MobileIron, Inc.
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the MobileIron Third Quarter 2016 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 Mr. Samuel Wilson, Head of Investor Relations. Please go ahead.

[Samuel Wilson:]

Thank you, operator. Good afternoon, and welcome to MobileIron's third quarter 2016 financial results conference call. Joining us from the company are Barry Mainz, Chief Executive Officer, Simon Biddiscombe, Chief Financial Officer and Ojas Rege, Chief Marketing and Strategy 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. Before we begin the formal remarks, the company advises that today's conference call contains forward-looking statements that involve risks and uncertainties including, but not limited to, statements regarding MobileIron's revenue, operating expenses, cost structure, GAAP and non-GAAP financial measures, projected financial results and trends in MobileIron's business. There are a significant number of factors that could cause actual results to differ materially from statements made on this call including, but not limited to, our limited operating history, quarterly fluctuations in our operating results, our need to develop new solutions, product defects, customer adoption, competitive pressures, mix shifts, our ability to scale, our ability to recruit and retain employees and the quality of our support services. Forward-looking statements are subject to a number of significant risks, uncertainties and assumptions as to future events that may not prove to be inaccurate. MobileIron's actual results may differ materially. For discussion of potential factors that could affect our future financial results and business, please refer to our reports on Forms 10-K, 10-Q, and 8-K and our other filings we make with the SEC from time to time. All statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented in the call may not contain current or accurate information. MobileIron does not assume any obligation to update any forward-looking statements to reflect events that occur or circumstances that exist after such statements are made today. In addition, several non-GAAP financial measures will be mentioned on this call. Information relating to the corresponding GAAP measures as well as a reconciliation of the non-GAAP and GAAP measures can be found in our press release on the Investor Relations website or in the 8-K filing with the SEC. We believe these non-GAAP financial measures are helpful in understanding MobileIron's past financial performance, it's future results, but are not meant to be considered an isolation or as a substitute for comparable GAAP measures and should be only read in conjunction with MobileIron's consolidated financial statements prepared in accordance with GAAP. As a reminder, in the past we've reported non-GAAP revenues to account for Vendor-Specific Objective Evidence or VSOE and to provide more meaningful period-over-period comparisons. Starting in the first quarter of this year, we are reporting only GAAP revenues for both 2015 and 2016, because VSOE adjustments are immaterial. At this time, I'd like to turn the call over to Barry. Please go ahead, sir.

[Barry Mainz:]

