Q1 2020 Earnings Call
[laughter] C and welcome to the proof points first quarter 2020 earnings results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jason Starr Vice President Investor Relations you may begin.
Thanks, Shelly good afternoon, and welcome to prove points first quarter 2020 earnings call joining me on the call or Gary Steele Proofpoints, Chief Executive Officer ensure motherboard and Paul will report Chief Financial Officer today, we'll be discussing the results announced in our press release. It was issued after the market close this afternoon, a copy which is available on the Investor relations section of or what.
Right.
The course of this call will make forward looking statements regarding future events in future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to consider the important risk factors contained in the press release and on this conference call.
These factors are more fully detailed under the caption risk factors in proof points filings with the filings with the FTC, including our most recent form 10-K.
We believe it to covert 19 crisis create particular complexity when it comes providing a forward looking view of the business, we're providing or guidance on a good thing basis for recent how do you see recommendations more specifically noted on equally you have to teach German Jay Clayton and the director Division of Corporate Corporation Finance still hyndman issue.
Joint statement extolling the importance of companies to provide as much guidance is possible. During the current your earnings season and in that context, we're choosing to fall. This directly was issued.
Note that we would like to specifically caution investors that are future performance will be harder to predict for the foreseeable future as compared to our performance over the top 10 years as a public company given the crisis in the many degrees of complexity that brings to understanding the impact to the various markets and customers that we serve.
These forward looking statements are based on assumptions that we believed to be reasonable as of today's date may seven 2020, we undertake no obligation to update these statements as a result of new information for future events.
No it as proof points policy than either reiterate nor just the financial guidance provided on todays call unless it is also down through a public disclosure such as the press release work through the filing on form 8-K.
Additionally, we will present, both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures exclude a number of items as set forth in our release and are not incentive if he considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing proof points performance.
A reconciliation of GAAP to non-GAAP measures analyst for the reasons why the company uses these non-GAAP measures are included in today's press release and form 8-K.
You also note that May change the format of today's prepared remarks prepared remarks to focus on our views regarding the impact to cobot 19 to our business and hence we have curtailed the amount of detail that we will typically that we typically provide regarding the performance of the quarter just standard and this case Q1 20 like all of our prior quarters. There was along with the compelling highlights from our sales.
Jimmy during the quarter, but it needs to time they will not be included in this call also note that given our current scaling the business. We're now rounding all figures to the nearest million for commentary on this call. We plan to continue this practice all future calls finally in addition to read our press releases and MPC filings. We encourage investors also monitor the investor section of our website.
Right and investors Doctor for Dot Com as we routinely post investor oriented information, such as news and events financial filings Webcasts <unk> presentations and other relevant materials to it so with all that said I'll turn the call to Gary Thanks, Jason I'd like to thank everyone for joining us on the call today, let me start by saying that we would like to extend our best wishes to every.
When listening to todays call and that our thoughts are with everyone impacted by the current pandemic.
Our top priority is a health and safety of our employees, while maintaining our world class Hopper operational readiness to continue to support and protect our customers. Despite this unique crisis our company our operating infrastructure at a product lines were often said specifically designed from the ground up to be able to handle disasters in emergencies of any kind and I. Please.
Before that we have proven ourselves to be equal to the task in all respects.
Point implemented at work from home policy across our global locations in March and I'm happy to say that we prepared well and that our overall team productivity remains quite strong I'd like to thank our teams around the world for doing such a fine job of quickly adapting to I work from home operating model as well as all of their outstanding efforts in support of our country.
Your commitment to our mission of defending our customers from advanced threats and compliance risks in its unprecedented situation.
In the first quarter, our results exceeded our guidance on all metrics driven by good when you already strong cash collections and solid demand across our broad product lines.
At the crisis deepen into final weeks a March our sales team did an excellent job in closing out the quarter, particularly as many shelter in place orders were implemented around the globe with little notice, resulting in overall disruption in sales cycles in general as well as fairly widespread reprioritization by procurement teams to urgently source unplanned products and solutions.
That they that were directly responsive to the Kobin 19 crisis over there over other purchasing initiatives. During this time, we also saw modest contraction that pipeline due to certain projects being deferred by enterprises, particularly those in hard hit industries, such as energy travel hospitality retail and certain segments.
Health care, we also saw both existing and new customers pivot towards shorter duration contracts as company sought to conserve cash to weather the I'd known economic challenges in the year ahead similar to the auctions. We saw during the 2019 financial crisis as resolved we saw on 11% sequential decline in del Conte.
Contract duration from Q4, 19, Q1 20, but this was partially offset by pricing gains to be elimination of the customary 10% discount for three year paper prepay transactions.
As we look at catch the remainder of the year I would state that our business overall remains healthy and the powerful secular drivers that few our business remain firmly in place with continuing demand for our next generation cloud security and compliance platform. The ongoing migration to the cloud can continuing apace and our unique visibility into the rapidly evolve.
