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MobileIron Inc (MOBL) Q4 2018 Earnings Conference Call Transcript

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MobileIron Inc  (NASDAQ: MOBL)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the MobileIron Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Erik Bylin. Please go ahead.

Erik Bylin -- Investor Relations

Thank you, operator. Good afternoon and welcome to MobileIron's Fourth Quarter 2018 Financial Results Conference Call. Joining us from the Company are Simon Biddiscombe, CEO and Scott Hill, CFO. The format of the call will be remarks by Simon then Scott will provide details on the financials. We'll then have time for questions. If you have not received a copy of today's press release, please go to MobileIron's Investor Relations website at investors.mobileiron.com. Today's conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding MobileIron's revenue, operating expenses, GAAP and non-GAAP financial metrics, product releases, projections and trends.

All of these forward-looking statements are subject to a number of significant risks, uncertainties and assumptions. Actual results could differ materially from the statements made on this call. Please see the Risk Factors section of our SEC filings. All statements made on this call are made as of today, we assume no obligation and do not currently intend to update any such forward-looking statements. If this call is reviewed after today, the information presented during this call may not be current or accurate with regard to non-GAAP financial metrics, while we believe them to be helpful in understanding MobileIron's financial performance. They are not meant to be considered in isolation or as a substitute for comparable GAAP metrics. They should be only read in conjunction with MobileIron's consolidated financial statements prepared in accordance with GAAP. Reconciliation of the non-GAAP financial metrics to the GAAP metrics can be found in our press release and on the Investor Relations page of our website. Unless, otherwise stated, results shared today will be non-GAAP. At this time, I would now like to turn the call over to Simon. Please go ahead.

Simon Biddiscombe -- President, Chief Executive Officer

Thank you, Eric, and good afternoon. In my remarks today, I will provide a brief commentary on our fourth quarter financial performance, look back on our 2018 accomplishments and share some highlights on what to expect for MobileIron in 2019. Starting with our financial performance. In Q4, we grew recurring revenue by 21% year-over-year, a testament to our progress toward a cloud and subscription model. We outperformed on billings once again delivering $69.5 million which is growth of more than 15% well above guidance with particularly strong execution in our European business.

Our new products Access and Threat Defense continued their consistent upwards trajectory and contributed $7.5 million in billings. We also set another operating profit record to finish the year. As we close out 2018, I'd like to look back on my first full year as CEO. A year ago, I spoke about our strategy to reignite growth at MobileIron. We came into 2018 with an industry-leading UEM solution that receives virtually every accolade available to it, has achieved the most stringent security certifications and has been sold into more than 17,000 customers. Our new products, Threat Defense and Access are perfect complements to UEM and ranked out the management and security suite that remains unparalleled in the market today.

Entering 2018. We felt confident that selling these solutions into our installed base would be a significant driver of growth and to bolster our go-to-market strategy late in 2017, we hired a Head of Sales who chartered a path and delivered on improved sales execution. Our strategy was to focus on our immediate opportunities by coupling improved sales execution with our exciting new products and a massive installed base. I'm very proud of the progress we made. In 2018, we continued to strengthen our team, build ecosystem partnerships and secure the accolades that prove we have the best mobile security suite.

As you know, we added world-class leaders to the engineering and finance organizations earlier in the year, who have already driven key initiatives to accelerate our transition to a cloud and subscription model. I'm excited to share that we filled too more important positions in the last two months. Brian Foster joined us as SVP of product management. Brian brings more than three decades of experience, leading high performance teams delivering cyber security innovation at numerous security pioneers, including Symantec and McAfee and Rhonda Shantz has joined us as CMO with over 25 years experience in leadership roles at Centrify, Rocket Fuel and Symantec. In 2018, we also added Blue Chip ecosystem partnerships with Google and McAfee and deepened our relationship with Lenovo. We closed out the year again. We are named a leader in the Forrester Wave Unified Endpoint Management Report garnering the highest possible score in application security, product vision and roadmap execution. This completed another hat trick of UEM leadership status among the big three industry research firms.

