Security stocks dip on earnings warning

After market close, the provider of software for detecting online security intrusions said it expects to report second-quarter results ranging between a loss of 2 cents per share to breakeven, on revenue of $50 million to $52 million, excluding special charges.

Analysts surveyed by earnings tracking firm First Call produced a consensus prediction of 15 cents per share on revenue of $65.7 million for Internet Security Systems' second-quarter ended June 30.

"We clearly saw evidence that security is not recession proof," Internet Security Systems CEO Thomas Noonan said.

Some security stocks such as ISS, Network Associates and Verisign have managed to outperform the tepid Nasdaq for much of this year. Until recently, many investors viewed them as islands of safety because security tends to be the last item cut from corporations' technology budgets.

Shares of Internet Security traded at $33.30 in after-hours activity on the Island ECN, following the company's announcement. ISS rose $1.61 to $50.17 in Monday's regular trading ahead of the news.

Other security-related software stocks fell after-hours, including Check Point Software, down 11.5 percent to $50.95; Verisign, down 6 percent to $56.90; and Network Associates, down 6 percent to $12.21; and Symantec, down 4 percent to $42.

"It's certainly not good news for other security companies," Dain Rauscher Wessels analyst Stephen Sigmond said. "I'd expect other stocks to trade down pretty hard."

Internet Security previously said it would earn 15 cents to 16 cents per share on revenue of $64 million to $67 million. Company executives for Internet Security Systems blamed their shortfall on the widely reported slowdown in the overall economy. Although the company saw its total number of deals increase 25 percent in the second quarter, many customers reduced the size of their purchases, or delayed them entirely.

"So much of this is just dependent on how the customer feels about the future when it's time to sign the contract," Sigmond said.

Among the 40 to 45 largest contracts expected of the quarter, 18 were delayed in the last two days of June, executives said. Many enterprise software companies don't close their sales until the final weeks of a quarter, although ISS packs more sales into the end of a quarter than security companies in other niches, Sigmond said.

This was the first time in almost six years that Internet Security has seen such a dramatic shortfall at the end, Noonan said.

"Quite frankly, the surprise to us, and why I am so damn disappointed, is that we saw that falloff at the very end of the quarter," he said, during a conference call with analysts. "And obviously with our track record here, we have never seen that before."

At the same time, the total value of the company's 25 largest contracts that were completed fell 50 percent from the first quarter, the CEO said.

"As a data point, our top 25 deals delivered the lowest amount in six quarters, even though most of them are part of large multiyear project rollouts of security protection projects requiring significantly more software and services to complete," Noonan said.

"Customers were just unwilling to buy at their previously committed levels and chose to buy at lower levels. We saw numerous customers this quarter say 'We're going to buy a quarter's worth, we're going to buy enough to get the initial implementation going, and then we're going to come back next quarter to buy.'"

Security software remains one of the top priorities for companies with money to spend on information technology, Sigmond said. But in the Dain Rauscher analyst's view, Internet Security Systems' products are less of a "must have" than those of a company like Check Point Systems, which sells firewalls and other software for protecting virtual private networks, intranets and extranets.