Cyber-security firm FireEye disappointed investors last night by missing sales estimates, although its adjusted losses weren’t as bad as expected. FireEye shares tumbled 19% to $12.94 today as investors piled out of the stock.

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FireEye’s SaaS cannibalizes legacy products

The company posted $168 million in revenue and adjusted losses of 47 cents per share, against the consensus estimates of $171.8 million and losses of 50 cents per share. Management had guided for revenue of $167 million to $177 million.

William Blair analysts Jonathan Ho and John Weidemoyer said the main reason for the revenue miss was an unfavorable product mix as customers purchased the company’s software-as-a-service offering rather than its traditional products. License revenue came in at $33.7 million, while subscription and services revenue was $134.3 million.

Management mentioned that they were surprised at the mix shift late in the quarter, although they still managed to exceed expectations for billings, coming in at $186 million against the outlook of $163 million to $183 million. Product revenue slipped 16.2% year over year, although subscription services revenue soared 57.7% as it expanded its product suite and more customers chose the SaaS offerings.

FireEye’s losses weren’t as bad as management expected because they were able to execute on their cost controls more quickly than they previously expected. They now expect to reduce costs by $30 million, a significant increase from the previous expectations of $8 million to $10 million. Stifel analysts also noted that management has significantly reduced their plans for capital expenditures, which should help them become profitable on an adjusted basis in the second half of next year and become fully profitable by the following year.

FireEye’s subscription model praised

Analysts aren’t generally worried about FireEye’s revenue miss as most note that the tech world is moving rapidly toward a subscription-based model. Stifel analysts Gur Talpaz and Christopher Speros called this an “optics issue” because customers aren’t dumping the company completely but rather switching to its SaaS offerings instead of its legacy products. Despite their positive view on FireEye, they cut their target price from $45 to $32 per share.

UBS analyst Brent Thil reiterated his Neutral rating and cut his price target from $18 to $16 per share, although he also likes FireEye’s SaaS progress. He explained that the company’s stock will continue to be pressured as investors are becoming less and less tolerant of high operating losses, mixed execution and changes in leadership.

Several other firms also cut their price targets for FireEye. JPMorgan analysts slashed their target from $30 to $20 per share

Surprise CEO transition announced

In a surprise move, FireEye also announced that CEO Dave Dewalt will leave the helm and become executive chairman. COO Kevin Mandia will take over, and CFO will also serve as COO. The William Blair team expected this transition to have a negative impact on the company’s stock, although they don’t expect it to disrupt the business. They also believe it means that FireEye probably won’t become an acquisition target anytime soon.

The Stifel team likes the move and sees this as a big positive, particularly because of the rumors that Mandia would leave the company. They see him as one of the world’s most well-respected security professionals, so moving him to the CEO post should help FireEye keep him around. They also like Berry’s promotion to COO because of his “strong operational chops.”