Security software firms battle economic realities

Elinor Abreu

NEW YORK: If this week's spate of profit warnings are to be believed, even

security software manufacturers aren't safe from this economy's slowdown in

corporate spending.

However, according to Wall Street analysts, companies that make software to

protect corporate networks from attacks and provide secure transactions may

prove to be uniquely positioned for long-term success.

Companies that may do best include those that sell antivirus software,

firewall software that blocks unauthorized access to networks, and software that

lets workers connect to their companies' internal networks by using public

networks as so-called virtual private networks, analysts said.

"Firewall and antivirus are must-have technologies," said Jordan

Klein, of UBS Warburg. "(Virtual private networks) are increasingly being

viewed as important due to the cost-saving nature and the desire to provide

remote connectivity to the network."

Until recently, security software companies were thought to be safe from the

tech bloodbath. Symantec Corp. of Cupertino, California, which sells antivirus

software mostly to PC users, warned in late June that its first-quarter sales

would fall short of expectations. This week, Internet Security Systems Inc. and

Check Point Software Technologies Ltd. announced earnings warnings.

The news dragged Internet Security Systems stock down 40 per cent on Tuesday

and Check Point down 12 per cent, along with other security stocks, and prompted

several brokerage firms to lower their recommendations for Internet Security

Systems.

On Thursday, Baltimore Technologies Plc , which provides software for secure

online transactions, issued its own earnings warning and announced job cuts.

Check Point shares rose 40 cents to $44.95 on Nasdaq on Thursday and ISS lost 1

cent to $29.98. Symantec was down 25 cents at $43.22 and Baltimore was down 25

cents to 58 cents.

Look out below!



"If category leaders like Check Point and ISS are having a difficult time
it does not bode well for other vendors," said Christopher Russ of First

Union Securities Inc.

"It's unlikely anyone is going to beat the numbers," concurred

Jordan Klein of UBS Warburg. "The only company I feel comfortable with

meeting numbers now is VeriSign."

In addition to selling digital certificates that authorize and verify

participants in e-commerce transactions, VeriSign Inc. owns Network Solutions

Inc. , which sells Web domain names. "We're expecting good numbers from

VeriSign," said Steve Sigmond of Dain Rauscher Wessels.

SonicWall Inc. and Macrovision Corp. also could do well, analysts said.

SonicWall makes security appliances that are used as firewalls and virtual

private networks, while Macrovision makes software to prevent use of unlicensed

software and from viewing or listening to unauthorized copyrighted Internet

files.

"These are areas that have tangible return on investment and help

companies provide the infrastructure necessary to generate revenue in a digital

economy," said P Sterling Auty, security software analyst at J P Morgan.

Must-have technology



While upgrading or expanding an existing corporate network is considered an
enhancement,



installing and upgrading security remains critical to most companies, analysts
said.

"If you look at the overall sector the predominance of the companies

continue to perform very well," said Auty. Buying products to protect

corporate networks "is still a very high priority within information

technology budgets."

"I don't think investors should be concerned that security spending is

in long-term decline," said Russ of First Union Securities. For example,

Dain Rauscher Wessels' Sigmund said he was maintaining Check Point at a price

target of $75 with a strong buy rating because upcoming products are likely to

improve the company's fourth-quarter revenue.

"Security will turn (around) first and it will turn fastest,"

Sigmond said.

Security stocks were down Thursday in Nasdaq trading with VeriSign off $4.50,

or 7.7 per cent, at $54.11; SonicWall down $1.05, or 4.6 per cent, at $21.72;

RSA Security Inc. off $1.89, or 6.7 per cent, at $26.11; Network Associates Inc.

down 18 cents, or 1.5 per cent, to $11.97; McAfee.com Corp. down 49 cents, or 4

per cent, at $11.81; and Macrovision off $1.16, or 1.7 per cent, at $68.75.

(C) Reuters Limited 2001.