Tech Beat: Network Management Software
The vast array of high-tech products and services on the market today might loosely be divided into two categories: consumer products (such as PCs and cell phones) and technologies, such as computer servers and networking gear, that operate behind the scenes to keep PCs, cell phones and Internet connections running.
But the growing number of people using the Internet for increasingly complex services has given rise to another level of software that supports the behind-the-scenes gear. This new level, called network management software, works to ensure everything in the back office runs smoothly and is quickly becoming a critical part of large IT departments.
In the early days of the Internet, when people logged on only occasionally for basic text data, it was not so difficult to support a network. These days, though, with hundreds of millions of people demanding an almost constant connection to talk, shop, download music, watch videos or even hold virtual business meetings, IT departments have become vastly complex ecosystems of computers and software layered on top of one another.
Keeping a network humming can be a huge challenge. A recent study by IBM, for example, found that the typical company spends just 30% of its IT budget on computer hardware, with the other 70% used to maintain all the gear.
Network management software helps optimize the performance of high-speed networks by closely monitoring the performance of everything from routers and switches to individual applications. Most major computer and software companies like IBM and HP are active in this area, but a few smaller players are trying to compete with them.
NetScout Systems, Inc. (Nasdaq: NTCT) of Westford, Mass., is one of the small-cap success stories in network management software. The company has steadily grown its revenues, from $85.2 million in 2005 to $102.5 million in fiscal 2007, while showing even sharper gains in net income, which rose from $2.9 million two years ago to $7.7 million in fiscal 2007.
Last month, NetScout agreed to acquire one of its key rivals, Network General Corp., in a $205 million deal that is expected to double its revenues while helping it compete more effectively with the larger players in the space.
“It will enable them to broaden and deepen their customer base and add more functionality to their products,” said Peter Jacobson, an analyst with Brean, Murray, Carret & Co., who in August initiated coverage of NetScout with a “buy” rating.
Although shares of NetScout, which closed Wednesday at $11.02 per share, are already near their 52-week high of $11.36, Jacobson said he sees more upside from the overall growth in demand for its software, as well as acquisition-related benefits. The 52-week low was $6.44.
Three analysts who follow the company are on average projecting that net income will grow to $0.37 per share in fiscal 2008 and $0.48 per share in fiscal 2009, compared with $0.23 in 2007. They are forecasting revenues will rise to $117.4 million in 2008 and $128.5 million in 2009, from $102.5 million in 2007.
OPNET Technologies Inc. (Nasdaq: OPNT) of Bethesda, Md. makes similar technology to help optimize network performance, but has recently struggled to grow its business and has seen its share price fall to $12.04 on Wednesday, well off its 52-week high of $16.82. Its 52-week low was $9.41.
Although the company’s revenue has grown sharply in recent years, to $74.6 million in 2007, from $58.3 million in 2006 and $50.3 million in 2005, it has been virtually flat (in the $23 million to $24 million range) for the past three quarters.
Even more troubling was a sharp decline in its license revenues in the most recent first quarter. Although OPNET’s total first quarter revenues rose 3.1% year over year, its license revenues, a key measure of ongoing sales, fell some 15.9%.
OPNET maintains that its business is not in serious trouble—and it probably is not. The company said its first quarter is traditionally its most challenging and not a good indicator of the overall state of the business.
On a more positive note, the company last month won a new contract with the U.S. Navy that could be worth as much as $75 million over a four-year period. And five analysts who follow the company are forecasting steady growth; their average estimate is for revenues of $100.3 million this year and $114.1 million next year, compared with $95.1 million last year.
In a sector that is largely dominated by larger companies, these smaller players might just have what it takes to compete with the big dogs.
