Although you wouldn't necessarily always know it by the growth rates at leading enterprise security vendors like Check Point (Nasdaq:CHKP) and Cisco (Nasdaq:CSCO), security has been one of the better markets in enterprise IT. So the real question in the wake of Fortinet's (Nasdaq:FTNT) warning on first quarter results is whether this is company-specific, market-specific, or a more widespread problem within the security sector.

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A Meaningful Miss On The Way
Fortinet announced Wednesday night that first quarter results were going to come in well shy of both sell-side expectations and prior management guidance.

Instead of the $140 million Wall Street revenue target, it looks like the number is about $135 million. Worse, billings are going to come in about 8% shy of the prior target. At these levels, the implied growth rate is about 8% and that's a worryingly low number for a big-multiple tech company.

While the revenue shortfall is likely to get most of the attention, I'm also concerned about the company's implied margins. I realize details like margins and cash flow are often afterthoughts to many tech investors, but I think they're important. To that end, it looks like the company's operating margin is going to be about 300bp to 600bp lower than most analysts in the market had been expecting. Whether that's due to lower yields on new products (costs/inefficiencies tied to the ramp and launch), more spending on sales, or what have you is something we'll have to wait for the full release to know.

SEE: Earning Forcasts: A Primer

A Fortinet Problem Or A Market/Sector Problem?
Fortinet blamed at least part of the miss on its inability to close multiple deals with major carriers. This echoes the warning we heard earlier from F5 (Nasdaq:FFIV) about weakness in carrier spending (and this is potentially a double-dose of bad news for Juniper (NYSE:JNPR)). It doesn't sound as though the carriers are abandoning Fortinet or delaying security products, but rather may be changing their buying habits/patterns (stretching it out instead of doing bigger one-time deals).

Here's the thing about that, though. Fortinet is a pretty aggressive price competitor. While I realize the businesses and products are very, very different, ADTRAN (Nasdaq:ADTN) is likewise a lower-price vendor of equipment for the carrier market and they had a pretty good report the other day. That gives me a little nagging doubt that maybe this miss wasn't just a one-time thing.

If this was just a carrier spending problem (coupled with weakness in Latin America and Europe), that could be relatively good news for companies like Check Point, Sourcefire (Nasdaq:FIRE), and Palo Alto (NYSE:PANW) given their market/customer exposures. Still, I would be careful about buying those stocks today on that thesis, as I believe there's mounting evidence that overall IT spending has slowed pretty considerably.

The Bottom Line
I continue to be conflicted on Fortinet. While I believe the company has good technology and could be a solid M&A candidate, I'm worried about a potential lack of breadth in security, particularly relative to the likes of Cisco and Check Point. At the same time, I have to ask why the company decided to acquire Coyote Point and compete with the likes of F5 and Citrix (Nasdaq:CTXS) in the very competitive (and quite possibly slowing) ADC market. I could see this helping the company in mobile carrier data centers and the small/medium-sized business market, but I still question the logic of the move.

SEE: Analyzing An Acquisition Announcement

In any case, Fortinet shares are down about 14% as of this writing. If you believe that the company can grow at a long-term rate in the low double-digits, that makes today's price pretty compelling. Keep in mind, though, that the summer is often a tough time for tech companies and particularly those that start off in the penalty box for missing expectations. While robust growth could make Fortinet an interesting stock from today's level, those same robust expectations do up the risk of an investment here to a meaningful extent.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.