Mandiant, Inc.
Q4 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Good day, everyone, and welcome to the FireEye Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Also this call is being recorded. At this time, I’d like to turn the call over to Kate Patterson. Please go ahead.

[Kate Patterson:]

Thank you, Joelle. Good afternoon, and thanks to everyone on the call for joining us today to discuss FireEye’s financial results for the fourth quarter of 2019 and the full year 2019. This call is being broadcast live over the Internet and can be accessed on the Investor Relations section of FireEye’s website at investors.fireeye.com. With me on today’s call are Kevin Mandia, FireEye’s Chief Executive Officer; Frank Verdecanna, Executive Vice President, Chief Financial Officer and Chief Accounting Officer of FireEye; Peter Bailey, FireEye’s Executive Vice President and Chief Operating Officer; and Bill Robbins, Executive Vice President, Chief Revenue Officer and General Manager of Products. After the market closed today, FireEye issued a press release announcing the results for the fourth quarter of 2019 and full year 2019. Before we begin, let me remind you that FireEye’s management will make forward-looking statements during the course of this call, including statements relating to FireEye’s guidance and expectations for certain financial results and metrics; FireEye’s priorities, initiatives, plans and investments; drivers and expectations for growth and business transformation; the expansion of FireEye’s platform; and the benefits, capabilities and availability of new and enhanced offerings; competitive position; market opportunities; and go-to-market strategies and organizational changes. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after the call. For a detailed description of the risks and uncertainties, please refer to our SEC filings as well as our earnings release posted an hour ago. Copies of these documents may be obtained from the SEC 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 point out that we have posted the supplemental slides and financial statements on the Investor Relations section of the website.

[Kevin Mandia:]

Thank you, Kate, and thank you to all the investors, employees, customers and partners joining us on this call. We appreciate your interest and support as we continue to transform from our origins as a network security appliance vendor to a comprehensive security solutions company. Let me begin by discussing some Q4 highlights and some full year highlights, followed by our priorities for 2020, and then I’ll turn the call over to Frank to discuss the details of our fourth quarter in 2019 results as well as the financial milestones we expect to achieve in 2020. For Q4 in 2019, in Q4 we delivered record revenue, record billings and record operating cash flow, and we did that not just for the quarter but for the full year. In the fourth quarter, we met or exceeded our revenue guidance for the 12th straight quarter and also delivered improved profitability. However, our Q4 billings fell short of the midpoint of our guidance range by approximately $16 million and many of you may focus on that. But this shortfall was primarily due to a shorter average contract length as our business transforms from appliance-based solutions to our platform and cloud-based products, our security validation offerings like Verodin and our Mandiant services. Frankly, this trend to shorter contract length is both welcome and expected to continue in the future as we accelerate our business transformation towards emerging growth solutions. So let’s review some of the highlights from the fourth quarter and the full year. Billings for the quarter was a record $274 million, an increase of 3% year-over-year. Billings for the year was $926 million, an increase of 8% over 2018. Revenue for the quarter was a record $235 million or $7 million above the high end of our guidance range. Revenue growth accelerated to 8% year-over-year, the highest growth rate we’ve had since the first quarter of 2018. For the year, revenue was $889 million, also a record, and up 7% over 2018. Our strong revenue performance in Q4 resulted in improved profitability and our earnings per share were well above the high end of our guided range. Our billings and revenue growth was led by our platform, cloud subscription and managed services category as well as our Mandiant services, all of which posted record billings in revenue. And first I’d like to speak about our Mandiant services. Our Mandiant services organization had another record quarter. It’s seventh in a row in regards to revenue. In the fourth quarter, Mandiant billings were $70 million, up 32% year-over-year. Mandiant services revenue in the fourth quarter grew 29% year-over-year and exceeded $50 million for the first time. While its financial metrics are record setting, what is more important is what these results represent, that Mandiant is trusted to handle the most complex security challenges.

[Frank Verdecanna:]

