SSH COMMUNICATIONS SECURITY CORP STOCK EXCHANGE RELEASE, October 18, 2006, at 9:00 a.m. SSH INTERIM REPORT FOR JANUARY 1 – SEPTEMBER 30, 2006 - Net sales for January-September totaled EUR 6.1 million, up 18.3 percent year on year (EUR 5.2 million in Q1-Q3/2005). - Third-quarter net sales came to EUR 1.8 million, down 24.9 percent on a year earlier (EUR 2.4 million in Q3/2005). - Operating loss for January–June amounted to EUR –1.4 million (a loss of -3.7 million in Q1-Q3/2005), loss EUR -0.9 million (-3.0 million). Third-quarter operating loss was EUR -0.5 million and net loss was EUR -0.4 million. - Third quarter sales were below expected due to several US customer orders that were moved forward. New long-term customer agreements were closed with two large financial sector companies. - SSH’s backlog of tenders has developed favorably. The full year revenue and profitability will depend significantly on the sales results of the last quarter. KEY FIGURES 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2006 2005 2006 2005 2005 Net sales (MEUR) 1.8 2.4 6.1 5.2 9.3 Net sales, change % -24.9 11.9 18.3 -18.1 13.0 Operating profit/loss -0.5 -0.2 -1.4 -3.7 -2.6 (MEUR) % of net sales -27.6 -7.8 -23.3 -71.2 -28.5 Operating profit/loss, -166.8 79.1 61.3 21.2 58.7 change % Profit/loss before -0.4 0.0 -0.9 -3.0 -2.0 extraordinary items and taxes (MEUR) % of net sales -20.4 2.1 -14.8 -58.7 -21.8 Number of employees 78 79 78 79 75 at period end Earnings per share (EUR) -0.03 -0.11 -0.07 Shareholders’ equity per 0.61 0.86 0.90 share (EUR) NET SALES Consolidated net sales for January-September totaled EUR 6.1 million (EUR 5.2 million), up by 18.3% percent, year on year. Net sales for the third quarter totaled EUR 1.8 million, down 24.9% compared to the corresponding quarter for year 2005. During the report period, SSH continued the systematic implementation of its strategy based on the SSH Tectia solution. SSH Tectia is a data security 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. The majority of SSH’s invoicing is based on the U.S. dollar. During the report period, the U.S. dollar’s average exchange rate was approximately 1.6 percent stronger than during the same period a year ago. RESULTS AND EXPENSES Operating loss for January–September amounted to EUR –1.4 million (Q1- Q3/2005: a loss of EUR –3.7 million), with net loss totaling EUR –0.9 million (a loss of EUR –3.0 million). Operating loss for the third quarter totaled EUR –0.5 million (a loss of EUR –0.2 million), with net loss amounting to EUR –0.4 million (a loss of EUR –0.0 million). SSH’s fixed costs reported for the period continued their year-on-year decline, as evidenced by the reduction of approximately EUR 1.2 million in fixed costs from the January–September 2005 level. Payroll costs were cut by 11 percent and other operating expenses by 17 percent. Research and development expenses for the report period totaled EUR 2.4 million (EUR 2.6 million), while sales and marketing expenses came to EUR 4.1 million (EUR 4.9 million) and administrative expenses EUR 1.2 million (EUR 1.5 million). BALANCE SHEET AND FINANCIAL POSITION The financial position of SSH remained at a healthy level during the report period even after the EUR 7.1 million return of capital to the shareholders. The consolidated balance sheet total on September 30, 2006 stood at EUR 19.7 million (EUR 26.2 million), of which liquid assets accounted for EUR 16.8 million (EUR 22.9 million), or 85.0 percent of the balance sheet total. The company has no long-term liabilities. On September 30, 2006, gearing, or the ratio of net liabilities to shareholders’ equity, was –96.7 (-94.2) and the equity ratio stood at 94.0 percent (95.9 percent). The reported gross capital expenditure for the period totaled EUR 0.1 million (EUR 0.1 million). Reported financial income came mainly from capital gains on fund shares. Financial income and expenses totaled EUR +0.5 million, compared with EUR +0.7 million a year ago. During January-September, SSH reported a positive cash flow of EUR 1.0 million from business operations, whereas investments showed a cash flow of EUR 6.6 million. Cash flow from financing was EUR -7.1 million. Cash flow from operations, investments and financing resulted in the company showing a positive total cash flow of EUR 0.5 million during the period. MARKET DEVELOPMENTS Legislative reforms concerning data confidentiality and secure data communication continue causing positive near- and long-term effects in the markets of our products in the United States, Japan and Europe. Customers are facing an ever greater challenge in information security management