SSH COMMUNICATIONS SECURITY CORP STOCK EXCHANGE RELEASE October 22, 2003 at 9:00 a.m. SSH INTERIM REPORT FOR JANUARY 1 - SEPTEMBER 30, 2003 - Net sales for January-September totaled EUR 11.0 million, down 11 percent (EUR 12.4 million in 2002). - Operating loss shrank by two thirds, year-on-year, to EUR -4.0 million (operating loss of EUR 11.9 million). The corresponding period last year was burdened by non-recurring restructuring costs of EUR 4.8 million. - After the third quarter, SSH no longer pays royalties to F-Secure Corporation, which improves significantly SSH's sales margin. - SSH Tectia(TM), launched in September and based on an innovative data security architecture, is expected to increase the average size of contracts and strengthen SSH's competitiveness in the enterprise markets. November will see the delivery of the major related new products for the current Secure Shell customers. - In October, SSH announced that it would divest its OEM business to SafeNet, Inc., based in the USA, for about EUR 12 million, which will improve almost in full the profit for 2003. - As a result of the OEM divestment, SSH expects its net sales for 2003 to decrease to about EUR 14 million, but the company will make a significant profit for the whole year. KEY FIGURES 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2003 2002 2003 2002 2002 Net sales, EUR million 3.3 3.9 11.0 12.4 16.8 Net sales, change % -14.1 -12.6 -11.2 -17.3 -15.4 Operating profit/loss, -0.8 -2.1 -4.0 -11.9 -14.1 EUR million % of net sales -24.1 -55.0 -36.7 -96.2 -83.7 Operating profit/loss, 61.5 -4.6 66.2 -173.3 -109.3 change % Profit/loss before -0.8 -2.0 -4.0 -11.9 -13.6 extraordinary items and taxes, EUR million % of net sales -24.6 -51.9 -36.0 -95.8 -81.0 Number of employees, 131 156 131 156 147 period-end Earnings/share, EUR -0.14 -0.43 -0.49 Equity/share, EUR 1.16 1.37 1.30 NET SALES Consolidated net sales for January-September totaled EUR 11.0 million (EUR 12.4 million), down by 11 percent, year on year. Third-quarter net sales of EUR 3.3 million (EUR 3.9 million) fell by 14 percent over the previous year. This fall was particularly due to the three following factors relevant to the company: - In September, SSH launched its SSH Tectia solution, absorbing marketing and sales resources to the detriment of other products, albeit on a temporary basis. - Arrangements for divesting the OEM business to SafeNet, Inc. rescheduled several key OEM contracts into the fourth quarter, and significantly refocused management attention on this complex transaction during the third quarter. - The US dollar continued to weaken against the euro, as evidenced by the January-September fall of almost 17 percent, year on year. The majority of SSH's invoicing is based on US dollars. RESULTS AND EXPENSES SSH was successful in continuing to trim its costs during January- September while reducing its operating loss to almost a third of the 2002 level. Operating loss for the period came to EUR -4.0 million (a loss of EUR 11.9 million), net loss totaling EUR -4.0 million (a loss of EUR 11.9 million). In 2002, the January- September operating result was burdened by the non-recurring expenses of EUR 4.8 million caused by company restructuring. Third-quarter operating loss came to EUR -0.8 million (a loss of 2.1 million) while the same period showed a net loss of EUR -0.8 million (a loss of EUR 2.1 million). SSH's cost-cutting measures yielded positive results during the report period, and fixed expenses continued to fall steadily, decreasing by about EUR 3.1 million year on year, excluding non- recurring company restructuring expenses. Cost-cutting measures applied to payroll and other operating costs, on a fifty-fifty basis. Research and development expenses for January-September totaled EUR 4.0 million (EUR 6.6 million). Sales and marketing expenses for the period came to EUR 6.9 million (EUR 11.4 million), while administrative expenses amounted to EUR 2.2 million (EUR 3.5 