Thanks, Kevin, and hello to everyone on the call. Before we move onto the details of our Q4 results and guidance for Q1 in 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, non-cash interest expense on our convertible debt, restructuring charges and other non-recurring items. Turning to our Q4 results, let me start by emphasizing that Q4 was one of the best quarters in our history. With billings, revenue, operating income, operating cash and free cash flow all at the highest levels in our history. More importantly, although billings of $274 million were below the midpoint of our guidance range by about $16 million, we showed continued momentum in the metrics that I believe matter the most, which are subscription billings, ARR, revenue, and operating leverage. Our performance relative to our guidance was due primarily to a decrease in the average contract length as mix shifted to subscription offerings and platform, cloud and managed services billings overall. The quality of our fourth quarter billings was high, which resulted in period revenue yield above our forecast and expectations. This helped drive revenue outperformance of $9 million above the midpoint of our guidance range. with expenses in line with our implied guidance on an absolute dollar basis, the revenue outperformance flowed directly to the bottom line, and we generated record operating and net income. Taking a closer look at our billings performance and the related ARR metrics by the portfolio categories; platform, cloud subscription and managed services, subscription billings increased 70% year-over-year, even though the average contract length, ACL for short declined by approximately three months. adjusting for a constant ACL, billings would have been approximately a $100 million and the year-over-year growth rate would have been 32%. Annual recurring revenue for this category accelerated to 31% year-over-year to $280 million. Every one of our cloud security solutions posted healthy year-over-year increases in the ARR with cloud endpoint to the highest at more than a 100%. Verodin finished the year as expected with about $20 million in billings and accounted for about one third of the increase in ARR. Mandiant billings grew 32% year-over-year to an all-time high of $70 million. services deferred revenue was also at a record level increasing 27% sequentially to $96 million. The majority of this growth was driven by strategic consulting services and expertise on demand. Please note some of these services within these categories tend to be reoccurring, but we do not include any services in our ARR calculations. Finally, our appliance-based product and related business continue to stabilize, although total billings for the category were down 16% compared with a year ago. The majority of the decline was in appliance hardware sales as customers continue to show a preference for virtual and cloud-based solutions for incremental deployments. A one-month decrease in the average contract length was also a factor, while ARR and the on-prem product and related category was, down slightly on a sequential basis. If I look at our detection products across all form factors, ARR was up 1% sequentially. This is a really important point and I want to emphasize that the sequential growth in the ARR for our detection solutions shows that at most – at the most fundamental level and we continue to expand deployment of our detection technology just in different form factors. Turning to revenue, revenue of $235 million exceeded the midpoint of our guidance range by $9 million. the year-over-year growth rate accelerated to 8% as a strong growth in platform and cloud revenue offset the headwind from the ratable recognition of appliance hardware. platform, cloud subscriptions and managed services revenue was a record $71 million in the quarter. The growth rate accelerated to 41% year-over-year reflecting the growth in billings, ARR and deferred revenue, we have experienced since early 2018. Mandiant professional services revenue of $50 million was also at a high – all-time high and the services revenue growth accelerated for the fifth consecutive quarter to 29% year-over-year. The growth reflects capacity expansion as well as increased efficiencies in services delivery through technology enablement. Product and related subscriptions and support revenue decreased $14 million or 11% from Q4 2018 to $114 million. the year-over-year decrease in revenue recognized was driven by a decline in product and related current deferred revenue as appliance revenue from prior years, amortizes off the balance sheet. We’ve been talking about this for a while, but as a quick reminder, we recognize appliance revenue ratably over four years under the 606 accounting standard. The good news is that the accelerating growth in the platform, cloud subscriptions and services revenue lines more than offset this backward looking dynamic again in Q4. We expect the headwind from appliance amortization to peak in 2020 and be less of a factor in 2021 and beyond. gross profit margin as a percentage of revenue was 73% in the quarter, consistent with our guidance range. The decrease from Q4 2018 was primarily related to the higher mix of professional services. Note that although Mandiant services are at a lower gross margin, our services contribution is consistent with, if not higher than other areas of the business. Total operating expenses decreased about $5 million sequentially. The sequential decline was primarily related to lower employee payroll taxes. on a year-over-year basis, operating expenses increased just 2%, substantially less than our revenue growth of 8%. the biggest increase was in R&D, largely due to the addition of the Verodin R&D team. Our continued operating discipline allowed the revenue overperformance to flow through to operating margin and we generated record quarterly operating income of $16.8 million. with other income partially offsetting taxes, operating profit translated to net income of $15 million and earnings per share of $0.07, well above our guidance range of $0.03 to $0.05. Turning to the balance sheet and cash flow, we continue to maintain a very healthy balance sheet with cash and short-term investments of more than $1 billion. We ended the quarter with receivables of approximately $171 million, an increase of about $18 million from the end of Q3. DSOs calculated on billings were 58 days, which were at the low end of our targeted range of 55 days to 65 days. Total deferred revenue at year-end was approximately $975 million, an increase of $39 million sequentially and $40 million from the end of 2018. $36 