Barracuda occupies a niche in mid-sized security market with a range of appliances for web and mail filtering, NG and legacy firewalls, WAF, Load Balancers, SSL VPN and so on. They announced financial results yesterday that hit their targets but showed the increase in sales (i.e. the selling price) was only 8% instead of a predicted 18%.
Billings in the first quarter were $94 million, up 8% year-over-year. As BJ mentioned, three primary factors impacted billings. First, storage billings in Q1 were impacted by shorter subscription contract terms and fewer large deals. Second, we experienced an increase in sales of our virtual products, which while positive for our long-term growth negatively impacts short-term billings. Finally, the impact of currency fluctuations on our business was greater than anticipated. Barracuda Networks’ (CUDA) CEO BJ Jenkins on Q1 2016 Results – Earnings Call Transcript | Seeking Alpha
Three things seem relevant:
- Storage sales slowed down for Barracuda. And QLogic dropped 20% or so after storage sales slowed for them too. QLogic down 16.9% on FQ1 warning – QLogic Corporation (NASDAQ:QLGC) | Seeking Alpha
- Sales of virtual appliances reduced short term revenue since the selling price is lower than hardware appliances.
- The stronger US dollar reduced global revenue however 75% of Barracuda revenue come from the US so this is a reasonably small impact.
This is why incumbent suppliers like Cisco don’t really want to sell you virtual appliances even though they know that everything will be software eventually. Reductions in top line sales will be punished by shareholders/investors in the short term.
I’ve been predicting that virtual appliances will result in revenue losses for vendors even while increasing the profit margin. In a couple of years, profits will match what is lost to hardware sales. Companies are valued in large part on turnover or volume and any reduction on selling price is a bad thing.
In the long term, virtual appliances have higher profit margins and MUCH lower cost of production, warehousing and sales. A short term world doesn’t appreciate long term value.