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This Cybersecurity Stock Could Step on the Gas in 2020

By Harsh Chauhan - Feb 27, 2020 at 8:22AM

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A change in its business model could turn out to be a tailwind for cybersecurity company FireEye.

FireEye (MNDT 0.46%) has turned out to be a disappointing cybersecurity bet over the past year. A transition from a hardware-centric model to a cloud-specific one and the company's failure to keep up with rivals on the research and development front have constricted its financial growth even though the overall cybersecurity market has been growing at a fast pace.

The disappointment continued with FireEye's fiscal 2019 fourth-quarter report as the company's billings growth wasn't solid enough to satisfy Wall Street.

Weak billings growth is a cause for concern

The company's billings increased just 3% annually during the quarter to $274 million, missing the consensus estimate range of $285 million to $295 million by a wide margin. This has sparked concern among investors as FireEye considers billings a gauge of the company's future revenue growth.

Cybersecurity abstract shield.

Image source: Getty Images.

Explaining the slowdown in billings growth, FireEye CFO Frank Verdecanna said, "While billings, revenue, and operating cash flow were at record levels, fourth-quarter billings were impacted by a two-month decrease in the average contract length for our subscription and support contracts."

Verdecanna added that FireEye's 2020 outlook assumes a decline of two to three months in the average contract length this year compared to last year. This is a cause for concern as a declining average contract length indicates that FireEye's customers are unwilling to commit to long-term subscription plans.

That's what Verdecanna confirmed over the latest earnings conference call. He said that the company is witnessing a "reluctance in the mid-market and a reluctance in the channel to bill multi-year upfront." This will affect FireEye's billings growth this year. The company is looking at $930 million to $950 million in billings this year, a marginal increase over 2019's billings of $926 million.

However, it might be a good idea to look past FireEye's tepid billings outlook as there were quite a few silver linings in the report.

Don't miss these positives

FireEye's problem with billings growth is a result of its transition to a software-based business model. The company used to sell on-premise security hardware and recognized revenue perpetually. Now that it has been moving to a hybrid, cloud-based model, there are bound to be some short-term pains.

But the upside is that FireEye's cloud-based business is growing at an impressive pace. Last quarter, the company's platform, cloud subscription, and managed services revenue jumped 41% annually to $71 million. What's more, revenue from the company's professional services business -- through which it provides security consulting services in response to cybersecurity incidents -- also jumped 29% year over year.

Both these segments together accounted for 51% of the company's total revenue, compared to 41% in the prior-year period. It was the product-based business that weighed on FireEye's top line as revenue from the same was down 11% annually. Meanwhile, billings from the cloud business were up 17% over the prior year, while services billings jumped an impressive 32%.

This is why savvy investors should keep FireEye stock on their radar and even consider going long on pullbacks as the company seems to be pulling the right strings in important areas.

The stock currently trades at 3.8 times sales, which is lower than the five-year average price-to-sales ratio of 5.01. Also, FireEye's non-GAAP (adjusted) earnings are expected to jump to $0.22 per share this year according to the mid-point of its guidance range, up from last year's adjusted earnings of $0.05. Not everything is doom and gloom at FireEye, which is why investors looking for a cybersecurity stock should keep this company in their sights.

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