Q3 2019 Earnings Call
Welcome to the Q3 2019 first go technologies earnings Conference call.
Time, all participants are in listen only mode. Later, we will conduct the question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on you touched on telephone as a reminder, this conference call is being recorded I would now like to turn the conference.
Over to your host Ms., Michelle Spolver Chief Communications Officer. Please go ahead.
Thank you Sarah and thank you all for joining us on today's conference call to discuss our financial results for the third quarter of 2019 and provide guidance for the fourth quarter and full year 2019.
This call is being broadcast live over the Internet and can be accessed from Investor Relations section of our website Www dot investors don't for Scout Dot com.
A few minutes ago, we issued a press release announcing our financial results for the third quarter of 2019 as well as guidance for the fourth quarter and full year 2019. The release can be found on our Investor Relations website, along with supplemental financial information that accompanies today's remarks.
Before we begin let me remind you that will make forward looking statements during this call, including statements relating to the guidance and expectations.
For the fourth quarter and full year 2019 market for our products our competitive position the use of our products fire customers changes in a threat landscape in the security industry, the ramping and success of our sales organization and our growth profitability and the impact security matters Jojo acquisitions on our market and offer and company.
These forward looking statements involve risks and uncertainties some of which are beyond our control, which could cause actual results could differ materially from that was anticipated by these statements. These forward looking statements apply only as of today and we undertake no obligation to update these statements in the future for detailed description of risks and uncertainties. Please refer to our Sep filings as well as our earnings.
Like copies of these documents may be obtained from the FCC.
Or by visiting the Investor Relations section of our website. Additionally, certain non-GAAP financial measures will be discussed on this call.
We have provided reconciliations of these non-GAAP financial measures against the most directly comparable GAAP financial measures any investor Relations section of our website as well as in our earnings release before I turn the call over to Mike I'd like to mention that this quarter will be presenting at their credit Suisse Technology conference in Scottsdale on December 2nd the NASDAQ Investor Conference in London.
And on December 4th and that you'd be asked technology conference on December 10th in.
The New York City, and now let me hand things over to Mike to discuss our business. They provide a review of our third quarter performance.
Thanks, Michelle and thanks to everyone for joining us on the call today to discuss our third quarter 2019 results.
Third quarter revenue came in at 91.6 million at the high end of the range that we pre announced in October but lower than our original guidance range communicated in August .
We experienced extended sales cycles across several of our customers that pushed out deals on which did not become apparent until we until the final days of the corner.
We do not believe that any of these deals have been lost to competitors. In fact, our win rate remained stable in Q3, you've already close some of these deals.
And we are optimistic and working hard to close others in Q4 in future quarters.
Our Q3 revenue shortfall was most pronounced in India, I guess, the more challenging macroeconomic environment, where several southern digit deals could not close as expected.
However, we experienced some of the same dynamics globally, which impacted close rates.
We continue to believe that we have a large market opportunity ahead of us end device visibility and control, which is becoming a more strategic priority for customers.
With 24% of the global 2000, those customers for Scott leads this market differentiated technology of the world's largest enterprises in government entities view as an essential component of a robust cyber security posture.
We have been moving from selling a single product to sell in and multi product solution inclusive of I site.
Control.
Extend and Simon defense.
Large deals have long been a part of our business and they continue to grow as evidenced by the number of our 1 million dollar plus transactions, increasing 38% year to date.
The large deal nature of our business gives us a strong foothold within our customer base, but can have a more pronounced impact on our results dependent on the size and timing of these deals because of our historical perpetual license model.
We are taking a number of stuff within our business to work on areas. We can control such as strengthening our sales execution in shaping our revenue model for better predictability.
First let me discuss our plans to increase the makes a ratable in recurring revenue within our business.
Just 18 months ago for Scott was predominantly an appliance based company.
Our path towards becoming a subscription model with greater recurring revenue began in April 2018, when we announced flex licensing.
50, coupled our software from the hardware to enable customers to purchasing separately since we announced flex more more and more of our deals are being sold this way and within our third quarter approximately 70% of our total deals were sold the influx.
In April we introduce term based licensing as an option for all of our products and just the past two quarters, 15% of our total license revenue has been term best which has increased our recurring revenue mix.
Third a key step in this journey happened today with the introduction of ice segments for Scouts first Hsas and cloud delivered product.
