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Sourcefire Being Reduced to Ashes?

Since its IPO in March, Sourcefire's (Nasdaq: FIRE  ) stock price has burnt to a crisp. And the second-quarter results released Friday didn't show any signs of improvement in the near future, sending the stock tumbling another 26% in one day. 

Sourcefire is an innovative player in the real-time network defense industry. The company boasts a 3-D approach (discover, determine, defend) to securing real networks that is transforming the way network risk is reduced. While many classify Sourcefire as one of the industry's leaders, its financial performance reveals the challenge of competing against prominent technology firms such as Cisco (Nasdaq: CSCO  ) and Symantec (Nasdaq: SYMC  ) .

Second-quarter revenue was up 18%, reaching $11.3 million. The bottom line suffered from an enormous charge for stock-based compensation, and Sourcefire posted a loss of $1.1 million. However, this was an improvement over last year's $1.2 million loss.

In the conference call, company officials acknowledged the weakening growth from the federal sector in the recent past. But the U.S. government has a June 2008 deadline to upgrade its network-security products, and Sourcefire's upcoming 3D9800 product offers all the requirements needed. So the company should experience increased demand from the government because it would be able to provide the appropriate protection for those networks.

Also, Sourcefire demonstrated traction with its alliance with Nokia (NYSE: NOK  ) and even snagged a seven-figure deal that will be recognized in the third quarter. But keep in mind that Nokia also has a relationship with Check Point Software, which owns Sourcefire rival NFR.

Over the next few months, Sourcefire plans to launch a variety of products.  But with the competitive environment and long sales cycles, it may take some time to get momentum.

Sourcefire has committed to its full-year guidance of $55 million to $58 million. Yet so far this year, revenue has amounted to only $21.7 million. So the company needs to make up a lot of ground. And with investors shell-shocked from recent stock price drops, it's not easy to make a bull case.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 4,156 out of 60,000 investors in Motley Fool CAPS. The Fool has a disclosure policy.

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