Analyst Q&A: 2010 Outlook for Software Security Companies

January 28, 2010

In this excerpt from TWST‘s interview with Daniel Ives, senior vice president and senior analyst in the technology, media and telecom research group of FBR Capital Markets & Co, Ives discusses the trends and growth drivers security software companies should expect to see in 2010.

TWST: Looking at your coverage universe, what type of growth do you expect among security software companies in 2010? What factors will drive that growth?
Mr. Ives: In 2010 we are looking for an improvement in spending, although I would believe modest. I think growth depends on which company you are talking about. I think in general, we will be looking at a 5% to 10% growth from most of the companies that we cover, although that can vary depending on economy and spending.

TWST: For the security software companies, what would you say will be the main drivers of the growth?
Mr. Ives: I think it’s a combination. I think security software is benefiting from being a defensive type of purchase in a tough spending environment. They have navigated the downturn, I think, better than many pockets of software. So I think they will benefit from a better spending environment. But in particular they are also benefiting from what I call “outdated security” – infrastructure out there that’s long overdue for an upgrade. So there is a really a massive upgrade cycle going on as well, which I think security benefits from.

TWST: If you are an investor who is new to the space, which key concepts do you must you understand before putting money into these companies?
Mr. Ives: I would focus on – there are a lot of technologies, but I think you have got to separate the legacy technologies versus some of the next-generation technologies as to where some of the companies are heading and more importantly where customers are buying. I think three big areas in the space for 2010 are going to be areas such as virtualization, WAN optimization as well as speech recognition technology. I think when you think about names that are beneficiaries from some of those trends, you have the Citrix (CTXS), EMC (EMC), Nuance (NUAN), Blue Coat (BCSI) and Riverbed (RVBD). Because 2009 was about survival, 2010 is going to be more about where technology is heading, who are the beneficiaries in the next cycle. So security vendors are extremely well positioned. But I think peeling away the onion, and trying to look at the subsectors and which companies benefit, I think that’s the key.