Anytime the Pentagon computers get hacked it makes international news.
Recall the headline a month ago about the Israeli teen who poked around in the
world’s best-known computer network? Wall Street eats it up.
Not surprisingly, a few weeks later in a stock market already hot for Net
offers, Internet Security Systems’ (NASDAQ:ISSX) IPO went ballistic.
But our analysis questions its huge run.
ISSX sold 3 million shares March 24 priced at the high-end of its range at
$22, generating more than $60 million proceeds. ISSX closed the first day
at $40.375 and backed off slightly March 25 at $37.50. A 70% gain from the
IPO. In the few days of stretching Internet Security Systems (ISS Group)
public persona ISSX hit as high as $42.50 per share.
Hacker Attacker
ISS Group | |
Internet Security Systems | |
Pro forma IPO valuation estimates | ISSX |
Offering | 3.00 |
Greenshoe | 0.45 |
Total offer with greenshoe | 3.45 |
IPO offering price | $ 22.00 |
IPO gross proceeds w/ greenshoe | $ 75.90 |
Shares out pro forma | 16.37 |
Plus options | 1.86 |
Fully-diluted shares (FDS) | 18.23 |
IPO market cap | $ 401.12 |
Plus long-term debt | 0.07 |
Less working cap | $ 53.86 |
= IPO enterprise value | $ 347.33 |
ISSX share price 3-25 | $ 37.50 |
Primary market cap 3-25 | $ 613.83 |
Enterprise value 3-25 | $ 560.04 |
Share price % change from IPO | 70% |
Revenue | |
1997 | $13.47 |
Estimated 1998 revenue | $22.00 |
Loss | |
1997 | -$3.92 |
Primary share loss 1997 | -$0.50 |
Revenue multiple | |
IPO market cap/1997 revenue | 30 |
MarketCap 3-25/1997 revenue | 46 |
IPO market cap/est.1998 revenue | 16 |
MarketCap 3-25/est.1998 revenue | 28 |
Vs. CHKPF multiple | 15 |
Premium vs. CHKPF multiple | 86% |
all figures in millions except | |
multiple and share prices | |
© 1998 Mecklermedia. www.internet.com |
The interest is fueled by ISS Group’s leadership status in hacker
detection. Its software suite of products acts as a watch dog of sorts,
snooping for those trying to break into computer networks. Some of its
1,500 customers include Charles Schwab, Microsoft, HP, Intel, Merrill
Lynch, Lockheed Martin, NASA, and Price Waterhouse to name a few.
Pro forma, insiders control 72%. Some of the pre-IPO investors include
venture capital groups Kleiner Perkins, Greylock, and AT&T Ventures.
But at what our analysis targets may be 28x 1998 revenue, ISSX seems a
little frothy given its relatively low revenue, $13 million in 1997, or we
estimate $22 million in 1998. Losses were $3.9 million last year.
Underwriters for the IPO were led by Goldman Sachs which brought it public
at 15x, which we think is about where ISSX ought to trade.
Consider that firewall leader Checkpoint Software (NASDAQ:CHKPF) trades at
our estimated 15x this year’s forecasted revenue–and it will likely bring
in more than $100 million sales–that’s five times more than ISS Group.
ISSX, with 20% of CHKPF revenue commands a value 39% of CHKPF? Seems a
little “hacked” itself. At 20x revenue we think Wall Street could perhaps
sleep a little sounder.
Don’t get us wrong. Security is vital. And ISS Group is hot, IPO
notwithstanding. We’d just like to see a little more revenue, some positive
earnings, and as much caution applied to valuation by investors as firms
like this do to hacker-proofing networks.
