F-Secure Oyj — Interim / Quarterly Report 2013

Jul 26, 2013

F-SECURE CORPORATION - INTERIM REPORT JANUARY 1 – JUNE 30, 2013

F-SECURE CORPORATION - INTERIM REPORT JANUARY 1 – JUNE 30, 2013

Interim Report
F-Secure Corporation
July 26, 2013 9am EEST

F-SECURE CORPORATION - INTERIM REPORT JANUARY 1 - JUNE 30, 2013

REVENUES AND PROFITABILITY DECLINED, IMPROVED CASHFLOW, CONTENT CLOUD
PROGRESSED WELL

Highlights in Q2
• Total revenues were 38.4 million (Q22012: 39.6m)
• EBIT was 4 million representing 11% of revenues (5.8m, 15% of revenues)
• Earnings per share was EUR 0.02 (EUR 0.03)
• Cash flow from operations was 5.7 million positive (6.7m); change in cash
4.6 million positive (3.4m) excluding paid dividend of 9.3million (9.3m) in
April

Outlook for 2013 - management's estimation for the year has been revised:
• Revenue is estimated to be at the level of 2012.
• Profitability is estimated to be over 15% of revenues.

The previous guidance was the following: revenue growth of over 5% compared to
2012 and profitability of over 15% of revenues.

(This report is unaudited. Unless otherwise stated the comparisons refer to the
corresponding period a year ago. The currency is euro. The Content Cloud
business is included in the Operator channel figures.)

Key figures 2013 2012 2013 2012 2012

(Eur Million) 4-6 4-6 1-6 1-6 12m

Revenues 38.4 39.6 76.8 77.9 157.2

Operating profit 4.0 5.8 10.0 11.2 20.3

% of revenues 11 15 13 14 13

Profit before taxes 3.8 5.7 9.8 10.9 19.9

Earnings per share (Eur) 0.02 0.03 0.04 0.05 0.09

At the end of period: 37.8 38.0 37.8 38.0 37.7
Deferred revenues

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Equity ratio, % 74 72 74 72 73

Debt-to-equity ratio, % -54 -43 -54 -43 -51

Personnel 954 990 954 990 931

President and CEO Christian Fredrikson:

“Our Q2 financial performance was below our expectations. Traditional PC
security sales were low in some countries. Our growth in Latin America was also
behind the plans. However, it is still our fastest growing security market. Our
cash flow improved due to lower operative costs and low capital expenditures
though the profitability was weaker than a year ago. Obviously, we are not
satisfied with these numbers.

While we are investing in new products and in geographical expansion to achieve
future growth, we will be even more prudent on our costs to keep our
profitability target. Short term revenue growth is limited which is reflected
in the revised guidance for the year.

Our content cloud business has developed well. In addition to AT&T and BT, we
have signed two new operators in Q2, two others have been won and several other
negotiations are at the final phase. On the security side, our new converged PC
and mobile security product, Safe Avenue, is gaining momentum. During the
quarter we signed four new Safe Avenue contracts with operators.

The transformation in the industry, shift from PCs to mobile devices, is
impacting us. We are focusing on developing new security and cloud services for
the post-PC era. As a result we will be launching several new products in 2H
2013 which aim to address both consumers and businesses.”

F-Secure business January - June 2013

Total revenues for the first half of 2013 decreased by 1% at 76.8 million
(77.9m). Revenues through the operator channel were practically flat compared
to the previous year at 46.9 million (47m). Revenues through the other channels
decreased by 3% totaling 29.9 million (30.9m). The growth rate was negatively
impacted by the communicated contractual changes and sluggish traditional PC
security sales in some countries.

EBIT was 10.0 million (11.2m), representing 13% (14%) of revenues. Earnings per
share were EUR 0.04 (EUR 0.05). Cash flow from operations was 13.1 million
positive (14.3m positive). The change of net cash was 0.9 million positive
(2.8m negative) including paid dividend of 9.3 million (9.3m). Deferred
revenues were 37.8 million at the end of June (38m).

Total fixed costs were 64.9 million (63.6m), 2% higher than in the previous
year. Depreciations (R&D activations, software, hardware) increased to 4.4
million (3.8m). The capitalized development expenses decreased to 0.3 million
(3.6m). The Company continued its sales and marketing investments, especially
in geographical expansion in Latin America. Total R&D costs decreased as a
result of the closing of French R&D unit at the end of 2012.