Thanks Sam and good afternoon. In my remarks today I will provide a brief commentary on the third quarter's financial performance, discuss a few key highlights and provide an update on the mobile security market. Simon will then provide a detailed financial results and our guidance for the fourth quarter. We were very pleased with our financial performance in the third quarter. GAAP revenues were up 41.6 million, above the high-end of our expected range of 39 million to 41 million. The better revenue was driven primarily by higher-than-expected billing. Billings came in at 47.3 million, above our expected range of 43 to 45 million. We saw strengthen in our business from new and existing customers. We demonstrated our financial discipline by keeping operating expenses at approximately 40 million below our forecast of 41 to 43 million. We remain committed to the goal of achieving cash flow breakeven in the fourth quarter. And Simon will discuss this further in his remarks. September marks the end of my third quarter as CEO of Mobileiron. In the last nine months, I have met in excess of 200 customers. They are all worried about security because mobile threats are becoming more frequent. And when these threats are successful both business and personal data are stolen. In August we published the second edition of our mobile security and risk review. Our data shows that enterprises are still not doing the things they could to protect themselves. We believe that a majority relies solely on ActiveSync. ActiveSyncwas designed as a messaging protocol, not a security tool back in the days of PalmPilot and Windows CE devices. The asset has permitted to device control in the form of full life but provides no detection for basic threats like jailbreaking or rooting which compromises the operating system and data. The only remediation capability in ActiveSync is a full device life.Device life is problematic because it only happens after the device a data where compromised. Over the last six months mobile attacks are getting more sophisticated, aggressive and severe. I will give you a couple of examples. On Android we saw the emergence of the HummingBad and godless malware families, which both include exploits to root devices over the air without user's knowledge and have already been widely distributed. The quad root of vulnerabilities affecting an estimated 900 million devices were disclosed. It is now possible for anyone to purchase versions of the Stage fright vulnerability. Once that attach has compromised the OS, they can take control of the user's device. On iOS the so-called Trident vulnerabilities were disclosed and the Pegasus malware families were revealed. This shows that attackers are going to increasingly extreme lengthto gain control of devices and to get access to data. Unprotected mobile devices full of valuable data are becoming a serious focus for hackers. Just this week the so-called Dirty Cow method rooting of Android devices was discovered. It is believed to work reliably on every version of Android and a wide array of hardware. This actually can be installed by malicious apps to spam users by circumventing applications sandboxing and other security measures to open the Android. Our software would detect the device, allowing remediation before the data was locked. Further we can blacklist known malware to ensure that unintentional installs do not incur. It’s not just that [indiscernible] driving this issue with mobile security. According to our data, 40% of companies have missing mobile devices and more than 25% have out of date policies on the devices, only 8% of the companies would enforce the OS update even as more and more attacks occur via old lessons of the OS and companies are worried about moving corporate data to consumer apps. The top blacklisted apps include consumer versions of Dropbox, Evernote, Twitter and Skype. In the early days of [indiscernible] mobility, the security threats were far and few to point. Now we are dealing with the fast-moving and swiftly changing threat landscape. And our software solution is required. [indiscernible] a leading industry research firm published detailed look at EMM‘s capability and evaluated all the top vendors in high security mobile use cases. Mobileiron scored exceptionally well and was far ahead of our primary competitors Microsoft and VMware. VMware AirWatch scored in the middle of the pack and Microsoft Intune was out of its’ league scoring in the bottom four in all but one use case. We firmly believe we have the most and best EMM platform on the market. Having in battled tested and sold into the toughest security environment in the world. We continue to gain traction with Mobileiron Access the first security solution to solve the data loss problem created by unmanaged application, accessing corporate data in the cloud. Mobileiron Access established a new security requirement only trusted apps on trust devices with trusted users should be able to access corporate information in the cloud. Mobileiron Access is particularly attracted to customers in highly regulated industries. We have a number of large financial services, retailand healthcare firms currently in early stages of use. During the quarter, we added another level of security with the announcement of derived credentialsfor next-generation multi-factor authentication. Along with our partner Entrust Datacard we provide government agencies with the ability to protect sensitive data using smart cards for authentication without passwords. While US federal government was the catalyst for derived credential, this methodology is receiving interest from enterprises moving to next generation forms of authentication. When we include Access and derived credentials with our EMM platform we believe Mobileiron is the most comprehensive mobility security platform. Our solution is low cost when compared to the expenses of a security book. We believe that customers will want a secure EMM platform with a native user experience. We announced today that we surpassed 12,500 cumulative customers. I'd like to share some deal highlights that show how companies are using mobile to transform their businesses. Thus far, the 200 year old plus provider of paint and coatings chose Mobileiron to replace their incumbent EMM vendor. Our consistency around Android devices and the desire to move to a cloud made Mobileiron Cloud the winning solution. We continue to gain traction in Asia with significant win at Nikon. Nikon chose Mobileiron over others based on our lower cost of ownership and better performance. For more than a 170 years New York life insurance company has helped people achieve financial security and peace of mind. The company has over 10,000 employees and with an extended workforce of more than 12,000 licensed agents in the field. Because the company deals with its customersmost sensitive personal and financial information, it needed to meet strict privacy data protection guidelines laid out by [indiscernible]. To meet these requirements Mobileiron and its ecosystem partners developed a layered security approach to make New York life agents more agile while protecting customer data. As I mentioned earlier this year, we have a sizeable pipeline of government opportunities. This is a result of years of investment and here are some examples of recent wins. The city of Los Angeles Bureau Sanitation, the lead agency for the city's environmental programs and initiatives selected Mobileiron Cloud to deploy secured custom apps to its employees. We received another stand order from the US Department of Agriculture, with over 100,000 employees and $140 billion total budget. The USDA is not a small organization; we thank them for letting us be part of the solution to more off their legacy provider. The State of IndianaOffice of Information Technology was created in 2005 to service 108 agencies. Indiana is moving to cloud technology such as Office 365 and wanted a holistic solution. We were chosen over other vendors because our ability to secure more than just one singleproductivity suite. For Surrey County Council, the local authority for population of more than 1.1 million people in the south-east of England, a mobile workforce means less time in the office and more time on the frontline delivering services such as adult social care and road improvement. The council has decided to initiate its mobile strategy with the help of Mobileiron. And the UK local government organization, Surrey County Councilmust comply with strict data security requirements such as Public Services Networkand Communications-Electronics Security Group. Organizations around the world are going mobile first and cloud first and the government is no exception. As you can see from these wins, it’s not just US government, the governments around the world. In closing, the company had a great third quarter betterthan we expected 90 days ago. I am very pleased with how the team executed and we enter seasonally strong fourth quarter in better shape than we have been in some time. With that said I’d like to turn the call over to Simon.