We are hard at work on our path towards the liver product portfolio is cloud delivered solutions, beginning with our core product I cite in late 2020.
To accelerate the pace of development last month, we completed the acquisition Upto, Joe Labs and brought on approximately 20 of their R&D team members with tremendous cloud and machine learning expertise.
In 2020, we expect to recognize a nominal amount of my segment revenue as a product begins to ramp to much larger levels in future years.
We also have plans to meaningfully accelerate term based licensing adoption via customer and Salesforce incentives.
Over time, we expect these initiatives to significantly increase the amount of recurring revenue on our financial model at an improved visibility into future revenue streams.
Looking now spend a few minutes on sales execution.
We need sales leadership with a track record of execution that our scale with the ability to navigate large deals spanning multiple products across all industries in regions to accomplish this we recently created the role of Chief revenue Officer, and appointed Steve Redmond, a world class operational leader with strong experience and scaling multibillion dollar companies during.
Third quarter. We also brought on Bernie Barker, a top notch VP of global accounts to drive the teams that own our largest hundred global customers and lastly, we recently created the role of Chief customer Officer, Unpromoted, Jason, but shoddy to lead our customer advocacy and support group chartered with nurturing and migrating our larger install base as we add and transit.
And to new products, including I. segment, and future SAS offerings.
We have also improved our processes around pipeline development and management as well as forecast accuracy, which we expect to give our team incremental structure and consistency.
Although it's Steven Bernie earlier in the stages.
They are bringing a higher level of operational rigor to our sales organization what needs to be improved in our go to market activities as well understood and we now have the right team in place to execute I assure you that the entire or executive team is laser focused on these efforts. Most importantly for scouts products and technology continued to be very well positioned in the market and is resonating.
Customers. This is evidenced by some of our successes during the third quarter. For example, we added nearly 110, new logos across industries. We added approximately 3.9 million new devices under management. This brings total devices under management to more than 76 million.
We had a strong quarter in federal wouldn't largest deal at the quarter was when the deal would be under the comply to connect program.
We also closed one of our largest OTI deals ever and continue to have a robust pipeline in our own tea business.
And we saw very strong adoption and attachment of I extend as nine of our top 10 deals in Q3 land deals included at least one of our I extend products.
I extend and our ability to integrate with security technologies across the stack are key differentiators for forced out in the market.
Now, let me quickly touch on a few of our key customer wins from the third quarter.
In the financial services vertical a new logo from Q2 significantly expanded with us in Q3, nearly tripling the devices under management to 300000, and adding I extend products for service now and rapid seven to bring their total I extend products to five this customer had originally expected to expand with us in the year, but was able to achieve.
Full device visibility and classification and just a matter of days when their recent prior investments. So they decided to accelerate the phase of the next generation the project with us.
Within the federal government vertical we closed our largest deal of the corner with a branch of the department of defense under the comply to connect program. The seven figure expansion deal included eyesight, I control and I extend products in an environment with nearly 800000 devices under management with Posco, recognizing the importance of the comply to connect program and securing their mask.
Number of traditional TV and high OTI devices as well as mission critical devices like ice skate and combat weapons systems. The Deo de reprogrammed funds from other areas of their budget to accelerate implementation, we believe for scouts asset visibility and control capabilities are foundational to the objectives of comply to connect anticipate closing.
An additional deals at the program ramps.
Within our new logos, we closed two highly strategic OTI deals with our silent defense product first one of the world's largest utility companies purchase side on defense for asset inventory and threat detection across more than 1000 locations cover in their relays human machine interfaces and plc is.
And second one of the world's largest online retailers purchased our OTI product for visibility and threat detection in their global fulfillment centers for OTI devices, ranging from conveyor belts robots to sorting machines.
Both of these deals were highly competitive wins involved in a very thorough assessment of our solid defense product.
Innovation continues to differentiate for Scouting was key in winning all of these deals to that end, we're very pleased to announce the general availability of by segment. Our first true cloud late to cloud delivered offering and making an important milestone our company's history. We believe by segment meets a unique needs in the large market for network segmentation and will expand.
Our long term Tam.
Landscape today for network segmentation consists of infrastructure based approaches next generation firewall approaches and agent based approaches for controlling network communications between connected devices, but each of these approaches only solves for one specific part of the network and doesn't provide complete enterprise wide network segmentation.