million of the $39 million increase was in current deferred. We generated a record $40 million in operating cash flow in the quarter and $68 million for the year. This was a bit below our guidance range, primarily due to lower billings. CapEx was about $7 million for the quarter, resulting in free cash flow of about $33 million, also a record. for the year, free cash flow was $22 million, up 117% from 2018. All in all, our Q4 results kept a solid year of consistent performance as we continued the operational transformation of our business model in parallel with our sales and technology transformation. As Kevin mentioned, we are taking steps to accelerate this transformation and set the stage for increasing growth and profitability in the future. Our outlook for 2020 reflects the internal and external forces driving our progress. Looking at the full-year guidance first, we currently expect total billings in the range of $930 million to $950 million. The 2020 billings outlook assumes a continued decline in appliance hardware sales, both in absolute dollars and as a percentage of the billings mix of customers continue to opt for virtual and cloud form factors for new and expansion deployment. A two to three-month decline in average contract length, this decline reflects the higher mix of cloud and virtual subscriptions which tend to be a lower average contract length in subscriptions attached to hardware. Additionally, now that we have achieved consistent operating leverage and positive cash flow on an annual basis, we are gradually transitioning to annual billing cycles consistent with the practices of other SaaS industry leaders. This allows us to shift our sales objectives to ARR growth rather than gross billings and we have made some changes in our compensation plans to encourage this behavior. While periodic billing creates a near term headwind to billings growth, it’s a long-term positive for our business. Not only does it make our solutions more attractive to smaller customers, expanding our TAM, it encourages cross sell and up sell conversations at more frequent intervals. Finally, our guidance assumes sustainable growth rate for services in the low-to-mid teens after a record 2019. Working through the math associated with the contraction in the average contract length. The midpoint of our guidance range implies a 9% year-over-year billings growth at a constant ACL. And an acceleration in the growth rate of ARR growth to the mid-teens from 6% growth in 2019 driven by 40% plus growth in the platform and cloud ARR. Looking at revenue, we expect 2020 revenue in the range of $935 million to $945 million, an increase of 6% at the midpoint compared to 2019. Our revenue outlook assumes the revenue growth rate of the platform and cloud category remains at about 30% for the year. It assumes negative revenue growth in the mid-teens for the product and related subscription and support category. As I mentioned earlier, this is the worst growth year for this category, because 2020 revenues compared to 2019 revenue metrics that included in the final amortization of appliance revenue from 2015. We call that 2015 was the peak year for our appliance sales. Finally, we expect services revenue growth in the mid-to-high teens reflecting the expanded capacity and the record level of current deferred revenue. We expect gross margin of about 71% and an operating margin between 5% and 6%. When you do the math, you’ll see that this implies a decrease in our operating expenses of $20 million to $25 million compared with 2019, reflecting continued cost optimization efforts as we align our expense structure with the evolution of our billings mix and sales motions. We expect most of the year-over-year decrease in operating expense savings will be realized in Q3 and Q4. We expect the expense savings to be realized across the business, but much more focused in the areas that are either declining or have slower growth. Finally, with a consistent revenue growth across the four quarters in mid-single digits, we expect to show increasing operating leverage as we progress through the year. This should allow us to exit the year with an operating margin in the 12% to 14% range. Finally, we are looking for operating cash flow for the year to be between $65 million and $85 million, approximately flat with 2019 and CapEx of approximately $10 million per quarter or $4 million – $40 million for the year. For Q1, we are expecting billings in the range of $165 million to $175 million. Our Q1 billings guidance assumes appliance sales contribute low-to-mid teens of total billings mix, similar to Q4 of 2019. This implies a decrease of 30% to 40% year-over-year. Recall that last year Q1 appliance sales were up 40% year-over-year due to the refresh of our third-generation appliances. Overall we expect product and related subscriptions and support to account for about 40% of the billings. Q1 billings guidance also assumes continuous strong 20% plus growth in the platform, cloud subscription and managed services categories. And assume services growth in the 15% to 20% range. We are assuming a decrease in the average contract length of two to three months. At a constant ACL, we estimate billings would have been relatively flat year-over-year, based on the midpoints of Q1 and 2020 billings, this implies we will bill approximately 18% of the year in Q1, slightly below linearity in last year, but within a normal range. We expect revenue in the range of $222 million to $226 million. We expect product and related revenue to decline 10% to 15% as the last of the 2015 appliances were amortized in Q4. Platform revenue to continue to grow to mid-to-high 30s year-over-year. And services revenue to grow from 2019, but to remain in the mid-to-high teens growth rate. Note that, because we expect revenue be greater than billings in Q1, we will see a sequential decline in the current deferred revenue. We expect gross margin of 71% and the normal seasonal increase in operating expenses as withholding taxes and other employee related expenses restart for the new calendar year. As a result, we expect to post an operating loss in the range of 3% to 5% and loss per share of $0.03 to $0.05. With lower billings and higher cash expenses compared with Q1 of 2019, we expect operating cash flow in the range of negative $5 million to positive $5 million for the quarter. That concludes my review of our guidance ranges and assumptions. I know there is a lot of detail here, so we have summarized all the assumptions in the math for you in the guidance section of our slides. Operator, we will now be open to take your calls – questions.

