MobileIron, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

Welcome to the MobileIron First Quarter Fiscal Year 2019 Financial Results Conference Call. As a remainder, 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:]

Thank you, Christine. Good afternoon and welcome to MobileIron's first quarter 2019 financial results conference call. Joining us from the Company are Simon Biddiscombe, CEO; and Scott Hill, CFO. The format of the call will be

[Simon Biddiscombe:]

Thank you, Erik, and good afternoon. In my remarks today, I will provide a brief commentary on our first quarter financial performance, give a preview of our forthcoming innovation and then share some recent successes. First, let me review of financial highlights. In Q1 we saw continued robust growth in ARR up 18% year-over-year. I'm pleased to see the organizational changes we made coming into the year drive greater focus on building a recurring revenue base and increased traction with cloud and subscription solutions. We delivered $48.1 million of revenue, up 10% from last year, which gives us two quarters in a row of double digit revenue growth for the first time in two years. This is another strong sign we have passed an inflection point on the path to accelerating our growth. Last quarter, I explained how 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 PCs 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. Our mobile centric approach to Zero Trust enables four critical capabilities using existing MobileIron technologies; firstly the ability to provision any device per user with the appropriate apps and policies using MobileIron UEM. Second, the ability to grant real time access to cloud services based on full context of the user, the app, location, time, et cetera, using MobileIron Access. Third, the ability to protect data addressed and in motion by containerizing and eliminating threats in the device using MobileIron and UEM and MobileIron Threat Defense together and finally, the ability to enforce security policies using all of our products. However, we can do more with our footprint of capabilities on the endpoint combined with elegant engineering we can bolster our security value to IT, while providing a significantly improved experience for the user. With the mobile devices unique ability to authenticate its user through biometrics, the mobile device can become the user's identity and access to the enterprise. Compared to username and password this is not only an infinitely more secure means to validate the user, but it's effortless. Passwords frustrate user's, they've been proven time and again to be the weakest link in the IT chain of security and therefore an extremely common entry point for cyber-attacks. By eliminating passwords, the threat of data breaches from easily compromised credentials completely disappears. This is the beauty of MobileIron's revolutionary Zero sign-on solution. With our UEM footprint on the endpoint, we can leverage a user's biometrics from a mobile device to enable completely password less authentication, while using Zero Trust security. At our User Conference next month, we will unveil how we are going to make mobile devices your identity and access for the enterprise. With mobile as your ID we'll be able to provide password less access to applications from any device, mobile, PC or Macs. This will remove the need for all passwords across all IT endpoints and services. Alongside the innovation that keeps MobileIron the thought leader in security, we continue our strong execution of the engineering and customer facing imperatives that keep us revered with our customers. In Q1 we became the first UEM vendor to be validated by the US government's Common Criteria MDM Protection Profile Version 3. In an industry accolade, in a book Gartner named us Customers' Choice for the UEM market, which means we were voted by customers as the best unified endpoint management tool. This is the second year in a row, we receive this recognition and we're the only leader in the Gartner UEM Magic Quadrant to achieve this. And for the second year in a row, we attained certification from the prestigious Service Capability and Performance Standards for our customer support. We continue to be the only UEM vendor to achieve this certification. When I say MobileIron has the best product, it is because the team MobileIron execute so well in delivering a world class product and service for our customers that we are regularly the only UEM vendor to receive these types of accolades. And with that, I'd like to tell you about some notable customer wins in the most recent quarter. For Continental Automotive, one of Europe's largest manufacturers of tiers, cars, trucks and agricultural vehicles, protection of their workforce is paramount. Founded in 1871, clearly Continental is no stranger to change in times and is committed to addressing a Zero Trust IT environment. With locations across six continents and customers and users in 60 countries, this global company, 240,000 employees strong to enter MobileIron's added peace of mind and securing their employees mobile devices, email and applications. I'm honored by their continued trust in MobileIron and pleased that Continental shares our commitment to providing the best solution for each and every one of their customers and markets. I'm excited to share that MobileIron's reach in the financial markets continues to deepen. During the quarter we won business with a leading European Bank, one of the world's most long standing and innovative banks with well over 100,000 employees. With millions of customers across both their retail and corporate banking divisions, this customer takes the security of their clients seriously, so I'm not surprised they've chosen MobileIron. With this win we have displaced one of our well known competitors through the strength of our core UEM solution, coupled with our Integrated Threat Defense offering. Adapt, adjusting to change, this large bank has clearly chosen MobileIron because we are the best security choice for changing threat environment. MobileIron's success with new products continues with an important win with a large Italian Oil and Gas Company. This large multinational company's dedication to creating value throughout their vast operations has propelled them to such levels of success. I'm honored that they have chosen to add our MTD solution to further secure this goal. Our shared focus on innovation, efficiency and operational excellence aligns perfectly as they continue, as they can rest assured in security of their mobile devices of their global workforce. And I'm thrilled to share that we continue to strengthen our team in 2019, with the addition of Leslie Stretch to MobileIron's Board of Directors. Leslie is currently the CEO of Medallia and was previously the CEO of Callidus. His experience driving SAS and cloud transitions will further strengthen MobileIron's position in the market and create long-term value for the company and for our investors. And with that, I'll turn it over to Scott. Scott?

