Infoblox Management Discusses Q3 2013 Results - Earnings Call Transcript

May.23.13 | About: Infoblox Inc. (BLOX)

Infoblox (NYSE:BLOX)

Q3 2013 Earnings Call

May 23, 2013 4:30 pm ET

Executives

Jane Underwood

Robert D. Thomas - Chief Executive Officer, President and Director

Remo E. Canessa - Chief Financial Officer and Principal Accounting Officer

Analysts

Jason Ader - William Blair & Company L.L.C., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Erik Suppiger - JMP Securities LLC, Research Division

Ehud A. Gelblum - Morgan Stanley, Research Division

Sanjit Singh - Wedbush Securities Inc., Research Division

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Alexander B. Henderson - Needham & Company, LLC, Research Division

Josh Beck - Pacific Crest Securities, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Infoblox Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to your host, Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon, and thank you for joining us to discuss Infoblox's financial results for the third quarter of fiscal 2013. With me on today's call are Robert Thomas, our President and Chief Executive Officer; and Remo Canessa, our Chief Financial Officer.

By now, everyone should have access to our earnings announcement, which we released this afternoon. This announcement may also be found on our website at www.infoblox.com in the Investor Relations section. Before I turn the call over to Robert, let me remind you that the presentation we'll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on March 5, 2013.

For the sake of clarity, unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. Please refer to the tables in our press release in the Investor Relations portion of our website for a reconciliation of GAAP to the non-GAAP numbers we will be discussing.

Before I turn the call over to Robert, I'd like to mention that Infoblox will be hosting its first Analyst Day event on Tuesday, June 4 in San Francisco. I'd like to encourage both financial analysts and institutional investors to register for the event on our IR website. Now I'd like to turn the call over to Robert.

Robert D. Thomas

Thank you, Jane. Good afternoon. We are very pleased with the company's continued strong execution during the third quarter and our ability to exceed the high end of our guidance range despite macroeconomic challenges. Revenue was a record $58 million, an increase of 34% year-over-year and 7% sequentially. Product revenue increased 37% year-over-year and our services and support revenue were up 30% year-over-year. We believe this strong performance reflects the increased recognition and importance of DNS, DHCP and IP address management in the market.

In the quarter, demand is broad-based with no major concentration in any particular vertical. We continue to draw that customer base, bringing the total worldwide count up to approximately 6,500. We believe that our customer base has the potential to drive significant growth for many years to come, given our relatively low penetration rate. In the quarter, we experienced strong demand in all geographies on a year-over-year basis. From a profitability standpoint, we also had a strong quarter with total gross margin at 79%; operating margin at 10.8%; and EPS at $0.11. Overall, I believe Infoblox remains well-positioned to maintain its momentum as the leading provider of automated network control solutions. Now I'd like to turn the call over to Remo to further discuss our financial results.

Remo E. Canessa

Thank you, Robert. I would like to remind everyone that the results I'll be discussing are non-GAAP financial results and excludes stock-based compensation expenses, amortization intangibles and the tax impact of these adjustments. All share counts that I'll be providing will be in a fully diluted weighted average share basis. We are very pleased with our execution and the strong results we've delivered in the April quarter.

Revenue in the quarter grew to $58 million, which represents a 34% increase over the April quarter last year and a 7% increase over the January quarter. Product revenue in the quarter was $33.6 million or 58% of total revenue, which increased 37% from the April quarter last year and was up 9% from the January quarter.

Service and support revenue was $24.4 million or 42% of total revenue, an increase of 30% over the April quarter last year and an increase of 3% over the January quarter. The increase in our service and support revenue is primarily due to our growing installed base of customers with prepaid support contracts that amortize over the service period.

From a geographic perspective, in the quarter, Americas represented approximately 66% of revenue, increased 35% over the April quarter last year and increased 12% over the January quarter. EMEA revenue represented approximately 23% of revenue and increased 30% over the April quarter of last year and was down 11% over the January quarter. We expected EMEA to be down sequentially due to the very strong performance that EMEA had experienced in the January quarter. APAC revenue represented approximately 11% of revenue and increased 32% from the April quarter last year and was up 24% over the January quarter.

Product gross margin remains strong even after the introduction of our new Trinzic series of appliances. In the April quarter, the product gross margin were 78% compared with 77% in the April quarter last year and 78% in the January quarter.

