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Edited Transcript of HIVE earnings conference call or presentation 6-Feb-19 10:00pm GMT

Q4 2018 Aerohive Networks Inc Earnings Call

Sunnyvale Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Aerohive Networks Inc earnings conference call or presentation Wednesday, February 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David K. Flynn

Aerohive Networks, Inc. - Chairman, President & CEO

* John Ritchie

Aerohive Networks, Inc. - Senior VP, CFO & COO

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Conference Call Participants

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* Christian David Schwab

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Chase Bunnell

Dougherty & Co., - Associate Analyst

* Melanie Solomon

Investor Relations

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Presentation

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Operator [1]

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Good day, and welcome to the Aerohive Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Melanie Solomon, Investor Relations. Please go ahead, ma'am.

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Melanie Solomon, Investor Relations [2]

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Thank you, Melissa. Welcome to Aerohive Networks' Fourth Quarter and Year-End 2018 Financial Results Conference Call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at aerohive.com.

This call is being webcast live on the Investor Relations section of the Aerohive website and will be available for 30 days.

Today's call is being hosted by David Flynn, President and Chief Executive Officer; and John Ritchie, Chief Financial Officer and Chief Operating Officer.

During the course of today's call, management will make forward-looking statements, including statements regarding our projections, operating results, expectations for future revenue growth, operating discipline, profitability and margin, plans for future investments, product development, deployment, adoption and performance and expectations of customer buying patterns and the growth of the market for our products and business generally.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the captions Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in our recent annual report on Form 10-K and quarterly report on Form 10-Q.

Aerohive's SEC filings are available on the Investor Relations section of our website at ir.aerohive.com and on the SEC's website at www.sec.gov. All forward-looking statements in this presentation and the referenced press release are based on information available to us as of the date hereof, and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the day on which they were made, except as required by law.

Today, we'll be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today's press release available on our website.

And now I'll turn the call over to David Flynn, President and CEO of Aerohive.

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [3]

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Thank you, Melanie, and thank you all for joining us today. While we did return to growth in 2018, it was less than the growth rates we aspire to going forward. However, 2018 was a year of improved operational execution and a reassertion of our position as an innovation leader in the space. We released a number of major new products, including A3, our standalone security offering; our new SD-WAN cloud-managed branch routing solution, Atom, the industry's first enterprise Pluggable Access Point; and our industry-first portfolio of 802.11ax capable access points also referred to as Wi-Fi 6.

We also delivered a continuous stream of innovation in our HiveManager cloud platform, including machine learning-based Client 360 and Network 360 as well as Alexa voice integration. These product enhancements strengthen our overall offering and reposition us as an innovator in the space. The strengthen in our cloud offering and strong execution in our renewals business led to 14% growth in our subscription and support revenue for the year.

On the sales side, we increased our operational efficiency, driving down full year sales and marketing expenses from 39% to a record low of 37% of revenue. At the same time, we drove our business mix toward the enterprise, delivering 13% growth in our non-K-12 business in 2018. This drove our non-K-12 business contribution up from 63% in 2017 to 70% of total in 2018. These activities combined with increased productivity and efficiency contributed to return to year-over-year growth, non-GAAP profitability for 3 of the 4 quarters in 2018 and significant cash generation.

Turning to our fourth quarter results. We delivered year-over-year revenue growth for the second-consecutive quarter. Our very successful subscription and support business showed double-digit growth and record revenue in Q4, accounting for 1/3 of our total revenue. We're pleased with the growth and predictability of our recurring as we continue to drive to a more SaaS-like business model.

Non-GAAP gross margins continue to hold strongly and exceeded our guidance for Q4, and we demonstrated operational efficiency and non-GAAP EPS at the top end of our guidance range and non-GAAP profitability for the quarter.

Looking at our business globally, Americas grew 7% year-over-year, and we are very pleased with EMEA quickly rebounded after Q3 and delivered 14% year-over-year growth. EMEA has now delivered double-digit growth rates in 3 of the last 4 quarters as well as for the full year.

In the quarter, we also made progress diversifying the business away from K-12 education with our worldwide non-K-12 business growing double digits and with our K-12 contribution decreasing year-over-year from 27% to 21%.