The threat landscape proving to be more important and valuable than ever without as a backdrop I'd like to share. The following observations in terms of how I expect our business to be impacted by the crisis as compared to historical norms until the pandemic subsides first I expect the customers will continue we continue to generally focused on conserving.
Cash and as such I would expect that our bill contract durations, we tried to that very low end of our targeted range of 14 to 20 months in the quarters ahead.
While this trend towards shorter contract impact billings and cash flow in 2020. It also increase overall pricing and of course would contribute additional cash flow in 2021 as these contracts renew in the following year second I believe that lay offs and furloughs will persist for at least the next several quarters with particular concentration.
In the highly impacted industries, given our proceed pricing model any reduction in customer head count will by definition impact our air our retention rates when these customers renew.
Third I believe that we will continue to experience some project deferrals in our existing pipeline first and foremost in the highly impacted industries, but also on our larger scale archiving projects and involve significant third party resources to execute date exporting of large datasets from the incumbent platform for while Europe.
The first of our regions to be impacted by the crisis and has one might assume that it would be first recover our sense is that demand in this region could be impacted for the full year as the key economies in that region Russell with restarted.
We do expect slower engagement with procurement teams in some companies as they continue to prioritize certain projects needed your properly enable working from home across the enterprise is ahead of other projects overall, we remain confident in our ability to deliver topline growth and attractive free free cash flow margins as we weathered this time.
Today Global crisis underscoring the power of our business model built on 98% recurring revenue high renewal rates and solid free cash flow.
Given the rapidly shifting operating environment as a result over 19, we have already taken quick actions to aggressively manage our spending including moderating the pace of our hiring activity rationalizing, our marketing spend reducing travel and entertainment expense and executing a shift to virtual events across the board including or.
Customer user conference in September we will continue to take a closer look at other areas to reduce costs, where feasible importantly, I'd like to highlight that we had no plans or expectations in terms of reducing headcount through layoffs or furloughs in our business and we plan to continue to pay our entire workforce without any reduction in their typical hours worked.
Or any adverse adjustments to their salaries. These commitments your workforce and our customers are a testament to the quality caliber of the business that Proofpoint is built over the past 18 years and we believe that these actions will further our ability to deliver our world class security and compliance capabilities no matter how challenging the situation maybe.
Overall, the threat landscape remains quite active with threat actors exploiting the fear and uncertainty in the current environment by targeting unwitting users through the use of koby 19 doors and other similar tactics to steal login credentials compromise users and gain access to other sensitive corporate data in these uncertain times in fact current work from home.
Environments in many cases served to further amplified in need need for proof points people centric security and compliance solutions as employees are accessing and interacting with sensitive corporate data in cloud venues from home networks and has by definition or not operating a corporate networks, where they have the traditional protection protections add to this the fact that.
The employees may be stressed in the new work environment, often distracted by their family members or uncertain them, new telecommuting procedures, which only further serves to magnify. These risks.
Doctors are keenly aware of this new reality to are actively trying to capitalize on these factors to try to increase the chances evidence of a successful attack I throw researchers have attracted significant rise and attacking campaigns over the past few months with hundreds of thousands of cobot 19 associated burst attempting to deliver be females.
She wishes attachment than your ALS and other dangerous payloads. In fact prepaid is currently tracking nearly 300 different campaigns and last week, we saw over 75 billion melissa's malicious messages leveraging covered 19 themes.
Our competitors struggle with detecting and preventing these new forms of attacks further adding to their risks employee space when working from home.
In some recent cases this efficacy gap has resulted in accelerated implementations at three point services.
While remains early we believe that these weren't new work from home mandates get further accelerate the embrace the cloud by enterprises, and hence serve as yet another catalyst in the shift away from legacy on premise applications and support and more flexible work from home capabilities. This new reality also reinforces the need for people centric cyber security and compliance given the inherent.
Colleges have applied infrastructure based security operating in these new settings Unsurprisingly email remains that most critical factors is to secure given that over 90% of all breaches began with malicious email. However, there are many other layers of capabilities and adaptive controls that are required to help protect users.
From the advanced threats they face in other venues the on email such as cloud and social media properties, our cloud application security broker, our Kathy can programmatically detect advanced threats and data loss prevention or DLP violations in cloud venues and our browser isolation capability can provide similar protection for an sanction quite out.
Applications or other web properties. Our recently acquired insider threat management solution provides security and compliance teams with important visibility into risks.
The endpoint for employees, who are either acting with malicious intent behaving carelessly or unknowingly compromised by it right. After this capabilities, particularly important when employees our operating beyond the reach of the corporate network. In fact during the first quarter. We saw several wins driven by this specific concern.
And finally security one is training efficient simulations are critical last pointed defense to ensure employees remain vigilant on the threats they paid outside of corporate offices.
What is uniquely positioned to solve all of these challenges by combining our excellence in email security threat intelligence with a growing portfolio people centric security and compliance solutions, which broaden our reach across these new threat factors, we see a compelling opportunity to continue to invest in expanding our product offerings, while scaling organization in infrastructure around the globe.