Our strong execution laid the foundation for the financial accomplishments we achieved in 2018. Most importantly, we reversed the decline in our growth rates. The growth rates of our three key metrics; revenue, recurring revenue and billings improved in each of the final three quarters of the year. We finished the year with recurring revenue growth above 20% for the first time in nine quarters, we did this while maintaining the operational discipline, you have come to expect of our team and drove our operating margin, up by 7 percentage points in 2018. And with that, I'd like to tell you about some notable customer wins in the most recent quarter. I'm thrilled to share that we closed a large global win with Volvo, the Swedish luxury vehicle company. With a workforce, almost 40,000 strong, Volvo chose us for our ability to provide a high security solution across multiple operating systems including Android, iOS and macOS, a brand known globally for safety, Volvo chose to add Access and Threat Defense to the UEM installation and we're honored to have earned Volvo's trust to keep their mobile and macOS operating environments safe. In the fourth quarter, MobileIron added another win in the financial sector with BBVA, a multinational Spanish banking group founded in 1857 with more than 125,000 employees.

We closed the deal for our UEM product with one of the world's most renowned and award-winning banks. With our one of a kind security solutions, MobileIron is thrilled to help BBVA manage and secure their corporate mobile devices. During the quarter, we won a deal with C.H. Robinson, a Fortune 200 provider of transportation services and logistics across the globe. C.H. Robinson is accelerating global trade seamlessly deliver the products that drive the world's economy and MobileIron is proud, we will harness our entire security suite to manage their mobile devices. Founded more than a century ago, C.H. Robinson understands the power of technology to transform global commerce and is a longtime UEM customer. Saw the need for accessing threat percents (ph) to round out their security profile.

We're honored to have earned their trust to secure their global supply chain services.

Entering 2019, I can say with confidence that MobileIron has its brightest outlook since becoming a public company. Our new leadership is reinvigorating the culture throughout the organization, lifting energy and productivity. I am seeing better alignment across teams in our execution than I have ever seen since joining MobileIron. MobileIron is perfectly positioned to capitalize on the shifting security paradigm of zero trust. Modern IT environments are being driven by a change in how people work and the security architecture must respond. IT organizations used to have a lockdown corporate issued PC accessing company data over company networks.

Now they have to guard against employees using their own phones and tablets over unsecured public networks, to access company data in third party cloud services. The IT environment has evolved into a zero trust state. Five years ago, this was not even a security afterthought and today, MobileIron has the most comprehensive security suite to address this new threat landscape. MobileIron's UEM products are the backbone for zero trust solution, providing the management security apps and connectivity a user needs, coupled of UEM, MobileIron's Threat Defense not only detects but remediates device, network and application threats, a capability unique in the market.

MobileIron Access establishes a secure link between the device and cloud services, such that only trusted users on trusted devices using trusted applications can have access to corporate data in cloud services. Taken together, these capabilities address zero trust environment, in a way that is unparalleled in the market. Only MobileIron has the building blocks necessary to create a zone of trust around data and cloud services in a multi-cloud, multi-OS environment that starts at the endpoint and extends across networks to the cloud.

We entered 2019 with durable momentum. We will continue a healthy expansion within our vast UEM customer base, as well as grow share by winning new accounts. We've just begun to scratch the surface in our efforts to cross sell our new products into our installed base. And are confident new products will continue the healthy growth through 2019. We have a strong team and will continue to improve operational and financial performance this year. I'd like to thank our employees, customers and shareholders for their continued support.

And now, I'll hand the call to Scott to discuss our financials and outlook in detail. Scott?

