Earnings Labs

HIVE Digital Technologies Ltd. (HIVE)

Q1 2018 Earnings Call· Wed, May 2, 2018

$2.32

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Transcript

Operator

Operator

Please standby. Good day ladies and gentlemen, welcome to the Aerohive First Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Melanie Salomon. Please go ahead ma'am.

Melanie Solomon

Management

Thank you, Catherine. Welcome to Aerohive Networks' first quarter 2018 financial results conference call. After the market closed today Aerohive issued a press release to Business Wire. The release is also available on our Web site at aerohive.com. This call is being webcast live in the Investor Relations section of the Aerohive Web site and will be available for 30 days. Today's call is being hosted by David Flynn, President and Chief Executive Officer and John Ritchie, Chief Financial Officer and Chief Operating Officer. During the course of today's call, management will make forward-looking statements including statements regarding our projections, operating results, expectations for future revenue growth, operating profitability and operating margin, plans for future investments, product development, deployment, adoption and performance and expectations of customer buying patterns and the growth of the market for our products and business generally. These forward-looking statements involve a number of risks and uncertainties some of which are beyond our control and the actual outcome and results may differ materially from those contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results. Including risks and uncertainties included under the caption Risk Factors and Management's Discussion and Analysis of financial condition and results of operations in our recent annual report on Form 10-K and quarterly report of Form 10-Q. Aerohive's SEC filings are available on the Investor Relations section of our Web site atir.aerohive.com and on the SEC's Web site at www.sec.gov. All forward-looking statements in this presentation and the reference press release are based on information available to us as of the date hereof and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they are made except as required by law. Today, we will be discussing both GAAP and Non-GAAP financial measures. The Non-GAAP financial measures have been adjusted exclude certain charges and are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today's press release available on our Web site. And now, I'll turn the call over to David Flynn, President and CEO of Aerohive.

Dave Flynn

Management

Thank you, Melanie and thank you all for joining us today. We're very pleased to report today first quarter results at the high-end of our guidance ranges for revenue, gross margin and EPS. We delivered sequential revenue growth in what is typically a sequentially down quarter. These results reflect the benefit of our strength and product offering, improved sales execution and progress diversifying our business. We do other than the U.S. K-12 market resulting in a record high percentage of our business coming from enterprise verticals, which grew from approximately 60% of the business a year ago to approximately 75% of the business this quarter. We also delivered year-over-year revenue growth of 21% in EMEA and 17% in APAC and we delivered meaningful sequential growth in the Americas. These results demonstrate improving execution and increased market acceptance of our product offerings. I'll highlight a few of the interesting wins in the quarter. We had a great double win in the U.K. First Clipping and River Managed Service Provider of the Aerohive and then with them winning a mid six figure deal to replace Cisco at a leading shared workspace company in the U.K. They're using our cloud Managed Wi-Fi solutions to provide secure connectivity to their customers at almost 70 locations. I'm very pleased to see this progress in our hospitality and MSP initiatives. We had a great win at Abercrombie & Fitch, which has selected Aerohive to refresh the Wi-Fi in their headquarters, distribution centers and more than 1000 stores around the world. We beat Meraki due to our ability to deploy HiveManager as a private cloud in their data center as well as our ability to integrate with Juniper and to deliver unified wired and wireless with Aerohive Wi-Fi and Juniper Switches. We look forward to expanding upon…

John Ritchie

Management

Thanks Dave. Good afternoon everybody and thank you for joining us here today. Before I begin, I'd like to remind everyone that all numbers discussed on today's call reflect the financial statement impact of the implementation of ASC 606. Now moving on to the quarter, I'd like to highlight some financial and operational milestones Aerohive achieved this quarter. As Dave mentioned, we came in at the high-end of our guidance range for all of our guidance metrics; revenues, non-GAAP gross margins, non-GAAP operating margins and non-GAAP EPS. We also completed our first full quarter under our Dell OEM agreement. And very importantly, we showed a modest sequential increase in what is usually a significantly sequentially down quarter. This is the first time we have seen this in many years. Now during the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the first quarter and provide some related commentary on our business. I will close by reviewing our financial guidance for the second quarter of 2018. Now moving onto the first quarter of 2018 revenues came in at $35.8 million up modestly on a sequential basis and down 2% on a year-over-year basis. Product revenue for the first quarter was $25.1 million up 1% sequentially and down 7% on a year-over-year basis. Subscription support revenues contributed $10.7 million in the quarter for a total of 30% of our total revenues. Approximately flat on a sequential basis and up 14% compared with the same quarter a year ago. Two positive factors were behind the relatively flat sequential subscription support results. First, more and more of our customers are requesting a migration path from their current on-premises solution to our market leading cloud network management solution. Under the new accounting pronouncement ASC 606 for…

Dave Flynn

Management

Thanks John. In closing, we have improved our product offering and our innovation is continuing to deliver. The portfolio we have in front of us is the most exciting it's ever been in the company's history. We've improved our execution on multiple fronts and we are well positioned for success this year. I'd like to thank our customers and our employees for their continued persistence and enthusiasm as we continue to make progress with our turnaround. I'll now take your questions. Operator?

