MobileIron, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Welcome to the MobileIron Second Quarter 2017 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 Sam Wilson. Please go ahead.

[Sam Wilson:]

Thank you, operator. Good afternoon. And welcome to MobileIron's second quarter 2017 financial results conference call. Joining us from the company are Barry Mainz, Chief Executive Officer; and Simon Biddiscombe, Chief Financial Officer. The format of the call will be an introduction by Barry. Then Simon will provide details on the financials. We will then have time for questions. If you have not received a copy of today's release, please call MobileIron Investor Relations or 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, 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 in 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 the call may not contain current or accurate information. 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 the 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 At this time, I'd like to turn the call over to Barry. Please go ahead, sir.

[Barry Mainz:]

Thank you, Sam, and good afternoon. In my remarks today, I will provide a brief commentary on the second quarter, discuss key highlights and provide progress on our growth initiative in the mobile and cloud security market. Simon will then provide our detailed financial results. Second quarter revenues were $42.7 million, within our guidance range of $42.5 million to $44.5 million that we provided on our last earnings call. Billings were $44.9 million, growth of 9% over the second quarter of last year but below our $47 million to $49 million guidance. This was a sales execution misstep and we are making a small adjustment to our full year guidance, taking down the high end of our 2017 billing range from $210 million to $205 million. Let me give you some color. At the beginning of the quarter, I upgraded our sales organization, bringing in Brian Carr, as VP North American Sales. I am thrilled that I was able to hire an executive of Bryan’s caliber, who has a wealth of sales leadership experience in mobile and enterprise. This change led to a combination of planned and unplanned turnover of sales reps which we believe resulted in some large deals flipping out of the quarter causing the shortfall in billings. We are confident slipped deals were not competitive losses. We just didn’t convert the deals within the quarter. As Head of Sales it is my responsibility to ensure sales excellence, which is why I made a leadership change. We have substantially backfilled the sales reps that left. Turning to our four growth initiatives, which as a reminder are core EMM, cloud security, desktop security and the IoT. We believe the EMM market remains solid. We continue to deliver features that differentiate us from our competitors and we have plenty of room to grow in the category. We don’t believe our billings' miss is in anyway an indicator of the markets potential or our strength in the market. Let me share some highlights from the second quarter. We are excited that we passed 15,000 cumulative customers. This is a major milestone for any software company and we are proud of what we have accomplished. Our biggest deal in the quarter was a large U.S. government agency that continues to replace its legacy Blackberry products with our platform. We secured a seven figure order and believe there is more to come. We also won an expand order from the Department of Homeland security. This was a direct result of the previous investments we had made in government specific certification and capabilities. The U.S. Federal Government is an area where we continue to have a first mover advantage over our competition. Our Federal success also helped us with state and local agencies, both domestically and internationally. In the second quarter we won a number of new customers including the Los Angeles metro transportation authority, the Slovenian railways and the Public Health Agency of Sweden. Each of these was a competitive win against one or more of the major players in the EMM space. I am very pleased that we are closing expand deals with our global federal government customers and winning new customers throughout the government vertical. Leading professional organization continue to choose MobileIron, RSM International, the sixth largest accountancy network continues to expand their mobility footprint and drive their IT initiatives. The IT department is deploying multiple Microsoft app and is using MobileIron for their security framework. John Hancock is another customer that expanded both in number of seats and in capabilities. With a broad market demand I just spoke up, and rich set of features, our cloud platform remains our fastest growing platform. I am pleased to report that over 75% of our new customers in the second quarter were on cloud. Moving on to our cloud security business, today’s companies are multi cloud enterprise. They deploy Office 365, Salesforce, G3, Box, [indiscernible] Tableau, Workday and more. Apps not browsers are becoming the primary way that employees access these services on mobile devices. Apps hold business data and all it takes is one miss placed device or one rogue app on a device to compromise data. MobileIron Access addresses these cloud app security challenge. Access ensures that only authorized devices with sanctioned apps can connect to cloud services like Office 365, or Workday. We believe MobileIron access is the only solution in the market that solves the cloud app security challenge for the multi cloud enterprise. We continue to ad capabilities to MobileIron access and as of the end of Q2 on the app side we added Dropbox for business and integrations with four major identity providers, Microsoft, Octa, One Login and Paint. User name and password are no longer enough for security. So identity solutions cannot solve the cloud app security problem on their own. You have to trust the user but you also have to trust the device and the app, and that’s the additional content that MobileIron access provides. Our third key growth driver is desktop security. Mac OS and Windows10 are transforming their requirements for traditional PC management tool. The old model of control and lock down are being supplanted by EMM and south service which provides greater security at a lower cost. To-date the pace of Windows10 adoption has given us the chance to work closely with customers who are in early stages of piloting Windows10. We have multiple customers conducting trials in those tablets and desktops using our EMM software. The combination of new security option, a completely new operating system and changes in application infrastructure appears to have caused IT department to proceed cautiously and therefore more slowly. We have begun operationalizing our partnership with Lenovo and during the quarter Lenovo and MobileIron sales organizations were jointly engaging with customers and planning the marketing roadmap for the second half of the year. We expect to report good news in the future. Moving on to IOT. The group is on track. We are looking to ship our first prototype in the third quarter and have revenue ready product by the end of this year. We believe that IOT will be a meaningful contributor to our business in the years to come. To reiterate, looking ahead we see our core EMM business cloud security, desktop security and IoT powering our growth. In the second half for the year we have recognized the importance of delivering on our financial goal in order to unlock shareholder value. We expect to generate positive cash from operations for the year and be approximately non-GAAP operating breakeven for the fourth quarter. I want to thank our shareholders, our employees, our partners and our customers for their continued support. Now I will turn the call over to Simon.

