FireEye (FEYE) was falling sharply Wednesday after the cybersecurity company issued weak profit forecasts for the fiscal third quarter and year.
The company posted a second-quarter adjusted loss of 1 cent a share vs. estimates that called for a profit of 1 cent. Revenue of $217.6 million topped Wall Street forecasts of $215.2 million. Adjusted billings in the period were $221.4 million vs. expectations of $213.8 million.
But FireEye said for the third quarter it expects earnings of break-even to 2 cents a share, below Wall Street forecasts of 7 cents a share. The company expects revenue of $217 million to $221 million; analysts had been calling for revenue of $228.4 million.
FireEye said it expects fiscal-year earnings of break-even to 4 cents a share on revenue of $865 million to $875 million - both metrics are below analysts' estimates. The company previously said it expected revenue of $890 million to $900 million.
"We were encouraged by our continued strong billings performance in the second quarter, and in particular by an increase in new business sales and growth in our platform, cloud subscription and managed services category," said Frank Verdecanna, FireEye's chief financial officer. "However, these positive dynamics in our business also resulted in a greater than expected increase in expenses related to cloud hosting and commissions on new business, which negatively impacted our gross and operating margins. Additionally, the end of life for our third-generation appliances resulted in a decline in annual recurring revenue in the product and related subscription and support category as contracts attached to these appliances expired. This resulted in a reduced outlook for revenue in the product and related subscription and support category in the second half of 2019."
The stock sank 11.83% to $14.20 in trading on Wednesday.
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Revenue rose to $217.6 million from $202.7 million in the year-ago quarter, while the Street had estimated revenue of $215.2 million after FireEye's guide of $213 million to $217 million.
Adjusted billings rose to $221.4 million from $196.1 million in the year ago period. Wall Street was looking for $213.8 million, after FireEye's billings forecast of billings of $207 million to $222 million.
Customers who had subscribed to FireEye's third-generation security service, which had been released in 2012, needed to upgrade to the company's fifth-generation service, and that resulted in lower-than-expected renewal rates especially from smaller customers, Frank Verdecanna, FireEye's chief financial officer, said in an interview.
Faster-than-expected internal data upgrades for FireEye's traffic also resulted in higher costs.
"We actually moved all our traffic on our cloud services from our internal data centers to a public cloud provider and we did it in a pretty quick fashion," said Verdecanna, with the primary cloud provider being Amazon.com Inc.'sAMZN, +0.24% AWS. "That basically spiked our cost because we are still running our internal data center costs for a few more quarters."
Also, higher commissions paid to salespeople for bringing in new customers compared with those paid for renewals also ate into FireEye's bottom line.
"So, we're over planned for the year in new business and we're under planned for the year on renewals," Verdecanna said.
For the third quarter, FireEye expects earnings of break-even to 2 cents a share on revenue of $217 million to $221 million, and billings of $245 million to $255 million. Analysts had forecast earnings of 7 cents a share on revenue of $228.4 million and billings of $249.4 million.
For the year, FireEye forecast earnings of break-even to 4 cents a share on revenue of $865 million to $875 million, and billings of $935 million to $955 million. Wall Street was looking for a consensus 15 cents a share on revenue of $893.5 million and billings of $943.1 million.
In late May, FireEye said it acquired security instrumentation company Verodin,after which it forecast a full-year outlook of adjusted earnings of 12 cents to 16 cents a share on revenue of $890 million to $900 million, and billings of $935 million to $955 million.