Gigamon's CEO Presents at Credit Suisse Technology Conference (Transcript)

Dec. 3.13 | About: Gigamon, Inc. (GIMO)

Gigamon Inc. (NYSE:GIMO)

Credit Suisse Technology Conference Call

December 3, 2013 12:30 PM ET

Executives

Paul Andrew Hooper – Chief Executive Officer

Analysts

Kulbinder S. Garcha – Credit Suisse Securities

Kulbinder S. Garcha – Credit Suisse Securities

Okay, we’ll get started, and my name is Kulbinder Garcha. I cover the com technology stuff and IT hardware stuffs at Credit Suisse. So very pleased to have from Gigamon Paul Hooper, CEO; and Duston Williams, CFO and I’ll kick off with some questions gentlemen. Hopefully the audience will ask a few as well. First of all maybe for those that are less familiar with the Gigamon story, can you speak about where you are positioned within the market and what the fundamental growth drivers are both for the end market, how you think about the TAM? And then specifically how Gigamon fit within that and that’s a good start and we’ll take if from that.

Paul Andrew Hooper

Got it. Okay, so thanks for the interest. So Gigamon provides pervasive visibility across networks of all forms. So as organizations build networks and those organizations can be enterprises, service providers, federal organizations, as they build networks and they get faster and faster with more information traversing that network, the need to have an intelligent mechanism that gives pervasive visibility across that network so the right information is delivered to the right technology or the right management tool at the right time is the focus for Gigamon. So we founded the company in 2004, have grown it, went public here back in June of 2013. And have been building out the organization and the company and to address what we believe to be a $2 billion to $3 billion TAM, international TAM.

Kulbinder S. Garcha – Credit Suisse Securities LLC

And so basically could you speak about how you think about penetration of the market, what the driver is in terms of fundamental drivers for the market, whether it’s virtualization, 4G, how that’s developing?

Paul Andrew Hooper

Thanks, Kulbinder. And so as we further do penetration, it’s a very interesting model at Gigamon. When we’re going through the preparation for the public offering we ran an analysis of our customers. We look at what we call the seed and grow, some people call it land and expand from that first penetration in a customer to the overall lifetime value of that customer. And so Duston ran some very significant modeling on our top 25 customers and our ratio, by the way this is a reasonably similar model that other companies that have been in the public transition have also completed. Our ratio of first transaction to overall life and value of relationship is 43 times. So from that first transaction that on average is $175,000, the average value of the top 25 customers to us is 43 times the value of that first transaction. That number is increasing, that number is 30...

Duston M. Williams

31 at the IPO time.

Paul Andrew Hooper

31 at IPO and six months later were 43. So the penetration, we did not believe we are penetrating our biggest accounts. We still have growing opportunity. Our largest accounts are still buying more frequently and buying larger volumes when they place transaction. In their last two quarters of our top 25 customers, 96% purchase from us in those course.

Kulbinder S. Garcha – Credit Suisse Securities LLC

And Paul, do we have to think about, in case of pushing penetration with those customers, is it going after new ones, is it geographic expansions, which of those or all of them, or how is it interrupting?

Paul Andrew Hooper

It’s a bit of all of them. As our customers have evolved, they’re gone through series of transitions and one of the primary buying transitions that is an enabler for us is that 1-gig to 10-gig transition. So if you network increases in speed your instrumentation is lagging behind. Now you need to be able to makes sure that you still got the right visibility to the faster network. So as the network gets faster as they move to the virtual world, our old catalyst to bring Gigamon in or to increase the investment that people have already got in the Gigamon infrastructure they have deployed. And as you rightly mentioned one of the big opportunities for us is to diversify internationally. We are approximately 80% of revenues North American, 20% is from the international theaters. We see that as a huge opportunity and so over the course of the next six months here, we’re going to be intentionally investing in our international organization, sales, marketing, the channel team to be able to expand our presence as we believe there is a significant market opportunity in Europe and then in Asia for us to go and expand and grow our top line and bottom line.

