It didn't appear many investors or pundits were happy with FireEye's (MNDT) second-quarter results announced Nov. 1. The problem, according to the naysayers, was twofold. One, the 2% rise in total revenue to $189.6 million disappointed, and so too did FireEye's guidance for the current quarter.
There were two things wrong with investors' pessimism. The first is that FireEye's top line should take a back seat, at least for the time being, to its efficiency initiative. Also, the mid-range of FireEye's $190 million to $196 million in sales expected in the fourth quarter would be a 4.5% improvement year over year. Not worth writing home about, but hardly disappointing given FireEye's focus.
So, is FireEye a buy? The answer to that question depends on your investment objective and time frame.
The future starts now
When CEO Kevin Mandia took the helm a year and a half ago from David DeWalt, FireEye was in shambles. Sagging revenue combined with out-of-control spending was the impetus for the much-needed change. Mandia immediately initiated a two-pronged plan of attack.
The first was to shift FireEye's focus away from a reliance on individual sales and instead drive long-term growth utilizing its then new-ish cloud software and the recurring revenue it generates. Not an easy proposition by any means, and certainly not one that would happen overnight. Nor will the recent $20 million deal -- $15 million in equity and $5 million in cash -- it made for big-data security provider X15 Software. Assimilating a new addition, just as with changing FireEye's revenue model, takes time.
Growing a reliable foundation of ongoing revenue is a step-by-step process that requires patience, not an attribute shared by all investors. FireEye's transition is why its "meager" 2% total revenue growth shouldn't weigh too heavy on investor's minds -- at least not yet.
The other objective was to slash expenses. FireEye is hardly the only cybersecurity firm to talk about cutting overhead. Palo Alto Networks (PANW -1.72%) has also talked the trimming expenses talk, but it has yet to walk the walk. Last quarter, Palo Alto's operating expenses rose 21% to $418.4 million, and its cost of revenue soared 40% to $141.5. Combined, the spending erased any good tidings from Palo Alto's 27% increase in sales to $505.5 million. By contrast, FireEye has done a remarkable job of cutting costs on the road to profitability.
Last quarter's $183 million in operating expenses was a 20% drop from a year ago, and cost of revenue eased 1% to $68.22 million. Accounting for a one-time restructuring charge a year ago, FireEye still cut over 11% in overhead. Cost of revenue didn't decline further because the shift in FireEye's business model to subscriptions cost a tad more than a year ago, even as product-related spending declined.
In addition to operating expenses, investors would be wise to look beyond total revenue and focus on FireEye's subscription and service results. FireEye's subscription sales jumped an impressive 12% last quarter to $159.13 million. In other words, 84% of FireEye's sales are recurring revenue to drive slow but steady growth.
In conjunction with FireEye's top-line growth and cost-cutting, third-quarter per-share earnings excluding one-time items improved to a loss of just $0.04 compared to $0.18 a share a year ago. Remember, Mandia has only been CEO for a year and a half. But for the first nine months of 2017, FireEye cut its adjusted per-share losses from the prior year's $0.97 to negative $0.16 share.
To buy or not to buy
Other CEOs may talk a good game, but FireEye is delivering. A 4.5% increase in revenue to end 2017 should be cause for celebration given FireEye's core objectives. Whether it is or not really doesn't matter. What does matter is FireEye continuing to improve efficiency and subscription revenue gains, and I have no doubt it will execute on both counts -- again.
For long-term investors in search of growth, FireEye warrants a spot at the top of your watchlist. It will take time and patience, but FireEye is delivering on its initiatives with each passing quarter.