Executives
Jane Underwood – Senior Director of Investor Relations
John E. McNulty – Chairman of the Board, Chief Executive Officer
Daniel P. Ryan – President, Chief Operating Officer
Timothy J. Steinkopf – Chief Financial Officer, Senior Vice President of Operations
Analysts
Rob Owens – Pacific Crest Securities
Rajesh Ghai – Think Equity Partners
Analyst for Sarah Fryer – Goldman Sachs
Eric Suppiger – Signal Hill Group, LLC
Jim Maxa – Dougherty & Company, LLC
Analyst for Todd Raker – Deutsche Bank Securities
Daniel Ives – Friedman, Billings, Ramsey & Co.
Alan Weinfeld – Henley & Company, LLC
Joshua Jabs – Roth Capital Partners, LLC
Secure Computing Corporation (SCUR) Q4 2007 Earnings Call February 4, 2008 4:30 PM ET
Operator
Welcome to the Secure Computing Corporations fourth quarter 2007 result conference call. All participants will be able to listen only until the question and answer session which will follow today’s presentation. (Operator Instructions) Today’s call is being recorded, if you have any objections please disconnect at this time. I will now turn the call over to Ms. Jane Underwood, Senior Director for Investor Relations.
Jane Underwood
Thank you and good afternoon welcome to our fourth quarter 2007 results conference call. On the call with me today is John McNulty our Chairman and Chief Executive Officer, Dan Ryan our President and Chief Operating Officer and Tim Steinkopf our Senior Vice President of Operations and Chief Financial Officer. Before I turn the call over to Tim I’m going to make a cautionary statement regarding forward-looking statements. During the course of this call and the question and answer session following management’s remarks we will make forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements are subject to the Safe Harbor created by these sections. These statements include for example, statements which may incur future results such as anticipated future operating results, metrics and statements that our product will be successful and will be available as planned. Our actual results could differ materially from the forward-looking statements. Factors which could cause actual results to differ include for example, risks related to competition in the security industry, changes in customer requirements, delays in product development and the other factors and risks identified in our press releases and in the documents we filed with the SEC. We do not undertake any obligation to correct or update any forward-looking statements that may become inaccurate.
Now I would like to turn the call over to Tim.
Timothy J. Steinkopf
Good afternoon everyone and thank you for joining us today. My comments for today’s call will focus on what we view as the key financial take aways for the fourth quarter along with our Q1 guidance and outlook for 2008 and 2009. In Q4 billing GAAP and non-GAAP revenue and EPS either met or exceeded the guidance ranges that we previously provided for the quarter. We also generated record cash from operations that allowed us to pay down our debt by $12 million while also paying $1.1 million of interest expense. Q4 billings were a record $82.2 million compared to our guidance range of $76 to $79 million. Non-GAAP revenue was also a record $69.9 million compared to guidance of $67 to $69 million. In Q4 billings for our Gateway security products were approximately 90% of total billing and billings for our identity and access products were approximately 10% of total billing. Domestic billing excluding the US federal government were 45% of total billing and international billings were 40%. Our US Federal team produced another solid quarter as they generated 15% of our Q4 billing consistent with our previous guidance.
In the quarter we closed seven individual transactions greater than $1 million and an additional 131 deals over $100,000, both of which are records. Differed revenue increased by $14.4 million or 9% sequentially which is also a record performance in a non-acquisition impacted quarter. At the end of December the total differed revenue balance was a record $168.2 million. Non-GAAP gross margin was 73.1%, 2.9 percentage points lower than guidance. The short fall in gross margin was primarily due to two large seven figure lower margin transactions. Early in the quarter we were presented with the opportunity to invest in two customer’s global security initiatives one in October and one in November. Given the highly competitive nature of these transactions, coupled with the potential for significant future sales, we decided to discount the two deals in order to capture the business. We believe this impact on margins is an anomaly in the quarter and should not be viewed as a trend going forward. In fact, our relationship with both customers is such that the expectation on future pricing has already been addressed with both customers. Additionally, we will realize cost savings as we move from initial production runs to full production capability and start to sell higher margin add on subscriptions.
Non-GAAP operating income for the quarter was 12% of revenue. Non-GAAP net income for the quarter was $7.2 million or $0.10 per fully diluted share. As a reminder on all of our GAAP and non-GAAP numbers you can refer to the detailed reconciliations included in the press release. In Q4 we generated a record $15.7 million in cash from operations. The company’s cash and restricted cash balance was $12.6 million on December 31st. Currently we have an outstanding balance of $44 million on our term debt.
Looking back on 2007 we would characterize it as the year of very solid financial performance for Secure as we generated $0.72 per fully diluted share in cash from operations and non-GAAP operating income increased 51% year-over-year on a pro forma combined basis. Additionally, on a year-over-year pro forma combined basis billings increased 12%, non-GAAP revenue grew 14%, non-GAAP operating expenses as a percent of non-GAAP revenue decreased from 67% in 2006 to 63% in 2007, non-GAAP operating margins grew from 9% in 2006 to 12% in 2007 and our differed revenue balance increased 38%.
