IPO Preview: FireEye

Sep.19.13 | About: FireEye, Inc. (FEYE)

Based in Milpitas, CA, FireEye (NASDAQ:FEYE) scheduled a $182 million IPO with a market capitalization of $1.5 billion million at a price range mid-point of $13, for Friday, September 20, 2013.

Nine IPOs are scheduled for this week, 12 for next week. The full IPO calendar can be found at IPOpremium

S-1 filed September 9, 2013

Manager, Joint Managers: Morgan Stanley; Goldman; J.P. Morgan; Barclays
Co-Managers: BofA Merrill Lynch UBS Securities/ Nomura

Summary

FEYE invented a purpose-built, virtual machine-based security platform that provides real-time protection to enterprises and governments worldwide against the next generation of cyber attacks.

For the six months ended June 2013 revenue reached $62 million, with 48% from subscriptions. Losses reached-$63 million from $14 million in the year earlier period.

Operating expenses increased from $13.5mm to $63.5mm for June '13 vs. June '12

2010 yr

2011 yr

2012 yr

June 6 mos '12

June 6 mos '13

Revenue % chg vs. prior period

183%

144%

107%

Click to enlarge

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

June '13 12 mos

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

FireEye

$1,512

12.2

-12.0

11.8

12.4

12%

Click to enlarge

Glossary

Accumulated deficit of -$170 million.

FEYE appears to be in a sweet spot as long as it invests heavily in sales, marketing and product development, which is what it's doing.

The high cost of customer acquisition is a concern, the market appears very large, and FEYE appears to be targeting early adopters.

Conclusion

Buy on the IPO. FEYE is a high-risk investment that might pay off. In this stock market top line revenue growth with a branded product/service (especially a subscription service) is highly valued.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

FEYE invented a purpose-built, virtual machine-based security platform that provides real-time protection to enterprises and governments worldwide against the next generation of cyber attacks.

FEYE's technology approach represents a paradigm shift in how IT security has been conducted since the earliest days of the information technology industry.

The core of FEYE's purpose-built, virtual machine-based security platform is virtual execution, or MVX, engine, which identifies and protects against known and unknown threats that existing signature-based technologies are unable to detect.

The new generation of cyber attacks on organizations, including large and small enterprises and governments worldwide, is characterized by an unprecedented escalation in the complexity and scale of advanced malware created by criminal organizations and nation-states.

Marketing & Sales

FEYE sells the majority of its products, subscriptions and services to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to end-customers.

Customer concentration

Accounts receivable

As of December 31, 2011, two customers represented 23% and 16% of gross accounts receivable.

As of December 31, 2012, two customers represented 14% and 10% of gross accounts receivable.

As of June 30, 2013, two customers represented 18% and 12% of gross accounts receivable.

Revenue

During the year ended December 31, 2010, two customers represented 12% and 12% of total revenue.

During the year ended December 31, 2011, one customer represented 12% of total revenue. During the year ended December 31, 2012, one customer represented 10% of total revenue.

During the six months ended June 30, 2012, two customers represented 14% and 11% of total revenue.

During the six months ended June 30, 2013, two customers represented 11% and 10% of total revenue.

Intellectual Property

FEYE has five U.S. issued patents and 43 patent applications pending in the United States. FEYE also has a number of foreign counterparts of these patent applications, consisting of two pending applications under the Patent Cooperation Treaty, a pending application in the European Patent Office and another in Japan.

Issued patents expire between 2025 and 2030. FEYE has five U.S. issued patents and 43 patent applications pending in the United States.

FEYE also have a number of foreign counterparts of these patent applications, consisting of two pending applications under the Patent Cooperation Treaty, a pending application in the European Patent Office and another in Japan.

Competition

Current and potential future competitors fall into five general categories:

Large networking vendors such as Cisco (NASDAQ:CSCO) and Juniper (NYSE:JNPR) that may emulate or integrate features similar to FEYE's into their own products.

Large companies such as Intel (NASDAQ:INTC), IBM (NYSE:IBM) and HP (NYSE:HPQ) that have acquired large IT security specialist vendors in recent years and have the technical and financial resources to bring competitive solutions to the market.

Independent security vendors such as Sourcefire (which recently announced its pending acquisition by Cisco), Palo Alto Networks and Trend Micro that offer products that claim to perform similar functions to FEYE's platform.

Small and large companies that offer point solutions that compete with some of the features present in FEYE's platform.

Providers of traditional IT security solutions, such as Symantec (NASDAQ:SYMC), that we may compete with in the future.

5% stockholders pre-IPO

Sequoia Capital Entities, 21.1%
Norwest Venture Partners Entities, 20.3%
Ashar Aziz, 10.6%
DAG Ventures Entities, 10.2%
JAFCO Technology Partners Entities, 7.4%
SVB Entities, 6.2%

Use of Proceeds

FEYE expects to net $166 million from its IPO. Proceeds are allocated to working capital and general corporate purposes.

Disclaimer: This FEYE IPO report is based on a reading and analysis of FEYE's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

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. I have no business relationship with any company whose stock is mentioned in this article.