[Simon Biddiscombe:]

Thanks, Barry, and good afternoon. Our discussion today refers to 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. In the second quarter of 2017 billings were below our guidance and revenue was within the range provided. With gross margins above the guidance range and operating expenses below the midpoint of the range, we continue to show improvement in non-GAAP EPS. Over the last four quarters we have grown billing by 8.9% and improved non-GAAP operating margin by 12.8 percentage points. For the second quarter ended June 30, 2017 gross billings were $44.9 million, up 9% year-over-year. As Barry mentioned several large deals slipped out of the quarter. Our recurring gross billings in the second quarter was $33.7 million, up 11% year-over-year and makeup 75% of total billings. On an annualized basis our recurring billings business is over $130 million. Revenues were $42.7 million, up 10% year-over-year. Breaking down revenues into the segments perpetual license sales were $9.7 million, down 1% year-over-year. This was the smallest year-over-year decline in perpetual since 2014. New customers continue to show a strong preference for subscription solutions and this was offset by expansion with existing perpetual customers. Revenue from subscriptions consisting of both term subscriptions and monthly recurring charges or MRC was $17.2 million, up 17% year-over-year. Term subscription revenue was $12 million up 37% from a year ago. During the second quarter we had a large MRC customer convert to a term subscription, in order to achieve cost savings by moving to a fixed term contract. As a result MRC revenue was $5.3 million, down 13% from a year ago. Revenue from software support and services was $15.7 million, up 10% year-over-year. We continue to enjoy renewal rates in excess of 90%. Revenue from recurring sources for the second quarter was $31.9 million, up 15% year-over-year. We believe that recurring revenue reflects combined performance data on seats, contract lengths, billings mix and renewal ASPs. And since ASP have been generally flat the rate of growth of recurring revenues has been highly correlated to the rate of growth of cumulative seats. We believe recurring revenue is the best policy for identical growth. Non-GAAP gross margin in the fourth quarter was 84.4%. This was stronger than expected based on our product mix and our continued operating efficiency in the customer success organization. Total non-GAAP operating expenses were $43.8 million which was just below the midpoint of our $43 million to $45 million guidance. We continue to keep a very close eye on expenses and are focused on return on investments for each dollar spent. Turning to the bottom line for the second quarter, we reported a GAAP net loss of $18.5 million and a non-GAAP net loss of $7.8 million. GAAP EPS was a loss of $0.20 and non-GAAP EPS was a loss of $0.08. This each based on a weighted average basic share account of 93 million shares. Moving to the balance sheet, we ended the quarter with $89.2 million in cash and short term investments, down from $90.5 million in the prior quarter. In the second quarter cash from operations was a negative $3.8 million. I continue to be pleased with our ability to manage cash flow. DSOs for the second quarter of 2017 were 83 days, up seven days from last quarter. In general, our DSOs remain in the 70 to 80 day range and have typically moved up with their invest [ph] on inter-quarter linearity and some seasonal factors. The second quarter was more backend loaded than usual causing us to bump above the normal range. Deferred revenue was $93.4 million at the end of June, versus $72.5 million the prior year, up 29% year-over-year. Turning to third quarter of 2017 guidance, we expect gross billings for the quarter to be in the range of $48 million to $52 million up 2% to 10% year-over-year. Projecting a revenue range of $44 million to $46 million, up 6% to 11% year-over-year. We expect non-GAAP gross margins to be approximately 82% to 84%, and we