million). Third-quarter R&D expenses totaled EUR 1.1 million, while a year ago they were EUR 1.5 million. Sales and marketing expenses for the same period amounted to EUR 2.0 million (EUR 3.0 million) while administrative expenses totaled EUR 0.6 million (EUR 0.9 million). SSH will continue to enhance its operational efficiency and pursue a tight cost control policy. In line with the company's strategy built around SSH Tectia, SSH will be able to speed up the development of all of its operations, since unrelated Development, Marketing and Sales activities for the OEM business will be eliminated, to enable focusing all resources to meet the needs of a broad, but homogeneous group of customers. BALANCE SHEET AND FINANCIAL POSITION SSH's financial position remained solid and strong during the report period. Consolidated balance sheet total on September 30, 2003 stood at EUR 35.2 million (EUR 44.2 million), of which liquid assets accounted for EUR 28.6 million (EUR 35.5 million), or 81.3 percent (80.6 percent) of the balance sheet total. The Group has no long-term liabilities other than the subordinated loan of EUR 0.2 million granted by the National Technology Agency (Tekes). Gearing, or the ratio of net liabilities to shareholders' equity, was -89.2 (-92.9) at the end of the third quarter. The equity ratio met with a favorable development, coming to 95.2 percent (88.6 percent) on September 30, 2003. The reported gross capital expenditure for the period totaled EUR 0.8 million (EUR 0.3 million), consisting mainly of software investment for business purposes. The reported financial income consisted of interest income and investment income. Financial income and expenses for the period totaled EUR 0.08 million, compared to EUR 0.05 million in the previous year. The increase in the value of bond funds, worth EUR 0.4 million, has not been recognized as income. MARKET DEVELOPMENTS By and large, SSH's customers continued to pursue a cautious investment policy, postponing their investment decisions until a later date. In North America, the company's main market area, growing IT budgets of large corporations, financial institutions and the US government sector also involved increasing IT allocations to data security. However, under continued budget pressures, many customers are carefully analyzing the costs and benefits involved, and, consequently, they have come to realize the opportunities provided by the centrally managed SSH Tectia solution for cutting total costs and managing risks more effectively. This trend is also partly due to the increase in warnings related to the vulnerability of free data security software versions. Europe, for its part, did not begin to show increasing interest in data security until the end of the third quarter, and the most interesting countries in Europe for SSH include Germany, the UK and Switzerland. In particular, there were positive signals in the response to the company's Public Key Infrastructure (PKI) based products targeted at enterprises. SSH is confident that the SSH Tectia solution will strengthen its competitive position in the US market for enterprises, financial institutions, and government agencies. As the world's leading provider of managed security middleware, SSH holds a unique position and SSH Tectia solution does not have direct competitors in the enterprise security markets. According to SSH, the company has maintained its share in the market for data security products for hardware and software manufacturers. SALES PERFORMANCE SSH'S NET SALES EUR million 7-9/ 4-6/ 1-3/ 10-12/ 7-9/ 1-12/ 2003 2003 2003 2002 2002 2002 BY SEGMENT AMER 1.2 1.8 2.0 2.0 1.5 7.1 APAC 0.7 0.7 0.3 0.8 0.5 2.2 EROW 1.4 1.6 1.3 1.6 1.9 7.5 SSH Group total 3.3 4.1 3.6 4.4 3.9 16.8 BY PRODUCT* Enterprise Security 1.8 3.0 2.0 3.2 2.5 10.4 Products OEM products 1.5 1.1 1.6 1.2 1.4 6.4 SSH Group total 3.3 4.1 3.6 4.4 3.9 16.8 * Due to changes in the product portfolio, the figures for 2002 are not completely