Q3 2019 Earnings Call
I would now like to turn the conference over to your hosts James Rescue Director of Investor Relations. Thank you you may begin. Thank you operator. Good afternoon. Thank you for joining us today to review Varonis. Its third quarter 2019 financial results with me on the call today, or Yaki, Faitelson, Chief Executive Officer, and Guy, Milan, <unk>, Chief Financial Officer and.
Chief operating officer after preliminary remarks, well open up the call to a question and answer session.
During this call we may make statements related to our business that would be considered forward looking statements under federal securities laws, including projections of future operating results for our fourth quarter and fiscal year ending December 30, Onest 2019.
Actual results may differ materially from those set forth in such statements important factors such as risks associated with anticipated growth in our addressable market competitive factors, including increased sales cycle time changes in the competitive environment pricing changes transition in sales from perpetual licenses to a subscription based model and increased.
Competition, the risks that we may not be able to attract retain employees, including sales personnel in engineers general economic and industry conditions, including expenditure trends for data and cyber security solutions risks associated with the closing of large transactions, including our ability to close large transactions consistently on a quarterly.
Basis, our ability to build and expand our direct sales efforts and reseller distribution channels, new product introductions, and our ability to develop and deliver innovative products risks associated with international operations and our ability to provide high quality service and support offerings could cause actual results could differ materially from those.
Contained in forward looking statements.
These factors are addressed in the earnings press release that we issue today under the section captioned forward looking statements and these and other important risk factors are described more fully our reports filed with the Securities and Exchange Commission.
We encourage all industries to read our S. You see filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date Berlin. Its expressly disclaims any application are undertaking to release publicly any updates or revisions to any forward looking statements made here at Additionally, non-GAAP financial measure as well.
As discussed on this conference call.
A reconciliation for the most directly comparable GAAP financial measures is also available on our third quarter 2019 earnings press release, which can be found at www dot for Ronas Dot com and the Investor Relations section also please note that an updated investor presentation as well as a webcast of today's call are available on our web site and the investor.
Elation section with that I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson Yaki.
Thanks, Jamie and good afternoon, everyone, Oh third quarter results demonstrated the power of the Barneys data security platform, but the revenues were $65.6 million and 74% before license revenues were from subscriptions compared to guidance of 55% real proud that even we substantially all subjects mix we.
Exceeded the high end revenues guidance at the beginning of 2019 honestly quarters ago, We announced Oh transition from a perpetual subscription based model, we said that moving as quickly as possible.
Well what d.
And we now expect that they transition it will be substantially complete in the next few quarters.
Net discuss what else subscription offering resonating so what do we know customers the goals of data and increased awareness on data security to get to present evolving regulatory environment like built Buckley usually use cases.
We have achieving high level of customer engagement in unleashing the potential for <unk> platform.
You know some examples large bank turned to go on east again visibility into the data. They do so been Arctic a sensitive they not in money, though they won't let me sit in cloud environments.
The purchase subscription for said it'll probably licenses and when you finally game console Oh, no data styles. They would identify maybe DOCSIS too sensitive at least data repairing thin file system for commissioning mother weeks and money doleful threats across the hybrid environment well in a single pane of glass you said just one example.
Customer, making the ALJ only showing this country's mahoney using the flexibility for subscription.
For example.
Well the federal agency that has been relying on voice for used to secure with sensitive information.
Danish already started with Datadvantage The foundation mobile data security platform.
Do you see it did a classification engine and did it unless we excuse me the agency again, expanding the investment in going East West subscription offering you Gotta Datadvantage for the actively Sobi says automation engine to date to transport and you know the agency will receive a live two unusual activity on Arctic director, we reduced risk based.
Finding and fixing assessing excessive permissions faster than ever and had been show sensitive fives remain well beach, where they should be.
This is also a good example of existing customer benefit for most subscription model.
Examples like that couldn't feel devalue fault block from technology, and he said I mean, he's they need to do so this could be picked in response to threats and we're going to to comply with those who bought of initial deployment well the expansion of existing deploying custom at all the more telemetry one data stove Arctic they like the we improved Dolby.
<unk> is the resorts, Oh, I love to become much more sophisticated.
