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Security Industry Overview

Posted on Monday, Sep 7th 2009

Security threats don’t seem to be subsiding. In the first half of 2009, 61 of the top 100 Web sites delivered malicious content to their visitors because the sites had been hacked and malware implanted. Of these infected sites, more than 75% were legitimate. Google identified nearly 325,000 sites as containing malware in August of this year compared with 150,000 a year ago. Spam now constitutes 92% of e-mails sent and is growing by a third each month. Hackers haven’t spared government or institutional sites, either. The New York Stock Exchange, White House and South Korean government Web sites were recently bombarded with requests from more than 100,000 infected located computers worldwide. No wonder network security is a priority for the Obama administration, and companies such as McAfee are doing a roaring business.

A recent report revealed that worldwide content security gateway revenues grew 1.5% over the quarter in Q209 to reach $544 million. With a growing focus on virtualization, cloud computing, and SaaS, coupled with security threats, analysts expect the market to grow to $3.2 billion in 2013 with the North American content security market expected to cross the $1 billion mark in 2009. McAfee continues to remain the leader in the segment, Websense came in second, and Blue Coat and Symantec were competing for the third position.

McAfee’s (NYSE:MFE) Q2 revenues of revenues of $469 million grew 18% over the year and exceeded the market’s expected $467 million target. EPS of $0.60 also managed to beat the Street’s expected $0.57.

Demand continued to be strong in North America, where revenues grew 30% over the year to $250 million. International revenues of $203 million grew 6% over the year and accounted for 43% of the business. Excluding the impact of foreign currency, international revenue grew 17% over the year.

By segment, Corporate revenues of $191 million grew 21% over the year driven by significant contract wins. McAfee now provides services to 83 of the Fortune 100 companies. Consumer revenues grew 13% over the year to $177 million.

McAfee is looking to gain market share through a strong product portfolio. In 2007, the worldwide security market was valued at $11.4 billion, and McAfee controlled 10.8% of it. A year later, even as the worldwide market grew 18%, McAfee retained their market share and inched 0.5% ahead to 10.9% and became the strongest growing player in the segment with 21% growth over the year. McAfee is also trying to gain share within the consumer segment, which Symantec leads with a 52% share compared with McAfee’s 18%.

McAfee is continuing to invest in developing their offerings both organically and inorganically. The company recently announced the acquisition of privately owned MX Logic for $140 million, with an earn-out of up to an additional $30 million if certain performance targets are met. MX Logic is a leading provider of cloud-based e-mail and Web security, email archiving and email continuity services. By adding MX Logic’s 40,000 customers and 1,800 channel partners to their portfolio, McAfee should be able to cross-sell their technology-based solutions to provide a security software-as-a-service in addition to offering a comprehensive cloud-based security portfolio to customers.

They announced the next generation release of ePO, or ePolicy Orchestrator, which should further streamline security operations for customers. The ePO provides real-time visibility on the security of IT environments. On the network side, McAfee created a new network security business unit that has products such as the McAfee Total Protection Internet Gateways, which is a single product that provides Web, mail and network DLP protection.

The company announced an upgrade to their enterprise firewall products with capabilities that will help increase network security and lower compliance and operational costs. These products have been integrated with ePO, thus offering more streamlined management. Later this year, McAfee is looking to launch an online standalone backup product in 26 languages.

The company projects Q3 revenues of $475 million to $495 million with EPS of $0.58 to $0.62. Analysts expect revenues of $478 million with EPS of $0.59.

The stock is currently trading at $40.19 with a market capitalization of $6.3 billion.

Amid similar market conditions, McAfee’s rival, Symantec (NASDAQ:SYMC), is seeing revenues fall. Symantec has been slowly losing ground. In 2008, the company controlled 22% of the $13.5 billion worldwide security market, compared with 24.4% market share a year ago.

Q1 revenues fell 13% to $1.43 billion from $1.65 billion and missed the market’s expected $1.49 billion target. By segment, revenues from the storage and server management fell 17%, and revenues from the consumer business fell 4% over the year. Revenues in the security and compliance segment fell 14% and revenue from services fell 20%. EPS of $0.34 was short of the Street’s expected $0.35.

Symantec blamed their poor performance on the recession, which has resulted in customers purchasing fewer new licenses. However, they expect the coming quarters be better as many businesses will release their annual budget spends.

Symantec is continuing to improve their product offering through innovation. Their new products feature reputation-based security, a capability code-named Quorum. With Quorum, Symantec can to use the data from their global intelligence network to statistically infer the likelihood that an unknown application is good or bad. PC Magazine called the beta version of their product “record-breakingly effective”.