Service and support gross margin was 81% for the April quarter compared with 81% in the April quarter last year and 82% in the January quarter. As a result, total gross margin in the April quarter was 79% compared with 79% in the April quarter last year and 80% in the January quarter. In the April quarter, total operating expenses were at $39.7 million, which is an increase of $8 million compared with April quarter last year. As a percent of revenue, operating expenses decreased to 68% from 73% in the April quarter last year.

On the year-over-year basis, R&D increased 16% and was 17% of total revenue compared with 20% last year. Sales and marketing increased 24% and was 43% of revenue compared with 46% last year. G&A increased 58% and was 9% of revenue compared with 7% last year. The increase in G&A was due primarily to headcount and public company-related expenses.

In the April quarter, total operating expenses were flat compared with the January quarter. On a quarter-over-quarter basis, R&D increased 4%; sales and marketing decreased 3%; and G&A increased 9%. The decrease in sales and marketing is primarily due to lower compensation expenses. At the end of the April quarter, our worldwide headcount was 564 employees. Operating margin for the April quarter was 10.8% compared with 5.5% in the April quarter of last year and 7% in the January quarter. The operating margin performance in the quarter was better than expected and is due to exceeding our revenue and gross margin targets along with operating expenses decreasing as a percent of revenue.

Net income in the quarter was $6 million or $0.11 per share. This compares to net income of $2.2 million or $0.05 per share in the April quarter last year. In the January quarter, net income was $3 million and or $0.06 per share. As of April 30, 2013, we had $192 million in cash, cash equivalents and short-term investments. We had net cash provided by operating activities of $13.1 million in the April quarter.

Total net deferred revenue increased by $18.1 million when compared to the April quarter last year and $5.9 million increase since the end of January quarter. Deferred revenue primarily represents support contracts that amortized over the contract period and to a smaller extent, channel inventory.

Now, I'd like to provide guidance for our July quarter and our fiscal 2013. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expense, amortization intangibles and the tax impact of these adjustments. For the July quarter, we expect revenue to be in the range of $58 million to $59 million or a year-over-year growth of 29% to 31%. We're targeting gross margin to be approximately 78%. We anticipate operating margin to be between 8% and 9% and we expect EPS to be between $0.08 and $0.09 using 55.3 million shares. For our fiscal year 2013, we expect revenue to be in the range of $220 million to $221 million or a year-over-year growth of 30% to 31%.

In closing, we're clearly aware of the concerns on the economy and its impact on overall IT spending. While we're not taking these concerns lightly, we believe that the compelling value proposition from our automated network control solution, places Infoblox in a position where it can deliver continued growth. Now, I'd like to turn the call back over to Robert.

Robert D. Thomas

Thank you, Remo. I'd now like to take a moment to highlight 3 customer wins. The first is with a prominent global data storage corporation. This customer had DNS running in a variety of different forms such as BIND, which is open source, and Microsoft. However, the biggest challenge was that they had multiple spreadsheets, homegrown systems and point solutions, trying to manage these services globally. In order to address these challenges, we provided a global deployment of virtual appliances to consolidate these DNS services and to bring up all of this together under a single IP address management platform, allowing delegation across critical functions. By the initial deployment of DNS, we believe DHCP will be completed in the later phase. An important competitive differentiator to winning this business was their partnership with VMware and our integration with vCloud Director. Our ability to automate the assignment of IP addresses and update DNS as new VMs and VM apps spin up and down was a key factor in the decision-making process.

The second is the NetMRI win with one of the largest grocery store chains in the United States. This customer did an extensive evaluation of NetMRI, along with solutions from HP and VMC. Since the customer has a very large network with equipment from multiple vendors, NetMRI was chosen as the best solution to manage configuration changes and to detect any issues in this highly complex environment.

The third is with one of the largest state agencies in the United States. This agency serves as significant denial-of-service attack and contacted us. In response to the attack, we designed the configuration with high intrinsic appliances and the Trinzic reporting appliance to provide high-performance capabilities and to withstand further attacks. Interestingly, this was not a budgeted item, but given the severity of attacks, they were able to find the budget dollars, issue an RFP and award the purchase agreement within 5 business days. This customer win also highlights another area where we provide critical security protection for our customers.

