Aerohive Networks (HIVE) Q1 2019 Earnings Call Transcript
Aerohive Networks (NYSE: HIVE)Q1 2019 Earnings CallMay. 08, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Aerohive first-quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melanie Solomon. Please go ahead.
Melanie Solomon -- Investor Relations
Thanks, Todd. Welcome to Aerohive Networks first-quarter 2019 financial results conference call. Today's call is being hosted by David Flynn, president and chief executive officer; and John Ritchie, chief financial officer and chief operating officer. We just distributed press release and filed an 8-K, detailing Aerohive Networks first-quarter 2019 financial results.
Copies of these documents, which include our GAAP to non-GAAP reconciliations, are available on the Investor Relations section of our website at ir.aerohive.com. This call is also being webcast live in our website and will be available for 30 days. I'd like to remind you that during today's call, our discussion may include forward-looking statements about Aerohive Networks and its future business and financial and operating results, products, customers, and markets. These statements involves risks and uncertainties that may cause actual results to differ materially from those anticipated by these statements.
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The risks and uncertainties include those described in the risk factors outlined under the caption Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in our reports filed with the SEC, including our most recent form 10-Q and Form 10-K, both available on the Investor Relations page of our website and on the SEC's website at www.sec.gov. All forward-looking statements in this presentation and the referenced 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 day on which they were made, except as required by law. Today, we'll be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges.
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 website. And now, I'll turn the call over to David Flynn, president and CEO of Aerohive.
David Flynn -- President and Chief Executive Officer
Thank you, Melanie, and thank you all for joining us today. We delivered first-quarter results in line with our preannouncement last month. I want to spend some time discussing the revenue shortfall before getting into some of the highlights from the quarter and our go forward view on the business. Revenue came in below our original forecasts primarily because of two factors.
One was a sales execution issue in United States, and the second factor was a two prong mix shift. First on sales execution, the sales team delivered results at or above forecast in EMEA, in APAC, and in much of the Americas. But this was not enough to compensate for very disappointing results in a few territories in the U.S. To be frank a much more active 2019 E-rate cycle with an end of March deadline for customers to make their vendor selection and file their funding requests likely cause some sales people that take their eyes off the ball and overly focused on E-rate at the expense of Q1 business On a positive side, our 2019 E-rate campaign yielded very strong results.
Reporting by E-rate profit works on customer funding request shows industry wide demand increased by 24% over 2018 and demand for Aerohive solution specifically increased 55% year over year demonstrating a significant increase in market share for Aerohive. We expect these funding requests to start to turn into orders begin in this quarter, but primarily to contribute to revenue over the second half of the year. Its lack of focus on closing imminent deals hurt our top line in Q1. And while we are optimistic about our position in 2019 E-rate cycle, I'm disappointed in the team's execution.
We've made changes in regional leadership and organizational design to improve the focus, execution and productivity of the U.S. sales team. We plan for these actions to return sales efficiency in Q2 to levels at or better than level seen in second half of 2018 and to drive growth in the second half of the year. Turning to the mix shifts.
First, we experienced an unexpected mix shift in unit product mix from mid-to-lower priced access points, because deal value on lower price access point business is more heavily weighted toward deferred subscription revenue, this mix shift reduced up front revenue in the quarter. We believe this buying pattern was an anomaly in the quarter and not an indication of a future trend. And that belief is supported by our April order pattern and our Q2 deal pipeline, which both have returned to a more typical mix. The second part of the mix shift was faster than expected transition from licenses to multiyear subscriptions.
This demonstrated increasing acceptance of our subscription based cloud offering. However, it also resulted in greater portion of revenue being deferred in the quarter. We're pleased with the record amount of deferred revenue generated in the first quarter, but the downside was reduced in product – in quarter product revenue. Despite the lower-than-expected revenue in the first quarter, we are encouraged that the sales execution issues are reasonably isolated and appear fixable and that the mix shift was an anomaly.
We're also encouraged by execution and results in many other aspects of the business that demonstrate we are making progress in executing to our plan. In Q1, we delivered record levels of subscription and support revenue and deferred revenue demonstrating the continued progress in transforming toward SaaS-like business model. The EMEA region had another strong quarter showing continued year-over-year growth and a record Q1. This was based on strong sales execution and the strength of our channel in EMEA.
