Q2 2021 FireEye Inc Earnings Call
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Thank you for holding your conference call will they be getting shortly.
And for your patience.
Once again, thank you for holding the conference call will be the game. Shortly thank you for your patience.
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Financial results Conference call My name is Adrian and and that'll be your operator for today's call.
And at this time, all participants are and of listen only mode. Later will conduct of question and answer session. During the the question and answer session.
And you have a question. Please press star and 1 and then you touched on phone I will now turn the call over the K Patterson Kate may begin.
Thank you Adrian good afternoon, and thanks to everyone for.
Joining us on today's call to discuss Fireeye financial results for the second quarter of 2021, and this call is being broadcast live over the Internet and can be accessed on the Investor Relations section of Fireeye website, and investors Dot Fireeye Dot com with me on today's call our Kevin Mandy up for her eyes, Chief Executive Officer and Frank.
Photo kind of executive Vice President and Chief Financial Officer, and Chief Accounting Officer of Fireeye.
After the market closed today Fireeye issued a press release announcing the results for the second quarter of 2021 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 the company's guidance and expectations for future financial results and metrics the.
The sale of Fireeye product business, including expectations regarding timing for the completion of the transaction and effects of the transaction the company's priorities initiatives plans and investments drivers and expectations for growth and business transformation 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 of differ materially from those anticipated by these statements. These forward looking statements supply as of today and you should not rely on them as rep.
<unk> divestiture will benefit our customers by accelerating innovation and create new opportunities for our employees and lead to an increased growth for both businesses as a separate company mandate will focus on delivering solutions and services to the mandaean advantaged platform further accelerating our transition to subscription based services and.
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Even with the potential distractions of the divestiture of the Fireeye products business. We remained focused on our mission of protecting our customers and continuing to execute well on the second quarter maintenance solutions billings grew 44% year over year, and our <unk> grew 19% year over year, mainly and solutions were included and 18 of our 20.
The largest deals and the second quarter.
And consulting services had its 13th straight record quarter reporting year over year revenue growth of 26% and revenues of $62 million.
Demand from India, and expertise has never been stronger we exited the second quarter with nearly $109 million and deferred services revenue representing a strong backlog of work we are scaling our capacity to meet the demand. We are also building our expertise and intelligence into the modules of the manager and advantaged platform to extend our expertise and.
Reach far beyond the number of customers, we can reach through services alone.
We focused on growing our strategic transformation services, which help organizations mature their security posture.
Growth and strategic services revenues was approximately 45% higher and the first half of 2021 compared to the same period and 2020.
We also strengthened our position as the strategic partner to our customers the constant evolution of the threat landscape and the rapid pace of innovation and information technology requires organizations to adapt their cyber security measures to maintain resilience as a trusted advisor and that's ongoing process, we work continuously with our customers to ensure.
Security effectiveness looking back over the last 12 months more than 500 customers generated services revenue and all 4 quarters and another 250 customers generated revenue and 3 out of the for quarters.
In addition to the Great financial performance, we continued to respond to the security breaches that made the headlines. We also continued to be recognized as thought leaders and the industry appearing on multiple occasions to testify in Congress, where we briefed our nation's leaders on cyber security issues and Mandy and services is our competitive advantage and <unk>.
Also creates a natural sales motion for our technology. We believe this is due to the trust and deep relationships, we build with our consulting customers. We are seeing this play out and early momentum for the modules of the mandate advantaged platform adoption.
And <unk> and abuse of the most common threat the guard against the.
This demonstrates the power of the Mandy and innovation cycle respond over a thousand and security breaches of year routinely seen the attack set of vague common safeguards and we feed our observations and learning back to our engineers and data scientists to build the Texans into our solutions to close the security gap for our customers I.
Believe automation powered by AI and machine learning technologies is the only way organizations will be able to keep up with the tax and maintained resilience customers are coming to this realization as well and momentum for Mandaean advantage continues to build we ended the second half of the year with the strong pipeline of new business and of growing base of renewals.
