As Slump Drags On, Cisco Looks For A Boost From Security Products
By Donna Howell
Investor's Business Daily
Wednesday March 12, 10:32 am ET
Routers and switches are the nuts and bolts for Cisco Systems Inc. (NasdaqNM:CSCO - News) But the No. 1 maker of networking gear wants to nail security, too.
Selling more security products is one way Cisco is battling a tough spending climate that CEO John Chambers has called tech's most challenging ever.
"Cisco has been talking for some time about security being one of its most important initiatives, if not the most, in coming years," said Tim McGurran, president of Secure Computing Corp. The San Jose, Calif., firm makes Web filtering software used in Cisco's content management appliances.
Security is part of Cisco's only growing unit. The company lumps this business with network management and telephony products. While this unit accounted for only 13% of company sales in the January quarter, its revenue rose 31% vs. the year-earlier quarter. By comparison, switch sales were flat and router sales fell 18%.
The company, hoping its security business takes off when tech spending rebounds, continues to make acquisitions in the security field.
"It's a way for us to scale our presence in new markets," said Daniel Scheinman, senior vice president of corporate development.
Security isn't a new market for San Jose, Calif.-based Cisco. It started selling technology for firewalls - systems companies use to keep outsiders outside their corporate networks - eight years ago when it bought Network Translation Inc.
Since then, Cisco has included security wares in much of its networking gear. "We've been embedding security functions," said Richard Palmer, head of Cisco's security services. "Security is going to be a transparent capability of networks."
Cisco has firewall software and hardware that work in its routers and switches. Its security wares aim to block intruders, identify attacks and let firms do business securely over the Internet.
Cisco is moving more into security by buying specialty firms. Late last year it bought intrusion detection firm Psionic Software Inc. And it's about to complete the purchase of Okena Inc. for $154 million in stock.
Other security firms bought by Cisco include Altiga Networks and Compatible Systems in 2000. They boosted Cisco's virtual private network products. VPNs let companies communicate securely over the Internet. Cisco bought WheelGroup Corp. in 1998. It brought intrusion detection technology that works with Cisco's routers and switches.
Waltham, Mass.-based Okena helps Cisco in intrusion detection. Its technology identifies and thwarts attacks on large networks by protecting network endpoints like servers and desktop computers.
"It's next-generation because it focuses on stopping attacks based on their behavior," said Palmer. Other products mostly use databases of known attacks.
Second-quarter sales of intrusion detection products are expected to rise 42% from the year-ago period to $135 million, says Infonetics Research. In this market, Cisco competes with Internet Security Systems Inc. and others.
Cisco sees endpoint protection as a companion to its products that protect the wider network. Palmer likes the way Okena has put many functions under one umbrella - a distributed firewall, malicious code protection and intrusion detection.
"There's an increasing awareness on the part of our customer base that they need a more complete approach to protecting the end points," Palmer said. "That complements network-based security that resides in switches, routers and appliances."
Cisco's increasing presence in the security field puts pressure on companies in that market. Few tech companies can match Cisco's size.
Cisco battles for market share with Israel-based firewall and VPN vendor Check Point Software Technologies Inc. and with security appliance vendor Symantec, based in Cupertino, Calif.
"Cisco has a history of putting their mind into something and making massive competitive changes to a market," said USB Piper Jaffray analyst Gene Munster. "So our feeling on Cisco is it's lurking out there."
In some niches, Cisco already leads in market share against smaller rivals. One example is WatchGuard Inc. , a Seattle security appliance maker that does $22 million in quarterly sales.
"We don't have the name Cisco has," said WatchGuard Chief Executive Jim Cady. "We compete on a product front."
A WatchGuard appliance recently outpaced Cisco's in tests by the Tolly Group of Manasquan, N.J. WatchGuard commissioned the tests. But eking out market-share gains against a giant remains tough.
"We try to leverage the channel where Cisco's products are kind of a victim of their own success," Cady said. He says Cisco resellers make half or less of the 18% to 24% gross profit margins they make on WatchGuard products.
While Okena, says Palmer, is Cisco's 79th acquisition, the company lately has also turned to partnerships to further its security work.
Last month Cisco announced a deal to promote AT&T security services that rely on Cisco technology, such as VPN services, network security services and Web-site hosting. This move comes shortly after AT&T said it would buy millions of dollars in advanced Cisco networking gear for its optical network.
The recent deals are steps in Cisco's plan to fortify networks - and its bottom line - with security.
"There's no question in the last year or two that our customers are increasingly concerned about security," said Palmer.
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