F-Secure Company report 7/2019

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Company report

  Inderes Corporate customer
F-Secure Company report 22.7.2019

Solid foundation for future growth                                                                                                     Analysts

We reiterate F-Secure’s accumulate recommendation and target price of EUR 2.9. To our minds, F-Secure offers a well-                                    Atte Riikola
managed and run combination of investment-phase business seeking strong growth (corporate security) and stable business                                 +358 44 593 4500
built on a solid foundation. During the past 5 years, the company has undergone a significant transformation from a consumer-                           atte.riikola@inderes.fi
driven endpoint protection company into a corporate cybersecurity company. During the last year, the transformation has now
clearly progressed to a phase of acceleration, with F-Secure finding an acquisition target matching its strategy and the new
                                                                                                                                                        Mikael Rautanen
product areas key to the strategy are beginning to be visible in the form of accelerating growth. With the strategy proceeding
                                                                                                                                                        +358 50 346 0321
on the current path, we find the risk/reward ratio of the share attractive.
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 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 good base to invest in the growth areas of the cyber security
market. The shift in the market from preventing threats to detecting and reacting to them also creates challenges and change
                                                                                                                                       Recommendation and target price
pressure for an established supplier like F-Secure that has historically focused on the consumer business. Customer demand             Accumulate
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               (prev. Accumulate)
medium sized and large enterprises and develop its organization.
                                                                                                                                       2,90 EUR                         Stock price: 2,55 EUR
Value is created through growth in corporate security                                                                                  (prev. 2,90 EUR)                 Potential: 13,9 %
In the current market situation, F-Secure sees the best value creation potential in strong net sales growth on the corporate
security markets. F-Secure’s current corporate security products and services (2019e 57% 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 in the sales channel. In consumer security (43% of net sales), the company aims at
stable growth and strong profitability. In line with its strategy, F-Secure invests considerably on the corporate side aiming for an   Key figures
annual growth of over 15%, while maintaining group level profitability positive with the help of the consumer business.
                                                                                                                                                                2018         2019e     2020e    2021e
Excellent growth outlook for the industry but also signs of overheating                                                                Revenue                    191          221       238     258
Cyber security companies are solving one of the biggest problems of digitizing society, which is why the demand                          growth-%                12 %         16 %       8%      8%
fundamentals of the market are excellent in a big picture. The size of the global cyber security market is around USD 124              EBIT adj.                 10,6          9,2       17,4   27,8
billion and is growing about 10% annually. F-Secure’s business is still somewhat more focused on slowly growing established              EBIT-% adj.            5,6 %         4,2 %     7,3 %   10,8 %
product areas than the general market, but the share of very rapidly growing detection and response solutions and rapidly              Net Income                0,8           4,5       9,5     17,3
growing cyber security services of the company’s business is continuously increasing as the strategy proceeds. The cyber
                                                                                                                                       EPS (adj.)                0,04         0,04      0,08     0,13
security sector is turning challenging as an investment object despite the growth outlook. We see a risk that the current,
partially 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 (adj.)                52,6         72,0      33,0    20,0
Upside in the valuation as the strategy proceeds on the right track                                                                    P/B                       5,5           5,7       5,0     4,3
The valuation of the F-Secure share (2019e EV/Revenue 1.9x) is low in the context of the cyber security sector and considering         Dividend yield-%         0,0 %        0,0 %      1,2 %   2,4 %
the historical valuation level of the company. The valuation is largely based on the growth rate in corporate security, with
                                                                                                                                       EV/EBIT (adj.)            35,2         44,9      23,5     14,3
regard to which market confidence has not fully recovered after the disappointing growth last year. The company has shown
accelerating growth in the first half of the year, and we estimate that this will gradually translate into recovering confidence and   EV/EBITDA                 27,1          13,1      13,7    10,0
in the valuation of the share as the company continues to grow as expected. Also based on our sum of the parts calculation,            EV/S                      2,0           1,9       1,7     1,5
the share has room for growth as the company’s strategy will proceed as planned in future years.                                        Lähde:Inderes
                                                                                                                                       Source: Inderes
Stock price                             Revenue and EBIT-% development                                                  Valuation (EV/S)
5,0                                                                                                                   14,0 %
                                                                                                              258                                            3,1
                                                                                                      238             12,0 %                         2,8
4,5                                                                                         221
                                                                                   191                                10,0 %
4,0                                                                        170                                                         1,9   2,0                   2,0
                                                                 158                                                                                                        1,9
                                                                                                                      8,0 %                                                        1,7         2,0
                                                                                                                      6,0 %
                                                                                                                      4,0 %
                                                                                                                      2,0 %
2,0                                                                                                                                   2014 2015 2016 2017 2018 2019e 2020e 2021e
      7/17                      7/18                7/19                                                              0,0 %
                                                                 2016     2017    2018   2019e    2020e 2021e
                     F-Secure             OMXHCAP                                                                                                EV/Sales                Median 2014 - 2018
                                                                                 Revenue          EBIT-% (adj.)
 Source: Thomson Reuters

                                                                       Value Drivers                         Risk factors                                   Valuation

                                                           •   Strong growth in corporate         •     Transformation process into a        •     Valuation levels in sector are
             MCAP                       EV
                                                               security                                 comprehensive cyber security               high, F-Secure’s EV/S-multiple
             401                       413                 •   Strategic fit of the MWR
                                                               acquisition                        •
                                                                                                        company partly in progress
                                                                                                        Tight competition and rapid          •
                                                                                                                                                   is low compared to the sector
                                                                                                                                                   F-Secure’s conscious growth
             MEUR                      MEUR
                                                           •   Strong demand outlook in                 market change in consumer                  investments burden the profit
                                                               corporate security                       security                             •     Growth speed is the most
                                                           •   F-Secure has good                  •     Success in corporate security              important value driver for the
                                                               preconditions to invest in               growth investments and the                 share
                                                               growth                                   integration of the MWR               •     We see upside potential in the
             EV/S                      EV/S                •   Consumer security creates                acquisition                                share as the strategy proceeds
             1,9x                      1,7x                •
                                                               stable cash flow
                                                               Scalable and continuous
                                                                                                  •     Cyber security market
                                                                                                        potentially over-invested at the
                                                                                                                                                   as planned

             2019e                     2020e                   business model by nature                 moment

