Below is the Ruby Tuesday Inc. (NYSE:RT) Q2 2015 earnings conference call held on Thursday, January 8, 2015, 5:00 PM ET. The Ruby Tuesday Inc reported overall business performance and financial earnings for the second quarter of fiscal 2015 ended December 2, 2014.
Ruby Tuesday Inc. (NYSE:RT) operates 744 company-owned and franchise restaurants across 44 states in the United States and 13 other foreign countries including Guam. As of the fiscal 2015 second quarter ending, Ruby Tuesday earned a total revenue of $262,659 and a diluted net loss per share at $0.15. Ruby Tuesday is committed in providing casual dining services without compromising freshness and quality of its products.
Company Representatives:
Richard Jenkins – Human Resources General Manager, Ruby Tuesday
David Syarto – Vice President Operations, Ruby Tuesday
Analysts:
Keith
Tal Leoni – Bank of America
Mark Kelleher – D.A. Davidson Companies
Rob Owens – Pacific Crest Securities
Michael Kim – Imperial Capital LLC
Aaron Schwartz – McCrorey
Michael Steger – ROTH Capital LLC
Keith
It seems like the billings growth 18% to 20%, whether it is consequence or not, matches up pretty well to the growth in the actual subscriber base. If we suggest that not making sort of too much headway in terms of getting additional revenues or additional billings out of the existing customers, am I reading that the right way and where are we in the efforts to sort of increase the contribution from each individual subscriber?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
I think the first thing I’d say is what we do not give you every quarter; we talk about it on a yearly basis, Keith. New subscribers could be coming from an existing customer, so I wouldn’t make that guess. In fact, you know, because we have to do the true up every year, we have the view of the data. It is just not completely done, but we think our cross-sell activities have been very strong year-to-date and you know we continue to improve on the number of products that a customer has.
Just remember that when we add a new subscriber, it could be into an existing customer already. I would just tell you that right now where we stand three quarters in, we feel like we are having a very good cross-sell and upsell year. We are a quarter away from being able to do that true up activity we do. We will be able to give you some more concrete data on that at the turn of the year. So far we are very happy with the cross-sell and upsell.
David Syarto, Vice President Operations, Ruby Tuesday
Yes. Just to reiterate in definition what an active subscriber represents is an installation. Again, as we have suggested, it can be multiple installations within an existing customer but it is an active serial number if you will that is entitled to services for any number of our products.
Operator
As a reminder ladies and gentlemen, please limit yourself to one question with one follow-up. Your next question is from Tal Leoni with Bank of America. Your line is open.
Tal Leoni, Bank of America
Hello. I have two questions and I will ask them together. If I look at the appliance revenue this quarter, they were flat sequentially and all the growth was from subscription. Can you discuss the patterns and why are you not concerned from the fact that the appliance sell did not grow sequentially?
The second question is when I look at your expenses this quarter, the expenses apex grew about 6.6% sequentially, which was almost double the growth of revenues. Given that a lot of the growth in revenues was subscription, and the question is why is apex growing like that more than revenues and what is the outlook for this year? I know it is a long question but when I look at your guidance for 2015, you are actually expecting operating margin to be slightly better than expected versus the street. Why was this quarter higher but for the year you expect better margin? Thanks.
David Syarto, Vice President Operations, Ruby Tuesday
Hi, Tal. This is Dave. Let me start with the first point. It’s important to remember that all of the appliance revenue is recognized ratably over three years. What we see in this quarter as appliance revenue is really the combination of the sales of units of physical appliances that we’ve made over many previous periods.
The only thing to remember right here I think is we can sell a virtual appliance as a new installation in the same way that we would sell a physical appliance. That is sold as an annual subscription not as [inaudible]. A new win or a new sale can manifest itself as either an appliance or as a subscription either in a virtual appliance or even in a cloud-only service which we sell into as well. I think the correlation of appliance to new sales is not necessarily the right way to think about.
I’ll let Peter jump in on the operating expense part of that and then I’ll come back to…
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Yes. Just to reiterate what Dave said I’m happy with the trend of the growth in the subscription business. We do have very fast growth in our virtual appliances and in our virtual appliances deployed in public cloud, which is helping drive that so we view that as a very positive trend for the business.