Scott Hill -- Chief Financial Officer

Thank you, Simon, and good afternoon. Today, we will be discussing non-GAAP financial measures, unless otherwise noted. Our press release, Form 8-K and website investors.mobileiron.com provide a reconciliation of GAAP to non-GAAP financial results. In the fourth quarter, we again showed how strengthening execution is resulting in improved financial performance. We delivered 21% recurring revenue growth and record profit, our billings in Q4 were $69.5 million, well above the high end of our guidance and up 15% year-over-year, as we delivered $7.5 million in billings across our new products, Access and Threat Defense.

Revenue in the fourth quarter was a record $54.1 million, up 10% year-over-year. Our revenue breakdown shows that we are continuing our transition to a recurring revenue model as customers continue to show a strong preference for our cloud and subscription solutions. Cloud revenue was $14.5 million, up 37% year-over-year and software support and services revenue was $21.6 million, up 7% from a year ago. License revenue was $18 million down 2% year-over-year. Revenue from recurring sources in Q4 was $40.8 million, up 21% year-over-year, annualized this recurring revenue is $163 million, our renewal rate remains about 90%.

Gross margin in the fourth quarter was 83%, 2 points below guidance, primarily due to one large customer purchasing a private cloud installation of mobile threat, which increased the cost of revenue associated with license. Operating expenses were $42.5 million, slightly better than our guidance and flat from the prior year. MobileIron delivered record operating income of $2.4 million, a $1.8 million improvement over last year, we reported net income of $2.7 million or $0.03 per share.

For the full year 2018, total billings were $223.3 million, an increase of 11% over the prior year and above our original full-year guidance. Revenue was $193.2 million, up 7% year-over-year, while recurring revenue was $151.1 million, up 18% year-over-year. We ended the year with a gross margin of 84.6%, we improved our operating margin by 7 percentage points for the full year as a result of continued growth coupled with disciplined investment.

Moving to the balance sheet, we ended the quarter with $105.6 million in cash and short-term investments and continue to have no debt. In the fourth quarter, cash generated by operations was $7.1 million, we spent $3.8 million repurchasing shares in the quarter, for the full year, we added $13 million to our cash and short-term investment balance. Our DSOs in the fourth quarter were 79 days compared to 78 days in the third quarter. In general, we expect our DSOs to remain in the 70 day to 80 day range. Unearned revenue was $106 million at the end of December, up 37% from $77 million a year ago. Customer arrangements with termination rights were $19.4 million at the end of December, roughly flat from a year ago.

As Simon noted, with the new leadership team in place, we are making substantive changes as to how we run MobileIron. As we drove improving performance during 2018, we have seen our customers increasingly demand subscription models and cloud-based deployments. At MobileIron, we are eager to embrace this shift because the lifetime value of a subscription customer is higher and subscription revenue streams are more predictable.

Given that, in 2019, we will accelerate our transition to a subscription model and away from one-time revenue, primarily in the form of perpetual licenses. As a result of these changes and to more closely align our metrics with other software companies, we are emphasizing recurring revenue as a business metric and de-emphasizing billings. We are introducing annual recurring revenue or ARR as a metric and define it as the annual value of all recurring revenue related to the contracts in place at the end of the quarter, as is common among subscription software companies.

While the growth rates of ARR and the recurring revenue, we have shared historically are highly correlated. ARR is a spot measurement at the end of the period, while recurring revenue is what we recognized during the quarter, we believe moving to the standard definition of ARR helps investors more clearly understand the true rate of growth of the business. At the end of 2018, our ARR was $162.6 million, up 20% from the prior year-end. Given our change of emphasis in 2019, we will no longer report or guide billings.

Now, I will share our guidance. For the first quarter of 2019, our guidance is as follows; we are projecting a revenue range of $46 million to $49 million for growth of 5% to 12% year-over-year, we expect non-GAAP gross margins to be approximately 82%, we expect non-GAAP operating expenses to be between $45 million and $46 million.

For the full year 2019, our guidance is as follows. We expect revenue to be in the range of $205 million and $215 million for a growth of 6% to 11% and seasonality should be similar to 2018. We expect ARR to grow by approximately 20% by the year end. We expect to generate non-GAAP operating profits.

