Q4 2019 Earnings Call

Basis, however, we are unable.

To make available a Reconciliation of non-gaap guidance measures to corresponding gaap measures on a forward-looking basis due to high variability and low visibility with respect to the charges which are excluded from these non-gaap measures now, I would like to call I would like to turn the call over to Jupiter Betty president and CEO of eight ten Networks.

Thank you, Chris. And thank you all for joining today. I am thrilled to join it and network at an exciting time for the business agent occupies an attractive area with a networking and security as companies increasingly focused on delivering business outcomes, while managing the operational complexities from proliferation of M O T shift to hybrid Cloud environments and ever-increasing complexity of the cyber security landscape service providers around the world also space the same challenges while getting ready for 5G technology to support many of these consumption Trends based on our Legacy 810 is well-positioned off to help our customers address these emerging themes. We deeply understand that application and have a strong Talent base to support them through these digital transformation.

Then Services they loyal and enviable customer base who are industry leaders and we are committed to enabling the success of our customers.

We are pleased to report fourth-quarter revenue of 60.3 million which represents 14% sequential growth.

For the full year 8 and reported two hundred and twelve point six million in total revenue.

Recurring Revenue increased from $91 in 2018 to $95 in 2019.

In Q4, the revenue strength was driven by solid quarter-over-quarter growth in all of our main geographic regions. We saw the most often and from our service provider client in Japan South Korea and the Middle East who are the furthest along in supporting 5G rollouts.

Addition to driving organic growth. The management team is focused on operational excellence to drive profitability as we grow the business. We finished the fourth quarter with our highest-ever adjusted ebitda of ten beating our guidance range and representing an improvement of hundred and 5% over the place your order this resulted in non-gaap earnings of ten cents per share during the fourth quarter also above the high end of our guidance range. Tom will give further detail on our financial performance during his remarks.

You for Mark continued momentum in the market surrounding 5G related opportunities. We announced our Orion 5G Security Suite wage which brings our customers and integrated version of the highest-performing network security scalability agility and analytics off this solution is directly helping our customers deploy 5G or get ready for it with their existing 4G networks efficiently.

And solution virtual or physical results in lower latency larger-scale High reliability and lower total cost of ownership, We are pleased with the level of customer interest in this offering building up on our leadership in deploying high-performing secure 5G networks for our service provider clients in South Korea, Japan and Middle East.

We begin twenty-twenty with more than 10 active 5G deployments around the world.

Why we are encouraged by this level of activity. It is important to remember what a massive undertaking. It is for service providers to execute their 5G roll out and supporting those deployments takes considerable time capex budgets and Technical effort to fully materialize.

In Q4, we benefited from a sizable order from our largest web giant customer in North America while we continue to have a strong Market position with all of our existing web giant customers. We are also dependent on their investment Cycles which can last multiple years and result in variable demand levels.

Our Enterprise vertical continues to improve with focus on enhancing commercial execution. Our install base is strong.

We enter twenty-twenty supporting over 50,000 installations with over 500,000 apps running on 8 and Technology. We are 8 or 3 months supplier and see meaningful growth opportunities as our install base moves to multi cloud infrastructures.

We also continue to invest in the product roadmap and channel Partnerships that will further enhance execution in this space.

We added a total of 840 new customers in 2019 and believe that we can continue to build upon that momentum going forward with strong focus on improving execution in all areas to that and I'm proud to be able to highlight some signature recent wins. First a large mobile network operator page repeat it and customer in South Korea selected for its GI land solution supporting secure 5G services and network address translation in its core Network Operation Center and mobile Cloud covering approximately 7 million subscribers by the end of 2020.

second

A major airline in Latin America selected virtual PC software technology and management platform to support its migration workloads to the Oracle Cloud infrastructure and to help manage a multi-cloud network environment for air towards Communications 8 and was selected because of certification as an oracle Cloud infrastructure partner and its ability to achieve the rigorous performance requirements.

As we begin 2020 we have a strong product roadmap and focus on Commercial execution to build Upon Our install base as well as add new customer service providers and Enterprise customers are addressing different business goals, and we will continue to adapt our Solutions and expertise home to help them win Tom or do you think you'd your food fourth quarter Revenue was 60.3 Million 14% sequentially from fifty two point eight million dollars reported in Q3 above the high end of our guidance range and down 2% year-over-year.

fourth quarter

Products Revenue which thirty six point nine million dollars representing 61% of total revenue service. Revenue was twenty three point five million dollars or 39% of total revenue.

