IDC forecasts the global Web security market to grow at a CAGR of 12.3% to $2.5 billion in 2013 from $1.4 billion in 2008, with SaaS Web security being the fastest-growing segment at a CAGR of 46.5% between 2008 and 2013. Also, with the increasing use of Web 2.0 by corporations and more spam, data leaks and malware, it has become imperative for businesses to manage data and security on a real-time basis. This presents Internet security companies with a host of opportunities.
According to IDC, Websense leads the worldwide Web security market. Websense doubled its share of the software-as-a-service segment of the Web security market in 2008. Further, Websense captured 26.2% of the 2008 worldwide market for Web security software and grew 96.3% in the SaaS Web security segment. The other major players in the Web Security SaaS space are Trend Micro, Scansafe, Symantec, Google, MX Logic, Webroot, and Blue Coat.
Websense, Inc. (NASDAQ:WBSN) declared its Q309 results on October 29. Billings for Q309 were $84.5 million, up 3% sequentially and 2% compared to Q308. International billings increased to $41.7 million in Q309 from $39.1 million in Q308. Non-GAAP revenues were $82.2 million, which included approximately $3.6 million of revenues from the SurfControl acquisition. Surf Control would have recognized the $3.6 million revenue in Q309 had it remained an independently operating company. Non-GAAP operating income was $21.6 million compared to $25.0 million in Q308. The company reported non-GAAP net income of $13.6 million, or 31 cents per share, compared to $14.7 million, or 32 cents per share, in Q308.
Incremental sales to new customers and upgrades to existing customers contributed $20.9 million, or 25% of total Q309 billings. Incremental billings were up 12% Y-o-Y and up 5% for Q209. North American incremental business was especially strong, up 24% Y-o-Y. Demand was strong for the company’s security-as-a-service Web solution, which grew more than 30% Y-o-Y.
Websense posted strong growth in its strategic product lines, especially Web Security Gateway (WSG). Billings from WSG were up 24% sequentially to $14.7 million. Unit sales of WSG appliances grew 50% Q-o-Q and the pipeline remains strong for Q4. Fifty-six percent of the customers who bought WSG bought it in the appliance form factor, and this adoption rate is well above management’s initial estimate. So far, Websense has upgraded about 2.5 million out of approximately 37 million total Web subscription seats. The company expects to be able to deliver WSG Web 2.0 functionality to substantially all of its users over time. The company sold more of its WSG with longer duration contracts. The robust growth for WSG vindicates the company’s strategy of a subscription-based business model.
With the economy improving, management believes that its new products will drive incremental growth in the coming quarters. Web security gateway, SaaS security, and data loss prevention products should drive future growth and profitability.
Websense implemented a cost-cutting exercise in August. It has reduced headcount and plans to reduce costs by $5 million in the second half of 2009 to remain more efficient and competitive in the market.
YTD, Websense has generated $65.4 million in cash flow from operations. Cash flows from operations were used to pay down debt and buy back shares. The company expects to earn operating cash flow of approximately $80 million for the year.
Websense revised its FY09 outlook. Though it kept the billings outlook for 2009 at $340 million-$350 million, it reduced GAAP revenue outlook to $312 million-$314 million from $318 million-$322 million and non-GAAP revenues to $329-$331 million from $334 million-$338 million. Non-GAAP diluted EPS guidance for the year was reduced to $1.15-$1.18 from $1.23-$1.27.
In August 2009, WSG was recognized by Business Solutions Magazine’s value-added reseller subscribers as one of the “Best Channel Products” of 2009. In September 2009, Websense topped Symantec and McAfee to win Information Security Magazine 2009 Readers’ Choice Award for Best Data Loss Prevention Solution.
With the increasing use of Web 2.0 by companies, employees working from remote areas, the emergence of smartphones, cloud computing and the rapid growth of social networks, the outlook remains positive for Websense, and the company has the right technology and the business model to take advantage of the situation. The acquisition of SurfControl, PortAuthority Technologies, and Defensio is enabling the company to provide integrated Web security,and data loss prevention that differentiate the company. The investment in sales reps seems to be paying off, and the management expects even more impact from this investment in Q4, especially internationally, and the pipeline is strong.
The stock is trading at $17.63 with a market cap of $762 million. It hit a 52-week high of $19.56 on June 11.
McAfee, Inc. (NYSE: MFE) declared its Q309 results on October 29, 2009. Revenues increased by 18.5% Y-o-Y to a record $485.3 million. It was up 3.5% Q-o-Q. This was the fifteenth consecutive quarter of double-digit revenue growth for the company. Deferred revenue increased by 26% Y-o-Y to $1.33 billion. Non-GAAP operating margin grew 310 basis points Y-o-Y. Non-GAAP Operating income grew 34% to $128.7 million. GAAP and non-GAAP earnings per share were $0.23 and $0.62, respectively. Cash flow from operations was $152 million, an increase of 74% Y-o-Y and 184% Q-o-Q.
The corporate business saw solid growth of 25%, and the company closed 31 deals greater than $1 million in value. Clearly, the economic slowdown has not affected McAfee’s corporate business. However, the consumer business grew only 8% to $177 million in Q309. It looks as though free trials are not converting into sales for McAfee. North America revenues grew 25% Y-o-Y to $273 million and international revenues grew 11% Y-o-Y to $212 million.
