SteelCloud, Inc. (SCLD)
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through its agreements with Computer Associates and Microsoft has developed a family of
software appliances for the rapidly growing network security market
1306 Squire Court
SteelCloud and Computer Associates International have developed a family of fully-integrated network security appliances. The CA security solutions run on proprietary, hardened SteelCloud appliances that have been streamlined and optimized for maximum application performance in a distributed environment. The first set of appliances feature eTrust Antivirus, the industry's most powerful, easy-to-own and cost-effective solution for protecting enterprise environments from a full range of viruses and malicious code. A family of intrusion detection system (IDS) appliances is being developed for eTrust IDS, which monitors over 350 known attacks and exploits. eTrust Intrusion Detection automatically mounts effective defenses against distributed denial-of-service and other malicious attacks directed at customers' business.
In addition to its network security appliances, SteelCloud has a consulting services organization that provides clients with a seamless extension of their own IT organizations. SteelCloud consultants deliver a full range of expert technical services, specializing in network analysis, security, design, troubleshooting and implementation. Project consultants assist clients with IT related decisions and are available to provide all the resources needed to manage and implement IT system designs, modifications and upgrades. From service-desk personnel to programmers to network administrators to most positions in between, SteelCloud provides a full spectrum of IT outsourcing services.
The company also develops custom computer systems designed to meet the precise needs of their volume integration customers. Custom systems reduce customers investments in logistics, integration capacity and support. SteelClouds Configuration Management Program further enhances the customers ROI by managing and controlling changes to software, hardware, firmware, documentation and operating procedures throughout the systems entire life cycle.
CEOCFOinterviews: Mr. Dunne, please give us a brief history of SteelCloud, Inc. and what services you provide.
Mr. Dunne: I founded SteelCloud in 1987. Prior to that I worked with Syntrex, Inc., which specialized in office automation and had their own proprietary workstations, file servers and software. Before leaving Syntrex, I explained to the management of the company that I felt personal computers were infringing on the space and believed they were going to overtake the office automation arena. I thought that we should get into the PC business quickly and, at minimum, replace our proprietary products with PC file servers and software. They did not agree at that time, so I started my own company to provide computers and networks to the federal government.
I targeted the federal government because it was an easier market to penetrate from a marketing and sales point of view, plus they always pay their debts - important to a start-up company without a lot of cash. We were reasonably successful and in 1997 went public to give us the ability to make some strategic acquisitions. We evolved into a company that built custom computers for specific federal integrators and federal accounts. In addition, we developed a consulting group of IT specialists that designed networks, installed new software packages, and implemented security solutions. We stayed primarily in the federal business until 2000. About that time, I felt that the company had to move in a different direction. The computer hardware business is a difficult business with low margins and deadly competition from some huge players in the market.
We then embarked on a strategy to approach software companies we felt could be better served if their software was put onto an appliance that we would develop for them. For the next few years we developed the hardware and packaging of the appliances for software companies, which they re-sold under their own name. After a few years, I felt we were doing all the work and not making a significant enough margin on our efforts, so we changed our focus slightly. We decided to partner with software companies whose products could be transformed into market leaders by implementing them on an optimized, hardened SteelCloud appliance. The idea was to reinforce the SteelCloud name by creating a co-branded appliance with our software partner. In June of this year, we entered into a partnership with Computer Associates. Together with CA, we have just announced our first two products for enterprise-class antivirus and the intrusion detection markets.
CEOCFOinterviews: Is most of this in the network security area?
Mr. Dunne: Yes. Our focus is in the network security market, which is a fast growing market and we know quite a bit about it. The appliances that we had developed with the OEMs from the past were mainly focused in the security area and therefore, we have developed a core competency in this market space.
CEOCFOinterviews: What is it about your product that a company such as CA is choosing you as opposed to your competition?
The network security market is one in which we have significant experience and insight. We knew that CA (Computer Associates International, Inc.) (NYSE: CA) had some very good software products in the security arena, however, unlike many of their competitors, none of CAs security products were available as ready-to-deploy appliances. As a result, CA had lost significant market share to competitors who sell their software as fully integrated appliances that deliver immediate ROI to the end user customer. We were very familiar with CAs competition, and knew we could develop an appliance that was superior to their competition. So we introduced CA to this concept. They may very well have been thinking internally of a plan along those lines. Anyway, we took the initiative, and formed a team (which includes Microsoft). The result was that we launched our family of SteelCloud/CA co-branded security appliances at the CA World Convention in Las Vegas. The reception by CAs worldwide group of channel partners was tremendous.