Company description and business model   5-13

Investment profile                       14-16

Industry                                 17-22

Competition                              23-24

Strategy                                 25-27

Historical development                   28-30

Estimates and valuation                  31-36

Tables                                   37-40

Disclaimer and recommendation history    41

F-Secure in brief
F-Secure is a company that offers cyber security
                                                                                                                                                •    Cloud storage
products and services, whose solutions help
                                                                                                                                                     business sold in
thousands of companies and millions of consumers                                                                                                     2015
to protect themselves from security threats.                                                                                                                                       •   MWR-
                                                                                                                                                •    Transformation into
                                                                                •    Endpoint protection                                             a more versatile                  acquisition
                                                                                     focused antivirus                                               provider of cyber                 accelerates
1988                                                                                 company                                                         security products                 growth in
Year of establishment                                                           •    Focus on consumer                                               and services                      corporate cyber
                                                                                     customers                                                                                         security
                                                                                                                                                •    Focus on growing
1999                                                                                                                                                 corporate security
IPO                                                                                                             •    Expansion into                  markets
                                                                                                                     cloud storage
EUR 190.7 million (+12 % vs. 2017)
Revenue 2018

+20 % 2015-2018
Corporate security revenue CAGR
                                                         Revenue (MEUR)
17.4 MEUR (9.1 % margin)                                                                                                                                                      98
Adj. EBITDA 2018                                                                                                                                                    96
                                                                          100                                                                              96
                                                                                                                86        94          92            92
                                                                                               74       78
1666                                                                                66
Personnel at the end of 2018
                                                                           50                                                                                                            96
49,7 % / 50,3 %                                                                                                                                                     63
Share of consumer/corporate security in net sales 2018                              47         50       49      47         47         45            46     52

                                                                                2008         2009      2010     2011     2012       2013       2014       2015     2016      2017       2018
                                                                                         Yritystietoturva      Consumer
                                                                                                              Kuluttajatietoturva          Pilvitallennus (lopetetut toiminnot)
                                                                                                                                             Cloud storage   business
Source: F-Secure / Inderes                                                                Security             Security                                                                            5
Company description and business model 1/6
Company description                                   security and responding to them. The corporate
                                                                                                                        Market change
                                                      security market is, therefore, growing strongly. In
Software company focusing on cyber security           consumer security, the market is extremely mature
F-Secure is a cyber security software company         and growth is slow.
established in 1988. The company’s roots are          F-Secure has reacted to the market change. In
deep in antivirus software, where the company has                                                              •   Mass viruses
                                                      2015, the company started transforming from an
operated since it was founded and, in practice, for   antivirus company towards a company that offers          •   Prevention
as long as computer viruses have existed. Through     more versatile cyber security services and               •   Cyber security is technology
its history, the company has developed a strong       products and focused its growth investments on
                                                                                                               •   Point solutions
reputation and brand in preventing malware and        the growing corporate security markets. This
cyber security threats and in how malware             transition has required a change in the company’s        Now
develop and how their industrial logic works. F-      organization, mindset, product offering and              •   Intelligent, targeted attacks
Secure’s antivirus software for endpoints have        strategy. The MWR acquisition in 2018 accelerated
                                                                                                               •   Detection and response
won numerous awards in international information      the transformation of the company, and today,
security tests and the company’s endpoint             corporate security accounts for more than one half       •   Cyber security is a process
protection products have been sold to millions of     of F-Secure’s net sales.                                 •   Complex wholes
consumer and hundreds of thousands of
companies worldwide.                                  The change process required by the market
                                                      disruption is still ongoing at F-Secure. Thanks to its
Historically, F-Secure’s business has focused on      history, the company’s clear strength is its stable
strong antivirus know-how, where the basis is the     and profitable consumer business, as well as
prevention of attacks and threats. However, a         established position and well-known brand on the
paradigm shift is ongoing on the information          security markets. In corporate security, many
security markets, where the assumption that all       competitors are clearly unprofitable and
attacks could be prevented has become                 dependent on external financing when investing                    F-Secure’s transition
impossible. With the development of technology,       aggressively in growth, while F-Secure can make
malware and hacking have also become clearly          similar investments in this area with cash flow.         •   Focus from consumer security to corporate security
smarter and constantly evolving, which is why it is
practically impossible to prevent all modern          In light of current market trends, the shift in F-       •   New product areas (detection and response)
attacks in advance with security software. Thus the   Secure’s strategic focus to the growing corporate        •   Uniform products and services
market is shifting from attack prevention             business could have started earlier as the
                                                                                                               •   Services next to products
increasingly towards detecting and responding to      company was still in the early 2010s investing
threats, a mindset where cyber security is seen       heavily in the consumer business, for example, in
more as processes than products. This has been        cloud storage. Expansion into the cloud storage
an important change for the market and F-Secure.      business and selling of this business in 2015 did,
                                                      however, create clear shareholder value and
Especially on the corporate security markets focus    provided the company with capital to invest in
has shifted from preventive blocking of threats to    growth in corporate security.
quick detection of threats that have passed
Company description and business model 2/6
                                                         Sales, marketing and distribution channels                                 Distribution of revenue (MEUR)
Business model                                                                                                     200
                                                         F-Secure is currently investing heavily in increasing
Two business areas                                       the net sales from corporate security and the
                                                                                                                   150                                                             95
F-Secure’s business currently comprises developing,      company has clearly increased its resources in terms
offering and selling of corporate security products      of sales and marketing in recent years. Sales and         100                             96
                                                         marketing expenses amounted to EUR 95 million in                    92         92
and services, as well as consumer security products.
The company’s basis is the stable and healthy            2018 or some 50% of net sales.                             50                                                             96
                                                                                                                                                               63         72
antivirus products business on top of which it is                                                                            45         46         52
                                                         F-Secure sells its corporate security products
building its current growth strategy.                                                                                0
                                                         through an extensive retailer network, which globally              2013       2014       2015        2016       2017     2018
In 2018, the company’s net sales were EUR 191            consists of over 6,000 IT service partners. The task
million and adjusted EBITDA was EUR 17,4 million.        of the company’s own sales organization is to                               Yritystietoturva
                                                                                                                                       Corporate           Kuluttajatietoturva
The share of corporate security in the company’s net     support and provide services for the retailers, as well
sales was 50% and that of consumer security was          as develop and grow this network in order to
                                                                                                                                         Number of employees
50%. On the corporate side, company growth has           accelerate the growth in corporate security products.
been strong and on the consumer side stable. Net         Critical in terms of success is that selling of F-        1600                                                            184
sales is by nature very continuous and is based on       Secure’s products and related services is good
                                                                                                                   1200                                                            437
annual licenses of various durations and,                business for the retailers. The current clientele of F-
                                                         Secure’s cyber security products consists mainly of                                                   131
increasingly, on monthly SaaS fees. Geographically                                                                 800       136        127        147                   360
                                                         small companies but the company is shifting its focus                                                 325
the company focuses on Europe. The share of the                                                                              366        325        279
                                                         towards medium sized and large companies with its                                                                        1045
Nordic countries in the company’s net sales was 35%                                                                400
                                                                                                                                                               570       636
                                                         new security products, which requires development                   437        469        500
and that of the rest of Europe was 44% in 2018. The
                                                         of the existing retailer channel. The company               0
remainder of net sales came from North America
                                                         primarily offers cyber security consultation as direct              2013      2014       2015        2016       2017     2018
(9%) and elsewhere in the world (11%). At the end of
2018, the company had 1,666 employees of whom            sales through its own sales organization.                         S&M, ja
                                                                                                                          Myynti consultants,
                                                                                                                                   markkinointi         Tuotekehitys       Administration
                                                                                                                           customer support
1045 worked in sales and marketing (includes             In consumer security, a majority of net sales is
consultants and customer support), 437 in product        created globally through a network that covers                     Geographic distribution of revenue (MEUR)
development, and 184 in administrative tasks.            approximately 200 operators, which is one of the          200
The company's strategic focus in terms of growth lies    company’s key strengths and competitive
in corporate security, where the market is growing       advantages. F-Secure started building a sales             150
rapidly. Consumer security is, however, an important     channel through operators already at the beginning
                                                         of the 2000s and its operator network is clearly the      100
pillar for F-Secure, where the company is aiming for
moderate growth in line with the market and good         largest compared to other cyber security companies.        50
profitability and cash flow, which in part can be used   Consumer products are also sold through many
to finance the growth investments in corporate           partners operating online and retailer partners, and        0
security. The synergy between the consumer and           also in the company’s own online store.                            2013      2014     2015           2016     2017      2018
                                                                                                                              Pohjoismaat                         Muu Eurooppa
                                                                                                                                                                   Other Europe
corporate business derive primarily from shared
                                                                                                                                 North America                    Muu Maailma
                                                                                                                                                                   Other Countries
                                                                                                                     Source: Inderes                                                7
Partners                         Operations                                       Business idea                                               Customer segments

