F-Secure Initiation of coverage 3/2018
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F-Secure
Initiation of coverage
3/2018New strategy in acceleration phase F-Secure Company report 9 March 2018
The shift in the focus of the information security market from blocking threats to detecting them has
required considerable regeneration from F-Secure. The company launched a strategy intended for Analysts
the growing corporate security markets in 2015 to respond to the change, and that strategy has
now reached a stage where growth can be accelerated thanks to an expanded product and service Mikael Rautanen
portfolio. However, the company still has to unify its solution portfolio and develop a sales channel 358 50 346 3460321
for the larger enterprise segment before the alluring growth potential of the market is fully realized. mikael.rautanen@inderes.fi
Information security company turning into a cyber security solution provider
Through its history, F-Secure has developed a strong expertise, reputation and brand in preventing Atte Riikola
malware and cyber security threats. The company’s business model focusing on endpoint protection
products is very stable, as well as recurring and scalable by nature, which provides the company with a +358 44 5934500
good base to invest in the growth areas of the cyber security market. The shift in the market from atte.riikola@inderes.fi
blocking threats to detecting and reacting to them also creates challenges and change pressure for an
established supplier like F-Secure that has historically focused on the consumer business. Customer Rating and target price
demand is shifting from point technology solutions towards acquiring cyber security as a
comprehensive process. In order to respond to the change, F-Secure must continue developing and
unifying its product and service portfolio, shift its focus towards medium sized and large enterprises and
Accumulate
develop its organization. Previous: -
Value is created through growth in corporate security EUR 3.90
In the current market situation, F-Secure sees the best value creation potential in strong net sales Previous: -
growth on the corporate security markets. F-Secure’s current corporate security products and services
(43% of net sales) are, in our view, very competitive, and the recently expanded portfolio creates cross-
selling possibilities but the company must continue investing in strengthening the product portfolio and Share price: EUR 3.65
in the sales channel. In consumer security (57% of net sales), the company aims at stable growth and Potential: 6.8%
strong profitability. In line with its strategy, F-Secure invests considerably on the corporate side aiming
for an annual growth of over 15%, while maintaining group level profitability positive with the help of the
consumer business. Key indicators
2016 2017 2018e 2019e
Excellent growth outlook for the industry but also signs of overheating
Net sales 158.3 169.7 182.0 196.6
Cyber security companies are solving one of the biggest problems of digitizing society, which is why the Growth % 7.2% 7.2% 7.2% 8.0%
demand fundamentals of the market are excellent in a big picture. The size of the global cyber security EBIT 19.2 11.1 10.0 15.2
market is around USD 89 billion and is growing by some eight per cent annually. F-Secure’s business is EBIT % 12.1% 6.5 % 5.5 % 7.7 %
focused on more established product segments that grow more slowly than the overall market, and the
Profit before taxes 20.8 11.9 10.7 15.9
company’s investments in growth areas are still in their early stage. The cyber security sector is turning
EPS (EUR) 0.10 0.07 0.05 0.08
challenging as an investment object despite the growth outlook. We see a risk that the current, partially
Dividend (EUR) 0.12 0.04 0.04 0.05
extremely high valuation levels of the sector are not sustainable when competitive pressure increases
after the investment wave seen in the industry in recent years. P/E (adjusted) 34.6 57.0 71.5 48.1
F-Secure optimizes shareholder value between growth and profitability P/B 7.2 8.8 8.0 7.4
EV/S 2.8 3.1 2.6 2.4
The growing corporate cyber security markets are now being allocated and shareholder value is EV/EBITDA 18.4 29.9 28.9 21.5
created through the right balance between growth and profitability. We initiate our coverage of F- EV/EBIT 23.5 46.8 47.5 30.8
Secure with a cautiously positive view as the valuation of the share already reflects moderate growth Dividend yield % 3.4% 1.0% 1.1% 1.4%
expectations (EV/net sales 2018e 2.6x). We require the company to showcase strengthening growth in Source: Inderes
corporate security generated by new products before we can take a bolder stand on the share.Share price development Net sales and operating profit Valuation and dividend yield
3,4 %
Valuation multiple Dividend yield-%
19 21
5,0
15
4,5 1,8 %
EBIT
11 10 1,5 %
4,0 1,0 % 1,2 %
3,5
3,0 213 72x P/E
182 197
2,5 158 170 57x EV/EBIT
Net Sales
2,0 47x 47x 48x
1,5 35x 31x 35x
23x 22x
1,0
3/13
9/13
3/14
9/14
3/15
9/15
3/16
9/16
3/17
9/17
3/18
F-Secure OMXHCAP 2016 2017 2018e 2019e 2020e
Source: Reuters
2016 2017 2018e 2019e 2020e
Value
MCAP EV Risk factors Valuation
drivers
572 475
EUR million MEUR Strong growth in Transformation process Valuation levels in sector
corporate security from consumer security to high, not much room for
Demand outlook for the a cyber security company valuation multiple
corporate security not finished expansion
market strong Tight competition and rapid F-Secure’s conscious
EV/S EV/EBIT market change in
F-Secure has good growth investments
2.6x 48x preconditions to invest in consumer security
Success of investments in
burden the profit
2018e 2018e growth Growth speed most
corporate security
Consumer security important value driver for
Cyber security market
creates stable cash flow the share
potentially over-invested at
Scalable and sustained We see a slight upward
the moment
Source: Inderes business model by potential if the strategy
3
nature progresses as plannedContents
Company description and business model pp. 5-13
Investment profile pp. 14-17
Industry pp. 18-23
Competition pp. 24-27
Strategy pp. 28-31
Historical development pp. 32-35
Estimates and valuation pp. 36-40
Tables pp. 41-45
Disclaimer and rating history p. 46
4F-Secure in brief
F-Secure is a company that offers cyber security products and services, whose solutions help
thousands of companies and millions of consumers to protect themselves from security
threats.
