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When FireEye (FEYE +0.00%) released fourth-quarter 2016 results last week, shareholders were interested in hearing the progress the company has made on its transition. While the cybersecurity company's revenue missed expectations, there's some light at the end of the tunnel for FireEye. Kevin Mandia took over as the company's new Chief Executive Officer (CEO) in June 2016 and has been aggressively moving to solidify the business going forward.
To give you some more background on how FireEye is pivoting its business, I'll breakdown the details of a quote from Kevin Mandia that really sums up the company's recent efforts.
We need to view our Q4 and 2016 results in the context of transitions that we are going through. And this includes the following transitions, from disparate products to a single platform, from an APT [Advanced Persistent Threat] or advanced threat solution company to comprehensive prevention, from on premise appliances to more cloud and hybrid solutions, from product revenues to subscription revenues.
Wow, that's a mouthful! Although it looks like the company is tackling a number of transitions at once, these efforts are complimentary initiatives and in combination will move the company to a much stronger position, which will bring value to its customers and grow its business. Let's take them one at a time.
"From disparate products to a single platform"
The company has grown its capabilities through acquisitions of iSight and Invotas International Corporation in 2016. iSight was a world leader in Global Threat Intelligence and Invotas had a product to unify all key elements of an organization's security program into a single console. The companies bring additional products to FireEye's suite of offerings.
Previously all of FireEye's products weren't integrated into one, and multiple products and systems make it more challenging to support, sell and ultimately use the platform. As the company blends these products into one platform, FireEye and its customers will yield cost benefits. Additionally, a single comprehensive platform is the direction the industry is going and FireEye is in a race with its competitors, Fortinent and Palo Alto Networks, to deliver this for their customers.
"From an APT or advanced threat solution company to comprehensive prevention"
In FireEye's 2014 annual report, the company's mission was "to protect our customers from advanced persistent threats (APTs) and targeted attacks". The mission of the company needed to expand as FireEye added additional capabilities by acquiring a total of four companies.
In addition to the two acquisitions mentioned above, FireEye added Mandiant, a security consulting and services firm in December 2013 and nPulse, a performance leader in network forensics in May 2014. When FireEye purchased nPulse, it described enterprise forensics as "adding a flight data recorder -- or a black box -- to the network", and went on to say that "nPulse gives [FireEye] the ability to "go back in time" to see the full extent of how malicious code behaved on the network."
Integrating these products and capabilities into one platform (as mentioned above) is only one part of an acquisition. All aspects of these separate companies must be integrated to enable FireEye to best serve its customers, and to deliver cost efficiency. Since the 2014 annual report, FireEye has embodied this idea of comprehensive prevention by simplifying and broadening its mission statement to "relentlessly protect our customers from cyberattacks."
"From on premise appliances to more cloud and hybrid solutions"
When FireEye went public, its primary source of revenue was what FireEye refers to as "product" revenue. This is a model where FireEye delivers a product or an "on premise appliance" to its customers. This model results in considerable effort from the customers to assist in the installation, integration and support of the FireEye products. With the trend of more products and services moving to the cloud, company's information technology teams are looking for ways to do more with less.
Maintaining hardware and software products with a customer's in-house staff takes away valuable resources that could be deployed to delivering strategic business improvements. Today, FireEye's primary source of revenue is now subscription based where customers utilize FireEye's cloud solutions, which allows FireEye to do the heavy lifting of product maintenance and support. Hybrid solutions are where customers chose a mix of cloud and on-premise appliances to solve their cybersecurity needs.
"From product revenues to subscription revenues"
As FireEye is able to migrate its customers to the cloud, the result is that the customers move to a pay by subscription arrangement. Having more subscription based revenue allows FireEye to have more predictable cash flow and makes more efficient use of its sales force, which will help FireEye on the way to profitability. Additionally, FireEye has retention rates for subscriptions in excess of 90% which should give investors further confidence that this model is working for the company and its customers.
The combination of these individual transition efforts is a more comprehensive and valuable service for FireEye's customers and at a lower cost for the company. FireEye continues to make progress with the consolidation of the separate capabilities from its four acquisitions into a single comprehensive cyberattack prevention platform, that can be launched from the cloud. This allows FireEye to move to a predominately subscription based revenue model -- and that is good for FireEye, its customers, and its shareholders.
