Infoblox (BLOX) CEO Robert Thomas on Q4 2014 Results - Earnings Call Transcript

| About: Infoblox Inc. (BLOX)

Infoblox Inc. (NYSE:BLOX)

Q4 2014 Results Earnings Conference Call

September 4, 2014; 04:30 p.m. ET

Executives

Robert Thomas - President & Chief Executive Officer

Remo Canessa - Chief Financial Officer

Jane Underwood - Investor Relations

Analysts

Paul Silverstein - Cowen & Company

Erik Suppiger - JMP Securities

Jason Ader - William Blair & Company

Matt Lebo - Piper Jaffray

Amitabh Passi - UBS

Kent Schofield - Goldman Sachs

Vijay Bhagavath - Deutsche Bank

Jeremy David - Citigroup

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Infoblox's, Fourth Quarter Results Conference Call.

At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon and thank you for joining us to discuss Infoblox's financial results for the fourth quarter of fiscal 2014. With me on today's call are Robert Thomas, our President and Chief Executive Officer; and Remo Canessa, our Chief Financial Officer.

By now, everyone should have access to our earnings announcement, which we released this afternoon. This announcement may also be found on our website at www.infoblox.com in the Investor Relations section.

Before I turn the call over to Robert, let me remind you that the presentation we'll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements.

For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the Securities and Exchange Commission, including but not limited to our Quarterly Report on Form 10-Q filed on June 5, 2014, as well as the risks and uncertainties discussed in today’s earnings release.

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

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

Robert Thomas

Thank you Jane and good afternoon. We were very pleased with our fourth quarter performance and the progress we continue to make across key areas of the business.

Revenue for the quarter grew 6% sequentially to a record $64.9 million, and full year revenue increased 11% to $250.3 million. In the fourth quarter, product revenue increased 4% quarter-over-quarter to $32 million, and we also reported better than expected bottom line results with total gross margin at 80%, operating margin at 3%, and EPS of $0.03.

In the fourth quarter, we saw improved execution in both sales and marketing. We added over 200 new customers with this being our best quarter for new customer acquisition in seven quarters. Our lead generation activities continued to experience good momentum.

In the fourth quarter, the number of new prospect meetings in North America increased 37% year-over-year. We also saw improvement in closing seven figure transactions and we closed six in the quarter.

The Americas region outperformed and was up 12% sequentially. Our security business also performed very well. We saw growing demand for our solutions from new and existing customers in both the enterprise and service provider markets.

Finally, in the fourth quarter, we trained approximately 200 channel pre-sales engineers as part of our Infoblox Advanced Solutions Architect Program. The program trains partners’ pre-sales engineers on a full portfolio of products, and as of mid-July, approximately 900 sales engineers from nearly 100 leader partners have completed the program. And by the end of the fourth quarter, the majority of our lead partners also received training on our security solutions.

Overall, I believe the fourth quarter performance is a positive sign; that the changes we made in sales and marketing are starting to take effect. In the fourth quarter, we had several great customer wins. I’d like to take a moment to highlight three.

The first customer is a major provider of consumer health products, medical devices, and pharmaceuticals and is also a FireEye customer. This customer’s security team found that its FireEye solution was detecting up to 40,000 malicious DNS requests daily; however, there was no means to determine the specific infected devices or mitigate the problem. As a result, they needed an integrant solution to improve their security.

The customer purchased our DNS Firewall, FireEye adapter and the Infoblox Malware Data Feed service. The combined Infoblox FireEye solution will now deliver two layers of protection against APTs, making it possible to pinpoint infected devices, quarantine and remediation and block outbound communications to command and control botnets.

The second customer is one of the largest insurance corporations in the United States. This customer wanted to replace its antiquated Microsoft and Alcatel-Lucent appliances, which have been in placed for 15 years. Network services related to the server provisioning have been taking several weeks, and the IT organization nominated a more reliable and automated solution for its cloud, wireless, wide area network, and orchestration initiatives.

