Morgan Stanley Previews FireEye's Q3 Results: 'Awaiting Productivity Inflection Point'; Maintains Equal-Weight

• FireEye, Inc. (NASDAQ: FEYE) shares have declined 32.59 percent over the past three months, hitting a low of $31.18 on October 6.
• Morgan Stanley’s Melissa Gorham has maintained an Equal-weight rating on the company, with a price target of $44.
• Although the pullback in the shares has improved the risk/reward profile, Gorham would prefer to wait for signs of improvement in the company’s sales productivity to get more positive on the stock.

According to the Morgan Stanley report, “While the pullback creates a more attractive risk/reward in the next 12 months, weaker checks, management changes, and the need to ramp productivity in 2H/FY16 likely still weighs more heavily on the risk side of the risk/reward equation in the near-term.”

Given the product revenue deceleration from over 60 percent in FY14 to 32 percent in 2Q15, Gorham believes that investors would be concerned about the sustainability of FireEye’s growth, which is reflected in the stock’s performance.

With the slowing growth in the sales and marketing heads, billings upside could come from ramping distribution and improved cross-selling. “However, with limited visibility on both, we think it's too early to pound the table ahead of the Q3 print, particularly with a new CFO on board,” Gorham stated.

Channel checks point towards slowing sales in Q3, although Gorham expects the company to post mostly in-line results. On the other hand, Mandiant is expected to sustain robust growth, which would help the company beat the FY15 billings expectations.

“FireEye is making a particular push into the Federal vertical, noting Federal traction as a key strategic imperative for this year,” Gorham reported.

The Q3 and 2H guidance implies that total expense growth would be below the revenue and billings growth in FY15. Gorham expects the “relatively breakeven” operating cash flow for the year.