Q3 2020 FireEye Inc Earnings Call

Time, all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time to ask the question during the session you'll need to press star one on your telephone you require any further assistance. Please press star Zero also this call is being recorded at this time I would like to turn the call over to Kate Patterson. Please go ahead.

Thank you Josh good afternoon, and thanks to everyone on the call for joining us today to discuss <unk> financial results for the third quarter of 2020. This call is being broadcast live over the Internet and can be accessed from the Investor Relations section of Fireeyes website at investors got Fireeye Dotcom with me on today's call are Kevin Mandia.

Alright, Chief Executive Officer, Frankfurt, ICANN Executive Vice President Chief Financial Officer, and Chief Accounting Officer of Fireeye, and Christopher Key Fireeyes Executive Vice President of products for Mandiant solution.

After the market close today Fireeye issued a press release announcing the results for the third quarter of 2020.

Before we begin let me remind you that Fireeyes management will make forward looking statements. During the course of this call, including statements relating to <unk> guidance and expectations for certain financial results and metrics.

<unk> priorities initiatives plans and investments drivers and expectations for growth and business transformation.

Spansion of firearm products subscriptions and services and expectations benefits capabilities and availability of new and enhanced offerings market opportunities and go to market strategies. 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.

Lee 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 risks and uncertainties. Please refer to our SEC filings as well as our earnings release posted an hour ago copies of these days.

Elements may be obtained from the FCC or by visiting the Investor Relations section of our website.

Additionally, certain non-GAAP financial measures 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 website as well as in the earnings release.

Finally, I'd like to also point out that we have posted 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 I like to thank all of you for joining us today and I hope that you and your loved ones are healthy and safe I remain proud of the Fireeye team and how we have adapted to new challenges that have emerged for all of US we continue to transform fireeye, while delivering strong results each quarter our results over the last few quarters.

Like the stabilization of our product businesses and strong continued demand for our emerging solutions and services.

Today, I will discuss some of the operating highlights of the third quarter and then provide more details on our recent innovations in both Mandiant solutions and our Fireeye control products.

He will then turn the call over to Chris King, Our executive Vice President of products from Mandiant solutions, and the driving force behind the SaaS platform, we call. The Mandiant advantage, which we launched approximately three weeks ago, Chris will provide a deeper dive on mandiant advantage, including the road map or additional offerings deployed to the cloud native platform and Frank.

Verdecanna will wrap up the prepared remarks with a discussion of our third quarter financial results and our updated outlook for the fourth quarter and the full year.

We did what we said we'd do in the third quarter and we exceeded our guidance range for both the topline and bottom line metrics in fact, our revenue non-GAAP operating income net income and earnings per share were all at all time record levels. Let me share some of the highlights third quarter revenue was $238 million, that's 11 million dollar.

Was above the midpoint of our guidance range.

Revenue growth was again led by our platform to cloud subscription and managed services category, which grew 21% compared to a year ago. This category includes our security validation platform threat intelligence and managed defense offerings as well as our cloud based security control products, our annual recurring revenue for this kind of.

<unk> increased 4% sequentially and 18% year over year.

Well the endpoint threat intelligence and security validation continues to drive the growth of this category.

Revenue for our Mandiant consulting services grew 19% compared to the third quarter of 2019. This marks the 10th quarter in a row of record revenue for our professional services and the fourth quarter in a row that or services revenue exceeded $50 million demand for expertise is stronger than ever and we continue to.

Operate at a very high tempo.

Combined revenue of a platform cloud category and our professional services category eclipsed our more mature appliance based business again in the third quarter and accounted for 54% of total revenue. This compares to 48% in the third quarter 2019, and 40% in the third quarter.

2018.

Even though it's a composite of our revenue continues to shift from appliance based control products to our cloud based products and Mandiant solutions, our traditional appliance based products remain deeply embedded in many organizations. In fact, we had sequential growth in product and remain today are for the first time since the fourth quarter of 2000.

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We added 279, new logo customers in the quarter and close 45 transactions greater than $1 million in both these metrics increased year over year and sequentially and we achieved these results while continuing to improve our bottom line, we generated a record 12% non-GAAP operating margin and record non.

GAAP operating income net income and earnings per share.

Now last year, we mentioned, we're seeing two different but we made it areas of focus emerge within fire.

Since that time, we have structured our business around two separate brands Fireeye products and Mandiant solutions, we have been able to accelerate innovation improve our go to market and leverage the equity of each brand.

Our fireeye products, our control technologies to best protect customers from cyber attacks and our Mandiant solutions, our product agnostic offerings that can enable and empower all security technologies to best leverage our frontline intelligence and security expertise I.

I would like to highlight a few of our recent innovations in our product businesses that are led by Bill Robbins.

The products leverage our frontline knowledge to provide what I believe is the best way of detection in security and we are focused on maintaining this position.

We have continued to improve our detection with machine learning and AI based features that learn from our front line intelligence and we have increased the correlation of data between our products and we have made significant progress, creating a single user interface through helix.

We added several new capabilities to helix, including integrations to accept data streaming from our endpoint agent and to perform endpoint remediation and response actions other new capabilities and he works include asset based alert correlation of Federated view and email Q management, the view and flush emails from our email secure.

30 products directly from the helix interface.

We also added a pivot to cloud buys ready to streamline cloud security management capabilities for our customers and added more than 50 compliance checks and club buys re designed by the Mandiant cloud security assessment team to sum up helix is stronger and more robust and better equipped to empower security operations for Fireeye product cost.