Cost of metals to detect and investigate threats more quickly and conclusively than ever before.
So platform has evolved we have seemed to go budgets focus on data protection insider threats advanced persistent threat somewhat relation these goals combine he's the ease of consumption for most subscription more than you had been make this since process much more predictable in carpet we had the scaling speed of the tons. This.
Jim should drive substantial customer lifetime value expansion.
We think that voice this transition can be a case study how company can successfully managing for city did it up its business model change.
Such Mcgee too.
We believe.
Oh, placing the market these on much.
The only is the only Bible solution for the problems. We had so in that we are making substantial progress towards our $1 billion target well delivering on customer demand unleashing the potential for platform and building a stronger company. These great long term value so still quotas we.
Let me turn the call, although the guy right.
Thanks, Yaki good afternoon, everyone.
Highlights this quarter, our first 52% year over year growth and they are $278.9 million second 74% subscription mix more than 10 times the percentage a year ago.
Third even with a substantially higher than guided subscription mix revenues of 65.6 million also comfortably beat the high end of our guidance.
And lastly, we are pleased that our disciplined approach has resulted in a transition being close to substantially complete in a much faster time than we originally anticipated.
Now, let's turn to result.
As mentioned total revenues for Q3 was $65.6 million.
Third quarter license revenue was $31.6 million, which included 23.3 million of subscription revenue.
Subscription adoption for both new and existing customers remains strong.
New customers continue to buy an average of between four and five licenses in the initial deal as opposed to purchasing between two and three licenses under the perpetual model.
Like we saw in previous quarter existing customers are embracing our subscription model and realizing greater value from their purchase.
Normalized results grew approximately 30% this quarter compared to Q3 2018.
We calculate normalize result by applying a conversion factor of 2.2, which estimates the value of subscription sales had they been sold as perpetual license.
This reflects the three year breakeven period, we saw across all subscription deals in the quarter consistent with what we have seen in the path.
We adopted the conversion factor in our Q1 earnings call in response to multiple request from analysts and investors to provide a means of analyzing our business during the transition.
As you know the conversion factor has been commonly used by other companies during their transition, but we understand that the FCC is not going to permit the use of your conversion methodology anymore. As a result, this will be the last quarter that we will provide normalize result.
We have always believed that they are is the most important <unk> when assessing the health of a subscription business.
Given that our transition has progressed far more quickly than we originally anticipated and that we now expect the subscription mix in Q4 to be approximately 75% and the subscription mix in fiscal 2020 to be plus or minus 80%. We view ourselves is the subscription company and we'll be focused on.
They are as our leading K.P.I. going forward.
They are which is the annualized value of active term based subscription licenses plus maintenance contracts related to perpetual licenses in effect at the end of each quarter was 178.9 million at the end of Q3 and grew 52% compared to last year.
This significant increase correlates with a much greater contribution we are seeing from subscription revenues, a more predictable and recurring revenue stream and reflects the underlying health of our business.
Turning back to our income statement maintenance and services revenues were $34.1 million, increasing 10% compared to the same period last year.
It's our subscription mix stays at these high level, we expect less perpetual license revenues and therefore less associated maintenance revenue.
We continue to move professional service work to our channel partners, while offering licenses that provide greater automation.
As a result, the maintenance and services line will not show the same growth levels, we have seen in the past.
Maintenance renewal rates on perpetual license once again exceeded 90% and we expect them to stay at these high level.
Looking at the business geographically North America revenues were $47.4 million or 72% of total revenue in EMEA revenues were $16.7 million, representing 26% of total revenue.
Rest of World revenues were $1.5 million or 2% of total revenue.
During the quarter, we added 148, new customer and we ended Q3 with approximately 6900 customer.
In line with our strategy the difference in the year over year Q3, new customer add was associated with the smallest user group companies with fewer than 500 employees.
In Q3, we saw new customers make larger initial commitments to her own it as they were responsible for 50% of our license in first year maintenance revenues compared to 47% in Q3 2018.
As of September Thirtyth, 75% of our customers had purchased two or more product family up from 72% at the same time last year.
43% of our customers purchased three or more product families compared with 39% in Q3 of 2018.
