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Gigamon, Inc. (NYSE:GIMO)

Q2 2014 Earnings Conference Call

July 24, 2014 05:00 PM ET

Executives

Paul Hooper - CEO

Ravi Narula - CAO and interim CFO

Cynthia Hiponia - IR

Analysts

Kent Schofield - Goldman Sachs & Co.

Kulbinder Garcha - Credit Suisse

Simon Leopold - Raymond James

Alex Henderson - Needham & Company

Mark Kelleher - D.A. Davidson & Co.

Operator

Good day and welcome to the Gigamon’s Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to Cynthia Hiponia, Investor Relations. Please go ahead, ma’am.

Cynthia Hiponia

Thank you, Jessica. This is Cynthia Hiponia, Gigamon Investor Relations, and I’m pleased to welcome you to Gigamon’s conference call to discuss its second quarter 2014 earnings results. After the market close today, Gigamon issued a press release through PRNewswire. The release is also available on the Company’s Web site at gigamon.com. This call is being webcast live on the Investor Relations page of the Gigamon Web site 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 focus on organizational and profit changes, our expectations regarding the market and our products, our expectations for inventory and our expectations regarding our deferred tax assets and tax rates. Our expectations and beliefs regarding these matters may not materialize and actual results in future periods 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 those more fully described in our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q. 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, or it’s otherwise specifically stated, the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for 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 press release that is available on our Web site.

On this call, we will give guidance for the third 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 second quarter 2014 earnings call. On the call with me today is Ravi Narula, our Chief Accounting Officer; and our interim CFO during the second quarter.

In a press release on Tuesday, we announced that we’ve appointed a new CFO, Mike Burns, who joined the Company this week. I’m very pleased that we’ve identified a strong financial leader to drive and support the changes that we need in our business.

On July the 8th, we announced that revenue in the second quarter were far below our original guidance. Where our margins and expenses were within guidance we provided in April. I’m very disappointed in these results.

We’re committed to making the changes that are needed to return growth and predictability to our business. We firmly believe that our market is healthy and growing and that our industry leading solution can capture share and is exciting and disruptive marketplace.

In order to take advantage of this opportunity, we need to make some change. We’ve already made some changes and more are occurring based upon what we learned during our view of the quarter, our business and specifically our go-to-market performance.

I want to take you through our results. The reasons that we believe contributed to this mess and what will changing to recover the momentum in our business. For the second quarter, revenue was $34.9 million, which is within the revised guidance range that we provided on July 8th, but below our original guidance of $38 million to $42 million.

The primary challenge that causes the revenue shortfall was the elongation of the sales cycle, specifically around larger transactions and our inability to backfill from the pipeline as the deals moved out of the quarter.

Let me get two specific examples from the quarter. We’ve been working on a $1.5 million transaction since the start of the year that we expected to close in Q2. From our perspective, the configuration represented a larger deal. It was part -- it was one part of a much larger multi million dollar infrastructure build out by our customer. The whole project moved from Q2 due to a variety of reasons, none of which were directly related to us, but clearly did directly impact us.

And the second example, the security and operation services team have a well recognized U.S university engaged us in Q4 of 2013 to begin discussing strategies to expand visibility and capacity, for centralized security monitoring tools. Design and feature use started in Q1 and ran for the duration of the quarter, which led to a successful proof-of-concept evaluation. The deal eventually closed in Q2.

The top 40 pipeline of opportunities in each quarter includes larger and larger transactions on a regular basis. And as larger transactions take longer to close, it is clear we need to improve our demand generation activities around smaller transactions and also improve the accuracy of our sales forecasting and pipeline management.

I’ve already made organizational and process changes to address this need. I will continue to drive more effectiveness and efficiency around our go-to-market execution within our business.

The other aspects of the business that needs to improve is delivering leverage to the bottom line. We’ve invested in the organization over the past years, notably in international theater over the first half of this year and we need to realize a return on these investments.

