CyberGuard news that its latest quarter revenue may be
overstated, the fact
that its auditor KPMG resigned, and two of its execs are suspended (and one
resigned) all combined for a stock plunge. Wall Street reacted swiftly,
sending CYBG shares down 68% to $1.969 per share on more than 20x average
volume.
The lesson is clear: aggressive companies and aggressive accounting don’t
mix. Rumors peg part of the problem on Asian sales shortfalls, sales booked
early or sales in that market that simply dried up due to the region’s
downturn. If so, it behooves Wall Street to take a closer look at how much
sales come from Asia for any Internet firm.
We tend to think, however, that Asia’s “dragon” may be only part of the
fire-eating act here. If it was a pure regional anomoly then we doubt the
CEO and CFO would be suspended.
But CYBG woes don’t necessarily translate into sector-wide problems. The
security software sector in general has been largely ignored on Wall Street
this year as consumer-driven brand Internet stocks bask in the limelight. A
sector already in the doldrums doesn’t need bad news from one of its
components though.
In the aftermath of CyberGuard’s fall does it represent a buying opportunity
for investors? We don’t think so. There are scores of Internet security
software makers with far stronger sales, market positions and potential, and
CEOs, CFOs still in place.