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Our endpoint security releases during the third quarter highlight the power of our innovation architecture to speed innovation and improve detection improve prevention and improve endpoint investigation workflows, specifically, we released three new modules process guard events streamer and richer a process go.

Card module detection stops unauthorized processes from obtaining and stealing user ideas and passwords. The event streamer module automate streaming when does that logs to helix and two third party Sims NR and richer module automates the analysts work flow by applying mandiant intelligence to the data, allowing analysts to understand and take.

Action to remediate and cloud endpoint remains an important growth driver for us and we have accelerated our investment in this area and.

An email we made a number of enhancements completing improvements to our outbound email scanning features which led to a 20% increase in outbound scanning adoption by our customers. We focused on our Microsoft integration, providing retroactive alert remediation for Oaktree 65, and active directory integration for easier and more effective.

Ways to protect recipients that are labeled VIP.

We started the quarter with announcement of our network security nine Dato release across our product family with nine data, we announced the ability to run and Microsoft Azure and released our smart grid product for use on ADW asked with bare metal instances and this capability meets the growing demand for many of our large customers that have strict data.

<unk> residency requirements and are building private data centers and ADW EPS.

Now I'd like to update you on Mandiant solutions, which consists of our consulting threat intelligence managed defense and security validation build.

Building solutions that allow us to scale the delivery of our Intel and expertise to software to any security environment is the foundation of our Mandiant solutions growth strategy. Therefore in October we achieved a significant milestone in this strategy with the launch of Mandiant advantage, our cloud native security as a service platform we believe.

The simplicity elegance and ease of use of the Mandiant advantaged platform make our Intel and expertise accessible and actionable by customers of all sizes using any security products in any infrastructure.

We also believe it will be instrumental in increasing the adoption of a threat intelligence and our validation technology.

Now I'd like to turn the call over to Chris key who will be discussing the details of our mandiant advantaged platform and how it revolutionizes customer access to our frontline intelligence and our experts Chris over to you.

Thanks, Kevin as mentioned, we launched Dominion advantage earlier this month with the goal of being a SaaS platform for all things mandiant, including our threat intelligence security validation, formerly barren.

Managed defense MDR and consulting services may.

Indian advantage will deliver integrated bundled offerings powered by our frontline intelligence and backed by our experts.

He's offerings will be focused on addressing the tough questions our customers are asking.

Are they compromised can they be compromised is their security posture, improving overtime and are they using their security budget effectively and efficiently.

With flexible delivery, we plan to offer solutions, ranging from 100% technology driven to EPS.

Expert back to fully managed enabling us to meet our customers wherever they are from a resourcing and maturity perspective.

Maybe an advantage opens up many new opportunities for our customers and our business.

Advantage provides our customer with an easy to deploy easy to use technology interface to our expertise in frontline intelligence we.

We expect that by leveraging advantage customer security teams will feel like Mandiant experts, our virtual extension of their cheap.

Up leveling their skill and improving their effectiveness customer.

Customer analyst will be able to see the world through the eyes of Mandiant consultant as we overlay and embed our breach and other frontline intelligence into their day to day work flows highlighting what is most important and guiding them on where to focus.

For many of solutions advantage provides a powerful technology scale for our expertise.

Imagine if what a single media consultant learns tomorrow, while battling through an incident response could immediately be leveraged by thousands of customers to improve their defenses.

Advantage allows us to scale this real time intelligence across an unlimited number of users.

Every consultant, we have I believe the ripple effect across our customer base is exponential.

Made these advantage enables us to extend the reach and impact and what makes us unique.

[noise] advantage also expands our total addressable market by expanding the number of potential customers building on our original good they're going for helix advantage enabled us to empower every security team in the world with her expertise and intelligence, regardless of the Sim or control products that they've deployed.

Given the unique position we hold as the go to organization for incident response, we believe that the knowledge, we have of attackers is unparalleled and incredibly valuable.

Advantage enables us to leverage this unique position to continue to up level fireeye products, but also scale and be relevant to the security teams that may have chosen another vendor for their controls.

Going to market isn't easy to try easy to buy stuff solution will enable us to take advantage of this new expanded opportunity.

The first module, we launched one advantage was mandiant threat intelligence. This represented a shift in how we provide threat intelligence to our customers moving from a traditional focus on reporting and finished intelligence to giving our customers direct access to our raw data and enabling our customers to know what we know when we know it.

As part of this new approach, we also decided to provide a freemium tier.

Enabling customers to easily sign up and experienced the new offering.

Confident that our unique and proprietary intelligence is a major differentiator. We've included millions of open source indicators and the machine learning driven confident score at no cost to our freemium users.

The level of open source data, we're providing for free is equal to what many vendors providing their paid offerings. We think this approach will be disruptive.

And just the first few weeks, we have seen hundreds of organizations sign up for our free tier and many of those have already requested information on pricing getting a demo and trialing the paid version.

Looking forward to see what impact this new approach has on our business in 2021 and beyond.

As we move into Q4, and Q1 21, we planned out additional modules commanding advantage, but.

By the end of this year, we will add both validation on demand as well as managed validation.

Elevation on demand will enable customers to go from investigating a through an actor in the many advantages lie to testing their actual environments against actress techniques and just a few clicks.

Validating their resilience using her frontline intelligence in their environment, we believe that our customers will be able to rapidly prioritize and deploy their resources to address new shortcomings.

In a recent demo this upcoming capability to see silver global retailer remark. This quantifiable data completely changes plants not just for 2021, but the next five years.

Being able to validate this environment against what Mandiant, assuming a breach is a game changer.