On the apex side, Tal, let me make a bunch of points here for you. You know I think the first is that we have showed already through the year about 6% in operating margin leverage all ready for the year. We have said each quarter – when we see investment opportunities we are going to try and capitalize on them. It wasn’t going to be straight linear, but we provided a lot of leverage all ready this year. We are going to show improvement next year also. We are still trending towards the long term model, but you can also see goings at accelerating each quarter, and we’ve been making investments in both sales and marketing and R&D to take advantage of where we see those opportunities.
Those investments in sales and marketing are happening in areas like the channels, where we continue to add partners and trying to increase our reach in our team that handles the growing public cloud opportunity. We are making investments there. Then finally and really are emerging and fast growing products like backup and engine firewall, we are making advantages to continue to grow those to where we think the opportunity is.
On the R&D side, this was a quarter where we had the first full quarter impact of C to C and that was the largest not the only but the largest contributor to growth in R&D span. Then also we continue to make investments in our products and these results in things like the Barracuda Security Sweep, which we think has a great opportunity to go displace old UTMs out there. You know the investment manifests itself in the storage refresh last quarter and also in things like the advance right protection subscription that we ruled out.
We try and balance those things. We feel like we have given good leverage throughout the year. We are going to give leverage next year, but where we do see those investment opportunities that will help drive growth. We are trying to capitalize on them.
Operator
Your next question is from Mark Kelleher with D.A. Davidson. Your line is open.
Mark Kelleher, D.A. Davidson Companies
Great. Thanks for taking the question. I want to go back to the year-over-year growth rate. We have got two divisions that are growing, two product lines that are growing pretty quickly – security and storage. We have got one application delivery that is kind of lagging the growth of those two. Mathematically, the two faster ones growing becoming a bigger part of the revenue stream, we should see over all year-over-year growth increasing. We have a couple of things working against that. We talked about the currency. I am curious getting to my question. My question is that third piece that application delivery that ADC. If that were decelerating that would also be masking some growth on the other two sides.
I was just wondering if you could give some insight into how the ADC piece is going. I do not know. You used to break it out kind of tell us what that part was versus the other two parts. I do not know if you can give us any inside into exactly how that piece is doing. Thanks.
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Hey, Mark. It is PJ. Let me just reset you a little bit. I got to correct for you. There are three categories we talk about – storage, which has been growing faster than our overall growth, and then that work in application security which also has been growing faster than our overall growth. Then that work in application security we have our NG Firewall, Barracuda Firewall, WAF, and our ADC as a part of that. The ADC is actually in the category that is growing you know faster than our overall growth.
The slower growing category has been content security, which is our spam and virus firewall and our web filter. That one has been growing slower and in fact this year as a category for the industry, it has grown slower than it did the previous year. That is the category that has really been — along with currency with some headwind to where our overall growth ended up.
We feel like in the content security category though we have continued to gain share where the number one unit volume player in that space. I think the move that we made that we feel very good about is that specifically around, there has been two factors that we needed to get out in front of that I think we are doing much better now.
The first has been the move for email to go on to public services like Office 365, [inaudible] and AWS. Just over the last six months, we have made all our products available in those poly clouds with feature enhancements that give a customer reason to deploy them there versus what Microsoft or Amazon would offer for protection. We are now in a position actually to sell our products much better into the public cloud.
The second driver in content security has been the emergence of platforms like the NG Firewall that take features like web filtering or SSL VPN and put them on the platform. When you look at the growth we have in the NG Firewall, our Barracuda Firewall, we believe that given our existing web filtering base, we have the ability to convert them on to our platform very well and we are doing a good job with that.
Content security has been the category growing slower. We think we got the products in a much better place. We continue to take share but that is a headwind to the acceleration in our growth.
Operator
Our next question is from Rob Owens with Pacific Crest Securities. Your line is open
Rob Owens, Pacific Crest Securities
Great. Thanks, guys. With the discussion around apex, can you update us a little bit on the target model? I think when you went public a year ago you talked about a three to five-year time frame. Can we assume that two to four-year time frame would still hold at this point?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Yes. I will start, maybe I will have Dave jump in, Rob. That time frame it still holds. –We have given a lot of leverage in the year all ready. Obviously, this corner we invested more. When we look at next year, we see the ability to give leverage again. It will not always be that straight linear path. There will be some variations to it. What we think we give in return is accelerated billings, where we have invested to try and grow.
The other thing we see that we like to keep pointing out and I know you are aware of this is when we do this and we get the accelerated billings — unfortunately because of the model, we incur all the cost upfront but we recognize the revenue over time, so that revenue is going to come down the road. The timing for the long-term model still holds in our minds. We will give leverage next year again. Where we do see opportunities, we are going to invest.
