Q3 2019 Earnings Call
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I would now like to hand, the conference over to your speaker for today.
Brian Bergot director of Investor Relations.
Please go ahead.
With me on the call today are Ruby Keith Johnson, our Chief Executive Officer, Jeff Kelly, Our Chief Financial Officer.
Before we begin I'd like to remind everyone that any statements made in todays conference call that express a belief expectation projection forecast anticipation or intent regarding future events and the company's future performance, maybe considered forward looking statements as defined by the private Securities Litigation Reform Act.
These forward looking statements are based on information available to Toobin's management team as of today.
And involve risks and uncertainties, including those noted in this mornings press release and Toobin's filings with the FCC.
Such forward looking statements are not guarantees of future performance actual results may differ materially from those projected in the forward looking statements toupin, specifically disclaims any intention or obligation to update these forward looking statements except as required by law.
Please note that a reconciliation of any non-GAAP number two the most directly comparable GAAP number can be found in the tables of our earnings press release located in the Investor Relations section of our website.
Telephone replay of this call will be available shortly after its completion, you'll find the dial in information in today's press release, the archived webcast will be available for one year on the company's website at to fund dotcom.
With that like turn the call over to Toupin, CEO and co founder Ruby Quito.
Thanks, Ryan and good morning, everyone. Thank you for joining today.
We had a good third quarter and I'm happy with our results.
Total revenue was $25.6 million, representing strong growth of 32% year over year.
We saw continued momentum with large enterprises as our automation capabilities integrations and scalability continue to resonate with customers looking to increase agility and security at the same time.
We also made good progress our investment initiatives and achieve some important milestones on the path to longer term growth on the U.S. federal market and in the cloud.
In many of you know we are the security policy company, helping large enterprises managed network policies to improve business agility, while mitigating security risk.
As these enterprises embrace digital transformation and adopt new technologies, such as cloud based services.
The N. and Microservices 19 cloud environments become increasingly complex and vulnerable to talk.
To count these challenges enterprises continue to implement additional firewalls endpoint security controls I didn't mean access management and other security solutions.
However in spite of all these security efforts most enterprise still a comprehensive security policy management, which results in suboptimal trade offs between the necessary security posture and the business requirements for agility.
Either securities compromise for Jody or vice versa.
We give customers the ability to increase agility without sacrificing security.
Our products govern how users system and applications are permitted to communicate can provide policy based security automation, enabling customers to reduce the time that is required to implement complex network changes from days to men with dramatically better security and accuracy.
And the third quarter, we continued to see strong demand for network security automation solutions as customers increasingly need to improve business agility used to compete into digital age.
One of the largest deals at the quarter was a seven figure lemon expand deal with an existing fortune 500 energy company.
That company had recently completed a merger with one of the entities being a small to from customer and they wanted to standardize in a single security policy management solution.
When they compare to fund against competitors, our strengths became clear.
Our superior network change tracking and compliance features stood up first.
On top of that the accuracy of our topology, a workflow management and our automation capabilities where different additional differentiators.
The customer also had a fragmented network and wanted to define different unified security policies across different parts of the network with a different compliance requirements.
Our ability to scale across their complex network, along with a robust compliance accuracy and automation capabilities made the difference.
Another large deal came from a fortune 500 insurance company that had been secure truck customer for several years.
They're in the process of undergoing digital transformation and they targeted the network security change process as part of that initiative.
There were changes were taking days and in many instances weeks. The complete so they created a debt boss incubator team to address the need for automation in order to improve agility.
The dramatically increased or two from footprint.
And secure attract a much larger percentage of their network and then added secure change integrated with servicenow to speed or the network to process, while maintaining compliance with a policy.
The last deal I want to highlight at a seven figure new logo deal in the financial services space.
The customer wanted to maintain policy compliance and full network change management, an automated provisioning.
The forward looking road map into the cloud and Dev ops.
What was interesting about this deal.
What we're hearing more and more from customers is that they really want to partner who was forward looking at a credible roadmap to integrate cloud and devops into their network security policy management solution.
While our or kind of Iris products are not explicitly part of this deal the customer was happy to see that their roadmap anticipates roadmaps are closely aligned.
