Melanie Solomon - Investor Relations, Managing Director at The Blueshirt Group David Flynn - Chairman, President & CEO John Ritchie - SVP, CFO & COO.

Mark Kelleher - D.A. Davidson Christian Schwab - Craig-Hallum Doug Clark - Goldman Sachs.

Good day, everyone. Welcome to the Aerohive Fourth Quarter 2017 Earnings Conference. Today's conference is being recorded. And at this time, I would like to turn things over to Ms. Melanie Solomon. Please go ahead, Ma'am..

Thanks Kellen. Welcome to Aerohive Networks' fourth quarter and full year 2017 financial results conference call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at aerohive.com.

This call is being webcast live in the Investor Relations section of the Aerohive website and will be available for 30 days. Today's call is being hosted by David Flynn, President and Chief Executive Officer and John Ritchie, Chief Financial Officer and Chief Operating Officer.

During the course of today's call, management will make forward-looking statements including statements regarding our projections, operating results, expectations for future revenue growth, operating profitability and operating margins, plans for future investments, product development, deployment, adoption and performance and expectations of customer buying patterns and the growth of the market for our products and business, generally.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the caption, Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, in our recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

Aerohive's SEC filings are available on the Investor Relations section of our website at ir.aerohive.com and on the SEC's website at www.sec.gov.

All forward-looking statements in this presentation and the referenced press release are based on information available to us as of the date hereof and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made except as required by law.

Today, we will be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today's press release available on our website. I will now turn the call over to David Flynn, President and CEO of Aerohive..

Thank you, Melanie and thank you all for joining us today. We delivered fourth quarter results that were in line with our preannouncement last month. We are pleased that we achieved non-GAAP operating profitability and solid cash generation, despite lower than expected revenue.

Following the November 1 change in sales leadership, we identified underlying sales execution issues that became fully apparent in the last month of the quarter.

We had experienced typical order linearity in October and November, but as December progressed, orders came in well below forecast and frankly, this was due to poor execution within our sales organization, including in part overoptimistic assessments of closed dates for deals in the pipeline.

We have already closed a number of these deals indicating that these were in fact timing issues. And we believe we have taken actions to address these execution issues and to replace underperforming sales team members and are driving more rigorous inspection of the forecast to ensure we'll be more predictable going forward.

As the new sales teams ramp up their productivity and as we benefit from our strengthened product offering and exciting near-term product roadmap, we're focused on positioning the company for profitable growth.

I'd like to highlight a few positive developments from the fourth quarter of 2017 and the beginning of 2018 that give us confidence in the year ahead.

In Q4, we delivered record levels of subscription revenue, demonstrating the SaaS-like characteristics of our new Connect to Select business model, as well as strong execution driving our renewal business. In Q4 we operationalized our Dell OEM partnership, positioning us to more efficiently leverage the scale and reach of Dell.

We are also making good progress with our Juniper partnership with increased field, channel and customer engagement related to their recent release of Juniper Sky Enterprise, a cloud-based management system that leverages HiveManager NG APIs for unified management and Aerohive Wi-Fi and Juniper Switches.

We've recently been selected for a number of large scale multicore rollout that will provide revenue throughout 2018 and a good baseline of business going forward. In Q4, we had a big win for our switching business as we were selected by a security MSP for 1500 site PCI compliant product managed switching deployment.

They started with 200 sites and attempt to expand to 1300 additional sites.

In Q4, we also received a $1.7 million order from a Fortune Global 500 customer in Asia that we expect to ship during 2018 and we've also been selected by major Korean telecommunications operator for a seven-figure nationwide deployment and in January we began booking orders for this multi-quarter deployment.

We also continue to make great progress on strengthening our product offering. We've executed well on delivering the core feature set of HiveManager NG and are now able to increasingly focus on delivering new innovations.

Over the last two months, we've announced four significant products that strengthen our offering and illustrate that our innovation machine is delivering. We entered the SDWAN market, expanding our addressable market and enabling us to deliver a full stack cloud managed branch office network solution.

We were the first vendor in the industry to announce a family of [AL 211 AX] axis points. We plan to deliver three platforms in the middle of the year and be at the leading edge of driving the transition to the next generation of Wi-Fi. This early leadership is already catching the attention of customers and partners.

Yesterday we announced that we have entered the secure access management market based on a new product offering called A3. A3 is a multivendor access management and authentication product that will provide a comprehensive portfolio of access management functionality for onboarding and security for IoT, BYOD and standard wired and wireless clients.