[Scott Hill:]

Thank you, Simon and good afternoon. Today we will discuss non-GAAP financial measures unless otherwise noted. Our press release, Form 8-K and website investors.mobileiron.com, providing a reconciliation of GAAP to non-GAAP financial results. Revenue in the first quarter was $48.1 million, up 10% year-over-year, our second quarter in a row of double digit revenue growth. As we have shared customers are increasingly demanding our subscription solutions and we are eager to embrace this trend as it delivers a higher lifetime value and greater revenue predictability for MobileIron. Last quarter we introduced ARR as a metric with the standard software definition as shared in our Q4 press release. We ended the first quarter with ARR of $167.2 million, up 18% year-over-year and on plan to achieve our guidance of 20% growth for the year. Looking into the composition of ARR highlights how well our subscription business is performing. Our subscription ARR was $100.4 million, up 29% year-over-year and our maintenance ARR was $66.8 million, up 3% from last year. Our renewal rate remains about 90%. While Mobile Iron is focused on driving recurring revenue growth, our history as a perpetual business has created a large maintenance stream. As our customers look to adopt cloud and subscription models, we have an opportunity to move them from maintenance to subscription. We are eager to help them through this conversion, but to date only about 5% of our maintenance seats have undertaken this transition. In Q1 we are again very pleased with the results delivered by our Access and Threat Defense products. Over the last year, these products have been ramping very well as we have sold them into our large installed base and they are solid contributors to the growth of cloud ARR. These products provide considerable differentiation versus our competitors and increase our stickiness with our customers. We believe Threat Defense could be purchased by all of our customers and Access could be purchased by roughly 80% of our installed base. That said the penetration of these products is in the mid-single digit percentage of our large UEM installed base, so we have a considerable runway to execute on this growth driver. In addition, I would like to point out that we are seeing the effect of improvements in the North American sales organization and its revenue growth in Q1 is the highest it has been in five quarters. Gross margin in the first quarter was 82% and operating expenses were $45.5 million, both right on guidance. MobileIron reported an operating loss of $6.2 million or $0.06 per share. Moving to the balance sheet, we ended the quarter with $107 million in cash and short-term investments and have no debt. In the first quarter cash generated by operations was $7.8 million. We spent $3.6 million repurchasing shares in the quarter with an average price of $4.87. Unearned revenue was $102.9 million at the end of March, up 27% from $80.9 million a year ago. Now, I will share our guidance. For the second quarter of 2019, our guidance is as follows. We are projecting a revenue range of $49 million to $52 million or growth of 6% to 13% year-over-year. We expect non-GAAP gross margin to be approximately 82%. We expect non-GAAP operating expenses to be about $46 million. Our full year guidance remains unchanged and is as follows. We expect revenue to be in the range of $205 million to $215 million or growth of 6% to 11%. We expect ARR to grow approximately 20% by year end. We expect to generate non-GAAP operating profit. And with that we can open up the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Scott Searle from ROTH. Your lines open.

