Barracuda Networks (CUDA) is trading sharply lower today (-11%) after reporting 2Q18 (Aug) earnings results last night. In case you're not familiar with Barracuda Networks, it's a fairly recent IPO which made its debut in November 2013. The company sells a suite of cloud-connected security and storage appliances and services.
These products help customers detect and prevent security threats, improve network performance, and store their data. The company started out in 2003 selling a spam and anti-virus firewall. However, in light of the intense competition and poor economics of that vertical, it's not surprising that CUDA has evolved into more of a suite provider that caters to customers looking to consolidate IT vendors and services.
In the security segment, the current product line-up consists of Email Security (spam and virus blocking, anti-phishing, fraud detection, Advanced Threat Protection, denial-of-service prevention etc.), NextGen Firewalls, Application Security via its Firewall options, Web Security, Application Delivery Controllers etc.
In its data protection segment, CUDA offers a portfolio of on-premises and cloud-based archiving and backup. Barracuda Backup protects physical, virtual and SaaS-based environments. Barracuda Backup uses advanced deduplication technology to reduce the amount of backup data stored. Barracuda Cloud Archiving provides cloud-based archiving.
CUDA has traditionally targeted the mid-size segment of the IT market, i.e. companies that have 100 to 4,999 employees. Management claims that there are over 1 million companies in this range, and that this segment has been underserved relative to the large enterprise segment. CUDA believes that its target segment has a large total addressable market value of $8.7 billion.
Turning to earnings results, non-GAAP EPS fell 19% YoY to $0.17, within prior guidance of $0.16-0.18. Revenue rose 7.3% YoY to $94.3 mln, slightly above the high end of prior guidance of $92-94 mln. Gross billings were $108.5 mln, compared with $100.3 million in the prior year period. Non-GAAP operating margin declined to 13.8% from 18.5% in the prior year period.
Billings for core products increased 22% to $70.9 mln. The number of active subscribers grew 17% to over 348,000. On the call, CUDA guided to Q3 (Nov) non-GAAP EPS of $0.17-0.19, the mid-point of which is slightly below market expectations. CUDA sees revenue coming at $92.5-94.5 mln. CUDA reaffirmed FY18 revenue guidance at $370-380 mln.
On the call, CUDA says its performance in AugQ was primarily driven by continued traction in the areas of the market where it has been investing, especially e-mail and public cloud security. Its product innovations are generating strong top line results, including four consecutive quarters of double-digit billings growth when excluding non-core billings.
Furthermore, CUDA talked about how, for large and small businesses alike, security remains top of mind. High profile breaches like Equifax, the SEC, and Deloitte further highlights that threats and the consequential damages are real and emphasize why security is so important. Also, Office 365 continues to be the e-mail platform of choice for customers, and this trend is accelerating. At the same time, e-mail remains the most exploited threat factor with attacks growing in volume and sophistication, heightening the need for better security to combat these attacks.
CUDA also talked about how many businesses are increasingly turning to MSPs to manage their IT and security needs. This trend is accelerating, and partners are seeking opportunities to move resources to a managed security services model with pay-as-you-go and monthly billing.
In sum, CUDA is in an attractive space (cybersecurity) and that's a good place to be in light of the numerous high profile security breaches recently. However, it's also a very competitive space. So why is the stock down so much when the AugQ results were basically in-line with prior guidance? It's probably because CUDA's non-GAAP operating margin is being seen as soft. CUDA has been investing in its business which has impacted margins. Keep an eye on other cybersecurity-related stocks (CHKP, FTNT, PANW, SYMC, VRSN).