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Technology Stocks : Secure Computing - Integrated Network Security -- Ignore unavailable to you. Want to Upgrade?

To: Brian in Honolulu who wrote (927)	1/20/2004 9:20:50 PM
From: D. K. G.	Read Replies (1) \| Respond to of 930

Firewall Gear Supplier Hopes Hot Market Will Secure Future Business BY MARILYN ALVA INVESTOR'S BUSINESS DAILY 2003 went down as a record year for computer worms and viruses. August was the worst. "We saw four very prevalent worms cause a lot of damage," said Rob Owens, Internet security analyst with Pacific Crest Securities. "They got through the firewalls." Those pests — Blaster, So-Big.F, Welchia and Slammer — as well as others that sneaked through last year caused many firms to go on alert and strengthen their defenses. The bad news for them was good news for firewall experts with products that analyze network traffic extensively. The technique is called deep-packet inspection — and also application-layer firewall security. As Owens explains the nature of those products, it's like looking inside the entire content of a packet transferred over the Internet rather than just the outside label. "It's a slower and more secure process," he said. Until recently, demand for such products hadn't taken off like the rest of the firewall market, which is now considered a mature industry. In 2002, the overall firewall market even showed a slight decline in sales to $892 million, according to industry researcher IDC. John McNulty, chief executive of Secure Computing Corp., (SCUR) is happy to report that's no longer the case. "The world of cyberinformation security has woken up to the need for application-layer protection in the last 12 to 18 months," he said. "That awakening, if you will, in the commercial space is absolutely a wonderful thing for us." Secure Computing is the nation's top supplier of application-layer firewalls. Demand for its products drove third-quarter sales to a record $20.1 million, up 14% from the prior year. Earnings doubled to 8 cents a share. About half of Secure Computing's revenue comes from the firm's Sidewinder line of application-layer products. It also sells Web filtering and authentication products. Each accounts for about 20% of total sales. Of the last two, the filtering business is growing the fastest, Owens says. Companies use Web filters to block employees from accessing certain Web sites, among other things. 'We Wrote The Book' Secure Computing said its October purchase of Web-filter firm N2H2 Inc. would add $1.8 million in revenue to fourth-quarter results, which will be reported Jan. 22. The company is mainly known as a pioneer in application-layer security, having begun product research two decades ago when it was still part of Honeywell's aerospace defense division. "I like to say we wrote the book on application-layer firewalls," McNulty said. The Defense Department started using his firm's security products 12 years ago, followed by other agencies such as the National Security Agency, CIA and FBI. Large commercial customers also signed on, including Citigroup Inc. (C) But there wasn't a real groundswell. That's changing. "The market is coming around to where they've been all along," said analyst Scott Richter of ThinkEquity Partners. He says Secure Computing's forte in application-layer security mechanisms should give it a leg up among firewall rivals. "It does mean they will get pulled into a lot more deals," Richter said. The company's latest Sidewinder G2 upgrade should help. It folds a lot more functions into one product, including anti-spam, anti-virus and e-mail filters. Having such an integrated solution is important because customers are becoming more interested in one-stop solutions rather than buying bits and pieces from different vendors, analysts say. Dell Of A Deal The new 6.1 version will run on multiple platforms, but it's been targeted and optimized to run on Dell Inc.'s (DELL) PowerEdge server family. McNulty says Dell has agreed to load the software on its servers if customers want it. "Dell is a tremendous fulfillment engine for us," he said, noting that Dell has 35% to 40% of the server market. Secure Computing will launch a full rollout of the software upgrade by the end of January, McNulty says. It sold the product last year on just a limited basis. If the company can continue to grow overall sales at a healthy clip, margins should get a lift as well. If sales grow 20% to 25%, as Richter expects, he says operating margins could rise to around 30% in the next couple of years from 13% during the third quarter. That means good things for the bottom line. Analysts polled by First Call expect Secure Computing to report 2003 profit of 23 cents a share, up from 4 cents the prior year. They see earnings this year rising 83% to 42 cents a share. Growing Field Competition is intense in the firewall market. And it might get tougher as large firewall companies come out with new deep-packet firewall products of their own. The Big Three — Check Point Software Technologies, (CHKP) Cisco Systems Inc. (CSCO) and Netscreen Technologies (NSCN) — are transitioning to deep-packet firewalls, Owens says. Another firewall company, Symantec Corp., (SYMC) already sells application-level firewall security. "The biggest risk is competition" Owens said. "Secure Computing is still a smaller player. (Rivals) have bigger balance sheets, bigger channels and bigger reputations." McNulty doesn't seem worried, however. "We believe we have best-of-breed products," he said.