<unk>.
And we're also excited by the momentum of our technology based solutions that are managed by mandaean experts and the first few months of making madness defence for Windows defender available nearly 25% of new logos for madness defence, where for the new offering and we expect the support more and point technologies and the second half.
<unk> of the year managed validation both on demand and continuous allows our customers to leverage our expertise to prioritize their security operations and increase the resilience to the latest of tax the new offering is generating growing interest with customers and we closed the multibillion dollar managed validation transaction already and the third.
Quarter.
The combination of increasing threats and of growing shortage of cyber security skills means in the house teams are overworked and they may lack the expertise of our visibility to manage their security controls and security posture or follow the some model for managed defense and managed validation means customers can add expertise to there in <unk>.
House capabilities closing, both the time and skills gap and their security coverage.
And Q too many and solutions billings performance and our outlook for the second half show. The progress we have made executing on the mandaean strategy. The 2 parts of our Mandaean business services and solutions are interdependent and complement each other our consultants our technology enabled by the mandate advantage platform.
Allowing them to scale of their productivity and our technology is expertise and enabled with our frontline and talent experience and combination that allows us to deliver our expertise that scale whenever and however customers needed going forward. We plan to continue building on our mandaean advantage strategy automating human tasks and applying machine.
And learning to create a super analyst of technology that thinks learns and makes recommendations to make our customers more secure.
Given the constant headlines about breaches there can be no doubt there is a growing need for a more simple and effective approach to cyber security I believe mandaean is uniquely positioned to address this need by enabling our customers to automate validate and augment the security programs growing numbers of organizations are finding that mandate makes security effect of.
Of with security validation.
Organizations are discovering how we are automating mandy and experts to address the shortage of expertise and the market with our automated defense.
And organizations of realizing that Mandy and can be a seamless extension of their security teams with the managed offering like managed validation and expertise on demand.
I believe this is another beginning from and yet and I would like to thank all of our employees for the progress we have made towards our transformation and for their commitment to the security of our customers with that I'll turn the call over Frank.
Kevin and Hello to everyone on the call. Thank you for joining us today.
For today's discussion on will focus on continuing operations and take you through the walk from our queue to results for continuing operations before the sale of the Fireeye product business closes.
To the transition model after the transaction closes.
We still currently expect that the transaction to be completed by the end of the fourth quarter subject to customer regulatory approvals and clothes and conditions.
Since our prior guidance for the quarter assume combined results for the Fireeye products and many of the solution businesses.
We have provided Q2 results of that map to our guidance metrics.
I am pleased to say that we met our guidance range is for all key metrics as always of weird for any non-GAAP metrics, except when discussing revenue and operating cash flow.
Are non-GAAP measures exclude stock based compensation amortization of intangibles non-cash interest expense on our convertible debt and convertible preferred equity.
Restructuring charges.
Accretion of series, a convertible preferred stock and other non-recurring items.
Highlights of the combined businesses performance is as follows.
Billings growth of 23% year over year to $249 million.
This was the the highest billings growth rate since Q1 of 2016, and the third consecutive quarter of acceleration and our billings growth.
We achieve this without of meaningful change and average contract way, which was approximately 24 months for the combined business.
Both the Fireeye products and mandaean solution businesses maintain focus and executed well on the quarter. We added 248, new logo customers up 11% from Q2 of 2020.
And closed 47 and transactions greater than $1 million compared to 39 and Q2 of 2020.
Combined revenue of $248 million was that the midpoint of our guidance range and increased 8% from Q2 of 20.
And this is largely organic as we are only and now starting to close deals and the pipeline for automated defense.
We expect growth for this category to accelerate and the second half of the year from the queue to growth rate.
While we don't guide billings.
Billings because of the variations and contract length timing of large renewals and other noise that can cause volatility and the year over year growth rates.
We have a strong pipeline of new and renewable business as we head into our seasonally strong second half.
