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MobileIron (NASDAQ:MOBL)
Q4 2019 Earnings Call
Feb 06, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the MobileIron fourth-quarter and fiscal year 2019 financial results conference call. [Operator instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead.

Erik Bylin -- Investor Relations Contact

Thank you Christine. Good afternoon, and welcome to MobileIron's fourth-quarter 2019 financial results conference call. Joining us from the company are Simon Biddiscombe, CEO; and Scott Hill, CFO. The format of the call will be remarks by Simon, and then Scott will provide details on the financials.

We'll then have time for questions. If you have not received a copy of today's press release, please go to MobileIron's investor relations website at investors.mobileiron.com. Today's conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding MobileIron's revenue, operating expenses, GAAP and non-GAAP financial metrics, product releases, projections and trends. All of these forward-looking statements are subject to a number of significant risks uncertainties and assumptions.

Actual results could differ materially from the statements made on this call. Please see the Risk Factors section of our SEC filings. All statements made on this call are made as of today. We assume no obligation and do not currently intend to update any such forward-looking statements.

If this call is reviewed after today, the information presented during this call may not be accurate or current. With regard to non-GAAP financial metrics, while we believe them to be helpful in understanding MobileIron's financial performance, they're not meant to be considered in isolation or as a substitute for comparable GAAP metrics. They should only be read in conjunction with MobileIron's consolidated financial statements prepared in accordance with GAAP. Reconciliation of the non-GAAP financial metrics to the GAAP metrics can be found in our press release and on the investor relations page of our website.

We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project certain charges and expenses. Unless otherwise stated, results shared today will be non-GAAP. At this time, I would now like to turn the call over to Simon. Please go ahead.

Simon Biddiscombe -- Chief Executive Officer

Thank you Erik, and good afternoon. In my remarks today, I will provide a brief overview of our fourth quarter and 2019 financial performance, outline the final steps on our transition to a subscription model, explain how our zero trust security architecture is differentiated in the market and then share some recent customer successes. Starting with an overview of our fourth-quarter results. Revenue in fourth quarter was $54.1 million, flat year over year.

And for the full year, we reported $205 million of revenue for growth of 6%. ARR growth came in at 10% for the year. Similar to Q3, we saw softness in Europe that is dampening our growth rate. In 2020, MobileIron will complete its transition to a subscription-led recurring revenue model.

The transition to subscription will entail two changes to our business. First, we've decided to stop selling new perpetual licenses as of the end of the second quarter. And second, as our customers are naturally migrating applications and workloads to the cloud, we are formally launching our efforts to proactively help them move their MobileIron capabilities to our cloud solution resulting in maintenance revenue converting to cloud subscription revenue over the next several years. Customers have increasingly shown a preference to our subscription model.

As you know, in 2019, subscription ARR grew 19%, while our maintenance ARR declined slightly. Our business has been trending in this direction for several years. In fact, over the last two years, more than 85% of our new customers have chosen a subscription. And in 2020, we will complete the shift to subscription only.

We have seen significant growth in our cloud offerings in recent years and have confidence that our cloud solutions offer best-in-market capabilities. For our customers, the advantages of being on our cloud platform are well understood including automatic application and security updates, access to new features as soon as they become available, guaranteed platform and services uptime and a lower total cost of ownership allowing IT to increase focus on driving business value. We spend a lot of time with our customers and partners and have established confidence that this transition will result in little to no disruption in customer satisfaction or UEM purchases. At the beginning of the third quarter of 2020, customers will still have the option to purchase UEM in a cloud or on-premise model altering the way they pay for but not how they choose to deploy our technology.

With a focus on subscription, we simplify our business, especially our engagement with customers, dramatically expand our customer lifetime value and create a far more predictable revenue stream. However, while this change will accelerate ARR growth, it will create a near-term headwind to our revenue growth due to the lack of upfront license revenue. And Scott will cover this in more detail. With that said, we're confident that this will drive considerable value for MobileIron's stakeholders.

In parallel with this transition away from perpetual licenses, in 2020, we will accelerate our efforts to support our on-premise maintenance customers who are ready to move to the cloud. We have been preparing to formally ramp this effort for more than a year and have developed a comprehensive set of tools to prove out the value to a customer and then move them seamlessly from an on-premise seat to the cloud. With maintenance revenue of approximately $65 million per year, the uplift in ASP on the migration from maintenance to cloud represents a great ARR growth opportunity for MobileIron. In 2019, we had plenty of inbound demand for the cloud offering from traditional on-premise customers who recognize the value proposition of our cloud deployment.