Cloud storage business sold in
1988 1999 Endpoint protection focused antivirus company
2015
Year of IPO Transformation into a more
Focus on consumer customers
versatile provider of cyber
establishment
security products and services
EUR 169.7 million (+7.2% vs. Expansion into cloud storage markets
Focus on growing corporate
security markets
200
2016)
NET SALES 2017 180
+16.4% 2015 to 2017 160
16 19 16 2
140 13
Average growth of net sales from corporate 4 97
2
security 120 97
96
100 96
86 94 92 92
78
EUR 11.1 million (6.5% of net 80 66
74
sales) 60
OPERATING PROFIT 2017 40 85
73
63
47 50 49 47 47 45 46 52
20
1,104 57% / 43%
Share of
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e
Personnel at the end consumer/corporate
of 2017 security in net sales 2017 Corporate
Yritystietoturva Consumer
Kuluttajatietoturva Pilvitallennus
Cloud storage (lopetetut
businesstoiminnot)
Security Security
Source: F-Secure / Inderes
5Company description and business model 1/6
Company description passed security and reacting to them. The
corporate security market is, therefore, growing
Software company focusing on cyber security strongly. In consumer security, the market is
extremely mature and growth is slow.
F-Secure is a cyber security software company Market change
established in 1988. The company’s roots are F-Secure has reacted to the market change. In
deep in antivirus software, where the company 2015, the company started transforming from an
has operated since it was founded and, in antivirus company towards a company that offers
practice, for as long as computer viruses have more versatile cyber security services and Previously
existed. Through its history, the company has products and focused its growth investments on
developed a strong reputation and brand in the growing corporate security markets. This ✓ Mass viruses
preventing malware and information security transition has required a change in the company’s ✓ Prevention
threats and in how malware develop and how organization, mindset, product offering and ✓ Data security is technology
their industrial logic works. F-Secure’s antivirus strategy.
✓ Point solutions
software for endpoints have won numerous
awards in international information security tests The change process required by the market
and the company’s endpoint protection products disruption is still ongoing at F-Secure. Thanks to Now
have been sold to millions of consumer and its history, the company’s clear strength is its
stable and profitable consumer business, as well
hundreds of thousands of companies worldwide. ✓ Intelligent, targeted attacks
as established position and well-known brand on
Historically, F-Secure’s business has focused on the security markets. In corporate security, many ✓ Attack detection
strong antivirus know-how, where the basis is the competitors are clearly unprofitable and ✓ Cyber security is a process
prevention of attacks and threats. However, a dependent on external financing when investing ✓ Complex wholes
paradigm shift is ongoing on the information aggressively in growth, while F-Secure can make
security markets, where the assumption that all similar investments in this area with cash flow.
attacks could be prevented has become
impossible. With the development of technology, In light of current market trends, the shift in F-
malware and hacking have also become clearly Secure’s strategic focus to the growing corporate
smarter and constantly evolving, which is why it is business could have started earlier as the F-Secure's transition
practically impossible to prevent all modern company was still in the early 2010s investing
attacks in advance with security software. Thus heavily in the consumer business, for example, in
cloud storage. Expansion into the cloud storage Focus from consumer security to
the market is shifting from attack prevention
increasingly towards detection and a mindset business and selling of this business in 2015 did, enterprises
where cyber security is seen more as processes however, create clear shareholder value and New product areas (detection)
than products. This has been an important provided the company with capital to invest in
growth in corporate security.
Uniform products and services
change for the market and F-Secure. Services next to products
Especially on the corporate security markets
focus has shifted from preventive blocking of
threats to quick detection of threats that have
6Company description and business model 2/6
Distribution of revenue
Business model Sales, marketing and distribution channels
200
Two business areas F-Secure is currently investing heavily in
increasing the net sales from corporate security 150
and the company has clearly increased its 97
F-Secure’s business currently comprises 100 96
96
developing, offering and selling of corporate resources in terms of sales and marketing in 92 92
security products and services, as well as recent years. At the end 2017, altogether 636 50
consumer security products. The company’s basis persons worked in sales and marketing (including 45 46 52 63 73
is the stable and healthy antivirus products consultants), which corresponds with 58% of the 0
business on top of which it is building its current company’s employees. Sales and marketing 2013 2014 2015 2016 2017
growth strategy. expenses amounted to EUR 105 million in 2017 or
Yritystietoturva
Corporate Kuluttajatietoturva
Consumer
some 62% of net sales.
In 2017, the company’s net sales were EUR 170
million and operating profit was EUR 11 million. F-Secure sells its corporate security products Number of employees
The share of corporate security in the company’s through an extensive retailer network, which 1200
net sales was 43% and that of consumer security globally consists of over 6,000 IT service
108
was 57%. On the corporate side, company growth partners. The task of the company’s own sales 1000 131
has been strong and on the consumer side organization is to support and provide services 800
136 127 147 360
stable. Net sales is by nature very continuous and for the retailers, as well as develop and grow this 325
600 366 325 279
is based on annual licenses of various durations network in order to accelerate the growth in
and, increasingly, on monthly SaaS fees. corporate security products. Critical in terms of 400
Geographically the company focuses on Europe. success is that selling of F-Secure’s products and 500 570 636
200 437 469
The share of the Nordic countries in the related services is good business for the retailers.
company’s net sales was 37% and that of the rest The current clientele of F-Secure’s data security 0
of Europe was 41% in 2017. The remainder of net products consists mainly of small companies but 2013 2014 2015 2016 2017
sales came from North America (10%) and the company is shifting its focus towards medium
elsewhere in the world (12%). At the end of 2017, sized and large companies with its new security Myynti
Sales ja markkinointi
and marketing Tuotekehitys
R&D Administration
Hallinto
the company had 1,104 employees of whom 636 products, which requires development of the
worked in sales and marketing, 360 in product existing retailer channel. The company primarily Geographic distribution of revenue
development, and 108 in administrative tasks. offers cyber security consultation as direct sales 200
through its own sales organization.