Turning back to the income statement I'd like to point out that I'll be discussing non-GAAP results going forward, unless otherwise stated, which for Q3 excludes $11 million in stock based compensation expense and approximately $200000 of related payroll tax expense.
Also excluded or foreign exchange losses of approximately $900000 related to FX differences from the revaluation of assets and liabilities denominated in non U.S. dollar.
Gross profit for the third quarter was $57.5 million, representing a gross margin of 87.6% compared to 90.2% in the third quarter 2018.
Consistent with the first half of the year. Our Q3 gross margin was slightly lower than in previous years due to the higher mix of subscription revenue.
Operating expenses in the third quarter totaled $62.3 million as a result, our operating loss was $4.7 million or an operating margin of negative 7.2% for the third quarter compared to operating income of $2 million or an operating margin of 3% in the same period.
Last year.
We feel very good about the state of the business and the market opportunity and we will continue to invest to drive future growth well planning to show margin expansion.
The transition continues to have a short term impact on our financial result, but we have been and remain committed to profitability.
We have said all along the faster we moved through the transition the quicker. We believe we can show healthier margins and the stronger our financial position will become.
During the quarter and similar to the third quarter of 2018, we had financial income of approximately $400000, both primarily due to interest income.
Our guidance does not consider any potential impact to the financial and other income and expense associated with interest income or any impact related to foreign exchange gains or losses, as we don't estimate movements in foreign currency rate.
Our net loss was $4.8 million for the third quarter of 2019 or a loss of 16 cents per basic and diluted share compared to net income of $1.8 million or six cents per diluted share for the third quarter 2018.
This is based on 30.4 million basic and diluted shares outstanding for Q3, 2019, and 32.5 million diluted shares outstanding for Q3 2018.
Turning to the balance sheet, we ended the quarter with $131.4 million in cash and cash equivalent marketable securities and short term deposit.
Through the first nine months of 2019, we use $10.7 million of cash from operations compared to generating $16.3 million of cash from operations in the same period last year.
As a reminder, we're collecting on annual contract value amount in this transition and therefore, we continue to see a short term impact on cash flow.
We ended the quarter with 1506 employees and 9% increase from the third quarter 2018.
Before we open for Q anyway, I'll discuss our guidance for the remainder of 2019.
Our updated full year guidance include the Q3 revenue beat offset by the headwind from the significant increase in the Q4 subscription mix guidance to approximately 75% from 40%.
Without this increase in the subscription mix, we would have shown a meaningful raised to our Q4 and full year guidance, we provided last quarter.
For the fourth quarter of 2019, we expect total revenues of 70.5 million to $73.5 million.
We expect our non-GAAP operating loss to range between negative 3.5 million negative 1.5 million and non-GAAP net loss per basic and diluted share in the range of 13 cents to seven cents.
This assumes a tax provision 400000 to $600000 and 30.5 million basic and diluted shares outstanding.
Given the higher Q4 mix, which now assumes approximately 29 million of subscription revenues. We now expect the full year subscription mix will be approximately 62% up significantly from our prior guidance of 45% and even more drastically from our 10% guidance at the beginning.
The year.
Our updated full year 2019 guidance is as follows.
We now expect total revenues in the range of 252 million to $255 million, we expect our full year non-GAAP operating loss to be in the range of negative 28.5 million the negative $26.5 million and non-GAAP net loss per basic and diluted chair in the range of nine.
86 cents the 90 cents.
This assumes a tax provision of $2 million to $2.2 million and 30.3 million basic and diluted shares outstanding.
While we will provide our full financial guidance for 2020, when we report our Q4 results here a couple of things to think about.
First for fiscal 2020 as previously mentioned, we expect the transition to be substantially complete with subscription levels at plus or minus 80% for the.
Second I want to remind everyone that in the first half of 2020, the subscription mix will be significantly higher than in the first half of 2019, when we were at the beginning of the transition.
And finally as we feel good about the business, we will continue to invest while balancing growth and profitability, which has been our philosophy for many years.
In summary, we're extremely pleased with our Q3 results, particularly with our 52% growth they are which reflects the strengthening fundamentals of our business.