The A3 solution includes capabilities to deliver a complete secure access solution, such as automated device provisioning, device profiling and NAC, self-service onboarding and guest access, all without the operational complexities associated with our two largest competitor's offerings.

A3 is unique in its ability to deploy on-premise akin to more traditional AAA and access management solutions and in the future as a cloud service or an hybrid model. We expect A3 to contribute to revenue in three ways. First, it strengthens our current product offering.

Second, enables us to capture incremental security revenue and third, it creates a new entry point into competitor’s accounts with the hardware agnostic product offering.

And finally, today we announced the Aerohive ATOM AP30 pluggable AP, the industry's first enterprise class pluggable access point, a small form factor cloud managed AP that delivers a radically simplify deployment model for both easy and hard-to-reach locations.

It's powered by cloud management and our software defined Wi-Fi architecture and the Aerohive ATOM AP30 can be installed in operation in less than a minute, using either our new radically simplify mesh technology or traditional ethernet for backhaul.

With a small form factor and easy deployment model and full enterprise feature set that can help organizations to quickly, easily and more cost-effectively solve for many used cases without having to install or move ceiling mounted access points.

They can plug it into a power socket and a [dynamic] next to the cloud and meshes with an existing Aerohive network to fill in dense spots that extend the network or bridge through an IoT device, or they can quickly light up a whole remote site by plugging in one and adding more to extend the mesh, enabling rapid deployment without on-site IT resources or cable folds.

The Aerohive ATOM AP30 pluggable access point can be deployed with Aerohive Connect, the industry's only subscription free cloud management or our enterprise class select management offering, making us the first vendor to deliver this disruptive new deployment model with the functionality needed by enterprises and MSPs.

We're very pleased to see the massive productivity improvements on our engineering organization has enabled us to deliver these new products with R&D spend levels that are $5 million below 2016. The flow of output confirms that we are investing efficiently and appropriately and that we're able to deliver significant innovation at our current scale.

Overall 2017 was a transitional year that challenged our ability to generate topline revenue growth. Between product transitions and sales execution issues, our topline hasn’t moved in the direction we would've liked. The actions we have taken to improve our product offering and sales execution are positive, but they'll take time to show results.

However, even with the volatility of the turnaround, we've been focused on financial stability and improving operational efficiency, which is evidenced by our ability to generate non-GAAP profit and significant increases in cash.

I realize we haven’t had the best track record of late, but we believe we have built a strong foundation on which to capitalize in 2018. A month into 2018 we're excited about our products and encouraged by our order linearity.

However, we realize we still have work to do to ramp our recently hired sales people and improve our sales execution, before we're really confident about delivering consistent year-over-year growth. That work is our top priority in the first half of 2018. I'll now turn it over to John to talk in more detail about our financials..

Thanks Dave, and good afternoon, everybody and thanks for taking the time to join us here today. Before I go through the quarter in detail, I'd like to highlight some financial and operational metric achieved by Aerohive in the fourth quarter of 2017. We achieved non-GAAP operating profitability and positive non-GAAP EPS for the second time this year.

We realized significant sales efficiencies with non-GAAP sales and marketing costs, coming in at 37% of revenue driving this important metric to under 40% for the quarter and for the full year. We delivered non-GAAP gross margins above our revised guidance range as non-GAAP EPS at the high-end of our guidance range.

We were meaningfully cash generative, including cash equivalents and short-term investments in the fourth quarter and on the full year-to-date basis. During the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the fourth quarter and provide some related commentary on our business.

I will close by reviewing our financial guidance for Q1 2018. Now looking back at 2017 on a full-year basis, revenues came in at $152.9 million down 10% compared to $169.8 million for fiscal '16.

We experienced the decline in our product revenues of 18%, partially offset by strong results from our subscription and support business, which grew 23% on a year-over-year basis. With that context I'll now turn to more details on our Q4 results. Q4 revenues came in at $37.2 million, similar to last quarter and down 11% on a year-over-year basis.

Product revenue in the fourth quarter was $26.2 million down 2% sequentially and 20% on a year-over-year basis. Subscription and support contributed a record $11 million of revenue in the quarter coming in at 30% of total revenue and growing 7% sequentially and 25% compared to the same quarter a year ago.

