Mandiant, Inc.
Q2 2014 Earnings Call Transcript

Published: 6 Aug 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the FireEye Second Quarter 2014 Financial 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. (Operator Instructions) I would now like to turn today’s conference call to Ms. Kate Patterson. You may begin, ma’am.

[Kate Patterson:]

Thank you very much and thank you all for joining us today on our conference call to discuss FireEye’s financial results for the second quarter of 2014. 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 Dave DeWalt, FireEye’s Chairman of the Board and Chief Executive Officer and Michael Sheridan, Senior Vice President and Chief Financial Officer. After the market closed, FireEye issued a press release announcing the results for the second quarter of 2014. Before we begin, let me remind you that FireEye’s management will make forward-looking statement during the course of this call, including statements related to FireEye’s guidance for the third quarter of 2014 and the full year 2014, industry growth drivers and customer adoption of our solutions, continued revenue growth and momentum in FireEye’s business, trends in FireEye’s business operating results and customer wins, the general availability and expected capabilities and benefits of new FireEye products and the integration of Mandiant and nPulse technologies. 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 10-Q filed with the SEC on May 14 as well as our earnings release posted a few moments ago to our website. Copies of these documents maybe obtained from the SEC or by visiting the Investor Relations section of the website. Also, please note that 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. With that, I will turn the call over to Dave DeWalt.

[Dave DeWalt:]

