Once investors’ darling in the cyber security space, things have not been in favor of FireEye Inc. for a while now. The stock is likely to close in the red once again this year, continuing its downfall for the third consecutive year.

Historical Prices

On the very first day of its trade on the Nasdaq (Sep 20, 2013), the stock closed at $36, which was 80% higher than the Initial Public Offering (IPO) price of $20. The company ended the year 2013 on a strong note with its share prices increasing to $43.61.

FireEye’s shares shot up to as high as $86 in Feb 2014 on rumors of its merger with privately-held security software firm, Mandiant. However, shares fell drastically as the deal didn’t materialize and never went even close to the Dec 31, 2013 closing price. In 2014, the stock lost almost 28%.

The downfall continued in 2015 too with shares of FireEye declining 34%. Notably, at yesterday’s closing price of $11.82, the stock has lost 67% from its first day trade and 41% from its IPO price.

So far this year, FireEye has lost 43% compared with the Zacks categorized Internet Software industry’s average negative return of just 6.3%.

What Went Wrong with FireEye?

Over the past several quarters, the company has been losing business to its rivals. FireEye faces stiff competition from other well-established players in the cyber security space which includes Cisco (CSCO Quick QuoteCSCO - Free Report) , Check Point Software (CHKP Quick QuoteCHKP - Free Report) and Palo Alto Networks (PANW Quick QuotePANW - Free Report) . These players have deals with large numbers of security vendors and have broader product portfolio, giving them a competitive advantage over FireEye.

Furthermore, the company’s top-line growth has also been affected due to its futuristic approach toward transitioning itself to the cloud and shifting its business model from hardware centric to subscription-based services. It should be noted that the company generates higher initial sales from hardware than the subscriptions.

Due to the aforementioned factors, the company’s top-line growth rates have been slowing down as evident from its last quarterly results. During third-quarter 2016, FireEye’s year- over-year revenue growth rate slowed down to a meager 12.6% from 45.6% and 165.1% registered in third-quarter 2015 and 2014, respectively. Additionally, the company’s revenue growth guidance of just 1% to 4% for fourth-quarter 2016 reflects its limited growth prospects.

Furthermore, the company’s bottom-line results failed to please as well. Since Sep 2013 when it was debuted on the stock markets, the company has not been able to report profits in even a single quarter. In fact, FireEye’s GAAP loss has widened on a year-over-year basis.

Going ahead, negative operating cash flow remains a major headwind for FireEye, which may hinder the execution of its growth plans. In the first three quarters of 2016, the company generated negative operating cash flow of $21.5 billion. Considering the projections given by FireEye for the fourth quarter, the company is expected to end 2016 with a negative operating cash flow between $41 million and $51 million.

Turnaround Efforts

To counter the aforementioned challenges, FireEye has taken a number of initiatives. Early this year, it acquired iSIGHT Partners to strengthen its current product lineup and offer an intelligence-led security model for enterprises of any size that other security providers will find difficult to match.

FireEye has also taken over Invotas, a firm specializing in improving response times post a cyber-attack. Its product, Security Orchestrator, is designed to compile information from a range of security products and automate responses when an incident occurs.

The company has launched FireEye Essentials, a lower-cost and simpler version of the FireEye Global Threat Management platform. It is targeting smaller, mid-market companies with the new offering.

Furthermore, last month it has launched new Cloud MVX and MVX Smart Grid offerings, a lower cost intelligent threat detection solution for large enterprises as well as mid-market businesses.

Also, FireEye is focusing on cost cutting initiatives, which include the layoff of 300 to 400 workers to boost its bottom-line performance. Through these initiatives, it intends to generate annualized cost savings of approximately $80 million.

Though shifting its business model to subscription-based services will generate lower revenues initially but the same will be stable in the long-run as organizations usually renew their subscriptions with the existing products or even with higher versions. Moreover, subscription-based services generate higher gross margins.

All these indicate FireEye’s efforts to move beyond the enterprise level and end-point protection products it had started off with. These factors are also likely to aid the company’s long-term results.

Bottom Line

We believe that the company’s turnaround efforts will yield results in the long run. Given the positive earnings estimate revisions over the last 60 days and its Zacks Rank #2 (Buy), we are optimistic about FireEye’s recovery in 2017.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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