In the meantime, we’re thoughtfully putting the pores in the hiring and investment growth plans, so we can assimilate and more fully capitalize on the investments over the past. Summarizing the quarter, two areas of the business need to improve. Both areas have already seen change and we will see more during the course of the quarter. Forecasting specifically around longer and larger deals and our go-to-market execution.

Looking forward, we’re confident in our market, our technology and our ability to return to the growth of the past. With respect to the market, according to report published by the 451 Research Group, the market transitions that are underway within networking are likely to accelerate the need for network visibility.

They highlight the differentiated features and functions of the Gigamon visibility fabric and they predict that revenue from the network visibility market will grow at a 24% CAGR over the 2013, 2018 period.

With respect to technology innovation, we launched a new technology platform in the quarter, the GigaVUE-HC2 which we further enhanced this quarter with the announcements of an inline module enabling us to capture share in the evolving and high demand market, by enabling security instrumentation.

One of the world’s most recognizable sports brands required a solution to deliver full visibility into their corporate IT and retail production environments to support that evolution to a global digital commerce organization.

With security a top concern, they selected the GigaVUE-HC2 and GigaSMART Platforms, including our net flow generation application to monitor and protect their most sensitive and critical customer transactions.

We continue to add customers, with 84 new accounts purchasing our solution for the first time in the quarter, up from 70 in Q1. This represents a 29% year-over-year increase resulting in the total of 1,474 customers.

We also continue to see a growing interest in our expanding GigaSMART Platform and suite of applications. The in quarter attach rate for GigaSMART on our HD series, grew from 67% in Q1 to 86% in Q2.

We continue to believe that this metric is a leading indicator that the markets desire, the high-level intelligence within their monitoring fabrics. And in its first quarter since launch, the HC series saw an attach rate of almost 50% for the GigaSMART platform.

As CEO of Gigamon, I’ve spend much of the last 12 months meeting an educating investors and analysts on the secular trends driving the market and are differentiated an industry leading solutions. We firmly believe this thesis remains intact. And it is our focus to address our internal execution challenges and return growth and predictability to our business.

Let me now turn the call over to Ravi, our Chief Accounting Officer, who will review the second quarter financials in detail and provide the outlook for the third quarter of fiscal 2014. Ravi?

Ravi Narula

Thanks, Paul. I’ll review our Q2 actual results, and then follow that up with our outlook for Q3. The following analysis of our Q2 results is based on non-GAAP unless otherwise noted. All references exclude stock-based compensation expense and any related payroll and income taxes. Please refer to our press release available on the Investor Relations Web site for the comparable GAAP results, along with the reconciliation to the non-GAAP figures.

Consistent to our revised guidance on July 8th, total revenue in Q2 was $34.9 million, representing sequential and year-over-year growth rate of 10% and 8% respectively. Our product revenue in Q2 was $22.5 million, representing sequential and year-over-year growth rate of 12% and negative 3%.As far described, the year-over-year decline was largely impacted by North American enterprise due to a historical concentration.

And our services revenue in Q2 were $12.3 million, representing sequential and year-over-year growth rates of 5% and 36% respectively. Our top 10 end-user customers accounted for 22% of revenue in Q2, compared to 20% in Q1. We had no 10% end user customers in Q2 with the largest end user customer representing 5% of revenue.

Turning to our distributors on a non-end user basis, Interlink accounted for 39% of revenue in Q2 versus 45% in Q1, while Arrow also on a non-end user basis accounted for 15% of revenue in Q2 versus 19% in Q1.

From a geographic perspective in Q2, North America accounted for 78% of revenue. EMEA was 14% and APAC was 8%. On a year-over-year basis, North America grew at 3%, EMEA at 33% and APAC at 22%.

Looking at the vertical market, enterprise accounted for 62% of bookings in Q2 versus 70% in Q2 of 2013. Service providers accounted for 23% in Q2 versus 21% in Q2 of last year, and the government vertical accounted for 15% in Q2 versus 9% in Q2 of last year.

