Gigamon's (GIMO) CEO Paul Hooper on Q1 2016 Results - Earnings Call Transcript

| About: Gigamon, Inc. (GIMO)
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Gigamon, Inc. (NYSE:GIMO) Q1 2016 Earnings Conference Call April 28, 2016 5:00 PM ET

Executives

Cynthia Hiponia - Investor Relations

Paul Hooper - Chief Executive Officer

Mike Burns - Chief Financial Officer

Analysts

Kulbinder Garcha - Credit Suisse

Alex Henderson - Needham & Co.

Jason Ader - William Blair & Co.

Simon Leopold - Raymond James & Associates, Inc.

Operator

Good day and welcome to the Gigamon First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Cynthia Hiponia. Please go ahead.

Cynthia Hiponia

Thank you. This is Cynthia Hiponia, Gigamon Investor Relations. And I am pleased to welcome you to Gigamon’s conference call to discuss its first quarter 2016 earnings results. With me on the call today is Gigamon’s CEO, Paul Hooper; and CFO, Mike Burns.

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

During the course of today’s presentation, our executives will make forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements generally relate to future events or 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 customer potential and our expectations regarding the market opportunity.

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 Annual Report on Form 10-K.

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 as 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 earnings press release that is available on our website.

On this call, we will give guidance for the second quarter of fiscal 2016 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. And thank you all for joining our call this afternoon. Accelerating profitable growth, consistent execution and market leadership – these are the hallmarks of our organization that has delivered another set of impressive results, proving that our portfolio and Company are setting the pace in this expanding market.

On the call today, I want to highlight three key themes that underpin our performance, that have delivered a GAAP-profitable first quarter and provide the foundation for our continued growth ahead. First, the demand for our security products continues to accelerate. Wins in this portion of the market represented more than 60% of our transactions this quarter, up from 40% in the year-ago period, with 21 of the largest 25 deals across all customers, and four of the largest five new customers being directly related to security deployments.

With the ever-increasing number of threats and attacks that pivot within IT organizations to focus on detection rather than just defense, and a significant road map of new features we have planned for GigaSECURE, we believe that security at Gigamon is both in the early days as a revenue add, and has a long runway ahead. Quite simply, without our GigaSECURE platform, the security solutions of today will not scale to the challenges of tomorrow.

The second theme originates in the world of mobile service providers. With Gigamon having the highest-performance, fully integrated and most extensible visibility solution on the market, we've established a clear leadership position. And while our 65% year-over-year revenue growth in the service provide market last year was impressive, we accelerated our pace of growth in this quarter to over 100%.

As service providers look to deploy next-generation architectures in preparation for the demands of tomorrow, many are seeking a more subscriber-centric and a more cost-efficient approach to instrument their infrastructure. Our unique visibility solution is that approach. And contrary to a number of other vendors in the market that are seeing some deal deferrals and spending pressure, our growth continues to accelerate.

One explanation for this can be found in the results of a recent survey conducted by Light Reading, a well-respected communications publication. 50% of respondents cited that the cost of tools and probes was their greatest motivation for seeking alternative approaches to instrument their infrastructure. Closely followed by 40% of respondents stating that tool and performance challenges were the stimulant.

As the scale of service provider infrastructure and the number of subscribers continues to grow, we believe a new approach is essential to enable the instrumentation of some of the largest networks in the world. We deliver that new approach, focusing visibility on the subscriber rather than on the network. And in doing so, we allow mobile service providers to move beyond the overpriced and underperforming tool proliferation approach of the past. We were the first to respond to this changing requirement, and our financial performance highlights the demand for that solution.

And our federal market, that saw a very strong year-over-year growth rate in excess of 70%, represents the third theme that I will review today. What is commonly referred to as the most attacked enterprise in the world - the U.S. government has established a multi-year $6 billion mission to improve their overall security posture across a number of civilian, defense and intelligence departments and agency. This initiative, called the Continuous Diagnostic and Mitigation, or CDM, program, led by the Department of Homeland Security, is utilizing our GigaSECURE platform to enhance the performance of their deployed instrumentation.

Our platform was adopted due to its flexibility, scale and compliance to key federal standards from the National Institute of Standards, or NIS, and our recent Common Criteria certification. And while we are in the early days of the CDM program, some initial wins, in combination with a number of other private security transactions across the federal market, delivered the exceptional revenue result this quarter.

