Subs, Services Support ISS

Despite strong revenue and profit growth in 2004, shares of Internet Security Systems Inc. (Nasdaq: ISSX) slipped on Tuesday after the company missed profit estimates by a penny.

On Monday night ISS announced fourth-quarter revenues of $80.56 million, up from $67.12 million in the same period of 2003. This came in just above analysts' estimates of $79.06 million (see ISS Reports 2004 Results).

However, the company came in slightly light on the profit side. Earnings per share were 19 cents on net income of $9.2 million, which was below analysts estimates of 20 cents per share. These profits were up from 9 cents on $4.45 million in the fourth quarter of 2003.

ISS shares took a hit, probably because investors have come to expect upside surprises from this company and from the security sector in general. In morning trading, ISS shares fell $2.18 (9.75%) to $20.17.

Revenues for the full year 2004 were $289.89 million, compared with $245.78 million for 2003, beating analysts’ estimates of $288.38 million. Annual earnings per share were 54 cents on net income of $26.29 million, compared to 39 cents on $19.74 million for 2003. This was below analysts’ estimates of 63 cents.Speaking on a conference call last night, ISS CEO Tom Noonan attributed the results to strong revenues from subscriptions and from managed security services. Subscriptions revenues accounted for $141 million in 2004, Noonan said, up 25 percent on the previous year.

Although still a smaller percentage of overall revenues, cash from managed security services is growing at a rapid rate, according to Noonan. Managed security services represented 13 percent of revenues in 2004, he said, which is 40 percent up on the previous year.

Noonan also gave some insight into the future ISS roadmap. He explained that the company’s eagerly awaited G2000 multi-gigabit security device will now be generally available in the first fiscal quarter, after its launch was delayed from the fourth. The delay enabled ISS to undertake more beta testing and training to support the platform, he added.

But the G2000 is not the only new product looming on the horizon. The Atlanta-based firm is also planning to expand its Proventia line of security appliances with a new offering designed to protect servers. Other launches will include 5- and 10-Gigabit IPS products as well as a 100-Gigabit appliance, said Noonan.

The security market is attracting more and more attention at the moment, prompted in no small part by a flurry of M&A activity in the space, notably 3Com Corp.’s (Nasdaq: COMS) decision to acquire TippingPoint Technologies Inc. (see 3Com Takes TippingPoint and 3Com Closes TippingPoint Buy).Has Noonan felt the impact of this? Not really: “I think that the competitive environment is fairly stable, as is the pricing environment,” he said.

However, unlike his counterpart over at Foundry Networks Inc. (Nasdaq: FDRY), Noonan is looking forward to the Federal Government opening its wallet in 2005 (see War Fogs Foundry's Numbers).

”Moving into 2005, we’re going to see a strong Department of Defense segment -- there’s a number of large projects that are queued up."

Noonan also predicts that budgets will be freed up at the state level.

— James Rogers, Site Editor, Next-Gen Data Center Forum0