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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Sonya, and I'll be your conference operator today. Welcome to the Tintri Fourth Quarter and Fiscal Year 2018 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, David Jew, Senior Director, Investor Relations, for Tintri. David, you may begin your conference.
Thank you, and good afternoon, and welcome to Tintri's Fourth Quarter and Fiscal Year 2018 Earnings Call. With me today are Ken Klein, Tintri's Chairman and Chief Executive Officer; and Ian Halifax, Chief Financial Officer. This call is being broadcast live over the web and can be accessed via the Investor Relations section of the Tintri website. As a reminder, during today's call, we may make forward-looking statements, including, but not limited to, statements regarding our operating model and our cash generation and usage in future periods; customer purchasing trends; our ability to expand our customer base and acquire new customers; our ability to hire a new CEO and the timing of such hiring; the completion, timing and terms of any future strategic transactions; our research and development plans; operating expenses in fiscal year 2019 and in future periods; our ability to reduce operating expenses; our investments in products, support and solutions-oriented go-to-market strategy and sales focus; our ability to comply with and/or modify terms of our outstanding debt; the impact of the new revenue standard ASC 606 on our revenue for the quarter ending April 30, 2018, and future periods; our ability to attract and retain employees; pricing trends for flash, DRAM and other components; the markets in which we operate and our market opportunity trends and expectations for our products and technology; the impact of our recent customer acquisitions on our long-term growth; our competitive position; our financial performance, profitability, expenses, operating expense reductions, gross margins, DSO levels, operating leverage and cash flows in future periods; our ability to achieve operating cash flow breakeven and the timing thereof; and our revenue and non-GAAP loss per share guidance for Q1 fiscal 2019. While these forward-looking statements reflect Tintri's best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from those implied by these forward-looking projections. For a more detailed description of these risks and uncertainties, please refer to our earnings release which was issued earlier today and our most recent 10-Q filed with the SEC. We undertake no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Also, during this call, we will discuss non-GAAP measures in talking about the company's performance. Reconciliation to the most directly comparable GAAP measures is provided in our earnings press release. Ken Klein will begin today's call with a review of the company's financial and operational highlights. Ian Halifax will then provide additional details about the company's financial results and outlook. This will be followed by a question-and-answer session. With that, it is now my pleasure to turn the call over to Tintri's Chairman and CEO, Ken Klein.
Thank you, David, and thanks to all of you for joining this call. First, let me summarize our financial results, which came in above our expectations. Revenue for fiscal year 2018 was $125.9 million, slightly higher than our fiscal year 2017. And Q4 revenue was $28.9 million while non-GAAP earnings per share was negative $0.72. We are pleased that both revenue and non-GAAP EPS exceeded the guidance we provided in December, reflecting our overall improved visibility into customer purchasing dynamics and our execution on expense and cash management. We made progress in the quarter by adding to our differentiated product portfolio and continued to increase our footprint with existing customers while adding 50 new customer logos in the quarter. Given our focus to bring us closer to cash flow breakeven, we have taken steps to strengthen our balance sheet. First, we have drawn on a $25 million note facility put in place some time ago by our VC investors. Second, we are discussing changes to terms of our existing debt with our principal lenders. Last Thursday, we implemented a workforce reduction of approximately 20%. In the prior week, we announced an early termination of a facility lease. And we continued to manage nonheadcount-related expenses extremely carefully. We expect with these and other actions to reduce FY '19 operating expenses by more than $70 million. It is important to note that while managing our expenses, we are committed to investing for growth. We are focused on delivering revenue-generating product road map capabilities, continuing to provide exemplary support to our enterprise customers and concentrating on a solutions-oriented go-to-market approach. We continue to explore available strategic options to deliver value to our shareholders and are focused on the optimization of our operating model to significantly reduce our cash burn rate and shorten the time to cash generation. Ian will provide more detail on our Q4 financial performance later on in the call. Now I'd like to provide color and highlights on our go-to-market approach and customer activity in the quarter. I'm delighted to announce that Tom Cashman has accepted the position of EVP, Worldwide Sales and Alliances, reporting to me. Tom has been with Tintri for almost 3 years and most recently led significant improvement in our international sales with the addition