Not only did the customer require higher availability for DNS and DHCP services that needed protection against malware. The customer purchased our DDI, Network Insight, and DNS Firewall solutions. The DNS Firewall adds another critical layer to their security model, and with the deployment of our solutions, the customer now has improved his ability into the enterprise based on live data and is no longer dependent upon tracking information in spreadsheets.

The third customer is a U.S. Federal customer who purchased our solutions for major cloud initiatives to deploy a virtual desktop infrastructure. They chose Infoblox based on their integration with VMware and other cloud platforms. By selecting Infoblox, the customer will be able to provision IP addresses and DNS records automatically to virtual machines, while managing multiple networks for multiple clients simultaneously.

As a result, the customer can now deploy cloud-based services much more quickly, secure and track network devices across multiple client networks, while ensuring services are reliable on day one. The customer also has a flexibility to quickly add new users or additional networks without manual effort and can track them all with Infoblox.

In the fourth quarter, we closed approximately 20 cloud related transactions. Private and hybrid clouds have the potential to be a tremendous opportunity for Infoblox. According to Gartner, 2016 will be a defining year for cloud spending as private cloud beings to expand to hybrid cloud, and nearly half of large enterprises will have hybrid cloud deployments by the end of 2017.

We believe the integration with multi-vendor platforms positioned us as a leader in DDI for cloud services. One significant new trend in cloud technology is the adoption of OpenStack. Recently, we integrated our DDI capabilities with OpenStack and extended the same rapid provisioning functionality we have with other vendor platforms. Our new OpenStack integration underscores our commitment to the standard and allows us to better capitalize on the private cloud opportunity we see before us.

Last month, we announced enhancements to our integration with VMware’s Cloud Automation platforms. One of these new capabilities allows different networks to be consolidated more rapidly such as in the case of company mergers or data center consolidations without requiring complex reconfiguration of IP addresses.

In the fourth quarter, we also signed a partner agreement with VMware to work on integrating with NSX, VMware’s network virtualization platform. This integration with our solutions will automate the process of provisioning and deprovisioning of IP addresses and DNS settings through NSX.

Our customers will be able to automate IP address allocation for both individual virtual machines as well as logical networks and logical routers as they move towards fully programmatically controlled data centers. This agreement is a natural extension of our VMware partnership and expands our opportunities beyond their current integration with vCloud Automation Center.

Security also represents a great opportunity for Infoblox. Earlier this week, we made available our new DNS Firewall Virtual Evaluation tool. This solution is designed to make it easier for both customers and prospects to try our DNS Firewall for 60 days. The DNS Firewall Virtual Evaluation is a 100% virtual instance running on VMware infrastructure. It’s fully automated and can be up and running in less than 60 minutes. It will enable organizations to easily detect malware and APT activity inside their network through detailed reporting.

In the fourth quarter, we also released a new version or our advanced DNS protection or ADP solution. In this release, we added new capabilities, which provide a protection against the broader range of DNS based attacks, well beyond VITAS or volumetric attacks. Our ADP solution comes with our unique threat adapt technology, which leverages the latest threat intelligence to automatically update its defense against new and evolving threats as they emerge.

In order to gain better distribution of our security solutions, we have created a partner certification called the DNS Security Expert. This is our most advanced program for DNS security credentials, and we expect many of our current partners will seek this more advanced security certification.

In closing, as we begin the new fiscal year, I believe there are a number of reasons to be confident. Our core business remains robust and the opportunities in cloud and security should help drive further market adoption. We expect fiscal 2015 to be a year of continued improvement in execution, and we believe we are well positioned to accelerate our revenue and product revenue growth trajectories.

Now, I'd like to turn the call over to Remo to further discuss our financial results.

