Check Point, Internet Security warn and dip

The companies warn about second-quarter results--the latest sign that Internet security companies aren't immune to economic weakness.

3 min read
Check Point Software Technologies warned that it will miss revenue estimates for the second quarter and potentially for the full year--the latest sign that Internet security firms aren't immune to economic weakness. Internet Security Systems also warned about its second quarter Monday night, sending security stocks into a tailspin.

Check Point is an Israel-based company that makes firewall software that protects corporate networks from hackers and other unauthorized access. Its VPN-1 product also lets companies set up virtual private networks for secure internal and remote communications.

The company said second-quarter earnings are expected to be 32 cents a share on a diluted basis, in line with First Call's estimate and better than the 17 cents a share earned in the second quarter of last year.

Revenue for the second quarter is expected to be between $140 million and $142 million, better than the $90.7 million in the second quarter last year but short of First Call's estimate of $150 million.

"Given the current market environment we really believe these numbers are strong testimony to Check Point's market strength," CEO Gil Shwed said on the company's Tuesday morning conference call.

Analysts on the call also praised the company for meeting earnings estimates. But they did have some questions about the company's new 2001 revenue estimates and its server provider business.

On the call, Checkpoint said it expects 2001 revenue to be up 30 percent to 50 percent over last year's. That leaves plenty of room for the company to miss First Call's consensus estimates of $630 million, which would imply a 48 percent gain over 2000's revenue.

Analysts questioned why the range was so big.

"A lot of our performance depends on the macro economic environment. If conditions improve, it will result in an upsurge in revenue, but it's hard to predict," said Shwed, who said that the upper end of guidance depended on a market improvement, while the low end would be the result if the economy remains the same. The company also has a lot of big deals, and if just a couple of them get delayed, that could dramatically alter results.

Analysts also expressed concern about the company's service provider business, which management admitted was its most drastically hit area.

While the service provider business in Asia is still going strong, "Europe is getting softer than it was in the first and fourth quarter," said president Jerry Ungerman, "though it's not as weak as the U.S."

Analysts maintained their positive outlook on the stock despite Tuesday's news, due to a belief that the company is still faring well next to competitors.

"We do not believe that the competitive environment for the firewall/VPN market has changed," wrote Wit SoundView analyst Paul Saunders, who continued to rate the stock a "strong buy," while lowering estimates on revenue.

While analysts were content to drop estimates for Check Point in line with the company's new revenue estimates, Internet Security Systems' Monday night warning prompted some downgrades and dour forecasts for the rest of the security sector.

Check Point's shares were only off $4.26 to $46.69 Tuesday, but some of its fellow security software makers were faring much worse following a warning from Internet Security Systems and some downgrades that affected the entire sector.

Internet Security Systems was off $20.84 to $29.33, and, among similar companies, Network Associates was down 27 cents to $12.69 and VeriSign fell $3.38 to $57.12. These companies had all previously been seen as safe bets since security tends to be the last item cut from corporations' technology budgets.

Merrill Lynch analyst Mark Fernandez reduced his intermediate-term rating on Internet Security Systems stock to "neutral" from "accumulate" due to the company's announcement it would miss revenue and earnings estimates for the second quarter.

Gerard Klauer Mattison & Co. analyst Gibbs Moody also lowered his rating on the stock to "neutral," calling the company's pre-announcement "extremely disappointing."

The company's news could also be a harbinger of tough times for the security industry, noted Tucker Anthony analyst Frederick Ziegel.

Ziegel didn't change any estimates, but noted that Network Associates, Check Point , RSA Security and Symantec are the most likely to suffer since they have "exposure to large enterprise deals and foreign markets."

On a positive note, the analyst predicted that "investors should get their shopping lists together."

"Information security stocks will be a major theme in the next bull cycle," Zeiegel wrote. "Yes, we believe we will have one," he added.