It has been about a month since the last earnings report for FireEye (FEYE). Shares have lost about 12.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is FireEye due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
FireEye Reports Q2 Results
FireEye reported second-quarter 2019 non-GAAP loss of 1 cent per share against break-even earnings in the prior-year quarter. Moreover, the bottom line missed the Zacks Consensus Estimate of earnings of a penny.
Revenues totaled $218 million, which increased 7% year over year, and outpaced the consensus estimate of $215 million.
Strong demand for threat intelligence and managed defense solutions, and Mandiant services boosted the top line.
Product and related subscription, and support revenues decreased 4% year over year to $117.5 million, reflecting a $24 million decline in the opening current deferred revenue balance for the segment. This stemmed from a fall in appliance hardware sales, which occurred in 2016 and 2017 but is still realized due to the ASC 606 revenue accounting standards.
Sales of appliances accounted for nearly 31% of the total product and related category, up 24% year over year, attributed to the end of life of older third-generation appliances. This led to a surge of network and email hardware refreshes.
Quarterly billings increased 13% backed by 27% year-over-year growth in platform, cloud subscription, and managed services category. Billings did not include any transactions higher than $10 million.
Notably, Mandiant Professional Services also performed well in the second quarter. Revenues from this segment were up 15% from the year-ago quarter to $46 million.
FireEye completed the acquisition of Verodin during the quarter.
Moreover, the Helix platform witnessed increased engagement. The company launched the early adopter program for the next generation of the platform, which is receiving positive feedback. The next generation of Helix is expected to be launched later this year.
FireEye secured 45 transactions greater than a $1 million, nearly 67% of which included services or expertise on demand.
Overall transaction volume increased with both Global 2000 customers as well as in the mid-market. In the second quarter, 261 new customers were added.
However, annual run rate (ARR) for the product and related subscriptions category declined $20 million sequentially in the second quarter, primarily due to the expiration of subscriptions and support of certain third-generation appliances.
Non-GAAP gross margin contracted 300 basis points (bps) year over year to 72%.
Non-GAAP operating margin was negative 1%, down 300 bps due to an 8% year-over-year rise in operating expenses.
The expense rise stemmed primarily from R&D and sales and marketing. Higher investment in product innovation and next generation Helix platform led to higher R&D expenses.
Increased commission expenses associated with higher sales performance and accelerated growth in new business resulted in higher sales and marketing expenses.
Further, operating expenses included the financial impact of Verodin being part of the company for the last month of the reported quarter.
However, as a percentage of billings, operating expenses declined from 75% to 72%, reflecting continued leverage in long-term business model.
Balance Sheet & Cash Flow
FireEye exited the second quarter with cash and cash equivalents, and short-term investments of approximately $987.7 million, down from $1.13 billion at the end of the previous quarter.
The company’s cash flow from operation was $9.5 million compared with $24.5 million in the first quarter.
For third-quarter 2019, FireEye anticipates revenues to be between $217 million and $221 million. The Zacks Consensus Estimate for revenues stands at $215.2 million, implying 6.17% growth from the year-ago reported figure. This reflects a $23 million decrease in current deferred revenues in the product and related category.
Billings are projected in the range of $245-$255 million. Non-GAAP gross margin is anticipated to be 72%. Non-GAAP operating margin is estimated in the band of 0% to 2%, suggesting a sequentially flat to lower operating expenses accruing to lower payroll taxes.
Capital expenditure of about $10 million is expected in the third quarter.
Non-GAAP earnings per share are expected in the 0-2 cents range. The midpoint of 1 cent matches the consensus estimate.
Operating cash flow is expected be within $15 million to $25 million.
For 2019, the company revised and lowered its revenue estimates from $880-$890 million to $865-$875 million.
Outlook for billings were raised to $935-$955 million, up from previous guidance of $915-$935 million.
Non-GAAP operating margin is expected in the band of 0-1%.
FireEye dropped its earnings forecast significantly, and now expects non-GAAP earnings to be between 0 and 4 cents per share, down from previous guidance of 17-21 cents.
The decline in ARR of product and related subscriptions lowered FireEye’s outlook. However, the fact that there's less than $3 million in ARR left for the third-generation appliances, product and related ARR is expected to stabilize and return to growth by virtue of the new cloud-based network security and server-based detection solutions.
Moreover, lower upfront revenues are expected for the year.
Further, an increase in the mix of appliance billings is expected, which is likely to lengthen the revenue recognition period to 48 months compared to a more subscription heavy mix at an average duration of 24 to 26 months.
How Have Estimates Been Moving Since Then?
Since the earnings release, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -51.97% due to these changes.
Currently, FireEye has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise FireEye has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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