Blue Coat Systems CEO Discusses F1Q2011 Results - Earnings Call Transcript

Blue Coat Systems CEO Discusses F1Q2011 Results - Earnings Call Transcript
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Blue Coat Systems Inc. (BCSI)

F1Q2011 Earnings Call Transcript

August 19, 2010 5:00 pm ET

Executives

Jane Underwood – VP, IR

Gordon Brooks – SVP & CFO

Brian NeSmith – President & CEO

Analysts

Scott Zeller – Needham & Company

Ryan Hutchinson – Lazard Capital Markets

Rohit Chopra – Wedbush Securities

Troy Jensen – Piper Jaffray

Daniel Ives – FBR Capital Markets

Jason Ader – William Blair & Company

Woo Jin Ho – Bank of America

Alex Kurtz – Merriman Curhan Ford

Jess Lubert – Wells Fargo Securities

Alex Henderson – Miller Tabak

Erik Suppiger – Signal Hill

Presentation

Operator

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Ladies and gentlemen, thank you for standing by and welcome to the Blue Coat Systems first quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (Operator instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Jane Underwood. Please go ahead.

Jane Underwood

Thank you and good afternoon and thank you for joining us to discuss Blue Coat's financial results for the first quarter of fiscal year 2011. With me on today's call are Brian NeSmith, our President and Chief Executive Officer; and Gordon Brooks, our Chief Financial Officer.

Before I turn the call over to Gordy, let me remind you that during the course of this call, we will make forward-looking statements about Blue Coat Systems, Inc. These include statements regarding expectations concerning market growth and business opportunities, including levels of IT spending, expectations regarding future revenues, expenses, margins, profits, tax rates and other financial metrics, plans to develop and offer new products and services and enter new markets, success of our business strategy, acquisitions, restructuring and changes in our business model and operations, any statements reflecting the potential confirmation of the settlement of the derivative lawsuits and other matters impacting Blue Coat's financial outlook and future business.

All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any statements of expectation or belief and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the risks that are described from time to time in the reports filed by Blue Coat with the Securities and Exchange Commission, including but not limited to, the risks described in Blue Coat's Annual Report on Form 10-K for the year ended April 30

th

2010.

No assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations or financial condition of Blue Coat. Blue Coat assumes no obligation and does not intend to update these forward-looking statements except as required by applicable laws. Now I'd like to turn the call over to Gordy.

Gordon Brooks

Thank you, Jane. Good afternoon. Today we are pleased to announce the net revenue for fiscal Q1 was $122.5 million, an increase of 6% compared with the same quarter a year ago. In the first quarter, we early adopted the new revenue recognition rules and there was a slightly positive impact to our results. This implementation allowed us to recognize net revenue that was $1 million than it would have been under previous revenue recognition rules. All future guidance will be based on the new accounting rules.

Product revenue for fiscal Q1 was $76 million, an increase of 3% compared with the same quarter a year ago, including PacketShaper revenue of $13 million and Blue Coat WebFilter product revenue of $6 million. Service revenue, which is primarily composed of revenue related to support and maintenance contracts was $47 million, an increase of 11% compared with the same quarter a year ago.

On a geographic basis in Q1 net revenue in the Americas was $55 million and represented 45% of total revenue. Net revenue in EMEA was $42 million and represented 34% of total revenue. And net revenue in Asia-Pac was $26 million and represented 21% of net revenue.

Net revenue in the Americas increased 2% compared with the same quarter a year ago. Net revenue in EMEA increased 1% compared with the same quarter a year ago. And net revenue in Asia-Pac increased 23% compared with the same quarter a year ago.

As we discussed on our Q4 earnings call, we expected weak performance in our EMEA business in Q1. In fact, we did experience a slowdown as evidenced by a decline in product revenue of 6% compared with the same quarter a year ago. We continue to believe that one factor affecting the business is macro economic uncertainty, which is being driven by some currency headwinds and sub-regional weakness in the U.K. and southern Europe.

At the same time, we now have concluded that the main reasons for our challenges in EMEA are related to poor sales execution and over reliance on a two-tier distribution model by our sales organization there. In a moment, Brian will discuss these issues and our action plan to address these challenges.

During the quarter we had seven deals worldwide whose total value was greater than $1 million. Although we closed seven large deals in Q1 compared with just three in the same quarter a year ago, the aggregate deal value was approximately the same.

From a vertical standpoint, our United States federal vertical showed continued strength and comprised 9% of product revenue compared with 8% of product revenue in the same period a year ago.

On a non-GAAP basis, gross margin increased to 79.7% in Q1 compared with 75.6% in the same period a year ago. This improvement was driven by both product mix and increased support margins. Product gross margin was 80.6% compared with 77.5% in the same period a year ago. And service gross margin was 78.3% compared with 72.4% in the same quarter a year ago.

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