comparable with those for 2003. By focusing on large enterprises, financial institutions and public sector organizations, SSH succeeded in increasing the average size of potential customer contracts during the report period. As a result, however, the sales process has become longer, which was reflected in third-quarter sales of products targeted at large enterprises. In SSH's main market areas, the mild upturn in the purchasing activity of both end-user organizations and hardware and software manufacturers has not yet been reflected in major improvements in sales. The postponement of certain SSH Tectia based product deliveries until the next quarter caused some customers to put off their final purchasing decisions. The Americas, Asia Pacific, and Europe and the Rest of the World accounted for 45.4 percent (40.8 percent), 15.3 percent (11.1 percent) and 39.3 percent (48.0 percent) of reported net sales, respectively. Although the USA remained SSH's main market area during the report period, its share fell over the previous quarter, due mainly to the larger deal sizes and consequent longer sales cycles stated above and delayed product development, which was reflected especially in sales of enterprise security products for US companies. During the third quarter, Europe increased its share of SSH's net sales over the second quarter, due mainly to lower US sales. Year on year, Europe's share of consolidated net sales for the report period fell by less than 10 percent. Asia Pacific maintained its third-quarter share at the second-quarter level, but showed a marked year-on-year improvement. In line with its strategy, SSH focused its sales on Enterprise Security Products targeted at end-user companies, their share of the company's net sales showing a growth, year on year. Accounting for 61.2 percent (58.1 percent) of reported net sales, Enterprise Security Products incorporate the SSH Tectia solution, consisting of the end-user versions of the former SSH Secure Shell product family, the SSH Certifier product family and IPVia hardware technology license fees. Similarly, OEM products for hardware and software manufacturers accounted for 38.8 percent (41.9 percent) of reported net sales. This product group includes Toolkit and SSH Sentinel products. During the report period, SSH concluded 13 customer agreements each worth more than EUR 100,000, 4 of which during the third quarter. SSH's ten largest customers accounted for 34.9 percent of reported net sales. However, none of the customers represents over 10 percent of the net sales, i.e. the company does not depend on a single customer. In September, SSH announced a major distributor agreement with Lyme Computer Systems. Similar to the agreement concluded with iGov.com in the second quarter, Lyme Computer Systems will provide the US government sector with a broad range of SSH's products. During the third quarter, SSH and Fujitsu Invia entered into a partnership in providing Nordic healthcare organizations with SSH Tectia Certifier software (formerly SSH Certifier (TM)) designed for the creation and management of digital certificates, with the first SSH Tectia Certifier sale to the Hospital District of Varsinais-Suomi. PRODUCTS AND MARKETING In line with its long-term strategy, SSH focused its sales and marketing efforts on serving large enterprises, financial institutions and government agencies, as well as selected hardware and software manufacturers in the USA, Europe and Asia. In particular, SSH Tectia, a solution based on an innovative data security architecture SSH launched in September, required significant marketing and sales resources during the third quarter. Dedicated efforts to develop SSH Tectia, which falls into the new managed security middleware product category, is part of the strategic decision previously announced by SSH to meet the increasing data security needs of large corporations. This innovative middleware operating between corporate information system