We feel confident there's ample opportunity to accelerate this momentum in 2020. The quality of our UEM cloud offering, coupled with the unmatched suite of cloud security products, makes now the right time to accelerate each of these initiatives. Clearly a thought leader, MobileIron has leveraged its core mobile management expertise into a seat forefront of zero trust security. Our mobile-centric innovation has led the market and our competitors, and the gap is wide.

We were the first UEM vendor to offer a product for secure cloud service, which is access, and we remain the most robust solution in the market. We were the first to couple threat defense to UEM and our integration into UEM creates meaningful deployment and remediation advantages. We've introduced zero sign-on, a groundbreaking offering that makes your mobile device your identity and removes passwords from corporate IT's threat landscape. We have made incredible progress with our macOS solution and now are a legitimate threat to disrupt that market.

All of this innovation has one thing in common, it is only offered through the cloud. We're delivering market-leading innovation to make mobile devices the center of security. And to capitalize on this value, our cloud -- customers need to access it through the cloud. As proof of the quality of our offerings, we continue to garner the accolades that give us confidence we're the best solution in the market.

We were once again the only vendor named in -- the leader in Gartner's Magic Quadrant for UEM tools as well as Gartner Peer Insights Customers' Choice, which identifies the best unified endpoint management tools as reviewed by customers. To round out a strong Q4, we were also named the leader in the Forrester Wave Unified Endpoint Management report as well as in three separate IDC MarketScape reports, each related to our UEM solution. And with that, I would like to touch on some customer wins from the quarter. MobileIron is increasingly becoming a trusted security provider, and we're pleased to announce that we expanded our relationship with Leidos, a global powerhouse of IT and technical services with a long history of innovative problem solving and outstanding customer service.

Leidos chose MobileIron because of our equal commitment to provide a revolutionary best-in-class technology, along with market-leading support. With 400 locations in 30 countries, they realized that as a global company, they required a seamless mobile security solution to maintain their employees' peace of mind. Serving the national security, healthcare and infrastructure markets, you can trust that Leidos selected the best solution to secure their workforce, and MobileIron is honored to be part of that solution. MobileIron continues to succeed in the government vertical, as evidenced in our recent win with Brisbane City Council, the largest local government in Australia.

A forward-thinking city, one of their stated strategic priorities is for a smart, connected Brisbane that promotes innovation and technology to help deliver better community services. A flourishing business hub home to more than 200,000 businesses in the metro area, BCC was unhappy with their mobile security solution, which allowed MobileIron a chance to showcase our products. Unsurprisingly, our comprehensive security suite immediately addressed many pain points BCC was experiencing while excelling on many fronts versus the competition including value for money. MobileIron is privileged to have been chosen as their provider of choice for mobile security.

I'm also pleased to announce that we expanded our relationship with the European Commission. Clearly, best-in-class mobile security is of the utmost importance for an institution dealing with security risks and international relations on a daily basis, and we are very happy to see traction for our macOS and access offerings at the European Commission. It clearly shows our value to secure access to services, like Office 365. I'm honored that MobileIron has the opportunity to play such an important role in helping the European Commission.

And before handing off to Scott, I wanted to touch on a very public hack of a mobile device, the exfiltration of data from Jeff Bezos' phone. This was a classic phishing attack that uses secure messaging as the attack vector and was designed to siphon user data. Mobile users are more susceptible to phishing attacks as they are more likely to click on a malicious URL, which can give hackers access to all the users' corporate and personal apps and data on the device. After a mobile device is compromised, it is relatively easy to use compromised credentials to initiate account takeover and then siphon off sensitive information.

Based on our understanding of this attack, our mobile-centric zero trust platform with native mobile threat defense capabilities will protect users from these types of attacks. And with that, I'll turn it over to Scott.

Scott Hill -- Chief Financial Officer

Thank you Simon, and good afternoon. Today, we will be discussing non-GAAP financial measures, unless otherwise noted. Our press release, Form 8-K and website, investors.mobileiron.com, provide a reconciliation of GAAP to non-GAAP financial results. Now I'll review the financials.

