MobileIron, Inc.
Q2 2018 Earnings Call Transcript

Published: 1 Aug 2018

[Operator:]

Thank you for standing by. Welcome to the MobileIron Second 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, sir.

[Erik Bylin:]

Thank you, operator. Good afternoon and welcome to MobileIron's second 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 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 the 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 read 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 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, Erik, and good afternoon. In my remarks today, I will provide comments on our second quarter financial performance and share some detail on our recent accomplishments and customer wins. First, however, I would like to introduce Scott Hill, who recently joined us as Chief Financial Officer. As I welcome Scott, I would also like to thank Shawn Ayers, who did admirable work covering the CFO position and will now return to his VP of Finance role. Scott brings nearly 20 years of experience, leading finance teams at global companies and joins us with a deep understanding of the enterprise security market. Prior to MobileIron, Scott was Senior Vice President of Finance at Symantec, where he spent almost 10 years in strategic finance and operational leadership roles. Before Symantec, Scott was an investment banker with JPMorgan, covering the technology sector. I am thrilled to welcome Scott to MobileIron and have rounded out our leadership team. I believe that the caliber of leader we have been able to attract recently is a great endorsement of the opportunity that exists at MobileIron with our outstanding team, technology and customers. I am excited to see the team continue to gel and drive MobileIron forward. Moving to our financials. Our billings in Q2 were $50.6 million, above the high end of our guidance and up 13% year-over-year. We saw strong traction for our new products, as MobileIron Access and Threat Defense added almost $4 million in billings. In addition, the results this quarter benefited from the evolving go-to-market strategy for our new products and reflect the impact that Greg Randolph is having on sales execution. From sales enablement to pipeline scrutiny for the processes to close deals, we are seeing the effect of Greg's changes in our billings and revenue growth and the penetration of our new products. Scott will provide further details on our financials in his prepared remarks. I am excited to announce that we added MobileIron Authenticator to our comprehensive MobileIron Access cloud security solution. Authenticator is a new mobile application that allows organizations to verify a user's identity with the phone acting as a second factor of authentication. According to the 2018 Verizon data breach investigation report, compromised credentials are the leading cause of reported data breaches. The best solution is to move beyond passwords, and MobileIron already does with seamless single sign-on for trusted devices and trusted applications. When this is not possible because of legacy devices or untrusted environments, many organizations look to multifactor authentication, or MFA, as additional evidence to confirm a user's identity. Traditional MFA uses hardware tokens that are usually lost and/or software tokens that require inconvenient activation through QR codes. Neither of these is an ideal user experience. MobileIron Authenticator provides simple and smart MFA. It is differentiated from traditional MFA solutions because it provides a one-touch setup process for end users, leverages mobile devices instead of hardware tokens and establishes device and application trust along with user trust. The addition of Authenticator to our MobileIron Access cloud security solution now brings MFA policies into a rich security workflow that already include single sign-on and conditional access for mobile applications. And our feature-rich products continue to receive accolades. After seven consecutive years as a leader in Gartner's Magic Quadrant for Enterprise Mobility Management Suites, MobileIron has been named the leader in Gartner's first Magic Quadrant for unified endpoint management tools. Our security capabilities and certifications are highlighted and provide the basis of our competitive differentiation. As we have said, we win when security matters. Additionally, independent third-party market analytics firm, Compass Intelligence, named MobileIron the top MDM and EMM solution in their sixth annual awards. Continuing our success with large go-to-market partners, I'm proud to announce that we were the first OEM vendor to integrate with McAfee's ePolicy Orchestrator or ePO. The ePO is the interface that tens of thousands of organizations rely on to define and monitor their security policies across more than 50 million endpoints. Previously, an administrator using ePO could only monitor laptops and desktops. But the MobileIron integration extends that visibility to increasingly ubiquitous mobile devices running Android and iOS. With this, MobileIron becomes the vendor of choice for companies using McAfee's ePO and looking for a solution to manage all endpoints. Coupling this with our existing partner referral relationship, we believe this will be another avenue to further strengthen our pipeline. I'm pleased to announce that we surpassed 17,000 cumulative customers in Q2, touching on a couple of these customer wins from the quarter. MobileIron will be securing the employees of the City of Stockholm with our Threat Defense solution. The City of Stockholm has chosen to replace their existing solution and will employ MobileIron's best-of-breed Threat Defense to ensure that they can safely use their devices without data being compromised across the employees' increasingly complex workflows. A city of almost 1 million citizens, Stockholm prides itself on being the forefront of technology, and we're thrilled to enable them to securely use their mobile endpoints to perform their work with agility and efficiency. In another example of a client realizing the value of a cloud solution, we are enabling a leading global strategic consultancy to securely use their cloud services with Access. Working up to this win, we were able to prove there was an extraordinary return on investment centered around saving each of their employees several minutes each week by utilizing Access for single sign-up. We are proud to secure their ability to help their clients make lasting improvements to their performance and realize their most important goals. A global leader in engine manufacturing has recently decided to deepen its relationship with MobileIron by adding Access and Threat Defense. Competing with some of the biggest players in the space, MobileIron helped the company meet its goals in cloud strategy, user experience and cybersecurity. While moving its EMM to the cloud, this global manufacturer also recognized the importance of controlling Access to its proprietary cloud services as well as protecting their employees' endpoints with Threat Defense. We're thrilled to be able to provide our best solutions to this market leader and to enable their team to safely execute modern work. In closing, I was very pleased with our execution in the second quarter and the performance it generated. We successfully added new seats to our large EMM base, while also selling our new products into existing customers. As we move into the second half of the year, we are well positioned to continue to deliver improving financial performance, innovative new products and strong customer outcomes. I wish to thank our shareholders, customers and employees for their continued support. And now I will turn the call over to Scott for his remarks. Scott?