Remo Canessa

Thank you, Robert. I would like to remind everyone that the results I will be discussing are non-GAAP financial results and excludes stock-based compensation expenses, amortization of intangibles and acquisition-related expenses. All share counts that I'll be providing will be on a fully diluted weighted average share basis.

I am very pleased with our performance in the July quarter, as we experience solid growth in both products and services revenue on a sequential basis. Total net revenue was $64.9 million, which represents a 3% year-over-year increase and was up 6% sequentially. Product revenue in the quarter was $32 million or 49% of total revenue, which decreased 13% year-over-year, but was up 4% sequentially.

Service and support revenue was $32.9 million or 51% of total revenue, which represents a year-over-year increase of 25% and a sequential increase of 9%. The increase in our service and support revenue is primarily due to a larger installed base of customers with prepaid support contracts that are amortized over the service period. From a geographic perspective, Americas represented approximately 66% of total net revenue and was up 3% year-over-year and increased 12% sequentially.

EMEA revenue represented approximately 24% of total net revenue and increased 6% year-over-year, and was up 4% sequentially. APAC revenue represented approximately 10% of total net revenue and decreased 3% year-over-year. It was down 15% sequentially.

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

In the July quarter total operating expenses were $49.7 million, which increased $7.5 million year-over-year. As a percent of total net revenue, operating expenses increased to 76% from 67% in the same quarter last year.

On a year-over-year basis R&D increased 15% and was 18% of total net revenue compared with 16% last year. Sales and marketing increased 22% and was 49% of total net revenue compared with 41% last year. G&A increased 6% and was 10% of total net revenue compared with 9% last year.

In the quarter total operating expenses increased 11% compared with the prior quarter. On a quarter-over-quarter basis R&D increased 13%, sales and marketing increased 12% and G&A increased 7%. These increases were primarily related to higher personal expenses.

As a percent of total net revenue, operating expenses increased to 76% in the July quarter from 73% in the prior quarter. At the end of July our worldwide headcount was 691 employees.

Operating margin for the July quarter was 3% compared with 12.3% in the same quarter last year and 6.4% in the prior quarter. Net income in the quarter was $1.8 million or $0.03 per share. This compares to net income of $7.9 million or $0.14 per share in the same quarter last year. In the prior quarter, net income was $3.8 million or $0.07 per share.

As of July 31, 2014 we had $270 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $4.3 million in the quarter. Total net deferred revenue increased by $17.9 million when compared to the same quarter last year and was up $5.7 million compared with the prior quarter. Deferred revenue primarily represents support contracts that amortize over the contract period and to a smaller extent channel inventory DNS Firewall and ADP subscriptions.

In closing, we are very pleased with the performance in the July quarter and remain optimistic as we enter fiscal 2015. The acceleration of product revenue growth continues to be a major financial goal for the upcoming fiscal year and I believe the drivers are in place to achieve this goal.

With that said, given the challenges we experience in fiscal 2014, we think it is important for us to remain cautious in terms of our financial outlook at this time. As such, today we won’t be providing guidance for the October quarter. As a remainder, these numbers are all non-GAAP which excludes stock base compensation expenses, amortization of intangibles and acquisition-related expenses.

For the October quarter we expect revenue to be in the range of $63 million to $65 million. We expect gross margin to be between 78% and 79%. We anticipate operating margin to be between 1% to 3% and we expect EPS to be between $0.01 to $0.03, using 57.9 million shares.

With that, I would like to turn the call back over to Jane.

Jane Underwood

Thank you, Remo. That concludes today prepared remarks. Operator we would now like to open up the call to analysts’ questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And we’ll begin it with the line of Paul Silverstein with Cowen & Company. Please go ahead. Mr. Silverstein your line is open.

Paul Silverstein - Cowen & Company

Can you hear me guys?

Robert Thomas

Yes, we can.