I would like to share a couple of assumptions that we have built into the 2019 plan. We expect gross margins to come down by a couple of points, due to the continued shift in revenue mix from license to cloud and the expected growth of Threat Defense revenue which carries a lower gross margin. We expect that operating expenses from sales and marketing and R&D will grow slightly as we pursue the opportunities ahead of us.

And with that, we can open up the lines for questions.

Questions and Answers:

Operator

Thank you.(Operator Instructions) Your first question comes from the line of Michael Turits from Raymond James. Your line is open.

Robert Majek -- Raymond James -- Analyst

Good afternoon. This is actually Robert Majek on for Michael today.

Simon Biddiscombe -- President, Chief Executive Officer

Hi Robert. How are you doing?

Robert Majek -- Raymond James -- Analyst

Doing great. I was wondering if there are any metrics you could give us to help us understand the efficiency of your sales and marking spend perhaps a sense of the payback period or how you think about the lifetime value relative to the customer acquisition costs?

Scott Hill -- Chief Financial Officer

So, yes, there are some metrics that we track internally around cost of acquisition and kind of the ratio of new business relative to what we are investing in go-to-market in general. I think from an external perspective, you'll be able to see the increase in ARR that we have and how we we're performing in that regard relative to the total sales and marketing investment.

Simon Biddiscombe -- President, Chief Executive Officer

I think the -- the add to that, Robert would be, we've continued to see improving execution as it relates to the sales organization, especially in Europe, as I talked about on the call and increasingly so here in North America, at this point in time as well. And the utility, we're able to extract from the dollar spend associated with sales and marketing organization continues to improve on a year-to-year basis, that's one of those numbers that I am never satisfied with, obviously, but we will continue to drive improvement as we move through 2019. And Scott said in his prepared remarks, ARR is what we're focused on at this point in time. We are making sure that the sales and marketing spend is highly aligned to driving incremental ARRs the priorities -- so hopefully that helps, we can follow up with more detail after the call.

Robert Majek -- Raymond James -- Analyst

Thanks. And then I appreciate you're giving us the annual ARR guide. But can you just give us some sense of how we should still think about billings for Q1 and for the full year. And additionally in the quarter, what was the contribution from mobile Threat Defense and Access.

Scott Hill -- Chief Financial Officer

So from a billing's perspective, where -- there is a reason we are not guiding it, so we rather not guide that and give you guidance around that. What was the second part of your question?

Robert Majek -- Raymond James -- Analyst

Just the contribution -- mobile.

Simon Biddiscombe -- President, Chief Executive Officer

Yeah. So $7.5 million, we said in the prepared remarks.

Scott Hill -- Chief Financial Officer

In billings. Yes. And remember that those products are cloud in nature. Therefore, roundable revenue, so it doesn't contribute much to revenue yet.

Simon Biddiscombe -- President, Chief Executive Officer

I want to follow up on your billings question little if I could, Robert and make sure you understand exactly what's driving this. Okay. So if you think about historically why we reported billings, it's because it was highly aligned how customers were buying product. So if you think about the -- over the course of the life of the Company. Perpetual licenses were the original way that product was sold and billings was a direct connect in that regard to what were seeing in terms perpetual revenue streams. Okay.

As customers have increasingly demanded subscription models and cloud deployments as well, what we've seen is that we are refocusing the business to make sure that we're managing toward achieving the objectives those customers are setting forth at this point in time and moving away from a billings based metric, given that it is far less connected to the reality of a revenue metric in a subscription model than it is in a perpetual model, right, so that's why we're pushing you and managing our business internally to an ARR based regime as opposed to a billings based regime and the reasons are fairly obvious. Number one is subscription agreements typically have a much higher lifetime value than the traditional license models do. They drive increased predictability in the business and they also bring us in line with how other subscription software companies report. And in the long run, we think it drives better shareholder value, right?

