FireEye (NASDAQ: FEYE) released earnings in early November showing a solid quarter, but the stock took a hit due to a conservative outlook for the remainder of the year. With the cybersecurity company in the midst of a turnaround, every quarter's result is an opportunity to check in to see how the company is progressing. Looking at deferred revenue growth and customer adoption of its new product platform, and following the company's commitments, will give investors an idea whether the plan is working.
Deferred revenue growth
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FireEye's management calls deferred revenue "an important indicator of [its] health": It represents the bulk of the company's future revenues and is a good measure of whether the company's plan is gaining traction.
Deferred revenue growth has been slowing for the last two years, and this quarter the company posted the lowest growth in the last several years at 2%. Management attributed this quarter's decline to a year-over-year decrease in contract length. CFO Frank Verdecanna isn't concerned and expects contract lengths to "stabilize in the 20 to 24 months range on an annual basis," with higher average contract length in the second half of the year. This is when government contracts are typically secured and those contracts are traditionally longer.
While the sequential growth of only 2% is certainly disappointing, there were positive signs, as CEO Kevin Mandia explained on the earnings call:
Strong demand for Helix, the company's new comprehensive platform, is critical for FireEye to return to growth.
New product-seeding program
The company had its best quarter for the adoption of its new Helix platform, which brought the total customer count to 71, but management isn't satisfied with the pace of adoption. In the earnings call, Mandia explained that FireEye is battling its long history of being an appliance company. So in order to get more customers introduced to the new product, it's implementing a "seeding program."
Helix's biggest advantage is pulling together all information related to cybersecurity in one place. On top of that is a layer of intelligence that filters all alert messages from multiple "spokes" to find those that are most important for the security specialist to act on. When the company sells or upgrades one element -- or spoke -- a customer is already using (for instance, the Endpoint HX), FireEye will install the Helix interface so the customer can begin to get comfortable with the product. When the customer chooses to add modules, that's an opportunity for the sales team to talk about upgrading to the cloud-based Helix platform.
Releasing the Helix platform was a key part of the turnaround plan. But building trust with investors requires the company to continue to meet its commitments.
Tracking company commitments
FireEye has executed well on its transition plan so far but needs to continue to deliver on the promises it makes. In the second-quarter earnings call, the company discussed three important milestones for the third quarter and for 2017:
Investors were disappointed with the adjusted revenue guidance, and the stock took a hit as a result. While the projection is more conservative than previously expected, the demand for new cloud product offerings should pay off for the company in the long run. The company still expects to "deliver non-GAAP operating profitability in Q4," even with the updated revenue guidance. This will be the first-ever profit for the company, an important milestone that investors have been waiting for.
The pricing study was important, due to FireEye's reputation as the high-priced cybersecurity vendor. It was to determine whether a simplified pricing structure and value-priced offering were possible; they would allow FireEye to go after customers with smaller budgets, which have been difficult for it to win in the past. While the company didn't provide any conclusions, Mandia indicated he'd keep investors posted on progress.
While some investors were disappointed with the weak finish to 2017, it's just a bump in the long road to recovery. Management is focused on driving the right long-term actions that will return the company to profitability and growth.
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