                                                                                  F-Secure offers a comprehensive
                                                                              selection of cyber security solutions and
                                      R&D                                                                                                Large companies            Small and medium     Consumers
                                                                                   services to both corporates and
                                                                                                                                         and governments            sized companies

                                      Sales and                                                                                                                  Products
     IT service partners              marketing
                                                                                                                                       Prevention solutions (EPP)
                                                                                                                                   •    Protection Service for Business          Significant product
                                                                                                                                   •    Business Suite                           area, stable growth
                                      F-Secure Labs
                                      research center                                                                              •    Cloud protection for Salesforce
                                                                                  ➢ Solid expertise in virus prevention
                                                                                  ➢ New products for detection and                     Prediction solutions
                                                                                    response                                       •    Radar and phishd                         Small product area
                                            Resources                             ➢ Ability to deliver comprehensive
      Telecom operators
                                                                                    product and service packages                       Detection and response
                                     Long-term cyber                                                                                   solutions
                                                                                  ➢ High value-added services
                                     security expertise                                                                            •    Rapid Detection & Response (EDR)          Rapidly growing,
                                                                                    complement the products
                                                                                                                                   •    Rapid Detection & Response Service        important product
                                     Cyber security                                                                                     (MDR)                                     area
                                     technology and                                                                                •    Countercept (MDR)
                                                                                               Go-to-market                            Cyber security services                    Significant business
           Retailers                 Extensive retailer                                                                            •    Premium consultancy services for all      area, strong growth
                                                                             Corporate security         Consumer security
                                     network                                                                                            areas of cyber security
                                                                               IT service partners:          +200 operators
                                     Strong brand,                             +6000 partners                Retailers                 Consumer Security
                                                                                                                                                                                 Significant product
                                     especially in Europe                                                                          •    Safe, Freedome, Key and Sense            area, stable growth
                                                                                                            Own online store

                                    Cost structure (2018)                1666 employees (2018)                                    Revenue stream (2018)                     Net sales 190.7 m€
                                                                         Total costs -188,4 m€ (2018)                                                                       Adj. EBITDA 17.4 m€ (2018)

                                                                                                                                          Corporate security
                                                                                                                                       Yritystietoturva               11%                Pohjoismaat
                                                                                                                            33%                                  9%            35%       Muu Eurooppa
                                                                                                                                                                                          Other Europe
                                                                                                             50%                       Yritystietoturva
                                                                                                                                         Corporate security
                                                                                                                                         services                                        Pohjois-Amerikka
                                                                                                                                                                                          North America
           Materials and           Sales and              Research and        Administration
             services              marketing              development                                                     17%          Kuluttajatietoturva
                                                                                                                                         Consumer security          44%                  Muu Maailma
                                                                                                                                                                                          Other Countries

