Here's Why The Best Is Yet to Come for FireEye, Inc.

As solid as the year's been -- its stock is up 14% in 2017 -- FireEye (NASDAQ: FEYE) shareholders got hit hard following its recently announced third-quarter earnings.

FireEye beat both revenue and earnings expectations, as it has all year, but its forecast for the current quarter didn't impress. The result was an immediate 15% nosedive. However, big movements either up or down based on analyst estimates are rarely a reliable indicator of a company's potential.

In FireEye's case, the knee-jerk reaction to its guidance is one more reason the best is yet to come.

A few particulars

Last quarter's $189.6 million in revenue was a 2% improvement compared to a year ago and slightly better than FireEye's guidance. While still in the red, FireEye's loss of $0.41 a share was a significant step in the right direction. FireEye lost $0.75 a year ago, shortly after CEO Kevin Mandia took the reins.

Excluding one-time items, per-share earnings were negative $0.04, a dramatic improvement from last year's loss of $0.18 a share. FireEye's balance sheet is sound with $879 million in cash and equivalents, though it does carry $770 million in senior convertible debt on the books.

FireEye's top and bottom lines and its $190 million to $196 million in expected revenue this quarter may not impress. However, when the progress Mandia has made in such a short period of time is taken into account, it explains why the best is yet to come for FireEye.

Tidying up

A year ago, FireEye generated $186.4 million in revenue -- not bad for a company with a market capitalization of around $2.13 billion at the time. Total operating expenses were $228.7 million, led by an eye-popping $110.76 million in sales and marketing overhead. Over 59% of FireEye's total revenue went to its sales efforts.

Mandia had three core objectives when he took over the top job. One, get a handle on costs, particularly sales-related expenses. Two, shift FireEye's sales efforts toward cloud-based software subscriptions including its new-ish Helix solution, as opposed to individual, one-time product sales. If the first two objectives were completed successfully, FireEye would reach its third objective: profitability.

Cleaning up the mess that was FireEye was never going to be quick or easy. But the strides made the past year make it clear Mandia has already made his mark. Last quarter's $183 million in operating expenses was a 20% drop, including paring 20% in sales-related costs. FireEye now spends 47% of its revenue on sales and marketing expenses.

Cutting costs while growing revenue is no easy feat, but FireEye can look to its peer, Check Point Software (NASDAQ: CHKP), for inspiration. In the third quarter, Check Point's revenue grew 6% to $454.63 million. Operating expenses rose just 3.9% and cost of revenue was essentially flat, with a relatively small 23% of revenue directed toward its sales efforts.

Building a foundation

Beyond monitoring overhead Check Point consistently increases profitability by emphasizing sales of its recurring revenue software subscriptions, as FireEye is now doing. Product revenue dropped 31% in the third quarter to $30.5 million. But with its Helix cloud subscription offering in full swing, FireEye's on-going service sales soared.

The 12% jump in subscription and service sales -- most on one to three year contracts -- to $159.1 million more than made up for the product results. As of last quarter, 84% of FireEye's revenue is derived from subscriptions and servicing existing customers.

This quarter's guidance may have disappointed, but it could prove to be a watershed moment for FireEye. According to Mandia, FireEye's on-going transformation has it "well positioned to achieve non-GAAP operating profitability in the fourth quarter."

The level of success accomplished in just over a year bodes well for the future, which is why FireEye's best days are ahead of it.

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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends FireEye. The Motley Fool has a disclosure policy.