I'm incredibly excited by the initial response Dominion advantage and look forward to continuing to build out its powerful capabilities over the next couple of quarters. We're just getting started.

Chris. Thank you very much for that report in closing I want to remind all of you have the four priorities that we had for 2020.

First we intend to be the best and water incident response, Red teaming and threat intelligence, we performed more investigations during the first three quarters of 2020 than during the same timeframe last year.

We continue to add capacity to our managed services organization, expanding our consulting services in all areas, including cloud security Aiotv security transformation and Red teaming.

Second we intend to extend our dynamic threat detection and expertise to defend cloud based infrastructures and we addressed a lot of this priority with our acquisition of cloud advisory and the launch of our cloud Security assessment service and again with our network security non that over these including multiple enhancements to support secure migration of workloads to the cloud.

Third we intend to deliver our EPS cheese on demand seamlessly through our technology and finally, we intend to be the best in the world that security validation as you heard from Chris, but many advantage, we're combining our intelligence security validation and our expertise into a platform, we're working to make the process of measuring security effectiveness against them.

Current attacks simple continuous and common place I believe our new Mandiant advantaged platform exposed to security gap between the attackers emerging techniques and the safe guards that are often too slow to adapt and stop or detect these attacks.

I also believe adding validation on demand as well as manage validation offerings will be instrumental to security validation adoption. The platform. All also make our experts available at the point when our customers need them at most as a proof point our expertise on demand adoption continues to increase and utilized.

However, experts continues to diversify revenue generated from the use of expertise on demand increased by more than 300% again in the third quarter with approximately 66% of the use of these experts for the delivery of non incident response services and now I'd like to turn the call over to Frank Thanks.

Kevin and Hello to everyone on the call.

Before we move on to the details of our Q3 or Q3 results and our updated guidance for Q4 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.

There are three key takeaways from our Q3 results.

Q3 extended the year to date trend of strong results building on the strength, we saw in the first and second quarters.

Demand remains solid across our products and solutions and we've increased our revenue and profit outlook for Q4 in 2020.

And with the stabilization of our more mature products and growth in the emerging solutions I believe we have set the stage for a strong close to 2020 and a great foundation to enter 2021.

Turning to the suspect specifics of our Q3 results in Q3, we had another strong performance across all key financial metrics we.

We delivered revenue record revenue that was $11 million above the midpoint of our guidance range and we reduced our operating expenses by $18 million compared to Q3 of 19.

As a result, we delivered another record quarter for operating profit.

We also delivered positive operating cash flow of 33 million and free cash flow of 29 million.

That's the high level summary of the quarter now, let's turn to the details.

We remain focused on annualized recurring revenue and revenue as the most important indicators of our financial performance.

Air or provide insight into the expansion of our installed base of recurring subscriptions without regard to short term changes in average contract length.

The timing of large renewals or hardware refresh cycles.

As we've seen any or all of these factors can cause volatility in the year over year growth rate for billings for.

For these reasons, we believe air are and revenue are better indicators of our progress on our transformation journey, especially in the current environment.

Well, we know billings continues to be a widely followed metric so.

So all we are no longer guiding to billings, we will provide some color on our Q3 billings performance.

For Q3, we delivered $239 million in billings down 9 million or 4% from Q3 of 19.

This was much better than the 8% year over year decline in Q2.

Which I believe was the low point for the year or year over year billings growth.

Oh outline a few of the reasons, we believe the year over year.

Growth rates in billings will continue to improve by a few percentage points each quarter.

First the product and related billings compare for the first half of 2020 were difficult due to the refresh activity of our third generation appliances in the first half of 2019.

With that grow over behind us the trends and product and related billings growth have normalized this is validated by the sequential increase in product and related air are.

Second we are seeing a strong pipeline growth for our emerging solutions in the platform and cloud subs category as organizations map out their long term security strategies.

Finally, our non financial operating metrics of new logo customers greater than a million dollar transactions and EMR are all trending up.

Looking at the large transactions not only as the number increasing but we are seeing in the number of products and solutions per transaction trend upward as well.

In Q3, 75% of the greater than $1 million transactions included four or more products or services.

Before we turn to revenue and air our let me make a take a moment to provide some additional context on the year over year billings growth rate for the platform cloud subs and managed services category.

The reported growth rate turned negative in Q3 I believe this is an aberration rather than a trend similar to what we incurred in the first half of 2019 the year over year decline was the result of a very strong quarter the year prior and the timing of some very large renewals.

Based on deals close quarter to date and our visibility into the pipeline in the fourth quarter I expect the growth rate to bounce back in Q4 to a level consistent with or slightly better than the billings growth rate. We achieved in this category in the first half of 2020.

Cloud endpoint helix, Intel and validation performed very well year over year, but our managed defense billings had a sizable year over year decline due to some large deals and renewals in the Q3 of my team quarter.

Looking at revenue in Air are cloud based and cloud delivered solutions showed continued strength in Q3 with the platform cloud subscription and managed services category, having revenue up 21% year over year.

This category accounted for 31% of total revenue compared with 27% of total revenue in Q3 of 19.

Air are for this category was up 4% sequentially and 18% year over year.

Every product in this category increased year over year with growth led by cloud endpoint Intel and validation.

Revenue associated with our on premise product and related subscriptions business decreased 8% year over year compared to decreases of.

The prior three quarters.

Revenue for this category increased by about 5 million sequentially versus our expectation of approximately flat with Q2.

Outperformance was largely due to strong sales of our PX forensic appliances in the quarter, which are recognized upfront.

