The world isn't a safe place. The interim Iraqi government felt the need to pass a law this week to give itself greater power to deal with insurgent uprisings. Residents of Canberra, Australia, were warned to watch out for attacks by aggressive kangaroos. And security at Secure Computing (NASDAQ:SCUR) seems to have suffered a breach. According to its press release, someone has run off with the expected second-quarter EPS figures.
After the firm warned of an earnings shortfall after the bell Tuesday, investors ran for the exits to the tune of $3.60, or a 36.3% decline, on nine times the average volume. Twenty percent of the shares outstanding changed hands. Yikes!
Analysts expected $0.09 per share in earnings while the company said it would come up with only $0.05 or $0.06 per share. Revenues were expected to be $23.7 million. Management expects $21.7 to $22.0 million.
What's going on here? Well, digging into Secure Computing's 10-K, here are two quotes:
"The United States government is the world's largest buyer of security products, and continues to be a strong market for us." Makes sense given the tragedy of 9/11. And the company has a dedicated sales force for the government.
What if Amazon.com (NASDAQ:AMZN) had a shortfall in sales in its books category? If I were a shareholder, I'd be concerned. What if Starbucks (NASDAQ:SBUX) warned about sales from its coffee segment? That would get management's attention.
However, Secure Computing's management called the results an "anomaly" and, to my mind, seemed to make a veiled threat to the federal government sales force to pick it up in the third quarter. Such a response gives no indication of the actual problem at hand. So let's try to turn over a few more rocks.
Again from the 10-K: "No customer accounted for more than 10% of our total revenue in 2003, 2002 or 2001."
Ahhh, some numbers. Let's quickly run with these and see what we get. The company brought in $21 million in revenues in the first quarter of 2004. If the U.S. government accounted for 10% of those, but no more, then it bought $2.1 million of products and services. With net margins around 10%, that's $210 thousand of lost income, or only $0.006 per share in earnings. What about the other $0.024 per share?
What about all the other divisions exceeding internal targets? Shouldn't that have made up for the lost government income? I would speculate one problem is that Secure Computing is spending too much money trying to keep those government sales. I would speculate another problem is that the other divisions are spending more too. Otherwise, the earnings shortfall would more closely match the revenue shortfall. The shortfalls were 7.2% and 33% respectively.
Given the intense competition in the encryption and security software industry, especially from larger companies such as McAfee (NYSE:MFE) and Symantec (NASDAQ:SYMC), it's not going to get less expensive, or, as Alyce Lomax pointed out, any easier.
Until the CSI team gathers and makes sense of the evidence from the upcoming 10-Q report, I encourage investors to remain outside the yellow security tape.
Fool contributor David Meier has never had a breach of security on his computer nor does he own any of the stocks mentioned.
