MobileIron, Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Thank you for standing by. Welcome to the MobileIron Third Quarter 2018 Financial Results Conference Call. As a reminder, all participants are in 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, Operator. Good afternoon. And welcome to MobileIron’s third 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 will then have time for questions. If you have not received the 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 the call today 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 read only in conjunction with MobileIron’s consolidated financial statements prepared in accordance with GAAP. A 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. Additionally, please remember that we are reporting our financial results under ASC 606 and have adopted the new standard using the full retrospective method, so that we have restated prior period financial results. At this time, I would like now to turn the call over to Simon. Please go ahead.

[Simon Biddiscombe:]

Thank you, Eric, and good afternoon. In my remarks today, I will provide comments on our third quarter financial performance, share some perspective on the security landscape within which we compete and close with some notable accolades and customer wins. I would like to start by sharing our financial highlights. In the third quarter, recurring revenue grew 19% year-over-year, its highest growth rate in the past seven quarters. Our billings were $57.2 million, well above the high end of our guidance range and up 14% year-over-year. Our new products, Threat Defense and Access continued to build momentum, delivering more than $6 million in billings. I am also proud to point out that we achieved a record non-GAAP operating profit of $2 million. I believe our financials are beginning to reflect the two improvements in the business I began telling you about earlier this year. First, adoption of our new products, Threat Defense and Access is accelerating with new and existing customers. And second, we are seeing the effect of better sales execution under new leadership. From our low point in Q1, we have now increased the growth rate of our billings, revenue and recurring revenue in the last two quarters. While I recognize two points don't quite make a trend, I do believe this is reflective of improving execution within our business, along with a very attractive product portfolio both of which provide a solid foundation for future growth. I would now like to address what Forrester has described as zero-trust security environment and how MobileIron’s offerings address the needs of that environment, be it a phone, tablet or laptop, endpoints are no longer locked down, networks are accessed to public Wi-Fi in a coffee shop, on an airplane or in a hotel lobby and business data no longer sits behind the corporate firewall. Now, created, consumed and stored outside the corporate network, across hundreds of millions of endpoints in a multitude of cloud services. The classic network perimeter which control laptops, communicate through secure Wi-Fi is gone. This was the network perimeter that CIOs learned to secure. The computing environment has evolved into a zero-trust state. At risk are the valuable stores of confidential company data, records on customers, personnel, financials and intellectual property and the new security model must establish trust at each vulnerability as data moves from the cloud over the network into the device and through the application. Five years ago, this was not even a security afterthought. But this issue has grown to become the latest security challenge. Only with a new security model, can you protect modern work, user identity alone is not enough to solve this problem. Modern security requires device and application trust. MobileIron has been designed into this paradigm for over 10 years. MobileIron’s UEM solution, provisions and secure digital workspace on the endpoint that contains all of the business application and user needs, and provides secure connectivity. Coupled to UEM, MobileIron Threat Defense establishes trust by detecting and remediating ongoing device network and application threats. The MobileIron access ensures that only trusted users on trusted devices use entrusted applications, gain access to cloud services. Only MobileIron can 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. Our strong security offerings have once again propelled us to a leadership status amongst our peers. We are pleased to announce that the independent research firm IDC recognized MobileIron as a leader in the 2018 IDC MarketScape for Unified Endpoint Management Software. According to the report, MobileIron security and support were critical factors that led to some of the highest customer satisfaction ratings among vendors in the study. Additionally, MobileIron was recently named a 2018 Gartner Peer Insights Customers’ Choice for Unified Endpoint Management Tools. This distinction is an incredible honor, because it comes straight from our customers and we believe it reinforces the importance of our focus on security and support. And with that, I will share some details on our customer wins from the quarter. I am extremely pleased to announce that we closed the win in the quarter with Faurecia, a $20 billion automotive technology manufacturer headquartered in France. MobileIron security solutions aligned seamlessly with Faurecia’s emphasis on team autonomy to ensure that even as their employees develop innovative solutions to advance the digital transformation of the auto industry, their devices remain protected and workflow security reaches new levels of productivity and efficiency. With hackers regularly making headlines, it is not surprising that Cooley, an internationally recognized law firm with offices in the U.S., China and Europe chose to deepen their relationship with MobileIron during the quarter. The number one law firm for tech and life sciences IPOs, Cooley is recognized for its impact on innovation and we are proud they placed their trust in our superior Threat Defense technology to broaden their mobile security framework by adding to their EMM deployment. This customer win perfectly exemplifies the ease of integration that MobileIron can provide existing customers who wish to bolster their IT security architecture. As a further testament to the security prowess of Windows 10 solution, we won new business during the quarter with River Island, a $1 billion dollar U.K.-based fashion house with over 350 stores across Europe Asia and the Middle East. This truly international company chose a cloud deployment of our UEM solution to assist in their migration from Windows 7 to Windows 10, and to streamline their mobile device and PC management. Our Windows 10 management capabilities provide an effortless upgrade experience, so River Island employees are able to use devices straight out of the box with all apps they need to do their work. We are thrilled to secure this forward thinking fashion brand. And turning now to the day's other news. This afternoon, we announced the retirement of Matt Howard and Aaref Hilaly from MobileIron’s Board of Directors. And managing partner at Northwest Venture Partners, Matt joined MobileIron’s Board in 2008, shortly after the company was founded. Aaref is a partner at Sequoia Capital and has served as a Director since 2012. On behalf of MobileIron and our Board of Directors, I would like to extend my warmest gratitude to both Matt and Aaref for their invaluable guidance and leadership from the early days of MobileIron through more than four years as a public company and they depart with our business in a stronger position than ever before. And with that, I will turn it over to Scott.

