FireEye (MNDT -0.13%) investors have been disappointed this year as the company has failed to capitalize on the jump in cybersecurity spending in the wake of the coronavirus pandemic. Canalys forecasts a 5.6% increase in cybersecurity spending this year to $43.1 billion as organizations look to tackle the challenges brought on by the the increase in remote work environments.
The research firm estimates that cybersecurity spending in 2020 could outpace the overall economy. The bad news is that FireEye doesn't seem to be in a position to take advantage of that growth. The company's recent results and outlook have failed to assure investors that it can thrive in such a competitive industry. Even then, FireEye stock has made a nice recovery from the bottom it hit in March, gaining over 60%.
But that momentum will be put to test when FireEye announces its fiscal second-quarter results after the close on July 28.
The bar is set low
Wall Street expects a loss of $0.02 per share from FireEye on revenue of $214.8 million, in line with the guidance the company issued at the end of April. The numbers don't compare favorably to the prior-year period when FireEye reported revenue of $217.6 million and a loss of $0.01 per share.
That's not surprising, as FireEye has been struggling to generate revenue growth because of its transition to a subscription-based model. The company now recognizes revenue over the length of a contract, compared to the earlier practice of recognizing the sale up front when it was selling a perpetual license. But the problem is that this change has created uncertainty for the company as customers are not entering into longer contracts now.
FireEye has withdrawn its billings guidance for the year, citing weak visibility amid the pandemic. The company is worried that some of its customers will be "less willing to pay for upfront for multiple years," and this has created uncertainty around the average length of contracts. In the first quarter, FireEye's average contract length of billings in the subscription and support business stood at 25 months. The company anticipates a drop of two to three months in the average contract length this year.
This doesn't bode well for FireEye at a time when cybersecurity spending is reportedly on the rise, and its peers are taking advantage of the environment. Palo Alto Networks surpassed expectations and delivered impressive growth last quarter. Even Check Point Software has witnessed an uptick in demand for its solutions thanks to an increase in remote working.
But FireEye seems to be going in the opposite direction: It had to lay off 6% of its workforce to cut costs to tackle an unfavorable business environment. Deferred revenue increased just 1.5% year over year in the first quarter, which was weaker than the increase in its actual revenue.
Deferred revenue is collected in advance by a company for services to be rendered at a later time. The metric should ideally increase at a faster pace for a company like FireEye that's moving to a subscription platform. But the challenges around contract lengths make it clear why the metric's growth lost steam last quarter.
FireEye's outlook needs to be good enough for the stock's rally to continue, but it remains to be seen whether the company will provide updated guidance or not.
If FireEye fails to reassure investors this week, its recent gains could quickly fade away. Wall Street is expecting $220 million in revenue and $0.02 per share in earnings for the fiscal third quarter, which would be nearly flat from the prior-year period. But as FireEye witnessed a 7% annual decline in billings last quarter and stagnant deferred revenue growth, the company has its work cut out for it.