Now I would like to turn to our outlook guidance which is based on current expectations. The following statements are forward-looking and actual results could differ materially. As in prior years we expect to see a sequential decrease in our Q1 billings and revenue due to normal seasonality. For the first quarter 2008 we expect billings to be in the range of $76 million to $79 million. Non-GAAP revenue is expected to be in the range of $67 to $69 million. Non-GAAP gross margin is anticipated to be approximately 75% of non-GAAP revenue. Non-GAAP operating expenses are expected to be in the range of $43 to $44 million. Fully diluted weighted average share count is expected to be approximately 76 million shares. Non-GAAP tax expense which also approximates our actual cash outlay for taxes is expected to be approximately $500 to $800,000 or 8% to 12 of non-GAAP pre-tax income. Interest in other expense is expected to be approximately $1.1 million and our Q1 non-GAAP earnings per share is expected to be approximately $0.07 to $0.09 per fully diluted share. We again expect the breakdown of our product lines in Q1 to be approximately 88 to 90% for enterprise gateway security and approximately 10% to 12% for identity and access products. In Q1 we expect to generate cash from operations in the range of $13 to $15 million. We expect our federal government billings for Q1 to account for 15% to 18% of total billing.
Turning to our outlook for 2008 and 2009 which is consistent with the guidance that we provided at our December investor day event Non-GAAP revenue in 2008 is expected to be approximately $295 million. We expect gross margins to be in the range of 75 to 76% and non-GAAP EPS is expected to be in the range of $0.45 to $0.47 per fully diluted share. In 2009 we expect non-GAAP revenue growth to be approximately 15% and non-GAAP EPS growth to be in the range of 45% to 50%.
In closing I’d like to emphasize the following points, first in today’s market we view billings and cash generated from operations as two key metrics, specific to these metrics our financial results for Q4 produced record billing up 11% sequentially and a record cash generated from operations. For the full year 2007 we generated $0.72 per fully diluted share in cash from operations and finally while we will continue to closely monitor the impact of macroeconomic environment on our business, at this time we have not seen deterioration in our pipeline or our forecast.
At this time I’ll turn the call over to John.
John E. McNulty
Good afternoon. Q4 saw solid sales performance in North America, Europe, Asia Pac and our federal operations which allowed us to increase the billing by 11% sequentially. Not only did our products perform as expected but equally important we exited 2007 with a robust pipeline. A year ago we said that we would be the leader in enterprise gateway security market, today we are delivering on that promise. According to Gartner, Secure is a leader in the web and messaging gateway magic quadrants and a challenger in Gartner’s network gateway magic quadrant. A recent IDC report names Secure as the worldwide market share leader in web security appliances. The only company that comes anywhere close to offering the breadth of our Gateway security product portfolio is Cisco. In fact Gartner group recently told us and I quote, “Secure has the best of breed security line-up it’s as broad as Cisco’s.”
Today company’s face an enormous challenge in protecting their information assets. While web and email are essential for commercial success, they are also the most commonly used attack points for fraud and business disruption. Secure is the only company with real time protection technology’s for anti-spam, anti-malware and web reputation to effectively combat these threats. In addition, by owning all three we have found that each of them gains distinct market advantage by the awareness and information available from the other two. Using these technology’s we are delivering a best in class portfolio of security products today and rapidly advancing our products to accelerate future growth. Going forward one of the keys to Secure’s success is the opportunity to cross sell and up sale our comprehensive product portfolio to our 22,000 plus customers worldwide. While we are pleased with the momentum of cross selling activity that we have experienced, we believe that we can do better and recently introduced new incentives to our sales force which should accelerate further growth.
In Q4 a few examples of cross selling and up selling successes include, first an international telecommunications company, a TSP customer that we acquired through the CyberGuard transaction purchased Sidewinder and Webwasher as part of their internet infrastructure expansion plan. This was a significant win for our [Amia] team against two major competitors. Second, the technology leader specializing in defense and homeland security was experiencing Web 2.0 issues as 40% of all virus attacks were making it to their client desk top. The customers challenge was to find a solution that would decrease latency and mitigate malware threats. After reviewing alternatives in the market place the customer purchased Webwasher, SmartFilter and Content Reporter and solved their problem. Third, Whirlpool Corporation a customer that was running SmartFilter on NetCash purchased 23 Webwasher appliances to be deployed in eight countries. This was a highly competitive win against a major competitor. And fourth, the leading financial services company, an IronMail, SmartFilter and SafeWord customer decided that strong security at the gateway was a critical component to their network. The customer chose Webwasher based on its robust security features resulting in the displacement of a major competitor.
These customer success stories are just a glimpse of why we believe we are very well positioned from a competitive stand point and are encouraged by the worldwide demand for our products. Given the threat environment and the strength of our product portfolio we are optimistic that we can continue to deliver solid growth and profitability going forward. Now I’d like to turn the call over to Dan.
