In yet another teleconference scheduled with investment analysts this week, Network Associates’ chief Bill Larson can be expected to use his usual rich blend of smooth talk and hard numbers in an attempt to win back the confidence of what’s becoming an increasingly skeptical investor community.
A seemingly unending run of 25 or so product and company acquisitions that has ended with a run-in with the Wall Street watchdog (Securities and Exchange Commission) probing the company’s write-down practices, forced NAI to restate its 1999 earnings to account for a $58m ‘goodwill’ amortization. The sum was some $36m higher than planned. The company has also pre- announced weaker than expected first quarter 1999 results, with analyst forecasts suggesting a shortfall of at least $35m on a target in the region of $285m. Not surprisingly NAI stock has gone into melt down, sliding from levels during January sometimes in excess of $60, all the way down to $15 by mid April.
As if that in itself doesn’t present enough problems Network Associates has been rocked with a class action suit. The company will need to answer to allegations of stock being inflated by ‘misrepresentations’ of its business prospects that’s supposedly led to $33m worth of insider trades by certain Network Associates executives. The charismatic Larson will need to pull out all the stops if he’s to prove the company is not only stable, but is in shape for growth.
More than anything analysts are looking for evidence of sustainable operating performance over the next few quarters. Most of all Larson needs to convince the markets that his is a business model that’s merely in need of a makeover than any major overhaul.
The challenge facing the company is to win customers over to the benefits of an integrated suite of network and security modules that has been assembled bit by bit during Network Associates’ four year acquisition spree. There is helpdesk software, encryption programs, anti-virus modules, network performance analyzers and firewall product. So far, the types of software features and utilities sold by NAI have in the main been bought piecemeal by businesses. Data security administrators, network managers and technical support staff have paid for such products as and when they needed them and usually as part of some major infrastructure project. NAI is now proposing a better approach.
Just as Computer Associates and IBM/Tivoli pioneered the adoption of a framework approach to solve the problems of managing disparate systems management utilities, so Network Associates seems to be positioning itself to champion integrated network/security management as an ultimate goal, and its emerging Net Tools suite as the eventual solution. Publicizing the company’s latest Active Security announcements, Bill Larson is quoted as saying NAI’s newest line sets a new standard for information security, going beyond simple product integration to a new paradigm where distributed components actively collaborate to keep a network secure.
Network Associates’ recent product launch (see report in M&A section next week) is a culmination of its acquisition strategy that sees it stitching together the McAfee Total Virus Defense product, with the Pretty Good Privacy encryption software and the CyberCop Intrusion Protection system. Providing for central access to aspects of each of these systems is a Visual Basic scripting system known as Event Orchestrator, something that’s going to enable systems administrators to automatically manage network events and actions according to an organization’s pre- defined policy.
Our customers have been talking about consolidating all IT organizations – from desktop and network operations to security groups – around a common support application, says Zach Nelson, a Network Associates executive VP. With its latest release, he claims there is everything available that is needed to build that common support application. Technology analysts are a little dubious. Meta Group suggests it will be another 18 months before there is a legitimate suite on the market and for the time being businesses are advised to select favored products and deal with integration only among related security areas.
Matters of timing aside, there are all sorts of problems with this approach, and they each could influence the pace at which NAI is able to build future revenue streams. First, integrated systems are a slow sell. Prospects remain just that for the many months it can take for a future customer to blueprint a strategy, evaluate the product and establish a rollout schedule. And large companies still tend to set security budgets on an ad hoc basis according to specific application implementations. Second the promise of end-to-end network security management – even across a mid size business – is unlikely to feasible with the NT-only focus Network Associates has adopted. It also calls for a comprehensive product set. And, despite the broad extent of its past product acquisitions, Network Associates still does not possess what for many prospects might be a critical must-have feature of an integrated approach: there’s a notable lack of any single sign-on solution in Net Tools, for instance. From that standpoint, NAI customers will need to rely on other vendor’s solutions and hope they will plug and play with Net Tools.
Finally, Larson’s serial acquisition strategy has stretched NAI’s standing in market so that it is not only straddled across a number of niche sectors where there are some strong specialist players, but it is now competing directly against the heavyweights of IBM, CA and HP.
Market analysts offer contradictory evidence on the current dynamics of NAI’s expanded market place. Hurwitz Group maintains there’s currently a noticeable slowdown in firewall spending, as evidence by tumbling stocks among some key vendors in that sector. With products to rival Network Associates’ Gauntlet firewall, Axent, CheckPoint and Secure Computing have been affected most the analyst group says, adding that ‘vendors in other security market areas have seen little effect’. It counts other Network Associates competitors like ISS in the intrusion detection space, and also names Entrust and Verisign as security suppliers that have seen continued growth of late. It has to be seen if NAI’s integrated approach means it’s buffered from these ups and downs or is left prone to every little hiatus in the numerous market niches it now plays in.
Meta Group says there is an increased interest in the integrated suite proposal but says that Network Associates can expect increased competition from IBM, both in the shape of the Tivoli subsidiary but also from IBM’s own SecureWay FirstSecure integrated security suite. Meanwhile, First Albany says there are signs of additional security spending among Global 2000 companies and that overall from a growth standpoint spending rose 23% last year. The money spent per employee is still quite small, however. Some 30% of companies are spending less than $50 a head on computer security.
Against this background, a research note from Credit Suisse First Boston argues NAI’s best option is to increase its sales and marketing investment in a bid to reinvigorate revenue growth. This could take operating margins down towards 20% however, against earlier Wall Street estimates of 33%.
In previous teleconference calls to financiers Larson has always insisted the company expected no lay-offs, that his operating model is sound and that sales will pick up. There seems widespread doubt on Wall Street if he’ll be able to persist with this line in future calls. Lehman Brothers for one is saying it’s expecting to hear of some rationalization of expenses in coming months. And Dain Rauscher says it is expecting only 10% revenue growth for calendar 1999 from NAI, against 30% growth for 1998. The one question Larson won’t able to answer this week is whether this slowdown is down to any fundamental flaw in his acquisition strategy.
Next report: Shape of things to come – NAI’s product portfolio.
