Cybersecurity company FireEye (FEYE +0.00%) surpassed expectations in its second-quarter fiscal 2017 report on Aug. 1 thanks to double-digit growth in the subscription business that helped it reduce customer acquisition costs substantially. The cybersecurity specialist also impressed investors with its guidance, which turned out to be better than Wall Street's expectations.
Not surprisingly, FireEye stock soared in after-hours trading after the report's release, though have since retreated. But the stock is up about 19% year to date and I think there is more room to run. A closer look at key trends revealed by the company's latest quarterly report will provide more clarity about why FireEye investors can expect the company's stock price momentum to continue.
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Strong subscription growth is a boon
FireEye's revenue from subscriptions and services jumped almost 15% year over year during the latest quarter. The subscription business now supplies 83% of the company's revenue as compared to around 77% in the prior-year period. But at the same time, FireEye's product revenue has been sliding (down 23% year over year in the latest quarter) thanks to its preference of improving the subscription side of the business.
This strategy has worked wonders for FireEye's bottom line, allowing the company to reduce its adjusted loss per share to just $0.04 as compared to a loss of $0.33 per share in the year-ago quarter. This reduction was driven by a massive drop in the company's operating expenses, which declined close to 25% year over year.
Such a substantial decline in operating expense was catalyzed by a 26% fall in the sales and marketing expenses, which can be attributed to the growing traction of FireEye's subscription business. As more customers take FireEye subscriptions, the company has to spend less money on sales and marketing as it gets repeat business from the same customers.
More importantly, it can upsell its existing subscription customers without a major bump in the cost base. This was clearly evident last quarter as FireEye's subscription cost of revenue stayed almost flat year-over-year despite the impressive jump in revenue from this segment.
This is why the promise of stronger subscription growth was met positively by investors after the latest report, as this will push FireEye close to reporting a profit in subsequent quarters.
More growth ahead
FireEye's billings for the second quarter show that the company's subscription business can grow further. A company's billings reflects the contracts that will eventually translate into revenue once the services are delivered, and this metric came in at the higher end of its $155 million-$175 million guidance range at $172 million.
The billings were also higher than analysts' forecast that called for $167.7 million, which enabled FireEye to post a stronger-than-anticipated forecast for the current quarter. The company expects third-quarter revenue of $186 million at the midpoint, with its net loss between $0.06 per share and $0.09 per share. By comparison, FireEye had reported a loss of $0.18 per share in the third quarter of 2016.
FireEye's upgraded full-year guidance was what bumped investor confidence. The company now expects $740 million in revenue this year at the midpoint of its guidance as compared to the prior expectation of $730 million, primarily driven by the adoption of its newly launched Helix security platform.
Helix adoption is gaining momentum
FireEye's Helix security platform integrates various anti-virus modules and next-generation firewalls into one platform that can be scaled according to the needs of the customer. This opens up an opportunity for FireEye to make a dent in the fast-growing security-as-a-service market that's expected to clock annual growth of 19% for the next four years, according to TechNavio.
The good news is that the new platform has been well-received by customers since it was launched at the end of the first quarter, helping FireEye land 10 new customers in the recently reported quarter. More importantly, the new platform helped the company land $2 worth of new business for each dollar that a customer spent on Helix, indicating that it is helping FireEye's cross-sell more services.
This is a green flag for FireEye's margin profile as the company will be able to sell more subscription services without a major bump in customer acquisition costs, setting it on the way toward profitability. Analysts estimate the cybersecurity company's bottom line could grow at 15% annually over the next five years. FireEye looks well-placed to hit this target given its product traction and declining costs.
