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Cyber Security ETFs in Focus on Mixed Bag Q1

The hype surrounding the cyber security industry has cooled down this year given a choppy stock market, reduced cyberattacks and lower spending on cybercrime. In fact, many stocks were crushed by concerns over high valuation. In addition, mixed earnings reports from the industry players have taken away the sheen that was left in this corner of the broad technology sector.   

Let’s dig into the earnings results of some of the cyber security firms that have the largest allocation to the ETFs in this industry:

Cyber Security Earnings in Focus

CyberArk Software (CYBR) reported earnings per share of 15 cents and revenues of $46.9 million, outpacing the Zacks Consensus Estimate of 11 cents and $44 million, respectively. The company projects earnings per share in the range of 18–20 cents on revenues of $47.5–$48.5 million, up 31–33% year over year, for the ongoing second quarter. For 2016, revenues are expected to grow 30%–31% to $209–$211 million and earnings per share are projected in the band of 87–91 cents.

The lower end of both the earnings projections was well above the current Zacks Consensus Estimate of 15 cents and 62 cents, respectively, while the mid-point of the revenue guidance was in line with our estimates. CYBR gained 2.5% following the earnings announcement on May 5 after the closing bell (read: Cyber Security Stock Earnings in Focus).
 
FireEye (FEYE) beat our earnings estimate but missed on revenues. Net loss per share came in at 83 cents, narrower than the Zacks Consensus Estimate of 89 cents loss but revenues of $168 million fell shy of our estimated $172 million. FireEye expects revenues of $178–$185 million for the second quarter and cut its full-year outlook to $780–$810 million from $815–$845 million. The upper end of both the ranges is much below our estimate of $194 million for the quarter and $830 million for the year at the time of earnings release.

Net loss per share is projected in the range of 38–48 cents for the ongoing quarter and $1.20–$1.27 for the full year. The midpoint of both projections was better than the Zacks Consensus Estimate of a loss of 78 cents and $2.92, respectively, at the time of earnings release. However, shares of FEYE have tumbled 16.2% to date following its earnings announcement on May 5 after the closing bell on a reduced revenue outlook.

Check Point Software Technologies (CHKP) topped our estimates for both the top and the bottom lines by $0.3 million and 4 cents, respectively. It expects earnings per share of $1.02–$1.09 on revenues of $405–$435 million for the second quarter. The midpoint is well above our current estimate of 98 cents for earnings but below our estimate of $422 million for revenues.

For the full year, revenues and earnings are expected in the range of $1.72–$1.79 billion and $4.45–$4.60, respectively. The midpoint of the revenue estimate is slightly below the current Zacks Consensus Estimate of $1.75 billion while the earnings projection is above our estimate of $4.13, respectively. The stock has plummeted 7.2% since its earnings announcement on April 20 before the opening bell.

Fortinet (FTNT) posted wider-than-expected loss of 6 cents against the Zacks Consensus Estimate of 1 cent but surpassed our revenue estimate by $11 million. It projects revenues in the range of $301–$306 million and earnings per share of 14 cents for the ongoing second quarter. Both were above our estimates of $300 million and 4 cents, respectively, for revenues and earnings at the time of the earnings release.

For 2016, the company raised its revenue guidance from $1.25–$1.26 billion to $1.262–$1.272 billion, which represents year-over-year growth of 26% and was pegged above the Zacks Consensus Estimate of $1.253 billion. Earnings per share are now expected in the range of 69–71 cents compared to the previous guidance of 67–69 cents. This was much above the Zacks Consensus Estimate of 25 cents at the time of earnings release. The stock has risen nearly 6% following the Q1 earnings announcement on April 26 after the closing bell.

Last but not the least, Juniper Networks Inc. (JNPR) lagged our estimates for both the top and the bottom lines by 4 cents and $35 million, respectively. For the second quarter, the company expects earnings per share in the range of 44–50 cents and revenues in the range of $1.16–$1.22 billion. The Zacks Consensus Estimate at the time of earnings release was pegged at 39 cents for earnings and $1.204 billion for revenues. Shares of JNPR are down 1.1% since its earnings announcement on April 28 after the closing bell (see: all the Technology ETFs here).
 
ETFs in Focus
 
The mixed earnings reports have put this niche area of the technology sector in focus for the days ahead. Currently, there are a couple of cyber security ETFs on investors’ radar:
 
PureFunds ISE Cyber Security ETF (HACK)
 
The fund offers global exposure to those companies that ensure safety to computer hardware, software and networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 35 securities in its basket. It is well spread out across components with FTNT, CYBR and CHKP accounting for over 4% share each while CHKP and JNPR make up for at least 3% of assets. From an industrial look, software and programming accounts for nearly 66% of the portfolio while communication equipment and IT consulting & data services round off the top three.
 
In terms of country exposure, U.S. firms take the top spot at 71%, followed by Israel (11%), the Netherlands (5%), Japan (4%), United Kingdom (4%), South Korea (3%), and Finland (1%). The fund has amassed $678.7 million in AUM and charges 75 bps in fees per year from investors. Volume is solid as it exchanges 325,000 shares in hand per day. HACK has lost 11.3% in the year-to-date timeframe.
 
First Trust NASDAQ CEA Cybersecurity ETF (CIBR)
 
This ETF has accumulated nearly $106 million in its asset base and charges 60 bps in annual fees. It trades in moderate average daily volume of around 44,000 shares. The fund follows the Nasdaq CTA Cybersecurity Index, which measures the performance of companies engaged in the cyber security segment of the technology and industrials sectors. In total, the product holds 34 stocks in its basket with the in-focus five firms accounting for 16.9% allocation.
 
Further, it is skewed toward the software industry at 44.7% while communications equipment rounds off the next spot with a double-digit allocation. Like HACK, American firms account for 69% of CIBR while the Netherlands, Israel, South Korea and many others make up for a single-digit allocation. The ETF has shed 7.3% in the same period (read: Time to Invest in Tech ETFs?).
 
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PURFDS-ISE CYBR (HACK): ETF Research Reports
 
FT-NDQ CYBERSEC (CIBR): ETF Research Reports
 
CYBER-ARK SFTWR (CYBR): Free Stock Analysis Report
 
FIREEYE INC (FEYE): Free Stock Analysis Report
 
CHECK PT SOFTW (CHKP): Free Stock Analysis Report
 
FORTINET INC (FTNT): Free Stock Analysis Report
 
JUNIPER NETWRKS (JNPR): Free Stock Analysis Report
 
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