At the end of June, the geographical breakdown of revenues was as follows:
Finland and Scandinavia 29 % (31%), Rest of Europe 47% (45%), North America 11%
(10%) and Rest of the World 13% (14%).

Operator channel in Q2

In Q2, the Company's content cloud business continued its good progress. The
ramp up of AT&T and BT continued well showing steady increase in subscriber
growth. The overall interest in this business remained at a high level. The
Company has signed two new operators - one of them Primacom in Germany - and
two others have been won. Several other operator contract negotiations are in
the final stage.

During the quarter, traditional PC security sales was sluggish in some
countries. Security sales were behind the plans in Latin America. The mobile
security business performed as anticipated. The Company signed a mobile
security contract with Vodafone Czech. Converged mobile and PC security
offering, Safe Avenue, is growing rapidly. During Q2, the Company signed four
new Safe Avenue contracts (Elisa/Saunalahti in Finland, Caiway in the
Netherlands, and Netia and Inea in Poland). Latin America expansion continued
with Telefonica Movistar in Argentina, in Nicaragua and in Guatemala, launching
both PC and mobile security services.

In May, F-Secure hosted its seventh annual SPECIES conference for its operator
partners. This year, the conference was held in Stockholm and approximately 60
operator partners globally participated in the conference. The main objective
of SPECIES is to share best practices in selling and promoting F-Secure Value
Added Services, as well as to enable networking among operator partners.

In the second quarter of 2013, sales through operator business partners totaled
23.8 million (24.4m), representing 62% of F-Secure's total revenues (62%).
Revenue decreased by 3% compared to the corresponding quarter in 2012 and
increased by 3% from the previous quarter. The growth of subscribers continued
at a good level.

Corporate and Direct to Consumer channels in Q2

Sales in traditional channels continued as anticipated. Our Security as a
Service for Business offer grew at a good rate. Customer satisfaction in
security services remained high, which was visible in healthy license and
renewal sales; deferred revenues were 37.8 million (Q212: 38m).

During the quarter, revenues in corporate and direct to consumer channels
decreased by 3% reaching 14.7 million (15.2 m). These channels represented 38%
of F-Secure's total revenues (38%).

Product announcements in Q2

F-Secure develops and sells security and content cloud products that support
personal computers, servers and an increasing set of major smartphone, tablet
and other mobile device operating systems. Services include a wide range of
security products like anti-virus, anti-theft, browsing protection and parental
control as well as content cloud products like online backup, synchronization
and sharing.

During the quarter the key product announcements were as follows:

In April, the Company launched a completely rebuilt Online Scanner. The free
tool now is faster, lighter and more powerful than before, and even cleans up
advanced rootkits, the most difficult-to-remove malware. The tool, downsized to
a slim 5MB, is easy to use with just a couple of clicks. It cleans without
actually installing itself to the PC - so consumers can run it and then forget
about it.

With the rollout of DeepGuard 5 in May, the Company reinforced its exploit
defenses with enhanced proactive protection. The newest version of F-Secure's
behavior-based analysis technology blocks new and emerging threats and is able
to detect exploit attempts without needing to know the vulnerability they are
exploiting.

With new Client Security Premium launched in early July, F-Secure makes it
easier than ever for businesses to plug the software holes that compromise data
security - and to provide stronger coverage for newly discovered holes that
haven't yet been patched.

Risks and uncertainties

Uncertainty in the economic environment may impact the growth of broadband
connections, operators' willingness to invest in new services and may create
pricing pressure. These may have a negative impact on F-Secure's security and
Content Cloud sales.

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

The Content Cloud project completion timelines and related revenues are more
unpredictable by nature than in the traditional security services business.
This may cause risks for delivery delay penalties and may cause more
variability in revenue forecasts.

Events after period-end

The Company has released a stock exchange release about the revised financial
guidance for 2013 on July 22, 2013. No other material changes regarding the
Company's business or financial position have materialized after the end of the
quarter.

Personnel and organization

F-Secure's personnel totaled 954 at the end of quarter (990).

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

Financing and capital structure

Cash flow from operations for the 1H was 13.1 million positive (14.3m
positive). The change of net cash was 0.9 million positive (2.8m negative)including paid dividend of 9.3 million (9.3m). Net financial income was
slightly negative at 0.1 million (negative 0.3m). Dividends of 9.3m were paid
in April.

