Q4 2019 Earnings Call
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Call over to Kate Patterson. Please go ahead.
Thank you do well good afternoon, and thanks to everyone on the call for joining us today to discuss virus financial results for the fourth quarter of 2019 and the full year 2019. This call is being broadcast live over the Internet and can be accessed on the Investor Relations section of Fireeyes website at investors Dot Fireeye Dot com with me on today's call or Ken.
In Mandia as far as Chief Executive Officer, Frankfurt economy, Executive Vice President Chief Financial Officer, and Chief Accounting Officer of Fireeye, Peter Bailey, Fireeyes Executive Vice President and Chief Operating Officer, and Bill Robbins Executive Vice President Chief revenue Officer, and general manager of products.
After the market close today Fireeye issued a press release announcing the results for the fourth quarter 2019, and the full year 2019 before we begin let me remind you that forest management will make forward looking statements. During the course of this call, including statements relating to flourish guidance and expectations for certain financial results and metrics Fireeyes priorities initiatives class.
And investments drivers and expectations for growth and business transformation, the expansion of fire as platform and the benefits capabilities and availability of new and enhanced offerings competitive position market opportunities and go to market strategies and organizational changes.
These forward looking statements involve a number of risks and uncertainties some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today and you should not rely on them as representing our views in the future and we undertake no obligation to update these statements after the call.
For a detailed description of the risks and uncertainties. Please refer to our FCC filings as well as our earnings release posted an hour ago copies of these documents may be obtained from the FCC or by visiting the Investor Relations section of our website.
Additionally, certain non-GAAP financial metrics will be discussed on this call. We have provided reconciliations on these non-GAAP financial measures for the most directly comparable GAAP financial measures in the Investor Relations section of the web site as well as in the earnings release.
Finally, I'd like to point out that we have posted a supplemental slides and financial statements on the Investor Relations section of the website with that I'll turn the call over to Kevin. Thank you Kate and thank you to all the investors employees customers and partners joining us on this call. We appreciate your interest and support as we continue to transform from our origins as a network security appliance vendor to a comprehensive.
Security Solutions company.
Let me begin by discussing some Q4 highlights and some four year highlights followed by our priorities for 2020, and then I'll turn the call over to Frank to discuss the details of our fourth quarter in 2019 results as well as the financial milestones, we expect to achieving 2020.
For Q4 in 2019.
In Q4, we delivered record revenue record billings and record operating cash flow and we did have not just for the quarter, but for the full year in the fourth quarter, we met or exceeded our revenue guidance for the 12 straight quarter and also delivered improved profitability. However, our Q4 billings fell short of the midpoint of guidance range by approximately 16 million in many of.
You may focus on that but this shortfall was primarily due to a shorter average contract length as our business transforms from appliance based solutions to our platform in cloud based products, our security validation offerings like varied and and our Mandiant services frankly, this trend to shorter contract lengths is both.
Welcome and expected to continue in the future as we accelerate or business transformation towards emerging growth solutions. So let's review some of the highlights from the fourth quarter and the full year.
Billings for the quarter was a record $274 million, an increase of 3% year over year billings for the year was 926 million an increase of 8% over 2018 revenue for the quarter was a record 235 million or 7 million above the high end ever guidance range revenue growth accelerated to eat.
Percent year over year, the highest growth rate we've had since the first quarter of 18 for the year revenue was 889 million also record and up 7% over 2018, our strong revenue performance in Q4 resulted in improved profitability and our earnings per share were well above the high end of our guided range.
Our billings and revenue growth was led by our platform cloud subscription and managed services category as well as our Mandiant services, all of which posted record billings and revenue and first I'd like to speak about our Mandiant services.
Our managed services organization had another record quarter its seventh in a row in regards to revenue.
In the fourth quarter, Mandiant billings were $70 million up 32% year over year Mandiant services revenue in the fourth quarter grew 29% year over year and exceeded 50 million for the first time.
Well its financial metrics a record setting what is more important is what these results represent that mandiant is trusted to handle the most complex security challenges.
Our many consultants have long been recognized as the premier experts to respond to security incidents and I believe we are also the best in world at Red Jamie I receive calls from customers, telling me, how our red teams expose critical gaps in their security gaps that had been missed multiple times by other cyber consulting organizations.
As a reputation and global footprint has grown customers around the world of caught a managed to not just respond to security breaches, but also proactively assessed the resilience against the latest attacks modernize their security operations and help them built in house intelligence capabilities. These strategic services allow us to extend our customer relationships.
And creates a highly efficient sales motion for a complimentary cloud based solutions have managed defense in short our managed services, our trusted inefficient gateway to new customers for our platform cloud and managed service offerings driving a change from point in time revenue to our platform in fact more than 7% of the customers engage with me.
Canyon services in 2018 purchase non incident response solutions within 12 months of their engagement.
The growth of our platform cloud subscription and managed services category reflects this relationship for example, billings for our platform crowd in managed services subscriptions grew 17% year over year in the fourth quarter and 16% for the full year.
Revenue growth in the platform category continued to accelerate in Q4 and was up 41% year over year for 2019, we generated 20% growth in our platform in cloud category. Moreover, the platform in cloud annual recurring revenue grew 31% year over year to a record $280 million. This is the second.
Consecutive quarter of air our growth greater than 30% for this category.
The strengthen our platform cloud and managed services billings and revenue offset decline in the mature appliance centric product and related category. The decline in this category reflects the end of the hardware refresh cycle around or third generation appliances, as well as industry trends towards cloud based in virtual form factors increasingly delivered as a service.
And vendor concern.