[Scott Hill:]

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 third quarter, we continued to drive improvement in the business and the financial results reflect this. We deliver 19% recurring revenue growth and record profits. Our billings in Q3 were $57.2 million well above the high end of our guidance and up 14% year-over-year as we delivered more than $6 million in billings across our new products, Access and Threat Defense. Revenue in the third quarter was a record $49.3 million, up 8% year-over-year and near the high end of our guidance. New customers continued to show a strong preference for our cloud deployment model and subscription solutions. Revenue from cloud services with $13.2 million, up 38% year-over-year and improvement over last quarter. Revenue from software support and services was $21 million, up 8% from a year ago. License revenue was $15 million down 9% year-over-year. Revenue from recurring sources in Q3 was $39.7 million, up 19% year-over-year and 81% of total revenue. Annualized, our recurring revenue is just under $160 million. Our renewal rate remains about 90%. Gross margin in the third quarter was 85.3% in line with our guidance. Operating expenses were $40 million, much better than our guidance and down $2.6 million from the prior year. As a result of strengthening growth and continued cross controls, MobileIron delivered record operating income of $2 million, a $5.7 million improvement over the last year. Heading into our seasonally strong fourth quarter, our year-to-date operating margin is more than 8 percentage points better than the same period last year. We reported net income of $1.9 million or $0.02 per share. Moving to the balance sheet, we ended the quarter with $102.3 million in cash and short-term investments, up following normal seasonality. During the last four quarters, we have added more than $20 million to our cash and short-term investments balance. In the third quarter, cash generated by operations was $860,000, approximately $5.1 million better than a year ago. Capital expenditures were approximately $615,000. Our DSOs for the third quarter were 78 days compared to 75 days in the second quarter. In general, we expect our DSOs to remain in the 70-day to 80-day range. Unearned revenue was $93 million at the end of September up 36% from $68.2 million a year ago. Customer arrangements with termination rights were $16.5 million at the end of September, down 4% from $17.3 million in a year ago quarter. With the third quarter performance behind us, our fourth quarter of 2018 guidance is as follows. We are projecting a revenue range of $53 million to $56 million for growth of 8% to 14% year-over-year. We expect billings to be in the range of $64 million to $67 million for growth of 6% to 11% year-over-year. We expect non-GAAP gross margins to be approximately 85.3%. We expect non-GAAP operating expenses to be approximately $43 million. Lastly, today we announced a share repurchase authorization of $25 million over two-year. We have implemented this program because we are confident that it will generate a strong return on investment and create value for our shareholders. We have made great progress in the business over the last year and that is beginning to show in our results. We are generating cash and have more than ample cash to run the business. We believe the stock is currently undervalued and as such we believe buying back our shares is an appropriate use of cash. Operator, we are ready for questions.

