FireEye (MNDT) announced this Wednesday a definitive agreement to sell its products business for $1.2 billion in cash to a consortium led by the private equity firm Symphony Technology Group. That transaction will significantly transform the profile of the cybersecurity specialist. So here's what you need to know before considering buying the stock.
FireEye and Mandiant
Over the last several years, FireEye managed to offset the decline of its legacy on-premises cybersecurity hardware products that protect emails, endpoints, networks, and more. Indeed, with acquisitions and internal developments, it has been growing its consultancy, software, and services, branded as Mandiant, to help enterprises dealing with cybersecurity threats and incidents.
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Interestingly, the company has been leveraging its Mandiant intelligence to trigger cross-selling opportunities with its legacy products to address weaknesses in customers' computing environments.
Thus, the sale of the products segment, which represented 43% of total revenue during the last quarter, will significantly transform FireEye. Granted, both entities will still operate under partnerships to avoid disrupting services to existing customers. But FireEye will be able to focus on growing its Mandiant business, which will become vendor agnostic.
The new FireEye
So the company will be left with its Mandiant business, which grew 20.6% year over year to $399.7 million in 2020. However, that strong top-line performance came with a heavy operating loss of $183.0 million, compared to a loss of $183.2 million the year before.
Given the anticipated focus on Mandiant, management forecasted revenue to grow at a compound annual rate above 20% to more than $1 billion by 2025. And with scale, it expects to significantly improve profitability with a non-GAAP (adjusted) operating margin above 20% by 2025, compared to a negative non-GAAP operating margin of 9% last year.
In particular, the company will be focusing on growing and scaling its software-as-a-service (SaaS) offering, Mandiant Advantage, thanks to automation and software. That will reduce the negative impact of resource-intensive and low-margin consultancy activities. In addition, it will run the classic expansion playbook of SaaS growth players by adding more modules to its platform to generate extra cross-selling opportunities.
Thus, the decision to get rid of the legacy products business makes sense, as it will allow FireEye to focus on its growth opportunities. But the company will have a huge gap to fill over the next many years to reach its ambitious goals in terms of growth and profitability.
A welcome safety net
Besides the operational transformation, FireEye negotiated a good price to sell its struggling products business, which declined 3% year over year to $540.9 million in 2020. In addition, management had indicated during the latest quarterly earnings call it expected the decline of hardware sales to continue going forward. Also, the products business turned barely profitable last year with a GAAP operating margin of 5%. And with diminishing scale, improving profitability would certainly come with significant challenges.
Yet despite those unattractive prospects, the company managed to sell its products business for $1.2 billion before taxes and transaction-related costs. That corresponds to 2.2 times last year's revenue, which looks like a good price for FireEye considering the declining revenue and low margins.
So after taxes, the company will receive approximately $1.1 billion in cash, which provides a comfortable safety net to sustain losses while growing Mandiant activities.
Still not attractive enough for investors
In any case, assuming the transaction completes as expected by the end of 2021, and taking into account the cash influx and the remaining Mandiant business, the cybersecurity stock is trading at an enterprise value-to-sales ratio of 8.2.
That somewhat elevated valuation indicates the market is already pricing in quite a lot of the anticipated growth over the next many years. Granted, Mandiant addresses a vast market opportunity management estimated at $65 billion by 2023. But the company will have to provide flawless execution to gain significant scale and generate much higher margins. Thus, investors should consider staying on the sidelines for now.