Station, especially for on premise security controls.
We expect these trends to continue and possibly accelerate in the future due to the transformation process. We began in 2016, I believe fireeyes well position to thrive as the market evolves.
When I took over as CEO in 2016, nearly two thirds of our business was appliance based and deployed on premise and the products category was declining in performance year over year.
At that time, we laid out our plans to modernize our solutions and transformer business to achieve profitability and sustained growth.
I'm pleased to announce that the billings for our emerging solutions in the platform cloud and services categories business exceeded our mature on premise appliance business for the first time in the third quarter of 2019.
This gap widened in the fourth quarter as a solutions business accelerated and our outlook for 2020 assumed this trend will continue and I believe this is a critical point for Fireeye and marks the turned that many investors have asked me about to be clear, we anticipate that our billings revenue.
Air are far platform cloud and managed services category in managed services will continue to eclipse the products that Fireeye pioneered 15 years ago. This is an important milestone for fireeyes transformation.
I'd like to review some of the specific actions. We took that are enabling this fundamental transformation of our business model.
First we invested in decoupling or detection capabilities, and IP from our appliances, giving customers greater deployment flexibility and enabling new cloud offerings.
We then simplified or go to market into and we introduced subscription pricing across all of our offerings. We introduced helix and open cloud based security operations platform that serves as a portal to our intelligence and our expertise and it integrates with more than 553rd party products today.
We continue that features to helix and I'm excited about the next release that we're going to launch at our say.
Meet our expertise available on demand through helix and as a standalone subscription equities on demand continues to gain momentum with customers and as a clear differentiator for our solutions.
We acquired buried in the leader in the rapidly emerging security validation market.
And most recently we of course.
Pretty company club Visors, the technology provides visibility and control across multiple cloud and container environments and it is a natural extension of our hewitt's platform in summary, we modernized how fireeye does business. We went from hardware to software from on premise to cloud and hybrid from perpetual license.
Turning to subscription from safeguarding our customers from advanced threats to all kinds of threats from unprofitable to profitable from transactional two strategic and with these changes we have crossed the point, where our emerging solutions and our growth categories are now the larger portion of our business.
To take the next steps to accelerate our transformation, we're bringing parts of our business together.
First we are unifying our products customer success marketing and sales organizations under Bill Robbins. He will continue to work closely with Brady and about two to ensure we execute a cohesive go to market strategy, while emphasizing the growth of our platform cloud and services offerings.
Second.
I'm pleased to announce a Peter Bailey, who joined fire on December has been appointed Chief operating Officer, and then this leadership role he will be driving the operational discipline necessary to support our growth and accelerate our transformation.
And finally.
As with very mixed feelings that I tell you that next month, Travis Reese will be retiring from his day job at Fireeye.
Travis has been my friend and second in command for nearly 15 years.
Want to thank them for all he has done has been a part of the Fireeye Mandiant family. Since 2006 my friend since we first met in the United States Air Force 1996.
The good news is that Travis has agreed to become a member of our advisory Board and stay close to me stay close to our mission and stay close to the people who have had the privilege to serve with Travis in this mission.
Now I'd like to talk to you about EUR 2020 priorities.
Our mission to relentlessly protect our customers remains unchanged and our objectives are clear first be the best in water incident response red teaming in threat intelligence, we intend to continue leading our industry and services and threat intelligence to ensure fireeye knows more about cyber attacks in any one second we continue to extend our dynamic.
Threat detection and expertise to defend cloud based infrastructure.
Third deliver expertise on demand seamlessly through technology. We're experts are available at the point when our customers need them most.
And finally.
We intend to be the best and worst security validation the varied and platform operationalize is our threat intelligence and expertise to help customers measure and test their security effectiveness I believe the process of attack measure fix repeat.
That process needs to be made simple continues in common place when I meet with our customers. The number. One question May ask is are we secure and the varied and validation platform can address that question with a binary answer.
As we increasingly use of Baird invalidation platform in our red team engagements and security assessments.
Believe our customers will clearly see the elegance of continuous security validation customers can either rely on or managed services offering to hunt for threat actors in their environment or enable their internal teams with our continuous validation platform in both scenarios customers will progress from services engagements to subscriptions delivering recur.
In value to our customers.
As a great solution for our customers and is helping accelerate a rapid transformation to a comprehensive solutions company.
I believe our strategic advantage lies in our ability to continues to adapt our model to the threat environment as it changes we innovate at the pace of the adversary given the fact that most of our instant response customers are re targeted by attackers within the first year the market desperately need to model that continuously validate security controls.
Against known threats in a customer's production environment, we're focusing our resources on this need and by doing so I believe we will deliver growth consistent with industry leadership at scale with that.
On a deeply thank all fireeye employees for their continued efforts as we focus on meeting modern cyber defense.
We we have all the pieces necessary to change the game and security.
And I look forward to our continued progress now I'd like to turn the call over to our Chief Financial Officer, Frank Vertica.
Thanks, Kevin and Hello to everyone on the call.
Before we move on the details of our Q4 results and guidance for Q1 and 2020.
Let me remind you that I'll be referring to non-GAAP metrics, except for revenue and operating cash flow.
Our non-GAAP measures exclude stock based compensation amortization of intangibles noncash interest expense on our convertible debt.
Restructuring charges and other nonrecurring items.
Turning to our Q4 results, let me start by emphasizing that Q4 was one of the best quarters in our history with billings revenue operating income operating cash and free cash flow all at the highest levels in our history.
More importantly, although billings of 274 million were below the midpoint of our guidance range by about 16 million.