Now moving on to revenues on a geographic basis, revenue in the Americas was $20.8 million or 56% of total revenue. Americas revenue was down $1.8 million or 8% on a sequential basis and down $2.9 million or 12% on a year-over-year basis.

As expected the Americas region continues to be impacted by the volatile education market as well as the previously discussed sales related issues.

Now moving on to EMEA, EMEA revenue for Q4 came in at $12.6 million, 34% of total revenue EMEA revenue increased $1.4 million or 13% on a sequential basis and was down $2.4 million or 16% on a year-over-year basis.

Despite a tough Q4 compare we are pleased with the sequential revenue improvements we've seen in the EMEA region throughout the course of the year. Moving on to the Asia PAC region, revenues came in at $3.8 million or 10% of total revenues, up $0.5 million or 16% on a sequential basis and up $800,000 or 27% on a year-over-year basis.

As we have mentioned previously, we expect results from this region to continue to be lumpy given the relatively small revenue base. Overall however, we view this region as offering tremendous growth potential as we head into 2018. I'll now turn to a discussion on our non-GAAP margins and operating expenses.

Overall, we're pleased with our gross margin performance, which came in well above our original expectations and revised guidance -- revised guidance range, primarily due to strong non-GAAP subscription and support margins, supplemented by better-than anticipated non-GAAP product gross margins.

Overall, margins for the fourth quarter came in at 68.8%, up meaningfully when compared to the 66.8% in Q3 and similar to the gross margins from the same period a year ago. Non-GAAP product gross margins for the quarter came in at 67.3% compared with 65.1% in the third quarter and compared to 68.8% in the same period a year ago.

Non-GAAP subscription and support gross margins came in at 72.4% in the fourth quarter, up 110 basis points compared to the 71.3% in the third quarter and up 370 basis points compared with 68.7% in the same quarter a year ago. The Q4 results for this business set a new record margin.

We're very pleased with the results coming out of our software -- our subscription and support business. Moving on to non-GAAP operating expenses.

Overall non-GAAP operating expenses were $25.1 million in the quarter down $6 million when compared to the $31.1 million in the same quarter a year ago and down $1.2 million for the $26.3 million in the third quarter.

While the year-over-year and quarter-over-quarter reductions in non-GAAP operating expenses were related to previously discussed cost reduction actions taken earlier in the year and significantly lower levels of variable compensation.

Non-GAAP R&D was $7.3 million or 20% of revenue compared with $8.9 million or 21% of revenue in the same period a year ago. This compares with $7.9 million or 21% of revenue in Q3. We're pleased with significant prudence we're seeing on the product side.

Engineering productivity continues to improve as evidenced by our numerous new product announcements, while at the same time, we are retaining disciplined R&D spending levels.

During the quarter we saw significant improvements in our sales efficiency, our sales spend efficiency as non-GAAP sales and marketing expense came in at $13.8 million or 37% of revenue in the fourth quarter down $600,000 from the $14.3 million expense in third quarter.

On a year-over-year basis, non-GAAP sales and marketing expense was down $3.3 million or 19%. We're encouraged by several metrics that point to improved sales expense management. For the fourth quarter, in a row we have reported year-over-year declines in sales and marketing expense.

In addition, on a full-year basis, our sales and marketing cost as a percentage of revenue were 39% compared with the 43% for the full year 2016. Looking forward to 2018, we expect an increase in Q1 sales and marketing expenses as a percentage of revenue based on our typical seasonality, but then a return to sequential improvement.

Lastly non-GAAP G&A expense came in at $4 million or 11% of revenue in the fourth quarter, compared to $5.1 million or 12% of revenue in the same period a year ago and they remained relatively flat compared to Q3.

Overall, our non-GAAP operating margin was 1.4%, a 710-basis point improvement when compared to the negative 5.7% in the same period a year ago and up from negative 4% in the third quarter.

Non-GAAP operating income was $0.5 million a $1.9 million improvement compared to the non-GAAP operating loss of $2.4 million in the same period a year ago and an improvement from the non-GAAP operating loss of $1.5 million in the third quarter.

We reported non-GAAP net income of $300,000 in the fourth quarter, compared with a non-GAAP loss of $2.3 million in the same quarter a year ago and a non-GAAP loss of $1.6 million in the third quarter.