On a year-over-year basis, the enterprise vertical declined by 12%, service provider grew by 11% and the government grew by 54%. Increased focus on the government vertical, well positioned solutions for many of the high volume data applications and improving willingness to spend on IT infrastructure, allowed for a strong growth in our government sector.

Overall gross margins in Q2 was 79% versus 75% in Q1 and 82% in Q2 of 2013. Product gross margins were 73% in Q2, 66% in Q1 and 78% in Q2 of 2013, while service margins were relatively consistent for these periods.

The year-over-year decline in product margins was primarily due to one-time transition charges to Jabil and also due to inventory carrying charges incurred in Q2 and not because of any specific pricing pressures.

Operating expenses for Q2 were $29.3 million versus $27million in Q1 and $21.9 million in Q2 of 2013, reflecting sequential and year-over-year growth rates of 9% and 34% respectively. We added 22 employees in the quarter to end at 413. The operating loss of Q2 was $1.8 million; and the net loss for Q2 after a $0.6 million non-GAAP tax benefit and other miscellaneous expenses was $1.1 million, or $0.04 per share loss on a weighted average basic and diluted basis.

Prior modeling purposes, we expect our ongoing non-GAAP tax rate to be approximately 35%/ With respect to our GAAP taxes, our GAAP income tax provision included a one-time non-cash charge of $24.6 million to establish a valuation allowance against the deferred tax assets.

This charge was primarily due to cumulative GAAP losses including stock-based compensation expense. Establishing the valuation allowance was required by GAAP, but looking forward, as we align our operating expenses and working towards that target model, we expect to be able to utilize these assets in the long-term.

Moving on to balance sheet, while we remain focused on improving our results, our balance sheet remains strong. Cash, cash equivalent, and investments ended the quarter at $134.8 million versus $142.7 million in Q1. We used $5.5 million of cash from operations in Q2.

As we’ve stated in our Q1 earnings call, we had a one-time $6 million finished goods inventory purchase from Jabil in Q2, to help reduce future inventory carrying charges. Because of the inventory purchase from Jabil our inventory turns was three in Q2. We expect to work through this inventory in the back half of this year.

DSOs were 45 days in Q2 versus 47 days in Q1. Service deferred revenue was $39.7 million in both Q2 and Q1 and $30.2 million in Q2 of 2013, a year-over-year growth rate of 31%.

Now for the Q3 outlook. The following guidance for Q3 is based on non-GAAP results and excludes any stock-based compensation and related taxes. Revenue is expected to be flat to slightly higher as compared to Q2 revenue.

Overall, gross margins are expected to be between 77% and 79%. As Paul mentioned, we’re pausing our continued headcount growth as we look to leverage [ph] [fast] investments and as a result, operating expenses are expected to be sequentially flat. Non-GAAP tax rate of approximately 35%, estimated average basic weighted shares outstanding of approximately $32.5 million shares.

Paul and I will now take questions. Operator, could you now please open up the line.

Question-and-Answer Session

Thank you. (Operator Instructions) And we will first go to Kent Schofield from Goldman Sachs.

Kent Schofield - Goldman Sachs & Co.

Great. Thank you. Paul, thank you for some of the detail about -- around some of the shortfall there. I guess if we could dig a little bit more, it looks like you’re looking at kind of maybe 4% product revenue growth in the first half of this year and if I look back at the previous few years, you were kind of at 30% plus. When we look at the elongation of the sales cycles, that’s understandable, we’ve heard that from some other appliance companies having some similar challenges. But I was wondering if you could kind of dive into the verticals here in North America and when you’re looking at some of the kind of what we’ve considered leading edge type customers, financial services vertical for example, are you seeing any increased competition there, any sort of technology changes, whether from competition or just as they’re looking at their architectures that are impacting the way they’re consuming your solution.