Subscription is unleashing the full potential of our platform and we believe that we will be able to leverage our new model. So the benefit of our customers employees and stockholders.
With that would be happy to take question operator.
Thank you at this time, we will be conducting a question answer session. If you like that's question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question Q. You May proceed start to if you will let some of your question from the Q for participants usually speaker equipment may be necessary to pick up your had said before person start keys one moment. Please.
Pull for questions.
Our first question comes a lot of Matt Hedberg with RBC. Please proceed with your question.
Hi, guys. Thanks for taking my questions. Congrats on the a strong results Yaki I wanted to talk about growth here, our grew 52% and I believe you said.
Normalized basis revenue grew 30% I guess I'm wondering from a high level can can you remind us of how fast do you think your underlying markets are growing I guess I'm trying to get a sense for maybe how fast we should think about gross post transition.
Hi, Matt you know the just the overall our marketing is always was everybody, but the keys that subscription really unleash the potential of the platform.
Do you see says that we all catering for all the data protection detection of you know it's type of security Intel inside some of the correlation.
The top priority for customers and what is happening you did they can buy more right off the bat and then we can really expand with them and what we see that it's just becoming a top bio diesel almost every organization I'll do the sales cycle is becoming much more predictable and most strategic and simply because you know its.
Most of lease under the C. So the cloud is a big driver as I said, you know with relation is a big though I live in everything that these hopping into cyberspace once you bypass the perimeter security.
Unmatched ability to detect M.D.C.
Hi, Bill Securities financing, just working extremely well.
Really believed that the just the friction you know ability to capture market share.
Efficiency of sense bosses are walking very well and we believe that.
Well, we use this transition to subscription we can go faster than we can boost for many years and being very efficient in doing so.
That's great and then maybe one for CGI.
In your prepared remarks, you noted that post transition you plan to show a margin improvement you remain committed to profitability, obviously the margins to their mean impacted negatively by the model transition, but can you help us think about you know sort of what you know obviously, you're gonna you're going to continue invest for growth, but what's the right way to think about margin expansion post.
It was the transition.
So you're right Matt the transition continues to have a short term impact on our financial results, but we have been and really remain committed to profitability in the give some color for 2020 will obviously provide guidance in our Q4 results, but just to give some color on how we think.
About about next year next year really is a year or to have you have kind of the first part the first six months of the year with a subscription mix was thinking well it will be significantly higher than kind of the first half of 2019 and in the second part.
Of the year when the subscription mix is expected to is expected expected to be kind of within the similar Oh ranges and when you look at kind of how we think about expenses.
We feel good about the business. So we want to continue to invest really while balancing growth and profitability, which really has been kind of our philosophy for many years. So I think in summary, we really have a track record of commitments of profitability and plan to continue on that path.
Great. Thanks, a lot well done guys.
Our next question comes the line of though with Jefferies. Please proceed with your question.
Thank you you mentioned product attach is higher and subscription and then you saw a perpetual I'm curious if you could just a comment on where you're seeing the strike strongest product attach and perhaps the strongest stuff opportunities going forward.
Hi, just so we see a lot we say you know the data protection, we still automation engine. The cloud. These huge philosophy. So just the just the hybrid world works very well Foster cloud is a big diving everything that they did we see 65 Monday as you walk sick extremely.
Well classification, because of liquidation and tie everything to the cyber security the lifting the for when things that we're doing really see from all over so a lot of B cell. These successes from big coming from customer demand the customer need and understanding that they need more.
And most of the licenses in the platform and automation in long beach, once you're bringing to the customer always relatively telephone they get the loan to value and wants to be adding more platforms.
They're having much battelle data protection del Amo in compliance and they did 11 thing into detection that we are providing of just increasing innocuous seen orders of magnitude. So we really anything when all is sitting there waiting films affair.
The platform and unleashing the potential of the platform and its time philosophically to customer demand, which now it's all coming from the customer just to get some data points, what we used to see under the perpetual model is that customers would buy on their first initial purchase between two to three licenses and what we see under the skin.
<unk> model is that new customers are buying between four to five licenses. So it ties to what yaki, saying that they're consuming more of the of the product and buying this is a platform.
