See, I Told You So

I'm not a braggart, honest. But today, I'm feeling pretty good. Read Secure Computing's (Nasdaq: SCUR  ) fourth-quarter earnings report, and you'll know why.

Secure, which mixes and matches hardware and software to protect networks from digital pests, blew away Q4 estimates by booking $0.07 in non-GAAP earnings on $63.2 million in sales. For the full year, the firm earned $0.39 on $193.2 million in revenue, also on a non-GAAP basis.

What went right? CEO John McNulty credited the 2006 acquisitions of CyberGuard, a firewall maker, and CipherTrust, a messaging security software maker. I think he's only partly right. As interesting as CyberGuard's products were, CipherTrust has truly made Secure securely profitable via its TrustedSource technology, which acts like a credit check for data.

How does it work? First, a global network of servers scans the Web for miscreants. Then, every suspicious bit is cavity-searched. Email, for example, is subjected to more than 1,000 tests and assigned a score. A poor score indicates a high probability of a malicious message, which is then barred from protected networks as fast as Daily Show host Jon Stewart gets disinvited from the annual meeting of the National Rifle Association.

Technically, this approach is called reputation-based security, and it's selling well. Secure Computing's billings -- a measure that counts prepaid subscriptions to TrustedSource and other protective services -- improved 150% in Q4, to $77.5 million.

Meanwhile, deferred revenue, which counts subscriptions for which Secure has already been paid but which have yet to be booked as GAAP revenue, improved by 28% to $122.3 million.

Why does this matter? Deferred revenue, though amortized according to accounting rules, is still cash. Consequently, Q4 owner earnings (OE), which measures cash production, equaled $19.5 million -- nearly four times the $5.3 million in non-GAAP net income reported with the financial statements. Third-quarter OE, meanwhile, equaled $13.5 million. That's $33 million in owner earnings since June.

Tom Gardner usually doubles the six-month OE figure to produce a year-ahead projection, and I've no reason to doubt his thinking. So if I do the same here, Secure Computing is on track to book $66 million, or $0.91 a share, in 2007 OE. Therefore, the stock was trading for just 7.5 times its OE multiple as of yesterday's close.

That's incredibly cheap, especially when management says it's on pace to grow sales by 50% annually over the next four years. Will OE expand by an equal rate? Probably not, but faster than 7.5% annually seems assured. Heck, faster than 15% annually seems assured.

At 15%, Secure Computing would probably trade for no worse than $21 per share in four years -- a triple from yesterday's close. But if management is right, and 50% growth is possible, then $60 a share or more could be ahead for investors who buy now. That's why this stock is a Rule Breaker, and also why it's still the best tech stock for 2007.

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Fool contributor Tim Beyers, ranked 1,370 out of more than 21,300 in Motley Fool CAPS, is a very happy owner of shares of Secure Computing. Get the skinny on all the stocks he owns by checking Tim's Fool profile. The Motley Fool's disclosure policy secures your portfolio for superior returns.


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