Has Anyone Looked at Gigamon?

Recently Gigamon (GIMO) crossed my radar. I would try to explain what they do, my attempt would be feeble because I barely understand it. So here is Google Finance describes the company:

Gigamon Inc. offers a solution that delivers visibility and control of data-in-motion traversing enterprise, federal and service provider networks. The Company’s Visibility Platform consists of a distributed system of nodes (that in combination establish a Visibility Fabric). The Visibility Platform includes physical appliances and virtual nodes that can be deployed in data centers, central offices, virtualized/private cloud/public cloud environments, and small form-factor remote site appliances, which in combination enable pervasive visibility of network infrastructures. Its GigaSECURE Security Delivery Platform enables security teams and information technology (IT) personnel to gain visibility into their IT infrastructure by forwarding selected traffic of interest from network, server and remote location infrastructure to security, management, analysis and compliance tools in a manner that is optimized for specific uses or functions.

From https://www.google.com/finance?q=NYSE%3AGIMO&hl=en&e…

What caught my attention is that the company crashed earlier this year from above $60 to back near $30. Yet it appears to still be growing strong. Apparently shares crashed on guidance which management said was probably being overly-cautious.

Bert Hochfeld wrote about the company earlier this month (and he’s written about them before too):

Gigamon calls itself the world’s #1 visibility platform. Basically, the company provides its users with visibility into what it calls “data in motion.” It is a hardware vendor, to be sure, but its products are highly differentiated with a variety of software options that customize the solution the customer receives. It has a typical mix of users with concentration in Financial Services, healthcare, retail, and particularly Federal. Most of its competitors are really niche players who offer visibility as a component of other solutions.

Later Hochfeld writes:

By comparison, despite Gigamon’s stumble it has enjoyed a CAGR of 34% for the past several years and that accelerated to above 40% in both 2015 and 2016. Over time, more and more of the company’s use cases have come from users deploying Gigamon to enhance their security solution. Currently, about 80% of new orders are security-centric. The security application typically works with third party tools that are sold by vendors of Next-Generation firewalls, as well as SIEM (Security information and event management) and analytic vendors and companies offering Advanced Threat protection.

Most recently, the company announced an arrangement with AWS (NASDAQ:AMZN) in which the Gigamon visibility platform can be embedded into the overall AWS fabric which should allow AWS users to accelerate their migration of existing applications and workloads while gaining greater visibility into network traffic.

Because of the nature of its service, Gigamon is supported by the major security vendors such as Palo Alto (NYSE:PANW), FireEye (NASDAQ:FEYE), Fortinet (NASDAQ:FTNT), Cisco (NASDAQ:CSCO) and Checkpoint (NASDAQ:CHKP) who view the company as offering a solution that makes their products work more effectively.

From https://seekingalpha.com/article/4055329-can-gigamon-visibil…

In my own research, I discovered they also can be used in conjunction with Splunk.

For more about what they do, here’s an eight minute presentation from a company exec reviewing the company: https://www.youtube.com/watch?v=BjcUUPVGtmQ

I will review the conference call at some point to discover what was so bad about guidance, but probably won’t have a chance today, which is why I’m just posting what I have now. But the guidance wasn’t bad enough to scare Hochfeld away.

Anyway, look at these beautiful numbers:


Revenue (millions)	Q1		Q2		Q3		Q4
2014									51.251
2015			46.853		51.446		56.652		67.024
2016			67.211		75.103		83.512		85.029

EPS (GAAP)		Q1		Q2		Q3		Q4
2014									0.09
2015			(0.02)		0.00		0.12		0.07
2016			0.08		0.91		0.16		0.17
	
EPS (non-GAAP)	        Q1		Q2		Q3		Q4
2014									0.18
2015			0.13		0.16		0.22		0.29
2016			0.22		0.30		0.36		0.37

Current (2016 Q4 Earnings):

Revenue Growth (millions)
2015 Q4 TTM Revenue = 221.975
2016 Q4 TTM Revenue = 310.855
YOY Revenue Growth = 40%

EPS Growth (GAAP)
2015 Q4 TTM Earnings = 0.17
2016 Q4 TTM Earnings = 1.32
YOY EPS Growth = 676%

EPS Growth (Non-GAAP)
2015 Q4 TTM Earnings = 0.80
2016 Q4 TTM Earnings = 1.25
YOY EPS Growth = 56.25%

Non-GAAP P/E (Check Current Price) = 35.55/1.25 = 28.44

1YPEG = 28.44/56.25 = 0.51

Has anybody else looked at this company? It looks pretty

Matt
Long AMZN, CSCO
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

17 Likes

Thanks Matt, for the nice write-up of Gigamon. I’ll have to take a look.
Saul

This does look interesting. One thing to note is the Q2 GAAP EPS of $0.91 looks to be an outlier likely due to tax loss carry forwards.

Irrespective of that, I plan on looking into this further and was totally unaware of the company.

Thanks Matt.

A.J.

Wow!, Nope, never heard of Gigamon. Looks like a gem.

Yeh - I follow it and again is in that annoying folder of stocks I didn’t buy that rise more then ones I did buy.
A t

One thing to note is the Q2 GAAP EPS of $0.91 looks to be an outlier likely due to tax loss carry forwards.

Definitely an outlier, AJ. Don’t know what caused it but just another example of why non-GAAP earnings usually work better than GAAP.

