FireEye Shares Jump on Earnings and Cost Discipline

By Evan Niu, CFAMarketsFool.com

Image source: FireEye.

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Cybersecurity specialist FireEye (NASDAQ: FEYE) reported third-quarter results last night, and the stock has jumped today following the relatively solid results. Shares have been under pressure throughout the year, and FireEye appointed Kevin Mandia as the new CEO in May, alongside other leadership changes, in an effort to strengthen the company's management team.

Here's how FireEye fared in quarter.

FireEye results: The raw numbers

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Data source: FireEye. YOY = year over year.

What happened with FireEye this quarter?

  • Both top- and bottom-line results were ahead of Street expectations. Analysts were modeling for $182.6 million in revenue and an adjusted loss of $0.31 per share.
  • Adjusted gross margin expanded modestly to 74%, up from 73% a year ago.
  • Adjusted operating margin was negative 14%, an improvement from the negative 32% a year ago.
  • Of 47 customers that spent more than $1 million on FireEye products and services in the third quarter, 41 purchased multiple products. This shows that FireEye is successfully cross-selling different offerings to customers.
  • The company is improving cost discipline, reducing total expenses by $10 million sequentially, driven by efficiency improvements, restructurings, and headcount reductions. Total GAAP operating expenses were $228.7 million.
  • Operating cash flow improved to $14.1 million, compared to negative $8.3 million a year ago.
  • FireEye's sales organization is in transition as it continues to search for a new head of worldwide sales.
  • The company closed its first ever seven-figure deal for FireEye Security Orchestrator.

What management said

FireEye also announced its new Cloud MVX and MVX Smart Grid offerings, which will offer intelligent threat detection at lower costs to both large enterprises and mid-market businesses. MVX Smart Grid is now available, and Cloud MVX will launch later this month. Mandia is bullish on Cloud MVX's competitiveness for mid-market businesses:

The company continues to expand its FireEye-as-a-Service (FaaS) model, which has a lot of potential going forward. Mandia commented:

CFO Mike Berry noted that there was quite a bit of demand for email security solutions, thanks to increased ransomware attacks:

Looking forward

For the fourth quarter, FireEye expects revenue to be in the range of $187 million to $193 million, with billings of $230 million to $250 million. Adjusted gross margin should be around 74%, which should translate into an adjusted net loss of $0.16 to $0.18. Operating cash flow will be adversely impacted by $10 million of cash restructuring payments, and should be negative $19 million to negative $29 million.

FireEye continues to make progress with reinvigorating the business after a string of disappointing quarters has pushed the stock to all-time lows. Mandia says that the company is hoping to achieve non-GAAP profitability in the fourth quarter of 2017, with positive free cash flow for the full year 2017. FaaS is expected to be an important driver of billings growth throughout next year, as FireEye navigates the market's transition away from product appliance sales toward cloud-based subscription solutions.

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Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends FireEye. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.