CEOCFOinterviews: What sets you apart from your competition?
Mr. Dunne: CAs security products run in a Windows environment, which does not normally lend itself to being integrated into a turn-key appliance. We worked with Microsoft and streamlined Windows by stripping out the unnecessary modules and routines not required for the appliance. Besides tuning, we also hardened the Windows Server operating system to make it virtually impenetrable. To support the creation of the CA appliance, we developed our own hardened appliance environment called SteelCloud Secure Console or SC2. This proprietary hardened and tuned software environment overlays the Windows operating system and adds a web-based management capability to the SteelCloud appliance. As a result, by using SC2, our appliances operate at roughly twice the throughput of standard Windows Server in a much more secure environment.
CEOCFOinterviews: How do you keep up with all the threats to security that appear unexpectedly?
Mr. Dunne: CAs Threat Analysis and Response Global Emergency Team (TARGET) updates the appliances with known attack patterns and virus signatures daily. In addition, TARGET works 24/7 to discover and remedy new viruses, worms, Trojans and other forms of malicious code. Actually, network performance and security challenges goes far beyond antivirus and intrusion detection as employee productivity can be severely hampered by spam, non-business related web transactions and non-business related email and messaging. All of these problems are opportunities for SteelCloud.
CEOCFOinterviews: Will you tell us about the award from Lockheed Martin?
Mr. Dunne: For sixteen years we have been building custom systems to government specifications. In this instance, Lockheed Martin had a requirement to put recognition systems into Post Office sorting facilities throughout the nation. Lockheed Martin came to us to build servers with special dust filters developed for the postal services unique environment. We then developed servers built to withstand those harsh environmental standards. We do not mind doing customization as long as the quantities are right. In this case, it was well in excess of ten thousand servers.
CEOCFOinterviews: How do you break up the different areas of the business and how do you see that changing?
Mr. Dunne: The initiative I am pushing is to double the margins of the company. I do not want to put out tens of thousands of computers and make ten, fifteen or twenty points of margin and and then at the end of the day, make three or four points on the bottom line. By developing hardened fully integrated appliances, we have entered the software business. When looking at the complete appliance product, the value of the hardware is an insignificant portion of the total solution. Our new appliances sell anywhere from fifteen thousand, to over five hundred thousand dollars. The hardware cost of goods for a twenty thousand dollar antivirus appliance is the same as it is on a two hundred thousand dollar appliance. We are just beginning to take orders on the appliances. We are being selective in signing up resellers worldwide to market our security appliances.
CEOCFOinterviews: Under the current economic conditions, how are your appliances going to be sold, and why are people going to upgrade?
Mr. Dunne: It is not a matter of a company or an agency making a decision whether they want to make a capital expenditure they have little choice these days security is a necessity. While most desktops today have some kind of antivirus on them, few organizations have protection at the Internet Gateway level which is provided by one of our first new appliance families.
CEOCFOinterviews: In closing, why should potential investors look at SteelCloud and what might not see at first glance?
Mr. Dunne: The investment bankers we have been speaking to recently believe we deserve at least a five times revenue in our category. We have to show that we can dramatically increase margins in this company and earn money. We will probably put out twenty thousand servers for our current fiscal year which ends in October a lot of servers and a lot of work. For that, we will probably have revenues north of thirty million dollars, with margins in the mid twenty percent range. Next year, I can do the same amount of revenue with less than three thousand appliances, and the margins will be in the forty plus percent range. To make it simple, if we can do twenty million dollars in the appliance area, we will realize upwards of ten million dollars in gross margin. The potential is there for this company to have some explosive earnings. For our company to partner with the fourth largest software company in the world and to build an appliance in the hottest market in the world and take advantage of their worldwide sales channels is really exciting. I think it is also exciting for our investors as the story gets out, and we start getting orders, signing up resellers, and start selling through one of the largest distributor in the country. This is an exciting time for our customers, employees and investors.
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