infrastructure and business applications will secure both the related internal and external data communications, the solution's key features including centralized management and transparency and ease-of-use to end-users. During the third quarter, SSH joined the RSA Secured Partner Program launched by RSA Security, a US company. This partnership will enable SSH's customers to make more efficient use of their SSH Tectia Client/Server software (former SSH Secure Shell for Workstations/for Servers products) interoperable with RSA's popular RSA SecurID(R), an authentication solution. FIPS 140-2 certification by NIST (U.S. National Institute of Standards and Technology), as stated in the previous interim report, for the company's crypto module used in many of SSH's products is now in the final stages. SSH now expects the certification during the next few weeks, which is expected to support SSH's marketing and sales efforts in its selected customer segments. RESEARCH AND DEVELOPMENT January-September R&D expenses totaled EUR 4.1 million (EUR 6.6 million), accounting for 37.6 percent of net sales (53.1 percent). The marked decrease in R&D expenses was mainly due to the discontinuance of VPN hardware and software development, and the focus of R&D resources on software products in line with the company's new business strategy. During the third quarter, the company put dedicated efforts into the development of products based on the SSH Tectia solution. Since the beginning of 2003, SSH has adopted an accounting principle complying with the IAS standard for its R&D expenditure, according to which it will capitalize only the product development expenses caused by the commercialization of new products at the end of R&D processes. Such R&D expenses incurred during the third quarter totaled EUR 0.1 million, resulting from the commercialization of the new SSH Tectia Manager solution. SSH will continue to expense the majority of its R&D expenses. At the end of September, SSH held five patents while 36 were pending. HUMAN RESOURCES AND ORGANIZATION At the end of the report period, the Group had 131 employees on its payroll. The number of employees decreased by 25 over the previous year (-16.6 percent). During the third quarter, company employees reduced by two over the second quarter of 2003. At the end of the period, 47.3 percent of the personnel worked in R&D, 39.7 percent in sales and marketing, and 13.0 percent in administration. After the report period, approximately 25 SSH employees will join SafeNet, Inc.'s payroll, as a result of SSH's OEM business divestment. SHARES AND SHAREHOLDING The reported trading volume of SSH Communications Security Corp shares totaled 5,286,666 (valued at EUR 5,994,713.07), i.e. 19.1 percent of the shares changed hands. The highest quotation was EUR 2.36 and the lowest EUR 0.61. The trade weighted average price for the period amounted to EUR 1.13, and the share closed at EUR 1.91 (on September 30, 2003). There were no substantial changes in SSH Communications Security Corp's shareholding during the period. Applied Computing Research (ACR) Oy still holds 61.2 percent of the company's shares. SHARE CAPITAL AND BOARD AUTHORIZATIONS SSH's 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 SSH's 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 tranches, 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 (EUR 0.87), plus 10 percent, and rounded upwards to the nearest ten cents. As a result of these subscriptions, the company's 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 tranches, 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 (EUR 0.87), plus 10 percent, and rounded upwards to the nearest ten cents. As a result of these subscriptions, the company's share capital may rise by a maximum of EUR 2,250. At the end of the report period, on September 30, 2003, SSH's share capital came to EUR 831.908,07, totaling 27,730,269 shares at a nominal per-share value of EUR 0.03. EVENTS AFTER THE