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SonicWall Tumbles on Downgrade

The IT security company drops more than 13% on an analysts' note.

Shares of IT security company



plunged more than 13% after an analyst raised concerns that the company could miss earnings expectations because of a slowdown in its core small- and medium-business segment.

Lower than expected follow-on orders and an overall slowdown in the SMB market could put SonicWall's December quarter at risk, Ryan Hutchinson, an analyst with WR Hambrecht wrote in a research report. WR Hambrecht does not own shares or have a banking relationship with SonicWall.

Shares of SonicWall slipped $1.29 to $8.60, wiping out most of the company's 12.7% stock gain in the three months since Sept. 7.

SonicWall specializes in Internet security appliances such as firewalls, virtual private networks and unified threat management that brings together such security products as antivirus, antispam and intrusion-prevention systems, in a single box.

The company, which has a market capitalization of about $580 million, has said it expects revenue to be in the range of $46 million to $47 million, or EPS in the range of 6 cents to 7 cents for the fourth quarter of 2006.

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Analysts polled by Thomson First Call are expecting earnings of 7 cents a share on revenue of $46.9 million.

But there is a danger that SonicWall could miss that target. "Given the weakness our channel checks have suggested is taking place, we believe that SonicWall is at risk of missing expectations and is currently tracking below its revenue guidance and towards the lower end of its EPS guidance," Hutchinson wrote.

Specifically, the trouble lies with the company's firewall product line, he said, downgrading the company's shares to hold.

SonicWall spokeswoman Mary McEvoy said the company has not changed its guidance.

In a separate interview, company CEO Matt Medeiros said SonicWall has been working to move into other high-growth areas in IT security. In his three-year stint at the company, Medeiros says he has been able to propel the company ahead in the software subscription services segment.

Nearly 50% of the company's revenue now comes from software subscription, which ensures steady revenue for the company.

"We have taken a biz that had 15% of its revenue in 2003 come from support contracts to one where on an ongoing basis 50% is now generated through software subscription contracts," he said.

SonicWall is also trying to move into areas such as content management, which tries to ensure that sensitive content does not leak out of the business through email or file transfer; backup and recovery for data protection; and wireless or mobile security.

"We are growing our entire company 30% year on year," said Medeiros.