We showed continued momentum in the metrics that I believe matter, the most which our subscription billings air our revenue and operating leverage.
Our performance relative to relative to our guidance was due primarily to.
To a decrease in the average contract length as mix shifted to subscription offerings and platform cloud and managed services billings overall.
The quality of our fourth quarter billings with high which resulted in in period revenue yield above our forecasts and expectations.
This helped drive revenue outperformance of $9 million above the midpoint of our guidance range.
With expenses in line with our implied guidance on an absolute dollar basis.
Revenue outperformance flow directly to the bottom line and we generated record operating and net income.
Taking a closer look at our billings performance and the related air our metrics why the portfolio categories.
Platform cloud subscription and managed services subscription billings increased 17% year over year.
Even though the average contract way Hcl for short declined by approximately three months.
Okay.
Adjusting for a constant hcl.
Billings would've been approximately 100 million and the year over year growth rate would have been 32%.
Annual recurring revenue for this category accelerated to 31% year over year to 280 million.
Everyone of our cloud security solutions posted healthy year over year increases in the error.
With cloud endpoint, the highest at more than 100%.
Varied and finished the year as expected with about $20 million and billing and accounted for about one third of the increase in error.
Manny Billings grew 32% year over year to an all time high of 70 million.
Services deferred revenue was also had a record level, increasing 27% sequentially to 96 million.
The majority of this growth was driven by strategic consulting services and expertise on demand.
Please note some of these services within these categories tend to be re occurring but we do not include any services in our a or our calculations.
Finally, our appliance based product and related business continue to stabilize.
Although total billings for the category were down 16% compared with a year ago. The majority of the decline was an appliance hardware sales.
As customers continue to show a preference for virtual and cloud based solutions for incremental deployments.
A one month decrease in the average contract length was also a factor.
While they are and the on Prem product related category was down slightly on sequential basis.
If I look at our detection products across all form factors, a our was up 1% sequentially.
This is a really important point I want to emphasize that the sequential growth in the air are for our detection solutions shows that at most.
The most fundamental level, we continue to expand deployment of our detection technology just in different form factors.
Turning to revenue revenue of 235 million exceeded the midpoint of our guidance range by 9 million.
The year over year growth rate accelerated to 8% of the strong growth in platform and cloud revenue offset the headwinds from the ratable recognition of appliance hardware.
Platform cloud subscriptions and managed services revenue was a record 71 million in the quarter.
The growth rate accelerated to 41% year over year, reflecting the growth in billings air AR and deferred revenue we have experienced since early 2018.
Manny professional services revenue of $50 million with also at a high.
All time high in the services revenue growth accelerated for the fifth consecutive quarter to 29% year over year.
The growth growth reflects capacity expansion as well as increased efficiencies and services delivery through technology enablement.
Product unrelated subscriptions and support revenue decreased 14 million or 11% from Q4 18 to 114 million.
The year over year decrease in revenue recognized was driven by a decline in product and related current deferred revenue.
As appliance revenue from prior years Amortizes off the balance sheet.
We've been talking about this for awhile, but as a quick reminder, we recognize appliance revenue ratably over four years under the six so six accounting standard.
The good news is that the accelerating growth in the platform cloud subscriptions and services revenue lines more than offset this backward looking dynamic again in Q4.
We expect a headwind from appliance amortization to peak in 2020 and be less of a factor in 2021 and beyond.
Gross profit margin as a percentage of revenue was 73% in the quarter consistent with our guidance range.
The decrease from Q4 18 was primarily related to the higher mix of professional services.
Note that although Mandiant services are at a lower gross margin our services contribution is consistent with if not higher than other areas of business.
Total operating expenses decreased about 5 million sequentially.
The sequential decline was primarily related to lower employee payroll taxes.
On a year over year basis operating expenses increased just 2% substantially less than our revenue growth of 8%.
The biggest increase in within R&D largely due to the addition of the buried in R&D team.
Our continued operating discipline allowed the revenue over performance to flow through to operating margin and we generated record quarterly operating income of 16.8 million.
With other income partially offsetting taxes operating profit translated to net income of 15 million and earnings per share of seven cents.
Well above our guidance range of three to five cents.
Turning to the balance sheet and cash flow, we continue to maintain a very healthy balance sheet with cash and short term investments of more than 1 billion.
We ended the quarter with receivables are approximately 171 million.
An increase of about 18 million from the end of Q3.
Dsos calculated on billings were 58 days.
Which were at the low end of our targeted range of 55 to 65 days.
Total deferred revenue at year end was approximately 975 million an increase of 39 million sequentially and 40 million from the end of 2018.
36 million of the 39 million increase was in current deferred.
We generated a record 40 million in operating cash flow in the quarter at 68 million for the year.
This was a bit below our guidance range, primarily due to lower billings.
Capex was about 7 million for the quarter, resulting in free cash flow of about 33 million also a record.
For the year free cash flows 22 million up 117% from 2018.
All in all our Q4 results capped a solid year of consistent performance as we continue the operational transformation of our business model in parallel with our sales and technology transformation.
As Kevin mentioned, we are taking steps to accelerate this transformation.
And set the stage for increasing growth and profitability in the future.
Our outlook for 2020 reflects the internal and external forces driving our progress.
Looking at the full year guidance first we currently expect total billings in the range of 930 to 950 million.
The 2020 billings outlook assumes continued decline in appliance hardware sales both in absolute dollars and as a percentage of the billings mix of customers continue to up for virtual and cloud form factors for new and expansion deployment.
A two to three month decline in average contract way.
This decline reflects a higher mix of cloud and virtual subscriptions.