[Scott Hill:]

Thanks, Simon, and good afternoon. Today we will be discussing non-GAAP financial measures unless otherwise noted. Our press release, Form 8-K and website provide a reconciliation of GAAP to non-GAAP financial results. Our billings in Q2 were $50.6 million, above the high end of our guidance and up 13% year-over-year as we delivered almost $4 million in billings cross our new products, Access and Threat Defense. Revenue in the second quarter was $46.1 million, up 7% year-over-year and above the high end of our guidance. New customers continue to show a strong preference for our cloud deployment model and subscription solutions. Revenue from cloud services was $11.8, million, up 24% year-over-year. Revenue from software support and services was $20.4 million, up 9% from a year-ago. License revenue was $13.9 million, down 6% year-over-year. Revenue from recurring sources in Q2was $36.9 million, up 17% year-over-year and 80% of total revenue. Annualized, our recurring revenue is approaching $150 million. Our renewal rate remains about 90%. Gross margin in the second quarter was 85.2%, just above the high end of our guidance. Operating expenses were $42.3 million, better than our guidance and down $2 million from the prior year. Turning to the bottom line for the second quarter, we reported a GAAP net loss of $12 million or $0.12 per share, an improvement of $6.6 million over last year. We reported a non-GAAP net loss of $3.6 million or $0.04 per share, an improvement of $4.2 million over last year. Moving to the balance sheet, we ended the quarter with $98.1 million in cash and short-terms investments, down slightly, following normal seasonal trends. During the last four quarters, we have added about $9 million to our cash and short-term investments balance. In the second quarter, cash used in operations was $2.9 million, $900,000 better than a year-ago. Capital expenditures were approximately $250,000. Our DSOs for the second quarter were 75 days, up from 70 days in the first quarter. In general, we expect our DSOs to remain in the 70 to 80-day range. As a reminder, under ASC 606, deferred revenue has been replaced by unearned revenue in customer arrangements with termination rights. Unearned revenue was $82.9 million at the end of June, up 28% from $65 million in the year-ago. Customer arrangements with termination rights were $19.5 million at the end of June, up 30% from $15 million in the year-ago quarter. This strong year-over-year growth reflects the ongoing transition of our business to subscriptions. With the second quarter performance behind us, our third quarter of 2018 guidance follows

[Operator:]

Thank you. [Operator Instructions] The first question comes from Michael Turits of Raymond James. Please go ahead.