David Syarto, Vice President Operations, Ruby Tuesday
Yes. Just to reiterate what PJ has said, the nature of a recurring revenue model is when you incur the period costs of sales and marketing now and the revenues in the future, it actually accelerated billing this growth naturally compresses your margin. It is only that kind of steady state of billings growth does that start to catch back up. We are very fortunate that we have been able to accelerate our billings. In spite of that, we still have improved margins.
Our forecast for Q4 here as indicated implies almost 8% margin relative to about 3% last year, so almost 5% increase in margin in spite of accelerating billings. I think we see what the power of model can deliver. As PJ said, from period to period, there will be investment opportunities but we think that time frame that you laid out is a reasonable way to think about us getting where we are going to go.
Rob Owens, Pacific Crest Securities
Thanks for that color. Then second, when you talk about accelerated billings, we have also seen throughout this year accelerated net new subscribers as well. It looks like from the model that is beginning to translate into this acceleration you are seeing in subscription revenue. The 21% that you guys just put up is the fastest you have grown in about 2.5 years. We think about the fourth quarter and the composition of revenue relative to your guidance, should we assume that that subscription revenue remains north of 20% year-over-year growth?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
I think there is a couple of factors there that I will hit on Rob. The first is two of the things driving some of the subscription growth had been what I would call multi site backup and multi site NG Firewall deployments. As the product capabilities have improved – again, like I spoke about before we started to see some six-figure deals as an example this is a pure mid market company. We had a deal that just started out looking two-unit backup deal. It was a global company and then it ended up being 22 units and a six-figure backup deal.
We have those types of opportunities in front of us in same way with NG. We like that trend and that trend is driving the number of backup subscribers we have up. We view that as a good future opportunity. I would not tell you exactly where we think that is going to fall each quarter, but you can see how it has played out over the last three quarters. I think the drivers of that have been those categories. We need to continue to execute it there the way we have been and we will polish what will happen.
Operator
Your next question is from Michael Kim with Imperial Capital. Your line is open.
Michael Kim, Imperial Capital LLC
Hey, good afternoon, guys and happy New Year. Just to expand on the security sweep opportunity, are you developing specific or new solutions for the suite or is it primarily to tighter integrations with existing solutions in the management council?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
This was a product we developed in-house. If using the existing virtual modules that we have but really where I think our IP came to play was around how they use memory and processing power on the platform. One of the big issues that UTMs have is you continue – you know try and turn on functionality, performance usually degrades, and you got to keep changing the boxes or improving the boxes which is a headache for our customer base.
We have developed a way for these virtual modules to interact directly with the processing and computing, where you should not see that type of performance degradation. There is real IP here. We think there is real benefit in bringing these three vectors – email, web, and network perimeter onto a single platform. You get the benefits of again a single management council on a single platform at a real affordable price.
That alone we think, Michael, is a real good opportunity for us to go into the existing UTM base that is out there and actually give them more value. If you think about this platform going forward, it also gives us the opportunity. We are not limited to three. We can add other virtual modules onto this. We think this is a platform that allows customers to consolidate the way they protect their environments. We are aiming it right now at the UTM market, and we think we have a very good strong value play there for our customer base.
Just announced, we have our first sales in the product and we are excited about it, but it is again something we got to go train the partners on. We have got to get everybody ramped up in selling it but we are off to a good start with it.
Michael Kim, Imperial Capital LLC
Is that advance threat detection included or is that part of the product Redmad?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
On this one right now, the Barracuda Firewall is on there, so advance threat protection is not yet but it is something we definitely have on the road map.
Operator
Your next question is from Aaron Schwartz with McCrorey. Your line is open.
Aaron Schwartz, McCrorey
Good afternoon. Thank you. I just have a question on the strength in the cloud services you also talked about the virtual appliances. Can you just walk through what the average deal length is on that? Is that a shorter deal length than you have traditionally seen? I am just wondering you saw a little bit of a mixed shift and deferred to shorter term. I am just wondering what is driving that.
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Let me hit the cloud services in there and in the virtual. There are a number of probably subtleties to that. The first is just on the virtual side, one of the things we have seen is growth in what I would just call self service, where there is not as many sales touches. The customer just comes to the site, downloads a product, gets working with it, and boom, they are off and running. We have seen growth there in our virtual business. We have also seen growth in what I would call the public cloud part of that, which is the AWS marketplace where the customer just comes to AWS, swipes the credit card, and starts using the product. Microsoft just deployed their marketplace called
We have seen growth there and we love that. That is low touch sale, very quick sales process kind of growth.
