We commented last week on results from defence contractors, Lockheed Martin and Raytheon (see Lacklustre performance from defence contractors). There was scant detail on the performance of their IT services activities, however, the lack of commentary on their cyber security operations seemed telling i.e. we surmised that investments in this space were not delivering the sales results they’d been looking for. Interestingly, since then we have had a few conversations with suppliers close to this space that have indicated that while it appears to be a ‘hot space’, selling cyber security solutions remains a tough sell. It’s the same old story, when times are tough, it’s easy to put off further investment in defending against something that ‘might never happen’. And in UK Government, the £650m investment in cyber security appears to have been largely swallowed up by internal spend rather than benefiting the suppliers i.e. on improving processes and procedures. The biggest opportunities in this space appear to be coming from the commercial sector for companies running our ‘critical national infrastructure’. Again though, there is the old argument questioning: who should be paying for that infrastructure to be protected - the companies or UK Government?
It’s interesting though to look at the progress of BAE Systems on this front. Helpfully, in October 2011, the company decided to separate out ‘electronic systems’ and ‘cyber security’ in its external reporting segments in order to give visibility of progress in growing these strategic areas of focus. And progress there has been (in cyber security at least). 7% of the Group’s business is now generated from the cyber and intelligence markets (up from £1,201m to £1,309m over the year). This hasn’t been enough to make up for the decline in its traditional ‘platforms and services’ business (total revenues declined substantially from £22.3b to £19.2b) but the company continues to invest for future growth. For example, in the UK it has invested in a UK Security Operations Centre to detect and remediate advanced cyber attacks for both government and business. Orders were received from two customers in the UK for this service in FY11. BAE Systems Detica (essentially the UK cyber and intelligence business) did have some contract wins with in Government (MoJ, TfL and MoD, as well as Strathclyde Police), but, in line with our view of the cyber security market, it views the biggest opportunities for growth in the commercial space.