Please ensure Javascript is enabled for purposes of website accessibility

Why FireEye, Inc. Could Be a Gold Mine for Growth Investors

By Tim Brugger - Oct 15, 2017 at 9:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The cybersecurity upstart is trying to right the ship, and if it does shareholders will reap the rewards.

A glance at FireEye's (MNDT -0.14%) second-quarter earnings may raise more questions than answers that explain why its stock has soared 50% this year. But digging a bit deeper shines a bright light on a number of areas CEO Kevin Mandia has delivered on in the past year.

Mandia made his objectives clear when he took the CEO reins in June 2016, and the strides he and the FireEye team have already made in a relatively short period of time demonstrates why its stellar performance in 2017 is warranted. FireEye is hardly out of the woods, but the light at the end of the tunnel is why its stock could be a goldmine for growth investors.

Close-up picture of cables attached to the back of a computer hard drive.

Image source: Getty Images.

Joining the party

One of FireEye's core objectives is shifting its focus from a reliance on generating new product sales. The goal is to transition to a cloud-based software subscription model to build a stable foundation of recurring revenue, much like FireEye's peers including Check Point Software (CHKP -0.60%).

FireEye's $185.5 million in revenue was a surprisingly strong 6% increase year over year. Though FireEye's sales beat expectations and resulted in another stock price boost, it was the revenue mix that growth investors should focus on.

Product sales in the quarter sank 23% to $31.2 million, and are down 26% to $54.95 million in the first half of the year. That may not seem like a win, but it's in line with Mandia's focus on building a steady stream of revenue.

The decline in product sales was more than made up for by the $154.27 million in cloud software subscription revenue, good for a 15% jump compared to a year ago. A primary reason FireEye could be a gold mine for growth investors is that it will likely report similar growth where it counts -- subscriptions -- for the current quarter on Nov. 1.

There is an additional benefit to building a foundation of on-going revenue, and FireEye nailed it again last quarter: lower operating expenses, particularly sales overhead.

When less is more

FireEye was able to shave an impressive 24% off its total operating expenses last quarter, down to $178.21 million. There's still a long road ahead, but to cut overhead that dramatically in just a year is not only a significant step in the right direction, it bodes well for the future.

A particular area of focus of FireEye, and its industry peers, is cutting sales costs which will be made easier by its recurring revenue efforts. FireEye can look to Check Point as the poster child for managing sales expenses. Last quarter Check Point spent $114.68 million on sales-related overhead, equal to a meager -- relative to its competitors -- 25% of its $458.73 million in total revenue.

Though FireEye is making headway, sales expenses still command a hefty piece of its revenue. The good news was last quarter's $89.63 million in sales and marketing costs was a 26% decline. The not-so-good news is FireEye's sales costs still equal 48% of total revenue.

However, like Check Point -- which to be fair is much further along in its transition to lower-cost recurring software subscription sales -- FireEye should be able to continue paring expenses.

Sure, there's more work to be done, but FireEye's expense management efforts are already paying off. Excluding one-time items, last quarter's operating margin of -3% was a fraction of the prior year's -28%. FireEye's bottom line also benefited from paring overhead.

Though still in the black, FireEye reported an adjusted loss-per-share of $0.04, a quantum leap in the right direction compared to 2016's disastrous loss of $0.33 a share.

If FireEye can string together more strong quarterly results, there's little doubt it could be an absolute gold mine for growth investors, as current shareholders know first-hand.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mandiant, Inc. Stock Quote
Mandiant, Inc.
MNDT
$21.69 (-0.14%) $0.03
Check Point Software Technologies Ltd. Stock Quote
Check Point Software Technologies Ltd.
CHKP
$120.97 (-0.60%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.