Operator

Operator

Thank you. [Operator Instructions] Our first question will come from Mark Kelleher with D.A. Davidson.

Mark Kelleher

Analyst

Great. Thanks for taking the questions. I was wondering if you could talk a little bit more about Dell. Can you give us the percent of revenue, can give us how that's trending, the effect on margins, and as that grows do we think that continues to be how significant will that headwind to margins be? Thanks.

John Ritchie

Management

Hi. John here. So I think in terms of Dell's contribution to the business, Dell was about 10% each quarter last year, it was 10% -- approximately 10% in the current quarter. We're very early in the stage in terms of moving to the Dell – the full Dell OEM relationship and transitioning from that existing relationship. But I think overall we're very pleased with Dell, I think the partnership working very well. It is a lower margin product and that's -- its contribution to margins is indicated in our guidance. Not sure if that specifically answered your question, but that's where we're at in Dell so far this quarter or in the first quarter.

Mark Kelleher

Analyst

Okay. And if I can put a second question and you talked about less dependence on retail vertical just given an update on the retail vertical e-rate and how that’s impacting?

John Ritchie

Management

Yes. I think you meant the K12 vertical –

Mark Kelleher

Analyst

K12.

John Ritchie

Management

Yes. So K12 is obviously been -- it's been an important vertical for us for a long time but we have consistently wanted to diversify our business and to decrease dependency on K12 due to the challenges in the U.S. market due to the e rate program and we've been executing on that and very pleased with the progress we've made on that that we saw a significant year-over-year growth in all the other verticals and all the other geographies. K12 was down year-over-year kind of as expected due to -- it was relatively weak e-rate year. Last year e-rates has sequentially declined each year since that program was launched, I think 3 or 4 years ago. And so we're very focused on growing the other parts of the business that we continue to be holding share roughly the same kind of results that we've seen in e-rate. But it is consistently year-over-year down, which is why we're very focused on making sure we're growing in other markets whether it's the enterprise or the hospitality retail health all those other places where we compete.

Mark Kelleher

Analyst

Okay. Great. Thanks.

Operator

Operator

Thank you. Our next question will come from Doug Clark with Goldman Sachs.

Doug Clark

Analyst

Hey, thanks for taking my question. My first one is, this is always a bit strange, but on the second quarter guide, the midpoint kind of implies about a 10% sequential increase. Just looking back at prior years that number is closer to kind of 20%, 25%. So is there anything that's coming in maybe a little bit seasonally softer in the second quarter that's factored into the guidance?

Dave Flynn

Management

Well, one of the key things is historically the sequential step up -- first thing is historically Q1 is a bigger sequential step down from Q4. So we actually delivered sequential increase, which makes the Q2 compare a little bit tougher. And then, the other thing is, as we diversify the business and have less dependence on K12, we anticipate seeing slightly more modest up tick in Q2. Q2 is normally historically been a very strong K12 quarter, but with less a smaller proportion of the business dependent on K12 we'd see more moderated step up from Q1 to Q2.

Doug Clark

Analyst

Okay. That makes a lot of sense. Thanks. And then, my other question is, kind of competitively and on the partnership fronts. Number one, you talked a little bit about Dell before Ruckus also has an OEM relationship with Dell, it's fairly new plus they're now part of ARRIS and seemingly doing fairly well. I'm curious kind of the competitive dynamics vis-à-vis them and if you're seeing them more or the same amount in the market. And then, secondarily any more detail you can give on the new kind of major networking vendor partnership that you're working on announcing, is it U.S. based what product area do they kind of currently focus on anything else you can provide there would be helpful.

Dave Flynn

Management

Sure. Sure. Doug, John wants to chime in and Ruckus, I will handle.

John Ritchie

Management

So I'll tell you, I see all of our meaningful sized deals. And as we've said in the past, our primary competitors are Cisco, Meraki and HP Aruba. And that hasn't changed at all over the course of the past year. I mean I think if there was any change we probably saw a modest decline in them showing up in the special deal that deals that process. So really aren't seeing them any more than we've seen them in the past.

Dave Flynn

Management

Couple of comments on the Dell relationship. They did announce something last quarter that is not supposed to be live until sometime in the later part of this quarter, I think late May, so far zero impact as far as we're we've seen. And we know what a challenge it is to work with a $60 billion entity and get to know all the parts of it and influence them and I think they'll probably take them quite some time to get connected and activate. So far we've seen no material impact from them on the Dell relationship. And as John said not seeing them in any increased way and in fact we continue to have a pretty steady flood of ex-Ruckus salespeople join the team and we're hearing I think they said they had a solid quarter, but from what we heard back channel that's probably primarily in hospitality and in service provider and their enterprise business is struggling. And that's where the bulk of our businesses is which why we wouldn’t be seeing them. Regarding the partnership you asked about. Yes. We're not in a liberty to announce those specifics of that partnership. We look to get a press release out before the end of the quarter, but it is a significant U.S. based vendor that we think is very symbiotic relationship and somewhat a significant coverage that can help us effectively grow our business.

