Cyber Security ETFs In Focus On String Of Q2 Earnings Beat

Cybersecurity companies have been gaining immense popularly in recent years as this corner of the market represents one of the few growth opportunities left for developed market investors. With extensive adoption of Internet usage in mobiles and computers and ceaseless cyber-attacks, demand for cybersecurity and overall spending by corporations and governments on it are rising by leaps and bounds.

As a result, the industry is flourishing as evident in  the latest quarterly earnings results. Most of the cybersecurity firms beat our earnings and revenue estimates, and provided an upbeat guidance. This has spread confidence in the space though earnings reports from many are still awaited (read: 3 Unique ETFs Beating the Market).

Cyber Security Earnings in Focus

Fortinet (FTNT - Snapshot Report) has been one of the major outperformers in the space as the stock climbed as much as 13.1% on the next day following the Q2 earnings announcement on July 22, after the closing bell. Earnings per share of 3 cents came in ahead of the Zacks Consensus Estimate by a penny while revenues of $240 million also edged past our estimate of $227 million.

For 2015, the company raised its revenue forecast to $1.0–$1.1 billion from $935–$940 million and reaffirmed its earnings per share guidance of 51–52 cents. The Zacks Consensus Estimate at the time of earnings release was pegged lower at $940 million for revenues and 23 cents for earnings. Further, for the ongoing third quarter, Fortinet sees revenues in the range of $255–260 million and earnings per share of 12 cents, both of which were much higher than our estimates of $235 million and 7 cents, respectively. To date post earnings, shares of FTNT are up 10.3%.

Check Point Software Technologies (CHKP - Analyst Report) topped our estimates on both the top and the bottom lines by 3 cents and $3 million, respectively. It expects earnings per share of 92 cents to $1.02 on revenues of $392–$410 million for Q3. The midpoints are well above our estimate of 87 cents for earnings but below our estimate of $403 million for revenues at the time of the earnings release. For the fiscal year, revenues and earnings are expected in the range of $1.6–$1.65 billion and $3.90–$4.02, respectively. The midpoints of both are well ahead of the Zacks Consensus Estimate of $1.63 billion and $3.66, respectively.

The stock climbed as much as 10.1% on the day of its earnings announcement on July 22 and is up 3.2% to date post results (read: Bright Outlook for This CyberSecurity ETF).

FireEye (FEYE - Snapshot Report) also reported solid Q2 results but the stock fell as much as 8.9% on the news of the resignation of its chief financial officer (CFO) Michael Sheridan. Net loss of 78 cents came in narrower than the Zacks Consensus Estimate of 84 cents loss and revenues of $147 million surpassed our estimate of $143 million. Fireeye expects revenues of $164–$168 million for the third quarter and raised its guidance for the full year to $630–$645 million from $615–$635 million. The midpoint of the range is below the current Zacks Consensus Estimate of $167 million and $639 million, respectively.

Net loss per share is projected at 44–48 cents for the third quarter and $1.70–$1.80 for the full year, narrower from the previous guidance of $1.75–$1.85. The Zacks Consensus Estimate is currently pegged at a loss of 87 cents for the third quarter and $3.25 cents for the full year. Shares of FEYE have fallen 9.4% to date post its earnings announcement on July 30, after the closing bell.

Proofpoint (PFPTPFPT - Snapshot Report) surged as much as 7.6% the next day following the earnings announcement on July 23, after the closing bell. The company reported loss per share of 47 cents, in line with the Zacks Consensus Estimate while revenues outpaced our estimate by $3 million. The company expects revenues in the range of $65–$66 million for the ongoing quarter and $255.5–$257.5 million for the full year. The midpoints of both are slightly below the current Zacks Consensus Estimate of $66 million for the third quarter and $257 million for the full year.
 

Loss per share is projected at 11–12 cents for the third quarter and 39–40 cents for the full year; narrower than our current estimate of loss of 57 cents and $2.09, respectively. However, the stock is down 5.1% to date post earnings announcement.

Last but not least, Imperva (IMPVIMPV- Snapshot Report) jumped more than 12% in extended trading hours following the earnings announcement on August 6, after the closing bell. Loss per share of 56 cents narrowed and revenues of $53.5 million came ahead of our estimates. For the third quarter, the company expects loss per share in the range of 5–6 cents and revenues in the range of $55–$57 million. The midpoints of both are much higher than the current Zacks Consensus Estimate of 55 cents for the ongoing quarter and $52 million for 2015 (read: Inside 5 Best Performing Stocks of the Cyber-Security ETF).

For the full year, Imperva raised its revenue guidance to $215–$217 from $202–$207 and narrowed the loss per share guidance to 44–46 cents from 63–77 cents. The current Zacks Consensus Estimate is pegged at $206 million for revenues and $2.39 for earnings.

ETFs in Focus

The string of earnings beat and solid stock performances by many cybersecurity firms have put this niche area of the technology sector in focus for the days ahead. Currently, there are a couple of cybersecurity ETFs which are detailed below:

PureFunds ISE Cyber Security ETF (HACK - ETF report)
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 32 securities in its basket. It is well spread out across components, as each security holds no more than 5.03% of total assets. From an industrial look, software and programming accounts for nearly two-thirds of the portfolio while communication equipment and Internet mobile applications 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 (6%), Japan (4%), South Korea (3%), Finland (3%) and Canada (1%). The fund has amassed $1.4 billion in AUM and charges 75 bps in fees per year from investors. Volume is solid as it exchanges 853,000 shares in hand per day.

First Trust NASDAQ CEA Cybersecurity ETF (CIBR - ETF report)
This ETF debuted last month in the space and has successfully accumulated over $50 million in its asset base. It charges 60 bps and trades in good average daily volume of about 174,000 shares. The fund follows the Nasdaq CEA Cybersecurity Index, which measures the performance of companies engaged in the cybersecurity segment of the technology and industrials sectors (read: First Trust Launches Cybersecurity ETF CIBR).

In total, the product holds 34 stocks in its basket with the top five firms dominating the returns at 31.2%. Further, it is skewed toward software industry at 47.5%, while communications equipment and Internet software & services round off the top three with double-digit allocation each. Like HACK, American firms account for 67% of CIBR while the Netherlands, China, Israel and many others make up for single-digit allocation.