Paul Silverstein - Cowen & Company

Thanks. Robert and Remo, as you look at the business, in harkening back to the competitive landscape in your comments from last quarter regarding Microsoft where perhaps myself and others might have misinterpreted when you said. I just want an update, are you seeing with the new IPM product, has there been any change whatsoever either in terms of delayed deals or competitive losses, and can you give us a little bit more insight in terms of competitive landscape? Has your win rate changed for better or worse or does it remains constant? Is BlueCat winning more deals from your vantage point? Any incremental insight you can share with us on the competitive landscape, and then I’ve got a question on market opportunity.

Robert Thomas

No, no real change on competitive landscape at all. No additional increased pressure from Microsoft at all. As I said last quarter, we’ve been competing against Microsoft for years and years and years, and we are used to doing it. Their product is about a 1.0 version and ours is a 6.8 version, so we are well ahead of them on functionality and many other things. Of course, they have improved a little bit with some functionality over time, but nothing to speak of in change of competitive activity from Microsoft BlueCat or any of the others.

Paul Silverstein - Cowen & Company

I trust you would also argue that the greater price erosion hasn’t changed.

Robert Thomas

I’m sorry Paul, say again.

Paul Silverstein - Cowen & Company

The rate of price erosion, no change.

Robert Thomas

No, no change. If you look at our gross margins for the quarter. They held at about as as high as last quarter. Right now, I think they are (inaudible) higher than last quarter, so no additional discounting, no change in the gross margin picture other than slightly up from Q3.

Paul Silverstein - Cowen & Company

Alright, and I know you’ve attributed your issues largely to taking your eye off the ball in execution, but if we look at the market opportunity and I assume the best metrics would be your pipeline of activity, the number of opportunities that are out there, etcetera. Can you give us any incremental insight in terms of what you are seeing from a market opportunity perspective?

Robert Thomas

Yes, we don’t see any change in the market opportunity. We have a very, very large addressable market in the billions of dollars, $6 billion or $7 billion. We did a very in-depth analysis of their customer base when we missed in the January quarter, and we looked at where existing customers sat, what kind of customers we had, what size they were, what kind of yield we were getting from different types of customers, and the short answer in all that analysis is that the customers who sit at the very top of the pyramid.

So the companies of 10,000 employees or more were giving us a much greater return over total life booking than customers below that. It was a multiple of what the customers below that were doing, and even in that segment of greater than 10,000 employees or more, we are about 10% penetrated, maybe a bit less than 10% penetrated.

So, we have plenty of opportunity in that area. We did change our demand creation and focus as a result of that exercise to focus mainly on the larger accounts rather than a much more broad based approach to everyone, and over the last couple of quarters Q3 and Q4, we have seen an increase in pipeline build, I think as a result of those activities and to focus on new name accounts as well.

Paul Silverstein - Cowen & Company

And one last question and I’ll pass it on. And if you already said this, my apologies, but consistent with the increase in the number of large $1 million deals, do you also see the increase in your average deal size?

Remo Canessa

We saw a slight increase on average deal size during the quarter and also more deals.

Paul Silverstein - Cowen & Company

Thanks Remo. I’ll pass it on to give others a chance. Thank you.

Robert Thomas

Thanks Paul.

Operator

Great. And our next question will come from the line of Erik Suppiger with JMP. Please go ahead.

Erik Suppiger - JMP Securities

Yes, congratulations on a solid quarter.

Robert Thomas

Thanks Erick.

Erik Suppiger - JMP Securities

First off, you had noted over 200 accounts was your best new account quarter in seven quarters. I think you’ve been saying that it’s been in the range of 200 for some time. Do you think that that number is going to start stepping up from 200?

Robert Thomas

I think because of the focus we have had on new name demand generation since January of this year, so in about seven or eight months now, we are much more focused on new name activity. We will see that start to happen.

I don’t know that – it’s still early days yet; that’s only eight months ago, and our sales cycle is about nine months as you know. We have seen though I would say. I just came back from all their quarterly business reviews, and a lot of the territories were reporting not only an increase in interest in security, but a resultant reduction in sales cycle as a result of security budgets being available and so on. So not enough yet to say there’s a trend, but we have closed some newer accounts in a shorter space of time because of that.