Yeh - I follow it and again is in that annoying folder of stocks I didn’t buy that rise more then ones I did buy.

I have a nice selection of stocks that fit that profile too, Ant!

It seems like GIMO a cloud security play, though there are other applications outside of security it can be used for. I’m fairly surprised it hasn’t been gobbled up by Cisco yet.

One thing that gives me pause is that if Cisco doesn’t buy it out, it could just try to compete with it and offer a similar service in its security bundle. I know Cisco is mostly considered as an obsolete dinosaur, ready to have its lunch eaten by Arista, on this board. And that’s partly true.

But it is also moving in a big way towards becoming the player in cybersecurity (at least what I can tell in my completely unqualified opinion). It has made a series of acquisitions toward this goal, all fueled by its router/swith business which is still a cash cow. The company is thus able to make acquisitions w/o going into net debt and fund a very nice yield.

Anyway, I don’t think its a coincidence that other cybersecurity players - like PANW for instance - have struggled as of late. I think Cisco’s competition in this area is an underrated aspect of PANW’s decline.

Anyway, I went long on Cisco about a year ago and am up 30%, not counting the dividend. And it still sells at a discount to the market. And it just seems like Cisco could easily duplicate what GIMO does if it doesn’t outright buy it. Cisco likes making acquisitions, so that’s a distinct possibility as well.

Just some thoughts. And please know everything above can be absolutely wrong. I don’t have a good feel for some areas, and this is one of them. I have a much better handle on fintech and payments. So please feel free to chime in if you know better or could add to my understanding!

Matt
Long CSCO
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

1 Like

Hi Matt.

I think your points on the competitive landscape in both networks and cyber-security are on target; although I’m not an expert either (although a bit more of a close observer in some aspects of networks).

What would concern me with Cisco is the relative weighting of those two businesses. Can the growth in one offset the decline in the other. Your point about valuation is well-taken, and I’m pleased you’ve had success with Cisco so far.

Thanks and best wishes,
TMFDatabaseBob (long: AMT + INFN, which are my main sources of “network” info)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

1 Like

Hi Matt,
I looked at Gigamon and you can go on Youtube to see what it actually does. It is very interesting and I think you are correct that someone will buy them up. They are not really a cloud security play but a Deep packet inspection play. They can look at a packet and see in real time what is moving across the network. They have a fabric that they can install over the network that allows deep packet inspection and they can be used with Hardware providers like Cisco, white boxes, and Virtual boxes like VMWare. They take all of this information and put it into one screen to allow companies to see what is going across the network. They have many ways to filter the traffic so that they can key on anything, including a persons email address. They stated they can filter up to layer 7 in the network which is impressive. They are now working on where they can filter segments and flows which will allow them to filter more of the traffic instead of a single packet. The security portion that you alluded to is more the ability to see what is disrupting the network and see how to correct the disruption, ie Dos attacks. They have 2/3rds of the fortune 100 as customers and 1/3 of the fortune 1000 companies as customers and the TAM is supposed to grow at 24% cagr up to 2020 I believe.

At least that is why I have seen so far.

Thanks for bringing it forward, interesting company.

Andy

5 Likes

Database Bob,

That is definitely the million dollar question for Cisco shareholders to consider. I don’t know if everybody saw it, but Hochfeld actually did a piece on this very matter earlier this month:

I wrote research reports on Cisco (NASDAQ:CSCO) for many years, but frankly grew bored with the subject as the company, despite numerous efforts to do so, couldn’t seem to find a growth business that produced results large enough to move the needle. And it became somewhat difficult to find any of value to say about this company which is still covered at the moment by 30 analysts.

But after writing about Palo Alto (NYSE:PANW) recently and reflecting on how that company had run into a competitive buzz saw called Cisco, I thought it might be time to write an article focused solely on how Cisco is doing in security and contrast that with the problems it faces in defending its turf in switching against a hyper-aggressive Arista (NYSE:ANET) that has developed or otherwise acquired technologies that many customers think of as superior to the classic architecture of switches.

Cisco is trying to do one of the hardest things in the tech world and that is to become a leader in a very crowded space, cyber security. As mentioned, last week, I had the occasion to write about the struggles through which Palo Alto is now going. For years, Palo Alto has been one of the hyper-growth businesses that was remaking the future. But, for better or worse, those days are over, and it has gotten down in the ring and is competing on a level basis with many competitors, most of them who have been around… but one of them has been Cisco, which is trying to become a leader in a product area that it entered a few years ago through acquisition.

It would be an interesting discussion if that were all that is happening - and from an investment point of view it would be very simple to talk about the opportunities that Cisco has and to include that if executed reasonably it would be a good investment.

But the fact is that while Cisco is building a significant cyber security business, it is simultaneously under assault in its switching space.

From https://seekingalpha.com/article/4054162-cisco-unusual-puzzl…

He eventually takes a bullish stance which was good to see because, in the past, he was definitely not a fan of the company.

Matt
Long CSCO
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

1 Like

Thanks Andy, appreciate that clarification.

Matt

Hi Matt, I have a question. Gigamon really interested me, and I see a lot of potential to exceed very low expectations. However, I’m concerned because it primarily sells hardware. Does this mean it has NO recurring revenue? Sure its past customers buy new add-ons each quarter, but when customers are just buying add-ons there’s no guarantee that this quarter’s add-ons will come to more dollars than a year ago’s add-ons. Customers must reach a saturation level where additional things they need become only a tiny proportion of what they’ve bought already. Gigamon must have to run as fast as it can just to remain in place. Am I seeing it wrong.