Which tend to be a lower average contract length and subscriptions attached to hardware.
Additionally, now that we have achieved consistent operating leverage and positive cash flow on an annual basis.
We are gradually transitioning to annual billing cycles consistent with the practices of other SaaS industry leaders.
This allows us to shift our sales objectives to air our growth.
Rather than gross billings and we've made some changes in our compensation plans to encourage this behavior.
While periodic billing creates a near term headwind to billings growth is a long term positive for our business.
Not only does it make our solutions more attractive to smaller customers expanding our Tam.
It encourages cross selling up sell conversations at more frequent intervals.
Finally, our guidance assumes a sustainable growth rate for services in the low to mid teens after a record 2019.
Working through the math associated with the contraction in the average contract length.
The midpoint of our guidance range implies a 9% year over year billings growth at a constant hcl.
An acceleration in the growth rate of air our growth to the mid teens from 6% growth in 2019.
Driven by 40 plus percent growth in the platform and cloud or.
Looking at revenue, we expect 2020 revenue in the range of 935 to 945 million.
An increase of 6% at the midpoint compared to 2019.
Our revenue outlook assumes the revenue growth rate of the platform cloud category remains at about 30% for the year.
It assumes negative revenue growth in the mid teens for the product related subscription and support category.
As I mentioned earlier this is the worst growth year for this category, because 2020 revenues compared to 2019 revenue metrics.
That included the final amortization of appliance revenue from 2015.
Recall that 2015 with the peak year for our appliance sales.
Finally, we expect services revenue growth in the mid to high teens, reflecting the expanded capacity and the record level of current deferred revenue.
We expect gross margin of about 71%.
And then operating margin between five and 6%.
When you do the math you will see that this implies a decrease in our operating expenses of 20 to 25 million compared with 2019, reflecting continued cost optimization efforts as we aligned our expense structure with the evolution of our billings mix and sales motions.
We expect most of the year over year decrease in operating expense savings will be realized in Q3 in Q4.
We expect expense savings to be realized across the business, but much more focused in the areas that are either declining or have slower growth.
Finally, with a consistent revenue growth across four quarters in mid single digits, we expect to show increasing operating leverage as we progress through the year.
This should allow us to exit the year with an operating margin in the 12% to 14% range.
Finally, we are looking for operating cash flow for the year to be between 65, and 85 million approximately flat with 2019.
And capex of approximately $10 million per quarter, or 4 million 40 million for the year.
For Q1, we are expecting billings in the range of 165 to 175 billion.
Our Q1 billings guidance assumes appliance sales contribute low to mid teens of total billings mix.
Similar to that or Q4 of 19.
This implies a decrease of 30% to 40% year over year.
Call that last year Q1 appliance sales were up 40% year over year due to the refresh of our third generation appliances.
Overall, we expect product and related subscriptions and support to account for about 40% of the billings.
Okay.
Sure when billings guidance also assumes continued strong 20 plus percent growth in the platform cloud subscription in managed services categories.
And assume services growth in the 15, 20% range.
We are assuming a decrease in the average contract length of two to three months.
Cost and Hcl, we estimate billings would have been relatively flat year over year.
Based on the Midpoints of Q1 and 2020 billings.
This implies we will build approximately 18% of the year in Q1.
Slightly below linearly last year, but within a normal range.
We expect revenue in the range of 222 to 226 million.
We expect product and related revenue to decline, 10% to 15% as the last of the 2015 appliances were amortizing Q4.
Platform revenue to continue to grow to mid to high thirtys year over year and services revenue to grow from 2019, but to remain in the mid to high teens growth rate.
Note that because we expect revenue to be greater than billings in Q1, we will see a sequential decline in the current deferred revenue.
We expect gross margin of 71% and the normal seasonal increase in operating expenses as withholding taxes and other employee related expenses restart for the new calendar year.
As a result, we expect to post an operating loss in the range of 3% to 5%.
Any loss per share three to five cents.
With lower billings and higher cash expenses compared with Q1 of 19.
We expect operating cash flow in the range of negative 5 million to positive 5 million for the quarter.
That concludes my review of our guidance ranges and assumptions I know theres a lot of detail here. So we have summarized all the assumptions and the math for you and the guidance section of our slides.
Operator, we'll now be open to take your calls questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question pressed upon key please standby, while we compile the given day roster.
First question comes from Sterling Auty with Jpmorgan. Your line is now open.
Yes, Thanks, Hi, guys. So curious around the shortening the duration with the impact.
But you mentioned I guess the question is why does that come as a surprise if we look back into 2019, we had the quarter, where there was the impact on refresh now the wolf.
Dewpoint, where now that this is passed us should things stabilize or is there you know another element that we want to watch for that could impact either billings or revenue.
Well I think the impact certainly as Frank the impact that we're expecting is that.
We're not expecting any impact on revenue, but we are expecting billings to have.
That headwind from a shorter contract duration and I think it wasn't a surprise, but it is something that we're actually pushing forward on.
Accelerating that transformation. So if you look at where Q4 ended you can see that we ended with 59%.
Of our businesses and the growth areas and that that would be platform cloud subscription managed services and services. So I think what you're seeing as a quicker transformation.
To subscription operating offerings and we also on our comp plans had a bigger focus on air our which will help to drive kind of higher a or our but shorter contract life.
Hi, guys and just a follow up to that just pushed back a little bit. It's I think we're all encouraged by the quality of of the billings and the revenue direction, where it's headed but just wondering if it wasn't surprise why maybe not an adjustment in the guidance rather than having.
The billings Miss that we saw in the quarter.