In Q4, our continued product enhancement strengthened our offering and led to key wins. We've seen a very high degree of interest in our new portfolio of 802.11ax capable access points, bringing into account for 15% of our Wi-Fi business in Q4, its first full quarter of shipment. Organizations making significant AX purchases, including LG Electronics, Abercrombie & Fitch, Daimler, University of Virginia and Pioneer Natural Resources. They were benefited from being first to market and our multi-model fleet is a strong testament to the quality of execution by our engineering team.

We also delivered another industry first by bringing management of our A3 secure network access solution into the cloud to ease deployment of the standalone security offering. This was instrumental in a 6-figure A3 win at a large Canadian customer.

We revolutionized our network management capabilities with the announcement and shipment of HiveManager shortcuts, integrating Amazon Alexa skills into our cloud platform allowing IT personnel to use their voices to onboard devices, monitor network status and troubleshoot issues from their phones.

And we introduced Network 360, which uses our cloud platform and machine-learning techniques to give customers a comprehensive view of their network to facilitate network planning and troubleshooting.

Our partnerships with Juniper and Dell continue to open doors for us. Examples in the fourth quarter include a mid-6-figure win with Juniper at a $5 billion energy enterprise and a 300k hospital win with Dell.

In summary, in 2018, we've dramatically improved our product offering and our operational efficiency, and we initiated our return to growth, in spite of significant headwinds in the U.S. education market.

As we enter 2019, we're encouraged by our position. Our portfolio is the strongest it's ever been and our product engine continues to hum. Our leadership in AX positions us to win new accounts and to drive installed-based upgrade revenue as customers increasingly look to move to AX. Our financial model and operational efficiency have been tuned on a ready-to-deliver leverage as revenue expands.

I'll now turn it over to John to talk in more detail about our financials.

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John Ritchie, Aerohive Networks, Inc. - Senior VP, CFO & COO [4]

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Thanks, Dave, and good afternoon, everybody, and thank you all for joining here today. Before I begin, I would like to remind everyone that all numbers discussed today have been adjusted for ASC 606. Under this accounting standard, we generally recognize revenue when we ship products to our customers, including our stocking distributors. The stocking distributors then hold inventory to meet end-customer demand.

Now looking back at 2018, on a full year basis, revenue came in at $154.9 million, up modestly compared to the $153.6 million recognized for fiscal 2017.

2018 benefited from strong results in our subscription and support revenues, which grew 14% on a year-over-year basis as well as strengthen our enterprise business. These combined to partially offset the revenue drag from the tough K-12 market. Despite challenging revenue performance, we focused on disciplined execution, which allowed us to drive positive operating margins and positive EPS. In our quarters there are seasonally low Q1, the same disciplined approach also resulted in meaningful cash generation. Maintaining this discipline, combined with revenue growth will put us in a path to a very successful 2019.

Now moving on to the quarter. I'd like to highlight some financial and operational milestones Aero have achieved. We came in at the high end of our guidance for non-GAAP operating margins and non-GAAP EPS. We exceeded our guidance range for non-GAAP gross margins. Our subscription and support business continues to set all-time records for revenues and gross margins, and for the first time, our quarterly revenue run rate for the subscription and support business exceeded $12 million per quarter.

Now during the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the fourth quarter and provide some related commentary on our business. I will close by reviewing our financial guidance for the first quarter of 2019.

Now moving on to the fourth quarter results, revenue came in at $38.1 million, down $2.4 million or 6% compared with the prior quarter and up $2.4 million or 7% on a year-over-year basis, continuing our return to year-over-year growth.

Product revenue in Q4 was $25.6 million, down $3.2 million sequentially and up $700,000 on year-over-year basis.

Subscription and support contributed to over $12.5 million in the quarter and [33%] (corrected by company after the call) of total revenues, up 7% on the sequential basis and up 16% compared with the same quarter a year ago.

On a geographic basis, revenues in the Americas came in at $20.8 million or 54% of total revenues. America revenues were down $5.8 million or 22% on a sequential basis and up $1.4 million or 7% on a year-over-year basis. Americas revenue was impacted by the expected seasonal Q3 to Q4 decline in the K-12 education market.

