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Future Seen Bright for Axent


By Hal Plotkin
Silicon Valley Correspondent
May 1, 2000

The future is bright for Axent Technologies Inc. {AXNT}, analysts say, because the market for network-security companies is expanding.

Last week, Axent posted better-than-expected quarterly results, leading two more analysts to upgrade the company’s stock, based on expectations of considerable upside potential during the coming year.

“When a 15-year-old Canadian kid can shut down major Web sites, you can just imagine what might happen when someone who really knows what they’re doing tries it,” says Paul Merenbloom, an analyst at Prudential Securities in New York. “That’s one of the factors helping Axent.”

Merenbloom upgraded Axent to “strong buy” in February, setting a $45 12-month price target on the somewhat beleaguered stock. “The need for security is expanding potentially geometrically,” he said at the time. “This is going to be bigger than big.”

Last week, Pacific Growth Equities analyst Steve Olson and FAC/Equities analyst Matt Barzowskas also upgraded the stock to “buy” from their previously less-enthusiastic ratings, citing the company’s recent earnings report for the moves.

Olsen set a 12-month price target of $30, while Barzowskas put his year-end target at $25.

Axent’s stock has been a technology-sector volatility poster child during the past two years.

The stock dropped sharply last April when the firm posted its first disappointing flat-revenue quarter, following 11 consecutive upside quarters. The company, which had trouble integrating an acquisition, was also dogged at the time by several other concerns that analysts now say were overblown, including the possibility that an apparently minor breach of conflict of interest rules might have required it to switch auditors.

Axent’s stock had nonetheless managed to climb back up to spitting distance of its former all-time high before the recent tech-stock selloff eased those gains.

On April 26, however, Axent reported first-quarter net income of 5 cents a share. The results were 2 cents higher than Wall Street expectations on revenue that topped $30 million, a 41 percent increase over the same quarter a year earlier.

“Axent showed solid improvement in its business this quarter,” Barzowskas wrote in a report. “We predict this momentum will continue. The company is positioned extremely well to take advantage of growth in the security market, and this should translate into solid revenue and earnings growth.”

Olson says he was particularly impressed by strong sales of Axent’s most advanced high-end product, Enterprise Security Manager, which is used to manage the complete security needs of complex organizations exposed to the Internet. Axent reported closing 35 sales worth more than $100,000 each during the most recent quarter, part of transaction volume that was up 40 percent year over year.

There are literally dozens of other companies focused on one or another part of the online security market, including Check Point Software Technologies Ltd. {CHKP}, privately held Integrated Software Specialists Inc. and RSA Security Inc. {RSAS}.

“Other companies are out there with more-focused products,” Olson says. “But when Axent succeeds with their top-level product, it puts them in the position to manage everything else.”

“The [stock] market has been reacting mostly to the best-of-breed approach,” Barzowskas adds. “But there is clearly demand from customers to provide a full system solution with the services and consulting to tie it all together.”

Axent is also benefiting from positioning itself as a vendor to the nascent application services provider (ASP) market, which involves delivering access to a variety of software applications over the Internet. Many major firms are betting heavily on the emergence of the ASP business model as a new way to deliver Internet-based services.

“Security is an absolutely critical concern for ASPs,” says Stacie McCullough, senior analyst at Forrester Research, based in Cambridge, Mass. “Promises of security are going to be one of the ways ASPs may compete in the future.”

“We are helping ASPs remove one of the major barriers to their success,” says Greg Coticchia, Axent’s vice president of marketing and business development.

Another factor working in Axent’s favor, analysts say, is that customers are usually unlikely to switch network-security providers, barring some major catastrophe.

“As long as they provide capabilities and good support services there is no real reason to knock them out of there,” Barzowski says.

“It puts them in a position to cross-sell and up-sell their customers,” agrees Olson, who says Axent’s current valuation, at about 2.8 times its expected 2000 revenue, is at the low end of comparable online security firms.

“A fair comparison would probably be RSA Data Security, which is at about five times revenue,” Olson adds. “That’s even cheap for them. But if you believe RSA is worth five times revenue, then Axent is very clearly undervalued at its current price.”

Who knows, give Axent a few more good quarters and the rest of the analysts who follow the stock may also agree.

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