Kulbinder S. Garcha – Credit Suisse Securities

And that expansion internationally is it, can you speak about Europe and Asia specifically what needs to happen, is it organization, management, sales, a new channel all of the above and where are we in each of them?

Paul Andrew Hooper

We have the new management. We put new management team place in both phases, about 15 months, 12 months-15 months ago. Now we put new management in Europe, new management in Asia. They have subsequently built out their teams and they are now looking at expanding and diversifying their channels in both of those geographies. However, the expansion that we’ll be making is to extend that presence. I believe we have right management and we now need to expand the reach that we have. We have some countries with one sales guy.

Well, that clearly doesn’t provide us with the coverage. So we’re going to look to expand the number of feet on the street. We’re going to add service provider sales guys. We’re going to add SEs [ph] in the territory and then also increase the focus in our channel. One of the reasons is, this morning I got an e-mail from a channel guy in Asia, we just rolled out the brand new education program for our channel and the feedback has been overwhelmingly positive. So understanding who Gigamon is, understanding how to sell the Gigamon technology, understanding how to up sell the Gigamon technology, is all part of that channel education program that we rolled out over the course of the last 180 days here and we’re going to continue to focus on that.

Kulbinder S. Garcha – Credit Suisse Securities

And where are we with the ramp up of our new department?

Paul Andrew Hooper

Little bit of context there, the company was really grew on the back of one distributor, Interlink who are a Tier 3 distributor in Tampa. It served us very well, a very good partner, we grew with them, and they grew with us. However, going into the IPO process and as we continue to expand and extend our presence, we decided we needed to bring in more distribution, we signed Arrow Electronics in early April of this year. And they are ramping, we are investing in the education, we are investing in the focus. Last quarter there were 10%, but then these ebbs and flows and peaks and drops in that growth, but they are starting to ramp in the North American Theatre. And then they after our signing them, they announced the acquisition of Computerlinks and Computerlinks happened to be our distributor in Europe and Asia as well. And so we’re going to look to be able to extend that Arrow relationship more internationally once we got the footprint in North America going.

Kulbinder S. Garcha – Credit Suisse Securities

And I think recently in both last night and in the recent results you spoke about some of the larger deals now coming to Gigamon than you’ve been used to in the past. Can you speak about what you think capitalizing that is in context around the deals, where and from here does that need to up sell of changing to engaging those deals over time or how is that altering the good business?

Paul Andrew Hooper

Yes, we are very proud and very pleased to have back-to-back courses, Q2 and Q3 where he had the largest order in the company’s history coming. And the last order Q3 was the U.S. Army and it was a multimillion dollar order. And it’s an indicative as I described it on the last earnings call, of a market that is going through a transition. If you look back two to three years ago customers would buy one of our smaller products, then try it, they’d buy another one, try it, buy another one try it and then they may do a larger deployment. We’re starting to see some customers build us in, design in the technology at the time they’re fracturing out the networks. So you build the network, you may be extending the network, you may be upgrading the network and at that same time you deploy the Gigamon Visibility Fabric which is resulting is some larger orders. Don’t hear from us that every quarter, the time in the laurel, we’re going to have the largest order in companies history, the rule of big numbers is going to kick in, but certainly we’re not going to allow that to be the case.

But we are seeing more and more interest in some larger constructs and larger deals. The customers are starting to think of less of an evaluation and more of a production roll out with the Gigamon technology.

Kulbinder S. Garcha – Credit Suisse Securities

With respect to how the business has been managed and with respect to margins, I guess we’ve had a period of last few quarters were significantly exceed expectations. They were over 20% I think last quarter. As you think about capturing this opportunity, how do you want to manage the business between leverage and having with an investing for, what this seem to be like a material time compared to revenue will move there.

Paul Andrew Hooper

Yes, yes, what we stated in the Q3 call is that you’re right, we’ve significant outsized our estimates for operating margins roughly 24%. We just fundamentally believe at this stage in the Company’s history and where we are in the infant stage of the market, it’s the right thing for the Company for long-term revenue growth, is to continue to invest heavily back into the business and we didn’t have any expectations whatsoever to drive a 24% operating margin.