I would not be surprised the report platform cloud subscription and managed services billings growth for the full year of 2021 approaching 50%.
Growth and platform cloud billings was driven by solid results and Intel and manage the fence, which are both well established and the market and growing momentum for the many and advantage platform. Following the integration of validation and automated defense modules.
Since billings are leading indicator and rateable subscription models, the sustained growth and many of the solution subscription billings gives me confidence and our ability to accelerate our revenue growth and the future to levels consistent with the long term model, we outlined at the time of the divestiture announcements.
Turning to the translation of our strong billings performance into revenue.
While the integration of validation and automated defense and to the cloud base Mandaean advantage platform is a big step and our transformation to a sales company and a huge positive for both customers and the company. The did create a headwind to revenue growth for the platform pilot subscription and managed services category and the second quarter.
A little more detail will explain why prior.
Prior to the integration of validation module into the many of ended platform customers have the option of cloud or hybrid and on premise deployments.
Hybrid and and on premise deployments are sold this term licenses fully renewable but under 6 O..6 revenue from the term licenses is recognize upfront rather than ratably.
And Q2 with the launch of the Mandy and advantage validation module and increasing number of both new and renewal customers opted for the cloud deployment over on premise.
As a result upfront license revenue decline on both of the sequential and year over year basis.
This has the effect of suppressing the revenue growth rate for the platform cloud subscription and managed services category, which came in and 8% year over year growth.
And is not always possible of forecast, which way of customer will deploy and any given quarter, but the longer term trend. The cloud based subscription is clear and of positive for our company and the and our financial model.
As a result, we encourage you to focus on the rateable revenue component of this category, which we expect to accelerate and Q3 and queue for for the low 20% range and Q3 and mid 20% range and queue for as we exit the year.
This is consistent with the growth we saw on <unk> for many of the solutions, which increased 19% from the end of this Q2 of 2000 and $20 million to $244 million.
Looking at the second half of 2021, and we expect to see of react reacceleration into the mid twenties.
Now, let's look at our operating expenses and margin.
Accounting for discontinued operations related to the sale of Fireeye products business requires the aggregation of all revenue and directly attributable costs to be aggregate into net income from discontinued operations, which is what you see on the face of our financial statements.
The expenses for shared resources and shared programs, including nearly all of our general and administrative and employees and events or marketing campaigns are included in the expenses of continuing operations, even if they support our benefit the discontinued operations.
Included in the queue to operating expenses of continuing operations are approximately 15 million and expenses incurred to support the fireeye product business.
And of further $3 million expenses for share program and the other overhead.
That would of been allocated to Fireeye product business under segregated reporting for the combined company.
The $80 million swing had the effect of reducing the operating margin of many solutions business by approximately 16% and increasing the margin performance of the Fireeye product business by approximately 14%.
The allocation of these cash expenses to continue operations also reduced the reported cash flow results for continuing operations.
Note that after the transaction closes.
We expect most of these costs of shared resources encouraged of support fireeye products to be reimbursed under the transition services agreement.
This means that the timing of the clothes, we will have a significant impact on queue for operating results.
Therefore, we only providing Q3 guidance at this time.
For the third quarter, we expect revenue for continuing operations of of 118 to 122 million.
Using the same assumptions of approximately 50%.
50 per cent professional services, and 50% platform and clouds subscription mix.
And 10% of the platform cloud bucket expecting to be upfront and term licenses.
Since the majority of rateable revenue is already sitting and deferred revenue variation and the mix of term licenses within the billings is the biggest swing factor.
At 10% of platform cloud billings. This represents the headwind to revenue of approximately $1 million to $2 million and Q3 compared to a year ago.
Since the transaction is not expected the clothes before the fourth quarter from.
From an expense standpoint, we will continue to have the share resources and programs and continuing operations. So we currently expect Q3 to look similar to Q2.
Plus incremental expense and sales and marketing for the ramping up of the many and brand which is reflected in our guidance.
I know, we're giving you a lot of information here. So let me summarize by reenter reiterating how confident we are about the future of Mandy and solutions.