So -- so that's underneath the covers, why are we making these changes? It's primarily driven by how customers are buying product today and the shift away from perpetual licenses toward subscription agreements.

So we're not going to give you billings, there are ways you can back into it, but we're not going to actually guide it and we're not going to get -- report it on a quarterly basis.

Robert Majek -- Raymond James -- Analyst

Thanks, Simon. That makes sense. And then just perhaps maybe lastly for me, how did you do with federal in the quarter and then if the government shuts down again will have any impact on your Q1 results relative to these (inaudible) built into your guide.

Simon Biddiscombe -- President, Chief Executive Officer

Yeah. So the fed business last quarter was pretty much in line with our expectations. I'm actually less concerned about the current period -- I am more -- meaning Q1. I'm more concerned about what we are seeing as it relates to Q2 and the uncertainties are obviously concerning. The fed market continues to be important to us.

The significant opportunity that we have to go prosecute in that market. But my sense is that with the uncertainty around the potential for another shutdown, with some of the projects that we're focused on, that would have impacted Q2, have a little bit of -- may have a little delay associated with them at this point in time. So that's how the Fed team is characterized in the challenges they see today.

Robert Majek -- Raymond James -- Analyst

Thank you. Appreciate it..

Simon Biddiscombe -- President, Chief Executive Officer

Okay, thanks.

Operator

Your next question comes from the line of Meta Marshall from Morgan Stanley, your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks. I just wanted to kind of ask about on the new products, you mentioned targeting the existing installed base. And just to get a sense of kind of penetration of new products within that installed base and kind of where you would expect to eventually be able to get. And then maybe if for the year, we could just get a growth rate on the UEM user base would be helpful.

Scott Hill -- Chief Financial Officer

Okay. This is Scott. Let me tackle a couple of those things. First off, on the, on the new products, right now. We kind of estimate or we measure our progress in cross selling, up selling at about little less than 5% of the installed base today and we expect that will advance. We -- every customer should be able to use both of those products.

So we expect that that could advance dramatically. And so over the course of next year, we expect to get into the teens in terms of percentage. Your second question was around the growth rate of the installed base and we think that's in the high single digits to low teens. So right around 10%.

Meta Marshall -- Morgan Stanley -- Analyst

Great. And then, understanding that kind of customers are gradually kind of asking to move more to subscription. But are there any incentives to kind of transition them quicker or to move away from perpetual or the ones who -- it will just kind of be a slow bleed off. That's it from me.

Simon Biddiscombe -- President, Chief Executive Officer

Yeah that's going to be. Yeah. So this is Simon. No, it will be a slow bleed off. There is nothing we are doing that forces or encourages existing customers who are on a either on-prem or subscription -- sorry, on-prem or cloud model to move from perpetual to subscription.

Okay. So we are not forcing anything. We know that ultimately we need to be able to deliver the solution to the customer in whichever license model they wish to buy it and more or more of it is subscription to-date obviously than it has been at any point in the past, but there's nothing in 2019, where we're trying to jam a certain outcome into the customer base. We're going to let customers continue to buy product in the way they wish to buy it.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thanks, guys.

Simon Biddiscombe -- President, Chief Executive Officer

Thanks Meta.

Operator

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks for my question. Simon, can I see on that subject -- the -- as we think about like the growth outlook that you gave us, obviously, the reports number is below the ARR growth et cetera. If I think about -- do I think about this correctly that this is all driven by less licenses and more subscription as we kind of -- at this plays out and hence at the moment what we're seeing is growth is -- revenue growth is depressed. But ARR is the right time for the future growth rates to come. Is that the right way to think about it? And I had a follow up.

Scott Hill -- Chief Financial Officer

Yes, absolutely. So we have kind of two competing trends within the business, the growth in ARR and recurring revenue, which we've highlighted in the past and now forecasting with ARR. And then the decline in perpetual license, primarily. Those are offsetting and as perpetual license gets smaller, you will clearly see the growth of the recurring revenue going forward.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Okay, that makes a lot of sense.

