Acquisition Helps Ready Internet Security Software Firm For Web 2.0
Most people know Websense as the forbidding white page that pops up when you try to visit a Web site your employer doesn’t care for. But that business isn’t enough in the ever more complex world of Internet security.
That’s why Websense (NasdaqGS:WBSN - News) has been buying companies that help it become a more complete Web security firm. Most recently, it shelled out $400 million last fall for one of its biggest rivals, SurfControl.
Websense rolled out the resulting product lineup on a limited basis in the second quarter. This quarter, it goes into wide release.
Web 2.0
The new software suite is made for the world of Web. 2.0, says Chief Executive Gene Hodges.
“The most important new product helps companies stay safe as their employees access these networking and community sites — like a Facebook or a MySpace,” said Hodges. “Basically, these sites are now prime targets for the bad guys. They’ve learned that when users put in content, they can put attacking content up on these Web sites.”
Security in Web 2.0 is much more complicated than in the earlier version, says Gartner analyst Arabella Hallawell.
Websense’s traditional approach was to examine and classify all the pages on the Internet. That way employers could block all pages in certain categories, such as “porn” or “chat.”
Now there are so many pages, and so many more being generated, that software has to classify pages on the fly. And the interactive nature of social-networking sites opens many new avenues for viruses.
Hallawell says last year’s buyout of an Israeli firm, PortAuthority Technologies, brought tools for monitoring social-networking sites. A smaller buyout brought e-mail scanning technology — another hot field.
On top of stopping malicious content from coming in, Websense also aims to stop precious data from leaking out. Back in October, company leaders said the SurfControl buyout was part of a strategy to offer total content protection, especially data leak prevention.
This quarter, the Websense Data Security Suite will become widely available.
All this brings Websense into a highly competitive field.
In the small niche of Web-filtering software, Websense is a giant. Some 42 million people all over the world use it. But with $212 million in sales last year, it’s a dwarf compared with McAfee (NYSE:MFE - News) and Symantec (NasdaqGS:SYMC - News), both with 10-digit annual revenues.
These firms have lately been buying their way into each other’s territory. Symantec moved into the data-leak prevention field last year by buying Vontu. At around the same time, Google (NasdaqGS:GOOG - News) got into the e-mail security business by acquiring Postini.
“We’re definitely competing with larger companies,” said Hodges. “That was our expectation — that as the market matured, larger players would move in.”
Both Hodges and Hallawell say Websense’s advantage is in its deep and detailed knowledge of Internet content — what Hallawell calls its “granularity of reporting.”
Or as Hodges puts it: “We know more about the bad stuff on the Web than anybody in the world.”
Still, some analysts have gotten antsy waiting for the new products to come out. In a note on Websense’s July 28 earnings report, Cowen & Co. analysts praised the firm’s ability to keep SurfControl customers through the merger. But they added that it’s “hard to get excited about renewals as a driver.”
“With release of new products this quarter, the company needs to successfully execute on new product sales,” the report said.
Hodges says that, given the merger and the economic slump, Websense’s leaders chose a policy of “stabilize, then grow.” Integrating SurfControl involved re-educating a lot of employees and struggling to keep up customer service.
Hodges admits to letting marketing slip through the cracks.
“We were so busy in the first quarter of this year, we were less aggressive than we normally would have been in terms of promotional activities,” he said. “Basically, that consists of discounting to encourage customers to take longer subscriptions. I think given the financial situation, not giving the customers a good cost-of-money return was an error.”
Earnings Growth
Even so, profit growth has sped up over the past three quarters. In the second quarter, earnings rose 68% over the prior year to 37 cents a share. Sales gained 45% to $73 million.
As Websense digests SurfControl, analysts expect the numbers to keep growing, but not as fast. For the full year, analysts polled by Thomson Reuters expect 41% profit growth to $1.34 a share. Next year, however, they see earnings up only 7%.
Hallawell says she and other industry watchers still worry about Websense’s ability to adapt to the new Web security scene. Many customers, she says, are abandoning software packages altogether and turning to appliances and software-as-a-service models.
“The installed base is still good, but Websense has never really been a technology innovator,” said Hallawell.
Websense did acquire a software-as-a-service platform from SurfControl, which it has enhanced over the past year. But Hodges is mainly banking on his firm’s superior knowledge of all the Web’s bad stuff.
“Our research knowledge is the heart of our product line,” he said. “That’s not something Symantec or McAfee can emulate quickly.”