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FireEye (FEYE) Soars on Narrower Q1 Loss & Solid Outlook

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It seems that FireEye Inc.’s turnaround efforts such as product refreshes, acquisitions and cost optimization are paying off, as reflected from the company’s splendid first-quarter results, along with the overwhelming second-quarter and 2017 outlook, which were released yesterday. The cyber security solution provider’s first-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 34 cents per share in the first quarter, the figure was significantly narrower than the Zacks Consensus Estimate of a loss of 57 cents and the year-ago quarter’s loss of 83 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 48 cents per share, while it had reported a loss of 98 cents in the year-ago period.

On a non-GAAP basis, FireEye posted loss per share of 9 cents compared with a loss of 47 cents in first-quarter 2016. The quarter’s non-GAAP loss per share was also significantly narrower than management’s loss guidance of 26–28 cents (mid-point: 27 cents). Notably, this was the third consecutive quarter of better-than-expected results for the bottom line and year-over-year improvement.

FireEye, Inc. Price, Consensus and EPS Surprise

 

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

A better-than-expected quarterly result, along with solid outlook, boosted the confidence of investors, thereby sending the company's shares up nearly 15% in yesterday’s after-hour trade.

Notably, for the past couple of years, the stock has not been doing well and lost over 80% of value from its pick. In the last one-year period, FireEye underperformed the Zacks categorized Internet Software industry. The stock lost nearly 17.3% in the said period comparing unfavorably with the industry’s gain of 18.5%.

Revenues

FireEye’s top-line performance was encouraging too. The company’s first-quarter revenues of $173.7 million not only registered a year-over-year increase of 3.4%, but also came ahead of the Zacks Consensus Estimate of $164 million as well as its own guidance of $160–$166 million (mid-point: $163 million).

The company revealed that a more strengthened leadership team, improved sales execution, enhanced relationship with channel partners and product launches, including Helix and HX, were the main reasons behind this splendid top-line performance.

Further, though billings decreased 18% to $152.4 million, but the figure was well above management’s guidance of $130–$150 million, mainly attributed to all the factors mentioned above.

Segment wise, Product revenues plunged 29.6% year over year to $23.7 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 11.7% to approximately $150 million.

Furthermore, FireEye continues to win large deals. Notably, the company closed 29 transactions with an individual value of over $1 million. The company also added 237 customers in the quarter.

Operating Results

Adjusted gross profit increased 11.1% from the year-ago quarter to $119.3 million. Gross margin expanded 480 basis points (bps) to 68.7%.

Adjusted operating expenses decreased 27.9% to $176.2 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 adjusted operating loss of $56.9 million, 58.5% narrower than the year-ago loss of $137.2 million. Moreover, FireEye noted that its non-GAAP operating margin was -7% compared with -44% in first-quarter 2016. The company stated that the quarter marked a $60 million improvement in operating loss on the back of increased operational efficiency and sales productivity.

Adjusted net loss for the first quarter was approximately $59 million compared with the year-ago net loss of $130.5 million. On a non-GAAP basis, the company reported net loss of $15.1 million compared with the prior-year quarter’s loss of $75.1 million.

Balance Sheet & Cash Flow

FireEye exited the quarter with cash and cash equivalents, and short-term investments of approximately $875 million, down from $935.7 million at the end of the previous quarter. Accounts receivable were $105.1 million compared with $121.2 million at the end of fourth-quarter 2016. During the quarter, the company used nearly $17 million of cash for operating activities.

Guidance

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 second quarter and full-year 2017.

For the second quarter, the company anticipates revenues in the range of $173–$179 million (mid-point: $176 million), above the Zacks Consensus Estimate of $172.53 million. Billings are expected in the range of $155–$175 million. Non-GAAP gross margin is anticipated to be approximately 72%, while non-GAAP operating margin is projected to remain in the band of -9% to -10% of revenues. The company projects non-GAAP loss per share of 10–14 cents (mid-point: 12 cents). Operating cash flow is likely to remain in the range of negative $17 million to negative $27 million.

Notably, during the fourth-quarter 2016 earnings conference call, FireEye had provided only qualitative guidance for 2017. At that time, FireEye was expecting billings and revenues to improve throughout the year, mainly in the second half. It had further anticipated positive operating cash flow for the first time ever in 2017.

As the latest quarterly results have now provided more insight about its future prospects, the company issued a quantitative guidance for 2017. FireEye estimates revenues in the range of $724–$736 million (mid-point: $730 million), significantly higher than the Zacks Consensus Estimate of $718.88 million. Billings are expected in the range of $745–$775 million.

Interestingly, the company forecasts to report its first ever positive non-GAAP operating margin in 2017. However, FireEye continues to expect reporting net loss on non-GAAP basis. It projects non-GAAP loss per share of 26–36 cents (mid-point: 31 cents).

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.

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 - Free Report) and Fortinet (FTNT - Free Report) in the cyber security space. In addition, the company’s top-line growth has also been affected due to its futuristic approach toward transitioning itself to cloud and shifting its business model from hardware centric to subscription-based services. It should be noted that the company generates higher initial sales from hardware than the subscriptions.

Due to the aforementioned factors, the company’s top-line growth rates have been slowing down as evident from the last quarterly results.

Nonetheless, FireEye’s management has been striving to turn the business around 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 latest sterling first-quarter results, and solid outlook for the second quarter and full year.

Also, in our opinion, the company has resolved its internal challenges like filing of sales personnel vacancies and sales executions, which helped it in reporting strong quarterly results.

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

A better-ranked stock in the Internet Software space is 2U, Inc. (TWOU - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The stock has an expected long-term EPS growth rate of 30%.

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