Blue Coat Systems' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Blue Coat Systems (BCSI)

Q2 2012 Earnings Call

November 17, 2011 5:00 pm ET

Executives

Jane Underwood - Senior Director for investor relations

Gregory S. Clark - Chief Executive Officer, President and Director

Gordon C. Brooks - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Scott Zeller - Needham & Company, LLC, Research Division

Sanjit Singh - Wedbush Securities Inc., Research Division

Gary Spivak - Noble Financial Group, Inc., Research Division

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Blue Coat Systems Second Quarter Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to the Vice President of Investor Relations, Jane Underwood. Please go ahead.

Jane Underwood

Thank you. Welcome to Blue Coat's financial results for the second quarter of fiscal 2012. With me on today's call are Greg Clark, our President and Chief Executive Officer; Gordy Brooks, our Chief Financial Officer; and Steve Daheb, our Chief Marketing 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; market trends and customer requirements; the success of our business strategy, go-to-market expectations and changes in our business model and operation; and other matters impacting Blue Coat's financial outlook and future business.

All statements other than statements with historical facts are statements that can be deemed forward-looking statements, including any statements of expectations or beliefs and any statements of assumptions underlying any of the foregoing risks, uncertainties and assumptions including 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, 2011. 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 it 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 C. Brooks

Thank you, Jane. Good afternoon, everyone. I'm pleased to report that Blue Coat exceeded the second quarter financial guidance that we provided on our last conference call. Importantly, our product revenue performance is stronger than we had anticipated, which drove a solid improvement in profitability. Not only did we deliver better-than-expected results, we made progress on improving execution in key areas of our business, which Greg will discuss in a few minutes.

Now turning to the results. Net revenue for fiscal Q2 was $114 million, an increase of 4% sequentially but a decrease of 6% compared with the same period a year ago. Product revenue for fiscal Q2 was $62 million, an increase of 6% from the prior quarter but a decrease of 15% compared with the same quarter a year ago. In Q2, the sequential strength in product revenue performance came from our Web security products and our federal vertical. Our Web security products, which currently include ProxySG, AV and Blue Coat WebFilter compose 77% of product revenue in Q2 compared with 69% in Q1 and 73% in Q2 of the prior fiscal year. Our acceleration products, which currently include PacketShaper, MACH5 and cash flow compose 23% of product revenue in Q2 compared with 31% in Q1 and 27% in Q2 of the prior fiscal year.

Going forward, we will be breaking out our product revenue results into 2 categories: Web security and acceleration, and we'll no longer be providing commentary on specific product revenue performance. Given the actions we are taking to improve our top line performance and the way we've realigned our organization, we believe these 2 product categories will more accurately measure the progress we are making and provide a better overall picture of our current business.

Service revenue was $52 million, which was essentially flat sequentially and increased to 8% compared with the same quarter a year ago. Similar to fiscal Q1, the dollar amount of annual renewal support contract value closed in the quarter, which was [ph] the highest we have closed in fiscal Q2.

We continue to be highly focused on this aspect of our revenue model by continuing to provide incremental value to our customers through software release upgrades. At the same time, we're also focusing on optimizing our support revenue stream by continuing to increase our service revenue contract renewal rate.

On a geographic basis in Q2, net revenue in the Americas was $58 million and represented 51% of total net revenue. Net revenue in EMEA was $35 million and represented 31% of total net revenue. Net revenue in Asia Pacific was $21 million and represented 18% of total revenue. Net revenue in the Americas increased 20% sequentially and 1% compared with the same quarter a year ago. Net revenue in EMEA decreased 7% sequentially and 14% compared with the same quarter a year ago, and net revenue in Asia Pac decreased 10% sequentially and decreased 9% compared with the same quarter a year ago.

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