[Simon Biddiscombe:]

Thanks Barry and good afternoon. The third quarter of fiscal 2016 showed a marked improvement in our financial performance. Billings and revenues were in excess of our expectations coming into the quarter. The upside was driven by improved sales execution but led to strength in new business. Operating expenses were below our expected range as a result of prudent expense management across all functions. As a reminder, our discussion today refers to non-GAAP financial measures unless otherwise noted. Our press release, Form 8-K and website provide the reconciliation for GAAP to non-GAAP financial results. For the third quarter ended September 30, 2016 gross billings were $47.3 million, up 15% year-over-year. Our recurring billings in the third quarter were nearly $35 million, up 28% year-over-year. On an annualized basis recurring billings are now at $140 million run rate. Revenues were $41.6 million,up 9% from the prior year. Breaking down revenues into the segments. Revenues from perpetual license sales were $11.3 million, down 17% year-over-year as new customers continue to show a strong preference for subscription solutions. Revenue from subscription consisting of both term subscriptions and monthly subscriptions or MRC was $15.6 million, up 27% year-over-year. MRC revenue was $6 million, up 13% from a year ago. Term subscription revenue was $9.5 million, up 38% from a year ago. Revenue from software support and services was $14.7 million, up 21% year-over-year. Revenue from recurring sources for the third quarter was $29 million, up 24% year-over-year. We believe that recurring revenue reflects combined performance data on seats, contract lengths, billings mix and renewal ASPs. Since ASPs have been generally flat, the rate of growth of our recurring revenues has been very highly correlated to the rate of growth of cumulative seats. Non-GAAP gross margin in the third quarter was 83.8%. Total non-GAAP operating expenses were slightly over $14 million as the organization continues to achieve gains in operating efficiency. This is shown by non-GAAP operating expenses decreasing 11% year-over-year, while billings grew 15% year-over-year. Non-GAAP operating margin were negative 12.6%, significantly better than the negative 35.1% a year ago. Turning to the bottom line for the third quarter, we reported a GAAP net loss of $14.6 million and a non-GAAP net loss of $5.5 million. GAAP EPS was a loss of $0.17 and non-GAAP EPS was a loss of $0.07. These are based on a weighted average basic share count of 86.7 million shares. Moving to the balance sheet, we ended the third quarter of 2016 with $80.4 million in cash, short-term and long-term investments, a decrease of $5.5 million from the prior quarter. Deferred revenue was $78.2 million at the end of September versus $64.3 million the prior year, up 22% year-over-year. DSOs for the third quarter were 79 days, up two days from last quarter. In general, our DSOs are in the 70 to 80 day range and have typically moved up or down based on intra-quarter linearity and some seasonal factors. Turning now to guidance. We expect billings for the fourth quarter to be in the range of the $52 million to $54 million, up 7% to 9% year-over-year. We are projecting a revenue range of $44 million to $46 million, up 2% to 7% year-over-year. We expect non-GAAP gross margins to be approximately 83% to 85%. We expect that non-GAAP operating expenses will be in the range of $41 million to $43 million. And we are tightening the guidance range on operating margins to be a negative 8% to 10%. Cash flow from operations should be positive for the quarter. The company put forth the target of becoming operating cash flow positive in the fourth quarter of 2016, nearly two years ago. Through business ups and downs, including a change of leadership, the company has remained unwavering in this objective. As we start the fourth quarter, we look forward to achieving this long-held goal for our shareholders, customers, employees and partners. Operator, we are ready for questions.