There is also another part of that public cloud business though that has been growing rapidly for us, which is a little bit different. Again, this is a small number for us but we think we are a leader in this public cloud marketplace. One of the examples I’ll give you there is – we had a Fortune 1000 company do a trial last November on our WAF. A year later now, they are doing over $100,000.00 annually with us and that is on a recurring monthly basis.
There definitely is kind of this try the product in the public cloud and then expand as they get more comfortable deploying applications there that we think is going to drive virtual growth for us and public cloud growth for us going forward that we’re excited about.
Then the third part is just our traditional what I would call virtual appliance on premise business. That business is growing much faster than our overall growth rate. I think the excitement for us there is where more of that happened in our legacy business – the content security business. We have seen a strong acceleration in virtual growth in our network and application security business, which we again think bold well for us. There is a number of ways virtual comes into play – self-service, [inaudible] virtual, and then public cloud. All three of those areas though we feel good about the activity and the growth.
David Syarto, Vice President Operations, Ruby Tuesday
Aaron just to follow-up on the deferred question. The physical appliances — majority of those sales are going into the long-term deferred. On the virtual appliance side, typically you are going to see shorter term durations than that three-year average on your appliance. You realize as you displace some more of the physical appliance sell for the virtual appliance sell, you will see more of that show up in your short-term deferred relative to your long-term deferred. It is the same trend. It is just manifested and how the balance sheets are playing out.
Aaron Schwartz, McCrorey
Right. I guess I’m just trying to play that out if you continue to see that shift would that be a little bit of a headwind to your billings growth unit if it’s better economics to your longer term?
David Syarto, Vice President Operations, Ruby Tuesday
Yes. We have said consistently that while we believe that the shift towards virtual appliance provides some headwind in any one period, it is very much in the long term benefit for the company. Number one, it is more margin rich than a physical appliance given the lack of kind of a hardware component. Also, it has got a much higher component of it is recurring and there is a higher customer let time value associated with it.
Yes, that continues to be the case every quarter that we continue to sell more virtual appliance in lieu of physical appliance. You will see some of the near term headwind, but it has a long term value to the business so we embrace it.
Operator
Your final question is from the line of Michael Steger with ROTH Capital. Your line is open.
Michael Steger, ROTH Capital Partners LLC
Hey, how are you doing? Happy new year. I am glad I got squeezed in. I think all the good questions have been answered. I just have maybe a follow-up. In the bundling, so to speak, it sounds like you are alluding to some more bundling coming forward. Should we expect it in the NG Firewall and the WAF part to be combined or not?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
No. I think Michael what we see is opportunities for a mid market customer who doesn’t want complexity needs the solutions to protect themselves the cost vectors to be able to deploy on a single platform. Oftentimes, a lot is going to deployed in a different part of the network, but for something like our NG Firewall or Barracuda Firewall, we do see that opportunity to consolidate on to a single platform. We think again it has been part of our heritage to give customers choice in how they deploy. This platform is another choice for customers to deploy these solutions in one location on one platform.
Again, we think the economics of this are good for us. It is three virtual licenses on a single hardware platform. We think that works out well for us. Yes, you can imagine us moving other virtual modules on to the platform, where it makes sense for the customers. They think about how they want to deploy and protect their data.
Michael Steger, ROTH Capital Partners LLC
Right. One final one here, you are PBBA unit volume leader, should we anticipate continued growth in the forward years actually with all the PBBA users as their data needs to grow as well?
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Yes. One of the great things about being in the storage and backup business is that information continues to grow. We get that in a couple of ways. One, customers are upgrading to bigger boxes and two, customers within a box back up more into the cloud. That has helped certainly drive our renewal rates to the levels they have been at in the mid-90s level. We see that as a trend that is going to continue. Information growth continues innovated, so we think that that is definitely a tailwind for us.
Operator
This concludes the Q&A session and I’ll turn the call back over to Mr. Jenkins for closing remarks.
Richard Jenkins, Human Resources General Manager, Ruby Tuesday
Thanks. I just want to thank everyone for taking the time to join us today. I just want to thank our Barracuda employees, our customers and partners around the world for all your support of us, our products, and the company. We look forward to speaking with all of you very soon. Thanks. Happy New Year and I look forward to talking again.
Operator
Ladies and gentlemen this concludes today’s conference call. You may now disconnect.