              (20,6 %)*             (49,8 %)*               (18,7 %)*            (9,6 %)*

Source: Inderes, *% of net sales
Company description and business model 3/6
Product development                                     products that are in use produce, the more               and as continuous subscriptions valid until further
                                                        efficiently it can find vulnerabilities and the better   notice (SaaS). Traditionally, a majority of the total
In 2018, product development costs (EUR 36
                                                        existing products become. This is particularly true      volume is fixed-term licenses whose renewal rates
million) corresponded with some 19% of net sales.
                                                        for endpoint protection products where the               are a key indicator for the company. Our view is
In its product development, the company focuses
                                                        economies of scale are considerable.                     that the renewal rates have constantly been on a
in particular on developing the features of existing
                                                                                                                 good level. The market is, however, strongly
corporate security detection and response               Corporate Security                                       shifting towards deliveries based on continuous
products (MDR and EDR). Another key
                                                        F-Secure’s corporate security business is                monthly licenses.
development target is better harmonization of the
product portfolio in order to be able to offer more     comprised of product business, managed services          The customer target segment for these products
comprehensive cyber security solutions to               in which product and service are combined, as            are small and medium sized companies and F-
customers. In consumer security, there is low           well as pure service business. In 2018, product          Secure’s endpoint protection products are used
pressure to increase product development                business accounted for 67 % of corporate security        by over 100,000 companies globally. The size
investments in endpoint protection products but         net sales and consulting for 33 %. Thanks to             category of annual contracts vary from hundreds
the company also invests in certain product areas       replicability, the product business is highly            of euros to some tens of thousands of euros.
on the consumer side (like the Sense security           scalable. Managed services (MDR) are also well
                                                        scalable in the long run.                                Competition is tight in endpoint protection
router). F-Secure’s core technologies, especially in
                                                                                                                 products and the field is quite established. F-
detecting malware, are basically very similar both      In its consulting business, the company focuses          Secure’s competitors are numerous companies
in consumer and corporate security products,            mainly on delivering services requiring the highest      that offer antivirus software, like Symantec,
which creates a lot of synergy in product               level of expertise, where the price levels for the       Kaspersky, McAfee, Sophos and Trend Micro. F-
development. F-Secure’s consulting business also        consultants can be really high compared to               Secure’s customer base in this product group
enriches product development as F-Secure’s              conventional IT service operations. The transition       focuses heavily on small companies, where the
consultants can investigate security breaches that      from “cyber security as a technology” towards            role of the retailer is emphasized in the customer’s
have never been seen before at large companies          “cyber security as a process” will in future also        purchase decision. Customers’ know-how in cyber
and transfer the knowledge they gained to               blur the line between products and services in F-        security issues is typically low and the purchase
product development.                                    Secure.                                                  decision is often made based on the price or the
F-Secure’s business model includes considerable         Endpoint protection products (EPP)                       retailer partner’s recommendation. Comparisons
economies of scale and network effects on                                                                        made by research institutes that test security
product development. The company’s products             A majority of F-Secure’s corporate security net          software also affect customers’ purchase decision
daily collect vast amounts of data from customers’      sales currently comes from selling of endpoint           in this product group. F-Secure’s endpoint
online traffic that are processed with the help of AI   protection products (EPP), the demand of which is        protection products have performed very well in
and machine learning in order to detect malware         stable and the market is growing moderately.             security tests within the industry (AV-Test, AV-LAB
and security threats. With the help of processed        These products represent F-Secure's core                 PL, V3) over the years and their ability to detect
information from this constant data stream, F-          competence, virus prevention, and are an integral        malware are of world class compared with the
Secure can refine its existing products and             part of the company’s product portfolio. Products        competition.
develop new products. The more data the                 are sold with annual licenses of various lengths
Company description and business model 4/6
Rapid Detection & Response service (RDS)              already managed to attract customers to RDS, e.g.      requirements. The integration is a demanding and
                                                      from banking, media, energy and IT. The biggest        time-consuming process, and it will not be ready
RDS is F-Secure’s first product launched in 2016
                                                      challenge in our view is that the target group for     until the end of 2019 at the earliest. Countercept
to respond to the paradigm shift on the security
                                                      RDS is in the size category of large companies         and RDS are currently still sold as independent
markets, where mere prevention of malware and
                                                      where F-Secure does not yet have a strong              products. When the integration is complete, F-
malicious hacking is evolving into quick detection
                                                      partner and distribution network.                      Secure’s MDR product offering should be very
of threats that have passed the security and
responding to them. RDS is a managed service by       F-Secure’s competitors in this product category
nature (MDR, Managed Detection & Response),           come mainly from USA and the main competitors          F-Secure has high expectations of the MDR
where technology plays a big role.                    include Crowdstrike, Carbon Black, Cybereason          products (RDS and Countercept), and the success
                                                      and Rapid7. According to F-Secure, it                  of their sales will have a significant impact on the
Sensors are installed in the customer’s IT
                                                      distinguishes itself from its competitors with its     growth in corporate security due to the large scale
networks and endpoints, which collect and stream
                                                      strong technological expertise in antivirus, which     of the agreements. F-Secure sees growth
data to F-Secure’s data center, where AI and
                                                      means that RDS’ detection ability of cyber-attacks     opportunities in this product area for several
machine learning are used to find anomalies in the
                                                      is very good. In addition, in Europe the company       years, and the company will invest significantly in
company’s data communications that could
                                                      has competitive advantage against its competitors      sales in the years to come, which will burden
indicate security threats that have passed into the
                                                      in that geopolitical factors may affect the decision   profitability. After the growth phase, the products
system. F-Secure’s data center monitors
                                                      making of some customers.                              have potential for an excellent level of profitability,
customers’ data environments 24/7 and when it
                                                                                                             with high customer retention adding continuity to
detects a possible threat it notifies its service     Countercept
                                                                                                             revenue and the service component scaling up
partners whose job it is to react to the customer’s
                                                      Countercept became part of the F-Secure product        with growth in revenue.
security alert. RDS’ sensors collect a huge amount
                                                      portfolio with the MWR acquisition, and in terms of
of data daily and the overall picture of the                                                                 Radar and phishd
                                                      operating logic, it is an RDS-like targeted solution
customer’s data communications becomes clearer
                                                      for detecting and responding to threats, offered as    F-Secure has two products for predicting threats;
over time. Through machine learning, the product
                                                      a managed service. In particular, Countercept’s        our view is that their share of the revenue from
increasingly becomes better tailored to the
                                                      technology stands out in responding to identified      corporate security is rather minor. The Radar
customer's environment and thus the customer’s
                                                      threats and in the fight against on-going targeted     vulnerability management solution can help
threshold to switch to another product grows over
                                                      cyber attacks.                                         identify vulnerabilities in the firm’s IT-environment.
                                                                                                             Radar became part of F-Secure’s offering with the
                                                      Countercept is intended for the upper end of
RDS is suitable for companies whose security                                                                 nSense acquisition in 2015. Having joined the
                                                      medium-sized corporations and large customers,
requirements are high and the target customers                                                               company’s product portfolio in the MWR
                                                      and the deals are in the range of hundreds of
are companies with more than 1,000 employees.                                                                acquisition, phishd is a behaviour management
                                                      thousands of euros annually. The competitive field
The size category of the contracts is around EUR                                                             platform that can be used to prevent phishing. In
                                                      for the product is largely the same as for the RDS
one hundred thousand and for the largest                                                                     the big picture, F-Secure faces large competitors
customers clearly higher. RDS still has a small                                                              focusing primarily on these segments in both of
weight in the company’s business as it is a           F-Secure is currently integrating RDS and              these products, and the company’s main focus is
relatively new product but thanks to the large size   Countercept into a single uniform MDR overall          not to start competing directly against them.
of the contracts its importance in the growth of      solution from which the customer can pick the                                                                    10
corporate security is considerable. F-Secure has      modules they need based on their cyber security
Company description and business model 5/6
In fact, F-Secure considers the potential of Radar   about the detected anomaly to F-Secure’s MDR           companies increasingly wanting more extensive
and phishd to lie in integrating these               service centre where F-Secure specialists help         turnkey solutions in cyber security services. The
functionalities into the company’s endpoint          resolve the matter. Even though EDR is a pure          scope of the consulting business also grew