Paul Hooper

Hey, Kent, thanks for the question. So if we look at the vertical markets, the markets that we break out clearly is service provider and enterprise. But when you take enterprise and you segment that, clearly federal businesses Ravi mentioned briefly on his notes is federal business is doing well for us. Then if you go further into the verticals, finance technology, online media, and healthcare probably are the top four that we got and we haven’t seen any significant change in the competitive landscape in many of those markets. We continue to pick up transactions in (indiscernible) and I’m sure we had transactions in Q2 from all of those verticals. So there is no dramatic competitive shift we have seen. The only thing I will highlight Kent, which I think really is an attribute to a larger deal is the thing that we need to do is to get in earlier in the cycle of the deals, to get to the head end of the deal, rather than get into the tail end of the deal. So I think a fair bit of energy here is we’re focused on getting earlier in the sales cycle with all of these vertical markets, not just finance, not just banking, not just insurance and so on, but all of the vertical market.

Kent Schofield - Goldman Sachs & Co.

And when you say get in earlier in the sales cycle. I’m sorry, just to clarify exactly what you mean by that?

Paul Hooper

So that’s the -- our competitive win rate has remained fundamentally the same since we’ve really been tracking it. So if we are in a transaction, our win rates remain the same. It’s our belief that we’re not getting into enough transactions. So this transactions that are playing out there in and around this market that we’re not competing in. And when I mean getting in earlier than transaction, I mean getting the opportunity to be actually part of the transaction versus joining the transaction very late in the cycle.

Kent Schofield - Goldman Sachs & Co.

Okay, I understand. And speaking of that, there were -- there was a comment about looking for a new head of worldwide sales. Where are you at in that process and then what’s happened with the reports there? Has there been any change in the kind of the next level down?

Paul Hooper

So we’re well in the process of looking for a new leader of worldwide sales. We have a search firm engaged, we have candidates in the pipeline, we have meetings already under way and ongoing. So I’d say we’re in that process. We are not going to commit how long it’s going to take, but I understand it has a degree of urgency from it. Degree of urgency on our site to complete that search. The direct reports, the next level down all remain and they’re all reporting to me now. I’ve taken temporarily -- taken on leadership for sales. So, all of the next level down remain in their chairs and inner structure. And I’ve have been very activity in ongoing conversations with them plus right away down to the field level talking to individual sales guys in the field as well to understand and making sure that everyone stays in the chair.

Kent Schofield - Goldman Sachs & Co.

Thank you. I’ll jump back in the queue.

Operator

We’ll now go to Kulbinder Garcha from Credit Suisse.

Kulbinder Garcha - Credit Suisse

Thanks. I guess, my questions are for Paul. On the guidance it looks like what you’re saying for September, revenues could even be down year-on-year if I heard that right. And it would actually probably imply you to struggle to grow for the full year, and this is a market that’s growing very quickly. I know there’s been mixed execution and there’s been elongating sales cycles. But for an entire year for this kind of a business in this kind of an end market not to post growth, it just feels like something more structurally is wrong. So, I guess, what assurances can you give us on that? And then secondly, just to be specific that, I understand Paul, that like sales cycles have stretched out. But then equally there should be, I would have thought they used to be that (indiscernible) whereby you talk about repeat customer activity, that continually growing, those customers growing back, there’s a geographic element to what you will guide. There seems to be a lot for the gross drives at least should have offset some of these things that having in Q1, having in Q2. So are those some of those metrics you spoke about just no longer is relevant you think or I will be curious how you’ll respond to that part as well, if anything.

