NetScreen Snags SSL Leader

NetScreen Technologies Inc. (Nasdaq: NSCN) has announced a deal to acquire SSL startup Neoteris Inc. for roughly $265 million in stock and cash (see NetScreen to Acquire Neoteris).

Based upon the completion of various revenue milestones, the $20 million cash payment could increase by an additional $30 million for a combined potential value of $295 million. To date, Neoteris has raised $38 million in funding from venture capital companies such as New Enterprise Associates (NEA) and Battery Ventures.

Analysts are hailing the acquisition as a strong move for NetScreen, which is already a leader in the IPSec VPN market. Neoteris is considered number one in VPN security gear based on SSL technology. According to a recent Frost & Sullivan report, Neoteris has 36 percent market share, more than 20 percentage points ahead of the closest competitor in the SSL market (see F&S: Neoteris Leads in SSL VPNs). As a combined entity, NetScreen and Neoteris offer one of the most comprehensive VPN portfolios in the market.

“This makes a lot of strategic sense,” says Erik Suppiger, an analyst with Pacific Growth Equities Inc. “There is a strong case to be made that NetScreen will be the entrenched leader in the VPN market.”

After the acquisition closes, which is expected in the December quarter, Neoteris should start generating revenue right away. The company has been shipping product to more than 550 enterprise customers and has 120 channel partners. NetScreen officials say they expect Neoteris to contribute between $47 million and $52 million in revenue for calendar year 2004. Analysts estimate NetScreen’s total revenue for calendar 2004 to be around $300 million.

NetScreen had been eyeing the SSL market for some time. Rumors circulated during the summer that the company was interested in an emerging player, uRoam Inc. (see NetScreen SSL Move Likely). F5 Networks Inc. (Nasdaq: FFIV) announced it was acquiring the startup in late July (see F5 Buys Into SSL VPNs).

Last year, NetScreen announced an interoperability and reseller relationship with SafeWeb Inc. (see SafeWeb Joins NetScreen Alliance). But David Flynn, vice president of marketing for NetScreen, says SafeWeb had few resources to devote to sales and marketing efforts. NetScreen will continue to interoperate with SafeWeb’s products, but it will no longer jointly sell or invest in the relationship, says Flynn.

“Our sales force has been beaten to hell by customers who really want SSL,” says Flynn. “SafeWeb had some funding trouble, and they were still investing in their technology. Neoteris, on the other hand, defined the segment with their product. We wanted to go with the number one player.”

NetScreen plans to keep the IPSec and SSL technology in separate products. Flynn says the reason for this is because the products address two separate and distinct VPN markets. Companies connecting remote and branch offices will continue using IPSec for static point-to-point connections. This has been NetScreen’s primary market for IPSec VPNs. SSL VPNs will be targeted at the remote access market.

The NetScreen strategy sets it apart from some of its competitors. F5, which started life as a load balancing appliance, is marketing its new SSL solution as an IPSec killer. Just today, the company announced the availability of its Uroam product (see F5 Intros SSL VPN Product). Eventually, the company plans to integrate the Uroam solution into its load balancing hardware.

“F5 is not a security company,” says Flynn. “They’re trying to transform into one, but that doesn’t happen overnight. They bought some interesting technology, but they’ve still got a lot of work ahead of them.”

NetScreen’s two biggest competitors are Cisco Systems Inc. (Nasdaq: CSCO) and Check Point Software Technologies Ltd. (Nasdaq: CHKP). So far, neither company has come out with as comprehensive an SSL offering as NetScreen will soon have.

Currently, Check Point sells a rough version of SSL, but the company hasn’t gotten much traction with it. In fact, Nokia Corp. (NYSE: NOK), which licenses Check Point’s firewall technology, decided to develop its own SSL VPN technology instead of using what was available from Check Point (see Nokia Sweetens SSL ). Right now, Cisco doesn’t offer any sort of SSL VPN solution, but rumor has it the company is developing technology internally.

Nortel Networks Corp. (NYSE/Toronto: NT) also has a solution. Like F5, it has added SSL VPN functionality to its load balancing switch (see Nortel Revamps VPN Portfolio). It also offers a strong IPSec portfolio on a separate product line. But, Nortel has struggled to promote these products, since they’re run by two different groups.

Neoteris's strongest competitor in the SSL market has been Aventail Corp. It just announced enhancements to its product today (see Aventail Enhances SSL Product).

Most of the 160 Neoteris employees are expected to remain through the acquisition, says Flynn. Netscreen was trading up $0.74 (3.34%) to $22.90 today.

— Marguerite Reardon, Senior Editor, Light Reading