The company's strategic focus in terms of growth 150
lies in corporate security, where the market is In consumer security, a majority of net sales is
growing rapidly. Consumer security is, however, created globally through a network that covers 100
an important pillar for F-Secure, where the over 200 operators, which is one of the
company’s key strengths and competitive 50
company is aiming for moderate growth in line
with the market and good profitability and cash advantages. F-Secure started building a sales
0
flow, which in part can be used to finance the channel through operators already at the 2013 2014 2015 2016 2017
growth investments in corporate security. The beginning of the 2000s and its operator network
synergy between the consumer and corporate is clearly the largest compared to other cyber Pohjoismaat
Nordic Muu Eurooppa
Other Europe
business derive primarily from shared security companies. Consumer products are also
technologies. sold through many partners operating online and Pohjois-Amerikka
USA Muu Maailma
Other countries 7Partners Operations Business idea Customer Products
segments
Protection Service for
F-Secure offers a comprehensive Business, Business Suite
R&D selection of cyber security
Large companies and Endpoint protection products
solutions and services to both governments
enterprises and consumers.
Rapid detection service
IT service partners Sales and
Marketing Detection of and responding to cyber-
Small and medium attacks as a managed service
Solid expertise in virus New products for sized companies Endpoint detection &
F-Secure Labs prevention detection and response (2018)
research center response
Automated alarm system for
endpoints
Consumers
F-Secure Radar
Telecom operators Resources
Vulnerability management
Go-to-market
Long-term cyber
security expertise Corporate security Cyber security consultation
Ability to deliver High value added Focus on more challenging
comprehensive product services complement Retailers cyber security customers
Cyber security
and service packages the products +6,000 IT service partners
technology and
F-Secure Cloud Protection
software
for Salesforce
Retailers Consumer security
Extensive retailer Securing cloud platforms
network Retailers
+200 operators
F-Secure Safe, Key,
Strong brand, Retailers
Freedome and Sense
especially in Europe Own online store Cyber security solutions for
consumers
Cost Income flow
1,104 employees (2017) structure MEUR -160.6 (2017) Net sales 170 MEUR
43% (2017) 57% (2017) EBIT 11.1 MEUR (2017)
Pohjoismaat
Nordic
12%
10% 37% Muu Eurooppa
Other Europe
North-
Pohjois-
Materials and services Sales and Research and Administration Corporate Consumer security America
Amerikka
41% Other
Muu Maailma
(3.9%)* Marketing development security
(20.4%)* (8.4%)* countries
(61.9%)*
Source: Inderes *% of net salesCompany description and business model 3/6
retailer partners, and also increasingly in the products and develop new products. The more Products
company’s own online store. data the products that are in use produce, the
more efficiently it can find vulnerabilities and the F-Secure offers its corporate security products
Product development better existing products become. This is an through an extensive retailer network, which
important distinguishing factor in the business globally consists of over 6,000 IT service
In 2017, in all, 360 F-Secure employees worked partners. F-Secure’s corporate security product
model when comparing F-Secure with software
with product development and product selection includes:
companies that sell their software products with
development costs (EUR 35 million)
the conventional linear business model. This is
corresponded with some 20% of net sales. In its • Cloud-based and locally managed endpoint
particularly true for endpoint protection products
product development, the company focuses in protection products (Protection Service for
where the economies of scale are considerable.
particular on developing the features of existing Business and Business Suite)
In detection products, the company’s products
corporate security products and launching new
are tailored to the customer’s network • Managed detection and response solutions
products on the markets. The main focus lies on
environment over time with the help of machine (Rapid Detection Service, RDS)
developing products that detect and respond to
learning, which also creates strong ties to the
security threats. Another key development target
customer. These factors generate an important • Automated tool for detecting and responding
is better harmonization of the product portfolio in
competitive edge in the company’s business to malicious hacking to be released this year
order to be able to offer more comprehensive
model. (Endpoint Detection and Response, EDR).
cyber security solutions to customers. In
consumer security, there is low pressure to
increase product development investments in Corporate security • Vulnerability management solution (F-Secure
Radar)
protection products for endpoints but the F-Secure’s corporate security business consists
company also invests in certain product areas on of product business, managed services, where • Solution for securing cloud platforms (F-
the consumer side (like the Sense security router). the product and service are combined, and pure Secure Cloud Protection for Salesforce)
F-Secure’s core technologies, especially in service business. The product business is Protection Service for Business and Business
detecting malware, are basically very similar both excellently scalable due to replicability. Managed Suite
in consumer and corporate security products, services are also easily scalable and F-Secure’s
which creates a lot of synergy in product products have in this category been designed so A majority of F-Secure’s corporate security net
development. F-Secure’s consulting business also that the company’s retailer or integration partner sales currently comes from selling of protection
enriches product development as F-Secure’s (IT service provider) is primarily responsible for products for endpoints, the demand of which is
consultants can investigate security breaches that delivering the service components and F-Secure stable and the market is growing moderately.