REPORT PERIOD On October, SSH agreed to sell its OEM business, consisting of the SSH's OEM Product group and VPN hardware businesses, to SafeNet, Inc. (NASDAQ: SFNT), a US company, for about USD 14 million, or approximately EUR 12 million, payable in cash. The price will be specified during the business transfer, the so- called Closing period. Fulfilling the standard terms and conditions governing the conclusion of agreements is required to finalize the agreement, which is expected to take place by mid-November 2003. On that date, SSH will transfer its OEM business, including an estimated number of 25 employees, to SafeNet. This divestment is a manifestation of SSH's re-focused strategy whereby the company focuses on its core business, i.e. serving large enterprises, banks and other financial institutions, as well as public sector organizations. PROSPECTS As a result of the OEM business divestment, SSH will revise its 2003 net sales and profit estimates issued earlier this year. SSH's previous estimations suggested that 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. As a result of the OEM divestment, SSH expects its net sales for 2003 to decrease to about EUR 14 million, but the company will make a significant profit for the whole year, because the about EUR 12 million received from the sale of the OEM business will improve almost in full SSH's profit for 2003. Also, the expiry of contractual royalties at the end of the third quarter paid to F- Secure Corporation, entered as purchasing and production costs, will contribute to the company's profit. SSH expects the market situation and customer's purchasing behavior to remain challenging during the rest of the year. The company will invest in the development of its core business, while focusing on selling its SSH Tectia solution to large enterprises, financial institutions and government agencies. SSH Tectia is expected to increase the average size of contracts, while contributing to long-term customer relationships based on SSH Tectia solution based system implementation programs. INCOME STATEMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2003 2002 2003 2002 2002 Net sales 3.3 3.9 11.0 12.4 16.8 Purchase and production -0.5 -0.9 -2.5 -3.5 -4.6 costs Gross margin 2.8 3.0 8.5 8.9 12.2 Expenses R&D -1.1 -1.5 -4.0 -6.6 -8.2 Sales and marketing -2.0 -3.0 -6.9 -11.4 -14.7 Administration -0.6 -0.8 -2.2 -3.5 -4.3 Other operating income 0.2 0.2 0.5 0.7 0.9 Operating profit/loss -0.8 -2.1 -4.0 -11.9 -14.1 Financial income and 0.0 0.1 0.1 0.0 0.5 expenses Profit/loss before -0.8 -2.1 -4.0 -11.9 -13.6 extraordinary items and taxes Profit/loss before -0.8 -2.1 -4.0 -11.9 -13.6 taxes Taxes* 0.0 0.0 0.0 0.0 0.0 Net profit/loss for the -0.8 -2.1 -4.0 -11.9 -13.6 period * Taxes are proportionate to the net profit for the period, and no deferred tax assets are recorded for the accrued loss. 1-9/ 1-9/ 1-12/ 2003 2002 2002 Earnings per share, EUR -0.14 - -0.49 0.43 Earnings per share -0.14 - -0.49 (diluted), EUR 0.42 BALANCE SHEET EUR million Sept.30, Sept.30, Dec.31, 2003 2002 2002 ASSETS Fixed and other non- current assets Intangible assets 1.5 1.0 1.0 Tangible assets 0.3 0.7 0.6 Inventories and current assets Inventories 0.5 0.8 0.8 Short-term receivables 4.2 6.2 4.9 Short-term investments 20.6 20.0 20.4 Cash in hand and at 8.0 15.5 14.3 bank Total assets 35.2 44.2 42.0 LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity 32.1 38.2 36.2 Obligatory provisions 1.7 1.5 Liabilities 3.2 4.4 4.3 Total liabilities and 35.2 44.2 42.0 shareholders' equity CASH FLOW STATEMENT EUR million 1-9/ 1-9/ 1-12/ 2003 2002 2002 Cash flow from business -5.1 -8.9 -9.5 operations Cash flow from investments -0.8 -0.2 -0.4 Cash flow from financing 0.0 0.0 0.0 Change in liquid assets/increase -6.1 -9.1 -9.9 (+), decrease (-) Liquid assets at period-start 34.7 44.2 44.6 Liquid assets at period-end* 28.6 35.5 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 0.2 50.1 equity January 1, 2002 