Simon Biddiscombe -- President, Chief Executive Officer

Raimo, one thing I want to add to that Raimo is that no part of what we are characterizing in terms of the growth that we expect in ARR is derived from a transition of existing customers from an on-prem platform to a subscription model or anything like that. From an on-prem platform to cloud platform or from a traditional maintenance -- license and maintenance model to subscription.

Okay. It's about new customers buying in that behavior. So please don't think that we're just flipping the existing customer base. That's not the case, substantially all of the growth comes from new deployments of our technology.

Raimo Lenschow -- Barclays -- Analyst

Okay, perfect. Okay that makes sense. Okay, thanks. And then I was wondering, could you just double click a little bit on the competitive landscape that you are seeing, they obviously like look, all the vendors are talking like a good gain, Microsoft is talking about like coming up from the low end and the other guys, can you just talk about what you see in the market in terms of who is kind of the vendor. Do you see more and who is kind of -- do you see less and are you kind of -- what's -- how do you kind of sell against those. Thank you.

Simon Biddiscombe -- President, Chief Executive Officer

Sure. So I think, I'll start with Microsoft, and then I'll talk about VMware. Microsoft really hasn't changed dramatically in terms of what we see from a competitive perspective. We continue to win when security matters and the government grade security that we have in place and the various certifications are what drives our highly regulated customers particularly to choose our technology, and don't forget, Microsoft is not part of the Gartner high security use case analysis. Right. They got thrown out of that.

So for us, it's about making sure that we have the best platform that offers the greatest level of security and then also making sure that we often have multi-stack, multicloud, multi app, multi OS environment that is not necessarily something that Microsoft wants to enable customers with. Make no mistake, they want you locked into a Microsoft stack, right.

And of course, our deployments are typically far more scalable or have been far more scalable than the Microsoft deployments have been over time. As it relates to VMware, VMware is changing, right. So their model is very different. What they are ultimately trying to sell you on is Workspace ONE and not the AirWatch product as we knew it.

One thing we do know is that based on third-party data, their customers are not thrilled with them at this point in time and they're seeing some erosion in customer satisfaction scores and so on. This level of support that VMware is offering customers is not where it was. So we are seeing a little bit of a change in the competitive dynamic against VMware that's working in our favor, but that, it's really down to those two.

Now, it's us and Microsoft and VMware, who are essentially the participants in substantially every bake off at this point.

Raimo Lenschow -- Barclays -- Analyst

Perfect, well then. Thank you.

Simon Biddiscombe -- President, Chief Executive Officer

Thanks. Thanks, Raimo

Operator

Your next question comes from the line of Robert Breza from Northland Capital Markets, your line is open.

Robert Breza -- Northland Capital Markets -- Analyst

Hi, thanks for taking my question. Maybe one for Scott and one for Simon. Scott, as you are talking to ARR, how should we think about the seasonality of ARR versus billings as we go through our 2019 modeling exercise?

Scott Hill -- Chief Financial Officer

Yeah, so the seasonality of ARR is with -- you can think about it as an accelerating growth rate as we go through the course of the year which really kind of mirrors what we've seen in billings. The second half is generally stronger in that regard. So with ARR being a measurement at a point in time at the end of the period. It does capture all the activity. Unlike recurring revenue, which would have only captured a portion of that's recognized in the period. So there will be a relationship between the two, but ARR obviously is an annualized number.

Simon Biddiscombe -- President, Chief Executive Officer

And as Scott said in this prepared remarks, Rob, usually (ph) expecting somewhere close to normal seasonality as it relates to revenue over the course of the year. Right. So you take what you've got for the current quarter guide, and then if you just build out your model at roughly 8%, 9%, you should end up at roughly the midpoint of the guide.