The platform set of walk very wedding, Dan the initial d. and working very willing to expansion.
And just a quick follow up just from a global perspective is the Salesforce now all onboard and up to speed on the shift to subscription it would seem with the numbers. They are but any pockets left to get the salesforce onboard with this go to market model.
Yes, they are going to subscription is it just a top priority. Obviously you know in EMEA, we need some changes to make sure that day, everybody everybody onboard, but we are in the high direction and you know we really.
Becoming gary's subscription their subscription business solids. We know this is one of the foster said transitions and you know you still your favorite enterprise software subscription and everybody Oh on everybody on board I mean, it's also working very well with the customers most of the custom though you know the vast majority DC as well.
The want new get much more value for my setting sending them in a subscription model.
[laughter].
Great. Thank you.
Thanks Bye.
Our next question comes a lot of Saket Kalia Barclays Capital. Please proceed with your question.
Hi, guys. Thanks for taking my questions here.
Oh and socket.
Hey, Yaki, Hey, guys, maybe just start with you.
You know, it's obviously early to get a good sample size here, but I think I think you should have started to see at least some of your early subscription pilot customers come up for renewal. So I was wondering just talk about what you're seeing from the first cohort of subscription customers that signed a year ago, and maybe even Q4 last year and they're willing.
As to renew under the new pricing model.
Hi, second yeah, you're right on Q3 last year is really when we started kind of the pilot and that ran for Q3 in Q4, we're very happy with the renewal rate for our Q2 pilot.
Got it Dot Yaki, maybe just my follow up for you.
Lots of traction on on subscription as I think we all see you know for the customers that are still on maintenance can you just talk about how you envision that base sort of evolving over time, you know I think we've seen a couple companies transitioning to a transition their maintenance base to subscription or.
Using various methods curious how you think about that based long term.
Yeah, you know, there's so much just to sell and the value is coming from the platform and this is what the customers want so I'll focus to be you know to move fast to subscription is thought to go in there and I am convinced that the maintenance that ndtv ticketing revenues, what we're doing selling them new licenses. This is how we talks well.
I'm going to the basin converting it just maintenance will going and selling additional licenses and make sure that will platform Blaine play to the base and as we said before the platform is working very well with new customers. These expansion.
Got it very helpful. Thanks, guys.
Thank you thanks.
Our next question comes on line, Okay. So ill with Oppenheimer. Please see with your question.
Thank you good afternoon, guys congrats on the consistent execution and without a doubt yeah the improved outlook.
Well for Yaki wonderful Guy so.
You will bounce back it would appear.
And I know you addressed it absolutely coherently over the call for the past few quarters.
What's driving that improvement these the be from macro concerns about a moderating European economic environment.
Hi, So we don't see you know we see this thing since I get as we see overall to you all good demand you know everything philosophy you open for the company to move so fast is not easy. This is how well you know to take a company in three quarters to moving these kind of this kind of plates and that's a full default.
Quite a bit they all they do all focus these two movie to subscription and you know we view up we needed to do some changes make sure but everybody on board and the you know it's it's although it's moving in the idea of action.
Do you know, we just see very good market. There historically, we did very well and also in the fourth quarter. They took away or do you. Just you know to move them to move to subscription ending trees Dale.
Understood and yet you, while while we haven't maybe on that topic, and then try and maybe to expanded a little bit. So you know cleared or the strategy hasn't unfolding better than expected customers are coming for a more modules law that the platform gets expanding.
And without a doubt the name become a much more recognizable out there in the market. So.
Can you think that down the road.
In the quest to the 1 billion dollar a target.
Do you think we might started the seven digit transaction.
Actually becoming more well do teen rather than you know exception.
Down the road.
You know I I don't know I, just know that at this point, what I know, it's becoming a top priority for away for organizations that so everything that is happening in the marketplace works very well for us the explosion of data and we said automation that we did the two we introduced the ability for customers to solve very fast.
With very little human intervention intervention.
They did the biggest risking data protection, but do you have done we just cyber security wants you bypass the Premier do you know would the way that we are doing this user behavior analytics, it's working extremely well and integration. So I just think that is going to be a top priority full full weakest full.
