Gigamon's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Gigamon, Inc. (GIMO)

Gigamon, Inc. (NYSE:GIMO)

Q4 2013 Earnings Conference Call

February 04, 2014 05:00 PM ET

Executives

Cynthia Hiponia – Investor Relations

Paul Hooper – Chief Executive Officer

Duston Williams – Chief Financial Officer

Analysts

Kent S. Schofield – Goldman Sachs & Co.

Eric A. Ghernati – Bank of America Merrill Lynch

Jason N. Ader – William Blair & Co. LLC

Simon M. Leopold – Raymond James & Associates, Inc.

Vlad Rom – Credit Suisse

Ben A. Reitzes – Barclays Capital, Inc.

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Gigamon's Fourth Quarter and Full Fiscal Year 2013 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, February 4th, 2014.

I would now like to turn the conference over to Ms. Cynthia Hiponia, Gigamon’s Investor Relations. Please go ahead, ma'am.

Cynthia Hiponia

Thank you, Mary. This is Cynthia Hiponia, Gigamon Investor Relations, and I'm pleased to welcome you to Gigamon's conference call to discuss its fourth quarter and full fiscal year 2013 earnings results.

After the market closed today, Gigamon issued a press release. The release is available on the Company's website at gigamon.com. The call is also being webcast live on the Investor Relations page of the Gigamon website and will be available for a period of one year.

During the course of today's presentation, our executives will make forward-looking statements within the meaning of federal securities laws. Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements in this presentation include but are not limited to statements related to our business and financial performance and expectations and guidance for future periods, our expectations regarding our continued focus on our current strategy, our expectations regarding macro trends in the market and our expectations for our products. Our expectations and beliefs regarding these matters may not materialize and actual results in future period are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release that we issued earlier today, as well as the more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law.

Please note that other than revenue, the financial measures to be discussed on this call will be on a non-GAAP basis. These non-GAAP financial measures are not intended to be considered in isolation or as the results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is available on our website.

On this call we will give guidance for the first quarter of fiscal 2014 on a non-GAAP basis. We do not make available reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to the high variability and low visibility with respect to the charges which are excluded from these non-GAAP measures.

Let me now turn the call over to Paul Hooper, Gigamon's CEO.

Paul Hooper

Thank you, Cynthia. Good afternoon and thank you for joining our fourth quarter and fiscal 2013 earnings call. On the call with me today is Duston Williams, our Chief Financial Officer.

We have once again delivered another solid quarter of both results and accomplishments. We achieved record revenue of $43.1 million, up 11% sequentially and 35% year-over-year. We delivered continued impressive gross margins at 81% in the fourth quarter, resulting in an EPS of $0.18 per diluted share.

In fiscal 2013, we realized total revenue of $140.3 million, representing 45% year-over-year growth and an EPS of $0.53.

During the quarter, we made tangible strides as we continue to innovate in this exiting and growing market. One area of specific focus during 2013 and notably in Q4 has been the evolution and adoption of our GigaSMART platform.

GigaSMART is our traffic inspection and modification technology, a combination of a purpose built, high performance platform with discrete software applications that operate independently or in combination to provide unique and powerful insight into the traffic traversing production networks of any type, physical, virtual, private or public.

Following the launch of our GigaSMART technology for the HD Chassis family in Q4 of 2012, we’re pleased to see that approximately 25% of our total HD install base is now upgraded at Visibility Fabric by adding GigaSMART capability.

In Q2, we mentioned that GigaSMART attach rates in the period were approaching 40% and in Q4 the attach rates exceeded 40%. GigaSMART not only provides tangible and clear value for our customers, but it also provides a platform upon which we can increase the strategic value of the fabric within the customers infrastructure now and into the future.

During the course of Q4, and early in Q1 of 2014 we announced the release of more GigaSMART applications that we’ve developed in direct response to customer requests. These applications increase the value and differentiation of our Visibility Fabric in the eyes of our customers, while representing an opportunity for high margin sales transaction.

I’d like to provide some color around these new applications to highlight how far and how quickly, Gigamon’s solution and this market have evolved beyond the traffic aggregation technology that some competitors solely address.

Late in the quarter, we launched an application to enable a large service provider customers to gain intelligent visibility in the world of big data. This application provides a powerful association of a subscriber to their specific traffic and in doing so ensures that the quality of service, reliability of the communications and the adoption of new mobile applications can be fully understood.

We concurrently launched a separate application called FlowVUE allowing both our service provider and larger enterprise customers to intelligently manage their network as a series of complete traffic flows rather than discrete package. This module has been developed working very closely with one of the largest service providers in the world and is already in field trials within their environment.

While our Flow Mapping capability, a feature of all GigaVUE fabric notes, still leads the market and a scale of four months in flexibility, we launched Adaptive Packet Filtering, APF, that provides a richer and deeper inspection capability to allow filtrating and forwarding decisions to be made on the content of a packet rather than just the header of the packet.