Protection against denial-of-service attacks is increasingly important for organizations and plays to our strengths when assisting our customers. This is just one indication of significant interest from both customers and partners for our new security solutions. We believe that the strong indication of incremental value that Infoblox brings to its customers. In particular, we are very pleased with the demand for a DNS firewall solution. Transactions closed in the quarter included customers from a very prominent federal agency, a supplier of aerospace technologies, a large convenient store retailer, a midsize asset management firm and a few colleges and universities.

This quarter, we will introduce a DHCP fingerprinting solution. This technology provides clear visibility into the types of devices on the network. When combined with our DNS firewall, we offer an ideal solution to BYOD deployments by enabling customers to identify the devices on the network and set security and connectivity standards accordingly.

And turning to our Channels business. In the quarter, we continue to invest in and expand our distribution channels. Xerox Corporation, a managed service provider, is improving its service quality internally and for their customers by deploying our Trinzic appliances for both internal and external DNS services. In addition, they will offer our network automation services to their global customers, delivered through their services business units.

We're also strengthening our global partnership with Dimension Data. This expanded partnership will allow us to leverage Dimension Data's relationships with their Global 500 accounts, and include Infoblox in key networking and security projects.

And so in closing, we had a very strong third quarter and are encouraged by our growth prospects for Q4 and beyond. We continue to expand our customer base each quarter, and we believe the majority of these customers have the potential to be much larger revenue contributors in the future. The proliferation of BYOD, cloud computing, virtualization and next-generation data centers are placing incredible demands on networks worldwide, and Infoblox is clearly benefiting as organizations rethink their network infrastructure. With that, Remo and I would be happy to take your questions.

Jane Underwood

Thank you, Robert. That concludes today's prepared remarks. Operator, we would now like to open up the call to analyst questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

I wanted to ask about linearity in the quarter and how you saw things close out. Was it sort of -- was it in line with your expectation? Was it stronger than your expectations? And then any comment that you have on the month of May as we're about 3 weeks into the month of May. I just wanted to get a sense of whether you're seeing any noticeable impact from the macro environment and how it played out over the last 3 or 4 months.

Remo E. Canessa

The linearity for the quarter for April was very good. It was better than prior April quarters for us. The quarter came in better than what we had guided to. But we're not surprised with our performance in the quarter. Regarding May, regarding the overall macro environment, at this point, no, we're not seeing any impact.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. And then just a follow-up on the DNS Firewall commentary. How much DDI product is that pull through when you sell DNS firewall? Or is this a standalone -- in most cases, is this just a standalone sale?

Robert D. Thomas

Jason, it was a bit of a mixture of both. We saw a few standalone sales, but we also saw DNS Firewall pull through, so normal DDI business as well so it's a combination.Usually when it was standalone, it was to our existing customer base, but it did help us in some competitive situations, too.

Operator

Our next question is from Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Just a couple of questions. Remo, maybe the first one, OpEx, 68% of sales this quarter. Sales and marketing, actually, it was down quarter-over-quarter. Just wanted to get a sense, are we finally at the point where you would expect to see greater leverage in the model? How should we think about your sales and marketing expenditure going forward?

Remo E. Canessa

We did have better leverage in the quarter, primarily the compensation expenses were down. We did increase the headcount in the sales organization. As we've talked about in the past, we see this is as a large market opportunity and our plans are to continue to invest primarily in R&D and also sales and marketing. The guidance we gave for the quarter at 8%, 9% is much higher than we had anticipated at the beginning of this year but again, as going forward, we plan to continue to invest in sales and marketing.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And then Robert, any commentary on just the competitive environment? What did you see with respect to your competition this quarter? Pricing and then anything on just deal size metrics?

Robert D. Thomas

No real -- excuse me, no real change in the competitive environment. Overall discount decreased just a little for this quarter versus the last quarter. I think our win rate against the competition is about where it is. Deal size, maybe is ticking up just a little because we're able to put DNS Firewall into some deals that we weren't able to do in the past. But I would say generally, pretty much the same kind of environment as we saw in the quarter before.

Operator

We'll then go next to Erik Suppiger with JMP Securities.

Erik Suppiger - JMP Securities LLC, Research Division

A couple of questions. First off, any color on how the DNS Firewall did in the quarter? Was that on track with expectations?

Robert D. Thomas

Erik, I would say that it did a little better than expected. It's a profit we've only just introduced recently and probably as you heard on the call, we had a number of customers for that product spread across the different -- a whole set of verticals. So I think it surprised a little. We always thought there was good opportunity with DNS Firewall, but I think it's off to a reasonable start, and maybe a slightly start -- or a faster start than we thought.

