Bandwidth Police Help Keep Corporate Networks Humming

• Marilyn Alva
• On 5:30 pm EDT, Thursday October 22, 2009

Bandwidth hogs are clogging business networks.

Some are mission-critical, such as data traffic, corporate video streams and Web searches. Others are the more frivolous kind: online music, shopping and social networking.

Both put strain on networks.

Enter the bandwidth police, companies that call themselves application delivery network, or ADN, specialists.

With their hardware and software technology, they scan and patrol wide-area networks, or WANs. ADN firms examine traffic so that clients can better manage it and exert controls as needed.

One on-the-rise ADN player, Blue Coat Systems (NasdaqGS:BCSI - News), says its "application intelligence" optimizes and secures the flow of information "to any user, on any network, anywhere."

The company's family of ProxySG appliances helps to secure and control Web communications and speeds business applications.

Big Clients

Blue Coat's customers include corporations, U.S. and foreign governments, and service providers such as AT&T (NYSE:T - News), Verizon (NYSE:VZ - News) and Sprint (NYSE:S - News).

Blue Coat, based in Sunnyvale, Calif., first gained mettle for its Web-gateway security products. Those are what differentiates it from major rivals such as Riverbed (NasdaqGS:RVBD - News), Cisco (NasdaqGS:CSCO - News), F5 Networks (NasdaqGS:FFIV - News) and Juniper (NasdaqGS:JNPR - News), analysts say.

Blue Coat can combine its traditional security products with WAN optimization products into a single operating system.

Analysts say chief rivals are good, even "best of breed," at one or the other.

Blue Coat "is an attractive alternative because it can solve a number of problems with a coherent operating system, which makes it easy to manage multiple applications," said analyst Alex Henderson of Miller Tabak.

That combined solution is a selling point, he says. But he warns that it could also be a sore point, as Blue Coat products might be perceived as weaker versions of rivals'.

"If a customer is focused on one issue, and it's clearly WAN-centric, Riverbed likely wins that business," Henderson wrote in a client note. "If the customer has a series of issues it's trying to address, Blue Coat is likely to win that business."

Even as companies have cut back on spending, Blue Coat's revenue in its first fiscal quarter ended July 31 grew 13% from a year ago to $116 million. Earnings jumped 44% to 23 cents a share.

Management said it expects revenue of at least that much in the current quarter and profit of 23 cents to 28 cents a share. That would be flat or down slightly from last year's 27 cents.

But for the full year ending in April, analysts expect profit growth of 26% to $1.06 a share, according to Thomson Reuters. They expect 21% growth the next year.

Last year, Blue Coat's earnings plunged 32%.

Besides the slowing economy, the firm acquired a whole new business with its June 2008 acquisition of Packeteer. Packeteer makes products that monitor and control traffic across networks.

Packeteer was meant to bolster Blue Coat's WAN optimization business and add new customers for its legacy products by cross-selling to Packeteer customers.

But the integration "was a bit of a challenge," said analyst Erik Suppiger of Signal Hill Capital Group. Some of Packeteer's revenue fell off after the merger, he says.

Of the firm's $116 million in first-quarter revenue, Packeteer's flagship PacketShaper took in $15 million in product revenue. That was about the same sum as in the previous quarter.

Blue Coat management told analysts it could do a better job of selling Blue Coat's flagship SG Appliances into the legacy Packeteer installed base.

In a conference call in late August, management said it was stepping up training and incentives to resellers to boost cross sells. Executives were unavailable to comment further, citing a "quiet period" ahead of the release of second-quarter earnings in late November.

In a Sept. 1 press release, Blue Coat was upbeat about the WAN optimization market. It said its market share rose to 31.4% in the second quarter from 24.8% the year before. Citing Infonetics Research, it said the market was expected to grow 50% over the next three years to $1.4 billion in 2012.

Some analysts are more leery about Blue Coat's growth prospects in that market, which is still at an early stage.

"The WAN optimization market is a high-growth market opportunity," Suppiger said. "But it is a very competitive market with strong brand names like Riverbed and Cisco."

He says the security piece is probably the more compelling opportunity for Blue Coat. "Demand for security Web content is pretty strong right now," he said. "Blue Coat is very competitive in that space. It has a good solution for large enterprise accounts."

Rivals in Web gateway security include Websense (NasdaqGS:WBSN - News), Cisco and McAfee (NYSE:MFE - News).

Blue Coat is well positioned in some of the fastest end markets in the enterprise IT market, Henderson has written. But he also cites challenges in integration and management control over various classes of technology, especially while the firm tries to improve operating margins.

Operating Margins

Blue Coat's low-teens operating margins pale in comparison to the 20%-plus numbers produced by many rivals.

Meanwhile, Blue Coat keeps plugging away at WAN optimization. It has added new software plug-ins to PacketShaper, for example. One targets the constant streaming music service, Spotify. Another allows firms to monitor and control Twitter usage among employees.

Blue Coat is rolling out a major new version of PacketShaper this fall. A product marketing manager told TechWorld that the upgraded product "can now see hundreds of different applications, and is even able to see inside difficult applications such as Oracle (NasdaqGS:ORCL - News) or Skype."

The launches address new and more interactive kinds of Web traffic and could help Blue Coat gain more traction in the WAN optimization market, analysts say.

"One of the things they've got working for them is that they're pretty effective in newer generations of Web content technologies," Suppiger said.

Buzz up!