F-Secure Oyj - Interim report (Q1 and Q3)

F-SECURE CORPORATION - INTERIM REPORT JANUARY 1 – SEPTEMBER 30, 2014

F-Secure Corporation, Interim Report, October 23rd 2014 at 09.00 (EEST)

SOLID PROFITABILITY AND CASHFLOW, FLAT REVENUES

Highlights in Q3

  -- Total revenues were 37.9 million (38.3 m) showing decline of 1%
  -- EBIT was 6.9 million representing 18% of revenues  (8.4m, 22% of revenues)
  -- Earnings per share was EUR 0.04 (EUR 0.03)
  -- Cash flow from operations was 5.3 million positive (6 m positive); change
     in cash 4.3 million (5.3 m positive)


Outlook for 2014 - management's estimation for the year has been revised

  -- Revenues are estimated to remain at a level of 2013
  -- Profitability estimate is unchanged at around 15% of revenues excluding
     one-off costs


The original guidance for the year was the following: revenues are estimated to
grow from 2013 with a stronger second half and profitability is estimated to be
around 15% of revenues excluding one-off costs. 


Key figures               2014  2013   2014   2013   2013
---------------------------------------------------------
(Eur Million)              7-9   7-9   1-9    1-9    1-12
---------------------------------------------------------
Revenues                  37.9  38.3  115.6  115.1  155.1
---------------------------------------------------------
Operating profit*          6.9   8.4   17     18.3   27.1
---------------------------------------------------------
% of revenues*             18    22    15     16     17  
---------------------------------------------------------
Profit before taxes*       7.5   7.8   18     17.7   26.3
---------------------------------------------------------
Earnings per share (Eur)  0.04  0.03   0.07   0.08   0.11
---------------------------------------------------------
At the end of period:                  38.3   36.2   38.7
Deferred revenues                                        
---------------------------------------------------------
---------------------------------------------------------
ROI%                       42    51    28     39     41  
---------------------------------------------------------
Equity ratio, %                        76     77     74  
---------------------------------------------------------
Debt-to-equity ratio, %                -68    -58    -66 
---------------------------------------------------------
Personnel                              933    973    939 
---------------------------------------------------------


(This report is unaudited. Unless otherwise stated the comparisons refer to the
corresponding period a year ago. The currency is euro. *1-9/14 excludes 2.9 m
of one-off costs booked in Q1) 



President and CEO Christian Fredrikson:

“Our financial performance in Q3 was below our expectations. The Company's
profitability and cash flow remained at a good level, but revenues disappointed
compared to our plans. Our personal cloud business progress was weaker than
anticipated. We still are very competitive in winning new operator partners,
but younited subscriber growth, especially in the direct to consumer channel,
has been slower than expected. While sales of traditional PC-centric security
continued to slowly decline, the growth of the Company's core cloud security
products for consumers and corporates compensated for this in all channels,
resulting in slightly positive total security sales. Our annual revenue
estimate for 2014 has been revised to reflect the situation; the annual revenue
is estimated to remain at 2013 levels, while the profitability estimation
remains unchanged at around 15% of revenues. 

New security and privacy threats, the decline of PC-centricity and the
ever-growing use of mobile devices continue to stir up the security markets.
Cloud-based security is disrupting the way protection is provided. This
transition creates great long term business opportunities. 

I am pleased to see the progress of Freedome, our next-generation security
product fully powered by the cloud, in app stores. We will soon introduce a
new, comprehensive version of Freedome that can be used on PCs and has even
more profound mobile security features. Our corporate security business,
especially Protection Service for Business, is steadily gaining new customers
and we expect it to represent an increasing part of our business in the future.
Overall, our security product portfolio is comprehensive and well fulfills the
needs of consumers and corporates. 

We will be driving for efficiencies in the Company to be able to invest in
developing and bringing cloud-based products to the market. I have strong
confidence in our cloud security strategy.” 