Air are for the product and related category increased 1% sequentially and important indicator. This portion of the business have stabilized.

Professional services revenue also increased sequentially to a record $55 million versus our expectation of approximately flat with Q2.

We continue to maintain high utilization rates and Chargeability, which resulted in services gross margin of 55% above our historical average of about 53%.

Total gross profit margin was relatively flat with Q2 of 20 and at the high end of our guidance.

Operating expenses were flat sequentially and down 18 million from Q3 of 19, reflecting our reduced cost structure. Following the first half transformation activities as well as continued travel reductions and lower facilities costs.

We estimate the savings on travel events at facilities related costs associated with the pandemic, we're about 8 million this quarter.

The combination of higher than expected revenue and reduced operating expense levels resulted in record operating margin of $28 million or 12%.

And earnings per share of 11 cents.

Or three three cents above our high end of our guidance range.

Turning to the balance sheet and cash flow our balance sheet remains very healthy we ended the quarter with cash and short term investments of 942 million.

The sequential increase was driven by our free cash flow of 29 million we.

We ended the quarter with $134 million in receivables an increase of $14 million from 120 million at at the end of Q2 deals.

Dsos based on billings was 51 days in the quarter.

With most of our facilities close worldwide as well as the purchase of fewer demo appliances as we continue to shift towards more cloud based solutions, our capital expenditures were less than 5 million in Q3, a record low.

We ended the quarter with $894 million in deferred revenue.

The decrease from prior year reflects the continued amortization of appliance sales from prior years.

Before we get to our outlook, we have had several incoming questions about our federal business in Q3, our federal bookings reached record levels with the strongest growth we've seen in the past two years.

Now, let's turn to our current outlook for Q4 and 2020.

With the strong revenue results posted in Q3 and the continued momentum we see in early Q4, we are raising our revenue and earnings per share guidance for the year.

For Q4, we currently expect revenue in the range of $237 million to $241 million.

Approximately equal to Q3 revenue at the midpoint.

We are taking a more conservative approach and assuming that the large PX appliance sales will not be reached repeated in Q4.

Resulting in less upfront revenue.

We also expect that expect that services revenue will be relatively flat with Q3 due to less billable days because of the holidays in Q4.

On a year over year basis, our guidance implies revenue growth of approximately 2%, which I believe will be the low point.

Although we are not specifically guiding to 2021 I believe we will see quarterly year over year revenue growth rates re accelerate from here.

We expect gross margin of between 70 and 71%.

We expect gross margin on our services to return to the long term average of about 53% as we return to average utilization and charge ability in the quarter with fewer working days due to the holidays.

We expect operating margin of between 10 and 11%.

Implying a $1 million to $2 million sequential increase in operating expenses.

This is primarily due to the higher commission expense driven by sequential growth in billings.

We expect fully diluted earnings per share of between nine and 11 sites.

For 2020, we are raising our revenue guidance range to $930 million to $934 million, an increase of $17 million at the midpoint on a narrower range.

We expect gross margin of between 70.5 and 71.5%.

We are raising our operating margin guidance range to 7.5% to 8%, which reflects our year to date results and our Q4 outlook.

Embedded within this guidance or some assumptions, including assumptions about the ongoing impact of the code 19 pandemic on our operating metrics that you should consider as you build your models.

First we expect teeny and facilities operating cost to increase slightly compared with Q3, some restrictions are relaxed globally.

That said as restrictions on travel of continued has become clear that we can operate effectively at reduced levels. So post pandemic. We do not expect these expense categories to return to pre tax print pandemic levels.

Second we remain somewhat cautious about the potential impact of the pandemic on our services billings growth rates.

More specifically based on our current outlook, we are not anticipating the same surge in prepaid services. We saw in Q4 of last year when services billings exceeded $70 million.

Although we expect continued strong revenue performance in our services category as outlined in the revenue section. We are anticipating that services billings will likely decline year over year in Q4.

This is by no means an indication of softening demand or ability to deliver services both remain extremely strong.

We also expect expertise on demand sales to continue to grow however for billings for services are more dependent on the mix of fixed bid or prepaid services versus time and material contracts, which is why revenue is a better indicator for services performance.

Finally, our Q4 outlook assumes no material impact from the newly launched Mandiant advantage solution.

Let me close by saying that although uncertainties remain we believe our performance year to date demonstrates the strength of our business.

I'm confident we will continue to show progress on all fronts as we expect adoption of emerging solutions to increase and the headwinds that have impacted our growth to lessen.

Operator, we'll now open the call for questions.

Thank you as a reminder is asking question you'll need to press star 100 telephone.

Good question press the pound key please stand volume from Palm tuning roster.

Our first question comes from Sterling Auty with JP Morgan you May proceed with your question.

Hi, guys. This is Matt on for Sterling. Thanks for taking the question.

I think I caught in your prepared remarks, you talked about product are growing.

I was wondering if you could break that down you know what really is driving the performance in product this quarter. Thanks.

Yeah, we had a strong product quarter really across the board to.

Dick on network email and endpoint products in helix.

Yes, specifically had good quarters and Q.

Q3 is that larger fed quarter, and we do see a better mix towards products in in the fed quarters.

Gotcha and.

Last quarter, you talked about access.

Accepting our you know now working with third party solutions for the Mandiant solution now what's been the reaction you've seen so far in terms of additional uptake from customers.

Chris This is Kevin speaking would you like to take that question. Please.

Absolutely yes.

No I mean, we've had kind of a two positive reactions one the customers and prospects were talking to definitely very excited about it.

They are looking to be able to leverage the uniqueness of our expertise and our intelligence.

