Company Spotlight: What nCipher can do for you, the investor

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The Independent Online

Spotting a company that is about to start making profits after years of losses can be a rewarding business - particularly if it has a big cash pile.

Spotting a company that is about to start making profits after years of losses can be a rewarding business - particularly if it has a big cash pile.

At the height of the dotcom boom, investors threw money at new technology companies. In many cases, the cash evaporated long before a real business could take its place. But not always. In the case of nCipher, which operates in the IT security market, the company is in danger of making a profit while still sitting on £40m of the cash it raised in October 2000.

In fact, that understates what nCipher has achieved. It originally raised £99m. In February last year, it handed back £64m of that to shareholders because it didn't need it.

Now the numbers are interesting. Last year, operating losses shrank from £7.7m to £2.5m and half-year figures due on 7 September should show the trend has continued into 2004. Assuming the cash burn is as good as over (there may be a small outflow from operations for a while yet, but not more than the interest earned on the remaining cash), that £40m money pile sits strangely besides a market valuation for the whole company of just £43m. In other words, the business itself is currently valued at just £3m.

In a note on the company in June this year, Ian Mitchell of brokers Charles Stanley forecast that the company would make a profit of almost £2m next year. And that, he thought, was conservative as it took no account of several positive things that could be happening to nCipher by then. Plainly, either he is wrong or the stock market is wrong.

What does nCipher do? Well, this is where it gets really interesting - though since I lack a masters degree from MIT and am over 25, I am unlikely to do the explanation justice. If you make a payment over the net, it will almost certainly be communicated over a secure link protected by encrypted code. Each organisation has its own password key for authenticating data. If it loses that to a hacker, its business takes a pronounced lurch downwards.

Believe it or not, but lots of companies store their password key in a server. That, says Mr Mitchell, "has been likened to securing your front door with the strongest lock available and then leaving the key under the mat". The safest approach is to store it in a separate hardware device. And that is what nCipher makes. In fact, it is the world leader in encryption protection hardware.

This is a fertile field to be in right now. According to the Department of Trade and Industry, more than two-thirds of all companies and more than 90 per cent of large ones suffered at least one malicious attack on their systems last year. The internet has changed the way many companies relate to their suppliers. Online collaboration in everything from purchasing to billing cuts costs but adds to security risks.

The arrival of VoIP (Voice over Internet Protocol) technology means employees with laptops or mobile phones operating remotely can plug in to a company's network as easily as if they were in the office.

That's all well and good provided the link is secure.

The nCipher system has helped to define common industry standards for hardware security. It has more product validations under the US government's Federal Information Processing Standard than any other firm. Their customers range from Bacs, the UK payments processing service, to the US navy. They even include Microsoft.

Perhaps the most exciting area is the credit card market. Both Visa and MasterCard have initiatives to cut card fraud, including the introduction of Chip and Pin. Under the Verified by Visa scheme, card- issuing banks will be required to introduce higher levels of security - including the storage and processing of encryption keys within separate hardware. That is supposed to happen by the end of 2005. This opens up a potentially huge market for nCipher, which has just the piece of kit required.

The company is also involved in a trial involving 5,000 Barclays customers. Each has been given a card reader that generates a unique password for transactions on websites. It is designed to combat "phishing", in which card details are stolen over the net.

Without the card reader, the card details themselves are useless. If the test is successful and the technology is adopted by Barclays and other banks, nCipher will cash in.

There is a host of new products in related fields, any one of which could be big business for nCipher. For example, one digitally signs, seals and time-stamps electronic documents in a tamper-proof fashion.

The payback from these products may be some way off. But one thing is certain: nCipher will not be calling for more cash to fund them.

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