Company's Software And Hardware Speed Up System Networks
By KEVIN HARLIN, INVESTOR'S BUSINESS DAILY
Posted 03/17/2010 05:42 PM ET
So when traffic gets bad, transportation planners often seek to remove bottlenecks and otherwise ease the flow before building new lanes.
The same principles apply online, where it's cheaper to manage the flow of data than to add more bandwidth.
That's where Blue Coat Systems (BCSI) comes in. The Sunnyvale, Calif., company sells application delivery network infrastructure. That's a fancy way of saying the software and systems that connect far-flung people and offices within an organization.
A major component of that is WAN optimization, which means smoothing the flow of data over those wide-area networks. Blue Coat also provides services such as Web gateway security and traffic flow monitoring.
It's all designed to coax more data through a company's existing infrastructure without requiring investment in expensive bandwidth.
Fast Growth
WAN optimization hardware and software sales were growing by double and triple digits annually in the early 2000s. The market broke the $1 billion mark for the first time in 2008, according to market tracker Infonetics Research.
But the market fell 10% in 2009 as companies big and small cut back on IT spending.
In spite of that, Blue Coat increased sales and gained market share. It did that in part by making a compelling case that WAN optimization lets firms do more with less.
"I think that Blue Coat is holding its own in a difficult spending environment," said Needham & Co. analyst Scott Zeller. "Companies want to maximize the value they get out of existing IT network infrastructure."
Infonetics thinks spending on those wide-area networks will start to grow again this year. It projects a 27% jump to $1.19 billion for 2010. By 2014, it thinks the WAN optimization market will rise to $1.54 billion.
Blue Coat serves more than 400 of the Fortune 500 companies.
In the most recent quarter, it landed some new large clients and expanded business with others. It signed a deal with HSBC Mexico to help deliver data to 40,000 employees across Latin America. Another deal streamlines and secures data transmission for 12 million business customers of a division of Deutsche Telekom (DT).
"We know that our industry is evolving rapidly," Chief Executive Brian NeSmith told analysts after the last quarter. "Importantly, we are well positioned to capitalize on these market transitions with greater speed and flexibility with our new product groups."
In fiscal 2009, the company's sales climbed 46% to $445 million.
For its 2010 fiscal third quarter, which ended Jan. 31, sales rose 16% to $127.1 million. Earnings per share jumped 76% to 37 cents.
There's some seasonality in the Q3 numbers. The company said it benefited slightly from a year-end budget flush as customers spent down their use-it-or-lose-it dollars. The federal government dollars fluctuate too. The government accounted for 5% of product revenue in the fiscal quarter ended Jan. 31, but 13% in the previous quarter. A year ago, the government was 4%.
Competition remains fierce.
Blue Coat became the market leader in 2009 with a 30% share of the market, according to Infonetics. Riverbed Technology (RVBD) was second with 28% and giant Cisco Systems (CSCO) third with 22%.
Blue Coat isn't necessarily the cheapest provider in the space, Needham's Zeller says. But the company's bundled offerings strike a chord with IT buyers.
"One important differentiator with Blue Coat is that it's considered a value purchase," Zeller said. "Buyers believe they're getting several functions for one price. They're considered a lot of bang for the buck."
In the developed world, large corporations are always looking to improve the efficiency of their systems.
But Infonetics analyst Matthias Machowinski says WAN optimization is even more critical in less developed areas, where new bandwidth is prohibitively expensive or unavailable at any price.
For instance, Blue Coat touted a deal in February with the United Arab Shipping Company to help it streamline the links between its four data centers in the Middle East and Southeast Asia. The world's 14th-largest shipper hopes Blue Coat's systems will shave bandwidth costs by 70% percent, saving $250,000 this year.
Opening To India
In a statement announcing the deal, Ashraf Jamal, the shipper's IT network and security manager, said high bandwidth costs "forced us to find another solution that would allow us to optimally utilize our existing bandwidth, accelerate our business-critical applications and data transfers, and at the same time provide a sophisticated level of policy control and security."
In the last quarter, Blue Coat opened a development center in Bangalore, India. It also has centers in Sunnyvale as well as in Draper, Utah, and Waterloo, Ontario.
Those centers are churning out new products. This year, the company is promising a new caching appliance that can help carriers deal with the explosion of video and other digital data, without adding more bandwidth.
With new products, Blue Coat can cross-sell to its existing customer base.
But going forward, Machowinski says players in this space can't just rely on the largest customers; they'll need to tailor their offerings better for midsize and smaller enterprises.
"There are only so many of those organizations," Machowinski said. "There are only 500 Fortune 500 companies."
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