It seems to me nothing like Shopify, where the subscription income comes in regularly, or Square, or Splunk, or Paycom, or Hortonworks, all of whom have next year’s revenue built on top of this year’s as a base, for the most part, and this year’s revenue adds on to that. With Gigamon, it seems to me, they have to come up with some new gizmo and hope that their customers will want to buy it to add on, and that total just isn’t always going to go up.

Am I seeing this totally wrong?

Saul

3 Likes

Saul,

I honestly don’t know that I’m the best person to answer this question. From what I can tell, you are mostly right. In their quarterly earnings releases about 2/3rds of their revenue is classified as “product” and the final 1/3rd is classified as “service”.

See their latest report at http://investor.gigamon.com/phoenix.zhtml?c=251476&p=iro…

It does seem that almost all their business growth comes from repeat customers. In his article, Hochfeld writes (I know you probably read this Saul, but I am excerpting here for others’ benefit as well):

This is a quintessential land/expand company with dramatic levels of repeat purchases from its different annual cohorts, some of whom have bought more "stuff: from Gigamon every quarter for 10 years. About 90% of the company’s business is coming from repeat customers which would seemingly make forecasting a bit easier than is the case for other enterprise IT vendors.

And for a hardware vendor, Hochfeld points out their profit margins are truly fantastic:

Compared to many other hyper-growth businesses, Gigamon has a more profitable business model and it has attained that record without total reliance on stock based comp. Gigamon is a hardware vendor so it does have somewhat different operational performance metrics when compared to companies that have a greater preponderance of software in their mix. That being said, at 84% in Q4, the company’s non-GAAP gross margins is amongst the highest seen in the industry, even for companies that sell just software or SaaS solutions.

In its investor presentation (accessed on its IR home page, near top-middle of the page, under “Featured Content”), Gigamon classified their solutions as “software centric”. And it seems some of their nodes they use for monitoring a network (or for creating their “fabric”) are virtual. What does that mean exactly? I am sure I have no idea. But it seems as if there is not actual hardware needed for those nodes? Maybe just software embedded in existing points of the network?

Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

2 Likes

And it seems some of their nodes they use for monitoring a network (or for creating their “fabric”) are virtual. What does that mean exactly? I am sure I have no idea. But it seems as if there is not actual hardware needed for those nodes? Maybe just software embedded in existing points of the network?

Hi again Matt,
So I guess the question is do they sell the product (whatever it is, which we don’t understand), and get paid for it once and for all, and then it belongs to the customer — or do they lease it to the customer and get paid forever. From what you and Bert said, it sounds like they sell product, which makes it a much shakier investment, and means their terrible guidance could be partly true. Otherwise it’s hard to see how revenue and earnings could fall off a cliff, even for two quarters, if they had largely recurring revenue.

But I could be completely wrong.

Saul

Your welcome Matt,
Do not take me as an expert in this field. I am just giving my opinion and it should be taken as that. I find this company interesting though and haven’t delved in very deep yet but I intend to. The article that Bert wrote had a comment that I felt was very good.

Gbrooks49
As the former CFO of BCSI, one area you should consider in your analysis of companies with a hardware component is the timing of their re-fresh cycles. If you followed our curve at BCSI before going private, and even the surge under Thoma Bravo/Bain before selling to Symantec (as seen in their S1 filing), the revenue wave was a often a story of re-fresh (if not inorganic acquisition revenue)…

You can see the trend in more established players like F5, who actually acknowledges when they are going through one, and Riverbed before their take private.
Please do not overlook for both PANW and GIGA the impact of such cycles. PANW tried to diversify their revenue stream ahead of the lull (highly penetrated market) with their endpoint solutions, but too little too late. However, when they go into a re-fresh, it assume will be big. I assume GIGA is experiencing the same cycles in the up/down/up/down cycle of the last 3 years.

As a CFO and investor, I am disappointed at how few companies acknowledge the impact of re-fresh cycles on their business. On the flip side, many companies are new enough that they may not understand it themselves and mistakenly interpret it as growth.

I think this is something that must be looked at. But Gigamon is starting to make products for SDN which is something that is just starting to take off so this should be good for their growth. I think something that is also interesting is they are working with Cisco, Aws and VMware with their product and also they are working with alot of the security companies Ie Fireeye. This in my mind shows that they are an essential add on for these companies which makes their product better because of what Gigamon does.

All of this is of course my opinion and should be taken as such.

Andy

4 Likes

I think that’s basically right, Saul. As far as I understand it. I will research it more this week and try to get back to this board with more info. It might not be until next weekend though when I can go through their 10K and really try to break down its business model.

If anybody else knows please chime in!

Matt

1 Like

Here’s from their 10-K where they describe their “product and technology”, which is comprised of both hardware and software from pages 4 to 6.
Page 7 refers to their customer support for both hardware and software, and the section on customers references T-Mobile as their largest customer at 10% of their revenue ( no other customers comprise over 10% of revenue. Report also references AWS.

As of December 31, 2016, GIMO had over 2,300 end-user customers, including 81 of the Fortune 100 and 418 of the Fortune 1000.

Page 8 says they compete with ANET and CSCO. so perhaps similar to how many initially thought ANET was. hardware company, GIMO may turn out to be a hybrid of both.

