Infoblox Management Discusses Q1 2014 Results - Earnings Call Transcript

Nov.26.13 | About: Infoblox Inc. (BLOX)

Infoblox (NYSE:BLOX)

Q1 2014 Earnings Call

November 26, 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

Jonathan B. Ruykhaver - Stephens Inc., Research Division

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

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Sanjit Singh - Wedbush Securities Inc., Research Division

Paul Silverstein - Cowen and Company, LLC, Research Division

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

Erik Suppiger - JMP Securities LLC, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Infoblox First Quarter Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon, and thank you for joining us to discuss Infoblox's financial results for the first quarter of fiscal 2014. 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 annual report on Form 10-K filed with the Securities and Exchange Commission on September 20, 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 and 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 a security briefing event, in conjunction with the RSA Conference on Thursday, February 27 in San Francisco. This event will focus on Infoblox's opportunities in the security market and will feature presentations by executives, along with a channel panel discussion. I would like to encourage both financial analysts and institutional investors to register for the event on our IR website.

Now I would like to turn the call over to Robert.

Robert D. Thomas

Thank you, Jane, and good afternoon. We are once again very pleased with our execution and the strong start of fiscal 2014. Revenue in the first quarter increased 28% year-over-year to a record $63.5 million and product revenue grew 33% year-over-year to $36 million. In the quarter, we saw a solid demand in all geographies, with all 3 experiencing year-over-year double-digit revenue growth. Complementing the strong demand from our existing customer base, the addition of new customers brought our cumulative count to approximately 6,900 customers. Key new wins included 2 large Japanese banks, 3 prominent U.S. retailers, a worldwide temporary staffing agency, the largest and busiest transit agency in North America and the world's largest library of health sciences.

In the first quarter, we achieved a strong gross margin of 80%. We reported solid bottom line results, with operating margin at 12.1% and EPS of $0.12.

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 will be discussing are non-GAAP financial results and excludes stock-based compensation expenses, amortization of intangibles and acquisition-related expenses. All share counts I'll be providing will be on a fully diluted weighted average share basis.

In the October quarter, Infoblox achieved revenue growth and operating results that are reflective of another quarter of strong execution. Total net revenue grew to $63.5 million, which represents a year-over-year increase of 28% and a sequential increase of 1%.

Product revenue in the quarter was $36 million or 57% of total revenue, which increased 33% year-over-year and was down 2% sequentially. In the October quarter, we expected product revenue to be slightly down sequentially due to our strong performance in prior quarters.

Service and support revenue was $27.5 million or 43% of total revenue, which represents a year-over-year increase of 23% and a sequential increase of 5%. The increase in our service and support revenue is primarily due to our growing installed base of customers with prepaid support contracts that are amortized over the service period.

From a geographic perspective, Americas represented approximately 68% of total revenue and was up 33% year-over-year and increased 4% sequentially. EMEA revenue represented approximately 22% of total net revenue and increased 19% year-over-year and was down 5% sequentially. We'd expected EMEA revenue to be down sequentially due to the very strong performance which EMEA experienced in the previous quarter. APAC revenue represented approximately 10% of total net revenue and increased 21% year-over-year and was down 9% sequentially. In the prior quarters, we had some large deals that drove the recent strong performance.

In the October quarter, product gross margin was 79% compared with 80% in the same quarter last year and 78% in the prior quarter. Service and support gross margin was 81% for the quarter compared with 82% in the same quarter last year and 81% in the prior quarter. As a result, total gross margin in the quarter was 80% compared with 81% in the same quarter last year and 79% in the prior quarter.

In the October quarter, total operating expenses were $43.1 million, which increased $6.4 million year-over-year. The increase in operating expenses is primarily related to increases in headcount and compensation expense, mainly in sales and marketing. As a percent of total net revenue, operating expenses decreased to 68% from 74% in the same period last year, highlighting the leverage we are seeing in our business model.

On a year-over-year basis, R&D increased 10% and was 16% of total net revenue compared with 18% last year. Sales and marketing increased 21% and was 43% of total net revenue compared with 46% last year. G&A increased 13% and was 9% of total net revenue compared with 10% last year.