That forced out people, we believe truly solving macro segmentation involved involves being able to work across a massively heterogeneous network environment managing these multi vendor policies creates complexity and operational cost, resulting in a lack of confidence for organizations to move forward network segmentation hasn't enterprise wide strategy.
We believe high segment will change that making segmentation easier and better.
Our scouts roots began a network access control by taking device network context, enabling policy based control and infrastructure agnostic way, what we've done with ice segment is to marry our device visibility and policy engine to Tropic inflow information, which enables customers to design and implement policies about communication paps across.
Futures applications systems, and devices, and an automated fashion across disparate technologies and throughout our vast partner ecosystem.
Early feedback from our beta program has been very promising for example, one of our beta customers and an untrained proof of concept was able to identify several PHR MPCI regulated applications that are required to be on segmented servers and quickly implemented the appropriate segmentation controls to ensure a proper compliance.
We look forward to introducing segment to our entire installed base as many of our customers are in the midst of network segmentation projects and these customers believe I segment can play a meaningful role in their environments.
Ill share some closing remarks in a bit but first let me call then turn the call over to our Chief Financial Officer, Chris Arms to discuss the detailed financial results for our third quarter as well as our guidance for fourth quarter and the full year 2019, Chris. Thanks, Mike Thanks to everyone for joining us on our call today.
Following Mike's remarks, let me dive deeper into four scouts third quarter 2019 financial results and our outlook for the fourth quarter and the full year 2019.
I'll begin by reminding you that except for the revenue results, which are gap all financials, we will speak about our non-GAAP unless stated otherwise.
As Michelle mentioned at the start of this call non-GAAP to GAAP reconciliations of these financials can be found in our earnings press release.
And supplemental financial information, both located on our Investor Relations website.
Now, let me review, our third quarter results.
Total revenue for Q3, 2019 was $91.6 million, an increase of 7% on a year over year basis.
License revenue was 50.2 million a decrease of 2% on a year over year basis.
Eyesight, and I control reflected 71% of license revenue in aggregate.
Subscription revenue in the third quarter grew 21% year over year to 36.6 million.
Professional services revenue in the third quarter grew 15% year over year to 4.8 million.
Looking at Q3 revenue mix by region. The geographic mix of revenue was Americas at 78% of total revenue compared to 74% in Q3 2018.
EMEA was 16% any PJ was 6% compared to 16% and 10% in Q3 2018, respectively.
Turning to our recurring revenue rate, which comprises our subscription revenue.
Plus the portion of our license revenue that is recurring via our term based licensing up contracts.
On a trailing 12 month basis as of September Thirtyth 2019, our recurring revenue rate was 46% of total revenue up from 44% as of June Thirtyth.
2019.
Moving to margins.
Gross margin for Q3 2019 was 78%.
A decrease of approximately 200 basis points sequentially and flat year over year.
Margin for our license revenue was 81% a decrease of approximately 600 basis points sequentially and approximately 100 basis points year over year.
The margin decrease on our license revenue and the associated gross margin decrease was driven primarily by an increase in customer buying preferences during the quarter towards more deployments that utilized hardware being provided by for Scott.
Margin for our subscription revenue was 87%.
An increase of approximately 100 basis points sequentially and a decrease of approximately 100 basis points year over year.
Margins for our professional services revenue was negative, 24% and improvement of 200 basis points sequentially and approximately 1400 basis points year over year.
Total operating expenses for Q3, 2019 were $72.7 million, an increase of 17% year over year.
Looking at the components of Opex.
Sales and marketing expense for Q3, 2019 was $44.2 million or 48% of revenue an increase of 11% year over year.
This reflects continuing investments in our direct and channel selling resources as well as sales engineering and sales enablement teams.
Our research and development expense was $17.5 million for 19% of revenue.
An increase of 40% year over year, reflecting continuing investments in our development teams.
General and administrative expense was $11.0 million or 12% of revenue an increase of 11% year over year.
Reflecting additional investments in infrastructure related to being a public company.
As a reminder, the operating expenses associated with the security matter acquisition pad and we will have an impact on the year over year changes in operating expenses through the end of 2019.
We posted an operating loss for Q3 2019 of $1.4 million or 1% of revenue.