For customers Aldo from every size and they did to focus more on the enterprise we give a lot would you initial views and they're very good expansion. So I don't know in terms of one below the auto but just thinking that the initial view and overall.
Overall, the customer lifetime value make a little sense would be able to focus a lot on a custom I'll make sure that a downtick stock being gay and look to fair value from the platform and are you starting to see the upsells, though oh really related to usage. So you know using the product small with relatively little if both because we.
We have diesel commissioning each one of the you ski says.
So just we just believe that everything we become you know not much more much more efficient and over the time of ability to get more former customers.
And we just in case.
Thank you so watch.
Thanks, Phil.
Our next question comes a lot of Chad Bennett with Craig Hallum. Please proceed with your question.
Great. Thanks for taking my questions phenomenal job on the quarter guys.
Thank you.
So me maybe a question for CGI first I know you don't want to give specifics necessarily on next year, but considering you know where we're at and the transition and now we're going to annualize on on those numbers specifically in the in the March quarter <unk>, how should we think.
About seasonality there you just because we haven't really seen it yet seasonality of the March quarter in terms of subscription revenue and license revenue compared to when you were a pure license company.
So without boring you today with a accounting treatment. The six so six really requires that subscription deals I'm for on Prem a recognize similar to perpetual so we'd expect the same kind of seasonality where Q1 its kind of our.
Lois smallest quarter in terms in dollar terms, and then Q4 being kind of the largest but again kind of going back to the way. We look at 2020 really will be kind of a year of two half where the Q1. When we Q1 19 is really when we started.
The transition and the subscription mix.
Is lower than Q1, 2020 subscription mix should be significantly higher so it won't really be apples to apples in terms of Q1 and also Q2 of 2020, but as we get to the second part of the year the second.
Half of it will be much more of an apples to apples comparison on the topline basis.
And maybe this is just some more blunt way of asking do you expect to return to revenue growth in the March quarter overall.
Sure.
So we'll provide our guidance in Q4 of a a this year and we'll give much more color on the 2020, a lot like a line item and how we see that but conceptually.
It will just have to break it into those two years, the first and second half and from an expense perspective, because the business is doing well we want to continue to invest.
Okay, and maybe a couple of segment questions I think you touched on EMEA.
And we have the overall revenue can you just give us a sense how for how EMEA performed in terms of skip a subscription revenue sequentially.
We were happy with the adoption of the subscription mix and EMEA I think the team there is onboard understands the value that it provides customers and we expect that to continue in Q4 <unk>.
One last one for me just fed you highlighted.
The substantial deal in the quarter is there any way to to indicate how fed performed for you guys in terms of of bookings or revenue this quarter compared to any quarter. Historically, then I'll jump off thanks.
We saw a nice contribution from February part of the team and we're very happy with the subscription adoption as well.
Thanks, guys.
Thanks, Chad.
Our next question comes the line of GERD top us with Stifel. Please state your question.
Great. Thanks for taking my question and congrats on the quarter based on what you're saying do you see a points where you'd be comfortable ripping the bandaid off so to speak and only selling subscriptions. I know you gave initial color for 2020, but given just the rapid growth you've seen here in subscription is there a point, where you kind of thing you know what were good to hear we were comfortable were only going to sell subscription.
Going forward.
Hi, go well well what about the customers you see the resource that we can be more committed to subscription and it's working extremely well and but do you know we slickwater into Eaton. The you know I time, we will see we will consider it but the you know we definitely in the I did actually.
And we that we subscription and the you know very committed to to sell a subscription and as much as weekend subscription on.
That's a that's helpful. And then if you look at sort of initial sale. The subscription are you seeing customers buying more data advantage for different storage area. As many are you seeing them deployed data beds across broader parts of the network and they would've done with perpetual not just additional solution module adoption, but really just the core data advantaged solution I think that's being deployed.
Across the broader part of the network. Thank you.
Yes, definitely without a doubt you know we see today, we see they'd be going mobile data advantage, we see another strong adoption of the data advantage to all the you know suite 65 environment.
But it's it's just walking and we feel good licenses that can really consumed the platform and have all the automation get much more value and then beimel.