protection (EPP) products. This could provide the    software product per se, it also provides F-Secure     significantly with the MWR acquisition, and F-
company with a competitive advantage over other      with service revenue through this feature.             Secure already employs more than 300
antivirus-based competitors that lack similar                                                               specialists in consulting.
                                                     F-Secure’s EDR is at the core of the company’s
capabilities in their EPP products.
                                                     corporate security growth strategy besides RDS         The demand for consulting services is strong, and
Rapid Detection & Response (EDR)                     and Countercept. Being a new product, EDR still        the growth is continuously restricted by the
                                                     accounts for a very minor share of F-Secure’s net      availability of experts. F-Secure already has
In the end of 2018, F-Secure launched an
                                                     sales. If successful, the product has significant      hundreds of large corporate customers covered
automated tool for detecting and responding to
                                                     growth potential, as the market for the product is     by its consulting services. Consulting net sales
malicious hacking (Endpoint Detection and
                                                     still in its early stages, and the market research     amounted to EUR 32 million in 2018, accounting
Response, EDR). The product is largely based on
                                                     company Gartner, for example, has estimated the        for 33% of corporate security net sales. Consulting
the same technology as RDS but it does not
                                                     number of endpoints with detection and response        net sales for H1/19, when the MWR acquisition was
include the service component and is scalable to
                                                     capabilities to increase many-fold in future years.    fully reflected in the figures, amounted to EUR
smaller companies as well through automation.
                                                     The EDR deals start from a few thousand euros, so      23.7 million, accounting for 40% of corporate
EDR acts as an additional ability on top of          there will need to be a significant number of deals    security net sales. Consulting continues to be a
endpoint protection products (EPP) and on the        made for this to become visible in the company’s       largely project-driven business, but the company
markets this product area is integrating with        figures.                                               continuously aims to sign continuing consulting
endpoint protection products. F-Secure has                                                                  agreements with its customers.
                                                     Also in this product category, F-Secure faces
designed its EDR product so that it is also
                                                     competition on a wide front, as nearly all             In the company’s largest market areas in the
compatible with the endpoint protection products
                                                     competitors that offer endpoint protection             consulting business (United Kingdom and the
of its competitors. This distinguishes F-Secure in
                                                     products have EDR capability, in addition to which,    Nordic countries), operations are already
the competition and makes it easier to sell the
                                                     the developing and rapidly growing market              developed partially with a focus on profitability,
product to parties that are not using F-Secure’s
                                                     constantly attracts new players. The weakness we       but in smaller markets, operations are still clearly
endpoint protection software.
                                                     see is that the company is only entering the EDR       in a pure phase of growth, which burdens
The operating principle of EDR is very similar to    competition this year with a slight handicap to its    profitability.
that of RDS, but when the product detects an         competitors.
                                                                                                            The focus of F-Secure’s consulting lies in the most
anomaly in a company’s network, the company’s
                                                     Cyber security services                                demanding security problems and the strategic
head of IT is automatically informed of it. The
                                                                                                            goal is not to expand its service business to
product also provides the head of IT with            F-Secure provides large corporations and other
                                                                                                            compete with regular IT service companies, even
operating instructions for responding to the cyber   parties with critical IT systems with cyber security
                                                                                                            if the company’s service offering is sometimes
security threat. The product is suitable for         consulting in all areas of cyber security. The focus
                                                                                                            overlapping with these. More extensive cyber
companies of all sizes, but SMEs are the main        of F-Secure’s consulting business is on the most
                                                                                                            security service packages are offered by
target group. The product also allows the end        demanding cyber security issues, but the service
                                                                                                            consultancy companies (like KPMG), IT generalists
customer or resale partner to send information       range has expanded in recent years, with                                                                      11
                                                                                                            (like CGI) and specialized players (like Nixu).
Company description and business model 6/6
The services offered by the company include          growing but we estimate that their effect on the         operators already at the beginning of the 2000s
cyber security audits, cyber security stress tests   net sales of consumer security is still low              and its operator network is clearly the largest
(Red Teaming), strategic risk and cyber security     compared to Safe. An increasing number of                compared to other security companies. In
management, cyber security in software               customer are, however, switching to the                  consumer security, operators sell F-Secure’s
development and responding to hacking and data       combination solution Total that includes both Safe       products as part of their own continuous cyber
leaks. F-Secure’s ability to offer consulting        and Freedome when renewing their order. This             security packages. Through the operator channel,
services offers the company a competitive            product bundling is a key growth driver for              F-Secure receives extensive distribution and
advantage against players who only offer cyber       consumer security sales.                                 volume for its products, and, thus, the replicability
security products. In addition, consulting offers                                                             and scalability of the products enable good
                                                     Launched in June 2017, Sense has not had a
cross-selling possibilities with the products.                                                                profitability even though the operators take a
                                                     significant impact on consumer security net sales
Consulting also polishes F-Secure’s brand                                                                     rather large share of the gross sales of the
                                                     for 2017-2018; however, the company sees
towards a more comprehensive cyber security                                                                   products as they are responsible for the lion’s
                                                     growing interest in the product, with smart devices
company.                                                                                                      share of product marketing. For operators, co-
                                                     becoming increasingly common in homes.
                                                                                                              operation with F-Secure is also fruitful as by
Consumer security                                    Nevertheless, the expectations for the product are
                                                                                                              offering cyber security packages in connection
                                                     still very cautious, because the market for the
Products                                                                                                      with broadband subscriptions operators have, in
                                                     product is in its early stages. The most potential
                                                                                                              addition to profitable additional sales, been able
F-Secure offers cyber security products for          route for more extensive commercial distribution
                                                                                                              to improve the customer loyalty and satisfaction of
consumers through a network of more than 200         of Sense is offering Sense as a software that can
                                                                                                              their subscriptions. In our opinion, the success of
operators. Consumer products are also sold           be installed in third-party routers. In late 2018, the
                                                                                                              F-Secure’s product among operators is based on
through many partners operating online and           company signed the first agreements with
                                                                                                              the fact that it solves two of the core problems of
retailer partners, and also in the company’s own     operators in this area. However, Sense is not going
                                                                                                              the operator business (average price and
online store. The company’s products are used by     to be a driver of net sales growth in the short term,
                                                                                                              customer churn).
millions of consumer customers across the world.     but if it succeeds, it will offer obvious growth
The main products in the company’s current           potential in the consumer security segment in the        Direct sales channel
product portfolio are:                               long term.
                                                                                                              Consumer products are also sold through many
•   Endpoint protection product, F-Secure Safe       F-Secure’s competitors in consumer EPP products          retailers operating physically and online. In
                                                     are largely comprised of the same companies as           addition, the company is increasingly selling its
•   Privacy protection product (VPN), F-Secure       in the corporate segment, as the product                 products through its own online store, which
    Freedom                                          technologies are very similar. Competition in            means there are no middlemen between F-
•   Password management product, F-Secure Key        consumer endpoint protection products is made            Secure and the end customer. The competition on
                                                     tighter by the fact that there are also several free     the market is extremely tough and customer
•   Cyber security router that protects all smart    antivirus software products available to                 acquisition requires considerable marketing
    equipment in the home, F-Secure Sense            consumers (e.g. Avast, Avira, Windows Defender).         investments, and various free products and
A majority of net sales in consumer security                                                                  freemium models make the consumer market
                                                     Operator channel
comes from selling endpoint protection products                                                               challenging to reach through direct sales.
(Safe). The sales of Freedome and Key has been       F-Secure started building a sales channel through                                                                12
F-Secure’s business model