Compared to a Q3 2018 operating income of $4.9 million or 6% of revenue.
Our net loss was.
Point $8 million compared to net income of $5.1 million in Q3 2018.
Net loss per share for Q3 2019 was two cents.
Compared to net income per share of 10 cents in Q3 2018.
We ended the third quarter with total deferred revenue of approximately $176.7 million, an increase of $3.5 million sequentially.
The combination of revenue.
Plus sequential change in deferred revenue provided Q3 billings of $95.2 million, a decrease of 5% year over year.
Free cash flow in the third quarter was negative $16.2 million compared to negative $13.6 million in Q3 2018.
Free cash flow margin was negative 18% compared to negative 16% in Q3 2018.
From a cash perspective, we finished the third quarter with cash cash equivalents and investments of nearly $94 million.
Moving to guidance.
Im going to start by providing updated ranges for both the fourth quarter and full year 2019, followed by a detailed explanation of the influencing factors within it.
For the fourth quarter 2019, we expect total revenue to be in the range of $93.5 million to $96.5 million representing year over year growth of 12% at the midpoint.
We expect operating loss in the range of $3.3 million to $2.3 million.
Net loss per share to be in the range of eight cents to six cents based on approximately 47.4 million weighted shares outstanding.
For the full year 2019, we now expect total revenue to be in the range of $335 million to $342 million representing year over year growth of 14% at the midpoint.
Operating loss in the range of $37.2 million to $36.2 million.
And loss per share in the range of 82 cents to 80 cents based on approximately 45.9 million weighted shares outstanding.
Since our IPO, we've attempted to appropriately balance the large deal volatility of our business into our guidance.
Customers invest in for Scott with large strategic transactions and seven digit eight digit deals have been a large and meaningful part of our topline.
This is both a positive.
As it reflects the critical integral role that for scout serves and our customers cyber security fabric and then also presents a challenge as it manifest itself in our financial result in less predictable patterns.
In both 27 team and 2018, we closed three or more eight digit strategic deals, which comprised a meaningful portion of our revenue.
In comparison, we have only closed one eight digit deal so far this year.
Our Q4 forecast previously included some eight digit deals that.
Though they continue to be in our pipeline.
Our no longer expected to close during the fourth quarter due to customer environmental dynamics that elongated deal cycles and internal forecasting that we just recently learned was too aggressive.
We do not believe these deals have been lost.
But the team does have a higher degree of confidence and being able to close them in 2020.
And we believe the prudent thing is to remove them from our current guidance.
Now I'd like to elaborate on what Mike discussed in regards to our transition to a ratable and more predictable revenue model that will reduce the volatility we are experiencing in our business.
In Q2, 2019, we introduced a term based form of subscription licensing for our on premise software products to provide our customers within opex licensing option to our legacy Capex perpetual licensing options.
29 team has been an initial launch period that we wanted to use to gain insight on customer adoption and pricing.
Thus far we havent been incenting, our customers to choose term licensing, but rather priced it to be neutral to our perpetual offerings.
Similarly, we haven't been Incenting, our field to date with commission incentives towards turn licensing and that provided them equal treatment based on total contract value.
As Mike shared in 2020, we will be taking the insights we have gained today on term licensing adoption and executing customer and salesforce incentive plans to meaningfully drive further adoption.
Additionally, we will begin to derive revenue from our first SaaS offering ice segment.
And also releasing our core product ice side in a cloud delivered version.
In time, we will offer a broad product portfolio of cloud delivered SAS offerings.
We're not sharing medium term model guidance today.
Want to provide some color regarding how this will impact future revenue mix.
We currently believe the recurring portion of our subscription business, which includes the SAS offerings I, just discussed maintenance contracts and the license value of our recurring term licenses will increase from the 40% of total revenue where it stood at the beginning of 2019.
I mean.
To more than half when we exit 2020.
And we continue to meaningfully increase and real and we believe we'll continue to meaningfully increase in the two years thereafter.
This shift will dramatically improve the visibility and predictability in our financial model.
On our February earnings call, we will provide our full year 2020 guidance and begin sharing with you.
Annual recurring revenue metric to measure our progress against the path to more recurring revenue.
Well, while we're not giving 2020 guidance today.
We would note that we do not believe our revenue growth rates in Q3 and Q4.
Our representative of market demand for our products and our opportunity.
