SSH Communications Security: Waiting for that tailwind
Research Update
2024-07-19
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Redeye provides an update following the Q2 2024 report. Sales increased by 4.1% y/y to EUR5.1m, with a EBITDA margin of 9.1%. PrivX grew by 21.5% pushing Subscription growth by 10.9%. We reiterate our valuation range and expect H2 to be strong. We argue that SSH should be seen as a stable company within the cybersecurity sector with a robust subscription revenue model that is growing profitable.
FR
Fredrik Reuterhäll
Contents
Q2 2024
Net sales TTM
Regions
Products
Tailwind ahead
Financial forecast 2024E - 2026E
Financial forecast
Valuation
Peer table
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Sales came in at EUR5.1m, a y/y increase of 4% -5% below our estimate. Subscription sales came in at EUR2m, License Sales were EUR0.1m, and Maintenance sales EUR1.9m. Subscriptions were slightly weaker than our expectations of EUR3.1m and grew 10.9% in the quarter. Subscription ARR was EUR19m (EUR10.8m), growing 3.8% y/y. Recurring revenue, ARR mounted to EUR11.7m (18.3m), up 8.3% y/y. PrivX subscription sales was up by 21.2%.
We stated in our update after the Q1 report that we expect a ramp-up in H2, and we are now even more convinced this will be the case. All organizational changes have been completed, the cost base is under control, and a sales push towards the US paves the way for a strong end to 2024 and into 2025. We anticipate full-year sales of EUR 23m, reflecting 13% growth.
Our Base Case is EUR1.8 (1.8) per share, with a Bear Case of EUR0.9 (1) and a Bull Case of EUR3.1 (3.4), implying a 36% upside to Base Case. The stock is trading at EV/Sales of 1.8x next year, and EV/Ebitda 14x, roughly 50% discount to peers. We still argue that SSH should be seen as the most stable and predictable company within the Nordic cybersecurity sector due to its robust subscription revenue model.
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Revenues | 19.3 | 20.4 | 22.9 | 28.6 | 35.0 |
| Revenue Growth | 13.1% | 5.8% | 12.5% | 24.7% | 22.4% |
| EBITDA | 1.2 | 1.8 | 1.7 | 3.6 | 4.9 |
| EBITDA Margin | 6.3% | 8.8% | 7.4% | 12.6% | 14.0% |
| Net Income | -2.6 | -1.9 | -1.7 | -0.24 | 0.68 |
| EV/EBITDA | 72.8 | 29.7 | 30.0 | 14.0 | 10.1 |
SSH Communications Security’s Q2’24 sales were slightly below our estimates. Sales came in at EUR5.1m, a y/y increase of 4.1% vs our estimate of EUR5.4m. Subscription sales came in at EUR3m, License Sales were EUR0.1m, and Maintenance sales EUR1.9m. Subscriptions were 4% below our expectations and grew 11% compared to one year ago.
Subscription ARR was EUR11.7m (EUR10.8m), growing 8.3% y/y. Recurring revenue, ARR mounted to EUR19m (18.3m), growing 3.8% y/y.
| SSH Communications Security: Actual vs Estimate (MSEK) | ||||
| 2024Q2A | 2024Q2E | Diff vs Est. | Y/Y Growth | |
| Net sales | 5.1 | 5.4 | -5% | 4% |
| Subscriptions | 3.0 | 3.1 | -4% | 11% |
| Licenses | 0.1 | 0.3 | -62% | -24% |
| Maintenance | 1.9 | 1.9 | 0% | -3% |
| Total opex | -4.6 | -5.1 | 10% | -16% |
| EBITDA | 0.5 | 0.2 | 103% | 400% |
| EBITDA Margin (%) | 9.8% | 5% | 5pp | 381% |
| Basic EPS | -0.06 | -0.05 | -0.3 | -2540% |
| Source: Redeye Research & Company data |
EBITDA was EUR0.5m, corresponding to a 9.1% margin. This quarter was the 13th consecutive quarter with a positive EBITDA result. According to the CEO, PrivX grew 21% compared to Q2 2023. Unfortunately, SSH does not consistently publish quarterly growth numbers for PrivX, so it is difficult to follow the growth path.
Trailing 12-month sales (TTM) came in at EUR20.8m, compared to EUR20.7m in Q1'24, a TTM growth of 3% y/y. The final two quarters of the year should be stronger in terms of sales growth. We anticipate TTM growth of 5% in Q3 and 12% in Q4. We might be a bit optimistic in our forest.
