Three months ago, mini Internet-security specialist Secure Computing (Nasdaq: SCUR) found itself unceremoniously dumped from our Motley Fool Rule Breakers recommendation list, a victim of its own weak performance. With second-quarter 2008 earnings news having come out Monday evening, it's time to check back in and determine whether Secure Computing deserves its place back at the table.
Not yet
Citing a history of poor performance relative to rivals like Check Point Software (Nasdaq: CHKP) -- and before that, Symantec (Nasdaq: SYMC), McAfee (NYSE: MFE), and Websense (Nasdaq: WBSN) -- fellow Fool Tim Beyers called SC at best a "turnaround" story, and definitely "no longer a growth story." Why?
Mainly because of guidance. As you may recall, we originally recommended SC on the promise of 20% annual growth. But back in May, SC warned it would generate just $3 million to $4 million in operating cash flow in Q2, flat billings, and just a percent or two of net revenue growth. Hardly what we signed up for.
Now, as it turned out, SC did better than that (and worse). Revenue was up 7% and billings up 5%. The firm booked an $0.18-per-share loss under GAAP. But more importantly to me, it generated only $2.9 million in operating cash flow, missing even the bottom level of its guided amount. Meanwhile, management continues to dilute outside shareholders excessively, predicting that its ever-expanding share count will crest to 75 million in three months.
Not good enough
Granted, SC promises to do better next quarter, and increase its operating cash flow to $7 million or $8 million. But last year, it did nearly $13 million. In other words, we're still heading in the wrong direction in the cash flow department.
Right now, I value the stock as follows: Free cash flow for the past 12 months comes to $29 million. At the present sub-$300 million market cap, the resulting price-to-free cash flow ratio of 8.5 would make SC a screaming bargain were the company growing at the aforementioned 20% rate. Unfortunately, management's latest guidance is for something more like 3% revenue growth (and yet another net loss under GAAP).
Fools, not only is this not a growth story -- it ain't even a turnaround.
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