During the quarter we added 40% more new customers in comparison to the year-ago period, with a few examples of these wins. Including a leading home shopping channel that broadcasts to over 200 million households in six countries that adopted our GigaSECURE platform to provide pervasive visibility for their security analytics system across nine locations.

One of America's most iconic major sporting leagues deployed our GigaSECURE platform throughout three large data centers to establish a foundation for their defense in-depth strategy. Our platform is providing relevant traffic into a wide variety of security tools, to mitigate against advanced persistent threats, zero-day exploits, and other forms of attack.

And one of the most recognized software-as-a-service-based HR companies in the world deployed our GigaSECURE platform to serve both inline, follow-up products and an infrastructure performance management system. The versatility of the Gigamon solution has allowed them to establish a security foundation that they plan to implement across their entire enterprise. This win extends our pervasive presence across many of the leading SaaS-based organizations, as our solution offers the scale, reliability and capabilities that are critical in this portion of the market.

In a recent Forrester Total Economic Impact study focusing specifically on the value of our GigaSECURE platform. They noted that customers realized a payback within seven months following deployment, in addition to a reduction in the ongoing cost of security of over 50%. Without a visibility solution to improve the efficiency, effectiveness and reach of security tools and systems, infrastructure security will not scale. There's too much traffic, too many places to protect, and too many attack factors for any point solution to keep up.

The GigaSECURE architecture is demonstrating its value through our rapid and significant growth in the security market, the customer interest in the portfolio and our forward-looking pipeline of business. Examining the GigaSECURE portfolio in more detail highlights the increasing traction and momentum of this portion of our business.

For the first time since its introduction our NetFlow software license was the top-selling application, seeing year-over-year growth in excess of 100%. And our SSL license, that has ended their second year, also saw exceptional growth rates. Our inline bypass module, a product that expanded our addressable market by allowing us to support inline security systems, including next generation firewalls, saw an attach rate above 50% to all HC2 systems that we shipped in the quarter.

Before handing over to Mike, I’d like to recognize the contribution of the dedicated Gigamon employees. The power of what we describe as one Gigamon in our core values has delivered exceptional results in the first quarter and as you will hear from Mike as set us up for a very strong first half of the year.

And with that, over to you Mike.

Mike Burns

Thanks, Paul. Unless otherwise noted, our comments will refer to non-GAAP, which excludes stock-based compensation expense and related payroll taxes, income tax effective stock-based compensation expense, and a valuation allowance against deferred tax assets. Please refer to the press release in our Investor Relations website for the comparable GAAP results with a reconciliation to non-GAAP.

We're off to a strong start in 2016. Total revenue was $67.2 million, up 43% from last year and up slightly sequentially. Product revenue was $44.7 million, up 39% from last year and down just 5% sequentially with our inline bypass module for security showing particular strength.

Recurring service revenue was $22.5 million, up 53% from last year and up 13% sequentially. In addition to the $57.2 million revenue recognize in the quarter. We increased deferred service revenue by $4.5 million. The Americas contributed 82% of revenue, EMEA 11%, and APAC 7%. Compared to a year-ago first quarter revenue in the Americas grew 55% and APAC grew 28%.

EMEA revenue was temporarily down 5% against the tough comparable due to a large government transaction a year-ago. The business remains robust, as EMEA enterprise bookings were up 60% year-on-year.

Starting this quarter we will transition vertical market reporting from bookings to revenue, since that’s more common practice. Our first quarter revenue by vertical was 59% enterprise, 25% service provider and 16% federal. Year-on-year revenue growth was 21% in enterprise, 108% in service provider and 75% in federal.

Although we will not being reporting bookings growth by a vertical after this quarter. I would like to note, that bookings growth was equal to or strong than revenue growth in each of our vertical markets this quarter. Year-on-year bookings growth in Q1 was 21% in enterprise, 134% in service provider and 160% in federal.

We continue to benefit from strong repeat customer purchase activity. 90% of our booking came from repeat customers. To make our top 25 customer list now requires a minimum $5.5 lifetime spend, a 38% increase from a year-ago. Our seed and growth strategy continues to deliver results and our cumulative customer count is now 2,045, up 20% from a year ago.

One longtime repeat service provider customer was 14% of revenue in the quarter. We had included a portion of revenue from this quarter in our initial guidance then the customers requirements expanded during the quarter which will have to their strong contribution. Even without this additional revenue we would have exceeded our overall revenue guidance.