Daniel P. Ryan
Good afternoon. There are three areas that we are emphasizing going into 2008: first, having the best talent in the industry; second, continuing to deliver leadership in innovation and gateway security; and third increasing our sales productivity. First, we have added talent to supplement the strong team already in place at Secure. As you know Glenn Cross joined the company as our new senior vice president of worldwide sales. Glenn brings deep security industry knowledge, a highly successful track record in sales and is a great addition to the team. In the last two months we also hired a number of key executives including a vice president of business development, a VP general manager for our web product line, a VP general manager for our messaging product line and a VP of product marketing.
Second, with regard to product leadership as John said the overwhelming majority of the attacks we believe the number is 90% plus, currently occur via web and email. Specifically these blended threats translate to web born malware, email spam attack and attacks on web paging applications. With WebWasher, IronMail and the Sidewinder application firewall Secure can uniquely protect our customers from all of these problem threats as well as other application level attacks. It is our intention to extend our lead in these areas in 2008. And last, as part of our strategy to increase sales productivity we are investing heavily in a small number of platinum and gold partners worldwide and providing enhanced channel and marketing support, lead generation and extensive product training. Additionally, we are focusing on marketing and selling solutions. For example in Q4 we introduced Secure SWAT initiative that highlights how Secure is taking action against sophisticated new blended web tool threats. And finally we have more than 22,000 customers relatively few of which own multiple secure products. This is perhaps our largest opportunity and we have set compensation plans and sales and marketing strategies to realize the potential in 2008.
In summary our organization, approximately 950 employees strong with over 300 engineers and 400 sales and marketing professionals is completely dedicated to leading the internet applications security market at the gateway. We are among the leaders in ever gateway segment that we address and offer a suite of products that is unmatched in protecting customers from the key threats of the day. We believe that we have the right team and strategy in place to deliver on the opportunity in 2008. Operator we’d now like to open the call to questions from sale side analyst.
Question-and-Answer Session
Operator
We will begin the formal question and answer session. For sale side analysts who cover the company please limit your questions to one per person. (Operator Instructions) Our first question comes from Rob Owens with Pacific Crest. Your line is open.
Rob Owens – Pacific Crest Securities
Could you address the sales and marketing costs in the quarter? I think as a percentage of revenue it went up and given the revenue strength, I would have expected a little more leverage, is that a function of how you pay out on the bookings or maybe you could just walk us through that?
Timothy J. Steinkopf
The sales and marketing expenses come in right where expected. You know, nothing is jumping out in my initial view of it so I will take a look at that off line and get back to you.
Rob Owens – Pacific Crest Securities
Okay and then if you could talk a little bit about the big deals, impressive numbers there. Are these on the direct side or are these more channel driven right now?
Timothy J. Steinkopf
We’re doing 90% of the deals in the quarter were through the channel distribution, platinum, gold, silver and that mix was similar or the same for the large deals as well. In fact, of the seven deals over a million dollars, I’ve got them listed here, all were indirect and I’m confident that of the 131 over 100 grand that 80% to 90% of those were indirect as well.
Operator
The next question comes from Jonathon Ruykhaver with Think Equity Partners.
Rajesh Ghai – Think Equity Partners
I had a question a on the competitive impairment that you’re facing with regard to Cisco, are you seeing aggressive pricing from like Cisco that might be impacting your margins given that they might be experiencing weaknesses in businesses other than security?.
Daniel P. Ryan
No. I think Cisco’s always been an aggressive tough competitor and they continue to do so, but there was absolutely nothing in the quarter that would indicate any thing other than a normal environment.
Rajesh Ghai – Think Equity Partners
Even in those two large deals where?
Daniel P. Ryan
Even in the two large deals. Typically in that type of deals that we were dealing with there you will get very aggressive competition because of the potential on follow on orders.
Analyst for Jonathon Ruykhaver – Think Equity Partners
Okay. And one more question, with this PCI compliance deadline coming up on June 30th, are you going to see any, are you anticipating an increase in activity for your application firewall products because of that and is that reflected in the guidance?
Daniel P. Ryan
We are very aggressively marketing in to the PCI opportunity because we believe we have an absolutely superb best of breed solution for PCI DSS compliance. So and that is in our pipeline today as we’re in five months from the finalization date. So and we’ve been running seminars, series of seminars and white papers etc. There’s quite a bit of information on our web site on PCI DSS so I would invite anyone interested to hit the web site and download the white papers or see when a seminar is available in their local marketplace.
Analyst for Jonathon Ruykhaver – Think Equity Partners
And is that reflected in your Q1 billings guidance?
Daniel P. Ryan
Certainly, yes.
Operator
Our next question comes from Sarah Fryer with Goldman Sachs.
Analyst for Sarah Fryer – Goldman Sachs
President Bush actually just sent a defense budget to congress today and it called for a 7.5% increase in spending in FY09 over FY08 which I think was a little bit lower than some had expected. So what type of impact do you think this will have on your business over the next couple of years?
Daniel P. Ryan
Well you know at this point certainly we don’t have any feedback from our federal team of what was done today. You know, we’ve been somewhat immune from some of the issues in the overall federal market spending arena because we are mission critical, both of the largest components of our federal business, the DOD and the intelligence community are really mission critical and I think even in an election year the politicians are probably going to be very reluctant to cut spending in those areas.
