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

F-SECURE CORPORATION - INTERIM REPORT - JANUARY 1 – DECEMBER 31, 2014

F-Secure Corporation, Interim Report, February 4th 2015 at 9.45 (EET)

YEAR OF CLOUD SECURITY, SOLID PROFITABILITY AND CASH FLOW BUT FLAT ANNUAL
REVENUES 

Highlights in Q4

  -- Total revenues were 38.2 million (40.0m) showing a decline of 4%
  -- EBIT was 6.1 million excluding one-offs of 1.4 million  representing 16% of
     revenues  (8.8 m, 22% of revenues)
  -- Earnings per share was EUR 0.03 (EUR 0.03)
  -- Cash flow from operations was 11.6 million positive (9,3 m positive);
     change in cash 9.5 million (8.5 m positive)
  -- Core cloud security sales continued strong growth while traditional
     PC-centric security and phased out online backup businesses declined
  -- Defferred revenues grew to 43 million (38.7 m) driven by strong corporate
     and direct business security  sales
  -- Personnel cooperation negotiations in Finland concluded in December;
     resulting in total one-off costs of 1.4 million
  -- Company strategy revised for 2015-17, increased focus on cloud security

Highlights in 2014

  -- Total revenues were 153.8 million (155.1 m) showing a decline of 1%
  -- EBIT was 23.1 million excluding one-off costs of 4.3 million representing
     15% of revenues  (27.1 m, 17% of revenues)
  -- Earnings per share was EUR 0.10 (EUR 0.11)
  -- Cash flow from operations was 29,1 million positive (28.5 m positive);
     change in cash 22.4 million excluding dividend of 9.3 m (24.5 m positive
     excluding dividend of 9.3 m)
  -- Restucturing of content cloud business was concluded in France in Q1 and in
     Finland in Q4; resulting in total one-off costs of 4.3 million
  -- Company's cloud security strategy progressed as planned; overall security
     sales grew in 2014

The Company's financial performance was within the revised guidance
communicated in October. The guidance was the following: Revenues are estimated
to remain at 2013 levels and  profitability estimate is 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. 

Outlook for 2015

  -- Revenues are estimated to remain at 2014 levels  
  -- Profitability is estimated to be around 15% of revenues  



Key figures                2014   2013   2014   2013
----------------------------------------------------
(Eur Million)             10-12  10-12   1-12   1-12
----------------------------------------------------
Revenues                   38.2   40.0  153.8  155.1
----------------------------------------------------
Operating profit*          6.1    8.8    23.1   27.1
----------------------------------------------------
% of revenues*             16     22     15     17  
----------------------------------------------------
Profit before taxes*       6.2    8.7    24.2   26.3
----------------------------------------------------
Earnings per share (Eur)   0.03   0.03   0.10   0.11
----------------------------------------------------
At the end of period:                    43.0   38.7
Deferred revenues                                   
----------------------------------------------------
----------------------------------------------------
ROI%                       25     52     27     41  
----------------------------------------------------
Equity ratio, %                          75     74  
----------------------------------------------------
Debt-to-equity ratio, %                  -77    -66 
----------------------------------------------------
Personnel                                921    939 
----------------------------------------------------

(This report is unaudited. Unless otherwise stated the comparisons refer to the
corresponding period a year ago. The currency is euro. *Excludes one-off costs
of 2.9m  booked in Q1 and 1.4m booked in Q4 ) 



President and CEO Christian Fredrikson:

“We have continued to successfully execute our cloud security strategy. The
profitability and cashflow in Q4, and throughout 2014, was solid while revenues
were clearly behind our ambitions. In Q4, operator sales overall continued to
decline as a result of the transition in our content cloud business. The
adoption of younited personal cloud, while strong, did not fully compensate for
the phaseout of our online backup business. Our overall security sales
increased even as traditional PC-centric sales continued to decline slowly. Our
corporate security business, especially Protection Service for Business, is
performing well. Also,our multi-device protection offering, SAFE, is delivering
good growth through operators as well as direct sales. We are pleased to see
the continued progress of Freedome, our first truly cloud-based privacy and
security product. With now close to two million downloads it has been well
received. 

Several security hacks and privacy threats made headlines across the globe in
recent months. We see malware getting increasingly complex, harder to detect
and more adept at exploiting weaknesses. Criminally motivated targeted
cyberattacks are compromising individuals' and companies' security. These
developments, combined with the ever growing use of mobile devices, continue to
stir up security markets. Cloud-based security solutions are transforming the
way protection is provided. Thus, short-term growth remains challenging in
PC-centric security. However, this ongoing transition presents great mid- and
long-term business opportunities. 