[Robert Majek:]

Good afternoon. This is actually Robert Majek on for Michael today. Can you just give us a little bit more detail on the traction your new products are getting, both Access and Mobile Threat detect? And then partially because of these products, are you having success in driving up ASPs?

[Simon Biddiscombe:]

Yes. So this is Simon. So let me start with Access, and then we'll move on to Threat, and then we'll talk about ASPs. So first of all, as you know, Access has been in the market at this point in time for coming up on two years. We actually changed slightly the way we're positioning Access with our customer base over the course of the last 90 days, and it's actually receiving a tremendous amount of attention as a result of that change. It was a slight architectural change that enabled us to be more successful in selling the solution into our existing customer base, obviously. So I'm very pleased with how Access is progressing at this point in time. And as I look in the pipeline associated with that solution as we move into Q3, very robust as well. On the Mobile Threat side, the value proposition is very clear. Many of the customers that we've historically mobile – around EMM had already embarked on initiatives associated with Mobile Threat or had already purchased Mobile Threat solutions from other providers, the technology that exists in the market. And what we're seeing is the idea of the single client that integrates both Mobile Threat and EMM and the distinct advantage that comes along with making sure that you're 100% penetrated across the device fleet with that technology is something that's incredibly important to our customers. So the value proposition of both technologies continues to be high with our customers. And when you look at some of the wins I've talked about in my prepared remarks with some of our largest customers, both Access and Mobile Threat were critical components of those new wins we saw over the course of the quarter. If you think about it within the context of ASPs, I mean, both Threat and Access have separate ASPs associated with them at this point in time. So we, obviously, track that differently, even just an EMM license ASP. But the total value of a customer is what's really important, right? So if you think about the value that we're able to extract from a customer, that increases beyond the base EMM capability when you add Access and then separately, when you add Threat as well. So the strategy has been, as we previously communicated, to take those new products into the installed base of the EMM customers that we have today and be able to extract higher value from that customer set and frankly, make ourselves more strategically important because we bring a broader set of technologies and increase the retention of those customers because the more we bring, the harder it is to, obviously, replace us. So that's conceptually how we think about how ASPs change all the time as a result of this deeper relationship.

[Robert Majek:]

Thank you. That's really helpful. And just maybe one more for me. Can you just give us an update on the overall market structure and competitive landscape in EMM? And most curiously, I'm wondering, how often you're going head-to-head with Microsoft when it comes to winning new business?

[Simon Biddiscombe:]

This is really the – Simon again. So it's really the three of us that are most relevant to the market it's ourselves, VMware and Microsoft. And as I said in my prepared remarks, we continue to win when security matters. And if you think about the types of customers that we've historically enjoyed the greatest success with, those have primarily been in the highly regulated, highly secure, a government financial services, healthcare-type markets, where security actually matters and is incredibly important. And when we're involved in those transactions, we win more than our fair share of those. Where we start to see some of the other competitors is, as you move down into the smaller customer part of the market where, perhaps, security is perceived to be less important, we would argue as to whether it should or shouldn't be less important, but where it's perceived to be less important, maybe it's managing e-mail only and things like that, then you can start to see some other competitors come to there as well. But in the vast majority of opportunities today, it's ourselves, Microsoft and the VMware. And we win when security matters. We win when choice matters, frankly. When you want to make sure that you have multiple different operating systems that are covered, when you want to make sure you've got multiple cloud services that are covered, we are the vendor of choice at that point in at that point in time.

[Robert Majek:]

Thanks a lot Simon.

[Simon Biddiscombe:]

Pleasure.

[Operator:]

The next question comes from Robert Breza of Northland Capital Markets. Please go ahead, sir.

[Robert Breza:]

[Question Inaudible]

[Simon Biddiscombe:]

Rob, I apologize. I actually didn't hear that clearly. Your phone was fading in and out. Right, you want to ask it again.

[Robert Breza:]

[Question Inaudible]

[Simon Biddiscombe:]

Rob, your phone faded in and out. I apologize, and I still couldn't hear your question. Operator, why don’t we go to the next one and maybe Rob can come back.

[Operator:]

The next question comes from Raimo Lenschow of Barclays. Please go ahead.

