to the large size of individual orders and uncertainty of timing,
the company has decided to refrain from giving a sales forecast for
the rest of the year.
The estimated net sales for the second half of the year are expected
to clearly outperform those for the first half, but the whole year
results will be negative.
INCOME STATEMENT
EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/
2005 2004 2005 2004 2004
Net sales 2.4 2.1 5.2 6.3 8.2
Purchasing and production 0.0 0.0 -0.1 -0.1 -0.1
costs
Gross profit 2.3 2.1 5.1 6.2 8.1
Other operating income 0.1 0.2 0.2 0.2 0.3
Expenses
Product development -0.7 -0.8 -2.6 -3.0 -3.8
Sales and -1.4 -1.9 -4.9 -6.3 -8.5
marketing
Administration -0.4 -0.5 -1.5 -1.8 -2.4
Operating profit/loss -0.2 -0.9 -3.7 -4.7 -6.4
Financial income and expenses 0.2 0.2 0.7 0.5 0.5
Profit/loss before taxes 0.0 -0.6 -3.0 -4.2 0,0
a Taxes 0.0 0.0 0.0 0.0 0,0
Net profit/loss for the 0.05 -0.6 -3.0 -4.2 -5.9
period
a) Taxes are proportionate to the net profit for the period, and no
deferred tax assets are recorded for the accrued loss.
1-9/ 1-9/ 1-12/
2005 2004 2004
Earnings per share (EUR) -0.11 -0.15 -0.21
Earnings per share, diluted -0.11 -0.15 -0.21
(EUR)
BALANCE SHEET
EUR million 9/30/ 9/30/ 12/31/
2005 2004 2004
ASSETS
Fixed and other non-current
assets
Tangible assets 0.2 0.5 0.4
Intangible assets 0.7 1.0 0.9
Deferred tax assets 0.2 0.2 0.2
Total fixed and other 1.1 1.7 1.6
non-current assets
Inventories and current
assets
Short-term receivables 2.2 4.8 2.6
Short-term investments 21.0 31.4 32.3
Cash and cash equivalents 2.0 1.6 1.5
Total inventories and current 25.1 37.8 36.4
assets
Total assets 26.2 39.6 38.0
LIABILITIES AND SHAREHOLDERS
EQUITY
Shareholders equity 24.3 37.1 35.4
Long-term liabilities
Provisions 0.1 0.1 0.2
Long-term financial 0.1 0.4 0.3
liabilities
Total long-term liabilities 0.2 0.5 0.6
Short-term liabilities 1.8 1.9 2.0
Total liabilities and 26.2 39.6 38.0
shareholders equity
STATEMENT ON CHANGES IN
SHAREHOLDERS EQUITY
EUR million Share Issue Fair Transl Retained Total
capital premium value ation earnings
fund* and differ
other ence
reserves
Shareholders 0.8 39.3 0.0 -0.7 1.7 41.1
equity
Jan. 1, 2004
Change 0.0 -14.9 15.1 0.0 -4.2
Shareholders 0.8 24.4 15.1 -0.7 -2.5 37.1
equity
Sep. 30, 2004
Change 0.0 0.0 0.0 -0.1 -1.7
Shareholders 0.8 24.4 15.1 -0.8 -4.2 35.4
equity
Dec. 31, 2004
Change 0.0 0.0 -0.1 0.1 -8.1
Net loss -3.0
Shareholders 0.8 24.4 15.1 -0.7 -15.4 24.3
equity
Sep. 30, 2005
* Transfer to the retained loss account has resulted in a reduction in
the issue premium fund.
CASH FLOW STATEMENT
EUR million 1-9/ 1-9/ 1-12/
2005 2004 2004
Cash flow from business operations -2.7 -3.5 -2.6
Cash flow from investments 0.4 -0.3 -0.4
Cash flow from financing -8.1 0.1 0.1
Increase(+) / decrease (-) in -10.5 -3.7 -2.8
liquid assets
Liquid assets at period start 33.0 35.9 35.9
Adjustment for translation 0.1 0.0 0.0
difference
b Liquid assets at period end 22.5 32.2 33.0
b)bbbb) Liquid assets consist of cash and cash equivalents, as well as
the amount invested in the interest-bearing funds from other
marketable securities.
NET SALES BY SEGMENT
EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/
2005 2004 2005 2004 2004
AMER 1.8 1.4 3.5 4.3 5.7
APAC 0.2 0.1 0.5 0.4 0.6
EROW 0.3 0.6 1.1 1.6 2.0
SSH Group total 2.4 2.1 5.2 6.3 8.2
OPERATING PROFIT/LOSS
BY SEGMENT
EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/
2005 2004 2005 2004 2004
AMER 1.0 0.4 1.3 1.4 2.1
APAC 0.1 0.0 0.1 0.1 0.2
EROW -0.1 0.6 -0.7 -0.1 -1.6
Common Group expenses* -1.2 -1.8 -4.5 -6.1 -7.1
SSH Group total -0.2 -0.8 -3.7 -4.6 -6.4
* Common Group expenses include Group administration expenses (e.g.,
management and finance) and product management and R&D expenses for
corporate headquarters.
