Is Redemption Possible for FireEye Inc?

Missing guidance will always make Wall Street nervous as investors put a company in the penalty box. But has the story fundamentally changed for this cybersecurity stock, or is this just a momentary hiccup?

FireEye (MNDT) shares have shed nearly 20% since it reported third quarter results. The company has always held a formidable position in the cybersecurity market, but this stock dip leaves investors wondering if now is the time to buy or if this is just a foreshadowing of greater losses to come.

Listen to the full podcast by clicking here. A full transcript follows the video.

This video was recorded on Nov. 13, 2015.

Sean O'Reilly: Who are we talking about next?

Dylan Lewis: We are going to talk about FireEye.

O'Reilly: Oh, gosh. How did I know you would do this?

Lewis: Another Dylan Lewis holding.

O'Reilly: Now, full disclosure, you own it. A lot of people in this building like it. I'll just preface this. They've got the only certification for the federal government of the United States for something.

Lewis: Yeah, I can give you the specifics if you want.

O'Reilly: Yeah, let's do that.

Lewis: So the U.S. Department of Homeland Security has certified FireEye's multi-vector virtual execution engine and dynamic threat intelligence cloud platform under the Safety Act.

O'Reilly: I will give you $20 to say that again five times fast.

Lewis: Oh, God, I couldn't.

O'Reilly: You nailed that, by the way.

Lewis: Yeah, right? I was shocked, because I remember we actually, this is rehashing what we talked about a couple podcasts ago and I stumbled all over that sentence.

O'Reilly: Butchered it.

Lewis: Yeah, it was brutal. So they are currently the only company that enjoys that certification. So that's fantastic.

O'Reilly: That was pretty cool.

Lewis: And basically what it does is it protects customers of FireEye against allegations of technological negligence when it comes to acts of cyberterrorism. So it's basically protecting them against any lawsuit liability, I kind of think.

O'Reilly: So Dylan, if Uncle Sam loves them so much, why is their stock down so much?

Lewis: Yeah, again tied to earnings. That's going to be the theme, I think, throughout this show. In their case, I think it came down a little bit more to them being overly ambitious when they provided guidance last quarter. And maybe not realizing that they were going up against some pretty tough comps from before.

O'Reilly: Are they newbies to playing the Wall Street earnings projection game?

Lewis: No, they've been around for a little bit. I think it's, like I said, it's just maybe getting caught up a little bit in not realizing that the previous year's quarter was absolutely stellar, and they landed a very large contract that I think influenced their results pretty heavily.

So basically one quarter ago they talked about their guidance for this quarter, and they said that for eight consecutive quarters they've raised their quarterly billings guidance, which was one of the main metrics they use. And basically looking to continue that, they issued guidance of $225 million to $230 million, and they wound up delivering billings of $211 million. So there's that dip there.

O'Reilly: And it was that 5%? Yeah, it is what it is.

Lewis: But you know, Wall Street always anchors to those. And of course, and this is again a company that I think has been struggling a little bit. You look at their chart from mid-summer or so, and it's been a pretty precipitous fall. And a lot of the things that were specific to this most recent dropoff, the management cited weakness in Europe; there were some shorter contract lengths, lower average deals with some of their large enterprise customers, and so on a service level I think that looks bad.

But again, I think this kind of goes back to what they were looking at from the previous-year quarter. A year ago they signed a five-year, eight-digit contract with a federal agency. And so that's huge, particularly when you're looking at billings in the $200 million range. That's something that will heavily influence your quarterly results and will kind of throw things off.

O'Reilly: That's so surprising to me, because just given the world we live in, and JPMorgan Chase just had a data breach, I would just think the people would just be throwing money at this sort of thing. I mean, is the bull case still intact?

Lewis: I think so. I'm still pretty bullish on it. And again, I own it and a lot of Fools like it. So take it with a grain of salt. But I think with this, the story is still intact, right? What we're talking about with this company is cybersecurity experts. And we're looking at the macro trend of some of these huge data breaches costing major corporations hundreds of millions of dollars in actual money and in lost brand equity, basically, right?

And so they're the best in the biz when it comes to this stuff. And I think it's something that's only going to become a larger problem. So I think they're extremely well positioned, and I think that story's still intact. One of the things that I really like is that they're transitioning from a product revenue to a subscription revenue model. So once they have people that are customers, they're getting this recurring revenue, which is obviously fantastic. And I think it offers a lot of stability.

So that's something to watch. One metric that I think is really great and just kind of is a testament to how good they are in their space, their customer renewal rates are 90%.

O'Reilly: Awesome.

Lewis: Which is fantastic.

O'Reilly: Real quick before we move on, what about that lovely negative, negative, negative free cash flow number?

Lewis: Yeah, they're turning that around a little bit. I think it was like through the first nine months of last year, they were like cash flow negative to the tune of negative $100 [million] and maybe $130 million.

O'Reilly: I mean, I assume that was capex. I mean it was just a massive investment.

Lewis: Yeah, I have to dig into the numbers to be sure. But, and they are cash flow positive for the first nine months. So you're seeing that turnaround. There's a lot of things to be happy about.

Obviously this is not a stock for everybody. You need to have a decent risk tolerance to be in this, and it's a small position for me. It's something that I think is a great space to be into. It's something that's going to become a larger issue and they're well positioned for that. But again, make sure that it's something that matches what you're looking for in your investments before you dive into it.