We are pleased to expand gross margin 440 basis points year-on-year to 81.7%. As we increased our software offerings and extend our competitive differentiation, product gross margin expanded 490 basis point year-on-year to 76.7% and service gross margin expanded 230 basis points from year-ago to 91.5%.

Gross margin continues to be bolstered by the rapid expansion in our market opportunity towards more security and software, as well as our recent move to a more scalable and cost-effective manufacturing facility in Mexico. We are investing to capitalize on this wave of opportunity, while delivering strong and sustainable operating margins. First quarter operating expenses were $43 million, up 4% sequentially, and 47% year-on-year with an extra week in the fiscal quarter.

Expenses were approximately $2.5 million above guidance, due to higher variable commission and bonus accrual based on business strength, as well as accelerated investments in product development and sales capacity. We added 52 employees during the quarter, ending with 534 employees, up 42% from a year-ago, in line with first quarter revenue growth.

Our India design center, which we opened a year-ago, is now staffed with 46 employees, and growing quickly in size and contribution. We booked a $3.8 million non-GAAP tax provision at a rate of 32%. With better-than-expected revenue, sustainably high gross margin and continued investment, we earned 18% operating margin, $11.9 operating profit, $8.2 million net income and $0.22 per share.

It's worth noting that for the first time, in the first quarter, which is typically our seasonally weakest, we were profitable on a GAAP basis, with GAAP net income of $3 million.

Our balance sheet and cash flow remain very strong, and reflect three notable activities during the quarter. First, we reduced accrued liability by $14 million this quarter, as we paid out annual bonus, as well as year-end commissions and end-of-month payroll. This brought cash, cash equivalents and short-term investments temporarily down $2 million to $208 million, but still up $41 million from a year-ago.

Secondly, as part of our strategic changes to improve our scalability, we transitioned to a centralized global fulfillment model that will improve our flexibility to meet upside customer demand. As result, we increased inventory on our books 20 days sequentially, to 55 days.

And correspondingly, we reduced our deferred product revenue, which for us, primarily just represents the value of stocking inventory that has been at various distributor locations and is now centralized. We reduced it by $8 million sequentially and $14 million from a year-ago, to end at less than $1 million. I would note that comparisons of the deferred product revenue this quarter to prior periods are not particularly meaningful, given this change in our fulfillment model.

Lastly, our support attach and renewals remain robust. Deferred service revenue balance, a key metric which represents known future revenue at 90% plus gross margin, is now $78 million, up $4.5 million sequentially and up $26 million from a year-ago. This provide improved visibility our future revenue and profits in 2016. Our ending product backlog remained healthy.

Now for our Q2 outlook. We are excited to provide the following guidance for the fiscal second quarter ending July 2, 2016 which is based on non-GAAP results and excludes any stock-based compensation and related expenses. With more deferred service revenue, a healthy product backlog, large pipeline of second-quarter deals, and a strong start under our belt, we expect revenue to be in the range of $69 million to $71 million, 36% year-over-year growth at the midpoint.

With the increasing demand for our software portfolio, along with various changes within our organization to drive improved operating efficiency. We are confident that we will sustain our gross margin at approximately 81% to 82%. We remain focused on healthy profitability. We are investing with conviction, approximately in line with revenue growth, to expand our security portfolio, deliver next-generation technology, and increase our reach and brand presence.

We're forecasting second quarter operating expenses of $43 million to $44 million, with the sequential benefit of not having the extra week – being more than offset by our increased hiring and investment. We expect that both a 32% non-GAAP tax provision with an $38 million diluted share count, we expect to deliver non-GAAP earnings per share in the range of $0.23 to $0.25. We plan to update our financial results at our second quarter 2016 conference call, preliminarily scheduled for Thursday July 28, 2016.

Before I hand it back to Paul, I’d like to share few calendar considerations for modeling and planning purposes. As previously discussed, fiscal 2016 is a 53 week year ending on Saturday December 31, 2016. The first quarter of 2016 is a 14 week quarter ending on April 2, and the other three fiscal quarters in 2016 will be 13 weeks.

With that, I’ll turn it back over to Paul.