The market value of the liquid assets of F-Secure at the end of the quarter was
34 million (Q212: 25.3m). Changes in exchange rates, especially JPY and GBP,
impacted negatively on sales and positively on costs.

The Company's capital expenditure for the first half was 2.1 million (6.4m).
The capitalized development expenses were 0.3 m (3.6m) and have substantially
decreased from the 2012 level as anticipated.

F-Secure's financial position remained solid. F-Secure's equity ratio at the
end of the quarter was 74% (72%) and gearing ratio was 54% negative (43%
negative).

Shares, shareholders' equity, own shares and option programs

The total number of Company shares is currently 158,798,739. The Company's
registered shareholders' equity is EUR 1,551,311.18. Currently, the Company
holds 3.415.835 own shares and does not have any warrant program.

Corporate Governance

F-Secure complies with the Corporate Governance recommendations for publicly
listed companies published by the Securities Market Association, a body
established by the Confederation of Finnish Industries EK, the Central Chamber
of Commerce and NASDAQ OMX Helsinki Ltd., as explained on F-Secure's web pages.
F-Secure published its corporate governance statement for 2012 in the Annual
Report and on the Company website in March 2013.

Annual General Meeting

The Annual General Meeting of F-Secure Corporation was held on April 3, 2013.
The Company released a stock exchange release about the decisions of the AGM on
April 3, 2013.

Market view

The long term market opportunities are attractive for F-Secure. Malware threats
and targeted attacks to private users and businesses in both PC and mobile
operating environments are still evolving.

Security is a growing market. According to Gartner (Jan 2013) the consumer
security software market is growing to be about a $6 billion market by 2016
($4.3 billion in 2012) and the mobile security software market is growing
almost at 40% per year over the next four years. Tablet computers and
smartphones are becoming the most dominant form of devices on the market,
according to IDC (March 2013). Tablets grew 78.4 % in units shipped from
2011-2012, while smartphone units grew 46.1 %.

However, the market landscape for security technology will change. By 2015, 10
percent of overall IT security enterprise product capabilities will be
delivered in the cloud, according to Gartner (April 2013). The analyst firm
expects the cloud-based security services market to reach $4.2 billion by 2016.

Based on several industry analyst estimates, the Software as a Service (SaaS)
business model is expected to continue to grow strongly and to gain more market
share over traditional license sales. For Operators the Software as a Service
model is a natural expansion of their other service offerings. The SaaS
business offers operators the opportunity to replace revenues lost from the
provision of commoditized services and to increase loyalty in the face of
competitive threats from over-the-top providers and third parties.

F-Secure's survey of 6,000 broadband subscribers in 15 countries from April
2013 shows that consumers want personal cloud services, but they want to know
their content is private, safe, and under their control. When storing content
on social networking sites and with cloud storage services, 63% of consumers
are concerned about the vulnerability of storage providers' technology, and six
out of ten are concerned about these providers selling their content.

F-Secure's content cloud has been conceived, built and managed according to
strict security and privacy policies with multiple layers of security
safeguarding encrypted consumer data. The company's unwavering commitment to
data privacy also derives from its roots in Finland, where privacy is a
fiercely guarded value. Additionally, F-Secure's emphasis on safe cloud
services even extends to protection from malware in the cloud as uploaded and
backed up content is scanned for malware.

Long-term objectives and strategy summary for 2012 -14

F-Secure's first priority is to drive growth and market expansion. Based on the
Company's strong technology assets in security products, cloud computing and
Content Cloud services, F-Secure continues to create new innovative offerings
to augment traditional security services, especially in the Content Cloud
space.

The Company sells its products globally through three channels; the Direct to
Consumer channel (eStore, App Stores, retail), the Corporate channel (reseller
network) and the Operator channel (SaaS).

Operators, including Internet service providers, mobile operators and cable
operators, are the largest channel for F-Secure services. F-Secure provides,
through operators, award-winning security and Content Cloud services and
utilizes the local presence and brand of operators to reach millions of
consumers in a cost-efficient and scalable way.

F-Secure's competitive advantage derives from existing operator network and
relationships built over the years. Key assets include security research,
scalable products optimized for the mass market, experience in service
provisioning in the operator network environment and the ever growing user base
of operators. F-Secure stands out in its ability to combine security with safe
Content Cloud services for both computers and mobile devices and its
understanding of the Operator channel as a whole.

