Barracuda Networks: Zacks’ Bear of the Day Play

The IT services sector has seen big growth over the past few years with the cloud and new computing software driving the surge in billings.  But when a company begins to miss their expected growth levels, and are compelled to revise guidance downwards, the stock price begins to drop.  This is what happed to Barracuda Networks (CUDASnapshot Report), our Zacks Bear of the Day.

This Zacks Ranked #5 (Strong Sell) is engaged in designing and delivering security and storage solutions. Its products span three distinct markets, including: 1) content security, 2) networking and application delivery and 3) data storage, protection and disaster recovery. It offers cloud-connected solutions that help its customers address security threats, enhance network performance, and protect and store their data.

In their most recent quarter, management missed both the Zacks Consensus Earnings and Revenue estimates (fourth consecutive time they have missed the Zacks Consensus Earnings numbers), and lowered FY 16 guidance across the board.  The main reason for these declines was total billings, which came in below the expected $102.5 million at $98.4 million for the quarter, and has declined from previous quarters; now expected to be around 10-13% from 16-18% growth levels for the second half of 2015.

Management said the cause of the sluggish billing was due to weak sales in EMEA (Europe, Middle East, and Africa), and longer sales cycles.  Due to the declining total billings, management lowered Q3 revenue guidance from between $79-$81 million below the Zacks Revenue Consensus of $82 million.  Unfortunately, management didn’t stop at just Q3, they revised downward both Earnings and Revenues for FY 16 as well.  Now management expects non-GAAP EPS from $0.36-$0.41 to $0.34-$0.36, and revenues from $325-$330 million to $320-$323 million for FY 2016.

Decreasing Estimates

As you can see in the table below, the recent misses and subsequent lowered guidance has negatively impacted the overall stock performance.

Over the past thirty days EPS estimates for Q3 15, Q4 15, FY 15 and FY 16 have all declined.  Specifically, Q3 15 fell from $0.03 to -$0.01, Q4 15 dropped from $0.04 to $0.00, FY 15 plummeted from $0.11 to $0.01, and FY 16 declined from $0.19 to $0.05.

Bottom Line

With overall billings declining between 3-5% for second half of 2015, and the lowered guidance for FY 16 management has a rough road ahead.

If you are inclined to invest in the IT Services segment, we would suggest looking into MAM Software (MAMSSnapshot Report), which carries a Zacks Rank #1 (Strong Buy), or Earthlink Holdings (ELNKSnapshot Report), which holds a Zacks Rank #2 (Buy).

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