due to deperimeterization, or the gradual disappearance of boundaries between companies’ internal and external information networks. Large enterprises continue finding it more difficult to protect their networks and businesses from sophisticated worms and backdoor-based network attacks, while at the same time the legislation, industry & inter-company agreements are enforcing much higher liabilities for data security and risk management. In the U.S., rules in Section 404 of the Sarbanes-Oxley Act continue to impact SSH’s target customers’ data security plans and budgets. Other important regulations that impact the demand for SSH’s products are the Gramm-Leach-Bliley Act for customer financial data security, HIPAA for patient health record security, as well as the PCI standards of the major credit card companies for card holder data security. The SSH Tectia solution’s features and management capabilities align well with these trends and can help the customers to cope with these rising requirements now and in future. SSH is confident that legislative reforms, new data security standards, as well as many industry and company level data security development programs will continue to drive the demand favorably for SSH Tectia. The new tighter data security regulations caused customers to re- assess the risks and hidden costs of their non-commercial deployments, giving many customers good new reasons to start and/or increase phase- by-phase migration programs to deploy fully commercially supported products, such as SSH Tectia. SALES PERFORMANCE SSH’S NET SALES EUR million 7-9/ 4-6/ 1-3/ 10-12/ 7-9/ 1-12/ 2006 2006 2006 2005 2005 2005 BY SEGMENT AMER 1.1 1.4 1.2 3.3 1.8 6.8 APAC 0.3 0.3 0.2 0.1 0.2 0.7 EROW 0.4 0.6 0.6 0.7 0.3 1.8 SSH Group total 1.8 2.3 2.0 4.1 2.4 9.3 SSH TECTIA BUSINESS Net sales / license 0.8 1.4 1.2 3.5 1.7 6.9 Sales Net sales / 0.9 0.9 0.9 0.6 0.7 2.4 maintenance SSH Tectia total 1.8 2.3 2.0 4.1 2.4 9.3 The interest to SSH’s products was reflected in the high volume of submitted tenders and offers. For a system-level IT product, such as SSH Tectia, the sales process is often long. With major customers, the timings of largest orders will cause 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 61.5 percent (68.0 percent), 12.4 percent (10.2 percent) and 26.1 percent (21.9 percent) of reported net sales, respectively. During the report period, SSH concluded a number of new customer agreements, five of which were each worth more than EUR 100,000. The ten largest customers accounted for 27 percent of reported net sales, with the largest single customer accounting for approximately 5 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 continued also developing its partner network in the same focus markets. As new regulations and related audits continue to solidify customers’ plans and requirements, SSH has been able to further develop its product offerings with new competitive features. Successful deployments of jointly developed new solutions with the largest US customers have generated good responses from target customers in Germany and the U.K, and other markets. The main themes of marketing were company’s new Tectia Secure Shell product for the IBM mainframe environment, and the new expanded uses of SSH Tectia for secure, automated file transfers in large internal enterprise networks. New applications, support of all essential enterprise OS platforms, versatile integration capabilities, and centralized management have made SSH Tectia the most extensive integrated Secure Shell-based solution in the market. RESEARCH AND DEVELOPMENT Research and development expenses for January-June totaled EUR 2.4 million (EUR 2.6 million), the equivalent of 39.8 percent of net sales (50.5 percent). At the end of June, the company held 11 patents, and 12 were pending. HUMAN RESOURCES AND ORGANIZATION At the end of June, the Group had 78 employees on its payroll, down 1 from the previous year, a decrease of –1.3 percent. At the end of the period, 48.7 percent of the employees worked in R&D, 37.2 percent in sales and marketing, and 14.1 percent in corporate administration. BOARD AND AUDITORS The Annual General Meeting (AGM) on March 21, 2006, re-elected Tapio Kallioja, Tomi Laamanen, Timo Ritakallio and Tatu Ylцnen 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 8,955,937 (valued at EUR 15,008,535.53); i.e. 31.65 percent of the shares changed hands. The highest quotation was EUR 2.40 and the lowest EUR 1.20. The trade-weighted average share price for the period was EUR 1.67, and the share closed at EUR 1.25 (September 29, 2006). SSH Communications Security Corp has received