We're very pleased with the results of our EMEA business over the last five quarters and we're actively working to emulate that success across other regions. Our Wi-Fi 6 or 802.11ax access points are rapidly be embraced by customers increasing sequentially from 15% to 20% of our total Wi-Fi business in Q1 In contrast, most of our competitors have only recently released their first Wi-Fi 6 access points and are still validating them in production networks. We believe that our early Wi-Fi 6 leadership and the increased ASPs of these products, significant contributors to the strong increase in our E-Rate market share. We saw double-digit year-over-year growth in our healthcare business in the quarter, which is anchored by our industry-leading position in the long term care market.
A market which Aerohive is used by the top four providers and six of the top 10 in the U.S. Highlight in Q1 was a high six-figure win through wide Wi-Fi 6 wireless and switching across 90 healthcare facilities in the southeast. The capacity of Wi-Fi 6 and the reduced operating expense of our single-pane-of-glass wired plus wireless solution were key to the win. We had a good quarter with Dell, including a number of six-figure wins with many in the higher education space.
One of those was a new customer win at a major university in Ireland, a country where we have no direct Aerohive presence and this win demonstrates a potential for Dell to extend our reach. We're seeing clear signs. The U.S. education market is returning to growth, position this market to turn from a headwind to a tailwind.
We're seeing high levels of interest in upgrading to 802.11ax for increased Wi-Fi efficiency and embracing our cloud managed AI and machine-learning-driven network architecture to simplify network deployment, operation and troubleshooting. We believe our increased share in E-rate funding request demonstrates the market appeal of our solution and our opportunity that benefit from the 2019 E-rate cycle and beyond. While we made significant progress in these areas, that progress was undermined by the lack of predictability we saw in the business in Q1. We know we need to improve in this area, and we're working hard to improve both our sales execution and predictability of our result.
As I mentioned earlier, we've already taken action to approve sales execution in the Americas. We are also driving to increase predictability by growing our recurring revenue business and by working diligently to close deals earlier in the quarter to reduce the risk in back-end loading. So far in Q2, we're seeing very strong order linearity, which combines a highly predictable and growing subscription support business, gives us a high degree of confidence in our outlook, which John will detail in a few minutes. I'll now turn it over to John to talk in more detail about our financials.
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Thanks, Dave, and good afternoon, everybody, and thanks for joining us here today. I'd like to start by providing some additional granularity as to what drove the lower-than-expected revenue performance in the first quarter. As Dave mentioned, the shortfall was attributable to two mix shift issues and original life sales execution issue. Regarding the mix shift issue, we saw an unprecedented mix shift toward our lower-priced products at the expense of our mid-range products.
Interestingly, on a skew-by-skew basis, we saw minimal pricing erosion across the low-end and mid-range product lines with the resulting mix shift contributing to the revenue shortfall. On a unit basis, we shift approximately the number of units we expected, but the mix was materially different than anticipated, resulting in the lower revenue levels. In addition, the mix also – the mix shift also resulted in a higher percentage than usual our revenue being deferred, because whether you purchase our higher- or lower-range products, the support, the subscription prices are generally the same. As such, more of the deal value was deferred with lower-priced products.
Lastly, on the mix topic, we saw more customers than anticipated move from our perpetual license to our multiyear subscription product offerings. Moving on to the sales execution issues, our America sales team specifically in the U.S. fell well short of their bookings goals. We have already begun several corrective actions toward remedying the situation.
Next, I'd like to highlight some milestones Aerohive achieved during our first quarter. Our subscription support business continues to perform very well. In Q1, we set a new record for subscription support revenues. Our subscriptions support businesses averaged growth in the mid-teens on a year-over-year basis for the trailing five quarters, and we expect The Street to continue in the second quarter.
Q1 2019 also marked the eighth consecutive quarter of greater than 70% non-GAAP gross margins for a subscription support business, another trend that we expect to continue in the second quarter. Now during the balance of my prepared remarks, I will cover our GAAP, our 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 2019. Now moving on to our first-quarter results.
Revenue of $33 million was down $5.1 million or 13% sequentially and down $2.8 million or 8% on a year-over-year basis. Product revenue in the first quarter was $20.5 million, down $5.1 million sequentially and down $4.6 million on a year-over-year basis. Subscription and support contributed over $12.5 million in the quarter for a total of 38% of revenue, nominally up on a sequential basis and up over 17% on a year-over-year basis. Geographically, revenue in the Americas was $17.2 million or 52% of total revenue.