Robert Breza -- Northland Capital Markets -- Analyst

Got you. And then, Simon, more for you. As you think about past partnership announcements with Google, also wanted to touch on the BlackBerry initiatives that were in place. Can you kind of give us an update on where you are from a partnership perspective with Google, and how we should be thinking about the BlackBerry replacement cycle?

Scott Hill -- Chief Financial Officer

Sure. So let's do the -- let's do the three big partners, OK. So let's do Lenovo, Google and McAfee. And we've talked -- I talked about two of them in my prepared remarks, obviously. On Lenovo, sales enablement and the ramp continues to develop. We've actually closed our first deals in Q4, with the Lenovo partnership, and the product teams continue to move forward with different -- its products, and the go-to-market options continue to evolve as well. So we've closed our first deals based on the back of the Lenovo relationship in Q4. And as -- if you remember, Lenovo, is our kind of principal UEM right to market at this point in time.

In terms of Google, we've signed multiple POCs, in Q4. And the interest certainly continues to grow, relative to the marketplace technologies that we and Google are developing at this point in time. And the goal remains to sign up large operator customers as well over the course of the next 90 days or so. And we're really close -- really close to being able to pull that off at this point in time. So I am optimistic the way we are with Google.

And then MacAfee, MacAfee we're actually, it's primarily a field referral related strategy at this point in time, as you know. We actually had the first sets of referrals that came through in Q4. And they will actually close here in Q1, in terms of been contributors to the revenues in the business and as you know, we kind of fill a hole -- they've gotten their portfolio at this point in time from a technology perspective.

So, of course, Lenovo, Google and MacAfee, this continuing to progress. As it relates to BlackBerry. I mean, you -- we are confident in our ability to win against BlackBerry. There is still a BlackBerry installed base in the federal government, in regulated industries, financial services, and so on and we continue to see opportunities to replace BlackBerry technology on a day-to-day basis, and that hasn't changed. That hasn't changed at any point over the course of the last year, if you will, regardless of what it was that BlackBerry was actually selling.

So our ability to compete against BlackBerry with the technology set that we've got in the market at this point in time is extraordinarily compelling and I am excited about the prospects that continue to exist there.

Robert Breza -- Northland Capital Markets -- Analyst

Sounds great. Thank you very much.

Operator

Your next question comes from the line of Scott Searle from ROTH Capital, your line is open.

Scott Searle -- ROTH Capital -- Analyst

Hey, good afternoon. Thanks for taking my question.

Nice job on the recurring revenue front. Scott, if I could just starting on some of the commentary around gross margins and OpEx. I want to make sure and clarify, gross margin pressure, largely due to mix more cloud, but also perpetual licenses on the Mobile Threat side. And it sounds like that continues into the first quarter. Is that, is that going to be a volatile number, as we look out over the course of 2019, or do you expect gross margins to trend up a little bit seasonally over the course of the year. And also on the OpEx front, I thought you said non-GAAP OpEx in the first quarter of $45 million to $46 million to step up from the fourth quarter. There are some seasonal payroll issues, and otherwise in there. Is that the baseline to build off of going forward or is that a little more seasonally front-end loaded, how should we think about that over the course of the year and then I had some follow-ups.

Scott Hill -- Chief Financial Officer

Sure. So let me tackle the first -- the first part on the gross margin. So the gross margin pressure, as you mentioned it, mix shift, and the increase in our Mobile Threat product which has the third party technology which, and which becomes a larger component of our COGS. So that will continue because that product is a routable, is cloud-based product and a routable recognition. The gross margin and the COGS associated with that are also routable.

So it won't be very volatile. It will be smooth and growing as the revenue grows over the course of the year. So that means that the gross margin should be relatively, really relatively stable. It will fluctuate based on revenue. To the extent we still have perpetual license revenue that is volatile, you'll see the margin move up and down because of the top line, but the spending side shouldn't be as much in that -- in that regard. On an OpEx perspective, Q1 is, is a heavy quarter for us, not just from a payroll taxes perspective, but also because of kind of marketing and other events that we have that take place in the quarter. So I would say, that is, it's a little bit high relative to using that as a baseline for the year.