Shareholders' 0.8 54.6 -5.6 -11.9 0.2 38.2 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* -5.9* -4.0 0.2 32.1 equity September 30, 2003 * = 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 of the parent company. NET SALES BY SEGMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2003 2002 2003 2002 2002 AMER 1.2 1.5 5.0 5.1 7.1 APAC 0.7 0.5 1.7 1.4 2.2 EROW 1.4 1.9 4.3 5.9 7.5 SSH Group total 3.3 3.9 11.0 12.4 16.8 EBIT BY SEGMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2003 2002 2003 2002 2002 AMER -0.4 -0.6 -0.8 -6.3 -6.6 APAC 0.1 -0.4 -0.3 -1.3 -0.9 EROW 2.3 0.9 3.7 2.2 2.8 Common Group Expenses* -2.9 -1.9 -6.6 -7.4 -9.4 SSH Group total -0.8 -2.1 -4.0 -11.9 -14.1 * Common Group Expenses include Group's administration expenses (e.g. Management, Finance) and headquarters' Product Management and R&D expenses. KEY FIGURES 1-9/ 1-9/ 1-12/ 2003 2002 2002 Net sales, EUR million 11.0 12.4 16.8 Operating profit/loss, EUR -4.0 -11.9 -14.1 million Operating profit/loss, % of net -36.7 -96.2 -83.7 sales Profit/loss before extraordinary -4.0 -11.9 -13.6 items and taxes, EUR million Profit/loss before extraordinary -36.0 -95.8 -81.0 items and taxes, % of net sales Profit/loss before taxes, EUR -4.0 -11.9 -13.6 million Profit/loss before taxes, -36.0 -95.8 -81.0 % of net sales Return on investment, % -30.6 Return on equity, % -31.7 Interest-bearing net -28.4 -35.2 -34.5 liabilities, EUR million Equity ratio, % 95.2 88.6 88.9 Net gearing, % -89.2 -92.9 -95.8 Gross capital expenditure, 0.7 0.3 0.4 EUR million % of net sales 6.3 2.7 2.6 Investments, EUR million 0.8 0.3 0.4 % of net sales 7.5 2.7 2.6 R&D expenses, EUR million 4.0 6.6 8.2 % of net sales 36.4 53.1 49.0 Personnel, on average 136 166 166 Personnel, period-end 131 156 147 PER-SHARE DATA 1-9/ 1-9/ 1-12/ 2003 2002 2002 Earnings/share, EUR (undiluted) -0.14 -0.43 -0.49 Earnings per share, EUR -0.14 -0.42 -0.49 (diluted) Equity/share, EUR 1.16 1.37 1.30 Volume of shares, period-end, 27 730 27 711 27 702 1000 Share performance, in EUR Average price 1.13 2.35 1.66 Low 0.61 0.98 0.60 High 2.36 3.65 3.70 Share price, period-end 1.91 0.98 0.75 Market capitalization, period- 53.0 27.1 20.8 end, EUR million Volume of shares traded, 5.3 2.4 4.3 million Volume of shares traded, 19.1 8.6 15.5 % of total Value of shares traded, EUR 5.9 5.6 7.1 million Price-earnings ratio (P/E) -1.6 CONTINGENT LIABILITIES EUR million Sept.30, Sept. Dec. 2003 30, 31, 2002 2002 Assets pledged Rental liabilities 1.2 1.2 0.8 Leasing liabilities 0.2 0.2 0.3 The social overhead expense based on stock options exercisable in the future would be EUR 34,211, calculated using the closing price of the company's share at EUR 1.91. The figures are unaudited. SHAREHOLDERS The company's 10 largest shareholders, excluding nominee-registered shareholders, were on September 30, 2003 as follows: Applied Computing Research (ACR) Ltd. 61.2% Ylönen Tatu 3.7% Nixu Oy 1.8% Promotion Capital I Ky 1.7% Ilmarinen Mutual Pension Insurance Company 1.7% Grahn Juha 1.4% Assetman Oy 1.4% Kaukonen Kalle 1.3% Markula Jussi 0.9% Kaleva Mutual Pension Insurance Company 0.8% Total 76.1% FINANCIAL REPORTING A briefing on this interim report for analysts and the media will be presented at the auditorium on the 1st floor of SSH's head office at Fredrikinkatu 42, Helsinki, Wednesday, on October 22, 2003, starting at 11:00 a.m. Entrance from the corner of Fredrikinkatu and Malminkatu. SSH Communications Security Corp will release its next interim report and financial statements for January 1-December 31, 2003 in February 2004. Further information will be available on the company's website in due course. Helsinki, October 22, 2003 SSH COMMUNICATIONS SECURITY CORP Board of Directors Arto Vainio CEO For further information, please contact: Arto Vainio, CEO tel. +358 (0)20 500 7400 Johanna Lamminen, CFO tel. +358 (0)20 500 7419 Kare Laukkanen, Director, IR tel. +358 (0)20 500 7433 Distribution: Helsinki Exchanges Major media