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Rainbow's Warning Slashes Stock Price

Earnings: Shares plunge nearly 28% after the Irvine security software firm says slowdown may hurt quarterly revenue.

February 13, 2001|From Dow Jones

An earnings warning from Rainbow Technologies Inc. sent shares of the Irvine security software provider down nearly 28% Monday and pushed other security software stocks lower as well.

After the market closed Friday, Rainbow warned that an unexpected slowdown in its North American business in the last month of the fourth quarter will probably hurt its quarterly earnings.

The company also said growth for the next two quarters could be slower because of market conditions.

Rainbow shares slumped to a 52-week low of $7.88 on Monday before rallying to close at $8.25, off $3.19, on the Nasdaq stock market. The shares have lost nearly 48% of their value this year.

Rainbow Technology said a slowdown in spending on information technology caused the earnings shortfall. The company depends heavily on original-equipment manufacturers, such as Sun Microsystems Inc., Hewlett-Packard Co. and Intel Corp.--some of which recently reported weak fourth-quarter earnings themselves.

"Rainbow has been very aggressive with their OEM distribution strategy, which is good," said Tomas Isakowitz with Janney Montgomery Scott LLC, adding that this means the company is also vulnerable when those firms cut back on Internet security spending.

Rainbow anticipates reporting earnings of 10 to 14 cents a share for the fourth quarter. A survey of analysts by First Call/Thomson Financial put earnings at 18 cents a share.

Other Internet security stocks also were under pressure Monday, in part because of Rainbow's announcement.

Shares of Internet Security Systems Inc. dropped 2.8%, or $1.88, to $64.56. The Atlanta company makes network security monitoring, detection and response software.

Also, Aladdin Knowledge Systems Ltd. fell 6.2%, or 31 cents, to $4.75. The Tel Aviv company sells security products that protect against software copying and illegal use.

Yet the future of the Internet security industry looks bright, at least according to a report released Monday by IDC, a research division of IDG Holdings Inc.

The study found that Internet security technologies are not value-added features that companies conducting business online can spare.

On the contrary, security appliances are "core requirements for conducting business," according to the study, North American Security Technology Adoption Trends, which is based on a survey of more than 1,000 North American companies.

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