We believe in substantial growth opportunities in cyber and cloud security in
the coming years. In our revised strategy for 2015-17, F-Secure aims to be the
preferred choice for consumers and companies who value privacy and security. We
focus on cloud-based security and continue to invest in developing and bringing
new related products to the market. Going forward, we are looking at new
initiatives to expand our offering to provide security  for the new generation
of connected devices (Internet of Things)  and protection against cyber
attacks. In the personal cloud business, the focus is on the operator channel,
where we maintain a strong position. 

I have strong confidence in our cloud security strategy, as we continue to
fight for digital freedom.” 

F-Secure Financials January - December 2014

Total revenues declined by 1% to 153.8 million (155.1 m). Revenues through the
operator channel decreased by 4% from the previous year to 91.9 million (95.3
m), representing 60% (61%) of F-Secure's total revenues. Revenues through
resellers and direct to consumer increased by 4% totaling 62 million (59.8 m).
These channels represented 40% of F-Secure's total revenues (39%). Deferred
revenues increased to  43 million (38.7 m)  at the end of the quarter as a
result of strong licence and renewal sales. 

EBIT was 18.8 million or 23.1 million (27.1 m) excluding one-offs of 4.3
million related to overall restructuring costs in Q1 & Q4, representing 12% or
15% (17%) of revenues. Earnings per share were EUR 0.10 (EUR 0.11). Cash flow
from operations was 29,1 million positive (28.5 m positive). The change of net
cash was 22.4 million positive excluding paid dividends of 9.3 million (24.5 m
positive excluding paid dividends of 9.3 m). 

Total fixed costs were 130.4 million or 126.1 million (123.7 m)  excluding
one-offs of 4.3 million related to the Bordeaux re-organization and efficiency
gains in Q1 and Q4, an increase of 5% or 2% 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 9.3 million (9 m). The capitalized development
expenses were 2.3 million (0.3 m). 

The 2014 geographical breakdown of revenues is as follows: Finland and
Scandinavia 31% (31%), Rest of Europe 46% (45%), North America 10% (11%) and
Rest of the World 13% (13%). 

F-Secure Business in Q4

Security sales in Q4 grew overall despite the decline in traditional PC
security. The growth is spurred by security sales based on the new cloud
security strategy. 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 privacy and
security product fully powered by the cloud. 

Among operators, F-Secure's security sales continued to gain traction in Q4,
especially with the multi-device offering SAFE. The Company has signed new
deals and launched new security services with operators, including SFR
(France), Telefonica (Peru & Ecuador) and VIVO ( Brazil). 

The Company's corporate security business performed very well in Q4, with sales
growth driven by Protection Service for Business. Traditional client security
sales among corporate customers grew as well. The Company has successfully 
focused on Germany, France and the USA, which has led to the growth of our
reseller network and thus to increasing  sales. 

F-Secure's direct to consumer security business had strong growth in Q4, driven
by the new 2015 versions of F-Secure SAFE and Internet Security. The next
generation privacy and security app, Freedome, continued to perform well with
close to two million downloads to date. 

The Company's personal cloud business, younited, is very competitive in winning
new operator partners. With younited, F-Secure has won about 30 operator
partners, over 20 of which are already in production. In Q4 for example, the
company launched PCCW (Hong Kong) and Claro (Brazil). In  Q4 the Company
decided to focus on  personal cloud business  on the operator channel, with
direct business serving as only a touch point to end-users.  This has led to
the reorganizing and optimizing of resources in the content cloud business. The
Company concluded personnel cooperation negotiations in December to drive
efficiencies (see stock exchange release on December 8, 2014). 

The Company's overall Q4 operator channel revenues continued to decline due to
the phasing out of the first-generation, legacy content cloud business (online
backup) and declining traditional PC-centric sales. Some of the decline was
compensated for by the growth of the multi-device offering SAFE and the new
younited personal cloud. 

Q4 operator revenues declined by 9% to 22.4 million (24.9 m). Revenues to
corporate and direct to consumers grew by 4% to 15.7 million (15.2m). In total,
revenues declined by 4% to 38.2 million (40.0 m) in Q4. 

In 2014 revenues from the operator channel declined by 4% to 91.7 million (95.5
m). Revenues to corporate and direct to consumers grew by 4% to 62 million
(59.8 m). In total, revenues declined by 1% to 153.8 million (155.1 m). 