have never been seen before at large companies only offers certain service components that These products represent F-Secure's core
and transfer the knowledge they gained to require specialized expertise. In its consulting competence, virus prevention, and are an integral
product development. business, the company focuses mainly on part of the company’s product portfolio. Products
delivering services requiring the highest level of are sold with annual licenses of various lengths
F-Secure’s business model includes considerable expertise, where the price levels for the and as continuous subscriptions valid until further
economies of scale and network effects on consultants can be really high compared to notice (SaaS). Traditionally, a majority of the total
product development. The company’s products conventional IT service operations. The transition volume is fixed-term licenses whose renewal
daily collect vast amounts of data from from “cyber security as a technology” towards rates are a key indicator for the company. Our
customers’ online traffic that are processed with “cyber security as a process” will in future also view is that the renewal rates have constantly
the help of AI and machine learning in order to blur the line between products and services in F- been on a good level. The market is, however,
detect malware and security threats. With the Secure. strongly shifting towards deliveries based on
help of processed information from this constant continuous monthly licenses. 9
data stream, F-Secure can refine its existingCompany description and business model 4/6
The customer target segment for these products by nature, where technology plays a big role. energy and IT. The biggest challenge in our view
are small and medium sized companies and F- Sensors are installed in the customer’s IT is that the target group for RDS is in the size
Secure’s endpoint protection products are used networks and endpoints, which collect and category of large companies where F-Secure
by over 100,000 companies globally. The size stream data to F-Secure’s data center, where AI does not yet have a strong partner and
category of annual contracts vary from hundreds and machine learning are used to find anomalies distribution network.
of euros to some tens of thousands of euros. in the company’s data communications that could
indicate security threats that have passed into F-Secure’s competitors in this product category
Competition is tight in endpoint protection the system. In addition, honey pots can be come mainly from USA and the main competitors
products and the field is quite established. F- installed in the customer’s network, which help include Darktrace, Crowdstrike, Carbon Black
Secure’s competitors are numerous companies detect if some external party tries to hack into the and FireEye. According to F-Secure, it
that offer antivirus software, like Symantec, customer’s systems. F-Secure’s data center distinguishes itself from its competitors with its
Kaspersky, McAfee, Sophos and Trend Micro. F- monitors customers’ data environments 24/7 and strong technological expertise in antivirus, which
Secure’s customer base in this product group when it detects a possible threat it notifies its means that RDS’ detection ability of cyber-attacks
focuses heavily on small companies, where the service partners whose job it is to react to the is very good. In addition, in Europe the company
role of the retailer is emphasized in the customer’s security alert. RDS’ sensors collect a has competitive advantage against its
customer’s purchase decision. Customers’ know- huge amount of data daily and the overall picture competitors in that geopolitical factors may affect
how in cyber security issues is typically low and of the customer’s data communications becomes the decision making of some customers.
the purchase decision is often made based on clearer over time. Through machine learning, the
the price or the retailer partner’s Endpoint Detection and Response (EDR)
product increasingly becomes better tailored to
recommendation, which means that management the customer's environment and thus the This year, F-Secure will launch an automated tool
and development of the retailer channel is an customer’s threshold to switch to another for detecting and responding to malicious
important factor in the competition. Comparisons product grows over time. hacking (Endpoint Detection and Response,
made by research institutes that test security
EDR). The product is largely based on the same
software also affect customers’ purchase RDS is suitable for companies whose security
technology as RDS but it does not include the
decision in this product group. F-Secure’s requirements are high and the target group are
service component and is scalable to smaller
endpoint protection products have performed companies with more than 1,000 employees. The
companies as well through automation. EDR acts
very well in security tests within the industry (AV- size category of the contracts is around EUR one
as an additional ability on top of endpoint
Test, AV-LAB PL, V3) over the years and their hundred thousand and for the largest customers
protection products and on the markets this
ability to detect malware are of world class clearly higher. RDS still has a small weight in the
product area is integrating with endpoint
compared with the competition. company’s business as it is a relatively new
protection products. F-Secure has designed its
product but thanks to the large size of the
Rapid detection service (RDS) EDR product so that it is also compatible with the
contracts its importance in the growth of
endpoint protection products of its competitors.
corporate security was already considerable in
RDS is F-Secure’s first product launched in 2016 This distinguishes F-Secure in the competition
2017. F-Secure’s expectations concerning the
to respond to the paradigm shift on the security and makes it easier to sell the product to parties
product are high, and the company invests
markets, where mere prevention of malware and that are not using F-Secure’s endpoint protection
heavily in its continuous development and sales.
malicious hacking is evolving into quick detection software.
F-Secure has already managed to attract
of threats that have passed the security and
customers to RDS, e.g. from banking, media,
responding to them. RDS is a managed service
10Company description and business model 5/6
The operating principle of EDR is highly similar information security. The product scans the who own critical IT systems cyber security
to RDS but when the product detects an company’s network and endpoint data against a consulting. In consulting, F-Secure focuses
anomaly in the company network the vulnerability database and notifies when it finds primarily on the most demanding customers and
information is automatically delivered to the vulnerabilities (e.g. software versions that have security issues and the company tries to hire the
company’s IT head, while in RDS F-Secure’s own not been updated and that have vulnerabilities). most respected cyber security consultants in the
experts help with detection. The product also Radar was transferred to F-Secure in 2015 in world, whose expertise companies are ready to
gives the IT head instructions on how to connection with the nSense acquisition and the pay high fees for. The focus of F-Secure’s
respond to the security threat. The product is sales of the product has grown well. In a big consulting lies in the most demanding security
suitable for companies of all sizes but the main picture, F-Secure faces large competitors in problems and the strategic goal is not to expand
target group will be small and medium sized vulnerability management that focus only on this its service business to compete with regular IT
companies whose cyber security budget is too segment (Rapid7, Tenable), and the company's service companies, even if the company’s
small for acquiring RDS. main focus is not to start competing directly with service offering is sometimes overlapping with
these large players. F-Secure sees integration of these. More extensive cyber security service
Next to RDS, F-Secure’s EDR holds center stage Radar’s functionalities into the company’s packages are offered by consultancy companies
in the company’s growth strategy for corporate endpoint protection products, as well as RDS (like KPMG), IT generalists (like CGI) and
security. If successful, the product has and EDR as the potential of Radar. This could specialized players (like Nixu).