Paul Hooper

Thank you, Mike. Our strong results in Q1 and our confident guide into Q2 are due to a number of factors. Our portfolio continues to extend our leadership. Market forces are demanding enterprises, service providers and federal organizations to embrace visibility solutions. And our Company is executing consistently and efficiently.

I encourage our investors to join us on Tuesday, May the 10th in New York, where we'll be discussing our first-to-market solution to deliver visibility into the public cloud. I'm convinced we're in the early days of something very significant. I remain very confident in and excited about the future for the Gigamon team, for our customers, our partners and you, our investors.

And with that, we'll open the call up for questions. Operator?

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] We will take our first question from Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha

Hi, guys. Just a couple of questions from me. Maybe the first one Paul, I wonder how you respond to this comment that you obviously have this very good tailwind over the last five, six quarters from security and is now more than 60% of transaction, so is the effect of that win on sales growth going forward.

I'm trying to understand - does the larger increasing deal sizes and that bring you more strategic with your customer help. I am trying - how you see it and what impacted it might have potentially decelerating sales. And then for Mike just two quick ones. Gross margins being in the 81% to 82% range. The conviction there is driven by increasing software content is that right? And also why did deferred revenue go down again sequentially [indiscernible]. Thanks

Paul Hooper

Okay. Thanks for the questions Kulbinder. Your first question is interesting. Security is an area that we very strategically moved into in Q3 of last year. And as you may recall some of the metrics that we provided about how new customers were coming to us for our security solution. What we're seeing now as we look over our top 25 customers, the number of those customers that are come back to us to extend their original deployments and enhance it, where the security capabilities is almost 50% I think it's over 50% now over our top 25.

And so what I look into the future or I will state that I’m very confident the security isn’t accelerated to sales, it’s accelerated in the size of transactions, it’s accelerated in the strategic relevance of transactions, is an accelerator in alignment of budgets, it’s an accelerator in the value proposition, you’ve noticed it’s been an accelerator in our software adoption.

So it’s all provided a good deal of lift across the wide range of portfolios and as you are here on our Analyst Day in New York, a number of our strategic partners both the ecosystem partners, but also the resellers have embraced Gigamon much tighter because of the security opportunities that we offer.

So I'm very convinced that I'm very bullish about security and I will continue to be so. We will continue to extend the portfolio and continue to drive what I believe to be an increasing leadership position around this particular market enabling security through visibility. So I'm very bullish about it. And kind of segues into your second point about gross margins, certainly software has been a substantial contributor to the gross margin uptick. Also Mike has mentioned previously I think we’ve spoken about it.

On the core, we’ve made some operational changes inside of our business to increase efficiency, and effectiveness, and scale in many ways. And some part of that you know good potentially was asking playing for into the gross margin line, so hence reasonably optimistic guide with 81% to 82% gross margins. We don’t see that reducing, we see that thing pretty stable and for a company in that space I think it’s a very, very healthy margin. Mike, you want to add anything?

Michael Burns

Yes, we expect that to continue, we’ve got these world-class software center gross margins based on the position that we have. We have taken the security apps [indiscernible] cost down, our distribution cost down, so things are looking really good on that angle. So we're very happy to be pleased and proud to guide at 81% to 82% type level.

Paul Hooper

Your question on deferred revenue is a good one. There is two components of our total deferred revenues and the most important one is the deferred service revenue so that's based on orders. Service orders from customers which is a really important part of the business. And there's been another piece which is the deferred product revenue which is really just de-stocking inventory and that moves around quarter-to-quarter and that can basically move the number around. And we've recently kind of have step two or move to a more scalable facility.

Step one was to get the cost down and more capacity and step two was to move to more centralized fulfillment models that we didn't have all these pockets as inventory out of various distributors around the U.S. and now we are fulfilling all customers’ orders including distributed orders.

Centrally from one central location, it gives us much greater scale ability and greater flexibility to meet the upside demand. We keep getting more and more demand each quarter here and so this is going to be a much more scalable model for us. So you see that deferred product revenue piece and our balance sheet coming down this quarter from $8 million to [indiscernible].

Kulbinder Garcha

Thank you.

Paul Hooper

Thanks, Kulbinder.

Michael Burns

Thank you.

Operator

We will go next to Alex Henderson with Needham.

