LONDON -- The roller-coaster ride that shares of

Baltimore Technologies


took following the release of its first-quarter figures on Tuesday shows just what a nerve-wracking experience it is to invest in volatile tech stocks. Yet, if you believe what many analysts and fund managers say about this provider of e-security services, a bit of discomfort is a small price to pay.

Baltimore announced a loss of

7.2 million ($11 million) in the first quarter compared with a loss of

7 million in the same year-ago period. This was generally better than many had expected, yet it was the 100% increase in revenue, to

9 million, that especially pleased the market.

The shares initially rose 3.5% on the statement, but then fell back 11.6% before closing the day down 333 pence, or 4.8%, at

66.36. Actually, this could be considered a quiet day for a stock that has a 52-week range of

7.20 to


Baltimore Technologies
The ups and downs of offering security

Source: Bloomberg

"These were a good set of figures," says one private banker, who declined to be named but said he owns a small amount of the shares for his "more adventurous" clients. "The problem was that the stock was dragged back by the fall in the


overnight. You'll never see Baltimore rise if the Nasdaq is down."

Indeed, that was proving true in New York on Tuesday. Baltimore shares traded as American depositary receipts were off 6 3/16, or 5.6%, to 105 3/16 as of 1 p.m., while the tech-tumescent index was down 2.3%.

Another reason for today's uncertainty surrounding the stock is that Baltimore is changing its business model by moving away from low-margin, security-hardware development and consulting toward higher-margin e-security software solutions. As such, there is difficulty comparing today's incarnation of Baltimore with that of a year ago.

Nevertheless, it is precisely this change that is encouraging analysts to put 12-month price targets of between

120 and

150 on the company. And today's announcement that software revenue jumped 800%, to

5.2 million, during the first quarter, has no doubt cheered those bullish analysts.

How Much Security?

Baltimore designs information security products that allow organizations to carry out activities (such as banking) securely over the Internet. The company is especially focused on a segment of the security market called public key infrastructure. PKI is the most sophisticated form of user authentication and especially important in the e-commerce market.

The consultancy


expects PKI to be the fastest growing part of the e-security market, growing six-fold between 1999 and 2003. IDC forecasts the global market for PKI products and services to be worth $1.4 billion in 2003, compared with just $123 million in 1998.

It's a big market, in which Baltimore faces some serious competition.

Entrust Technologies


is probably Baltimore's closest and biggest competitor. It is the market leader in PKI, and in 1999, it had sales of $71 million in the U.S. and Canada compared with Baltimore's paltry $2 million.

However, Baltimore is seeking to address this problem. In January, it announced an agreement to buy U.S. PKI developer



GTE Corporation

(GTE) - Get Report

for $150 million.

Baltimore said today it hopes that CyberTrust's "strong sales pipeline" would help it increase its percentage of revenue from North America. Currently, the region accounts for 18% of total revenue, while Europe, Middle East and Africa represents 52%, and Asia Pacific 30%. Also, by buying the No. 4 PKI provider in the world, Baltimore has increased its global share of the PKI market to 21%.

Security in Diversity

Baltimore is also diversifying into new areas, such as the PKI market for wireless, a potentially huge market with the roll-out of third-generation mobile services. Yet, Jemma Houlihan, an analyst with

ABN Amro

, says in a recent research report that this could prove a double-edged sword.

"While Baltimore's approach ensures that it benefits from growth in both methods of Internet access, it does spread the company's resources more thinly and leaves the company vulnerable to competitive threats from more specialist players," says Houlihan, who has a buy rating on Baltimore. ABN has no investment banking relationship with the company.

Wireless PKI specialists include


(NOK) - Get Report



, a division of Finnish mobile operator



. (


wrote about Sonera on


With losses expected to continue until some time after 2002, investing in Baltimore is not, as the fund manager says, "for widows and orphans." While the company can't assure investors of a smooth ride, what it can say for certain is that organizations require security in an increasingly insecure world, and Baltimore intends to sell it to them.