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Margalit explains how Aladdin had a great year

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midastouch017   Wednesday, 01/25/06 06:58:52 AM
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Margalit explains how Aladdin had a great year

25.1.06 | 10:20 By Omri Cohen
"The year 2005 was an excellent one for Aladdin Knowledge Systems (Nasdaq, TASE: ALDN)," declares the Israeli tech company's chairman and chief executive, Yanki Margalit. Okay, but its figures tell a story of slowing revenue and profit growth, in terms of percent and absolute figures, too.

The entire data security market, Aladdin's stamping ground, has been rather feeble of late, which may explain why Aladdin stock has lost 30% of its value since the end of 2004.
Aladdin reported record revenues of $81.8 million for 2005. But in 2004 its revenues grew by 26.3% and in 2005, by 18.4%.
In absolute terms, its revenues increased by $12.7 million in 2005, compared with $14.4 million in 2004.

As for profits, in 2004 they increased by $6.1 million while in 2005, the increase was $5.6 million, and that's after neutralizing $2 million in one-time costs on settling a claim. Including the costs reduces Aladdin's 2005 earnings to $12.4 million, against $8.8 million in 2004.

Yet Margalit feels 2005 was a good year. "According to the research company IDB Development Corporation, we increased our market share in the last year at the expense of the competition, which attests that the entire market grew less in 2005 than in the prior year," he explains.
"I measure myself in terms of the increase in profits, in cash flow generation and in their relation to the market. If the market grew less than in 2004, I want to know that I'm growing faster than the competition. The year 2005 was good for Aladdin in all three of these parameters and that trend is expected to continue, or even improve, in 2006."

The company managed to generate record revenues and high cash flow from regular operations, he continues, while leveraging its strategic positioning in the market of software to protect digital rights management (DRM) and data security for enterprises.

"I am highly satisfied with our ability to present rapid, significant profit growth and the momentum of our data security for enterprises unit, which was driven in the last year by demand for eSafe products," Margalit went on, referring to a hardware user identification key that grants access to the enterprise computer system.
Demand for eToken also rose high, that being a solution to secure digital content, he said.

Record profit as malware runs riot

Aladdin's technology addresses global threats such as software piracy, spam, hostile content (malware - malicious software, eg worms and viruses) and the like, which have been running riot around the world, frustrating surfers, home users, companies and governments.

The company's offerings for digital rights management (DRM) are mainly products to prevent illegal software copying from enterprise computer systems. That remains the company's main activity and supplies most of its income.

But Aladdin's DRM system sales increased by only 12% in 2005 compared with the year before, to $56.6 million. Fourth-quarter growth was just 4%, to $14.1 million.

Annual revenue from data security products for enterprises increased 36% to $25.2 million, while fourth-quarter sales of these grew 45% to $7.7 million.

Aladdin did meet its guidance for the last quarter of 2005, and slightly beat the Wall Street consensus. Sales increased 16% to $21.8 million, while net profit broke records at $3.9 million, or 26 cents per share. In the parallel quarter it had netted $2.6 million.

This quarter, the first quarter of 2006, Aladdin expects to achieve $21.3 million to $23.3 million sales, and to earn 25-28 cents per share. Wall Street expects it to make $22.9 million sales and to earn 26 cents per share.

Yanki Margalit, the global software sphere is in the throes of consolidation. Why aren't you part of that?

"The data security sector has a lot of trends. There is a constant battle between the one-stop-shop concept and the best-of-breed concept. The one-shop is accelerating mainly in the household sector, but in our market, which is companies and government institutions, the trend is the reverse - toward best of breed. This market demands more specific solutions, not one supplier to provide all solutions.

"We are also starting to work with bigger enterprises and institutions, which extended the sales cycle and delayed income in the last year."

Almost a year ago Aladdin raised $40 million and it hasn't done anything with the money.

No rush, Margalit explains: indeed, the company has a mind to acquire, but there's no gun to its head.

After two great years for investors, Aladdin stock lost 30% in 2005.

"All I can say about the stock is that I constantly compare the multiples Aladdin gets in the market compared with peer companies. In 2005, though we improved in all possible parameters, it didn't show up in the share price. We shall continue to do our work and wait for investors to understand Aladdin."



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