FireEye (FEYE) Soars On First Ever Positive Earnings In Q4

FireEye Inc.’s (NASDAQ:FEYE) shares gained more than 9% last Friday after the company delivered splendid fourth-quarter 2017 results. The cyber-security solution provider’s quarterly results not only fared better than the Zacks Consensus Estimate, but also marked significant year-over-year improvement. Also, the fourth-quarter results exceeded the company’s guidance ranges at every key metrics.

The main highlight of the overall quarterly result was that the company reported its first ever positive non-GAAP operating income. It should be noted that FireEye, during its second-quarter conference call, had predicted to report positive non-GAAP operating income in the fourth quarter.

Buoyed by stellar quarterly results, the company provided an encouraging outlook for the current quarter and full-year 2018. These, in turn, boosted investors’ confidence in the stock which was well reflected in the share price movement on Friday.

Notably, shares of FireEye have made remarkable gain over the past year. The stock has appreciated 31.3%, significantly outperforming the industry’s gain of just 4.9%.

Now let’s discuss the quarterly results first.

Revenues

The company’s fourth-quarter revenues of $202.3 million increased 9.5% year over year and outpaced the Zacks Consensus Estimate of $194 million as well as management’s guidance of $190-$196 million.

The company noted that its quarterly revenues mainly benefited from shift in the business model from product based to subscription based. Apart from this, improved sales execution, enhanced relationship with channel partners and growing adoption of its Helix, iSIGHT Intelligence and Endpoint security solutions were other key growth drivers.

Further, billings climbed 9% year over year to $242.2 million and came way ahead of management’s guidance of $210-$230 million, mainly attributed to all the factors mentioned above.

Segment wise, Product revenues grew 14% year over year to $38.3 million. Subscription and Services revenues, on the other hand, rose 8.5% to approximately $164 million.

Additonally, FireEye continues to secure large deals. Notably, the company closed 52 transactions, with an individual value of more than $1 million. The company also added 298 customers in the recently-reported quarter.

Operating Results

Non-GAAP gross profit increased approximately 10.7% from the year-ago quarter to $152 million. Gross margin expanded 80 basis points (bps) to 75.1% as the company has been able to deliver its subscriptions or services more efficiently.

Non-GAAP operating expenses dropped 7.4% to $149 million primarily due to elevated sales and marketing expenses. Increased commissions on higher billings resulted in raised sales and marketing expenses.

The company posted non-GAAP operating income of $2.9 million, while in the year-ago quarter it had incurred a loss of $1.4 million. In addition, FireEye noted that its non-GAAP operating margin was positive 1% compared with negative 1% recorded in fourth-quarter 2016. The company stated that improved operating income and margin are results of increased operational efficiency and sales productivity.

Non-GAAP net income for the fourth quarter was approximately $1.3 million compared with the year-ago net loss of $4.8 million.

FireEye reported its first-ever non-GAAP earnings per share of a penny which compares favorably with the consensus estimate of a loss of penny as well as the year-ago quarter’s loss of 3 cents. The quarter’s non-GAAP earnings per share also compared favorably with management’s guidance range of a loss of cents to breakeven. Notably, this is the ninth consecutive quarter of better-than-expected results for the bottom line and year-over-year improvement.

Balance Sheet & Cash Flow

FireEye exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $896.8 million, up from $878.8 million at the end of the third quarter. Accounts receivable were $140 million compared with $120.2 million at the end of third-quarter 2017. During the year, the company generated $17.6 million of cash from operating activities.

Guidance

Buoyed by impressive fourth-quarter results, improved operational efficiency and sales productivity, as well as healthy demand for intelligence-led security products, FireEye issued an encouraging outlook for the first quarter and full-year 2018.

For the first quarter, the company anticipates revenues in the range of $192-$197 million (mid-point: $194.5 million), higher than the Zacks Consensus Estimate of $187.1 million. Billings are projected in the range of $165-$175 million. Non-GAAP gross margin is estimated to be approximately 74%, while non-GAAP operating margin is projected to remain in the band of -2% to -4%. Operating cash flow is likely to lie between zero and negative $10 million.

The company projects to report loss per share of 3-6 cents. The Zacks Consensus Estimate for the quarter is pegged at a loss of 4 cents.

For the full year, the company anticipates revenues in the range of $815-$825 million (mid-point: $820 million), higher than the Zacks Consensus Estimate of $804 million. Billings are projected in the range of $810-$830 million. Non-GAAP operating margin is estimated to remain in the band of 1-2%.

The company projects to report non-GAAP earnings in the range of breakeven to 4 cents per share. The Zacks Consensus Estimate for the quarter is pegged at a loss of a penny.

Operating cash flow is likely to come between $45 million and $55 million. Capital expenditure is projected to be between $35 million and $40 million.

Our Take

A shorter contract length is likely to adversely impact the company’s near-term top-line performance. However, there is an advantage to the shorter-length contracts as these generally generate higher margins compared with three-year contracts.

Also, FireEye’s management has been striving to turn around the business through a string of initiatives, which includes product launches, acquisition and cost optimization. We consider that the company’s turnaround strategies are paying off as reflected from its back-to-back four quarters of splendid results.

Additionally, although a shift from product-based to subscription-based business model will have a negative impact on FireEye’s near-term results, we believe it will lead to more stable revenues over the long run.

Currently, FireEye carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Micron Technology (NASDAQ:MU) , Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA) . While Micron sports a Zacks Rank #1 (Strong Buy), Intel and NVIDIA carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron, Intel and NVIDIA have an expected long-term EPS growth rate of 10%, 8.4% and 10.3%, respectively.

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