‘Growth rate forecasts too high for security firms’

By Elinor Mills Abreu

MENLO PARK, Calif: Growth rate forecasts for the computer security sector,

which range between 25 per cent and 50 per cent, are too high and need to come

down at least 8 percentage points to be realigned with a slower economy, a

financial analyst said on Wednesday.

Last week's Nimda virus outbreak and the events of Sept. 11 demonstrate how

computer security will become more vital to business going forward, said Gene

Munster, a senior research analyst at investment bank USBancorp Piper Jaffray.

However, nothing can eclipse the economic fallout from last year's Internet

bubble burst and the slowdown in the global economy, he told a group of venture

capitalists during a presentation on the future of the computer security market.

"The fundamental market is really bad right now," Munster said.

"People are not spending money as fast as these companies are

growing."

Munster said the deadly Sept. 11 attacks - which came at a crucial time for

many companies that do a lot of their business in September following slow

summer months - could result in revenue shortfalls of 20 per cent to 30 per cent

for software companies. While customers have cut their spending

across-the-board, computer security companies are planning to spend 10 per cent

to 15 per cent more than they did last year, according to Munster. "Budget

cycles and sales cycles need to be realigned," he said.

Meanwhile, computer security stocks have dropped an average of 70 per cent

over the past year, compared to the 58 per cent drop of the Nasdaq, Munster

noted. Wall Street analysts recently cut their revenue projections for computer

security companies an average of 8 percent as a result of the continued economic

atrophy and the Sept. 11 attacks.

CATALYSTS FOR GROWTH

While the timing of the deadly attacks was bad for many companies, for

computer security companies it will mean more sales in the long run as security

and disaster recovery become more of a priority than cost reduction, Munster

said. "We're not talking about a bubble effect here," said Munster.

"We're talking about real changes."

In addition, the Nimda virus that wormed its way into thousands of computers

last week, spreading through e-mails and holes in Microsoft Corp.'s Web server

software, also raised a red flag. For example, a large financial institution,

with more than 50,000 employees, lost its Internet access for eight days as a

result of the virus, according to Munster.

"This is just the beginning; at least once a year we'll see a massive

attack, and they're getting more sophisticated," he said. "I'm not

trying to be an alarmist. I'm just trying to talk about the reality here."

Recent legislation mandating the protection of financial and medical data,

requiring large companies to report security strategies and codifying digital

signatures will also provide a boost. That's good news for companies that sell

firewalls, antivirus, authentication and virtual private network products and

services. Virtual private networks allow companies to use public networks

securely. Other key growth areas will be vulnerability assessment, intrusion

prevention, biometrics and managed security services, Munster said. One security

area where investments could be reduced is wireless.

"The theme with companies is we've got to get back to basics," he

said. As a result, "I think you're going to see investments pull back"

from wireless.

(C) Reuters Limited 2001.