Street Views Web Security Leaders
Differently
By PETER LOFTUS
NEW YORK -- In the race for leadership in the market for Internet security
software, VeriSign Inc. (VRSN) and Entrust Technologies Inc. (ENTU) have
had similar financial success.
But VeriSign appears to have the edge among investors. Shares in the
Mountain View, Calif., company rose 50% in August and hit a 52-week high
last week, as Wall Street judged it to have a better business model.
Meanwhile, Entrust shares fell more than 30% in August.
VeriSign and Entrust each sell digital certificates, which basically ensure that
the parties in an online transaction are who they say they are. For example, an
Internet user who orders a book from a Web site that uses the encryption
software can be assured that personal information like credit-card numbers
will get to the right merchant, and to that merchant only.
Both VeriSign and Entrust have tapped into the growth in Internet commerce
and concerns about online security during the past year. VeriSign's revenue
for the quarter ended June 30 rose nearly 120% to $18.7 million from $8.6
million a year earlier. Entrust reported second-quarter revenue of $19.8
million, up 80% from the $11 million reported a year ago.
But investors favor VeriSign partly because it outsources online security
services for its customers, according to analysts and fund managers.
Outsourcing not only makes things easier for the customer, but also gives
VeriSign a subscription-based business model that ensures a steady stream of
revenue. Entrust, on the other hand, mostly sells Web security software to its
customers, leaving it up to them to install and maintain the product.
"VeriSign has the best business model in a very rapidly growing business that
has high returns," said Christopher Bonavico, manager of the $230 million
Transamerica Premier Aggressive Growth fund, which owns VeriSign shares.
In addition to Web site security, VeriSign provides security services to
corporate networks. For example, companies like Texas Instruments Inc.
(TXN) use the technology to allow certain customers or partners access to its
internal network to check on billing or shipping information.
International Moves Enhance Growth Potential
VeriSign also gets revenues through partnerships with affiliates who market
VeriSign's services, particularly in international markets. British
Telecommunications PLC (BTY) is one such partner, and in mid-August,
Canadian Imperial Bank of Commerce (BCM) signed on to be VeriSign's
Canadian affiliate.
International markets hold important growth potential for VeriSign. Last
March, the federal government approved VeriSign's request to expand its
export of 128-bit digital certificates, which provide stronger security than
standard 40-bit versions. VeriSign thus became the only seller of digital
certificates with such an exemption.
Growth in international and domestic markets helped VeriSign narrow its loss
to $152,000, or break-even on a per-share basis, for the quarter ended June
30. This marked the first quarter since it went public in January 1998 that
VeriSign avoided a per-share loss, and it beat analysts' estimates by 2 cents a
share.
Analysts and VeriSign executives see improved results going forward.
VeriSign provided digital certificate services to about 102,000 commerce
Web sites worldwide in 1998, or 17% of all such Web sites, according to
A.G. Edwards analyst John Puricelli. He expects VeriSign's share of that
market to rise to 588,000 commerce Web sites in 2003, or 58% of the
projected total.
"We think demand for Web site services and enterprise services is going to be
a global one," VeriSign President and Chief Executive Stratton Sclavos said in
an interview. "We've gone into foreign markets and selected partners who we
believe can supply the same kind of infrastructure that we provide here."
VeriSign envisions expanding its product offerings beyond security products,
Sclavos said. The company plans to announce new "broad-based
e-commerce services" in 2000, he said.
If VeriSign is seen as well-positioned to benefit from the growth in
e-commerce, why isn't Entrust? The Plano, Texas, company reported more
revenues than VeriSign in its most recent quarter, and reached profitability in
the quarter ended March 31, ahead of VeriSign.
The problem is a dearth of reliable service revenue, analysts said. Entrust,
which was spun off from Nortel Networks Corp. (NT) last year, reported
service revenue of just $5.8 million, or 30% of total revenue, in the quarter
ended June 30. The majority came from software license revenue.
"Entrust's business can be a little lumpier," said Eric Efron, manager of the
$1.1 billion USAA Aggressive Growth Fund, which owns Entrust shares.
While Efron candidly said he "took the wrong horse" in choosing between
Entrust and VeriSign stock, he likes Entrust. He is heartened by its recent
moves to build more service revenue; the company's service revenue has risen
from the 1998 second quarter, when it represented 25% of total revenue.
An Entrust spokeswoman suggested the stock's recent slide was caused by
insider selling, as the company is approaching a quiet period during which
insiders are barred from selling. Entrust executives couldn't be reached for
comment.
With the recent enthusiasm for VeriSign, some observers think the stock may
have jumped too high. It is now trading like an Internet stock, at about 370
times projected 2000 earnings, said Brown Brothers Harriman analyst Dawn
Simon, who downgraded her short-term rating for the stock to neutral earlier
this summer, citing valuation concerns.
By comparison, most data security companies - which don't necessarily have
strong Internet presences - trade at around 26 to 27 times projected 2000
earnings, Simon said. "I just thought (VeriSign) was getting a bit ahead of
itself," she said.
But Simon is still bullish on VeriSign in the long-term, citing its outsourcing
model and international positioning. |