considerable growth potential as the product generate a considerable competitive edge
market is still in an early development stage against other antivirus-based competitors that The demand for consulting services is strong
and, for example, the market research company do not have capabilities in vulnerability and growth is constantly restricted by the
Gartner has estimated that the number of management. This product integration requires availability of experts. F-Secure already has
endpoints with detection ability will grow more product development investments from hundreds of large corporate customers in its
manifold in coming years and that the EDR the company and, thus far, Radar’s importance consulting services. The company has not
markets will grow at an annual rate of 45% in the for the company’s business is still relatively low. revealed the size class of the business but the
next few years. F-Secure is now investing net sales of nSense that was acquired in 2015
heavily in completing the product in order to get F-Secure Cloud Protection for Salesforce was around EUR 7 million and the number of
a piece of this rapidly growing market segment. employees was some 70 (in 2014). The business
Also in this product category, F-Secure faces F-Secure has developed cyber security has been growing heavily since the acquisition
competition on a wide front, as nearly all capabilities into the Salesforce platform for and it has been complemented with two small
competitors that offer endpoint protection checking links and appendices for malware. The acquisitions (Inverse Path, 2017 and Digital
products have EDR capability, in addition to development is still at relatively early stages and Assurance, 2017), so we can assume it currently
which, the developing and rapidly growing the importance of the product as a whole is employs over 100 persons and its net sales is
market constantly attracts new players. The rather small at this stage. F-Secure also has clearly above EUR 10 million.
weakness we see is that the company is only other ongoing research projects to secure cloud
entering the EDR competition this year with a platforms but the main focus in product The services offered by the company include
slight handicap to its competitors. development lies in developing detection cyber security audits, cyber security stress tests
capabilities and products related to them. (Red Teaming), strategic risk and cyber security
F-Secure Radar management, cyber security in software
Consulting services development and responding to hacking and
The vulnerability management solution Radar data leaks.
enables analyses of weak spots in companies’ F-Secure offers large companies and others
11Company description and business model 6/6
F-Secure’s cyber security consulting also offers operators. Consumer products are also sold Operator channel
synergies with the product business. F-Secure’s through many partners operating online and
consultants get to help companies in preventing retailer partners, and also in the company’s own F-Secure started building a sales channel through
the most challenging and completely new cyber online store. The company’s products are used by operators already at the beginning of the 2000s
security attacks and threats and this know-how millions of consumer customers across the world. and its operator network is clearly the largest
can be utilized in product development when The main products in the company’s current compared to other security companies. In
developing new cyber security products. F- product portfolio are: consumer security, operators sell F-Secure’s
Secure’s ability to offer consulting services offers products as part of their own continuous cyber
the company a competitive advantage against • Endpoint protection product, F-Secure Safe security packages. Through the operator channel,
players who only offer cyber security products. In F-Secure receives extensive distribution and
• Privacy protection product (VPN), F-Secure volume for its products, and, thus, the replicability
addition, consulting offers cross-selling
Freedome and scalability of the products enable good
possibilities with the products. Consulting also
polishes F-Secure’s brand towards a more profitability even though the operators take a
• Password management product, F-Secure Key
comprehensive cyber security company. rather large share of the gross sales of the
• Data security router that protects all smart products as they are responsible for the lion’s
F-Secure’s cyber security consulting is still equipment in the home, F-Secure Sense share of product marketing. For operators, co-
primarily a project driven business but the operation with F-Secure is also fruitful as by
company is constantly trying to make continuous A majority of net sales in consumer security offering cyber security packages in connection
consulting agreements with its customers. comes from selling endpoint protection products with broadband subscriptions operators have, in
(Safe). The sales of Freedome and Key was addition to profitable additional sales, been able
Total solutions for corporate security growing last year but we estimate that their effect to improve the customer loyalty and satisfaction of
on the net sales of consumer security is still low their subscriptions. In our opinion, the success of
F-Secure’s product portfolio is currently more
compared to Safe. An increasing number of F-Secure’s product among operators is based on
extensive than ever. As the company moves from
customer are, however, switching to the the fact that it solves two of the core problems of
smaller companies to larger ones, new demands
combination solution Total that includes both Safe the operator business (average price and
are also created for the product portfolio as IT
and Freedome when renewing their order. This customer churn).
decision makers are more willing to buy easily
product bundling is a key growth driver for
understandable and clear comprehensive Direct sales channel
consumer security sales.
solutions than separate individual products. F-
Secure still has things to do in order to integrate Sense, that was introduced to the market in 2017, Consumer products are also sold through many
its product and service portfolio into a more did not affect the net sales of the company’s retailers operating physically and online. In
uniform whole in order for the company to better consumer security last year but the company sees addition, the company is increasingly selling its
sell comprehensive solutions (e.g. growing interest in the product as smart products through its own online store, which
RDS+Radar+consulting). The current renewed equipment increases in households. Expectations means there are no middlemen between F-Secure
product portfolio already offers considerable concerning the product are still cautious because and the end customer. The competition on the
additional sales possibilities to existing customers. the market for the product is in its infancy. One market is extremely tough and customer
potential route for more extensive commercial acquisition requires considerable marketing
Consumer security distribution of Sense would be to offer Sense as a investments, and various free products and
software that can be installed on the routers of freemium models make the consumer market
Products third parties. challenging to reach through direct sales.
