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Oscar Gruss cuts Aladdin to Hold

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midastouch017   Sunday, 07/09/06 06:24:11 AM
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Oscar Gruss cuts Aladdin to Hold

09.7.06 | 10:13 By Omri Cohen

As last week rolled to a close, Oscar Gruss analyst Ehud Eisenstein downgraded Aladdin Knowledge Systems (Nasdaq, TASE: ALDN) from Buy to Hold, after the company warned that second-quarter 2006 revenues would fall short of expectations.

Aladdin, a provider of computer network security systems, now sees second-quarter earnings at the lower end of its previous range of 22 cents per share to 26 cents per share. Quarterly sales are now expected to be in a range of $20.8 million to $21 million, down from its prior outlook of $21.7 million to $23.7 million.

Eisenstein says he sees no substantial change in Aladdin's business environment, but the company may be having difficulties in implementing its business program, which it couldn't resolve in the space of a single quarter.

The analyst therefore counsels investors to wait and see what steps the Aladdin management takes in order to restart growth.

Aladdin's field is data security, including software to protect digital copyright. It has two key products, eSafe to protect digital content and eToken, a user identification key when accessing the enterprise network.

In the first half of 2005 Aladdin posted 21% earnings growth, Eisenstein says, but that dropped to 15.8% in the second half. At the end of the third quarter of 2005 Aladdin had warned that growth in its digital protection software sales (DRM) were expected to slow.

Aladdin did not provide a breakdown of product sales, so it's hard to see where the drag is, says the analyst.

For the year 2006 Eisenstein lowered his forecasts, to $95 million sales or 10% growth compared with 2005. His pro forma profit forecast was lowered by 17 cents per share to $1.

In parallel, CIBC World Markets repeated an Outperform rating for Aladdin, but cut the 12-month price target from $25 to $20. Analyst Shaul Eyal thinks the German market, which is responsible for 20-22% of Aladdin's sales, was the main problem in the second quarter, possibly due to distraction by the World Cup.



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