Cybercrime: The Cop on the Beat

Companies are increasingly defined by the right combination of 1s and 0s, not by bricks and mortar. This digital transformation has given rise to “the extended enterprise,” and with it a breeding ground for attacks on IT systems.

This year, hackers breached Zappos, LinkedIn, Yahoo and other heavily trafficked sites, and then posted customers’ sensitive information—including user names, passwords, e-mail addresses and device IDs—on the Internet for the world to see.

According to a 2012 study of 56 benchmarked companies released in November by the Ponemon Institute, an independent research firm, information theft this year accounted for 44 percent of corporate external costs on an annualized basis, up 4 percent from 2011. The average annualized cost of each data breach was $8.9 million, compared to $8.4 million last year.

This rising incidence of hacking, cybercrime and industrial espionage is creating robust demand for corporate security.

Cisco Systems
(NSDQ: CSCO) is dominant in the technologies that make the extended enterprise possible; it’s also a pioneer in creating computer defenses along the extended outreaches of these “virtual” empires.

Cisco controls 64 percent of the global market for networking equipment, as well as 45 percent of the market for corporate security, making it the clear leader in both arenas.

This two-pronged dominance has helped Cisco more than hold its own, despite slumping technology demand because of weak economic conditions in the US and recessions in the troubled euro zone.

Chinks in the Armor

Proprietary information is a major competitive asset, but data security systems are riddled with vulnerabilities, especially as the workforce becomes more mobile and supply chains more global.

According to a global survey conducted this year by research firm Insight Express, 44 percent of employees share work devices with others without supervision; 39 percent of employees access unauthorized parts of a company’s network or facility; 46 percent of employees admitted to transferring files between work and personal computers when working from home; and 18 percent of employees share passwords with co-workers (a rate that jumps to 25 percent in China and India).

Even old-line manufacturing companies are vulnerable to online security breaches. For example, automobile manufacturers today make few of the component parts of their finished product. They orchestrate thousands of suppliers around the globe in integrated supply, marketing, sales, and financial chains. Information security specialists must understand and address the security vulnerabilities within this web of data.

That’s where Cisco comes in. The company’s security innovations provide firewall, web, and email security and intrusion prevention, while also facilitating mobility and telework.

Cisco is one of the biggest suppliers of Internet-based networking products; the company’s routers and switches are pervasive in offices, classrooms and government offices around the globe. The company will continue to benefit from the accelerating trend of around-the-clock, global connectivity—and the cybercrime that it spawns.

The phenomenon of cybertheft is exacerbated by the growing involvement of organized crime. Many financial losses have been traced back to the bank accounts of specific criminal organizations, especially in Russia and Eastern Europe. These tech-savvy gangsters won’t whack you; they’ll hack you.

According to research firm IDC, the global network security market, described as hardware and software with functionality that includes firewalls, virtual private networks (VPNs), intrusion prevention and detection, and multi-purpose security known as unified threat management, racked up revenue of $8.16 billion in 2011, an increase of 8.1 percent from the previous year. This sector is on track for similar growth in 2012.

As the networking and security leader, Cisco is reaping the spoils.

In November, Cisco reported first-quarter fiscal 2013 revenue of $11.9 billion, an increase of nearly 6 percent year over year that blew away analysts’ expectations of $11.7 billion.

Earnings rose 18 percent to $2.1 billion; earnings per share (EPS) came in at $0.48, a year-over-year increase of 12 percent. The company’s service provider video and wireless segments both saw significant growth of 30 percent and 38 percent, respectively. This latest quarter marks the fourth consecutive positive earnings report for the company.

So far this year, Cisco had bought back 3.8 billion shares of stock at a cost of $76.4 billion, with $5.6 billion remaining in its current buyback plan. The company raised its dividend after last quarter from $.08 to $0.14 per quarter, for a current yield of 3.11 percent that’s only a 37 percent payout.

Cisco’s trailing price-to-earnings (P/E) ratio of 12.1 and its price/earnings to growth (PEG) ratio of 1.1 make the stock an enticing value proposition. Analysts’ consensus calls for the company’s earnings to grow 32 percent and revenue 5.7 percent in 2013.

As investors view the tumultuous markets with a wary eye, this technology stock provides both growth and safety.

John Persinos is managing director of Investing Daily and Personal Finance.