Revenue in the EMEA region was $14.4 million or 38% of total revenue, an increase of $3.4 million or 31% sequentially and was up $1.7 million or 14% on a year-over-year basis.

The European growth highlights the success we are seeing in the enterprise market as this region is less dependent than the U.S. market is on the K-12 market.

Q4 revenue in Asia-Pac was $2.9 million or 8% of total revenue, essentially even on a sequential basis and down $800,000 or 21% on a year-over-year basis.

I'll now turn the discussion over to our non-GAAP margins and expenses. Q4 '18 non-GAAP gross margin came in above our guidance range at 66.3%, up when compared with the 66.1% in Q3 and down from 69.3% compared -- recorded in the year-ago period. Per previous discussions on this topic, we are seeing anticipated declines in product gross margins, significantly offset by strong subscription and support gross margins. This is reflective of the success we are experiencing in transitioning customer value from our hardware platforms to our feature-rich subscriptions.

Non-GAAP product margin for the quarter came in at 62.4% compared with 63.3% in the third quarter. On a year-over-year basis, non-GAAP product gross margins declined from 68.2%. This anticipated decline is a result of proactively migrating our customers from perpetual licenses through subscriptions as well as a year-over-year increase in sales of our lower margin switch products, and to a lesser extent, an increase in overall material costs.

Non-GAAP subscription and support gross margins came in at 74.2% in the fourth quarter, up 120 basis points when compared to the 73% in the third quarter and up 230 basis points when compared with the 71.9% from the year-ago period.

This marks a company record and our seventh consecutive quarter of greater than 70.70% subscription and support margins.

Moving on to non-GAAP expenses. Non-GAAP operating expenses were $25 million in the quarter, down $500,000 or 2% when compared with the $25.5 million in Q3 and even with the expense levels from the year-ago period.

Non-GAAP research and development was $7.6 million or 20% of revenue compared to the $7.4 million or 18% of revenue in the third quarter. This compares with $7.3 million or 20% of revenues in the same period a year ago. Non-GAAP sales and marketing expenses came in at $13.4 million or 35% of revenue in Q4 compared with $14.3 million or 35% of revenue in Q3 and compares with a $13.6 million or 38% of revenue in the same period a year ago.

And lastly, non-GAAP G&A expenses came in at $4 million or 11% of revenue in Q4 compared to $3.8 million or 9% of revenue in the third quarter. This compares with $4 million or 11% of revenue in the same period a year ago.

Overall, our non-GAAP operating margin was 0.6%, down compared to the 3.2% from the third quarter and up [110] (corrected by company after the call) basis points compared to the negative 0.5% from the year-ago period.

Our non-GAAP operating income was $200,000, down compared to the operating income level in the third quarter of $1.3 million and an improvement compared to the operating loss of $200,000 from the year-ago period.

We reported non-GAAP net income of $400,000 in the fourth quarter, compared with non-GAAP net income of $1.5 million in Q3 and a notable improvement from a non-GAAP net loss of $400,000 in the same period a year ago.

This all translates to non-GAAP net income per share in the fourth quarter of $0.01, compared to non-GAAP net income per share of $0.03 in the third quarter at a non-GAAP loss of $0.01 per share in the same period a year ago. The non-GAAP net income per share for the fourth quarter is based on $56.9 million weighted common shares outstanding.

On a GAAP basis, in the fourth quarter, the net loss was $0.10 per share compared with net loss of $0.04 per share in Q3 and a net loss of $0.08 per share in the prior year.

Our Q4 GAAP net loss included stock-based compensation expenses of $3.8 million, cost of restructuring, primarily our China and EMEA-based operations of $1.2 million and an $800,000 write-down off an early-stage investment we made several years ago.

Now moving on to the balance sheet. Our cash and cash equivalents and short-term investments as of the end of December totaled approximately $92 million, excluding the impact of our share repurchase program and cost associated with the restructuring of our China and EMEA operations, we were essentially cash neutral for the quarter. On a full year basis, we generated over $12 million of cash excluding these previously mentioned items.

Accounts receivable increased to $16.2 million as of December 31 compared to $14.8 million at the end of the third quarter. DSOs increased by 5 days to 39 days from 34 days in the prior quarter. All these ranges stay well within our level of comfort.