Erik Suppiger - JMP Securities LLC, Research Division

And then secondly, you had noted a denial-of-service win, a win -- one of your wins was for denial-of-service. What was the competitive environment for that? And how often are you competing in deals that are looking for a denial-of-service protection?

Robert D. Thomas

The high end box that we have, the 40-30 that is primarily our best defense, denial services. It's not that new, as you know, only a couple of quarters or so, or maybe a bit more into the market. And we're not seeing a lot of competitive pressure on that. That particular denial-of-service deal that we talked about opened and closed very, very quickly. And they had a severe attack, they called us, we showed what we could do and the deal was done in a matter of a few days. And there was no competition in that deal. We demonstrated we could deliver the solution and protect them and they bought it. So it might be a bit early yet to make a general comment on competitive in denial service, but we have a very high-end solution that I don't think anyone else in the market can match.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. Then lastly, I think you said in the past that your government business is in the low-teens as a percentage of revenue. Was that consistent again this quarter? And can you give us any additional clarity in terms of what the federal component is, given that federal visibility is somewhat low?

Remo E. Canessa

Yes. Government business actually ticked up overall worldwide in the quarter. It was more in the mid-teens to a little bit higher teens. The Federal business, don't have the exact numbers, but I do know that for the last 3 quarters, our Federal business has been flat in related to the bookings we've been getting.

Erik Suppiger - JMP Securities LLC, Research Division

Would you expect it to remain flat? Is that kind of the expectation?

Remo E. Canessa

I would say I don't want to speak specifically for the federal government, but just for the overall government, I think we've talked about is that we don't really see change in our model that we see service providers in the mid-teens; government in the mid-teens; education will be single-digit and the rest on enterprise. So we really don't so much change in that.

Operator

So we now have a question from Ehud Gelblum with Morgan Stanley.

Ehud A. Gelblum - Morgan Stanley, Research Division

A couple of questions. First, what percent of revs would you guess, Remo, went into your existing customer base versus which weren't renewal [ph] ones? Not just the new ones in this particular quarter, but if you could break it into customers that you've had for 6 months or more versus customers you've had 6 months or less, or something. Whatever you think is the reasonable break point, just trying to get some sort of recurring -- a sense of the recurring business that you're seeing on existing customers versus sort of new wins. Is there any way of looking at it from that perspective?

Remo E. Canessa

From a time frame perspective, I don't have that, but just an overall -- our break between the existing customers and new customers, new customers any one quarter in the 20%, 25% range, and then the remaining is for existing customers. That's the range we're in this past quarter.

Ehud A. Gelblum - Morgan Stanley, Research Division

So it didn't changed at all, appreciably?

Remo E. Canessa

No.

Ehud A. Gelblum - Morgan Stanley, Research Division

Previous quarter to quarter?

Remo E. Canessa

No. Not over the last several quarters.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Your guidance into your fiscal fourth quarter is basically flat, right? And it's been up the last several quarters. You'd think in the fiscal fourth quarter at least you'll have a little bit of an incentive from sales force to push harder, why are you -- is there something seasonal going on?

Remo E. Canessa

If you take a look at the growth that we've had over the last 3 quarters, we've grown in the product basis, 10% each quarter, 9% or 10%. And if you take a look at a lot from fiscal year 2012 versus the fiscal year 2013, our growth rate is basically going to be over 30%. So we are -- we've had great quarters and based on the pipeline that we have, we feel comfortable with the guidance we've given.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Now clearly over the last 3 quarters, you've seen a nice acceleration from the Trinzic upgrade. Has that -- you used to give percents so I assumed it's now 100% of your sales are Trinzic?

Remo E. Canessa

That's correct.

Ehud A. Gelblum - Morgan Stanley, Research Division

So do you think you'll start seeing a little bit of a slowdown just because the product refreshes now all the way through? And so there's not as much of an immediate need for interesting customers to upgrade and now you're looking at pushing it into new customers? Or is that -- that affect not really something that you look out when you model out?

Robert D. Thomas

As Remo said the mixture between new customer and existing customer, product bookings each quarter has been 75% new customer -- existing customers -- 20% to 25% new customer, and 80% to 75% existing customer for several quarters. And it's always been a mixture of some product replacement where appliances are getting old and they are being replaced. Some expansion into the networks. Now, of course we're selling DNS Firewall into those existing customers, as well. So I would expect that blend of base customer, new customer to continue for some time to come.