of key talent. One of his responsibilities is to execute on a solutions-oriented go-to-market approach, focusing on use cases where we are more differentiated, sales cycles are shorter and business is more profitable. As we look to the future, we expect this focus-sales approach, coupled with a stronger balance sheet, rationalized operating model and drive toward cash generation, to result in higher ASPs, broader expansion into our customer base and smoother new customer acquisitions. In the quarter, our sales organization grew our total customer count to over 1,540, adding 50 new logos. Many of these new wins included a number of blue chip customers spanning different verticals, such as a large defense contractor who chose Tintri over NetApp for server virtualization because of our simplicity and functionality; a large film studio who chose Tintri over Dell and HGS for their private cloud infrastructure, again, because of our simplicity and functionality; a European manufacturer who chose Tintri over NetApp for their enterprise applications because of our simplicity and very compelling TCO. This quarter also demonstrated the continued strength of our land-and-expand strategy. Our Top 25 customers have now invested on average 24x their initial Tintri purchases in their lifetime to date. In other words, an initial spend of $100,000 has turned into an average of $2.4 million over the customer's life with us. The number of customers with lifetime to date purchases greater than $1 million increased 43% from last year. Some of our repeat customers this quarter included the largest technology companies, financial institutions and telecommunications firms. In Q4, we continued to benefit from the confidence of our customers, given the positive business impact that Tintri has had in these accounts. Our 10 largest deals in the quarter included a substantial software licensing agreement with one of North America's fastest-growing cloud service providers utilizing Tintri to scale their operations, a footprint expansion at what to the world's Top 5 telecom companies has built their private cloud on Tintri storage, a large investment from one of the federal governments' largest agencies, leveraging Tintri's virtual machine density to consolidate their data center footprint. Now let's turn to our recent product announcements. We remain focused on our technology differentiation, exemplified by our software. We recently announced Tintri Centralized Upgrade, also known as remote management, a new management capability in Tintri Global Center. This enables customers to deploy centralized upgrades of multiple Tintri storage solutions across data centers without disruption. In Q4, we also introduced Tintri FlexDrive, a storage expansion feature that enables customers to increase system capacity of Tintri's enterprise cloud 6000 all-flash storage arrays one drive at a time. I'm pleased with our Q4 financial results and the continued passion and commitment of our enterprise customers. We've taken steps to strengthen our balance sheet by adding incremental cash. This fiscal year, our cash burn is projected to improve materially each quarter as a result of the expense reduction actions we took last week. Tintri is in the strongest position since our public offering in June. I'm very proud of the company we've built and believe Tintri is on the right path. With Tintri on solid footing, I plan to transition out of my role as CEO and to assist in an orderly and smooth leadership transition. I'll now turn the call over to Ian to provide details on our financials.
Thank you, Ken. Good afternoon, everyone. Before I get into the specifics of the financial results, and as a reminder, please note that during my remarks, unless I specify otherwise, all financial results and projections discussed on today's call, other than revenue, will be non-GAAP. A reconciliation of these measures to their nearest GAAP comparable measures is available in our earnings press release. Total revenue for Q4 FY '18 fell 29% year-over-year to $29.8 million but was above our guidance. And our full fiscal year revenue grew 1% year-over-year to $125.9 million. Product revenue, which consists of system sales and software license revenue, fell 41% year-over-year to $19.3 million. Services revenue, which stems from maintenance and support agreements, grew 24% year-over-year to $9.6 million. Services revenue accounted for 33% of total revenue compared with 19% in the same quarter a year ago. In Q4, 68% of revenue came from the U.S., and 32% from our international operations. This compares with 74% and 26%, respectively, in the same quarter a year ago. Gross margin in Q4 was 59.1% compared with 63.4% in the same quarter a year ago. Product gross margin in Q4 was 57% compared with 61.8% in the same quarter a year ago. This change is primarily due to a product mix shift toward lower price points, industrywide increases in DRAM pricing and, to a lesser extent, flash pricing and lower product revenues. We expect flash pricing to stabilize but DRAM memory pricing to continue to increase over the near to midterm. Services gross margin was 63.3% in Q4, down from 70.4% in the same quarter a year ago. This stems primarily from an increase in services personnel over the prior year as we scale to support enterprise customers worldwide. Operating expenses were $37.7 million in Q4, down from $47 million in the same quarter a year ago, a decrease of 20%. Sequentially, operating expenses were down 11% as a result of careful expense