So going forward you will continue to see heavy investments in sales and marketing and R&D to fund the revenue growth hopefully well into the future. We will remain profitable, good cash flow, but it will be a balancing act between that and investing back into the business. We’ve proven the business model, the business model works. We’ve got a long-term business model of 23% to 28% on the operating margins. We were there in that range last quarter, so the model is proven, but we will continue to focus on spending.

Kulbinder S. Garcha – Credit Suisse Securities

Has the challenge then been last six months just about being able to invest in the past mutual revenue that exceeded, is that a challenge and what will happen in the next six months?

Paul Andrew Hooper

Yes, that’s a bit of a challenge. We had a slow period here in Q3 for hiring. And we only added I believe nine net new folks in Q3 which was unusual. We had a couple of things going on there. The good news in Q4 from our perspective, we have already extended offers or brought on significant amount more than that nine that we added in Q3. So to a certain extent, you are right we are in a competitive market, where we have a base certainly for engineering talent and it’s hard to spend at that pace when you outperform on the revenue line and gross margin line.

Kulbinder S. Garcha – Credit Suisse Securities

So you understand the balance between revenue growth and margins for the next year or even longer path. It’s a case that you want to remain profitable obviously you will have good cash flow given the choice you’d be adding in R&D and SG&A?

Paul Andrew Hooper

Absolutely, right.

Kulbinder S. Garcha – Credit Suisse Securities

Okay. And may be on the competitive environment, can you speak about right now who you face investing customer base, where you loose, who to, why and in what way you win?

Paul Andrew Hooper

So the competitive landscapes evolved over the course of the last 12 months here, quite significantly a natural fact it’s based on an exciting market. Competitors back a year ago Anue, Ixia, VSS, ONPATH, Simena all been acquired. So Anue and Net Optics have been acquired by Ixia. So we now face competitive challenge from Ixia. It really was – it really is Anue portfolio and Net Optics portfolio, no change there. But competitor now is Ixia. VSS was acquired by Danaher and ONPATH and Simena were acquired by NetScout. So the competitive landscape really is those three guys, it’s Ixia or it’s NetScout, it’s Danaher, but truly VSS and there’s some others. There’s other range of competitors that we come up against, but we differentiate ourselves in three ways. We look at the market as being a breadth, a scale and an intelligence. Breadth, we’ll be doing physical, virtual, we’ll be doing physical or SDN when you’re doing one to 100 gig. I’ve got the breadth. I’ll find the traffic in any of those architectures for you.

The scale, I’ll be able to give you that kind of granularity of control, so that you may have one stream of traffic, four different people looking at it and each different person wanting to see something different about that stream of traffic. The security guy wants to see everything. The network guy doesn’t want someone’s social security number buried in the packet. The applications guy wants all the packet times then. The operations guy just wants to see the top talkers [ph]. It’s the same stream, but I’m going to bifurcate it four times and give each one of those guys that are on personal view into what’s going on across the network if that’s what they require.

And then the most exciting area to us is intelligence and that is what can you do with information. Certainly all of our competitors confined information. Many can forward it, many can filtrate and so on and so forth. I would argue that at forwarding, at finding, forwarding and filtering is more intelligent than any other competitor, but I’m sure on marketing slide where we are all going to look reasonably similar.

What becomes really interesting to me is the intelligence. It’s no longer the market where you can say, I want to watch all the traffic. That was the world of 10 years ago. The world of today is there just too much traffic to watch. You need to be very intelligent and very surgical about that that you watch. That’s the intelligence.

So give me the top 5% of traffic on a link. What does that mean? Top 5%. Does that mean give me the first 5%, does it mean the busiest 5%, or does it mean give me 5% of all of the flows. So all of you guys operating on your devices, sending e-mails back and forward, it’s not the one package because of interest, someone that’s watching the network. It’s the overall e-mail flow that you are completing, that is of interest. So give me 5% of the flows. That’s the intelligence. That’s only one example of how we had greater intelligence into that that you can do in the Gigamon Visibility Fabric beyond and above competitors.