Yeah, I think if if you look at Q3 results in Q4 results, you're starting to see less.
Greater million dollars deals and that's because of the contract duration is coming down I think you probably density in the Q4 guidance because we had one data point being Q3 now we've got two data points on and we feel.
Especially with the changes in the comp plan that were kind of moving in that direction.
And if you look at where the growth of the business coming from its coming from subscription offerings that we do anticipate having just shorter.
Terms.
Got it thank you.
Thank you gentlemen.
Thank you. Our next question comes from Korea toppled with Stifel. Your line is now open.
Okay, great. Thanks for taking my questions. One for you Kevin one for you Frank for Kevin with Baird, and we talk a little but the automatic security validation piece of the business and then aside duration have assumptions changed around potential contribution from Baird and this year and then just taking a step back more broadly you talk about the efforts Upsells Mandy.
And customers here post engagements.
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Yes, so a couple of things on the varied and platform overtime Intel that we sell.
Which I think we'll never be relic.
Ever replicated we speak over 30 languages relocated and 20 plus countries now you take our Intel platform, where modernizing it we're bringing to market with the varied and security validation piece he add expertise on demand well, here's what I can tell you about security validation, it's when you're sitting in the.
Yes, we it is the number one thing that matters, where people want to know Hey, my secure well Here's your vulnerability management report with 2 million vulnerabilities 19000 patches you have to do and we have to do that stuff you know theres been a 20 year run of vulnerability management paradigms in defense in depth paradigms, what we want to do here at Fireeyes start.
A paradigm that I saw rich abate lake in some other folks out and cyber security referred to as the threat elimination paradigm, that's done with making its safe to do real attacks continue seven hack you, yes, or no can APTP 28 compromise you and get your email stores, yes, or no. These kind of binary tasks on a cash.
Continuous basis, just cuts through the chasing gives you the cliff notes of what you got to do for security right now to feel secure so talking about buried in combining it with our Intel our attacker knowledge, adding a button for expertise on demand and you can see that we can kind of attached to a sem and.
Provide exceptional value here's our Intel and as we modernize that what we want to do is almost provide a.
Hey.
Minted reality of years your Sim ingesting, where you go all my Gosh. This is so here's all the open source information on this alert and here's all the Fireeye information on this alert and here's what we think we should do about it bring that to market and elegant way and combine it with validation that's a long winded way of saying this Intel.
Expertise on demand is all really converging into a single platform that we will have and that it.
Just unbelievably relevant right now fastest way to get unvarnished truth about what you got to doing security has hit the button validate your controls.
So I'm pretty optimistic on on that on the proof through side.
Think about what we do on Red team you know you'll never.
In my opinion.
Probably will never truly ought to meet humans, all right and we're not going up robots doing red team, but we can get 85, 90% of the validation into the varied and platform. So when we get go out and do a red team today and we're already booked for the next couple of months. These folks are hard at work they can use to validate.
And platform, while they're doing the job and then is constantly attack rinse repeat is tack rinse repeat and when you do that for a customer that you take them from security point, a key things are getting through to security point be acceptable risk. So I just see when our services folks are technology enabled with.
Our technology, it's just a logical.
Sellthrough logical gateway and that was my commentary so and the second part of your credit that's in Europe.
Our expectations for 2020 for varied and remains at 70 million in billings.
Perfect Thats, great and what the duration adjustment.
Correct Veritiv been primarily one year deals so.
There are multiyear deals that billed annually.
Okay, and then frankly, just one additional question for you I'm sorry blood.
No go ahead Frank.
Sure, So frankly, but yes.
So around product and support billings for next year and the implied 11% decline even with the duration adjustment can you talk about the delta there relative to what you offered at the analyst day for more like flattish growth would you call. This conservatism or would you see this more as a reflection of of the changes you're making the business to reflect.
Water shift towards platform cloud managed.
I think we are seeing a broader shift towards the platform cloud and managed services and services. So.
We're not updating our long term model, but at this point I think you can see into 2020 guidance in Q1 guidance that we are anticipating.
A quicker transformation there.
Okay. Thank you.
Thank you.
Our next question comes from Gregg Moskowitz with Mizuho. Your line is now open.
Okay. Thank you very much high guys and thanks for taking the question I guess the first first one just for Frank So your revenue guidance for 2020.
But a lot of focus on billings, but the revenue guide was below consensus and I would've thought that would be affected by duration. So just wondering if there was anything else we should be aware of as it relates to in period revenue that might potentially act as a headwind on the business. This year or is there, perhaps just a little bit of conservatism.
I think it's a little just a little bit of a mix difference. We have we do have a couple products that are upfront revenue and if you look at our expectations for 2020 Theres more of a mix shift from kind of those upfront products too.
More subscription based products.
Okay. Thanks, and then for Kevin so with expertise automatically.
So given that this was your Q4, Kevin did you see bigger commits from customers looking ahead to 2020, how are customers engaging with you around out here with the yeah I was our best quarter ever and we guards to the billings and basically you know as I look at how it's being use we will always have to integrated with our tech you want to be push button and you know and in.
You can imagine a future where it's not even push button. We just know when you need as based on how you are in your operating with the data.
Along so we made short biggest use cases, hey, we need a forensic investigation, we need an unbiased party in 30 seconds, the comment and take a look at something.
Thats kind of and again remember Rio de we started that not to sell more services. It's just been as a 15 year March towards I believe the best products in the world provide a seamless extension experts and so thats why we have it's a bomb on who is the best quarter ever Frio D., we're continuing to modernize how we deliver it right now we delivered.