Page 15
I believe this answers the recurring revenue question…
A significant portion of our revenues come from new or recurring purchases of products from our installed base of end-user customers. Our future success depends, in part, on our ability to increase the adoption of our products within and across our existing end-user customers and future end-user customers. If we fail to expand existing deployments or sell additional products to our customers, our ability to grow our business and improve our operating results and financial condition would be adversely affected.

Need someone on this board with far more tech-Savy and investment expertise than I to interpret this and determine if GIMO’s software component and infrastructure as a service creates a situation where they have the kind of recurring revenue those of us on this board are seeking.

Interesting to see the partnerships and business relationships they have with SPLK PaloAlto Networks and CSCO, etc. in order to make their deliverables happen.

Caution, this gets long…

Products and Technology

Our Visibility Platform is comprised of a range of custom software and applications that in combination reside on high-performance, modular purpose-built hardware, or run as virtual machines in private and public clouds. The traffic intelligence applications and capabilities provide advanced controls for traffic selection, forwarding, manipulation, modification, de-duplication, SSL decryption, correlation, sampling and generation of flow records. Our physical appliances are based upon a combination of commercially available hardware components, processing resources and storage devices. Centralized control across the Visibility Platform is provided by the GigaVUE-FM Fabric Manager software suite, our multi-node orchestration system.

These products enable our end-user customers to design and deploy Visibility Fabric architectures optimized for a range of scale and performance requirements from monitoring in virtualized server environments, and from 1 Gigabit appliances to multi-Terabit chassis-based solutions. The majority of our GigaVUE products are modular and extensible, enabling our Visibility Platform to be deployed on any size infrastructure and to scale as the environment grows.

Our product portfolio enables customers to deploy an architecture that delivers pervasive and active visibility to data-in-motion across their infrastructure. The product portfolio encompassed by the Visibility Platform has three major categories:


Visibility nodes powered by GigaVUE-OS software that offer a set of built-in services


Traffic Intelligence applications powered by GigaSMART

4


Orchestration engine powered by GigaVUE-FM
Collectively, the above components form a distributed set of physical and virtual visibility nodes that aggregate traffic, optimize traffic to precisely identify data of interest and deliver the data to interested applications/tools that consume this information.

Visibility Nodes: The visibility nodes in the Gigamon Visibility Platform can be physical appliances or, virtual appliances for both on-premise and public cloud IaaS.

GigaVUE physical visibility nodes are high-performance appliances that form the foundation of a distributed fabric. These hardware visibility nodes are modular and extensible for a range of scale and performance requirements from 1 Gigabit 1RU (“RackUnit”) nodes to 2.4 Terabit-14RU chassis-based solutions. Our hardware visibility nodes are offered in two primary product lines:


GigaVUE H Series: These intelligent visibility nodes are offered in a variety of form factors optimized for different locations in the network ranging from branch offices/remote sites (GigaVUE-HB1 or GigaVUE-HC1) to highly demanding data centers / private clouds / mobile switching centers (GigaVUE-HC2, GigaVUE-HD4 or GigaVUE-HD8). A key characteristic of the GigaVUE H Series is integrated GigaSMART traffic intelligence and other custom hardware modules without the need for another discrete appliance.


GigaVUE TA Series: These nodes are traffic aggregators that collect network traffic from different segments of network infrastructure. The GigaVUE TA Series nodes are optimized for cost and do not support native GigaSMART traffic intelligence. However, by clustering GigaVUE-TA Series nodes with GigaVUE H Series nodes, GigaSMART traffic intelligence can be extended to traffic from ports that are physically resident on a GigaVUE TA Series node. This ability to mix-and-match multiple nodes allows flexible designs that maximize the reach of visibility without compromising the intelligence required for rich visibility.
Both the GigaVUE H Series and GigaVUE TA Series run a common operating system, GigaVUE-OS.

Visibility nodes may also be deployed in a software form factor (GigaVUE-VM) and are typically instantiated as virtual machines. GigaVUE-VM supports VMware ESXi, VMware NSX and OpenStack/KVM infrastructure. We are currently a design partner of VMware. Our visibility solution for VMware NSX is currently certified by VMware and features Service Composer integration to enable automated deployment of visibility when virtual networks are deployed with VMware NSX.

For public cloud environments, a new type of visibility node (GigaVUE V Series) enables aggregation of traffic from virtual taps in the AWS public cloud. The GigaVUE V Series nodes will integrate the GigaSMART traffic intelligence applications. By combining the GigaVUE V Series deployments in the public cloud with our physical /virtual visibility nodes on-premise, organizations can gain pervasive visibility into their hybrid IT infrastructure while still managing the hybrid visibility infrastructure from a common orchestration layer (GigaVUE-FM). Our visibility solution for AWS is offered on a term basis, where the end-user customer purchases the offering for a specific duration based on the number of monitored points in its infrastructure. All other software products are offered as a perpetual license.

Access to network traffic to feed our visibility nodes is performed by:


Mirroring traffic from a network device using a SPAN (Switch Port Analyzer) session.


Using a physical test access point (“TAP”). We offer a broad range of passive and active TAPs. Our G-TAP series of TAPs provide non-intrusive access to physical traffic at various network interface speeds-1Gb (Copper or Fiber), 10Gb, 40Gb (including Cisco 40Gb BiDi) and 100Gb. Customers can deploy our G-TAP series products to provide economical connectivity between network traffic and the rest of the Visibility Platform. In 2015, we introduced a new series of modular, high-density 10Gb/40Gb/100Gb TAPs called the G-TAP M Series to address the growing demand for high-density TAP deployments.