expect that non-GAAP operating expenses will be in the range of $41 million to $43 million primarily driven by the removal of seasonal factor, for example our annual user conference which occurred in Q2. The second quarter performance behind us we are updating our annual guidance to reflect recent results. So far this year, product mix was coming as expected. We continue to see the mix shift from perpetual to subscription slope, and we're modeling perpetual as a percentage of revenue to decline by roughly 4% to 5% throughout 2017. As with and new product introduction, we remain very conservative with billings related to MobileIron Access and Windows 10 in 2017. The Windows 10 rollout is running behind both iOS and the industry expectations while Access is doing very well. We expect the blended ASPs will be at least flat in 2017. We believe our renewal rates will remain stable for the year. We expect the gross billings in 2017 will be in the range of $195 million to $205 million depending on the mix in the overall business trends, for growth of approximately 10% in the midpoint. And we expect revenue to be in the range of $175 million to $185 million for growth of approximately 10% at the midpoint. We're reducing the high end of the range by $5 million. Our plan is to exit 2017 the fourth quarter with a non-GAAP operating margin around zero so the range is negative 2% to a positive 2% and we continue to believe we can generate cash from operations in 2017. As a reminder 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 today. And all statements made on the call are made as of today. Operator, we are ready for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Michael Turits with Raymond James. Please go ahead.

[Michael Turits:]

Hey guys. Overall you've been a very consistent for a long time. Let's drill down a little bit on the (inaudible). I believe it's occupied to bring on Prime Car [ph], can you talk about exactly what happened there and why have the churn and the spills and then obviously what you are doing to do try and fix that.

[Barry Mainz:]

Yeah no problems, Michael thank you. So as I said in my prepared remarks, we changed leadership, with stuff we needed to do like to take the company to next level. I'm really excited about Brian, both not on his pedigree but he's got subject matter expertise from his good experience, but also just he's a sales professional. And as a result, we had both planned and unplanned turnover. And if I got look back and say what I do that knowing what I know now would I have made the change? Absolutely. And I feel we're stronger than we were 90 days ago and it's just kind more of a stumble versus a fundamental shift in the company or the strategic value.

[Michael Turits:]

So what any of those deals that about to be closed and besides hiring more people, is there anything that you're doing to try to change kind of market at this point.

[Barry Mainz:]

Yeah, so we're going to close these deals in Q3. I feel very confidence about them, and yes on the other side we made progress on closing those deals for sure. I think the other way to look at is this. When you have new sales reps you not only have a chance to kind of boot them up, and also there is a productivity dynamic like how productive do they get. And so that’s we were conservative in not only the guide having a little bit wider guide, but also the forecast. And part of the changes, that what we are making, we’re hiring people, upgrading the team. And really getting people that can take us to the next level, as we start to look at some of the solutions, like Access and having to sell maybe a broader portfolio of product plus services and a more complex sale. We had to upgrade certain of the sales organization, and we’ve made that and we’ve substantially back fill the sales reps that have left the company. And also I like make sure that, I say again, I think we’re better off than they were 90 days and kind of remember the financial objectives for the company remained unchanged for the year.