Ehud A. Gelblum - Morgan Stanley, Research Division

Right. But with Trinzic I think you had an ASP boost which helped?

Robert D. Thomas

That's true. Trinzic is slightly higher-priced than the old appliances were.

Ehud A. Gelblum - Morgan Stanley, Research Division

And so now that effect probably helped -- and I'm wondering if that had something to do with your guidance into Q4?

Robert D. Thomas

No, no. I think our guidance on -- if you look at Q4 guidance this year over Q4 actual last year, it's up 27%, 28% or more. So over Q4 of 2012, it's significantly up.

Ehud A. Gelblum - Morgan Stanley, Research Division

Because you still have a year-over-year impact of Trinzic in Q4 this year and no Trinzic in Q4 of last year?

Robert D. Thomas

Yes, correct.

Ehud A. Gelblum - Morgan Stanley, Research Division

So -- but on a sequential basis, you're going to -- and as we start moving forward, you're going to see less and less of that effect?

Robert D. Thomas

I'm not quite sure what you mean. You mean in terms of Trinzic replacing existing appliances?

Ehud A. Gelblum - Morgan Stanley, Research Division

Correct, correct. And your run rate.

Robert D. Thomas

Well, I don't know. As we've had this migration over the last 3 quarters or so, as I said, the percentage of existing base business to new customer has remained pretty well constant. So that mixture of upgrading, expanding networks, replacing appliances hasn't really affected the percentage of base business versus new business.

Ehud A. Gelblum - Morgan Stanley, Research Division

Right. You know I wouldn't expect it to.

Operator

Then we'll go next to Sanjit Singh with Wedbush Securities.

Sanjit Singh - Wedbush Securities Inc., Research Division

Can we get a sense of -- you announced a number of new distribution agreements. Can you give a sense of what channel productivity's looking like, the trends there? How's the channel ramping up on core Trinzic and what are the training plans for the newer solutions?

Robert D. Thomas

We introduced a new channel program about 3 quarters ago or so I think where we distinguished differently between some of the channel partners, those who are investing in our business in training people and educating people and those who aren't. And we call that the elite partner program that people -- that group of people who are investing more in the Infoblox business. That's progressing and growing quite well. And as we add new partners into the mix, people at Xerox for example, that we mentioned during the call, we expect them and they want to invest in the Infoblox business too. So I think we will see increased leverage over time from these partners who have invested in training, education or are able to do professional services as well, and some of them even delivered managed services. So our Channel business though as you know -- our business is about 95% Channel, 5% Direct, and it's never changed from that. But that group of elite partners is definitely generating more prospects and they're getting more involved in the actual business of closing and selling as well.

Sanjit Singh - Wedbush Securities Inc., Research Division

On the network edge appliance, what was the uptick on that this quarter? Is the gross margin, the 78% gross margin guidance, does that assume continued uptick of the edge appliance?

Robert D. Thomas

I'll answer half and Remo will answer the other half. The uptick was fairly modest in the last quarter. We didn't receive any very large orders for that edge appliance, the T100. We received a few small orders as people started to test them and deploy them in the scenarios where they could evaluate what it could do for them. We expect that to increase somewhat over the coming quarters. And Remo, if you could answer the question on the effect on gross margin for that?

Remo E. Canessa

You're absolutely right. The reason for the 78% gross margin seems an uptick in the edge appliance.

Sanjit Singh - Wedbush Securities Inc., Research Division

The last question on sale cycles. Have these changed over -- versus your prior quarters and is it still a 6 to 9 months sale cycle? Or is there any change there?

Robert D. Thomas

Generally, it's about 9 months plus. It's maybe ticked down a tad, but I would say nothing that was noteworthy or we could say was a trend. But we did notice, as I may have mentioned on the call, that the sale cycle for DNS Firewall is significantly less. Sometimes because we're filling in to our existing customer base, of course. And then they know us and understand their product range and probably trust us a little bit more. So the DNS Firewall sale cycle is considerably less than our average sale cycle.

Operator

Our next question is from Jonathan Ruykhaver with Stephens.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Yes. I apologize for any background noise. I find myself stuck once again at an airport. I'm trying to get a sense for Robert, the comment you made as to around [ph] an environment for DDI where you think there's broadening adoption. And the 25% product booking coming from new customers, do you see the pipeline representing a higher percentage of both the new customers? I think historically, you generally added around 200 customers, new customers before. Can you comment on how that's trending as well?