In the quarter, total operating expenses increased 2% compared with the prior quarter. On a quarter-over-quarter basis, R&D decreased 2%, sales and marketing increased 6%, and G&A decreased 6%. The decreases in R&D and G&A are primarily related to lower compensation expenses, and the increase in sales and marketing is primarily due to our annual worldwide sales kickoff meeting. As a percent of total net revenue, operating expenses increased from 67% in the prior quarter to 68% in the October quarter.

At the end of the October quarter, our worldwide headcount was 633 employees. Operating margin for the October quarter was 12.1% compared with 6.9% in the same quarter last year and 12.3% in the prior quarter. Our operating margin performance was better than we expected and is due to higher gross margin and lower operating expenses as a percent of revenue.

Net income in the quarter was $7.1 million or $0.12 per share. This compares to net income of $3.1 million or $0.06 per share in the same quarter last year. In the prior quarter, net income was $7.9 million or $0.14 per share.

As October 31, 2013, we had $229 million in cash, cash equivalents and short-term investments. We had net cash provided by operating activities of $14.9 million in the October quarter.

Total net deferred revenue increased $25 million when compared to the same quarter last year and $5.1 million increase since the end of the prior quarter. Deferred revenue primarily represents support contracts that amortized over the contract period, and to a smaller extent, channel inventory and now DNS Firewall subscriptions.

Now I'd like to provide guidance for our January quarter and our fiscal year 2014. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expenses, amortization of intangibles and acquisition-related expenses. For the January quarter, we expect revenue to be in the range of $65 million to $66 million or a year-over-year growth of 19% to 21%. We are now targeting gross margin to be between 78% and 79%. We anticipate operating margin to be between 9% and 11%, and we expect EPS to be between $0.09 and $0.11 per share using 58.5 million shares.

For our fiscal year 2014, we expect revenue to remain in the range of $270 million to $276 million or a year-over-year growth of 20% to 23%. We anticipate operating margin to increase and be between 10.5% and 12.5%. And we expect the EPS to be in the range of $0.44 to $0.54, using 58.5 million shares.

In closing, as Robert mentioned, we're off to a good start in fiscal 2014. Our strong product portfolio positions us well in the market. We're investing further to accelerate the adoption of our Automated Network Control offerings. At the same time, we are focused on expanding our addressable market with our security solutions, where we have very unique and timely offerings. With our current solutions and new product offerings, we'll continue to expand our customer base, deepen our relationships with existing customers and partners, and extend our strong competitive lead.

Now I'd like to turn the call back over to Robert.

Robert D. Thomas

Thank you, Remo. As in previous quarters, we closed new business with many marquee customers. I'd like to share with you 3 notable wins. The first customer is an NFL team and a new Infoblox customer. This customer had experienced an outage on their stadium's guest network during a game because their existing solution could no longer handle the increased user load. The guest network provides Internet access to media, facilities and football fans and is critical to media crews for broadcast TV.

As a result of the network outage, fans and guest suites where they provide wireless access were unable to connect to the Internet, and media crews and others that rely on Internet access to connect to corporate networks were unable to do so. All of these caused floods of phone calls into their IT help desk and impacted Internet access throughout the facility.

This customer needed a scalable and reliable solution that would instantly provide tens of thousands of IP addresses as people entered the stadium. The customer purchased our solutions which will rapidly provide IP addresses to all devices, along with IP address management and DHCP fingerprinting that allows for easy tracking of users and the identification of devices on the network.

This customer also purchased our NetMRI solution because they lacked a unified platform that is capable of managing their network infrastructure. With NetMRI, they can now automate the provisioning of network switch ports and delegate the operation to their IT help desk versus using valuable IT engineering staff resources.

The second customer is a multinational corporation that develops and sells consumer electronics. Over the years, Infoblox has become a trusted vendor to this corporation, providing network service solutions for multiple business units. This customer was evaluating our reporting appliances. And as part of the sales process, we presented them with our DNS Firewall solution. Our firewall is designed to protect against DNS-based malware by proactively stopping command-and-control requests from infected devices, therefore, preventing the Botnet from operating. The customer's IT team quickly recognized the value of our DNS Firewall for securing the network against malware and Botnet attacks. By combining this solution with our reporting appliance, the customer will gain greater security control and visibility. Infoblox is able to meet both of these business drivers in the turnkey solution.

