Tuesday, May 30, 2000
Certicom feels the heat as brokers lower earnings boom
Down 84% from high
Thomas Hirschmann
Financial Post, with files from Dow Jones
The share price of encryption technology company Certicom Corp. has proven to be anything but secure.
The Toronto-based company's stock has plunged more than 84% from its high of $250 in early March and continues to head south as brokerages in the United States lower the bar for earnings estimates over the next few years.
Certicom shares (CIC/TSE) dipped $3.75, or 8%, to $39.25 yesterday, adding to last week's woes when they dropped 36% and were the worst performing issue of any Toronto Stock Exchange company that did not deliver a profit warning. The stock is down almost 75% this quarter.
While three U.S. brokerages initiated coverage of the firm with "buy" ratings last week, they all were involved with Certicom's latest financing. What speaks more clearly are the lowered earnings expectations that the brokerages are proffering.
Online brokerage Wit Soundview began coverage of Certicom on Thursday. A day earlier, Bancboston Robertson Stephens and Dain Rauscher started Certicom at "buy" and "buy-speculative," respectively.
Dain Rauscher put a one-year target price of US$65 on the stock, up 128% from yesterday's close of US$28 9/16 in New York.
Alex Baluta, an e-networking software analyst at Robertson Stephens, said in a research note that Certicom is "well positioned to become a dominant infrastructure player in the wireless world."
He claimed that conventional encryption technologies have inherent limitations when operating in the wireless arena that has recently exploded. Certicom's solutions require less processing power and bandwidth and are more suited to the mobile environment where such elements are at a higher premium.
Robertson Stephens forecasts Certicom will lose US88½ a share in 2000 and US$1.39 in 2001, while Dain Rauscher projects loss of US87½ in 2000 and US$1.42 in 2001. Wit Soundview forecasts a loss of US86½ in 2000 and US$1.39 in 2001.
The U.S. brokerages have forecasted much higher losses than Canadian analysts who follow the company.
Mark Pavan, a technology specialist at Yorkton Securities Inc., said the U.S. firms had higher loss projections because they had likely made their forecasts after the May 4 completion of Certicom's public offering.
The company has said it will use the proceeds to expand its sales and marketing efforts, which will lead to increased expenditures and higher losses.
Certicom raised US$57.9-million from the sale of 1.25 million common shares at US$46.30 each. At the time, Certicom shares were trading at US$55 7/16 but it has been all downhill since then.
Mr. Pavan said he will factor in the expected increase in spending after the company releases its results for the year ended April 30.
For now, he projects a loss of US52½ a share in 2000 and US17½ in 2001. He still rates the company a "strong buy."
A more cautious mindset has taken hold in the marketplace, Mr. Pavan said, and that has sparked Certicom's decline.
"The reality is [Certicom] is a speculative story and the market wants to see cash flow and earnings," he said.
Paul Lechem, an analyst at CIBC World Markets Inc., said that he is not overly concerned about Certicom's weakening bottom line because, to him, technology is still a top-line game. He expects the company to post revenue of US$12-million this year and US$22.5-million in 2001.
"The issue in the U.S. is that people would rather see them spend the money," he said. "The status quo is not acceptable [in the U.S.]. Now they have the money -- so go to it."
Mr. Lechem said that Certicom is clearly focused on raising its U.S. profile. The encryption technology business is still a relatively young sector with a tremendous opportunities and, at this point, "it's still a land grab."
Brandon Osten, an analyst at Sprott Securities Inc. in Toronto, said recent research indicates that Certicom's fourth-quarter loss might be higher than projected. "The more recent numbers call for a US$4-million loss, rather than a US$1-million loss," he said.
Mr. Osten rates Certicom a "hold" but noted that, in general, Canadian analysts tend to have a more bullish outlook on the company than their U.S. counterparts. "I'm kind of the only analyst in Canada who isn't bullish [on Certicom]," he said, adding that the firm's recent financing allowed it to avoid a lot of financial trouble.
Mr. Osten said that some recent statements from the company had led him to lower his fiscal 2001 forecast but he declined to elaborate.
CERTICOM CORP.:
CEO: Richard Dalmazzi
Ticker: CIC, CERT
Listed: Toronto Stock Exchange, Nasdaq Stock Market
Head office: 5520 Explorer Drive, Mississauga, Ontario, L4W 5L1
Telephone: (905) 507-4220
www.certicom.com
INCOME STATEMENT:
3rd Qtr. 2nd Qtr. 1st Qtr.
U 1/31/00 U 10/31/99 U 7/31/99
Operating revenue $000s 3,309 2,612 2,148
Net income $000s (5,302) (5,343) (5,559)
Earnings per share $ (0.47) (0.49) (0.51)
Cash flow operations $000s (2,045) (1,642) (3,224)
Cash flow operations per share $ (0.183) (0.150) (0.295)
4th Qtr. 3rd Qtr. 2nd Qtr.
04.30.99 01.31.99 10.31.98
Operating revenue $000s 2,325 1,694 1,288
Net income $000s (8,930) (8,761) (8,174)
Earnings per share $ (0.85) (0.81) (0.76)
Cash flow operations $000s (3,840) (3,804) (2,407)
Cash flow operations per share $ (0.352) (0.351) (0.226)
P/E ratio: n.m. Dividend yield: n.a. (at 5/26/00) U in US$
RATIOS:
04.30.99 04.30.98 04.30.97
Net profit margin (482.05) (773.49) (471.64)
Return on equity (58.71) (40.40) (57.72)
Return on assets (55.60) (38.15) (51.01)
Total debt/equity 0.01 0.01 0.04
Current ratio 8.08 22.55 14.85
Avg. price/book value 4.9 7.1 10.3 |