[Scott Searle:]

Good afternoon. Nice quarter. Thanks for taking my question. Hey, just to get a little bit more color in terms of the business outlook, the mix, when you're looking at your cloud business into the second quarter and for the year. What are the thoughts in terms of how that progresses? Also perpetual continues to be on a decline. I think Simon in the past you talked about some stabilization on that front. Could you just give us some color on that front? And also, on the US sales, looks like you finally stabilized that. It sounds like this isn't a one quarter anomaly. Can you kind of give us some idea what the outlook might be for that over the course of 2019?

[Scott Hill:]

Yeah, thanks, Scott. Let me step in here on the on the revenue outlook and the revenue trends, so as we've seen the trends over the last few quarters of solid growth in our cloud business and that's continued in Q1 with 37% growth year-over-year. The on-prem subscription business grew 13% year-over-year, the maintenance crews 6% and then the perpetual license declined as it has been 17%. So as we look to the future, we expect those trends to continue because they're obviously fundamental in terms of the drivers from the business and what we're getting from our customers.

[Simon Biddiscombe:]

I think the part that I would reinforce this spot is that as we're seeing this growth in our cloud business and as we're seeing the growth in the subscription business as well. None of that to date is really being driven by customers who are transitioning from our on-prem platform to our cloud platform or from traditional perpetual license and maintenance agreements to subscription agreements as Scott said in his prepared remarks it's probably about 5% and the total installed base that has been through that kind of transition to date. So that opportunity is still all ahead of us. I think most of it actually comes in 2020 and beyond as a lot of work going on right now to help customers on their journey to cloud and to help customers on their journey to subscription as part of that as well. Something's changed dramatically over the course of the last year, two years, there's a much greater propensity even on the part of our European customers today to be demanding cloud solutions. So clearly, we're going to continue to see the cloud solutions line, which includes the new products, don't forget and would also include things like Mac West [ph] are available on cloud platforms continue to grow far better than the other lines in the business at this point. North America, sorry, go ahead, I'm don't know if I answered your question right.

[Scott Searle:]

No, I was just going to yeah, say North America, please and then I had a couple of quick follow ups.

[Simon Biddiscombe:]

So North America I'm actually pleased with the progress we've made. Greg Randolph is our Head of Sales and made some changes across that organization in the fourth quarter. And coming into the year, I was optimistic that the changes were going to benefit us the way that they did. There's still work to be done, make no mistake, we can still do better. And the European business has always been an extraordinarily strong performer for us. We've got to get the North American business performing the way the European business does, but make no mistake, it was a step in the right direction in Q1. And as Scott said in his prepared remarks, that was the best rate of growth we've seen in about five quarters, so certainly the changes that Greg has made to people, the changes he's made to process are certainly beginning to bear the fruits that we expected.

[Scott Searle:]

Great and if I could one clarification and two quick follow ups, Scott, in terms of guidance for the year and operating profit, is that for the year, just to clarify, is that for the year or is that for the fourth quarter exiting with positive operating profit? And then, in terms of Access and Mobile Threat, you've been giving some billings numbers, I'm not sure if I heard that in the call, but it sounds like you continue to make progress on that front. I'd love to hear any updated numbers if you got them. And then lastly, Zero Trust, Simon, it sounds like things are starting to really accelerate in terms of the ability to use your solutions in the multitude of new environments that you really hadn't talked about in the past. When do we start to see the initial contributions from that? Is that 2020 or do we start to see some of that later this year? Thank you.

[Simon Biddiscombe:]

So I'll do the last question first, I think people have under appreciated the value of MobileIron's end point solution for years and years and years, and the establishment of a footprint across a fleet of mobile devices and what you can do with that continues to expand. So beyond the Zero Trust conversation, when you start thinking about Zero sign-on, which I touched on in my prepared remarks and which we'll be talking about extensively over the course of the coming months, quarters and years. You have to be on the endpoint to be able to do the types of things that MobileIron is going to be doing as you move forward. And I think people are beginning to understand to your point, the criticality of actually having a client on the device itself, as it relates to being able to deliver the security framework that IT professionals are demanding at this point in time. So I'll let it go back to Scott on your question about Access and Threat.