Robert D. Thomas

I think we aren't seeing it as any anecdotal, Jonathan. I don't think we have kind of hard, empirical evidence for this. But I think we are seeing an understanding amongst perspective customers that DNS and DHCP is extremely important in their networks today and especially in trying to do the kind of things they're doing with virtualization cloud, BYOD and so and so. The need for more bulletproof performance is I think understood and we see people recognizing that. Some people even starting to budget for it in the coming years. I think it will take time, of course, for that to mature and for us to get built into budgets. And it won't happen in a quarter or two, it'll happen over several quarters, if that happens. Again, the win rate on new accounts versus existing was pretty much consistent with other quarters.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. So generally right in that 200 number in terms of new customers [indiscernible]?

Robert D. Thomas

You're correct.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. I guess on another point, the activity that you saw in the service provider vertical in the quarter. Can you comment on that and the mix of that activity between infrastructure to support managed services versus on the wireless side do you help lower [ph] support of board DNS against issue [ph] ?

Robert D. Thomas

I think there is nothing different about last quarter from the service provider front than we have seen from the preceding several quarters. And business is a mixture of infrastructure and resale and supporting wireless networks and so on. So I don't think there was anything remarkably different either one way or the other in the service provider market for us last quarter.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Can you remind us the percentage of revenues from that vertical?

Remo E. Canessa

We've indicated in the past that we've been in the teens. It was lower this quarter. It was still double-digit, but low double-digits. And the -- as I've mentioned before, overall government was higher this quarter and that was more than mid- to high-teens.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. And my final question is just around APAC. The growth really accelerated from a year-over-year comparison. Can you talk about what you did execution wise to your buildout [ph] performance?

Remo E. Canessa

We had a change of management in Asia-Pacific just on the year ago. And we have, through the last year or so, being rebuilding Asia-Pacific, investing a bit more money into it, reevaluating where we're spending money and how we spend it. And I think we're starting to see returns on that investment. The guy who runs Asia-Pacific for us now was the guy who ran Asia-Pacific at NetScreen for us. And he's been in the seat for a year, and we're starting to see some of the benefits on his contacts and his ability to run that region.

Operator

Our next question is from Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Just as a follow-up to the service provider question. Can you remind us how the competitive landscape differs when you're selling into service providers for external usage versus maybe kind of the broader enterprise business, if there is a difference?

Robert D. Thomas

I think one of the strongest areas for us in service provider is DNS caching where service providers are providing different caching points around their network for DNS queries. As you know, both smartphones are heavily DNS-intensive, so as people run applications on smartphones or web browser phones, they generate a lot of DNS queries. And that is something that the service providers haven't seen the past in traditional networks. So one of the strongest parts of our business is in DNS caching. That's not so true, of course, in enterprises. Enterprises don't have that very heavy network hit on DNS. So that's probably I would think the biggest different for us in the service provider market.

Kent Schofield - Goldman Sachs Group Inc., Research Division

And are you seeing any, as IPv6 continues to chug along, are you -- have you seen any change in terms of the way customers are looking at that over, say the last 6 to 9 months, any change in the customer uptake there?

Robert D. Thomas

I think there's definitely significantly more interest in IPv6 in Asia Pacific. And we were just out there during the last quarter, talking to some service providers and customers out there. And they're starting to deploy IPv6 clearly ahead of the United States and even Europe. But in the mainstream, in the enterprise, we're still in the phase of people planning what the IPv6 strategy should be, how they're going to approach it, how they're going to handle mixed mode environment of IPv4 and IPv6 with little money at the moment in North America being spent on specific IPv6 deployments.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And then as a follow-up to the earlier gross margin question. Is there any difference with the -- some of the security offerings, meaningful difference from the overall gross margin that we should be looking out for as that grows as a piece of revenue?

Remo E. Canessa

I think generally the -- when we do sell the DNS Firewall, it is at 100% gross margin. Related to the feed that we give to customers, that is going to come in probably in the mid-70% type margin perspective. So the short answer is no, nothing really meaningful change in the gross margin related to the Firewall product.

Operator

We will go next to Andrew Dillo[ph] with Cowen and Company.