F-Secure Financials January - September 2014

Total revenues grew to 115.6 million (115.1 m). Revenues through the operator
channel decreased by 2% from the previous year to 69.4 million (70.5m),
representing 60% (61%) of F-Secure's total revenues. Revenues through resellers
and direct to consumer increased by 4% totaling 46.2 million (44.6 m). These
channels represented 40% of F-Secure's total revenues (39%). Deferred revenues
were 38.3 million (36.2 m)  at the end of the quarter. 

EBIT was 14.1 million or 17 million excluding one-offs of 2.9 million related
to overall restructuring costs in Q1 (18.3 m), representing 12% or 15% (16%) of
revenues. Earnings per share were EUR 0.07 (EUR 0.08). Cash flow from
operations was 17.5 million positive (19.1 m positive). The change of net cash
was 3.8 million positive including paid dividend of 9.3 million (6.2 m positive
including paid dividend of 9.3 m). Total fixed costs were 97.8 million or 94.9 million excluding one-offs of 2.9
million related to the Bordeaux re-organization and efficiency gains (93.6m),
an increase of 4% or 1% from the previous year. These increases are mainly
related to investments in Sales and Marketing activities to core businesses and
geographical expansions. Depreciations (R&D activations, software, hardware)
increased to 6.9 million (6.7m). The capitalized development expenses were 1.6
million (0.3 m). 

The 1-9/2014 geographical breakdown of revenues is as follows: Finland and
Scandinavia 31% (30%), Rest of Europe 46% (45%), North America 10% (12%) and
Rest of the World 13% (13%). 


F-Secure Business in Q3

Security sales based on our cloud security strategy are steadily growing and
compensating for the decline in traditional PC security sales. The Company's
core cloud businesses in security consist of SAFE (our multi-device offering
for consumers), Protection Service for Business (our corporate offering), and
Freedome, our next-generation security product fully powered by the cloud. 

F-Secure continued gaining traction in Q3 among operators, especially with our
multi-device offering SAFE. The Company has signed new deals and launched new
security services with operators; for example Polkomtel (PL) and Claro
(Brazil). Traditional PC-centric security sales continue to decline among
operators as well. The revenue growth in operator security was driven by Europe
and the Nordics. 

The Company's corporate security service, Protection Service for Business,
continues to gain momentum. This service is partially replacing the declining
traditional client security sales among corporate customers. The Company's SMB
focus in Germany, France and the USA is progressing well and has led to the
growth of our reseller network and thus to growing sales. 

F-Secure's direct to consumer security business is performing very well. New
2015 versions of F-Secure SAFE and Internet Security, launched to consumers in
September, have received highly positive feedback with very good ratings.
F-Secure is the best Internet Security company in tests over a five year
period. The next generation security app, Freedome, also continues to attract
interest among its audience and is generating conversions from freemium to paid
customers. 

The Company's personal cloud business, younited, is very competitive in winning
new operator partners. With younited, F-Secure has won around 30 operator
partners, of which over 20 are already in production. In Q3, the company
launched e.g. KPN (NL), TDC (DK) and Polkomtel (PL). However, direct to
consumer personal cloud sales have developed weaker than anticipated. Overall
subscriber growth has grown slowly while conversion rates to premium customers
have been low. The competition in the personal cloud business is fierce with
multiple international players. Younited for Business, launched in Q2, is still
in its early phase. 

The Company's overall Q3 operator revenues continued to take a hit due to the
phasing out of the first generation, legacy content cloud business with some
operators. Revenues were also impacted by delays in personal cloud deliveries
as well as declining traditional PC-centric sales. Much of the decline was
compensated for by our multi-device offering SAFE; thus leading to stable total
operator security sales. Revenues from the operator channel declined by 6% to
22.1 million (23.6m). Decline in the operator channel was partially compensated
for by growing security sales to corporate and direct to consumers. These
revenues grew by 7% to 15.8 million (14.7m). In total, revenues declined by 1%
in Q3. 

The Company is investing in developing and bringing cloud-based products
successfully to the market. Geographically, the Company continues its expansion
in Latin America with Telefonica and American Moviles. Another investment area
is corporate focus in Germany, France and the USA. The Company is also
investigating new geographical entries in the APAC area. 