McAfee is making progress with its ToPS (Total Protection Suite). Since the company has only been able to convert around 50% of its customers to ToPS, there is room for growth. The ToPS SaaS has tremendous opportunity in the small and medium business space. Recently, McAfee launched McAfee Email and Web Security Appliance 5.5 to help protect customers against the latest email and Web-borne threats, manage Web and email traffic and usage, and reduce system administration requirements. Designed for small and midsized businesses the solution will provide comprehensive email and Web security in a single, integrated appliance. We will have to wait and see how McAfee is able to grow this market.
In early November, McAfee announced the signing of a $10 million services agreement through Northrop Grumman for the U.S. Air Force. The company is looking to sign similar large deals with various government organizations, and this I believe this is an area that has a lot of scope across the globe since more and more government networks are either being hacked or attacked. Also, the brand name that McAfee has built over the years should enable it to gain acceptance in international markets.
The company has signed a number of partnerships for bundling of its software and applications. Of these, the most important are 1) being a recommended security partner for Dell’s personal computers from November 2009 through October 2011; 2) HP’s offering an exclusive 18-month subscription to McAfee Total Protection Service on HP small business desktop and notebook PCs in Europe, the Middle East, and Africa; and 3) Lenovo’s preinstalling McAfee VirusScan Plus on all Windows 7-based Lenovo consumer PCs under the Idea brand. These are positive steps, not only for growing revenues in the long term but also for stifling competition and cornering market share.
The company has entered into an alliance with Verizon, whereby Verizon will offer McAfee’s entire line of enterprise security products and services while McAfee will use Verizon’s data center outsourcing and expert consulting and managed services capabilities. The two companies are also jointly developing a suite of next-generation, cloud-based managed security services. McAfee is also working with Adobe to jointly deliver an integrated data loss prevention and enterprise digital rights management solution to expand the reach of data protection beyond the boundaries of the enterprise. In another multi-year deal, Adobe consumers can run a security scan, get a trial subscription to McAfee when downloading an Adobe program or update, or both.
The stock is trading at $37.45 with a market cap of $5.91 billion. It hit a 52-week high of $45.68 on October 14.
Symantec, Inc. (NASDAQ: SYMC) declared its Q210 results on October 28. GAAP revenue for Q210 was $1.47 billion. Non-GAAP revenue was $1.48 billion, down 3% over Q209. Non-GAAP deferred revenue as of Q210 was $2.91 billion compared with $2.72 billion as of Q209, an increase of 7% Y-o-Y. Non-GAAP operating margin for Q210 was 29.2%, flat Y-o-Y. Non-GAAP net income for the fiscal second quarter was $294 million. Non-GAAP earnings per share were $0.36 compared to earnings per share of $0.37 in Q209.
For the quarter, Symantec’s Storage and Server Management segment represented 38% of total non-GAAP revenue and declined 9% Y-o-Y. The Consumer segment represented 31% of total non-GAAP revenue and increased 6% Y-o-Y. The Security and Compliance segment represented 24% of total non-GAAP revenue and declined 3% Y-o-Y. Services represented 7% of total non-GAAP revenue and declined 1% Y-o-Y.
International revenue represented 51% of total non-GAAP revenue in Q210 and declined 2% Y-o-Y. The Europe, Middle East, and Africa region represented 31% of total non-GAAP revenue for the quarter and declined 5% Y-o-Y. The Asia Pacific/Japan revenue for the quarter represented 15% percent of total non-GAAP revenue and increased 5% Y-o-Y. The Americas, including the United States, Latin America, and Canada, represented 54% of total non-GAAP revenue and declined 4% Y-o-Y.
In mid September, Symantec launched Norton Internet Security and Norton AntiVirus 2010 products. These products leverage the new reputation based security technology, code named Corem, to deliver detection of new malware. The 2010 Norton Security products have already received top reviews from respected independent testing bodies.
The company won consumer online backup deals with Toshiba and Acer. Symantec claims that it has backup relationships with four of the top five OEMs. Spyware Doctor Starter Edition has been selected as the only security product for the Google Pack. This relationship enables Symantec to gain access to Google’s 165 million unique visitors. The company is migrating its Norton customers to the new Symantec developed and operated online store. This will help the company to be better focused, build more targeted programs and deliver more innovative products and services.
Software-as-a-Service posted sequential growth as the company continues to take advantage of cross-selling opportunities for its online security solutions within the Symantec customer base. It increased sales of its hosted Web security offering, since Web-based attacks remain a leading source of new infections. With the acquisition of MessageLabs a little over a year ago, Symantec has become a leading player in email and Web security-as-a-service. The company is pursuing a strategy of offering backup, archiving, data loss prevention, and so forth as a SaaS.
Symantec expects to release Symantec Data Loss Prevention 10 in December with the industry’s first open DOP platform integrating its hosted e-mail services. The company expects Backup Exec 2010, scheduled to be available by April 2010 to include integrated add-on options and deduplication and archiving capabilities.
The stock is trading at $17.36 with a market cap of $14.07 billion. It’s down from a 52-week high of $18.48 on December 4.
Even in a recessionary market, demand for security seems to be holding steday as the use of social networks and smartphones is giving rise to security threats and data leakages. The small and medium business segment could also possibly be a major growth driver in the coming quarters. I believe that companies which are able to integrate their services and have strong SaaS capabilities, such as Websense and Blue Coat, will come out better than the competition.