KEY FIGURES AND RATIOS
1-9/ 1-9/ 1-12/
2005 2004 2004
Net sales (MEUR) 5.2 6.3 8.2
Operating profit/loss (MEUR) -3.7 -4.7 -6.4
Operating profit/loss, as % of -71.2 -74.1 -77.8
net sales
Profit/loss before extraordinary -3.0 -4.2 -5.9
items and taxes (MEUR)
Profit/loss before extraordinary -58.7 -66.1 -71.2
items and taxes, as % of net
sales
Profit/loss before taxes (MEUR) -3.0 -4.2 -5.9
Profit/loss before taxes, as -58.7 -66.1 -71.2
% of net sales
Return on investment (%) -13.6
Return on equity (%) -15.4
Interest-bearing net liabilities -22.9 -32.7 -33.5
(MEUR)
Equity ratio (%) 95.9 95.5 94.8
Gearing (%) -94.3 -88.0 -94.8
Gross capital expenditure (MEUR) 0.1 0.4 0.5
% of net sales 1.9 6.4 5.6
R&D expenses (MEUR) 2.6 3.0 3.8
% of net sales 50.5 46.9 46.7
Personnel, period average 86 106 105
Personnel, period end 79 102 105
PER-SHARE DATA
1-9/ 1-9/ 1-12/
2005 2004 2004
Earnings per share, undiluted -0.11 -0.15 -0.21
(EUR)
Earnings per share, diluted -0.11 -0.15 -0.21
(EUR)
Equity per share (EUR) 0.86 1.33 1.26
No. of shares at period end 28 204 28 090 28 102
(thousands)
Share performance (EUR)
Average price 1.30 1.80 1.69
Low 0.97 1.18 1.18
High 1.78 2.69 2.69
Share price, period end 0.98 1.33 1.28
Market capitalization, period 27.6 37.4 36.0
end (MEUR)
Volume of shares traded 7.4 7.4 9.3
(in millions)
Volume of shares traded, as 26.3 26.5 33.3
% of total
Value of shares traded, in 9.6 13.4 15.8
millions of euros
Price-to-earnings ratio (P/E) -6.1
CONTINGENT LIABILITIES
EUR million 9/30/ 9/30/ 12/31/
2005 2004 2004
Rental liabilities 0.2 0.2 0.1
Leasing liabilities 0.7 2.4 0.1
Other contingent liabilities 0.1 0.2 0.6
Currency derivatives (not 1.0 2.0 0.7
included in hedge accounting)
These data are based on unaudited figures.
NOTES TO THE CONSOLIDATED ACCOUNTS
1. ACCOUNTING PRINCIPLES
This interim report is based on IAS 34 (Interim Financial Reporting)
accounting principles.
The table below shows the effects of IFRS 2 (Share-based Payment) on
the 2004 comparatives.
2. RECONCILIATION OF INCOME
STATEMENT
EUR million 1-9/ Effect 1-12/ IFRS 1-12/
2004 on 1-9/ 2004 2 2004
IFRS 2 2004
Net sales 6.3 6.3 8.2 8.2
Purchasing and -0.1 -0.1 -0.1 -0.1
production costs
Gross profit 6.2 6.2 8.1 8.1
Other operating 0.2 0.2 0.3 0.3
income
Operating expenses -11.1 -0.03 -11.1 -14.7 -0.04 -14.8
Operating -4.6 -0.03 -4.7 -6.4 -0.04 -6.4
profit/loss
Total financial 0.5 0.5 0.5 0.5
income and expenses
Net profit/loss for 0.0 0.0 -5.8 -0.04 -5.9
the period
-4.1 -0.03 -4.2
Earnings per share -0.21 -0.21
(EUR)
Earnings per share, -0.15 -0.15 -0.21 -0.21
diluted (EUR)
The table below shows the effects of IFRS 2 (Share-based Payment) on
the 2004 comparatives.
3. RECONCILIATION OF BALANCE
SHEET
EUR million 9/30/ IFRS 2
2004 9/30/
2004
Fixed and other
non-current assets
Tangible assets 0,5 0,5
Intangible assets 1,0 1,0
Deferred tax assets 0,2 0,2
Total fixed and other 1,7 1,7
non-current assets
Inventories and current
assets
Short-term receivables 4,8 4,8
Available-for-sale 31,4 31,4
assets
Cash and cash 1,6 1,6
equivalents
Total inventories and 37,8 37,8
current assets
Total assets 39,6 39,6
LIABILITIES AND
SHAREHOLDERS EQUITY
Shareholders equity
Share capital 0,8 0,8
Issue premium fund 24,4 24,4
Fair value reserve 15,0 0,1 15,1
Retained earnings -3,2 -0,1 -3,2
Total shareholders 37,1 37,1
equity
Long-term liabilities
Provisions 0,1 0,1
Long-term financial 0,4 0,4
liabilities
Deferred tax liability 0,0 0,0
Total long-term 0,5 0,5
liabilities
Short-term liabilities 1,9 1,9
Total liabilities and 39,6 39,6
shareholders equity
SHAREHOLDERS
On September 30, 2005, the companys 10 largest shareholders,
excluding nominee-registered shares, were as follows:
Ylönen Tatu 52,2 %
Kivinen Tero Tapani 8,2 %
Assetman Oy 5,0 %
Pension Insurance Company Ilmarinen Ltd. 1,7 %
Promotion Capital I Ky 1,7 %
Jaakonsaari Markus 1,4 %
Tatu Ylönen Oy 1,3 %
Pohjola Finland value Investment Fund 1,3 %
Kaukonen Kalle Simeoni 0,7 %
Adams George F 0,6 %
Total 74,2 %
FINANCIAL REPORTING
The company will hold a briefing on its interim report for equity
analysts and the media in its head office, Cabinet 204, 2nd floor,
Valimotie 17, Helsinki, on Wednesday, October 19, 2005, starting at
11:00 a.m.
SSH Communications Security Corp will release its next interim report
and financial statements for January 1-December 31, 2005 in February
2006. Further information will be available on the companys website
in due course.
Helsinki, on October 19, 2005
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: 
© 2005 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.