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Internet 2001: Suddenly Insecure Security Giant

Early in the month I wrote about the Security sector, noting the difficulty facing small vendors trying to gain a foothold in the market at the expense of larger, more established competitors.

Based on the fourth-quarter disaster alert issued by security products provider Network Associates , it's clear that even the giants of the sector can stumble badly.

One day after Christmas, security products provider Network Associates belatedly dumped a truckload of coal on its shareholders, warning that Q4 revenue will be between $55 million and $65 million - that compares to $250 million it forecast in October and the $239 million in third-quarter sales - and that its net loss, excluding amortization and other expenses, will be between $130 million and $140 million. That loss translates to about $1 per share; in October, NETA forecast a Q4 profit of 32 cents per share.

NETA tried to minimize the impact of the news by attributing $120 million of the revenue shortfall to a change in how it books sales, but that's just spin control. I don't recall ever seeing such a dramatic, short-term downturn in revenue before.

The impact on NETA management and its shares was immediate. Chairman and CEO William Larson has been stripped of his board seat, while the company's president and CFO are departing. Meanwhile, shares plunged nearly 50% in after-hours trading to $6. At that price, NETA is down 78% from its close of $26.69 last Dec. 31.

Of course, given its shrinking market capitalization, NETA can no longer be classified as a giant. At the $6 price, the company is valued around $800 million.

NETA may seem attractive to some bargain hunters - after all, even including the horrible Q4 numbers, it now trades at 1.1x trailing 12 months' revenue of $752 million. But stay away; this is a rudderless, listing ship. Furthermore, the company now has serious credibility issues. CEO Larson said on Tuesday that NETA's board began searching for a new management in November, before it realized there were big problems with Q4 performance. If I were an investor, I would be highly skeptical. Look for the lawsuits to fly.

So what security companies are worth investing as 2001 approaches? Check the Dec. 7 Morning Report at www.internet.com.