This translates to non-GAAP net income on a per-share basis of $0.01 in the fourth quarter compared to a non-GAAP net loss of $0.04 in the same period a year ago and a non-GAAP net loss per share of $0.03 in the prior quarter. Non-GAAP net income per share in the fourth quarter is based on $55.3 million weighted average common shares outstanding.

Moving to the GAAP basis, on a GAAP basis in the fourth quarter, the net loss was $0.06 per share compared with a net loss of $0.14 per share a year ago and a net loss of $0.12 per share in the prior quarter. Our Q4 GAAP net loss includes a stock-based compensation expense of approximately $3.7 million.

Now moving on to the balance sheet, cash, equivalents and short-term investments at the end of the year totaled $85 million a sequential increase of $1.9 million. During the quarter, we repurchased approximately 200,000 shares of our high stock for an aggregate value of approximately $1 million as part of our share repurchase program.

Excluding the cost of our share repurchase program for the full year, we generated increases in our cash and short-term investments by approximately $12.3 million in the full fiscal year 2017.

Inventory levels saw very modest increase of $300,000 to a total of $13.5 million at the end of the quarter compared to the $13.2 million level at the end of the third quarter.

Accounts receivable also saw a modest increase to $17.7 million as of the end of December compared to $17.2 million at the end of the third quarter and DSOs remain relatively flat with 43 days compared to 44 days.

Moving on to our guidance for our fiscal Q1 2018, we currently are anticipating Q1 revenues in the range of $34 million to $36 million, a muted seasonal decline compared to our normal Q1 seasonality.

On a non-GAAP basis, we expect gross margins to be in the range of 66% to 67% driven by the anticipated growth in our lower margin Dell business impacting our product margins offset by continued strong margins from our subscription and support business.

On a non-GAAP basis, we expect our operating margins to be between negative 13% at negative 9%, reflecting our seasonally low first quarter. We expect other expenses including tax expense to be approximately $200,000 in the quarter.

And lastly, we're expecting non-GAAP EPS results between $0.08 and $0.06 per share based on share count of approximately 54 million shares outstanding. On a GAAP basis, we expect Q4 net loss to be between $0.16 and $0.14 based on a similar 54 million weighted average shares common shares outstanding.

As a reminder, we exclude stock-based compensation and the cost relates to shareholder class action litigations actions from our non-GAAP results. I'd also like to take a brief moment to highlight that we have adopted the new revenue accounting standard ASE 606 as of January 1, 2018.

The company has applied the full retrospective approach and we plan on providing our historic results under the new accounting guidance and our upcoming SEC filings. Our preliminary view is that, we don't anticipate the retrospective application of ASE 606 to have a material impact in any of our historical comparisons.

Now with that, I'll turn the call back over to Dave for some additional remarks. .

Thanks John. Despite revenue challenges in 2017, we improved our product offering and are now of full stack, cloud networking company able to deliver innovative new solutions.

We also strengthened our financial foundation with increased recurring revenue, gross margins and cash flow and we are targeting full year non-GAAP operating profitability in 2018. As we look ahead, I have confidence in the team we have assembled as evidenced by their performance so far in Q1.

I'd like to thank our customers and employees for their continued loyalty and dedication as we work through this turnaround. I will now take your questions.

Operator?.

Thank you. [Operator Instruction] We’ll hear first from Mark Kelleher with D.A. Davidson..

Great. Thanks for taking the questions.

First just a clarification, could you repeat the guidance for EPS, the non-GAAP EPS for Q1?.

Yeah, the non-GAAP EPS guidance is loss of $0.06 to $0.08..

A loss of $0.06 to $0.08. Okay. Thanks.

And is there a way you could size what Dell contributed in the quarter?.

The only granularity we've given to Dell was Dell's material with the [filing that] as 10%. And Dell has been material throughout all of 2017 and continued to hit that threshold in the fourth quarter. So overall, we're very, very pleased with Dell. And I think we're looking forward to it with this OEM relationship as we move into 2018..

So, with Dell doing so well and the topline not doing so well, is there a channel conflict issue, is there difficulty selling to your other channels if they're competing against the Dell channel?.

To be clear Dell's probably consistent with what it had been trending. So, it didn't take a material increase. It didn't take an increase or contribute an increased portion of the quarterly results. There is with any kind of OEM, there is some modest amount of channel conflict.

But at this point, we think it's been managed well and there's not a material issue. We only started into the OEM in early November. So, we’ve had just two months of it and I think our transitioning from the prior resell relationship into OEM. So, I wouldn't attribute any of the challenges to that..