Tapping into the underlying virtual switch in environments such as VMware ESXi and VMware NSX.


Using a virtual TAP agent. We offer a virtual TAP agent (“G-vTAP” agent) for OpenStack and public cloud (Amazon Web Services) environments when those environments do not provide the underlying facility to tap into the traffic. Traffic from these agents is aggregated by the GigaVUE V Series virtual aggregator.
Traffic Intelligence: Our traffic intelligence applications offered via the GigaSMART suite, enable organizations to profile, shape, refine and enhance the traffic before delivery to a security or management tool. Our GigaSMART applications are offered on purpose-built GigaVUE H Series appliances for optimal performance. Our V Series virtual appliances in the public cloud integrate a subset of GigaSMART applications.

5

Our GigaSMART suite of applications offers a number of significant benefits, including the ability to:


Extract data of interest from massive volumes of network traffic and minimize tool overload. Network traffic can be “searched” for specific signatures of interest to extract packets or entire sessions containing the data of interest.


Reduce unnecessary traffic. When traffic is monitored across different network segments, duplicate copies of the same network packet may be collected. Our de-duplication application eliminates redundant traffic that is not relevant to the task being performed, reducing wasted bandwidth, storage and processing resources.


Extract flow records and metadata. Many security tools (e.g. Security Information and Event Management tools) are not efficient in handling traffic feeds due to the overhead and cost of indexing. The NetFlow/IPFIX GigaSMART application, together with metadata extensions, addresses this pain point by generating flow records and metadata that is more easily consumed by such tools.


Enhance data privacy protection measures. GigaSMART applications such as slicing and masking are able to remove or obviate confidential or personal information and in doing so play an important role in ensuring data privacy.


Uncover blind spots. The “SSL Decryption” GigaSMART application is able to decrypt traffic that would normally be invisible to security and monitoring tools and in doing so uncovers blind spots and hidden risks within the data-in-motion. In February 2017, we announced a new feature enabling our customers to decrypt and encrypt SSL traffic ‘in-line’ of the production network. This new feature is scheduled to be generally available in April 2017.


Increase subscriber-aware visibility. Correlate traffic from split control and data planes (e.g. in a mobile network) to extract entire sessions corresponding to specific subscribers.
Orchestration engine: GigaVUE-FM is a software application that provides centralized orchestration and a common policy framework for deploying the Visibility Platform. GigaVUE-FM delivers a single pane-of-glass view of all the physical and virtual nodes across the Visibility Platform, while also providing an easy-to-use wizard-based approach for configuring our patented Flow Mapping and GigaSMART traffic policies.

In addition to centralized orchestration, GigaVUE-FM features fabric-wide reporting, scheduling capabilities, backup and restore functions and enhanced monitoring capabilities to proactively monitor and troubleshoot hot spots in the visibility infrastructure. Our GigaVUE-FM also features a broad range of out-of-the-box integrations with VMware vCenter, VMware NSX Manager, OpenStack, Amazon EC2 APIs, Amazon CloudWatch, as well as tools such as Splunk, Viavi and other customer applications. The open-standard REST Application Programmer Interfaces (APIs) form the basis of our programmable Software-Defined Visibility infrastructure. GigaVUE-FM is sold as a licensed product available at multiple tiers and can manage up to 250 discrete physical GigaVUE visibility (hardware) appliances and 1000s of virtualized visibility software nodes.

To complement our visibility nodes and software applications, we offer a range of supplemental components and accessories including modules, cables and transceivers. The transceivers are offered in a variety of form factors, including SFP, SFP+, QSFP+ and QSFP28.

Together, the various components in the Visibility Platform provide traffic aggregation, filtering, replication, traffic intelligence and orchestration capabilities to optimize traffic for the tools to better manage, secure and understand critical data-in-motion in a customer network. Changes can be made dynamically without impacting the production network so network, security and cloud operations teams can be agile and responsive to threats, events or anomalies on the network.

6

Customer Support

We offer ongoing technical support with our hardware and software products, including those sold directly to our end-user customers and through our channel partners. Our primary support offering provides two-tiered support levels, including premium-level support coverage. Certain channel partners offer their own additional support services to the end-user customer and then rely on our support organization for more complex support requests. We offer our end-user customers ongoing maintenance services for both hardware and software, which enable them to receive ongoing software updates, bug fixes and repairs. These services are sold to end-user customers typically for a one-year term at the time of the initial product sale, and customers may choose to renew for successive annual or multi-year periods. We also provide end-user customers with expedited replacement for any defective hardware. Our support personnel are based in Santa Clara, California, Reading, United Kingdom, Hong Kong, and Singapore.

End-User Customers

As of December 31, 2016, we had over 2,300 end-user customers, including 81 of the Fortune 100 and 418 of the Fortune 1000. Our Visibility Platform can be used in a broad range of applications and has been adopted across many vertical markets including finance, high-speed trading, insurance, healthcare, higher education, government, e-commerce, technology, telecom and service providers. For fiscal 2016, one end-user customer, T-Mobile US, Inc., accounted for approximately 10% of our total revenue. No other end-user customer accounted for 10% or more of our total revenue during the periods presented.