Analyst for Sarah Fryer – Goldman Sachs
Great and one follow-up, it looks like the tax rate this quarter was a little bit lower than normal, do you have any additional color there?
Timothy J. Steinkopf
Before I answer the tax question I’m going to answer Rob Owens question on sales and marketing for the benefit of everyone on the call, I was looking at it while John was answering those other questions, so on sales and marketing there’s two things Rob. Number one it is just the accumulative or the impact of being Q4 some of the full year incentive plans etc, kick in in the fourth quarter. But number two, we did do about 20% to 25% of the increase from Q3 to Q4, we did do a small re-org in sales a little bit in marketing but it was mostly sales but it was on the sales and marketing line and there is just shy of about $600,000 of costs related to that re-org on that line. So that answers that question.
Fred on the tax rate, you know through the first three quarters of the year we’re always estimating what our full year expenses look like and we typically try to estimate a little bit on the conservative side. What you are seeing at year end and hence showing in the fourth quarter is the benefit of now truing up everything for the full year and so the fourth quarter came in a little bit less than the first three quarters. Again, a function of us being conservative on the tax line through the first three quarters of the year.
Operator
Next question comes from Eric Suppiger with Signal Hill.
Eric Suppiger – Signal Hill Group, LLC
First of I’m sorry I got on a little late, what was the government contribution?
Daniel P. Ryan
It was 15% of actual billing but there number is actually 16% of the mid point of guidance so they’re right in the expected range for their performance.
Eric Suppiger – Signal Hill Group, LLC
And can you talk, I know you don’t want to break it out, but can you talk qualitative what you saw between Webwasher, IronMail and SideWinder?
Daniel P. Ryan
We did have a strong quarter in gateway and about 90% of the activity for the quarter was gateway, approximately 10% identity and access management. So gateway is network, web and mail and we saw good strength across all three product lines.
Eric Suppiger – Signal Hill Group, LLC
Any ones in particular? Webwasher we saw good results out of Websense, was that sector notable?
Daniel P. Ryan
Presently we are seeing you know, good activity in web so we would echo that. We are also seeing good activity in mail and I think that would be as expected you know, the mail, spam, the threat factor coming from the payload of mail is out there with good experience. You know the industry pundits would probably put web and mail first and second with network third although when you look at Sidewinder and it’s position in the UTM niche and then at its focus on web application. That’s what really driving and PCI as well, that’s what really driving the momentum and access.
Eric Suppiger – Signal Hill Group, LLC
Okay and then from the sound of it it doesn’t sound like your seeing much concern from an economic perspective. Any comments just kind of what your visibility is in terms of the broader economy and how that might impact?
Timothy J. Steinkopf
You know certainly we have our eyes very wide open relative to the broader economy but as we mentioned in the prepared remarks, we have not seen any impact in our business and we entered the year with a robust pipeline. So no, I think security has reached a point where the IT community knows they can’t ignore it and they have to spend on it as they implement Web2.0. And if you think about Web2.0 type applications they’ll typically provide a reduced costs for the business but that’s of no value at all if it’s not secure. So I think security is a little bit immune to this downturn.
Operator
The next question comes from Joe Maxa with Dougherty & Company.
Jim Maxa – Dougherty & Company, LLC
Was your organic growth greater, is that equal to your overall growth rate from the quarter? Was there any impact from acquisitions? I think that was all done though?
Daniel P. Ryan
No, not at all, that’s all organic apples-to-apples, pro forma combined basis, all the numbers we gave.
Jim Maxa – Dougherty & Company, LLC
That’s what I was thinking. Thank you. What was your percent of revenue from your OEM’s in the quarter?
Daniel P. Ryan
Only 5% Joe.
Jim Maxa – Dougherty & Company, LLC
5%, so it came down a little bit. And lastly, on your seven figure deals, are you starting to see, or are they a combination of products? Or are you starting to see more trend to be more combination of products.
Daniel P. Ryan
The trend is clearly more combination of products in the larger deals. Again, think of the blended threat environment out there, it’s typically web mail and application and so we’ve got an ideal compliment to that.
Jim Maxa – Dougherty & Company, LLC
So typically are all your deals of this size with several components?
Daniel P. Ryan
I would say one to two. So no not I guess your definition of typical, but I’m going to say if we had seven, I’m looking at them here and I believe two of them were multi products. The other five were single product families.
Operator
Our next question comes from Todd Raker with Deutsche Bank Securities.
Analyst for Todd Raker – Deutsche Bank Securities
First question for you, if you look at those two large deals, A) can you quantify just how large they were? And two, you alluded to you’ve already had some pricing conversations post deal win with those customers. Can you give us a little more insight to what those are and is there more business on the way with those customers?