During the strategy period, the Company is aiming for double-digit revenue
growth, driven by the Operator channel and supported by the Corporate and
Direct to Consumer channels. The growth is expected to come from the western
hemisphere and emerging markets like Latin America and the APAC.

The Company will continue its investments in new services around the Content
Cloud and security products with emphasis on end-customer focus. Profitability
is targeted to develop towards the 25% level at the end of the strategy period.F-Secure's longer-term profitability level continues to be driven by revenue
growth and scalable operations.

Outlook for 2013

The Operator channel is expected to continue to drive the revenue growth
powered by security sales and supported by a productized, highly scalable
Content Cloud service. The Company also estimates steady progress from the
Corporate and Direct to Consumer channels. As stated at the beginning of the
year, the short-term revenue growth remains at lower level due to contractual
changes and decreased Content Cloud project revenues as the project sizes are
smaller.

The actual operational cost increase is fairly limited, and is targeted at
driving product portfolio competitiveness and supporting geographical
expansion.

Management's estimation for the year has been revised; the annual revenue is
estimated to be at the level of 2012. The annual profitability is estimated to
be over 15% of revenues.

The previous guidance was the following: revenue growth of over 5% compared to
2012 and profitability of over 15% of revenues.

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

News conference today at 11am EEST

A news conference for analysts and press is arranged today, July 26, at 11 am
Finnish time at F-Secure's Headquarters, address: Tammasaarenkatu 7,
Ruoholahti, Helsinki. At the news conference, President & CEO Christian
Fredrikson will present the Q2 financial results. A conference call for
international investors and analysts is arranged at 13.00 Finnish time (EEST)
(12.00 CEST, 11.00 UK time). To participate in the call, please dial in and
register 5-10 minutes prior to the event through the following number: +44 20
7162 0077, password: F-Secure.

The Q2 financial results presentation material, including a video where
Christian Fredrikson will present Q2 results, will be available on our
Investors web pages at www.f-secure.com under About F-Secure, Investors before
the call begins.

Financial calendar for 2013

The quarterly interim report for the third quarter of 2013 will be published on
October 25. On the publication date a stock exchange release will be published
at 9 am Finnish time on the NASDAQ OMX Helsinki Ltd., a press and analyst
conference will be arranged at 11 am Finnish time in Helsinki, and an
international conference call will be arranged in the afternoon.

F-Secure Corporation

Additional information

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

Taneli Virtanen, CFO
tel. +358 9 2520 5655

This interim report is prepared in accordance with IAS 34 standard Interim
Financial Reporting and with accounting principles stated in the annual report
2012.

Key figures (unaudited):

Euro million

INCOME STATEMENT 2013 2012 2013 2012 Change 2012

                                        4-6   4-6   1-6   1-6       %   1-12

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Revenues 38.4 39.6 76.8 77.9 -1 157.2

Cost of revenues 1.8 2.1 3.5 3.9 -11 7.4

Gross margin 36.6 37.5 73.3 74.0 -1 149.7

Other operating income 0.7 0.5 1.5 0.8 83 1.8

Sales and marketing 19.8 17.9 38.2 34.9 10 70.9

Research and development 11.1 11.4 21.8 22.9 -5 49.3

Administration 2.4 2.9 4.9 5.9 -18 11.0

Operating result 4.0 5.8 10.0 11.2 -11 20.3

Financial net -0.2 -0.1 -0.1 -0.3 -0.3

Result before taxes 3.8 5.7 9.8 10.9 19.9

Income taxes -1.4 -1.7 -3.3 -3.1 -5.8

Result for the period 2.4 4.0 6.5 7.8 14.1

Other comprehensive income:

Exchange diff. on translating 0.1 0.1 0.1 0.1 0.2
foreign operations

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Available-for-sale fin. assets -0.2 -0.1 -0.2 0.1 0.1

Income tax rel. to components of other 0.1 0.0 0.0 0.0 0.0
comprehensive income

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Total compr. income (owners) 2.3 4.0 6.5 8.0 14.3

Earnings per share, EUR 0.02 0.03 0.04 0.05 0.09

EPS diluted, EUR 0.02 0.02 0.04 0.05 0.09

BALANCE SHEET 30/6/2013 30/6/2012 31/12/2012
ASSETS

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Intangible assets 19.2 26.6 20.8