And our ability to drive accelerating growth and operating leverage average.
After we get through this transition period and close the transaction.
I will now turn the call over the operator for questions.
Thank you and that became the question and answer tasks.
And you have a question please cash.
And the line on your touch Tom Tom and.
If you wish to be removed from the queue. Please press the pound sign are the ash.
Excuse the speaker phone and you may need to pick up the and such first repressed and the numbers and once again if you have a question. Please crestar and 1 on your touch downtown.
And our first question comes from a hamster.
And from market Stanley Your line of something.
Hey, guys. Thank you for taking my question Frank prescription for you.
There was quite a lot there I just wanted to basically try to level of side. So.
Imagine the era of our metric and for the the.
The continuing operations the mandaean business is gonna be.
The key metric there so.
It seemed like the consulting portion of the air or.
It was quite strong I think I heard of 26% revenue growth of I'm not sure exactly what it was on the air or basis and then.
How fast it sort of the the SaaS or the manage defense part of that for this growth.
Yeah, So I think the way to look at it as.
Right now and many of the solutions you have the professional services revenues that are not contributing to are are but did my row, 26% year over year from of revenue perspective, and then you've got the SaaS subscription part of Mandy of solutions that did grow 19% year over year from and <unk> basis and.
Also group.
37% from the billings basis.
Okay got it got it that's helpful.
And then just on.
The expectation for air on our growth to kind of of accelerates and the mid twenties and the back half and then revenue growth to sort of accelerated I think I heard low twenties, and Q3 of mid twenties and queue for.
What sort of driving the confidence and that other than perhaps obviously, what's and strong demand environment does it like maybe a couple of more quarters until.
The the the sales of the go to Mark attraction kind of get the speed underneath the like.
Out of the stone on menu and business.
Yeah, It's really if you look at the launch of the different Mandy and advantage of platform. We Sue the pipeline building up we also see a lot of traction and some of the new offerings. Great example is in the quarter, 25% of our new manage the fence customers.
Customers that we are supporting on Microsoft Microsoft defender and point, so by opening up some of the different modules and different capabilities, we have a lot of confidence and the outlook outlook for the next couple of quarters and beyond and we see that and the pipeline and we also saw some very nice deals that we closed.
And the United States and and other governments based on being a security company and based on having a services component as well where a lot of governments prefer to buy technology, along with some services to go with it and when you look at our threat intelligence capability, and we want to be and the hot zones and work with those agencies that matter during times of duress and cyber.
Space, So I am confident and our federal government business I am confident and our relevance there and when you look at our strategy. It's very simple every day as we're having this conversation we're responding to over 150 security incidents clearly theres, a GAAP and cyber security and all we're doing is taking that case.
The ability to find the needle and the haystack that we have with hundreds and hundreds of consultants and automating it and putting it inside of every single security operation with software. So that strategy is sound and we all know that almost every single human skill over time, it's going to be replicated by machine intelligence and <unk>.
What we're doing here.
So getting back to your question Catherine we have great relationships with numerous governments.
And I intend to see that part of our business always growth.
Alright. Thanks.
Thanks, Kevin.
And your next question comes from Brian Essex from Goldman Sachs. Your line is open.
Hi, good afternoon, and thank you for taking the question I guess, maybe Kevin to start off.
You mentioned.
I guess.
Opening the modules to other other providers and as you've come as you've kind of untether the business from the legacy product business.
As far you along the path of developing those relationships with partners that.
And that you might be more accretive with and how do we how does that roadmap look too with regard to developing those relationships further.
Yes, so we got a lot of work to do we're just getting started but I was very encouraged and I think you picked up on where I think it was April where we had windows defender and managed defense and it was literally 25% of our net new logos, where our managed defense experts supporting the windows defender and point. So we've got to get the second 1 and the Hopper and then the third then the for.
US decoupling, Mandy and expertise from Fireeye products and is 1 of the.