Product Announcements in Q3

F-Secure continued to invest in security excellence and launched a new version
of F-Secure SAFE for multi-device security and Internet Security 2015. The
products incorporate advanced heuristic protection capabilities and
security-in-the-cloud to provide 100% protection against zero-day malware
attacks and prevalent malware as proven by independent certification
organizations. As tablets and smartphones are becoming more commonplace for
mobile banking, F-Secure expanded its Banking Protection capabilities to all
mobile devices to secure the ever growing need for online shopping and mobile
banking. 

F-Secure is the world's first security vendor to embed its pioneering Antibot
technology into endpoint security; i.e. F-Secure SAFE, and to create a unified
security app to meet the network security demand. More about the service
http://www.f-secure.com/safe 

New versions of the younited service have been released at a steady pace in Q3.
New functionalities include, among other features, a timeline view for content
in mobile devices, Chromecast TV integration, customer value vouchers and a
younited Android app for Jolla devices. More about the service
https://app.younited.com/ 

A completely renewed version of F-Secure Key, the password manager for online
services that helps the user control their online identity safely, was
published for both Android and iOS devices. The improvements focus on usability
and easier take-in-to-use, both essential for non-tech users. More about the
app http://www.f-secure.com/key 

In September, in tandem with the Consumer Launch 2015, F-Secure released a new
consumer website, which is also optimized for mobile device visitors with
responsive design. The new web and whole product portfolio was rebranded to the
new brand design and tone of voice. More about http://www.f-secure.com 


Risks and uncertainties

F-Secure's risks and uncertainties are related to, among other things, the
competitiveness of F-Secure's product portfolio, competitive dynamics in the
industry, market fluctuations, pricing models (e.g. free services, cost of
content cloud services), FX changes, impact of changes in technology, timely
and successful commercialization of complex technologies and new products and
solutions, the ability to protect intellectual property (IPR) in F-Secure's
solutions as well as the use of third party technologies on reasonable
commercial terms, subcontracting relationships, regional development in new
growth markets, sustainability of partner relationships, compromising stored
personal data, service quality related penalties, and risk exposure from
increasing contractual liability requirements and forming of the new business
areas. 


Events after period-end

F-Secure issued a stock exchange release on October 16 related to lowered
revenue guidance for 2014. 


Personnel and Organization

F-Secure's personnel totaled 933 at the end of the quarter (973).

Currently, the Leadership Team consists of the following persons: Christian
Fredrikson (President and CEO), Janne Juvonen (Customer and Market Operations),
Samu Konttinen (Consumer Security Business), Timo Laaksonen (Content Cloud
Business), Johanna Orjatsalo (Human Resources & Facilities), Pirkka Palomäki
(Chief Strategy Officer), Jari Still (R&D Operations), Pekka Usva (Corporate
Security Business) and Taneli Virtanen (Chief Financial Officer). 


Financing and Capital Structure F-Secure Financials January-September

Cash flow from operations was 17.5 million positive (19.1 m positive). The
change of net cash was 3.8 million positive including paid dividend of 9.3
million in April (6.2 m positive including paid dividend of 9.3m). Net
financial income was 1.0 million positive (0.7m negative). 

The market value of the liquid assets of F-Secure at the end of the quarter was
51.6 million (39.3 m). Changes in exchange rates, especially USD, JPY, SEK and
BRL, decreased slightly sales and costs. 

The Company's capital expenditure was 5.1 million (2.8m). The capitalized
development expenses were 1.6 million (0.3m). 

F-Secure's financial position remained solid. F-Secure's equity ratio at the
end of the quarter was 76% (77%) and gearing ratio was 68% negative (58%
negative). 


Shares, Shareholders' Equity, Own Shares and Option Programs

The total number of Company shares is currently 158,798,739. The Company's
registered shareholders' equity is EUR 1,551,311.18. Currently, the Company
holds 3,017,773 own shares. 


Corporate Governance

F-Secure complies with the Corporate Governance recommendations for publicly
listed companies published by the Securities Market Association, a body
established by the Confederation of Finnish Industries EK, the Central Chamber
of Commerce and NASDAQ OMX Helsinki Ltd., as explained on F-Secure's web pages.
F-Secure published its corporate governance statement for 2013 in the Annual
Report and on the Company website. 