That's a that's that's helpful and maybe if I can throw one more in there for CGI Guy you talked about four to five licenses at initial deal that was due to three perpetual how should we think about potential customer LTV here in differences between the two given that you've got a few quarters now under your belt of subscription selling thank you very much.
So I think what we see is definitely the how this transition and how the sale of subscription has unleashed a potential of the platform customers are consuming this and purchasing licenses much more as a platform play and that's really beneficial because the more licenses they have the more value they can.
Great song from our product. So we believe in and we see the additional purchases of license is a very positive thing for customers, where they can continue to buy more licenses after that.
Our next question comes the line of Melissa Frenchie with Morgan Stanley . Please with your question.
Okay. Thanks for taking my question congrats on the quarter Yucky looking beyond the change to subscription how do your customers asked for more cloud based offerings from you all versus your on premise offerings that something that you have given the consideration to.
No.
Customers if they want installed the platform to getting started the nodule Dickens started the nice double U.S.. So he's theyve cloud infrastructure. They don't they don't have.
We have an issue to doing study, but primarily what they're asking philosophy to support most of these say it datalink positively in the cloud and this is what we're doing and it's driving a lot of Gulfport.
Okay got it I just wanted to follow up on the earlier question on renewal rates and I know.
It is early but guy is your assumption that the renewal.
The subscription will be similar to <unk>.
Yeah.
Okay.
Thanks, Melissa Thank you.
Our next question comes the line of Daniel Ives with Wedbush. Please see what's your question.
Yes. Thanks.
Can you for can you still a regulatory especially GDPR some of the fine.
And even what's happening here in the U.S. from a steep perspective, how that's driving sales cycles and maybe activity. Thanks.
Yep Yep regulation, primarily what it's doing just the had been they organizations out there to understand how to Threed data and cyber security and elevating the it willingness to the senior executives on.
On the both on the at least can Dane and they need to put picked a data infrastructure to visit tossed foundation to function. So it's definitely helping us but this is something that walks you know over over.
A long time, just the educational process not organizations, though I'll, having the I'll just you know a lot of regulation and other big relations in the D.A. generating a lot of need but this is something that just.
Building up overtime.
Great and then when have you scheduled to D. So the seminar on how to do a subscription transition yet when when you're seeking to do that seminar.
[laughter] both handling [laughter], Okay, you're just let me know when the links out thanks [laughter]. Thanks, Dan.
Our next question comes on line of Erik Suppiger with JMP. Please suited question.
Yeah. Thanks for taking the question congrats.
First off can you talk a little bit about deal size.
I understand the number of subscriptions.
Services are there, but customers new customers are buying moves up from two to three to four to five.
But in light of the the move to subscription it's hard for us to gauge what the overall deal sizes for new customer can you talk a little bit about how the dynamics will not have changed with the move to subscription.
Hi, So we provide our ASP on an annual basis, providing it on a quarterly basis can be a slightly confusing because historically Q4 has been our largest quarter for the year, So and the next earning call. When we report Q4 numbers will provide more color on the ASV.
Okay.
Then lastly on the number of new customers. When do you think that's going to a reverse some start growing again I understand you're shifting to larger customers, but when do you think you see do ads and start to accelerate.
The way, we look at at the new customer add that it's really working in line with our strategy. When when you. When you look at the Delta between the Q3 as year over year, it's all related to the less than 500 or employee companies. So like the lowest user group.
And it really fits well with our with our strategy. So we're not just spoken about bringing new customers also kind of the quality of those customers in the larger customers will weaken later on sell more license. So it's really working very well for us and we will continue in that strategy.
[laughter]. Thank you.
Thanks Aaron.
Our next question comes from a line of Jonathan came from with Baird. Please proceed with your question.
Yes, good afternoon.
Yeah, I'm kind of curious when you look at the data security issues around GDP, our active directory and Officethree hundred 60 bite in particular it can you get to talk about how those use cases rank of rone is in terms of demand trends and then which one do you see driving a greater platform opportunity for the company.
Yeah, Hi, you know, it's it's sort of then you just do you have just unstructured data that the seats very how to align the right people to access the data and once youre going to the cloud we use all of the added collaboration features it's becoming much bigger and into one single pay.