Revenue in the fourth quarter was $54.1 million, flat year over year and within guidance. We ended the fourth quarter with ARR of $180 million for growth of 10% year over year. Our subscription ARR was $114 million, up 19% year over year. And our maintenance ARR was $65.6 million, down 2% from last year.

Our renewal rate came in about 90%. Starting next quarter, we are going to move from the -- from reporting the SEC renewal rate to dollar-based net retention as we believe the standard SaaS metric is a more complete measure of retention and highlights our success upselling our products into existing customers. In Q4, our net dollar retention was 104% and it has typically run six to seven percentage points below our ARR growth rate. On the new product front, we continued to increase our upsell penetration and have sold access and threat defense into about 10% of our large UEM installed base.

We remain optimistic about our ability to sell access and threat defense into our existing customer base. And our convinced zero sign-on will be a significant driver of ARR growth in the future. Gross margin in the fourth quarter was 82%, in line with our guidance, and operating expenses were $42.8 million, above the high end of our guidance range due to higher-than-expected legal expenses outside the normal course of business. We reported positive operating income of $1.6 million.

Net income was $1.2 million or $0.01 on a per share basis. For the full-year 2019, revenue was $205 million, up 6% year over year. We ended the year with gross margin of 82%. The operating margin came in at negative 4.2% for the year.

Moving to the balance sheet. We ended the quarter with $94.4 million in cash and short-term investments and have no debt. In the fourth quarter, cash flow from operations was breakeven and we spent $2.7 million repurchasing shares. Unearned revenue was $118 million at the end of December, up 12% from $106 million a year ago.

Before I discuss guidance, I wanted to share some detail on how we expect our accelerated transition to subscription away from perpetual license and maintenance will impact our revenue over the next two years. In the first half of 2020, we don't expect a change to our normal seasonal pattern given that we will still be selling new perpetual licenses. When we stop selling perpetual licenses in Q3, we will experience an acceleration of ARR growth and a slowdown in revenue growth from the perpetual decline for the subsequent four quarters. For the purpose of modeling our growth this year, we would expect to the ARR growth tick up in the second half because seats that previously sold as perpetual licenses will be sold as subscriptions.

Our revenue growth rate will become slightly negative as our year-over-year comparison will be to a time of strong perpetual license sales. In the first half of 2021, we expect to experience a similar effect, but revenue growth should start to converge on ARR growth and the year-over-year revenue growth rate should return to positive. In the second half of 2021, we will not have perpetual licenses in the prior year comparable period so the headwind will disappear and the revenue growth rate will increase to align closely with the ARR growth rate. During this time of transition in our revenue growth, we urge investors to monitor our progress by paying close attention to our ARR growth.

Now, I will share our guidance. For the first quarter of 2020, our guidance is as follows: we are projecting a revenue range of $46 million to $49 million or roughly flat at the midpoint year over year. We expect non-GAAP gross margin to be approximately 78%. We expect non-GAAP operating expenses to be between $45 million and $46 million.

For the full-year 2020, our guidance is as follows: we expect ARR growth to be between 12% and 16% by year-end. The growth in the first half will be closer to 10%. We expect revenue to be in the range of $195 million to $205 million. We expect our non-GAAP operating margin to be between negative 5% and negative 10%.

Lastly, as we execute the initiatives we've discussed over the next year and a half with $94.4 million in cash and equivalents, we have more than ample liquidity to run the business with a healthy buffer. And with that, we can open up the line for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Scott Searle from ROTH Capital. Your line is open.

Scott Searle -- ROTH Capital Partners -- Analyst

Hey good afternoon. Thanks for taking my question. Scott, maybe just real quickly to follow up and make sure we understand the transition of perpetual as we go from the third quarter to the second quarter, it sounds like you get some modest growth year over year in first half, and then we're facing the tougher comps. But what is that sequential drop-off that you're expecting that was built into the model in the first half of this year that perpetual drops off as we go from the third quarter to the second quarter? And then maybe to follow on to that, looking at the number of perpetual seats that are out there, can you give us some idea what that installed base looks like? Maybe give us an idea in terms of perpetual licenses, how many existing customers were buying add-on seats? And how you manage that transition and/or continue to support those customers going forward? And then I had a follow-up or two on Europe.

Scott Hill -- Chief Financial Officer

Yeah. Sure. So quite a few questions in that. Let me start with the first one about the perpetual revenue.

