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Why FireEye’s Cash Flow Is a Source of Concern in 3Q17

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FireEye’s cash, debt, and cash flows

So far in this series, we’ve looked at FireEye’s (FEYE) growth in fiscal 3Q17 and the threats the company faces in the rapidly growing and competitive cybersecurity space.

With a market cap of ~$2.6 billion, FireEye had ~$878 million in cash and short-term investments in 3Q17. The company had $770 million in debt on its books in the form of senior convertible notes. FireEye’s OCF (operating cash flow) stood at $12.5 million in 3Q17, compared with $14.5 million in 3Q16.
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FireEye a potential acquisition target

FireEye continues to be a target for potential takeover. The growth in data breaches from WannaCry, Petya, to Equifax (EFX) has increased the demand for app security and has led to an increase in cybersecurity spending. As a result, cybersecurity companies like Symantec and FireEye, who are engaged in identity protection security solutions, have seen a significant boost in 2017.

FireEye’s transition toward subscription and support services to improve future cash flow makes it an attractive investment to PE (private equity) investors. PE investors prefer to look into FCF (free cash flow) to assess how much debt they can take on in an LBO (leveraged buyout) transaction.

The fall in FireEye stock after its fiscal 3Q17 results has increased its attractiveness as a potential takeover target.

The technology sector (QQQ), especially in cybersecurity space, appears to be a closely monitored sector by PE firms. In February 2016, Elliott Management, a PE firm, took on a substantial stake in Symantec (SYMC). It then forced Symantec to acquire Blue Coat Systems and LifeLock. Elliott Management had a stake in both Blue Coat Systems and LifeLock.

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