As much of the cyber security industry is concentrated on enterprise clients, Barracuda Networks (NYSE:CUDA) is doing fine with small and medium businesses ("SMBs"). Its recognition in a trade publication for both solutions and customer service is probably helping. Although, while Q2 results are encouraging, there are concerns.
The tech firm Gartner's research can be insightful toward understanding the industry. However, I am not sure how influential it is as a marketing or sales tool to SMBs. With Barracuda being a top provider for them, it might keep rolling along. Still, particular dynamics are manifesting and merit attention.
For example, Gartner contends that software such as secure email gateways ("SEG") is becoming commoditized. Some of Barracuda's key technologies involve email. As positives, its SEG is award-winning and the firm enjoys stable relations with Microsoft (NASDAQ:MSFT). Per the Q2 earnings call:
…in six months we've signed up over a 1,000 customers onto our cloud delivered email security and management platform.
While it may be the case that the firm is an acquisition target, corporate leaders perhaps read Gartner and might prefer to pay up for a privately-held competitor that does not emphasize email, such as Veeam.
It sounds as if there is deflation. In response to a question on the Q2 call, Barracuda's CEO replies:
We think…we're actually differentiated from Proofpoint (NASDAQ:PFPT) and Mimecast (NASDAQ:MIME)… we can - and selling at a better price, the more disruptive price, I think we're well-positioned in that, into mid-market and the upper end of the mid-market to compete with both of those folks and we're seeing them more now.
Gartner's commentary may be valid.
While Barracuda beat top and bottom lines, and the initial market reaction has been positive, guidance of $97 to $100 in Q3 billings against $84 to $87 million in revenue is not overwhelming. Sometimes management teams are conservative. However, there is indication that surcease of product lines such as the CUDA Drive and the Barracuda Phone System is factored into the quarterly forecast. In light of this, and contention about SEG viability, there could be pressure for something new - through R&D or maybe smaller M&A.
Pertaining to ongoing investment, the company is emphasizing sales and marketing over R&D. It gets leads and opportunities through Microsoft and Amazon (NASDAQ:AMZN). Prospects for cross-selling of products follow. Going a step further, Barracuda could be in the process of identifying something further down the food chain. Perhaps a smaller cloud or Security as a Service ("SecAAS") provider such as Allot Communications (NASDAQ:ALLT) is within reach. Barracuda repurchases shares, which could be difficult to continue if it opts for a sizable buyout.
Though email may cause questions, performance in advanced threat detection ("ATD") is obvious. Out of 1,000 added customers, over 300 are new. Additionally, 77% of those customers are signed up for an ATD subscription.
The corporation is exhibiting strength with virtualized solutions for smaller companies. As firms move away from keeping equipment on premises, Barracuda is gaining. There is a small amount of offsetting decline in appliances.
Product lines such as virtual firewalls and the public cloud show vigor. The latter is reported to be growing "Very, very rapidly" with solid penetration, higher prices and expanding customer opportunities. Leadership, and stable relations, with Amazon's Web Services ("AWS") and Microsoft Azure help. There has been a relatively large competitive win of an online bank that reportedly had tried Amazon's Web Application Firewall ("WAF") already. Next Generation Firewall ("NG") offerings are also billed as integrating well with AWS and Azure.
The public cloud business does have longer sales cycles, which can increase the risk of a deal falling through.
There are questions about Europe, with over 17% of Barracuda's Q2 revenues generated in EMEA. As most readers are aware, the United Kingdom has voted to separate from the European Union and the new government is affirming the ballot's results. There has been some conjecture about implications of Norbert Hofer's win in the recent Austrian election, but he evidently prefers a continental identity. Another important matter is Hungary's initiative to overturn migration quotas.
Barracuda management says "...we feel good about Europe's position for the second half." While it sounds like everything should be fine in the next several months, there may be longer-term considerations.
Also, a recently-filed lawsuit might be an overlooked issue. As of September 21st, an IP Lawsuit is on file within the United States District Court for the Eastern District of Texas. The venue is known to be friendly to claimants as VirnetX (NYSEMKT:VHC) has repeatedly enjoyed success there. A better notion of potential damages would be valuable in consideration of any decision to risk capital.
Barracuda's Q2 results are strong, beating expectations. Its sales service, cloud and firewall products are reasons for success and present future viability in the cyber security field. It also has a substantial email business, which is experiencing some pressure. Patent litigation is another matter.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ALLT, CUDA over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.