So I think we will start to see it going up. I think probably another quarter or two before we see a predictable trend upwards, but as I said, this quarter was very, very, very healthy. It was quite a bit higher than 200 new accounts and quite an improvement on the previous quarter.

Erik Suppiger - JMP Securities

Okay. And then you had talked about 20 cloud transactions. Can you talk about the size of those cloud transactions or opportunities and how does that 20 compare to where you were just a quarter or two ago?

Robert Thomas

I don’t know the size of those transactions. I don’t have numbers in front of me to say what the average deal size was and so on, and I don’t think we’ve actually tracked the average deal size of cloud transactions yet. I think we will start to do that in the future.

If you go back a couple of quarters, I would say in Q3 and Q2 we probably had zero to one cloud transaction. We have seen a lot of activity on the private cloud front and we are starting to see many organization start to take the private cloud test Dell staff have been doing out of the lab and start implementing it in production. We have a number of cloud transactions also in the pipeline for this quarter, so we are starting to see some reasonable movement in that area.

Erik Suppiger - JMP Securities

And would you include – do you see opportunities for Internet of things type deals or would that be part of that 20-cloud transaction that you were looking at?

Robert Thomas

It depends what Internet of things means and what kind of functionality a customer needs to handle that. I think it might still be a bit early yet, but of course we have a lot of devices connected to networks today that are not computing devices, cameras and door locks and those kind of things and have been connected for quite a while. So there is still a lot of IP address requirement and you know the States actually ran out of IPv4 addresses about two or three months ago, which is about six month or seven month ahead of what was predicted.

So as more things get connected, we might start to see a bit more IPv6 activity pick up in the next 12 months as well. But at the moment the Internet of things business is not related to the cloud business and over time that will become merged I suppose, but today it’s not for us.

Erik Suppiger - JMP Securities

And last question, your services growth has been good for while. Is professional services becoming a bigger contributor there or is that pretty distinctly warranty and support?

Robert Thomas

Primarily warranty where subscription is starting to pick up a little bit on a quarter-to-quarter basis, professional services are pretty constant in the 2 million range each quarter.

Erik Suppiger - JMP Securities

Very good. Thank you very much.

Operator

We’ll go to the line of Jason Ader with William Blair. Please go ahead.

Jason Ader - William Blair & Company

Yes, thank you. Hi guys, a couple of quick questions. First, could you give us an update on the CEO search, maybe in particular some timing when you think them might be completed in what type of person you are looking for.

And then secondly, Robert you talked last quarter about the Infoblox products not being a priority or at least in some cases not being a priority for customers. So I was just wondering what do you think has changed from the April quarter to the July quarter to drive some of your results?

Robert Thomas

Sure. The CEO search is going well. We have interviewed a number of candidates. We are through the stage where we are identifying people and seeing whether there was interest into the stage of actually interviewing candidate as well. We’ve interviewed quite a few candidates. I’d say, of the people we’ve interviewed there are one or two of significant interest to us and we will be moving forward with further discussions with them.

I think from a timing point of view given the positions that people hold, that we are looking to about the job, its unlikely anyone can give a couple of weeks and just move from one job to the next. Clearly people will want to gracefully move out of any existing job into a new job. So I would think over the next couple of month we will clearly finalize on one or two short listed candidate after we have been through another round of interviews and so on and I would expect another month or two after that we would see someone on board.

On the Infoblox not being a priority subject, I said last quarter that while we were winning deals, sometimes that deal would get shifted to the next quarter, because human resources and so on were on other projects and they just didn’t have the bandwidth and people to follow up. So sometimes we were seeing our deals get delayed although we had won it and pushed to a different quarter.