Unknown Analyst

I'm calling in for Paul Silverstein. Just wanted to follow up in terms of -- in the past, you'd said at 4 years ago to generate new business, it was 80-20, and now it's 65-35. I mean, last -- in recent conference, it's 65-35. I was just wondering if you're starting to get even closer to that 50-50, if you saw any appreciable change in the quarter where people or businesses are starting to come to you and whether that had an impact on the lower sales and marketing because in the past, you talked about sales and marketing investments for because if it's such a high touch. So I was wondering if you sort of could comment on that and if that was any way impacting the lower sales and marketing.

Robert D. Thomas

I don't think there was much change. You're talking about the opportunities we generate and we've said in the past that about 65% of the opportunities we generate come from the events that we run, webinars, seminars and so on, and about 35% or so come from leads over the website or unsolicited leads. I don't think we saw a significant change in that but I think it's still about the same. I think it's still some time before we'll see it approach 50-50. But it is drifting down just a little. It's working in the right direction but no appreciable change in the last quarter.

Unknown Analyst

Okay. Great. And last quarter, you guys have called out what MRI had grown year-over-year. You gave a good example of a new customer. I was wondering if you could provide what MRI did this quarter.

Robert D. Thomas

Yes. NetMRI, year-over-year, grew slightly. So Q3 of this year over Q3 last year was slight growth. It was down a little bit quarter-over-quarter because we had such a large growth last quarter. I think last quarter, NMRI grew 24% over the previous years. So we had significant uptick. But this quarter, it was slightly up from the year before quarter and slightly down from previous quarter.

Unknown Analyst

Okay. Great. And in terms of the upside in the revenue in the quarter, was it mostly the DNS Firewall or was there other products? Was the 40-30, did that -- did revenues come in from that? And you talked last quarter about some orders happening faster than you had thought because understanding that there's a little bit of a longer lead time with that for carriers. But just wondering if it was just the DNS or maybe other broader base of products that drove the upside?

Robert D. Thomas

I think it was more broadly based. DNS Firewall clearly was a new product for us. We had installed it in previous quarters, so we did bring in some revenue. It also dragged in some DDI revenue that we may not have gotten this quarter if it hadn't been for DNS Firewall. I think the number of 40-30s was pretty decent for the quarter and they're high revenue products as you know. And so it wasn't a particular product, it was a little bit more broadly based but DNS Firewall had an effect.

Operator

And we now have a question from Alex Henderson with Needham & Company.

Alexander B. Henderson - Needham & Company, LLC, Research Division

First question. I just wanted to clarify on the comments about the existing customers. It sounds -- you've made it sound like existing customers were simply replacing existing installed base with the new Trinzic product as opposed to extending their footprint to new branch offices or new locations in their firm. I would think that it was more of a latter than the former, could you just clarify that, that's an accurate statement?

Robert D. Thomas

Yes, that is accurate. I'm sorry if we misrepresented it. The existing customer business is a combination of, of course, some appliance replacement and expanding into new business. So I mean, we have a lot of customers who come back quarter after quarter and just add more appliances to what they already had to expand us further into the network and deploy us in other locations and so on. So yes, I didn't mean to give the impression that it was purely replacement. That's not true at all.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Would it be the vast majority of it be extension of footprint?

Robert D. Thomas

Yes. Well, I think we've said earlier that we're only about 20% to 25% penetrated in to our existing base anyway. So we have a long way to go in expanding our presence in most of our customers. So that's definitely a major part of what we sell.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Second question. Again, following up on prior call's commentary. The DNS query caching in the service provider, I would assume that the signaling storm problems would go up enormously as we move to the LTE devices. Does that accelerate the demand and requirements for this type of technology in that footprint?

Robert D. Thomas

Well, LTE, I think as we may have said before, is a huge consumer of DNS query. So as more LTE networks are deployed, so the demand for that kind of caching capability does go up. So yes, as LTE gets further deployed both here and throughout the rest of the world, there will be a higher demand for DNS high-performance and caching and so on.

Alexander B. Henderson - Needham & Company, LLC, Research Division

And one more on the kind of a combination of that MRI extending your reach into controlled plane and competition. In talking to people out at Interop [ph] about what Blue Cat's doing and some of the other players are doing, they seem to be diverging somewhat in terms of your strategic position and their strategic position as you guys move more into the core of the network in terms of managing the network, and they're moving more to edge security. Is that how you would see the world evolving in terms of a competitive balance? And as we move into more integrated into the core, how do we think about integrating into the orchestration systems of other vendors versus competing with them?

