- The Washington Times - Monday, July 14, 2003

Strong second-quarter profits and increased government business at SafeNet Inc. encouraged investors this week, lifting the stock of the Baltimore maker of network security products.

SafeNet shares gained $2.14 yesterday to close at $36.28, up 17 percent from a week before, when they closed at $31.02. The manufacturer of security chips for networks and mobile phones reported profits last Tuesday that beat Wall Street expectations.

The company said sales for its second-quarter ending June 30 more than doubled to $15.4 million from $7.4 million for the same period in 2002, helping to increase net income to $2.2 million (20 cents per diluted share) from $400,000 (5 cents) a year earlier. Diluted earnings per share reflect the value of convertible warrants and stock options.

Several analysts said the earnings boost came from additional Defense Department contracts, including a recent award to provide research and development for an Internet security system based on SafeNet’s remote software.

“SafeNet is really in a good position to benefit from the government’s increased spending on technology security,” said Frederick Ziegel, senior vice president of Brean Murray & Co. Inc., a New York investment firm. Mr. Ziegel does not own any SafeNet stock.

Mr. Ziegel, who rates SafeNet a buy, said SafeNet’s government contracts helped save the company when its largest client, Cisco Systems Inc., pulled out of a lucrative business deal that accounted for almost half of SafeNet’s sales last year.

SafeNet owed nearly 20 percent of its revenue to a multiyear licensing deal with Cisco, but that business is expected to drop to 8 percent by 2004, Mr. Ziegel said. SafeNet now does about half of its business with the government.

“They’ve been able to weather Cisco by working more with the federal government and other clients, and it’s paying off,” Mr. Ziegel said, forecasting $64 million in revenues and earnings of 70 cents per share for fiscal 2003.

Sales in the second quarter also got a lift from acquisitions of Cylink Corp. and Raqia Networks Inc. in February and from the recent release of a new security system for managing ATM machines and Internet provider networks, Chief Executive Officer Anthony Caputo said.

Maureen Kolb, Safenet spokeswoman, said the company was in a “quiet period” and would not comment because of a public offering of 2.5 million shares that closes today.

Joel Fishbein, research director at Philadelphia brokerage Janney Montgomery Scott, said he was encouraged by SafeNet’s business deal with Texas Instruments Inc. to provide encryption security for cell phones. SafeNet did not disclose terms of that deal.

“We expect significant revenue to materialize in 2004,” from the Texas Instruments agreement, Mr. Fishbein said in his latest report, rating the stock a buy. Mr. Fishbein does not own Safenet stock.

But Sean Jackson, vice president for equity research at Avondale Partners LLC, was cautious about the revenue amount the Texas Instruments deal will bring in, keeping his near-term rating of the stock at a hold or in-line with market performance.

“There is also the unknown of how much was lost from the Cisco business and how that will affect the September quarter,” said Mr. Jackson, who does not own any stock. “I think we’ll have to wait to see because there is still some uncertainty.”

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