We didn’t really see any of that this quarter and I think as we focus more on security and cloud opportunities where there is a compelling need and there are projects in existence to do things, as that becomes a greater of focus for us and we speak more business in that area, there’s likely to be less of that push because of lack of resources to implement absolutely.

Jason Ader - William Blair & Company

Thank you.

Operator

And next we will go to the line of Matt Lebo (ph) at Piper Jaffray. Please go ahead.

Matt Lebo - Piper Jaffray

Good afternoon. Just very briefly; looking at the guidance, it looks like the mid point of gross margin guidance is about 100 basis points lower and knowing that one of your main priorities is to try and drive or reaccelerate the product sales, does this guidance indicate that we are going to see that next quarter? And then my follow up is just, could you give a little color on some of the softness that you are seeing in APAC. Thank you.

Remo Canessa

Regarding the guidance on the gross margin that’s consistent with what we’ve done on a quarterly basis for several quarters. So I would hope to be able to beat that, but again that’s consistent with that we’ve done. On an APAC basis the bookings were strong, were up on a quarter-to-quarter basis. Its basically a timing of revenue recognition.

Matt Lebo - Piper Jaffray

Okay, great. Thank you very much.

Operator

Next we’ll go to the line of Amitabh Passi with UBS. Please go ahead.

Amitabh Passi - UBS

Hi, thank you. Robert, last quarter you talked about seeing the impact of certain details slipping out. I just wanted to get an update; did most of those close in the July quarter to that and how much does that potentially help sales coming above your expectations?

Robert Thomas

In the July quarter we did see a couple of deals that have been pushed out from other quarters, so that was of some help. We closed about six details. Like we said they are in the seven figure and above. We have a healthy pipeline of similar type of details for this quarter as well. So I wouldn’t say that that was a one of blip with a couple of those deals happening and helping the quarter. We have a good pipeline too.

Amitabh Passi - UBS

Got it. And then Remo, OpEx definitely running at fairly elevated levels. Just wondering how long does this persist? How should we think about OpEx over the next few quarters?

Remo Canessa

Yes, we planned to build hire aggressively. Our plans for the quarter are to hire 30-plus people in Q1. As we go forward the increase in headcount is probably going to decrease to a smaller number, but for the next few quarters I would expect that again it will come down as revenues go up on a percentage basis, but for the next few quarters that does some significant hiring.

Amitabh Passi - UBS

Okay, and then just one final question, can you give us any help in terms of how we should be thinking about the potential growth in your TAM in your addressable market. Things have been pretty volatile the last few quarters. I think street has you up about 5% to 6% in fiscal ’15. I know you are not guidance for the fiscal year, but just any help in terms of how we can think about the growth in your potential markets.

Remo Canessa

We still feel that the market potential that we have, that Infoblox is significant. Again, we are not giving any guidance out for the full year, because of what occurred last year. However when we take a look at the TAM, every way we look at it, we look at the increased opportunity and its related to the security, which could increase the purchase of DDI products, as well as the private clouds and hybrid clouds coming more mainstream. We still feel that the market potential, TAM is very, very large for Infoblox.

Robert Thomas

Yes, and I wouldn’t attribute the last couple of quarters, the weakness in our business to anything related to TAM at all. It was operational execution on our part and I think we are through that in trying to see the signs of improvement.

Of course we still need to run a few more quarters, because demand generation activities generate prospect to close six, nine, 12 months beyond when you generate them and they focus on new account that take a while to kick in. But I wouldn’t attribute our weakness in the last couple of quarters to anything to do with the opportunity, more about our execution.

Amitabh Passi - UBS

Do you have a number for us in terms of what security was as a percent of sales or dollars this quarter?

Remo Canessa

Last quarter I’ve indicated that it was between 2.5% and 3%, but this quarter it was up 4.5% to 5%.

Amitabh Passi - UBS

Okay. Thank you.

Operator

We will go to the line of Kent Schofield with Goldman Sachs. Please go ahead.

