Netegrity’s Quiet Ticker Ascent

A little more than four years ago, computer catalog seller Software
Developer’s Company saw the handwriting on the wall: Spelled out in large,
clear letters was the word “DOOMED.”

Facing rapidly shrinking margins in the software catalog sector, the company
abruptly dumped its catalog business and bet its future on the Internet. In
July 1996, parlaying its status as a value-added reseller for leading
firewall vendor Check Point Software
, SDC became NeTegrity , a
provider of network security software and consulting services.

The market responded with a yawn, and shares of Netegrity (which eventually
lower-cased the first “T” in its name), trading around $3.50 at the time of
the change, subsequently spent more than two years sputtering along between
$1 and $3.

Finally, in late 1998, NETE shares began a slow, arduous climb, cracking $10
per share in March of last year, $20 per share in July and $30 per share in
November.

Today, as investors await a 3-for-2 stock split slated to go into effect
Friday, shares of Netegrity are trading around $80. And though it plummeted
along with nearly every other ‘Net stock this spring, NETE has gained 283%
over the past year – only 11 out of 218 Internet stocks trading since last
August have fared better.

For the year to date, Netegrity shares are up 41%, placing the stock among
the top 20 ‘Net gainers.

All this, despite the fact that Netegrity trails a half-dozen other security
companies in revenue and remains unprofitable.

Figures from Netegrity’s Q2 report show $10.5 million in revenues, up 298%
from last year’s second-quarter sales. In contrast, Check Point’s revenues
in the most recent quarter were $91 million, RSA Security’s
were $67 million and Internet Security
Systems
were $44 million.

And while Netegrity continues to move toward profitability, it is at a slow
pace. Net loss in Q2 was $167,000, or 1 cent per share, compared to a net
loss of $1.4 million, or 13 cents per share, in the year-ago quarter. Gross
profit has remained in the 75% area for the past year.

So what is driving the stock’s surge? Two things, from what I can see.
First, a number of security stocks have weathered this year’s market
meltdown better than other ‘Net tickers. CHKP is the No. 2 performer for the
year, while WatchGuard Technologies
is in the top dozen.

Second, the market has noticed the impressive sales growth of Netegrity’s
flagship product, its SiteMinder security software. Q2 sales of SiteMinder
reached $9.5 million, or 91% of all revenue for the quarter. Clearly
Netegrity’s days as a mere reseller of Check Point firewalls are over.

With a current market capitalization of $1.6 billion, NETE is valued at 62x
trailing 12 months’ revenues of $25 million. That compares to Check Point’s
revenue multiple of 72.6x TTM, WatchGuard’s 32.6x TTM and ISSX’s 20.3x TTM.

Given that Check Point and Internet Security Systems are profitable, at this
time I would consider them better bets than Netegrity in the security arena.
But the former software catalog vendor is moving in the right direction,
even if its stock has gotten ahead of itself.

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