Geographically, the Company continued its expansion in Latin America with
Telefonica and American Moviles. Another investment area focus is corporate
sales in Germany, France and the USA. The Company continues to investigate
possible new geographical entries in the APAC area. 

Product Announcements in Q4

In Q4 the Company continued to invest in security excellence and go-to-market
activities as well as enhancing the user experience of our products. 

F -Secure SAFE launched an upgraded user interface and improved usability.
F-Secure Search, SAFE's search extension, was expanded to mobile users with
Android, iOS and Windows Phone. More about the SAFE service
http://www.f-secure.com/safe 

The PC version of Freedome was pre-launched in December with the full launch
following on 21 January. Freedome was also on offer in selected retail stores.
A new Freedome service node was launched in Australia. More about Freedome:
https://www.f-secure.com/en/web/home_global/freedome 

Younited launched an upgraded version of the service that includes improved
sorting of content on mobile devices, support for iOS8 and Chromecast also for
Apple devices. More about younited:
https://www.f-secure.com/en/web/home_global/younited 

Risks and uncertainties

The most significant risks for F-Secure are related to the following factors:
instability in the economic climate, changes in the competitive environment and
customer demand affecting the volume of business and price levels, the
competitiveness of F-Secure's product portfolio in the changing market
situation, the ability to protect the intellectual property (IPR) in F-Secure's
solutions, risk exposure from increasing contractual liability requirements,
regional development in new growth markets, the sustainability of partner
relationships, the development of new business areas, continuous change in the
storage and content cloud services markets, and potential security threats
targeted at these services. 

Events after period-end

No material changes regarding the Company's business or financial position have
materialized after the end of the quarter. 

Personnel and Organization

F-Secure's personnel totaled 921 at the end of the quarter (939).

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), Jari Still (R&D
Operations), Pekka Usva (Corporate Security Business) and Taneli Virtanen
(Chief Financial Officer, until 22 February) and Saila Miettinen-Lähde (Chief
Financial Officer, from 23 February onwards). 

Financing and Capital Structure in 2014

Cash flow from operations was 29,1 million positive (28.5 m positive). The
change of net cash was 13.1  million positive including paid dividends of 9.3
million in April (15.2 m positive including paid dividends of 9.3m). Net
financial income was 1.1 million positive (0.7 m negative). 

The market value of the liquid assets of F-Secure at the end of the quarter was
61.3  million (47.7 m). Changes in exchange rates had a non-material impact on
sales and costs. 

The Company's capital expenditure was 5.8 million (3,7 m). The capitalized
development expenses were 2.3 million (0.3 m). 

F-Secure's financial position remained solid. F-Secure's equity ratio at the
end of the quarter was 75% (74%) and gearing ratio was 77% negative (66%
negative). 

Taxation

In 2013, Finnish tax authorities changed their interpretation of the right to
deduct paid withholding tax in some countries. Thus, the Company was obligated
to pay previously approved withholding tax from 2012 and  could  not decuct
them in 2013. Now, the Company has managed to collect some of this withholding
tax from certain countries. However, the Company is partially double taxed. In
2014, based on the Company's request, Supreme Administrative Court made a
favourable decision on taxation related to the Company's Malaysian subsidiary.
As a consequence of these activities, the Group's  tax rate in 2014 is  21%
(37% in 2013, 29% in 2012). 

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. At the end of the year,
the Company held 3,004,812 of its own shares. 

Corporate Governance

F-Secure's corporate governance practices comply with Finnish laws and
regulations, F-Secure's Articles of Association, the rules of NASDAQ OMX
Helsinki and the Finnish Corporate Governance Code issued by the Securities
Market Association of Finland in 2010. The code is publicly available at
www.cgfinland.com. 

F-Secure published its corporate governance statement for 2013 in the Annual
Report and on the Company website in March 2014.  Market Overview The security
software business is in transition. The Software-as-a-Service business model
and cloud-based delivery are rapidly disrupting traditional ways of doing
business. While PCs continue to play an important part in the device landscape,
especially in business use, the majority of the growth in new device sales will
come from post-PC mobile devices and Internet of Things. These changes
continues to transform the security markets, too. The short-term growth in
PC-centric security is challenging. However, there are substiantial mid- and
long-term business opportunities due to this ongoing transition. 

The growing variety of connected devices and services creates increasing
complexity for both business and individuals. The threat landscape is becoming
more sophisticated and threats to online security have grown and evolved
considerably. Online criminals are following users to social media and mobile
devices. In addition to traditional malware, governmental surveillance,
espionage and targeted cyber attacks are a reality. According to a recent study
by the Pew Research Center Internet Project, 91% of adults in the survey agreed
that consumers have lost control over how personal information is collected and
used by companies. Since the Snowden revelations, consumers have become more
aware that they may be revealing the most intimate details of their lives
through their connected devices. The need for security has never been greater. 

