Palo Alto Networks Stole a Key Customer from FireEye Last Quarter

By Markets Fool.com


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FireEye's (NASDAQ: FEYE) business isn't doing well.

The company turned in a disastrous second quarter earnings report earlier this month. Revenue, billings, and guidance all came in short of expectations. Demand for FireEye's services continues to rise, but not nearly as fast as the company's own management had expected.Part of that disappointment is directly attributable to increased competition. During FireEye's most recent earnings call, new CEO Kevin Mandia admitted that FireEye is losing out to its rivals.

At the same time, security vendor Palo Alto Networks (NYSE: PANW) has boasted of stealing customers from FireEye in the past. The rapid growth of its competing service, WildFire, may be taking a toll on FireEye and its shareholders.

FireEye's customers think "good enough" is just fine

FireEye's management remains confident in its products, arguing that it continues to offer the most compelling solutions in their respective categories. Yet FireEye's customers aren't impressed, at least not enough to pay up for its offerings. Instead, they may be flocking to lesser alternatives. FireEye's CEO Kevin Mandia explained on the company's August earnings call:

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The threat landscape is also impacting the sales of our other products and subscriptions. As the current threat environment shifts to smaller scoped breaches, some organizations may be opting for good enough over best-of-breed detection...

FireEye's business is cyclical in a sense, shifting with the ebbs and flows of the threat landscape. As I've said in the past, FireEye shares could rise or fall on the basis of cyber threats -- both real and perceived. The impressive price appreciation FireEye shares experienced in early 2014 was fueled by a number of high-profile hacks; the lack of such activity, while broadly good for businesses, is a problem for FireEye. To date, 2016 has been relatively quiet on the cyber security front, weakening the demand for FireEye's offerings.

More than 20,000 users

Meanwhile, Palo Alto Networks appears to be benefiting at FireEye's expense. During its May earnings call, Palo Alto Networks CEO Mark McLaughlin boasted of a customer the company stole from FireEye:

Competitive wins...included...a new win with a global semiconductor company where we replaced...FireEye to secure more than 10,000 workstations and servers with Traps, and more than 20,000 users with Aperture.

FireEye and Palo Alto Networks have introduced a plethora of new security services in recent years, putting their businesses into ever-increasing competition. But Palo Alto Networks' direct competition to FireEye's advanced persistent threat (APT) detection has long been WildFire. Demand for WildFire has been strong in recent quarters -- last quarter, Palo Alto Networks said it had more than 10,000 WildFire customers, up from just over 9,000 in the prior quarter.

FireEye will look to expand its offerings

Fortunately for shareholders, FireEye doesn't intend to rest on its laurels. During its most recent earnings call, management laid out a strategy for winning back customers. Mandia detailed FireEye's plan:

...we will deliver new cloud-based and hybrid security products that leverage our MVX detection engine...MVX detection in the cloud, which will allow us to reach smaller, more price-sensitive customers, is on track for general availability in [the fourth quarter]. We believe that these solutions will open new markets as we have greater price flexibility and multiple deployment options.

MVX is FireEye's core APT offering. Traditionally, it's been sold in conjunction with FireEye's hardware appliances; soon, it will be offered as cloud-based service. That could allow FireEye to reduce its prices and attract more customers, particularly among smaller size, perhaps more price sensitive businesses.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends FireEye. The Motley Fool recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.