MINNESTOTA COMPUTER SECURITY INDUSTRY ATTRACTING INVESTMENT INTERESTTechnology market: An uptick, not a recoveryLast update: May 13, 2005 at 11:11 PM
Technology market: An uptick, not a recovery
Steve Alexander, Star Tribune
May 14, 2005 TECH0514


The whole computer industry has been waiting for corporate America to open its wallet and begin spending freely again.

That has begun to happen, but corporations are buying brunch, not dinner, and they're taking only a few of their closest associates out to eat. Technology companies that help improve corporate network security or replace aging personal computers appear to be the initial beneficiaries. (Shares in PC maker Dell Inc. surged 7 percent Friday, after the company reported a 28 percent first-quarter earnings gain and boosted its sales outlook.)

U.S. information-technology (IT) spending is expected to increase 5 percent this year, said IDC, a market research firm in Framingham, Mass. That's good but not earth-shaking news, analysts said.

"The technology market is not showing a recovery. Recovery is too strong a word," said Gene Munster, an analyst at Piper Jaffray & Co. in Minneapolis. "But the fundamentals are moving in the right direction."

IDC agrees that the economic signals for tech spending are mixed. During the first quarter of 2005, corporations "continued to increase their technology budgets and initiate projects focused on security, regulatory compliance, infrastructure management and business intelligence," IDC said. For example, corporations are being driven to upgrade their computer networks by new technology, the need for wireless connectivity and a desire to increase network capacity, IDC said.

But that economic activity could be slowed in the second quarter and for the rest of the year because of higher interest rates, high oil prices and world currency fluctuations -- all of which are "potential wild cards that could impact business confidence and investment," IDC said.

So far, increased IT spending is benefiting a few segments of the computer industry disproportionately, Munster said.

"The hottest area within that 5 percent increase is computer security spending," Munster said. In addition, companies such as Microsoft are ratcheting up their guidance on how many PCs are likely to be sold this year as corporations replace obsolete desktop PCs and network servers.

"The biggest local beneficiary of the upturn is Secure Computing Corp., which is a major player that ranks in the top 20 security firms worldwide in terms of total revenue," Munster said.

Secure Computing Corp. is a former Minnesota company now based in San Jose, Calif. Though Secure Computing left Minnesota in 1999, a little more than half of its 380 employees are still based in Roseville.

Secure Computing's revenue rose 21 percent in the first quarter to $25.6 million. First-quarter earnings grew 84 percent to $4.1 million. But the company is reluctant to say how much of that growth resulted from an increase in corporate IT spending.

"The trend right now is looking like an uptick in IT spending," said Tim Steinkopf, Secure Computing's senior vice president and chief financial officer. "But I'm not sure what the percentage is for us. We're a technology company delivering a high-value-added product to the marketplace, so we can get a fair price for it and we're doing a good job of controlling expenses, and those things are driving the profit increase."

Secure Computing sells several types of security hardware and software. Its "security appliance" is a specialized computer that combines firewall, antivirus and antispam software with Web filtering, which can be used to restrict Internet use by corporate employees. The company also sells Web filtering software that runs on ordinary corporate servers. In addition, Secure Computing sells authentication equipment and software to help ensure that only authorized people gain access to a company's network.

Authentication works partly by giving employees a portable electronic device that displays rapidly changing corporate passwords; it is electronically compared with a company computer server that changes passwords in the same sequence.

"Companies are looking for ways to enhance their computer network security, because the threats from the Internet continue to change," Steinkopf said. "In the last three to four years, security has ranked in the top three priorities of IT directors and chief information officers in every survey I've seen."

While Secure Computing has benefited from the modest increase in corporate technology spending, "it's a little early to tell how it will play out for all of 2005. The Fed has raised interest rates and oil prices are up, and those things tend to dampen economic activity," Steinkopf said. "And it's important to remember that the 5 percent spending increase benefits only a few companies. I don't believe all technology companies are going to experience that kind of growth."

Steve Alexander is at alex@startribune.com.