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FireEye Inc (FEYE) Loss Lower than Expected; Shares Fall On CFO Exit

FireEye Inc (NASDAQ:FEYE) reported second-quarter 2015 results wherein both the top and bottom lines compared favorably with the respective Zacks Consensus Estimate. However, the company’s shares declined over 5% after it announced the resignation of Chief Financial Officer (CFO) Michael Sheridan.

Let’s First Discuss Second-Quarter Results

The cloud-based security solution provider’s second-quarter revenues jumped 55.8% year over year to $147.2 million. Moreover, quarterly revenues surpassed the Zacks Consensus Estimate of $143 million as well as the guided range of $140 million to $144 million. Billings during the quarter marked a year-over-year jump of 57% to $178.3 million.

The year-over-year improvement was primarily aided by solid yields from sales and marketing strategies and strength in the network security market. A large number of deal wins and customer additions also contributed to the strength.

Gross profit for the quarter increased 72.2% year over year to $91.1 million, while, as a percentage of sales, gross margin improved 590 basis points (bps) to 61.9%. The year-over-year improvement was mainly due to higher product revenues.

Furthermore, continued cost management efforts helped FireEye to lower adjusted operating costs, as a percentage of sales, to 141.1% from 179% reported a year ago.

FireEye posted adjusted operating loss of $116.6 million, flat year over year. Adjusted net loss came in at $119 million as against a loss of $103.6 million incurred in the prior-year period.

On a per share basis, the company’s adjusted loss widened from 73 cents to 78 cents, but narrowed from the Zacks Consensus Estimate of a loss of 84 cents.

FireEye exited the quarter with cash and cash equivalents and short-term investments of approximately $1.19 billion, up significantly from $397.6 million at the end of the previous quarter. The company also witnessed significant year-over-year improvement in operating cash flow, which increased by more than $120 million to $35.8 million from a negative cash flow of $84.5 million at the end of second-quarter 2014.


Buoyed by better-than-expected second-quarter results, FireEye revised the full-year revenue guidance range to $630–$645 million from $615–$635 million. Moreover, the company narrowed its non-GAAP loss per share expectations to $1.70–$1.80 from $1.75–$1.85.

For the third quarter, the company expects revenues between $164 million and $168 million. Non-GAAP loss per share is projected in the range of 44 cents to 48 cents.

Investors Frown At CFO Departure

FireEye’s financial results were, however, overshadowed by the news of the sudden departure of its CFO to join a private tech company in an unrelated industry. Sheridan joined FireEye in 2011 and since then it has witnessed tremendous growth.

Under his supervision, the company got listed with an oversubscribed IPO in the fall of 2013. The company has raised nearly $1.5 billion through the IPO, follow-on public offering and issuance of convertible debt offerings since then. The revenue growth trajectory also looks great – in 2013, FireEye recorded revenues of $161.6 million, which increased to $425.7 million in 2014 and is projected to be nearly $645 million in 2015.

Therefore, investors are concerned about the company’s leadership at this crucial juncture. FireEye’s current vice president of finance, Frank Verdecanna, will serve as interim CFO from early August.


We believe that the share price decline is temporary and FireEye is poised to grow over the long run. The main reason for our optimism is the healthy security market, the company’s strong product line-up, flow of deal wins and investment plans that should in combination boost results.

The demand for cyber security is on the rise and the previous quarterly results show that FireEye is gaining from it. With the advancement in technology, more organizations are adopting a bring-your-own-device (BYOD) policy, which has enhanced employee productivity with anytime, anywhere access, while making it all the more necessary for organizations to enforce data security measures.

Furthermore, numerous data breaches over the last couple of years at high-profile business houses such as Target Corp. and Anthem Inc. as well as government agencies are leading to the recognition of security as a primary investment area, which in turn is boosting the demand for cyber security products. Per Gartner, worldwide spending on IT security in 2014 was about $70 billion and is likely to reach $76.9 billion in 2015. Another research firm, Markets and Markets estimates that, IT security market to cross $155 billion mark by 2019.

Additionally, in the first half of 2015, FireEye and VISA partnered to create tools and services to help protect against cyber attacks. The first-of-its-kind partnership will generate incremental revenues for FireEye. All these factors are likely to aid its top line and bottom line, going forward.

FireEye currently carries a Zacks Rank #2 (Buy).

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