FireEye IPO Gets My Attention

| About: FireEye, Inc. (FEYE)

FireEye (NASDAQ:FEYE), a next generation cyber security firm, plans to raise $182 million through its upcoming IPO. The firm will offer 14,000,000 shares at an expected price range of $12.00-$14.00. If FEYE can hit the midpoint of that range at $13 per share, the firm will command a market value of $1.7 billion. FireEye was founded in 2004 and has principal executive offices in Milpitas, California.

FEYE filed confidentially on May 14, 2013.
Joint Managers: Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Barclays
Co-Managers: BofA Merrill Lynch, UBS Investment Bank, Nomura


FireEye is a cyber security firm that markets itself as capable of deflecting modern cyber attacks that traditional signature-based cyber security systems are unable to detect. The firm's proprietary MVX engine is able to detect advanced cyber attacks that penetrate IT networks through multiple access points. FEYE's platform is virtual-machine based and is designed to serve both corporations and governments. FEYE has developed a broad customer base with 1,100 customers spread across 40 countries, including 100 members of the Fortune 500.

The firm has demonstrated impressive revenue growth in the course of the past few years. In 2010, FEYE posted $10.8 million in revenues; in 2011, $33.7 million (a year-over-year growth of 186%); and in 2012, $83.3 million (a year-over-year growth of 148%). Despite this expansive growth, FEYE has yet to turn a profit over the same period, posting net losses of $9.5 million in 2010, $16.8 million in 2011, and $35.8 million in 2012 which is a concern to us.


FEYE offers the following figures in its S-1 balance sheet for the six months ending June 30, 2013:
Revenue: $61,638,000
Net Income: ($67,196,000)
Total Assets: $139,487,000
Total Liabilities: $184,533,000
Stockholders' Equity: ($45,046,000)

FEYE's explosive revenue growth would be much more compelling if it had been accompanied by making money for its six venture backed investors, or at least by decreasing losses over time. Though the company's MVX engine may be top-of-the-line, like any product, it requires a competent organization in order to fully take advantage of its profit potential. Concerns with executive overcompensation are also problematic; shareholders are unlikely to be satisfied with a $6,000,000 CEO in a year when he doubled the company's losses.


FEYE is a high risk IPO in a very exciting niche in the world we currently live in. Despite our serious concerns, I believe this IPO will be in high demand and will have a solid first day as a public company. We are rating it a buy if it prices in the $12 to $14 range. However, we do not expect to be long-term holders.

The market for cyber security is certainly burgeoning, and FEYE has grown its revenues alongside the market, but the inability of the firm to find its way into the black - or even to hold losses steady - is a serious red flag. Highly compensated executives are also a concern for a firm that has yet to turn profitable; Chief Executive David G. DeWalt received total compensation of over $6 million in 2012, while Chief Technology Officer Ashar Aziz received over $2.3 million.

The recent influx of proven competitors into the field will make life difficult for the relatively young cyber security firm in coming years, as well. Though FEYE is certainly on the cutting edge of cyber security technology, it's hardly in a class by itself, and there's little indication that it's offering anything that other firms will be unable to provide in the near term.


The rising sophistication of malware attacks in the past decade is no accident, nor is it the work of bored teenagers with internet access. Modern cyber attacks are funded by government agencies and criminal organizations; the famed STUXNET virus designed to attack Iranian nuclear facilities was just the tip of the iceberg. Both states and corporations have every reason to fear that rivals will take advantage of the chances for relatively anonymous espionage presented by cyber attacks, especially as organizations grow increasingly reliant on mobile computing, social networks, and cloud-based services for day-to-day operations. For firms on the cutting edge of cyber security, like FEYE, these conditions translate to growth opportunities.

As a result of these opportunities, FEYE faces an absolutely brutal competitive environment. Sourcefire, an independent IT security firm that offers services very similar to those offered by FEYE, has announced its pending acquisition by Cisco Systems (NASDAQ:CSCO). HP (NYSE:HPQ), IBM (NYSE:IBM), and Intel (NASDAQ:INTC) have also recently acquired firms specializing in IT security, and are likely to intensify competition in the field significantly. These firms have more resources and a greater diversity of established services available than FEYE, and the many companies with existing relationships with those firms for other services may choose them over FEYE for cyber security.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: IPOs have substantial risk. This article was written for informational purposes and was partially based on the company's S-1. Investors should read the S-! and consult with their financial adviser.