F-Secure offers cyber security products for
consumers through a network of more than 200 12F-Secure's business model
Shared technology and product development
Management
Threat Research Analytics and
services
Lab monitoring platform
(companies)
Consumer security Corporate security products and services
57% of net sales 2017 43% of net sales 2017
Privacy protection (F-Secure Freedome) Endpoint protection (EPP)
Endpoint protection (F-Secure Safe) Endpoint detection and response (EDR)
Password management (F-Secure Key)
Vulnerability management (Radar)
Data security router (F-Secure Sense)
Managed detection (RDS)
Threat detection
IT and sensor data
Retailers and IT service
Operators Retailers integrators/direct from millions of
online store partners products in use
sales (services)
Consumers Consumers Small Medium sized Large
businesses (200-5,000) businesses
(25-200) (>5,000)
Product sales Product sales Product and service Product and service
Product sales
(retail sales/revenue sales sales
sharing with operators)
13
Source: InderesInvestment profile 1/2
Challenging development stage to perceive create more of a risk factor for the share. responding to them has forced F-Secure to
start a transition from a company focusing on
F-Secure is difficult to perceive for investors in Strengths antivirus products to a more comprehensive
the current development stage, as the share cyber security company.
combines a stable cash flow business ▪ Strong expertise and products in virus
(consumers) with a business that is in a heavy prevention technologies. F-Secure has ▪ Transformation into a cyber security
investment stage with negative cash flow award winning cyber security products, a company still ongoing. The change requires
(corporate) and the company does not report the strong brand in certain market areas, and further development and integration of the
profitability of the businesses by segment. The long experience in detecting malware. company’s product portfolio, as well as sales
former of these is basically priced with earnings- investments, which depress profitability in the
▪ A stable and established position in
based valuation ratios and operating margin on short-term. Also, as a brand, F-Secure is not
endpoint security gives the company good
the stock markets. The latter is priced with yet seen as a provider of corporate security
resources to expand F-Secure’s core
EV/Sales ratio and the growth percentage. So solutions.
competence and technology to new
the company is not a pure growth company but
segments and sell new solutions to the ▪ The change process could have started
not a “matured” tech company either.
existing customer base. sooner. In light of the current market
F-Secure’s own objective is to continuously situation, one could argue that the company
▪ The business model based on scalability and
balance between growth investments and should have started focusing the strategy
strong customer loyalty enables excellent
profitability, which ever is optimal for heavily on the corporate side already earlier
profitability after the current investment stage
shareholder value at the time. We consider this in the 2010s in order for it to have a clearer
is successful.
approach to be sensible but difficult for lead in the competition. F-Secure is now
shareholders to interpret. The share cannot ▪ Hot and growing market. The rapidly entering certain product areas (like EDR) later
simply be priced with one method or multiple, growing corporate security market and than its competitors. On the other hand, the
value creation must be viewed as part of a certain product areas within it offer strong sales of the cloud storage business in 2015
bigger whole. In our opinion, the main drivers for growth potential. gave the company resources to start
the company’s value creation are the growth investing in the corporate side.
rate (of corporate security) and the operating ▪ Strong balance sheet and good cash flow
profit margin of the whole company, so a strong offer leeway in growth investments and ▪ The sales channel in corporate security for
growth rate compensates the weakness in enable acquisitions when the opportunity medium sized and large companies is still
profitability and vice versa. Currently, the stock presents itself, while many smaller players in being built.
market values growth rate very highly and it is the sector depend on external financing. F-
Opportunities
seen as a key value driver as the cyber security Secure’s cash in hand and financial assets
market is seen to be on the threshold of strong available for sale amounted to EUR 90 million ▪ Successful growth in corporate security
growth and it is important for players to stake at the end of 2017 and the company has no creates shareholder value as the market for
out the market now. interest-bearing debt. detection and response products is only
emerging and market shares are handed out
We point out that the valuation multiples of F- Weaknesses
now. RDS and the coming EDR product are
Secure’s industry are already stretched high. A
▪ Paradigm shift in the industry from prevention the growth drivers in coming years. Radar
rise in the valuation levels in the sector should
of cyber security threats to rapid detection of offers a potentially considerable competitive
no longer be seen as a value driver, they actually
threats that have passed security and edge if integrated into the portfolio.
14Investment profile 2/2
▪ Success in renewing and integrating the for F-Secure's share. We caution that the
product portfolio would also enable the valuation multiples in the industry are in some
company moving in the value chain more cases stretched very high.
towards larger customers and would
accelerate the growth of corporate security. A ▪ Competitive threat in consumer security and
more integrated product portfolio would also weak net sales growth: Free antivirus
bring a competitive edge. software are one reason for slow growth on
the market for consumer security. Microsoft is
▪ New product areas, like the Sense security constantly developing the features of the free
router on the consumer side, can offer the Windows Defender and this can in the
company considerable scalable growth medium term affect consumers’ purchase
potential. decisions in consumer security. Despite this
and threat scenarios that have been discussed
▪ Inorganic growth through acquisitions could for years, consumer security seems to remain
generate shareholder value if successful. F- a very vital business.
Secure has a track record of successful
corporate reorganization transactions that
have generated value in the past and the
company constantly scans for potential
acquisition targets. The valuation levels of the
industry are high at the moment and it is not
easy to find suitable acquisition targets at the
right price.
Risks
▪ The industry is potentially over invested,
which can lead to a clear increase in
competition in the next few years. In recent
years, capital investors have invested several
billions in hundreds of new cyber security
companies and corporate transaction activity
is high in the sector. The gold rush of new
players can lead to tightened competition and,
despite the growing market, there is not
enough to go around.
▪ Dissolving of high valuation traps in the
sector would probably have a negative effect
also on the valuation accepted on the market
15Investment profile
Potential Risks
Strong growth focus in corporate
1. security ▪ In corporate security, ▪ The industry is potentially
strong growth now over invested, which can
generates shareholder lead to a clear increase in
2. Hot and growing market value competition in the next
▪ Strengthening growth few years
and competitive edge ▪ Dissolving of the high
Scalable and sustained business through renewal and
3. model integration of product
valuation levels in the
sector could have a
portfolio negative effect on the
▪ Strong demand outlook share
Transformation from virus prevention to
4. a cyber security company still ongoing on the market ▪ Competitive threat in
▪ Strong and stable consumer security and
business in consumer weak growth
Strong cash flow provides capacity to security
5. invest in corporate security growth
Source: Inderes
16Risk profile
Risk profile of the business model
Low risk level High risk level
Market Strong demand drivers on
cyclicality
1 the market but tight
competition
Net sales Net sales is by nature continuous
1 Net sales continuity 1
and is based on annual licenses
of various durations and monthly
SaaS fees.