a notification in accordance with the Securities Market Act 2:9, according to which the total of Assetman Oy’s (business code 0748885-4) shares in SSH Communications Security Corp has on March 17, 2006 risen above one twentieth part (1/20) of the total of all shares and related voting rights. Assetman OY held 6.2 percent of the companyґs shares at the end of the period. There were no other substantial changes in SSH Communications Security Corp.’s shareholding during the report period. Tatu Ylцnen and Tero Kivinen are the largest shareholders. The former holds, directly and through his company, Tatu Ylцnen Oy, 53.4 percent of the company’s shares, and Kivinen holds 6.6 percent. More information about the shareholding can be obtained from the companyґs Web site. There were no changes in the group structure during the period. SHARE CAPITAL AND BOARD AUTHORIZATIONS The company’s registered share capital on June 30, 2006 was EUR 848,794.38, consisting of 28,293,146 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, 5,000 new SSH shares were subscribed to under the I/1999 stock-option plan and 19,333 shares under the I/2003 stock-option plan, respectively. With these subscriptions the company’s share capital was increased by EUR 729.99. The SSH Annual General Meeting of March 21, 2006 authorized the Board of Directors to decide by March 21, 2007, to increase the share capital through a rights issue and/or convertible bonds and/or issue share options, 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. The Finnish National Board of Patents and Registrations granted and registered on July 14, 2006 its permission pursuant to the Companies Act Section 6 (5) for the implementation of the decision of the Annual Shareholders Meeting on March 21, 2006 regarding the decrease of the company’s share premium fund of capital to the shareholders. After the permission was registered, SSH Communications Security Corp’s Board of Directors in its meeting confirmed the schedule. The record date was set to July 19, 2006 and the payment date July 21, 2006. The amount distributed was EUR 0.25 per share, totaling EUR 7,073,286.50. 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. More information on corporate governance is available on the company’s Web site (www.ssh.com). PROSPECTS The full year sales and profitability remain highly dependent on the sales results of the last quarter. Thanks to high volume of tenders, customer base, and new products, the company is in a good position to continue improving its financial results by growing sales and profitability. Continuous development of company’s products enables wider access to new, larger market segments with the established and new customers. As new data security regulations and risks continue driving our customers to increase their investments for better data security we expect to see new and continued growth of the demand in all markets. We also believe that the trends driving our North American customers to increase their investments in internal data security will spread in phases to our target customer base in Germany, the U.K. and Japan. Our business model is based on long-term relations and multi-year frame agreements with large enterprise and public sector customers. Our business model enables growth by continuous adding of value with SSH Tectia solution expansions, new features, as well as growing value of the recurring software maintenance. Due to the large size of individual orders and uncertainty of timing, the actual quarterly revenue may vary substantially, although the growth of the sales prospect base can in the future help compensate the impact of single large orders within a quarter. INCOME STATEMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2006 2005 2006 2005 2005 Net sales 1.8 2.4 6.1 5.2 9.3 Purchasing and production 0.0 0.0 0.0 -0.1 -0.1 costs Gross profit 1.8 2.3 6.1 5.1 9.2 Other operating income 0.1 0.1 0.3 0.2 0.2 Expenses Product development -0.7 -0.7 -2.4 -2.6 -3.4 Sales and -1.2 -1.4 -4.1 -4.9 -6.7 marketing Administration -0.4 -0.4 -1.2 -1.5 -1.9 Operating profit/loss -0.5 -0.2 -1.4 -3.7 -2.6 Financial income and expenses 0.1 0.2 0.5 0.7 0.6 Profit/loss before taxes -0.4 0.0 -0.9 -3.0 -2.0 a Taxes 0.0 0.0 0.0 0.0 0.0 Net profit/loss for the -0.4 0.0 -0.9 -3.0 -2.0 period a) Taxes are proportionate to the net profit for the period, and no deferred tax assets are recorded for the accrued loss. EARNINGS PER SHARE 1-9/ 1-9/ 1-12/ 2006 2005 2005 Earnings per share (EUR) -0.03 -0.11 -0.07 Earnings per share, diluted -0.03 -0.11 -0.07 (EUR) BALANCE SHEET EUR million 9/30/ 9/30/ 12/31/ 2006 2005 2005 ASSETS Fixed