Critical Infrastructure Security

Sourcefire offers weak outlook following rough fourth quarter

A dismal earnings report this week from intrusion prevention maker Sourcefire underscores some of the challenges facing public IT security companies, a pair of analysts said Friday.

Sourcefire, which makes the open-source IPS Snort, also will lose its chief executive officer, E. Wayne Jackson III, who announced he will resign to pursue other opportunities.

Jackson, with the company since 2002, will retain his role until a new CEO is named.

Sourcefire late Wednesday reported a 59 percent drop in profit in the fourth quarter of 2007, despite a 21 percent growth in revenue. In addition, the Columbia, Md.-based firm also predicted a first-quarter loss of up to 14 cents per share, far worse than analysts expected.

Sourcefire, which went public last March, has struggled since the start. Shares closed at $6 Friday, down sharply from a 52-week high of $18.83, which occurred during the first few days of trading last year.

John Pescatore, vice president and senior fellow at Gartner, told Friday that Sourcefire's financials – $19.3 million in fourth-quarter revenue and net income of $800,000 – are not terrible. But, he said, where Sourcefire has struggled is in meeting financial expectations.

“A big part of the CEO's and CFO's job is managing Wall Street,” Pescatore said. “They still did not get it to where the expectations are in line with what Sourcefire can deliver. They went public and immediately missed their first quarter [earnings projection]. What that tells you is [the stock] was overpriced at the start.”

Pescatore cited two other security vendors to recently go public – ArcSight and ActivIdentity – whose stock prices also are down from their initial public offering.

“I think the real issue is the security market is relatively mature,” he said. “It's a tough spot for a new entrant to come in and keep growing. It takes extraordinary performance to succeed.”

Mike Rothman, president of analyst firm Security Incite, said Sourcefire's open-source intrusion prevention-focused product line may have trouble competing as network security becomes consolidated into integrated solutions that are easier for end-users to manage.

He said Jackson's successor will have to “figure out what this company is about moving forward.”

In the meantime, continued failure to meet Wall Street expectations will diminish its ability to win lucrative contracts and attract strong employees.

“The stigma of being a public company that's struggling, it's hard,” Rothman said. “Once you lose that momentum, it's very hard to get it back. It doesn't mean it can't happen, but you're really swimming upstream.”

Pescatore said Sourcefire either must be a single-product company that produces a superior solution – a difficult task in the competitive IPS space – or offer multiple products. It started down the latter road when, in August, it acquired open-source anti-virus project ClamAV.

“You don't want to be caught in the middle,” he said.

Sourcefire surprised many experts last year when it announced it was going public, following a failed takeover by Check Point Software Technologies. The Israel-based firewall provider withdrew its $225 million offer after a group of government agencies voiced objections over a foreign company owning Sourcefire, whose technology secures some U.S. government networks.

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