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Why Is FireEye (FEYE) Down 8.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for FireEye (FEYE - Free Report) . Shares have lost about 8.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is FireEye due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

FireEye Reports Q1 Results

FireEye reported first-quarter 2019 non-GAAP loss of 3 cents per share, 25% narrower year over year. The bottom line matched the Zacks Consensus Estimate.

Revenues totaled $211 million, which increased 6% and outpaced the consensus estimate of $210 million.

Growth in email security, network security and Endpoint security solutions, and continued focus on the Helix platform bode well for the company.

Quarter Details

Product and related subscription, and support revenues decreased 2.2% year over year to $118.4 million, reflecting the decline in appliance hardware sales, which occurred in 2016 and 2017 but is still realized due to the ASC 606 revenue accounting standards. Billings increased 11% backed by strong refresh activity in appliances and growth in subscription.

Cloud subscriptions and managed services revenues rose 16% year over year driven by growth in billings and deferred revenues from 2018.

Notably, Mandiant Professional Services also performed well in the first quarter. Revenues from this segment were up 21% from the year-ago quarter to $40.6 million.

During the quarter, FireEye launched Expertise On Demand and added click to chat capabilities into the Helix platform. Adoption of Helix grew and an increase in the number of third-party alerts added to workflows.

The company’s customer retention rate was also strong. Notably, it generated annual recurring revenues of $550 million, up 8% on a year-over-year basis.

Operating Results

Non-GAAP gross margin was flat year over year at 74%.

Non-GAAP operating margin was negative 3%, flat year over year due to a 6% rise in operating expenses.

Both the gross and operating margins met the company’s expectations.

Products, subscription and support gross margin (non-GAAP) was stable at 79%.

Non-GAAP gross margin for Professional Services increased to 53% from the prior-year quarter, reflecting consistently high chargeability levels and continued advances in its enabled technologies.

Balance Sheet & Cash Flow

FireEye exited the first quarter with cash and cash equivalents, and short-term investments of approximately $1.13 billion, up from $1.12 billion at the end of the previous quarter.

The company’s cash flow from operation was $24.5 million compared with $18 million in the fourth quarter.

Guidance

For second-quarter 2019, FireEye anticipates revenues to be between $212 million and $216 million. The midpoint, at $214 million, is lower than the Zacks Consensus Estimate of $216.1 million.

Billings are projected in the range of $205-$220 million. Non-GAAP gross margin is anticipated to be between 74% and 75%, and non-GAAP operating margin is estimated in the band of 1% to 3%.

Non-GAAP earnings per share are expected to range from a penny to 3 cents. The midpoint, at 2 cents, is lower than the consensus estimate of 4 cents.

The company does not expect any $10 million plus transactions in the second quarter of 2019. This is likely to lead to tough year-over-year comparison for cloud subscriptions and managed services revenues.

A sequential decrease in operating expenses of $6-$7 million, primarily related to lower payroll-related expenses and less events expense in the second quarter is expected to be a tailwind for margins.

For 2019, the company estimates revenues in the range of $880-$890 million. The midpoint, at $885 million, is tad lower than the consensus estimate of $885.4 million.

Outlook for billings were raised to range of $915-$935 million, up from previous guidance of $910-930 million.

Non-GAAP operating margin is expected in the band of 5-6%.

FireEye forecasts non-GAAP earnings to be 17-21 cents per share. The midpoint, at 19 cents matches the Zacks Consensus Estimate.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -20.25% due to these changes.

VGM Scores

At this time, FireEye has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, FireEye has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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