Through the helix platform kind of like a click to chat and the top use cases review this machine with your friends Ics experts to figure out if I have a problem or not.
Great. Thank you very much.
Thank you. Our next question comes from Michael Turits with Raymond James Your line is now open.
Hey, guys could even Frank Frank for you back to duration on two things.
Is this just because there's more as a function primarily the mix shift and is it.
Or is it more driven by you guys in terms of shifting the model or demand side from customers wanted to go that way.
Yes, I would say Michael it's both.
We're seeing a quicker shift to subscription, but we're also.
Expanding kind of our market opportunity because we have seen a reluctance in the mid market in a reluctance in the channel to bill multi year upfront and so.
By tweaking the comp plans and by changing things a little bit to allow for that and put some more controls on degradation of a our.
On renewals and conversions.
Theres just a much bigger focus on air are that.
We know that changes will have an impact on duration, along with kind of the natural kind of move from.
Appliance hardware that typically is three years to subscription is usually a year or two.
And I guess I'm I'm surprised that if you're incenting it and there's the demand side driver that it's not more of an impact. This year. I mean is there any downside risk to that two to three months and where could it go longer term.
Well I think.
Adjusted with guidance, there's always an upside and downside to it but I would say that we feel pretty good with.
The changes, we made driving somewhat of an impact, but I wouldn't say a drastic impact.
Plan changes aren't drastic enough that.
It would move move the needle that quickly the other way.
And longer term I mean does continue each year, where does it go eventually from your perspective.
Yes, I think longer term as we continue to focus on selling subscription and focus on there are I think you'll see kind of a general.
Trend downwards on contract length, but.
Yeah, we do still sell product and appliances, and we do still.
Incense longer term deals than some of which are going to be paid upfront. So I think it's going to be more gradual but.
Two to three months in any one year I think is a pretty significant transformation.
Okay. Thanks, Frank Thanks, a lot thanks, Kevin.
Thank you.
Thank you next question comes from the team of Lani with.
Your line is now open.
Okay. Thank you for taking the.
Yes.
Thank you for taking the questions Kevin I have one for you and frankly, you I'll start with you Kevin.
I, just kind of digging into Travis his retirement I know overnight team.
You had a pretty.
Yes, again reorganization effort under Robison Grady so at a very high level, how should we think about succession in continuity from here and appreciating build sort of expanded role and the new CLL is if you can just help us contextualize around the succession.
Yes, sure so first and foremost and I. This is either complementing me or not complementing Travis Travis I have shared a brain for 20 some years, so that the spirit of Travis we thought so much more like this so sounds like a strange comment, but I think I knew his habits, better and I knew my wife's habits I mean, that's what happens in the workplace.
So he is still working with me who always been advisor when were 80 years old and on the front porch, we'll be talking about fireeye.
So theres going to be total continuity to the mission in the things you put forward we've been doing this for a long time Travis join me in February 2006.
And since that time, a lot of things can happen and when you're putting in seven days a week in 24 hours a day. The comes a time, where you say hey, it's time for me to step out of the river.
And being advisor for Wilan step back in so my opinion Travis now always work together will benefit from his guidance.
And all the things that we put in motion together over the years, you're going to stay in motion I do not anticipate he's a stranger at all and as he goes into.
These new schedule, we have to obviously operationally execute and what I do there and I guess is just the first five to eight years in my career between ROTC in the military when you've got to execute and execute quickly you reduce your span of control and you roll and that's what we're doing as an organization, we're going to most senior executives and were.
Kind of tightened in New York chart to execute quicker, so that's where I'm doing those changes, but this is something that.
Lot of folks when you're in a start up and you get bought by the Big companies. You know this is six years later and we were still here and we're in and Travis is going to stay connected to it but.
It's been a 14 year run for him and when when folks get to that point, all I can do salute and respect.
I appreciate that color.
Thanks for you.
If we can revisit just some of the dynamics around the product and related categories.
The declining or accelerating declines in that segment relative to what we discussed at analyst day, If you could put a finer point on that for us as it relates to the Gen. Four Gen five appliance refreshes and refresh rates that would be really helpful. Justin So we can better appreciate.
On the disparity there and Thats it from me. Thank you.
Yes so.
Q1 of last year, we did have kind of the force end of life.
The end of March 2019 for the third generation appliances. So that did have kind of an outsize kind of product impact in Q1 of 19. So if you recall in Q1 of 19 product grew.
40% year over year, and so now you're seeing kind of the converse of that having a more significant decline year over year, because we don't have a kind of a force refresh happening in Q1 of 20.
As we look at the year, we look at the pipeline, we just see significant growth opportunities in the platform cloud subscription.
Part of our business now the good thing even with contract like coming down from the billings perspective, we're still getting multiyear commitments from customers. That's just what's being billed upfront is typically more annual then.
Three year deal at this point.
And if you look at just the overall growth in a our I think you can see that metric really showing strength because of that transformation from on premise to cloud.
About endpoint for example grew 100% year over year in cloud.
Hey are so.
We are seeing that transformation, probably a little bit quicker and we expected, but I think if a good thing for the business those are the growth areas or a business. They continue to grow very strongly.
Thank you.
Our next question comes from Melissa Banshee with Morgan Stanley. Your line is now open.
Great. Thanks for taking my question I'll start with just a product or segment related question for you Havent.
The strength and services was really notable this quarter and I think when you guys talked to last quarter. You said that Mandiant was operating at near capacity utilization. So can you just talk about what drove that strengthen outperformance and what you're seeing from a.
