Cyber security specialist FireEye's (MNDT) is becoming more financially fit. Last quarter, the company came within just $2 million of posting positive operating earnings on a non-GAAP basis. It also returned to positive cash flow despite big charges related to its restructuring efforts.
However, investors ignored that good news and sent the stock sharply lower following FireEye's fourth-quarter report. Let's take a closer look at the main red flags that have Wall Street worried the company's growth prospects are in serious trouble.
Image source: Getty Images.
Growth challenges
FireEye closed fiscal 2016 at a 15% annual growth pace, which marked a huge slowdown from the prior year's 46% spike. The most recent trends paint an even starker picture, though. Sales were flat in the fourth quarter as billings dove to a 14% loss from the prior quarter's 2% gain. Since both figures were well below management's forecast, the company missed its full-year sales and billings targets.
In a conference call with investors, CEO Kevin Mandia and his executive team pointed to two key drivers behind those disappointing results. First, FireEye had management struggles as it lacked an executive in charge of worldwide sales and was also missing a leader responsible for the European geography. The sales team underwent turnover at the top in both the Middle East and Japan divisions, too.
The lack of steady leadership likely contributed to the loss of several large deals, executives said. They believe most of these projects were just pushed into 2017, but there's no way to know for sure that the company hasn't lost a big chunk of its expected business to rivals.
Management turnover
While it has filled those important sales positions, turnover at the executive level doesn't inspire a lot of confidence. Chief Financial Officer Michael Berry is leaving the team after less than two years in that key position, FireEye announced last week. And David DeWalt, its former CEO, has resigned to pursue other opportunities.
The current chief executive is sticking around, but his eight-month tenure has so far produced an almost 30% slump in the stock price as sales growth slowed to a halt from 19% in the second quarter of 2016. Mandia has no shortage of challenges ahead, including a pivot to a new go-to-market strategy, rolling out completely refreshed product offerings, and implementing an aggressive cost-cutting program that aims to push the company into profitability without damaging its long-run growth potential.
Cloudy forecast
Mandia and his team issued a forecast for the current quarter that implies its sales struggles aren't about to disappear. Revenue will fall to $163 million to mark FireEye's first decline on that metric since going public in 2013 (its growth pace peaked at almost 200% in 2014).
FEYE Revenue (Quarterly YoY Growth) data by YCharts.
More worrying is the fact that the company did not issue a full-year forecast for sales or billings as it has in each of the prior three fiscal years. The demand picture is apparently too uncertain for management to predict whether billings will tick higher or continue along the double-digit pace of declines the company endured in the most recent quarter.
Executives did say they believe FireEye will bounce back to billings growth sometime in the second half of the year, but that's not a very concrete prediction. FireEye will issue an official full-year forecast when it holds its investor conference sometime in the next few months. While that report is likely to include positive forecasts around cash flow and operating profitability, there's a good chance the company will project flat or even declining overall sales at least through 2017.
