Gene Hodges the CEO (since January of 2006) started by emphasizing their leading position in Web filtering. For security and productivity reasons, companies around the world are focused on controlling the flow of Web content in and out of their networks.
The company is increasingly going after security applications with their new ThreatSeeker application to leverage their position and compete with firms like McAfee. The strategy is to reposition the company from the “nice to have” URL filter market of $750M to the “must have” layer of network security software of $5B. This will pit them against firewall vendors (CSCO, CHKP) and Anti-Virus vendors (SYMC, MFE, MSFT.)Much of the growth story will depend on how well the company can execute this security strategy. The per seat pricing would move from $19/seat/year for web filtering/productivity to $30/seat/year for a security suite to $50/seat/year for a premium security offering. (The last one seems pretty weakly defined.) There was a loose claim that they have a 63% attach rate but that was for a very low value product (like $3/seat/year) which is much different than asking for a rate 2-3x the current price.
The filtering market is still growing a bit and has a number of small competitors like SurfControl. The US market is pretty saturated but Asia and the Far East still offer substantial opportunity.
The company hit the air pocket in the US earlier this year and in the future will rely more on distributors that create large networks of small value-added resellers. There is 8-10% margin at the distributor level and another 10-15% at the reseller level.
One aspect of the security space they are going after is the data leakage market which ensure that sensitive information (source code, credit card numbers) isn’t sent outside the corporation. Company seems to not know how to really go and sell this solution to monetize it.
Reminded us that YouTube is one of the most infected sites on the Internet and many people go to it without thinking there is a major risk. Websense can make the claim that by blocking the risky URL, preventing the download of malware and finally not allowing information to flow out of the network gives it a superior multi-point solution for corporate content security.
The mobile wireless opportunity was presented for no apparent reason. It’s pie in the sky and the company has no idea how they will sell to it, how large it is, or what level of profit there might be. There are some RFPs out there that the company expects to be rewarded in 2007. The idea is that the network providers would want offer IP audio and video while controlling content access using technology like Websense.
Believes WebSense has one of the most simple business models in the industry with recurring revenues, stable install base, high renewal rates and pretty fixed contract length. Company has 24.5M seats in over 24,000 customers. After 33 quarters of revenue growth Q3’06 reached $46M; up 20% YoY. Deferred revenue stands at $189M. Total employees of 637. Company has $300M in cash and the stock has rebounded quite a bit since to $26 after it dropped from the mid-$30’s to the high teens earlier in the year.
Makes a dig on anti-virus software vendors saying that pricing will collapse in 2007. Claims that as the avenue of attack changes WebSense is more in the path to offer protection. Admitted that long-term growth in the filtering market will go to zero and they need to establish this “Act II” before then and illustrate it can generate the same 30%+ margins.