How Barracuda Networks Blew Away Its Q2 Earnings Guidance

Mark Kelleher of D.A. Davidson reiterated his Underperform rating on Barracuda Networks Inc CUDA despite company reporting solid second-quarter results on increased traction of its Microsoft Corporation MSFT Office 365 essentials product.

Q2 Results

Barracuda Networks’ second-quarter non-EPS of $0.21 handily beat consensus’ $0.13 estimate and revenue grew 12 percent to $87.9 million, also topping the Street view of $85.27 million. Kelleher was expecting EPS of $0.14 and revenue of $85 million. The result also beat the company’s guidance that called for EPS of $0.12–$0.13 and revenue of $84 million–$86 million.

The company’s subscription revenue rose 19 percent to $66.9 million. Gross billings were $100.3 million, compared with $98.4 million in the second quarter of fiscal 2016. The number of active subscribers grew about 14 percent to over 298,000 and the dollar-based renewal rate was 96 percent for the quarter.

Related Link: BTIG Bullish On Barracuda Networks, Sees Several Near-Term Catalysts

The company recently unveiled the new Barracuda Email Threat Scan for Office 365, a cloud-based service that identifies latent threats, including hidden advanced persistent threats, within Microsoft Office 365 email accounts.

“Overall the company is seeing success with its email security/monitoring offering, as well as network security products. CUDA is working closely with Microsoft to offer additional functionality in those areas above and beyond what Microsoft itself is providing,” Kelleher wrote in a note.

Looking Ahead

For the third quarter, the company expects EPS/revenue of $0.13–$0.15/$85 million–$87 million versus consensus of $0.12/$85.4 million and D.A. Davidson estimate of $0.13/$86.5 million.

Kelleher is impressed with Barracuda' ability to find a niche in the small- and mid-markets without affected by competition from Microsoft or Amazon.com, Inc. AMZN. Importantly, both companies are investing heavily in exactly the same markets as Barracuda (email security, network security/WAFS, data protection to the SMB market).

“Our earnings model assumes CUDA can continue to carve out a profitable niche against these larger competitors; however, even with this assumption, we believe the stock valuation is rich,” Kelleher noted.

Analyst's Final Take

However, the analyst finds valuation is heavy. The analyst’s price target of $22 applies a multiple of 22x EPS to his calendar 2018 EPS estimate and he remains Underperform on the stock given limited upside to this price target, and the significant competitive environment.

Shares of Barracuda closed Tuesday’s trading at $23.33. In the pre-market hours, they rose 12 percent to $26.14, and at last check within the first 30 minutes following the opening bell, the stock was up 9.97 percent at $25.66.

Full ratings data available on Benzinga Pro.