So in the first half, we're anticipating that we're going to have -- given the declines we've seen over the last year, that continuing, and we'll have, call it, between $8 million, $9 million of perpetual revenue in the first half. That will fall to near 0 in the second half of the year. So that drop-off will be quite precipitous and cause the revenue growth rate to turn slightly negative in the second half. When it comes to customers and how we're going to manage the transition for them, customers are still going to be able to buy their on-premise product, the expansion seats they used in the past.

They will just do so in a subscription form rather than paying upfront with a perpetual license. So our installed base is still -- very much has a large on-premise component to it. That has been driving expansion seats. We don't expect that will change.

There's still the need for our product to be deployed throughout their environment. They still have a need for using the upsell products, which have always been cloud in nature. So we still expect that they're going to buy those as well. So -- and all that part shouldn't change at all.

It's really just the licensing mechanism for buying the UEM product switching from where they might have bought in a perpetual way to a subscription.

Simon Biddiscombe -- Chief Executive Officer

That's a very helpful point there, Scott. I'm going to add one point there which is this is about license model, not deployment model, OK? So as it relates to this change to subscription, you'll still be able to buy the on-premise product in a subscription model, which you've been able to do for many years, OK? This is not about forcing customers to a cloud. Now obviously, we're seeing a significant uptake for our cloud solutions within the business anyway, but customers who are on-prem today will continue to be on-prem if they choose to be so. We are not forcing them to the cloud platform at this point in time.

Scott Searle -- ROTH Capital Partners -- Analyst

Got you. And Simon, any insight into the number of installed seats on the perpetual front and if you're building any sort of conversion?

Simon Biddiscombe -- Chief Executive Officer

Yeah. We don't -- we actually don't share that, Scott. We don't tell people the mix of UEM seats on the on-prem platform versus the cloud platform. But when we look at the opportunity to upsell to the subscription licenses, customers convert from maintenance to subscription as they move to cloud.

There's significant upside. We've talked at length about that in the past. And interestingly, it benefits everybody. And the total cost of ownership to the customer as they make that migration from the on-prem platform to the cloud platform is pretty dramatic.

And across the samples that we've seen, we've seen anything up to a 50% improvement on the customer side of that transaction. So it's something that we don't share the specific data around, but we're excited about the uplift we'll see in the business as customers go in that journey.

Scott Searle -- ROTH Capital Partners -- Analyst

Got you. And if I could just to follow-up, Europe was -- or actually I guess, international was up sequentially. There had been some European headwinds. Can you just give us your thoughts about what you're seeing on that front? And also, in terms of attach rates for the new products and zero sign-on, I think you said 10% for access and threat in the fourth quarter.

Kind of what's your expectation exiting this year? And any word on whether or not Bezos is a MobileIron customer yet? Thanks.

Simon Biddiscombe -- Chief Executive Officer

Nicely asked. OK. So on Europe, the European business actually performed consistently with our expectations, and there was no rebound in the U.K. business.

The U.K. business was essentially flat sequentially. Normally, in the fourth quarter, we'd expect a pretty significant improvement sequentially in the performance of the business, and that didn't manifest itself, which was consistent with the expectation that we had going into the quarter. So no significant rebound in Europe in the most recent period.

Obviously, that was coming off a tough compare as well. The fourth quarter of last year, the European or international business delivered 25% revenue growth, right? So there was a really strong compare that that business had to execute against.

Scott Hill -- Chief Financial Officer

Yeah. I was just going to add that the uptick that you see between revenue in Q3 and Q4 internationally is a result of the on-premise business to perpetual license that we do sell. Q4 is a strong perpetual license. Despite the declines year over year, it is a strong perpetual license relative to Q3.

So that's what you see. It's not really a change in kind of the business environment.

Simon Biddiscombe -- Chief Executive Officer

Thanks Scott.

Scott Searle -- ROTH Capital Partners -- Analyst

Thank you.

Operator

Your next question comes from the line of Chad Bennett from Craig-Hallum. Your line is open.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

My question. So just a little bit more on the transition here Simon. So what is the logic behind continuing to sell perpetual license in kind of the $8 million to $9 million estimate for the first half that Scott alluded to? Are those just deals that were basically in motion in the pipeline kind of -- through the -- at some stage in the process. And you're just kind of performing to your obligation on that or are salespeople really starting the year selling perpetual license products?

