FireEye Sets $224 Mil IPO In Next-Gen Network Security Field

Investor's Business Daily

THE BUZZ

Stocks in the Computer Software-Security category have been top performers at No. 10 on IBD's list of 197 industry groups.

The group includes companies such as Check Point Software (CHKP), Symantec (SYMC) and Qihoo 360 (QIHU).

The category will get a new entrant with the upcoming initial public offering of FireEye (FEYE), which is expected to launch its IPO Friday.

The Silicon Valley startup, founded in 2004 and based in Milpitas, Calif., has developed computer security technology geared toward detection of the newest kinds of cyberattacks.

The days of amateur hackers who launched attacks principally for fame or mischief has since evolved into highly sophisticated attacks fundamentally different from earlier generation threats.

FireEye, in its S-1 prospectus filed with the Securities and Exchange Commission, said, "Today's organizations face an advanced malware pandemic of unprecedented severity led by 'advanced persistent threat actors,' such as cybercriminal organizations, nation-states and hacktivists, who are utilizing highly sophisticated next-generation threats to circumvent traditional IT defenses at an alarming rate.

Examples of an advanced persistent threat include the RSA attack in 2011. RSA Security is a network security firm that EMC (EMC) acquired in 2006. The attack started as an email with an Excel attachment sent to a small group of company employees. Once opened, the virus harvested user credentials to move higher up the chain of command. In time it collected keys to the RSA token master key database, thereby compromising the security of thousands of other companies, FireEye said in its SEC filing.

According to FireEye, these next-generation threats are significantly harder to detect. They mutate quickly, making it difficult for traditional security technology to identify.

THE COMPANY

FireEye was founded by Ashar Aziz, chief technology officer and formerly a network security engineer from Sun Microsystems. FireEye's CEO is David DeWalt, who was CEO of security outfit McAfee before its $7.6 billion acquisition by Intel (INTC). And Enrique Salem, former CEO of Symantec, the largest company in IBD's Computer Software-Security group, is on FireEye's board of directors.

The company's technology provides real-time protection that targets so-called next-generation cyberattacks.

Aziz, in a videotaped presentation to analysts in preparation for the IPO, said, "Competitive approaches don't have any of these aspects of FireEye's technology. We engineered the world's most advanced cyberattack detection and protection technology to protect enterprises large and small from the world's most dangerous threats.

Its technology "represents a paradigm shift from how IT security has been conducted since the earliest days of the information technology industry," the company said. The technology includes a cloud-based threat intelligence network "that uniquely protects organizations from next-generation threats at all stages of the attack lifecycle and across all primary threat vectors, including Web, email and file systems," it said.

RISK/CHALLENGES

According to research firm IDC, about $18 billion will be spent on information technology security in 2013 worldwide. While most of that is spent on traditional IT security products, spending on next-generation products of the kind provided by FireEye is expected to grow rapidly.

"They are in a good field and competitors are big, but FireEye is probably more nimble and focused right now," said Francis Gaskins, founder of IPOdesktop.com. "Their success will draw in more competitors but if FireEye can maintain their lead it might be hard to catch them in the near term.

Cisco Systems (CSCO) upped the competitive stakes in the cybersecurity field in late July when it announced plans to acquire Sourcefire for $2.7 billion. Like FireEye, Sourcefire provides next-generation intrusion prevention systems for the corporate world.

Gaskins, in his review of FireEye's business, called it "a high- risk investment that might pay off." FireEye is investing heavily in sales, marketing and product development, he said, "but when you're introducing something that's new and different it takes money to break through to the next level of buyers.

Two recent IPOs in this field are AVG Technologies (AVG) in February 2012 and Palo Alto Networks (PANW) in July 2012. AVG is up 50% from its IPO price while Palo Alto Networks is down 14%.

THE RESULTS

For the six-month period ended June 30, FireEye reported revenue of $61.6 million, up 107% from the year-ago period. It reported a net loss of $67.1 million. About 48% of revenue is subscription-based, with the remaining coming from product sales.

In 2012 FireEye reported revenue of $83.3 million, up 150% from 2011, and a net loss of $35.7 million. Losses have been heavy as sales and marketing expenses and R&D expenditures have soared.

As of June 30, FireEye said it had more than 1,100 customers across 40 countries. Customers include "leading enterprises in a diverse set of industries," including telecommunications, technology, financial services, public utilities, health care and government agencies.

PROCEEDS

FireEye estimates net proceeds from the offering will be approximately $205 million, based on an assumed offering price of $16 a share, the midpoint of the price range. It will use proceeds to expand staffing, sales and marketing, product development, and other general and administrative matters. On Tuesday, FireEye updated its pricing to a range of $15 to $17 a share, up from a range of $12 to $14, indicating that demand for shares is strong.

THE MANAGEMENT

David DeWalt

Chief executive officer

DeWalt, 49, became CEO in November 2012. He was CEO of McAfee from 2007 until February 2011 when it was acquired by Intel. He previously held various positions at EMC.

Ashar AzizChief technology officer

Aziz, 54, founded FireEye in 2004 and served as CEO before DeWalt. Prior to FireEye, Aziz founded Terraspring, a data center automation firm acquired by Sun Microsystems. Aziz spent 12 years at Sun as an engineer.

Michael Sheridan

Chief financial officer

Sheridan, 48, has served as CFO since June 2011. Before that he was chief financial officer at Mimosa Systems, a provider of enterprise content archiving systems, until its acquisition by Iron Mountain.

FireEye

Milpitas, Calif.

(408) 321-6300fireeye.comLead underwriters: Morgan Stanley, Goldman SachsOffering price: $15-$17Expected date: Friday, Sept. 20Ticker: FEYE

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