Following its first operating loss in 10 quarters, anti-hacking vendor Internet Security Systems (ISS) is reorganizing its business to become more focused on managed security services.
IT security vendors that put a high valuation on their products are likely to have to take similar measures over the coming months.
In common with many other software companies, ISS' second-quarter results were characterized by the reduction, or postponement, of a number of large deals. To cut expenses and rationalize business processes, ISS will incorporate its managed services division into its core business. Mark Hangen, general manager of ISS' managed services, will leave the company, and Ken Walters, formerly general manager of ISS' enterprise solutions division, has become COO of the company. He will assume responsibility for product development, managed services and marketing operations.
The move is both a response to a depressed market and a recognition that managed services will become far more crucial to ISS' core business going forward. Analyst Yankee Group estimates that the managed security market was worth $140 million in 2000 and will grow to $1.7 billion by 2005. Even large enterprises are coming to the realization that the upfront license costs - coupled with the management of the countermeasures necessary to combat the growing sophistication of hackers - are too heavy a burden for their internal IT procedures.
Analyst IDC said in March that ISS' 30% share of the intrusion-detection and vulnerability assessment market was significantly ahead of its competitors'. But in a quarter where all security software sales were hit hard by the IT-spending slump, it seems that the kind of high-cost anti-hacking products that ISS sells are considered far more discretionary than simple, comparatively cheap and easy-to-install products, such as firewalls and antivirus software packages.
Excluding charges from its acquistion of competitor Network ICE earlier this year, ISS' second-quarter results showed a loss of $980,000, or $0.02 per share, on revenues of $51.7 million. ISS expected to achieve revenues of between $64 and $67 million, and earnings in the range of $0.15 to $0.16 per share, when it reported its first-quarter results in March.
But managed services have grown to 10% of ISS' revenues in under a year. These are poised for growth - even in spite of the economic downturn - because they effectively cut costs for corporations experiencing problems with hackers. It costs a company as much as $500,000 a year to outsource intrusion monitoring and firewall protection ? and eight to 10 times that amount to do it in-house. But bad publicity resulting from successful hacks on a corporation with a well-known brand can wipe out millions of the company's stock value, and affect future business drastically. Still, ISS is aware of the fact that it needs to make its anti-hacking services much more convenient to buy and manage for its customers.
For its next quarter, ending this Sept. 30, ISS expects to achieve revenues of between $52 million and $55 million, and earnings of between $0.01 and $0.03 per share.
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