Q4 2019 Earnings Call
Welcome to the mobile iron fourth quarter and fiscal year 2019 financial results Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question Q. You May proceed Star then one on your telephone keypad genius systems. During the conference call. You May signal operated by pressing Star and then zero I would now like to turn the conference over to Eric filing. Please go ahead.
Thank you Christine good afternoon, and welcome to mobile our fourth quarter.
2019 financial results conference call.
Joining us from the company, our Simon Biddiscombe CEO.
And Scott Hills CFO.
The format of the coal will be remarks by Simon and that Scott will provide details on the financials.
Well then.
I have time for questions.
If you're not received a copy of today's press release. Please go to mobile wireless Investor Relations website.
Investors got Maguire dotcom.
Today's conference call contains forward looking statements that involve risks and uncertainties, including statements regarding mobile phones revenue.
<unk> 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.
We see the risk factor section of our.
SEC filings.
All statements made on this call are made as of today.
Assumes no obligation and do not currently intend to update any such forward looking statements.
This call is reviewed after today the information presented during this call may not be accurate or current.
With regard to non-GAAP.
Financial metrics.
So we believe them to be helpful. In understanding Billboard financial performance, they're not miss to be considered and isolation, whereas a substitute for comparable GAAP metrics. They should only be read in conjunction with mobile <unk> consolidated financial statements prepared in accordance with got.
A reconciliation of the non-GAAP furniture.
Metrics to the got metrics can be found in our press release and on the Investor Relations page of our website.
We do not provide a reconciliation of forward looking non-GAAP financial measures due to our inability to project certain charges in expenses.
Unless otherwise stated results here today will be non-GAAP.
At this time I would now like to turn the call over to Simon. Please go ahead.
Thank you Eric Good afternoon, My remarks today I'll provide a brief overview of our fourth quarter in 2019 financial performance I.
Hi, blind the final steps now would transition to a subscription model explain how old Zero Trust security architecture.
<unk> differentiated in the market and then share some recent customer successes.
Starting with an overview of our fourth quarter results revenue in the fourth quarter was $54.1 million flat year over year on for the full year, we reported $205 million of revenue growth from 6%.
They are all.
Growth came in at 10% for the year.
Similar to Q3, so softness in Europe, but he's dampening our growth rate.
In Twentytwenty mobile and we'll compete its transition to a subscription led recurring revenue model.
The transition to subscription will entail two changes to our business first with.
I did the stopped selling new perpetual licenses as off the end of the second quarter.
Second as our customers I'm actually migrating applications and workloads to the claims were formally launching our efforts to proactively help them.
Mobile and capabilities to our type solution, resulting in maintenance revenue convergent.
Right subscription revenue over the next several years.
Customers have increasingly showing a preference from subscription model.
You know in 2009 team subscription they are all grew 19% while our maintenance.
Declined slightly I.
Our business has been trending in this direction for.
Couple of years in fact over the last two years more than 85% about when you customers have chosen a subscription I mean, twentytwenty, we will complete the shift the subscription formally.
We have seen significant brokers know quite offerings in recent years.
Confidence type solutions offer.
The market capabilities.
Customers the advantages of being on I have a quite platform well understood include an automatic application and security updates access to new features as soon as they become available guaranteed platform and services up time on the lower total cost of ownership, allowing I teach have increased focus on driving business value.
We spend a lot of time, but our customers and partners and have established confidence that this transition will result in little to no disruption in customer satisfaction for U.M.C. purchases.
But the beginning of the third quarter of Twentytwenty customers will still have the option to purchase julianne in a crowd on premise model altering the way they pay for but not how they choose to deploy technology.
With a focus on subscription we simplify our business, especially I would engagement with customers dramatically expanded our customer lifetime value and create a far more predictable revenue stream. However.
<unk> change will accelerate A.R. growth it will create a near to him had when two hour revenue growth due to the lack of up front license revenue Scott will cover this in more detail would that said, we're confident but this will drive considerable value for mobile lines stakeholders.
In parallel with this transition away from perpetual licenses in Twentytwenty, we will accelerate our efforts to support I will on premise maintenance customers, who are ready to move to the <unk>.
