<DAILY DOUBLE>
Thursday, March 4, 1999

Security First Technologies Inc.
(Nasdaq: SONE)
Phone: 404-812-6300
Website: http://www.s1.com
Price (3/3/99): $66 15/16


HOW DID IT DOUBLE?

Shortly after coming public in 1996, Security First Technologies found its shares tickling the $40 mark. The company had in the previous year opened the first Internet-only bank and enthusiasm was riding high. But as the red ink from the new venture flowed in increasing quantities, investors soon bailed out of the stock in great numbers. By the time all was said and done, the stock bottomed at $5 1/4 per share little more than a year after coming public.

The company then started on the long road to recovery. After seeing its stock perform moderately well through early 1998 even as losses mounted, Security First went through a metamorphosis in September of last year. The company completely switched gears by selling its Internet bank to the Royal Bank of Canada (NYSE: RY) and then focusing on becoming the premier vendor of Internet banking software.

The shift has played extremely well on Wall Street as investors bid the shares above $30 to end the year, double the level seen just three months earlier. Those with the fortitude to hold their shares have continued to be treated extremely well in 1999. On February 25 it was announced that the Royal Bank signed a contract with the company worth, at a minimum, $50 million. After announcing a strategic alliance with Andersen Consulting and Hewlett-Packard (NYSE: HWP) earlier in the week, the company had cleared the runway for takeoff as the stock rose over 23% in one day to $69 a share, a level more than double where the stock started the year.

BUSINESS DESCRIPTION

Security First, also known as S1, is one of the leading providers of Internet-based applications for financial services companies. The Atlanta-based company was the first to open an Internet bank back in 1995, but S1 now focuses on providing Web-based software and related services to other financial institutions. Banks can either use S1's data center to clear the transactions or it can merely use S1's secure Internet interface with their own in-house resources. Fourteen of the top 100 domestic financial institutions in the country are customers of S1.

One of the numerous institutions that have implemented S1's Virtual Financial Manager (VFM) software is the Royal Bank of Canada, one of the largest banks north of the border. Royal Bank is not only a primary customer, but the bank also owns a significant option to purchase close to 15% of S1 as certain contractual obligations are met. State Farm Insurance, Hewlett-Packard, and Andersen Consulting are also among the companies that are both customers and partial owners of S1.

FINANCIAL FACTS

Income Statement
12-month sales: $24.2 million
12-month income: ($30.8 million)*
12-month EPS: ($2.80)*
Profit Margin: N/A
Market Cap: $820.9 million
(*Includes charges from discontinued operations)

Balance Sheet
Cash: $14.5 million
Total Assets: $48.3 million
Total Liabilities: $32.8 million
Shareholders' Equity: $15.5 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 33.9

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Those with a Rule Breaker bent may have been more inclined to find a company like S1 than the rest of the investing public. Online banking is an important and emerging industry, and S1 is one of the top dogs in the sector. The fact that the company has been able to sign up so many top-level banks to its system should have been a major clue that S1 should not have been left for dead.

Another factor that could have brought S1 to an investor's attention was the company's increasing margins. While the company's bottom line is still a distinctive color of red, margins for its software business have been greatly improving throughout the year. For example, gross margins stood at negative 7% in the fourth quarter of 1997, but were all the way up to positive 36% in the most recently announced earnings.

Just like numerous other Internet businesses, accounts and subscribers play an important roll in the company's fortunes. The total number of accounts using the company's VFM software was 52,200 at the end of 1997. By the time the company restructured in September, it had 387,000 accounts under its wings. At the end of December, S1 had 542,000 users for its software, a vibrant 40% increase in just one quarter.

WHERE TO FROM HERE?

S1 is ultimately going to go in the same direction as the market penetration of its software and services. The 40% spike in users in the last quarter is certainly a sign of strength, and the recent alliances with Royal Bank and Andersen are sure to bring many more users to the table. Many banks may be better off outsourcing their current Internet needs than trying to develop similar systems internally.

One concern does have to be raised about the company when looking at the deals it has done recently. With each of the alliances and contracts with Royal Bank, Hewlett-Packard, and Andersen, the company has essentially given away large chunks of itself via zero-coupon preferred stock and warrants, diluting current shareholders. While one may argue that having Royal Bank and Andersen each owning a vested interest in seeing S1 do well is a positive factor, the dilutive nature of the company's contracts should not go unquestioned.

In any case, S1 looks to have successfully reinvented itself, and the future looks as bright as it ever has. But at trading at over 30x sales and sans current profits, the stock can be called anything but a value at these levels. Nevertheless, Internet stocks with strong stories rarely trade on the cheap. And if the company can continue to add accounts while keeping incremental costs down as it has in the recent past, investors may continue to laugh all the way to the virtual bank.

-- Paul Larson
(TMFParlay@aol.com)

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