                                            Shared technology and product development

                                                                                              Analytics and
                  Threat Research Lab                    Managed services
                                                                                              monitoring platform

                  Consumer security                                Products            Corporate security                   Services
                    50% of net sales 2018                     33 % of net sales 2018                                   17 % of net sales 2018

        Privacy protection (F-Secure Freedome)                          Endpoint protection (EPP)

        Endpoint protection (F-Secure Safe)                                      Endpoint detection and response (EDR)
        Password management (F-Secure Key)
                                                                               Prediction solutions (Radar, phishd)
        Cyber security router (F-Secure Sense)
                                                                                                 Managed detection and response
                                                                                                     (RDS and Countercept)

                                                                                                                                                Threat detection
                                  Retailers and online                                                                                          and sensor data
                                                                                                                      IT integrators/direct
       Operators                                                Retailers                IT service partners                                     from millions of
                                          store                                                                          sales (services)
                                                                                                                                                products in use

   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)
Source: Inderes                                                                                                                                             13
Investment profile
Growth in corporate security creates value               Currently, the stock market appreciates growth                 resources for expanding F-Secure’s core
                                                         rate very much and it is considered to be a key                competence and technology to new segments
F-Secure is difficult for an investor to perceive in
                                                         value driver, as the cyber security market is found            and sell new solutions to the existing customer
the company’s current development phase, as the
                                                         to be on the threshold of strong growth and it is              base.
share combines steady cash flow business
                                                         important for the players to lay a foundation for
(consumers) and cash flow-negative business                                                                         Key risks
                                                         the market.
(corporate customers) still strongly in the
                                                                                                                    •   The sector is potentially over-invested, which
investment phase, and the company does not               Strengths and drivers
                                                                                                                        may lead to a significant increase in
report on the segment distribution with regard to
                                                         According to our view, the key positive value                  competition in the next couple of years. A gold
the profitability of these functions. In practice, the
                                                         drivers of F-Secure are:                                       rush of new companies may lead to there not
first is priced in the stock market through
                                                                                                                        being enough bread for all to share, in spite of
earnings-based multiples and profit margin. The          •   Growth in MDR/EDR products is at the core of
                                                                                                                        the strongly growing market.
latter is priced based on sales multiple and                 value creation, as the market for these
revenue growth rate. In addition, corporate                  products is still in its early stages, it is growing   •   Decrease of the high valuation levels of the
security is comprised of three businesses different          at a very fast rate and market shares are now              sector would probably also have a negative
in terms of profile and development phase: EPP               being distributed. Companies operating in                  impact on the market valuation of the F-Secure
products (slow growth, good profitability),                  these rapidly growing product areas are                    share.
consulting (good growth, mediocre profitability)             occasionally priced using very high valuation
                                                                                                                    •   Threat of competition in consumer security
and MDR/EDR products (very strong growth, loss-              multiples.
                                                                                                                        and poor net sales growth due to free
making). These product/service areas have to be
                                                         •   A scalable business model with strong                      antivirus software. In spite of these threats,
priced using very different valuation multiples due
                                                             customer retention allows for excellent                    which have been evident for years, consumer
to the different growth, scalability and profitability
                                                             profitability after a successful current                   security seems to remain a very healthy
profiles. The company is therefore not a pure
                                                             investment phase of the company.                           business.
growth company, but also not a technology
company in the “mature phase”.                           •   Success in unifying the product portfolio              •   Sales channels in corporate security to the
                                                             would facilitate the company’s transition in the           SME market are still in the making. Without
F-Secure’s own goal is to continuously balance
                                                             value chain towards larger customers and                   suitable partners, it will be challenging for the
between growth investments and profitability,
                                                             accelerate the growth in corporate security. A             company to reach its growth goals.
depending on what is optimal in terms of
                                                             more unified product portfolio would also
shareholder value. We find the approach                                                                             •   The transformation into a cyber security
                                                             provide the company with a competitive
reasonable, but difficult for shareholders to                                                                           company is still partly in progress. The
interpret. The share cannot be priced directly                                                                          transformation still requires the company to
using an individual method or valuation multiple;        •   New product areas, such as the consumer                    develop its product portfolio, integration of the
value creation must be considered as part of a               Sense cyber security router, can provide the               MWR acquisition, harmonisation and
bigger picture. To our minds, the key drivers of the         company with significant scalable growth                   investments in sales, which will burden
company’s value creation are the growth rate (of             potential in the long term.                                profitability in the short term. Moreover, as a
corporate security) and the entire company’s                                                                            brand, F-Secure is not yet perceived as a
                                                         •   A strong and established position in endpoint
operating margin; a strong growth rate                                                                                  corporate security solutions provider.              14
                                                             protection provides the company with good
compensates for poor profitability and vice versa.
Investment profile

                  Strong growth focus in corporate        Potential
           1.     security
                                                          •   In corporate security, strong growth now generates
                                                              shareholder value

                                                          •   Accelerating growth and competitive edge through

           2.     Hot and growing market
                                                              renewal and integration of product portfolio

                                                          •   Strong demand outlook on the market

                                                          •   Strong and stable business in consumer security

                  Scalable and continuous business
           3.     model

                  Transformation into a cyber security    Risks
           4.     company still partly ongoing
                                                          •   The industry is potentially over invested, which can lead
                                                              to a clear increase in competition in the next few years

                                                          •   Failure with growth investments
          5.      Strong cash flow provides capacity to
                                                          •   Failure with MWR Infosecurity integration
                  invest in corporate security growth
                                                          •   Dissolving of the high valuation levels in the sector could
                                                              have a negative effect on the share

                                                          •   Competitive threat in consumer security and weak
Source: Inderes                                                                                                             15
Risk profile of the business model
                                                                                          Estimate of the overall risk level of F-
                                                                                          Secure’s business

                                            Change rate of                                                                                         Technologies and threats are changing at

                                                                                                                        1                          a rapid rate in the cyber security market.
                                            the industry
                                            Development                                                                                            A lot of mature products, the strategy is
                                            phase of the                                                                                           still in the investment phase with regard to
                                                                                          1                                                        the new MDR and EDR products and
                                            company                                                                                                cyber security services.

