Friday, July 22, 2011

Weakness in European Technology Spending?





It’s been a good week for technology in general but three stocks stand out as being the big losers. Fortinet $FTNT , Riverbed $RVBD and, F5 Networks $FFIV have all seen significant declines. Why?

These companies have been written about on EarningsView. For example, Blue Coat Earnings Write Up , F5 Networks Growth Looks Solid , Fortinet Delivers Strong Results

What all three have in common is that they all reported weaker spending in technology in Europe and were on evaluations that appeared ‘stretched’ to say the least. I’ve decided to go through the conference calls and see what each said about Europe.


Company
European Commentary
F5 Networks
‘We have taken a fairly conservative forecast in terms of Q4 for EMEA as well. So, we are not looking for much growth sequentially there at all’…    …‘much like last quarter we saw weakness in some of the more macro affected economies in EMEA. Germany wasn’t great, UK wasn’t great. But the rest of the country did pretty well, excuse me, rest of the theater did pretty well.’
Riverbed Technology
‘Sales in EMEA were weaker than expected.. ..we attribute the softness both to the environment and our own execution’…  …‘Looking at Europe specifically, the weakness was in a surprising place, which is our central region headquartered in Germany, and Germany is supposed to have one of the stronger European economies. So that's what tells me there was some execution problem there.’
Fortinet
‘In terms of geographic breakdown of the billings growth Americas was at 32%, EMEA 2% and APAC 41% compared to Q2 2010. While Americas and APAC had very strong quarters, softness in EMEA from a macro perspective as well as timing of some of our large transactions resulted in lower billings growth for this region in this quarter. However, pipelines remain strong and we do expect to resume good growth in EMEA during Q3 and the balance of the second half.’…  …’ I don’t think it's totally ourselves, but what I’ve heard from some others that EMEA was, there was a little bit of malaise in EMEA, but that’s not an excuse, we think we will do better’





All three companies are leaders within their respective niches in technology and signs of weakness should be taken seriously. F5 Networks is a leader in application delivery networking, Riverbed is the top firm in the WAN (Wide Area Network) Optimization market and Fortinet is a global leader in UTM (Unified Threat Management) which is security solution primarily offered to small and medium sized enterprises.


European Macro Economic Woes Weighing on Technology

There is no doubt that firms in Europe have somewhat slowed purchasing decisions in response to fears over the macro environment and in particular European peripheral Sovereign Debt. I suspect this is a late quarter event because surveys up to June were indicating conditions that were holding up quite well in Europe. For example, here is the Optimism Index from Duke/Fuqua School of Business CFO Survey for June


Business Optimism Duke CFO Survey




Moreover, with regards to Riverbed we could be seeing the results of competitive pressures from the restructuring at rival WAN Optimization firm Blue Coat Systems International $BCSI. It will be worth seeing the results of Blue Coat because that company’s restructuring has been a long time coming.


Sovereign Debt Issues or Evaluation

I suspect, assuming a successful resolution of the European debt issues (Italy is the key) that these companies could report some upside surprise in EMEA revenues in the second half. So does this sell off in the stocks create a buying opportunity?

I’m not so sure and this view is principally due to the current evaluations. All of them looked stretched and were priced to perfection. In these cases, the slightest disappointment will see the stock price take a substantial hit. Even given the disappointing statements on Europe, these companies beat estimates and guidance was hardly weak, but it still leaves them on high evaluations.


Co
Stock Price
Q EPS Est
Q EPS Act
Next Q Guidance vs. Analyst Est
Current PE
Forward PE
F5 Networks
$101.5
91c
97c
97-99c vs. 98c
30.1x
28.7x
Riverbed
$32.3
21c
21c
21-22c vs. 23c
44.9x
36.3x
Fortinet
$21.3
8c
9c
9-10c vs. 9c
76x
59.2x



Frankly, I think the disappointment over the European statements is sending a warning over how highly rated these companies are. They are all attractive but, for now, these evaluations look a bit rich for me.