[Operator:]

Thank you. [Operator Instructions] Okay. Go ahead. [Operator Instructions]

[Simon Biddiscombe:]

How does everyone feel?

[Scott Hill:]

Good.

[Operator:]

[Operator Instructions] Sorry about that. [Operator Instructions] Our first question is from Michael Turits with Raymond James. Please go ahead.

[Robert Majek:]

Hi. This is actually Robert Majek on for Michael today. Simon, have you so...

[Simon Biddiscombe:]

Hey, Robert. How are you?

[Robert Majek:]

Doing great. Simon, have you so far had any large or notable renewals come up for your legacy on-premise customers where you had success in converting them to the new cloud base subscription offering? And if so I am just curious as to what the recurring revenue uplift per customer has been so far on those conversions?

[Simon Biddiscombe:]

Yeah. It's a great question. So the answer is that are very few customers who we have taken through the transition from the on-prem pep platform to the cloud platform or from the traditional maintenance – license and maintenance model to a subscription model, okay. So there are very few customers who have actually taken through that journey yet. In fact, it’s kind of one of the hidden gems in the business at this point in time, which is as we take customers through that journey, we do expect that there will be some uplift associated with the level of recurring revenues that we will be able to extract as we take them to the modern cloud platform that we have in the market at this point in time and away from the on-premise platform. That’s obviously going to take an extended period of time to take customers through that journey and there will be some piece of our customer set that ultimately probably wants to host their own solution that could be a derivative of our cloud platform at that point in time. But I would say it’s very early days as it relates to actually taking the existing customers through that transition and the vast majority of the growth in subscription business is being driven by new customers, who are certainly choose to buy and subscription models in cloud models primarily at this point in time. And then the new products, the new products both MobileIron Threat Defense and Access are about only available in the subscription model and in cloud based models. So those are driving a tremendous amount of the success we see. But the opportunity associated with transitioning customers from one platform to another and one license model to another is still all ahead of us.

[Robert Majek:]

Thanks. Thanks. That's very helpful. And then just maybe one more for me, can you just talk about how the customer response has been so far for your new products and whether customers are showing willingness to pay the incremental $2 per user per month per product that you have previously outlined? And then maybe if you can just how much contribution from the new products is built into your Q4 billings guide?

[Simon Biddiscombe:]

So, first of all, we don't typically talk about pricing, so the concept of $2 per device per or per user whatever you say is not something that we broadly ever communicate. So, yeah, there is a very broad acceptance for the new products and it's showing up in the business already. If you look at what we said we talked about north of $6 million worth of billings in the most recent quarter associated with the new products, that's of $4 million in the prior quarter and both up dramatically, in total it's up dramatically over the course of last year obviously. So our customers are certainly intrigued and in many instances as it relates to MobileIron Threat already had initiatives underway that give consideration to that type of technology. In certain cases that already deployed some of the other technologies that are in the market and we find ourselves in the advantageous position of displacing certain competitors. And the value proposition is enormously compelling. The idea of being able to integrate the UEM capability along with the Threat Defense capability into one agent on the device and not have to put the user through the experience of having multiple different clients on the device is something that is extraordinarily compelling to CIOs and the broad adoption of the technology is certainly moving more quickly than I'd expected it to as we came into the year. So I am excited. I am excited about what the new products are contributing at this point in time. We have got a robust pipeline as we move into Q4 for those products and I think they are going to be meaningful as we move into 2019.

