Earnings Miss: Web(non)sense misses bookings

So it looks like most of the public security companies will make Wall Street expectations this quarter. Except Websense. After the market close, Websense announced a light quarter (link here) from a bookings standpoint, though they did hit revenue and earnings numbers. I had previously covered their Q1 miss (link here) and mentioned how important it was to make the Q2 number.

I'm of the opinion that Websense's business is sick, even if the Street doesn't think so (as evidenced by the slight raise in WBSN after hours). I continue to hear a lot of back chatter from my industry contacts. Competition is getting harder, the lack of a legitimate appliance platform is also hurting, as well as emerging competition from managed services like ScanSafe.

Websense tries to explain away the shortfall because they are changing their distribution model and other sales execution issues. Here is CEO Gene Hodges quote:

"Our second quarter billings performance reflected continued transition to a pure channel distribution model, which resulted in challenges generating new business outside our renewal base, especially in North America," said Gene Hodges, president and CEO of Websense. "We believe our market opportunity remains strong and the actions we have taken will generate continued growth over the long term."

Sorry, I don't buy it. Because you are transitioning to a channel model, your existing sales force doesn't have to sell anything to new customers? That's a load of crap.

I've navigated the treacherous waters to pure channel distribution and it doesn't go down like that. What happens is that you give the new deals to the channel in good faith. But to be clear, there are still new customers and new deals. The transition does usually involve a revenue hiccup because you are taking the VAR margin off the revenue line - which you don't have to pay when you take a deal direct.

But what you don't say is that you are having trouble generating new demand. That means either the market has slowed down or you are losing deals because the product is no longer competitive, either on the functionality or pricing side. I've navigated those waters as well and both options are very painful and take at least a year to fix. On the conference call, Hodges said that prices are holding, but when your customers feel trapped (or are too lazy to switch), they continue to pay for renewals. Again, I know this from personal experience.

And they continue to believe moving to a 2-tier distribution model will help them get to the SMB market. I'm skeptical because big enterprise software is not easy to sell, especially when there are lower cost competitors that target that market.

These folks feel like Check Point more and more. Very interesting and large client base, but little technical differentiation and no real strategy. At least Check Point didn't piss off their channel.

This may be getting a bit ahead of the things, but I think Websense is now an acquisition target. If only for their customer base, they've got to be interesting to a company like CA, Symantec or even Check Point. Though I'd expect any potential suitor to wait for another quarter or two for things to get really stinky since it would still cost over a billion to take these guys out.