Key purposes behind the strategy of divestiture and we are seeing with windows defender and Thats, our first big technical partnership.
And we just got to get in the queue and I know John waters and the team are laser focused on the technical partnerships that we need to have now automated defense, how we're bringing all of these partnerships. The market is with our automated defense. It already works of 70 or more third party technologies, but we like to get it frankly is the phrase sea legs.
Before we just roll that out and the managed capacity, we'd like to test it and do a bunch of things first and make sure. It scales. So windows defender checking the box.
And we're hoping to launch of couple of these every few quarters and.
Keep expanding and expanding what we can support.
And do it and its strategic order as well there are certain products that are getting.
Widespread adoption that are more effective than others and we want to make sure. We can support those and overlay mandate intelligence and expertise on top of those so stay tuned.
But we certainly intend to and.
We expect to expand beyond just 1 endpoint between now and the end of the year.
Got it Thats helpful and maybe to follow up how is this being communicated to the channel and I know you mentioned.
On the direct sales force and the education effort, there, but but.
As the channel I guess, how far along are they in terms of understanding of the shift and go to market and how they might be able to open up as well with some more of these partners and.
And there is no doubt I can answer both of your questions with I feel like we're in the first phase of those in other words.
And when I look at Fireeye in aggregate, we were more structured for the controls product side of our business when it came to our channel and our partnerships as mandate and becomes a separate entity.
We just hired Aaron Joe from the FBI to lead some of our strategic partnerships with the government and youre going to see it and build out and additional capability and the prioritization of who our strategic partners, who are channel partners and how we have some already and there was always overlap between some overlap between the Fireeye channel partner.
<unk> and the <unk> channel partners.
But we're going to get more clarity on which ones will serve the mandate and controls agnostic business.
Potentially better than some of the channel partners that looked at yourself controls. So that's my long winded answer of saying were in the first standing on a lot of this and you're going to see us make tremendous progress over the next few quarters on it.
Got it that's helpful. Thank you.
And the next question comes from roster of Kim Jong from JMP Securities. Your line is open.
Hi, guys.
Just 1 from me on kind of piggybacking on Bryan's question, how do you foresee.
The relationship with the channel kind of moving forward given that.
The majority of the product piece is going to be managed by symphony and traditionally and that's kind of the area that the resellers and we've spoken to have been geared towards and our feedback from the resellers suggest that they have kind of more limited exposure to of the professional services piece and so just curious how we should think.
About the channel kind of from the Mandy and perspective.
Russell I would start with the strike that if you look at the menu of solutions business half of the business and increasingly more overtime is SaaS subscription business, which does fit the channel really well, so I think youll see us.
<unk> to have a strong relationship on the partner with partners on that side of the business and then I think theres going to be a lot of wraparound services that our partners can do on top of a lot of the subscription offerings. So we look at it as of.
And opportunity to really grow channel partner relationships on the Standalone side on the mandate side and I know the from the product perspective.
And you have lot of opportunities for working with the MSS fees and other service organizations as well.
Thank you that's very helpful.
Okay.
And just a reminder, and entered the queue. Please press Star then 1 on your Touchtone phone and your next question comes from <unk> Kalia from Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Hey, Kevin Hey, Frank I think Frank maybe just to start with you.
Realizing there's a lot going on so it might be early to talk about this but could you maybe just go 1 level deeper broadbrush into sort of the makeup of of <unk>.
Platform and cloud for continuing operations in terms of how much of the I.
E of the SaaS business, how much of that is from intelligence versus managed defense versus validation.
Broad brushes that you could share.
Yes, so on the on the platform.
Platform cloud side, you've got managed defense and Intel from a.
Billings and revenue perspective, being the larger components of it but then you've got the validation and automated defense expecting to have much larger growth growth rates and then over time.
And getting to be similar sizes. So we've obviously had Intel and managed defense for quite some time and so we built a pretty big base of customers and revenue there, but a lot of the growth is going to be coming and some of the new modules like validation and automated defense.
