FireEye (NASDAQ:FEYE) investors haven't been enthused by the cybersecurity specialist's performance in recent quarters thanks to slow customer growth and a drop in contract lengths, but its latest quarterly results point toward a turnaround.

FireEye's revenue, billings, and adjusted income were comfortably ahead of the higher end of its own guidance range during the third quarter, enabling it to beat Wall Street's expectations. Investors were impressed, as the nearly 10% stock jump the next day shows, and they will be expecting bigger things from the company in the future. The good part: FireEye looks primed to deliver, as it seems to be making the right moves to grow the business.

Hacker in a hoodie sitting with a laptop.

Image source: Getty Images.

Stepping on the gas

The growth in FireEye's key customer metrics has been patchy at best in recent quarters, but the third quarter shows that the company is finally finding momentum on this front. It added 243 new customers during the latest quarter, nine more than it had added in the same quarter last year. In all, FireEye has added 747 new customers through the first three quarters of this fiscal year, an increase of 8% over the same period last year.

But it's not just the increasing customer count that's worth noting. FireEye struck 43 deals that were worth at least $1 million during the third quarter. Though the number is flat compared to the prior-year period, what's worth noting is that the company is witnessing a favorable trend on this front overall this year. This is evident from the fact that the number of $1 million-plus transactions has increased around 10% through the first nine months of the current fiscal year.

What's more, FireEye seems to be locking in its customers for longer now. Its weighted average contract length (which includes cloud subscription services as well as product and related subscription and support) has now inched up to 28.6 months. The average contract length had dropped to just over 27 months earlier this year; an improvement on this front bodes well for the company, as it points toward recurring revenue growth in the long run.

FireEye's annual recurring revenue run rate now stands at $538 million, an increase of 10% over the prior-year period. The company has generated $776 million in revenue over the past year, which means that nearly 70% of it is recurring in nature. The good part is that FireEye is steadily increasing its revenue from recurring sources with each passing quarter. Its annual recurring revenue was less than 68% at the end of fiscal 2017.

Looking ahead, it won't be surprising to see a further increase in the portion of revenue that is recurring, as FireEye is witnessing solid growth in the cloud subscriptions and managed services business. Revenue from this business was up nearly 18% year over year in the most recent quarter, outpacing the 7% annual growth in the overall revenue.

The cloud business now accounts for more than 26% of the company's deferred revenue, up from 20% in the year-ago period, indicating that there's a lot of room for growth. As deferred revenue refers to the money collected in advance by a company for services to be delivered later, the increase in this line item is a positive indicator of a company's future revenue growth.

Moreover, FireEye looks set to enjoy secular growth in this market, as the global cloud security market is expected to grow at a CAGR (compound annual growth rate) of 25.5% through 2022. So it can be said with some degree of confidence that FireEye is setting itself up for long-term revenue growth, and a greater percentage of recurring revenue should ensure that it does the same profitably.

Expect greater earnings power

As FireEye's recurring revenue increases, the company will be able to better control its selling and marketing expenses and keep the operating expenses in check. The company's latest results provide clear evidence that this positive trend is materializing.

FireEye spent 43.6% of its total revenue on sales and marketing last quarter, while its outlay stood at almost 47% of revenue in the prior-year period. Additionally, its total cost of revenue declined year over year thanks to the growing contribution of the subscription business. These improvements allowed FireEye to cut its net loss by 27% year over year to $50 million.

What's more, the company was able to post non-GAAP net income of $11.8 million in the third quarter, reversing the year-ago loss of $2.7 million. This makes it clear that the positive top-line trends at FireEye are positively affecting the company's bottom line, and Wall Street recognizes the same, as consensus estimates indicate.

FireEye is expected to be profitable on a non-GAAP basis this fiscal year, posting an adjusted profit of $0.08 per share as compared to a loss of $0.16 a share last year. The performance is expected to improve big-time next year with non-GAAP earnings of $0.19 a share.

In all, there's a lot to like about FireEye. The company is turning its business around successfully, and the results are showing on the financial statements. More importantly, there are indications that its newly found momentum won't be short-lived, which is why investors looking for a pure-play cybersecurity stock should take a closer look at FireEye.

 

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