The deal was also helped along by a person who used to fund the previous life had a different company.
It's great to see someone who uses the platform experiences the value and becomes a champion for two or more.
More and more we're becoming a must have for network security professionals, who have used one of our products in the past and as we scale the company with security professionals changing jobs, often theres a gradual network effect that's developing for us.
Moving on as I mentioned earlier, we passed an important milestone this quarter on our path to long term growth in the U.S. federal market.
Continued to make progress club business.
In federal I'm happy to announce it that the toupin arbitration suite has recently been added to the GRC scheduled 70, which will enable us to sell to the entire U.S federal government as well stay local governments.
We're working with multiple partners the specialize in the U.S federal market.
One of those that I'd like to mention as network partners, which is the reseller that recently completed or service delivery partners certification and can now delivered the to fund orchestration suite with engineers that have the necessary security clearances for the U.S. Federal government.
I'm very excited about the opportunity in federal and the coming years and these are very important first steps.
On the cloud front I'm happy to report that we have moved working Iris products into limited general availability in anticipation of several customers going live this quarter and a growing qualified pipeline for the products.
We expect to move to general availability for all customers and the first quarter of next year.
We also continued to grow our sales effort in the third quarter, and we had a Jeff Walmart as VP of Americas sales.
Disposition did not exist previously and I'm very excited about the new energy experience and leadership that Jeff brings to the already strong Americas sales team.
On the product front, we recently announced support for zero touch automation for Vmware NSX tea.
This is a next generation and be more software defined data center and with this capability, we help customers migrate their applications from being more NSX v., two there and 60 environment.
Thereby supporting end to end conductivity replications across their entire hybrid cloud environment.
A product also continued to be recognized for their excellent.
Recently, the two for an arbitration suite or 19 to was awarded five out of five stars.
He magazine's annual risk management test group for the fifth you're in a row.
It's great to be recognized for part of performance, we remain committed to innovation in our R&D team is growing and working as hard as ever to build the next generation products.
With that I would like to turn it over to Jack what Keeley, our CFO to discuss our financials Jack.
Thanks Ravi.
Let's turn to our third quarter results and guidance for the remainder of the you.
Total revenue was $25.6 million in Q3 of this year.
There's two per cent compared to Q3 of last year.
Product revenue increased 32% year over year to 11.5 billion and our maintenance and professional services revenue grew 33% to 14.1 billion.
Looking at the geographic mix. So Q3 revenue, we have a well diversified geographical distribution with Americas, representing 59% the for revenue email, representing 38% and the remaining 2% coming from Asia Pacific.
As I said in the past given the size of or business and the fact that though revenue maybe comprised of seven figure deals in any quarter.
We may experience variability by geography on a quarter by quarter basis.
Moving to margins than expenses I will discuss our result, the based on GAAP financial measures and what applicable Nongaap financial measures.
non-GAAP numbers exclude stock based compensation expense and the total amount of $2.6 million for Q3 of 2019.
0.9 million for Q3 of 2018.
Please note that the GAAP to non-GAAP reconciliation can be found in the table earnings press release located in the Investor Relations section of website.
GAAP gross profit for the third quarter was $20.7 billion or 81% of revenue compared to $16 billion or 83% revenue in Q3 of 2000 if anything.
non-GAAP gross profit for the third quarter was $21 million, 42% of revenue and that's compared to $16.2 million, 84% revenue in Q3 of 2000 anything.
Gross margins compressed slightly due to the expansion of professional services teams to support faster time to value into playing goes solutions with a global 2000 customers.
As we talked about last quarter bookings addressing the large market. This is primarily greenfield.
The market neither we continue to invest in this opportunity.
After that and total GAAP operating expenses for Q3 of 2019 worked with the $8.3 million up from 18.8 million in Q3 of last year.
On a non-GAAP basis operating expenses for Q3 was $26.1 billion up from $80 million in the same quarter last year.
Breaking out non-GAAP expenses in two line items R&D expense for Q3 was $7.8 million or 31% of revenue compared to $5.1 billion and 26% of revenue in Q3 of last year.
As we mentioned we remain committed to innovation and our R&D team is growing as we moved over next generation of products.
