Upgrade Boosts Internet Security Systems

An analyst thinks guidance may prove too conservative.
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A sell-side upgrade gave shares of

Internet Security Systems

(ISSX)

a boost of nearly 7% on Monday.

Katherine Egbert, who follows ISS for Jefferies & Co., raised her rating to buy and boosted her target price by $4 to $24, saying she expects a solid second quarter and noting that management's guidance for 2005 as a whole "could prove conservative."

ISS sells security software to large businesses. A key area for the company is known as intrusion and prevention services, or IPS. Simply put, IPS adds significant intelligence to the conventional firewall, which is passive, making it more effective at screening out security threats.

"ISS looks to be ideally positioned to benefit from widespread adoption of IPS, which is not currently widely deployed," Egbert wrote in a note to clients. Jefferies has no investment banking relationship with ISS.

Egbert also said that the company has mended fences with the distribution channel, after a long period of tension. ISS, who earlier this year hired a new channel chief, sold all of its products via a direct sales force until the end of 2005, but now derives nearly 75% of its revenue through distribution.

The shift, said CEO Tom Noonan in a recent interview, has helped push operating margins from 8% in 2001 to about 17% this year and an expected 20% next year.

The company will report June quarter earnings after the market closes on July 27.

In recent trading, shares were up $1.42, or 6.6%, to $22.82.