[Scott Hill:]

Yeah, and also your question on operating profit. So the operating profit guidance we gave was for the full year, not just the exit on Q4. So hopefully that clarifies that and then in terms of the performance of the Access and Mobile Threat products, yeah, they continue to perform well. We still have expectations that the penetration is going to grow over the course of the year and we're on track for that.

[Simon Biddiscombe:]

So the reason we didn't give me the number Scott is that they're just extraordinary, right because they would have been a very low base a year ago. And the numbers would have looked absurdly large in terms of the rate of growth of ARR or the rate of growth of revenues as well.

[Scott Searle:]

Extraordinary good, thanks guys.

[Simon Biddiscombe:]

Thank you.

[Operator:]

Your next question comes from live Michael Turits from Raymond James. Your line is open.

[Robert Majek:]

Good afternoon. It's actually Robert Majek on for Michael today.

[Scott Hill:]

Hey, Robert.

[Simon Biddiscombe:]

Hey, Robert.

[Robert Majek:]

You touched on it in a prior question, but can you just talk more about the plan to convert the existing on premise installed base to the cloud product, how the initial customer feedback has been so far, especially around pricing and what drives the material selection in 2020?

[Simon Biddiscombe:]

So let me first say, we have no desire to force a customer one direction or another, okay. So there's a very large part of our installed base. Obviously, you can see it in the maintenance stream. That is an on-prem solution at this point in time and I'm not trying to jam a customer into one solution or another solution, I want customers to continue to buy technology from MobileIron that solves for the used cases that they're trying to solve for. So now that said, there's a natural poll by our customers toward cloud based deployments at this point in time, okay. So if you're an existing customer and you're looking at MobileIron's cloud capability versus MobileIron's on-prem capability, typically what you're looking at is the following. Number one, the actual cloud platform itself, does it give you the feature set and functionality that you need for your specific set of used cases. And I've got great confidence that that is the case, we've solved for essentially every used case that somebody may have had on core in the cloud platform at this point in time. So it's part number one. Part number two is you're going to be looking for migration tools, what tools are we going to be making available to you to take a device off the on-prem platform and move it to the cloud platform. Third thing you might want is migration services, we have a set of skews that are available that help customers through that migration journey. Then you need enablement, type things, right. So you're going to be looking at what's the ROI? What is my ROI as a customer associated with being on the cloud platform as opposed to being on the on-prem platform? And then for us on the on the inside, if you will, it's all about partner enablement. It's about sales enablement. It's about skews and bundles and so on. So I don't want to give you the impression that we're trying to force customers, that's not the case for one second, customers are naturally moving in this direction at this point in time and we're there to support them as they go on that journey.

[Robert Majek:]

That's helpful and perhaps just one more from me, you've announced a number of partnerships over the past few quarters and it makes sense leveraging the core product. Can you just tell us more about the broad strategic plan for further partnerships and help us understand what other areas you might be focused on.

[Simon Biddiscombe:]

So there's two ways to think about that, okay, the technology partnerships and then this go to market partnerships, okay. We are always looking for ways to monetize our installed base, okay. So as our customers demand, greater feature set and functionality from us, some of the ways that we're able to enable those technologies is through technology partnerships, right. So if you think about what we've done with Mobile Threat, as an example, where there's a technology partner, who is responsible for the R&D associated with the product and so on. Those types of solutions we will continue to bring to market as we move forward. And there's a handful of things that we're looking at very specifically today that our customers are demanding from us as incremental feature sets and functionality that we can deliver through technology partnerships. It's not stuff that we have to do nor the stuff we should develop ourselves at this point in time. On the other side there's the go to market partnerships, right. So when you look at some of the things we've announced with people like Lenovo, some of the things we've announced with people like McAfee and so on, there's clearly opportunity for others to be able to take advantage of our technology. We announced one with a company called NetMotion just earlier this quarter. And the deal with NetMotion is very specifically targeted at a part of the new first responder network that's being developed here in the US that takes advantage of one specific technology that NetMotion has when combined with our UEM platform to give a far more robust offering to those customers. So we're always looking at both go to market partnerships and technology partnerships and there'll be more and more every quarter as we move forward.