Okay, Kate, thank you and greetings everybody and welcome to our second quarter 2014 earnings call. I am very pleased to report that FireEye delivered another strong quarter of billings and revenue growth in Q2 exceeding the guidance ranges for both. Our overall growth rate on a year-over-year as reported basis was 153% for billings and 184% for revenue. We also reduced our operating losses as a percentage of revenue and posted non-GAAP loss per share below our expected range of $0.58 to $0.63 per share. In addition, our outlook looks strong and we are raising our guidance for the full year 2014 on the key metrics of billings revenue and loss per share. This marks the fourth consecutive quarter of beating and raising our top line metrics as the adoption of FireEye’s industry-leading security technologies continues to expand. We also more than doubled our installed base of customers compared with the year ago. And I believe this growth reflects proof that today’s security architectures are ill-equipped to address tomorrow’s threats. Point products, no matter how advanced, simply cannot provide the rapid detection and response necessary to contain and prevent the types of threats we see everyday now. This is the reason we invested in building a comprehensive security platform and why we expanded our global infrastructure and service capacity. As we look at the competitive landscape today, there is no other company that can compare FireEye in terms of its diversified Bluechip customer base, the depth of threat intelligence from that customer base, the breadth of products and services and established global infrastructure. These are competitive advantages that will continue to fuel our growth as we enter the next phase of a revolution from an advanced security pioneer to the industry leader. I want to take a minute to review the tremendous progress we have made over the last 12 months; then I will outline some of our Q2 highlights, which will show the momentum, FireEye is having in the marketplace; and lastly, I want to speak to the next phase of our growth. It’s now been almost a year since our IPO and we are a much different company today than we were last September. In the last four quarters, we more than doubled the number of FireEye protected customers growing our installed base from 1,182 customers to nearly 2,500 customers today. Our customers include some of the most important organizations in the world in industries such as banking, telecom, energy, transportation, retail and probably most influential more than 50 global government, military and intelligence operations. Our customer base is perhaps our most important asset. These organizations are the most frequently targeted networks in the world giving us unparalleled visibility into the threat environment. We also built a worldwide sales service and support infrastructure with the presence in 65 plus countries to support our growing installed base. We also built a global engineering organization that enables continuous innovation in nearly every continent. These investments resulted in industry leading net promoter score of 54 compared with the software industry average of 35. The net promoter scores are independent surveys that reflect overall satisfaction, quality and support of our products. Additionally to further extend our market reach and achieve greater leverage from our sales and marketing investments, we expanded and improved our partner programs. As a result we increased the number of registered partners by more than 300% year-over-year and the value of partner generated pipeline by more than 200%. We also acquired several companies including Mandiant and nPulse extending our lead in many new and important areas of the security market. And finally through the efforts of our engineering threat research and incident response teams at the combined company we accelerated our new product engine and transformed FireEye from a company with just two network based products a year ago to one with 20 plus products today integrated across the end point network and the cloud all wrapped with the suite of services including our managed defense offering which is now deployed worldwide. Speaking of acquisitions the people, products and threat intelligence of Mandiant played a powerful role in this transformation on many levels. The addition of Mandiant’s incident response and threat research capabilities took our threat intelligence to the next level. With the detailed contextual information Mandiant has accumulated on threat actors and their methods, we are better able to identify and respond to zero day attacks. This capability has now allowed us to the deliver a new cloud subscription service to our products called advanced threat intelligence or ATI that complements and extends our existing dynamic threat intelligence service that FireEye offers today. This product is just now shipping live and will be launched this summer. Moreover Mandiant’s people and technology are also enabling other new products and services extending our advanced security platform to the end point and added new cloud based services such as TAP with the threat analytics platform. Industry analysts are saying this is one of the most interesting and innovative products they have seen come out in the industry in a long time. And finally Mandiant’s respected incident response practice has expanded to our go to market strategies with services led sales models. When we lead with the incident response services the conversion rate to product sales for managed defense is very high. Now we got in nPulse for an end to end enterprise forensics platform. nPulse’s capability enables FireEye customers deploy an important area of security technology, the ability to detect a threat and report critical breaches that can create unprecedented damage if not properly managed. It’s been amazing journey getting to this point and I am extremely proud to have been a part of it. And I believe the best is yet to come. As I look to the feature I believe we are at the beginning of the next phase of our growth, a phase characterized by continued high growth and improving financial metrics. Highlights for the second quarter included the following. We continue the expansion of our customer base worldwide adding more than 243 new customers compared to 148 in the second quarter of 2013. We also increased the number and the value of deals that included multiple products including cross sell of FireEye and Mandiant products. New global 2000 customers included are well known multinational automobile manufactures who signed a seven figure managed defense contract, an electrical grid operator in Europe who funded their purchase of multiple FireEye products with funds earmarked to renew other security products after we demonstrated the value of FireEye platform and a leading U.S. medial technology company of operations in more than 50 countries off to our managed defense subscription that follows the successful incident response engagement. And as successful as we have been the largest of the (D to O) of the global 2000 there is still plenty of opportunity in this market segment in terms of both new logos and an opportunity to cross sell and up sell to the existing customers we have. We also added a record number of new non-global 2000 customers in Q2, which I believe is a direct result of the investments we made in our telesales organization and in our channel program. This proves once again that it’s the value of our customers’ data and intellectual property rather than the size of the company that drives the need for advanced security. Looking at the Q2 transactions, there was no particular concentration by any vertical market or size. In the mid-market, customers range from law firms purchasing a single NX or a web appliance to reinsurance providers implementing an end-to-end solution that include web, e-mail and endpoint products. We closed deals with retailers, social media, internet companies, financial institutions, universities, government agencies and cloud-based service providers to name just a few. We also saw growing momentum in our international business as awareness of advanced attacks continues to increase in these markets and our international field organization continues to move up the productivity curve. Revenue from international markets was up 189% compared to Q2 a year ago and accounted for 26% of total revenue. I have already mentioned a couple of new international Global 2000 customers. Another notable international deal was our First Financial Services customer in India. That deal was particularly competitive as Cisco and Trend Micro both offered large price discounts prevent us from getting a foothold in Indian banking market. We are able to demonstrate our technical superiority in the customer purchased multiple products and services at much higher prices. I believe we have hit critical maths in our installed base of customers around the world making it a perfect time to expand our sales leadership. To help take us to the next level, I am pleased to announce the hiring of John McGee, our Senior Vice President of Global Sales. John has a remarkable track record of running $1 billion cost businesses. Having recently helped Informatica grow to over $1 billion in sales as well as running a multi-billion dollar business at Adobe and prior to that EMC, John brings outstanding experience and leadership in building and scaling a global sales organization. I have known John for 15 years and I have firsthand experience working side by side with him in the trenches. His passion, energy and drive for excellence are exceptional. As the company moves into its critical next phase of our growth, I am also very excited to announce that Jeff Williams, our current Head of Sales will be staying on as our new Senior Vice President of Americas reporting to John. In this capacity, Jeff will continue to be a vital part of our global executive management team and help drive the company to the next level. On the product front, we have continued to invest in both platform expansion and enhancements to our existing products as well as threat detection technology and threat intelligence. I believe that maintaining this balance between enhancements to existing products and the introduction of new products, all supported by the industry’s most comprehensive threat intelligence, is the key to maintaining our multi-year technology lead and supporting our growth. In Q2, we introduced an update to our e-mail security products and launched our IPS solution globally. Both solutions expanded the portion of the total security market we addressed and allow us to target existing line items in IT budget as we go from market creator to market consolidator. As the first of many add-on products and subscription for existing platforms, our IPS solution is especially important for multiple reasons. First, it demonstrates the value of our MVX or a virtual machine technology by validating alerts in a virtual machine. Our IPS reduces thousands of false alerts typically generated by IPS devices. And one example, a large healthcare organization reduced 1,400 alerts per day to just 40 in a single day. And these were all true positive alerts. Second, the availability of our IPS on our NX or web appliances begins to transition both our customers and sales force from a point product sale to a multi-product platform sale. And finally, the IPS demonstrates the markets readiness to transfer budget dollars investment from ineffective legacy solutions to advanced security. Still very early and what we anticipate will be a multi-year adoption cycle for IPS. The customer’s interest is very high and in several transactions, IPS pulled the rest of the sale. Looking to the new product calendar in the back half of the year, we are on track with the additional releases for our NX appliance and our endpoint products. The NX release will include support from the Mac OS, for the Apple Mac OS making FireEye the only advanced security platform to protect Apple and Windows from zero day target attacks and multi-protocol callbacks, The endpoint release will include a tighter integration with FireEye products and the CMS management platform that will include strong detection capability now as well as fully integrated solutions from the network and cloud products. And finally, we will launch formally our advanced threat intelligence subscription offering us add-on subscription to our existing platforms. I want to just take another minute to emphasize how critical our advanced threat intelligence is combined with the expertise of our world-class threat researchers is detecting containing preventing advanced threats. The story of our discovery of the operation Clandestine Fox attack initially discovered on April 26 is a very good example how our ability to detect new zero day exploits, contain the threat and then prevent future attacks the rapid distribution of the resulting threat intelligence with virtual machines and end point sensors across the entire security architecture. There are multiple detailed blog posts on this but to summarize we detected the threat in one of our managed defense customers determined it was new zero day exploit and updated our customers virtual machines with the new threat intelligence in less than 24 hours worldwide. As the campaign worked over the next ten days we are able to use our applied threat intelligence to detect new threats and protect the eleven other managed defense customers initially targeted by the attack. There is no other security company with threat intelligence products and services capable of delivering this level of rapid detection response and protection. Based on real world data from trials with more than 1,200 customers around the world, we believe is there is no other company that could have detected these types of attacks. You can read the detailed statistics in our marginal line white paper. But we found that existing security products detected only 18% of the threats and 90% of the works were false positive. FireEye detected by comparison 99% of the attacks finding that 97% of these customers were in fact breached. A quick side note on managed defense, our securities as a service platform managed defense was initially introduced by Mandiant to give customers the choice of purchasing product and managing themselves or having Mandiant managing through their security operations center. With the acquisition we expanded this offering to include multiple service levels now and rolled out globally. Initially we thought it will be most compelling to SMBs or small and medium businesses. We typically do not have in-house advance security resources of large enterprises. However, as multiple seven figured managed defense transactions in Q2 demonstrate, the offering is equally relevant for the global 2000. I believe these contracts show that the market is right for a new security as a service model. And if I am correct in managed defense adoption continues to accelerate will change the game again. This will create a new product and service standard, new go to market models and new partnership opportunities and we are really exploring a few of those. So to summarize, I believe we are in the early stages of the market’s transformation from legacy pattern-matching security to virtual machine based threat detection and from traditional product and consulting models to security as a service model. Whichever direction the market takes at whatever pace I believe FireEye is well positioned to succeed with leading technologies, a broad product offering in a flexible business model. And on that note I will turn the call back over to Mike and I will be back in a minute. Mike?