The third customer is a FORTUNE 500 medical device pharmaceutical and consumer packaged goods manufacturer. This customer wanted to modernize its network infrastructure and move away from Alcatel-Lucent's QIP to speed operations, increase reliability and lower operational costs across 167 global locations, mainly to consolidate network services running on multiple disparate platforms, including Windows 2000 servers to a common distributed platform. This customer purchased our appliances primarily due to our Grid technology, network discovery, rich IP address management features and the ability to integrate with external systems for true network automation.

Going forward, the customer will gain centralized network control by using our Grid architecture and integrated device discovery, providing a more resilient network.

In the first quarter, we also continued to expand our business partnerships. Xerox Corporation, a managed services provider, continued to strategically utilize Infoblox this quarter. Following the deployment of our Trinzic appliances across their 18 data centers, Xerox is now deploying our NetMRI appliances to drive operational efficiencies to provide better insight into their network, and to increase automation and workflows for over 100 of their global managed services customers.

Last week, Infoblox won Techworld's Networking Product of the Year award for both our Trinzic and NetMRI appliances. Techworld is one of the most influential IT news sites in Europe, with more than 330,000 unique visitors every month.

As I mentioned earlier, last quarter we introduced the Infoblox DNS Firewall-FireEye Adapter. This solution brings together the powerful capabilities from our DNS Firewall and malware protection technology from FireEye, helping organizations protect themselves against Advanced Persistent Threats or APTs. By using FireEye's technology, APTs are detected in a safe virtual environment where behavior is observed and any malicious activities identified. Our DNS Firewall then disconnects malware from its host, disrupting any command-and-control activity, pinpoints the infected devices quickly and helps speed up remediation efforts.

We continue to be very pleased with the strong momentum from our DNS Firewall solution. In the first quarter, we saw customer adoption across a wide range of verticals, including financial services, health care, aerospace, manufacturing, government and education.

We're continuing to expand our security portfolio by adding additional security capabilities. Next month, we will introduce the Infoblox advanced DNS protection solution. This solution is our first appliance with integrated defenses against a number of security threats, including distributed denial of service, cache poisoning, malformed queries and tunneling.

Infoblox's core business has always been focused on providing highly available network services. This solution will assure our customers that these robust network services will continue to operate under a variety of DNS-based attacks. And by building defense directly into a fortified appliance, we will deliver protection that is stronger, more intelligent and more comprehensive than what is possible today with separate external security solutions. We view this as a great market opportunity.

To provide some perspective, according to IDC, the worldwide market for just DDoS preventative solutions is expected to grow by compound annual growth rate of 18.2% from 2012 through 2017 and reach $879 million.

Gartner estimates that its DDoS inquiry level has quadrupled from September 2012 through September of this year. We believe the increase of higher volume and application-based DDoS attacks and other DNS-related threats on corporate networks are forcing CIOs and security teams to find new proactive solutions for reducing network downtime.

In closing, we are very excited about our opportunities in fiscal 2014 and beyond. The investments we are making in sales and marketing and R&D have been paying off, as evidenced by our year-over-year growth in product revenue. Our pipeline remains strong, and we remain committed to investing further to grow market share and expand our technology leadership position.

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'd like to now open up the call to analyst questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Jonathan Ruykhaver with Stephens.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

I've got a question just on EMEA. It looks like performance in EMEA decelerated from the fourth quarter. Is that reflective of macro pressures or is it more just timing, with the end of your fiscal year and rebuilding the pipeline going into this year?

Robert D. Thomas

Jonathan, EMEA was down, as you say, quarter-over-quarter but they had an extremely strong Q4. So I think it's not an indication of any kind of weakness in the EMEA market or any macro trend at all. It's just a little bit of a byproduct of their very, very strong Q4.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. Have you seen just, overall, any kind of change in pipeline coverage or conversion rates on the business or do you continue to see those metrics move forward?

Robert D. Thomas

I don't think there's been much of a change in conversion rates. I don't think there's been much of a change from last quarter in sales cycle and so on. I think our pipeline is where we expect it to be. So I don't think there's anything indicative of any kind of major changes or changes to our business in any of those things.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Right. And now the guidance for the January quarter, it looks conservative, but you guys have a history of being conservative. Do you expect license revenues to grow sequentially in January from the October quarter?

Remo E. Canessa

Based on the guidance we gave of top line revenue of $65 million to $66 million, we expect the license revenue to be flattish or up for the quarter.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. Is that more reflective of your historic stance around conservatism?

