PANW, FIRE Among Oppenheimer’s Upstarts in Network Security

Oppenheimer & Co.’s networking analyst Shaul Eyal this morning kicks off what he expects to offer as a quarterly summary of the security segment of network hardware and software, using data from research firm IDC as well as his own “field checks.”

The market for security products, which was $8.1 billion in 2012, is “healthy,” he notes, with growth of 7.2%, year over year, and in the fourth quarter, to $2.3 billion. Eyal expects the category to continue to experience growth “in the high single digits” on a percentage basis.

Cisco Systems (CSCO) had the biggest share, at 16.8%, though it was down from 17.9% in 2011. Check Point Software Technologies (CHKP) was in second place with 12.8% share, up from 11.9% a year earlier. Fortinet (FTNT) was in third place at 6%, and the “Other” category included Blue Coat,�Palo Alto Networks (PANW), Sourcefire (FIRE), and Dell (DELL).

“Competition in the network security software market is intense and looks only to intensify,” writes Eyal, with Palo Alto and other newer companies growing faster than Cisco and Check Point.

As far as the technology, Eyal focuses on appliances that fall into categories of firewall, “unified threat management,” intrusion detection, and virtual private networks. Unified threat management, or UTM, is the current driver of market growth, he notes:

Growth in the market will be primarily driven by the UTM segment. UTM is expected to surpass firewall as the largest network security submarket in 2013 and account for over 40% of network security revenue by 2015.
At the functional market level, the Unified Threat Management (UTM) segment saw the largest year-over-year revenue growth at 34.3% and accounted for 35.0% of security appliance revenue in 4Q12, as multi-function appliances continue to drive growth in the overall market. We would like to remind investors that IDC, classifies next-generation firewalls as UTM appliances. The Firewall/VPN market represented 24.0% of security appliance revenue despite a year-over-year decline of 2.8% after ten consecutive quarters of steady growth. The IPS segment declined by 3.6% compared to the prior year as these dedicated products continue to battle for share in the mid-market with UTM appliances.

Eyal has an Outperform rating on shares of Check Point, Cisco, and Fortinet, and a “Perform” rating on shares of Sourcefire. He doesn’t formally cover Palo Alto.