Daniel P. Ryan
Well the two of them added up to about $7 million, the two transactions. The way we evaluate those, the situation looking at it when you get into these competitive environments is is it a good business decision to go a little deeper in your discount to capture the initial business and will there be follow on business and in each case the probability of follow on business is I think 99.99%. It absolutely has to occur unless they stop the project completely and I think both situations they are not projects that are going to be stopped. Additionally, there’s some technology that was pre-production run involved. We’re going to full production run and that will take some cost dollars out of it upping the margin. Each of the technologies in each of the deals has the opportunity to add subscription type upgrades onto the base products that were sold. So we clearly are going to improve margins over all in that. So, I think the answer is absolutely yes, there’s is a great opportunity to improve those margins going forward and we will improve them going forward.
Analyst for Todd Raker – Deutsche Bank Securities
And are there any more of these types of deals either from magnitude or type that are in the kind of near term pipeline right now?
Timothy J. Steinkopf
So we’ve actually looked at the pipeline, we always forecast out the pipeline, we do forecast of revenues and margin. You know obviously you’re looking into the future but at this time for the first quarter the answer is no. We don’t appear to have anything along this line. These are two kind of unique situations. You know one kind of came up in October and the follow on opportunity on that particular program could be 10 to 20 times business potentially. The other one that came up in November, they’ve clearly indicated that three to four times additional business in the near future, the next year or so. But again relative to looking at the Q1 pipeline at this time it does not appear that there is anything of this magnitude in the same type of situation.
Analyst for Todd Raker – Deutsche Bank Securities
Okay and Tim if I looked at the mix between current and long term differed long term’s clearly grown very nicely here this past year I assume that’s because customers lock up for longer term contracts. As you look into 2008 I guess can you give us a sense for what you’re expecting in your guidance as far as more customers locking up long term or is there any metrics you can give us around that particular you know on contract length or what percent of customers are on multi year contracts?
Timothy J. Steinkopf
So if you look at the average on the balance sheet it’s not a perfect number but I think it’s about two fifths long term and about three fifths current and what I would say is you’re dead on. The reason the long term has grown a little bit faster is because customers are signing up for two and three year types of commitments. So they’re really, you know showing a vote of confidence in Secure’s technology, Secure’s teams, Secure’s support, the road maps etc. I think if we had predicted at the beginning of the year we would have predicted a slightly lower rate of longer term contracts. So the amount that we have booked is ahead of expectations and If I were going to look into 2008 I probably again would have that more conservative view that it might be at a little lower pace. Just because I think mostly just because looking at if from a conservative nature, but there will be you know, again I think it will be at the same rate or slightly lower in 08 when compared to 07 as far the booking of longer terms things.
Operator
Our next question comes from Daniel Ives with Friedman Billings.
Daniel Ives – Friedman, Billings, Ramsey & Co.
What do you think going in the financial vertical specifically are you guys seeing that there’s been [inaudible] across the board in security? And no ones really seen it yet, I mean, just based on your guys that you’ve been through some cycles, ups and downs, what do you thinks happening that’s having this vertical kind of hold up on the enterprise? Thanks.
John E. McNulty
You know I think we haven’t seen it and I think I would attribute that largely to the fact that you can’t ignore security today and the kinds of products that we have are addressing the threats that the particularly the financial community has to address. I don’t know Dan do you want to.
Daniel P. Ryan
No I think that’s the case. I think you know now what we’ve been telling you is that the primary threats are web and mail, web being malware as well as attacking web applications. That’s the problem we solve and that’s something that nobody can get around right now and I think that that’s why we are not seeing maybe a detoriation in our forecast at this time in any vertical.
Operator
Our next question comes from Alan Weinfeld with Henley and Company.
Alan Weinfeld – Henley & Company, LLC
I was wondering you talked about you know Webwasher selling it to some of your better accounts and some of your other new products that you either acquired or upgraded, the new Sidewinder that’s come out, how well is that selling into your huge kind of sort of base either domestic going international or the Webwasher product which was mostly all international selling into the US accounts in the quarter and looking into the pipeline in 2008?
Timothy J. Steinkopf
Allen you specifically asked about Sidewinder Version 7 and currently I can give you kind of a macro view of that. About two thirds of the shipping version for Sidewinder in the quarter, so today going forward is Version 7, so we have great adoption of Version 7 but the balance is shifting from version 6.X. So again that’s ramped in the last, just since April from 0 up to two thirds of the product going out is Version 7. So the adoption, the vote of confidence, the acceptation of that version, the vote of confidence and the road map etc, has been as expected which is a very high or even better. Then on Webwasher, now you asked specifically about Webwasher into the US, because Webwasher obviously is a technology coming out of Paderborn, Germany. Again excellent, we’ve got great pipeline activity in all US regions for Webwasher. I think Dan wants to maybe add on a few comments.
Daniel P. Ryan
I think that that’s accurate Tim. I think that Webwasher probably is one of the easier products for us to cross sell into existing accounts whether those are SmartFilter running on somebody else’s gateway, or whether it’s a messaging mail account or whether it’s Sidewinder account, Webwasher is probably the greenest field opportunity and I think we find it maybe the easiest to cross sell into other accounts.
John E. McNulty
I mentioned the whirlpool business that we captured in the quarter was 23 NetCash appliances that were running SmartFilter being replaced with Webwasher and it’s a natural way to go and it addresses the malware being downloaded from the web with the scanning capabilities and pro-active defenses of Webwasher.
