OPNET Posts Weak Results

OPNET Technologies Inc. (OPNT - Analyst Report) reported weak results for the first quarter of fiscal 2010, with both revenue and EPS falling year over year and quarter over quarter. Not surprisingly, the company blamed the weak economic environment for decline in results.

Although negative earnings of $0.02 per share reported in the quarter did manage to edge out the Zacks Consensus Estimate by $0.01 and was in line with the Street estimate, it fell from a positive $0.04 in the year-ago quarter and a breakeven EPS in the previous quarter.

Excluding stock-based compensation and amortization of intangibles, quarterly EPS was $0.01, a penny above our estimate but down six cents from the year-ago quarter and one cent sequentially. Effective tax rate for the quarter fell to 35.5% from 76.7% last year due to higher losses. Consequently, the company received a quarterly tax benefit of $197,000.

Revenue of $27.7 million fell 7.9% from the year-ago period and 4.1% sequentially, in line with Zacks Consensus estimate of $27.7 million and the Street’s estimate of $27.6 million.

Revenue declined due to lower software license revenue which was down 31.1% from the prior year and a 16.6% sequentially, due to lower revenue from corporate enterprises and was partially offset by sales growth from U.S. government customers.

OPNET’s first-quarter results reflect that customers continue to face tighter budgets in a challenging economy. Customer deals for network planning, engineering and operations solutions were postponed in the quarter, which hurt results.

Quarterly margins also fell due to lower software license revenue, along with a higher cost of revenue, partially offset by lower operating expenses.

Despite the challenging economy, growth was observed in the application performance management (APM) solutions as APM license bookings increased approximately 17% quarter over quarter and approximately 6% year over year. With the recent release of ACE Live VMon, OPNET is expected to capture a bigger market share in the APM segment.

On a positive note, deferred revenue for the quarter was $33.2 million, an increase of 5.6% year over year and 0.2% sequentially. Deferred revenue rose in the quarter as the company closed its largest international corporate enterprise deal in APM. This will also drive revenue in the coming quarters.

OPNET declared a quarterly dividend of $0.09 per share which will be paid on Sept. 29 to stockholders of record as on Sept. 15. For the second quarter of fiscal 2010, OPNET expects GAAP revenue between $27.5 million and $30.0 million and GAAP EPS between negative $0.04 and positive $0.04.

While the current outlook continues to reflect the adverse and uncertain economic conditions that are hurting OPNET’s business and pressurizing near-term results, we believe this is only a temporary phenomenon. The company’s long-term growth story remains intact, with above-average growth rates of license updates and support and new software licenses. OPNET is poised to grow market share and increase revenue when the economy improves.

We maintain our Buy rating on the stock based on valuations.