Imperial Capital Downgrades Barracuda: Stock Worth $12, Not $25

• Barracuda Networks Inc CUDA shares plummeted 35 percent on January 8.
• Imperial Capital’s Michael Kim downgraded the rating for the company from Outperform to In-Line, while reducing the price target from $25 to $12.
• Billings outlook has been lowered to reflect an accelerated move towards virtual and Cloud solutions, Kim stated.

Barracuda reported its F3Q16 results broadly in-line with the consensus expectations and the Imperial Capital estimates, with revenue of $80.1mn and adjusted EPS of $0.07. Subscription revenue grew 17.5 percent y/y to $58.4mn and constituted 73 percent of total revenue. Appliance revenue grew 5 percent y/y to $21.7mn and comprised 27 percent of total revenue.

The company reported a 3 percent decline in gross billings to $89.0mn, with appliance billings down significantly by 15 percent sequentially. Management indicates that F4Q16 billings could decline similar to what was witnessed in F3Q16. This implies F2H16 billings of approximately $182mn, short of the prior guidance of $203-209mn.

“We see significant execution risks and billings headwinds over the next several quarters due to customers’ accelerated shift toward virtual and cloud solutions from physical appliances, particularly in the company’s legacy content security business,” analyst Michael Kim commented.

Sales cycles further lengthened in F3Q16 and increased 25 percent y/y worldwide. Although subscription annual recurring revenue related to Barracuda’s virtual and cloud products did jump 42 percent y/y to nearly $50mn, growth is likely to be “more than offset” by softness in the sales of physical appliances, Kim said.

The analyst expects Barracuda’s business transition to be challenging, since company would need to “significantly adjust its go-to-market strategy and capture new opportunities for customers migrating to public cloud infrastructure and software-as-a-service (SaaS) applications.” The EPS estimate for FY17 has been reduced from $0.45 to $0.38.