Net sales Net sales comes from millions of
distribution
1 consumers and hundreds of
thousands of companies
Scalability of Cost structure primarily
2 Profitability costs
2 fixed, marketing costs are
flexible if necessary.
Cost structure Strategy aims at strong growth
2 at the expense of short-term
result.
Capital Operations tie a little capital and
3 working capital is negative.
3 Capital commitment
structure
Net debt-free balance sheet. At
Financing need
3 the end of 2017, the company’s
net financial assets stood at EUR
90 million.
Assessment of F-Secure’s overall
business risk 17
Source: InderesIndustry 1/4
Market Market segments In the big picture, market growth is the result of 1)
data security issues playing an important role for
Market definition, size and growth The target groups of the cyber security market an increasing number of industries when
can be roughly divided into three parts in a planning new digital businesses and 2) the rising
Cyber security companies are solving one of the pyramid model based on the intelligence of trends on the IT markets (industrial Internet of
biggest problems of the digitizing society. Big attacks and technologies. The intelligence of things, social media, digital commerce) force
problems always also means big business attacks and technologies also broadly correlates organizations to pay more attention to data
opportunities, which makes the market extremely with the size of the customer organizations as security. In the segment of targeted attacks
interesting, dynamic and rapidly growing. the biggest organizations and state (large and medium sized organizations), cyber
administration are typically the main targets of security cannot be solved only with mass
Cyber security refers to processes, technologies, cyber criminals. For organizations at the top of solutions. The information security budgets of
solutions and services that protect companies’ the hierarchy, solutions that have been created companies in this segment are annually roughly
and other organizations’ or individual users’ data for the masses at the bottom of the hierarchy do around EUR 1 to 5 million, which makes this
against criminality that occurs in electronic not offer sufficient protection levels. segment attractive to companies that offer cyber
networks. Cyber threats can be divided into three Correspondingly, the solutions focusing on the security products and services. F-Secure has
categories: 1) criminality that aims at financial top levels of the hierarchy are too expensive for expanded into this segment in recent years
profit, 2) hacking that aims at disrupting organizations whose activities do not require a through acquisitions (consulting service) and a
companies’ or governments’ activities, and 3) high protection level. The development of new wider product portfolio (e.g. RDS).
spying that aims at gaining a competitive technology focuses on the more demanding top
business advantage or discovering government level segments after which the technology is The most important segment for F-Secure at the
security secrets. The number of cyber threats duplicated to the lower levels for broader moment is the lowest level of the triangle that
and their intelligence is constantly growing and segments. includes small and medium sized companies and
the market is, in practice, driven by an endless consumers. For small companies and consumers,
race between criminals and cyber security The top of the cyber security market is the main thing is to be protected against mass
technologies and processes. represented by state espionage and the defense attacks, which can be done with regular “off the
industry. This is a niche market from the shelf” cyber security products like endpoint
The cyber security market develops quickly and viewpoint of cyber security companies but it protection products and firewalls. A majority of F-
the estimates on the total market size and growth represents the highest technology and level of Secure’s net sales still comes from endpoint
vary dramatically. The market research company expertise and is thus important. The largest protection products.
Gartner estimates that the global size of the volume of the market is found in the center part
cyber security market was USD 89.1 billion in of the pyramid that covers targeted attacks. In Among medium sized companies the need for
2017 and it is expected to grow at an average this case, the primary target group is in practice higher cyber security than mere endpoint
annual rate of 7.9% in 2016 to 2021. The share of all large organizations and public administration, protection is growing, but the data security
consumer security is USD 4.6 billion and it is and in particular the actors whose activities budgets (EUR 0.1 to 1.0 million) are clearly lower
expected to grow at an annual rate of 1.6%. The include critical activities in terms of security of than in the large company segment, which
majority of the market is formed by corporate supply (like energy, banks and operators). Crucial means that buying of the best technologies or
cyber security services and products. The share in this target group is that its size is constantly managed/outsourced cyber security services is
of services is good one-half of the total market growing as data security threats expand, which not necessarily possible.
and they are expected to grow by 8.3% annually. also expands the market for demanding cyber
The rest consists of corporate security products, security solutions.
the market of which grows by 7.4% annually.