On page 8:
Technology Partners

We have ongoing non-exclusive relationships with a number of leading vendors of network management, analysis, compliance and security tools, including arrangements with Check Point Software Technologies Inc., Cisco Systems, Inc., CA, Inc., Dynatrace Corporation, ExtraHop, ForeScout Technologies, Inc., Fortinet, Inc., FireEye, Inc., Imperva, Inc., LightCyber, LogRhythm, Inc., Palo Alto Networks, Inc., Plixer International, Inc., RSA (the Security Division of EMC Corporation), Riverbed Technology, Inc., Savvius, Inc., SevOne, Inc., SolarWinds Inc., Splunk Inc, VMware, Inc., and Viavi Solutions Inc., some of which include the joint development of use-case and reference architectures that enhance the performance and efficiency of the end-user customer’s infrastructure. We expect to continue adding more technology partners and to publish joint case studies with these partners following end-user deployment and approval. In addition to joint development of reference designs and case studies, we have undertaken various joint-marketing activities and events to drive interest and awareness of the combined solution as well as the power of visibility in our solution. As our solution helps optimize the efficiency of our tool partners’ management, analysis, compliance and security tools, we believe these vendors improve awareness at end-user customers of our solution and create new deployment opportunities.

Competition

The markets in which we compete are highly competitive. We expect competition to intensify in the future as existing competitors bundle new and more competitive offerings with their existing products and services, and as new market entrants introduce new products into our markets.

We compete either directly or indirectly with certain Ethernet switch vendors, such as Cisco Systems, Inc., Brocade Communications Systems, Inc. and Arista Networks, Inc., and network management, analysis, compliance and security tool vendors, such as Netscout and Ixia, which recently announced that it had entered into a definitive agreement to be acquired by Keysight Technologies, Inc., that offer point solutions that address a portion of the issues that we solve. In the future, we expect to compete with new market entrants, which may include our joint-development partners or other current technology partners.

The principal competitive factors applicable to our products include:

•functionality and performance;

•price and total cost of ownership;

•ease of use;

•flexibility and scalability of deployment;

•brand awareness;

•product reliability and quality;

•interoperability with other products;

•the extent and speed of user adoption; and

•quality of service, support and fulfillment.

Although we believe that we compete favorably with respect to the above factors, we believe that other competitors may emerge with new technological approaches to the problems we solve, greater name recognition, longer operating histories, well-established relationships with end-user customers or channel partners in our markets, broader product portfolios, the ability to bundle competitive offerings with other products and services, larger intellectual property portfolios and substantially greater financial, technical, personnel and other resources than we have. We expect competition and competitive pressure, from both new and existing competitors, to increase in the future.

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If our end-user customers do not continue to purchase our products or expand deployment of our technologies, our ability to grow our business and improve our operating results and financial condition may be adversely affected.

A significant portion of our revenues come from new or recurring purchases of products from our installed base of end-user customers. Our future success depends, in part, on our ability to increase the adoption of our products within and across our existing end-user customers and future end-user customers. If we fail to expand existing deployments or sell additional products to our customers, our ability to grow our business and improve our operating results and financial condition would be adversely affected.

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.

We have experienced difficulty managing lengthening and increasingly unpredictable sales cycles in the past. Our sales efforts involve educating our end-user customers about the use and benefits of our solutions, including their technical capabilities. End-user customers often undertake an evaluation and testing process that can result in a lengthy sales cycle. Also, as our distribution strategy typically leverages a channel model, utilizing distributors, the level of variability in the length of sales cycle across transactions has increased and made it more difficult to predict the timing of many of our sales transactions. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales or a material amount of revenue from such sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. These factors, among others, have in the past led to, and could continue to result in, long and unpredictable sales cycles.

We sell our products primarily to enterprise IT departments and service providers. Our sales cycles typically range from three to six months and are generally longer for larger transactions. Often times, our larger transactions are part of larger data center projects or upgrades by our customers and we have little ability to influence the timing of these transactions. As a result, our sales cycles can often be more than six months, with sales cycles involving service providers taking significantly longer to complete. To the extent that the mix of our future sales shifts to include relatively more revenue from service providers, the average length of our sales cycles will likely increase. Furthermore, our sales to federal, state and local governmental agency end-user customers have increased in recent periods, and we may in the future increase sales to governmental entities. Selling to governmental entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that some of these efforts will generate a sale. As a result of these lengthy and uncertain sales cycles and the increasing size of our transactions, it is difficult for us to predict when end-user customers may purchase solutions and accept products from us. If we are unable to effectively manage the sales cycle or if we fail to close a large transaction or multiple smaller transactions that we expect to close in a given period, our operating results may vary significantly from period to period and may be materially adversely affected.

sjo

5 Likes

Good job Sjo,

This is what I came up with after looking at the last couple of CC, 10K, and 10Q.

Who Gigamon (GIMO) is

Our GigaSECURE Security Delivery Platform enhances our Visibility Platform and is an architectural approach to streamline security operations by providing comprehensive infrastructure visibility that is specifically tuned to the needs of security tools, including those typically used by enterprises. Our solution enables security teams and IT personnel to gain advanced visibility into their IT infrastructure by dynamically forwarding selected traffic of interest from network, server and remote location infrastructure to security, management, analysis and compliance tools in a manner optimized for specific uses or functions. Given the inherent asymmetrical relationship between a cyber-security attacker and the organization tasked with the defense of infrastructure, we believe a significant opportunity to bring parity to their roles is to deploy a Visibility Fabric solution, and in doing so, significantly reduces the window of threat exposure for an organization. For public cloud environments, a new type of visibility node.