Paul Hooper

So, let me start with, the first quarter you asked I think that Kulbinder was, what assurances that we’ve got regarding the guidance? Well I understand and I appreciate your concern and the concern of all investors. And equally from our perspective with two misses now, I need to be appropriate that we’re cautious and so we have guided very cautiously. Hence we’re referring to flat to marginally up for the Q3 quarter and that certainly does look like a slower growth year-over-year than the market is growing at. I will not deny that. But recognize, going back to the previous comment, I am remaining cautious, and we need to be appropriate with the amount of change that we will be instituting inside of the business. We need to be careful regarding how we provide guidance going forward and hence the kind of guidance we’ve provided for Q3. The second point you provided was some of the metrics that we’ve got. The global drivers, the repeat business with the large customers. I wouldn’t exclude those portions of the business from being also impacted by larger transactions. Some global drivers, there are some large transactions to play out, internationally large transactions that play out with existing customers. We do still track our international revenue quite obviously. We do still track our repeat multiple from our top 25 customers as we have been reporting since going public here. And those metrics, the metric for repeat customers still continues to increase. But I’ve got to be honest Kulbinder that, I want to be sure that when we provide metrics for you all, that they are metrics that give and a solid indication of the health of the business and with the miss in Q2, I think its appropriate that we provide guidance that is cautious, and we don’t provide significant number of forward looking metrics regarding what may have been a good indication because clearly the core business has got some things we need to go fix. So, hence the guidance being cautious and we were fraying from commenting about the repeat multiple of customers, although I will tell you it is up.

Kulbinder Garcha - Credit Suisse

And then, I guess Paul, the other thing is then, with respect to the sales cycle that are getting longer, I guess your backlog must be very good if you’re not reducing business and you had this period happening for a while. So, beyond the quarter, an issue of you working out how quickly they convert and the backlog is very healthy or and like in terms of further more, you have a business you’re going to execute or no, that isn’t the way it looks?

Paul Hooper

Well, so I’ll be careful with using the word backlog. This isn’t a backlog business. This is a [ph] [book share] business. So backlog isn’t really a consideration. But if you think, if you use the word backlog as it relates to a pipeline, in other words not an order and not a transaction, but certainly an opportunity. Yes, the fact that we had a good percentage of transaction slide in the last couple of weeks of Q2, they are not -- and we looked to them closely Kulbinder is regarding, which have been competitive loses, which have been basically eliminated by the customer for whatever reason, and which are truly just reforecast to different days. And the vast majority -- the vast majority have been reforecast to different days. And if you refer to that as a backlog, then that’s certainly a backlog -- a pipeline backlog. Yes, we’ve got that. And it remains to be at a level that is, that gives us the ability to guide in the way we have, but yet again we’re being very cautious about it. And just because it slid, which means that transaction moved once, it doesn’t mean its not going to move twice or three times. So, I want to be very cautious and very careful about when we guide the business particularly for Q3.

Kulbinder Garcha - Credit Suisse

Okay. Thank you.

Operator

Our next question comes from Simon Leopold from Raymond James.

Simon Leopold - Raymond James

Thank you. I wanted to talk a little bit about the competitive landscape. I know you said it had some change, but one of the comments I think you made at the analyst meeting earlier this year suggested that your competitors now that your primary competitors have been acquired by larger companies simply have more sales people. And so, I’m struggling with how to think about the pause in hiring and pause in OpEx when part of the challenge maybe the fact that your primary competitors simply have more touch points with customers. Can you help me reconcile that?

Paul Hooper

Yes. There’s one thing I’ll point you at Simon, and I understand it’s a good question. The one thing I’ll point at is the channel. I don’t think we have had the leverage out of the channel, but we believe we should be getting. And so, reach is certainly the number of quite are carrying sales guys and organization heads, but it’s also the leverage it has through the channel. And as an organization I believe we have a lot of leverage to be had inside of our channel to give us far greater reach without having to necessarily put a significant number of sales guys in the field. With that said, as you may recall from the Analyst Day, we were quite clear that we were going to be investing in international sales heads and we certainly have done in the first half of this year. That plan was still executed to the trajectory that we laid out on the Analyst Day. But as I said in my prepared remarks, we are intentionally going to put a pause in that, because now we’ve some of those sales guys in the chair for four -- three four months here. We’re going to start to look to get some leverage and get some return, because we believe there’s a good deal of opportunity in international arena. And once we start to see that return then we can thoughtfully and cautiously go back to returning the investment and the growth. But at the moment, I think it’s only appropriate that we drive some of the profitability -- should we drive some of the numbers to the bottom line, and also gain some of the leverage of the investments that we’ve made here in the course of the last six months.