and other non-current assets Tangible assets 0.1 0.2 0.2 Intangible assets 0.4 0.7 0.6 Deferred tax assets 0.2 0.2 0.2 Total fixed and other 0.7 1.1 1.0 non-current assets Inventories and current assets Short-term receivables 2.2 2.2 5.6 Short-term investments 14.8 21.0 21.1 Cash and cash equivalents 1.9 2.0 1.4 Total inventories and current 19.0 25.1 28.1 assets Total assets 19.7 26.2 29.1 LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholders’ equity 17.3 24.3 25.4 Long-term liabilities Provisions 0.1 0.1 0.1 Long-term financial 0.0 0.1 0.0 liabilities Total long-term liabilities 0.1 0.2 0.2 Short-term liabilities 2.3 1.8 3.5 Total liabilities and 19.7 26.2 29.1 shareholders’ equity CASH FLOW STATEMENT EUR million 1-9/ 1-9/ 1-12/ 2006 2005 2005 Cash flow from business operations 1.0 -3.0 -3.5 Cash flow from investments 6.6 10.9 10.9 Cash flow from financing -7.1 -8.4 -8.4 Increase(+) / decrease (-) in 0.5 -0.5 -1.0 liquid assets Liquid assets at period start 1.4 2.4 2.4 Adjustment for translation -0.1 0.1 0.1 difference Liquid assets at period end 1.9 2.0 1.4 STATEMENT ON CHANGES IN SHAREHOLDERS’ EQUITY EUR million Share Issue Fair Transl Retained Total capital premium value ation earnings fund reserves differ and free ence reserves Shareholders’ 0.8 24.4 0.1 -0.8 10.8 35.4 equity Jan. 1, 2005 Change 0.0 0.0 -0.1 0.1 -11.1 Shareholders’ 0.8 24.4 0.1 -0.7 -0.4 24.3 equity Sep. 30, 2005 Change 0.0 0.0 0.2 0.0 1.0 Shareholders’ 0.8 24.4 0.3 -0.7 0.6 25.4 equity Dec. 31, 2005 Change 0.0 -13.0 -0.1 -0.1 5.9 Net loss -0.9 Shareholders’ 0.8 11.5 0.2 -0.8 5.6 17.3 equity Sep. 30, 2006 NET SALES BY SEGMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2006 2005 2006 2005 2005 AMER 1.1 1.8 3.8 3.5 6.8 APAC 0.3 0.2 0.8 0.5 0.7 EROW 0.4 0.3 1.6 1.1 1.8 SSH Group total 1.8 2.4 6.1 5.2 9.3 OPERATING PROFIT/LOSS BY SEGMENT EUR million 7-9/ 7-9/ 1-9/ 1-9/ 1-12/ 2006 2005 2006 2005 2005 AMER 0.4 1.0 1.7 1.3 3.5 APAC 0.1 0.1 0.4 0.1 0.2 EROW -0.1 -0.1 0.0 -0.7 -0.8 Common Group expenses* -1.0 -1.2 -3.5 -4.5 -5.5 SSH Group total -0.5 -0.2 -1.4 -3.7 -2.6 * 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/ 2006 2005 2005 Net sales (MEUR) 6.1 5.2 9.3 Operating profit/loss (MEUR) -1.4 -3.7 -2.6 Operating profit/loss, as % of -23.3 -71.2 -28.5 net sales Profit/loss before extraordinary -0.9 -3.0 -2.0 items and taxes (MEUR) Profit/loss before extraordinary -14.8 -58.7 -21.8 items and taxes, as % of net sales Profit/loss before taxes (MEUR) -0.9 -3.0 -2.0 Profit/loss before taxes, as -14.8 -58.7 -21.8 % of net sales Return on investment (%) -6.4 Return on equity (%) -6.6 Interest-bearing net liabilities -16.7 -22.9 -22.5 (MEUR) Equity ratio (%) 94.0 95.9 92.8 Gearing (%) -96.7 -94.2 -88.4 Gross capital expenditure (MEUR) 0.1 0.1 0.1 % of net sales 1.2 1.9 1.0 R&D expenses (MEUR) 2.4 2.6 3.4 % of net sales 39.8 50.5 36.8 Personnel, period average 81 86 83 Personnel, period end 78 79 75 PER-SHARE DATA 1-9/ 1-9/ 1-12/ 2006 2005 2005 Earnings per share, undiluted -0.03 -0.11 -0.07 (EUR) Earnings per share, diluted -0.03 -0.11 -0.07 (EUR) Equity per share (EUR) 0.61 0.86 0.90 No. of shares at period end 28 293 28 204 28 269 (thousands) Share performance (EUR) Average price 1.67 1.30 1.23 Low 1.20 0.97 0.91 High 2.40 1.78 1.78 Share price, period end 1.25 0.98 1.23 Market capitalization, period 35.4 27.6 34.8 end (MEUR) Volume of shares traded 9.0 7.4 11.4 (in millions) Volume of shares traded, as 31.7 26.3 40.5 % of total Value of shares traded, in 15.0 9.6 14.0 millions of euros Price-to-earnings ratio (P/E) - CONTINGENT LIABILITIES EUR million 09/30 09/30 12/31 2006 2005 2005 Rental liabilities 0.2 0.2 0.2 Leasing liabilities 0.2 0.1 0.1 Other contingent liabilities 0.6 0.7 0.7 Currency derivatives (not included in hedge accounting) Fair value 0.0 0.0 0.0 Nominal value 0.3 1.0 6.0 This interim report has been compiled observing IAS 34 (Interim Financial Reporting) accounting standard. The same accounting principles have been used in the interim report as in the financial statement for 2005. These data are based on unaudited figures. FINANCIAL REPORTING The company will hold a briefing on its interim report for equity analysts and the media in Hotel Scandic Simonkenttдґs Lцnkka-cabinet, 1st floor, address Simonkatu 9, 00100 Helsinki on Wednesday, October 18, 2006, starting at 11:00 a.m. SSH Communications Security Corp will release its next interim report and financial statements for January 1–December 31, 2006 in February 2007. Further information will be available on the company’s website in due course. Helsinki, on October 18, 2006 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