Remo E. Canessa

It's based on our visibility of what we've seen or what we see currently.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. And the last question I have is just, can you talk about the IPAM integration with VMware vCenter, how the opportunity differs relative to the integration with VM Orchestrator? Are you seeing stronger activity in adoption rates?

Robert D. Thomas

We just finished that work towards the end of last quarter, beginning of this quarter. So I haven't got a chance to see any change in adoption rate yet. But I would say there's definitely a change in interest in that product. There's more interest, I think, in what we've done recently with VMware than there was in the past with vCloud Director.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

And can you just talk to that, what is the reason for the higher level of interest? Would you expect that partnership to be more fruitful in terms of driving sales?

Robert D. Thomas

I think so. But I think it's more related to what the vast majority of VMware's base is doing. I think the integration we have done just recently is much more indicative of the environment that most VMware customers are using today, whereas the integration we did a year or so ago was very much vCloud Director-oriented and a very small percentage of their base, maybe less than 20% or so, are using that product. So we're addressing a larger percentage, much larger percentage of VMware's base today than we have in the past.

Operator

Next question will come from the line of Jason Ader with William Blair.

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

So I think, obviously, the stock's getting hit in the aftermarket. And I think, clearly, the question is going to be, "Has anything changed?" And you just said nothing changed, but the last -- certainly, last couple of quarters, you've been beating the top line guidance pretty handily by -- it looks like $3 million last quarter and $2 million the quarter before that. So obviously, you didn't -- sort of an in-line guide and kind of in-line quarter, so you didn't miss. But has anything changed in terms of the momentum of the business that causes you to be a little bit more cautious? That would be my first question. And second question, I guess, more specifically for Remo is why would the operating margin be lower in Q2 given the higher revenue? I assume it's an OpEx issue, but could you talk to that?

Robert D. Thomas

Jason, no, I don't think anything has changed in the business. As you said, we have had significant quarter-over-quarter revenue growth and product growth for the past 5 or 6 quarters even. So it's been a message, a consistent message over that. It does sometimes take a little time to digest those large quarter-over-quarter increases. So there's nothing fundamental in our business that's changed that we can see. As I said earlier, our pipeline is where we expect it to be. We had about the same number of greater-than-$1 million-deals this quarter as well. So it's just, I think, a timing thing and get a little fluctuation in the business from quarter-to-quarter. And sometimes after several quarters of consistently and significantly beating guidance, you just have to digest that a little.

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

Anything on fed, Robert?

Robert D. Thomas

Our fed business was about where we expect it to be. Remo, was it slightly up quarter-over-quarter?

Remo E. Canessa

It was slightly up quarter-over-quarter.

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

Okay. Then Remo, can you address the operating margin?

Remo E. Canessa

You're absolutely correct, Jason. It's related to continuing to hire, so it's in OpEx, which will be increasing primarily in sales and marketing.

Operator

Next question comes from the line of Brent Bracelin, Pacific Crest.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

A couple of questions just relative to kind of demand picture. Clearly Cisco is calling out BRIC is an area where they're seeing weakness. Could you talk a little bit about some emerging country, what your exposure is there? Are you seeing any sort of kind of demand slowdown in those regions, albeit even if it's small?

Robert D. Thomas

I don't think a demand slowdown. I think in Latin America, we are doing well. It's still a very, very small part of our business, of course, but we're doing well and that's growing at a reasonable rate, so no slowdown there. But again, when you have only a very small part of your business coming from that territory, then I would not expect us to see much of a slowdown. There's probably far more opportunity than we can address with the limited resources we have in the moment. In India and in China, as you saw, APAC was a little down this quarter, but it was based on what they've done in the past. They had a good Q4 as well. The pipeline in those regions is strong and good. So I don't think -- and again, I would say what I've said in the past. I think our business is relatively small when you compare it to the size of Cisco's business, and the resources we're investing in the BRIC-type countries and regions is relatively small as well or extremely small. So I think there is more opportunity in those areas than we can address. And our size is one of the things that I think insulates us a little bit from any change in those environments.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Sure, you bet. And then, I guess, secondarily, as you look at kind of the product and then license revenue in the quarter, it was down kind of sequentially slightly. As you look at the guidance going forward, I think 3% sequential growth to the mid-point. If I assume services up another 5%, it implies only 2% sequential growth on the product side this quarter. So could you maybe walk us through what you're seeing on the pipeline? What are the kind of levers that you see relative to kind of reaccelerating growth on product? Is it -- did you have a bit of a slowdown relative to security? Or help us understand as we look at those trends versus very, very strong sequential growth rate all of last year, how we should interpret the sequential change and outlook relative to the product revenue?