Doug Clark

Analyst

I look forward to that. Thanks a lot guys.

Dave Flynn

Management

Thank you.

Operator

Operator

Thank you. Our next question comes from Bailey Lund with Dougherty & Company.

Bailey Lund

Analyst · Dougherty & Company.

Hi, this is Bailey Lund for Catherine. I was just wondering, could you guys split out the percentage of revenue for education and healthcare?

Dave Flynn

Management

The education I think we commented -- the lower education is no less than 25% of the business inside the quarter. And then on that historically we've given the commentary about how -- we tended to lump retail and health together as a category and said it's in the range of 15 to 20 and it was in that range [so actually mostly] [ph] above that range this quarter.

Bailey Lund

Analyst · Dougherty & Company.

All right. Thank you. And then what's the status of your Juniper partnership, I know you guys expressed that you had a deal this quarter?

Dave Flynn

Management

Yes. Well, one of the first things that happened is they now have a cloud management product called Juniper Sky Enterprise that is -- enhanced so it can hook into our HiveManager and provide unified management of Aerohive Wi-Fi along with Juniper Switches and routers and security gateways. So, we have a nice unified solution with them and we were engaged in joint sales opportunities such as the Abercrombie one that I mentioned in the call. So it's an effective joint solution where we're currently meeting the channel.

Bailey Lund

Analyst · Dougherty & Company.

All right. Thank you.

Operator

Operator

Thank you. We will continue on to Michael Berg with GMP Securities.

Michael Berg

Analyst

Hi. Thanks for taking my question. You mentioned releasing your AX product later this summer. Do you have any color on what type of pipeline you're seeing, any type of metric you can write around that or what type of customer interest are you seeing going into the [partner lease] [ph]?

Dave Flynn

Management

Yes. I think at this point, [indiscernible] haven’t had a chance to get their hands on and use or test the product because they don't exist in the world. I will say there is a high degree of interest in it and curiosity about it and it's helping us to be at the forefront that we're -- is one of the most aggressive vendor out there in terms of delivering a roadmap. We're having an opportunity educate people and it’s opening up dialogue for us. We expect AX is going to be a much more compelling technology than AC Wave 2 was. Wave 2 provided very little benefit to customers versus Wave 1, but once AX client starts to show up towards the end of this calendar year, we think AX is going to provide huge benefits in terms of client battery life and the determinism a much more predictable deterministic network because you can allocate resources per client. So we think it's going to have a very big impact probably minimal in the first quarter is a lot of a tire kicking technology test and evaluation, but expected to start to ramp later in the year and I think being out early is going to help us with a win rate and visibility.

John Ritchie

Management

Yes. We are quoting the product today. I mean it's our sales teams are out there quoting the product. I think the advantage we have of being first to market with the AX solution.

Michael Berg

Analyst

Okay. I guess a couple of follow ups on that. One would be just for clarification. It's going to be generally available this summer, right? It's not going into testing or customer testing. Right?

Dave Flynn

Management

No. Well, I mean we will be shipping that. It will be a fully released product from us and then customers will probably test and evaluate for a couple of months before they go and deploy it. That's typical there's always a typical evolve cycle, but it will not be a fully released production product.

Michael Berg

Analyst

Okay. And then, last follow up and I'll see the floor. What are the competitors doing on the AX front? I haven't seen, I believe seeing anything on -- from Ruckus or Meraki. Can you provide some color onto where those vendors are in their AX development?

Dave Flynn

Management

Yes. We get rumors and a lot of stories but it's hard to comment exactly on where they are, but our understanding is that some -- the size of a few months ago at least a few of those vendors hadn't even started which really surprised us. The leading vendors people like Aruba and Cisco, we believe are building product but will come out with a product as opposed to a full portfolio like we're launching. We think they'll be out later this year. So not way behind but with a much near single product line is the feedback we've heard.

John Ritchie

Management

Yes. I was looking through parts of the Aero’s release and I think there was a reference there to a Ruckus product sometime in 2019. So we feel like we're very well positioned vis-à-vis the competition.

Michael Berg

Analyst

Okay, great. That’s great to hear. Thank you.

Guy Griffin

Analyst

Thank you.

John Ritchie

Management

Thank you.

Operator

Operator

Thank you. With no additional questions, I'd like to turn the floor back over to David Flynn for any additional or closing remarks.

Dave Flynn

Management

All right. Thank you. Thank you all for joining us today. We look forward to seeing many of you soon at conference and on the road. Good night.

Operator

Operator

Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.