FireEye's Future: 6 Reasons Analysts Are Skeptical About The Security Vendor's Outlook

Causes For Concern

Last week, FireEye stock plummeted after investors showed disappointment in the company's Q3 results and guidance for next quarter. After the call, analysts published reports, either downgrading their expectations for the security vendor's stock or expressing skepticism at its performance. BofA Merrill Lynch, for example, downgraded the vendor from "buy" to "neutral" after the call. While positive notes included continued strong demand for security technologies and an improving cost structure led by management, analysts said FireEye faces steepening competition in the security market, and that both internal and macroeconomic changes could challenge the vendor going forward. Take a look at some of their concerns.

Growth Versus Market

While FireEye cited growing macroeconomic challenges and a slight slowdown in security spending as part of the reason behind its slower growth for the quarter, investors questioned how that could be possible as competitors are seeing growth spike from a strong market for security spending. An analyst's report by FBR said the growth issues experienced by FireEye are "more company specific" as it approaches 2016.

"We note that nearly every major cybersecurity player (Check Point, Imperva, Proofpoint, Palo Alto, Fortinet) recently has delivered strong results across the board with a healthy outlook," the report said.

Growing Competition

As big-name security players such as Palo Alto Networks and Cisco roll out threat-prevention solutions that directly compete with FireEye's, analysts said they expect the vendor to experience increased headwinds going forward. Andrew Nowinski, senior research analyst at Piper Jaffray, wrote in an October report that "increasing competition" was the primary driver for the firm's downgrade of FireEye to "neutral" and a lowering of its target by $23 to $37.

On the company's earnings call, CEO Dave DeWalt (pictured) said FireEye continues to see "strong win rates" over the competition, with a 35 percent year-over-year growth in the number of transactions and a 70 percent growth in new customers. But DeWalt said FireEye has to "get sharper against the competition."

Lowering Billings Forecast

A big factor driving FireEye's stock down as much as 25 percent from the company's price at closing before earnings was its disappointing billings numbers and the lowering of its forecast going forward. In its Q3 earnings, FireEye reported billings of $210.6 million, compared with estimates of between $225 million and $230 million, attributing the miss to weak European business and macroeconomic factors. Going forward, FireEye said it expects billings for Q4 to be in the range of $240 million to $260 million. Analyst reports, including those from Stone Fox Capital and Enceladus Research, said the billings challenges show the effects of growing competition in the marketplace.

"The [billings] problem though is partially blamed on a level of emergency spending by customers over the last 18 months due to heightened cyber-security threats. The odd part is that competitors in the space had routinely called out the out performance of the initial quarters in 2015 due to this very reason," the report by Stone Fox Capital said.

Executive Shuffle

FireEye has seen some top-level executive changes in recent months, including the departure of CFO Michael Sheridan in July, and the poaching of EMEA Chief Technology Officer Greg Day and federal sales Vice President Nick Urick by Palo Alto Networks in September and October, respectively. The CFO slot was filled by Michael Berry, the CTO position by Ryan Brichant, and David Ramirez was brought on to lead federal sales. On the FireEye's earnings call last week, analysts asked if they should be worried about the recent changes. CEO DeWalt said executive departures are to be expected in any company, especially in security, where there is a lot of money and demand for top-notch talent. DeWalt said FireEye is having "no trouble hiring" and believes it is upgrading its talent across the board with each new executive addition.

"I think it's a great chance for us to upgrade our business," DeWalt said. "Would I be worried as an investor? Of course. It's never good to see adjustments like this. But I can tell you ... across the board, we're constantly improving."

Customer Spending Changes

The past 18 months saw accelerated emergency security purchases, FireEye said, which it said affected billings negatively and shortened the length of contracts. However, CEO DeWalt said he was confident that the effects will be short-lived.

"We've always seen this. We've seen these periods over time. We'll have to get better. And we'll have to be better internationally as a company and we will," DeWalt said on the call.

Stone Fox Capital said the comments on a lag in customer spending and long-term contracts were concerning, as other security vendor competitors have cited those very reasons as a catalyst for higher sales performance than expected.

Channel Conflict

Another point of concern for FireEye is "conflict within the channel," which Piper Jaffray's Nowinski cited as one of the factors in the company's October downgrade of the security vendor to "neutral." FireEye has seen some contention in the channel since its January 2014 acquisition of incident response company Mandiant, which caused some ire in the channel around how its services business would compete with partners.