Robert D. Thomas

I don't think there's anything fundamentally different from the business. I think it's part of the kind of ups and downs of doing business. On the DNS Firewall front and on the network automation front, we had an up quarter, where both of those products did significantly well. Of course, on the DNS Firewall front, a fairly reasonable portion of that booking from those products doesn't appear in revenue straight away because it's subscription based and, therefore, it appears over time. Probably 30% or 40% of the bookings for a DNS Firewall deal shows up in revenue over the 12 months, so that we don't get immediate benefit from some of the bookings for that product. I think we're coming out with some security products this quarter. Expanded security products will also give us a great opportunity. We're coming out with a thing called network insight, which starts to blend network automation more tightly into the Grid, which I think will prevent -- present us with big possibilities. And year-over-year guidance didn't change when we announced 2014 guidance last quarter. We announced the same this year. So we don't see any slowing down in the guidance we originally projected for that. And our year-over-year growth is strong. Sometimes quarter-over-quarter fluctuates a bit. But if you look at the year-over-year numbers from Q1 last year to Q2 this year, there's 33% product growth this year over last year, so we are very happy with the fundamentals of the business and the way in which it's heading.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

All right. Last question for me is really on product gross margin. After 3 quarters of being at that 78% level, it looks like you had a nice little uptick to 80% this quarter. Was there any onetime benefits that you kind of witnessed in this quarter, and it should go back to 78%? Or was it just tied to increased software mix that helped drive that slightly higher-than-expected kind of product gross margin in the quarter?

Remo E. Canessa

It was product mix and software, and we've raised the guidance for this quarter from 78% to -- basically 78% to 79%.

Operator

The next question comes from the line of Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Robert and Remo, I just wanted to follow up on the last question. If we look at your product performance in the October-ending quarter and the implied guidance for Jan, to get to your full year guidance, we have to assume quite a bit of acceleration in the back half of the year. So I just wanted to understand, again, what gives you the confidence that we will see product growth reaccelerate on a quarter-over-quarter basis as you move into your fiscal 3Q and 4Q?

Robert D. Thomas

Amitabh, I think it's the products that we have. We have, as you know, security products, which is starting to grow, and every quarter the DNS Firewall has been in the market now, it's significantly increased over the quarter before. And we have a very large base that is a target for that originally. Although DNS Firewall has helped us with some new deals and some new customers who have bought it, it's largely applicable to our existing base because they can just buy a license key and turn it on, and then after buying additional hardware to do it. So of our 6,900 customers, I would, say 150 or less have bought DNS Firewall from us today, and DNS happens to be one of the most common attack vectors that we see in the security space today. So I think that will continue to grow at a decent rate and give us opportunities. The advanced DNS protection product that we're introducing this quarter in December is aimed at DDoS and other DNS attacks, such as cache poisoning and so on. Both are very much in the news today and also are very much targeted at a very large base of customers. And then when we look at things like network insight, which is a combining or marriage of network automation and DNS and DHCP capability, again, very applicable to our existing base and also a very strong comparative feature in the DDI space as we compete with other people. So it makes us even more competitive than we were in the past. Our network automation on the NetMRI front, too, is increasing over the last 3 quarters. We've seen increased growth in NetMRI products across the board, and so that gives us a lot of opportunity as well. And then you were adding to that the just underpenetrated nature of the DDI market. It's still a very underpenetrated market. I think people are becoming a bit more aware of the need for it. The NFL football team example we gave today is cropping up in other places, too, where this attachment of all kinds of devices to networks are just overwhelming the ability of the network to handle IP address allocation and management. So we're pretty confident that we will meet or exceed the guidance we gave you for the full fiscal year.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. Robert, just on that final point on the core DDI market, you very consistently seem to be adding 200 customers. Is there an inflection point we should expect at some point, where we see that number accelerate and what would it take to see a larger number of customer additions on a quarterly basis?