                                            Market                                                                                                 Strong demand drivers on the market
          NET SALES

                                            cyclicity                                 2                                                            but tight competition.
                                            Net sales                                                                                              Net sales are continuous by nature, based
                                            continuity                            2                                                                on annual licences of varying lengths and
                                                                                                                                                   monthly SaaS fees. The customer base is
                                                                                                                                                   extensively distributed.

                                                                                                                                                   The cost structure is primarily fixed, room for

                                            Scalability of
                                                                                                     3                                             flexibility in the cost structure by adjusting
                                            costs                                                                                                  sales investments

                                                                                                                                                   Strategy aims at strong growth at the
                                            Cost structure                                                  3                                      expense of short-term result.

                                            Capital                                                                                                Operations tie a little capital and
   4                                        commitment                                                                                             working capital is negative.

                                                                                                                                                   Balance sheet is in good condition and
                                            Financing need                        4                                                                the amount of debt is moderate in spite
                                                                                                                                                   of the large MWR-acquisition.
                                                             Low risk level                                                      High risk level

Source: Inderes                                                                                                                                                                                 16
Industry 1/4
Market                                                 pyramid model based on the intelligence of               new digital businesses and 2) the rising trends on
                                                       attacks and technologies. The intelligence of            the IT markets (industrial Internet of things, social
Market definition, size and growth                     attacks and technologies also broadly correlates         media, digital commerce) force organizations to
Cyber security companies are solving one of the        with the size of the customer organizations as the       pay more attention to cyber security. In the
biggest problems of the digitizing society. Big        biggest organizations and state administration are       segment of targeted attacks (large and medium
problems always also means big business                typically the main targets of cyber criminals. For       sized organizations), cyber security cannot be
opportunities, which makes the market extremely        organizations at the top of the hierarchy, solutions     solved only with mass solutions. The information
interesting, dynamic and rapidly growing.              that have been created for the masses at the             security budgets of companies in this segment are
                                                       bottom of the hierarchy do not offer sufficient          annually roughly around EUR 1 to 5 million, which
Cyber security refers to processes, technologies,      protection levels. Correspondingly, the solutions        makes this segment attractive to companies that
solutions and services that protect companies’         focusing on the top levels of the hierarchy are too      offer cyber security products and services. F-
and other organizations’ or individual users’ data     expensive for organizations whose activities do          Secure has expanded into this segment in recent
against criminality that occurs in electronic          not require a high protection level. The                 years through acquisitions (consulting service) and
networks. Cyber threats can be divided into three      development of new technology focuses on the             a wider product portfolio (e.g. RDS).
categories: 1) criminality that aims at financial      more demanding top level segments after which
profit, 2) hacking that aims at disrupting                                                                      The most important segment for F-Secure at the
                                                       the technology is duplicated to the lower levels for
companies’ or governments’ activities, and 3)                                                                   moment is the lowest level of the triangle that
                                                       broader segments.
spying that aims at gaining a competitive business                                                              includes small and medium sized companies and
advantage or discovering government security           The top of the cyber security market is                  consumers. For small companies and consumers,
secrets. The number of cyber threats and their         represented by state espionage and the defense           the main thing is to be protected against mass
intelligence is constantly growing and the market      industry. This is a niche market from the viewpoint      attacks, which can be done with regular “off the
is, in practice, driven by an endless race between     of cyber security companies but it represents the        shelf” cyber security products like endpoint
criminals and cyber security technologies and          highest technology and level of expertise and is         protection products and firewalls. A majority of F-
processes.                                             thus important. The largest volume of the market         Secure’s net sales still comes from endpoint
                                                       is found in the center part of the pyramid that          protection products.
The cyber security market develops quickly and         covers targeted attacks. In this case, the primary
the estimates on the total market size and growth                                                               Among medium sized companies the need for
                                                       target group is in practice all large organizations
vary dramatically. The market research company                                                                  higher cyber security than mere endpoint
                                                       and public administration, and in particular the
Gartner (8/2018) estimates that the global size of                                                              protection is growing, but the cyber security
                                                       actors whose activities include critical activities in
the cyber security market will be USD 124 billion in                                                            budgets (EUR 0.1 to 1.0 million) are clearly lower
                                                       terms of security of supply (like energy, banks and
2019 (+9% growth). In general market is expected                                                                than in the large company segment, which means
                                                       operators). Crucial in this target group is that its
to grow at an average annual rate of 10% in                                                                     that buying of the best technologies or
                                                       size is constantly growing as cyber security
coming years.                                                                                                   managed/outsourced cyber security services is
                                                       threats expand, which also expands the market
                                                                                                                not necessarily possible. Especially the rapid
Market segments                                        for demanding cyber security solutions.
                                                                                                                detection and responding to threats that have
The target groups of the cyber security market         In the big picture, market growth is the result of 1)    passed endpoint protection is now emphasized in
can be roughly divided into three parts in a           cyber security issues playing an important role for      the segment of medium sized companies.
                                                       an increasing number of industries when planning                                                                 17

      Distribution and operating logic of the cyber security
                                                                                                                            Market drivers

                                                                                                                Digitalization               Regulation
                                                                                  R&D focus on highest level
                                  Cyber security             State
                                  consulting               espionage
                                                                                                                 Digital commerce
                                                                                  Duplication of technology    Industrial Internet of
                                                                                                                                              EU's Data
                                                                                     to larger markets                 things
                                                                                                                  Open systems
Detection and response to                                                                                              Cloud                  Regulation
evolved attacks (RDS,                                                                                                 Mobility
Countercept and EDR)
                                                       Targeted attacks