Security driven product Revenue comprised 56% of total product Revenue in Q4 for the full year 2019 recurring revenue is approximately $95 million dollars.

Moving to our revenue from a geographic standpoint for the season. We strong fourth-quarter revenue from the Americas increased 21% sequentially to twenty seven point five billion dollars compared to twenty two point five million dollars in the third quarter and was down 4% year-over-year in Japan. Revenue was sixteen point three million dollars up 7% sequentially and flat year-over-year we achieved digit growth in revenue from a pack excluding Japan which was nine point three million dollars up 11% compared with eight point four million in Q3 and emea where Revenue was seven point two million dollars an increase of 10% when compared with six point five million dollars in the third quarter. Both of these regions were down modestly on a year-over-year basis.

service provider

In the quarter was 64% of total revenue in Enterprise Revenue was 36% We have revised our reporting to reflect the typical purchasing patterns of our largest web giant customers wage, which are similar to other service provider customers in the fourth quarter. Our largest web giant customer now included within service provider contributed 9.1 million dollars of Revenue.

As we move Beyond Revenue all further metrics discussed on this call around a non-gaap basis unless stated otherwise our fourth quarter total gross margin was the highest of the year at 78.5% of 40 basis points better than Q3 and above the high end of our guidance range.

Fourth-quarter gross margin was 77.6% one hundred basis points better than last quarter and also up from 76.8% in Keyport 2018.

Service gross margin the quarter came in at 79.9% compared to 80.2% last quarter and 80.6% in Q4 of 2018.

We are gross margin for a ten was 77.8% And this is a level that we expect to maintain or improve upon going forward. We ended the quarter with head count of 819870 at the end of Q3 reflecting the actions taken to reduce total headcount in the fourth quarter as we communicated on last quarter's call. We believe the annual savings from this rationalization and other cost savings measures will enable a reduction objects in 2020 compared to 2019 of approximately $10 non-gaap operating expense just in Q4 were thirty nine point seven million dollars, excluding two and half million dollars of restructuring costs effects was roughly in line with last quarter an absolute dollar based off a 12% lower than 45.1 million dollars in the prior-year fourth quarter.

Further reductions in variable compensation rationalize that count and discipline G&A spending all contributed to this year-over-year decline.

we

47.7 million dollars and non-gaap operating income. We also continue to improve our adjusted ebitda significantly which came in at ten million dollars for the for the fourth quarter more than doubling the same bolt for Q3 and the year ago. Beating the high end of our guidance range and represents our highest-ever quarterly adjusted ebitda results as stupid mentioned earlier this reflects off intense focus on improving profitability non-gaap. Net income for the quarter was approximately 7.8 million dollars or ten cents on a per-share basis in above the high end of our guidance range diluted weighted shares used for computing. V PS4 the quarter or approximately 79.2 million chairs.

Moving to the balance sheet average Day sales outstanding or eighty two days compared with 79 days in the prior quarter at December 31st, 2019. We had one hundred thousand nine forty nine million dollars in total cash and marketable securities compared to one hundred twenty two point six million dollars at the end of September.

Before I provide guidance for the coming quarter, I would like to Echo drip his excitement about the next chapter 4 8 10 moving in the twenty20. We will continue to focus on profitable growth by way of driving operational excellence. We plan to build upon early success in helping our customers prepare for 5G.

Moving on to our outlook for the first quarter of fiscal 2020. We currently expect Revenue to be in the range of 51 million to fifty three million dollars representing year-over-year Revenue growth of 5% at the high end of that range.

We expect first quarter gross margin to be in the Seventy-Six to seventy-eight percent range and operating expenses to be between 37.5 million and 38.5 million dollars a month. We expect our first quarter non-gaap income to be between $0.01 and $0.03 on a per-share basis using a shared account of approximately 81 million diluted shares filing. We expect our first quarter adjusted ebitda to be between 3.7 and 5 million dollars operator. You can now open the call up for questions. Thank you. We will now begin the question-and-answer session to ask a question. You may press star than one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question will come from Hamed croissant with bws financial, please go ahead. Hi. Thanks for taking the questions. Excuse me, if that's always in the background first off. Could you talk about the product mix having an impact on Gross margins? And if you know given the web giant order, you know, how much can you see going forward with volatility and the product mix on the gross margin line?