A kind of the billing rate perspective and expectations for hiring in 2020, you bet. So here's the reality if we hire it grows that simple you know you only got three things how many folks you got hourly rate and Chargeability. Chargeability is you every single metric for the Mannion services component is exactly where you want it to be it's probably a little bit hot.
Right now.
Especially in the you call we hall business of incident response, but the fact is its growth rate is directly tied to adding more people into the mix and that's it and plus.
We have expanded to services, we have Charles Carmichael, leading strategic services.
We have Ron do Schar, who leads a lot of our government efforts and it's just little bit more expansion into the strategic side of things as well, but bottom line right now if we hired 10 more folks we've got we're form right. Now we are 20 more folks my gut, we have where form right now and Melissa one of the things helping drive that is the fact that we've.
Been able to build kind of more than we're delivering and so we've constantly been able to increase the professional services deferred revenue with things like expertise on demand and what that does is give even in between any major projects. We have a bunch of work we can do with existing team and so services deferred revenue got up to 95 million.
Q4, so I think thats really healthy for the business because it gives us the ability to they just continue focus on hiring the right resources to be able to deliver on that.
That's great Okay, and one follow up for you Frank I just wanted to contextualize your guidance for 2020 in light of your longer term guidance. So if we look at the Billings guide and we normalize for the contract length, you're guiding to 9% billings growth I believe.
And then looking at your longer term guide for the CAGR through 2024, I think you initially guided for 12% to 16% CAGR and so can you just help us understand well first whether that's still stands and then secondly, what drives like the acceleration beyond 2020.
Sure. So we haven't updated the long term guidance, but but basically if you look at where this business is heading.
59% of the billings is in areas that are growing very quickly.
Growing at rates above that five year Cagar overall, CAGR and so as we continue to move throughout the year and move into 2021 and 2022, what you'll see is the growth part of your business is a much bigger part of the overall business and so the overall growth rate for that business is going to be much more significant.
If you look at.
Where we expect product going product billings ended at 10% of our overall billing. So while that has been declining it's becoming a much smaller piece of our overall business and so you know as we go through the year it.
Next year I would expect that the overall growth rate will go up because of growth part of your business is just a much bigger portion.
Very helpful. Thank you.
Thank you. Our next question comes from Patrick calls with EVD Research Your line is Hamilton.
Thank you for taking my question.
With the profitability if possible because.
I mean that was a pretty.
Impressive.
Both.
This quarter.
Okay.
So can you just couldn't talk through why we're seeing that inflection.
Fiscal 20, given that the last two years and won't really be much increasing profitability.
Yeah, I think Patrick a lot of it is just the focus on.
Having expenses go relatively down from where they are today and so ultimately even though we're investing.
Anywhere from 25 to 35 million in the growth areas of the business in 2020, we're pulling out roughly 50 million in the other parts of the business that are slower growth, which enables us to have an overall opex of down 20 to 25 million year over year and I think what's really impressive is.
We are getting too by the end of the year expecting 12% to 14% operating margin in Q4, and we haven't been in double digits before so I think thats really showed the leverage in the business.
Yes, that's very clear thank you very much and can I just.
So cool, but who the fiscal 20 revenue guidance and so you talked about the headwinds from the third generation appliances, and actually fiscal 20 being the one of the headwind is that what you had expected previously or has that kind of troughing out being pushed back a little.
First as you approach expectations.
Yes, I mean, we knew the amortization from the appliance.
What's going to continue impacting us in 2020, and the fact that we sold less appliances in Q3 in Q4, Yeah. There was left to add back into that pool.
So it so that doesn't surprise us its.
Again, the good news about that is that that headwind kind of dissipates in 2021 and beyond so it kind of hits its peak in 2020, so the revenue guidance.
Well, having that headwind, we're still able to show kind, an overall growth of 6% there.
Great. Thank you.
Thank you.
Next question comes from Rob Owens with Piper Sam Your line is now open.
Great. Thanks for taking my questions guys wanted to drill a little bit number one on the number of million dollar transactions and Frank you did touch on the fact that.
For the back half of 19, they were down on a year over year basis. So how long would you expect that headwind to last as that wouldn't laps itself in Q3 or is this going to persist throughout 2020 in your view kind of given that given some of the changes.
With the expectation of contract length going down.
You are going to see probably an impact and the greater million dollars deals I mean that we're able to grow over that because of the transaction velocity that we're seeing within.
The business, but we're just less deals are going to get to that level, because they're going from three year deals to two year deals.
Okay Fair and I guess on the along lines of transaction velocity in the just.
Switching to customer acquisition. It look like for 19, your new logos were actually flat on a year over year basis and.
That's reported I'm not sure how buried in the acquisition actually would impact that if it was in the number one when acquired or not but maybe you could just walk us through kind of your thoughts in terms of customer acquisition.
With some of the new compensation or you are you driving for new logos on what we should see throughout 2020.
Yeah, our expectation is that we're going to continue focusing on new customers. Because if you look at our ability to cross sell and up sell our existing customer base. We do a really good job of that so I think planning those seeds for the future is really important if you look at some of that comp plan changes. If you look at some of the newer products like buried and I think they fit the chance.
I will very well and I think we should see some traction there from a new customer logo perspective.
Alright. Thanks.
Thanks, Rob.
Thank you.
Next question comes from Jonathan Ho with William Blair. Your line is now open.
Good afternoon.
Just wanted to start out with maybe trying to understand a little bit better.
The acquisition around cloud visor, either what trends are you seeing in sort of securing multi cloud and you're maybe prioritization for 2020.
