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Shares of FireEye Inc. (FEYE - Free Report) moved up over 12% on Friday in response to the cybersecurity company’s stronger-than-expected third-quarter 2016 results reported late on Nov 3. An upbeat guidance for non-GAAP operating margin and earnings per share for 2016 also helped in boosting investors’ confidence about the company’s future prospects. It should be noted that the stock was up nearly 14% in the afterhours trading session on Nov 3.

Although the cyber security solution provider posted an adjusted loss (excluding one-time items but including stock-based compensation) of 46 cents per share, it was significantly narrower than the Zacks Consensus Estimate of a loss of 68 cents as well as the year-ago quarter’s loss of 75 cents.

On a GAAP and non-GAAP basis too, the year-over-year comparisons were favorable. On a GAAP basis, the company reported loss of 75 cents per share, while in the year-ago period it had reported a loss of 88 cents.

On a non-GAAP basis, FireEye posted a loss per share of 18 cents compared with a loss of 37 cents in the third-quarter of 2015. The quarter’s non-GAAP loss per share was also significantly lower than management’s own guidance range of 30–32 cents (mid-point: 31 cents). The improved bottom line performance on a year-over-year basis was mainly driven by solid top-line growth and cost optimization initiatives.

Revenues

FireEye’s third-quarter revenues increased 12.6% year over year to $186.4 million. The improvement was primarily driven by a large number of deal wins and customer additions during the quarter. New product launches were also one of the main reasons behind this tremendous growth. FireEye witnessed strong customer additions in the Asia Pacific and Middle East regions.

Notably, the company closed 47 transactions with an individual value of over $1 million and added 287 new customers during the quarter. Moreover, it closed its first ever seven figure transaction for FireEye Security Orchestrator.

Moreover, quarterly revenues came ahead of the Zacks Consensus Estimate of $182 million as well as the company’s own guidance range of $180 million to $186 million (mid-point: $183 million).

Segment-wise, Product revenues tanked 27% year over year to $43.9 million. Subscription and Services revenues, on the other hand, surged 35.1% to $142.6 million, driven mainly by continued transition to subscription and cloud-based offering.

Billings increased 2% to $215.4 million, which was above management’s guidance of $200 million to $215 million.

Operating Results

Adjusted gross profit increased 14.8% from the year-ago quarter to $128.96 million. Gross margin improved 140 basis points (bps) to 69.2%.

Adjusted operating expenses increased 10.2% to $201 million. FireEye revealed that it managed to reduce its non-GAAP operating expenses on a year-over-year as well as sequential basis due to its sustained focus on cost optimization and productivity.

The company posted adjusted operating loss of $72.1 million, which was 35.4% narrower than the year-ago loss of $111.5 million. Moreover, FireEye revealed that its non-GAAP operating margin was -14%, compared with -32% in the third quarter of 2015. Per the company, this was “the best operating margin in the history of FireEye.”

Adjusted net loss for the third quarter was $75.2 million, or 46 cents per share, compared with the year-ago net loss of $115.2 million or 75 cents. On a non-GAAP basis, the company reported net loss of $29.4 million compared with the year-ago quarter’s loss of $56.8 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 roughly $926.2 million. Accounts receivable were $124 million compared with $124.3 million at the end of second quarter. During the first three quarters of 2016, the company used $21.5 million of cash for operating activities.

Guidance

FireEye has revised its guidance for the full year. Although, it lowered its revenues and billings guidance, we are encouraged by its upbeat guidance for non-GAAP operating margin and earnings per share.

The new revenue projection ranges from $716 million to $722 million (mid-point: $719 million) compared with the previous projection of $716–$728 million (mid-point: $722 million). The Zacks Consensus Estimate of $721.3 million is higher than the mid-point of management’s guided range. Non-GAAP billings are now anticipated to be between $828 million and $848 million, down from the earlier guidance of $835 – $855 million.

On the other hand, non-GAAP operating margin is now projected to be -22% to -23% of revenues, which is better than its previous guidance range of -26% to -28%. Similarly, the company now expects loss to be narrower than its previous guidance. Non-GAAP net loss per share is expected to be between $1.14 and $1.16 (mid-point $1.15), compared with the earlier projection of $1.28 and $1.32 (mid-point $1.30).

For the fourth quarter, FireEye anticipates revenues in the range of $187 million to $193 million (mid-point: $190 million), below the Zacks Consensus Estimate of $195.45 million. Non-GAAP billings are expected in the range of $230 million to $250 million. Non-GAAP operating margin is projected to remain in the range of -11% to -13% of revenues. The company expects non-GAAP loss per share of 16–18 cents (mid-point: 17 cents).

Our Take

FireEye, headquartered in Milpitas, CA, is a global provider of web, email, file and malware security to enterprises and governments. The company reported strong third quarter results which not only came ahead of the Zacks Consensus Estimate but also marked a solid year-over-year improvement.

The significant improvement in revenues was primarily driven by a large number of deal wins and customer additions during the quarter. New product launches were also one of the main reasons behind this tremendous growth. FireEye witnessed strong customer additions in the Asia Pacific and Middle East regions. Moreover, the strong year-over-year bottom line result was mainly driven by solid top-line growth and cost optimization initiatives.

Furthermore, the company’s upbeat guidance for non-GAAP operating margin as well as earnings per share for 2016 is also encouraging.

Going ahead, despite persistent macro uncertainty, the company appears optimistic due to a healthy security market, strong product line up, deal wins and investment plans, which should boost results in the long run.

Furthermore, FireEye’s strategy of growing through acquisitions is encouraging, the latest being the buyout of iSIGHT Partners during the first quarter. The deal has beefed up FireEye’s cyber security suite and enhanced its competitive dynamics.

FireEye has also taken over Invotas, a firm specializing in improving response times post a cyber attack. Its product, Security Orchestrator, is designed to compile information from a range of security products and automate responses when an incident occurs.

Furthermore, concurrent with its third-quarter results, FireEye on Nov 3 announced its new Cloud MVX and MVX Smart Grid offerings, a lower cost intelligent threat detection solution for large enterprises as well as mid-market businesses. While MVX Smart Grid is currently available, the Cloud MVX will be launched later this month.

All these indicate FireEye’s efforts to move beyond the enterprise level, end-point protection products it had initially started off with. These factors are also likely to aid the company’s long-term results.

However, an uncertain economic environment, competition from the likes of Palo Alto Networks Inc. (PANW - Free Report) and Juniper Networks Inc. (JNPR - Free Report) , and currency headwinds remain concerns.

Currently, FireEye carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock in the Internet Software space is F5 Networks Inc. (FFIV - Free Report) with a Zacks Rank #2 (Buy). The stock has surpassed the Zacks Consensus Estimate thrice while missing the same once in the trailing four quarters. It has an average positive earnings surprise of 3.37%.

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