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Security Dynamics tightens hold on RSA

Reorganization will integrate the encryption software unit more closely with the parent company.

Security Dynamics is integrating RSA Data Security, the encryption software unit it acquired in April 1996, more tightly into the parent company. RSA President Jim Bidzos will remain, but Al Sisto, RSA's chief operating officer since December 1997, will leave the company.

Security Dynamics disclosed the moves, which involve laying off about 30 employees, in reporting financial results for the fourth quarter. The company earned 8 cents a share, below the consensus estimate of 12 cents a share as reported by First Call.

The company will take a $5 million to $7 million charge in the first quarter for the reorganization, which follows a phased melding of engineering, marketing, and now sales and administrative functions.

Art Coviello, chief operating officer, blamed the disappointing results on higher commissions paid to ISPs and other service providers for reselling Security Dynamics products, particularly its flagship SecurID security tokens. Those commissions were designed to jumpstart channel sales of Security Dynamics products and expired at year's end.

"Security Dynamics looks like it's starting to turn around," said Rakesh Sood, who follows the company for Goldman Sachs and has a "hold" rating on the stock. "Revenues were better than I was expecting. They seem to be executing better than in the last two or three quarters."

Sood is also cheered by RSA's major licensing deal with Intel, which intends to build security into its Pentium III--if the plan survives a firestorm of criticism from online privacy advocates.

Security Dynamics is betting much of its future on the new Keon public key infrastructure offering, which it announced last week at the annual RSA Data Security conference.

The product includes technology bought in July 1997 with Sweden's DynaSoft, certificate authority software licensed from VeriSign, Netscape's directory server, and internal development.

Security Dynamics reported that fourth quarter revenues last year grew 14 percent to $46.9 million, up from $41.1 million for the comparable 1997 quarter. Excluding non-operating and one-time items, earnings for the quarter were $3.3 million compared to $7.1 million in 1997.

Security Dynamics has been unloading its stock in VeriSign, an RSA spin-off whose stock has performed well since its 1998 IPO.

Security Dynamics sold 800,000 shares last quarter, Coviello said, using part of the proceeds to buy back 3 percent of its own shares. This month Security Dynamics has sold another 1 million shares of VeriSign, a high-visibility player in the digital certificates arena that reported its earnings earlier this week. Security Dynamics still owns 2.6 million shares of VeriSign, currently valued around $225 million.

The RSA business faces a challenge when the patents on its basic encryption algorithms expire in September 2000, but RSA and parent Security Dynamics have been working to diversify its revenue before then.

"RSA is not just a toolkit and patent license business anymore," Coviello said.