FireEye Fizzles on Conservative Guidance

FireEye Inc. (MNDT) announced stronger-than-expected third-quarter 2017 results on Wednesday after the market closed, lauding strong sequential growth in subscription billings and a record quarter from its Mandiant services subsidiary. The cybersecurity specialist also continued to edge toward sustained profitability with the help of operating-efficiency improvements.

But shares plunged on Thursday after FireEye issued mixed fourth-quarter guidance relative to the market's expectations. Let's dig deeper to see what drove FireEye's business as it entered the second half of the year, and what investors should expect from the company as we look ahead.

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FireEye results: The raw numbers

Data source: FireEye Inc.

What happened with FireEye this quarter?

• On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation, FireEye's net loss was $6.5 million, or $0.04 per share, narrowed from an adjusted net loss of $0.18 per share in the same year-ago period.
• By comparison, both the top and bottom lines were well above FireEye's latest guidance, which called for an adjusted per-share loss of $0.06 to $0.09 and revenue of $183 million to $189 million.
• Billings fell 6.4% year over year, to $201.7 million, to near the high end of guidance for billings of $190 million to $205 million. Within that, product subscription billings climbed 28% sequentially from last quarter, to $95.8 million.
• Adjusted gross margin was 74%, flat from last year's Q3 and above guidance for 73%. Operating margin was negative 2%, improving from negative 14% in last year's third quarter and above guidance of negative 4% to negative 6%.
• Product revenue fell 30.5% year over year, to $30.5 million.
• Subscription and services revenue increased 11.6%, to $159.1 million. Within that, Mandiant professional services revenue climbed 13% year over year, to $33.5 million, helped by its role investigating recent high-profile security breaches.
• Added 234 new customers in the quarter and closed 43 transactions greater than $1 million.
• Generated cash flow from operations of $12.5 million, above guidance for a range of $1 million to $10 million.

What management said

FireEye CEO Kevin Mandia stated:

We executed against our financial commitments in the third quarter, delivering billings, revenue, earnings per share and operating cash flow above expectations. I believe we have done an excellent job of right-sizing our cost structure over the past year while innovating faster than at any time in our history. Our mission is to relentlessly protect our customers with innovative technology and expertise learned on the front lines. FireEye Helix is our technology platform that makes it simple to deliver advanced security to any organization. It enhances the visibility into unseen threats provided by our individual security products and empowers organizations to make expert decisions based on our frontline threat intelligence and expertise. I believe Helix, coupled with innovations in our key product families, has the potential to expand our customer base, accelerate multi-product adoption, and increase our subscription billings over the long term.

Looking forward

For the fourth quarter, FireEye expects revenue in the range of $190 million to $196 million, billings of $210 million to $230 million, and an adjusted net loss per share ranging from breakeven to $0.03. By comparison, investors were anticipating a fourth-quarter loss of $0.01 per share on revenue near the high end of FireEye's guidance range. 

During the subsequent conference call, FireEye CFO Frank Verdecanna explained that this outlook assumes seasonal strength for both endpoint sales and Helix, as well as encouraging momentum for subscription-based solutions. But he also noted that there are "some larger committed subscription deals in [FireEye's] pipeline that look to have shorter contract lengths compared to what we were expecting when we reiterated our annual guidance last quarter."

As such, FireEye narrowed both its full-year 2017 guidance to call for revenue of $739 million to $745 million (from $734 million to $746 million previously), and reduced its outlook for full-year billings to be in the range of $736 million to $756 million (down from $745 million to $775 million previously). At the same time, FireEye now expects its full-year adjusted net loss per share to be in the range of $0.16 to $0.19, marking an improvement from previous guidance for a per-share net loss of $0.19 to $0.24.

Bottom line: This was a great quarter from FireEye, punctuated by its improving profitability and strong momentum for key products and services. But while it's also hard to blame FireEye for its cautious forward view, it's also no surprise that shares dropped today as the market frets over the near-term implications of those shorter subscription contracts.