SafeNet Soars, Hifn Sags

Evening announcements provide good news for SafeNet and another disappointment for Hifn

September 30, 2005

3 Min Read
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Is today a good day to be a security stock? Well, yes and no.

Shares of SafeNet Inc. (Nasdaq: SFNT) shot up $4.80 (16%) to $34.50 in after-hours trading yesterday, as the company announced an unexpectedly large win with the U.S. Department of Defense (DOD). (See SafeNet Wins DOD Contract.)

Hifn Inc. (Nasdaq: HIFN) won't be as eager to hear the opening bell. Its shares fell 54 cents (9.3%) after hours, as the company lowered its revenue forecasts for the September quarter. (See Hifn Lowers Q4 Forecast.)

The two incidents have nothing in common other than their timing, both coming out after the market closed on Sept. 29. But they indicate that the ubiquity of network security hasn't made life so secure for the chip vendors in the business. As with many sectors, volatility can be a problem.

SafeNet announced yesterday a $150 million contract to provide its KIV-7M Link Encryptor (a box small enough to fit in a backpack but also available in 19-inch rack-mount form) to the DOD. It's the largest contract in SafeNet's history, and the DOD has already asked for delivery of $18 million worth of the appliances.SafeNet anticipated winning this contract. The surprise was that it came out three times bigger than expected. But it's also arriving later than expected -- which means SafeNet actually had to lower its revenue prediction for its third quarter, which ends Sept. 30. SafeNet expects $63 million to $65 million in revenues for the quarter, compared with analyst estimates of $69.7 million as tallied by Reuters Research.

In a conference call with analysts last night, SafeNet officials implied that the delayed third-quarter revenues will appear in the December quarter. SafeNet won't spell out the details until its earnings call in October, however.

Hifn didn't have any surprise wins to temper its bad news. Revenues for its fourth quarter, which ends Sept. 30, are expected to be $8.5 million to $9 million, well short of the analyst consensus estimate of $12 million.

Hifn's only explanation was a weak telecom market. "Orders from several key customers were delayed" due to weak demand and inventory buildup, the company's release stated.

The announcement continues a disappointing streak for Hifn. In July, the company's revenues fell about $1 million short of expectations due to inventory overstock at Quantum Corp. (NYSE: DSS), as noted in a July report by analyst Joseph Maxa of Dougherty & Co. LLC.On top of that, Hifn predicted back then that fourth-quarter revenues would be flat due to another inventory situation with a different customer; Maxa pegged that as Huawei Technologies Co. Ltd.. And now, with yesterday's announcement, the company has had to lower expectations even further.

For its third quarter, which ended July 30, Hifn reported pro-forma break-even earnings on revenues of $12 million. Analysts had expected losses of 2 cents per share and revenues of $13.6 million, according to Reuters Research. (See Hifn Reports Q3.)

Craig Matsumoto, Senior Editor, Light Reading

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