18Sector
Distribution and operating logic of the cyber security
Market drivers
market
Digitalization Regulation
R&D focus on highest level
technologies
Cyber security State
consulting espionage
Digital commerce
Duplication of technology Industrial Internet of EU's Data
to larger markets things
Open systems
Protection
Cloud Regulation
Detection of evolved attacks
Targeted attacks Mobility
(RDS & EDR)
Vulnerability management Large companies and organizations,
(Radar)
public administration
Risk-based Forced
purchasing purchasing
Mass solutions
(endpoint
Mass attacks
protection)
Medium sized companies Complexity and change rate as growth drivers
for cyber security products, expert services and
Small companies and consumers outsourced cyber security
Market size / number of buyers
Source: Inderes 19Industry 2/4
Especially the rapid detection of threats that management solutions. The size of the market Weights, size and annual growth
have passed endpoint protection is now for outsourced corporate cyber security services rate of F-Secure’s market
emphasized in the segment of medium sized (including managed security services) was,
companies. For this need, F-Secure is according to Gartner’s estimate, USD 16.7 billion
segments
developing an automated alert system for in 2017 and the market is expected to grow on
endpoints (EDR) that will be launched this year, average by 11.4% per year in 2015 to 2020. IDC USD 4.6 bn
which offers additional/cross-selling has estimated that the market size for
Consumer security
opportunities for the company in this partially vulnerability management solutions is around
under-serviced segment. In medium sized USD 1.0 billion and the market is expected to Significant product area 1.6%
companies, IT managers demand more grow at an annual rate of around 13% in 2015 to
comprehensive cyber security solutions instead 2020. F-Secure expanded to these markets
of point product solutions, which creates through the nSense acquisition in 2015 and the
challenges for F-Secure to integrate its product launch of the RDS product and it has been able USD 3.6 bn
portfolio to meet the needs of this customer to grow faster than the market in these Endpoint protection
segment. segments. products for companies
Significant product area 2.6 %
Market sub-segments for F-Secure In terms of F-Secure’s growth in coming years,
an interesting market is the segment for
F-Secure’s potential market can be examined automated detection and response products for
more closely through the company’s product cyber-attacks. (Endpoint detection and USD 0.4 bn
and service selection. According to Gartner, the response, EDR), where F-Secure is launching its Endpoint detection and
market for consumer security products was USD own product in 2018. The market is at the response (EDR)
4.6 billion in 2017 and it is expected to grow at beginning of its life cycle and Gartner estimates New product area
45%
an average annual rate of 1.6 % in 2016 to 2021. that its size was USD 0.4 billion in 2016 but the
The slow growth on the consumer security market is expected to grow by an average of
market is explained by the popularity of over 45% per year in 2015 to 2020. The
constantly evolving free antivirus solutions (e.g. definition of the EDR segment is blurred by the
USD 1.0 bn
Windows Defender) but growing product areas Vulnerability
fact that it can be seen as a market area that
management
can be found, for example, in privacy protection overlaps with the market for endpoint protection
Small product area
13%
(VPN solutions) and in solutions designed to products. Growth is driven by the fact that
protect smart equipment in the home. malicious hacking against companies is often
not detected for months, and this has shifted the
In corporate security, a majority of F-Secure’s
focus from merely preventing hacking towards
net sales still comes from endpoint protection
faster detection and response. Large companies USD 16.0 bn
products, the market size of which was USD 3.6 Cyber security services
can buy detection capabilities as managed
billion in 2017 and Gartner estimates it will grow Important, growing area
at an annual rate of 2.6% in 2015 to 2021.
services (like F-Secure’s RDS) but especially for 10%
smaller companies a pure product solution is the
The most rapidly growing markets for F-Secure only sensible solution in terms of costs.
in corporate security can be found in cyber
security services, detection and response
solutions for malicious hacking and vulnerability 20
Source: Gartner, IDCIndustry 3/4
Gartner estimates that the share of endpoints by the fact that cyber security is increasingly EU's Data Protection Regulation
equipped with automated detection and becoming a critical and integral part of any new
response products of all endpoints will grow IT system, digital service or product. This means EU's Data Protection Regulation (GDPR), that
from 10% on 2017 to 35% by 2020. that problems related to cyber security cannot was passed in spring 2016 and that will enter
be solved simply by acquiring cyber security into force in May 2018, has clearly increased the
Market drivers software and equipment off the shelf but solving demand for cyber security services, which also
of cyber security also requires the use of high- supports F-Secure’s business. The regulation
In our opinion, the cyber security market is still imposes new obligations on organizations that
level expertise services. Due to these market
emerging and will develop strongly over the handle personal data. Through EU's Data
drivers, F-Secure’s business has also been in
next few years, which is why current market Protection Regulation organizations are, for
turmoil in recent years where the company is
estimates are even at best only indicative. example, obliged to report any breach of
transforming from a endpoint focused antivirus
Market growth will probably be steady and security. The authority that supervises the
company to a more versatile provider of cyber
strong and accelerate pushed by digitalization regulation can impose sanctions if the regulation
security products and services in the corporate
investments. In addition, constant news of is breached. The sanctions can be massive, as
segment.
serious hacking (risk-based purchasing) and for more serious breaches the fine is EUR 20
pressure created by regulations (forced Consumer security changing million or 4% of the company's annual net sales,
purchasing) will boost market growth. At the top which is intended to make companies take the
level, growth is, in practice, driven by two forces: In consumer security, the changing endpoint new regulation seriously. At the same time, the
regulation and threat scenarios. portfolio has been visible as a slight drop in monetary definition of the sanctions provide
antivirus software for PCs but, as a whole, the cyber criminals with a price tag, which they can
The commonly recognized mega trends in the IT number of devices connected to the web is use to blackmail companies after a successful
world like mobility, cloud, industrial Internet of growing rapidly in consumers’ homes. This hacking operation. GDPR also supports F-
things, social media and digital commerce are provides growth opportunities for new cyber Secure’s product business as the regulation
strongly linked with cyber security. In many of security products that protect smart devices in means that companies have to build better
these areas, the barrier for creating new the home even though PC driven antivirus capabilities to detect realized security breaches.
applications, products and digital services is software sales is a challenging market. In
information security challenges. These consumer security, the nature of the market is
challenges are related, for example, to privacy changing rather than the market faltering with
protection, e-commerce or security. One mega PC antivirus. For example, Windows’ own data
trend worth mentioning is also open systems security is cannibalizing conventional cyber
(like Android) becoming more common. This security but this does not solve the consumer’s
makes the market more attractive from a problem of how to protect several different
criminal’s viewpoint than when companies still endpoints. Thus, there is a natural need for F-
operated mainly in their own individual closed Secure’s packages for comprehensive
environments. consumer solutions as the array of endpoints
and operating systems is vast and constantly
Building of new digital services requires that
changing. Gartner estimates that the number of
companies and governments solve the
consumer devices connected to the web will
challenges related to data security in advance.
grow from 5.2 billion in 2017 to 12.8 billion by
This means that the demand for cyber security
2020.
related products and services is also supported
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