Tangible assets 9.1 9.5 9.8

Goodwill 19.4 19.4 19.4

Other financial assets 4.5 5.1 5.4

Non-current assets total 52.2 60.7 55.4

Inventories 0.2 0.2 0.2

Other receivables 35.9 33.4 38.4

Available-for-sale financial assets 20.3 16.3 16.8

Cash and bank accounts 13.8 9.1 16.5

Current asset total 70.3 59.0 71.9

Total 122.5 119.7 127.3

SHAREHOLDERS' EQUITY 30/6/2013 30/6/2012 31/12/2012
AND LIABILITIES

---

Equity 62.6 58.4 65.1

Other non-current 0.4 1.5 0.4

Provisions 1.0 0.0 0.1

Deferred revenues 8.7 8.1 8.5

Non-current liabilities total 9.1 9.6 9.1

Other current 21.7 21.7 23.9

Deferred revenues 29.1 30.0 29.3

Current liabilities total 50.8 51.7 53.2

Total 122.5 119.7 127.3

CASH FLOW STATEMENT 30/6/2013 30/6/2012 31/12/2012

Cash flow from operations 13.1 14.3 25.6

Cash flow from investments -2.5 -7.9 -11.1

Cash flow from financing -9.3 -9.3 -9.3
activities 1)

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Change in cash 1.3 -2.9 5.2

Cash and bank at 1 Jan 32.9 28.1 27.8

Change in net fair value of Available-for-sale -0.2 0.1 0.1

Cash and bank at end of period 34.0 25.3 33.1

Statement of changes in shareholders' equity

       Share    Share  Unrestrict  Treasu  Retaine     Assets  Transl  Total
      capita  premium   ed equity      ry        d  available       .       
           l     fund     reserve  shares  earning   for sale   diff.       
                                                 s

---

Equity 1.6 0.2 5.1 -8.4 66.5 0.2 65.1
on:
31.12.20
12

---

Total 6.5 -0.1 0.1 6.5
comprehe
nsive
income
for the
year

---

Dividend -9.3 -9.3

Cost of 0.6 -0.3 0.3
share
based
payment
s

---

Equity 1.6 0.2 5.1 -7.8 63.4 0.1 0.1 62.6
on
30.6.201
3

---

NOTES

1. Cash flow from financing

Dividend for year 2012 0.06 euro per share totaling 9,322,974.24 euro was paid
on 16th April 2013. In 2012 paid dividend totaled 9,303,980.94 euro.

Key ratios 2013 2012 2012

                                  6m     6m    12m

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Operating result, % of revenues 13.0 14.4 12.9

ROI, % 33.4 40.1 34.9

ROE, % 21.2 26.4 22.6

Equity ratio, % 73.9 71.5 72.7

Debt-to-equity ratio, % -54.3 -43.3 -50.9

Earnings per share (EUR) 0.04 0.05 0.09

Earnings per share diluted (EUR) 0.04 0.05 0.09

Shareholders' equity 0.39 0.37 0.41
per share, (EUR)

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P/E ratio 25.4 14.3 17.09

Capitalized expenditures (MEUR) 2.1 6.4 10.3

Contingent liabilities 14.2 17.8 15.6

Personnel, average 944 973 970

Personnel, end of period 954 990 931

Segment information

The Group has only one segment; data security.

Quarterly development 1/12 2/12 3/12 4/12 1/13 2/13

Revenues 38.4 39.6 39.1 40.1 38.4 38.4

Cost of revenues 1.9 2.1 1.7 1.8 1.7 1.8

Gross margin 36.5 37.5 37.4 38.3 36.7 36.6

Other operating income 0.3 0.5 0.6 0.3 0.8 0.7

Sales and marketing 16.9 17.9 16.4 19.6 18.4 19.8

Research and 11.5 11.4 10.6 15.8 10.7 11.1
development

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Administration 3.0 2.9 2.3 2.7 2.5 2.4

Operating result 5.4 5.8 8.6 0.4 5.9 4.0

Financial net -0.2 -0.1 -0.1 0.1 0.1 -0.2

Result before taxes 5.2 5.7 8.5 0.5 6.0 3.8

Geographical information

Revenue 4-6/2013 4-6/2012 1-6/2013 1-6/2012

Nordic countries 11.0 11.6 22.3 23.6

Rest of Europe 18.0 18.4 35.8 35.7

North America 4.4 4.0 8.7 7.7

Rest of the world 5.0 5.6 10.0 10.9

Total 38.4 39.6 76.8 77.9

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