Net sales TTM
Subscription ARR was EUR11.7m, growing 8.3% y/y, and recurring revenue (ARR) mounted to EUR19m, growing 3.8% y/y. The CFO explained the decline was due to two main reasons: 1) slight seasonality in Q2 (one working day less), and 2) A couple of Zero trust customers renewals were delayed and took longer than expected; one customer will close in Q3, and the other customer will be recognized in Q4. Then it lost a major customer in secure collaboration
Subscription sales came in at EUR3m, growing 10.9% y/y, slightly lower than our estimates of EUR5.4m. SSH clearly shows it manages to increase its subscription revenue model to be the primary type of its sale. Back in Q1'21, Subscriptions were 7.6% of revenue compared to 59% in this quarter.
In the current quarter, License sales amounted to EUR0.1mn as customers continue to migrate towards a subscription model. Over time, it is obvious the subscription model will be the golden standard.
Maintenance sales came in at EUR1.9m vs our estimate of EUR1.9m.
Quaterly sales per segment
TTM sales per segment
During the quarter, EMEA, which accounts for around 54% of SSH's revenues, was flat y/y. Same with the Americas, while APAC grew 33% to EUR2.7m. During the quarter, SSH signed a number of new parter deals and we should expect more in coming quarters as it is the most efficient way to gain new customers.
PrivX grew 21.5% year over year as its the core product within SSH's product family. Priv-X will continue to benefit from the integration within a wide variety of its products and should grow steadily throughout the year.
Announced in November 2023, the Secure Collaboration 2024 is now offered to customers. The product is highly scalable, with a 95% gross margin and is now re-branded to SalaX.
We wrote in our update after the Q1 report that we expect a ramp up in H2 and we are even more We stated in our update after the Q1 report that we expect a ramp-up in H2, and we are now even more convinced this will be the case. All organizational changes have been completed, the cost base is under control, and a sales push towards the US paves the way for a strong end to 2024 and into 2025. We anticipate full-year sales of EUR 23m, reflecting 13% growth.
We made no changes to our Base Case estimate after the quarter. However, we widened our valuation range somewhat. We still believe in solid delivery in H2 2024 due to the expected positive momentum from ramping up new product launches and customers finally starting to place orders. Additionally, the revenue recognition for the cryptographic solution order announced in February 2024 will occur in two parts. Half of the EUR 1.8m revenue will be recognized by the end of 2024, and the rest will be recognized by the following year.
Redeye expects net sales of EUR23 with EBITDA of EUR1.7m for 2024. This translates into an EBITDA margin of 7% for 2024E.
| SSH Communications Security: Changes vs previous estimates (MEUR) | ||||||||
| 2023 | 2024Q1 | 2024Q2 | 2024Q3 | 2024Q4 | 2024 | 2025 | 2026 | |
| Net sales | 20 | 5.0 | 5.1 | |||||
| New | 6.1 | 6.7 | 23 | 29 | 35 | |||
| Old | 6.1 | 6.7 | 23 | 29 | 35 | |||
| Change | 0% | 0% | -1% | 0% | 0% | |||
| EBITDA | 1.8 | 0.2 | 0.5 | |||||
| New | 0.5 | 0.4 | 1.7 | 4 | 5 | |||
| Margin (%) | 9% | 5% | 10% | 9% | 6% | 7% | 13% | 14% |
| Old | 0.6 | 0.4 | 1.5 | 4 | 5 | |||
| Margin (%) | 9% | 6% | 6% | 13% | 14% | |||
| Change | 0pp | 0pp | 1pp | 0pp | 0pp | |||
| Source: Redeye Research |
| SSH Communications Security: Financial Forecast (MEUR) | ||||||||
| 2023 | 2024Q1 | 2024Q2 | 2024Q3 | 2024Q4 | 2024 | 2025 | 2026 | |
| Net sales | 20 | 5.0 | 5.1 | 6.1 | 6.7 | 23 | 29 | 35 |
| Gross Profit | 20 | 5.0 | 5.1 | 6.1 | 6.7 | 23 | 29 | 35 |
| EBITDA | 2 | 0.2 | 0.5 | 0.5 | 0.4 | 1.7 | 3.6 | 4.9 |
| EBIT | -1.6 | -0.6 | -0.3 | -0.4 | -0.6 | -1.9 | -0.1 | 1.1 |
| Basic EPS | -0.05 | -0.01 | -0.01 | -0.01 | -0.01 | -0.04 | -0.01 | 0.02 |
| Revenue Growth | 6% | 6% | 4% | 16% | 23% | 13% | 25% | 22% |
| Gross Profit Margin (%) | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
| EBITDA Margin (%) | 9% | 5% | 10% | 9% | 6% | 7% | 13% | 14% |
| EBIT Margin (%) | -8% | -11% | -6% | -7% | -9% | -8% | 0% | 3% |
| Net Income Margin (%) | -9% | -10% | -6% | -6% | -8% | -7% | -1% | 2% |
| Source: Redeye Research |
We keep our Base Case of EUR1.8 (1.8) per share, with a Bear case of EUR 0.9 (1) and Bull Case of EUR3.1 (3.4). We are a bit more pessimistic about the growth rate in both Bear and Bull Cases, hence both are lower
| SSH Communications Security: Fair value range | ||||||||
| EUR | Bear Case | Base Case | Bull Case | DCF split per period, Base Case | WACC | 11.0% | ||
| Value per share | 0.9 | 1.8 | 3.1 | 2025-2028 | 3% | 2 | ||
| 2029-2039 | 54% | 38 | ||||||
| Revenue CAGR 2025-2039 | 9% | 13% | 15% | Terminal | 43% | 30 | ||
| Revenue CAGR 2025-2029 | 14% | 21% | 24% | Sum | 100% | 71 | ||
| Growth Terminal | 3% | 3% | 3% | Net debt 2024E | -1 | |||
| Equity value | 72 | |||||||
| EBITDA-margin 2025-2039 | 12% | 16% | 19% | Shares outstanding | 41 | |||
| EBIT-margin 2025-2039 | 7% | 12% | 13% | Value per share, EUR | 1.8 | |||
| Source: Redeye Research | Current share price | 1.3 |
SSH trades at 1.8x EV/S 2025E and 14x Ev/Ebitda. We argue that SSH Communications Security has the most stable and predictable revenue stream compared to its peers and, therefore, is the better choice.