[Operator:]

Thank you. Our first question comes from Sterling Auty with JPMorgan. Your line is now open.

[Sterling Auty:]

Yes, thanks. Hi, guys. So curious around the shortening of the duration with the impact that you mentioned. I guess the question is why does that come as a surprise? If we look back into 2019, we had the quarter where there was the impact on refresh. Now due point where now that business passed us, should things stabilize or is there another element that we want to watch for that could impact either billings or revenue?

[Frank Verdecanna:]

Well, I think the impact, certainly this is Frank. The impact that we were expecting is that – we’re not expecting an impact on revenue, but we are expecting billings to have that headwind from shorter contract duration and I think it wasn’t a surprise, but it is something that we’re actually pushing forward on accelerating that transformation. So if you look at where Q4 ended, you can see that, we ended with 59% of our business in the growth areas and that would be platform, cloud, subscription and managed services, and services. So I think what you’re seeing is a quicker transformation to subscription operating – offerings. And we also, in our comp plans had a bigger focus on ARR, which will help to drive kind of higher ARR, but shorter contract length.

[Sterling Auty:]

I got it. And just to follow up to that, just to push back a little bit, I think we’re all encouraged by the quality of the billings and the revenue direction where it’s headed, but just wondering if it wasn’t a surprise, why maybe not an adjustment in the guidance rather than having the billings mix that we saw in the quarter.

[Frank Verdecanna:]

Yes, I think if, if you look at Q3 results and Q4 results, you’re starting to see less – greater than $1 million deals and that’s because of the contract duration is coming down. I think you probably didn’t see in the Q4 guidance, because we had one data point being Q3 and now we’ve got two data points. And we feel, especially with the changes in the comp plan that we’re kind of moving in that direction. And if you look at where the growth of the business is coming from, it’s coming from subscription offerings that we do anticipate having just shorter-terms.

[Sterling Auty:]

Got it. Thank you.

[Kevin Mandia:]

Thanks, Sterling.

[Operator:]

Thank you. Our next question comes from Gur Talpaz with Stifel. your line is now open.

[Gur Talpaz:]

Okay, great. Thanks for taking my questions. One for you Kevin and one for you Frank. For Kevin, with Verodin, can we talk a little bit about the automated security validation piece of the business and then aside from the duration, have assumptions changed around potential contribution from Verodin this year? And then just taking a step back more broadly, you talked about the efforts to up sell Mandiant customers here post engagements.

[Kevin Mandia:]

Yes. So a couple of things on the Verodin platform, over time the intel that we sell which I think will never be – ever replicated, we speak over 30 languages. We’re located in 20 plus countries now. You take our intel platform, we’re modernizing it, we’re bringing it to market with the Verodin security validation piece and we add Expertise On Demand. Here’s what I can tell you about security validation. It’s when you’re sitting in the C-Suite it’s the number one thing that matters, Gur. People want to know, hey, am I secured? Well, here’s your vulnerability management report, 2 million vulnerabilities, 19,000 patches you have to do and we have to do that stuff. There’s been a 20 year run of vulnerability management paradigms in defense and depth paradigms. What we want to do here at FireEye, start a paradigm that I saw Richard Blaylock and some other folks out in cybersecurity referred to as the threat elimination paradigm that’s done with making it safe to do real attacks. Can Fin7 hack you? Yes or no? Can APT28 compromise you and get to your email stories? Yes or no? These kinds of binary tests on a continuous basis, just cuts through the chase and gives you the quick notes of what you got to do for security right now the field is secured. So talking about Verodin and combining it with our intel, our attacker knowledge, adding a button for Expertise On Demand. And you can see that we can kind of attach to a SIM and provide exceptional value. Here’s our intel and as we modernize that, what we want to do is almost provide a augmented reality of your SIM ingesting, where you go, oh my gosh, this is – so here’s all the open source information on this alert and here’s all the FireEye information on this alert and here’s what we think we should do about it. Bringing that to market in an elegant way and combine it with validation, that’s a long winded way of saying this, intel Expertise On Demand is all really converging into a single platform that we will have and that it’s just unbelievably relevant right now, fastest way to get unvarnished truth about what you got to do, when security has hit the button validate your controls, so I’m pretty optimistic on it. On the proof through side, think about what we do on Red Team. In my opinion, you will probably we’ll never truly automate humans, all right. And, we’re not going to have robots doing Red Team, but we can get 85%, 90% of the validation into the Verodin platform. So when we go out and do a Red Team today and we’re already booked for the next couple of months and folks are hard at work, they can use the validation platform while they’re doing the job. And then it’s constantly attack, rinse, repeat, attack, rinse, repeat. And when you do that for a customer, that you take them from security point A, geez, things are getting through to security B, acceptable risk. So, I just see when our services folks are technology enabled with our technology, it’s just a logical sell-through, logical gateway. And that was my comment there.

[Frank Verdecanna:]

And to the second part of your question, Gur, our expectations for 2020 for Verodin remains at $70 million in billings.

[Gur Talpaz:]

Perfect. That’s great. Any more with the duration adjustment?

[Frank Verdecanna:]

Correct. Verodin has been primarily one-year deal, so there are multi-year deals that build annually.

[Gur Talpaz:]

Okay. And then Frank, just one additional question for you..

[Frank Verdecanna:]

I’m sorry, go ahead.

[Gur Talpaz:]

Yes. So around product and support billing for next year and the implied 11% decline even with the duration adjustment, can you talk about the delta there relative to what you offered at the Analyst Day for more like flattish growth, would you call this conservatism or would you see this more as a reflection of the changes you’re making in the business to reflect a broader shift towards platform, cloud managing.

[Frank Verdecanna:]

Yes, I think we are seeing a broader shift towards the platform, cloud and managed services and services. We’re not updating our long-term model, but at this point, but I think you can see in the 2020 guidance and Q1 guidance that we are anticipating a quicker transformation there.

[Gur Talpaz:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Gregg Moskowitz with Mizuho. Your line is now open.