America's revenue was down approximately $3.5 million or 17%, both sequentially and on a year-over-year basis. America's revenue was impacted by the previously mentioned mix shift and sales execution issues in the U.S. Revenue in the EMEA region was $12.8 million or 39% of total revenue, a decrease of $1.7 million or 12% sequentially as expected in this seasonally down first quarter. Revenue was up $900,000 or approximately 7% on a year-over-year basis.
This – the continued year-over-year European growth highlights the success we are seeing in the enterprise sector with our channel-centric approach. We are seeing record high levels of productivity with our EMEA sales teams and we're actively working toward emulating this in the U.S. Moving on to Asia Pac for the first quarter, revenue was $3 million or 9% of total, an increase of 4% sequentially and essentially even on a year-over-year basis. Now I'll turn the discussion to our margins and expenses.
In the first quarter, non-GAAP gross margin came in at 62.5%, compared with 66.3% in the fourth quarter and 67% in the year-ago period. Non-GAAP product gross margins for the quarter came in at 56.2%, compared with 62.4% in the fourth quarter and 65.5% in the year-ago period. The declining gross margins is related to the previously mentioned mixed shift to lower price products, which carry lower margins, combined with fixed costs over lower than anticipated revenue levels. Non-GAAP subscription support gross margins come in at 72.8% in the first quarter, compared with 74.2% in the fourth quarter of last year and 70.5% in the year-ago period.
This marks our eighth consecutive quarter of greater than 70% gross margins and is reflective of the success we were seeing in transitioning customer value from our hardware platforms to our feature rich subscriptions. Now moving on to our non-GAAP expenses. Non-GAAP operating expenses came in at $25.7 million in the quarter, up $700,000 or 3% on a sequential basis and down $1.7 million or 6% on a year-over-year basis. The resetting of the FICA payroll tax clock contributed almost all of the sequential increase in our operating expenses in the first quarter.
Non-GAAP R&D was $7.7 million or 23% of revenue, compared to $7.6 million or 20% of revenue in the fourth quarter. And this compares with $8.2 million or 23% of revenue in the year-ago period. Non-GAAP sales and marketing came in at $13.6 million or 41% of revenue in Q1, compared to $13.4 million or 35% of revenue in Q4 of 2018 and compares with $14.7 million or 41% of revenue in the year-ago period. We expect sales and marketing expenses to return to the mid-30% levels of revenue that we saw throughout most of 2018.
Lastly, non-GAAP G&A expenses came in at $4.5 million or 14% of revenue in Q1, compared with $4.1 million or 11% in the fourth quarter of 2018. This compares with $4.5 million or 13% of revenue in the year-ago period. Overall, our non-GAAP operating margin was negative 15%, compared to approximately 1% for Q4 of 2018 and compared to negative 10% in the year-ago period. As a reminder, Q1 is typically our low point in operating margins for the year due to the revenue seasonality.
Our non-GAAP operating loss was $5.1 million, compared to non-GAAP income of $200,000 in the fourth quarter and an operating loss of $3.4 million in the year-ago period. We reported a non-GAAP net loss of $4.8 million in the first quarter, compared with a non-GAAP net income of $400,000 in the fourth quarter of 2018 and the non-GAAP loss of $3.5 million in the year-ago period. All of this translates to non-GAAP net loss per share in Q1 of $0.09, compared to non-GAAP net income per share of $0.01 in the fourth quarter and a non-GAAP loss of $0.06 per share in the year-ago period. The non-GAAP net income for the first quarter is based on 56 million weighted average common shares outstanding.
On a GAAP basis, for the first quarter, the net loss was $0.15 per share, compared with a net loss of $0.10 per share in the fourth quarter and $0.13 in the year-ago period. As a reminder, our Q1 GAAP net loss includes stock-based compensation expenses of approximately $3.6 million. Now moving on to our balance sheet. Cash, cash equivalents and short-term investments as of the end of March, totaled approximately $82 million, an increase of $4 million when compared to March of last year.
The sequential decline from our year-end balances is reflective of our normal operating seasonality, combined with soft Q1 results. We expect cash, cash equivalents and short-term investments to increase in the second quarter. Accounts receivable increased to $18.8 million as of March 31, compared to $16.2 million at the end of the fourth quarter of 2018. DSO has increased to 51 days from 39 in the prior quarter.