Gross margin is typically, you know result of the geographic mix, you know in where the revenue comes from the seasonally we we do see, you know, typically in q1 there that that comes down a little bit typically would normal seasonality. But but it's just a just a doctor of where you know where the revenues coming from. Some regions are honestly more profitable than other Sports Net regard, you know large website that we have. Um,

you know we

You know, we do expect to have some demand in 2020 from from that web giant as well. Uh, and that's factored into the into our guidance range for q1.

Okay, and then what kind of pipeline are you seeing as far as the 5G is concerned and where you stand with some of the customers that are still early in the 5G deployment?

Yeah, you know 5G it's still very early stages or 5G generally and a lot of a lot of service providers are still figuring out what they what they need in terms of texture and the installed base that we have. You know, it's very early stages for them. We we've had some really strong early success in South Korea who's took the furthest ahead from what we see in the world. So they're they're well-established in that but there will be continued business from those accounts Japan obviously as well is is uh, you know ahead of things in terms of preparing for the Olympics, but it's this is going to be a long, you know race so we'll see, you know, see a long tail on this process and maybe God I can add to that a couple more comments that that might be helpful. So I think the way we approach 5G today is that

Globally, service providers are either going to start building out.

5G or the account of get ready for 5G with their 4G LTE and other Solutions, right? So our success today is not just Greenfield 5G build-outs, but also service providers that we are enabling, uh to do a migration without having to replace everything. So that's one element of it as it comes to the design wins. I think the C cup 5G is usually it starts with selling and purchase offer Spectrum, then radio infrastructure, then small-cell build out and then services and software, uh, in certain countries like the ones we mentioned that has been a specific, uh boost by, you know, government spending and other priorities including that service providers to build our new 5G structure and they are earlier doctors in the rest of the Region's I think our focus is today on design wins, whether it's for 5G or 4G upgrades off.

Towards the goal that when they do start deploying.

And building out. We are already selected as the choice, right? So I think uh, you could say that for some years to come you will see those design wins translate into Revenue off, but that will be dependent on for example, the carriers ability to invest in capex at that time etcetera. So but our focus is if we have the right technology and we are selected five or 5G or 4G upgrade. We are positioned very well for years to come.

Are you seeing are you seeing any kind of competitions that you heat up for you on the security front when it comes to 5G?

Are you thinking better precious?

Yeah, so we are not seeing competitive pressure in terms of exactly what we do, right? So I think we tend to not be competitive head-to-head with people who do you know pure security or Pure Play radios and things like that, uh for us over solution is uniquely integrated in the service provider, uh-huh and allows them to do things in a more scalable more secure way. So of course the competition is going to be what are there alternatives to doing that even if it's not a one-for-one replacement, right? So that's more of what it is and to the degree that we can demonstrate lower total cost of ownership. It's it's actually as much a competitive Advantage as anything to do with technology.

And then you guidance implies that you're pretty much immediately seeing that in your life savings in q1 on the optic line. Is there more cost Savings Bank can implement or is this pretty much it for twenty twenty?

Well, the full effect of what we announced last quarter will be seen until we get into Q2. So we got a little bit more to go and Q2 and then as you can imagine, you know, we are you know where to constant mode of looking for how to become more efficient. So we'll just be in that mindset all year. But in terms of the specifics to the actions, we took off the full the full impact of that will be seen in Q2.

Okay, and my last question was that there was a a k would be resigning and is he you know, what was the reason behind that and is he going to sell all his stock immediately or anything like that?

Drew Bledsoe, you know I would say, you know as as for our filing Lee notified the board of directors on February 3rd prior to the quarterly board meeting that he would resign from the board of directors effective immediately. Right? And this was a personal choice made by him and I would say, you know, since I joined the company he has been uh, tremendously supportive wage jobs off transition helping with customer insights and thing with Team insights and all of that. So I think uh, you know in some ways he has done even more to help make sure that the company is up to speed and running beyond that. I think obviously there are you know, I'm sure there are more legal complications and other discussions on on the remaining questions, so I cannot speculate on them right now, but I think uh, I would say certainly, you know, we we certainly Celia somebody who wants the company that he founded and build to to be very successful going forward right and I don't Club

Anything else other than that today?

