Better Buy: FireEye vs. Symantec

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Cybersecurity specialists FireEye (NASDAQ: FEYE) and Symantec (NASDAQ: SYMC) have turned out to be good bets for investors this year, beating the NASDAQ CTA Cybersecurity Index thanks to a spate of cybersecurity attacks that have increased demand for their products.

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Symantec has seen a massive spike in sales of its identity protection solution after the Equifax data breach, while the WannaCry ransomware attack earlier this year has helped FireEye accelerate customer additions. But investors now seem to be having doubts about the potential of both these cybersecurity specialists.

Shares of both Symantec and FireEye have plunged in recent weeks after their latest guidance numbers failed to inspire confidence. However, both companies are primed for a comeback as they are making smart moves to attack the cybersecurity opportunity. But which one has the potential to do better? Let's find out.

FireEye

FireEye recently lowered its full-year revenue and billings guidance, citing shorter customer contracts after the launch of its Helix cybersecurity platform. In fact, the average contract length of FireEye's customers was down to 25 months last quarter as compared to 27 months in the year-ago period.

Looking ahead, the company expects average customer contract lengths to stabilize at 20-24 months. This could lead to further top-line weakness as shorter contracts mean less revenue visibility. However, the shorter contracts are a result of FireEye's transition to a subscription model, and they are eventually going to boost margins since it costs less to service a subscription customer.

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In fact, FireEye now expects an adjusted loss of $0.16 to $0.19 per share this year, well below the prior range of $0.19 to $0.24 per share. Therefore, the company's shift toward a subscription model is accelerating its push toward profitability.

In all, FireEye has tried to reset investors' expectations after gauging the response to the Helix cybersecurity platform, and also provided proof that its strategy will work with a stronger bottom-line guidance. But a closer look at the company's deal activity in the previous quarter indicates that investors need to be cautious.

Last quarter, FireEye added 234 new customers, down from the 287 it added in the prior-year period. What's more, the number of $1 million-plus deals fell from 47 last year to 43 in the last-reported quarter. Therefore, FireEye's average deal size seems to be on the decline, which is a cause for concern in light of the decreasing contract lengths.

A combination of shorter contracts and smaller deals will hurt FireEye's deferred revenue, which has the potential to hurt long-term top-line growth. As it turns out, FireEye's deferred revenue growth has slowed down alarmingly. The company had $631 million in deferred revenue last quarter, up slightly from $616 million in the year-ago period.

By comparison, rival Palo Alto Networks' deferred revenue grew 37% year over year last quarter, indicating that FireEye is probably witnessing a drop in demand for its products.

Symantec

Symantec pulled back its full-year guidance when it released its latest quarterly report, but the reasons were vastly different when compared to FireEye. The company has divested one of its businesses that supplied $203 million in revenue during the first half of the year, so its justification for a lower revenue expectation this year seems to be more convincing.

Now, Symantec has been streamlining its business with the help of acquisitions and divestitures so as to attack potentially fertile markets such as identity protection, and network and cloud security. The good news is that its moves have started paying off. Symantec saw a massive surge in demand for its LifeLock identity protection after the Equifax data breach, with sales reportedly jumping tenfold.

More importantly, Symantec has pulled in a younger customer demographic and customers are buying the full-price subscription costing $29.99 a month as compared to the discounted plan of $9.99 a month.

More importantly, Symantec's deferred revenue from its enterprise segment, which supplies over 55% of the revenue, increased 12% year over year last quarter. Meanwhile, the deferred revenue of its consumer digital safety segment was flat year over year after accounting for the acquisitions and divestitures.

Additionally, Symantec management claimed that it closed a record number of eight-figure-plus enterprise deals last quarter, without getting into any more specifics. Moreover, the company is witnessing a jump in cross-selling opportunities as it integrates the various acquisitions into its business. As a result, Symantec saw an increase in multiproduct deals last quarter thanks to its integrated cyber defense platform.

This is good news for investors as cross-sales ideally lead to stronger margins because it is less expensive to sell products to an existing customer as compared to acquiring a new one. Therefore, Symantec seems to be in a better position than FireEye when it comes to deal activity and customer acquisition.

The verdict

There are a number of factors playing in Symantec's favor from an investment viewpoint. The company's business is on the rise as evidenced by a 27% year over year rise in the revenue. On the other hand, FireEye's turnaround might be jeopardized by potentially weak revenue growth as its top line rose just 2% last quarter.

Additionally, Symantec's cash position of $2.3 billion easily exceeds FireEye's $870 million, which means that the former is capable of spending more money on marketing. In fact, Symantec's marketing expenses rose over 28% last quarter as it tried to aggressively increase sales, while FireEye's outlay dropped almost 20%.

Therefore, Symantec's stronger financial muscle and robust deal momentum make it a stronger bet to take advantage of the cybersecurity opportunity, while FireEye is still trying to overcome the uncertainties of its changing business model.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends FireEye and Palo Alto Networks. The Motley Fool has a disclosure policy.