Robert D. Thomas

Yes, I think that's a very good point. I think one of the things that sometimes prevents us from getting beyond that 200 -- well, it does bump around a bit. It's 240, 220, 180, 200, so it does bump around. Sometimes it's a bit more, sometimes it's a bit less. And one of the things that, I think, we need to concentrate on is how we go and get more business from new names. Because we have so much repeat business from our customer base, it does take a lot of our time servicing those customers. Although it's a shorter sales cycle, of course, when you're selling to someone who knows you and loves you already, it still does take time. So I do think we do need to find a way of aiming more resources at the new DDI market because it is so underpenetrated. There's still a lot of opportunity there, and that's one of the things we'll be looking at.

Amitabh Passi - UBS Investment Bank, Research Division

And then just one final one for me. On the services product line we continue to see year-over-year growth decelerate. And again, I'm curious, does that turn around at some point? Or why are we continuing to see services decelerate?

Robert D. Thomas

We typically expect the services to grow $1 million a quarter, and that's what it's doing. It's timing of contracts, basically, that we can get from our customers, so it's going to be in that $1 million range, potentially going up to $1.5 million and maybe a little bit higher than that, but that's our expectation.

Operator

The next question comes from the line of Sanjit Singh.

Sanjit Singh - Wedbush Securities Inc., Research Division

Can I get an update on the competitive environment? Did you walk away from any deals, from any more price aggressive competitors or anything in the competitive front that may have changed versus last quarter?

Robert D. Thomas

Sanjit, no, I don't think so. We've had a very consistent win rate in the competitive world of pretty much 8 to 9 times out of 10. So it didn't change for us. I think, as I said earlier, we had about the same number of deals in the greater-than-$1 million category. They all weren't quite as large as other deals we've seen sometimes in the greater-than-$1 million category. But in a competitive environment, we have basically -- we face BlueCat. We have the same win rate. Haven't seen it go down, and probably you can tell that from our increased gross margin. I mean, we haven't had to discount anymore than we have in the past to win deals and it's stuck at about the same level.

Sanjit Singh - Wedbush Securities Inc., Research Division

Great. And Remo, maybe -- was there any impact on seasonality? You came off a very strong fiscal Q4. Is there -- should we start, in our model, start thinking about the FQ4 to FQ1 seasonality playing more of a role as the business starts to grow?

Remo E. Canessa

If there is any seasonality, I would say it's -- probably is in our fiscal Q1. And as we go forward, I think we're going to take a look at that. So that's a good comment.

Sanjit Singh - Wedbush Securities Inc., Research Division

And then regarding the target model in terms of your long-term operating model, any change in that timeline? Or is that -- are we still on track with the target?

Robert D. Thomas

We're still on track.

Operator

Next question comes from the line of Paul Silverstein, Cowen & Company.

Paul Silverstein - Cowen and Company, LLC, Research Division

Just a couple of quick ones. First off, I think, last quarter you commented that 2 out of the last 3 quarters, pricing has gone up, and in 1 quarter it was stable. What did pricing do this quarter?

Robert D. Thomas

Paul, do you mean by pricing discount?

Paul Silverstein - Cowen and Company, LLC, Research Division

Yes.

Remo E. Canessa

It was better this quarter, slightly better than it was the prior quarter.

Paul Silverstein - Cowen and Company, LLC, Research Division

So that's 3 out of the last 4 quarters that's true?

Remo E. Canessa

I believe so.

Paul Silverstein - Cowen and Company, LLC, Research Division

All right. Secondly, of the 200 new customers or thereabouts that you've been adding quarter in and quarter out, and the 150 or thereabouts of DNS Firewall customers, what percentage of the new customers roughly are taking either DNS Firewall or one of the other new security platforms along with your traditional solutions?

Robert D. Thomas

I'm going to have to have a bit of a guess at this, but I think of the new customers we signed this quarter, probably 10% or a bit less took DNS Firewall. It's an easier sell, I think, to our existing customer base. But as we said, some new customers do buy it and it does become a competitive differentiator for us with our competition. But I would say in the order of 10% or a bit less in the new customer category would buy it as an initial order.

Paul Silverstein - Cowen and Company, LLC, Research Division

One last question. When you sell DNS Firewall, what does that do to the deal size typically?