management. With the recent workforce reductions and other costs and expense actions, we expect to reduce FY '19 operating expenses by more than $70 million. Consequently, by Q4 of FY '19, we expect to approach operating cash flow breakeven based on planned revenue levels. R&D expenses were $12 million in Q4, a 4% decrease from the $12.4 million in the same quarter a year ago. Sales and marketing expenses were $21.9 million in Q4, down 29% from the $30.7 million in the same quarter a year ago. G&A expenses were $3.8 million in Q4, down from $3.9 million in the same quarter a year ago. As Ken mentioned, while we are carefully managing our expenses, we are also thoughtfully investing in areas to help drive long-term growth. Total headcount at the end of Q4 was 445, down 63 sequentially, resulting from ongoing cost-reduction actions we took in the quarter. Operating loss was $20.6 million in Q4 compared with $21.2 million in the same quarter a year ago. Operating margin was negative 71% compared to negative 53% in the same quarter a year ago. Interest and other expense was $2.1 million for Q4. This is primarily interest on our debt facilities. Net loss was $22.6 million for Q4 compared with $22.5 million in the same quarter a year ago. Loss per share was $0.72 in Q4 compared with $1.05 in the same quarter a year ago. The weighted average shares used in the per share calculations were 31.3 million and 21.5 million, respectively. Moving to the balance sheet and cash flow. We finished the quarter with $32.3 million in cash, cash equivalents and investments. Note that this amount does not include funds drawn last week under the note facility. Operating cash flow was negative $20.2 million for the quarter, and free cash flow was negative $22.6 million. This is a sequential improvement of almost $10 million from negative $32.2 million in Q3. DSOs, or days sales outstanding, were 58 days at the end of the quarter, down from 69 days in the same quarter a year ago. At the end of Q4, debt stood at $68.6 million, consistent with the prior quarter. As Ken stated, since the end of the quarter, we have drawn down $25 million in incremental financing available under a note facility with some of our principal VC investors, and we are discussing changes to the terms of our existing debt with our principal lenders. I would now like to turn to guidance for Q1. We continue to take a cautious view to near-term guidance. We expect revenues for the quarter to be in the range of $20 million to $21 million and non-GAAP loss per share to be in the range of $0.64 to $0.68 using 32.6 million weighted average shares outstanding. Note, these guidance numbers are based on ASC 605. We are in the middle of implementing ASC 606, which we have adopted and made effective as of February 1, 2018. We expect to complete the assessment of its impact to recast historical financials and to file an 8-K before the end of this quarter. If appropriate, we may also update the outlook at that time. With that, I will hand it back to David to open the call for the question-and-answer session. David?
We'll now open the call for the question-and-answer session. Operator?
[Operator Instructions] Our first question comes from Jack Andrews of Needham & Company.
I was wondering if you could talk a little bit more or drill down on some of the new products that you launched in September, the EC6000 and the T1000. Are there any specific metrics zeroing in on those 2 products that you can share about regarding orders and/or expansions there?
Yes. The -- what we've actually found in the last quarter is that 2/3 of our product revenues actually came from the EC6000. So that product line has been very successful for us. The other point is that -- as you know, we're very focused on adding software and -- because that's key to our differentiation. And actually, we saw software as a percentage of product revenues actually climb up sequentially to 16.5%. And again, we continue to add to our software portfolio as we've gone along, and last quarter was no exception with the addition of a remote management capability. The other point is that we added the drive-by-drive capability for expansion capability to the EC6000, which basically means our customers can smoothly scale our platforms one drive at a time, so they don't to have either underbuy or overbuy. And so it actually makes it much easier for customers to do business with us. It also, we believe, will result in higher margins, too, because we don't have to discount back to what our customer actually needs.
Sure. And then just as a quick follow-up. Could you talk about -- elaborate a little bit more on your plans to reduce the fiscal '19 operating expenses? Is there a way to break that out a little bit more into specific components? Or how to think about the expense line items around exactly what's happening underneath the surface there?
Yes. I'll give you the high levels. So we're going take OpEx from the mid-30s down to the low 20s now, and give it to Ian to go through the particulars of the operating expense lines.
Yes. Most of those actually have already been taken. They were announced last week that. The bulk of the reduction is from our lower headcounts. We've also looked at program spend also. Those are the 2 large and main categories. As well as we announced, in fact, that we've moved out of the facility lease that we had as well. So those are the 3 mains areas. It's people, facilities and program expense.
Our next question comes from Simon Leopold of Raymond James.
