Future Data Sovereignty And Quantum Security Trends Will Support Gradual Earnings Recovery

Catalysts

About SSH Communications Security Oyj

SSH Communications Security Oyj provides cybersecurity solutions focused on privileged access management, network encryption and secure communications for enterprises and public sector customers.

What are the underlying business or industry changes driving this perspective?

• The shift to a subscription and as a service model has increased annual recurring revenue to 97% of total revenue. However, the move away from large license deals can limit near term top line spikes and keep net sales growth modest while the recurring base builds.
• PrivX is positioned around the global move to modern privileged access management, zero standing access and the growth of machine identities. The current low double digit subscription growth rates suggest that capturing a larger share of this market may take time and keep revenue expansion and earnings progression gradual.
• The partnership with Leonardo has created about 40 identified opportunities in areas such as sovereign cloud, defense, critical infrastructure and high performance computing. Long procurement cycles, complex certifications such as NATO and EU approvals and multi year rollouts can delay when these deals convert into recognized revenue and EBITDA.
• Growing demand for data sovereignty, European made cyber solutions and open source based secure messaging supports products such as SalaX and NQX. Reliance on export licenses, country specific regulations and partner execution in regions such as APAC can introduce timing risk for both revenue growth and margin improvement.
• Heavy investment in R&D and new hires aims to capture trends such as post quantum cryptography adoption and modern PAM architectures. The more than 40% resource spend on development raises the cost base, so if subscription ARR and deal sizes do not scale as planned, operating leverage and net margins could remain constrained.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on SSH Communications Security Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SSH Communications Security Oyj's revenue will grow by 16.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -16.8% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach €1.5 million (and earnings per share of €0.03) by about March 2029, up from -€3.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €8.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 106.9x on those 2029 earnings, up from -32.8x today. This future PE is greater than the current PE for the GB Software industry at 17.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Leonardo has generated about 40 joint opportunities and is embedding SSH’s products into a broad European cyber offering. If even a portion of these opportunities convert into multi year deployments, subscription ARR and earnings could rise more than expected, which may support a higher share price over time through stronger revenue and EBITDA.
• PrivX is positioned in a large PAM market, is growing in the low double digits with Q4 growth of 17.7%, and has received positive recognition from Gartner and other analysts. Wider customer adoption of modern PAM and machine identity use cases could lift net sales and operating margins more than assumed.
• Long term themes such as European data sovereignty, adoption of Matrix based secure messaging and increasing regulatory focus on quantum safe encryption align directly with SalaX and NQX. If these secular trends translate into broader deployment in areas like PSN, healthcare and critical infrastructure, that could provide upside to revenue and earnings.
• SSH is investing heavily in people and R&D, with more than 40% of resource spend in development and new hires across the U.S. and other regions. If this expanded capacity and new functional structure convert into better sales execution and partner driven distribution, operating leverage could improve and net margins could widen.
• APAC net sales grew for the full year and the region now has export licenses for NQX and new partners in markets such as Vietnam and Taiwan. If these partnerships start to scale across a very large addressable market, the contribution from APAC could exceed current expectations for revenue growth and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for SSH Communications Security Oyj is €2.0, which represents up to two standard deviations below the consensus price target of €2.45. This valuation is based on what can be assumed as the expectations of SSH Communications Security Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €2.9, and the most bearish reporting a price target of just €2.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €33.9 million, earnings will come to €1.5 million, and it would be trading on a PE ratio of 106.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of €2.18, the analyst price target of €2.0 is 9.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.