Scott Searle -- ROTH Capital -- Analyst

Got you. And on the, the Access and the more preferred front. You're moving away from billings, and been growing basically about $2 million (ph) a quarter. Would you be giving us some color from recurring revenue standpoint in terms of how that ramps up. And I thought you said, came to about 15% penetration into the base. I'm not sure if I heard a timeline associated with that. So are we kind of implying exiting 2019 at 10% to 15% at least of the recurring mix, coming from Mobile Threat, and Access.

Scott Hill -- Chief Financial Officer

Yeah, I think going forward, we're not going to really be focused on the mix, from a product perspective in terms of how we're going to -- to present the financials.

Scott Searle -- ROTH Capital -- Analyst

Okay.

Simon Biddiscombe -- President, Chief Executive Officer

But I do think. I'll add to that, Scott, as I look at my expectation for the ARR that will be derived from the new products Access and Threat as a percentage of total ARR at the end of the year, I think it would be north of 10%. Absolutely.

Scott Searle -- ROTH Capital -- Analyst

Okay, and one last one if I could. On the UEM side, you talked about Volvo. I'm just wondering is that a part of the dialog now for all conversations that are going on with customers that that's a component. I'm just kind of curious how that is kind of filtering into the equation right now. And I'm not sure if I heard you talk about zero trust on the call. I'm just kind of curious what your latest thoughts are in terms of how that evolves and how you guys are positioned? Thanks.

Simon Biddiscombe -- President, Chief Executive Officer

Yeah. So on the UEM side at Volvo specifically what we talked about in my prepared remarks is macOS, right. So, very pleased with what we've got going with macOS at this point in time. On the Windows 10 side, it's just much slower. It's much slower adoption, across the industry of modern management of Windows 10 devices and tremendous amount of it is left with what you might characterize is the legacy management technologies. And I think, it's going to be that way for many years to come. But macOS is certainly something where we're focused and we see significant opportunity, as we move through 2019. As it relates to zero trust. Yeah, I did talk about zero trust in my prepared remarks, and we are excited about the opportunity that is ahead of us associated with zero trust and the reason is, when you think about the way the different people trying to solve the challenge, whether it's our approach, which is obviously device-based approach or whether it's a gateway-based approach kind of a network-based approach or whether it's an identity-based approach. We continue to believe that we've got more of the building blocks necessary for success than any other participant in the market. And when you think about what is necessary for success, it's ability to provision any device for any user, then it's the ability to grant access based on context, then it's the ability to protect data, is it in rest and in motion and then it's the ability to enforce security policies. And if you look at the stack of technologies that we have, UEM, Access, what we can do with Threat, and then what we can do moving forward with other technologies that are obviously in development.

We think, we're going to have an incredibly robust offering for the zero trust market that is beyond anything that a gateway approach could have at this point, or anything an identity provider could have at this point in time. So I'm very excited about how our core technologies are coming together to solve the CIO's challenge associated with zero trust.

Scott Searle -- ROTH Capital -- Analyst

Okay, thank you.

Simon Biddiscombe -- President, Chief Executive Officer

Thanks Scott.

Operator

There are no further questions at this time. Simon, I turn the call back over to you.

Simon Biddiscombe -- President, Chief Executive Officer

That's great, thanks very much for your participation, this afternoon. And we look forward to updating you on our Q1 performance, at some point in late April. Thanks again.

Bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 39 minutes

Call participants:

Erik Bylin -- Investor Relations

Simon Biddiscombe -- President, Chief Executive Officer

Scott Hill -- Chief Financial Officer

Robert Majek -- Raymond James -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Robert Breza -- Northland Capital Markets -- Analyst

Scott Searle -- ROTH Capital -- Analyst

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