Yesterday, shares of network security firm Fortinet (FTNT) looked anything but secure. The stock plunged 18% at some point on a huge guidance cut; it recouped some of its losses and closed down 10%. Fortinet reports third quarter fiscal 2016 results on Oct. 27.
The company surprised investors with a huge guidance cut after the close on Tuesday. It said revenue would be in the range of $311-316 million, down sharply from the consensus estimate of $319-324 million. The company also cut earnings guidance.
Management said the company would earn between $0.15 and $0.16, not the $0.17-0.18 it previously projected. The figures represent non-GAAP earnings per share.
The company expected the bad news to hit the stock and stepped up with a $100 million share buyback.
Billings are expected to be in the range of $343 million to $348 million, which was way down from the previously announced guidance of $372 million to $376 million.
Management blamed a "lengthening deal cycle" and enterprises that are becoming more "strategic" with their purchases. And buying decisions are less urgent. The stock tanked and took the rest of the security group with it.
But there were warning signs this was going to happen.
Fortinet reported second quarter results at the end of July and said billings grew 26% to $374 million. Revenue was up 30% to $311 million. While that's great, the company only beat the consensus estimate by 2%. Small and mid-range appliances sales were up 48%, which made investors wonder what happened to high-end enterprise sales growth.
Sales and service was the main driver of the quarter. Deferred revenue grew 37.5% to $904 million, according to the end-July statement.
There was weakness in the service provider segment. There were also rumors of heavy product discounting, a higher number of days of sales outstanding and lingering complications from the first quarter salesforce re-alignment. Historically, the third quarter is back-end loaded, so the salesforce probably just ran out of time.
On Wednesday morning, Wall Street was quick to defend the company saying the shortfall was a one-quarter issue and investors shouldn't overreact.
I have been through these shortfalls before. I think competition heated up and customers are taking their time making a buying decision. I was surprised the first quarter salesforce shakeup is still hurting the company nine months out. Usually, tech companies straighten these things out very quickly. Seems to me there must be some infighting among the sales teams, and the salesforce probably lost a lot of productivity.
I know investors are hungry for security names, but I would hold off buying the stock into the dip. I would wait for the company results on Oct. 27 before making any decisions on this name. No reason to catch a falling knife.