Following last quarter’s pre-announcement, Aerohive Networks delivered a solid close to the year, with revenue of $36.2 million (up 19.5% year-over-year), in line with guidance and the Street, while better-than-expected profitability propelled a modest bottom-line beat.
Management noted a strong showing from retail and healthcare verticals, which offset E-rate-induced deal pushouts in K-12. Management also noted strong customer additions (over 1,500) and revenue from existing customers. However, first-quarter guidance came in below expectations, with management citing E-rate-induced delays and heightened discounting pressure from international distributors looking to offset the impact of a strengthening dollar. In addition, Aerohive is still working through some sales execution issues, with much work to be done to strengthen the channel and add capacity in key territories.
Similar to commentary from Ruckus, Aerohive management expects a strong second half to the year, given the acceleration in E-rate funding approvals and early upgrades to Wave 2 of 802.11ac, in addition to new product introductions throughout the year. The FCC approved an incremental $2 billion in E-rate funding over the next two years, specifically for Wi-Fi initiatives. In December, the FCC clarified that funding would be available to a broader set of schools beyond just underprivileged Title I and Title II schools, causing a mad scramble by schools across the country to apply for the funding, pushing many early 2015 deals toward the second half of the year when funding grants begin to get approved.
Education accounted for 41% of Aerohive revenue in 2014, of which U.S. K-12 accounts for roughly two-thirds to 75% of this total. What remains to be seen is how much of the new E-rate funds will be incremental to total K-12 spending versus substitution of other funding vehicles by wealthier schools applying for reimbursement. We should have greater clarity on this by the end of March or in early April.
For the fourth quarter, management expects revenue to come in between $29 million and $31 million, $3 million below the Street estimate of $33 million at the midpoint. Non-GAAP gross margin is expected to come in between 66.5% and 68.0%, with management noting an expanded range, due to greater potential for adverse product mix in the company’s seasonally weaker quarters.
Non-GAAP operating loss margin is expected to come in between 35% and 29%, as the weaker revenue and weak seasonality adversely combine with Aerohive’s multiquarter plan to build out its sales presence, particularly in underdeveloped areas. Similar to the revenue guide, the non-GAAP loss per share range of $0.21 to $0.24 is behind consensus of a $0.15 loss per share.