Sourcefire's Mis-steps

Marty Roesch, co-founder and chief technology officer of Sourcefire, has done an interview with Network Computing and it's a very interesting read because it confirms some of my suspicions about the company's inability to understand how Wall Street thinks and works.

I have been following Sourcefire since my days at Red Herring and they used to be a favorite then. I wrote about them through their various ups and down, through the time when I thought they were one of the smartest private security players and most likely to go public (they did in March) to the botched acquisition of the company by Check Point.

The Network Computing interview itself is a very soft one. I wish the reporter had really pressed Marty for answers.

An excerpt from the interview:
Sourcefire announced its first quarterly earnings as a public company this May. The stock went from $18 to around $12, a drop of 30 percent. What happened?
The expectations were a little higher than the performance, and you can't do that in the public market, so we definitely got a good-sized correction. Q1 was something of an anomaly. There was some slowness in the federal procurement cycle and a few other factors came together--we had a bit of a perfect storm.

"Expectations higher than the performance" is an understatement here.

The problem was Sourcefire didn't play it right by investors.

The company did what I consider one of the biggest PR no-no's and was penalized for it.

Here's how the series of events around their Q1 results really unfolded.

In its first quarterly earnings report after the company went public, Sourcefire realized that it was going to miss expectations.

That's really bad news... but well it happens. Investors and analysts understand that much.

But the way Sourcefire tried to convey the news was all wrong.

The company chose to put out a release about the likely earnings miss on Good Friday--a day when the stock markets are closed.

When investors saw the news on Monday morning, they were very upset. To make it worse, Sourcefire never made an attempt to explain the reasons for the miss--at least not till it was too late.

The company didn't make its CEO, CFO or anyone from the company available to the media or analysts to answer questions. I repeatedly tried to get the company and its PR agency to respond to my requests for a comment but they just couldn't be reached.

Sourcefire's stock fell nearly 30% on that day's trading alone. Finally around 3 p.m. --after market close on Monday--Sourcefire released a terse explanation. By then it was too late.

(My story about Sourcefire from that fateful Monday is here)

I find it difficult to believe that you need special acumen to understand this is totally the wrong way to handle something as important as earnings.

What Sourcefire should have done is release the news about the earnings miss on Monday before market opened and have had a brief explanation in the press release about what it thought was the reason for the shortfall.

Sourcefire should have also scheduled a conference call inviting all analysts, media, and investors and explained how the company is doing and what's going on with the numbers.

Something as simple as that could have saved them much grief.

Last when I checked a few days ago, a Wall Street analyst told me it could take nearly a year-and-a-half for Sourcefire to gain back investor & analyst confidence.

Companies can't and shouldn't go public if they are not willing to do what it takes to work with investors and Wall Street. Many times it is as simple as being transparent and upfront about both bad news and good news.

I can't understand how a company, as smart as Sourcefire, could have gone so wrong.

The rest of the interview is about how Marty thinks there's more to Sourcefire than just IPS/IDS. I am not convinced about that either. Sourcefire needs some serious help with telling their story. Any wonder that their stock has been down nearly 25% in the two-and-a-half months since their IPO?

via Mike Rothman's The Daily Incite.