Simon Leopold - Raymond James

And how are you thinking about the pricing environment? Your guidance suggest there’s similar gross margin maybe slightly lower, and I’m just wondering whether or not that’s on the table potential price cuts is the way of improving the revenue growth?

Paul Hooper

Its always an opportunity and I’m not a big proponent of pricing activity. But that said, we have come out with a set of promotions over the course of the last few months here, and they would certainly look like a pricing promotion although they are incentivized to help our customers move from what we refer to as our G-series onto our H-series. We’ve also got some competitive displacement promotions in place. We’ve got a variety out there. But when we look at pricing at a holistic level and as you rightly state the margins kind of indicate we do not see any pricing pressure. We don’t loose deals on price Simon. If pricing was the issue I would certainly -- given Q2, I certainly would have sacrificed margin to have revenue. But we weren’t in enough transactions at the right point in time to be able to make that call. So, pricing wasn’t a needle -- wasn’t a dial that we could turn that late in the quarter. And going into this quarter, whilst we have made some pricing adjustments as you would expect with the launch of a new product, you make some pricing changes to other components of the portfolio it’s just all part of a normal business. We don’t intent to, and do not plan in any way to become specifically overly aggressive on pricing or discounting.

Simon Leopold - Raymond James

Thank you. And just one last one, also at the analyst meeting you had indicated that you felt very good about international growth and the numbers you sited today suggest you’re up APAC growing very quickly. Is that aspect of the growth basically international going well into the double-digits, is that still sustainable and your problems are strictly North America?

Paul Hooper

That’s a great question Simon, and I believe that what you’ve seen in the growth in the international arena is the early indications that some of our investments are starting to pay-off. However don’t forget Q3 is always a challenged quarter in Europe with the vacation and the holiday schedule. But my core focus right now is North America. It’s been the engine of the business, and it’s the backyard of the business, and its one that, as you see from the number did not execute as well as it should have done in Q2, and that’s certainly the area of focus that we’ve got in. And our leader of the North American sales team is actively engaged and is very focused on make sure that we return his region, his territory back to healthy growth which is one of my core focuses as well.

Simon Leopold - Raymond James

Great. Thank you for taking my questions.

Paul Hooper

Thanks, Simon.

Operator

We’ll now go to Alex Henderson from Needham & Company.

Alex Henderson - Needham & Company

Thanks. I’ve got a couple of questions. The first one is, this comment about getting in earlier in the sales cycles strikes me as a clear indication that you in fact expect a stretching -- further stretching out of the selling process timeline. If you’re getting in earlier that implies that you’re going to take longer to close transactions from the time you start them to the time they’re completed. If that is going to cause an additional stretching, does that not delay the timeline for turning the sales growth up? And against that context, I was hoping if you could give us some sense, I know you don’t want to give guidance more than one quarter at a time, but how many quarters do you think you’ll need to get this boat, ride it and get back to a more appropriate rate of growth for a company in your technology niche?