Daniel P. Ryan
As you’ve all seen I’m sure the AV test lab reports on our malware capability being typically number one in the world by a substantial margin.
Alan Weinfeld – Henley & Company, LLC
So have you seen any early Webwasher, you know take away business of sort of control customers being up in the air? Obviously we saw Websense keeping their share of them in the quarter?
Daniel P. Fair
Sure I think we’ve seen a lot of take away business. We talk a lot about being the traditional web gateway competitors as who we see competitively often but I think the other side is that a real small percentage of the enterprises actually have malware protection today so there’s pretty much an opportunity to go into any enterprise whether they have something or nothing and we can sell them something that’s better we believe from a security perspective. So we’ve you know beat a lot of competition in both the companies you’ve mentioned and displaced existing platforms, beat them in new deals but I think there’s also a fairly open market, a green field out there as well that really has nothing in place doing security very well with web gateway.
Operator
Our next question comes from Joshua Jabs with Roth Capital.
Joshua Jabs – Roth Capital Partners, LLC
To start with here, expectations for differed I mean obviously, we seen that build in through 2007, but expectations for differed in Q1 and then what we should expect throughout 2008 given there’s some seasonality there?
Timothy J. Steinkopf
We do expect differed to go up in Q1 because it’s a seasonally softer quarter normal for us it may be at a little slightly lower clip than it has been the last two or three quarters. And I’m sorry I didn’t get the second half of the question, Josh.
Joshua Jabs – Roth Capital Partners, LLC
Just how what will transfer throughout 2008.
Timothy J. Steinkopf
Then we would expect, now knock on wood, and I think that’s the first time I’ve said that today. I’m always knocking on wood. So it should grow in Q1 and then normally what we would see is an even a little bit stronger growth in differed Q2, Q3, Q4.
Joshua Jabs – Roth Capital Partners, LLC
Okay. Then can you give us some details on the new incentive programs and what you think that means for cross selling opportunities as far as you know, do we see that slowly pick up for the year or should the new incentive programs pick up right away in Q1 and kind of give us a sign of what we should expect for 2008?
Daniel P. Ryan
I mean obviously we already provided a forecast for Q1 so whatever incentive is in is in. But the intention was to have an impact on this year and to really look at our customer base and it doesn’t take much math to say if we can cross sell to 10% of 22,000 customers a new product, what an impact that could have on our company. So we put explicit programs in place that are really above and beyond the traditional on target compensation for the sales organization to do just that. And so there’s some real upside for the field and there’s some real upside for the company long term by accomplishing this. The compensation plans also have an emphasize on new business growth as well and brining any of our products, and when we talk about cross sell incentive we also have a multi-product incentive. So going into an enterprise and selling multiple products in a single order, as somebody asked earlier is also covered in the new compensation plan, there’s incremental incentives for doing that.
Timothy J. Steinkopf
I think the comp plans would be there is three or four main components. One, is there’s a new bus focus, a renewal focus because obviously we want to maintain all of our great customers and then there’s a cross sell and an up-sell across multi product sale type of focus. So we want to keep it fairly straight forward so that the team that we have understands exactly what they’re trying to accomplish and what they get paid for.
Joshua Jabs – Roth Capital Partners, LLC
Okay and then we did hear a little bit from the channel this quarter that a trusted source has been used a little bit more often as a differentiator in deals. How much of the focus you know does industry give into the reputation services at this point?
Daniel P. Ryan
We’re giving a lot of focus because we think it’s critical to the overall success of these products and you know we’re a little bit unique we believe, in really having what we would call multi-dimensional global intelligence covering spam and malware, you know combining these capabilities make each of them stronger. Not only do we have the multiple dimensions of global intelligence as I think John mentioned we apply those to each product. So we can do reputation at a firewall level at the message gateway level. So we have a unique capability here in the amount of global intelligence and types that we have as well as the number of gateways that we can apply it to and so we’re obviously making a lot of emphasize on that in our marketing and sales messages.
Joshua Jabs – Roth Capital Partners, LLC
Thanks and then thoughts on the Safeware line I mean should we be thinking about Safeware now as more of a multi-product sale you know, type opportunity for you guys or there any enhancements expected in that product line this year?
Daniel P. Ryan
Yes. So we have a big launch of Safeware 2008 coming out which is supporting the new Microsoft platforms that we think is a great selling opportunity for us. But to your first point we do see a lot of cross selling opportunity when you think of our traditional customer base where we’re selling mail security for example, remote access email is one of the great remote access applications that there is and we probably haven’t done enough of taking advantage of going back in and trying to sell strong authentication into those accounts and cross sell specifically into those accounts. So yes about we have a great new product launch, Safeware 2008 is one element. I think the other element is that this will also be played into this cross selling program that we have.
Joshua Jabs – Roth Capital Partners, LLC
Okay and then last here, based on the product mix, how much of the big deals were recognized in the quarter versus what ended up in differed?