As an example and using a simple letter post analogy, we enable information to be forwarded based upon the content within the envelope rather than the address on the cover. To enable a rapid adoption of this powerful capability, we’re offering a range of pre-defined math’s to allow customers to select flows from specific applications. E-mail versus ERP, specific websites, Google versus Facebook or specific network functions, DNS versus printing. These are only a few of the examples highlighting the power and versatility that the APF application affords Gigamon customers.

In the current quarter, Q1 of 2014 we announced a further GigaSMART application, NetFlow Generation, which will be available shortly. This is particularly interesting, I think it represents an expansion of our existing addressable market opportunity. Members of our customer counsel have been big proponent to this new application. As many have confirmed that Ethernet switch is a challenge with generating NetFlow statistics.

We believe our unique and highly relevant architectural position within the infrastructure enables us to be the origination point of accurate and reliable NetFlow metrics without impacting or affecting production network traffic. As independent proof of decreasing significance and need for our visibly fabric solution, in TechTarget 2013 survey of over 18,000 IT enterprise professionals in North America ensuring end-to-end network visibility was listed as a major technology challenge ahead of both moving applications to the cloud and also understanding the role of technologies including SDN.

We continue to experience good demand for our GigaVUE HB1 in Q4, the fastest ramping product since launch. As a reminder, the product was introduced to open-up the midsize enterprise market for the Visibility Fabric solution in addition to providing a low complexity, low cost pilot platform allowing us to penetrate larger prospects.

We are pleased with the adoption of this product as it continues to gain traction in the midsize market. In both Q4 and in the prior quarter, over 70% of the customers that purchased HB1s were outside of the Fortune 1000.

Turning attention to the HB1 as a pilot product and larger opportunities, we saw some first time customers, that purchased an HB1 in Q3, increased the footprint of the Visibility Fabric within their environments in this quarter.

Safeway, one of the nation’s largest grocery stores initially purchased HB1s in Q3 to deliver traffic to analysis tools where the removal of duplicate packaged streams was a key requirement.

Although this was a competitive opportunity, our HB1 technology with the new user interface and the scalable de-duplication function was selected and deployed. Following on from this initial transaction, Safeway turned to Gigamon to establish a pervasive Visibility Fabric, designed around our HB portfolio, resulting in purchases in both Q4 as well as the current quarter as they create the market-leading and datacenter infrastructure.

In Q4, our customer metrics included the addition of 92 new customers, 15 paying within the Fortune 1000, building upon the 86 new customers added in Q3. We are pleased with the growth in our customer base and this specific metric will continue to be an area of focus for us in 2014.

As we mentioned previously, we’ve established a new role within sales, the Regional Sales Manager, whose specific focus and compensation is driven through the acquisition of new logos into the Gigamon customer list.

We are well down the path of filling these positions and will look to increase momentum around new customer additions. While I will leave Duston to discuss the regional results, I did want to highlight the accomplishments of our Asia-Pacific region in 2013. With a new team in place, we saw revenues grow on a year-over-year basis twice as fast as our core business due to improved execution, growing awareness, and a momentum of some strategic wins.

For example, a large privately owned and diversified organization based in China with businesses including online retail, payment services and a large cloud computing platform, deployed our Fabric to enable accurate and timely billing and chargeback for the uses of their cloud services. They use our GigaVUE platforms to simplify the deployment and operational needs for their security and traffic accounting platform. While this is a first step into the account, we expect to drive more value and capabilities for the customer as we continue to display some incumbent competitor.

Secondly, a large mobile operator in the Asian region purchased several GigaVUE-HD8 fabric nodes for deployment across multiple locations. Our nodes intelligently forward traffic to a variety of customer experience monitoring systems to improve quality of service for their mobile customers while also delivering improved operational efficiency by reducing the resolution time of network issues by over 85%.

And now turning attention to the future, as we enter 2014, we’ve realized that the traffic visibility market landscape continues to evolve at the value of and the need for intelligence traffic visibility increases within enterprises and service providers. This is causing both tool vendors and network switch vendors to consider entering our market through both organic and inorganic actions.

A high value fast growing market does look very attractive from the outside, but entrance from both markets face significant hurdles. The purpose-built merchant silicon that powers network switch market is designed to forward package using addressing information only. Our market is built around intelligent and agile content inception enabling far more and farmed forwarding duplication and modification designs as well all well out of the reach of Ethernet switches.

Unlike Ethernet switch solutions, our customers can intelligently understand a whole packet, its content and context, establish traffic visibility of both the packet and flow-level and modify, transform, duplicate or enhance information inside before delivery to the destination tool, examining, existing or potential entrance from the tool market. While some vendors have entered our market through acquisition, we firmly believe the remaining independent and tool agnostic represents the greatest value for our customers and partners and our investors. Why? Because we are not conflicted when designing the most valuable and capable solution for our customers, we do not have any tools or probes that are cannibalized by the power of the fabric. A singular focus delivers market leading results.