Vulnerability management (Radar              Large companies and organizations,
and phishd)                                         public administration
                                                                                                                  Risk-based                   Forced
                                                                                                                  purchasing                 purchasing
     Mass solutions
                                                       Mass attacks
                                                   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                                                                                                                                                   18
Industry 2/4
Market sub-segments for F-Secure                       and response capabilities as a managed service          Weights, size and annual growth rate
                                                       (such as F-Secure’s RDS), but for smaller               of F-Secure’s market segments
F-Secure’s potential market can be examined
                                                       companies in particular, a pure product solution is
more closely through the company’s product and
                                                       the only reasonable solution in terms of costs.
service selection. According to Gartner, the
                                                       Gartner estimates that the share of endpoints with
market for consumer security products was USD                                                                                                      $6.6 bn.
                                                       EDR products of all endpoints will increase from
6.6 billion in 2017 and it is expected to grow at an                                                           Consumer security
                                                       10% in 2017 to 35% by 2020. F-Secure launched
average annual rate of 4% in 2016 to 2022. The                                                                 →Significant product area                 4%
                                                       its new product for the EDR market in late 2018,
slow growth on the consumer security market is
                                                       and the product will play an important role in
explained by the popularity of constantly evolving
                                                       terms of the company’s growth in the years to
free antivirus solutions (e.g. Windows Defender)                                                             Endpoint protection (EPP) and
but growing product areas can be found, for                                                                  Endpoint detection and                $5.0 bn.
example, in privacy protection (VPN solutions) and     The market for managed detection and response         response (EDR) products for
in solutions designed to protect smart equipment       services (MDR) is also only shaping up, and
                                                                                                             → EPP: Significant product area
in the home.                                           estimates of the size and growth of the market are
                                                                                                             → EDR: New, important product
                                                       only indicative. MarketsandMarkets has estimated         area
The market growth of corporate endpoint
                                                       the size of the MDR market to be approximately
protection (EPP) products is slow but steady. At
                                                       USD 0.4 billion, and it is estimated to grow at a
the same time, the EPP market is undergoing a                                                                  Managed detection and               $0.4 bn.
                                                       very strong annual rate of some 32% in 2017–
transformation with new automated threat                                                                       response (MDR)
                                                       2022. F-Secure’s RDS and Countercept operate in         → New, important product
detection and response products (EDR) unifying                                                                                                               32 %
                                                       this rapidly growing market.                            area
with EPP products. Gartner, for example, already
bundles these products in the same category and        The size of the market outsourced cyber security
estimates the value of the entire EPP/EDR market       services is, according to Gartner’s estimate,
to be approximately USD 5 billion. We estimate         approximately USD 19 billion, and the market is
                                                                                                                                                    $0.9 bn.
that EDR products still account for clearly under      expected to grow by approximately 10% annually          management
USD 1 billion of this. Thanks to the strong growth     in 2016–2022.                                           →Small product area                           7%
in EDR products, the overall market for these
                                                       Gartner has estimated the size of the vulnerability
products is expected to grow by approximately
                                                       management market to be approximately USD
6% annually in 2016–2022. The growth is driven
                                                       0.9 billion, and it is estimated to grow by some 7%
by the fact that cyber attacks or data breaches                                                                                                    $19.0 bn.
                                                       annually in 2016–2022.                                  Cyber security services
against companies are not often detected for
                                                                                                               →Important, growing area
months, and this has shifted the focus from merely                                                                                                           10 %
proactively protecting against cyber attacks
towards detecting and responding to them more
quickly. Large companies can purchase detection

                                                                                                               Source: Gartner, MarketsandMarkets, Inderes          19
Industry 3/4
Market drivers                                         digital service or product. This means that              EU's Data Protection Regulation
                                                       problems related to cyber security cannot be
In our opinion, the cyber security market is still                                                              EU's Data Protection Regulation (GDPR), that
                                                       solved simply by acquiring cyber security software
emerging and will develop strongly over the next                                                                entered into force in May 2018, has clearly
                                                       and equipment off the shelf but solving of cyber
few years, which is why current market estimates                                                                increased the demand for cyber security services.
                                                       security also requires the use of high-level
are even at best only indicative. Market growth                                                                 The regulation imposes new obligations on
                                                       expertise services. Due to these market drivers, F-
will probably be steady and strong and accelerate                                                               organizations that handle personal data. Through
                                                       Secure’s business has also been in turmoil in
pushed by digitalization investments. In addition,                                                              EU's Data Protection Regulation organizations are,
                                                       recent years where the company is transforming
constant news of serious hacking (risk-based                                                                    for example, obliged to report any breach of
                                                       from an endpoint focused antivirus company to a
purchasing) and pressure created by regulations                                                                 security. The authority that supervises the
                                                       more versatile provider of cyber security products
(forced purchasing) will boost market growth. At                                                                regulation can impose sanctions if the regulation
                                                       and services in the corporate segment.
the top level, growth is, in practice, driven by two                                                            is breached. The sanctions can be massive, as for
forces: regulation and threat scenarios.               Consumer security changing                               more serious breaches the fine is EUR 20 million
                                                                                                                or 4% of the company's annual net sales, which is
The commonly recognized mega trends in the IT          In consumer security, the changing endpoint
                                                                                                                intended to make companies take the new
world like mobility, cloud, industrial Internet of     portfolio has been visible as a slight drop in
                                                                                                                regulation seriously. At the same time, the
things, social media and digital commerce are          antivirus software for PCs but, as a whole, the
                                                                                                                monetary definition of the sanctions provide cyber
strongly linked with cyber security. In many of        number of devices connected to the web is
                                                                                                                criminals with a price tag, which they can use to
these areas, the barrier for creating new              growing rapidly in consumers’ homes. This
                                                                                                                blackmail companies after a successful hacking
applications, products and digital services is         provides growth opportunities for new cyber
                                                                                                                operation. GDPR also supports F-Secure’s product
information security challenges. These challenges      security products that protect smart devices in the
                                                                                                                business as the regulation means that companies
are related, for example, to privacy protection, e-    home even though PC driven antivirus software
                                                                                                                have to build better capabilities to detect realized
commerce or security. One mega trend worth             sales is a challenging market. In consumer
                                                                                                                security breaches
mentioning is also open systems (like Android)         security, the nature of the market is changing
becoming more common. This makes the market            rather than the market faltering with PC antivirus.
more attractive from a criminal’s viewpoint than       For example, Windows’ own cyber security is
when companies still operated mainly in their own      cannibalizing conventional cyber security but this
individual closed environments.                        does not solve the consumer’s problem of how to
                                                       protect several different endpoints. Thus, there is
Building of new digital services requires that
                                                       a natural need for F-Secure’s packages for
companies and governments solve the challenges
                                                       comprehensive consumer solutions as the array of
related to cyber security in advance. This means
                                                       endpoints and operating systems is vast and
that the demand for cyber security related
                                                       constantly changing. Gartner estimates that the
products and services is also supported by the
                                                       number of consumer devices connected to the
fact that cyber security is increasingly becoming a
                                                       web will grow from 5.2 billion in 2017 to 12.8 billion
critical and integral part of any new IT system,
                                                       by 2020.

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