Of glass to a.
To control it to component everything and we think relation talking about data protection data classification.
And the ability to a stope and I laid out on any cyber attacks. So it's all the or data security platform that we added a lot of telemetry and it's because a lot of it related to A.H. devices and infrastructure. It's everything works very well in terms of you know classified.
Data and remediate due east, making sure the billings in the ice places and a little on any abnormal behavior is exactly the platform play and the fact that you had a lot of data in the cloud an on Prem and you using every organization accessing whatever it leaves you have these info.
Formation and data spoiled works very well for us, it's just make the pain so much bigger.
Would it be safe to assume that ought to 365 isn't the larger three use cases.
It's it's a big use case.
Right. Okay and then my final question when you look at cloud the in store.
Versus on premise did do you see any notable and [laughter] by customers on one of the other or what do you look at the business makes today or are those security concerns and important your opportunity.
Equal across the on premise to cloud today.
In sequence in on premise in cloud, but you know him in the club O do you if you're doing a mistake and you open it for the whole roll. These you know it's smaller than just your way it just still employees and some of these technologies have a lot of <unk> productivity tools for the end user but.
That it's much easier for him to doing mistaken opened the say data stove too much more due to many more people than a they intended so it's equally opportunity, but sometimes in the cloud the public can be bigger.
Are you seeing faster growth with your products that address cloud security data stores today.
It's the cloud is a decline of these big for us, but do you know it's the same when a customer wants to solve the problem usually do want to solve it on when most of the date I still don't blame you know he would say well over 90% of the date I still on Prem, but it's starting to gain voting with made a in the cloud and dozens mall did I.
They have more data in the cloud they definitely see more weighted acute need to use vacone. So you know always was you know data growth really fuel Vone school.
Right. Okay. That's helpful. Thank you.
Thanks, Jonathan.
Our final question comes on line of Rishi Jaluria with D.A. Davidson. Please see with your question.
Hi, guys Ah Thanks for taking my question.
Maybe just one on one or two for Guy a first just thinking about the normalized world calculation that that you provide which is which is really helpful. But it looks like you're using a different calculation. This time then when you did on the slide deck last quarter, when I pull that up.
A world, where you're actually kind of taking the delta between subscription this quarter.
If you have a year ago quarter, among adding back in the subscription from a year ago quarter and you're doing that again for Q3 of last year can you really help us understand the difference in your calculations now versus what we got 90 days ago and you know is that the new calculation you should be using going forward and I think retrospectively as well and then kind of a follow up.
Just on the air our side you know nationally got a huge uplift also partially there are from your subscription mix just how should we be thinking about that that airline going forward. Thanks.
Sure. The there's a couple of questions they'll try and break them. One by one first of all in terms of the change in kind of the way. We're calculating it. This is really the first quarter with taking into consideration the pilot amount and we don't want to double count. So we're being very responsible on every metric, where we're providing a and that's why.
Why the conversion factor is only being applied to the incremental subscription kind of the second part that you asked about how we would apply it I'm going forward. So you know we adopted the conversion factor in our Q1, earning call really in response to kind of the multiple request from analysts and investors that provide the means of analog.
Using the business during the transition and as you know the conversion factor has been commonly used by other companies during that transition, but we understand that the FCC is not going to permit the use of that conversion methodology <unk> methodology anymore. So as a result, this is really the last quarter that we will.
We'll provide normalized result, but we've always believed that our our is the most important Katy I when assessing the health of a subscription business and as such you know they are will be the focus metric.
Going forward. So given the transition has progressed much quicker than we originally anticipated you know with where the expected subscription mix of 75% in Q4 and with our guidance for subscription mix in 2020 of plus or minus 80%, we really are.
A subscription company and we'll be focused on they are as our leading CPI going forward.
Okay. That's helpful. Thank you.
Thanks Ritchie.
Starting around the color.
Since our no further questions in queue I'd like to pass the floor back over to management for any closing remarks.
Thank you for when the call, we'd like to saying qualified employees for their hard work and contribution to our success. This quarter, we're still like to saying well for customers and partners for their continued support. Thank you all for joining us today and we're looking forward to talk to some.
This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation I never wonderful day.