[Gregg Moskowitz:]

Okay. Thank you very much. Hi guys. And thanks for taking the question. I guess the first one just for Frank, so your revenue guidance for 2020, I know there’s been a lot of focus on billings, but the revenue guide was a below consensus and I would’ve thought that would be unaffected by duration. So just wondering if there was anything else we should be aware of as it relates to in-period revenue that might potentially act as a headwind on the business this year or is it perhaps just a little bit about conservatism?

[Frank Verdecanna:]

I think it’s a little – just a little bit of a mix difference. We have a – yes, we do have a couple of products that are upfront revenue and if you look at our expectations for 2020, there’s more of a mixed shift from kind of those upfront products to more subscription based products.

[Gregg Moskowitz:]

Okay, thanks. And then for Kevin, so with Expertise On Demand, given that this was – for Kevin, did you see bigger commits from customers looking ahead to 2020? How are customers engaging with you around EOD?

[Kevin Mandia:]

Yes. Well it was our best quarter ever with regards to the billings. And basically as I look at how it’s being used, we will always have to integrate it with our tech, you want it to be push button and then you can imagine a future where it’s not even push button, we just know when you need us, based on how your intel operating with the data. A long story made short, biggest use cases, hey, we need a forensic investigation. We need an unbiased party in 30 seconds, who can come in and take a look at something and that’s kind of, and again, remember EOD we started that not to sell more services. It’s just been a 15 year march towards I believe the best products in the world provide a seamless extension to their experts and so that’s what why we have it. So bottom line, it was the best quarter ever for EOD. We’re continuing to modernize, how we deliver it. Right now, we deliver it through the Helix platform, kind of like Click to Chat in the top use cases, review this machine with your friends, experts to figure out if I have a problem or not.

[Gregg Moskowitz:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from Michael Turits with Raymond James. Your line is now open.

[Michael Turits:]

Hey guys. Good evening, Frank, for you, back to duration. Two things; one, is this just – is this more – is this a function primarily the mix shift and is it – or is it more driven by you guys in terms of shifting the model or demand side from customers wanting to go that way?

[Frank Verdecanna:]

Yes. I think, I would say, Michael, it’s both. We’re seeing a quicker shift to subscription, but we’re also expanding kind of our market opportunity because we have seen a reluctance in the midmarket and a reluctance in the channel to bill multi-year up front. And so, by tweaking the comp plans and by changing things a little bit to allow for that and put some more controls on degradation of ARR on renewals and conversions, there’s just a much bigger focus on ARR that we know the changes will have an impact on duration along with kind of the natural kind of move from appliance hardware that typically have three years to subscription that is usually a year or two.

[Michael Turits:]

And I guess, I’m surprised that if you’re incenting it and there’s the demand side driver, that it’s not more of an impact this year. I mean, is there any downside risk to that two to three months and where could it go longer term?

[Frank Verdecanna:]

Well, I think, obviously, with guidance there’s always an upside and a downside to it. But I would say that, we feel pretty good with the changes we made driving. Somewhat of an impact, but I wouldn’t say a drastic impact. The comp plan changes aren’t drastic enough that it would move the needle that quickly the other way.

[Michael Turits:]

And longer term, I mean, does this continue each year? Where does it go eventually from your perspective?

[Frank Verdecanna:]

Yes. I think, longer term as we continue to focus on selling subscription and focus on ARR, I think you’ll see kind of a general trend downwards on contract length. But we do still sell product and appliances and we do still incentive longer term deals and some of which are going to be paid up front. So I think it’s going to be more gradual, but two to three months in any one year, I think is a pretty significant transformation.

[Michael Turits:]

Right. Okay. Thanks, Frank. Thanks a lot. Thanks Kevin.

[Kevin Mandia:]

Thank you.

[Operator:]

Thank you. Our next question comes from Fatima Boolani with UBS. Your line is now open.

[Kevin Mandia:]

Hey, how are you?

[Fatima Boolani:]

Good morning. Thank you for taking the – I’m great, Kevin. How are you? Thank you for taking the questions. Kevin, I have one for you and Frank for you. I’ll start with you, Kevin. Just kind of digging into Travis’s retirement, I know over 2019 you had a pretty significant reorganization effort under Travis and Grady. So at a very high level, how should we think about succession and continuity from here? And appreciating Bill’s sort of expanded role on the new COO. So if you can just help us contextualize around the succession.

[Kevin Mandia:]

Yes, sure. So first and foremost, and I – this is either complimenting me or not complimenting Travis. Travis and I’ve shared our brain for 20 something years. So the spirit of Travis, we thought so much more alike. This will sound like a strange comment, but I think I knew his habits better than I knew my wife’s habits. I mean, that’s what happens in a workplace. So he’s still working with me. He’ll always be an advisor. When we’re 80 years old and on the front porch, we’ll be talking about FireEye. So there’s going to be total continuity to the mission and the things you put forward. We’ve been doing this for a long time. Travis joined me in February of 2006. And since that time, a lot of things can happen. And when you’re putting in seven days a week and 24 hours a day, there comes a time where you say, hey, it’s time for me to step out of the river and be an advisor for a while and step back in. So my opinion, Travis and I will always work together, will always benefit from his guidance. And all the things that we put in motion together over the years are going to stay in motion. I do not anticipate he’s a stranger at all. And as he goes into his new schedule, we have to obviously operationally execute. And what I do there, and I guess it’s just the first five to eight years of my career, between ROTC and the military. When you’ve got to execute and execute quickly, you reduce your span of control and you roll. And that’s what we’re doing as an organization. We’re going to most senior executives and we’re kind of tightening the org chart to execute quicker. So that’s where I’m doing those changes. But this is something that – a lot of folks, when you’re in a startup and you get bought by the big companies, this is six years later and we were still here and we’re in and Travis is going to stay connected to it. But it’s been a 14-year run for him. And when folks get to that point, all I can do is salute and respect.