[Michael Sheridan:]

Thanks Dave. First I would like to join Dave in thanking you for your ongoing support in interest Fire Eye. Before I begin I would like to remind you that I will be discussing our non-GAAP financial results and metrics for the first quarter. Specifically our reported non-GAAP results excludes stock based compensation, the amortization of intangible assets, acquisition related costs and non-recurring tax benefits related to the Mandiant’s and nPulse acquisitions. Our 2013 non-GAAP financial results also exclude changes in the fair value of the preferred stock warrant liability. In terms of our financial results, I would like to begin with a summary of progress made in the quarter on some important initiatives. First we made significant progress in continuing the integration of the FireEye, Mandiant and nPulse. We increased the number of combined transactions we closed in the quarter and in a few movements I will discuss improvements that we are making to our combined spending model in the second half of 2014. We also made strong progress in growth of our product revenues which accounted for 40% of total revenues in Q2. On a pro forma combined basis, our product revenues grew at a rate – greater than 75% rate year-over-year. And third we achieved billings growth that exceeded our Q2 guidance and the analyst consensus estimate while at the same time reducing our average contract length on multi-year contracts from 31 months in Q2 of ’13 to 27 months in Q2 of ’14. More specifically our billings grew to $113.8 million from $45 million, 153% increase year-over-year. There were several key drivers to the billings growth we achieved in the second quarter. First we continued the rapid expansion of our customer base. Our worldwide customer base grew to nearly 2,500 customers in Q2 from approximately 1200 customers in Q2 last year, 111% increase and a 59% increase on a pro forma combined basis. Our total billings growth was further driven by our business model that centers around recurring subscriptions and support and development, sales and marketing and global infrastructure. Our operating expenses as a percentage of revenue decreased from 175% in Q2 of last year to 150% in Q2 of this year. In particular, our investment in sales and marketing as a percentage of revenues decreased from 109% in Q2 of 2013 to 80% in Q2 of 2014. This improved leverage is resulting from the continuing expansion of our revenues in our domestic and international markets and the increasing productivity of our sales force as they move up the productivity round. In terms of our financial condition, we exited the second quarter with approximately $465 million of cash and investments on hand. Our accounts receivable increased to $108 million at the end of Q2. Our aging and collections remained strong. This increase in receivables relates to higher billings in the quarter as well as a higher percentage of these billings occurring near the end of the quarter. Our inventory levels remains stable and we do not anticipate any issues with respect to excess or obsolescence in our stock. Finally, with respect to Q2, as you know we have not reported pro forma combined financial results for the second quarter of 2013. So, the financial statistics I have addressed in my comments only include FireEye’s standalone results for the 2013 quarter. However, the Mandiant combination is a key contributor to our growth. So, I would like to provide some commentary into the pro forma growth contribution to both businesses in the second quarter. Specifically, total product and product subscription billings for FireEye and Mandiant each grew at a greater than 65% rate in the second quarter. In addition, product and product subscription revenues for FireEye and Mandiant, each grew at a greater than 50% rate in the second quarter. In terms of our guidance for the third quarter of 2014, there are two topics I would like to cover before providing our guidance ranges. First, in the last 18 months, we have completed five acquisitions, the two most recent of Mandiant and nPulse being the largest. We have had sufficient time as combined operations to identify opportunities for cost synergies and we have initiated a process in the third quarter to optimize our spending. We expect to achieve these cost savings in Q3 and Q4 of this year and we expect that they will relate primarily to personnel resources and facilities consolidations. We expect to incur one-time charges in the next two quarters related to these efforts and these charges will primarily be comprised of severance cost and excess lease commitments. The guidance I am about to provide for Q3 excludes the cost that will be incurred as a one-time charge. In addition, near the end of the second quarter, we made changes to our e-mail product that will allow us to recognize revenue for this product in period rather than on a ratable basis. For all e-mail shipments prior to this change, those billings will continue to be amortized ratably over the life of the initial contract. We have been working with our product managers and our auditors for several quarters to implement this change, because it brings into alignment our accounting treatment of web, file and e-mail sales. We believe this change provides better clarity into our results of operations. Because this change was implemented late in the second quarter, it did not have a significant impact on our Q2 reported results. Specifically, we exceeded our Q2 guidance as well as the analyst consensus estimate for product revenues, total revenues, and EPS before the impact of this change. In terms of guidance for the third quarter of 2014, we expect our billings to be in the range of $150 million to $155 million. We expect our revenue to be in the range of $114 million to $117 million, which excludes approximately $1.7 million of revenue amortization related to the deferred revenue haircut from the Mandiant acquisition. We expect our Q3 gross margins to be in the range of 68% to 71% after the effect of the deferred revenue haircut. For operating expenses as a percentage of revenue in Q3, we expect R&D spending to fall in the range of 41% to 44%, sales and marketing spending to fall into the range of 77% to 80%, and G&A spending to fall into the range of 18% to 21%. Based upon our weighted average – estimated weighted average shares outstanding of 144 million shares, we expect our loss per share in Q3 to fall within the range of $0.52 to $0.56 per share. For the fourth quarter of 2014, based on our estimated weighted average shares outstanding of 148 million shares, we expect our loss per share to fall within the range of $0.46 to $0.50 per share. In terms of total year guidance, we are raising the 2014 guidance that we previously provided specifically the billings in 2014 will now be in the range of $560 million to $580 million and revenue for the combined company will be in the range of $423 to $430 million. Regarding the components of our revenues, w estimate that product revenue will comprise 40% to 45% of total revenues, subscription and support revenues will comprise 40% to 45% of total revenues and professional services will comprise 15% to 20% of total revenues. We expect our gross margins for 2014 will be in the range of 69% to 72%. For operating expenses as a percentage of revenues in 2014, we expect R&D spending to fall within the range of 41% to 44%, sales and marketing spending to fall into the range of 76% to 79% and G&A spending to fall in the range of 18% to 21%. Excluding the impact of tax benefits related to the Mandiant and nPulse acquisitions, we expect to record a tax provision of approximately $1.7 million to $2 million per quarter in the second half of 2014. Based upon our estimated weighted average shares outstanding of 142 million shares, we expect our loss per share in 2014 to fall within the range of $2.05 to $2.15 per share. That completes my prepared comments. I will return the call to Dave for some closing comments and Q&A.