Yeah, a couple of thoughts on that first you want to be able to secure multi cloud one interface right. So you need ADW as Google cloud as your to 65, all in one place and then if you can get visibility in the security controls in one place. That's also very valuable. So bottom line is this most companies want to enterprises are going to the cloud faster than a no. They.
Our.
I know that's even here at Fireeye, it's always fun for us to watch radio the ask Bill Cosby climb up from time to time and people are you need the visibility on it and more importantly, they need to test the security controls in place and then actually adjust advisory gives us visibility into the diesel.
For Google MW asset to 65, and Azure and means to do firewall rules and controls based on what we see so it's just a perfect kind of add it to the log ingestion that we get from all those providers in helix and you can now go from visibility log ingestion and.
Let's change some things and orchestrate some defenses. So that's how it fits in with us.
Bottom line every vendor.
Take that out every customer of ours, that's gone into cloud is going to need that capability.
Got it got it and then just maybe on go back to the hardware discussion at what point does it make sense to maybe just discontinue the hardware business were forced customers on to the cloud and would there be any meaningful cost savings if you didnt need to support sort of both platforms. Thank you.
I think from a customer perspective, theres still lot of industry is were on premise appliances are important. So we are intention would be to always support those customers.
I think where we have a pretty streamlined organization, they're supporting kind of the hardware. So I believe.
I believe it wouldn't be a huge savings to move straight to the cloud or force you know movement to the cloud.
I think it's an important part of various customer verticals.
Thank you.
Thank you and just to be.
This too I mean, there's no question at this point gradient I've been on the phone with customers recognizing the fact that.
Our cloud based helix is just going to advance that at a rate and pace of change that's different than the on Prem. So at some point in time, you've got to go to where the puck is going to be it is obviously that.
It's rare in America in history of the World you can get something cheaper thats, better and cloud platforms actually providing infrastructure, that's better and cost less that simple so as people embraced that change we got embrace it as well so internally when you look at the innovation that we're doing its cloud first and that's why Grady has the Rowley has.
As he has a bias for change in buys for cloud and he has been put me in a headlock from nine years now to get there faster so.
We will keep getting there as fast as we can you know were there already.
But we're going to cloud visors shows that we wanted to get the visibility and the controls plane done as well we already epilogue ingestion done. So we kind of got the Tri factor there of how we need to operating the cloud we'll get our validation. There you can already run our security validation in the cloud, but one thing that I think would be a great growth there actually two things great growth areas for Fireeyes one.
Managed.
Defense in the cloud.
People want to just say, Hey man I'm going out to cloud I'm gone fast can you secured for me, we ought to be able to say hey, what we will do that and the second thing is we started doing security assessment for the cloud, we'd like to do that to our own technology like cloud dietary side I lied. There's a third thing we've got to validate in the cloud agent imagine a day and.
Push fireeyes innovators to do this where you can come to our website and say I want to validate my cloud infrastructure and just click through menus click through the licensing agreements by it and run test to make sure you can validate your security and that to me is.
You know transacting like a SaaS company, so we'll keep that as our aspiration.
Operator, I think we have time for one more question. Please.
Thank you.
And our next question comes from Brian Essex with Goldman Sachs. Your line is open.
All right. Thank you for squeezing me in.
Maybe Kevin effects is actually real quick about.
As we are focused here on platform cloud managed services. How is this platform adoption trending relative to I think at analyst day, you noted.
20% of customers are three or more products are you getting meaningful traction with platform business or is there. Another gear here in terms of growth if you get better adoption there.
Yeah first off you know so I always believe there's another gear period, you know so yeah, I just waved grady over as captain Helix is I come to give you the updates of Grady Yeah. I was just say adoption is going well we see.
The customers with three or more segment. It we've shared this before but continues to go sub 36% CAGR. So we see customers once you're getting a door, adding on those additional product and service pieces I'd also add some of the announcements the just the products that the Kevin alluded to it ourselves the ability to manage our on prem appliances through helix.
We expect to be kind of a phase shifted how quickly customers adopt the platform in other words, you don't need that on Prem control anymore to manager on premise hardware. So it's a really big step forward for us.
Got it that's super helpful, maybe greater while you're on the line if if he could mean for an update I think when you.
Yeah, we shifted roles here, we noted that.
You had a lot of changes on the development side of the organization in terms of the cost reduction inefficiency that I think Frank alluded to is any of that coming from maybe R&D and development side or all of these kind of just strictly around.
Rationalizing expenses related to the legacy or on premise part of an attach business.
Yes, definitely bit more than just that but okay actually had it back to Frank to answer specific questions on the opposition, yes, Brian It really is across the business, but much more focused.
And tailored to the areas that are not growing so if you think kind of out of the more mature products. If you look at the platform cloud category and solutions, we are actually investing quite a bit more in there, but we are pulling some costs out of.
The more mature products, so any R&D scale would be incremental to those I guess efficiencies.
There would be included an incremental okay got it thank you very much.
Thank you.
This concludes our question and answer session I would now like to turn the call back over to Kevin Mandia for any closing remarks.
Yes. These will be quick I just want to thank you for your interest in fire either there is you can see there's a lot of excitement in the business three and a half years ago and that might even be coming up on four years ago. I was appointed CEO. This organization I knew we had two in the back my minor caught at the turn in quotes and the way I defined that was growth business.
Overcoming and becoming the larger portion of the Fireeye business. We got there in Q3, we did it again in Q4 and now that we've arrived.
You're going to see as pivoting more and more of our focus towards those growth areas. So the first portion of the transformation checkmark complete now it's time to deliver more growth on the side of our business that can grow even faster and be more relevant. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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