[Robert Majek:]

That's helpful. Thanks.

[Simon Biddiscombe:]

Thanks, Robert.

[Operator:]

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

[Raimo Lenschow:]

Hey, thanks for taking my question. And hey, good progress on the cloud side. Simon, can you talk a little bit and that was kind of one of the themes from the speakers before me, like if you look at your installed base and the big maintenance space you have, beside customers making the choices, is there anything you guys can do to help people to get on the cloud journey when renewals come up, et cetera. And can you maybe remind me as well as your maintenance is at annual and it needs to initiated or is it automatic renewal until something happens? Thank you.

[Simon Biddiscombe:]

So I think the journey, us helping a customer through the transition from an on-prem platform to a cloud platform is primarily predicated on what I talked about earlier, do we have the right tools, we have the right services available to them and so on? Could we force customers in that direction? Yes, we could. But it's not something that we think is the right thing to do for our customers. Yet we may decide that is the right thing to do at some point in the future, but it's certainly not something that we've decided is the right thing to do at this point in time, but for the vast majority of customers. If you think about the life cycle of a device, it's kind of a two year life cycle for most devices that our enterprise customers have on our platforms and so on. So there are ways where you can even just naturally migrate the device from the on-prem platform to the cloud platform over the course of a couple of years, as every employee receives a new device and you just move it from one to the other. And two years later, you've actually completed the journey as people have bought new devices on the platform and so on. So we've got some ways that we can solve this challenge with customers Raimo that are different than other companies who've had to go through these types of transitions. And we can make it far less painful or not pain less that's wrong way to say, but far less painful than other types of technologies that have gone from on-prem to cloud transitions and so on.

[Scott Hill:]

Raimo to add -

[Raimo Lenschow:]

Yeah. Okay. Sorry. Go ahead.

[Scott Hill:]

I was just - just to follow up on the second part of your question about the maintenance contract. They are - the vast majority are annual, so that does provide an opportunity for us to intersect when a customer is going to be making a journey to cloud.

[Raimo Lenschow:]

Okay, perfect and then one last follow up for me is like, if you look at the - we do see on the cost side that the investments that you kind of keep investing to grow, which is a good thing. Can you just kind of double click a little bit on that, again, like where are we on that journey and what are the priorities there?

[Scott Hill:]

Yeah, so our costs this quarter and our guidance implied guidance for next quarter. We have a relatively heavy first half. We have a lot of marketing events and things like that that we have in the first half and we would expect costs in the second half to come down a bit. We are now relative to last year, what I would consider more at full staff. So that that has been one of the drivers in terms of the increase in cost this quarter over the last quarter. And the areas of investment have been product and go to market, both of those areas in terms of new features and offerings that we have, and then reaching out to the market in a new way with our Zero Trust message.

[Raimo Lenschow:]

Okay, perfect. Thank you.

[Scott Hill:]

Thanks.

[Operator:]

Your next question comes from a line of Meta Marshall from Morgan Stanley. Your line is open.

[Meta Marshall:]

Great, thanks. First, I wanted to - I know the new product isn't out or you're going to make some announcements kind of on this Mobile ID product, but just would this be an incremental product, is this additional or is it like a feature? And I guess is it something that you guys have developed or is it something that you will be using a technology partnership for? Then I have one other question.

[Simon Biddiscombe:]

So it's a - make no mistake, this is a new product. But it leverages critical components of the UEM platform and of Access as well, but as we take this to market, whether it's going to be a new product with new technology, significant new technology that has been under development for an extended period of time. There are components of the new technology that will be secured to partnership, there are some things that we shouldn't do ourselves and there are components of the new technology that are development that is ongoing here at MobileIron. So it's a combination of the two. And it will result in an entirely new set of product skews and revenue streams as we move forward.

