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This Cybersecurity Stock Could Be a Risky Bet

By Harsh Chauhan – May 5, 2020 at 12:30PM

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The novel coronavirus pandemic is weighing on this cybersecurity company's business.

While the broader stock market has recovered to some extent after the novel coronavirus (COVID-19) pandemic crushed investor confidence back in March, FireEye (MNDT) continues to languish thanks to concerns about the company's growth and competitiveness

FEYE Chart

FEYE data by YCharts

The cybersecurity specialist's billings growth -- a key indicator of its future revenue -- was on the verge of drying up earlier, and the economic fallout caused by the COVID-19 outbreak may make things worse. Here's why.

FireEye's quarterly results raise red flags

FireEye's fiscal first-quarter results contained a big red flag, as billings fell 7% year over year to $170 million. The novel coronavirus outbreak shaved off $10 million to $15 million from FireEye's first-quarter billings and forced the company to withdraw its annual billings guidance.

FireEye was originally expecting to deliver billings between $930 million to $950 million this year, a small increase over last year's figure of $926 million. Things could now get worse, as the withdrawn guidance indicates that FireEye doesn't have clarity about how much sales it is going to bill in 2020.

Money kept inside a trap.

Image source: Getty Images.

The company was already struggling with billings growth thanks to its transition from a product-based business model to a software-centric one. Instead of taking an upfront payment from customers for a perpetual license under the earlier model, FireEye now recognizes revenue over the length of the subscription contract. The problem for FireEye is that customers weren't willing to commit to long-term contracts earlier, and COVID-19 has added more uncertainty into the mix.

CFO Frank Verdecanna pointed this out over the latest earnings conference call:

I believe the biggest unknown for us is the average contract length of billings. While customers may still commit to multiple years, given the current economic uncertainties, we are assuming that some will be less willing to pay for upfront for multiple years.

FireEye's average contract length (ACL) for recurring subscriptions and support billings came in at 25 months during the first quarter. This was an improvement over the prior-year period's average contract length of 24 months, though lower than the ACL of 27 months seen in the second quarter of 2019. FireEye anticipates its average contract length to drop by two to three months in 2020.

In all, there is a lot of uncertainty about FireEye's financial performance this year under the current circumstances, and that makes it a risky cybersecurity bet.

A few more things to be wary of

FireEye announced that it will be laying off 6% of the company's workforce. The company says that this move was planned before the novel coronavirus-related disruptions hit the business, but the moves will help FireEye save some money in these difficult times.

The company estimates a non-GAAP operating expense reduction of $25 million in 2020 over last year thanks to this restructuring. FireEye also clarifies that the layoffs are happening in the company's traditional appliance-based product business, and it was necessary for its transformation into a software-as-a-service (SaaS) provider.

But a closer look at FireEye's balance sheet indicates that the disruptions caused by COVID-19 may have forced its hand. The company has around $980 million in cash on its balance sheet as compared to $1.1 billion in debt. Its gross margin and cash flow have been heading south over the past year, and things are likely to get worse in the coming months.

FEYE Gross Profit Margin Chart

FEYE Gross Profit Margin data by YCharts

In the end, it is clear that there are quite a few reasons why it would be a good idea to avoid FireEye. It is unable to take advantage of a jump in the volume of cyber threats that are arising because of an increase in telecommuting -- unlike rival Check Point Software Technologies, which recently delivered a robust quarterly performance and reported an uptick in business activity.

FireEye's business was already on shaky ground before the novel coronavirus pandemic arrived, and it may be a long time before it gets back on track.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends FireEye. The Motley Fool has a disclosure policy.

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