SSH Communications Security Q3’23 sales were slightly lower than our estimates. Net sales grew 12% in the quarter and came in at EUR5.3m vs. our estimated EUR5.6m. Subscriptions ARR grew by 25% to EUR19m. Profitability was much stronger than our estimate. EBITDA came in at EUR1m, translating to a margin of 19.2%, versus our estimate of EUR0.1m

According to SSH's CFO, overall cost control, sales growth in combination with price increases, and a favourable product mix boosted the margin. From now on, we believe SSH will continue to deliver positive margins.

Subscription ARR came in at EUR12m in Q3’23, growing 25% (Jan-Sep YoY).

Trailing 12-month sales (TTM) came in at EUR20.7m, compared to EUR20.1m in Q2'23. TTM y/y, the difference is an increase of 6%, compared to 7% in Q2'23. Historically, Q4 has been the strongest quarter, but as a larger part of the revenue is subscription-based, the calendar effect is diminishing. However, we estimate the run rate going forward to pick up at the end of the year and hit approximately 13% in Q4'23E.

Subscription ARR was EUR12m Q3’23, growing 25% (37%) y/y, and recurring revenue (ARR) mounted to EUR19m, growing 10% (12.3%) y/y.

Recurring revenues (subscriptions and maintenance) accounted for 95% of total revenues, an increase from 93% in Q3’22.

Subscription sales came in at EUR2.9m, growing 33% (35%) Y/Y, below our estimates of EUR3.3m.

SSH clearly shows it manages to increase its subscription revenue model to be the primary type of its sale. Back in Q1'21, Subscription was 7.6% of revenue compared to 56% in this quarter.

In the current quarter, license sales amounted to EUR0.2mn, compared to EUR0.4m in Q2'22.

Maintenance sale came in at EUR2m vs our estimate of EUR1.9m, Y/Y growth of 4%

Prof. Service & Other sales came in at EUR0.1m vs. our estimated EUR0.1m.

During the quarter, EMEA, which accounts for around 55% of SSH's revenues this quarter, saw a 17% y/y growth. The Americas experienced a 12% increase, while APAC saw a decline of -25%.

Year to date (YDT) PrivX grew 23% (20%). The ongoing focus on increasing deal sizes in the main focus, and management continues to highlight the importance of focusing on a land-and-expand strategy and securing sweet spot orders of around USD200 to 250k. With the new Secure Collaboration 2024, where Priv-X is the core product, we believe Priv-X will benefit from the bundle offer and continue to grow at a high rate.

Management indicated last quarter that NQX, an ultra-secure, quantum-ready encryption solution designed for transporting Ethernet and IP traffic across any network, is gaining traction beyond Finland, especially after Finland's NATO inclusion. Clients in Japan, Austria, and France have shown interest, along with several countries near or neighbouring Russia. Although the ramp-up has not been as rapid as desired, SSH now has approximately ten customers.

According to the management, demand is high, but customers are still in the waiting mode, delaying the investment decision. At the moment, several companies are announcing personnel lay-off rounds and cost-cutting programs. Therefore, companies seem more hesitant to place orders despite a demand for SSHs products.

Some customers already decided on SSH products but are pushing forward the actual placing of the order. However, because of the importance and flexibility of SSHs products, some customers start and implement a smaller part of the whole order, or a pilot project with the intention to ramp it up over time. It is important to note, however, that there are not any larger cancellations in the order book.

SSH has established an internal marketing department consisting of eight people. Currently, the marketing team is actively exploring diverse marketing strategies to reach the desired target audience effectively. Their approach involves a comprehensive evaluation of various media marketing channels to achieve the highest return on investment (ROI) for their marketing budget. In addition, SSH is in the process of developing a new self-educational homepage for clients, allowing them to gain insights and knowledge about SSH's array of products.

We are making minor changes to the growth prospect while increasing profitability somewhat. Still, we anticipate SSH will continue to grow with profitability, and we believe the scaling effect will materialise when "sweet-spot-order" inflow starts to kick in. Whether this will happen in Q4 2023 or next year is very hard to tell.

Management continues to focus on two main areas: 1) Increasing deal size ("sweet spot" USD200 to 250k) and 2) Closing pending orders.

We raise the EBITDA to EUR0.8m (EUR0.1) for next quarter on the back of continued better cost control. This translates into a full-year EBITDA 2023E of EUR2.1m (EUR0.6m), 10% margin.

On the back of the report and adjusted better profitability, we adjusted our base case upward. However, due to higher interest rates, Redeye implemented a hike in the risk-free rate from 2.5% to 3% used in all our DCF valuations. With a higher WACC of 11% (10.5%), the effect is lower valuation. Our new Base Case is EUR1.9 (2.04) per share, with a Bear case of EUR1.2 (1.2) and Bull Case of EUR3.6 (4.0)

SSH trades at 1.9x EV/S 2024E and EV/EBITDA of 13x. Compared to Nasdaq Cybersecurity index growth companies, SSH trades at a 24% discount on EV/Sale.

Ongoing geopolitical risks remain a global concern, and we expect SSH to capitalize on these challenges in the future.

SSH's estimated EV/Sales in 2024e is 1.9x, and the average for its international growth peers is 7 times. It's worth noting that SSH is growing with profitability while several peers continuously make losses and need to raise cash through capital increases. SSH should be seen as a stable company within the cybersecurity area with a robust subscription revenue model.

Sales CAGR 2023e–2027e: 20%

Sales CAGR 2028e–2032e: 17%

Avg. EBIT margin 2023e–2027e: -1.3%

Avg. EBIT margin 2028e–2032e: 10.5%

Terminal growth: 4%

Terminal EBIT margin: 15%

WACC: 11%

Sales CAGR 2023e–2027e: 23%

Sales CAGR 2028e–2032e: 22%

Avg. EBIT margin 2023e–2027e: -1%

Avg. EBIT margin 2028e–2032e: 11%

Terminal growth: 2%

Terminal EBIT margin: 16%

WACC: 11%

Sales CAGR 2023e–2027e: 17%

Sales CAGR 2028e–2032e: 18%

Avg. EBIT margin 2023e–2027e: -1.5%

Avg. EBIT margin 2028e–2032e: 9.7%

Terminal growth: 3%

Terminal EBIT margin: 12% WACC: 11%