5 Things FireEye Inc's Management Wants Investors to Know

By Brian Withers Markets Fool.com

FireEye(NASDAQ: FEYE)released fourth-quarter 2016 results last week, and investors were left wondering when FireEye is going to start growing consistently. While the company didn't provide any full year 2017 guidance, investors did gain some key insight into what actions management is taking to get back to sustainable growth. Management owned up to the issues, has taken decisive action, which is beginning to yield some positive results in the bottom line numbers, but there's clearly more to do.

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To help you understand where FireEye is going, here are five important points the company's management discussed during this quarter's call.

Image source: Getty Images.

1. With multiple business transitions, focus is only on two priorities

And as we manage our business through these transitions, we have maintained our focus on two significant priorities. The first priority is rightsizing our cost structure to support a balance of growth and profitability. And the second priority, evolving our product portfolio to a comprehensive security platform delivered as a service on premise in hybrid environments or in the cloud. We made good progress on both of these priorities in 2016 and we remain committed to each in this year. I believe our dedicated pursuit of both profitability and innovation will result in growth and will enable us to fulfill our mission to our customers and it allows us to provide increased value to our shareholders.
-- Kevin Mandia, Chief Executive Officer

In this article, I detail out the numerous transitions that FireEye is undertaking. With a lot of change going on in the company it is encouraging to see company CEO Kevin Mandia boil it down to two singular priorities. Let's breakthis quote down into bite site pieces: A) Right size cost structure, the companyis making progress toward profitability, andB) evolving FireEye's product portfolio. The result of Aplus B is growth, which serves customers and shareholders.

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This is a good plan, but a plan doesn't always equal success. The proof will be whether FireEye can win more customers with its innovative platform, if it can do that then consistent, solid growth will result.

2. Management owned up to the revenue shortfall

We had several internal and external factors that influenced our top line performance and let me step you through each of them. They relate to some sales leadership vacancies, sales capacity and lastly some targeted limited releases of our new products.
-- Kevin Mandia, Chief Executive Officer

Image source: FireEye.

What was refreshing is that Mandia didn't blame any of the revenue shortfall on external factors. FireEye's leadership vacancies persisted most of the second half of 2016 and included gaps for the head of worldwide sales and the head of European sales. In addition, Kevin Mandia also mentioned that sales leadership transitions occurred in the Middle East and Japan.

The sales capacity comment refers to fully trained sales staff that were lost after the sales organization restructuring FireEye completed in the third quarter. With a reduced sales staff, FireEye booked only 27% of its annual revenue versus what had been a 30% to 35% rate in previous years.

Lastly, FireEye chose to have a limited release of several products including: "new virtual appliances, Smart Grid, Cloud MVX and new endpoint features."This decision was made to ensure early customer success of these products and allow the sales teams to have positive customer accounts and testimonials that they can reference. Kevin Mandia went on to say that steps have been taken on all three fronts to fix these issues. While the sales leadership roles have been filled and the new products have been fully launched, it may take some time for the sales staff changes to be fully realized.

3. The key management changes are in place

Finally, we have made several organizational changes to better align our resources withour priorities. We have appointed John Watters, the former CEO of iSIGHT Partners, asExecutive Vice President of Global Services and Intelligence... Our President, Travis Reese, who spent the last two quarters stepping in to help lead our sales team, will return to his normal duties focusing on the strategic direction of the company and our execution. We announced earlier today that Mike Berry [Chief Financial Officer] has decided to leave FireEye to pursue another opportunity... I'm pleased to announce that our Chief Accounting Officer and Senior Vice President of Finance, Frank Verdecanna has accepted the board's appointment as our new Executive Vice President and Chief Financial Officer... We also announced that Dave DeWalt has resigned from his role as Executive Chairman of the Board.
-- Kevin Mandia, Chief Executive Officer

In addition to the sales reorganization mentioned above, this management change is a significant shift in the key leaders of FireEye. It seems that Kevin Mandia now has the leadership team that he wants in place. With Dave DeWalt, FireEye's former Chief Executive Officer, out of the picture Kevin Mandia can run the company as he sees fit without the baggage of the former management team. While it takes some time for new management teams to become fully effective, they typically bring new energy and enthusiasm, a fresh perspective and are not tied to the conventions of the past. Investors should applaud that Kevin Mandia moved fast to get his team in place and expect him to quickly get this team aligned on continuing FireEye's transition to focus on the two priorities mentioned earlier.

4. Key operating metrics are hitting records

Our much lower than expected expenses resulted in non-GAAP operating loss of approximately $1.4 million, or negative 1% of revenue versus the midpoint of our guidance range of negative 12% of revenue. This translates to a decrease in operating losses of more than $25 million on a sequential basis versus the third quarter 2016, and $51 million from the fourth quarter of 2015. This resulted in a non-GAAP loss per share of $0.03 versus our guidance range of $0.16 to $0.18 and a loss per share of $0.36 in the fourth quarter of last year. This is the best operating margin and earnings per share performance in the history of FireEye.
-- Michael Berry-FireEye's Outgoing Chief Financial Officer

While FireEye missed revenue targets, it is really encouraging that the company delivered the best bottom-line numbers in the history of the company. It was also mentioned in the call that this success was in spite of the additional costs added due to the acquisitions of iSight and Invotas, which makes this accomplishment that much more impressive. While these results are great, FireEye will need to continue this positive trend to make good on the company's commitment to "achieve our objective of non-GAAP profitability in the fourth quarter 2017."

5. FireEye needs some time for the changes to show up in results

...given the transitions, we don't want to lean forward too much in our guiding here, and I've guided in my opinion conservatively. When I look at 2017, I want to stress we needed new sales leadership. We have that team in place now, and they've only been here about a month. So I didn't want to lean too forward there. We have a lineup of a lot of new products...but we've got to give these products time to develop the pipeline...But when you look at our new products, our channel excitement and our interest in Helix, the campaigns we're doing, the $200 million refresh opportunity that we're laser focused on, and new sales leadership and John Watters taken that role, all those things that's good inertia, that's the right things, but again, we didn't want to lean too forward in the guide.
-- Kevin Mandia, Chief Executive Officer

Once again Mandia demonstrates humility by acknowledging that these transitions will take some time and sets expectations for the analysts and shareholders. Hopefully, this is the beginning of a trend of under-promising and over-delivering for FireEye. Kevin Mandia is less than a year into his role as CEO, but he has moved quickly to make changes that will hopefully make a meaningful difference to FireEye's trajectory.

It's encouraging to see FireEye's actions resulting in some record bottom-line results for the company, and it is wise of management to ask for time to turn these actions into positive, real, sustainable gains. These changes aren't going to move the stock price back to growth unless these results can be sustained. Shareholders should ask the new FireEye leadership team to "show me the money" as they make progress to profitability and consistent positive revenue growth.

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Brian Withers owns shares of FireEye and FireEye. The Motley Fool owns shares of and recommends FireEye. The Motley Fool has a disclosure policy.