Security stocks dip on earnings warning

[InfoSec News <isn () c4i org>]

http://news.cnet.com/news/0-1003-200-6446130.html?tag=mn_hd

By Sergio G. Non
Staff Writer, CNET News.com 
July 2, 2001, 5:20 p.m. PT 

Security software stocks fell in after-hours trading Monday following
a warning from Internet Security Systems.

After market close, the provider of software for detecting online
security intrusions said it expects to report second-quarter results
ranging between a loss of 2 cents per share to breakeven, on revenue
of $50 million to $52 million, excluding special charges.

Analysts surveyed by earnings tracking firm First Call produced a
consensus prediction of 15 cents per share on revenue of $65.7 million
for Internet Security Systems' second-quarter ended June 30.

"We clearly saw evidence that security is not recession proof,"
Internet Security Systems CEO Thomas Noonan said.

Some security stocks such as ISS, Network Associates and Verisign have
managed to outperform the tepid Nasdaq for much of this year. Until
recently, many investors viewed them as islands of safety because
security tends to be the last item cut from corporations' technology
budgets.

Shares of Internet Security traded at $33.30 in after-hours activity
on the Island ECN, following the company's announcement. ISS rose
$1.61 to $50.17 in Monday's regular trading ahead of the news.

Other security-related software stocks fell after-hours, including
Check Point Software, down 11.5 percent to $50.95; Verisign, down 6
percent to $56.90; and Network Associates, down 6 percent to $12.21;
and Symantec, down 4 percent to $42.

"It's certainly not good news for other security companies," Dain
Rauscher Wessels analyst Stephen Sigmond said. "I'd expect other
stocks to trade down pretty hard."

Internet Security previously said it would earn 15 cents to 16 cents
per share on revenue of $64 million to $67 million. Company executives
for Internet Security Systems blamed their shortfall on the widely
reported slowdown in the overall economy. Although the company saw its
total number of deals increase 25 percent in the second quarter, many
customers reduced the size of their purchases, or delayed them
entirely.

"So much of this is just dependent on how the customer feels about the
future when it's time to sign the contract," Sigmond said.

Among the 40 to 45 largest contracts expected of the quarter, 18 were
delayed in the last two days of June, executives said. Many enterprise
software companies don't close their sales until the final weeks of a
quarter, although ISS packs more sales into the end of a quarter than
security companies in other niches, Sigmond said.

This was the first time in almost six years that Internet Security has
seen such a dramatic shortfall at the end, Noonan said.

"Quite frankly, the surprise to us, and why I am so damn disappointed,
is that we saw that falloff at the very end of the quarter," he said,
during a conference call with analysts. "And obviously with our track
record here, we have never seen that before."

At the same time, the total value of the company's 25 largest
contracts that were completed fell 50 percent from the first quarter,
the CEO said.

"As a data point, our top 25 deals delivered the lowest amount in six
quarters, even though most of them are part of large multiyear project
rollouts of security protection projects requiring significantly more
software and services to complete," Noonan said.

"Customers were just unwilling to buy at their previously committed
levels and chose to buy at lower levels. We saw numerous customers
this quarter say 'We're going to buy a quarter's worth, we're going to
buy enough to get the initial implementation going, and then we're
going to come back next quarter to buy.'"

Security software remains one of the top priorities for companies with
money to spend on information technology, Sigmond said. But in the
Dain Rauscher analyst's view, Internet Security Systems' products are
less of a "must have" than those of a company like Check Point
Systems, which sells firewalls and other software for protecting
virtual private networks, intranets and extranets.




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