Regardless of the control product decisions that they've made as well as our existing fire I control customers are excited about having a deeper level access into the to the data that we have.

Additionally, with industry analysts, it's definitely something that has resonated well. So so far it's been a very good positive reaction all around.

Great. Thanks, guys.

Thank you. Our next question comes from GERD top at Stifel. You May proceed with your question.

Hi, This is actually Chris euros on for Gore for Kevin can you provide some incremental detail surrounding fireeyes enhance relationship with Microsoft, particularly the demand that youre seeing from Mandiant security.

Estimate within both office 300, 6500, you're as well as the opportunity related.

You, adding Mandy and intelligence to the defender technology.

Yes, it's something that we recognize Microsoft's everywhere, you know and with that ubiquity, what we want to be able to do is make sure. We can overlay our intelligence, but specifically with the managed defense service on endpoints. Besides just our endpoint, we think our endpoint differentiates with a lot of the forensics capabilities.

There's other end points out there that are customers or prospects want us to support so we've been working hard to incorporate the ability to sell our customers or prospects say if you use Microsoft.

Advanced endpoint, we can do that we can put a.

Overlay, our intelligence and our experts and manage that for you you know and be an extension of your security team. So.

We're rolling that out over the course of this quarter, we have a a beta customer that we're working with on that but prior to that the service managed defense was really wholly dependent on us using our endpoint and and so you'll Microsoft is the first of several other third parties that were going to expect to.

Over time, we want to be able to apply our skills and Intel too. So it's still too soon to say the impact.

But that being said, it's a move in the right direction, we want the mandiant brand to be seen as product agnostic, obviously, fireeye products and controls will be advantaged by being in the same house and under the same roof is mandiant, but.

But we want to take that that Intel and that expertise, which I think our biggest differentiators and let other products leverage on so.

That makes a ton of science and one for Frank you.

You noted that 75% of the group.

Later than $1 million transaction included four or more products can you talk about which products are being are being included and to what degree the validation and technology is being included and driving these larger transactions.

Yeah.

One of the real benefits to Fireeye is how comprehensive our offering is and so if you look at a lot of those greater million dollar transactions, what you'll see is multiple products and multiple solutions and so a lot of cases, you'll have a point product like and network email or endpoint and then you couple that with the helix subscription and then we will.

Add on managed defense or expertise on demand. So I think you see a really nice broad kind of set of multiple products and services being there isn't one tip of the spear that kind of leads the way every time you know it really this deal dependent and customer dependent on what they know their immediate needs are but I think the important.

Point for this is that when we look at the business today versus when we looked at it a year or two ago. We're just selling a lot more of the platform and a lot more of the comprehensive offering.

Than in previous years, we'd have one large product driving the vast majority of the deal.

So I think it's a healthier way to operate because we were getting expansion within those customer bases at a much higher level.

That's great thanks, guys and congrats on the quarter.

Thank you thank you Chris.

Thank you. Our next question comes from for Timo Lani with you'd be EPS. You May proceed with your question.

Good afternoon. Thank you for taking the questions.

Frank a couple of questions for you as we think about the.

Product performance this quarter I know you highlighted the PX appliances is maybe out shining on but as we think about the gen. Four and Gen. Five appliances that you have in your base can you talk us through some of the lifecycle considerations on those appliances in the base and how we should think about those rolling through over the next.

A couple of quarters, and then I have a follow up as well.

Yes, I think for the refresh activity I think you're going to see it was pretty acute the last time. When we went through the refresh of the third generation. This time around it is going to be much it's going to go over a longer period of time and right now the only thing that would be refreshed typically would be our fourth generation appliances and I think you can think of that.

Hi, Ming prime.

Primarily in 2021, but again I don't think it's going to be as acute as we saw concentrated within a couple of quarters in 2019 that we saw in particular this is Kevin one of the things that's going to change a little bit is when we were selling a lot of the gen. Three it was at a time or Fireeyes product growth was exceptional with 90 per.

The same growth, 50% gross sixties.

And we were selling down market one into appliances. So when we did the gen. Three right refresh that's where we saw some less commitment to fire at the small to medium businesses that Bob products back in 2014 2015, what we're seeing is that flushed out some of the smaller but we're seeing the big.

A large one a enterprises renew and stayed committed so now when we look at our base, it's more the one a enterprises.

Where fireeye plays better and have more strength and so I'm more confident that we will handle the next refresh cycle better than the prior one the fit between us and the customers better.

Going to handle that better.

Dan while our clients with our forensic appliances were a little bit better than we had planned it it's still a very small piece of the overall product business.

Fair enough.

Just as a broader question as I think about the breadth of the portfolio, how much expanded and how much more software enablement is being rolled out, especially after the mandate. The brother as I think about the long tail on some of the support revenue streams and maintenance revenue streams, you had with some of your customers.

I'm wondering if you had sort of an active program or campaign or any specific initiatives.

Targeted towards customers, who may be looking to move to the cloud and art.

Necessarily certain that there.

Wanting to expand.

Their spend and I'm curious if you have any sort of I guess maintenance conversion programs. Just some of your other form factors in the portfolio and Thats. It from me. Thank you.

Yes, Tim I would say I'd answer that two ways. One is yes, we are working with our customers to really be where they want to be so if they have a cloud migration strata. Jerry we are moving along with them to the cloud and a lot of cases, we have on premise customers that move to a hybrid environment before they go 100% of the cloud.

And the good news is across our entire product set we have both on premise hybrid and fully cloud. So we're we want to be where they want to be but ultimately we realize that we want to eventually move the vast majority of our customers to the cloud. So yeah. We do work with them. We also do and sent the cells.