[Robert Majek:]

And just a last part of that, can you help us just quantify how much contribution from the new products is built into your Q4 guide?

[Simon Biddiscombe:]

No. Absolutely not. We will help you think about that later, but suffice to say, the new products contribute the most significantly than we had expected them to, which is why you end up with a billings number that certainly at the high end of the annual guidance that we have previously provided.

[Robert Majek:]

Okay. Thanks a lot, Simon.

[Simon Biddiscombe:]

Perfect. Thanks a lot.

[Operator:]

Our next question is from Robert Breza with Northland Capital Markets. Please go ahead.

[Robert Breza:]

Hi. Good afternoon. Congratulations on a great quarter.

[Simon Biddiscombe:]

Hi, Rob.

[Robert Breza:]

Simon, how should we think about with recurring revenue up 19%? How do you think about that maybe on a go-forward basis? Just kind of curious to kind of take your temperature on that and how do you think about the…

[Simon Biddiscombe:]

Sure.

[Robert Breza:]

… recurring revenue baseline, I guess, maybe?

[Simon Biddiscombe:]

Sure. So, as I looked, let's talk about Q4, I am not going to talk about 2019, yet, Rob, because we haven't given guidance for that. But if you look at Q4…

[Robert Breza:]

Sure.

[Simon Biddiscombe:]

… specifically for our recurring revenues, I expect something very similar to what we experienced last quarter. So last quarter was 19% growth, the previous quarter was 17% growth. I think it's going to be very consistent with that in Q4 as well. That's $160 million recurring revenue business at this point in time and it's growing at 19%, I would say. I think it's an incredible asset that we have within the business that isn't receiving the value that we might expect it to see and that's one of the reasons that we have announced the buyback today, obviously. So the focus on recurring revenues has always been the metric that we pointed investors to because we think it's the best proxy to what is actually going on in the business. So if you could normalize the make shift away from traditional license models towards subscription models and you focused on what is truly the rate of growth in the business, we have always pointed to recurring revenues as being the best proxy for the rate of growth. And historically, when we talked about the rate of growth, what we were really talking about was the number of devices of what under management on a year-over-year basis, right. So that's pretty reflective of what we have by way of a rate of growth associated with devices that we are managing on a day-to-day basis, okay. Now that's started to be slightly different recently, because the new products resulted in incremental dollars, but they don't result in incremental seats, okay. So you don't have a new license, you just have an up sell associated with the technology and so on. But to me recurring revenues is where we have always tried to point investors as being the true rate of growth in the business and that was 19% last quarter and we are really pleased with the progress we have made.

[Robert Breza:]

And then maybe – we have talked about this on previous calls and enhance productivity within the employee base and sales base. How are you thinking about hiring right now within the overall environment? I know it's tough to get people in Silicon Valley, but just curious to get your thoughts about increased productivity versus hiring.

[Simon Biddiscombe:]

So it's a combination. As I look at where we are today versus where we would expect it to be. So, again, the forecast essentially, I mean, as I look forward where we are taking the business. First of all, we have to continue to extract incremental productivity from the organization as it exists today and you have heard me talk about that for an extended period of time, Rob. And if you look at the rate of growth, we were able to deliver relative to the rate of decline in operating expense structure on a year-over-year basis. Clearly, we are starting to demonstrate the leverage that exists in the model, okay. So we have, hey, we have to maintain that focus on driving incremental productivity into the resource base. But there is currently a hiring that is ongoing that I expect to see impact the expense structure as we move forward. So the reason the OpEx goes from $40 million roughly last quarter to $43 million in Q4 is primarily associated with hiring. I am making sure that as it relates to various critical resources that we need to run the business both in terms of engineering, resource, and then, frankly, in terms of sales resource as well, making sure that the capacity is in place to set us up for success as we move into 2019, that's something as critical as well obviously. So, no, it's a combination. We have got hiring that is ongoing that results in the increase in OpEx on a quarter-to-quarter basis, but we are still going to extract more from the dollars that we are spending today.