Alex Henderson

Thanks. A couple of quick housekeeping questions. The first one is, would you give us an estimate of what the revenue impact and the cost impact was for the extra week. And then the second, there was a lot of companies that have reported numbers that have said that January and February given the fear that was in the marketplace that enterprise customers seem to be hesitant in the marketplace and pulling back on timing and purchasing activity, and that might have improved somewhat in March and April. Is that consistent with your view of things, did that happen and impact your numbers at all in the quarter? And then just one follow-up.

Michael Burns

Well, I’ll tackle the extra week one first. On the expense side it came in about expected by $2.5 million incremental expense for the extra week. On the revenue side, I would put that into two buckets. The service revenue fees, which we did get an extra week of recognition there so that helps basically 114th of our $22.5 million that we had there. On the product side it’s not clear, it’s not clear it may have been a slight help but it’s not really clear that gives much of an extra bump.

Paul Hooper

So as Mike said, we look at the linearity throughout the quarter. I didn't sense that, last week was anything other than just a normal week of business. And we certainly started off and kind of segueing to your second question I guess, we certainly started off January and February with very normal linearity for us as we've seen over the past four quarters.

So what I know that there were a number of infrastructure vendors that were talking about a soft January and February. We didn't sense that. We didn't experience that. We had a good velocity of business on a very reasonable and normalized linearity.

And you then mentioned April and the reason that we guide the way that we have today is because we've had a very strong start to the Q2 period and so we haven’t seen I’ve heard as you have a lot of comments about January and February, but we certainly didn’t centered or failure inside of our business.

Alex Henderson

And then there's a follow-up question more theoretical one. So a lot of the service providers are rolling out network function virtualization and that has been cited as a reason for some softness in the application layer oriented systems vendors selling into the service provider market. Obviously that didn't show up in your numbers, but can you talk about whether at a fees helping pull in the need for a visibility fabric as we become more dynamic and less static in architecture or whether it's, causing some hesitation or how would you see that?

Paul Hooper

So we are certainly not seeing any hesitation if I back up a few thousand feet for one second, the world of NFV is creating a significant amounts of disruption inside of the service provider landscape. Certainly it's opportunity raised, but when you start to take functions that were until recently physically bound and now virtualized them.

The need to be able to provide pervasive visibility only increases because those functions that were static and understood and now mobile and agile and in that landscape, we believe our technology has a very significant role to play so we continue to work with the largest - 50% of the largest service providers around the globe and as you'd imagine a number of those are embracing, adopting, piloting, NFV capabilities and we're in active conversations and dialogue with them all.

And that you put all that together and you realize that I think NFV creates opportunity for us it certainly doesn't create headwinds or potentially any kind of resistance or delay we are seeing a good deal of traction across the number of service provider as 100% year-over-year growth in Q1 to some degree demonstrates.

Alex Henderson

Yes, great thank you very much.

Paul Hooper

Thanks, Alex.

Mike Burns

Thank you.

Operator

We’ll go next to Jason Ader with William Blair.

Jason Ader

Thank you. Hey guys, I wanted to ask you a couple questions about security. First, which vendors tools are most often connecting into your fabric and then you can just name a few and then how much of your deals today are being sourced your security on there on there being sourced by VARs and security partners as opposed to your sales force itself?

Paul Hooper

Sorry, if I just answering those questions in that order I would give you probably – I would tell that there is 20 or so security vendors that are in our reasonably common attached list, let’s call that, but if I just think of the top of the list is going to be names like RSA its going to Cisco its probably Imperva it would be FireEye increasingly parallel toe that probably the top five that gives you a list. I mean but recognize Jason that list floats around transactionally but that probably the most common we see in the field. And second part of question was…

Jason Ader

How much of your business today is sourced by partners in VARs and other tools partners as opposed to your sales force I mean [indiscernible]?

Paul Hooper

Thanks for clarifying. It's changing and it's changing and I believe very significant way we had invested talk to us a few months here when we are on the road and they openly admitted that during channel checks over starting to here from the channel the number of customers we are coming to the resellers and asking to help understand the Gigamon security story. So that’s me is an interesting indicator of what the future can be.

So we are starting to see a number of resellers bring us into transactions and I will give you some examples of companies like E plus. E plus is the largest reseller of Cisco security in North America and E plus is a very significant channel for us ramping very quickly very significant year-over-year growth around the Gigamon portfolio.

