When FireEye Inc (NASDAQ:FEYE) reported fourth-quarter earnings on Feb. 2, the company missed consensus revenue estimates and issued a disappointing Q1 outlook. It expected a loss of as high as -28 cents per share on revenue as low as $160 million. The company has too high a cost structure.
When the company reports results on May 2, investors should not expect any positive developments. Shares already bottomed out at $10.35 in March but shorts (with a short float of 18.7%) are right, the company may issue an uninspiring outlook.
FEYE’s stock may break its $11-$13 trading range, depending on the progress of the company’s cost-cutting. The company cut its loss by over $50 million year-over-year in the last quarter. Slow revenue growth suggests management must find more ways to cut costs.
Despite near break-even free cash flow generation, FEYE has plenty of cash on the balance sheet. Its $5.29 per share in cash and short-term investments, or $935 million, may assure nervous investors. FireEye may use the cash to fund R&D activities.
Investing in future products will strengthen the company’s long-term prospects. But it also hurts the near-term results.
FireEye’s revenues are not growing fast enough to offset the higher expenses. The one-time cost of spending $22 million to move from five separate buildings to a single one may pay off. Sales may improve with a physically closer-knit team. Investors will look for evidence the expanded sales team, through the hiring of an executive to lead the EMEA unit, paid off in the quarter.
FireEye’s Software Growth, Cost Controls
FEYE may report higher subscription sales, building on the 40% year-over-year growth in Q4. The higher mix of cloud-based solutions will help lift profit margins. The company will likely keep up with the rate of renewal subscriptions in the quarter.
A positive unknown is that FireEye books new billings this quarter. This positive sales beat depends on the sales team outperforming expectations.
Note that last quarter, FireEye did not complete any transactions worth over $10 million. But combined with winning more deals worth over $1 million, the stock could conceivably jump after the earnings report.
FireEye’s cost structure needs an adjustment. It had a 64% product margin. The strong support and services bookings did not offset the lower volumes of product billings. In the upcoming report, the company’s SKU reduction, from 22 down to 6, should give billings a boost. Customers have fewer products to consider. This should cut down the time it takes for the sales team to close a deal.
Takeaway on FEYE Stock
FireEye cut sales commissions, headcount and operating expenses to keep pace with the slower revenue growth. Those efforts may lead to the company reporting a lower-than-expected loss. The stock already bounced back around 20% from its $10.35 bottom reached in March. The stock is pricing in a moderate level of optimism. If the company beats expectations, the likely scenario for the stock is that it holds its level.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
