SSH - Issues profit warning

SSH lowered on Tuesday its revenue estimate for 2019. The lowered outlook did not come as a surprise as the bar was set really high for Q4. We’ve cut our sales and EBIT estimates for 2019 and coming years. Despite the estimates cut, the big picture remains unchanged in our view, with the underlying question in the investment case still being growth. We note that, SSH is making progress, but the speed of the transition is slow due to limited growth investment capacity. On the back of lowered estimates, our new target price is 1.0 euros (prev. 1.10), our recommendation remains SELL.

Lowering revenue estimate for 2019

SSH now estimates that its revenue from the software business (software fees, professional services, and recurring revenue) will decrease somewhat compared to 2018 level, which was 15.6 MEUR (excluding patent income). The previous guidance was for above 10% revenue growth. Reasons behind the lowered revenue outlook are lower professional services revenue than expected, negative FX impact from weakening euro, and postponement of significant NQX sales due to lengthy procurement processes.

Estimates cut, NQX showing signs of traction

Due to the profit warning we have cut our 2019E net sales estimates from 17.1 MEUR to 15.0 MEUR, and 2019E EBIT from 0.9 MEUR to -0.9 MEUR. Consequently, our net sales estimates for 2020-21E are also cut ~8%, while our EBIT estimates are cut even further. The lowered net sales estimates have a clear negative effect on our profitability estimates, thus postponing profit turnaround into the future. On the positive, the firewall product NQX is showing promising traction, with SSH citing that “significant sales” were now postponed to 2020. Our read is that significant would mean deals in the seven-figure range. In Q3, SSH received a request for information (RFI) by the Finnish Defence Forces Logistics Command regarding NQX.

Target price 1.0 euros, recommendation unchanged

On our renewed 2019-20E estimates, SSH is trading at EV/Sales multiples of 3.0x and 2.5x, which is clearly below the sector as noted before. Despite the estimates cut, the big picture remains unchanged in our view, with the underlying question in the investment case still regarding growth. We note that, SSH is making progress, but the speed of the transition is slow due to limited growth investment capacity. On the back of lowered estimates, our new target price is 1.0 euros (prev. 1.10), our recommendation remains SELL. Our target price implies an EV/Sales multiple of 2.2x 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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