We have been preparing for many ramp this effort for more than a year and if developed a comprehensive set of tools to prove that the value to a customer and then moved them seamlessly from an on premise seats to the <unk>.
Maintenance revenue of approximately $65 million per year. The uplifting. They asked p. on the migration from maintenance declared represents a great a a a growth opportunity for mobile line.
In 2019, <unk> plenty of invading demand for the cloud off rent from traditional on premise customers, who recognized value proposition about <unk> deployment.
We feel confident there's ample opportunity to accelerate this momentum in twentytwenty.
The quality of how you E.M. claim to offering coupled with the unmatched suite of quite security products makes nave the right time to accelerate each of these initiatives.
Clearly a thought lead to mobilize leveraged it's called mobile management expertise into a seat at the forefront of zero Trust security.
I will mobile centric innovation has led the market and I would competitors and the gap is wide.
We were the first you invented to offer a product for secure Clive service access.
And we remain the most robust solution in the market.
We were the first a couple of threat defense to you again, and I were integration into U.M. crates meaningful deployment and remediation advantages.
We've introduced zero sign up a groundbreaking offering that makes your mobile device your identity and removes passwords from corporate I.T.'s threat landscape.
We have made incredible progress without a macro s. solution.
Naylor legitimate threat to disrupt that market.
All of this innovation has one thing in common it is only offered through the <unk>.
Delivering market, leading innovation to make mobile devices, the scent of security and to capitalize on this value I <unk> customers need to access it through the Clyde.
As proof of the quality of our offerings, but continue to done at the accolades give us confidence we have the best solution in the market.
We were once again, the only vendor named in the leader in gotten as magic quadrant for U.M. tools as well as gotten a p. a inside customers choice, which identifies the best unified endpoint management tools as reviewed by customers.
The rain data strong few for we were also named the leader in the Forest a wave unified endpoint management report as well as in three separate I.D.C. Marketscape reports each related to L.U.M. solution.
I'm with that I would like to touch on some customer winds from the quota.
Mobile I. is increasingly becoming a trusted security provider, we're pleased to announce that we expanded our relationship with lighters.
Global powerhouse of I.T., and technical services, where they long history of innovative problem solving and extending customer service like those chose mobilizing because of equal commitment to provide in revolutionary best in class technology, along with market leading support.
With 400 locations in 30 countries, they realize that as a global company.
Required a seamless mobile security solution to maintain but employees peace of mind.
Seven the National Security Health care and infrastructure markets, you can trust that Lydalls selected the best solution to secure their workforce and mobile line is on it to be part of that solution.
Yeah.
Multiply and continues to succeed in the government vertical.
Evidenced in our recent when with Brisbin City Council.
Largest local government in Australia.
Forward thinking city one of their stated strategic priorities is for a smart connected to <unk>.
Promotes innovation and technology.
Help to live a better community services.
A flourishing business hub home to more than 200000 businesses in the Metro area.
He was unhappy with their mobile security solution, which are like mobile line, a chance to showcase I what products Unsurprisingly, a comprehensive security sweet immediately addressed many pain points B.C.C. was experiencing wallich selling on many fronts versus the competition, including value for money.
Oh by line is privileged to have been chosen I said provider of choice for mobile security.
I'm also please tonight, so we expanded our relationship with the European Commission.
Nearly investing class mobile security because of the most important for an institution dealing with security risks and international relations on a daily basis, and we're very happy to see traction fro, a macro s. and access offerings of the European Commission.
Clearly shows that were valued skew access to services like officers 65.
I'm on a mobile I.N. as the opportunity to play such an important role in helping the European Commission.
Before handing off the start I wanted to touch on a very public hacking for mobile device you exfiltration of data from Jeff Bezos as phone.
This was a classic fishing attack, but you secure messaging as the attack effective was designed to siphon use of data.
Mobile users most susceptible to fishing attacks.
More likely to click on a malicious U.R.L., which can give hackers access to all the users corporate and personal apps and data on the device.