Paul Hooper

So, getting earlier in the sales cycle, you’re right Alex. There is an element that says the early you get into the sales cycle obviously you’re adding a month or two months or three months on the start of the sales process. My point there is not necessary to infer that every single transaction we’ve got is going to add another three months to it. My point there is to infer that we’re not enough to use this common term add backs. We don’t get enough opportunities into our pipeline to be able to close them. If we get an opportunity into our pipeline and it’s a tangible deal with budget, with customer issue, with the real requirement, our win rates as I said previously on the call here are solid. I don’t see us getting into early on into transactions necessarily elongating the recovery time that we’ve got here. I see that as being an opportunity to increase the pipeline and increase the head of steam we’ve got behind us as we go quarter into quarter into quarter. That’s the core reason why I want to get back into more sales cycles earlier, because I believe there is a lot of transactions out there that we’re not even competing in, leave along not winning. And I want to get out to those transactions much earlier so that before people are starting to make considerations and starting to dial in on a competitive product they’re hearing the alternative from Gigamon which we believe to be the market leading alternative. And how many quarters to recover? Well, we guide for a 90 day period. But I’m going to be very focused for the second half of this year to make sure that we drive this business back to the growth that I know you predicted for us and growth that we’ve demonstrated in the past, Alex. So, it’s going to be quarter-by-quarter and next quarter is definitely or the quarter that we’re currently in is going to be the quarter of focus around organizational change, process change, restructuring around that forecasting process to make sure that we’ve got the right visibility. We’ve got the right ability to predict and manage to a guidance that we provide you all. And then we’re going to start also focusing around the go-to-market understanding how we can drive more channel activity, more demand creation activity, and as I say get earlier into the sales cycle. So next 90 days we’ve guided to, but its going to be a focus for the back half of this year to make sure we recover this business to the growth that we know is out there.

Alex Henderson - Needham & Company

Okay. One other question. The launch of the ACI architecture over at Cisco in the first quarter of this year obviously changes the architectural decision timeline for deploying important pieces of your networking infrastructure, i.e. the switch in fabric. To the extent that, that slowed down the switching market, is there a collateral damage in the visibility fabric market as a result of the timeline to make those decisions being typically 6 to 12 months?

Paul Hooper

So its -- that’s an interesting question. Its one that we spent a lot of time thinking about. I’ll give you another example, Alex that kind of talks to the point you made. There was another transaction that I didn’t comment on in my script in which it was a slide out of Q2 and into Q3. It was a reasonably sized transaction. And the reason it slid was because the customer was choosing to move to Cisco ACI when there had been a catalyst customer up to that point. And before they could deploy the ACI, the new ACI products they needed to go through a certification process. And so their certification lab got log gammed and we got log gammed behind the Cisco. And consequently our products, the HC2 the new one that we’ve just come out with, it was going through the first time certification and the customer it came second in the pipe behind the Cisco. And so our transaction got delayed to this quarter because we couldn’t get through the funnel. Now that’s a very specific micro example of your macro question. But there could certainly be a pause in some people’s consideration as they look at alternative infrastructure. But once I recognized we missed results in Q2, I don’t believe we have enough -- we’re a large enough company to feel significant headwinds from that transaction or from that change and Cisco is kind of stressed -- Cisco is changing direction here. So it’s just an evolution in direction I should say. But we still work with Cisco customers, we work with VMware customers, all have been through a degree of change and that technology works very well with both. And one of the things that we believe our value proposition is, is that we help customers make migration between infrastructures. So we see this being an enabling force for us rather than disabling force. But to my prior comment, there certainly can be some impact as people consider what the right of architecture might be in the future.

Alex Henderson - Needham & Company

One last question if I could. Is there any impact of the ACI architecture on your win rates or is that completely independent of your success in the market place?

Paul Hooper

We have not seen and have not heard of any impact and in fact Cisco works with us very closely. And we actually were at Cisco Live and they presented their solutions and some of the solutions they presented to work with Cisco was the Gigamon solution. So, we work well with them, we work with the ACI architecture or their classic catalyst architecture. But we haven’t -- I don’t believe there’s any impact to the win rates particularly around there. I haven’t seen anything in the loss analysis that reflects ACI particularly.

Alex Henderson - Needham & Company

Thank you.

Operator

(Operator Instructions) We’ll now go to Mark Kelleher from D.A. Davidson.

Mark Kelleher - D.A. Davidson & Co.

Great. Thanks for taking the question. I wanted to go back and look at the processes for forecasting. I know after last quarters difficulty you put some new processes in place and you’ve talked about putting some more in place this quarter. Is there an inherent -- something structural with the way your sales motion goes with you being two steps removed from the end customer that makes that forecasting just inherently difficult. Or do you think there you can get that better?

Paul Hooper

So just -- Mark its Paul. When you say two steps removed, what are you referring to, [ph] [your set of interest]?