So we are seeing more and more resellers bring us into transactions although a lot our sales guys are out that finding them as well, but resellers are becoming an increasing origination point the transactions. And that means a indication of one customer demand and rather than us on it push basis is much more of a pull basis and secondly some of the activities and investments that we have made in/and around the channel over the last six months I believe to starting to talk hold and we are starting to see the benefit.

Jason Ader

Okay. One quick follow-up on that Paul to the security tools vendors see your product and reducing that revenue opportunity you talked earlier about the high cost of tools and probes. So do they view you as somebody that enhances their market opportunity or something that could actually didn’t to it?

Paul Hooper

I would suggest they see as being someone that can systems support the transaction the tools in the probes that I spoke to earlier that was primarily around the network performance in the application performance market space. And I would certainly suggest in those markets a visibility fabric is a way to reduce the investment in the tool and provide a much richer functionality for the same amount of dollars. So in that case it is cannibalistic.

In the case of the security market there’s a myriad of used cases of where our technology assists and enables a security event that rather than cannibalizes or marginalizes. It's that the value of the security tool is in no way being compromised and the ability to go in line or out of bounds the ability to support maintenance windows, the ability to maintain up time, the ability to distribute traffic to multiple tools rather than just a single tool is all of the value that we bring to them and all of which I believe is accretive value rather than diluted value.

Jason Ader

Thank you.

Operator

[Operator Instructions] We’ll go next to Simon Leopold with Raymond James.

Simon Leopold

Great, thank you. I appreciate the questions. A couple of things first I wanted to get a clarification. You talked about the large service provider customer. And I think you indicated that you still would have exceeded expectation, if not for the upside. Could you give us a little bit more detail how much was above your expectation from this particular customer or this project?

Paul Hooper

Sure. Yes I will give out specific numbers remember we gave very strong guidance for Q1. And that was supported by this customer you know high single-digit kind of percentage but after we guided they came in even stronger so that help drive that upside to over the 10% level but even without that a portion of that upside was from our other customers.

Simon Leopold

Okay. So you had expected like an 8% or 9% contribution. Is that are you saying?

Paul Hooper

Yes, something along those lines, yes.

Simon Leopold

Very technically, and if we can just get an update on the competitive landscape, one of your competitors I think had some weaker results earlier in the reporting season. Just if you can give us any kind of update of what's going on competitively?

Paul Hooper

It's happy to do that Simon. It is an interesting market, it's an evolving market and certainly the competitors that I think if you go back through our S1. And you look at the competitors of a few years back here. It's a very different landscape of competitors that we face today. And it’s in the markets where we have the highest performance and highest density solution to for service providers and into the – in the security. Both of which the competitors to me still remains, our awareness and our brand and the opportunity for customers to understand a solution exists in this market.

And if you put that aside there are still some competitors that we face. But it's less of a focus for us on an ongoing basis more of a focus is how we embrace the opportunity in the runway ahead. And that certainly is where we spend a lot of our attention, a lot of our time.

Simon Leopold

And maybe more of a big picture question. As we often get questions about the impact of enterprises moving applications to the cloud, things like Azure and Amazon web services. For your business what are the implications of your customers moving more of their applications, more of their jobs to the cloud service providers. And how are you adjusting to that shifting environment? Thank you.

Paul Hooper

Interesting question. If you look at our customer set there are a good number that have already adopted a lot of software-as-a-service capabilities. And if you look at the software-as-a-service, if you think of the cloud as software-as-a-service and you list the names of the leading vendors in that SaaS space world the vast majority of those are our customers.

So even though a customer may not have purchased or enterprise customer may not have purchased technology when he moves activities into the cloud, the vendor that’s services to him has already got Gigamon technology in that. And so we're protecting both ends of the equation.

We still continue to see software-as-a-service being a very active market and I mentioned it in the prepared remarks today that one of the - I believe the world's leading HR solution, SaaS solution has embraced our technology this quarter and it's the start of what we believe to be a very long and healthy relationship. So SaaS to me is the market that we are already very heavily in so as customers embrace SaaS based solutions it really represents upside to us.

Now, if you think about infrastructure as a service and you talk about Amazon or Azure et cetera. I don't want to steer at thunder, but I do certainly want to tell you that's been a very active area of developments and on the Analyst Day in early May hare, we're going to be talking to you and to the street about the fact that we come out with a solution that will instrument the public cloud.