[Raimo Lenschow:]

Hey. Hope this is working better. Congrats from me as well. That was a great quarter. Simon, can you talk a little bit towards the Google partnership, like, how is that evolving since we kind of talked about it earlier this year? And then I have a follow-up question.

[Simon Biddiscombe:]

Sure. So no change. As you know, we expected that the relationship with Google, which, as a reminder to those who are not familiar with it, is about making sure that Google and we are able to bring a cloud services marketplace to bear for both the enterprise market and for the service provider market as well. So we've progressed all of the activities as we would have expected them to progress over the course of the last 90 days. Some of those are technology-related initiatives, as we continue to work on the integrations of the platforms that are necessary. And some of those are go-to-market relationships as well – go-to-market initiatives as well, where we've been working extensively with the team on finding that right set of initial customers and making sure that both on the enterprise side and on the mobile operator side that we have got the right first customers lined up to be able to go and execute the vision and the strategy associated with the overall relationship. So it's going exactly as I would've expected it to at this point in time, and more news as we move later into the year on exactly who those first customers are and when we expect it to contribute to both our billings and revenue.

[Raimo Lenschow:]

Perfect. Thank you. And then, Scott, one for you, and welcome to the team. If you look at – now that you've kind of start to look at the business and as kind of billings, they're starting to go double digits again, the cloud revenue is kind of momentum continues to be strong with a good 24% growth, how do you think about OpEx in this context? Because, obviously, Simon introduced really good types of cost control to never get to their breakeven point. How do you think about OpEx going forward though? Thank you.

[Scott Hill:]

Thank you very much. So I think about OpEx going forward, kind of, in a consistent run rate fashion. As we billed over the course of the second half of the year, there'll be a little bit of an increase over Q2 in terms of the OpEx. But otherwise, it's going to be pretty consistent going forward. Thanks.

[Raimo Lenschow:]

Perfect. Thank you.

[Simon Biddiscombe:]

Hey Raimo, let me add to Scott's answer. One of the reasons I hired Scott is, he has a good sense of the balance between what you're driving for, for growth and what you're driving for, for profitability, okay. So the ability to balance those dynamics within any technology company is critical, obviously, in the CFO capacity. And Scott brought a real nice balance of how to think about growth and how to think about profitability as you move forward into 2019 and beyond.

[Raimo Lenschow:]

All right. Perfect. Thank you.

[Simon Biddiscombe:]

Thank you.

[Operator:]

The next question comes from James Faucette of Morgan Stanley. Please go ahead James.

[Yuuji Anderson:]

Hi. This is actually Yuuji Anderson on for James. Thank you for taking the question. Just to follow-up on OpEx again. I think Q2 came in a little bit lighter than what we would have expected. So is it the case that there was something related to the timing of hiring? And should we be thinking about that just being more back-end loaded than usual for the rest of the year?

[Scott Hill:]

Yes. So Q2 came in a little bit light, obviously, relative to our guidance, and a good portion of that was attributable to being a bit light on headcount. We also had – comparable to where Q2 was a little bit heavier, we would expect the second half of the year to bounce back to a more normalized level with what it's been recently.

[Yuuji Anderson:]

Got it. And then just a question on the billings metrics here. So if I heard the prepared remarks correctly, I think there was $4 million related to the newer products. So just kind of backing that out, it looks like billings would have been flat. So I'm sure I'm totally oversimplifying things here, but just, kind of, can you help us unpack a little bit what's going on just in terms of, perhaps, in seasonality in terms of existing products or older product sales? Thank you.

[Simon Biddiscombe:]

Yes. This is Simon. You actually – you can't do what you just did because there was actually a contribution from the Access solution in the second quarter of 2017 as well, right. So that product has been shipping now for about 18 months. So you're off in as much as the growth in the business on a year-over-year basis. It does have some nice EMM growth associated with it as well, okay. So we didn't unpack it quite the way you're trying to unpack it. But EMM actually grew quite nicely in Q2 as well.

[Yuuji Anderson:]

Great. Thanks so much.

[Simon Biddiscombe:]

Thank you.

