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Diversinet Loses Its Grip on Its Biggest Customer

Is a Canadian wireless Internet company up a creek without a paddle?

Among Internet stocks, no notion is hotter than wireless. And it's not just

Palm

(PALM)

and

Nokia

(NOK) - Get Report

cresting on this wave of interest.

A handful of other stocks have gone along for the ride. Investors, it seems, rush to buy

anything

associated with wireless these days, in which rumors of hot companies are chased like

Mickey Mantle

rookie cards. But when it comes to one of the wireless highfliers, some wonder if wires aren't the only thing missing.

Diversinet

(DVNT)

, a Toronto-based seller of digital certificate technology, has seen its stock on a tear. The company claims to sell a digital encryption certificate that promises secure wireless communications. The product, the PASSport, is a tiny snippet of computer code; you can't see it work, but Diversinet claims it will add a layer of security to wireless Internet applications. Shares of Diversinet have ridden the excitement over wireless stocks, rising more than 1,500% since last year. This tiny 45-person outfit boasts a market capitalization of $664 million.

The 3-year-old company was formed out of the shell of the now-defunct Canadian firm

Instant Publisher

. Diversinet's current CEO Nagy Moustafa says that the management of Instant Publisher is no longer involved in the company -- and good thing: Instant Publisher's former head and Moustafa crony Jack Banks (also known by the name Jacque Banques) is being held in a Manhattan jail on $35 million bail, charged with stock fraud.

For most of the last year, Diversinet has seen its shares rise hand in hand with those of its biggest customer,

Research in Motion

(RIMM)

, the Waterloo, Ontario-based maker of the popular Blackberry pager. And it's little wonder investors link the success of RIM to that of Diversinet: Diversinet has put out more than a dozen press releases announcing a relationship with RIM. They seem to be joined at the hip.

In Concert
Diversinet's share price has risen with that of Research In Motion. But their businesses aren't as tight as investors might think.

And yet, the RIM pager doesn't actually

use

Diversinet's PASSport products: The RIM pager, by all accounts, works just fine without it. But Diversinet signed a deal with RIM that, in the words of a Nov. 16, 1999 Diversinet press release, "will provide Diversinet with ongoing recurring revenue."

According to that Diversinet release, RIM will "extend

Diversinet's existing CA

certificate authority infrastructure to provide CA services for wireless e-commerce applications using Diversinet's PASSport." It might not sound like much, but it's the biggest deal Diversinet has going.

Problem is, the sale of RIM devices hasn't brought Diversinet a dime -- let alone a loonie -- in reported revenue thus far. In the quarter that ended last Oct. 31, the company had revenue of just $181,266 ($246,352 Canadian). According to Moustafa, RIM agreed to pay Diversinet a one-time licensing fee in that quarter. "It was about $150,000 Canadian

$110,370 U.S.," says Moustafa. "That is all the revenue we will actually get from RIM."

According to RIM's chief executive officer, Jim Balsillie, RIM's Diversinet deal has produced nothing. Yes, they have a partnership, but so far, without results. "We want to elegantly extend any platform our customers work on," says Balsillie. "So we will partner with anybody working in this space. We have 400 different companies that are writing applications for RIM."

Diversinet, in theory, would get revenue from those companies for every one of the applications that uses PASSport for its security. And how many of those 400 companies are using Diversinet technology?

"Oh, none," says Balsillie. "And I don't know of any developing any right now. Really, when you come down to it, there are two main leaders,

Entrust

(ENTU)

and

VeriSign

(VRSN) - Get Report

. The next one would be

TST Recommends

Baltimore

-- out of Ireland -- then you've got

Certicom

(CIC.TO)

and

DST

(DST)

. But if someone ever does use Diversinet, we want to be able to support it."

Moustafa is vague when asked to describe the deal with RIM. "We provide the whole security component and secure the communication between their device and the gateway," the Diversinet CEO said in a Feb. 7 interview. But when pressed, he admits that the RIM deal has yet to produce any working RIM pagers that use Diversinet. "There is no production system yet," says Moustafa. "There are only pilot programs."

Diversinet boasts of a number of other deals with a handful of other companies, including

First Call

and

BellSouth

(BLS)

. But the company has been unable to pump out a single product for public consumption. It has, however, managed to pump out a steady stream of press releases, 30 in the last six months, with more than a dozen boasting of the RIM relationship.

Mountain Climbing
On paltry revenues, Diversinet's price-to-sales ratio towers over that of competitors.

If the releases were designed to drive up Diversinet's share price, they've worked. The company lost more than $10 million last year, and took in less than $300,000 in sales. And yet Diversinet now trades at 2,196 times those sales. By comparison, RIM is trading at 105 times sales. Even VeriSign, the dominant Internet security player and media darling of late, is at 271 times revenue.

Diversinet is, in many ways, a poster child for today's technology stock market. The demonstrable success of Diversinet's shares is accompanied with scant evidence of the success of Diversinet's products. As technology gets mind-numbingly complicated, investors are buying successful sectors rather than picking out successful companies. "Increasingly, I hear from money managers that they're taking the basket approach,"

Robertson Stephens

research director John Rohal says. "They buy every stock in the sector to make sure they don't miss out on the eventual winners. They hope that their overall success will mask their individual mistakes."

Wireless surely will be big. But the prospects for Diversinet in that space look uncertain at this point. Indeed, it remains to be seen if wireless digital certificates are needed at all. The Palm VII works fine with secure e-commerce applications from

Amazon.com

(AMZN) - Get Report

,

BarnesandNoble.com

(BNBN)

and

eBay

(EBAY) - Get Report

.

Sprint's

phones with proprietary

Yahoo!

(YHOO)

content work without special digital certificates. Indeed, even if such certificates are someday used, the prospects for Diversinet's technology seem hopeful at best. Its shaky start with RIM offers little confidence that Diversinet's future will brighten.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.