[Dave DeWalt:]

Alright, Mike, thank you and thank you all for your time this afternoon. I hope you can tell how excited we are regarding the future of FireEye and our opportunity to transform the security industry like salesforce in CRM, our Workday in human resources and Servicenow in IT we have the opportunity to transform the security industry with both disruptive technology and a new business model. As the pace of attacks and the cost of breaches continue to escalate, I believe FireEye is entering a phase of sustained growth and leadership supported by our competitive advantages and detection technology, threat intelligence and global infrastructure. No competitor can deliver the intelligence in security architecture to address advanced threats as we have shown in our recent Maginot Line study. As investors in FireEye, I hope you will read it. It’s going to be an exciting journey. I look forward to keeping you updated. And with that, I will turn it back over to Kevin and Kate for some questions.

[Operator:]

(Operator Instructions) Our first question comes from Rick Sherlund with Nomura.

[Rick Sherlund:]

Good quarter. So, first on the John McGee, are you planning on any changes restructuring and so forth of the sales organization we found historically that can be kind of disruptive. So, if you can kind of address what your plans might be there?

[Dave DeWalt:]

Yes. Sure, Rick. Absolutely. And John is in the room here as well and others, but that we are really excited to have John come on board number one, but we really have kind of a best of both worlds frankly. We have Jeff Williams who has done an amazing job helping to build this company from sort of zero to $0.5 billion range here. And he has taken over the big portion of the Americas operation, which as you know is 65% to 70% of our business. So, John has taken over global sales and John has had a track record of running and operating $1 billion pulse businesses. So, we are excited to have both of them. But the answer to your question is no, we are not doing any restructuring in sales operations. We are tuning in a little bit. We are continuing to optimize the plays that Mandiant has and FireEye has. And I still think we are in the early innings of getting all the synergies from those two combination of companies, but for the most part, sales is doing great, where I was scaling internationally. We have multi vectors of sales we are doing both inside sales, partner sales, service-led sales and product sales. So, for the most part, we feel pretty good about what we are doing and we are just trying to bring in some new leadership to help get us to the next level and quite frankly just augment what we have got, so no major change there.

[Rick Sherlund:]

Okay, thanks on that. And just while having been on the sales cycle, any comments in terms of with Mandiant, is it the branding benefit you get from that and the publicity around target and some of the others? Have you seen any material shortening of the sales cycle?

