WatchGuard Wades Through Tough Q1

Troubled security vendor's accounting overhaul hits revenues, but M&A speculation sends confusing signals

May 12, 2005

3 Min Read
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Security vendor WatchGuard Technologies Inc. (Nasdaq: WGRD) announced its first-quarter results today, in a report full of damage control and mixed messages.

WatchGuard posted net revenues of $16.6 million, down from $20.2 million in the year-ago quarter. The results dipped below analyst estimates of $16.89 million (see WatchGuard Announces Q1 ). The company's net loss was $3.9 million, or 12 cents per share, compared to a net loss of $2.7 million, or 8 cents per share, in the first quarter of 2004. This was in line with analyst estimates.

On a conference call last night, WatchGuard execs blamed the performance on first-quarter seasonality in Europe and the companys decision to overhaul its accounting model in some geographies.

The last few months have been tricky for WatchGuard, to say the least. Earlier this year the Seattle-based vendor was forced to postpone its fourth quarter and fiscal year 2004 earnings, due to a series of financial errors (see WatchGuard Postpones Earnings).

Then, during the first quarter, WatchGuard completed its transition to a sell-through revenue recognition model in the U.S., Australia, and New Zealand. However, this reduced revenues by around $2 million.Under the sell-through model, sales into distributors are not recognized as revenue until the products have actually been sold on to customers. Last night, CFO Bradley E. Sparks explained that the new model lets the vendor compete more effectively in the cut-throat market for security products. “It will enable WatchGuard to be more nimble and flexible and better address pricing,” he said.

Sparks himself is a newcomer to WatchGuard and recently took over from the interim CFO, James A. Richman. However, in documents filed with the Securities and Exchange Commission (SEC), WatchGuard maintained the change of personnel was not the result of any disagreement between WatchGuard and Richman on any matter relating to operations, policies, or practices.

Elsewhere, WatchGuard is sending mixed messages. Last week, the vendor announced a Shareholder Rights Agreement to protect the “long-term value” of shareholders’ investments in the event of a takeover. Ed Borey, WatchGuard’s CEO, sought to downplay this move during the conference call. “WatchGuard is not aware of any attempts to acquire the company, but we believe in safeguarding shareholders,” he said.

Back at the drawing board, Borey discussed the company’s future product roadmap. The vendor is looking to exploit the current popularity for security devices that are loaded with with a range of features (see Fortinet Fuses SSL & VOIP).

WatchGuard recently launched its new, high-end integrated appliance, the Firebox X Peak, and more product consolidation looks to be in the cards (see WatchGuard Intros Firebox X Peak). Long-term, according to Borey, the company is looking to employ one set of software running on just two hardware platforms. Currently, WatchGuard offers five different versions of its Firebox security product.The market was less than overwhelmed with WatchGuard's results. In after-hours trading, WatchGuard shares fell 5 cents (1.49 percent) to $3.30.

— James Rogers, Site Editor, Next-Gen Data Center Forum

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