Analyst: Big Shift in Security Spending

Authentication and VPN gear are the hot new fields for security applications, says a J.P. Morgan Chase analyst.

Yesterday, Sterling Auty issued a series of research notes in which he details his expectation that overall IT security spending will increase among enterprises. But he expects the bulk of those increases to go toward authentication and authorization products, while spending on firewalls and virus protection stays flat.

“It’s not that companies will stop spending money on anti-virus and firewall protection,” he says. “But they won’t be spending any more than they have previously.”

Based on this premise, Auty upgraded access-control software companies, Netegrity (Nasdaq: NETE) and SonicWall (Nasdaq: SNWL). He downgraded firewall specialist Check Point Software Technologies Ltd. (Nasdaq: CHKP) and an anti-virus company, Symantec Corp. (Nasdaq: SYMC). He also sees virtual private network companies like NetScreen Technologies Inc. (Nasdaq: NSCN) doing well.

Auty says the shift in spending is coming because companies will be spending more money on Web-based services that automate data delivery between applications or companies. As these projects are deployed, companies will have to secure that access via authorization and authentication. Also, companies will be looking to expand other Web-based services like extranets and intranets, which will need to be secured as well. As a result, companies like Netegrity, a notable Web services supplier, will likely benefit from the trend, he says.

Another driver is the expansion of remote access to more workers. Companies are using secure VPN technology such as IPSec and secure socket layer (SSL) to offer remote workers access to the corporate network (see Nokia Sweetens SSL ). As a result, companies like NetScreen and SonicWall, which provide products that integrate VPN support along with firewall and anti-virus protection into their platforms, are also expected to benefit from the increased spending.

By contrast, pure firewall companies like Check Point and anti-virus specialists like Symantec will not benefit much from the increased spending, says Auty.

Erik Suppiger, an analyst with Pacific Growth Equities Inc., agrees with Auty’s assessment that VPNs will see continued growth. But he emphasizes that the Web-based authentication companies like Netegrity represent a small piece of the overall security market. He says the bulk of security growth will come from VPN technologies (see VPN/Firewall Market Still Growing).

“VPN penetration still has a long way to go,” says Suppiger. “You’ve got to keep the relative size of these markets in perspective, though. Firewall is over a billion dollar a year market, and the Web sign-in or authentication market is dramatically smaller than that.”

Both analysts agree that the winners in the VPN/Firewall sector are Cisco Systems Inc. (Nasdaq: CSCO) and NetScreen, which both offer appliances. Auty notes that product revenue for Cisco and NetScreen has been growing faster than revenues for Check Point. Specifically, he says that NetScreen has superior technology and continues to win deals over its competitors, despite stiff pricing pressure.

NetScreen's and Netegrity's share prices were unchanged today. NetScreen was trading at $24.18 per share, and Netegrity was at $7.00. Check Point was down $0.28 (1.40%) to $19.64; SonicWall was down $0.15 (2.84%) to $5.13; and Symantec was down $0.86 (1.95%) to $43.33.

— Marguerite Reardon, Senior Editor, Light Reading

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