While speeds and feeds and port density are important, the versatility and intelligence of our GigaVUE and GigaSMART technology and platforms remains an ongoing differentiator. Our traffic inspection applications operate and deliver and advertise even in stressful and demanding environment. And we work with any and all tool vendors in the industry enabling our customers to choose the best-in-class solutions to meet their instrumentation, management and security requirements.

But our work is not done, we see great potential to continue the growth of our business as we look out into 2014. We plan to continue to build a momentum of the market, market which we create by delivering innovative market leading and compelling solutions and technologies, focusing on accelerating the growth in our international regions, embracing the new world that’s likely to arrive as SDN gains traction that many believe it should, driving new routes to market through managed service providers and system integrators, expanding and amplifying the results that we realized through our channel and extending the relationships that we have with our ecosystem partners that continue to develop and evolve including for example FireEye, Palo Alto Networks, and Splunk.

Let me now turn the call over to our CFO, Duston, who will review the fourth quarter and full year in detail and provide the outlook for the first quarter of fiscal 2014, Duston?

Duston Williams

Thank you, Paul. Now I’ll review our Q4 actual results and then follow that up with our outlook for Q1. The following analysis of our Q4 results is based on non-GAAP or references exclude non-cash stock-based compensation and any related income taxes. And please refer to our press release available on our Investor Relations website for the comparable GAAP results along with the reconciliation to the non-GAAP figures.

Total revenue in Q4 was a record $43.1 million, our product revenue in Q4 was $31.7 million representing sequential and year-over-year growth rates of 9% and 34%. Our services revenue in Q4 were $11.4 million representing sequential and year-over-year growth rates of 16% and 40%.

Revenue for the full fiscal 2013 was $140.3 million versus $96.7 million in fiscal 2012 representing a year-over-year growth rate of 45%. Our top ten end-user customers accounted for 24% of revenue in Q4 compared to 27% in Q3 and we had no 10% end-user customers in Q4.

Turning to our distributors on a non-end-user basis, Interlink accounted for 47% of revenue versus 55% in Q3, while Arrow also on a non-end-user basis accounted for 9% of revenue versus 10% in Q3. And as a reminder the revenue derived from these two relationships represents products sold through to a majority of our industry customers.

From a geographic perspective in Q4, North America accounted for 74% of revenue, EMEA was 18% and APAC was 8%. On a year-over-year basis North America grew at 29%, EMEA 41% and APAC 114%. Looking at the verticals, enterprise accounted for 74% of bookings in Q4 versus 67% in Q4 of 2012. Service providers accounted for 20% versus 27% and the government vertical accounted for 6% versus 6%. On a year-over-year basis, Enterprise vertical grew at 30%, service provider declined by 11% due to a nonrecurring large deployment in Q4 2012 and government grew by 26%.

Gross margins in Q4 were 81% versus 79% in Q4 of 2012. Product gross margins were 77% versus 74% and service margins were 92% versus 91%. The gross margin performance for the quarter was favorably impacted by approximately one percentage point due to the sale of previously reserved excess and obsolete inventory.

Now turning to expenses operating expenses for Q4 were $26.3 million versus $22.4 million in Q3 of 2013 and $20.1 million in Q4 of 2012 reflecting sequential and year-over-year growth rates of 17% and 31%. Ending headcount for the quarter was 352 versus 335 in Q3 reflecting a net increase of 17 heads in the quarter. The operating profit for Q4 was $8.4 million or 20% of revenue and net profit for Q4 after a $2.4 million non-GAAP tax provision and other miscellaneous expenses was $6 million or $0.18 per share on the weighted average diluted basis.

Quickly turning to the balance sheet, cash, cash equivalents and investments ended the quarter at $138.2 million versus $105.4 million in Q3. The Q4 cash balance was aided by approximately $10.2 million raised during our secondary offering completed in October. We generated $22.5 million in cash from operations in Q4. DSOs were 52 days versus 63 days in Q3, inventory turns were 21% versus 22% in Q3, and capital expenditures were $1.4 million versus $0.6 million in Q3.

The total deferred revenue balance was $47.5 million versus $40.9 million in Q3. Service deferred revenue in Q4 was $40.3 million versus $34 million in Q3 of 2013 and $26.6 million in Q4 of 2012 for a sequential and year-over-year growth rate of 19% and 51%.

Now for the outlook for Q1, our Q1 operating outlook closely merits the typical seasonality of our business over the last several years. All in guidance for Q1 is based on non-GAAP results and excludes any non-cash stock-based compensation expenses.

