Tech Industry

THE DAY AHEAD: For Websense, Big Brother equals big IPO

Websense Inc. and its Big Brother software are about to make a big splash on Wall Street. Websense, which tracks employees' Web surfing habits, will make its market debut Tuesday with 4 million shares priced at $18.

Websense (Nasdaq: WBSN, profile) priced well above its raised range of $12 to $14. The range was upped from $10 to $12. Chase H&Q is the lead underwriter.



Websense: Can Big Brother software be big business?



In regulatory filings, the company said it provides "employee Internet management products that enable businesses to monitor, report and manage how their employees use the Internet." Translation: Big Brother software.

Websense's software allows corporate managers to implement Internet access policies for different user groups. Managers can rule some sites off limits, restrict access hours and produce reports tracking employee habits. The benefit to the Websense customer is clear: If you can keep Joe Employee from spending his time checking stock quotes and sports scores, he might actually accomplish something.

"We believe that a substantial amount of employee Internet activity in the workplace is non-work-related, and that a significant portion of non-business-related e-commerce is conducted through an Internet connection at work," said Websense in filings. "Employees' personal use of company Internet access during business hours can result in lost employee productivity, increased network bandwidth consumption and potential legal liability."

Although the corporate productivity pitch sounds appealing, employees may not like being monitored. "There are two schools of thought here," said Randall Roth, an analyst at Renaissance Capital. "The company either boosts productivity or upsets employees."

Analysts said Websense's pitch might be affected by two factors. For starters, the labor market is tight and companies may not want to irk employees with monitoring software. The recent flap about online privacy only heightens those concerns.

"Websense is a borderline case because of the Big Brother thing," said Kenan Pollack, money editor at Hoover's Online. Pollack noted a Websense competitor, N2H2 (Nasdaq: NTWO), went public last July priced at $13 and was one of last year's "broken IPOs." It took N2H2 months to break through its offering price, and the company currently trades just above it.

In addition to N2H2, the company said Secure Computing (Nasdaq: SCUR), Symantec (Nasdaq: SYMC) and WebTrends Corp. (Nasdaq: WEBT) are likely competitors.

Websense, however, may be onto something. The company's customer list reads like a corporate who's who list. As of Jan. 31, Websense was used by more than 7,500 organizations, including companies such as American Express, Compaq Computer (NYSE: CPQ), IBM Corp. (NYSE: IBM), J.C. Penney and Merrill Lynch & Co.

To complement its customer list, Websense also has some powerful allies. The company has reselling arrangements with AT&T Corp. (NYSE: T), Unipalm and VeriSign (Nasdaq: VRSN), and has relationships with Net plumbing companies such as CacheFlow Inc. (Nasdaq: CFLO), Check Point Software Technologies (Nasdaq: CHKP), Cisco Systems (Nasdaq: CSCO), Inktomi Corp. (Nasdaq: INKT) and Nokia Corp.(NYSE: NOK).

Although those partnerships have boosted sales, they haven't helped Websense's bottom line. For the year ended Dec. 31, Websense reported sales of $8.64 million and a loss of $9.25 million. As of Dec. 31, Websense had an accumulated deficit of $14.9 million. Twenty-one percent of sales for 1999 came from abroad.

Websense said the market for its Big Brother software could grow significantly. "We believe that many corporations are unaware of the existence or scope of problems caused by employee misuse of the Internet," the company said.

That situation should change. Websense said it will use part of its IPO windfall to market heavily and grab market share quickly. "There has to be an education process here," said Pollack. "Websense is simply an extension of what you see in the workplace now. Some companies already have cameras, check e-mail and randomly listen to phone conversations."