Shares of cybersecurity specialist FireEye (NASDAQ: FEYE) got a much-needed shot in the arm after the company delivered a solid first-quarter beat, rising over 14% in one day. The company's adjusted net loss of $0.09 per share on revenue of $173.7 million easily beat Wall Street estimates, while strong guidance also boosted investor sentiment.
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The stock enjoyed additional momentum following reports of worldwide cyberattacks as security breaches once again became a focus for corporate and government entities. Now, FireEye expectsto generate $730 million of revenue this year at the midpoint of its guidance, while its projected loss of $0.31 per share is much lower than the $0.48 analyst consensus. More importantly, key developments indicate that the rally is sustainable, thanks to an improving revenue mix and lower costs.
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The subscription business is gaining critical mass . . .
FireEye's subscription business jumped almost 12% year over year during the first quarter, offsetting a 30% product revenue decline. Subscription services now account for 86% of the company's business, compared with 80% in the prior-year period. FireEye was able to grow its overall top line despite the massive drop in product revenue.
Not surprisingly, FireEye's billings dropped 18% year over year as the transition continued. However, the value of subscription-related billings increased 20% annually. FireEye launched its Helix security platform at the end of quarter, so investors can expect stronger subscription billings growth as the year progresses.
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On the other hand, deferred revenue jumped 12% year over year to $632 million, despite the overall drop in billings with short-term deferred revenue increasing 21% to almost $400 million. This revenue will be recognized on the income statement within the next year, indicating that a good half of management's top line guidance for 2017 is already covered.
. . . and driving the push toward profitability
FireEye's shift toward a subscription-led business model is expanding its margin as well. Its non-GAAP gross margin jumped 3 percentage points last quarter to 73%, thanks to a 4.6% drop in subscription-related cost of revenue. In addition, the subscription business is helping the company right-size its cost structure.
For instance, FireEye's total operating expenses fell close to 29% from the prior-year period, thanks to a massive decline in sales and marketing expenses. This isn't surprising, as the subscription business will ensure a steady stream of revenue without the need to spend heavily on customer acquisition.
The company has also taken note of the burden that massive stock-based compensation expense creates on its bottom line. Therefore, the company slashed this line item by 31% last quarter, helping it reduce the GAAP net loss to just $83 million, compared with $156 million in the first quarter of 2016.
Data by YCharts.
The new platform ensures long-term growth
FireEye's recently launched Helix cybersecurity platform will help it tap the growing demand for security-as-a-service in a cloud environment by integrating its threat prevention and analytics services into a single platform. In fact, Helix integrates over 300 technology operations into a single interface, such as next-generation firewalls and anti-virus, making it easy for partners and customers to deploy.
What's more, Helix is a scalable platform, and FireEye is offering it through a low-cost subscription model, so it can be deployed across organizations of all sizes. This could be a big deal for FireEye as Statista forecasts that the global security-as-a-service market will be worth $8.5 billion in 2020, compared with just $3.8 billion last year.
More importantly, Helix brings FireEye on par with rival cybersecurity companies such as Palo Alto Networks and Symantec, both of which offer integrated security platforms providing end-to-end solutions. Therefore, FireEye is now in a stronger position to fight for a bigger share of the cybersecurity market and accelerate its growth.
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