After a mobile devices compromised it is relatively easy to use compromised credentials to initiate it can't take over and then siphoned off sensitive information.
Based on our understanding of this attack I will mobile Central Zero Trust platform with native mobile threat defense capabilities will protect uses for these types of attacks.
And with that I'll turn it over the stuff.
Thank you Simon and good afternoon.
Today, we would be discussing non gap financial measures unless otherwise noted our press release form eight a. and website investors Dot mobile iron Dot com provide a reconciliation of gap to non gap financial results.
Now <unk> view the financial.
Revenue in the fourth quarter with 54.1 million dollar last year over year and within guide.
We ended the fourth quarter with air are of 180 million dollar for growth of 10 per cent you're over here.
Are subscription era was $114 million up 19% your every year and our maintenance era with 65.6 million dollar.
Down 2% from last year.
Are renewal rate came in about 90%.
Starting next quarter, we are going to move from the from reporting the seat renewal rate two dollar Bayes net retention as we believe the standard fast metric is a more complete measure of retention and highlights our success up selling our product into existing customers.
Q for our net dollar retention with 104%.
And it has typically run six to seven percentage points below our air our growth rate.
And the new product front, we continue to increase our uphill penetration and have sold access and threat defense into about 10% of our large <unk>.
We remain optimistic about our ability to sell accessing threat defense into our existing customer base.
And are convinced zero sign on will be a significant driver of error growth in the future.
Gross margin in the fourth quarter with 82% in line with our guidance and operating expenses were $42.8 million above the high end of our guidance range due to higher than expected legal expenses outside the normal course a business.
We reported positive operating income of $1.6 million net income was $1.2 million or one cent on a per share basis.
For the full year 2019 revenue with $205 million up 6% year over year.
We ended the year with gross margin of 82%.
Operating margin came in at negative 4.2% for the year.
Moving to the balance sheet, we ended the quarter with $94.4 million in cash in short term investments and have no debt.
In the fourth quarter cash flow from operations was break even and we spent $2.7 million repurchase unfair.
<unk> revenue was $118 million at the end of December up 12% from $106 million a year ago.
Before I discussed Guy and I wanted to share some detail on how we expect r. accelerated transition to subscription away from her control license and maintenance will impact our revenue over the next two years.
In the first half of 2020, we don't expect exchange to our normal seasonal pattern given that we will still be selling new perpetual license.
When we stop selling perpetual licenses in Q3.
We will experience in acceleration of air our growth and a slowdown in revenue growth from the perpetual decline for the subsequent four quarters.
For the purpose of modeling are wrote this year, we would expect to see air our growth pick up in the second half because seats. The previously sold his perpetual licenses will be sold a subscription.
Our revenue growth rate will become slightly negative as a year over year comparison will be three time strong perpetual license sales.
In the first half of 2021, we expect to experience a similar effect, but revenue growth should start to converge on air our growth and the year over year revenue growth rates should returned positive.
In the second half of 2021, we will not have perpetual licenses in the prior year comparable period. So their head when will disappear and the revenue growth rate will increase to align closely with the air our growth rate.
During this time of transition in our revenue growth, we urge investors to monitor our progress by paying close attention to our air our growth.
Now I will share our guide.
For the first quarter of 2020 or guidance is as follows.
We are projecting a revenue range of $46 million to $49 million or roughly flat at the midpoint year over year.
We expect non gap gross margins can be approximately 78%.
We expect non gap operating expenses to be between 45 and $46 million.
For the full year 2020 or <unk>.
We expect air our growth to be between 12, and 16% a year and.
Where growth in the first half will be closer to 10%.
We expect revenue to be in the range of 195 to 205 million dollar.
We expect are non gap operating margin to be between negative, 5% and negative 10%.
Lastly, as we execute the initiatives we've discussed over the next year and a half.
With $94.4 million in cash equivalent we have more than Apple liquidity run the business with a healthy buffer.
And with that we can open up the line for question.
As a reminder, task the question even need depressed star and then one on your telephone to Italia question press, the pound or Husky. Please stand by African <unk>.