Got it got it that makes a lot of sense, Kevin maybe for you just asked at that point.
How do you kind of think about the the competitive backdrop for the threat Intel business I mean, I imagine that Mandy and has an advantage.
I guess pun intended right I guess, Mandy and Hasnt advantage with the incident response business, but how do you sort of think about all the noise out there with with other folks that have threat Intel as well that makes sense.
You always want whatever you do you want to be the best and rolled out and Thats. What you strive to do and every time I see third party validation of our Intel were and the top of right of those quadrants I can't speak for the other Intel that's out there because we don't depend on and we don't rely on it and we prefer having firsthand knowledge of the intelligence that we produce.
And the only way to get that firsthand intelligence is to have.
Hundreds of responders out there on the front lines I can tell you how I measure how well we're doing with Intel's if I wake up and see a headline on the call and European culture of runs our professional services Hey are we on the ground there and when I get 90% of the time. It seems like every time I see a headline we are on the ground responding firsthand My next question.
And is hey, our customers safe from this have you already built the detections into our technology I'm not getting distracted by what other folks are doing there may be good offerings out there on any given day 1 company may be on the Frontlines within total other companies don't have all I know is we were structured and it's strategically important to respond to security breaches to have the <unk>.
Intel So that's what we did and then to augment that.
We have nearly 300 threat analysts that speak over 30 languages and over 25 countries I am confident that that doesn't exist and the private sector or anywhere else.
If somebody wants to.
Say, there and the threat intelligence business I'd be interested and how do they have of global infrastructure doing collections like we do.
Got it got it and if I could squeeze and 1 more maybe for you frame kind of just to just the similar question just on makeup and maybe shifting to the services business.
I guess, how do you think about sort of the sub categories within that services line and I think we all think about incident response, but then he sort of broad brush on kind of how much of IR versus training versus and anything else that might be and that line.
Okay.
Yes, the socket. We've historically said we've been around 35% of instead of response last couple of quarters Q1 and <unk>.
At the beginning of Q2 were closer to 40% incident response.
And then the balance of that really is made up of all of the strategic consulting services like compromise assessments red teaming and strategic program assessments.
Yes.
Yeah, that's important and realize a lot of people and I've said this before and I'll think incident response is so darn tactical use bungie and and you figure out what happened right of report on what to do about it and get out of the Dodge I would argue incident responses at the highest and of the food chain, you know routers windows and Unix infrastructure, you know identity.
The management.
You know all of it when you respond so that makes you unbelievably capable at strategic consulting so that's why I reported and my.
Permanent remarks, my direct remarks upfront that we saw now and flipping back to at 45% revenue growth and our strategic services.
And the first half of this year over last year, it's because whenever IR, let's just say we have world peace overnight and there is no inbound IRS. We can repurpose every 1 of those people for the most parts of the strategic services or red teaming and all of the skills or overlap.
His role so so that's the good news with incident response consultants.
And they can play for safety and pretty much do any of the services that we have.
Yeah, and I think youll see that socket and our deferred revenue balances on the services side was we ended the quarter at a record of $109 million. So we are building. Even in addition to kind of the third of the business. The IR worried and building a lot of backlog for all of these.
Additional strategic consulting arrangements.
Got it very helpful. Thanks, guys.
Hey, Thank you.
And that concludes our question and answer session I will now turn the call back over.
And centers for final remarks.
Well first I want to thank the Fireeye employees, we had a heck of a quarter. When you look at the quarter and what we had the accomplished with the divestiture.
We had to go through a lot of speed bumps and all of our jobs doubled during the quarter.
And we're doing all of the right things, we have and alignment of strategy for mandate and when you have and alignment of the strategy you actually have and easier execution path. So I'm very confident and what we've done very excited about the second half of the year, but I just wanted to on this call with a thank you to the Fireeye employees for staying steadfast and staying focused and thank you for all of you for <unk>.
Joining us on this call look forward to speaking with you and 90 days.
Sure.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
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