SSH Communications Security Q4’23 sales were lower than our estimates. Net sales declined by -5% in the quarter and came in at EUR5.5m vs. our estimated EUR6.6m. Subscriptions ARR grew by 16% (25%) to EUR11.5m. EBITDA in the quarter was EUR0.5m, a margin of 9%.

Management attributed the overall miss to two key factors. Firstly, some invoices were deferred to Q1 2024 and will be acknowledged in the upcoming quarter. Additionally, a significant customer's subscription is currently without renewal. Moreover, the transition of licensing customers to subscriptions revealed a gap in the process, resulting in a year-over-year decline in licensing by 42%. Recurring revenue, ARR came in at EUR19.3m in Q4’23, down by EUR100k.

For the full year, SSH managed to generate EUR3.2m in operating cash flow and at the cash level is EUR3.7m. During the year the final instalment of the Deltagon acquisition of EUR1.7m will be paid. On a direct question on the call, management said it could pay the balance with cash at hand.

Trailing 12-month sales (TTM) came in at EUR20.4m, compared to EUR20.7m in Q3'23. TTM is growing 6% y/y. Historically, Q4 has been the strongest quarter, but as a larger part of the revenue is subscription-based, the calendar effect is diminishing. In our last update, we projected a run rate of 13% in Q4'23E, but the quarter growth rate of 6% came in short of our expectations. Going forward, a pick-up in the sales momentum should be expected. Redeye´s new target is for the Net sales TTM to reach 19% (y/y) at the end of 2024.

Subscription ARR was EUR11.5m, growing 16% (25%) y/y, and recurring revenue (ARR) mounted to EUR19.3m, growing 5% (10%) y/y. ARR lost some EUR100k in the quarter. Overall, the churn for SSH's products is low, but there will be customers leaving.

Recurring revenues (subscriptions and maintenance) accounted for 87% of total revenues, an increase from 93% in Q3’22.

Subscription sales came in at EUR2.9m, growing 16% (33%) y/y, below our estimates of EUR3.7m. 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 56% in this quarter.

In the current quarter, License sales amounted to EUR0.4mn, compared to EUR1.1m in Q4'22. Some customers hesitate to go from a license holder to a subscription-based contract. We find it quite odd because, with a subscription model, all updates and new versions will be pushed out to the customers when needed. Is there any contract that is not a subscription these days? Over time, we believe the subscription model will be the golden standard.

Maintenance sales came in at EUR1.9m vs our estimate of EUR2,2m, Y/Y decline of -9.5%.

During the quarter, EMEA, which accounts for around 53% (55%) of SSH's revenues this quarter, saw a -22% y/y decline. The Americas experienced a 22% increase, while APAC grew 33%.

Year to date PrivX grew 29% (23%). The ongoing focus on increasing deal sizes is still 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 USD250k. Customers continue to have problems funding new projects, according to the management. We understand it is frustrating for both investors and management the push is not coming. With the new Secure Collaboration 2024 just launched, 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.

PrixX is also an important bolt-on product for Microsoft Entra as it seamlessly integrates with MS Entra ID, providing comprehensive access management to critical targets for privileged users. This solution prioritizes a seamless user experience with features such as biometric authentication, single sign-on (SSO), and passwordless access. HERE is a short video presentation of how MS Entra and PrivX are working together.

Announced in November 2023 the Secure Collaboration 2024 is now rolling out to customers. The product is highly scalable with 95% gross margin. The question is how fast management will be able to ramp up sales going forward. We believe we should see some real progress in H2 2024.

As we wrote in our last update after the Q3 report, demand is high, but customers are still waiting, delaying the investment decision. Currently, 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 to ramp it up over time. However, it is important to note that there are no larger cancellations in the order book.

It was announced on 14 February SSH received an order of EUR1.8m to be delivered and recognized during 2024.

We are making changes for the sales downward by 7% for 2024 following the quarter report. Redeye expects net sales of EUR24 (EUR26m). The EUR1.8m order announced February 14 will mitigate part of our lower growth adjustments. Still, we anticipate SSH will continue to grow with profitability, and we believe the scaling effect will materialise when the "sweet-spot-order" inflow starts to kick in. Whether this will happen in H1 2024 or later is very hard to tell. We lower the EBITDA to EUR2.21m (EUR3.8m) for 2024 as we anticipate slightly higher R&D, sales, and marketing costs. This translates into an EBITDA margin of 9%.

On the back of the report, we adjusted our base case downward by -7% . Our new Base Case is EUR1.8 (1.9) per share, with a Bear case of EUR 1 (1.2) and Bull Case of EUR3.4 (3.6).

SSH trades at 1.9x EV/S 2025E, in line with its Nordic peers. We argue that SSH Communications Security has the most stable and predictable revenue stream compared to its peers.

Ongoing geopolitical risks remain a global concern, and we expect SSH to capitalize on these challenges in the future. However, it will take a longer time than we anticipated to ramp up sales.

SSH's estimated EV/Sales in 2024e is 2.3x, and the average for its Nordic peers is 1.7x 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.

The reaction in the stock following the Q4 report was very harsh, and the stock closed down -19% to EUR1.47. We argue SSH should be seen as a stable company within the cybersecurity area with a robust subscription revenue model growing profitably.