Want to spawn an industry? All you have to do is prank your friends.
Apparently, the first computer virus, spawned 25 years ago, started as a 15-year-old kid's way to pull one over on his buddies. It was a relatively harmless virus -- more of an annoyance, really -- but, it did get me thinking about how something so seemingly innocuous could grow into a massive and wonderful industry. I'm talking about business-security software.
Why is it so wonderful? Well, since ingenious hackers are always devising ways to destroy your computers or steal your sensitive information, that means we'll always need security from them. And the security will always have to evolve, to stay a step ahead of them. That means continually devising new ways to stop them.
Remember the Love Bug back in 2000? I didn't fall for it, because, quite frankly, I couldn't imagine attractive females sending me such an affectionate message. However, others did open it, and it did quite a lot of damage to computers worldwide. More recently, a 17-year-old hacked into Apple's (Nasdaq: AAPL) latest high-tech gadget, the iPhone, unlocking it from AT&T's network and allowing him to make calls through T-Mobile. And remember the troubles at TJX (NYSE: TJX)? That company suffered a security breach in which customer information was stolen.
Companies will pay a tidy sum to ensure that their information systems are protected from events like these. Individuals will, too. So it's not surprising that a study by research firm Gartner shows the security market growing at 10% per year.
A trio of hacker haters
So, which software companies are poised to benefit? Let's start by looking at Symantec (Nasdaq: SYMC), which enjoys a dominant position in the security market. It makes the ever-popular Norton software, and it sports a customer roster that includes Atmel (Nasdaq: ATML) and Rite Aid (NYSE: RAD). Although Symantec made some large and ill-advised acquisitions in the past -- including paying $13.5 billion back in 2004 for Veritas, a storage company that was already slowing down -- management seems to have learned from those experiences and pledges to do only smaller deals from now on.
Symantec is also using part of its cash stockpile to buy back shares. It bought back $500 million worth in its latest quarter, and having just completed its $1 billion repurchase authorization, it has now announced a new $2 billion program. Symantec appears to be able to afford it -- the company still finished the quarter with more than $2 billion in cash and short-term investments. It was also able, during the most recent quarter, to sign 249 contracts worth more than $30,000 each, including 48 worth more than $1 million.
Earnings, however, haven't been great. For the latest quarter, while sales showed decent double-digit growth, net income was down 5%, and per-share earnings -- thanks to buybacks -- were flat at $0.10. Results were hurt by ongoing restructuring charges and the amortization of intangible assets.
But if management does what it promises and slows acquisitions down, these charges should abate going forward. Symantec also expects to save $200 million per year once the restructuring charges are done. Just don't buy management's argument and ignore those charges.
At first glance, McAfee's (NYSE: MFE) latest results look better than Symantec's. For its most recent quarter, McAfee put in its best performance in five years. Revenue increased 13%, to $314.3 million, and earnings rose 55%, to $0.30 a share. It also snagged 11 deals of better than $1 million.
Be careful of appearances, though. Prior results are going to be restated to take charges for stock-option expenses. Therefore, the GAAP earnings numbers might change. The company would like you to focus on pro forma earnings, but going that route excludes important and relevant business expenses such as stock-based compensation, SEC compliance costs, retention bonuses, and severance (presumably the company isn't paying both to the same person). Beware when a company tries to get you to concentrate on pro forma results -- a lot of pain could've been avoided earlier in the decade if investors had heeded this advice.
Then there's CA (NYSE: CA), which has also had its share of problems -- restatements and criminal prosecutions among them. The company has taken a ton of charges from restructuring, but whether the steps prove beneficial and allow CA to get its act together remains to be seen. I suppose the company does deserve some kudos for avoiding bankruptcy, but I couldn't advise investing here until I was sure the company had put all of these issues to rest and could concentrate fully on the business at hand.
Time to boot up
Given the problems CA has had and the restatements McAfee is going to have to make, Symantec looks like the most attractive option to me right now. It's poised to avoid any more large acquisitions and will use its cash to repurchase shares. With the top line growing, earnings could see a boost going forward, should charges slow.
The industry, however, is not going away, and companies need to keep up the pace. Those teenage hackers are going to be around for a while.
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