Robert D. Thomas

It depends on how the customer deploys it. A customer could deploy DNS Firewall on 1 or 2 of their appliances in the network and that might have a bookings impact of, let's say, in the 20k, 30k, 40k kind of range. It would be more if it was a bigger appliance; less, if it was a smaller appliance. But then, other customers choose to deploy it across a number of appliances at different points in the network. Where that happens, the deal size could change by $40,000, $50,000, $60,000, $100,000. I think the largest DNS Firewall order we took last quarter was north of $100,000.

Operator

Next, we go to the line of Alex Henderson with Needham.

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

I was wondering if you could just give us the headcount. I don't think you gave it to us on the presentation.

Remo E. Canessa

So the ending headcount was 633.

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

633. Going back to the VMware question earlier. Obviously, moving from cloud to vCenter is a big transition. Is there any delay or any slowdown in orders as people were waiting for that transition to occur?

Robert D. Thomas

No, I think it's a new opportunity for us. The integration we did with VMware around vCloud Director had some benefit, and we did see some business from it, but not a lot because most of VMware's customers are not using vCloud Director. As we made the transition or integrated with vCenter, then, as I said, we only finished that towards the end of last quarter, beginning of this quarter. So we haven't seen any business impact from it yet, but we've seen a lot of -- a lot more interest in that integration, especially from some of our larger customers.

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

But there was no hesitation as a result of the people waiting for that transition to occur to make a better purchase for themselves?

Robert D. Thomas

No, there wasn't any hesitation.

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

Okay. And then, can you talk a little bit about what portion of your sales are oriented towards bring-your-own device versus what portion of your sales are being driven by VM automation and that type of application?

Robert D. Thomas

No. We don't really track it at that kind of granular level. I think I could say that we get quite a bit of interest around organization -- around BYOD, where companies are trying to establish a bring-your-own-device work policy now and they're thinking about how they manage that and how they want to look at devices that come onto the network and things like DHCP fingerprinting and so on. It gives them information about devices before they even get an IP address or even attach to the network. So we don't track it at that kind of granular level, but we do get quite a bit of interest from organizations, who are starting to roll out BYOD policies and implementations around how they will track and identify in group devices that come on the network. In the automation space, it's just -- it still just a little under 10% of our business for network automation, although as I said, that is a growing part of the business.

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

Is there any difference in the competitive landscape between what you see when you're competing with BlueCat deals that are more around BYOD or deals that are more around automation or deals around -- more around security? Is there any variance in the orientation of when you run up against them?

Robert D. Thomas

No. I would say we see them -- the more determining factor of when we run up against them is usually, I would think, again just gut feel, is deal size. We see them a bit more often in the larger deals than we do in smaller deals, but it doesn't necessarily have any orientation about what the deployment model is.

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

Okay. Two last quick questions. Any change in the linearity in the quarter? And then, with the vCenter Director version coming out, does that improve your average selling price as we move into the back half of the calendar year and into the new year?

Remo E. Canessa

On the linearity basis, when comparing Q1 this year versus last year, linearity was better this year than last year.

Robert D. Thomas

And on vCenter, I just -- could you repeat the question again?

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

Does the rollout of the vCenter functionality increase your ASP?

Robert D. Thomas

I don't think so. vCenter -- the vCenter functionality will usually be sold to our existing customer base where much of the interest is at the moment. So we will kind of get rolled up into network expansions and add-on staff and replacement of appliances and so on. So I doubt that it will change the ASP for us.

Operator

Next question comes from the line of Erik Suppiger with JMP.

Erik Suppiger - JMP Securities LLC, Research Division

Just wondering, in terms of your outlook, I think your guidance for 20%-type growth. Do you think that reflective of a slowing market? Or do you think that there's any share -- any reason why you'd lose share in the coming quarter?

Robert D. Thomas

Erik, I'm sorry, you're fading in and out a bit. Would you mind repeating the question, please?

Erik Suppiger - JMP Securities LLC, Research Division

So I was just wondering in terms of your outlook, do you think that your outlook reflects sustaining market share, or is there anything that would cause -- cause a shift away from you in light of the growth that you're projecting for the January quarter?

Robert D. Thomas

I would be extremely surprised if we lost market share, and I would be extremely surprised if we weren't gaining market share. Just based on where we see competitors and how often we win against those competitors, I would be shocked for us to lose market share.