[Dave DeWalt:]

Yes, Rick. It’s a great question. One of the things that Mike alluded to in his script was improving our cross-sell between FireEye’s base and Mandiant’s base and Mandiant’s stuff back to FireEye and we need some really good traction, we went from like 15 or so cross-sells from Q4 to Q1 in our first quarter of operation and now had triple that in the next quarter of operation. So, we are seeing some good things. And the number of companies that we cross-sell to is picking up, pretty optimistic about the second half as we really get the products integrated, the service place integrated, but it’s still early days, we like what we are seeing and they are shortening the sales cycle, especially where the incident responding led model starts. We have also seen some more success leading with services as an engagement before we do a proof-of-concept or proof-of-value of FireEye’s product. So, Mandiant brings us something very unique there, where we can do things like strategic program assessments or vulnerability assessments in the account before we are bringing our FireEye appliance. That helps the conversion rates. So, number of synergies that are starting to get there. And I think as time tells we will get even more. Good question. Thank you.

[Rick Sherlund:]

Thank you.

[Kate Patterson:]

Next question, please.

[Operator:]

Our next question comes from Rob Owens with Pacific Crest Securities.

[Dave DeWalt:]

Hey, Rob.

[Rob Owens:]

Good afternoon. Could you talk a little bit about the change in your e-mail rev rec and potentially how that impacts your guidance or the second half?

[Michael Sheridan:]

Sure, Rob. It’s Mike. What we have done historically is we have recognized the hardware portion of our e-mail sales ratably over the contract period of the subscriptions that go along with it. The reason we have done that historically is because in the event of a non-renewal, the box would not continue to provide functionality. What we have changed is what the same model we have in our web product, which is in the event of a non-renewal, there will still be value provided, but it will decline rapidly over time in the event of a non-renewal. We felt that, that change and by making that change by the way that cost us to able to recognize our e-mail in period just like we do with our web and our file products. It’s been our desire to do this for quite sometime. It’s been a lot of work to get the product aligned with it as well as making sure that on the accounting side, everybody is aligned and we achieved that this quarter. As I mentioned very late, so it’s really more of a prospective change and so you have seen the changes, but I have made into our guidance, it doesn’t affect billings of course, but it does affect the timing of revenue and that’s incorporated into the guidance that I provided.

[Rob Owens:]

Great. Any sense of quantification as we look at Q3 or Q4 relative to that change I think you mention this quarter was nominal, you would have overachieved on the high-end even without it?

[Michael Sheridan:]

Yes. Historically, we have guided e-mail as a contributor, as a percentage of our billings. We won’t be doing that going forward because it was necessary in the past because of the ratable treatment, but you should look to e-mail contribution in the same way that you have looked at in the past with results – with respect to ratable treatment. I would say that there really hasn’t been a change to the kind of guidance we provided on that in the past, but the contributors to the overall revenue guidance change includes some e-mail, includes some of the increase in billings that I also mentioned and it’s a combination of all of the above.

[Rob Owens:]

Thanks. And Dave, as you look at the marketplace, you mentioned you are doing a better job of cross-selling, talk about new customer acquisition, because it seems like there is a lot of noise out there from competition. Are you seeing any elongation in sales cycles or just how that’s playing out? Thanks.

[Dave DeWalt:]

Hey, Rob. Good question. I think that’s the heart of what we watch and monitor here. I look at kind of three areas as you kind of described, one is what is called brand new sale. We have very strong results across the board with that internationally with new customers non-Global 2000, Global 2000, felt pretty good with the number of new customers that were chasing, pretty high numbers, you saw the numbers we have reported in the 200 plus range. So, that feels pretty good. The up-sell is getting going. I would give us kind of early innings of that gain that we have got to keep improving upon. We certainly did a lot better in Q2 than we did in Q1 when it came to the cross-selling of FireEye Mandiant technology and even selling multiple products as Mike mentioned in the FireEye cases, in the FireEye customers. And then it’s just the up-sell is the last one selling more product to the same customer and all those keep moving positive with competition really hasn’t had any impact some notice. Quite frankly, our win rates are extraordinarily high across the board. We recognized we are not at all markets in all segments, but at the same time whenever we have competed directly, we have a very, very high win rate near 100% win rates and we continue to separate ourselves, Rob. I think because of the security threat, it is very complicated. And even when you do detect a threat, all laws targeted case it takes people and process to resolve these breaches and that’s what I alluded to about the next generation security platforms you don’t have people, process and product intertwined to a platform it’s very hard to solve customers problems. And I think in that regard we are very, very unique in the marketplace it’s not just the product company here we have that architecture built worldwide none of our competition has services models like we do and on the threat intelligence that we do and on the detection products that we do and when I look at that compared to where we are out with competition I feel good about it so really comes down the sales execution product reach, can we get really good with that cross selling model and I think we are seeing that and hopefully in the second half we will see a lot more. Good question.

[Kate Patterson:]

Next question please.

[Operator:]

Our next question comes from Matthew Niknam with Goldman Sachs.

[Matthew Niknam:]

Hi guys. Congrats on a quarter. Thanks for taking my question. Obviously, the company has added headcount very aggressively in recent quarters as you consider moving towards the next stage of growth do you feel comfortable with what you have done putting in place from a headcount perspective and maybe put another way how do you think about incremental expense growth from here given the ramp we have seen to-date? Thanks.