Overall, the security market is over $20 billion in size and growing. According
to Gartner (Q3 2014) the consumer security software market is growing to be
over a $6 billion market by 2017 ($5.1 billion in 2013). 

Long-term objectives and strategy summary for 2015 - 17

In 2014 F-Secure updated its strategy, last communicated in February 2014. The
sharpened focus is on cloud security. F-Secure protects all connected devices
and secures the privacy of people and corporations. The strategy is built on
the following trends: 

Connected devices. Mobility and the vast variety of connected devices (Internet
of Things) are changing the Internet landscape rapidly. The need to protect
privacy and reputations, safeguarding the digital freedom of businesses and
individuals, has become even more relevant as threats to new types of connected
devices emerge. 

Cloudification. In the future, most of the data and services will be in the
cloud - or rather, many clouds. This means there will be an opportunity to
solve both security and usability problems while delivering products and
services, including security, from the cloud. 

With the Company's strong technology assets, a foresight on the security
landscape, and attention to customer insights, F-Secure continues to invest in
developing and bringing cloud-based privacy and security products to the
market. The Company will increasingly use the cloud to power existing PC and
mobile security products and to develop new products that are fully
cloud-based. From the cloud, the Company can offer security to the ever-growing
variety of connected devices (Internet of Things) in a scalable way. Our
position in the market is strengthened by the strong Finnish legal framework
for privacy. 

The Company will focus on consumers and corporate customers by leveraging its
current channels, and will use its operator network to sell personal cloud
services as well as traditional and cloud-based security to consumers. Our
reseller network in key markets will be further expanded to serve our
increasing corporate customer base. The Company will employ its direct business
channels in providing security and privacy products to consumers globally. 

During the strategy period of 2015-2017, the Company's target towards the end 
of the period is to grow the overall subscriber base by tens of millions of
users while seeking double digit revenue growth. The growth is expected to come
from the western hemisphere and some emerging markets like Latin America. As
the Company invests in growth, the proportional profitability will remain at
the current level and longer-term profitability continues to be driven by
revenue growth and scalable operations. 

Outlook for 2015

The management estimates annual revenues will remain flat in 2015. During the
first half, the revenue decline is expected to continue, affected by the
phaseout of  the online backup business as well as  declining traditional PC
security sales. The management expects to see a stronger second half as a
result of continued growth in our core cloud-based security  sales. Annual
profitability is estimated to remain at around 15% of revenues. 

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). The Company will also invest in new initiatives to further expand
into cloud and cyber security offerings. Traditional PC security sales are
expected to continue a slight decline. 

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. 

Signing of the annual report and proposals to the Annual General Meeting

The Board of Directors will sign the annual report on February 13. The Company
will on that date publish the proposals to the AGM. The Company's dividend
policy is to pay approximately half of its profits as dividends. Subject to
circumstances, the company may deviate from this policy. 

News conference today at 11 am

A news conference for analysts and press is arranged today, 4 February, 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 Q4 financial results. 

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

https://meet.F-Secure.com/tapio.pesola/RVM2BPP6

To participate in the online meeting through phone, please dial in to
+358975110100. Conference ID is 6657805. 

The webinar will be organized through Lync to enable a better experience with
video and presentation while providing access to international investors and
analysts. If you have not used Lync before, you need to download and install
it. For more advice on how to use it, please visit 

https://support.office.com/en-in/article/Quick-Start-Use-Lync-2010-Attendee-3141
c2f5-ffac-42a8-a426-cff158dda27f 

It is possible to participate through the Lync web application, but please note
that you will also need call in to the meeting via phone to hear the audio. 

The Q4 financial results presentation material will be available on our
Investors web pages at http://www.f-secure.com/investors before the call
begins. 

Financial calendar for 2015

F-Secure Corporation will publish its interim reports during 2015 as follows.

  -- Interim Report for Q1/2014 - April 23, 2015 
  -- Interim Report for Q2/2014 - July 23, 2015 
  -- Interim Report for Q3/2014 - October 22, 2015 

The Board's proposals to the Annual General Meeting will be published on
February 13. The Annual Report for 2014 will be published on the company's
website by week 12. The Annual General Meeting is scheduled to be held on
Thursday, April 8, 2015. The Board of Directors will summon the meeting at the
later date. 

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_Q4_ENG_final.pdf