Simon Biddiscombe -- Chief Executive Officer

So there's really two parts to it Chad. Number one is we don't want to put our customers, and equally our partners, in a position where they're unable to track -- to transact business that they have line of sight to at this point in time, right? And given the cycles -- sales cycle length that our business has, obviously, there's deals in the pipeline that are structured, just perpetual transactions that we would like to see close that way over the course of the coming months. We've got no desire to frustrate our customers, we've got no desire to frustrate our partners. And frankly, we've got no desire to frustrate the sales organizations.

They've been working specific transactions with a specific license model attached to them. So really this is about making sure that we permit for an orderly transition over the course of the next six months as opposed to creating thrash by pulling the band-aid off immediately.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

OK. And then remind me again Scott on on-prem subscription deals, roughly what percentage of the deal is recognized upfront versus ratable?

Scott Hill -- Chief Financial Officer

50%.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

OK. So when you guys talk about -- I think you guys talked about an acceleration in subscription ARR. So I know you gave overall ARR for the year, but do you believe your subscription ARR will accelerate from 19%? I guess, it's not that it did last year. That's not apparent obviously in the overall ARR, but can you give me some color there.

Scott Hill -- Chief Financial Officer

Yeah. So the acceleration that we talk about is that the customers who would have previously bought perpetual license and then going forward would only be paying maintenance, which is in ARR but it's a relatively small number relative to subscription. They're going to be paying subscription. So that is effectively an uplift in recurring economics associated with that seat.

And that does go into the subscription ARR line, so we should see an improvement as a result of that shift away from maintenance to subscription.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

So subscription ARR should accelerate from fiscal year '19, that's what you're saying?

Scott Hill -- Chief Financial Officer

Yeah.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

OK. And then maybe one more question into that recurring or subscription ARR item. Should we expect cloud-specific revenue growth to accelerate due to the transition?

Scott Hill -- Chief Financial Officer

So the transition really for the new business that we sell is just between the two on-prem versions of the product, right? From perpetual maintenance to on-prem line. It really shouldn't affect the cloud unless the customer, for their own reasons, makes the jump to the cloud product which, obviously, we have an agenda to drive that. We're trying to encourage the product, and many of our customers want it. I think the bigger factor you'll see is our concerted effort to start to migrate more of our maintenance base as customers are moving to the cloud to embrace and help them make their transition to the cloud.

That will impact the cloud ARR, the cloud revenue line to a greater extent than the perpetual license change.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

OK. Then maybe last real quick for Simon. Any difference in the competitive environment from your standpoint, either in UEM or mobile threat or access for that matter? Obviously, there's been some announcements, whether it's BlackBerry and Cylance formally kind of introducing a product to market recently and VMware. So what are your thoughts there? Thanks.

Simon Biddiscombe -- Chief Executive Officer

Yes. So we haven't seen any change at this point in time. And it's important when I look at the business and the changes that we're seeing in the business, we're not seeing anything as it relates to churn that's causing me a different level of concern. We're not seeing any dramatic change in our win/loss ratios, we're not seeing anything impact pricing at this point in time.

And yes, there've been product-specific announcements from some of our competitors. But they really haven't impacted any part of what we are seeing in our customer base. And don't forget, where we're selling integrated UEM and threat, it's almost exclusively into our existing customer base. So I wouldn't expect to see a change associated with the BlackBerry/Cylance type integration or anything like that.

So no, we haven't seen any dramatic change in the competitive dynamic in the market over the course of the last quarter, and we continue to execute well with solutions that we believe are the right sets of solutions for our customers to be embracing at this point in time. And at no point have we second guessed in the overall strategy as it relates to what we're doing at the device level, with devices' identity, with the integration of threat with conditional access to cloud services, on-prem services as well. We absolutely believe we're executing to the right strategy and we're not seeing anything from the competitors that causes me to believe that we're not moving in the right direction.

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

OK. Thanks so much.

Simon Biddiscombe -- Chief Executive Officer

Thanks Chad.

Operator

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open.

Raimo Lenschow -- Barclays -- Analyst

Hey thanks for squeezing me in. Congrats on that move to all subscription. The -- it's -- I really like it. The quick question around that, though, what's the risk -- or do you see a risk that you see, like some last-minute perpetual buying in Q1, Q2 to kind of move ahead of that? And then I had a follow-up.