[Dave DeWalt:]

Matthew I will start Mike feel free to add on I had a little bit to a little bit this next phase of the company and I think it is important Matt to understand that we kind of have that Phase 1 which I just call the startup company with Shane and the team here and Kevin when he was at Mandiant very (indiscernible) stage trying to get a product launch. We then have a good period of time here in the next phase which was all about high, high end growth, explosive growth if you will. And I kind of see ourselves reaching another phase where we continue that high growth trajectory that we are on but at the same time we are really much more aggressively towards profitability towards cost management and Mike alluded to it we are doing some optimization across the company and we have hired several thousand people here over the last couple of years and run from hundreds to well over 2,000 people. We have acquired a few companies and we want to make sure we got the synergies right both from a revenue side and the cost side and that’s reflective in our guidance. We want to keep being mindful of that. I think it’s important as we get to the next stage of the company that we shall leverage not just in sales and marketing but across the company and you are seeing that as we lowered our loss per share to $2.05 to $2.15 on a range that’s down quite substantially from the prior guidance. So hopefully that’s a good direction for us. Mike do you want to add on that?

[Michael Sheridan:]

Yes. I would add Matt that the way to think about it I think is the strategy that we have focused upon globally to expand our global presence and infrastructure remains and we believe it’s the right strategy as you can see in some of our billings and revenue contributions it’s really a global success and we think that that’s right strategy to pursue. That said, as we have had time to integrate the companies that we brought together ultimately we were very interested in finding out how we could run these companies on a combined basis more efficiently. And I think we are doing a lot of work successfully to identify those. So strategy the same, you will see absolute spending aligned with what you have seen in the past that the growth because I think we will successfully remove some of these costs. We will start to taper and what you will see if you break it down into our investments. I think in the areas like R&D I mentioned a little bit about managed defense platform and the threat analytics platform those are areas where we are investing in and expanding headcount to address those. Other areas you can see in my guidance around sales and marketing that leverage is now moving into high 70s. Last year it was over 100% of spend as a percentage of revenue. Same thing with G&A you are starting to see the G&A percentage start to move more towards our target model that we talked about. So overall I think these are the right things to do. And as David mentioned in this phase we are going to continue to focus on growth and investment. But really at the same time take a hard look and make sure that our spending is efficient and effective.

[Matthew Niknam:]

Very helpful. Thanks

[Operator:]

And our next question comes from Daniel Ives with FBR Capital Markets.

[Daniel Ives:]

Thanks guys. So I am just curious in terms of not just sales cycles but position wise are you starting to see any changes our there as more of your competitors usually going after the same space almost copy cat solutions are you seeing any changes out there in the field?

[Dave DeWalt:]

Yes. Daniel this is Dave. I would tell you similar to I think what Rob was asking – Rob Owens was asking. We haven’t, the sales cycles have been very consistent, the average sales price discounts have been consistent. We certainly see the news much like you do about competitors and kind of copying, kind of FireEye’s model here and talking about sandboxes or virtual machines or some sort of improved detection, but the proof is when we compete head on. And we feel we have a substantial gap and it’s important and I know you understand this pretty virtual machines in line real time. And analyzing real traffic at millions of objects per hour is not something any competitor has been able to do. And do so with a virtual machine has been written from the ground up that can camouflage from these attacks really is an extraordinary advantage that we have. So when you look at the competition, yes there is a lot of messaging out there but when you look at the technology itself and when customers look at it directly, we feel very confident the gap is wide. When it comes to detection and as I said earlier I think the competition is going to have to play a lot of catch up in this next space in my opinion because it is more and just detection you have to respond to the threat, you have to be able to analyze that threat, you have to manage these threats and these breaches in different ways and it takes more than a product do it. And so I believe that the people saw and the experts of Mandiant really come into play in this. The threat intelligence comes into play and now that we are building these managed defense talks our security operation centers around the world, it really gives us a very unique advantage against point product companies selling a singe solution in this market compared to a platform player like us. So it’s going to take us a little bit of time to get all that rolled down and get the messaging there. But I tried to call out some color of some of the deals we won with very large global 2000 companies as well as S&P companies and we are kind of in that inning two as I mentioned and we feel like if we can keep going after that our competitive gap will grow, not shrink. Good question.

[Operator:]

Our next question comes from Walter Pritchard with Citi.

[Walter Pritchard:]

Hi, question for you. Hi, how are you doing Dave. A question for you just Dave on the government side, you guys have done well in that market I think your product is ahead of the pack in terms of certifications and so forth here, can you talk about what you are seeing in terms of Q3 in the government when spend is usually pretty robust?

[Dave DeWalt:]

Yes. Walter, at that time of year, it’s Q3 and end of the fiscal year for United States federal government at least. I have always had a strategy as you know from my McAfee days to win government and win the market. And we have done a lot of the foundational work I believe here at FireEye to win a lot of governments I called up 150 military intelligence operations around the world, 50 different countries using our technology, getting the base in place to really materially up sell and cross sell from that base. And this quarter again with the U.S. federal we are seeing a lot of opportunity. You got to execute on it clearly, but at the same time we are a much, much further along that we were even two quarters ago with our progress in that market because Mandiant brought us a lot of synergy in that particular sector as well as other governments around the world. So we feel optimistic that we have the business there. The pipeline feels good. And if all goes well, we will have a really good government quarter and hopefully really good end of second half of the year. Good question.