Great. Just really -- just to follow up on how you're thinking about the expense reductions. The rough math if we think about the most recent quarter was about $38 million of pro forma. So that would suggest $70 million divided by 4, gives you roughly $18 million-ish by the end of fiscal '19. So I would think you should be down around $20 million on that very simple math. And your guidance suggests that maybe some of the expense reduction is really coming out of COGS rather than OpEx. I just want to see if I'm interpreting this correctly.
That's not quite right. I mean, the way to think about the $70 million is to look at last fiscal year's operating expense levels, which were around $170 million in total. So we expect the number to be north of $70 million less than that. The bulk of the deductions are in OpEx as opposed to COGS.
Okay. So based on your answer, I think what you're suggesting is the full year '19 operating expenses should be in the neighborhood of $100 million, $70 million less than fiscal '18. Is that the way to think about it?
That's correct.
That's very helpful. And I guess in terms of when you're making these kinds of cuts, can you be somewhat more specific as to what were things that were in the original vision? Whether it was product or market verticals or marketing strategy, what are the things you're eliminating in terms of what comes out of this cost cutting?
So we've consolidated, for example, engineering and product management. And obviously, we've consolidated sales under our worldwide sales leader. But it's a balancing act. So in addition to obviously cutting OpEx, here's where we're focused. So there's really sort of 3 areas. The first is, on the road map, we're super hyper focused on the revenue-generating capabilities of the road map. Second, we've been very judicious about leaving our enterprise support capability intact. And third, we're focused on really, a tweak, if you will, to how we're going to market relative to go-to-market. So specifically, we're focusing on a solutions-oriented approach where we enjoy higher differentiation, higher win rates, faster sales cycles and more profitable business. So we're focused, for example, on the DevOps use case or enterprise cloud use case, VDI, where we enjoy sort of unprecedented scale and performance and also database virtualization. So those are really the 3 focus areas.
Our next question comes from Katy Huberty of Morgan Stanley.
You mentioned in your remarks that you're seeing better revenue visibility. Is that just a function of more of product revenue in your recent quarter is coming from repeat purchases? Or is there another dynamic that's improving your visibility?
Well, if you look at our split between new business and existing business or existing customers, it's -- it remains consistent with what we saw in Q3. So basically, 15% from new and 85% from existing customers. What we've -- what's changed, if you will, is we've really got our hands around sort of how to navigate in this market with the self-imposed headwinds from our IPO and getting a real sense of what sort of a pipeline we need and pipeline conversion we need in order to arrive at a particular revenue level. And that's really what changed, really understanding customer buying behavior. Fundamentally, customers are buying what they need from us, and that's manifested in smaller ASPs than, say, a year ago. And that's why we're very confident, actually, that the actions we've taken around strengthening the balance sheet with additional cash, rationalizing our P&L, continuing to invest in our products and our support and with more refined go-to-market, we think that we can begin to mitigate these headwinds over time.
And then from a product gross margin standpoint, the DRAM and NAND pricing dynamics make perfect sense. You also mentioned that you're seeing a mix shift down to lower-priced SKUs, which weighed on product margins. What do you think is driving that? With so much revenue coming from existing customers, you'd think that they'd be maybe moving up the product line.
Well, it actually has to do with the existing customers -- they love what we do, obviously. But they remain cautious about doing business with us and, therefore, they're buying, if you will, at lower price points and at lower product points as well. And so that's one of the reasons we took the actions that we took because we want to basically restore confidence, allow our customers to increase their investments with us.
Okay. Understood. And then just lastly. Any update on strategic evaluation? Obviously, the restructuring is part of that. What are your thoughts on other potential paths for the company now that you've gone through that review?
We -- I can't comment on really the status of our strategic process. What I will say is, we are open to explore all available strategic options and it gives us -- we're focused on obviously delivering shareholder value. Right now, obviously we're focusing on getting the company to the best place to succeed in the long term. And as you can tell, we've taken a number of very material steps to get us there. Obviously, I think it'd be very, very interesting to a lot of different companies in the infrastructure and cloud space based on our differentiated technology, based on our blue chip customers, growing 200% of the Fortune 100 and of course, our talented employees.
Our next question comes from Andrew Nowinski of Piper Jaffray.
Maybe just a couple of questions here for you. I think you just mentioned it now, I think you said last quarter, customers are concerned with the healthier balance sheet and are cautious on doing business with you. I guess, based on the average cash burn over the last 4 quarters, the new parameter, it really not gives you enough cash, it looks like for, call it, 3 quarters. I guess, are you anticipating another debt raise in calendar '18?