[Fatima Boolani:]

I appreciate that color. Frank, for you, if I – if we can revisit just some of the dynamics around the product and related category in the declining or accelerating declines in that segment relative to what we discussed at Analyst Day? If you could put a finer point on that for us as it relates to the Gen 4, Gen 5 appliance refreshes and refresh rates, that would be really helpful just to so we can better appreciate the disparity there. And that’s it for me. Thank you.

[Frank Verdecanna:]

Yes. Fatima, so in Q1 of last year, we did have kind of the forced end of life at the end of March 2019 for the third generation appliances. So that did have kind of an outsize kind of product impact in Q1 of 2019. So if you recall in Q1 of 2019, product grew 40% year-over-year. And so now you’re seeing kind of the converse of that having a more significant decline year-over-year because we don’t have kind of a forced refresh happening in Q1 of 2020. As we look at the year and we look at the pipeline, we just see significant growth opportunities in the platform, cloud subscription part of our business. Now the good thing, even with contract length coming down from the billings perspective, we’re still getting multi-year commitments from customers, it’s just what’s being built up front is typically more annual event, a three-year deal at this point. And if you look at just the overall growth in ARR, I think you can see that metric really showing strength because of that transformation from on-prem to cloud. Our cloud endpoint, for example, grew 100% year-over-year in cloud and ARR. So we are seeing that transformation probably a little bit quicker than we expected, but I think it’s a good thing for the business. Those are the growth areas of our business. They continue to grow very strongly.

[Fatima Boolani:]

Thank you.

[Operator:]

Thank you. Our next question comes from Melissa Franchi with Morgan Stanley. Your line is open.

[Melissa Franchi:]

Great. Thanks for taking my question. I’ll start with just a product or a segment related question for you, Kevin. The strength and services was really notable this quarter. And I think when you guys talked to last quarter, you said that Mandiant was operating at near capacity for utilization. So, can you just talk about what drove that strength and outperformance? And what you’re seeing from a kind of a billing rate perspective and expectation for hiring in 2020?

[Kevin Mandia:]

You bet. So here’s the reality, if we hire, it grows, that simple. You only got three things, how many folks you got, hourly rate and chargeability. Chargeability is – every single metric for the Mandiant Services component is exactly where you want it to be. It’s probably a little bit hot right now, especially in the – you call, we haul business of incident response. But the fact is its growth rate is directly tied to adding more people into the mix. And that’s it. And plus, we have expanded the services. We have Charles Carmakal leading Strategic Services. We have Ron Bushar, who leads a lot of our government efforts. And it’s just a little bit more expansion into the strategic side of things as well. The bottom line right now, if we hired 10 more folks, we’ve got work for them right now. If we hired 20 more folks, my good, we have work for them right now.

[Frank Verdecanna:]

And Melissa, one of the things helping that drive that is the fact that we’ve been able to build kind of more than we’re delivering. And so we’ve constantly been able to increase the professional services’ deferred revenue with things like Expertise On Demand. And what that does is give, even in between any major projects, we have a bunch of work we can do with the existing team. And so services’ deferred revenue got up to $95 million in Q4. So I think that’s really healthy for the business because it gives us the ability to just continue to focus on hiring the right resources to be able to deliver on that.

[Melissa Franchi:]

That’s great. Okay. And one follow-up for you, Frank, I just wanted to contextualize your guidance for 2020 in light of your longer term guidance. So if we look at the billings guide and we normalize for the contract length, you’re guiding to 9% billings growth I believe. And then looking at your longer term guide for the CAGR to 2024, I think you initially got it for 12% to 16% CAGR and so. Can you just help us understand, while first whether that’s still stands and then secondly, what drives like the acceleration beyond 2020?

[Frank Verdecanna:]

Sure. So we haven’t updated the long term guidance. But basically, if you look at where this business is heading, 59% of the billings is in areas that are growing very quickly, growing at rates above that five-year CAGR, overall CAGR. And so as we continue move throughout the year and move into 2021 and 2022, what you’ll see is that growth part of your business is the much bigger part of the overall business. And so the overall growth rate for that business is going to be much more significant. I mean, if you look at, where we expect product billing, and product billings ended at 10% of our overall billings. So while that has been declining, it’s becoming a much smaller piece of our overall business. And so as we go through the year and as we go through the next year, I would expect that the overall growth rate will go up because your growth part of your business is just a much bigger portion.

[Melissa Franchi:]

Very helpful. Thank you.

