One-Day Wonder: RSA Stock Jumps 36% on Profit, VPN Hype

R. A. Hettinga rah at
Sat Apr 12 09:58:13 EDT 2003


Wall Street Journal

April 11, 2003 6:01 p.m. EDT 

Wonder: Techland Security 


Security Inc. (RSAS)

Share price as of Thursday's close: $6.67

price now: $9.10

Change: 36.4%

Volume: 5.1 million shares, daily average

Last time this high: March 27, 2002

52-week high:

52-week low: $2.23

Forward P/E before announcement: 47.6 (based on
14 cents a share)

Forward P/E after announcement: 53.5 (based on 17 cents
a share) 

THE NEED FOR SECURITY isn't limited to the real world. 

In the
face of a broad pullback in information-technology spending, RSA Security
(RSAS) managed to post its first quarterly profit in nearly two years late
Thursday on strong demand for its systems that protect so-called virtual
private networks, or VPNs. For the first quarter, RSA reported net income
of $1.7 million, or three cents a share, compared with a net loss of $13.7
million, or 24 cents, a year earlier. Both periods included one-time items.
Thomson First Call had a consensus estimate of a penny a share. Revenue
climbed 10% to $61.3 million, beating analysts' projections. 

Shares of
RSA jumped 36% to a 52-week high of $9.10 on Friday. 

While simple
password protection was once adequate for most networks, corporations
facing escalating threats of cyberterrorism - not to mention
run-of-the-mill hackers and disgruntled ex-employees - are now shelling out
for greater protection. That's where RSA comes in. The Bedford, Mass.,
company is profiting from its technology that authenticates the identities
of remote users attempting to enter VPNs. The most widely used method is an
authentication token that comes in the shape of a key fob or credit card.
This token has a chip, which creates a new randomly generated number every
minute or so that's synchronized with the network server. The remote user
types in a password as well as the correct randomly generated number to
connect to the network. It's called two-factor authentication: something a
user knows, a password, and something a user has in his possession, the

"Because of all the threats out there, you need more than just a
password," says Matt Barzowskas, an analyst at First Albany. "People
understand that you have to provide a higher level of security for remote
users, and that higher level is an authentication device." 

says the token system is popular because it's easy to use and very
reliable. RSA dominates the space with 80% of the market. 

"One of RSA's
greatest assets is that it has worked with almost every vendor to put the
technology in all the VPN devices," says Barzowskas. "So when a company
says, 'Let's buy one,' RSA's SecurID system is already integrated into the
equipment and the company just goes to RSA and says, 'We need to buy some

Others on Wall Street agree. 

"RSA is the de facto standard
for two-factor authentication," says Israel Hernandez of Lehman Brothers.
"There's been an increased awareness of the need for more security. These
things don't happen overnight, but the company has been executing well. It
has focused on small businesses and is doing a better job of managing
channels and deriving more sales out of the channel. That increased focus
is going to pay off." (Hernandez doesn't own shares of RSA Security, and
Lehman Brothers doesn't have an investment-banking relationship with the

Still, RSA has its problems. Like many other tech companies, it
has taken a hit from layoffs and the IT slowdown. RSA is also under an
ongoing informal investigation by the Securities and Exchange Commission
related to revenue-recognition practices and questionable trading in its
stock. Further, Barzowskas says the company was forced to replace its chief
financial officer in July after suffering through a series of ill-handled
financial transactions. 

Looking ahead to the second quarter, RSA
predicted earnings in the range of break-even to four cents a share.
Revenue should come in between $58 million to $63 million. 

think there's still opportunity in the stock," says First Albany's
Barzowskas. "We're still at the beginning stage of a turnaround story, so
there's more upside. Demand for its products is starting to grow as
security continues to be one of the highest priorities, and this is one of
the most effective ways to authenticate users." (Barzowskas doesn't own
shares of RSA Security, and First Albany doesn't have an investment-banking
relationship with the company.) 

R. A. Hettinga <mailto: rah at>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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