Tech Beat: Encryption technology
Your mother’s maiden name may be sufficient to protect personal email conversations with friends and family, but when it comes to transmitting valuable company data or private health records, a higher level of security is in order.
Encryption technologies, which essentially transform plaintext data into a coded form so that it is unreadable while it’s in transit, have for years helped companies ensure the safe transmission of credit card numbers over the Internet, or human resources records inside corporate Intranets.
More recently though, companies specializing in encryption have shifted their focus away from the broad consumer market and toward more specialized enterprise applications. Years of conversing over email have led most people to see that, while it may be possible for Internet service providers to intercept individual emails, in most cases they have no reason to do so. Companies, on the other hand, are increasingly transmitting sensitive data over computers and handheld devices and are keenly interested in technologies that will guard this material.
Lots of large software companies like Microsoft Corp. (Nasdaq: MSFT) are active in encryption technology, but because high-tech security is a constantly moving target that regularly requires new solutions, it is an area where young companies with creative approaches to securing data may compete effectively with the established giants.
Zix Corp. (Nasdaq: ZIXI) is one of these smaller companies that has not only tapped into the demand for encryption technology serving enterprise customers, but has helped create new markets around encryption. The Dallas, Texas-based firm offers basic encryption technology for email communications, as well as an e-prescribing service that lets doctors check patient records, order prescriptions over a secure handheld device and then transmit those orders to patients’ pharmacies.
To date, almost 15 million prescriptions have been sent over Pocket Script, the Zix electronic prescription service, helping total company revenues rise to $18.4 million in fiscal 2006 from $14 million the year before. The company posted a net loss of $19.5 million last year, down from a $43.6 million loss the year before.
Most analysts are optimistic for continued growth in the company’s e-prescribing business as more and more doctors and hospitals move away from an antiquated and error-prone system of scrawling down prescriptions in illegible handwriting.
Two analysts who provide forecasts are estimating that revenues will grow sharply, to $23.8 million in 2007 and $32.6 million in 2008. They also project a steady widening of net losses to $0.17 per share in the current fiscal year and $0.03 per share next year, compared with a net loss of $0.06 per share last year.
Investors also seem optimistic for further growth. Shares of Zix have more than doubled from $1.21 per share at the start of the year to $3.62 at today’s close.
Indeed, the stock rose more than $1 just since the start of October, when Zix announced that its third-quarter revenues would exceed earlier forecasts. Following that dramatic run-up, the stock has retreated in recent days.
That could mean a good buying opportunity ahead of the release of third-quarter earnings next week. That report is expected to show strong growth in both the company’s key business segments. Clearly, investors looking for a buying opportunity in the encryption space need look no further than Zix.
One of Zix Corp.’s rivals, Tumbleweed Communications Corp. (Nasdaq: TMWD) of Redwood City, Calif., offers a more complex investment picture. Although Tumbleweed has shown sharp revenue growth—to $62 million in 2006 from $50 million in 2005 and $43.4 million in 2004—it has in recent years made no meaningful move toward profitability. The company’s net loss last year totaled $6 million, an increase from the $4.9 million loss it reported in the year-ago period.
Tumbleweed is aware that its cost structure is high, and is in the process of restructuring some of its operations, including shifting from a direct sales model to distributing its technology through resellers.
Tumbleweed’s problems, though, go beyond high operating costs. In October, it reported third-quarter results that showed revenues fell to $14.1 million from $15.1 million in the year-ago quarter and came in below expectations.
At the core of these steady losses and disappointing revenues, there seems to be a failure to innovate aggressively into new areas the way Zix has done with its technology for the health-care industry.
Tumbleweed’s products essentially provide for secure messaging, file transferring and validating. While all these services are valuable to large enterprises, Tumbleweed is not the only company offering them.
Tumbleweed’s (TMWD) shares have fallen to $1.73 per share today from $2.68 per share at the start of the year. Shares have ranged between $1.61 and $3.66 for the past 52 weeks. While ongoing restructurings may help lower the company’s expense structure, Tumbleweed will need to do more to boost product sales before its stock will be a compelling investment.
It’s a stock that is worth watching, but under the current circumstances, not one that’s worth buying.
