Security firms up and down

RSA Security and SmartForce have raised questions about the accounting they used in their first-quarter financial reports, with RSA also raising questions about the state of its business.

After reporting a 21 percent rise in revenue for the quarter, RSA warned that third-quarter sales could be flat and that fourth-quarter sales might not be much better. Growth next year could slow to less than 20 percent, the company said, touching off a 25 percent drop in RSA's stock price.

SmartForce, a provider of e-learning solutions, fared better. The Redwood City, Calif., company said that sales rose 82 percent from a year ago, to $66.1 million, and that it had $1.1 million in net income, compared with a $9.9 million loss last year. SmartForce said that revenue should increase to almost $69 million in the third quarter, and to $75 million to $76 million in the fourth quarter. The stock jumped from $29.72 per share to $37.

Analysts had been skeptical about RSA's decision in the first quarter to recognize revenue on products shipped to three distributors, instead of waiting until those products were sold to end users. SmartForce's method of recording sales commission was questioned in a controversial report by a research firm.

Art Coviello, CEO and president of RSA, was asked about the revenue recognition, and he said that the $9 million to $10 million in question in the first quarter was not significant. In the second quarter, $10 million revenue came through distribution again, he said.

Coviello explained that RSA was capturing market share from other security software and hardware vendors, but that the current economic conditions made it difficult to predict what RSA's sales would be in the next six months or in 2002

"There are lot of deals," Coviello said. "What is lacking is predictability on timing of those deals, based on this uncertain economy."

Coviello said that revenue for the third quarter could be $72 million to $80 million, and for the fourth quarter it could be $78 million to $90 million. That implies a growth rate for all of 2001 that ranges from 10 percent to a figure in the high teens, he noted. For 2002, revenue might be $350 million to $400 million, reflecting growth in the teens to low 20s percent range, he said.

"The economy continues to impact our business and shows few signs of easing," Coviello added. "We will be growing, but we will be growing more slowly."

RSA, of Bedford, Mass., is profitable, and will continue to be profitable despite the slowdown in its business, Coviello said. The company's stock was downgraded by several brokerages following the earnings report.

SmartForce has become the "poster child" for the e-learning market, and has transformed itself from selling technology to IT managers to selling e-learning solutions to companies, said George Sutton, a securities analyst of Dain Rauscher Wessels.

SmartForce should be commended for doing as well as it has in the current economy, Sutton said. The accounting issues, which were raised by the Center for Financial Research and Analysis, were misleading and not well thought through, he said.