We think it's a huge lift to [indiscernible] and a very significant opportunity for us going forward as well as customers are moving wholesale into Amazon, they are moving a good percentage of activities in the Amazon. We still – we now they need to instrument the datacenter. We know they need to watch and protect the enterprise, but we also know they need to watch and protect information that goes into Amazon. That’s one of the fugitive focuses for Gigamon. And as I say on Analyst Day, we're going to talk about that in some degree of detail.

Simon Leopold

Great. Thank you for taking my questions.

Paul Hooper

You are welcome.

Operator

Let’s take a follow-up question from Alex Henderson with Needham.

Alex Henderson

Oh, great. So one of the questions that I really wanted to ask is relative to the new products that you guys just announced the 100-gig products, the additional feature sets. It looks like a very large new product launch and new feature launch. Can you give us some sense of implication of that launch in comparison to the size of the launch of say the HC2 platform back in May of the prior year? I mean how big is this? Is this big as a bread box is it bigger than a breadbox in terms of the implications for the growth of the company and the opportunity set?

Paul Hooper

A great question Alex and I love your phrase, a very large launch and if you want to characterize that as a very large launch I would tell you, you don’t see nothing yet as the phrase goes because we have some very significant launches ahead relative to this one. However, and by implication will tell you that I think it is a good size bread box. But the value that it brings is pretty significant. We've now extended all of our portfolio into the high density 100-gig markets prices.

And as you know intimately as the 25-gig market starts to gain traction and 100-gig becomes the de facto back claim. With that we are ready it right now and our technology scale to that performance and that capability. But equally interestingly, the software extensions we offered in that launch are very rich and we've taken one of our best selling products net flow and over the course of the last couple of launches here, we've extended and enhanced it and added more capabilities and really more intellect into net flows, so that we can continue to differentiate ourselves.

So it was a big launch. It attracted a lot of attention inside of our sales force and inside of our partner communities, but we have some pretty exciting launches lined up for the rest of the next twelve months as well here, which I think are going to make this very large launch team interesting site compared to some of the magnitudes we have ahead.

Alex Henderson

It is it fair to say the impact would be – 25% to 50% of the impact let’s say HC2 launch, is that the way to think about it. And then second question on the same lines is, is this more of a – because of the 100-gig characteristics absolute requirement for the service provider and cloud players and therefore it opens up that venue in a much bigger way or is that the right way to think about it.

Paul Hooper

Yes, I start with the last bit, yes you said right. Was the 100-gig hasn’t got wide scale adoption inside of enterprise; inside of Web 2.0; inside of service providers certainly has a high density, high performance 100-gig solutions are absolutely critical for those markets. So it really opens up those and next level of those markets to us as we go forward. So we are certainly pretty optimistic regarding the fact that they are going to open up new opportunities in existing accounts and potentially some new accounts as well.

Quantifying the size of the launch relative to something else is kind of challenging because each launch has very different characteristics and different trajectories. I believe 100-gig was a very exciting market opener, it’s going to have a reasonably long tail associated with it. Is it runs, but when it does runs I think it's going to run ferociously, but it's going to take a little while before it kind of get to the legs and momentum we're going to need to see wider scale deployments of 100-gig and 25-gig before we start getting very solid traction out of the cost that hopeful further.

But right now the 100-gig solutions are attracting a terrific amount of interest almost immediately and we actually – we had some oldest place for some of the products before we [EVGA] them. And so I think it’s one of the first times it has to happen to give you an indication and excitement for t the product.

Alex Henderson

Just a final question on the same line, it sounds like this is a precursor and necessity to have out in the field in order to significantly move to the cloud and significantly move to the Web 2.0 type environments which sounds like is the major part of your upcoming news follow, is that the right way to think about it?

Paul Hooper

Yes to some degree, but in the news flows that we're going to be talking about in the Analyst Day, our approach to providing visibility into the public clouds is not to approach it from the provider end of the equation, it's to approach it from the subscriber end. And so if that mobile – the 100-gig connectivity was interesting in the Web 2.0, it’s not a prerequisite for our enterprise customers to be able to embrace our cloud solution. And we’ll talk about this in far greater detail when we kind of – when we meet up in New York in the next couple of weeks.

Alex Henderson

Thank you.

Operator

And with no further questions in the queue, I would like to turn the call back over to Cynthia Hiponia with any additional or closing remarks.

Cynthia Hiponia

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

Operator

This does conclude today’s conference. We thank you for your participation. You may now disconnect.

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