Kent Schofield - Goldman Sachs

Thank you. (Inaudible) I think joined in April. When did he actually get here to California and when you talk about being kind of further along in terms of some of the execution challenges you’ve seen on the sales side of things. Can you just help us to understand what he’s been able to accomplish and kind of what’s on deck and how long that should kind of take to play out.

Robert Thomas

He joint in April as you said, and he’s been all over the place. Actually he spent a lot of time in the U.S. from April and in EMEA and in APAC and all the theaters of operations. So he’s been with the sales guys working full booked ever since that. He spends a lot of time on the road meeting customers and meeting accounts as well.

We’ve made a number of changes to sales commissions plans and to the sales organization in terms of where we focus and what we do since he’s arrived and I would say most of those changes have been completed. Our focus on major accounts for example and the way we approached them and a bit of planning and discipline around large deal management is in place and has been working for over a quarter or so, rewarding our sales guys more on the product they sell rather than report and maintenance, renewal and so on has been in place for a quarter of so. We did that in Q4 in the beginning of Q4.

At the beginning of this fiscal year we changed the commission plan again a little bit to focus again more on new accounts and more on product rather than maintenance, renewals and so on and such. The sales forces had over a quarter now to start to adapt to those changes in focus and the changes in commission plan and I think some of that is reflected in our new account acquisition this quarter, just a little bit, because it does take time to work its way through the system. Over the next two or three quarters hopefully it will get better and pipeline creation, pipeline generation in the larger deals has gone up in Q4 and I think we’ll see increases in the Q1 again.

So some of those changes have been in effect per quarter and we are stating to see some effect from them. It will be another two or three quarters before we start to get one significant advantage coming up.

Kent Schofield - Goldman Sachs

Great, and then you discussed a little bit the competitive environment earlier. I was wondering in particular with Alcatel-Lucent, given the change in ownership. I know its still little bit early days, but its been a few months now. Have you seen any change in that opportunity either good or bad?

Robert Thomas

We continue to win deals from them, QIP deals from Alcatel-Lucent and we won a few last quarter as well. We haven’t seen any kind of fee change in that yet. I think the deal just cleared all the regulatory hurdles in the last three or four weeks. I don’t think its still closed, but I think they are through that. And of course we are attempting to exploit that by talking to some of the larger customers about the potential and stability of the product and lack of development going forward and so on.

I don’t think we will see a larger opportunity for a little while until the deal actually closes and things change for QIP customers. But there is definitely an opportunity over the next three or four or five or six quarters to take advantage of it I think.

Kent Schofield - Goldman Sachs

Thank you Robert.

Robert Thomas

Pleasure.

Operator

We will go now to the line of Vijay Bhagavath with Deutsche Bank. Please go ahead.

Vijay Bhagavath - Deutsche Bank

Yes, thanks. Yes, hi Robert, hi Remo. Two questions if I may. The first question is around the Alcatel-Lucent QIP. You know refresh opportunity, do you view that as one of the key catalysts to product revenue rebound or what in your view could be some of the catalyst for product revenue reacceleration. Thanks.

Robert Thomas

Well, I think it will as I suggested a couple of moments ago. I don’t think we started to see any panic in the QIP base yet or any mass perfection as a result of the change in ownership. It just cleared all the regulatory hurdles in the last few weeks and the deal hasn’t closed yet, but I doubt it will soon. And I think while we have been trying to exploit that and talking to QIP customers about the uncertainty, once the whole deal is done and over and finished, I think we would hope to see some momentum for people to move away, so I think that’s a little bit in the future.

There’s no doubt in my mind that rebound of product revenue versus support and service revenue will be largely impacted by the opportunity cloud. We closed about 20 could related deals last quarter. We have quite a few in the pipeline for this quarter and we saw a significant increase in our security opportunity as well, and the security broadly across DNS.