Timothy J. Steinkopf
Josh, hang on one second I’m just looking at the list. So, as you know, across the product lines we sell appliances or tokens as kind of perpetual license, immediate revenue, we sell support, we sell subscriptions. You know looking at the list of large deals we had a very typical mix in aggregate of either appliances or tokens versus support versus subscription. So a very typical mix of immediately recognized revenue versus that which was differed.
Joshua Jac – Boss Capital
Okay so maybe on our part not really worth going through on the model side trying to break it out, it looks like it’s just going to flow?
Timothy J. Steinkopf
No we have a very - our products are sold - you know the sales marketing team, sales team does a great job of selling in the base appliances or tokens on the Safeware side but then of course they’ve got to sell support and of course the higher margin add on subscriptions are a high priority as well. So we have a very typical mix whether that’s on a $10,000 deal, $100,000, $500,000 or $1 million.
Operator
Our next question comes from Jordan Roberts with Jefferies & Company.
Jordan Roberts – Jefferies & Company
Looking at question under guidance, looking at the numbers you guided to, on the top line you were a little bit above expectations and on the bottom line a little bit below. You had mentioned that the margin impact of big deals was a one quarter event. Is that just you guys being conservative or should we expense?
Timothy J. Steinkopf
Well I think guidance if I’m correct, I’m working off my memory here, the consensus for Q1 is about $68 million and we guided $67 to $69 in non-GAAP revenue. And the average of all analysts posted on Secure for EPS is $0.08, I know Thompson actually has it listed as $0.09 but the true mathematical average is $0.08. We guided $0.07 to $0.09 so we guided right on top of census.
Jordan Roberts – Jefferies & Company
Okay. I mean you’re looking at different numbers but that’s fine. So I mean just looking at the gross margin it’s a little bit lower than its been.
Timothy J. Steinkopf
We did guide 75% for Q1. Our guidance for 2008 back in December was 75 to 76 and I would make two comments one, that the impact in Q4 was very specific to a couple of things, we’ve already talked about that. For Q1 we have done a forecast of our pipeline, and I’m going to say it twice now, “Knock on wood,” that forecast, the forecasting we’ve done our pipeline etc, supports the guidance we gave today.
Jordan Roberts – Jefferies & Company
Okay. Fair enough. Quick follow-up question, just following up on a question previously asked just on the cross selling opportunity. After [inaudible] analyst day it just seems to be really the kind of the story here, trusted source is cross selling into accounts and penetrating deeper. You know you said long term, you talk about some of the comp plan changes and long term there’s going to be some benefits. Is there some sort of statistic or metric? I know you talked about [inaudible] a little bit but help us understand how many accounts you’re cross selling into? Do you have targets? Is there any sort of deeper more color you can give on that?
Daniel P. Ryan
I don’t think there’s a specific metric that we’re marketing or publishing at this point. But I think we’re going to start with our best and biggest accounts and we have 300 plus people in the field and they’re going to be very motivated to go after those. Maybe at some point in the future we’ll have more quantitative data on this but I think right now it’s really to go across the entire base.
John E. McNulty
And again, as mentioned there’s several prongs to the comp plan. If you look at the four product lines, identity and access management is fairly under penetrated market on strong authentication. I think that most people would agree with that. So a lot of green field opportunity there. As far as web access and web security, again there is a fairly penetrated market in simple URL filtering but true web security is a fairly lush green field opportunity, so lots of new business to be had there. Mail security is going to be slightly more penetrated but again there is a significant amount of green field in mail security as well. Where as now when you get to firewalls, that is a fairly penetrated market, less green field but the green field is in UTM type appliances, web specific facing application or the up-sell to UTM, the renewal the refresh cycle. So depending on the product line, again we’ve got an emphasis on new bus, on renewals, on cross selling and up selling. The sales force is really armed with, when they go into separate or different account or different types of opportunities they have different things to motivate them or different things to sell. So each individual product line is going to have a slightly different answer there.
Daniel P. Ryan
Let me add something here. If you go back a couple of years ago we started talking about cross selling because we had a big customer base and most of that customer base was using one product. When we started talking about it we were single digit percentage penetration of customer’s using more than one product. Today customer’s that have two, three or four products are in the 30% range. Now that’s a significant up tick from where we were 2 to 2.5 years ago. But we’ve really only just begun, you’ve got another 70%. If you take 22,000 customers, 70% of that is a big number that can buy second, third, fourth product. Today maybe 1% of our customers use four products use all four of our major products, that give us a whole lot of up side. And Tim and Dan hit on the opportunities whether it’s in Safeword for strong authentication with Safeword 2008 coupled with the web mail, web and messaging remote access etcetera. It’s really a compelling value proposition from a security perspective. So that’s where we expect to make some significant in roads with that cross selling.
Daniel P. Ryan
I think it evens goes in the firewall business though because we are, many customers would be more of a up sell in this case where use specifically we get to a business entry which might be securing a specific application or set of applications with Sidewinder which is in our opinion the best application firewall in the industry. From that point we can move to other applications and often do. And even more over when there doing a network firewall refresh, we’re now, now that we’re a trusted vendor and they understand the capability of the product then we get considered for the network replacement or displacement or refreshment as well. So even in the traditional firewall business even though it’s somewhat as Tim said saturated when you think of network gateway. Where we sit we see a lot of opportunity there still.