[Operator:]

Thank you. Our next question comes from Patrick Colville with Arete Research. Your line is now open.

[Patrick Colville:]

Thank you for taking my question. Can I switch over to profitability, if possible, because I mean that was a pretty impressive area, both this quarter and in your guidance? So can you just could me talk through, why we’re seeing that inflection in profitability in fiscal 2020, given that the – for last two years and not really be much increase in profitability?

[Frank Verdecanna:]

Yes. I think, Patrick, a lot of it is just the focus on having expenses go relatively down from where they are today. And so ultimately, even though we’re investing anywhere from $25 million to $35 million in the growth areas of the business in 2020, we’re pulling out roughly $50 million in the other parts of the business that are slower growth, which enabled us to have an overall OpEx down $20 million to $25 million year-over-year. And I think what’s really impressive is, we’re getting to by the end of the year expecting 12% to 14% operating margin in Q4. And we haven’t been in double digits before. So I think that’s really shows the leverage in the business.

[Patrick Colville:]

Yes. That’s very clear. Thank you very much. And can I just circle back to the fiscal 2020 revenue guidance? And so you talked about the headwind from the third-generation appliances and actually fiscal 2020 being the worst of the headwind. I mean, is that what you had expected previously? Or has that kind of troughing out been pushed back a little bit versus your prior expectations?

[Kevin Mandia:]

Yes. I mean, we knew the amortization from the appliance was going to continue impacting us in 2020 and the fact that, we sold less appliances in Q3 and Q4. There was less to add back into that pool. So that doesn’t surprise us. It’s – again, the good news about that is that headwind kind of dissipates in 2021 and beyond. So it kind of hits its peak in 2020. So the revenue guidance while having that headwind, we’re still able to show kind of an overall growth of 6% there.

[Patrick Colville:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Rob Owens with Piper Sandler. Your line is now open.

[Rob Owens:]

Great. And thanks for taking my questions guys. I want to drill in a little bit, number one, on the number of million dollar transactions. And Frank, you did touch on the fact that for the back half of 2019, they were down on a year-over-year basis. So how long would you expect that headwind to last? Is that when it lapse itself in Q3? Or is this going to persist throughout 2020 in your view, kind of given some of the changes?

[Frank Verdecanna:]

With the expectation of contract length going down, you’re going to see probably an impact in the greater million dollar deals. I mean, we’re able to grow over that because of the transaction velocity that we’re seeing within the business. But we’re just – less deals are going to get to that level because they’re going from three-year deals to two-year deals.

[Rob Owens:]

Okay, fair enough. I guess on the – along the lines of transaction velocity and then just switching to customer acquisition, it looked like for 2019 your new logos were actually flat on a year-over-year basis and that’s reported. I’m not sure how Verodin, the acquisition actually would impact that if it was in the number when acquired or not. But maybe you could just walk us through kind of your thoughts in terms of customer acquisition with some of the new compensation? Are you driving for new logos? And what we should see throughout 2020?

[Frank Verdecanna:]

Yes. Our expectation is that, we’re going to continue focusing on new customers, because if you look at our ability to cross sell and upsell our existing customer base, we do a really good job of that. So I think planting those seeds for the future is really important. If you look at some of the comp plan changes, if you look at some of the newer products like Verodin and I think they fit the channel very well and I think we should see some traction there from a new customer logo perspective.

[Rob Owens:]

All right, thanks.

[Operator:]

Thank you. Our next question comes from Jonathan Ho with William Blair. Your line is now open.

[Jonathan Ho:]

Hi, good afternoon. I just wanted to start out with maybe trying to understand a little bit better the acquisition around Cloudvisory, what trends are you seeing in sort of securing multi-cloud and maybe prioritization for 2020?

[Kevin Mandia:]

Yes. A couple of thoughts on that. First, you want to be able to secure multi-cloud in one interface, right? So, you need AWS, Google Cloud, Azure, O365, all-in-one place. And then if you can get visibility and the security controls in one place, that’s also very valuable. So, bottom line is this, most companies want the enterprises go into the cloud faster than they know they are. I know that’s even here at FireEye, it’s always fun for us to watch your AWS that will climb up from time-to-time and people are – need the visibility on it. And more importantly, they need to test the security controls in place and then actually adjust. Cloudvisory gives us visibility into these four Google, AWS, O365 and Azure, and it means to do FireEye rules and controls based on what we see. So, it’s just a perfect kind of edit to the log ingestion that we get from all of those providers in Helix and you can now go from visibility, log ingestion and let’s change some things and orchestrate some defenses. So that’s how it fits in with us, bottom line, every vendor – take that out, every customer of ours that’s going, the cloud is going to need that capability.

[Jonathan Ho:]

Got it, got it. And then just to maybe, go back to the hardware discussion; at what point, does it make sense to maybe, just discontinue the hardware business or force customers to the cloud and would there be any meaningful cost savings if you didn’t need to support sort of both platforms? Thank you.

