Do FireEye’s Lowered Billings Indicate Margin Expansion?

Helix platform likely led to lowered billings guidance

FireEye (FEYE) estimated its 4Q17 billings to be $210.0 million–$230.0 million, which was below analysts’ estimate of $237.4 million.

For fiscal 2017, FireEye lowered its guidance for billings to $736.0 million–$756.0 million from the previous range of $745.0 million–$775.0 million.

Do FireEye’s Lowered Billings Indicate Margin Expansion?

FireEye’s lower-than-expected billings guidance for 4Q17 could hamper its growth and sustainability in the long run. This trend contributed to the fall in FireEye stock after its 3Q17 earnings announcement.

The Helix cybersecurity platform is shortening its contract term with customers, which could be the reason behind FireEye’s lowered guidance for billings in 4Q17.

According to FireEye, “The decrease in contract length year-over-year reduce subscription and support billings by approximately $11 million compared to what billings would have been had the average contract length remained constant at 27 months.”

FireEye’s transition to the SaaS model

However, there might be a positive side to this trend. FireEye’s (FEYE) management believes that shorter contracts could lead to an expansion of its margins. With long-term contracts, tech companies generally have to offer discounted prices to attract customers.

The double-digit growth in FireEye’s subscription offerings indicates its strong customer acquisition. The transition to the SaaS (software-as-a-service) model could benefit FireEye.

Recurring revenues and customer acquisition costs are some of the important metrics to measure the performance of the SaaS model. As SaaS businesses attain scale, the cost of servicing each customer falls. In the long run, this could help the company report a growing and predictable cash flow.

FireEye’s margins are already showing improvement. In 3Q17, FireEye’s non-GAAP[2. generally accepted accounting practices] operating margin of -2.0% was significantly better than -14.0% in 3Q16. FireEye noted that it expected an operating margin from -4.0% to -6.0% for 4Q17.