Heading into the first-quarter earnings report for FireEye Inc (FEYE), Wall Street analysts weren’t short on worries … and it looks like that anxiety was warranted.
FireEye is cratering this morning, off 14% after a pretty lousy report and a change in the C-suite.
The biggest news of the day is that CEO David DeWalt is out — and stepping in will be company President Kevin Mandia, who founded Mandiant, which FireEye paid $1 billion to acquire back in 2014. Mandia will take the reins on June 15, and DeWalt will slip back to jsut being executive chairman.
But the change in leadership isn’t coming because all is hunky-dory. The financials from FireEye’s Q1 report were far from encouraging.
An adjusted loss of 47 cents per share came in 3 cents ahead of expectations, and billings — a vital stat in the software space — came in at $186 million to easily best estimates for $176.2 million.
But revenues were weak, at $168 million versus expectations of $171.7 million, and guidance didn’t please anyone. FEYE expects Q2 sales to come in between $178 million to $185 million, with the entire range falling below analysts’ estimate of $192.75 million.
Those numbers also represent a deceleration in the growth path for FireEye. Yes, revenues were up 34% year-over-year … but that’s far less than the 69% growth it saw in Q1 2015. Similarly, billings growth declined from 53% to 23%.
A Bright Side to FEYE Stock?
But that said, FEYE is a company in transition. It has been struggling to revamp its product line for the cloud, as well as to offer subscriptions to customers. And those are the right moves — they simply take time to pull off.
Just ask Adobe Systems Incorporated (ADBE).
Plus, FireEye is making some bold plays to make the transition successful, including acquiring firms such as iSight Partners and Invotas.
What’s more, Mandia may be the right person to lead the charge.
I recently talked to Paul Kraus, founder and CEO of Eastwind Networks, who said:
“The board seems to believe he is a proven leader who can execute against FireEye’s broader vision of monetizing its branded version of security-as-a service — FireEye-as-a-service or FaaS.
“Can Mandia propel FireEye to achieve its top-line revenue projections for FaaS? That will likely unfold over the coming quarters and remains to be seen. Cybersecurity is a hyper-crowded and rapidly evolving sector, and Mandia will have a clear charter to continue to focus on services, grab market share, and eventually turn a profit.”
Of course, that’s an uphill climb, considering FireEye will be trying to grab that market share against companies like Palo Alto Networks Inc (PANW) and Cyberark Software Ltd (CYBR), as well as mega-tech firms like Cisco Systems, Inc. (CSCO) and International Business Machines Corp. (IBM), which can bundle their security offerings.
But FireEye is far from doomed.
Despite the woes of FEYE stock, the company still is a top-notch player in the fast-growing cybersecurity market. And the Mandiant business is critical because it’s often the go-to adviser for high-profile breaches, such as with Sony Corp (SNE), Target Corporation (TGT) and Anthem, Inc. (ANTM). That first-to-the-site recognition is an effective way to sell software and hardware appliances to top customers.
FEYE also has tremendous credibility in the cybersecurity industry. Consider that the company was the first to earn certification from Homeland Security for the Safety Act, which provides the highest level of liability protection.
And from a valuation standpoint, FireEye looks a lot more reasonable now, with a price-to-sales ratio of 4.3 comparing well to PANW’s 11X and CYBR’s 7X. The flip side is that these companies are growing at a faster clip and not dealing with the heavy lifting of making core changes to product lines and business models.
Bottom line? Hold off on FEYE stock for now, simply because this is a company in transition under a new CEO. Growth will be there eventually, but
In other words, for investors it’s probably best to hold off on FEYE stock for now, especially since there is a new CEO and there are few signs that growth is picking up.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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