Operator

Next question comes from the line of Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Could you talk about the concentration of large deals in your Q4s versus your Q1s just historically? Is there some kind of focus from the sales force around accelerators on larger deals that you guys have been working on all year, and maybe that was some of the change we saw from Q4 to Q1, and that's how we should think about Q4 of this current fiscal year?

Robert D. Thomas

Alex, no. I think Q4, our fiscal Q4 is traditionally a strong quarter for us because it is end of fiscal year. Although the way we pay our sales guys doesn't really reflect that. We don't have any end-of-year accelerators. Everything is driven around quarterly numbers. But I think there is a reasonably large psychological impact about end of fiscal year just because it's end of fiscal year. The number of larger deals we saw in Q4 last quarter versus Q1 this quarter was about the same, I mean, meaning the deals are over $1 million or so. I think it was $5 million last quarter. It was $6 million this quarter. In aggregate, they might have been a bit less this quarter than they were in Q4. But no real change in that. So there's nothing -- this is, as Remo said earlier, if there is any seasonality around our business, it would usually be the Q1 quarter for us, but it's not massive seasonality swings that we see.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And last question. How have you guys forecasted U.S. federal into this quarter, given that there's a January 15 deadline coming up and could create some continued pause out of that sector?

Robert D. Thomas

No change for us. Again, and I think I said in the past that because we're a relatively small company, I think we can navigate around some of these things. Of course, there will always be something we can't navigate around, I guess. But federal for us, we would expect to be business as usual for us. So we haven't really forecasted any downturn in federal for this quarter.

Operator

Next question comes from the line of Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Now that we have a little bit of time separating us from FY '13 and you look back at kind of the 35% product revenue growth, and now looking at guidance that implies more like 20%, I was wondering if you could help us understand kind of what you think the impact was of kind of product cycle or ASP increases versus kind of any changes in market growth or share taking? Because it sounds like you've been taking share, you expect to take some share. So maybe if we could parse some of those things out, we can wrap our head around the change in product revenue growth from fiscal year to fiscal year.

Robert D. Thomas

I think, Kent, we had a very good FY '13, as you know. We grew significantly each quarter and year-over-year as well. If you look at this quarter, Q1 over last Q1 in FY '13, we still grew product revenue by 33% or so. And while our full year guidance of $270 million to $276 million is growth, I think, of 20% to 23%, that's still a pretty decent growth. But we have to forecast as we see the year ahead of us. We have good visibility into a couple of quarters out. Our pipeline is pretty strong. We have a sales cycle that's 6 to 9 months at least, some sales -- some of the newer sales or newer customers that are larger take a little bit longer than that. So I don't think we feel any less confident going into FY '14 than we did into FY '13. But we just need to play each quarter as we play it and see where the opportunities are and forecast numbers that we feel very comfortable with.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Good deal. So when you think about the hiring around sales headcount, have you been happy with where you're tracking in terms of those numbers? And do you continue to have kind of similar plans in terms of headcount growth in the sales and marketing side of things? Or is there -- or should we be looking for some sort of an acceleration?

Robert D. Thomas

I think we feel happy. I think, as we ended FY '13 at about 100% of sales headcount, it took us a while to get there. In the last couple of quarters of FY '13, we were under 10 or 12 or 15 heads in sales, but we put a good effort into hiring towards the end of that fiscal year and got people on board by August 1, which is the beginning of our year. We will continue to hire fairly aggressively this year. The thing though that is important about our sales environment is that it's not a 1 or 2 quarter period to full quota-carrying capability. The product is a little bit different from other products in the market. We have no direct competitors. When we hire people into our space, it's not like we're Palo Alto hiring a Check Point guy or a Juniper guy or a Cisco guy, where the sales guy knows 80% of what he needs to know to sell the product; he just needs to understand the differentiators between the firewall for Palo Alto and the firewall for Check Point. When we hire people in, they typically haven't been selling our product anywhere else because we have virtually no competitors. So the time for a sales site guy to reach medium maturation is about 9 months or a bit longer and to reach full maturation is probably around 2 years. So we have this long gestation period of new salespeople coming onboard.

Operator

[Operator Instructions]

Jane Underwood

Okay, operator, I believe there are no more questions. 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 November 26, 2013 at 4:00 p.m. Pacific and an audio archive will also be available on our website. Have a good day, and we look forward to speaking with you again soon. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. I want to thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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