[Michael Turits:]

Okay. If I got to squeeze one more on the new product front. You said that Access was ahead of plan. I think that Windows 10 was behind. Can you just give a little more to that?

[Barry Mainz:]

Yes. So let me start with Windows 10 first. I mean you can see these in Microsoft Office and kind of see it in the enterprise. Many adopters of Windows 10 in the enterprise, especially with large enterprise where we have our sort of sweet spot and it’s hard. I mean Window 10 breaks pretty much every business process of a domain join infrastructure. And it's moving out slower than I think that everyone would expect. So good news is we’re having timed there, make sure we’ve a really robust application lots of PoC time because – that the boot up time for that it grow this slower than we expect it. And we’re also spending time with Lenovo and we announced last quarter with best strategic relationship. So, sales teams have put together joint a calling campaigns, we’re building at a pipeline and we’ll see some good success moving forward already. Now you asked a question about access, feel good about Access. I mean we’re solving a problem that other companies don’t have any answer for, our competitors if they will. And I feel really good about our ability going and talk about something that's differentiated and solves business problems for senior executives that are important and we’ll continue to see nice structural growth over time.

[Michael Turits:]

Okay, great. Thanks Barry and thanks everything Simon.

[Barry Mainz:]

Thanks Jim. Next question please.

[Operator:]

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

[Raimo Lenschow:]

Thanks for taking my question. First is the -- you’ve talked about the issues that you had this quarter on the sales front. Is there -- just -- sorry, and if I look at the industry like I saw BlackBerry kind of stumble this quarter as well. Is there any kind of broader issue or do you think it’s really like internal, like in sales force related?

[Barry Mainz:]

Sales force related.

[Raimo Lenschow:]

Great, okay.

[Simon Biddiscombe:]

So Raimo, let me build on that really quickie so if you look -- I am going to tell you what the value of the transactions that didn’t close and slipped from period-to-period were, but suffice to say we know those deals were there and as Barry pointed it was execution related, that result in those deals not closing. Which is why we get Barry's conclusion that this is Salesforce execution related, had those deals not existed than it would have been an entirely different conversation to be had, right but the deals were there, they just didn't get close.

[Raimo Lenschow:]

Yes. So, wasn't a big comparative for taking longer to sign deals, it was really you guys not working the deals properly, or alike could have worked the deals better?

[Barry Mainz:]

Yes, having people to work them. And just to remind you we had fourth quarter of realty successful track record of being able to go and talk about execution and then providing results from that execution.

[Raimo Lenschow:]

Exactly, no exactly that’s the way to a little bit on unfortunate because it was a good trend. And then you said like [indiscernible] you will be signing in Q3 or coming back but then the Q3 billing growth is like 2 to 10, like how I even -- is that kind of conservatism or how you do have to think about that?

[Simon Biddiscombe:]

I’ve mentioned this before Raimo, look people take time to be productive. So, as we have the new records come on board, we’ve been conservable about the forecast, kind of no one has their productivity works to sales people and we have also widen the range to incorporate that. But again I really think that this company is stronger now than it was 90 ago.

[Raimo Lenschow:]

Okay, perfect. Hey thanks good luck

[Simon Biddiscombe:]

Thanks Raimo. Thank you. Next question please.

[Operator:]

The next question comes from Robert Breza with Northland Capital Market. Please go ahead.

[Robert Breza:]

Hi, good afternoon. Thanks for taking my question. Barry and Simon maybe, can you help me to understand where you had the sales execution issue, was a European base, North American base, when you have talked about the turnover I know you mentioned the specific change in the leadership in North America but what else did you see in your -- I am just curious get your thoughts overall?

[Barry Mainz:]

Yeah it’s a good question, it is North America based.