| EV | EV/S | EV/EBITDA | Sales CAGR | Avg EBITDA | ||||||||
| Company name | EURm | 2024 | 2025 | 2026 | 2024 | 2025 | 2026 | 2022-24 | 2023-24 | |||
| Nordic Cybersec | ||||||||||||
| Napatech A/S | 248 | 11.8 | 6.3 | 3.1 | neg | >100 | 10.0 | 23% | 5% | |||
| Advenica AB | 59 | 4.3 | 3.9 | 3.4 | neg | 132 | 69 | 10% | 3% | |||
| Yubico AB | 1,942 | 9.6 | 7.8 | 6.3 | 48 | 35 | 27 | 19% | 22% | |||
| F-Secure Oyj | 507 | 3.4 | 3.3 | 3.2 | 9.0 | 9.0 | 8.0 | 11% | 38% | |||
| SSH Communications Security Oyj | 53 | 2.2 | 1.8 | 1.4 | 30 | 14 | 10 | 13% | 8% | |||
| Average | 562 | 6.3 | 4.6 | 3.5 | 29 | 48 | 25 | 15% | 15% | |||
| Median | 248 | 4.3 | 3.9 | 3.2 | 30 | 25 | 10 | 13% | 8% | |||
| Source: Factset & Redeye Reserach |
Case
Profitable growth with subscription based business model
Evidence
Certifications and acquisitions
Supportive Analysis
Challenge
Competition
Challenge
Foreign government contracts
Valuation
Growth outlook justifies high near-term multiples
People: 4
The current CEO was appointed in 2020, which means the senior management has not been together too long. However, it has demonstrated serious execution capabilities, manifested in the Deltagon acquisition and meeting all financial targets in FY2021. Moreover, we believe the management thinks independently, best reflected in recent technology investments that have proven successful, like zero trust and post-quantum safe. There is, in our opinion, a well-defined strategy to grow organically for many years. Also, we appreciate Accendo's controlling ownership (defined as >20% of the capital), which we regard as a long-term commitment. We would consider improving this rating should the management's insider ownership increase.
Business: 3
Positives include (1) a high share of recurring sales (77% in 2021) derived from subscriptions and maintenance, (2) an asset-light software-based business, (3) a long runway for growth considering fast underlying growth in the cybersecurity market, (4) a strong value proposition and solving a genuine customer need, (5) clear competitive moats in terms of high switching costs and meaningful intangible assets, and (6) a large installed base of 5,000+ customers which creates up and cross-selling opportunities.
Negatives include (1) a fast-changing market which requires significant continuous investments to stay ahead of competitors, (2) many competitors entering the market, both new entrants and established firms in adjacent segments, and (3) regulatory risks which could hurt the company's odds of winning major contracts outside its domestic market.
Financials: 2
The rating's retrospective nature results in a score of 2. The company has seen declining sales and negative earnings in recent years. However, the trend broke in 2021, and sales rose 42%. We expect to see high annual growth in sales and EPS in the near term, far above the underlying market of c.12%. The company does not need to raise capital to become cash flow positive sustainably. Finally, we appreciate the company's high gross margins (95%+), which confirms its business's scalability.
Disclosures and disclaimers
Contents
Q2 2024
Net sales TTM
Regions
Products
Tailwind ahead
Financial forecast 2024E - 2026E
Financial forecast
Valuation
Peer table
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article