Shortly after Kevin Mandia replaced took the helm of FireEye (NASDAQ:FEYE) last year, tough decisions had to be made, and he wasted no time in making them. The much-needed change in direction he instituted included as many as 400 job cuts -- FireEye's headcount at the time was 3,400 -- to jump start its cost-cutting initiatives.
As big a step as laying off more than 10% of its workforce was, FireEye's shift away from a reliance on product sales to subscription-based cloud software solutions promised to change everything -- for good or bad, depending on execution.
Light at the end of the tunnel
When FireEye announced its layoff plan in August, it also cut revenue guidance; subsequently, its stock nosedived 16% to $14.02 a share, a plunge it's has only recently fully recovered from. In addition to shifting to a more efficient business model, FireEye hoped to shave $80 million in costs. Turns out FireEye underpromised and overdelivered on virtually all of its objectives.
The $173.7 million in revenue it brought in during Q1 was only a 3% year-over-year increase, but that was to be expected as while the company focuses on growing the aforementioned recurring revenue base. This type of transition is a slow one, as FireEye peer Check Point Software (NASDAQ:CHKP) knows all too well. But patience has paid off in a big way for Check Point, and FireEye is in the early stages of achieving similar objectives.
Despite the mere 3% sales increase, FireEye cut its per-share losses by more than half to $0.48 compared to 2016's $0.98 a share loss. As for overhead, last quarter FireEye shaved $72.1 million from its operating expenses, including $28 million from sales and marketing. That's delivering the goods, which is why improved efficiency is one of FireEye's best accomplishments of 2017.
Another sign that FireEye is making good on its promises was that it trimmed $20.5 million in stock-based compensation. When a company is in FireEye's situation, the necessary belt-tightening should happen across the board; that figure is an indication that this is what's happening.
The other side of the coin
As Check Point CEO Gil Shwed can attest, its takes time to initiate, let alone complete, a business transformation. Shwed instituted a software-subscription sales/recurring-revenue model at his company a couple of years ago, and shareholders are now reaping the benefits.
Thanks to its slow-but-steady subscription focus, Check Point reported an 8% increase in revenue of $435 million in the first quarter. But the lower costs associated with servicing existing clients rather than relying solely on new product sales helped push Check Point's earnings per share up an impressive 15% to $1.08. That's the model FireEye is working to emulate, which brings us to another of its best moves in 2017.
FireEye may have only increased sales by 3%, but it's how it did lifted them that bodes well for the future. Product sales decreased a whopping 30% in Q1 to $23.74 million, yet FireEye was still able to post an incremental gain in total revenue by delivering on its subscription emphasis.
The subscription and services unit reported a 12% jump in sales to $150 million for the quarter, more than making up for the precipitous drop in product sales; that unit now accounts for 86% of total revenue. For some perspective, including software updates and subscription revenue, the two key areas combined accounted for 71% of Check Point's total revenue.
Cutting overhead while significantly improving sales of its cloud software offerings is a winning combination, and FireEye's delivering on both which is why they're two of its best moves so far this year.
Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends FireEye. The Motley Fool has a disclosure policy.