NW200: Profitable PKIs, 04/24/00

Profitable PKIs

BY JULIE BORT
Network World, 04/24/00

An Internet company making a profit? And a sizable one at that? You bet, if you're talking about RSA Security, the result of the merger of Security Dynamics and RSA Data Security.

RSA Security turned in an amazing 1999 performance, earning $184 million in profit on its $218 million in revenue. In other words, for every dollar it brought in, slightly more than 84 cents was profit. That sent it to the top of our list of the most profitable Network World 200 companies.

The secret is investing, says Arthur Coviello, CEO at RSA Security in Bedford, Mass.

At the close of 1999, RSA owned $5.5 million worth of VeriSign shares. Big returns on those shares boosted the company's profitability tremendously, Coviello says. If calculating only operational profit, RSA would have landed at 12.4% of profit per revenue. Most of that additional 70% and up came from realizing big returns on the VeriSign shares, he explains.

And as of March 31, RSA increased its stake in VeriSign with another $5 million in shares. That means that Coviello expects to boost shareholder returns even more over the next 11 quarters, reaping $25 million from its additional VeriSign stock alone. Likewise, RSA expects to realize $125 million from its $5 million investment in e-commerce payment system maker Trintech.

RSA's encryption licensing business, which accounts for about 20% of revenue, provides an inside scoop on emerging companies. "Inktomi, Akamai, Ariba, Commerce One - they all came to us very early in their development for licensing of RSA technology. It gives us an attractive window into the next high-flying start-up," Coviello explains.

So much so that in January, RSA launched RSA Capital, with $100 million to dole out. "We've formed an investment subsidiary to formalize what we've been doing on an ad hoc basis over the last several years," Coviello says. Not only will RSA Capital seed hot prospects that wander in the door seeking OEM agreements, but also actively search for young bloods to fund.

Yet none of this should minimize RSA's solid operating performance, which for 1999 was in itself an Internet example.

"If you weed through the financial bits and pieces, you'll see an operating profit of $27 million," Coviello points out. That's an important part of the financial health of a company. By running itself profitably, he adds, the company shows that it has the stamina to support customers and continue to innovate.

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