On May 12, The Wall Street Transcript interviewed Sean Jackson, CFA, a Managing Director and Senior Research Analyst at Avondale Partners, LLC, covering Internet security and China technology. Key excerpts, including his information security sector picks, follow:
TWST: Given that [customers now want a one-stop-shop for solutions], how do you play the space?
Mr. Jackson: You look for stocks in companies that may have a niche area that is either under the radar or where maybe the markets are not big enough to get the attention of the big guys. There are probably two names I would highlight there. Again, these are basically microcap stocks. One is Hifn (HIFN). They provide encryption technology that goes into chips and boards as well as compression technology, very niche areas. But the need to put encryption functions on all of network equipment is growing and that's particularly true in the storage area. That's their niche, and it's not a huge market, maybe a couple of hundred million. It is enough for Hifn to succeed, but not enough for some of the bigger players to step in.
TWST: Do they have any real competition in this space?
Mr. Jackson: Yes, the main competitor to them is a company called Cavium (NASDAQ:CAVM). Now, Cavium does a few more things. They are involved in more verticals than Hifn is. Their market capital is a lot bigger, but that's probably their main competitor.
TWST: What is it that gives Hifn an edge in this space?
Mr. Jackson: In the storage verticals, they have just been at it longer. They have probably a year or two lead and so their solutions are faster right now, more adaptable right now, and the relationships within the storage players are stronger.
TWST: So Hifn is one name. What is the other one?
Mr. Jackson: We are starting to warm up to Entrust (ENTU). Entrust provides digital identity solutions and this is, again, a very niche area. They issue digital credentials to individuals and computers. Their market is governments and high-end financial institutions. At one time this market back in 1999-2000 was going to be more of a mass market, but that has not been the case. It is a little more of a specialized niche. Now, the unique thing about Entrust, the reason why we are warming up to it is they have been plagued by mixed executions for the last several years. But we think they are starting to get their house in order and their business is becoming more predictable.
TWST: What have they done to get their house in order?
Mr. Jackson: They have concentrated more on recurring revenue sources. 51% of their business right now is what you can classify as recurring revenue and that is versus 15% this time last year. This company has been plagued by having to sign big deals at the end of a quarter but that's not necessarily the case any more. The second thing is that they are involved with several global ID projects, which is why we think it is one of the most likely takeout candidates. When I say global ID projects, I am talking about countries like the UK, which is trying to implement and give away smart cards for many of its citizens, and also a country like Germany which is about to embark on a project to issue health ID cards to every one of its citizens. There are all these little projects popping up everywhere. Entrust is involved in many of these at a subcontract type of level. The company provides a small piece of the ID project, but it is still critical. We think that they are on the radar screen or they should be on the radar screen to a lot of these bigger system integration companies that are trying to win the main general contractor role for these ID projects.
TWST: They are providing a piece that everybody needs.
Mr. Jackson: Yes, they are providing a piece that everybody needs. It is a small piece but still a critical piece.