On the Web? Your boss
may be watching
Companies are rushing to sign up for
high-tech tools that let them monitor and control what their
employees do online. Here's why -- and how you can profit from the
By Michael Brush
Chances are -- according to our own Web site
traffic statistics -- you¡¦re reading these words in your office or
cubicle while your boss thinks you're working.
Don¡¦t worry. We won't say a word.
But the odds are getting better each day that your boss already
Cyber security at work isn't new, of course. But as security risks
from Web surfing multiply and more employees use the Internet, an
increasing number of companies are signing up for high-tech spy
tools that let them see -- and control -- what their workers do
Workplace-privacy experts don¡¦t have hard numbers yet on how many
businesses watch and control Web usage. But judging by the explosive
growth at companies providing these tools, Web filtering is coming
soon to a cubicle near you -- if it's not already there.
Look at the impressive growth at Websense (WBSN), for example, the market leader in this space. Last
year, Websense reported a 21% jump in the number of workers around
the globe whose Web surfing gets monitored and controlled by the
company's Web-filtering tools. The number rose to 19.8 million from
16.4 million in 2003.
Not surprisingly, there's money to be made here for investors who
pick the right stock. Two other companies targeting this niche,
Secure Computing (SCUR) and Blue Coat Systems (BCSI) have recently reported growth similar to that of
Big brother has legitimate concerns
While you may find it disturbing that your boss knows your Web
surfing habits and can tell you what you can do on the Internet, it
makes sense to cut managers some slack. Companies have several good
reasons for clamping down on Internet usage.
If you download porn or visit hate sites at work, your actions may
wind up as evidence in a costly sexual harassment or discrimination
lawsuit. One in five employers already has e-mail subpoenaed in
legal proceedings. Surfing habits and downloaded images can be
equally problematic, says Nancy Flynn, of ePolicy Institute, which
consults companies on Internet and privacy policies in the
¡§Often what happens is employees will not only visit a porn site,
but they will print out material or forward videos and photos and
they will save the material to a hard drive,¡¨ Flynn says. Once a
lawsuit is launched, computer forensic experts may come in and dig
up secrets from hard drives -- including records of Web sites
visited by employees.
Piercing corporate defenses via the Web
Corporate networks are well-fortified against viruses coming in
through e-mail. But they¡¦re not so good at blocking spyware programs
that download automatically from Web sites. Web filtering gets the
job done by simply blocking dubious sites. In the most-recent
quarter, about half the sales leads at Blue Coat Systems came in
because of concerns about spyware, says Erik Suppiger, an analyst
who covers the stock for Pacific Growth Equities.
Web-filtering tools also suppress bandwidth hogs like peer-to-peer
file-sharing services for downloading music or movies. After all,
grabbing tunes for your iPod may seem innocent, but it could be
sopping up bandwidth needed for a Web-based conference down the
¡§Anything that chews up a lot of bandwidth, we limit that,¡¨ says
Douglas Wride, the finance chief at Websense. Web-filtering tools
can also suspend low-priority activities when broadband capacity
taps out. As more companies turn to Internet-based phone systems,
this could be crucial for keeping phone systems up and running,
Companies typically pay about $15 to $20 a year per employee for
Web-filtering tools. So if Web filtering prevents a worker from
wasting just an hour of time, it pays for itself.
How Web filtering works
Web-filtering tools like Websense Enterprise set up checkpoints that
block or limit access to millions of Web sites and billions of Web
pages. Web filtering typically blocks the ¡§sinful six:¡¨ pornography,
hate sites, gambling, tasteless material, violent content and
illegal activities. The filters let companies give workers limited
access to sites for personal use, like shopping or checking on
The databases containing forbidden Web pages are constantly updated.
Any new sites that workers visit are uploaded to the Web-filtering
companies. Then they¡¦re reviewed -- and blocked if necessary.
Web-filtering companies are quick to reject the notion that their
tools are used to ¡§spy¡¨ on workers. True, their systems can generate
reports on Internet use, but most managers don¡¦t have the time to do
anything but put the Web-filtering tools on autopilot. ¡§Monitoring
is an incredibly time-consuming task, whether you do it manually or
through software,¡¨ says Wride. ¡§You can generate reports, but if you
are managing behavior correctly you don¡¦t have to see the reports.¡¨
Privacy losses, portfolio gains
About two-thirds of Websense's revenue comes from current customers
who renew subscriptions, so investors can feel confident the money
will keep rolling in. The company also has about $10 per share in
cash and is buying back stock -- often a sign of more stock-price
gains ahead. Shares recently traded for $59.
Secure Computing, which gets about 40% of its revenue from
Web-filtering tools -- and most of the rest from sales of firewalls
that protect corporate networks from intrusion -- saw some healthy
insider buying last summer. Chief Executive John McNulty purchased
$384,000 worth of his company¡¦s stock last summer for $6 to $6.50,
according to Thomson Financial. The company has about $1.50 per
share in cash. The stock recently traded for $9.
Blue Coat Systems, which recently sold for $18.50 per share, has
$3.50 per share in cash. Blue Coat Systems fell $3.80, or 17%, on
Feb. 25 when it beat earnings estimates but guided for
lighter-than-expected growth this quarter. Given the long-term
growth trends in the sector, that sell-off looks like a good
opportunity to pick up shares.
Stocks cheaper than they look
Given the valuations on these stocks, some analysts are cautious --
especially since major competitors like Microsoft (MSFT) could come into the space. But several factors
suggest it¡¦s well worth buying these stocks, particularly at times
when the stock prices do come down.
Websense, for example, has a price-earnings ratio
of 35 times the coming year's earnings, which seems rich. But that¡¦s
the wrong way to value the company. The reason: The cash Websense
collects from customers is recorded as revenue over time -- a
process that delays that cash being converted to earnings.
Fourth-quarter 2004 sales at the company grew by 40%, compared with
the prior-year period, to $31.7 million.
Other high-growth software companies book most of their revenue
immediately, which gives them relatively lower price-earnings
ratios, says Ken Allen, a software sector analyst at T. Rowe Price.
Instead, it makes more sense to value Websense based on how its cash
flows compare to its stock price, which makes the current price seem
more reasonable relative to other software companies.
Spying opportunities abound overseas
There's plenty of room for continued growth. Even with security
concerns widespread, the "vast majority of companies are still not
protected in this area,¡¨ says Brian NeSmith, chief executive of Blue
Wride, the finance chief at Websense, thinks market penetration in
the United States comes in at 30% to 40%. ¡§Every quarter we sign up
a large customer and it amazes us that they did not use our kind of
product before,¡¨ he says.
Things look even better abroad. Wride estimates only about 20% to
25% of European companies use Web filtering, and the numbers are
even lower in Latin America and Asia. ¡§We are very early in the
growth stages, because of the international markets,¡¨ he says.
Meanwhile, the number of workers with high-speed Internet connections
should double over the next three years globally, to 600 million
from 300 million, he says. That creates even more demand, of course.