Sales and marketing expense for Q3 of 2019 was 15.1 million or 59% of revenue compared to 11.6 million or 60% of revenue in Q3 with last year.
Do you any expense for Q3 was $3.2 million or 12% of revenue compared to $1.3 million and 7% of revenue in Q3 of 2018 thinkers in Germany expenses is primarily driven by the expenses related to becoming a public company.
GAAP operating loss for Q3 was $7.7 million compared to an operating loss of $2.7 million in Q3 last year on a non-GAAP basis operating loss for Q3 was $5.1 billion compared to an operating loss of $1.8 million in Q3 aircraft you.
GAAP net loss was $8.3 million compared to net loss of $3.3 million in Q3 of last year.
Net loss per share basic and diluted was 24 cents for Q3 of this year compared to a net loss per share of 41 cents in Q3 last year. That's based on 34.1 billion and 8.1 million weighted average ordinary shares outstanding respectively.
On a non-GAAP basis Netlist for this quarter was $5.7 million compared to a net loss of $2.4 million in Q3 of last year and net loss per share basic and diluted was 17 cents for Q3 of this year compared to 29 cents in Q3 off last year.
Turning now to our balance sheet.
As of September 32019, we had cash cash equivalents of $122.7 billion compared with $147.5 billion as of June Thirtyth 2019.
Deferred revenue on our balance sheet as of end of this quarter was $37.6 million compared to $27.4 million as of end of the third quarter of last year.
These figures are present, the deferred revenue balance after netting of the portion of the deferred revenue that has not been collected as of the reporting these.
The gross deferred revenue as of September was $49.8 million compared to $39.7 million as of September of last year.
In the third quarter of 2019, we used $4.5 million discussion operating activities compared to 7.7 billion in the same period of last year.
Overall, I'm pleased with our third quarter results, where we delivered strong growth and the small operating loss within our targeted range.
Turning to guidance.
For the fourth quarter of 2019, we expect total revenue of 30 $438 million.
Expects non-GAAP operating profit to range between zero to $3 million.
For the full year 2019, we expect total revenue in the range of 107 to 111 million.
We expect non-GAAP operating loss to range between $10.3 billion to $13.3 billion.
With that I'll turn it back to Ruby for his closing remarks.
Thanks, Jack I'd like to wrap up by saying that I'm very pleased with our third quarter and the progress that we're making as we invest for growth.
We believe that fundamentally your security is only as good as the policy that you've been funded in force.
The need for policy centric network automation continues to grow.
We are in the early innings of realizing a potential and im optimistic about our market opportunity in our outlook.
I'd like to thank our customers our partners, our investors and all the tufan employees for helping us achieve our goals.
Now, let's open up the life for questions.
Operator.
Thank you.
As a reminder to ask a question you'll need to press star one on your telephone.
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Our first question. This morning comes from a cat Kellyanne from Barclays Capital. Please go ahead.
Hi, guys. Thanks for taking my questions here.
Ruby maybe just to start with you can do just talk a little bit about what you're seeing on adoption of secure change versus secure track in the prepared remarks, we talked about a couple deals in the quarter that seem to extend usage beyond secure track, but can you just talk about that trend, perhaps more broadly across the business.
Sure Hi Tech and good morning.
So we're seeing strong demand for automation and in terms of revenues. It's the majority of our business today.
But if you're looking at the opportunity in most customers still did not by secure change or secure out from to answer most customers are secure track only customers for us.
But as you're looking at the bigger customers and the bigger deals six figure deals seven figure deals.
A lot of times those customers are either upgrading to automation. So that's a significant expansion for those customers or those are customers that realize the need for automation day, one and so they buy the full suite on secure trackers and secure change or track change in App in one fell swoop for either one data center work.
Our third turn network.
Got it that makes sense.
Maybe as my follow up for you check.
I think last quarter, you talked about how services billings here.
Could change as customers opted for billing based on percent completion versus upfront.
Can you just give us an update on that and sort of how that trended this quarter.
Yes, Hi second sure.
So.
Like updated in the past.
Walter we are still.
Working to say mechanism P. S is not invoiced upfront.
But rather based on Muslims. So what this great just can create some.
