Secure Computing Slashes Product Line

In an effort to shore up its flagging share price, the company plans to eliminate half of its products.
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SAN FRANCISCO -- In an effort to pull out of a severe slump, Secure Computing (SCUR) said it is going to cut its product line in half.

Plagued with deteriorating revenue and high executive turnover, the provider of network-security products is rethinking how to take on the big-name competition, which includes the likes of

Microsoft

(MSFT) - Get Report

,

Cisco

(CSCO) - Get Report

,

CheckFree

(CKFR)

and

VeriSign

(VRSN) - Get Report

.

Secure's executive staff was sequestered at an off-site meeting Tuesday and Wednesday discussing strategy and direction, with plans to eliminate half of its products. "We are narrowing our focus," says president and COO John McNulty, who joined the company earlier this month. "We cut the list in half. Any product that was not key to the future, we'll fill our commitments, meet

our customers' expectations and stop investing in those products."

This could be just the strategy to jump-start the lagging stock. Shareholders tired of playing the waiting game have been pulling out of the stock. On Tuesday, when the stock dropped 8%, some 1.74 million shares traded hands, nearly four times its three-month daily average. "That was a big day in that stock," says Tony Cecin, director of capital trading at

U.S. Bancorp Piper Jaffray

, one of the lead market makers in the stock. Cecin says a block of 500,000 shares sold Tuesday, an indication that a large institution was selling off its position.

Secure's 52-week stock movement resembles Coney Island's legendary

Cyclone

roller coaster. After a bumpy rise starting last fall, the stock peaked at 29 in late January, before dropping down below 5. Shares of the stock closed unchanged Thursday at 3 5/8.

After reporting fourth-quarter revenue that was below expectations, the company warned that its first-quarter revenue would decline about 36% to $8.2 million. As a result, the company reported a first-quarter loss of about 30 cents a share before charges, instead of the 10-cent profit estimated by

First Call

.

"Companies that have tried to be the grocery store for security haven't done well," says Nicole Schmidt, an analyst at

Josepthal

, who has no rating on the stock. Josepthal has no underwriting relationship with the company. "They're streamlining their business, but it means a lot of the products weren't panning out."

Neither were their customer contracts. The company attributed the shortfall to unanticipated delays in closing several large transactions in the federal and international sectors. Nine out of its ten largest contracts slipped from the first quarter. Only three of those delayed deals have closed so far this quarter. And there's "some cloudiness and mixed signals" as to when those other deals may close, says CFO Tim McGurran.

Secure has offered a suite of security products including firewalls, Internet tools, and authentication. The company wouldn't specify which products they'd focus on, but said it hopes to take advantage of the Internet, e-commerce and firewalls. "Everything will end up having firewalls," says McNulty.

Secure isn't the only security company facing tough times.

Axent

(AXNT)

and

Network Associates

(NETA)

also saw their stocks tumble after pre-announcing larger-than-expected losses this year.

Secure has other concerns, such as management transition. So far this year, Secure named McNulty as its new president and announced that its executive vice president of research and product development left the company for "personal reasons."

In addition, insiders have been selling shares when the stock was tumbling, which gives investors the impression that things are not going to get better, says Paul Elliot, an analyst at

CDA Investnet

, which tracks insider activity. CEO Jeffrey Waxman accounted for 200,000 shares of the 391,001 shares filed to be sold.

And even at the bottom, institutional investors appear to be backing out. In addition to the heavy block trading Tuesday,

American Express Financial Partners

said in a recent filing it no longer holds a stake larger than 5%. Last September, the company owned 6.6% of Secure Computing shares.

But with every seller there has to be a buyer. One of those buyers was Richard Perkins, portfolio manager at

Perkins Capital Management

, which has owned the stock for about a year and bought more Tuesday.

"People have just pushed the stock extremely low relative to its product line and assets of the company," says Perkins, who was surprised to hear of the recent developments. "I didn't think that was necessary," he says. "They have some award-winning products."

Maybe so, but big names likely have more clout with their customers. That means Secure could get squashed or acquired, says

Dakin Securities

analyst Roy Lobo, who rates the stock hold and has no underwriting relationship with the company.

Computer Associates

(CA) - Get Report

bought

Platinum Technologies

in March, and the security market could be the next area of expansion for server makers. "HP needs to get into security," says Lobo, "and Secure has a high-end Unix firewall

product. It would be a good fit."

The company says it took that into consideration during its retreat and could potentially partner with those server companies or be bought. "If somebody steps in with an offer we can't refuse, shareholder values comes first," says McNulty. That uncertainty could be another negative on the stock. A lot of big investors "don't want to invest in a company that's a takeover candidate," says Lobo.

Even though revenue for the first quarter deteriorated from a year earlier, Lobo still expects Secure to produce about $60 million in revenue in 1999. That's about $1.4 million shy of 1998's results. The stock is trading at about one times both 1999 and 1998 revenue. Axent, meanwhile, is trading at four times 1998 revenue.