February 7, 1997 4:00 PM PST

Cylink stock falls sharply

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Network security company Cylink (CYLK) saw its stock dive more than ten percent today, a day after its new CEO told Wall Street analysts that he would boost spending on sales and marketing by $1 million in the next year.

The stock closed at 11-5/8, down 1-3/8 on heavier-than-usual volume. UBS Securities downgraded its recommendation from a "buy" to a "hold." The stock traded as low as 11 during the day.

Cylink, which went public last February, offers high-end network and wireless security products. Operating income for the fourth quarter was $1.42 million, or 5 cents a share, excluding a one-time charge of 2 cents per share related to reorganization--figures that were consistent with analyst expectations.

Revenue for the 1996 fourth quarter rose 71 percent to $16.2 million from $9.4 million in the corresponding 1995 period.

"New management has embarked on a path of yet more investment, as demonstrated by the sales and marketing expenditures," UBS analysts Gibbs Moody and M.K. Agarwala said in downgrading the stock.

But Stephen Olson of Volpe, Welty, which brought Cylink public a year ago, thinks the higher spending will pay off and reiterated his "buy" recommendation.

"Look at how revenue has grown: over 100 percent year over year, all through a direct sales force," Olson said. He noted that Cylink has added sales staff and is still hiring, in addition to signing a reseller agreement with networking giant Cisco and Concert, the new name for the merger of British Telecom and MCI. "Cylink will start benefiting from those reseller relationships in the second quarter."

Chief financial officer John Daws noted that Cylink has had the reputation as a "stealth" company with strong technology and a weak sales organization. But with the addition of Fernand Sarrat, who joined the company in December, "we now have a marketing-driven president," he added.

Sarrat replaced Louis Morris, who suffered a stroke last year. Morris's son, a former sales executive, is among a group of employees fired by Sarrat who have demanded $34 million for wrongful termination. Daws said, however, that few analysts have raised concerns about that dispute.


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