Inventory levels increased $2.4 million, coming in at $16.1 million at the end of the quarter, compared with $13.7 million at the end of the previous quarter.

The increase in inventory was primarily driven by increased inventory levels of our AX products and to a lesser extent, pulling inventory forward to minimize the impact of future tariffs.

Our deferred revenue balance now stands at an all-time high of $77.3 million, up $1.5 million from the $75.8 million in the previous quarter. And on a year-over-year basis, our deferred revenue balances increased $10.3 million or over 15%. It is important to note that this increase far exceeds our year-over-year revenue growth. We view the growth in our subscription and support businesses as a vote of confidence by our customers as they were relying on us to run their cloud managed networks well into the future.

Now moving on to the guidance for the first quarter of 2019. We are currently anticipating revenues in the range of $36 million to $38 million. On a non-GAAP basis, we expect gross margins to be in the range of 64.5% to 65.5%. Though, like many companies, we are still trying to understand the full impact of the ongoing trade tensions. We want to remind you that only a minority of our product portfolio is currently subject to tariffs. And of these -- of this small subset of our portfolio, we only pay tariffs on products sold in the U.S. The impact of tariffs across our portfolio is included in the guidance provided.

On a non-GAAP basis, we are expecting our operating margins to be between negative 5% and negative 2%. Any point inside this range would represent a company record for the first quarter.

We expect other expenses, including tax expense to be negligible in the quarter. And lastly, we expect non-GAAP EPS to be between a loss of $0.01 and $0.03 per share based on 55.9 million common shares outstanding.

On a GAAP basis, we expect the Q1 loss to be between $0.08 and $0.10 per share on the same 55.9 million shares outstanding. As a reminder, we typically exclude stock-based compensation and shareholder class action costs amongst other items from our non-GAAP results.

We are particularly pleased that revenue growth reflected in our guidance range, although modest, would represent our third consecutive quarter of year-over-year growth.

Revenues within this range would also represent a significantly smaller seasonal decline than average over the last several years. I want to point out that last year, the sequential increase in revenue from the fourth quarter to Q1 of '18 was not reflective of typical seasonality. As we exited 2017, our stocking distributors held very little product inventory. In Q1 '18 and over the course of '18, we increased the use of distribution and built inventory with our stocking distributors to manage to our expected levels of business.

Under ASC 606, our Q1 '18 as well as Q3 and Q4 revenue benefited from this build in inventory. Under our current distribution model, we estimate that to effectively manage end-customer demand, aggregate inventory with our stocking distributors should be between 2 and 3 weeks of global demand for our products.

As of the end of the fourth quarter, the inventory was at approximately these 3-week levels. We intend to continue to manage stocking distributor inventory levels within this 2- to 3-week range so, therefore, we expect Q1 '19 to reflect a seasonal decline. And given the improvements in our business, we expect a more modest decline than is typical.

Now with that, I'll turn the call back over to Dave for some additional remarks.

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [5]

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Thanks, John. In closing, we are encouraged by the strengthening of our business, and we believe we are well positioned to continue building on in the coming year. With the stronger product offering and more opportunities to showcase our innovation, we believe we will increasingly be viewed as a formidable competitor in the space.

While we are focusing on continuing 2018's double-digit enterprise growth, we are also seeing a number of leading indicators that the U.S. education market may return to growth, which could turn that market from a headwind to a tailwind for 2019. We are viewing E-Rate with caution because of the history of issues with the program. We are encouraged that the volume of request for quotes this year is running 30% to 40% higher than the same time last year and is on pace with the extremely robust levels we saw in the 2015 program.

With Q4's results and the positive foundational changes made throughout 2018 and this position heading into 2019, we believe we are positioned to deliver profitable growth, as we drive as a team to achieve our long-term goal of leadership in cloud networking. I'm proud of the progress we made in 2018 and the hard work of our employees. I'd like to thank them along with our partners for their ongoing dedication and support.

We'll now take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Christian Schwab with Craig-Hallum.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Could you remind us how much money you won in E-Rate in 2015?

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [3]

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Yes. Give me 1 minute to look that up. It was in -- I think the total 471 awards were in the kind of mid-$20 million range. I'll have to pull that back.