[Meta Marshall:]

Got it and then maybe you mentioned kind of having a pretty large competitive replacement in the quarter. Just what are you seeing as far as kind of discounting aggressiveness of competitors in the marketplace?

[Simon Biddiscombe:]

Yes, look, so actually I didn't make reference to who it was. But I talked about the large European financial institution. It was actually BNP Paribas, where we were able to replace one of our traditional competitors. Let's see. ASP is held up; ASPs were very stable in the period. I think when we look across our customer base Meta, it's the high end of enterprise, government, highly regulated industries and so on and they value what we bring to bay and while price is always part of the thought process. For most of our customers, it's not the first part for process. First part for processes is typically, is this the most secure solution that I can deploy? If I'm the infrastructure buyer or fund the Cecil's organization, the first question I'm asking myself is have I solved the security challenge and MobileIron has always been able to win based on having the most robust and secure offering in the market in that regard. So at some point price does hit the decision framework, obviously, but for most of our customers, it's not number one. And as I said, ASPs have held up very nicely over the course of time and I wouldn't characterize the environment being dramatically different across our customer base.

[Meta Marshall:]

Okay, got it. Thank you.

[Simon Biddiscombe:]

Thank you.

[Operator:]

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

[Robert Breza:]

Hi, thanks for taking my question. Most of my questions was asked during the call, but just want to follow up on a prior question as it related to the response to the operating margin expansion and headcount capacity. I want to make sure I heard correctly. We should not expect any more headcount hiring throughout the year and cost would come down in the second half, is that correct?

[Scott Hill:]

In general, yes. I wouldn't say there's going to be no hiring. I'm just saying that that our total staffing will be relatively stable over the course of the year and that we will have a natural - our OpEx will come down naturally because we do not have as many large events and other things taking place in the second half that we do in the first half on the go to market front.

[Robert Breza:]

Okay, great. And Simon, as you think about the new product and maybe as I pin you back on the prior question and you were very clear stating that the new product per se, what kind of product lift would you expect not only from AK that product, but as you think about some of the newer products and you talked about hitting the inflection point with two quarters of double digit growth and obviously new products are helping to drive that. How should we think about new products maybe as a percentage of total bookings to drive future 2020 business?

[Simon Biddiscombe:]

So, on the last earnings call, what Scott said was he expected the new products and the purposes of that is very specific conversation, make it Threat and Access not the new products associated with Zero sign-on at this point in time. But what Scott said on the last call was we expected ARR for those new products, by the end of the year to be roughly -

[Scott Hill:]

That was actually the penetration, into our database. So if you think about this, the way we look at it, we have an installed base of seats of UEM that have been sold and been built up over the last 10 years. And that is the audience for the new products in terms of our focus for up selling those products into that we started the year and about roughly 5%. On a seat penetration we expect over the course of the year we'll end up kind of in the mid-teens kind of - in the teen's area and this quarter we're on track for that. A new product, the new product of Zero sign-on would be similar in that sense. We would start obviously with the relatively low as we go into 2020 and then look to build that over the course of the year. I don't think we have any more specific plans or anything we can disclose yet. But that's the general framework.

[Simon Biddiscombe:]

I think that that's great nicely on top of an EMM business Rob that continues to grow in the double digits, right. Make no mistake, our EMM business is continuing to grow in the double digits and we're very pleased with the progress that we're seeing with the regard to EMM ARR at this point in time, so it's moving in the right way.

[Robert Breza:]

Absolutely, thank you very much.

[Simon Biddiscombe:]

Excellent. Thank you.

[Operator:]

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

[Simon Biddiscombe:]

Thank you everyone for joining us today. I'm pleased to see the progress MobileIron is making to strengthen our place in the market and accelerate recurring revenue growth. I remain convinced that MobileIron has the best suite of products to address the Zero Trust environment and our innovation will continue to extend that advantage. I look forward to updating you through the rest of 2019 on our progress and successes. And with that we can close the call. Thank you.

[Operator:]

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