[Operator:]

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

[Michael Turits:]

Fundamental side, can you tell us about your progress on trying to address the Windows 10 market and the effects as well on the mobile side? And then from a modeling perspective, great that you hit the or in-line or on target to hit cash flow perhaps breakeven in the fourth quarter, what can you begin to tell us about the path for free cash flow and EBIT profitability in 2017?

[Barry Mainz:]

Hey, Michael. Do us a favor; we actually missed the first part of the question. Your phone didn't click in, could you ask the first part of the Windows 10 related question again for us?

[Michael Turits:]

Yes. Just what can you tell us in terms of early traction in addressing the Windows 10 mobile and fixed market? And then the second one was on fiscal -- anything you can tell us on the path to fiscal ‘17, both cash flow and EBIT profitability?

[Barry Mainz:]

Yes. So I’ll take the first one. This is Barry by the way. So we’re making really good progress on Windows 10. We had a recent announcement with Bridge that really helps bring sort of all the global policy objects, all the old and allow us under one console to be able to manage sort of the old processes with the new. And to sort of stay tuned for more data on progress, but early -- kind of early successes are pointing in the right direction.

[Simon Biddiscombe:]

And I'll take the second part of the question, Michael. This is Simon. So we're not going to provide guidance for 2017 at this point in time, but it’s very fair to say and I've said this for some extended period of time now that we’re not going to let this business regress significantly from a financial performance perspective in 2017. Having got to cash flow breakeven, the guidance that we just provided, my expectation is that we will be around that number as we move through 2017 plus or minus a little. We’re not going to let it regress significantly. I think that's the important message that we need to be able to communicate to our shareholders.

[Operator:]

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

[Michael Kim:]

Hi, good afternoon, guys. Can you talk a little about the pipeline for Access and some of the early progress that whether you are seeing maybe a little high percent income, existing clients are net?

[Barry Mainz:]

We're having a little bit of difficulty on the line here, I heard the first part of your question. Just if you could?

[Michael Kim:]

Yes. I just wanted to get a little more insight on the pipeline for access and the adoption, or reception for adoption from existing customers or net new?

[Barry Mainz:]

Well, here is the good news. The good news is having 12,500 customers and kind of the museum quality customers if you will. We're starting there first for obvious reasons, and most of the POCs that we have are early kind of usage. It’s all in our installed base.

[Michael Kim:]

Great. And then just one question on the Q4 guidance, where do you see kind of the incremental OpEx spending coming from investments, primarily on the sales side or experiencing on the R&D side?

[Simon Biddiscombe:]

Actually, so it's a combination of R&D and sales and marketing at this point in time. Michael, we obviously expect the sales and marketing line to be slightly higher based on commissions in the fourth quarter, but if you go aligned in the middle of the guidance that we provided, 42 million would be the midpoint. I think R&D is going to be roughly 14. So the marketing roughly 23 and GNA roughly $5 million. So on a sequential basis, both the R&D and sales and marketing will pick up.

[Michael Kim:]

Great. And just lastly on pricing, are you seeing any shift, especially with the mix towards maybe prices and packages?

