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FireEye (FEYE) Posts Narrower Q3 Loss, Down on Weak '17 View

FireEye Inc. FEYE yesterday delivered splendid third-quarter results. The cyber security solution provider’s third-quarter results not only fared better than our estimates, but also marked significant year-over-year improvement.

Despite this, shares of FireEye plunged nearly 14% during yesterdays’ after-hour trade as the company’s fourth-quarter guidance fell short of analyst expectations. Notably, the company, during its second-quarter conference call, had predicted to report its first ever positive non-GAAP operating income in 2017, which was expected to be reported in the fourth quarter. However, FireEye’s recent outlook projects another quarter of loss.

The company stated that its conservative fourth-quarter outlook reflects shorter contract lengths which have resulted in lower billions. FireEye noted that more customers are opting for one- or two-year contracts rather than going for three-year contracts.

Nonetheless, shares of FireEye have made remarkable gain so far this year. The stock has returned 37.6%, significantly outperforming the industry’s gain of just 20.1%.

Now let’s discuss quarterly results first.

Revenues

The company’s third-quarter revenues of $189.6 million increased 1.7% year over year and came ahead of the Zacks Consensus Estimate of $186 million as well as its guidance of $183-$189 million.

The company noted that its quarterly revenues mainly benefited from shift in the 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 growth.

Further, though billings dipped 6% to $201.7 million, but the figure was toward the higher-end of management’s guidance range of $190-$205 million, mainly attributed to all the factors mentioned above.

Segment wise, Product revenues plunged 30.5% year over year to $30.5 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 11.6% to approximately $159.1 million.

Furthermore, FireEye continues to secure large deals. Notably, the company closed 43 transactions, with an individual value of over $1 million. The company also added 234 customers in the quarter.

Operating Results

Non-GAAP gross profit increased approximately 2% from the year-ago quarter to $139.9 million. Gross margin expanded 20 basis points (bps) to 73.8% as the company has been able to deliver its subscriptions or services more efficiently.

Non-GAAP operating expenses dropped 11.8% to $144.6 million. FireEye mentioned that it managed to bring down its non-GAAP operating expenses on a year-over-year and sequential basis, supported by the company’s consistent focus on cost optimization and productivity.

The company posted non-GAAP operating loss of $4.7 million, 82.4% narrower than the year-ago loss of $26.6 million. In addition, FireEye noted that its non-GAAP operating margin was -2.5% compared with    -14.3% recorded in third-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 third quarter was approximately $6.5 million compared with the year-ago net loss of $29.4 million.

Although, FireEye continued to report loss by posting non-GAAP loss of 4 cents per share in the third quarter, the figure was significantly narrower than the Zacks Consensus Estimate of a loss of 7 cents and the year-ago quarter’s loss of 18 cents. The quarter’s non-GAAP loss per share was also significantly narrower than management’s loss guidance of 6-9 cents. Notably, this is the eighth consecutive quarter of better-than-expected results for the bottom line and year-over-year improvement.

FireEye, Inc. Price and EPS Surprise

 

FireEye, Inc. Price 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 $878.8 million, marginally up from $875 million at the end of the previous quarter. Accounts receivable were $120.2 million compared with $110 million at the end of second-quarter 2017. During the first three quarters of 2017, the company used nearly $15.9 million of cash for operating activities.

Guidance

As the latest quarterly results have now provided more insight about its future prospects, the company revised its revenues and earnings outlook for 2017. FireEye now estimates revenues in the range of $739-$745 million (mid-point: $742 million) compared with the earlier guidance range of $734-$746 million (mid-point: $740 million). The guidance at the mid-point is slightly higher than the Zacks Consensus Estimate of $740.8 million. Projections for billings have been lowered to $736-$756 million from earlier forecast of $745-$775 million.

FireEye also lowered its non-GAAP loss per share projection for the full year. The company now anticipates posting non-GAAP loss of 16-19 cents per share, down from the earlier projection of 19-24 cents. The Zacks Consensus Estimate for the year is pegged at a loss of 21 cents.

However, all other guidance for 2017 has been reiterated. 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 $45 million.

Coming to the fourth quarter, the company anticipates revenues in the range of $190-$196 million (mid-point: $193 million), lower than the Zacks Consensus Estimate of $195 million at the mid-point. Billings are projected in the range of $210-$230 million. Non-GAAP gross margin is estimated to be approximately 75%, while non-GAAP operating margin is projected to remain in the band of -1% to +1%. Operating cash flow is likely to be in the range of $16-$25 million.

The company projects to report loss per share of 3 cents to breakeven. The Zacks Consensus Estimate for the quarter is pegged at a loss of a penny.

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. Furthermore, a shorter contract length is likely to adversely impact the company’s near-term top-line performance.

Nonetheless, there is an advantage to the shorter-length contracts as they generally generate higher margins compared with three-year contracts.

Also, 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 three quarters of splendid results.

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 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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