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FireEye (FEYE) Soars on Narrower Q2 Loss & Upbeat 2017 View

It seems that FireEye Inc.’s FEYE turnaround efforts such as product refreshes, acquisitions and cost optimization are paying off, as reflected from the company’s splendid second-quarter results, along with the overwhelming third-quarter and 2017 outlook, which were released yesterday. The cyber security solution provider’s second-quarter results not only fared better than our estimates, but also marked a significant year-over-year improvement.

Although, FireEye continued to report loss by posting adjusted loss (excluding one-time items but including stock-based compensation) of 26 cents per share in the second quarter, the figure was significantly narrower than the Zacks Consensus Estimate of a loss of 39 cents and the year-ago quarter’s loss of 68 cents.

On a GAAP and non-GAAP basis as well, the year-over-year comparisons were favorable. On a GAAP basis, the company reported loss of 40 cents per share, while it had reported a loss of 86 cents in the year-ago period.

On a non-GAAP basis, FireEye posted loss per share of 4 cents compared with a loss of 33 cents in second-quarter 2016. The quarter’s non-GAAP loss per share was also significantly narrower than management’s loss guidance of 10–14 cents (mid-point: 12 cents). Notably, this is the fourth consecutive quarter of better-than-expected results for the bottom line and year-over-year improvement.

A better-than-expected quarterly result, along with a solid outlook, boosted the confidence of investors, thereby sending the company's shares up over 6% in yesterday’s after-hour trade.

Notably, shares of FireEye have made remarkable gain since its first-quarter 2017 results were reported on May 2. The stock has returned 20.3% since then, significantly outperforming the industry’s gain of just 4.9%.


FireEye’s top-line performance was encouraging too. The company’s second-quarter revenues of $185.5 million not only registered a year-over-year increase of 6%, but also came ahead of the Zacks Consensus Estimate of $176 million as well as its guidance of $173–$179 million (mid-point: $176 million).

The company noted that quarterly revenues mainly benefited from shift in business model from product based to subscription based. Apart from this, improved sales execution, enhanced relationship with channel partners and product launches, including Helix and HX, were other main reasons behind this splendid top-line performance.

Further, though billings decreased 12% to $172 million, but the figure was toward the higher-end of management’s guidance range of $155–$175 million, mainly attributed to all the factors mentioned above.

Segment wise, Product revenues plunged 23.5% year over year to $31.2 million. FireEye’s strategy of transitioning its business to subscription and cloud-based offerings from hardware offerings was the main reason for the decline in product revenues. Subscription and Services revenues, on the other hand, rose 14.9% to approximately $185.5 million.

Furthermore, FireEye continues to win large deals. Notably, the company closed 27 transactions, with an individual value of over $1 million. The company also added 221 customers in the quarter, bringing in total customer counts to over 6,000.

Operating Results

Non-GAAP gross profit increased approximately 7% from the year-ago quarter to $136.4 million. Gross margin expanded 100 basis points (bps) to 74% as the company has been able to deliver its subscriptions or services more efficiently.

Non-GAAP operating expenses decreased 19.7% to $141.7 million. FireEye mentioned that it managed to bring down its non-GAAP operating expenses on a year-over-year and sequential basis, supported by its consistent focus on cost optimization and productivity.

The company posted non-GAAP operating loss of $5.3 million, 89.2% narrower than the year-ago loss of $49 million. Moreover, FireEye noted that its non-GAAP operating margin was -3% compared with -28% recorded in second-quarter 2016. The company stated that on a year-to-date basis, it has been able to reduce operating loss by $100 million on the back of increased operational efficiency and sales productivity.

Non-GAAP net loss for the second quarter was approximately $7.3 million compared with the year-ago net loss of $52.7 million.

FireEye, Inc. Price, Consensus and EPS Surprise


FireEye, Inc. Price, Consensus and EPS Surprise | FireEye, Inc. Quote

Balance Sheet & Cash Flow

FireEye exited the quarter with cash and cash equivalents, and short-term investments of approximately $870.8 million, slightly down from $875 million at the end of the previous quarter. Accounts receivable were $110 million compared with $105.1 million at the end of first-quarter 2017. During the first half of 2017, the company used nearly $28.4 million of cash for operating activities.


Buoyed by impressive first-quarter results, improved operational efficiency and sales productivity, as well as healthy demand for intelligence-led security products, FireEye issued a strong outlook for the third quarter and raised guidance for the full year.

As the latest quarterly results have now provided more insight about its future prospects, the company raised revenues and earnings outlook for 2017. FireEye now estimates revenues in the range of $734–$746 million (mid-point: $740 million), up from the earlier guidance range of $724–$736 million (mid-point: $730 million). The upbeat guidance at the mid-point is significantly higher than the Zacks Consensus Estimate of $731.93 million.

FireEye also lowered its non-GAAP loss per share projection for the full year. The company now anticipates posting non-GAAP loss of 19–24 cents per share, down from the earlier projection of 26–36 cents.

However, all other guidance for 2017 has been reiterated. Billings are still expected to be in the range of $745–$775 million. Additionally, the company continues to forecast to report its first ever positive non-GAAP operating income in 2017, which it expects to be the fourth quarter.

As projected earlier, the company is expecting to generate operating cash flow for the first time ever in 2017 in the range of $1–$10 million. Capital expenditure is projected to be within $40 million and $50 million.

Coming to the third quarter, the company anticipates revenues in the range of $183–$189 million (mid-point: $186 million), almost in line with the Zacks Consensus Estimate of $186.62 million. Billings are expected in the range of $190–$205 million. Non-GAAP gross margin is estimated to be approximately 73%, while non-GAAP operating margin is projected to remain in the band of -4% to -6% of revenues. The company projects non-GAAP loss per share of 6–9 cents. Operating cash flow is likely to be in the range of $1–$10 million.

Our Take

Notably, for the past several quarters, the company has been losing business to its rivals. FireEye faces stiff competition from other well-established players such as Check Point Software CHKP and Fortinet FTNT in the cyber security space.

Nonetheless, FireEye’s management has been striving to turn around the business through a string of initiatives, which includes product launches, acquisition and cost optimization. We consider that FireEye’s turnaround strategies are paying off as reflected from its back-to-back two quarters of splendid results, and solid outlook for the third quarter and full year.

Additionally, although a shift from product-based to subscription-based business model will have a negative impact on FireEye’s near-term results, we believe that it will lead to more stable revenues over the long run.

Currently, FireEye carries a Zacks Rank #3 (Hold).

A better-ranked stock in the same industry space is Imperva, Inc. IMPV, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has an expected long-term EPS growth rate of 25%.

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