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April 21, 2004

ISS in Proventia transition period

Internet Security Systems Inc missed financial targets in the first quarter, as the firm adjusts its business model to accommodate the market shift from its old core intrusion detection systems business to demand for appliances and intrusion prevention.

By CBR Staff Writer

ISS reported first-quarter net income of $5.2m, down from $5.4m a year ago, on revenue up 13% at $67m. The company reported earnings per share excluding certain charges that missed estimates by a penny at $0.13.

The company has started deferring more revenue as a result of the subscription components of its services and products. Some of the new Proventia appliances require content components such as virus definition updates.

Proventia provides both ISS and our partners an enduring stream of revenues due largely to subscription nature of packaging, CEO Tom Noonan said in a conference call with analysts and investors on Tuesday.

While this may limit short-term revenue recognition for ISS, we are confident it is in the best interests of ISS, our customers and our partners, Noonan said. Proventia momentum is real, he added.

It was the first full quarter of sales of its G and M series of Proventia appliances. The G is an IPS device with a passive IDS option. The M is a multi-function security device that also includes things like anti-virus and stateful inspection firewall.

The company said that the G series is the best seller, eating into the year-old A series somewhat. The A series is a standalone IDS box, without the prevention option, but built on the same code base, executives said.

The M series has the most deferred revenue involved. This line accounted for 11% of units shipped but less than 4% of revenue, the company said. The G series accounted for almost half of unit sales in the quarter.

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Illustrating the point, executives said that a $1.6m deal signed in the quarter did not make it to the top 25 deals, as not even 10% of the revenue was recognized during the period. The rest will be recognized over the subscription’s lifetime.

Noonan said the most of the competition still comes from Cisco Systems Inc and Network Associates Inc. He said ISS is so far not seeing much competition from Symantec Corp, but expects to in future.

This article is based on material originally published by ComputerWire

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