Kulbinder S. Garcha – Credit Suisse Securities

And that intelligence plays across your portfolio today or are we yet to be rolled out?

Paul Andrew Hooper

No, it’s across the portfolio. We launched a product in Q3 here called – we actually launched it back in the Q2. Q3 was its first full quarter. We launched a product called HB1, very low cost, low complexity, low configuration from box to running and moving traffic intelligence under two minutes, so that you can bring value very, very quickly into your environment and whatever you do on that very simple box, you can take exactly the same configuration, exactly the same control, exactly the same scale and move it across to the chassis that will serve you 100 gigabit length if that’s what you want today.

So we are trying to start with a system that allows all the way from an entry product that’s listed at $20,000 all the way out to line card chassis configurations and all points in between the same breadth, scale and intelligence that customers are looking for depending upon what your configuration maybe, how big in that so on and so forth drives you into different parts of portfolio.

Kulbinder S. Garcha – Credit Suisse Securities

And maybe one more from me then we’ll see if the audience have any questions. With respect to disruptions in this market, one of the things I think about your proposed concentration on revenue growth, the gross margins are very high. So actually if you look back at attractive market, is there disruption that traditional networking companies will try to come more into this area, is there this, the SDN type software because you were trying to commoditize hardware that’s impossible, I don’t even know or is it just using the competitive environment really the NetScout and you see that today, or did you see any changes evolving there over the next 12 months that disrupt how you go to market, how you sell your product?

Paul Andrew Hooper

There’s been a range of disruptive changes throughout our market. We lead our market. We were really the first into this market, we’ve continued to lead the market. However going forward, there has been some disruptive that have occurred and the ones that you mentioned are all very relevant that you made, some network vendors are starting to talk about the ability to provide some level of functionality Gigamon like.

Firstly, I am honored and proud to be the benchmark in the industry, they are looking me as being the benchmark for providing this which is an indication of our success. But as they talk about what they can do inside our network switch, there is a fundamental difference to what a network switch will do, to what a purpose build appliance running our proprietary solution will always be able to do.

And you may be able to find traffic and you may be able to do some very simplistic filtering and traffic in an Ethernet switch you’ve got it. That’s the 2009 part of this market. 2013 part of this market is as I talk about, removing duplicates. Looking at flows, understanding and finding information anywhere inside a packet and transforming just that part of the packet and sending it on, that’s what a 2013 part of this market is about. So there maybe others that come into this market and talk about this market, they certainly a few that are talking about it.

From app space if they are talking about what the market was, not what the market is and certainly not where the market is going to be and you’re going to be hearing from Gigamon more exciting launches as we continue to expand this market. Let me just, one of the things that I’d like to kind of not necessary end with, but on that point, when a company gets up on stage and start talking about where the market is going, it’s all well and good. And you may be listening to a guy that’s pontificating about how he thinks the market is going to grow. If no one follows him you’re a lonely guy. It doesn’t bring any revenue with you.

We’ve been talking about intelligence in this market for the last three years and we say that this is the whole market this market. Well, that HB1 product that I announced, if you look at the unit counts of number of smart licenses, our intelligence we call it smart, that trade line silicone product. So we call it smart intelligence, the attach rate of licenses of smart to that HP1 was over 85%. So this is not us just saying this is where that we build it, and they may come. We built it and they are coming. And so this is where we believe the market is going into more and more intelligence, greater and greater smart functionality in the last product launch. Although not net guaranteed to be repeated every single quarter, more and more people are buying into the intelligence trajectory, which is what we can uniquely do without proprietary hardware and our purpose built appliances.

Kulbinder S. Garcha – Credit Suisse Securities

Thank you. Are there any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

Hi, good morning. Two, three questions if I may. One, if you can provide your enterprise versus service provider wings and where is that going, just to into the big picture driver. Is it 10-gig LTE, which is you can talk about the application and then specific applications which drive more spend intelligence sponsoring perspective? Thank you.