The company is are also concentrating on OEM relationships and expanded their relationship with Sony to include shipping of Norton Internet security on all biosystems in the Americas, and offering a protection suite that includes Norton Internet security and Norton Online Backup to all North American customers; the Norton Online Backup agreement is being made global. They also entered into agreements with HP and Lenovo.

Symantec is dedicatedly following a SMB strategy and recently created an SMB specialization in North America. In the current quarter, they plan to extend this initiative to EMEA and APJ. They began shipping their SMB product in America in May of this year.

The impact of reduced IT spending is greatest in storage and server management, where Symantec is seeing fewer new data center projects. With a view to control costs, they have launched software management tools to help customers get better ROI from their hardware infrastructure. Their Stop Buying Storage campaign, initiated last quarter, is also helping drive business amid weak conditions.

Through their Deduplication Everywhere campaign, Symantec is moving deduplication closer to information sources. Integrating Deduplication Technology is available in NetBackup and Enterprise Vault, and it will be available in the new version of Backup Exec later this year. The company plans to continue to develop advanced deduplication features through their OpenStorage technology APIs to provide an industry-unique interface which will allow partners to integrate with their backup technologies. They should look at Ocarina Networks as a potential acquisition in this area. For more about this company, read my interview with Ocarina CEO Murli Thirumale.

In the current quarter, Symantec is projecting revenues of $1.4 billion to $1.45 billion with EPS of $0.32 to $0.34, both short of analysts’ expected revenue of $1.5 billion and EPS of $0.36.

The stock is trading at $15.24 with a market capitalization of $12.4 billion.

Meanwhile, Websense (NASDAQ:WBSN), the leader in Web security, saw Q2 revenues climb to $84.1 million with EPS of $0.32. The market was expecting revenues of $83.8 million with EPS of $0.31.

During the quarter, Websense repurchased 447,000 shares for $7.5 million.

Their products continued to win awards: the Secure Web Gateway was named Product Innovation of the Year by Frost & Sullivan for its ability to identify and prevent threats associated with Web 2.0 sites in real time by selectively blocking the portion of the Web page that presents the threat. Secure Web Gateway was also voted the Best Channel Product of 2009.

In spite of these accolades, Websense has been troubled by the recession . Customers have delayed renewals or reduced contract duration for their seats, which resulted in billings falling $11.5 million in the quarter. Overall, the company’s product seat count declined by 800,000 seats sequentially, even though it grew over the year.

Websense is facing stiff competition from appliance vendors such as Blue Coat, Cisco, and McAfee in enterprise accounts. They are trying to win against the competition by selling their industry-leading software at good price points and retain more customers than they were earlier.

Within the SMB segment, Barracuda is a bigger threat. Instead of resorting to selling appliances at very low price points and low margins in this segment, Websense is focusing on the segment by selling next generation solutions with their security-as-a-service Web and e-mail offerings.

The company expects revenues of $334 million to $338 million with EPS of $1.23 to $1.27. Analysts expect earnings of $1.31 per share on revenues of $343 million.

The stock is trading at $14.83 with a market capitalization of $655 million.

The security market competition is heating up despite the recession. Later this year, Microsoft is planning to launch Security Essentials, a free consumer anti-virus product – this is a clear departure from the prevalent business model of software subscriptions. With security-as-a-service, virtualization and cloud computing being touted as high-growth areas within the segment, the number of acquisitions within the industry is increasing, thus shifting each player’s market share. Overall, security is an industry worth watching even in the present depressed conditions.

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While I must appreciate your analysis and compilation of data, the title and the content may be misleading for many. You have focussed primarily on content or web filtering solutions with basic coverages on antivirus, antispam. However you will appreciate the fact that the overall security market is much beyond that. There are strong market segments of vulnerability management, application security scanning, patch and config managemnet, SIEM, access management, VPN, encruption, secure back up, forensics etc. As such the article represents a portion of the security industry and not the trend of the entire security industry. Two cents.

Rudra Monday, September 7, 2009 at 5:35 AM PT

Yes, you are right. These are public security stocks and a compilation of their performance. Part of our Technology Stock coverage. Not a Gartner style deep-dive analysis.

Sramana Mitra Monday, September 7, 2009 at 9:09 AM PT

Where can I find information on IT Security Spending by industry?

E Haubrich Tuesday, July 24, 2012 at 5:32 PM PT


Sramana Mitra Wednesday, July 25, 2012 at 3:08 PM PT