Your first question comes from the line of Scottsdale from Ross Capital, You're nine is hoping hey, good afternoon. Thanks for taking my question. He's got maybe just real quickly to follow up and make sure. We understand the transition of perpetual as we go from the third quarter. The second quarter. It sounds like you get some modest growth year over year in the first half and then we're facing the tougher calms for what.
What is that sequential drop off that you're expecting that was built into the model and the first half this year that perpetual drops off as we go from the third quarter of the second quarter and then maybe it'll follow onto that looking at the number of perpetual seats that are out there can you give us some idea what that installed base looks like maybe gives an idea in terms of perpetual licenses.
How many existing customers were buying add on seats and how you manage that transition end or continue to support those customer's going forward and then I had to follow for two on Europe.
Yeah sure so quite a few quite a few questions in that let me start with the first one about the perpetual revenue. So in the first half we're anticipating that we're gonna have given the declines we've seen over the last year that continuing and we'll have call. It between eight and 9 million of perpetual light revenue in the first half that will fall too near zero.
Second half of the year, so that drop off would be quite precipitous and cause the <unk> the revenue growth rate to turned slightly negative in the second half.
When it comes to customers and how we're going to manage the transition for them customers are still going to be able to buy a there on premise product the expansion seats. They used in the past they will just do so in a in a subscription form rather than paying up front with a perpetual license. So you know are installed base is still you know.
Very much has has a large on premise component to it that has been driving a expansion seats. We don't expect that will that will change there's still the need for our product to be deployed throughout their environment. They still have a need for using the up sell products, which I've always been cloud in nature. So we still expect that they're going to buy those as well so all that.
<unk> shouldn't change you know at all it's really just the licensing mechanism for buying the U.M. product switching from where they may have bought in a perpetual way to a subscription.
I think very helpful point, Scott I'm Gonna I'm going to add one point, though which is this is about a license model not deployment model. Okay. So as it relates to this change the subscription you'll still be able to buy the on premise product in a subscription model, which been able to do for many years. Okay. This is not about forcing customers to a client and I, obviously, we'll see in a significant.
<unk> solutions within the business anyway, but customers who are on prime today will continue to be on prime if they choose to be so we are not forcing them to the clay platform at this point in time.
And Simon any insight into the number of installed seats on the perpetual front and if you're building yeah, what any sort of conversion.
Oh, So we don't we actually don't share that Scott, we don't tell people a mix of you we m. seats on the on prime platform versus the class platform, but.
When we look at the opportunity to upset out.
To the subscription licenses customers can vote for maintenance to a subscription as they moved quite a significant upside we've talked at length about that in the past and interestingly benefits everybody. The total cost of ownership to the <unk> to the customer as they make that migration from the <unk> pretty dramatic and.
The the samples that we've seen you've seen anything up to a 50% improvement.
On on the customer side of that transactions I know, it's it's something that we don't share the specific data right, but we're excited about yup yup and we'll see in the businesses customer's going that June gotcha, and and if I could just to follow up Europe was that or actually I guess international was was up sequentially. There had been some European headwinds can you just give us.
Your thoughts about what you're seeing on that front and also in terms of attach rates for the new products and zero sign on I think you said, 10% for access and threat in the fourth quarter. What's your expectation aging this year and any word on whether or not bayes those is a mobile or customer yet [laughter] nicely asked okay. So on Europe.
European business actually performed consistently with our expectation and there was no rebound in the U.K. business. The U.K. business was essentially flat sequentially normally in the fourth quarter, we'd expect a a pretty significant.
Improvement sequentially in the performance of the business and that didn't manifest itself, which was consistent with the expectation that we'd had going into the quota. So no no significant rebound in in Europe in the most recent period options that was coming off a tough compares while the fourth quarter of last year, the European or international business delivered.
25% revenue growth right. So that there was a really strong compare that business had to execute against yeah. I was just going and that the uptick that you see between revenue in two three and Q. for internationally is a result of the <unk>. The on premise business to perpetual license that we do sell queue for is a strong perpetual licensed despite the decline zero.
Here. It is a strong perpetual license relative to Q3. So that's what you see it's not really a change in in kind of the business environment.