With that let me turn the call over to Mike with some closing comments Mike.
Thanks, Chris before turning the call over for Q in a I want to close off by saying that we continue to be confident in the opportunity that lies ahead of us.
The need for device visibility and control is real and although early in its evolution is becoming increasingly important for organizations in solving an important problem.
The market opportunity is large and for Scott is best positioned to win.
No. Our Q3 performance in Q4 outlook is disappointing to me I'm excited about our opportunity of long term growth runway.
The largest and most sophisticated enterprise and governments in the world by from for Scott.
We have a solid plan in place now to improve what needs to be improved my management team and I and the entire company are laser focused on improving on our go to market execution, increasing the predictability of our revenue model and delivering on our Q4 commitments to help rebuild shareholder trust.
I want to thank you again for joining us today for your continued support and we will now open the call for questions operator.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your touched on telephone. If your question has been answered or are you wish to remove yourself from the Q. Please press the pound.
Your first question comes from the line of Mercer friendship with Morgan Stanley . Please go ahead.
Thanks for taking my question.
Mike I just wanted to dig into some of the issues that you saw in the quarter. So you mentioned some macro factors in EMEA. It sounds like there was some execution issues, perhaps and then to see no company specific factors like the volatility you typically see in large deals, but just across those issues can you just maybe put a finer point on what had more of the.
Impact in the corner with it more company specific or with it more macro and then the second related question to that is if you could just put a finer point on maybe like the one or two things that you're doing that you feel like will be the most meaningful to improve execution. Thanks.
So first of all as far as Q3 goes I mean, it really wasn't issue. It wasn't one issue I mean, there are there there's a category of transactions inside invested quite frankly, we just needed to better on.
Got digging deeper on making sure that we understand the situation before things get in guidance and we are well working on our way to make sure that we deliver on that.
Other side, though is there were some macro and micro and customer oriented issues right as we've talked about in the prepared remarks kind of saw higher concentration in the EMEA region, just going a little bit more difficult to get especially larger higher profile deals across the finish line and then without going into too many details within those customers where projects sponsor leaves or something.
And that caused that so kind of when we look at that from a numbers perspective, you know we cannot yet.
A good chunk of deals that were above $500000 and our guidance and none of those closed and before the 930 days when we look back at that list of transactions about 80% of those are in our guide for the fourth quarter and about 25% of those being closed already.
If I kind of switch over to your second part, which is really around the execution side.
And then there is theres if there's if theres, obviously a lot that we're doing.
We acknowledge again some of the transactions that we just need to be maybe they'll grow a little bit too aggressive on putting them into guidance and we need to do better on those kind of quick down on that a level that was a big part of of naming Steve Redmond into the Chief revenue Officer role now Steve comes with a whole bunch of discipline and operational bigger that we think will really help this issue not just across our top deals but across.
Every deal that we do in every sales rep.
We were being disciplined about forecast accuracy prior but in light of what we saw in the third quarter. We're digging in much deeper making sure that we get to every executive sponsor before things get into guidance that type of thing. These are the natural activities that you would expect from us and we're working on all those things concurrently.
That's helpful. Thank you. Thank you.
Your next question comes from the line of Sterling Auty from JP Morgan. Please go ahead.
Yes, thanks, guys.
Okay.
Okay, all investors I talk is.
Definitely on your side in terms.
Two.
More recurring and definitely better visibility in terms of results, but I just want to make sure that.
We are understanding.
The term license stronger seasickness fix spoken to have them upfront revenue treatment correct or is there something that you can do to smooth out even the turned licensee again, well recurring and visibility of the ratable.
So, yes, sterling, you're correct that the licenses value.
Gets recognized upfront.
But if you.
Without getting into to the technical what what most firms are doing PTC and Verona Sun others is.
Staggering the payment terms as well as giving the customer it out to whether they do a one year contract or give a three year PEO youre basically breaking it up into three consecutive one year values for you are taking a three year value in your splitting it up.
Our move towards term license seem in both the one and a three year option.
At least takes third of that value and only that that first third gets recognized upfront in the first year in that same license value gets recognized upfront at the beginning of year too and then again in year three.
So it does spread the value of that deal out over three years, though it is not.
Fully ratable and event as you would in a a SaaS or cloud delivered offering.
Okay.
Thank you and then one follow up like for you.