Despite the increase, we are comfortable with DSOs in this range. Inventory levels decreased $800,000, coming in at $15.3 million at the end of the quarter, compared to $16.1 million at the end of the prior quarter. Moving on to our deferred revenue balances, which now stands at an all-time high of $79 million, up $1.7 million from the $77.3 million in the prior quarter. On a year-over-year basis, our deferred revenue balances increased $11.1 million or over 16%.
It is important to note that deferred revenue growth comes at the expense of recognizing in-period revenue. We've used the growth in our subscription and support businesses as a vote of confidence by our customers that they are increasingly relying on us to run their cloud-managed networks well into the future. I'll now move on to our guidance for the second quarter of 2019. We're currently anticipating revenues in the second quarter in the range of $37.5 million to $39 million.
Given the sizable shortfall in last quarter's revenue, we have taken extra steps to increase confidence in the guide. We have substantially more pipeline coverage to support the guidance that we're giving in this level of pipeline coverage as great as it's ever been at this point in the quarter. The first month of the quarter is trending very favorably. As Dave previously mentioned, we have begun the execution of realigning our resource in the Americas to emulate the significant success we're seeing in the EMEA region.
And lastly, we have an extremely high level of confidence that our subscription and support revenue will grow on a year-over-year basis in the mid teens, which we expect will translate to approximately a third of our revenue for the second quarter. On a non-GAAP basis, we expect a rebound in gross margins and to return to 64% to 65%. I want to touch on the tariff topic. As a reminder, only a minority of our products are currently subject to tariffs, and we only pay tariffs on the products sold into the U.S.
Hence, the impact of the current tariffs across our product portfolio is included in our guidance. However, it is not yet clear how the most recent comments on potential new tariffs may affect us. Moving on to our operating margins. We expect them to be between negative 2% and 1% in the second quarter.
We expect other expenses, including tax expenses, to be negligible in the quarter. And lastly, from an EPS perspective, we expect to be between a loss of $0.01 and profit of $0.01 based on approximately 56.7 and 58 million shares outstanding, respectively. On a GAAP basis, we expect Q2 net loss per share to be between $0.07 and $0.05 based on approximately 56.7 million weighted average shares outstanding. As a reminder, we typically exclude stock-based compensation, shareholder class action litigation costs, as well as restructuring costs, among other items from our non-GAAP results.
With that, I'll turn the call back over to Dave for some additional remarks.
David Flynn -- President and Chief Executive Officer
Thanks, John. Despite the revenue challenges in the first quarter of 2019, we are encouraged by the strong performance in key aspects of our business, such as EMEA, our subscription and support business and our strong E-rate results, all of which demonstrate the customer acceptance of our cloud networking platform. Our priority now is to improve sales execution and results in the Americas, so that is no longer a growth inhibitor, which should enable us to more fully deliver on the business opportunity that the strength of our product offering enables. We've taken action here, and we're encouraged by the strong start to Q2.
I'd like to thank our employees, partners and customers for their ongoing support and commitment. I will now take your questions. Operator?
Questions & Answers:
Operator
Thank you. [Operator instructions] We'll take our first question from Mark Kelleher of D.A. Davidson.
Mark Kelleher -- D.A. Davidson and Company -- Analyst
Great. Thanks for taking the questions. E-rate pickup seems pretty encouraging. What do you think the ramp of that looks like? You said it's going to be a little bit in this quarter, but does that – is it a little bit more in September and then a lot more in December? How does the seasonality play out there? And kind of connected to that, I know you said that the 802.11ax Wi-Fi 6 was helping that, is there a situation where that may have been delaying sales in the March quarter?
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Yes. So with regard to E-rate, I mean you're right. It was very encouraging. Both that the industry return to growth 24% year-over-year growth and that we grew much faster.
Our -- the funding request for Aerohive was up by 55%, so a nice increase in market share, so very encouraged by that. The timing of when E-rate is actually books. It is a – it has wiggled around a lot over the years, because some it depends on the pace at which the FCC, the organization USAC, part of the FCC actually issues funding letters. But broadly speaking, we've seen some a portion of that 10%, maybe 20% in the high end or 10%-ish kind of a showing up early, people buying ahead of the official release of funds, which is July 1 and later.
And the bulk of it tending to be kind of Q3 and Q4, if they get the funding letters out on a normal basis. So we would expect that the vast majority to be in Q3, Q4. Some can trickle on into the next year. But that's the typical seasonality.