Revenue of $34 million to $35 million which at the midpoint reflects a sequential decline of 20% which is well within historical norms. Gross margin of 78% to 79%, operating expenses of $26.5 million to $27.5 million and a non-GAAP tax rate of approximately 35%. Based on an estimated average diluted weighted shares outstanding of approximately $34.5 million, this would lead to a breakeven earnings per share for the quarter.

Just one ending comment regarding our non-GAAP tax rate. We now have several quarters of reporting history as a public company and we are now comfortable using an estimated non-GAAP tax rate of 35% for the foreseeable future. We were previously assuming a non-GAAP tax rate of 40%.

And before we go ahead and open up the call for questions let me turn the call back to Paul for a few summary comments. Paul?

Paul Hooper

Thank you Duston. In summary, 2013 was an exceptional year for Gigamon. We delivered total revenue about $140.3 million representing 45% year-over-year growth. We executed a successful IPO. We continued to gain contraction and extend the penetration in our largest customers with the repeat purchase multiple expanding from 37 to 47 over the year. We created further separation from the competition through the launch of several key products including the expansion of our GigaSMART technology and our fabric in a box, the GigaVUE HB1.

And we highlighted the power of our fabric in SDN environments by being the first to demonstrate a solution that enables visibility into this dynamic world. And with that, operator, can you please open the call up for questions.

Question-and-Answer Session

Operator

Thank you Mr. Hooper. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Kent Schofield with Goldman Sachs. Please go ahead.

Kent S. Schofield – Goldman Sachs & Co.

Great. Thank you, Paul and Duston. Thanks for some of the detail on the vertical side of things. I was wondering if you could touch on the service provider piece. You said, it was down year-on-year because of a one-off deal in 4Q 2013. Can you just talk about, outside of that, what the growth looked like relative to the rest of the company and then just as you look into 2014, what are some of the opportunities? And then I have one follow-up after that.

Duston Williams

You want to take the opportunity?

Paul Hooper

Yes, sure, I’ll so. So if you’re referencing to opportunities inside of the service provider space specifically Kent, then we are seeing a good deal of traction. We’ve had as you know we had our service provider sales team, we kind of constituted that 18 months back here. And they definitely got some solid traction in some of the major accounts in the domestic U.S. and we actually decided going into 2014 that we were going to institutionalize that same approach in our international theaters well.

So we have taken the teams in the international regions and focused them on enterprise or service providers. We do see a good deal of interest and a good deal of traction in the service provider space specifically. If you look at kind of a broader macro level, we still see very little vertical concentration. I think the service provider is right up there, the federal government last quarter because of a large transaction you recall with the U.S. Army.

But that aside we get very little vertical concentration bounded above just service provider being that one unique one. Duston, you want to say to the first question.

Duston Williams

Yes, I don’t have the exact figures already Kent. But in starting in Q3 of last year and then Q4 and Q1 we had a project deployment for one service provider. So we saw a little bit of that in Q3 and then effectively in Q4 the bookings on the service provider doubled and exceeded roughly $10 million or $11 million in Q4 and Q1 and then came back down. So we definitely had some benefit last year then when you look at the comparisons year-to-year that’s why you see the decline there. I don’t have the exact amount that was booked for that large deal, but I believe without that large deal we wouldn’t have that growth year-on-year.

Kent S. Schofield – Goldman Sachs & Co.

Okay. That's helpful. And then on the hiring side of things, I think you said they hired – I think it was about 19 heads or 17 heads. How did that compare to plan and just how does the pipeline look going into the current quarter?

Paul Hooper

So, it was – we continued to hire throughout Q4, but as you may recall, one of things that we do on a regular basis is we start to ramp the hiring right towards the backend of Q4 and very early into Q1 as we focus very much on bringing sales guys in. So there is a spike around these three weeks either side of the New Year, let’s just say that one. We are focusing on bringing sales guys in because we tend to get them in before we have our sales kick-off. But this year it actually happens to be one week earlier in the cycle. So it was kind of week 3 of January we had – our sales kick-off and we tried to get all of our sales guys in. So we’re still focused very much on bringing the heads in. We came close to the expectations in Q4 and Q1, still working the process and one of the areas that I mentioned in my script is the regional sales managers. We’ve opened up those positions and we’ve got upside getting towards 70%, 75% of those positions filled now. And we’re pleased that many of those, in actually fact, are internal hires. So we’ve actually transferred out of our inside sales function and moved into a regional sales function. So we got skill going straight into the field, that’s right from the outset rather than training people cold.

Duston Williams

And Kent just to clarify, that 17% was as net number.

Kent S. Schofield – Goldman Sachs & Co.

Right.

Duston Williams

Actually you always have some turn over in the quarter. So the actual closed ads were a fair amount higher.

Kent S. Schofield – Goldman Sachs & Co.

Okay, thank you Paul, thank you Duston.