Force, a little bit in 2020, and a little bit more in 2021 on having them push for initial cloud sales. So that we don't have to go through kind of any migration process.

Yes, and just this is Kevin what the remark to the broadness of the portfolio it.

We have a different things in the portfolio network security endpoint security email security helix as the interface that can integrate all that then we have Intel validation Mandiant services managed defense when we talk about Mannion advantage. What we're actually doing is taking that eight avenues into a customer and we're taking Intel validate.

In managed defense inequities on demand and moving them into Mandiant advantage. So theres five avenues into a customer so we're actually trying to take.

Yes, several hundred million dollars of our business and put it into the mandate advantage. So its.

An easier and simpler portfolio.

I appreciate the color. Thank you so much gentlemen, thank you.

Thank you. Our next question comes from Rob knowledge type Resentments you May proceed with your question.

Hey, good afternoon, guys and thanks for taking my question.

Kevin that was talking.

Talking about revenue acceleration as we move forward and there's been a lot of puts and takes and moving parts to the model is.

Our focus from here on execution or is there still work to be done around infrastructure around go to markets and how we see success will not asking for 21 guidance, but obvious.

And with acceleration playing out what would those proof points be.

Well you know, we're very keen on the many advantages getting adopted Robyn Moderniser Intel P. everywhere I went customers like we want your operational until today not your finished until three days later, so we delivered that already in the key to that actually was the source of truth, where we have.

We went from a whole bunch of different Intel sources internally that Weve got one now in the graph databases maintained by the smartest folks we have at the company, making sure we input it by taking or Intel and marrying that up with validation. It is such a logical marriage tap one interface, where you're reading the news for the day in Dominion.

Vantage, you're seeing the banners. This industry is being targeted here's the most common vulnerabilities being exported based on you know.

Insights into thousands of customers and all the intrusions responding to hey, I want to test to see if I've got this problem to be able to get a quick away I think consolidating our portfolio into a platform make it consumable making it enabled from the cloud, making it easy to try and easy to buy is going to be the top driver going into next year and that's why.

Yes, Christy on this call is because we put the Mandiant engineering one of the biggest things. We did last year is we took the engineering and kind of split it with Fireeye control products engineering and manufacturing operations engineering, and we have Chris driving that and that platform is bringing our differentiators to market and simpler ways more.

A relevant ways and ways that scale better so I think thats the big driver for 2021 and everywhere I go Rob I'm getting the question and I guess I might get this question more on the average security person they reading the headline and saying Hey, do I have to worry about this attack well tested try it out and we're going I'm just make that so simple and safe to do.

Over the next few months that I think it's going to be widely adopted.

Great. Thanks, and then second for Frank if I looked at the platform cloud and MSP category, both from a revenue perspective as well as in our.

Our perspective.

Record performance.

It was.

Probably didn't grow as much as I would've thought were there any particular puts and takes there.

Yes, I think it's really just kind of driven by the large deals in the quarter. If we look at the Q3 deals up there was a lot of a lot of large deals kind of skewed towards product, but if we look at the Q4 deals closed to date and the pipeline for Q4, we're going to have a great platform cloud category quarter in Q4, and so I think you'll see it.

A pretty nice bounce back in Q4, there and I think if you look at it on trended basis, you'll see that category continues to grow very nicely in a pretty tight range you get every now and then as we saw in Q1 of 19, you get one negative quarter, but then it's backed up by three quarters that are growing 20% to 40%. So.

Year over year so.

I really do think it's an anomaly that Joe.

Just some of the larger deals just happened to be more skewed towards product part of that's driven by the fact that we did have a really strong fed quarter, which tends to skew towards product versus cloud right now.

Great. Thank you.

Thank you Rob.

Thank you. Our next question comes from Jonathan root tamper with.

You May proceed with your question.

Yeah, Hey, guys.

And where did the.

Services. This is obviously performed very well once again and you look at the gross portfolio a portfolio of compelling capabilities entity security validation now mandiant.

Dan, It's obviously, helping there, but as we look into fiscal 21 I could do you expect a pattern of continued relative outperformance from Mandiant just due to this growing portfolio it could could that impact how we should be thinking.

Our billings growth for Mandiant relative to Fireeye products and services.

Well I can tell you you know I'm not sure if billings is the right metric and services firms billings is a trailing metrics because we do a lot of incident response, which is usually time and material contracts. So you build for it. After you do the work so that can that can be a trailing indicator for us, but I definitely look at the growth rate of mandiant solutions to be faster in products.

Period, you know it has to be and when you look at that business with the best of all that threat intelligence, where the best eroded validation with the best in World at responding to breaches. We're you know we have incredible experts running our managed defense business. So I look at that and say, let's take all the things that were exceptional and then.

The top right at and put it into a platform and make it more accessible to folks that are using fireeye controls as well as not using the fireeye control products. So it's absolutely the growth area, we're emphasizing yeah and I think if you look forward to 2021 its going to.

The growth drivers in 2020 are going to look pretty similar.

We're going to expect so.

Inefficient consistent growth across Mandiant solutions, but also some of our products cloud endpoint had a great year in 2020, and what we expect to continue have really good quarters going forward.

Okay. Good.

That sounds great and then just.

On product you talked about the stabilization and improvement in renewal rate and I Wonder if you could talk specifically about the pricing dynamic and then the opportunity for add on service adoption and how that might be impacting ACB at renewal and helping to stabilize that are.