Reoccurring revenue

We generate service revenue primarily from the sale of maintenance and support services for our products. Starting in the quarter ended September 26, 2015, we began to sell first year maintenance and support as an additional offering. Prior to that time, the first year of maintenance and support services was generally bundled or purchased with the initial contract to purchase our products. Following expiration of this one-year contract, our end-user customers typically purchase maintenance and support contracts that generally have one-year terms.

(GigaVUE V Series) enables aggregation of traffic from virtual taps in the AWS public cloud. The GigaVUE V Series nodes will integrate the GigaSMART traffic intelligence applications. By combining the GigaVUE V Series deployments in the public cloud with our physical /virtual visibility nodes on-premise, organizations can gain pervasive visibility into their hybrid IT infrastructure while still managing the hybrid visibility infrastructure from a common orchestration layer (GigaVUE-FM). Our visibility solution for AWS is offered on a term basis, where the end-user customer purchases the offering for a specific duration based on the number of monitored points in its infrastructure. All other software products are offered as a perpetual license.

We offer ongoing technical support with our hardware and software products, including those sold directly to our end-user customers and through our channel partners. Our primary support offering provides two-tiered support levels, including premium-level support coverage. Certain channel partners offer their own additional support services to the end-user customer and then rely on our support organization for more complex support requests. We offer our end-user customers ongoing maintenance services for both hardware and software, which enable them to receive ongoing software updates, bug fixes and repairs. These services are sold to end-user customers typically for a one-year term at the time of the initial product sale, and customers may choose to renew for successive annual or multi-year periods. We also provide end-user customers with expedited replacement for any defective hardware. Our support personnel are based in Santa Clara, California, Reading, United Kingdom, Hong Kong, and Singapore.

As of December 31, 2016, we had over 2,300 end-user customers, including 81 of the Fortune 100 and 418 of the Fortune 1000. Our Visibility Platform can be used in a broad range of applications and has been adopted across many vertical markets including finance, high-speed trading, insurance, healthcare, higher education, government, e-commerce, technology, telecom and service providers. For fiscal 2016, one end-user customer, T-Mobile US, Inc., accounted for approximately 10% of our total revenue. No other end-user customer accounted for 10% or more of our total revenue during the periods presented.

We are planning to offer our AWS products, as a tiered term-based software license, the pricing varying depending upon the term of the agreement and the number of monitored virtual machines. We have a number of enhancement schedule in the roadmap, which we planned to upsell into our installed base. As we launch additional higher function capabilities. This is an exciting and significant launch for our company.

The following is the news article on 11/22/2016

http://investor.gigamon.com/phoenix.zhtml?c=251476&p=iro…

They are also planning on working with Microsoft Azure cloud and Google cloud which should give them more recurring revenue.

Technology Partners

We have ongoing non-exclusive relationships with a number of leading vendors of network management, analysis, compliance and security tools, including arrangements with Check Point Software Technologies Inc., Cisco Systems, Inc., CA, Inc., Dynatrace Corporation, ExtraHop, ForeScout Technologies, Inc., Fortinet, Inc., FireEye, Inc., Imperva, Inc., LightCyber, LogRhythm, Inc., Palo Alto Networks, Inc., Plixer International, Inc., RSA (the Security Division of EMC Corporation), Riverbed Technology, Inc., Savvius, Inc., SevOne, Inc., SolarWinds Inc., Splunk Inc, VMware, Inc., and Viavi Solutions Inc., some of which include the joint development of use-case and reference architectures that enhance the performance and efficiency of the end-user customer’s infrastructure. We expect to continue adding more technology partners and to publish joint case studies with these partners following end-user deployment and approval. In addition to joint development of reference designs and case studies, we have undertaken various joint-marketing activities and events to drive interest and awareness of the combined solution as well as the power of visibility in our solution. As our solution helps optimize the efficiency of our tool partners’ management, analysis, compliance and security tools, we believe these vendors improve awareness at end-user customers of our solution and create new deployment opportunities.

Backlog

Product backlog includes orders for products scheduled to be shipped within 90 days to customers with approved credit status, and is net of service revenue allocations and any rebates and discounts. Because of the generally short cycle between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which are made without significant penalty), we do not believe that our product backlog, as of any particular date, is necessarily indicative of actual product revenue for any future period. A significant portion of our product revenue comes from orders that are received and shipped in the same quarter. Our product backlog at December 31, 2016, the last day of fiscal 2016, was $3.1 million. Our product backlog as of December 26, 2015, the last day of fiscal 2015, was $8.4 million. Our product backlog as of December 27, 2014, the last day of fiscal 2014, was $12.2 million.

Competition

We compete either directly or indirectly with certain Ethernet switch vendors, such as Cisco Systems, Inc., Brocade Communications Systems, Inc. and Arista Networks, Inc., and network management, analysis, compliance and security tool vendors, such as Netscout and Ixia, which recently announced that it had entered into a definitive agreement to be acquired by Keysight Technologies, Inc., that offer point solutions that address a portion of the issues that we solve. In the future, we expect to compete with new market entrants, which may include our joint-development partners or other current technology partners.

