Security vendors hit by IT spending slowdown

Security software vendors that until recently seemed immune to the broad slowdown in IT spending are now feeling the pinch, with several companies issuing warnings about deteriorating business conditions this week.

The latest example came Thursday, when Dublin-based Baltimore Technologies PLC said it’s planning a “major restructuring” of its operations, in a bid to preserve cash. The upcoming cutbacks, which follow an 18 per cent workforce reduction in May, come as Baltimore anticipates second-quarter revenue to drop from US$24.6 million a year ago to about $22 million.

Earlier this week, Atlanta-based Internet Security Systems Inc. (ISS) announced that its second-quarter results would range from a loss of about $860,000 to break-even performance on a pro forma basis, with revenue finishing in the $50 million range. The company also said it plans to take $6.9 million worth of charges related to amortization of goodwill, a write-off of some research and development work, and other costs associated with a recent acquisition.

The second-quarter revenue figure will be up from the year-earlier total of $44 million. But ISS, which is mainly known for its intrusion-detection technologies, conducted $61 million worth of business in this year’s first quarter, and analysts polled by First Call/Thomson Financial in Boston had expected a second-quarter profit of about $6.5 million on revenue of $65 million.

Network security vendor Check Point Software Technologies Ltd. in Redwood City, Calif., also warned that its second-quarter revenue would come in slightly below expectations, at about $140 million, though that total would be up sharply from the year-earlier level of $90.7 million. Like ISS, Check Point blamed a slowdown in corporate spending for the lowered outlook.

The warnings – and a resulting sell-off on Wall Street that battered the stocks of numerous security vendors – show that the IT security market isn’t as protected from the economic softening as some observers had expected it would be, said Charles Kolodgy, an analyst at market research firm International Data Corp. in Framingham, Mass.

“I thought the security sector would hold up better than some of the other [technology] areas,” Kolodgy said. He wasn’t alone: Spending on security was seen as relatively safe because of heightening hacker threats and the increasing importance of data privacy. But the same deferred spending, delayed upgrades and canceled projects that have affected other parts of the IT industry now appear to have hit the security business as well, Kolodgy said.

Fran Rooney, CEO of Baltimore Technologies, confirmed as much during a conference call Thursday. “Last year, we were building our company for significant growth,” he said. “Now we’re in a different situation. All companies are feeling the pain in a tough technology sector … There has been a change in the buying pattern, [and] purchases are more on a phased basis.”

Baltimore officials indicated that the new cutbacks will include a significant reduction in staffing at the company, but they didn’t provide any specific numbers. More details will be disclosed when the final second-quarter financial results are released next month, Rooney said.

The extent to which security vendors are being affected by the IT spending slowdown depends on their market niches, said Michael Rasmussen, an analyst at Giga Information Group Inc. in Cambridge, Mass. For example, he noted, many companies have already deployed the kind of intrusion-detection technology that ISS makes and could defer upgrades for the time being.

Even with this week’s warnings, though, Rasmussen remained relatively upbeat about the security market. “In general, I don’t see security being as hard hit as other areas,” because of its importance to corporate users, he said.

However, Baltimore, ISS and Check Point aren’t the only vendors that have been affected. Hayward, Calif.-based Certicom Corp., which sells security software for use on wireless networks, cut its workforce by 30 percent last month after reporting a $40.7 million net loss for its fiscal year ended April 30. WatchGuard Technologies Inc., a Seattle-based maker of Internet security software, this week named a new president and chief operating officer in the wake of a 16 percent workforce cut made in April.

Pilot Network Services Inc., a provider of security outsourcing services in Alameda, Calif., was hit even harder by financial problems. Pilot announced in late April that it was suspending business operations and laying off all its employees following a series of losses. At the same time, Helsinki-based F-Secure Corp. said it was laying off 95 of its 445 workers because of weakened demand for its software.

(Joris Evers and Sumner Lemon of the IDG News Service contributed to this report.)