Paul Andrew Hooper

Firstly, enterprise service provider in 2012 it was 24%. It was service provider. Enterprise represented the rest and we fold Federal under enterprise. It does floats around the service servicer number somewhere between 20% and 33%, 34% depends upon the quarter as you will know it, it’s a reasonably lumpy business, so it floats around. But think of between 20% and 30% service provider on a quarter by quarter basis. The catalyst for buying certainly the 1-gig to 10-gig is one of the biggest ongoing catalysts. We are starting to see early form of the 10-gig to 40-gig.

The second one is the move to virtual, physical and now going in to virtual, I’ve moved my server applications from physical service, I put them in virtual service, then I am chatting on a Hypervisor, how can I see that same traffic. Well, we can have the technology that plugs into the Hypervisor, that every single I have described for the physical world, we’re now doing the virtual world. So if you’re moving to virtual world, I’ll provide you that. And the third buying catalyst is, I want to centralize my tooling. So I have a very distributed network and may have multiple data centers, I want to bring all of my tooling into one location and that can be something as simple as 35 racks in one data center. I want all of my sniffers in one rack.

Well you can consolidate it, dynamically change the profile of the traffic that goes to those sniffers using the Gigamon fabric. You’re network operations guys, that will now have to leave the chair, no one touches your production network, no one changes the configuration, no one gets out of a chair, no one does any cross connect you do it all through the fabric.

So those are the three primary buying catalysts. If you look to the service provider market LTE and VoLTE by far away are from a north-American perspective, the most interesting and exciting ones. From an international arena, LTE is almost slightly slow ramp than it is in North America, but definitely the 3G, 4G way because they started to scale our infrastructure as one of the biggest buying catalysts for the service providers. Was there a third part of the question I missed?

Okay. Thank you. Sorry. So we attached, the primary tools that attached to us Network Performance Tools, NPMs, Applications Performance Tools APMs and Security Technologies. Those are the top three that attach to us. And if you look at it from a CIOs perspective, one of the biggest drivers is doing more with less, much as I hate that phrase and it’s substantially overused, bear with me for a second when I use it. But to be able to do more instrumentation across the network with less investment, we absolutely help customers to take down the cost of tooling with NPM, APMs, and security in a very significant way.

Any side of the service provider world, we help them understand what a customer is doing with the traffic? What the profile is of that traffic? What the quality of service is of that so on and so forth. So we help these guys instrument their networks to be able to gain the right insight to what’s the next way to monetize the network and how did they sustain the subscriber base, ultimately drive through that.

Unidentified Analyst

And just a quick clarification on the Telco, service provider side for the LTE and the VoLTE opportunity, can you speak about what traction have with the major top-ten Telco in the world and their own customers today. Is that significantly or is it mainly just the U.S. thing at the moment and an update expand internationally as well?

Unidentified Company Representative

It’s international. We’ve got many of the recognized brand name, international carriers as customers. I’ll come back one second by the customer base. But there is the Telcos are still a big opportunity as they rollout LTE’s, they rollout VoLTE, we’re engaged with many of them in conversations about how to kind of rollout and instrument VoLTE Networks.

We have on the list. I think it’s still 50 of the top 100 mobile service provider. So as a ranking of all the mobile service providers around the globe, of the top largest 100 we have 50% as customers. But assume that once you’ve got that customer check that box and move on you got a bit, that’s done deal. All of these guys are repeat buying characteristics. So once you’re into the service provider, you may have done the 2G to 3G work and they’re now doing 3G and 4G and may be LTE, and maybe in LTE lab you maybe looking at regional network. You might be doing national requirements. The service providers are a great opportunity and an ongoing opportunity for us, not just the one-time customer. They are our peak customers on a very frequent basis.

Kulbinder S. Garcha – Credit Suisse Securities

Great. I think that’s all the time. Thank you very much.

Unidentified Company Representative

Okay, all right. Thank you. Thanks for the interest.

Kulbinder S. Garcha – Credit Suisse Securities

Thanks.

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