[Robert Breza:]

Great. Congratulations.

[Simon Biddiscombe:]

Thank you very much.

[Operator:]

Our next question comes from Raimo Lenschow with Barclays. Please go ahead.

[Raimo Lenschow:]

Many thanks for taking my question. Simon, on the -- you told – you referenced earlier the industry document and your strong position there, and it still seems like a crowded market. Can you see like on the other competitors that are computing with you? Do you see it easing a little bit as kind of you can clearly see the leadership between you guys the Emmen, et cetera?

[Simon Biddiscombe:]

Well, I look at this been primarily three of us today, right. Raimo, as I think about who we see on a day-to-day basis from competition perspective it’s Microsoft and it’s VMware. And they both offer a different value proposition and we offer at this point time. When we engage with a customer or prospect it’s primarily associated with the high security value proposition with our UEM solution has and then everything that comes along with Threat Defense and Access as well. So we compete our security factor if you will. When I look at what the VMware is trying do what – VMware is very much trying to do is compete on the kind of workspace one concept of result in your having one entire experience regardless of what the endpoint is that is essentially controlled by VMware look and feel as opposed to what you might be getting from the native experience and we believe this is in the native experience. I know what happen – so it’s been the way we told that users wanted to engage with devices and having used an iOS device for example of 10 years, when you try and trade from device to device becomes very comfortable, very quickly and we -- what we want to do is make sure the user has a choices to what is the device they are using, it is not something that should always be dedicated by somebody else. And then when it comes to Microsoft, but look, Microsoft still is a relevant participant in any of the conservation associated with high security use cases and so on, and we don’t see them winning in that high security use scenario, so whether it’s government related types of transactions, whether it’s highly regulated industry such as financial services or healthcare. We don't see Microsoft from a high security used case perspective. And typically, we win when companies want multi-stock, multi-cloud, multi-app and so on, and that's not something that Microsoft is able to support in anywhere near the way we are able to support. So, it was kind of a long winded answer, Raimo. But the competitive dynamic really hasn't changed dramatically over the course of the last 90 days, 180 days. We continue -- with each carved it our way of thinking about the market and thinking about the opportunity, and we are all progressing in that direction.

[Raimo Lenschow:]

Perfect. Okay. And that helps. And then more on the number of side, if I look obviously your –the recurring revenue is to focus now and it's going wisely. Can you talk a little bit about the puts and takes that you see in the numbers, so the 19% growth on recurrence, obviously, very healthy, but then your overall growth rate gets tracked down? Does that impact, is that kind of a mechanical way or do you see it easing at some point, if I look at kind of Q4 numbers and looking out into next year as well?

[Scott Hill:]

Right. So that number is being driven by a number of things. First and foremost, the new products which are in a recurring subscription oriented format. So that's a layer of growth that layered on top of the base of the business that's been expanding through the seat count that Simon talked about earlier. And we also see that the – as customers are buying those new products, they are starting to do so for the rest of their purchases in a subscription way too. So that the second factor that's driving as well. So right now, we don't see as Simon alluded to you know change in that trajectory in the near-term.

[Raimo Lenschow:]

Okay. Got it. Thank you. Well done.

[Simon Biddiscombe:]

Thanks, Raimo.

[Scott Hill:]

Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Scott Searle with ROTH Capital. Please go ahead.

[Scott Searle:]

Hey. Good afternoon. Thanks for taking my question. Nice quarter. Hey. Just to start off to clarify on the OpEx front you are investing a little bit more in sales and development. The base level that we are talking about of $43 million in the December quarter, is that what we should extrapolate out as a starting point going into the March quarter as well for 2019 or we got some bonus accruals and other things that you are playing a little bit of catch up?

