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Netegrity Inc. Is Coming on Strong


By Hal Plotkin
Silicon Valley Correspondent

Everyone wants to get a foot in the e-commerce door. But owning the door is even better.

That is the recipe for Netegrity Inc.’s {NETE} rather stunning success. The Web portal security company posted its first profit one quarter ahead of schedule last week, providing convincing evidence that the once little-known firm is emerging from the Internet shakeout with a particularly strong hand.

Netegrity’s total third-quarter revenue increased 361% to more than $15 million, up from just over $3 million for the same period a year earlier. Revenue from the company’s flagship product, called, SiteMinder®, which grew by 456% over the same quarter last year, was up 52% over the previous quarter. Net income came in at 3 cents a share, compared with a loss of 17 cents for the same quarter last year. The early profitability surprised analysts, many of whom expected a break-even quarter, at best.

Netegrity is hardly a household name. But analysts say investors should get to know the company.

Even leading industry analysts, who unlike financial analysts don’t make markets in any stocks, are showering the company with praise.

“Netegrity has been doing really well,” says John Pescatore, research director for network security at the Gartner Group in Washington. “I have them in the leader’s position.”

“Netegrity will enjoy steady growth for at least the next three years in its current niche,” predicts Steve Hunt, vice president for research at the Giga Information Group in Santa Clara, Calif. “The company also has a road map that will ensure its continued viability for four years beyond that.”

Waltham, Mass.-based Netegrity provides software that authenticates online users and lets them view whatever information or files they are authorized to access, even if those files are contained on different servers or within different software applications. The product’s versatility gives corporate customers more freedom to use other best-of-breed software applications because it doesn’t require them to turn their entire online infrastructure over to any one single vendor.

On Wednesday, Robertson Stephens analyst Dane Lewis, who is based in San Francisco, upgraded the stock to “strong buy” from “buy,” saying Netegrity is providing a “must-own technology for e-commerce.”

Lewis didn’t set a price target on the stock but says that at about $70 a share it is trading at a discount, as compared with similar best-of-breed Internet software firms, such as Check Point Software Technologies Ltd {CHKP} and Veritas Software Corp. {VRTS}, both of which have been increasing revenue over the past year at less than one-third of Netegrity’s breakneck pace.

Katherine Egbert, an analyst at Thomas Weisel Partners in San Francisco, also reiterated her “strong buy” rating on the stock after the quarterly numbers were announced.

Egbert compares the stock to a broader group of comparable companies than were used in the Robertson Stephens’ analysis. By her yardstick, Netegrity trades at a slight premium, at 23 times her projected calendar year 2001 revenue, as compared with the average of 18 times 2001 projected revenue for the group of companies she thinks most comparable. That group includes Allaire Corp. {ALLR}, Art Technology Group Inc. {ARTG}, BroadVision Inc. {BVSN}, Inktomi Corp. {INKT} and Vignette Corp. {VIGN}, among several others.

Even so, Egbert thinks Netegrity’s stock has more room to run. “We believe the premium on Netegrity’s shares is warranted, given the company’s leadership in the market and strong business fundamentals,” she says.

Although Egbert hasn’t calculated a new forward-looking price target on the stock yet, she says Netegrity’s sales must grow by just 47% per year to deliver a 20% rate of return over the next five years.

“Given how the company has been doing lately, we certainly believe they can do at least that,” Egbert says.

The analysts particularly like Netegrity’s strategy and position in the market. They say the growing complexity of the Internet as well as corporate intranets are creating a burgeoning need to manage online access to archived information and online services.

The success of both the business-to-business, or B2B, and business-to-consumer, or B2C, sectors hinges on whether online businesses can efficiently manage and personalize online-access procedures.

“If you’re GM {GM}, you might not want Firestone to have access to the same information you share with Goodyear {GT}, or with other vendors,” Pescatore says. “What’s really hot here is you’re talking about extranets and intranets that can give you authorization to connect to hundreds or even tens of thousands of different connections.”

Pescatore says he wouldn’t be surprised to see further consolidation in the sector that could lead to an eventual acquisition of Netegrity by some larger player.

“Hewlett-Packard {HWP} wants to get into this space, and you have companies such as Commerce One Inc. {CMRC} and Oracle Corp. {ORCL} that could also be interested,” he says. “I think mid next year you start to think about that.”

There are a number of other competitors targeting the same market, including Oracle, which offers a similar product that works with its own applications, and Entrust Technologies Inc. {ENTU}, which recently acquired competitor enCommerce Inc. Those are in addition to several still privately held upstarts, such as Cupertino, Calif.-based Oblix Inc. and Securant Technologies Inc., of San Francisco.

But analysts give the edge to Netegrity.

“With Oracle, you have to drink the Oracle Kool-Aid,” Pescatore says. “And none of the other competitors have the strong marketing partnerships that Netegrity has created.”

Netegrity’s marketing partners include leading system integrators such as Ernst & Young LLP and KPMG International, as well as online powerhouses Art Technology Group, BroadVision and Vignette, in addition to B2B platform providers, such as Commerce One and i2 Technologies Inc. {ITWO}. Those and other partners brought Netegrity 46 major new accounts during the most-recent quarter, including DaimlerChrysler AG {DCX}, The Gap Inc. {GPS}, Pacific Gas & Electric Corp. {PCG} and Toyota Motor Corp. {TM}.

“Even though it has had a good run, Netegrity isn’t on most people’s radar screens yet,” says Paul Saunders, an analyst at Wit SoundView in San Francisco. “But it’s the only pure play in a market it’s dominating.” He also has a “strong buy” rating on the stock, along with a 12-month price target of $91.

“I think the company will continue to outperform expectations,” Saunders says.

More stories from Hal Plotkin

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