From: <anonymous>
FIRST CALL RESEARCH NETWORK
08:09am EST 08-Jul-98 SBC Warburg Dillon Read (Gibbs R Moody (415) 352-5673)
ISSX: PATENT SUIT UNFOUNDED; REITERATE BUY
Warburg Dillon Read LLC July 08, 1998
Gibbs R Moody (415) 352-5673
INTERNET SECURITY SYSTEMS INC. (ISSX-OTC) - Buy
ISSX: PATENT SUIT UNFOUNDED; REITERATE BUY
Business: Internet Information Security
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Price: 44.00 Div: Nil Mkt Cap: 708m Debt/TC:
Price Tgt: 60 Yld: Nil Shrs O/S: 16.1m ROE:
52wk: 56.62-31.62 5yr Est: 70% BV/Shr: LTM OCF:
Cvt Secs: No
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FY QUARTERLY ESTIMATES FISCAL YEAR ESTIMATES
1stQ 2ndQ 3rdQ 4thQ EPS P/E REV(M)
12/97 (.03)A (.05)A (.08)A (.16)A F97A (0.32) NM 13.5
12/98 (.12)A (.05)E (.03)E .01E F98E (0.15) NM 28.5
12/99 .02E .02E .04E .08E F99E 0.15 NM 46.8
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Summary:
On the same day Internet Security Systems (ISS) announced a significant
contract win with the U.S. Army for its RealSecure intrusion detection product,
Network Associates announced its intent to file against ISS for patent
infringement. As anticipated, ISS formally responded that Network Associates`
allegations were unfounded. Moreover, we believe that this lawsuit was Network
Associates`s "Hail Mary" pass to slow the growth of ISS`s blockbuster
RealSecure product. Thus, we reiterate our Buy on ISS shares with a price
target of $60.
Highlights:
*RealSecure is ISS`s comprehensive intrusion detection system. While currently
representing only 25% of total revenue, demand for RealSecure continues to
exceed expectations. Since its release, RealSecure has successfully won every
piece of business against its competitors. The U.S. Army contract announced
yesterday is RealSecure`s first of many significant wins we anticipate and
affirms customer preference for security solutions from focused security
"specialists" like ISS.
*Network Associates does not have any established credentials in the security
market and competes unsuccessfully against ISS`s RealSecure with an older
generation technology it acquired from Haystack in 1997. In analogous
situations, Network Associates has often gone to the courts against its
competitors. We believe the lawsuit in this case is particularly questionable
because ISS had completed its due diligence on RealSecure two years ago,
revealing no evidence of patent infringement.
*We continue to rate ISS Buy because this lawsuit should not alter the
underlying opportunity ISS has to dominate the IRAM market which is expected to
grow from $40 million in 1997 to nearly $500 million in 2001. Moreover, we
think it merely affirms ISS`s RealSecure product as the de facto standard for
intrusion detection systems.
First Call Corporation - all rights reserved. 617/345-2500
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Received on Tue Jul 21 18:17:41 1998