Talking about scrubbing, the pipeline and maybe some a little bit too aggressive on timing.
Lasers do you think the impact in some of your top of funnel activity. So.
No.
Earlier in the year.
Thank you would have been focusing more on programs to bolster the pipeline. So maybe had a little bit bigger coverage ratio in.
You have discovered is that what you're intending to do in coming quarters.
So the short answer is absolutely, yes, and now and if we if we realize that there might be a shortfall towards the end of the year. We would have looked kind of deeper into the pipeline earlier to make sure that we that we know what we kind of filled that now we're very disciplined about pipeline generation. We have a lot of operational controls in place all the way through the process of generating pipeline.
And kind of getting to a technical when the business when in closing that but in light of what we saw in the third quarter, where even doubling down further on this and this doesn't just conclude what we're doing it for the fourth quarter on the guidance. We provided it's to get in front of Q1 in Q2, and just make sure that you know, we we get all those t's crossed and i's dotted earlier on that process. So that we hopefully.
For the situation that we're in right now.
Okay. Thank you. Thank you.
And your next question comes from line of Bettina Baloney from Libya. Please go ahead.
Thank you for taking the questions.
Maybe to start with extended sales cycles, Mike I know you called out EMEA as being particularly.
Acute in terms of sales cycles, even though it's broad based but I did notice that your PJ business was down year on year based on the splits of revenue Matt that Chris provided so I'm wondering if you can comment on that and just to piggyback on not if there any certain verticals or particular end markets.
That or feeling the pain in terms of procurement that would be helpful. In and have a follow up for Chris. Please sure. So just first of all on on on the A.J. region, just acknowledge that that's a relatively small part of our business than it is more impacted on a quarter by quarter basis from the impact of one or two larger deals.
But yes, we we did see some of the shortfall in a PJ from this quarter were tight were quite pleased with what eight PJ is done kind of since we started investing the couple of years ago, but again it can have a more material impact in any given quarter on as far as the second part of that now there is not really anything about size of account or vertical where things were highly concentrated.
You know we've just we've we've been we're having to kind of push harder on trying to get some of these larger more strategic deals across the finish line. What I will just remind you in for everybody on the call as we're moving from a single product solution in the world of network access control to a much broader offering in this device visibility and control category and now we're trying to.
Broaden ourselves even further from being in the IP part of those networks to the OTI parts on top of that and just as such it's becoming more common for us to have to have a direct touch into more people inside a single account to have that degree of confidence to be able to put things into guidance and that's a lot of what we're working not at this stage.
And just really making sure that we've kind of cross default T's and dotting. The I's as I said to make sure that we can be kind of get that that news earlier in the process. It's a team of before you give me my question I want to add a little bit what might provided.
Did I expect it will be a common question as you alluded to yes. The contribution of EMEA was consistent on a year over year basis in terms of its mix.
But as we've signaled in the Preannouncement in October that the role that we expected to me at a play in Q3 as was weaved into our guidance was definitely higher and Thats why we pointed to a long dated sales cycles in EMEA as.
Major contributor to the shortfall on our guidance.
I appreciate that clarity and then Chris sticking with you last quarter, you gave us a lot of a helpful. Bridging comments as it relates to term based licensing uptake I'm wondering if you can kind of reiterate some of those comments for this quarter. So just give us a sense of term based licensing adoption to the extent is.
Mental headwind to recorded revenues and to what extent, you're expecting term based adoption or for the rest of the year in your fourth quarter guide and between both the one year in three year terms because those are the two factors that.
Impacted or that the second quarter results. So any incremental updated you sign on the term next would be super helpful. Thank you. Yeah. Those are great clarifying questions, because we did not put them into the prepared remarks. So.
I'm going to begin with a recap of Q2, just in case or others on the on the call where this is new information. So the Q2 contribution of roughly 11 million in term based licensing value built into our subscription.
Those were almost all one year and so that pro forma I gave was to give a kind of a bridge to had those one year's come in as a perpetual and what that factor would have been to help people understand the demand trajectory that was implicit.
Unlike Q2 Q3.
Was much smaller in magnitude you'll see in the tend to Italy totaled $2 million and unlike the Q2 11.
All of this almost all of it was was were three year contracts, where we didnt have the clauses into place.