[Walter Pritchard:]

And then Mike just on – one numbers question here, it looks like your product revenue was actually ahead of your product billings which hasn’t happened I guess since we have been tracking the numbers here and you did talk about some changes to coming, but could you talk about what drove that during the second quarter?

[Michael Sheridan:]

I don’t think anything that’s really trended, Walter I just think it’s a timing issue between bringing two businesses together. So if you look at it on a pro forma combined basis that’s one of the things that’s going to fall out. So there is not perfect alignment there, but you are right, generally the billings will outpace the product revenues, but the variances is pretty small and there is nothing in it that’s imply any kind of trend.

[Walter Pritchard:]

We should expect that product billings is generally in excess of product revenue except for maybe seasonally weaker quarters?

[Michael Sheridan:]

Right.

[Walter Pritchard:]

Okay. Thank you.

[Operator:]

Our next question comes from Gary Powell with Wells Fargo Securities.

[Gary Powell:]

Great, thanks for taking the questions. I just have a few. So if I look at your billings disclosures a couple things jump out of me. First pro forma for Mandiant the absolute dollar billings growth in 2014, according to guidance will be $190 million this year versus $163 million that you added in 2013, so that’s actually a pretty good acceleration. The other thing that jumps out is that the implied Q4 guidance of the midpoint shows 55% year-over-year growth versus closer to 47% growth in the first nine months of the year. So, I guess my question is how much of the 2014 acceleration is due to cross-selling versus new products versus favorable market conditions? And then how confident are you and the implied ramp for Q4 ‘14 and just what’s the main driver there? Thanks.

[Dave DeWalt:]

I will take some of the color points, Mike, if you want to take some numbers in the second, but when we look at the pipeline for the second half of the year, we are seeing a lot more cross-sell opportunities as you sort of mentioned in the Q3 and Q4 quarters, sometimes timing on one quarter to another is hard to predict, but when you look at the amount of pipeline built, we still have a very small percentage of FireEye and Mandiant overlap customers. So, there is a lot of cross-sell that we can do. FireEye appliances and products sold into the Mandiant Managed Defense model, incident responding by Mandiant leading into FireEye product, FireEye product cross-selling endpoint product for Mandiant and things like that. So each quarter, we are getting a little strong with the synergies as we kind of go throughout the year. And as we look into the second half of enterprise spending, you tend to see a lot more opportunity. If you are us as we work during the first half of the year to build pipeline and close it in the second half of the year and for all the factors that I just described that’s what you are seeing an increase of that growth rate a bit. As you get into the first nine months versus the Q4 quarter, just because again a lot of things get teed up, lot of renewal opportunity, lot of opportunity for us to close bigger transactions. And we think the pipeline and outlook looks good there. Mike, do you want to add on to that?

[Michael Sheridan:]

Yes. I think just in terms of the guidance one thing that we haven’t done, because we are not really running the business this way as we haven’t guided the growth in 2014 for the FireEye business and the Mandiant business separately. So, I know that there is ways of sort of breaking the numbers down. And I think that’s healthy, but overall I think the way we are looking at the business and Dave just articulated it is we are running it as one business. As I mentioned in my comments, we are seeing a good increase in the number of accounts that are purchasing products across Mandiant, FireEye, nPulse and so forth. And that’s a primary driver. And I think in terms of confidence certainly just the fact that we are guiding it, we believe that the road is there. We believe the pipeline is there. We think our sales force is making great progress ramping up. And yes, so we are heading into the second half with an optimistic view.

[Dave DeWalt:]

Do you have one more, Gary?

[Gary Powell:]

Got it. Thank you very much. I am good. Congrats.

[Dave DeWalt:]

Thank you.

[Operator:]

Our next question comes from Brent Thill with UBS.

[Brent Thill:]

Good afternoon. Dave, you mentioned the product evolution to Dover, 20 new products and I know you love all your kids equally, but if you looked at the new solutions coming to market, which ones would you highlight that you are probably the most excited about in terms of a needle mover? And I had a quick follow up for Mike?

[Dave DeWalt:]

Yes, Brent. Absolutely, great question. Actually, we have got our product machine cranking our products now, but we have really got to get ourselves to selling multiple products in the initial deal, cross-selling those products more easily. We worked very hard at trying to get the product and packaging, but to answer your question, there is two or three what I just kind of call Blades or feature areas to our main flagship product, which is our NX or our web product. And as you know, this is the product that’s driven a lot of the FireEye model in the past. One is the IPS product, we feel very good about that product so far. The amount of false saying that the traditional product does can be dramatically reduced with our virtual machines. The amount of true positives that we discover, are extraordinary with that combination. And it’s really just a Blade in our NX is a software update to the current hardware and essentially 15% subscription of the hardware price. So, that one felt good and at the end of Q2 we start to get some good sales there. I think that will start to pick up and a chance to consolidate some spending that’s already in motion with a lot of companies and after. The other Blades that are in NX platform are pretty exciting too. One I mentioned, which is our advanced threat intelligence. We now have two subscriptions to our intelligent cloud, one called DTI or dynamic threat intelligence, which is FireEye intelligence. The second one now is advanced threat intelligence, which is essentially Mandiant threat intelligence and what it allows us to do whenever we detect a threat in an architecture we get a threat score, which is coming from FireEye and DTI, but we can add to kind of a risk score. And the risk score is essentially adversary information, more information about what’s called tools and techniques and procedures of the adversary kind of helps you understand that the Chinese attacking you, the Russians attacking you, the Iranians attacking you not just as alert but what’s the relevant portion of that intelligence and we can do it at that the point of alert real time with both intelligence engines. So long and short of that is we have a number of new blades to a flagship product. We’ve also added Mac OS capability. So we now have multiple guest images running real-time network not just Windows platform but now the Apple platform is the first in the industry for virtual machines especially running real time. So a number of kind of add-on things are pretty exiting. And then the cloud stuff that we are doing particularly this product called threat analytics platform kind of a next generation SIM type product is starting to get some good traction. We are excited about that, still little early days in the first half of the year. But I think the second half has a pipeline kind of interesting technology there to really bring SIM from the PREM to the cloud and leveraging some of the technologies like Amazon’s web services to do it. So bunch of new products pretty exciting, we got to get them going, we got to get them cross selling but that’s part of the next chapter of the company. Good question.