With a concentration in Q3, if they are executing smoothly and getting funding letters out.
David Flynn -- President and Chief Executive Officer
The ax issue, so we don't see the ax, we're shipping in volume and so we have no – there's no issue with people waiting for ax or for that impeding funding. The education spending in Q1 is always – it was always a light quarter, because if they want to do fund E-rate process, they have to purchase after April 1. So Q1 wasn't particularly low education quarter in the very low 20% of the business. That's a little bit lower than usual, but kind of as expected.
But we see ax is mostly an ASP upgrade and we think it helped us with our share grade – share gain, because we were out ahead of the competition.
Mark Kelleher -- D.A. Davidson and Company -- Analyst
OK. And last question, you said the shift to the low end access points was an anomaly. Is there anything really nothing that drove that? I mean, are you sure that was an anomaly?
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Well, actually a great question. So we've looked at our pipeline for the current quarter. We've looked at the mix shift and products that we've shipped so far in April. And it's looking like a snapback.
You can see that in our guidance, right. I mean we're back to the guidance we gave you in gross margins. So all indicators were – it wasn't an anomaly, it was some – also somewhat regionally focused as well. And we're seeing it – we're seeing the snapback, again that's what gives us confidence that we'll see margins take such a big step-up in the second quarter.
Mark Kelleher -- D.A. Davidson and Company -- Analyst
OK. Thanks.
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Thank you.
Operator
Thank you. [Operator instructions] We'll take our next question from Christian Schwab of Craig-Hallum.
Unidentified speaker
Hi, this is Tyler on for Christian. Thanks for taking the couple of questions here. So first, I was wondering if you could just help draw some parameters on the E-rate funding, I believe you said education as a whole is about 30% of revenue last year. What percent of that education, I assume it's a large part, but what percent of that is directly E-rate.
David Flynn -- President and Chief Executive Officer
Yes. E-rate is typically less than half of that. There's a bunch of – all the international education business doesn't, is unrelated to E-rate. And even in the U.S., it's somewhere or roughly half.
So you expect modestly below 50% of that business will be E-rate.
Unidentified speaker
Awesome, thank you. And then I was hoping for maybe a little bit of an update on your expectations with the Dell and Juniper agreements. I guess, maybe first if you could somehow, what are they contributing to results now and what's a maybe full run rate in a year or two kind of I'll look for the contribution.
David Flynn -- President and Chief Executive Officer
So the Juniper relationship is kind of in a wind down, following the purchase of a midst. It had never become a very material portion of the business. I think, order of magnitude, just modify above 1%, I think in Q4. So did not have a material impact on the business.
We had originally hoped, it would be a growth catalyst, but it hadn't developed into that prior to the acquisition. So that's not going to contribute and we've got to Dell. Dell is generally a material customer in that around the 10%-ish range. We saw good quarter with Dell, optimistically, it'll continue at that level and hopefully increase modestly.
Unidentified speaker
All right, great. And then I understand the Q1, but looking out for the rest of the year, confident bounce back here in Q2. Do you guys believe you can grow full-year revenue for the full-year 2019?
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Well, that's given that we should be gradually give one quarters, where the guidance, that's hard to respond to it, because we're going to stick that given the quarters where the guidance. We different way of answering that, we think that E-rate given that E-rate's going to be a back half of then for us, puts us in a position, to have some growth in the back half. But again, we're working at building credibility back one quarter at a time at this point, given the size of the Q1 miss. So a little bit reticent to jump to telling a great back half story, although we think we have all the components or a great backup story.
We'll give you more updates on that, when we get into our second-quarter conference call.
Unidentified speaker
All right. That's great. That's all for me. Thanks, guys.
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Thank you.
David Flynn -- President and Chief Executive Officer
Thanks.
Operator
Thank you. This concludes our question for today. I'll turn it back to management for closing remarks.
David Flynn -- President and Chief Executive Officer
Thank you. Thank you all for joining us today. Later this quarter, we will be at the Craig-Hallum and Bank of America Merrill Lynch conferences. And we look forward to seeing many of you there.
Thank you. Have a good night.
Operator
[Operator signoff]
Duration: 30 minutes
Call participants:
Melanie Solomon -- Investor Relations
David Flynn -- President and Chief Executive Officer
John Ritchie -- Chief Financial Officer and Chief Operating Officer
Mark Kelleher -- D.A. Davidson and Company -- Analyst
Unidentified speaker
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