Yeah, I think a couple of things are happening with the stabilization of there are one is we have had a little bit better renewal rates on the product side part of that could be driven by.

Co bid, but I do think that as we look at you know air are in the kind of the go forward. We we don't have those big grow over challenges that we had in the first half of the year and so product has definitely stabilized in Q3, and we expect it to remain stabilize in Q4, but I think the important thing is.

As we and we proved that are validated in the greater and million dollar transaction is that products, bringing along with it.

A lot of the solutions solutions brings along with a lot of the products and we're really able to kind of jointly sell a lot of the different products, which helps each individual growth rate because we're selling comprehensive solutions and a lot of cases.

Very helpful. Thanks, guys.

Thanks, John.

Thank you. Our next question comes from suggest.

Please you May proceed with your question.

Hey, guys. Thanks for taking my questions here.

Frank maybe first for you maybe just to pivot to the profitability. So nice to see that double digit profitability. During the quarter can you just talk maybe how you think about the remaining cost savings from some of that restructuring activity and an understanding you're not giving 2021 guidance, but maybe maybe you could talk a little bit about anecdotally you know the key.

And suddenly be backfilling some of that in the coming quarters, if you do backfill it.

Yes, I think when we look at Opex. Our expectation is that 2021 will look a lot like 2020, we will get the benefit of a full year in 2021 of the transformation activities. We did in the first and second quarter. So we use that if you look at the model I mean, the great thing about what we've been able to do is.

We've been able to reduce overall opex, but at the same time significantly invest in the growth areas of the business. So as we look forward. We will continue to invest in the growth areas of the business, but I think the overall bucket of spend from an opex standpoint will be relatively flat in 2021 versus 20.

We will obviously see increases in Cogs, because we will add mandiant consultants, we will also.

Add some cloud hosting costs as we continue to drive additional cloud growth.

Got it got it Kevin front follow up maybe for you I mean, clearly very excited about man didn't vantage. So maybe maybe I'll just put that aside just for a second if I think about the cloud managed services part of the business. There are several products in there and as you think about about about those products in coming years. What products are you may be most excited about.

Having sort of a sustainable competitive advantage in your mind as it makes sense.

Meaning which products are we going to sport inside of managed defense over the coming years as the high growth and even the cloud Oh, yes.

Well, so inside of men and solutions The act.

The validation on demands can be a cloud product that's something that we made it we did it kind of dry run of that based on some of the recent ransomware actors and it's just it works you know even we ran at one time the value from the moment, we decided hey, we want to download an agent run the threats and see how well we do.

It was 15 minutes time to value. So I'm very excited about validation on demand for all the systems out there and smalls, even they might want to hey, let's let's see how good we really are and try that out it.

It was time to operationalize, our Intel people always want to know where we know when we know it and Chris talked about Thats I'm just excited that we upgraded our intelligence offering meaning we put our operational Intel it may not be cleansed.

Just it's coming in from the front lines right now as we're doing this call by the way we're doing over 150 investigations right now I mean were hot on the front lines all that stuff is feeding right. As we're speaking there folks submitting data into mandiant advantage to make sure our customers can take advantage of it so I'm pretty excited about that.

I'm not sure if I understood. The question right, but I'm actually excited about our endpoint I'll add that we have unique forensic capabilities in our endpoint and I know endpoint forensics isn't this enormous tam, but we back up everybody else's endpoint when it fails to protect people and I think theres value in our expert using our endpoint.

It really find the threats that a lot of folks mess. So looking at our managed defense service. We're excited about our endpoint. We think it's a differentiator, but we are going to go to other third party products in the upcoming quarters.

Simply because that's what our customers want us to do.

Makes sense, thanks, a bunch Kevin.

Thank you. Our next question comes from so Fodderwala with Morgan Stanley You May proceed with your question.

Hi, guys. Thank you for taking my question, just maybe a follow up to the previous question.

Kevin as you think about your.

When you talk to your customers and you think about their spending priorities.

The 2021, obviously there was a lot less spending done to sort of in April the rapid increase in work from home, but as they start to think about their security architectures.

And what will remain a more distributor work environment can.

Can you talk about where they are focused.

As it relates to your product portfolio, perhaps which parts of the portfolio or maybe perhaps be more de emphasized.

Yeah, well you know on Prem appliances are going to be deemphasize, one one of the things that absolutely happen with the M. Sun defending remote users is I think the majority of car companies recognized say, let's accelerate to the cloud, it's just easier for us to manage it then get cloud visibility.

And so you will see Caspian cloud security get important I think endpoint is going through a great run right. Now people are recognized with ransomware you need by an endpoint that can learn that can think that adapt that can do signature list based detection that is backed by experts that eliminates a lot of the endpoint choices. So from our portfolio our portfolio I think endpoint is absolutely.

Growth driver no question about it I think cloud assessments is absolutely a growth driver if people take a look at our helix in the visibility. It provides now with cloud buys read you can manage all your cloud based resources ready and Google Cloud Azure ADW EPS all in one place with Fireeye products and get the controls in there to defend that I believe in.

Wed teaming.

And that that's validation on demand or humans doing it if you want to prioritize your portfolio you know I said, if you're just starting your security program today, you start with Hey, I need a firewall, but about six innings into it you've got to start thinking about credential management you got to start thinking about how do all the controls you have integrate and that's where red teaming and validation becomes.

Critical at some stage of your maturity level as a security organization you have to start validating your security program is in fact, what you think it is and you had the configurations to think you have so when I look at our portfolio endpoints going to matter helix is going to matter because the cloud dessert cloud buys or in the cloud visibility that's neat.