And the contract terms to to stagger it to break it up into thirds. So the full three year value is included in that two year, that's why I didnt break it out specifically so the second part of your question it did not contribute to the.
Underperformance relative to guidance in Q2.
To the last part of your question as it pertains to Q4.
The TBL contribution for Q4, that's embedded in our guidance is very nominal more of a approximate value of what we saw in Q3, even actually a little smaller.
This was part of the.
Narrative that Mike and I bet it into the prepared remarks about look we did things neutral this year and clearly to drive adoption, we're going to need to put customer incentives and salesforce incentives that we did treat 2019 as our Petri dish. We did learn a lot and we did learn that unless we change those leavers.
We will not be able to drive the adoption rates that were seeking.
Appreciate that detail. Thank you so much.
Once again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one.
Touched on telephone if your question has been answered or you wish move you saw from the Q. Please press the pound.
Your next question comes from the line of Alex Henderson from Needham. Please go ahead.
Thanks, just a couple of a simple housekeeping questions first if I could you said, 50% by the end of 2020, I Didnt catch what you said the.
The trailing number was.
The trailing as of September Thirtyth was 46% 46. Thank you and then if you had.
Oh turned a profit in the quarter.
What would the fully diluted share count the for evaluation purposes. Please I will definitely take it offline and we can do it in the call back I Didnt do the math and advance Alex no problem.
And then the question I wanted to address here is there was a product introduction over it qualifies I know you are familiar with it.
Essentially giving away a free version of.
Device identity.
Access management.
Have you seen any impact on that was it.
Variable that might have caused some delays and timing of transactions, obviously, there's a big gap between what they offer and what you offer but.
Free does have a way of.
Slowing things down for people to take a look at it.
Yes, I'll take this call US just released their product after it has been delayed for over a year I'd still in beta so we haven't had a chance to evaluate it yet.
We are quite confident that passive scanning is a very difficult thing to do to try to do this in an agent bousman or is one of the core differentiators of our product and be most direct about it now we have not seen a single customer yet that has evaluated that product against thus far has given us any indication, but that is going to be a concern for us in the future.
I could ask one last quick question, you talked about increasing incentives from neutral.
And what form factor will that come in is that a reduction in pricing is it.
More compensation to the share it is a salesperson.
How do you mechanically achieve that yes, no great clarifying questions first our recap our breakeven between a license and maintenance really and a term base. In 2019 is it three years that there are definitely other companies that are at three years, but it is the more vendor favorable.
Breakeven point.
We are definitely looking at a longer breakeven point and are assessing whereas the optimal spot for us, but definitely will not.
Remain at the vendor beneficial three year.
The second part of that to mechanics is in.
Compensation and commission quota rates and relief points.
As I said.
For 2019, we structured those is neutral so there was no incentive for our team one way or another what we would be doing is giving greater quota relief and or a combination of different rates for term based licensing over our traditional license in major maintenance structures. Those are the two primary mechanic.
So just to be clear does that increase the compensation to the salesperson neutral to the sales person is just a mix shift between what you're doing I mean is there any change in the aggregate cost.
We are assessing this is Mike we're assessing all of those things at this point at an absolute minimum what we will do is we will fracture of the average commission rate. So that it is higher for the term based products than for the perpetual products, but we're assessing wasn't that has done neutral inside of our commission model or whether it's additive.
Thanks.
Your next question comes from the line of Walter Pritchard from Citi. Please go ahead.
Hi, two questions first on the on the term trend here I guess are your customers ready for that are out for that or it seems like some of these transitions have gone smoothly and and others based on sort of how the customers speaking about the value to provide how they pay for it I am curious what sort of work you have you done to get comfortable with.
That aspect. So just remember we only introduced us in April of this year right. So kind of since April .
In all the deals where are we aren't at a place yet where the bill of materials is finalized in the budgets finalized because obviously capex and opex are quite different inside organizations. We have been met introducing this quite aggressively to our installed base. There is definitely demand inside of our installed base for term based licensing evidence as Chris mentioned earlier, we've kind of view.
This is different weapons for a different fight like way, if a customer wants capex versus Opex. We now have both kind of both of those.
As we move into 2020, and we get a chance to get in at the front end of these sales cycles instead of Interjecting. This into the middle of existing sales cycles. That's when we get some more confidence that we'll be able to influence those customers in one direction or another we've also got the benefit here of many of our larger organizations now they buy subscription services from any other.