[Operator:]

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

[Scott Searle:]

Hey, good afternoon. Thanks for taking my questions. Nice quarter Simon. Scott, welcome aboard, congratulations. Hey, quick question on the authentication product, Simon. In terms of – is it internally developed solution or did you partner on that front? And how quickly do you expect to get this rolled out? And kind of give us an idea about what you think the attach rate could be across the existing installed base? And what that does from an ARPU standpoint? I had a couple follow-ups.

[Simon Biddiscombe:]

Yes, sure. So first of all, the technology was internally developed, but let's make sure you understand exactly what that technology was doing, Scott. So if you think about – it's part of the Access product offering, if you will. And if you think about what Access does in terms of ensuring that only trusted users, trusted devices and trusted applications have access to cloud-based services, you need our MFA solution, Authenticator, in order to deal with the situation where you don't have a trusted device, right? So if you know you've got a trusted user, and you've got a trusted application, how do you deal with the scenario where it may not be a trusted device or a managed device by MobileIron? So that's the use case that we very specifically targeted our MFA solution at, which is different than how others think about targeting the MFA market, okay? So think of a laptop, right? Let's say you've got a laptop, and you want to make sure that you have an Access solution to a laptop market. But that laptop might not actually be managed and secured by MobileIron. It may have a legacy management system associated with it. So what Authenticator does is solve for that type of challenge within the overall Access suite. So the attach rate, I think, will be lower than the overall attach rate associated with Access because, obviously, Access is taking advantage of the mobile fleet that we have penetrated over the course of the last seven, eight years. I mean, in many instances, the customer was demanding the Access solution from us is not necessarily asking that we manage that type of capability associated with their laptops that might be attaching the legacy internal applications as opposed to cloud services and so on. So that's the backdrop for Authenticator, and I'm happy to take you through it in more detail afterwards.

[Scott Searle:]

Okay. And just a follow up, it sounds like on the threat protection side, which – $4 million of billings across that. And Access, certainly off to a good start. But what is the sales cycle looking like on the Mobile Threat protection side? How quickly are you getting to the table? It sounds like there's an installed base that you have to knock out. And so what is it look like in terms of getting into some of those accounts, when those renewals come up for bid that you're able to get your foot in the door?

[Simon Biddiscombe:]

Yes, it’s actually the other way. The vast majority of customers we're engaging with –and it's obviously our 17,000-plus cumulative customers we've sold this technology to over the course of the years. The vast majority of those customers don't have a solution deployed today, Scott. They may have been looking at solutions, and in some circumstances, they'd previously deployed one of our competitors' solutions. But in the vast majority of the opportunities we are looking at, it's Greenfield at this point in time. And they haven't deployed an MTD solution in the past. The cycle, kind of, three months plus a little for most of the wins associated with those technologies our customers do expect to go through some level of, not necessarily, the proof-of-concept, but some level of proving that for their specific use cases that the combination of the MTD capability and the EMM capability gives them exactly what they need. So it's not a short cycle, it's not in a weeks or anything like that. But it's not a long cycle either. But call it, probably three months on average, something like that.

[Scott Searle:]

Okay. And last question is just a follow-up. I think you'd indicated in terms of Threat and Access that there were – there are other services besides authentication possibly, I think maybe a forthcoming at some point this year. Are you still on track to continue to add additional upsell opportunities and services? Thanks.

[Simon Biddiscombe:]

Yes. We have to, right? I mean, as I said in my prepared – in answer to the first question actually and in my prepared remarks, we recognize that there's an incredible value in the incumbency that we have at this point in time and making sure that we continue to deliver differentiated solutions to the customer base will drive greater, strategic importance as it relates to our customers and our technologies. It will drive greater economic value from any one of those relationships and drives big enough. So yes, continuing to deliver new solutions to our customer base is critical as we move forward to, not only this year, obviously, but into 2019 and beyond as well.

[Scott Searle:]

Thank you.

[Simon Biddiscombe:]

Thanks Scott. Appreciate it. End of Q&A

[Operator:]

[Operator Instructions] There are no more questions at this time. This concludes the question-and-answer session and today’s call. Thank you for participating. You may disconnect your lines. Have a pleasant day.