Not a point product like DNS Firewall, but securing the entire DNS infrastructure. But we have a broader range of products now to address, a much broader issue around the insecurity of DNS and I think those two things, together with our focus on new accounts will be the things that drive produce revenue acceleration.

Vijay Bhagavath - Deutsche Bank

Yes, thanks Robert and then a quick follow-on if I may. Its around CEO search. What timing do you have in mind, would it be by year-end and then the other question is around the profile of the person. Would you have a person who’d be more focused on the newer opportunity such as security or would you have a person focused more on the core business. I’d like to understand what type of a profile or a person are you looking out as you do the CEO search. Thanks.

Robert Thomas

We are well into the search. We are through the phase of identifying potential candidates and so on and we are in to the phase of now interviewing people that we have identified as potential candidates and who are interested in the job, and we’ve interviewed quite a few people.

There are one or two people that we have identified in that process that we are going to take to the next stage, because we think they are right fit for us and they like the company as well. I think its still going to take us another two or three months or so before we get through final short listing and the whole reference checking process and then whoever we offer the job to, extracting themselves from their current position, but I think its progressing at the right pace.

The profile is really, we are interested in someone who understands the way the world is going and in our view the way the world is going is much more towards software than hardware, that the old paradigm of large chunks of iron running the networking with custom basic in them. Very expensive boxes that people would spend a lot of money on and use 20% of the functionality is going to change over the next three or four, five years to a much more software oriented world and that’s the world we can play in very well.

So we want someone who understands the way that’s changing for the working organizations and hopefully currently is in a job that is taking advantage of that. So working in an organizing where cloud is important, virtualization is important and the progression towards software define and sync; whatever they are with their software defined network, software defined data centers, so someone who understands what is involved.

And probably someone who has had a CEO gig somewhere else before. It may not have necessarily be in a public company, it may have been in a private company, that got acquired by a public company, but someone who has been in a business that has been rapid growth and has been in the CEO role in a business like that, because it was that software oriented vision.

Vijay Bhagavath - Deutsche Bank

Thanks Robert. Good luck.

Robert Thomas

Thank you.

Operator

Thank you. And our final question will come from the like of Jeremy David with Citigroup. Please go ahead.

Jeremy David – Citigroup

Hi good afternoon. Congratulations on a strong finish to the fiscal year.

Robert Thomas

Thanks Jeremy.

Jeremy David – Citigroup

Two questions; first on the guidance for the revenue for fiscal Q1. You are actually guiding revenue to be down sequentially despite the fact that of course rates are getting better, the pipeline is getting better. Are you just being conservative or is there something else happening and if you can elaborate on that, that would be great. Then in have a follow up.

Remo Canessa

We feel comfortable with that based on what occurred last year. We feel comfortable with the guidance we gave based on what we see.

Jeremy David – Citigroup

Okay. My follow-up is on the connect AD initiative, which I think is a big opportunity for potentially suppliers for wireless LAN equipment. That means any more IP addresses, many more devices in schools. Do you think that’s an opportunity for you as well? That there is a play for you in the backend to benefit from connect (inaudible).

Robert Thomas

I think there probably is. Any organization that’s connecting a lot of devices to their network using a lot of IP addresses is going to face the challenges of managing a more complex environment and so I think that does create an opportunity for us. We are very strong in education anyway. We have a very strong education business, mainly at the tertiary level, but sometimes below that. So I think that strength in education and the complexity that’s going to be created in those networks, because so much stuff is being connected to them, does up the mark.

Jeremy David – Citigroup

Again, thank you very much for your answers.

Robert Thomas

Thank you.

Operator

And that was our final question today.

Jane Underwood

Okay great. I would like to thank you for joining us on today's call. A replay will be made available at 800-475-6701 beginning on September 4, 2014 at 4:00 p.m. Pacific and an audio archive will also be available on our website.

Have a great day and we look forward to speaking with you again soon. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T’s executive teleconference service. You may now disconnect.

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