Intellectual property

To protect our intellectual property, we rely primarily on patent, trademark, copyright and trade secret laws. As of December 31, 2016, we had 35 issued patents that expire between 2025 and 2033, and 30 pending patent applications in the United States. Internationally, as of December 31, 2016 we had 9 issued patents and a number of pending patent applications. The claims for which we have sought patent protection relate primarily to system architecture, traffic visibility technology, traffic control, monitoring and management, and filtering technology we have developed. We also license software from third parties for integration into our products, including open source software and other commercially available software.

Seasonality:

We have experienced seasonality in the sale of our products. The first quarter of each year is usually our lowest revenue quarter during the year and product revenue typically declines sequentially from the prior fourth quarter. We generally expect an increase in sales in the second half of the year relative to the first half, primarily due to the buying habits of many of our end-user customers as budgets for annual capital purchases are being fully utilized.

Gross profits Margins

                2016                2015                2014
Prod            78.6%               74.5%               70.6%
Service         90.8%               90.0%               87.5%

Services have stayed steady at 31% of Revenue the last 2 years

No debt and 259,164 million in cash.

FCF

   2016                          2015                      2014
   29 million                    58.1 million              3.5 million

Deferred Revenue was down between 2015 and 2016
Accounts receivable was up in 2016 which subtracted from Cashflow
Inventory was up but not alarmingly
Deferred and other income taxes was up in 2016 which was negative

These are just my notes adding to Matt and SJO’s nice write ups.

Andy

10 Likes

Wow sjo and Andy, you guys gave great answers ! Now, has either of you bitten the bullet and actually invested in Gigamon since the terrible guidance came out. If so why? If not, why not? I personally am very hesitant although it might turn out to be a profitable trade, I’m worried about structural changes in their market, although Bert clearly doesn’t think so.

Saul

Thanks SJO and Andy for some great research.

I am not as enthusiastic about Gigamon as I was at first. Here’s why:

It is clear from the research presented that they have no recurring revenue built into their business model. For example, if they had a component of revenue tied to volume of traffic monitored this would produce ongoing and most likely growing revenue over time. Instead the sell hardware and software in a more traditional manner. The hardware, once sold produces no recurring revenue. They rely on selling more hardware to existing customers who always have the option of not buying more. The software is similarly sold with a perpetual license and an annual maintenance renewal. Again, the customer has the option to not renew the maintenance agreement. Typically, even if the customer renews, annual maintenance contracts do not produce significant revenue. In other words, they have to sell more products (and possibly services) to existing and new customers in order to produce and grow revenues. Of course they can enhance their products and thereby give their customers reason to buy new/improved products, but the customer always has the option to say, “No thanks. We’re good with what we’ve got.” Or more likely, “We’re going through a budget contraction, maybe next year.”

Next thing is that the product is typically sold to IT. Unless the business is IT or network based (such as T-Mobile) this does not bode well. Speaking from my own experience as a 30 year IT employee in an aerospace company, IT was considered a cost center. IT does not directly sell anything to end customers. Executive management is always motivated to cut costs, and organizations that are cost centers are always targets of cost cutting. Some things are more vulnerable than others, and IMO Gigamon products look like they fall in the more vulnerable category. If more storage is required, more storage is required. It’s very hard to reduce the data center budget for storage when more is needed. And it’s very easy to demonstrate storage growth, available capacity and future requirements. Every dumb executive on the planet can understand that.

Gigamon monitors network traffic flow and volume via their “visibility fabric”. I don’t know about you, but to me that’s IT gobbledygook. What do those buzz words mean? In my experience that’s a hard sell once you get beyond the IT middle management. Executive management of IT organizations may or may not actually have an IT background (does that seem ludicrous? Welcome to the real world of big corporate think).

Finally, I went to the Gigamon website and looked through the “solutions.” The information provided by SJO and Andy spoke a lot to their technology and how they provide the “visibility fabric,” but didn’t really address the problems they are trying to solve, and why do they do it better than anyone else. What’s the value proposition? To be honest, the solutions described did not help me understand the problem. They have a 13 minute video with a Forrester consultant and a Gigamon rep that tries to offer solutions, but the Forrester guy talks about problems while the Gigamon guy talks more about technology than solutions and not much about the value add that they provide.

My estimation is that they will do pretty well with IT and network oriented companies, and make some inroads elsewhere with security offerings, but mostly I see Gigamon as a sophisticated technology company in search of problems.

I’ll pass.

10 Likes

I just started looking at this Saul since Matt brought it to us on the board. Although Recurring revenue is at 31% of their revenue it is mostly service revenue right now. But this should move up as they get their product into Microsoft and Googles cloud. I like that they have dropped down and their P/E is reasonable. Also, after reading Bert’s article, and realizing that Ixea is one of their biggest competitors. I just had to shake my head. They were bought by keysight, an oscilloscope company. I just can’t see them being able to compete so Gima should take more market share. It seems their backlog has been dropping the last 3 years though. They do not make their own product though and they are trying to make the product as needed. They have two different companies that produce their product which looks like they can keep up with the growth.

Saul I think I am going to take a small position while I see how they do. This is an important piece of equipment to let companies see into their network. They are working with some of the more important companies in the space, Csco, Anet, Aws. I think they will be bought up but if they do not I will have to keep a close eye on them to make sure they do not get disrupted.

Andy

2 Likes