Our services will always matter because there is always going to be another breach and.

And there is always going to be a need for somebody to show up for what happened what to do about validation will matter and exceptionally important and Intel is going to matter because that is what you need to drive better controls and to prioritize which events matter more than others. So I I look at our portfolio and the things that are.

Just less applicable on a go forward basis would be the on Prem appliance portion of it.

Got it thank you.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You May proceed with your question.

Great. Thank you. Thank you for taking the question.

I guess, maybe Frank I'd like to kind of hit on sales and marketing a little bit, particularly post restructuring efforts earlier. This year, maybe if you can talk about.

Efforts that you're making to reaccelerate growth in sales and marketing side, how much or is the sales force and.

What are changes you might make if the economy opens back up again, and we can travel where you might elect to kind of spend any kind of incremental dollars to drive better.

Better pipeline sales growth.

Yes, I think you know I think we've seen a lot of improvements in sales productivity I think a lot of that is we've got.

A set of leaders across all Geos that have now been with the company for a number of years at least three to three to four years.

Yes, the vast majority of our sales leadership and they brought in a lot of good folks that have ramped up and are selling.

More than just one or two products like they may have sold in the past. We're now seeing a lot of comprehensive platform sales with multiple products and multiple solutions. So I think as we look forward. We expect productivity will continue there we've been able to reduce the cost there and not really took a hit.

From a sales perspective, so I think we've done a really good job of kind of managing that expense down.

To a point, where we are we are definitely more productive than we've been in the past and as things open up we do expect teeny to go up a little bit.

Next year as things open up, but we don't expect it really to get back to the pre pandemic levels, because I think even post co bid, we will likely do some mix of virtual and in person events rather than all in person events. So I think there'll be some savings there and I think.

We've also just kind of got used to this working.

Working from home and zoom meetings and teams meetings and I think the teams been really effective and so I think that will be kind of a paradigm shift kind of post cove, it but yes.

The good news is we have been able to acquire new customers and been able to continue to cross sell and up sell so we've been very happy with the sales performance.

Okay, Great and maybe just a quick follow up kind of housekeeping item. It looks like you had a bit of improvement in contract duration, maybe any insight around that and.

You know is is this kind of the new level or was that primarily product driven and we might see a kind of reversion back to levels that we saw last quarter may be intact to expect going forward.

I think from an average contract like perspective, I think we will continue to see over time kind of a shortening of the average contract length. As we continue to move to more cloud services I would expect you know as we look at year over year, we'd probably see less year over year declines of one two month.

Q3, because we did have a large product quarter and when you know we have more multiyear kind of product I do.

Do you think that reverses a little bit in Q4.

But I think the good news is we're not seeing that fall off a cliff and I think we really like to see it kind of managed down a little bit over time, but not very significant in any one period, because we've been able to drive.

Cash flows over the last year and I think we're going to see nice continued cash flow growth there.

Okay, great. Thanks, guys appreciate it.

Thank you Trent.

Take one more question please.

Thank you our last question comes from equally with Oppenheimer. You May proceed with your question.

Thank you for taking my question, John and congrats on US all set of results. Just one question on my end.

Let it be fill Kevin Frank call, Chris just maybe some cottesloe general Macklin by net new seemed elevated cybex that biden interdependent, Nick and this will be helpful for the Mandiant advantage business, obviously in the cloud business as well, but as we look ahead.

Below the line now in certain regions in AMEA, and maybe a second wave.

Can you comment on that.

Then Franco Chris Please yes sure that's it for me, Yes, Kevin you know just looking at the macro environment, whether its geopolitics till bid unrest.

Economic challenges geopolitical conditions, there's no doubt there's an escalation in cyberspace, mostly wrapped around ran somewhere I think health care is getting targeted I think industries that are more likely to pay to get their business back online are being targeted and it just seems like it's reached in power.

The level, so that's driving a lot of the activity right now so that's my way of saying there is an escalation of activity in cyberspace. That's negative right. Now there is an increase it's either an increase in attacks or increase in the impact of these attacks, that's keeping us busy and probably many factors that are contributing to it but probably the number one.

Factor is they're safe harbors.

Theres no risser repercussions for the folks conducting many of these attacks at this juncture so.

It will be a while before that gets sorted out in regards to any lock down as it may happen in the future.

You know, we're already working remotely and I think almost all organizations are period. So I think any lockdowns, it's still going to be you know, it's not going to be as impactful as what happened in March and we didnt feel the impact then.

We brace for it but we are used to sending our expertise from remote locations. We are used to collaborating in remote ways and by now so our customers or prospects or future customers. So I'm not too worried about an additional lockdown, especially considers a lot of the organizations have said hey, we're not coming.

Back ever again to the offices.

I'll see if thats much of a difference between a lock down there are organizations that are choosing to not have their employees come back to physical location. So the new normal is you've got to be able to work in a distributed way in fireeyes prepared to do that.

Thanks for the color, Kevin and thank you answer that.

Next year.

Thank you.

Thank you I'm not showing any further questions at this time I'd now like to turn the call back over to Kevin Mandia for any further remarks. Thank you yeah, I'd like to wrap up.

To be excited about our strong performance in this quarter in some prior quarters and our outlook for Q4, and it's a result of our focus on structuring our business around products and solutions I want to thank all the fireeye employees for the progress we have made towards our transformation for their continued efforts and focus to these most challenging times.

For your commitment to the security of our customers and thanks again to all of you for joining us today and for your interest in Fireeye, Please stay safe and healthy take care.

Thank you ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.

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