Sourcefire's Teething Troubles

It also failed to manage expectations. Sourcefire offered no guidance, and its numbers were off the mark from those of the lone analyst on Wall Street who covers the company.

Add to that Sourcefire's open-source business model, which could potentially confuse some investors, and it's not surprising that Sourcefire hit the ground hard.

Unlike traditional proprietary companies, Sourcefire cannot offer big licensing deals as proof of its success on its balance sheet -- at least in its early days, says Fletcher.

"In the short term, the business model involves them trading a lot of the upfront revenue for a larger user base by basically providing the software or making parts of it available for free," he explains.

A better indicator of the company's health could be the state of the open-source technology it is dependant on for its revenue.

To get a sense of this, investors should look at the community activity around the Snort project, the feedback about it, its release schedule and its flaws -- all of which are easily available, says Fletcher.

"Because of the open and transparent nature of open source, if someone wants to see this, they can easily look it up," he says.

In the short term, though, continued volatility around the stock shouldn't come as a surprise to investors. "On the one hand, a shift from 40% to 30% growth outlook is not exactly a blunder, but on a relatively smaller revenue base and an expensive stock it translates into volatility that gives Wall Street heartburn, particularly when they are already reevaluating their security investing," says Charlie Rice, principal with boutique investment banking firm East Peak Advisors, who does not have a banking relationship with Sourcefire.

Sourcefire expects to report its full first-quarter 2007 results in early May.

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