What I mean, when comparing this year to previous year, both on bookings and on the news. So this is something we should take into consideration.
Well this means it means that be as well there was always be a backlog.
Sure, Yes, there has been.
Needs to be accounted for when we're measuring our bookings and deferred.
Very helpful I'll get back in queue. Thanks, guys.
Our next question comes from Sterling Auty from JP Morgan. Please go ahead.
Oh.
Certainly your line is open please check your phone.
Hi, guys can you hear me.
Yep.
Hi, This is Matt on the for Sterling. Thanks for taking my question.
You know looking at your.
No performance this quarter.
Tick down in EMEA and APAC region sequentially just wondering.
How are you guys are seeing the macro landscape.
Kind of.
Given some of the uncertainty so so any color there would be appreciated. Thanks.
Yeah, Hi, Brent This is Jack I'll take a question.
So, but as I said in my remarks, given the size of or business and the fact that Oh business can be comprised of seven figure deals in any quarter.
Oh lip advice to look at the variability between the quarters when we're talking about geography.
So yes, you may have realized a slower growth or M&A, but for this quarter.
Q3.
But overall, we don't think this is the right measure to look at this point all in all looking at this year over year to date.
Three regions Americas, EMEA and APAC has been growing above 30% and currently this is the way we're looking good.
Hi, This is really just to touch on the macro environment from my perspective at this point, we're not seeing any impact.
So the macro environment, but we're keeping a close eye on it and well continue to monitor it moving forward.
Great. Thanks, guys.
Yeah.
Our next question comes from friends from Jefferies. Please go ahead.
Hey, guys. This is Joe on for Brent. Thanks for taking my question you guys have said that 19 and 20 your investment years, just maybe get a progress report update on where we are regarding hiring R&D et cetera, and where the bulk of the focus will be going forward a few more specifics to be helpful. As we try to gauge both top and bottom line growth.
Yeah sure so so to begin with.
Well, we guided that for a.
Topline and for operating expense this factors Oh plans for this year and specifically on.
So the marketing and R&D.
So you can raising.
So you may have.
Notice that sales and marketing fluctuates between the quarters, we something we have it some of the factors and suddenly marketing.
Matter of timing you can see some interesting between the quarters.
But all in all we are very inline with our plans for Q3 and the remainder of the you.
On R&D, it's a little bit different we started the first half year was ELAD.
Oh, we're hiring plans.
But as of early.
Early Q3, we caught up.
We're still a little bit behind the headcount want to be yet, but as we speak now and into Q4, we're seeing the catch up.
Brokers.
Hey, this is Ruby and just to add some more color to your question on on the investment in sales and marketing.
So we define several growth engines that we're investing in such as the channel.
Going into federal Japan.
And several other initiatives those are all going very well, we're expanding and all those areas, but I just want to highlight the fact that these are long term growth engines that we're building so I'm not expecting any of that to have immediate impact user growth engines for let's say a year or two for now.
Makes sense and that's very helpful. And then last quarter you guys hired Larry I'll finish GM cloud, maybe just give an update on the efforts there I know it's early stages, but the long term potential there is huge and then I'm just wondering if you've seen an up tick in the pipe you mentioned, an uptick in that pipeline fires and Orca I'm just wondering if that's due.
The capital one breach if you had an increase in demand not.
Sure. So I'm not sure that is directly tied to capital one breach you know those things sometimes take time to actually have an impact on the market.
But in terms of or momentum were seeing stronger pipeline, there's actually customers that are in the process of buying and that's why we move to limited general availability.
We're seeing some interesting things.
You know increasingly customers are interested not Justin iris or Justin Orca, but actually in both a lot of times, we see that Dev ops teams are interested in visibility when the kubernetes environments, but actually security teams, which happened to be our primary customer are interested in visibility in policy control across all departments.
Cloud public cloud and micro services. So that's one interesting aspect and another thing that.
We're seeing more more customers as for is actually to integrate or kind of iris back into the traditional soufun were constriction suite with integration points. It to secure track secure Trina secure out so they can visualize their applications as they go all the way from their internal data center out to the cloud and into Microservices Mcleod.
Very helpful. Thank you.
Thanks.
