Supplier Of Internet Security Gear Looks To Widen Customer Base

If it seems like you're spending more time taking steps to stop viruses from attacking your computer than you are actually using the computer, you might not be too far off.


Computer viruses will cause a staggering $16.7 billion impact worldwide this year, according to research firm Computer Economics.


As a result, you're probably a lot more familiar than you want to be with virus names such as MyDoom, Blaster and others.


Trend Micro (NasdaqNM:TMIC - News) is a leader in the fast-growing business of protecting computers from these irritants. It battles Symantec (NasdaqNM:SYMC - News) and McAfee (NYSE:MFE - News) for anti-virus software business around the world.


Trend Micro doesn't do a lot of business in the U.S., and it does very little consumer business here. But the Tokyo-based firm is the market leader in Japan, where it tops the consumer market.


The U.S. accounts for only 21% of Trend Micro's overall sales. The company aims to change that.


"The U.S. must replace Japan as our biggest source of revenue," said Chief Financial Officer Mahendra Negi. "The U.S. is the biggest security market in the world."


In the past, Trend Micro served only very large firms in the U.S., Negi says. That limited its growth. Now it's going after small and midsize firms.


To win their business, the company needs broader distribution and nationwide coverage. It's adding resources to gain both.


As a result, Trend Micro's U.S. sales grew by 33% in the third quarter. That's the fastest rate of its four largest markets.


Trend Micro also sees promise in serving the U.S. consumer market, says Chief Technology Officer Eva Chen, who will become chief executive Jan. 1.


"We thought that market was saturated, but now we're seeing threats like spyware that require constant update," she said. "That's an underserved market."


The rise of home networking creates another chance for Trend Micro to boost U.S. sales, she adds. And businesses are more worried about spyware, too.


Business clients fuel Trend Micro's growth. They made up 78% of its third-quarter sales. A heightened focus on protecting networks plays into Trend Micro's hands.


The global anti-virus market hit $2.7 billion last year, according to a report from Brian Burke, analyst at research firm IDC. He expects the market to grow 12.5% a year through 2008 to $4.85 billion.


Growth is due to greater awareness of security issues, CFO Negi says. "On the enterprise side, more money has been put into the security area in the last 18 months."


A few years ago, a virus' impact would have been pretty isolated at many firms. These days, the effect often spreads through the ranks and up to the CEO's computer.





"Reliance on networks is increasing every day," Negi said. "It costs companies money every time their network goes down."

Trend Micro gains from that because it charges a premium for its services. The company doesn't sell just software. Much of the value it provides comes from its service.

Trend Micro holds an edge on rivals because it's focused only on anti-virus and Internet content, Negi says.

"We're confident we're taking market share from (rivals)," he said.

It's already the global leader in network gateway, mail server and file server anti-virus products, IDC's Burke says. Each protects systems at different points in the network.

"(Trend Micro) historically has had good products on the network gateway platform," said analyst Arabella Hallawell of Gartner Inc.

That's helped fuel its growth. Trend Micro's third-quarter earnings rose 75% from the prior year to 28 cents a share. Sales moved up 30% to $144.2 million. The firm expects fourth-quarter profit to rise only 1%, but sales should climb 19%.

The low fourth-quarter figure is a result of a one-time charge that lowered its tax rate last year, Negi says. Without that, profit growth would be in line with sales growth.

Trend Micro's focus on the market, while giving it an edge, creates a big risk.

"The downside is, if a company provides a service as good as ours, we're out of business," he said.

That drives Trend Micro's intense focus on service. It has a total program that works with clients to lower risk and clean up viruses, among other things.

"If they've been infected, they want help in getting their system back up," Negi said. "Enterprise plays to our strength. We base our business on reducing downtime. They're willing to pay more for that."

Trend Micro is continually rolling out new products to stay on top of the market. A key challenge is dealing with the growing number of threats, Chen says.

"We need to always look out for where the next attack could come from," she said.

The company recently launched a new version of its network virus wall. That technology played a key role in the partnership with Cisco Systems (NasdaqNM:CSCO - News), announced in June. The two are teaming up to help companies protect networks against worms and viruses.

There's still room for Trend Micro to get deeper into clients' pockets. It hasn't really cracked into the business desktop field.

"Trend Micro is not necessarily in the best position there," Hallawell said, adding that its best bet to make inroads in that market is through acquisitions or partnerships.