Andy, this is Ian speaking. I don't think that math you've just done is correct. Our cash burn, as Ken said in the call, will come down materially from prior levels over the course of this fiscal year, such that we expect to approach operating cash flow breakeven in the fourth fiscal quarter of FY '19. So we have a much longer runway than you're assuming there. And so as of right now, there are no plans to raising incremental financing this fiscal year.
Okay. And then with regard to the restructuring, the 20% cut does seem fairly significant. I guess, can you give us any color in terms of the impact to your sales productivity? And then specifically, where these cuts occurred.
Yes. We're -- so specifically, relative to sales, we -- the cuts -- most of the headcount, of course, in our organization is really in the engineering and the go-to-market functions. And so those functions were affected. But we're comfortable with the sales capacity we have and the increasing sales productivity that we're seeing. We did see an increase in productivity sequentially to be able to make our numbers for the year.
Our next question comes from Wamsi Mohan of Bank of America Merrill Lynch.
Your guidance for revenue indicates down 31% to 34% in this next quarter versus down 29% in this quarter that you just reported, but your growth comps are significantly easier. When do you think the business can stabilize? I know you're rightsizing OpEx quite aggressively, but when do you think the business can stabilize from a top line perspective? And I have a couple of follow-ups.
I think given the moving parts of recent weeks, we're naturally being very prudent in our guidance, that's the first thing I'd say. We're just taking things right now given the headwinds and all the moving parts, taking things very carefully and prudently quarter-by-quarter.
Okay. How many -- can you give us some sense of how many sales teams you currently have? And post all the restructuring that you were alluding to where you might be at the end of this year?
No. We don't disclose the number of sales teams. We've not done that and don't intend to going forward.
We are comfortable with the number of teams we had in place and, as I alluded to, the increase in productivity per team that we're achieving.
Okay. And can you -- I know you're -- we're not going to hold you to a full year guidance number here. But can you give us some sense of sort of what revenue range you're thinking that drives that breakeven cash flow with the given OpEx cuts that you're targeting?
Well, if you do the math based on the prior conversation, this is not guidance for the year, but we get to north of breakeven -- beyond breakeven at around $35 million in revenue if you'd follow the math through.
[Operator Instructions] Our next question comes from Alex Kurtz of KeyBanc Capital Markets.
Ken, just on the turnover in the sales org in the engineering department. What happened sequentially? Was there a change from last quarter to this quarter?
Yes. We actually saw a turnover decrease sequentially in sales from Q3 to Q4. And I think there are a number of reasons for that. I think probably the first and the overriding point was that a number of the sales force that were disappointed with the IPO, they flushed out sort of midyear. And of course, given we put in place -- we had -- it's an annual compensation plan, our sales teams are obviously very intent on maximizing their earnings. And they are sticking around because they've got larger territories now. They've got a robust product line to sell. We've got a very attractive incentive plan that we've put in front of them. And so we're comfortable with the teams we have in place and as I mentioned, the productivity we're achieving.
And just a quick question about Tom's focus for the next 30 to 60 days. Besides the solutions selling that you spoke to earlier, any other kind of initial playbooks that he's going to try to run starting out of the gate beyond what you've sort of outlined at the beginning the call?
Yes. The great news is that Tom is very familiar. He'll be picking up, obviously, North America as sales force, but he played a role previously in global accounts. And so he knows a number of the folks personally, and so I expect this to be a relatively seamless transition.
And at this time, there are no further questions.
So this concludes the question-and-answer session. I will now turn the call back to Ken for some concluding remarks.
Thanks, David. Let me summarize with 3 key points. One, we're pleased with our Q4 performance. Despite continued headwinds, we comfortably beat our expectations for revenue and earnings per share. Two, our enterprise customers continue to invest in our platform and are delighted with the value we provide. And three, most importantly, we positioned the company for future success. We've taken steps to materially improve the company's financial position and operating model. We've added $25 million in cash to the balance sheet. We reduced headcount and facilities and significantly reduced cash burn going forward. We plan to reduce FY '19 operating expenses by more than $70 million. While reducing operating expenses, we're investing for growth in our product roadmap, enterprise customer support and a solutions-oriented go-to-market strategy. Tintri has taken material steps to reduce headwinds and is now in a stronger position as we transition to new leadership. I would like to thank our customers, partners, investors and employees for their support, passion and commitment. We thank you for your interest in Tintri, and we look forward to talking with you again in the near future.
This concludes today's conference call. You may now disconnect.