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SSH - Small progress, but not enough

SSH’s Q4 was broadly in line, capping off a challenging year of sales decline. Given the weak performance in FY’19, SSH’s guidance for 2020 was a small disappointment. We’ve cut our estimates for the coming years and maintain our target price of EUR 1.0, our recommendation is now HOLD (prev. SELL).

Q4 broadly as expected, capping off a disappointing year

Q4 net sales were EUR 4.1 million (vs. 4.7m our Evli). Net sales decreased by -35.8% compared to the previous year mainly due to the end of the patent licensing programme and reduced consulting revenue. Software business sales decreased -11.8% y/y due to the smaller initial project size compared to last year including a large license deal received in Q4’18. Software fees were EUR 1.8 million (2.2m Evli), Professional services were EUR 0.3 million (0.2m Evli), and Recurring revenue was EUR 2.1 million (2.3m Evli). Q4 operating loss was EUR -0.1 million (vs. 0.2m Evli). FY’19 as a whole; net sales of software business (excluding patent income in FY’18) decreased -8% y/y and EBIT was -1.2 MEUR (0.5 MEUR FY’18), attributed to lower sales (despite OPEX reduction), less larger license deals and with significant patent income received in FY’18.

2020 guidance disappointing given 2019 performance

SSH’s expectations for 2020 are revenue growth of 10-15 percent and an improving operating result (-1.2 MEUR FY'19). SSH expect clearly faster growth rates for PrivX and NQX, steady growth for UKM matching the industry growth rate, and modest growth for Tectia, which is the most mature product. The combined effect of these growth rates will result in moderate short-term growth, which SSH expects to accelerate over the next several years. Given the weak performance in SSH’s software business in FY’19, the guidance was a small disappointment and we have consequently cut our sales estimates. We now estimate 16.6 MEUR net sales for 2020E (prev. 17.5MEUR), resulting in 15% y/y growth, which is right at SSH’s guidance upper range. Reaching that level of net sales will require several larger one-off UKM license deals and/or some bigger NQX deals in 2020E. In conjunction with our estimates revision, we have also now amended our estimates regarding the 12 MEUR hybrid loan interest expenses, which as of March 30th 2020 will rise from 7.5% to 11.5%. Management did not provide any new commentary regarding hybrid loan and its possible redemption or re-financing.

Maintain EUR 1.0 target price, recommendation HOLD (prev. SELL)

Despite our estimates cut, the bigger picture remains unchanged in our view; with the underlying question in the investment case still regarding growth. SSH has made progress, but the progress is slow and given SSH’s historical and current growth profile, the question remains will growth materialize. We maintain our target price of EUR 1.0, our recommendation is now HOLD (prev. SELL). As noted before, SSH trades at a clear discount to the cyber security sector. Our target price implies an EV/Sales multiple of 2.4 on our ‘20E estimate, slightly below Nordic software peers, which we see as warranted given weaker metrics and the uncertainty to our estimates.

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