Simon Biddiscombe -- Chief Executive Officer

That's a very good question. So we've given careful consideration to could there be improvement in the perpetual number in Q1 and Q2 ahead of customers potentially not being able to buy licenses on a perpetual basis with maintenance attached to them. We don't know, Raimo, right? We're certainly not setting it up for that to be the case. But I don't doubt that there will be some partners potentially who want to be in a position where they can continue to support their customers with perpetual licenses.

None of that is contemplated in the guidance that we've provided as it relates to what we expect in the first half of perpetual or anything like that. And thank you for recognizing the importance of moving to a subscription-only model. It's been a source of frustration for investors for many years that we've got this model that is a hybrid between perpetual license and subscription that causes the business not to have the predictability that investors would like to see it have. And taking the opportunity here is the right thing to do, not because investors are looking for predictability but because, as I said in my prepared remarks, when I look at the business itself, 85% -- north of 85% of all new customers are buying subscription agreements.

And we've got a huge number of our traditional on-prem customers who are looking at how they move not just MobileIron-based technologies to cloud deployment but many types of technologies. So now is the right time to do this because our customers recognize the value associated with it. The predictability that comes that gives investors confidence, that's very nice as well. But this is really about customer demand.

Raimo Lenschow -- Barclays -- Analyst

Yeah, yeah. No mixed in makes total sense. Good luck on that journey. The -- and then, Scott, like you talked about the ARR, like down 2% for -- on the maintenance side.

What's your expectations? Are you -- and it's for Simon as well now, are you going to target some of the old perpetual guys on maintenance to try to kind of lift them up to subscription or like talk about that too that kind of maintenance ARR run rate.

Scott Hill -- Chief Financial Officer

Yeah. So we definitely are. That is a big focus of 2020 to help our customer base who are paying -- the on-premise customer base who are paying maintenance today move to the cloud, and in doing so, move from a maintenance agreement to a subscription agreement at a pricing uplift. That's a big focus.

We expect to make significant progress on that, and it will shift ARR from maintenance to subscription.

Simon Biddiscombe -- Chief Executive Officer

I think Raimo, if you look back into 2019, we were able to move hundreds of thousands of seats from the on-premise platform to the cloud platform and change the license model associated with those seats. The important part for our customers is that this is done invisibly to the end user or as close to invisibly to the end user as possible. And over the course of the last couple of years, we've developed a very comprehensive set of tools and services that allow it to be invisible to the end user. Then it's something our customers embrace.

If it puts end users through any kind of device registration process that they're uncomfortable with, then it's much more difficult for customers to do. But we've got it to a point where it's virtually invisible to the end user that they're going through a change. And therefore, our customer gets to take advantage of all of the new feature set and functionality that exists on the cloud platform. So very excited for that opportunity.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Thank you. Good luck.

Simon Biddiscombe -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Robert Majek from Raymond James. Your line is open.

Robert Majek -- Raymond James -- Analyst

Thanks a lot. My question is just on margins and cash flow. It looks like you're guiding down margins into Q1 and into next year. I'm just wondering -- obviously, understand part of it is the shift to subscription, but can you just walk us through any other factors that might be driving the implied opex growth?

Scott Hill -- Chief Financial Officer

Yeah. There's really two things at play here, Robert. One is the loss of the upfront license revenue. That's, obviously, impacting the top line, and then that falls to the bottom line.

The second thing is our gross margin has been coming down and will continue to come down over the course of this year as we accelerate the shift to cloud. So those are really the two factors that are impacting the operating margin.

Robert Majek -- Raymond James -- Analyst

Thanks a lot.

Scott Hill -- Chief Financial Officer

Sure.

Operator

There are no further questions at this time. Simon, I turn the call back over to you.

Simon Biddiscombe -- Chief Executive Officer

Well, thank you for attending our call today. We look forward to updating you on our progress on our next earnings call. Thank you again and goodbye.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Erik Bylin -- Investor Relations Contact

Simon Biddiscombe -- Chief Executive Officer

Scott Hill -- Chief Financial Officer

Scott Searle -- ROTH Capital Partners -- Analyst

Chad Bennett -- Craig-Hallum Capital Group LLC -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Robert Majek -- Raymond James -- Analyst

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