And yes, remember that award volume is -- that's the VARs revenue to the end customer is what they reflect there.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Right, right. So is there -- was -- all of the schools that in fiscal year '15 being able to come back this year after having to take 3 off. We're seeing, as you said, quite high surge of volume of people looking to upgrade the schools again. If this goes really well, could you give us a range of outcomes of what you would anticipate, since I'm sure the sales force has been active here?

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John Ritchie, Aerohive Networks, Inc. - Senior VP, CFO & COO [5]

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Christian, that puts us in an odd position, right? Because while we've given 1 quarter's worth of guidance, and we've been whip-sawed before with this function in the E-Rate market. Although, we do believe and we've talked before that it's clearly not going to be contracting next year, and there is high likelihood of growth. We just want to be very cautious on that, and that's a long way of saying that we won't specifically answer that question.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Would you expect to see revenue pick up in this in the June quarter? Or would you expect the majority of it to kind of be in the September quarter?

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [7]

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Typically, the bulk of the E-Rate benefit comes in Q3 and beyond because the direct reimbursement for the purchases is on the (inaudible) for products made after July 1. People are eligible, able to buy in Q2 if they use their own money and later get reimbursed, so typically a little bit of lift in Q2. But it's mostly in the back half of the year. And it can continue on into the next year even.

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Operator [8]

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The next question will come from Chase Bunnell with Dougherty & Company.

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Chase Bunnell, Dougherty & Co., - Associate Analyst [9]

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So you've launched a lot of new products recently in the last 12 months. Can you talk a little bit about the number of deals you've closed directly related to products? Or what kind of traction you're seeing with new products?

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [10]

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Yes, I think if you look at the most successful -- probably the strongest reaction we've seen so far is on the AX portfolio. As we said in the first quarter, it was -- in our first full quarter it was 15% of our Wi-Fi shipment. So that's well received and I rattled off significant large enterprises that have purchased that product. So very pleased with the results of that, very pleased, universal enthusiasm about all the cloud innovations that we're delivering, things like Client 360 and Network 360 being well received.

A3 is probably the more interesting wildcard, that's a business starting from scratch, completely new standalone security business, high degrees of interest. The business is still is not material yet but it is growing with a significant growth in the quarter, mentioned a 6-figure win at a large Canadian customer. That's 6 figures of just A3 revenue and that's pretty much -- that's pure software product on a percent margin business. So in general, we're very encouraged by all that. Probably more importantly is there is a halo effect that we're seeing that customers and partners are seeing the pace of innovation and they're realizing that we're back to being the innovator of the historic where we have been and seeing things. We did a -- just a seminar -- a little webinar over the last couple of weeks and 5,000 people signed up to it. A year or 2 ago, we used to have 1,500 people sign up to it. So I think it's that kind of thing that's -- over time that will pay off from the halo effect as well as the acceptance of the products directly by customers.

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Chase Bunnell, Dougherty & Co., - Associate Analyst [11]

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Awesome. That's great. And One more is so you said that you've had some good growth in your non-K-12 business. What portion of that is healthcare and retail? And like how -- what is the growth from that kind of driving, is it all from the new products or are you getting better traction with your sales team from -- or is it kind of a combination of all of that?

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [12]

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Yes. I think it's a combination of all. The health and retail continue to be pretty significant portion of our business and they actually bolstered up pretty sharply in Q4, in quickly kind of a year-over-year growth rates and kind of double-digit growth in both health and retail. So they are material contributors they're generally in that 15% to 20% range of the total business in that and then most of the rest in other general enterprise. European growth, we highlighted, that's a great indicator of the business without the K-12 headwind. You've seen double-digit growth for the year in Europe and 3 out of the last 4 quarters and that's indicative of what's going on outside of the K-12 space.

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Operator [13]

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And that does conclude our question-and-answer session at this time. And I'd like to turn the call back over to David Flynn for any additional or closing remarks.

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David K. Flynn, Aerohive Networks, Inc. - Chairman, President & CEO [14]

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Thank you all for joining us today. We look forward to seeing in upcoming conferences and on the road and good night.

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Operator [15]

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That does conclude our conference for today. Thank you for your participation. You may now disconnect.