How about the new 802.11 AX protocol? You said you've got the new products tied up for that.

Could that be causing a slowdown at this part of the year waiting for those new products?.

No, we've not seen that yet. We are seeing -- obviously now we just announced in this quarter we're seeing interest in it, curiosity. People are starting to try to get more educated on it, but we've not seen people actually waiting on it.

To be clear, they are -- the challenges we had in Q4 really were around just execution of forecasting an execution in the December month and we've taken actions to improve upon those things.

We don't think it goes beyond that in terms of the issues and so we view AX as exciting thing that's getting more attention, getting new customers and partners to pay attention to us, excited about the velocity at which we're executing, the fact that we're out and the leading edge when frankly some of the competitors that are behind are now tapped and trying to slow things down because there are some competitors that aren't ready to hit AX as we are in midyear..

Okay. Great. Thanks. .

Thank you..

We’ll hear next from Christian Schwab from Craig-Hallum Capital Group..

Thanks for taking my question.

Can you remind us, how many people are on the sales force and can you give us an idea of how many you replaced that were underperformers?.

I will let Dave get into the size of the sales force. But to be honest, we're not going to get to the level of granularity and who we took out.

I will say that, it was probably skewed to more sales leaders than individual contributors so again and Dave, do you want to add to that?.

Yeah, I think, not planning on breaking out specific quantities, but it was -- there were several changes in our leadership and a number of changes that we call the regional sales manager level, the people that owned a territory, given usually of a multi-state cluster.

So, change in a variety of those, but we've been affecting some of those changes through the year and frankly, but following the disappointing outcome we accelerated and took some action we think was appropriate and think positioned us for success going forward..

Can you remind us how many regional sales managers you have?.

So, the worldwide sales force, this includes system engineers and channel inside/outside it’s in the range of about 180 people. Regional guys are in the -- it's probably in the 70 to 80 range would be the number of regional sales managers around the world..

Okay. Kind of given kind of the challenging track record of later maybe even since becoming public, when do you think it's reasonable to just aggressively take a look at the cost structure of the company to drive sustainable profits. Obviously, you've got wonderful products, very few companies have the type of gross margins you have.

So, the perceived value of your product is extremely high.

And so, given the challenges of the market and the expansion of the distribution channel and the new OEM agreement, it seems if we targeted something in the lower growth category versus double-digit growth with the rightsizing of expenses, the company could be very profitable?.

So, there's a lot to answer in that question. But I would say that the rightsizing of the company has occurred all year long right. If you look back -- look at our year-over-year expenses, look at our meaningful sequential decline, we think it's very important to get profitable.

I think even with higher estimates the levels of profitability we got to this year on disappointing topline growth, poised to the fact that we view that as a very important metric. So yeah without answering your question directly saying do we need to get to a certain level, yeah, we think we're close to that level.

We'd like to see some topline growth to get some leverage in the P&L. But we view profitability is an extremely important metric for us to achieve and maintain and it's not a direct answer, but an important context and something to understand what you're getting at.

But one of the important things is we've driven kind of a massive transformation in our product line and our engineering execution over the last year.

And we look at the roadmap of the things that we've just announced over the last few months including SD-WAN, the A3 authentications through access platform, the AX roadmap that portfolio we have in front of us is frankly the most exciting that we've had in the company's history.

And we want to make sure that we are able to capitalize on what products team has done over the last year and half as we've really accelerated that machine. So clearly, we're going to be watching that. We expect that those actions will all lead to interesting growth.

But at the same time, we're going to manage as we said to be -- our target is to -- have non-GAAP operating profitability through the year and we're going to manage that and expect that we get more leverage from topline growth taking advantage of the products we are delivering..

Okay. Great. Thank you..

Thank you..

We’ll hear next from [Zach] with Dougherty..

Thanks Zack on for Catharine Trebnick here. Just a couple of things. So, first I think you mentioned last quarter that through Q3 you had added or maybe it was activated 900 of hours. So, I'm wondering, if they've had any impacts with the weak sales they kind of thought that the channel would be a bigger piece of that.

And if you see any impact on that in 2018 and if there were any VARs added in Q4 as well?.

Yeah, so we have added a lot of new VARs and you're right we have added them and we continue to add them at a similar pace to be honest.

I think want some of our sales execution issues that we took action around where there were some people that weren't enabling and developing those VARs as effectively as we would have liked them to have been to drive growth.