Your one product so we've got that insight into ones that are that either our are not more no more open to that.
Great and then probably another question for you.
Mike on.
On the predict the productive sales side, you've given us that's in the past talking about.
And your reps that are productive and and and I'm curious obviously this is probably set you back a bit but.
It's some large deals I'm just wondering if you give us a sense as to where rep productivity stands and how that how that impacts how you're thinking about hiring.
So I mean rough rep productivity has actually been fairly consistent year over year, obviously, the absence of the eight digit deals, which would kind of have an average across the entire cohort will have an impact on this but when it kind of we look at the every rep individually productivity has been quite quite consistent with years past.
As far as hiring goes I'm not sure. It has that big an impact on hiring one way or another now because we have a large kind of a large deal nature. We have lots of reps that finished substantially above the average and.
We just kind of keep working on making sure that we get as many of those reps above that that mark as possible. So.
So it's not directly tied to whether we are not hiring.
I think I think this is an important points I'm going to add three cents or to what might provided.
As part of what we've been looking out here October in the first week of November .
When we look at the cohort us.
Kind of first your sales productivity. It has stayed consistent with what we saw last year in prior years. When we look at the kind of second year cohort productivity. It has remained relatively consistent with what we saw last year, what we saw in prior years.
What has what has changed from just a measurement of productivity had been will be called those tenured reps those who have been here over two years and it's not that they are not still doing well with a lot of million dollars plus transactions as Mike alluded to in his in his remarks. The number of those deals has actually increased 38% year to date, but well.
We havent had are those eight digit deals that really swing that needle for us.
Okay. Thank you.
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And your next question comes from the line of Joshua Tulgan from.
Please go ahead.
Hi, guys. Thanks for taking my question.
Could you, possibly just comment on the puts and takes the topline growth next year, if we see customers choosing one near term licenses are you, possibly going to incentivize fulfill forced to maybe push three year deals.
Okay. So I'm going to just tackle the latter part of your question.
We are definitely going to be incenting, the salesforce towards TBL over.
Over the perpetual and maintenance model.
In terms of that how we structure between one and three like our objective is to get all of those to get them on an annual recurring revenue basis. So a one year deal.
That went straight forward on a case, where a customer wants to give us a purchase order for three years.
We're going to put the clauses in place so that we can see that revenue in threeq equal one year chunks, where the license value is recognized on day one of each of those three years.
In terms of us incenting customers between those one and three that is still a point of discussion in terms of what we should optimize in terms how customers want to plan for this and budget their dollars with us in terms of the first part of your question you know, where we provide annual guidance in the February cadence.
Yes, I recognize given the dynamics people would like to to have it now, but we will be providing that in February .
Okay that was helpful. And then just a follow up is it possible that maybe some of the execution issues could just be a function of going from one product focused on IP to them being able to focus on OATI and then on bundling the product into a suite of products, maybe maybe the product stories just gotten a little noisy are you guys are you guys still seeing customers.
Hey, with the with the value proposition to the offering.
Yes, I mean that BP.
The part about it becoming noisy the product suite is actually quite easy to understand I mean, the decoupling that we did have our visibility in our control products has actually been quite well received by the market still the vast majority of our customers by both of those at the same time, so I would kind of say that's non factor, but what is a factor in this is that we have broadened our eyesight.
Products to work across IP and OTI within the ITC side, we have more and more customers using us in the data center in the cloud and then as we continue to roll out I extend products.
We are touching more people inside organizations and that is a contributing factor to this is.
Whereas maybe we were owned by security or network, a couple of years ago Theres more deals now what we need to be coordinated with the security team and the networking and potentially the OTI team is often different as well. So I think thats one of the lessons that we've learned relative to kind of the mega deals that are out there is to be more diligent about making sure we understand all.
All of the players inside companies that might have a chance to weigh in and to make sure that we do a better job of covering all that real estate before we get to the quarter that we're putting something in guidance.
That was very helpful. Thanks, guys.
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Thanks, Sara and thank you everybody for joining our call today I.
I know that we will be talking to a lot of view in the coming our days and weeks ahead, causing it also conference circuit, we afford to being able to do that and as always we chat.
Second question, Thanks, a lot ticketing.
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Yes.