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Cloud Stocks: Forescout Fails to Deliver

Posted on Wednesday, Jan 15th 2020
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According to a recent report, the global cyber security market is estimated to grow at 15% CAGR to $267.73 billion by 2024 from $118.78 billion industry in 2018. The growth in the industry is attributed to the adoption of IoT, BYOD, AI, and machine learning technologies. Despite the robust growth potential, Forescout Technologies (Nasdaq: FSCT) is facing some challenges in meeting market expectations.

Forescout’s Financials

For the third quarter, Forescout’s revenues grew a comparatively modest 7% to $91.6 million, falling short of analyst estimates of $94.3 million. Net loss was $33.5 million, or $0.72 a share, compared with a loss of $8.3 million, or $0.20 a share a year ago. On an adjusted basis, net loss was $0.02 per share, which was also worse than the market’s forecast of a loss of a penny a share.

By segment, License revenues fell 2% to $50.2 million. Subscription revenues grew 21% to $36.6 million and revenues from Professional services grew 15% to $4.8 million. Forescout has been shifting its business to a subscription-based model that is evident in the results.

For its fourth quarter, Forescout forecast revenues of $93.5-$96.5 million with an adjusted loss of $0.08-$0.06 per share. The forecast was significantly worse than the market’s estimated revenues of $109.5 million and earnings of $0.24 per share for the quarter.

Forescout attributed its weak performance to extended sales cycles, especially in the EMEA regions. It claims that it is working on addressing the challenges by focusing on sales execution and shaping its revenue model for better predictability.

Forescout’s Product Expansion

Forescout is working to improve its position by improving its product offering. It recently announced that it was transforming enterprise-wide network segmentation with the launch of a new cloud-based offering called eyeSegment. It is expected to accelerate network segmentation projects, driven by the need to secure critical applications, mitigate increased exposure due to IoT devices, and limit the lateral movement and blast radius of threats across flat networks.

eyeSegment will allow organizations to translate every IP-connected entity into a logical taxonomy of users, devices, applications, and services to help organizations define policy in business terms and drive device segmentation decisions across the enterprise. It will be able to visualize device communication and behavior to create a segmentation policy and proactively edit policies before enforcing segmentation controls. The tool will allow customers to centrally monitor traffic flows between segmentation zones, validate controls, and automatically react to policy violations.

Last quarter, Forescout also upgraded its industrial control system security solution SilentDefense. SilentDefense helps organizations aggregate and prioritize risks targeting OT and IoT devices. The upgraded Asset Risk Framework will now provide users with intuitive, impact-based scores in a central dashboard so they can determine their current security risk exposure, identify assets that have a high potential of being attacked and enable engineers to take action on the assets that need attention. It will offer expanded capabilities to seamlessly process and create alert parameters and automate the compliance and reporting process for North American Electric Reliability Corporation Critical Infrastructure Protection (NERC CIP) compliance and meet the Federal Information Processing Standards (FIPS) to support its federal and government customers.

But despite the product upgrades, the market is concerned about the company’s weak financial performance. Recent reports suggest that the company is also looking for a potential suitor. Forescout was rumored to be working with a financial advisor to help it with its potential sale. Some investors have also filed a class action suit against Forescout citing that it made false and misleading statements to the market that resulted in significant volatility related to large customer orders and poor execution on deals in the pipeline.  

Its stock is currently trading at $32.56 with a market capitalization of $1 billion. It had climbed to a 52-week high of $46.43 in March last year. The stock has recovered from the year low of $23.95 that it had fallen to in October last year after the announcement of its preliminary third quarter results.

The stock had listed in October 2017 at $22 apiece at a valuation of $800 million. Prior to that it was venture funded and had raised $121.6 million from investors including Wellington Management, Accel, Amadeus Capital Partners, Aspect Ventures, Cross Creek Advisors, Founders Circle Capital, ITOCHU Corporation, Meritech Capital Partners, and Pitango Venture Capital. Even after two years, the stock value hasn’t picked up much.

This segment is a part in the series : Cloud Stocks


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