Security Threats Escalating

In times when overall technology budgets seem to be restricted, there isn’t that much of a slowdown in the anti-virus and computer security product sales, as was evident from the last quarter results of McAfee. With increasingly larger digital security threats, the market has always been mission critical, and continues to remain so.

Q1 revenue for McAfee (NYSE:MFE) grew 21% over the year to $447.7 million, the thirteenth consecutive quarter of double-digit revenue growth. EPS of $0.57 also grew a significant 31% over the year.

North American revenue of $254 million grew by 34% over the year and contributed 57% of the business. International revenue of $194 million grew by 7% and was impacted by foreign currency movements.

By segment, Corporate revenues of $276 million grew by 28% over the year and was the sixth consecutive quarter of double-digit growth. Total Protection revenues grew 34% over the year while Consumer revenues grew 12% over the year to $172 million.

While macro economic conditions might not be too sound for the rest of the world, McAfee is doing well as of now. With overall breaches of data records multiplying to 285 million records in 2008 compared with only 38 million a year ago, the market is definitely growing for the likes of McAfee. The FBI reported 33% growth in Internet crime complaints in the year. The worldwide problem of data loss and identity theft is estimated at more than $1 trillion, adding to conditions that heighten the need for a strong global data security provider.

Further, the worldwide regulatory environment is becoming more complex, with nearly 40 countries having 50 different regulatory requirements in their data protection regulations. Today regulations mandate controls over confidential and personal information on a global basis. For instance, any company that processes a credit card needs to be able to prove PCI compliance.

Also, it is not just businesses, but individuals as well that are now under attack from malware and malpractices. As Internet usage spreads across the world, there are new opportunities for security providers to address.

Amid such requirements, McAfee expects the fragmented security provider’s market to move to consolidation of costs, vendors and resources. In continuation with their merger spree earlier last year, they recently announced their intention to acquire Solidcore Systems Inc. for nearly $33 million. Solidcore focuses on protecting IT infrastructure, and McAfee hopes to strengthen their position in the compliance market through the acquisition “by adding real-time enforcement that eliminates compliance drift.”

McAfee has a strong foothold owing to its product leadership, partner ecosystem, alliance initiatives and a powerful business model. They continued to expand their product line by preparing to launch products such as the next generation ePO platform 4.5, which features improved scalability and user interface as well as improved reporting functionality. With products such as the Total Protection suite, McAfee Unified Threat Management Firewalls and McAfee Family Protection, the company is addressing cost-effective and easy-to-deploy solutions targeted at both the SMB market and the individual customers, thus giving them a bigger market to bite into.

Going forward, they are expecting revenues of $455-$475 million with EPS of $0.54-$0.58 per share, higher than the Street’s expectations.

The stock is currently trading around $39.5, close to a five-year high, with a market capitalization of about $6 billion.

McAfee’s competitor, Symantec (NASADQ:SYMC), did not have as good a run. Q4 revenue fell 5% over the year to $1.47 billion against the market’s expected $1.52 billion. EPS of $0.38 was slightly higher than the estimated $0.35. For the year, revenue came in at $6.15 billion, compared to $5.87 billion a year ago. For the year, they lost $8.10 per share compared to EPS of $0.52 a year ago.

By segment, storage and server management revenues contributed 36% of total revenue and fell 4% over the year. The consumer business declined 1% over the year and contributed 30% of total quarterly revenue. The virus threats of Conficker and Trojan.H resulted in controlling the revenue falls as consumers are now more aware of the need for security software to protect their personal data. Security and compliance segment contributed the balance 25% and reported a significant decline of 14% over the year.

Going forward, the company is expecting revenue of $1.45-$1.51 billion with EPS of $0.34-$0.36.

Symantec continued building stronger relationships in the OEM deals with contracts for shipping on Dell’s global small business and the gaming line. They renewed their relationship with Lenovo’s ThinkPad brand and have extended their agreement with Acer. In the Netbook segment, their 2009 products continued to be attractive and they announced contracts with Asus, Dell and HP Minis.

Additionally, Symantec has invested and continues to reap benefits from their data center backup and de-duplication products such as NetBackup, Puredisk and Symantec Endpoint Protection Small Business Edition, which aim to be cost-effective solutions for SMBs. Their NetBackup, which was popularized by the “Stop Buying Storage!” campaign, is targeted at customers looking to control capital expenditures in the storage areas by taking advantage of concepts like intelligent archiving, provisions and storage resource management. Products such as the recently launched version 3.0 of the Norton 360 software are also targeted at opportunities in the enterprise security, data protection and software-as-a-service (SaaS) space.

Symantec is looking to do a lot more in the SaaS space as they move more of their products onto the platform that they acquired when they bought MessageLabs. Their goal is to “offer customers the flexibility to manage their business using online services, onsite software, or hybrid onsite and online solutions.” Given the current budgetary controls being exercised by clients, SaaS as a delivery method is likely to gain much traction. While SaaS might be the panacea for Symantec, as of now it needs a bigger boost as the much larger anti-virus market share is being eaten into by McAfee.

The stock rose and is trading around $15.7 taking its market capitalization to nearly $13 billion.

Meanwhile, Websense’s (NASDAQ:WBSN) Q1 revenue grew by 21% over the year to $81 million, thus continuing their unbroken record of double-digit year over year growth since they went public in 2000. EPS for the quarter grew 4% over the year to $0.37 from $0.35.

International billing of $32.9 million was severely impacted by the foreign currency valuations. On constant currency, the international billings would have been $37.9 million compared to $35.5 million earned a year ago.

During the quarter, they repurchased 649,500 shares for approximately $7.5 million.

Going forward, they are anticipating revenues of $326-$334 million with EPS of $1.25-$1.35 for the fiscal 2009. While revenues are expected to fall by nearly $2 million in Q2, the company expects them to pick up by the second half of the year.

Websense expects good renewal performance and ongoing expense management to help them meet their financial goals for the year. They are looking at increased investments in sales to improve their pipeline.

The fact that they managed to beat both McAfee and Symantec in the recently announced Reader Trust Award for their achievement in information technology security will definitely help their sales. Web Security, was named the Best Web Filtering Solution and Websense Data Security Suite was named Best Data Loss/Leakage Prevention Solution. This was their fourth consecutive win.

They claim to be benefiting from their investments in sales managing and expect substantial growth in the incremental business pipeline for their in-the-cloud offerings both for web and email security.

The stock is trading around $18 with a market capitalization of about $800 million.