[Simon Biddiscombe:]

No. Pricing was very stable. It would be the right way to characterize it and allowing for the fact that we do continue to feel the mix towards the higher level of solution, it’s fair to say. It’s certainly moving in the right direction, no concern about ASP at this point.

[Operator:]

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

[Eugene Anderson:]

Hi. It’s Eugene Anderson on for James. Thanks for taking my question. Just looking at the Q4 guidance, are you anticipating a pickup in perpetual licenses perhaps from like year-end budget flushes and whatnot, just wondering what's kind of baked in there?

[Simon Biddiscombe:]

So if I actually look at it on a revenue basis, I think the mix is going to be relatively constant with what we delivered in the most recent quarters. So perpetual this year was 27% in Q1 of revenues, 25 in Q2, it’s back to 27 in Q3. My current estimate is it's going to be right around that number again here in the fourth quarter. So on a revenue basis, I think perpetual is going to be roughly where it was.

[Eugene Anderson:]

Got it. All right. And I’ve figured out, I should check in on the competitive landscape a little bit, I think [indiscernible] so their billings are up in the mid-teens, are there any changes you’re seeing sort of in the heads -- growing competitively head-to-head with their guys?

[Barry Mainz:]

So here is what I will say. I will say that there are still competitors that you can look at their results and they are certainly struggling in and around the sales execution and that's benefiting us.

[Operator:]

[Operator Instructions] The next question comes from Raimo Lenschow with Barclays. Please go ahead.

[Raimo Lenschow:]

Hey, congrats. That was a great comeback quarter for you guys. Just if you look at the improvement you saw this quarter, like how would you characterize or split it between execution on your side and market getting better in terms of competitive fields and customers being able to understand better your value proposition versus what other guys have to offer?

[Barry Mainz:]

That's a good question. There are three ways I would say that. Execution is getting stronger, the team is starting to gel from expected standpoint and our sales organizations are really executing. So I think it’s on competitive landscape, you mentioned just prior to that, you can go look at the earnings of our competitors, they are struggling. Any time you do acquisitions, it’s what we were hoping for. There would be pause in sales execution. So we are benefiting there. There is a third like this tool and as customers go more mobile first and they start to say I’m going to migrate more and more business processes and applications to mobile devices, securities become more and more important and as a result, when customers look at our solutions compared with the others out there for native experience solutions, we win and I am really excited about how that market is changing, and I am really happy about how competition is having their challenges and I really love the way we are executing.

[Raimo Lenschow:]

Okay. If you look at the markets, you guys are like good growth on the subscription part that is much higher than the competition, but overall you’re kind of in the mid-teens. [indiscernible] about a much faster growing market, how would you characterize the market, I mean now it is back on track, is that kind of more that you can outgrow the market growth, should there be market growth change as whole, can you talk to us at least?

[Simon Biddiscombe:]

Yes. So, Raimo, this is Simon. So let's talk about what exists in the market by a way of market growth information, so the data we point to is typically the IDC report and the IDC report is a revenue-based and certain markets grow somewhere between 15% and 20%, okay. So that's the market data that is available. The reason we give you that second layer of data along revenues and point you to recurring revenues is we believe that's far more indicative how quickly our business is growing, because every seat that we sell has a recurring revenue component to it. So every quarter, we give you recurring revenues and on a year-over-year basis, in the most recent quarter, our recurring revenues grew by 24%. So, given that average seat has a recurring component to it, that’s a good way to think about the actual rates of seat growth that we see in the business, which is far more indicative of the size of the market as I think about how to manage this business. We are fixated on making sure that we are winning new seats because every one of those new seats ultimately will have a long-term economic value associated with it. So there is no great market information granted to that, but on the metric that I’m most focused on, I'm convinced it will impact some of the markets.

[Operator:]

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

[Samuel Wilson:]

Thank you, everyone. A replay will be available on the Investor Relations website or by dialing 877-870-5176 or 1858-384-5517 and requesting ID number 117242 through November 27, 2016. Thank you.

[Operator:]

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