Robert D. Thomas

I think there's a big differentiation for us in terms of what we're doing with competitors. We are pushing under the edges of our network too, of course, because we introduced this product called the T100, which is a low-cost, high-volume kind of product, which we would expect to see deployed in retail locations, branch offices and so on. So we are extending our reach out to the edge, I think quite strongly, and we'll see some of that activity over the next few quarters. But you're right, there's no one else in our space I don't think that is delivering the kind of infrastructure automation products that we are integrating DNS and DHCP data with automation products into the core of the network to now cloud computing virtualization and so on. That is definitely not a direction our competitors are taking at all.

Alexander B. Henderson - Needham & Company, LLC, Research Division

So integration with other people's orchestration?

Robert D. Thomas

No. Yes. Sorry, yes. No, we're not really playing in the orchestration space at all. Automation and orchestration are different things and in fact, they're complementary. So as we go forward, one of our strategies is to enrich the API of our products so that we can integrate into other people's orchestration systems and network management systems, as well. So we see that as a complementary thing to do and we're not going to compete with the orchestration guys.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Just one last question on the same line of thinking. So SDN and impact of moving towards orchestration integration, should we be viewing the IPAM and DNS stuff as the Trojan horse that gets you into that strategic position that allows you to be that feedback loop in that network?

Robert D. Thomas

Yes, that's exactly our positioning by embedding ourselves into people's networks in that way, DNS and DHCP. And enriching IPAM, you'll see us enrich IPAM over time. Our IP address nation system with more data that we collect, not just from DNS and DHCP, but collect from automation tools and NetMRI products and so on, that puts us in a unique position because we have accessed to that data to play a major role in SDN, unlike any other company.

Operator

Our next question is from Brent Bracelin with Pacific Crest Securities.

Josh Beck - Pacific Crest Securities, Inc., Research Division

This is Josh Beck in for Brent here. Just wanted to ask on the DNS Firewall, it sounds like it has a shorter sales cycle than your traditional product. Could that actually potentially improve your overall sales cycle moving forward just as it becomes more mainstream or is that something that it's going to take some time to materialize?

Robert D. Thomas

Well, I think both things are true. I think we would hope and expect it to improve the sales cycle over time. With DNS Firewall, we're tapping into a budget that already exists, so almost every company that has a network has a security budget. And people are starting to lay a security, this defense and depth approach where many different elements combine to create a more secure environment and DNS Firewall plays into that very well. So one of the reasons that our sales cycle is longer than most is it's often the budget line that people can use to buy stuff from us. Definitely not true for DNS Firewall, we fit squarely into the security space. So overtime we would expect sale cycles to come down a little. People would see the value of DDI, DNS, DHCP and IPAM associated with DNS Firewall and that may help people buy a little bit sooner. But the second part of what you said is true also, it will take a while. It's not something that will happen overnight, but I think we'll start to see it.

Josh Beck - Pacific Crest Securities, Inc., Research Division

Okay. And then just digging into the security portfolio, I mean, it seems fairly broad, I mean, you have the firewall, I think a controller and now this DHCP fingerprint device. Should we think about them just architecturally as being more software modules that you can layer on top of your core solutions? Or is it more of a separate box maybe that resides somewhere else in the network?

Robert D. Thomas

In terms of DHCP fingerprinting, which gives people much greater visibility into what's connecting to the network and therefore, what they should do with it is just a feature within the product than it is software. DNS Firewall is exactly the same thing. It's just a license key that we turn on. So those things are just laid into the product and turned on via license keys. In terms of the Security Device Controller, the thing that manages heterogenous firewall environment, that is a separate appliance and will remain a separate appliance for some time. Over time, we may see that gets folded into the overall architecture, but today and for the foreseeable future, that would be a separate appliance. And in terms of denial service and distributed denial service attack prevention, that is a specific high-end box that we sell today.

Operator

And we have no further questions.

Jane Underwood

Okay, thank you. I would like to thank you for joining us on today's call. A replay will be made available at (800) 475-6701 beginning on May 23, 2013, at 4:00 p.m. Pacific and an audio archive will also be available on our website. Have a great day. We look forward to speaking with you again soon. Thank you.

Robert D. Thomas

Thank you.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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