World infection map of a new mobile malicious adware discovered by FireEye researchers, dubbed "Kemoge." Image source:

Please pardon the pun, but in what's best described as a conflagration, shares of popular cybersecurity software company FireEye (NASDAQ:FEYE) plunged nearly 23% during trading Thursday following the company's fiscal third-quarter 2015 earnings, which were released after the markets closed on Wednesday.

While FireEye reported healthy revenue growth of 45% for a top-line result of $165.5 million, billings of $210.6 million fell below the company's own guidance range of $225 million to $230 million. In addition, management significantly dialed back full-year estimates of billings, from a projected range of $840 miilion-$850 million to a revised band of $780 million-$800 million. 

The company attributed the billings shortfall partially to missteps by its "relatively young field organization" in Europe. This lack of execution certainly proved costly, as last quarter, the company exceeded its own billings guidance, and prematurely (as it turns out) raised billings guidance for the year.

Compounding investors' angst, CEO Dave DeWalt blamed at least part of the slowdown to the slight rapprochement between China and the U.S. on the topic of state-sponsored cyber-espionage. Referring to the recent agreement in principle between the two countries, to refrain from intrusions and the theft of each other's intellectual property, DeWalt stated the following on the company's earnings call:

We see these new cyber peace initiatives reflected in the climb in number of APT alerts detected in our DTI network in the U.S., in the number of threats captured in our worldwide opps network, and the number of APT threats uncovered by our people in the U.S.-based compromise assessments and other service engagements.

This is the type of statement that has no positive outcome for stockholders. One interpretation is that DeWalt is simply providing cover for the various sales units that failed to deliver. If you happened to sample various business publications the day after the earnings report, you'd have seen this as a common takeaway among not only reporters, but Wall Street analysts issuing downgrades.

But taking the CEO at face value is just as worrying. While FireEye's total addressable market will surely grow over time, much of the enthusiasm around the company rests on a perceived acute demand for its products. If global threats are indeed easing, it means that FireEye's torrid revenue growth may be in for at least a cyclical pause.

Drilling down into those billings
The term "billings" is a fairly straightforward concept that can differ slightly from company to company. Like most public corporations, FireEye defines billings as total revenue less the change in deferred revenue during the period measured.

The balance between new sales and the portion of deferred revenue that gets earned in the same quarter can be difficult for investors to distinguish. Billings provides a way to ascertain that either through fresh revenue, or continued growth in the deferred revenue account, total revenue is on the rise.

Here's an analysis of billings provided by FireEye in its Q3 2015 earnings report:

 Q3 2015Q3 2014% Change
GAAP revenue $165,616 $114,211 45%
Change in deferred revenue account $44,976 $50,914 (11.7%)
Non-GAAP billings $210,592 $165,125 27.5%

All dollar figures in millions. Source: FireEye SEC 8-K filing, 11/4/2015; author's percentage calculations.

As you can see, billings rose at an extremely rapid pace. But the positive change in the deferred revenue account -- as measured from each year's prior sequential quarter, i.e. Q2 2015 and Q2 2014 -- actually slowed this year versus last year. The inference is that FireEye isn't replenishing its storehouse of deferred revenue -- essentially monies collected in advance of earnings -- at the previous pace.

The drop-off in deferred revenue growth not only caused FireEye to miss its own guidance, it threw up a caution signal -- easing billings and softer total revenue growth are suddenly a possibility for 2016. But does this really warrant the punishment investors doled out to FireEye following earnings? And is FireEye now a buy at its new price level? To find out, read on in the final article of this two-part series.