We've engaged a lot of VARs and they certainly are contributing but we would have expected them to contribute it, part of that is people have you know people there may be more used to direct - more direct touch.

So, we need to change their motion and their behavior to be more channel centric or in some of these cases we needed to bring in people that know how to really develop the VARs more effectively. So that's an ongoing effort. We are seeing more VARs engaging continued progress in that area.

But now it's a matter of taking an engagement ramp in terms of revenue contribution..

Got it. And then one of the things, kind of from reminding perspective I know you I said, in Q1 at least for sales and marketing it will increase for Q1 and then decline sequentially.

So, I was just wondering how far along these cost reductions are? Are you going to continue to see OpEx as a percentage of revenue declining through ‘18 or ’19? Do you have particular long-term targets for these?.

So, to answer your first question I just want to make sure, I was clear. We expect as a percentage of revenue to see an increase in sales and marketing in the first quarter and to step down right through the balance of the year. That's an increase from Q4 to Q1 but it should be a decrease as a percentage of revenue moving forward versus Q1, ‘17.

We are improving reducing our OpEx versus Q1, ‘17..

Right, but increasing sequentially. Okay.

And then just any sort of long term targets, how long you expect the cost reductions impact the percentage of revenue that OpEx is?.

Well I think we expect to get leverage throughout the year on the operating margin line right. So, when you look at obviously depends what revenue number you're starting with. If we expect to get to non-GAAP operating profitability with the exception of Q1, you'll see a natural progression of that improved leverage as the year goes forward..

Got it. Thanks..

We'll move to Doug Clark with Goldman Sachs..

Hey thanks for taking my question. My first one is, I want to understand the sales execution issues a little bit before because it's not really reconciling is the comment that linearity in the first two months of the quarter was kind of as expected and then the issues uncovered in the last month of the quarter.

So, can you provide a little bit more detail to kind of what was being over modeled or what the underlying issue was and then exactly how you've addressed that on a go forward basis?.

Yeah, I think the primary issue was - we were operating with sales forecast that substantiated the guidance we'd given, we'd see normal linearity and they had a projected close for what was going to happen December and then just fully closed substantially less than what was the projections.

So, I think the execution issues were not adequately assessing the realistic close date and the probability of close inside the quarterly window which led to bad forecasting.

And so, as I said we have closed a number of those deals since then in the first weeks of the 2018 which is you know that's encouraging, indicate that in fact some of this much of this was timing, but that kind of forecasting accuracy is pretty serious execution problem we have to fix..

Okay that makes sense. And then on the product gross margin side it's stepped up in the quarter and fourth quarter. I'm wondering if there's anything notable there.

And then just looking out longer term, I'm wondering if you can give us kind of a perspective on the gross margin trajectory on the product side as you weigh factors like 11 AX to the extent that that's accretive offset by growth in the business from Dell which may be dilutive or any anything else that I may be missing?.

Sure. So, on the sequential side, we're actually seeing improvements in our COGS on the hardware, we overachieved if you will in the fourth quarter. In terms of the longer-term model, we think that there will be modest downward pressure as Dell ramps up and becomes more of the mix with some modest downward pressure on the product gross margin line.

But that will be offset with stable or growing gross margins on the subscription and support line. So, I think what that all equates to is kind of a modest tapering of gross margins as the year progresses. Nothing particularly material, but just kind of a downward very shallow downward slope to the gross margin line..

Okay. That makes sense.

And then final question, I'm curious if you can give it now or will be in the 10K, but I understand that all being a 10% plus customarily be disclosing exactly what size the customer exposure is?.

So, we don't because Dell takes their product through their chosen distributor. So, we don't -- you won't see, excess true, actually not the true case on the OEM business. So, you won't see it in the current 10-Q because it's a mix of both their reseller, which goes through their chosen distributor and the OEM business.

So, you have to combine those to get over the threshold. So that ultimately won't be disclosed. Once Dell's OEM business on its own crosses that threshold it will be disclosed in the filings..

Okay. Thanks a lot guys..

Thank you..

And at this time, I'd like to turn the conference back to Mr. Flynn for any closing remarks..

All right. Thank you, all for joining us today. We will be at the Goldman Sachs Conference in San Francisco next week and hope to see many of you there. Good night..

Thank you..

That does conclude today's conference again. Thank you all for joining us..