It has been about a month since the last earnings report for FireEye (FEYE - Free Report) . Shares have added about 9.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is FireEye due for a pullback? 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 Q3 Earnings & Revenues Surpass Estimates
FireEye reported third-quarter 2019 non-GAAP earnings of 2 cent per share, beating the Zacks Consensus Estimate of a penny. However, the bottom line dropped from prior-year quarter’s earnings of 6 cents per share.
Revenues totaled $226 million, which increased 7% year over year, and outpaced the consensus estimate of $220 million.
This rally was led by strong growth in platform and cloud subscriptions, and managed defense services. Moreover, significant momentum in Mandiant Professional Services was a tailwind for top-line growth.
Product and related subscription, and support revenues decreased 7% year over year to $117.8 million, reflecting $23 million decline in the opening current deferred revenue balance for the segment. This stemmed from a fall in appliance hardware sales, which occurred in 2016 and 2017 but is still realized due to the ASC 606 revenue accounting standards.
Sales of appliances accounted for nearly 15% of total billings. Appliance-based product and related annual recurring revenues (ARR) stabilized in the third quarter after the end-of-life of the third-generation appliances, which had affected the company’s results in the first half of 2019.
Quarterly billings of $249 million increased 13% year over year backed by 43% growth in platform, cloud subscription and managed services category. This category growth was led by strong sales of cloud endpoint and cloud email security solutions, threat intelligence, the Helix platform and Managed Defense. Verodin also displayed strong momentum in the quarter.
Billings did not include any transactions higher than $10 million.
Mandiant Professional Services also performed well in the third quarter. Revenues from this segment were up 28% from the year-ago quarter.
Moreover, the Helix platform was officially launched and several new capabilities were added to it.
Overall transaction volume increased with Global 2000 customers. Moreover, non-Global 2000 customers contributed meaningfully to billings growth in the third quarter. In the quarter, 276 new logo customers were added.
ARR for the product and related subscriptions category increased 11% sequentially to $263 million. This was driven by strong billings growth.
Non-GAAP gross margin contracted 300 basis points (bps) year over year to 73%.
Non-GAAP operating margin was 2%, down 500 bps due to an $1 million sequential rise in operating expenses.
Operating expenses included the financial impact of Verodin being part of the company for the full quarter.
However, as a percentage of billings, operating expenses declined from 67% to 64%, reflecting continued leverage in long-term business model.
Balance Sheet & Cash Flow
FireEye exited the third quarter with cash and cash equivalents, and short-term investments of approximately $997 million, up from $987.7 million at the end of the previous quarter.
The company’s cash flow from operation was $18.5 million compared with $9.5 million in the second quarter.
For fourth-quarter 2019, FireEye anticipates revenues to be between $224 million and $228 million. The Zacks Consensus Estimate for revenues stands at $223.8 million, implying 2.88% growth from the year-ago reported figure. Services revenues are expected to be more or less flat sequentially due to fewer potential billable hours in the fourth quarter due to holidays. Growth in platform and cloud subscriptions is expected to be a key driver. However, an expected year-over-year decline in product and related subscriptions and support revenues might be a dampener.
Billings are projected in the range of $285-$295 million. Management expects platform, cloud subscription and managed services category to contribute significantly to the year-over-year growth in billings. Continued momentum in Helix, managed defense, Intel and cloud e-mail and cloud endpoint is expected to be a tailwind. Additionally, any additional billings for the new AWS hosted network security and detection on demand solutions will be calculated as part of the platform and cloud category.
Non-GAAP gross margin is anticipated to be 73%. Non-GAAP operating margin is estimated in the band of 3% to 5%, suggesting a sequential decline in operating expenses accruing to lower payroll taxes and cost-optimization activities completed in the third quarter.
Capital expenditure between $10 million and $12 million is expected for the fourth quarter.
Non-GAAP earnings per share are expected in the 3-5 cents range. The midpoint of 4 cents matches the consensus estimate.
Operating cash flow is expected be within $57 million to $67 million.
For 2019, the company revised its guidance and raised revenue estimates from $865-$875 million to $878-$882 million. Higher platform and cloud ARR and an increase in services revenue in the third quarter encouraged the company to raise revenue guidance.
Outlook for billings were revised to $937-$947 million from the previous guidance of $935-$955 million.
Non-GAAP operating margin is expected in the band of 0-1%. Non-GAAP gross margin is expected to be around 73%.
FireEye now expects non-GAAP earnings to be between 1 cent and 3 cents per share compared with the previous guidance of 0-4 cents.
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 28.94% due to these changes.
Currently, FireEye has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, FireEye has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.