[Brent Thill:]

Okay. And Mike just on billings you had fairly strong upside in Q1, the upside relative to your high end of the guide wasn’t as large this quarter, is there anything that we should sense in terms of how that weighted the quarter was it more back end loaded that perhaps you maybe booked more than you build and we just don’t see that or any other anomalies to explain for that on the total billings?

[Michael Sheridan:]

I think the biggest factor, Brent is what I mentioned with respect to average contract length, as you know we sold primarily one year and three year contracts. And in recent quarters we have seen the trend of the average contract length moving up to 30, 31 months. In fact in Q2 of ‘13 that was the average contract length that we were booking. In Q2 of this year that came down to 27 months. And so as a result obviously the billings for those out years wasn’t as big of a contributor, the reason it came down a little bit or two fold. One is that it’s a normal fluctuation in the business. The second is that we are working with our sales force to ensure that they are properly incentivized not just to achieve their quotas without your billings and bookings, but also to really focus on product penetration, market penetration and first year penetration. So we have made some changes to get them focused on that. We are seeing some good results from it but that would be the biggest factor in terms of looking at that overall billings outperformed.

[Brent Thill:]

Thanks.

[Dave DeWalt:]

One more question…

[Kate Patterson:]

We have time for one more.

[Operator:]

Our next question comes from Greg Moskowitz with Cowen & Company.

[Greg Moskowitz:]

Okay. Thank you and good afternoon. Dave, you have hired a kind of feet on the street over the past year plus, wondering how you would characterize your sales productivity today as well as what you’ll see over the next 6 to 12 months? And then I just had follow-up for Mike as well?

[Dave DeWalt:]

Greg, we can always do better that’s for sure that we have described it and it still feels early. We are going from just a couple of products as I mentioned to quite a big suite of products. We have gone from a couple of countries we are selling to 60 plus countries. We won some larger selling in the global 2000 to now selling in the non-global 2000. So what takes you to maturation for us to get the productivity really where we want it and we are focused in on making the hiring that we have done already really ramp up, I think that we can get there in the second half of this year and beyond. But it takes a little time and we are excited about the progress. But in the grand scheme of things I still think we are early days in this whole play that FireEye is doing particularly with Mandiant. And especially take Mandiant International as well another area for us to improve upon with productivity. Mike alluded to a lot of service investment we made in the international markets, they are just getting ramped up. You can’t get these incident responders in a day fully doable and completely utilize but the progress seems to be there. The pipeline seems to be there and I think those investments will start to pay off both in productivity as well as doing some revenue. Do you have another one?

[Greg Moskowitz:]

Thanks, Dave. That’s great. That’s helpful. And then just Mike and Dave actually may have partially entered this, but I just wanted to expand on this if I could – if you look at product and product subscription billings both were quite strong in the quarter although professional services billings were down slightly versus Q1 and I am wondering if you could speak to the dynamic that you saw in the services side this quarter and if there was anything that you would call out, either in the U.S. or internationally? Thanks.

[Michael Sheridan:]

I think a couple of things on the international front as Dave mentioned we are just now getting started it with those investments. I think overall, the services business is performing well. It tends to be a bit more tied to breach activity than a sales force out creating pipeline. So, it’s a part of our business that will be a little bit more dependent upon on what might be happening in the market, for example, if you have a major breach that might drive a little more in one quarter versus another quarter. Overall, we think the business is strong and as we start to pickup our utilization in the new capacity, we think that the growth in the margins in that part of our business, are going to stand at 15% to 20% of our total revenue contribution.

[Greg Moskowitz:]

Great, thank you.

[Dave DeWalt:]

Good, okay. I will just wrap up if it’s alright, this is Dave DeWalt, I just want to again say to all the investors thank you and all the employees on the line, really proud of you all for your accomplishments in Q2, not only beating the numbers again and now having a chance to raise our guidance for the second half of the year. And hopefully we get a chance to everybody soon and we are looking forward to that this summer at the investor conferences and things. And with that, we will end the call. Thank you very much. Have a good day.

[Operator:]

Well, ladies and gentlemen, this does conclude today’s conference call. If you were in queue to ask a question, we have taken your names down. We will do call back. So, you may all disconnect and have a wonderful day.