Operator

Our next question comes from the line of with Eric Ghernati with Bank of America Merrill Lynch. Please go ahead.

Eric A. Ghernati – Bank of America Merrill Lynch

Hi, thanks for taking my question. Just on the gross margin in Q1, if you normalize for the 1 point benefit that you incurred in Q4, still calls for call it it’s around like 4 point sequential decline in product gross margin, if my math is correct. Can you just walk us through the puts and takes with respect to the Q1 guidance; and also, if you don't mind, what’s the trajectory of the gross margins as you go into the second and third quarter? Thank you.

Duston Williams

Yes, first on the – I didn’t quite get your 4 points or whatever, but the product gross margins if you’re trying just about those were flat, quarter-over-quarter at 77% . And the total gross margins rounded to 81%, but I think if you do the exact math it’s 80.6%. So you take 1% off, so roughly 79.6% without the adjustment.

Eric A. Ghernati – Bank of America Merrill Lynch

Okay. And then as far as Q1 goes, implicit if I assume just product gross margins that took the hit. It implies that 4.5 points sequential decline. Just walk us through what’s I understand the volume side of it being seasonally weak, but any other puts and takes on the Q1 gross margins?

Duston Williams

Nothing specific. We have lower revenues, so we’re always absorbing a little less cost, So the fixed cost go up a little bit there on a percentage basis. And then we always have deals and geographic expansion hanging out there and we’ve been pretty successful keeping the margins above 80%, but we believe there is some deals out there that highly likely could get us back into the 78% or 79% here over the next quarter or two.

Eric A. Ghernati – Bank of America Merrill Lynch

Okay. And then Paul, I would love to hear your thoughts on, you talked extensively about great potential to grow the business in 2014. I'm curious about your roadmap in 2014, mainly around any potential new products or features that you think you could leverage to gain additional footprint, especially with new customers. And also just looking at 2014, there is obviously a lot of service provider activity around LTE. Just curious to see how do you expect that vertical to trend for you this year? Thank you.

Paul Hooper

Great, great questions, Eric thanks. So we have as you’d expect we’re going into the year with a roadmap already laid out for the quarters ahead, beyond just 2014 and certainly you’re going to see from us a continued cadence of new capabilities in the portfolio, on new products. You are going to see, I’m just kind of going back to my prepared remarks, NetFlow was a very interesting in my opinion in some ways an inflection kind of capability. Must of the technology, much is small that we delivered to date has been an extension of our existing kind of focus area of that visibility of traffic as it goes northbound into the tool.

NetFlow is a real diversification away from that. It really was moving into providing some of the higher functions of the Ethernet switch market. And so over the course of 2014, we’re going to be exploring that particular area more deeply and also looking at rather adjacencies that we could basically provide a high value solution and rather than just focusing on continuing to amply the small technologies we have today. So you may see more exiting things coming out from us around that space.

The footprint with new customer’s comments is very germane, it’s smart if the vehicle allows us to do that. Once you brought the node, once you’ve got smart, we can then increase the performance of the scale, the functionality, the feature capability of the fabric that you have deployed through just simple licenses. And so we see that as being a good opportunity to continue to improve not at least which just in software applications but also as we move things like the HB1 and take it out to branches and the distribution centers we see good opportunity to diversify that.

And then finally your last question around the LTE market space, that’s the reason why we came out with the two apps I mentioned on the prepared remarks again. FlowVue, we see that as being absolutely critical for service providers when tools are clearly no longer able to keep up with the volume of traffic that LTE represents. You got to start looking at traffic in a very different way and we believe the way to look at that is through flow based rather than packet-based activity. And this is as I said, develop in conjunction with one of the biggest service providers in the world. So it’s relevant, it’s domain and they are using it today inside of their lap.

So we see that technology, both FlowVue plus the other application which was GTP. GTP correlation we launched is also to serve the LTE market. We see a good lot of opportunity inside of service providers as they are front and center struggling with the big type of challenges that many are going to face over the course of the years ahead here.

Eric A. Ghernati – Bank of America Merrill Lynch

Thanks and good luck.

Paul Hooper

Thanks Eric.

Operator

Our next question comes from the line of Jason Ader with William Blair. Please go ahead.

Jason N. Ader – William Blair & Co. LLC

Yes, thank you, hi guys. Duston, did I miss it? Did you provide us with the orders greater than 100,000 in the top 10 end users as a percentage of sales?

Duston Williams

I did the top 10, which was 24%. I did not give the orders over 100,000, but I believe about 110.

Jason N. Ader – William Blair & Co. LLC

Okay, thank you. And then, as we think about 2014 and we think about enterprise, service provider, and government as your three verticals, do you think that there's – I mean would you kind of rank order the growth rates at this point for the three verticals or do you think they're sort of all going to be in the same range?