[Robert Breza:]

Okay and then as you think about the cash flow objectives Simon and back filling here for sales execs, can you talk to your hiring plans for the second half of the and how we should think about those relative to the cost structure.

[Barry Mainz:]

Yeah so if you think about the cost structure that I talked about we just delivered an operating expense number of $43.8 million. It takes time in Q3 primarily attributable to those one-time items that kind of rolled out things at our annual user conference and so on And then as always we are going to be maniacally focused on making sure we understand how every dollar is spent and making sure that as we look at the hiring plans, as it relates to new heads and as it relates to attrition replacement as well, that we are optimizing for the success of the business. That’s no different than it's historically been but I think we have done a good job continuing to improve the financial performance of the business. We have, I think for, probably everyone over the last four quarters the operating performance improving at a higher rate than the billings or revenue performances improved. So we are going to keep our focus on driving the business to operating profit in the fourth quarter and we will keep our focus on getting the point where we generate cash the operating level on a full year basis as well.

[Robert Breza:]

Maybe just one last follow up for Barry, as you think about sales force teams I think it's pretty standard and software where we see -- you turn out the bottom 5% of the sales force was it significantly in excess of that, where you talked about being more confident and you think the firm is better positioned going forward since the last 90 days, but can you kind of put some context around the churn that you guys had, either voluntary or involuntary?

[Simon Biddiscombe:]

So I will take this one for Barry, Rob. No, we’re not going to provide that level of detail obviously and it wouldn’t be appropriate to discuss exactly what rates of churn we saw nor what type of person it was, with power [indiscernible] written down.

[Robert Breza:]

Okay. Thank you gentlemen.

[Barry Mainz:]

Thanks Rob. Next question please.

[Operator:]

Your next question comes from Michael Kim with Imperial Capital. Please go ahead.

[Michael Kim:]

Hi, good afternoon guys. I am just following up on the sales organization. Just to put in context do you see you sales capacity maybe exceeding billings, anticipated billings growth by year end or how should we think about that? And then behind the capacity, are you seeing the percentage of rep sales guys exceed 50% on their productivity?

[Simon Biddiscombe:]

So it's Simon. That’s a very granular question and we wouldn’t normally answer it. First of all I am not certainly not answering the second part of that which where individual sales guys may stand relative to quota. If I actually look at the quota capacity, clearly that's something which given consideration as it relates to both the Q3 guidance and then the full year number as well. As Barry said when you hire sales guy, it takes six to nine months to get them fully ramped and to the point where they are truly delivering on a quota number that somebody who may have left the organization would have been carrying. So turnover certainly impacts capacity or certainly kind of functional capacity if you will. But we’re not going to go into any more detail than that at this point in time Michael.

[Barry Mainz:]

There is one thing I’ll add to that Michael, Michael, can I add one more bit of a color there. Maybe it was implied in the question about that, that we certainly recognize that the changes will have a short term impact. But we needed to upgrade certain functions in the sales organization bringing certain kind of talent and we did. So those major changes are done. Front line managers as well as leader, as I mentioned with Brian and we are through all of that. So now it's really about building pipeline and executing, and we have got the people and the team that we think feel very confident about moving forward.

[Michael Kim:]

Got it and then switching gears to the desktop opportunity can you provide an update on partnerships with additional PC OEM, beyond Lenovo, how you are building out that part of your business.

[Barry Mainz:]

Yeah so with others like HP we are meeting in the channel today and all I say that nothing announced at this time but again as I mentioned before, the enemy of your enemy is your friend and being able to align with the HPs and Lenovos of the world is a nice things for them as well. So got one future partnership done and we are meeting in the channel with the other one, and nothing to announce at this time.

[Michael Kim:]

Okay great, thanks very much.

[Barry Mainz:]

Next question please.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Sam Wilson for any closing remarks.

[Sam Wilson:]

Thank you for joining us today. If you need a replay of this call please call 1844-512-2921 and use the replay code 10003121. Once again thank you very much and have a good day.

[Operator:]

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.