[noise] Thanksgiving your net.
<unk>.
Your next question comes on line of <unk>. Some crank Hounds. Your line is open.
My question, so just a little bit more on on the transition here.
<unk> so.
What is the logic behind.
Behind continued to sell perpetual license, you know and and kind of the eight to 9 million estimate for the first half that that Scott alluded to.
<unk> are those just.
Deals that we're basically in motion in the pipeline kind of <unk> through the at some stage in the process you know in in your just kinda performing to your obligation on that a or.
Our our sales people really starting a year selling perpetual licensed products.
No Oh, so there's there's really two parts to it chat number one is we we don't want to put our customers and equally our partners in a position where they're unable to attract to transmit business that they have line of sight to at this point in time, right and given the cycles sales cycle Lang.
But I will business has obviously this deals in the pipeline that structure, just perpetual transactions that we would like to see close that way over the cost of the coming months, we've got no desire to frustrate our customers. We've got no desire to frustrate, Iowa partners and Frank and we've got no desire to frustrate the sales organizations they'd be working specific transactions with.
Specific license model attached to them. So really this is about making sure that we we permit for an orderly transition over the cost of the next six months as opposed to creating thrash by pulling the bandaid off immediately.
Okay, and then remind me again Scott on on from a subscription deals roughly what percentage of the deal is recognized up front versus ratable.
50%.
Okay. So <unk> when you guys talk about so I I think you guys talked about an acceleration and subscription A.R.R. So I I know you gave overall error or for the year, but do you believe your subscription A.R.R. will accelerate from 19% I I guess.
It's not.
You know that that did last year, that's not apparent obviously in the overall error are but can you give me some color there.
Yeah. So so the acceleration that we talk about is that the customers would have previously but perpetual license and then going forward would only be paying maintenance, which is in air are but it's a relatively small number relative to subscription they're going to be paying subscription. So that is effectively a you know and <unk>.
Lift in recurring economics associated with that seat and that does go into the subscription airlines. So we should see an improvement as a result of that a shift away from maintenance to subscription.
So subscription air our should accelerate from fiscal year 19, that's what you're saying.
Yes.
Okay and then.
Maybe one more question into that recurring ER subscription air are item.
Should we expect cloud.
<unk> revenue growth to accelerate due to the transition.
So the transition.
Really for the new business that we sell it.
Is just between the two.
Cram versions of the product from perpetual perpetual in maintenance to.
Ancrum line, it really shouldn't affect the cloud unless the customer you know for for you know their own reasons makes the jump to the clown product, which obviously, we have an agenda to drive that we're we're trying to encourage the the product in many of our customers want it I think the bigger factor, you'll see is our concerted effort to.
Start to migrate more of our maintenance bases customers are moving to the cloud to embrace and help help them make their transition to the club that will.
Impact the cloud error Clinton to cloud revenue line has to a greater extent than the perpetually change.
Okay, then maybe last real quick for Simon any difference in the competitive environment from your standpoint, either in <unk> or or mobile threat.
Or access for that matter, obviously, there's been some and announcements you know whether blackberry in in silence formally kinda introducing a product to market recently yep.
Via where so what are your thoughts their.
Yeah. So we haven't seen any change at this point in time and it's important when I when I look at the business and the <unk>. The changes that we're seeing in the business and we're not seeing anything as it relates to true and that's causing me a different level of concern about seen any dramatic change no win loss ratio is we're not seeing.
Anything impact pricing at this point in time, and yes, I've been product specific announcements from some oh compared to this but they really haven't impacted any part of what we're seeing in our customer base and don't forget where where we're selling integrated you, we I'm and threat, it's almost exclusively into our existing customer base. So I wouldn't expect to see.
Change associated with a Blackberry silence type integration or anything like that so no. We haven't seen any dramatic change in the competitive dynamic in the market, but with the close the last quota.
We continue to execute a well with the solutions that we believe for the right set some solutions pro customers to be embracing at this point in time and no point that we second guessing the overall strategy as it relates to what we're doing at the device level with devices identity with the integration a threat with can do.