Duston Williams

It’s a great question Jason. It’s difficult, I mean government is a little spiky, clearly with the nature of the business. Q3 was a very good quarter for us with the army deal that we had and so I’d expect Q3 to be spiky again for just the nature of the year-end.

Service provider, I believe we are starting to see some good traction and some good legs and some big names, and so I am expecting service provider to continue to ramp. But at the same time, I am seeing and as I mentioned on the call, I mentioned Safeway just as one of a variety of customers that starting out with just a couple of HB1s and before we knew it over the course of this quarter Q4 and also the quarter we’re currently in Q1 has significantly increased the footprint. And so all of a sudden the customer that we have had little conversation where it has gone from being smaller to being reasonably large in our radar.

So it’s difficult to predict whether we are going to see growth out of any one vertical ahead of the others. I would like to say that this time next year, we will be holding a conversation in which we’ve seen international growth faster than domestic U.S. growth, but that’s not because domestic is slowing, that’s because we are focusing on driving international harder. just any one to add anything?

Paul Hooper

No, I think that covers everything.

Jason N. Ader – William Blair & Co. LLC

Okay. And then one final quick one, if I can get in, just on the business right now that’s been driven by references from tools vendors. I assume that a fair amount of your business comes through that route. Do you have a sense of where a lot of the action is right now, NPM, APM, security, you mentioned some security guys, and you mentioned Splunk on the script. But can you give us just some sense of where you're seeing lot of sort of inbound requests and reference selling from some of your partners?

Paul Hooper

It’s a interesting question. I think over the course of the life of the company, I wouldn’t say that we strategically are seeing a significant volume of inbound references from tool vendors. I think it appeared more regionally. It comes down to in-field kind of relationships where our regional sales guy has a good relationship with the regional sales guy of tool vendor whatever that maybe and that relationship works better.

So we haven’t got a strategic platform what such that leads come in. But what I’d say in building upon your question is, we are seeing an increased momentum with some of our ecosystem partners to start to become closer partners. I think as more and more of our original peer group of three years ago is being substituted into tools and so. I think that’s changing the disposition of the way some tool vendors look at that market space. And they are looking for agnostic independent player. So we are starting to see a greater disposition of partners come to us and the ones I mentioned on the call were not picked out because they are the darlings of Wall Street in many way.

They are picked out, because they are the ones that seem to be the hottest, FireEye certainly is, Sourcefire certainly is, Splunk certainly is, LogRhythm certainly is, these guys are starting to attract a lot of attention. I think their markets are highly relevant and they are bringing up into a good number of transactions. Thanks.

Operator

We have a question from the line of Simon Leopold with Raymond James. Please go ahead.

Simon M. Leopold – Raymond James & Associates, Inc.

Thank you very much. I think I have two quick ones and maybe one a little bit longer. So let me just ask the quick ones first. Wondering if you could characterize the value of the initial purchases, how that trend has been moving up, down, how to quantify that?

The other quick question was, in terms of the mix you're expecting in the March quarter, we've typically seen most of the decline really show up in product, where services have been more flat. I'm wondering if you expect that kind of mix in the quarter. And then I'll follow up with another question.

Paul Hooper

Okay, let me take a shot at it. On the services part yeah that was most likely just because of the deferred revenue build up that we have and the rollouts that we have, that would suggest a more flat, flattish anyway quarter-over-quarter trend and most of the decline would be in the product base.

Duston Williams

And then the other part of the question Simon was, have we seen the value of the initial prices up, the answer is yes. We’ve seen that number kind of go up over the back half of last year and that’s due to some when you get the first time customer purchases, the largest order in the company’s history that’s the army deal I am referring too, when that happens it’s going to skew that number fair bit and so we’ve seen that number start to increase.

But we are starting to see deal constructs not necessarily with first time customers but where the deals are just accretively larger than they are – than they were two, three years ago now. So we are starting to see bigger transactions, I’d say that but not necessarily if it’s the first time customers, not many of those left.

Paul Hooper

I think probably the more important trend there Simon is, not necessarily the first time buy but it’s the quickness of the next buy. And that seems to be accelerating before customers maybe would take several quarters off, or a year off. Now what we are seeing is those customers coming back rather rapidly for additional product either in the first quarter after they purchase or the second quarter.

Simon M. Leopold – Raymond James & Associates, Inc.

Great, thanks. Interesting point on that. You gave us some good color on the competitive environment. And I was hoping you could elaborate a little bit in terms of helping us understand specifically what’s changed during the quarter, as well as your perspective on what companies like Cisco and Juniper might be doing as potential competitors to your products?

Duston Williams

So over the course of the quarter, I am just winding my mind back here. Nothing specifically happened during the course of the quarter, made it significant. Clearly we’ve launched a fair number of product so competitively from that position I think is moved. But I put the comments in there more as an annual kind of reflection because this time last year it was a different market and the year prior it was a different market. So the market is clearly evolving, it was just appropriate to kind of 10%, 20%, 30% and start 2014 looking at the competitive landscape as it has evolved over the course of the last twelve months and I think probably we’ll continue to evolve over the coming twelve month.