Market Overview, long term objectives and strategy 2014-16

The software business is in transition. The Software-as-a-Service business
model and cloud-based delivery are rapidly disrupting the traditional way of
doing business. The Company has communicated its renewed strategy in the
February, Q4 interim stock exchange release. The Company is focusing on
cloud-based initiatives to serve and protect the post-PC multi-device
environment. 

During the strategy period 2014-2016, the Company aims to grow the overall
subscriber base by tens of millions of users and seeks accelerating revenue
growth. As the Company invests in growth, the relative profitability remains at
its current level and longer-term profitability continues to be driven by
revenue growth and scalable operations. 

Further details of the market overview and the strategy can be found in the Q4
interim release (February 5, 2014) and on the Company's web pages at
http://www.f-secure.com/en/web/corporation_global/company/vision-and-strategy. 


Outlook for 2014

The Company will drive for efficiencies to be able to invest in bringing new
cloud-based products to the market. Revenue growth is expected to come from the
Company's core cloud businesses, consisting of converged PC and mobile security
(SAFE), Protection Service for Business, personal cloud via operators
(younited) and security from the cloud (Freedome). Traditional PC security
sales are expected to be in decline. Geographically, Latin America is expected
to continue as a growth driver. 

Slower than anticipated development in the personal cloud business combined
with declining traditional PC-centric sales is estimated to impact negatively
on revenues in 2014. The Company has revised (see stock- exchange release on
October 16) its original guidance for the year: the annual revenue in 2014 is
estimated to remain at the level of 2013 (2013 revenues were 155.1 million
euros). The annual profitability estimate is  unchanged at around 15% of
revenues excluding one-off costs (2013 EBIT was 27.1 million euros; 17% of
revenues). 

The original guidance was stated as follows: revenue is estimated to grow from
2013 with a stronger second half and profitability is estimated to be around
15% of revenues excluding one-off costs. 

One-off costs 2.9 million related to efficiency improvements and reorganization
in F-Secure SDC (France) has been recognized in the Q1 financials. 

The revenue estimate is based on the sales pipeline at the time of publishing,
existing subscriptions and support contracts as well as current exchange rates.
The Company continues to prioritize growth over short-term profitability and
plans to invest the majority of the improved earnings in growth opportunities
in its core business. 


News conference today at 11 am

A news conference for analysts and press is arranged today, October 23rd, 2014
at 11 am Finnish time at F-Secure's Headquarters, address: Tammasaarenkatu 7,
Ruoholahti, Helsinki. At the news conference, President & CEO Christian
Fredrikson will present the Q3 financial results. 

An online meeting for international investors and analysts will be held (in
English) on the same day at 2.00 p.m. (EEST). To participate in the online
meeting, click on the link below: 

https://meet.F-Secure.com/gia.forsman-harkonen/DNG04SF9

To participate in the online meeting through phone, please dial in to
+358975110100. Conference ID is 3345794. 

The webcast will be organized through Lync to enable a better experience with
video and presentation also for the international investors and analysts. If
you have not used Lync before, need to download and install it, or need more
advice on how to use it, please visit 

http://r.office.microsoft.com/r/rlidOC10?clid=1033&p1=4&p2=1041&pc=oc&ver=4&subv
er=0&bld=7185&bldver=0 

It is possible to participate through the Lync web application, but please note
that this will not have sound and it is necessary to also call in to the
meeting via phone. 

The Q3 financial results presentation material, including a video where
Christian Fredrikson will present the Q3 results, will be available on our
Investors web pages at www.f-secure.com under Investors before the call begins:
http://www2.f-secure.com/en/web/corporation_global/investors/investors 


Financial calendar

F-Secure Corporation will publish its financial calendar for 2015 later this
autumn. 


F-Secure Corporation

Additional information

F-Secure Corporation
Christian Fredrikson, President and CEO
tel. +358 9 2520 0700

Taneli Virtanen, CFO
tel. +358 9 2520 5655

Attachments:

Interim_report_2014_Q3_EN.pdf