Operator
Our next question comes from Eric Suppiger with Signal Hill.
Eric Suppiger – Signal Hill Group, LLC
Just looking at the guidance it looks like your, if I’m doing my model right, it looks like we might see some further decline on the operating margin front in spite of the fact it looks like gross margin bumped up some and I was thinking that some of these sales and marketing had some one time hits. I know you talked about a $600,000.
Timothy J. Steinkopf
That’d be our normal seasonality from Q4 to Q1 Eric.
Eric Suppiger – Signal Hill Group, LLC
Okay.
Timothy J. Steinkopf
So normally in Q1 we would incur a small down tick in operating margin.
Eric Suppiger – Signal Hill Group, LLC
Yes. But I was just thinking.
Timothy J. Steinkopf
It’s our typical, we d our annual focal point reviews for all employees, our pay roll tax expense kick back in in Q1, things of that nature. So it’s our typical seasonal decline and the typical impact of the Q1 expenses that jump up because it’s a new year.
Eric Suppiger – Signal Hill Group, LLC
Would you expect the actual dollars to increase for your op ex?
Timothy J. Steinkopf
In Q1?
Eric Suppiger – Signal Hill Group, LLC
Yes.
Timothy J. Steinkopf
Compared to Q4?
Eric Suppiger – Signal Hill Group, LLC
Yes.
Timothy J. Steinkopf
Yes.
Eric Suppiger – Signal Hill Group, LLC
Okay. And then secondly can you comment at all about the competitive landscape with Webwasher and Blue Coat?
Timothy J. Steinkopf
It’s very competitive. How’s that for an answer?
Daniel P. Ryan
It’s always been very competitive and we think Blue Coat does a great job in the WIN optimization space.
Timothy J. Steinkopf
Their more of an infrastructure company and we have had great success, I would say better than expected success and continue to have better than expected success in competing with them in the NetCash install base. If you’d of asked us say a year ago or a year and a half ago we would have not predicted that we would be able to compete with them as well as we have and I think it’s a testament to our Webwasher technology. The team, the road map happened to dove tail well when NetCash sold out. Then secondly, the team responded very quickly to a couple of additional opportunities on the technology side, on the heels of NetCash discontinuing that part of their business but I think the execution there’s been very very good.
Eric Suppiger – Signal Hill Group, LLC
What is your sense in terms of that customer base migrating away from NetCash? Would you have a guess, is there still a lot of NetCash product there? Is half the product there left? Or do you get a sense that that migration away from the NetCash product is largely done?
Daniel P. Ryan
Well no I don’t think it’s done. I think actually the majority of it will be coming to end of life type situations, I think in 2008 and probably into 2009. So there’s a lot more opportunity out there for us.
Timothy J. Steinkopf
I was just going to say since we didn’t buy it, we don’t specifically have metrics on what was ended or sold. So it’s kind of difficult for us to answer that question. Go ahead Dan.
Daniel P. Ryan
I was just going to say I think the simple view that we take or have of the market now is people were doing URL filtering and people were doing cashing and the market now is really a combination of URL filtering and inbound malware security. That’s where we solve the problems and I think people are coming at it from one or both of those angles and they’re trying to what we’re seeing is replace that with a security product. And we happen to have the worlds’ best URL filtering and we believe the world’s best malware protection and we have industry equivalent cashing.
Timothy J. Steinkopf
Exactly we tried to consolidate the appropriate services for that point in the network in front of the web servers where if the servers used to be a little disjointed, cashing, URL filtering, ETC, SSL scanning, content reporting, we’ve brought that all together on one box in very effectively.
Eric Suppiger – Signal Hill Group, LLC
And it sounds like you see fertile grass a lot more customer turn over the next, over 2008 and 2009?
Daniel P. Ryan
Yes.
Operator
And our next question is from Matt Hewitt with Craig-Hallum.
Matt Hewitt – Craig-Hallum
Two quick questions, first of all the sales marketing reorganization and realignment was that, were there lay-offs involved there or was that just simply getting people set up for this new compensation plan that you’ve talked about?
Timothy J. Steinkopf
I wouldn’t say lay-off we had a restructuring where we did a new organization worldwide which displaced some jobs and created some others. I think net-net we actually increased the sales and marketing headcount and compensation but it meant a different organization and so that was about 20 or so people who were displaced or restructured.
Matt Hewitt – Craig-Hallum
Okay and secondly, international growth you mentioned 40% this quarter. I don’t have in front me what was last quarter but what are you seeing internationally as far as product pipeline?
John E. McNulty
The Asia Pacific market seems to be very robust as does the European market. Latin America continues to be a developing market for us. It’s relatively small but has great potential.
Operator
I would now like to turn the call over to Mr. John McNulty for closing comments.
John E. McNulty
Thank you and I’d like to thank everybody for joining us and thank the employees of Secure Computing, All 950 strong that made possible the good performance in Q4 and in 2007. We look forward to talking to you again in about 90 days.
Operator
Thank you for participating in today’s conference call.
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