SSH COMMUNICATIONS SECURITY CORP STOCK EXCHANGE RELEASE October 19, 2005 at 9:00a.m. SSH 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 SSH's invoicing is based on the U.S. dollar, the dollar's exchange rate has a fundamental effect on consolidated net sales. During the report period, the U.S. dollar's 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). SSH's 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 company's 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, SSH's 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 solution's 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 SSH's 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 SSH's target customers' 2005 and 2006 data security plans and the related investment plans and budgets. From SSH's 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 SSH'S 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 company's 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 year's 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 company's 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 company's shares, and Kivinen holds 8.2 percent. SHARE CAPITAL AND BOARD AUTHORIZATIONS The company's 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 SSH's 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 company's 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 company's 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 company's 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 company's 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 company's website in due course. Helsinki, on October 19, 2005 SSH COMMUNICATIONS SECURITY CORP Board of Directors Arto Vainio CEO For further information, please contact: Arto Vainio, CEO tel. +358 (0)20 500 7400 Mika Peuranen, CFO tel. +358 (0)20 500 7419 Distribution: Helsinki Stock Exchange Major media