Mark Kelleher - D.A. Davidson & Co.

Just when you’re selling through partners, when you’re selling through your -- as you said you have to sell your product as part -- your product is selling as part of a larger installation and its that installation at a larger piece that’s getting delayed that you may not have visibility on?

Paul Hooper

Okay, understood. Sorry, thanks for the clarification. Well, as I said previously our channel is not working as effectively that it should do. One of the manifestations of that is we have to get actively involved in a good number of the transactions that go through the channel. So, our sales team, our direct sales team actually do touch the vast majority of transactions. I think it’s a very rare day when a deal comes in from a channel without one of our sales guys having some influence, some involvement if not a very hands on customer interaction with the transaction. So, I don’t believe our forecasting is hampered or limited, sorry. The accuracy of that forecasting is hampered or limited by having the channel in place. And I think we have got a good relationship with our international channel and our North American channel we continue to work with to make sure that we’ve got the visibility we need. I believe this is an internal thing and I wouldn’t want to say that we’ve got an impact through our distribution or reseller community. I think this is an all internal issue.

Mark Kelleher - D.A. Davidson & Co.

Okay. And you touched a little bit on HC2 launching in the quarter and some effect that might have had on the testing. But could that have had a larger effect as customers evaluated that product in general in pushing out sales team?

Paul Hooper

Well the HC2, when we launched it, it’s a new product in the space. It fits within our H portfolio and it overlaps marginally with one of our existing H-series products, and it also overlaps with one of our older G-series products. But we very closely watched the introduction for the cannibalization that we did expect. And to some degree we saw a part of that cannibalization play out, but not quite as significantly as we expected. So, we saw the HC2 as being -- it was more of an incremental launch than a cannibalistic launch. We don’t believe customers stalled in the transactions. We did watch for any transactions that flowed from Q1 into Q2 when we launched the HC2 very early in the quarter. I wanted to make sure that no transaction stalled or got reconfigured or changed profile or build up materials from an older product to a newer product. And we saw a very, very, very few number of those play out. So, I don’t believe the HC2 launch was stalled in the buying behavior of our customers although we continue to look and continue to explore exactly the root causes of kind of why we’re having so much difficulty forecasting here and that’s one of the areas is to ensure that we have not got that kind of behavior going on in our customers. We do not believe that to be the case.

Mark Kelleher - D.A. Davidson & Co.

Okay, great. And one last numbers question. The $6 million purchase from Jabil you mentioned on your balance sheet. Could you just give some more detail on what that’s about?

Ravi Narula

Yes, Mark. This is Ravi. So we did -- we own that, we moved to Jabil last year. And what Jabil was owning on our behalf, we used to give them some forecast for inventory, so they would own some finished goods, and they would also own some components. For the finished goods inventory, as a typical contract manufacturer would do, they would hold that inventory in their books, but we were fully committed to that, and they would charge some carrying charges, cash interest rates also low. We decided since that is our commitment that’s our inventory, why not bring that in the books, and that would actually help us with some carrying charges going forward. So, that’s why we bought this inventory which was ours in any case, but now we can at least reduce those carrying charges. So that’s a onetime cumulative inventory finished goods we bought from Jabil, which we had mentioned in our Q1 earnings call also. That’s good inventory, we’ll be using those -- using for the next six months. And that number should go down -- the inventory number should go down in future, but going forward we are going to take all the ownership of finished goods inventory as soon as they are in finished goods from Jabil.

Mark Kelleher - D.A. Davidson & Co.

Okay, great. Thanks.

Operator

And that is all the time we have for questions today. I’ll now turn the conference back over to our presenters for any additional or closing remarks.

Cynthia Hiponia

Thank you everyone for joining us today and we look forward to updating you again on our next call.

Operator

This concludes today's presentation. Thank you for your participation.

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Source: Gigamon's (GIMO) CEO Paul Hooper on Q2 2014 Results - Earnings Call Transcript

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