Blue Coat Misses - "Barracuda Effect" the Cause?

Blue Coat pre-announced a pretty substantial miss this morning. Analysts were expecting $39 million in revenue for the quarter and BCSI will come in somewhere between $34.5 - $35.1 million. That's an over 10% miss on the revenue side, which is definitely not just a couple of big deals that slip into the next quarter.

Blue Coat's stock is off 35% this morning, so clearly Wall Street was surprised. There are a couple of things at work here:

1. The pain of being public - I think most companies would be pretty much crazy to go public. Between trying to hit Wall Streets "expectations" and Sarbanes-Oxley, it just doesn't seem worth it. Now Blue Coat went public as Cacheflow back in the bubble days, so this doesn't necessarily apply to them, but still, they could have been taken private during the dark days and not have to deal with this crap.
   
   
2. Opaque channels - Blue Coat sells most of their products through the security reseller channel. That is a very effective method (just look at how Blue Coat ramped over the past year), but it does introduce a bit of a blind spot. I suspect Blue Coat was surprised by this miss, and my guess is that deals committed to by the resellers didn't close.

Now what about the fundamentals of Blue Coat's business? Actually they remain strong. Spyware continues to be a high profile issue and with the Permeo acquisition, Blue Coat is working on an end to end protection story. I've only heard good things about the product, so that leads me to believe that it's not a product issue. So, what's the answer then?

This could be indicative of a pretty major change in spyware appliance market dynamics. Blue Coat could be suffering from what I'll now term as the "Barracuda Effect." I've seen this up close and personal in the anti-spam business and it is not pretty. Basically companies that have enterprise class appliances build their business on $30-50k deals. Lots of them. But Barracuda enters the market with a product that sells for about $3,000. Right. 10% of the previous price.

Did Barracuda win every deal? No, the product didn't really stand up under heavy load. But for many many companies, their product was "good enough." And what used to be a good $30k deal became $10k if you could even get it. That absolutely KILLS both revenue predictability and puts a much bigger reliance on the large enterprise deals. You don't leave yourself much margin for error. Blue Coat may have discovered this.

Barracuda introduced an anti-spyware device in mid-2005. I don't have a lot of data points, but again it seems to be "good enough" for the mid-sized market. That would definitely cannabalize the sweet spot for Blue Coat. If this is the case, this will cause Blue Coat significant economic pain. It will be interesting to hear BCSI's explanation for the miss in a couple of weeks.

Of course, end users need to figure out if a low cost solution like Barracuda will meet their needs. It usually makes sense to test Barracuda with the "enterprise" product to compare in a bake-off. If Barracuda is good enough, you can't beat the price.