[Scott Hill:]

No. I think you can take that $43 million as a base for the next year. We are a little bit behind in terms of our expectations on hiring this quarter, but we expect to make that up and exit the year that have closer to full – full staff I guess we'd call it.

[Scott Searle:]

Got you. And on the new products front, Simon, we have talked about this quite a bit, but you are having tremendous success early on with Access and our Mobile Threat Protection. Didn’t hear you talk as much about multi-factor authentication, kind of curious how that's going? And as you are now getting in and selling into accounts, I am kind of curious as to what you are seeing and contrasting that with the core EMM business of ultimate penetration rates within the existing base sell cycle and any other color that you'd try to provide on that front related to the rapid adoption?

[Simon Biddiscombe:]

So, let's start with MFA. So, don't forget MFA for us is really part of the Access solution, right. So, what it solves for is, multi-factor authentication associated with non-managed devices use an Access related technologies, okay. So, we are not selling MFA as an entirely separate initiative as part of how we think about Access and taking the Access value proposition to market, be it broader than just the mobile devices that we might be managing, okay. So that's part number one. Ask the second part of your question again, if you would Scott for me.

[Scott Searle:]

Just in terms of sell cycle and ultimate penetration rates for Access and Mobile Threat, where do you think you can get to that in terms of adjusting…

[Simon Biddiscombe:]

Yeah.

[Scott Searle:]

… installed base?

[Simon Biddiscombe:]

Yeah. So, here’s how we think about it. I think the maximum penetration rate right now for Access is probably somewhere around 40% of the total installed base, okay. And the reason I give you that metric is Access is a relatively sophisticated purchase and if you are a small organization that's using a very lightweight MBM, EMM type technology, the likelihood of you actually buying Access is pretty low, okay. So, when we look at the opportunity associated with Access, what we are really looking at is at our most sophisticated customers who have historically bought the Platinum Bundle of our EMM solution and we think that's the set of customers that will be inclined to want to buy Access as a solution, okay. So I think it's about 40%, total opportunity if I were installed base at this point in time. When you look at Threat, it's much higher. So Threat has a much higher opportunity associated with it primarily because it's a relatively straightforward sale and a relatively straightforward purchase on behalf of the buyer. And what we are seeing is that the sales cycle associated with Threat is actually much shorter than the sales cycle associated with Access at this point in time. With Access, as you know, we talked about it we have to do some evangelizing for the market. We had to help buyers understand exactly what the problem was that they didn't necessarily appreciate they had and then helped them understand why Access was the right solution for them. That takes a little longer. With Threat our customers were broadly aware of the technologies that were in the market and what we were able to do was integrate the two capabilities and change the conversation that the buyer was having around the deployment of that technology. So the Threat a much larger opportunity in terms of the ability to penetrate our installed base for EMM and a much shorter cycle because in many instances our customers were already looking at the various different technologies.

[Scott Searle:]

Got you. And one last question if I could, U.S. market was up a little bit sequentially, is that seasonal or are we fixed all of the sales leadership issues now we are starting to see some of the benefits of that? Thanks. Nice quarter.

[Simon Biddiscombe:]

Yeah. Thank you for that. Thanks for the comment. Now look we are always trying to make sure we have got all the right people in the all the right slots and there was year-over-year growth in North America it isn’t what I wanted it to be. That’s for sure. But if you look at last year, last year with one significant transaction, this year we didn’t have a recurrent transaction of that kind that resulted in looking flatter than it might otherwise have been. But now we are always looking to make sure that we got the right people in the right slots and we are going to continue to drive the North American organization will forward aggressively. So, no, I am pleased with the traction. I think Greg has made enormous progress and although organizations made enormous progress under Greg’s leadership will be the right way to say it and expect more as we move forward.

[Scott Searle:]

Great. Thank you.

[Simon Biddiscombe:]

Thanks, Scott.

[Operator:]

There are no further questions registered at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.