Cybersecurity software specialist FireEye (NASDAQ:FEYE) has big plans for 2017. Despite sharply slowing sales growth, the company aims to reach operating profitability while generating positive cash flow this year.
Below, we’ll take a closer look at these business trends and how they fit into FireEye’s rebound plan.
FireEye’s sales growth pace has been slowing significantly, and that’s likely the single biggest driver behind the stock’s dramatic underperformance. Its expansion pace peaked in 2014 at 163% before plunging to 46% in fiscal 2015 and hitting 15% last year. Revenue gains even dipped into negative territory at one point, but have rebounded slightly.
CEO Kevin Mandia and his executive team are forecasting near-zero growth in the second quarter before a more substantial acceleration comes in the second half of the year.
FireEye’s profitability is ultimately a function of how well its next-gen security solutions can stand out against the competition, especially those large rivals with the resources to offer lower-priced security products as part of a more comprehensive IT management solution. These pressures have resulted in lower selling prices lately, as gross profit margin fell to near 60% of sales from a peak of 75% of sales. Rival Palo Alto Networks (NYSE:PANW) is enjoying consistently higher results.
The key to improvement on this metric is that FireEye must continually introduce new product and subscription offerings, like its recent iSIGHT analytics platform, that better meet the needs of its customers.
As it grapples with the new reality of slowing sales gains, FireEye has turned its attention to slicing costs. It has made good progress on this score, with operating expenses falling to 81% of sales last quarter from 114% a year ago. FireEye has a tight balance to strike here, though, as it sharply reduces spending on sales and marketing and on research and development. It’s important that it brings costs in line with its growth forecast, but executives don’t want to cut so deeply that they threaten the company’s long-term competitive position.
Management is targeting reaching positive non-GAAP operating income for the first time by the fourth quarter of 2017. FireEye’s margin was a negative 7% in the first quarter and is projected to worsen slightly, falling to negative 9% in Q2.
Besides achieving positive operating margin, FireEye’s other major financial goal this year is to begin generating — rather than burning through — cash. Its cash flow trend improved at a faster pace than management expected last quarter, rising to negative $17 million compared to negative $23 million in the prior year. That success has kept FireEye on pace to show positive cash flow for the year, assuming management’s industry outlook plays out roughly as expected over the next few quarters.
FireEye’s deferred revenue represents invoiced but not yet booked contracts. Since this metric includes the company’s software billings, it is a key predictor of future sales. Deferred revenue growth has slowed to a crawl recently, and last quarter it declined for the first time in over two years. Palo Alto Networks, by contrast, booked a 51% spike in deferred revenue last quarter and is projecting sales gains of as much as 23% in the current quarter.
FireEye believes it will manage a rebound in the second half of the year, though, and that’s why billings will be a critical number to watch over the coming quarters. The company’s best shot at improving its growth pace is in adding new customers, ideally through larger contracts of $1 million or more in revenue.
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