[Kevin Mandia:]

Yes. I think, from a customer perspective, there’s still a lot of industries, where on-prem’s appliances are important. So, our intention would be to always support those customers. I think we’re – we have a pretty streamlined organization. They’re supporting kind of the hardware. So, I believe it wouldn’t be a huge savings to move straight to the cloud or force movement to the cloud. Yes, I think it’s an important part of various customer verticals.

[Jonathan Ho:]

Thank you.

[Operator:]

Thank you. Our next...

[Kevin Mandia:]

And Jon, just to be clear on this too. I mean, there’s no question at this point. Grady and I have been on the phone with customers recognizing the fact that our cloud-based helix is just going to advance at a rate and pace of change that’s different than the on-prem. So, at some point in time, you got to go to where the puck’s going to be. It is obviously that it’s rare in history of the world; you can get something cheaper that’s better and cloud platforms actually providing infrastructures better and costless, that’s simple. So, as people embrace that change, we got embrace it as well. So internally, when you look at the innovation that we’re doing, it’s cloud first and that’s why Grady has the role he has as he has a bias for change and bias for cloud. And he’s been putting me in a headlock from nine years now to get there faster. So, we’ll keep getting there as fast as we can. We’re there already, but moving to the Cloudvisory shows that we wanted to get the visibility and the controls playing done as well. We already had the log ingestion done. So, we kind of got the trifecta there of how we need to operate in the cloud. We’ll get our validation there. You can already run our security validation in the cloud, but one thing that I think would be a great growth there, actually two things, great growth areas for FireEye’s; one, Managed Defense in the cloud. people want to just say, hey man, I’m going out to the cloud, I’m going fast. Can you secure it for me? We ought to be able to say, hey, you know what, we will do that. And the second thing is we started doing security assessments for the cloud and we’d like to do that through our own technology, like cloudvisory. so, I lied, there’s a third thing. We got to validate in the cloud. And imagine a day and I’ll push FireEye’s innovators to do this, where you can come to our website and say, I want to validate my cloud infrastructure and just click through menus, click through the licensing agreements, buy it and run tests to make sure you can validate your security. And that to me is transacting like a SaaS company. So, we’ll keep that as our aspiration.

[Kate Patterson:]

Operator, I think we have time for one more question, please.

[Operator:]

Thank you. And our next question comes from Brian Essex with Goldman Sachs. Your line is now open.

[Brian Essex:]

All right. Thank you for squeezing me in. maybe Kevin, if I could just ask you a real quick about, as we’re focused here on platform, cloud and managed services, how is platform adoption trending relative to, I think at Analyst Day, you noted about 20% of customers have three or more products. Are you getting meaningful traction with platform business or is there another gear here in terms of growth if you get better adoption there?

[Kevin Mandia:]

Yes. First off, I – so, I always believe there’s another gear period. So yes, I just waved Grady over as Captain helix as I call him to give you the updates. So, Grady?

[Grady Summers:]

yes. I would just say adoption’s going well, we see the customers with three or more segments that we’ve shared this before, but continues and goes about 36% CAGR. So, we see customers once you’re getting in the door, adding on those additional product and service pieces. I’d also add some of the announcements, just the products that Kevin alluded to at RSA is the ability to manage our on-prem appliances through helix, which we expect to be kind of a phase shift, and how quickly customers adopt the platform; in other words, you don’t – you don’t need that on-prem controller anymore to manage your on-premise hardware. So, it’s a really big step forward for us.

[Brian Essex:]

Got it. That’s super helpful. and maybe, Grady while you’re on the line, if you could maybe, provide an update, I think when you can shift the roles here, we noted that you had a lot of changes on the development side of the organization. In terms of the cost reduction and efficiency that I think Frank had alluded to. Is any of that coming from maybe, R&D and development side, or all of these kind of just strictly around rationalizing expenses related to the legacy or on-premise product-attached business?

[Grady Summers:]

Yes, definitely a bit more than just that. But I’ll actually hand it back to Frank to answer specific questions in the organization. Yes.

[Frank Verdecanna:]

Yes. Brian, it really is across the business, but it’s much more focused and tailored to the areas that are not growing. So, if you think kind of the more mature products. if you look at the platform, cloud category and solutions, we are actually investing quite a bit more in there, but we are pulling some costs out of kind of the more mature products.

[Brian Essex:]

So, any R&D scale would be incremental to those, I guess, efficiencies.

[Frank Verdecanna:]

That would be included in incremental.

[Brian Essex:]

Okay, got it. Thank you very much.

[Operator:]

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Kevin Mandia for any closing remarks.

[Kevin Mandia:]

Yes, these will be quick. I just want to thank you for your interest in FireEye. There’s a – you can see there’s a lot of excitement in the business, three and a half years ago and might even be coming up on four years ago, I was appointed CEO of this organization. I knew we had to, in the back of my mind; I called it “the turn.” And the way I defined that was growth business, overcoming and becoming the larger portion of FireEye business. We got there in Q3. We did it again in Q4 and now that we’ve arrived you’re going to see us pivoting more and more of our focus towards those growth areas. So, the first portion of the transformation is check mark complete. Now, it’s time to deliver more growth on the side of our business that can grow even faster and be more relevant. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.