And as we look at Cisco and Juniper the two you mentioned there, they are – we don’t see them competitively. We certainly understand the market space that they are into and the technology we’ve got, the Ethernet switch space they’ve got and some of the technologies with Cisco for example with 1PK and Juniper with some of the capabilities they’ve got regarding SDN. But we do not see them competitively in this field at all. But we’ll continue to watch and continue to remain alert and vigilant, but at the moment it’s a market that is really more driven by tool vendors acquiring into our space and it is through Ethernet switch vendors.

Simon M. Leopold – Raymond James & Associates, Inc.

Thank you. That’s very helpful.

Duston Williams

Thanks Simon.

Operator

Our next question comes from the line of Kulbinder Garcha with Credit Suisse. Please go ahead.

Vlad Rom – Credit Suisse

Hi, Paul, Duston. This is Vlad for Kulbinder. I just wanted to get back to the new customer adds. There seems to be a deceleration in growth there. And alternatively, it seems like the number of customers over 100,000 have actually declined quarter-on-quarter. Can you talk to the dynamics there?

Paul Hooper

So let me just add, I just want to go back on a point that we’ve made a couple of times on the call and that is the definition of new customer. We have a very conservative definition Vlad. If you recall, it’s – our definition of new customer is someone we’ve never done any form of transaction within the past, which given the company is now 10 years old is an awfully long tail.

And secondly, a unique DUNS number at the parent level. So perhaps you have to wait, as an example, is a customer anyone inside of our family is not counted as a new customer even though some companies might count them as new logos, we would not count them as a new customer. That would still be an existing customer. And that applies to all of those kind of conglomerates.

So it’s a conservative camp. Now going back to your point about the customer matrix and the add, yeah, I think in Q4 the number of customers 92 over 86 in Q3 is maybe – it may look like slowing down as a relative percentage, but recognizing Q4 is the quadrant which sales guys are going to go back to their existing accounts a little bit and then continue to drive business out of existing accounts more so than new accounts.

We are also saying that the deals get larger. Deals take more nurturing and more development through from initial contact through to full closure which can become for sales team can be – I won’t say distracting, but it can certainly become a focus of attention which is the reason why we intentionally like in Q3 and now aggressively in Q4 have come out and created a new role, RFM. His job is to go find new logos, go find new accounts, find a transaction, successfully engage in plans of Visibility Fabric and then move onto the next opportunity. And that allow our accounts, our existing in field accounts seem to be able to go nurture that as an existing relationship.

So we see this as the focus. I think we’ve done reasonably well, we’re at 1330 plus customers in the – total customers for the company, that’s right 1320 total customers of the company which is that’s why on a conservative account is a pretty, we are pretty pleased with that number but yet again it’s a number that we’re going to continue to focus on over the course of the year.

Duston Williams

And the order is over 100, Vlad – 100,000 there, that’s going to bounce around, that’s was 170,000 last quarter, it’s down to 110,000 this quarter, it’s just going to bounce a little bit probably down in Q1 just because of the down quarter that we always have in Q1. Here we just had a lot of smaller transactions in Q4, I wouldn’t read anything into that, just these things go up and down a little bit, probably again down in Q1 and then it will probably reaccelerate in Q2, Q3, and Q4.

Paul Hooper

And then other, just referring to Duston’s point, Doug make sure you don’t confuse orders with deals. A deal can have multiple orders, so one deal could come across the multiple POs, all look less than $100,000, but the deal could be multiple hundreds of thousands. So just there is some separation there.

Vlad Rom – Credit Suisse

Okay, great. And then just getting back to the software, are you seeing sales depot focusing on kind of existing installed base, trying to sell the software or is the software cashed higher for new customers, just trying [indiscernible]?

Paul Hooper

We are seeing software attached with new transactions. We’ve watched that closely and it still remains to be and as I mentioned with 40% in Q4 for GigaSMART hardware attached to HD chassis.

So we’ve watched that metric. We haven’t necessarily watched how many – penetrated we are of this software platform in our existing customers. So interesting question, I don’t think we’ve got a kind of hard on do that, but we do see some sales guys and recently this morning, I got a note from one of our sales guys on the East Coast saying, something to the effect of NetFlow application is phenomenal, it has allowed me to open a whole new range of conversations with my customers. So in that case, I am sure he is going back to existing and up-selling software, but I am also seeing a lot of transactions that have software tucked-in as a first time customer as well as they kind of split, any color Duston on…

Duston Williams

I can speak as much more we can. It’s a good question, something we will continue to watch.