Access cloud services on Prime services as well <unk>, absolutely believe were executed to the right strategy and Oh, we're not seeing anything from the competitors. The causes me to believed that went up moved in the right direction.
I think much.
<unk>.
Your next question comes from line of <unk> from Barclays. Your line is hoping.
He thinks excuse me and he congrats on that move to all subscription <unk>. It's you know.
The question around that the <unk>, what's T.V.'s score do you see <unk> that you see it's like some some last minute perpetual buying and you want you to to kind of never heard of that.
And then had to follow up.
Mm.
It's a very good question. So we've given careful consideration to could that be <unk> an improvement in the perpetual number in q. wanting to to ahead of customers potentially not being able to buy licenses on a perpetual basis maintenance attached to them. We don't know Rhino right. We're certainly not setting it up for that to be the case.
But I don't doubt that there will be some pot and as potentially who wants to be in a position where they can continue to support their customers with perpetual licenses. None of that is contemplated in the guidance that we've provided as it relates to what we expect in the first half a perpetual or anything like that and and thank you for recognizing.
The importance of a move into a subscription only model it's been a a source of frustration for investors for many years that we've got this model that is a hybrid between perpetual licensing subscription that causes the business not to have the predictability that investors would like to see it happen and.
Taking the opportunity here is the right thing to do not because investors are looking for predictability because as I said to my prepared remarks, when I look at the business itself, 85% north of 85% of all new customers by and subscription agreements and we've got a you know a huge number of our traditional on prime customers who.
Looking at how they move not just mobile I am based technologies to claim deployment, but too many types of technology. So now is the right time to do this because our customers recognize the value associated with it the predictability that comes the gives investors' confidence that's that's very nice as well, but this is really about customer demand.
Yeah, Yeah, no mixed in snakes talking sense political not during the and then it's got like you talked about the E.R.R. like to to the the down to pretend for on that May decide what's your expectations, you or and it's for Simon as well no are you going to target some of the old perpetual guys on maintenance to try to <unk> kind of live.
Them up to subscription or or you know like talk about that too that's kind of maintenance they are run rate.
Yes. So we definitely are there to that as a big focus of 2022 help our customer base, who are paying on the on premise customer base, we're paying maintenance today move to the cloud and in doing so moved from the maintenance agreement to a subscription agreement at a pricing off left that's a big focus we expect to make a significant.
<unk> on that and it will shift air are from maintenance to subscription.
Well if you look back if you look back into 2019, we were able to move hundreds of thousands of seat.
From the on premise platform to the <unk> platform and change the license model associated with those seats. The important part pro customers is this is done invisibly to the end user or as close to invisibly to the end user as possible and over the cost of the last couple of years, we've developed a very comprehensive.
Set of tools and services that allow it to be invisible to the end use that then it's something our customers embrace if it puts and uses through any any kind of no device registration process that that are uncomfortable with and it's much more difficult for customers to do but we've got it to a point where it's.
Truly invisible to the end user that they're going through a change and therefore, our customer gets to take advantage of all of the new features that and functionality that exists on the clay platform. So very excited for that opportunity perfect pink. Thank you could like.
Thank you.
Your next question comes in line of Robert <unk> from Raymond change your lifestyle.
Thanks, a lot of my question, just the largest cashflow looks like you're cutting down <unk> into couponing into into next year just wondering yeah.
Obviously I understand part of it is they shift description you just walk us through any other factors that might be driving the applied <unk>.
Yeah, that's really there's really two things at play here rubber one is the the loss of the up front license revenue.
That's obviously impacting the top line and then that falls you know to the bottom line. The second thing is our gross margin has been coming down and will continue to come down over the course of this year as we accelerate the shift to cloud. So those are really the two the two factors that are impacting the the operating margin.
Wow.
<unk>.
Sure.
No further questions out this time assignment I turned to call back over to you.
Oh, well. Thank you for attending of a cold today, we look forward to update you on our progress on our next door and it's cool. Thank you again and goodbye.
Yeah.
Ladies and gentlemen, this confits today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Yeah.