Okay. Thank you for your time.

Thanks a lot. And the next question will come from nehal chokshi with Maxim group, please go ahead yes congrats on the birth of the guidance. This has been happening over all throughout calendar nineteen, but long-term deferred revenue has been up here. While short-term has not been can you explain that.

The deferred revenue Trends they you know, they do reflect.

A trailing effect of a decline in product revenue and fortunately, so if you look at you know product Revenue in 2019, it was down, you know, it was doubtful digit, right? And so what you're going to the deferred revenue is mainly A build-up of um, um support contracts that are that are you know deferred do in nature. So as in it gets sold as an attached to a product Revenue right product sales. So, um, so that's really what you're seeing there. It's not that it's not that often. If you look at our service Revenue line that is up so it's still training the right direction in terms of the revenue. But but the deferred revenue does get impacted by them, you know as a tail to the decline in the product review and and I think maybe Dom the other data point that's relevant is we have not seen our attached rate drop, but because wage

decline in product Revenue

Associated attached Revenue that would come with support subscription maintenance all that has declined uh, and only other component of that Professional Services, which is not found even wage. It's just the attachment to the product Revenue which is down showing up in that deferred revenue.

Okay, I mean it's not just a fleet that product revenues down here of your it's that's driving an install base declined because whatever might be coming off of renewal four or five years ago. Uh, that amount is not being. Uh, it's not as much as what you sold it to this current to some reporters throughout the nineteen, correct.

Yeah, that's correct. I mean you have to think of it like a waterfall exactly like you are describing so yeah, okay. All right, but then the long-term preferred revenue is going up and so what's the driver of that mechanic off?

You know that that's going to be more of a factor of the couple of things one is going to be the nature of the contracts that are purchased so they can be typically 1 3 or 5 year off. Right? So if we're selling a longer-term contract, then you're going to see more of it sitting in long-term. And that's that's the majority of it, you know adults. It also does move depending on revloc, you know carve-out impacts, but it's it's for the most part just I directly to the you know, the duration of those contracts the more the more long-term in nature. They are dead Okay increasing duration of support contracts that that has something to do with the subscription rep that you guys have been talking about, right?

It's description is also in there. So.

Think you know as the industry moved towards wanting to consume products as a subscription rather than a capex purchase upfront. Uh-huh, you know, we certainly are aligned with supporting our customer and while it's not a meaningful driver of that today that is where we would like that subscription-based recurring Revenue to keep coming and can you share a specific subscription rep

Yeah, we don't break it out separately today.

Okay. All right, and then you mentioned that you have a strong partner program for a 2020. I think you related at specifically to an improving Enterprise performance issue expected a can you verify that and then be if that is indeed the case. Can you give a little bit more details on what this product or dead just of and why it would improve your Enterprise performance?

Yeah sure and I probably start by saying the product roadmap focus and Improvement are both service provider and Enterprise. I think on the service provider side obviously based on the design wage and the customer traction we feel we are on track, right and we need to do more which we will I think on the Enterprise side, the two things that are very relevant is uh lot of our Legacy install a historically been on prempro oriented customers and our roadmap will more actively address customers to home and like an example which stored in multiple environments which could include on Prime public Cloud private Cloud hybrid, uh, and to enable that obviously we need to make it easier for our customers and our Channel Partners to consume those products, right? So, I think the biggest thing you will see from a roadmap perspective is focus on looking at the customer.

application and

Similar flying pattern and aligning to that. Uh, and the second is obviously as you know, we already have sort of leading performance and things like that and uh agility and so forth, which we will continue to invest in to maintain that but the real uh thing that is a little different would be further adapting that to be consumed by Enterprise customers and with and alongside our Channel Partners as well.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to droop it Trivedi for any closing remarks.

Thank you, and thank you to all of our shareholders for joining us today and for your support. We believe that our focus and commitment to profitable growth and improving the operating leverage of our business model will reward our shareholders. I look forward to meeting and spending more time with you as we move forward together. Thank you, and have a good day. And thank you sir. The conference has now concluded. Thank you for attending today's presentation. You may not disconnect.

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