Our next question comes from Shaul Eyal from Oppenheimer. Please go ahead.
Thank you.
Good afternoon, guys. Good morning, guys congrats on the quarter.
Well actually on on that native cloud.
And your comments are encouraging can you talk to us about this leads process.
A lot of your core on premise product.
Is there any different you know with respect to who's buying good within the enterprise.
That's a great question. Thanks show so.
You know, we're actually learning a lot from this so initially if you look at our approach a year ago. I think we're focused primarily on desktops organizations, we're going to lots of Devops conferences.
And we thought the Abbas folks would be very interested in what we're doing which we think is critical.
So one of the lessons that we've learned.
In the past years that develops folks are interested in only in their application development not really interested in security.
But security folks are very interested in security and they have almost no visibility into the cloud environment and it's a dev ops environments.
So in terms of the sales process. While initially we thought it would be fragmented. It we would need to go after devops folks in parallel to security folks more and more we're saying that we're actually going to be selling toward traditional customer and selling with our traditional sales teams. What we've done with the cloud team here is that we have.
Overlays specialists that specialize in the cloud so that if we have an enterprise account that is interested in were for hours, we especially to come in but not a demo these things they know how to.
Propose the value and demonstrate it.
But then in terms of the.
The buying center, who is interested in it. It's the exact same buyer it's people that want to extend their applications into the cloud. So from a sales perspective, I think it's actually going to be very similar to the sales motion that we're seeing an enterprise accounts will some adjustments based on the fact that you need to understand microservices on the club.
Understood understood. Thank you for the color a movie or Jack.
You mentioned.
The environment, it's mostly greenfield driven.
Nevertheless, we had some.
Disruption woodinville competitive landscape over.
Over the course over the past few orders.
Number one maybe just to what about the competitive landscape.
And maybe one and a half.
Any impact from some of the disruption.
Going on within your competitive environment.
So I think we were discussing that in the previous quarter as well yeah, we can't really comment on what's going on inside competitors from our perspective the demand in the market is strong and the competitive landscape is not really changed significantly right. We have our usual suspects we have aldo.
Sick firemen, and skybox and competitive deals.
And most customers actually don't have an automated solution yet so from an automation perspective, which is where the growth really is.
Is it you know significantly a greenfield opportunity and in those we win because we have superior automation capabilities.
You know, it's the depth and the breadth of automation.
Including the scalability and the change accuracy.
From our perspective, we're continuing to innovate and be first to market and increasing our leadership.
Got it thank you well done.
Thank you.
Our next question comes from Girl very tough health from Stifel. Please go ahead.
Okay. Thank you for taking my questions at Ruby you make an interesting announcements.
Back without beyond where I was conducted you talk a bit more about the SDN opportunity more broadly in the POS you've talked about just go ahead.
It seems like this is emerging pretty nicely maybe to drilling a little bit and understand what you're seeing out there in terms of just the broader opportunities and best yet.
Sure. Thanks score so we're seeing two things here, what we're seeing an increase in interest in SDN technologies in general right a lot more customers are starting to deploy Cisco ACI production. We have been more customers that are now looking to migrate to be ameren sixtyv from NSX.
You know some so we have large customers that are committing to these massive next generation network projects.
In some cases, we're seeing billion dollar projects on a multi year basis.
Going forward their next generation network, which is going to be software defined.
So these are going to be huge projects.
On that one hand, they're going to modernize their network infrastructure and they're going to enable customers actually reroute the network quickly and on the other hand from our perspective, I think it's going to actually create even more complexity at the policy level, because youre going to have physical firewalls, you're going to have virtual firewalls, and then you're going have this software defined.
Network, whether its Cisco, we see Irene Wanna sex, and you're going to have firewalls plugged into it because a lot of customers actually extended by having checkpoint Paolo fortunate for example, plugged into H.T.I. or plugged into being one of sex and customers need the visibility and policy control across the board both.
In the layer of the Hypervisor. So they want to actually see what is happening in Cisco ACI and B minus X and also the advanced fiber technologies like checkpoint Palo Alto unfortunate within those so from our perspective.
