how would you compare SYMC and CHKP?
Here is an old but still relevant, DEC. BUSINEES wEEK piece:
By Alex Salkever, BusinessWeek Online's Technology editor With Jim Kerstetter in San Mateo, Calif.
In the wake of September 11, many analysts were quick to predict a big boost for companies that protect corporate technology networks. Experts saw the Net as the logical next target for terrorists. Factor in the recent barrage of damaging and increasingly complex computer viruses and worms -- such as CodeRed, Nimda, and Badtrans -- and it's clear the Web needs protecting.
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The analysts were right -- and then again they weren't. Investors are high on these companies for now. But the stocks are volatile, and if they're to gain more ground the industry will have to quickly bounce back from a lackluster quarter or two.
Indeed, most information technology security companies have reported disappointing sales for the third quarter as economic malaise trumps security concerns -- at least for computer networks. While these companies have avoided the sales shrinkage suffered by many other software sectors and the PC industry, their shipments rose in only the low single digits in the third quarter.
SMALLER BUMPS? Sales in the fourth quarter could fall short of year-earlier levels as the full force of the recession is felt. Tech consultancy Gartner Group's worst-case scenario calls for sales of security software to increase from 2000's $3.3 billion to $3.6 billion in 2001, a bump of only about 9%, vs. a 25% increase from 1999 to 2000.
A good example is Check Point Systems (NasdaqNM:CHKP - news), the market leader in firewall software and a big player in virtual private networks [VPNs] -- encrypted data tunnels that allow for secure remote access into corporate networks. Check Point suffered between $15 million and $20 million in delayed sales and service revenue in the third quarter because of September 11, according to CEO Gil Shwed. Revenue for the quarter rose less than 2% compared to a year earlier, to $118 million. Shwed expects demand to weaken further before it bottoms out, and he sees fourth-quarter sales coming in at $120 million to $130 million, vs. $140 million for the same quarter last year.
``It's not as though security wasn't a priority before the attacks'' True, the company remains extremely profitable. It posted 62% net margins and $74.6 million in net earnings for the third quarter of 2001. But if Shwed's prediction is accurate, Check Point's final quarter will mark the first time in four years that it has seen its revenues decline from the same quarter a year earlier. That raises the question of how quickly Check Point's growth will bounce back in 2002. Nevertheless, analysts expect that cost-cutting will enable the company to earn $1.29 a share in 2002, vs. $1.23 for this year.
So much for terrorism translating into new business -- at least right away. Shwed was skeptical immediately after September 11, and he still is. ``It's not as though security wasn't a priority before the attacks,'' he says. ``Maybe some companies are thinking of it more now. But whatever their interest, it won't make up for the bad economy.''
BETTER DAYS AHEAD. Investors seem to be shrugging off the short term and betting on a long-term terror dividend. They've mounted a rally in the past month, sending up the stocks of most security players in the hope that next year will be better. Shares of Internet Security Systems (NasdaqNM:ISSX - news), a large software supplier and IT security consulting company, are up 20% in the last month or so. Check Point's are up 26% over that same period. And stocks of other major security players have reacted similarly.
The shares of antivirus software suppliers Symantec (SYMC) and Network Associates (NETA) are up 13% and 17%, respectively. E-business security software company NeTegrity (NETE) has enjoyed a 41% hop, while fast-growing firewall maker SonicWall (SNWL) is up 18%.
True, all of those stocks remain well off their 52-week peaks. But the market climate for them has turned so positive that firewall maker NetScreen is planning an initial public offering for this month.
VALUATION CONFUSION. Analysts, meanwhile, expect a stronger rebound for IT security companies in 2002 than for the rest of the technology sector. Gartner's forecasts call for 18% growth in sales next year. And many IT security companies claim that the contracts they're signing now guarantee higher revenues in the coming year, with many projects extending into 2003 and beyond.
``The leading companies in security will do quite well next year,'' declares Thomas Noonan, CEO of ISS. ``I don't know whether that's 40% or 20% growth. But we are talking growth, which is not true of the rest of the technology sector.'' While it may not be terribly traumatic for analysts to try to decide between growth forecasts of 20% or 40%, that dilemma has nevertheless led to valuation confusion and analyst upgrades and downgrades that gyrate from quarter to quarter.
Companies that focus on preloaded systems are doing well That's partly because the Street is trying to figure out how several key trends will mesh. In the firewall market, more and more companies are opting to buy hardware preloaded with security software rather than install the programs themselves. This will heighten the reliance of firewall makers on hardware partners and their distribution channels. Companies that focus on preloaded systems, such as NetScreen and SonicWall, are doing well.
VPNs GO VROOM! Market leader Check Point is also on that bandwagon. It now distributes its firewalls on computers from 15 manufacturers -- and it sells at least 20% of its firewall licenses on Nokia hardware platforms. ``I think Check Point is better positioned to make a transition to these devices than investors believe,'' says Stephen Sigmond, a managing director at investment bank RBC Capital Markets.
The growing popularity of VPNs will also boost the industry. ``VPNs have already eclipsed firewalls in terms of installations,'' says Noonan. Check Point holds more than 50% of the VPN market, in part because VPNs are tightly integrated with firewalls, so it's convenient to buy the two together.
Still, Shwed & Co. face tough competition going forward as router makers such as Cisco Systems (CSCO) continue to build more VPN capabilities into their equipment -- a logical step, since routers serve as data traffic cops. Another threat could be firewall upstart NetScreen, which has won kudos for the fast throughput of encrypted data on its integrated firewall-VPN product.
PILING IN. The next few years could represent salad days for another up-and-coming type of security software -- so-called intrusion detection systems [IDS]. These programs scan networks for signs of unwarranted activity that could point to attack from either inside or outside. In the IDS sector, ISS has a significant lead with slightly more than one-third of the market. But it faces rising pressure from Cabletron spin-off Enterasys (ETS) as well as from Cisco, which packages an IDS product with its Pix firewall.
Still, the IDS market will grow at a 38% rate on a compound annual basis between now and 2004, estimates tech consultancy International Data Corp. That implies growth in IDS sales from below $200 million in 2001 to more than $500 million by 2004 -- a market that could easily support several players, though probably not the dozens that are piling in today.
Would-be survivors need to move fast to lock in their customers. Gartner predicts that by 2003, overall security spending will start to tail off to a 13% annual growth rate as businesses begin to focus on other IT initiatives. In particular, the firewall and antivirus areas could look very mature by then, with sales growth pulling back markedly.
When that slowdown arrives, many of the security stocks will look pricey, even at today's levels. With that prospect on the horizon, investors might want to wait and see if the 2002 bump actually materializes -- and with it, more upside for these stocks. |