Vlad Rom – Credit Suisse

Okay, great. And just one more from me; and you guys have been working on Europe for quite a bit, how comfortable are you in the ground work that you thought for us to generate revenue growth there?

Paul Hooper

We are remaining increasingly confident. We’ve as I say will be this quarter going into it, we have taken the international teams, but just to focus on Europe for a second and we’ve focused on enterprise and service provider, the different sales cycle, different sales vernacular different sales approach and so now we have got a team of established provider of sales guys in Europe and a team of enterprise sales guys in Europe and we are reasonably confident with the teams that we have got some momentum and some role during the course of the year and going forward.

We will still continue to build the channel, but I don’t think the channel is where it needs to be. I think the acquisition by Arrow of Computerlinks which was a distributor and still is our distributor in Europe is a good move for us that gives us one large entity to work with worldwide, but it’s never done, it’s still is an area of focus, it’s still an area of growth for us and as I said on the prepared remarks and I’ve said previously, internationally it’s a big opportunity. We are investing in the sales head that we are putting into the world this year.

I think we are really doubling the footprint we have got internationally with the number of sales guys we have. We see that as a big growth opportunity and so we are investing to capture the opportunity.

Vlad Rom – Credit Suisse

Okay, great, thank you, I appreciate it.

Paul Hooper

Okay.

Operator

(Operator Instructions) Our next question comes from the line of Ben Reitzes with Barclays. Please go ahead.

Ben A. Reitzes – Barclays Capital, Inc.

Hey guys, thanks a lot. I wanted to just – a lot of things have been asked obviously, so I wanted to ask a federal and government question. That segment I think you said 26% year-over-year which is obviously really good, but it’s actually below the average, so I just wanted if that was inline with your expectations and how that vertical looked heading into this quarter and when you set guidance’s, should we expect the growth rate obviously to remain below the company average given what’s going on in that sector? And then I also wanted to ask a follow-up, so I’ll do that one first.

Duston Williams

Yes, Ben, Duston. We don’t – when we give guidance, really don’t give color on the verticals quarter-over-quarter. But we are taking it seriously, we are putting significant amount of new resources. We’ve already hired, several of those new resources in Federal space here already in Q1. So a long of those heads we would expect additional improvement out of that area. But we don’t give the specific guidance quarter-over-quarter on a vertical.

Ben A. Reitzes – Barclays Capital, Inc.

Was it better or worse than expected in the quarter or how would you characterize it?

Duston Williams

About as planned. We knew it was going to be down significantly just because of the quarter ends in Q3 for the government.

Ben A. Reitzes – Barclays Capital, Inc.

Yes. And then in terms of partnerships, there was a question about Cisco and Juniper as competitors, but is there any creative partnerships you guys would do in terms of your go-to-market strategy, any thing you guys are obviously thinking about or direction we would get in terms of interest from potential partners that have broad new distribution in different ways?

Duston Williams

Yes, we are looking at the ecosystem partnership with increasing focus Ben. I think as I mentioned in a note, as we look at some of the moves around the massive spa, the fact that it was still independent and agnostic make it more appealing than others. And so I think there is a lot of good opportunity and I am actually going to close the call out today with a few notes regarding some of the ecosystem partners that we’ve gotten some of the work that we are going to be gearing at various shows up on the horizon here, because we are seeing a good deal of increasing interest from some real brand name partners. So we are going to continue to do that. I think if I am reading the backend of your question right, I don’t think we are going to be setting out technology through anybody, anytime soon or will explore opportunities but if won’t happen any time soon. The meeting in the channel, the meeting in the field is certainly something that’s worked very well with some brave reputable organizations that we have very high regard for us, and mutually high regard, so were well reserve – with many of the big security companies that customer experienced companies and some of the APNs.

Ben A. Reitzes – Barclays Capital, Inc.

That’s a lot.

Duston Williams

Thanks Ben.

Operator

Obviously there are no further questions at this time. Please continue with your closing remarks.

Duston Williams

Thank you. And in closing, I just want to let you know that we will be attending two significant industry events during the month of February at which we will be demonstrating solutions and technology, the securities industry premier event takes place in San Francisco later this month. We will be demonstrating our new NetFlow enabled security solutions in addition to our integrated inline and out-of-band portfolio alongside of a variety of about ecosystem partners including FireEye, Sourcefire, LogRhythm and Narus.

And during the same week we will also be at the marquee mobile service provider event, mobile world congress in Barcelona. In addition to demonstrating our new traffic intelligence portfolio we will also be discussing the future of cloud based monitoring tools in conjunction with our ecosystem partner, VistaPoint.

If you plan to attend either show please contact our investor relations team to schedule an onsite meeting and in closing we look forward to talking to you again at the end of Q1. Thank you operator.

Operator

Ladies and gentlemen, this concludes the Gigamon fourth quarter and full fiscal year 2013 earnings conference call. Thank you for your participation. You may now disconnect.

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