On one hand, you're going to have a unified network went on the other him at the policy level, it's going to actually increase fragmentation and when you add the cloud to it you know the proliferation of networking software in public cloud infrastructure is actually a net positive to us in the mid to long term future. So that's the first thing we're saying.
Another thing that is in the softer defined world is a lot of customers are embarking on SD Wan initiatives, usually be start networking projects they want to replace Mpls backbones.
A lot of these actually have the potential to be security related. So we're seeing SD Lan solutions are building technologies.
Yes, some firewall vendors are building Dan when into their firewall right. So for the first and tell US is following them.
That's very interesting area for us so from our perspective, it's another type of technology right. That's the way router that affects rowdy, but can also acts as a firewall. So from you know from our opportunity perspective that is even more network fragmentation, yet another type of routing firewall device out there.
It is becoming.
Increasingly predominant and it's increasing opportunity for us.
That's a that's really interesting where do you also called out the U.S. federal market as an opportunity that maybe you could elaborate a little more on that not just the U.S. bed, but the public sector more broadly both domestic internationally in these are making some some significant investments how do you think about the opportunity, especially as it exists across the board there.
It's interesting you know on one hand, we're making a lot of progress building out the federal practice right. So we're happy where we are.
You know, we're expecting to see more contribution from a sales perspective in 2020, and we spoke about that before one of the interesting drivers in federal there's increasing compliance regulations. So if you look at.
And the federal government risk management framework initiatives.
So they are actually mandated to have policy control.
And you need a tool like too thin, regardless rights, we need secure check at a minimum but then they have these huge networks and the realize that they need automation as well.
You know the government sector is huge right yeah complex fragmented networks.
100 billion dollar annualized T. budget. So it's a huge market opportunity for us that is largely untapped both in the U.S. So everything I mentioned up to now is U.S. middle market, we're seeing pickup in governments everywhere.
I think in many ways, if you look even at politics.
Things are becoming more polarized and from our perspective.
As as people become more and more defensive they need more and more security locally within their local government.
That said, it's very helpful. Thanks really.
Thanks word.
Our next question comes from Jonathan Ho from William Blair. Please go ahead.
Good morning, I, just wanted to maybe touch on the VP of America's higher you can you maybe give us a little bit of additional detail about the role here and it was there a specific opportunity around either channel or sales management that you see on yet to build out here.
Sure Hi, Jonathan so.
You know very happy with Jefferies got tons of experience.
You know, we eat into Boston area and.
It's grown up in several companies has lots of experience in enterprise sales has lots of experience in the channel had lots of experience an inside sales.
So.
He's got a very wide background, which is great for us and if we step back for a moment geographically you know the way were structured we have a VP of eight back we have a VP of Europe that manages several regional directors and in the U.S.. We had three regional vps that all lined up to Kevin Maloney or SPP.
Sales so come along we simply had too many direct reports so from our perspective, we needed another layer of management.
We're building out the Americas and growing it so it's a natural addition.
Just in terms of.
You know ability to manage and having the right management structure and Jeff brings tons of experience that is super valuable to us so both in the channel.
Sales and enterprise accounts I think.
He is going to help build better productivity within the Americas.
And then you're just as a follow up based on your earlier comments around Orca and Iris demand are you guys potentially looking at bundling the solution together or offering on some type of a skew that combines both of those capabilities and then any sense of when we could maybe.
Oh, sorry to see Orkin Iris contribute more materially you know just given the GE and in the first quarter. Thank you.
Sure. So you know the J going to be the first quarter. So we're going to start seeing it next year, exactly which quarter, it's probably too early to tell but you know in 2020, we're going to see some impact, but it's going to be minimal we said that before.
But there is a very significant opportunity there in terms of having a single skew or or actually bundling the products together I mentioned that.
And one of my comments.
Customers are asking to use it used both products together, so it's definitely something that we're thinking about.
You know, we're selling it together isn't MBS singles Q or not you know, we're going to think about that.
Weve no further questions in queue at this time I'll turn the call back to the presenters for closing remarks.
All right I'll, just like to say that like to thank everyone or investors our partners our customers in our employees for another great quarter. Thanks, everyone popular.
Ladies and gentlemen, this concludes today's conference call. Thank you once more for participating you may now disconnect.