With an eye toward emerging even better position to capture the significant growth opportunity that lies ahead as this crisis upsides. Our platform of services is also enabling freeplay to emerge as a strategic and trusted partner for our customers, particularly as they look to consolidate spending around best in class solutions in support of today's right.
Environment, while also reducing the number of point solutions from smaller often privately held vendors in order to streamline their security and compliance infrastructure and simplify vendor managed that.
We also continued to make progress.
Towards further expansion abroad, and our international business grew 29% year over year and represented 20% of total revenue.
While we're pleased with these results we did see a pronounced downturn in Europe in the final two weeks of the quarter as countries, such as Italy, and Spain implemented shelter in place policies in advance of the U.S. and other markets. While we remain optimistic on longer term ability to gain share internationally, we recognize that there could be further deferrals on purchases.
For the arc of 2020 in these markets, depending on the timing and slow other economic recovery.
As a final update earlier this week the close of small, but exciting acquisition of a company called defense works as security where to start at based in Manchester UK. The purchase price is less than $5 million and while the financial impact for 2020 is minimal the acquisition brings a library of Internet interactive content to our.
Hi growth security awareness training business. It provides our customers innovative content content that we think will support our continued success in this market and the acquired team will be another interactive content engine to enable us to drive further differentiation and deliver highly engaging training aimed at helping customers improve their employee secure.
The behavior.
Before turning over to Paul why were what we are clearly operating in uncertain times I'd like to remind investors of six important characteristics of our business model that we believe bolster our ability to whether the current crisis and help to enable us to emerge even stronger when things normalize first we protected that most important direct factor in the enterprise.
And as such we provide a service that cannot be allowed to laugh. Despite the challenging economic conditions that surround us cyber security and compliance requirements are nondiscretionary and if anything the need for these solutions has become even more apparent as threat actors escalate their tax to exploit the crisis the record number of people working from home.
Clean spans the threat surface and our people centric set of solutions fit nicely to address this challenge second our overall efficacy of advanced threat services is measurably superior to our competitors and easily demonstrated through remote proof of concepts.
Our cloud based delivery model requires no complex onsite implementations to activate service.
Third our business model is built on a recurring subscription revenue model that drive, 98% annual recurring revenue, which when paired with our strong renewal rates, resulting in a business with what the remarkable degree of stability in turbulent times for we have a blue chip customer base, which is diversified across verticals and predominantly enterprise.
Spoke as though we estimate that approximately 20% of our revenue comes from sectors more impacted by the current crisis, such as retail travel energy and parts of the healthcare industry as we shared last quarter at the end of 2019.
Enterprise customer count increased 16% to 7100 as compared to 2018 these customers collectively generate over 90% of our revenue and hence only a small fraction of our overall revenues are exposed to the SMB segment.
Yes in both the first quarter of 2020 as well as throughout 2018 over 60% of our new an add on revenue came from existing customers underscoring the demonstrably truskin value that Proofpoint has created with our customers and hence our ability to consolidate spending within our customer base across point solutions.
Which is increasingly important in a world where enterprises have you write key staff available to manage vendors.
On a sixth and final point Proofpoint is always had a strong culture around maintaining discipline with our discretionary spending the resulting in strong free cash flow paired with our strong balance sheet enables us to continue to invest in the business, while maintaining financial stability without any change to our employee morale or expectations as a reason.
Also the current economic environment. So in summary, we are very pleased with our Q1 operating results that we also recognize the additional complexity ever operating environment and the challenges that many of our customer space are you need people centric approach to cyber security and compliance is clearly resonating with customers and price.
Aspects alike, and we believe that we are well positioned to further execute on our plan to continue to gain share and drive attack attracted top and bottom line growth in that in the current environment, We will remain keenly focused.
Front, our health and wellbeing of our employees and the needs of our customers while delivering on our operational objectives with discipline. We believe this rigor will enable proof point to emerge from this unprecedented situation, even stronger and better position in the years ahead with that let me turn it over to Paul.
Thanks, Gary we were pleased with our operating results this quarter, particularly given the rapidly changing environment in the final few weeks quarter revenue totaled $250 million up 23% year over year and above our guidance range of 246 to 248 million.
As Gary noted, we recorded an 11% sequential decline in Gulf contract duration this quarter across our new Adam and renewal bookings activity.
We also saw a number of project deferrals, particularly impacted industries, which resulted in a dip in new an add on business closed during the final two weeks in March. So all things considered we were pleased to deliver 230 million is telling us here in the first quarter.
As noted on prior calls Andre Agassi, six or six the derivation of our billings metric now requires adjustments to reflect.
Unbilled accounts receivable activity during the quarter as well as any write a refund liability.
Q1, the adjustment related to these two items had a negative impact of $1 million.
Turning to expenses and profitability for the first quarter on a non-GAAP basis, our total gross margin was 79% inline with our expectations.
During the first quarter total non-GAAP operating expenses increased 26% over the prior year period to 172 million representing 69% of total revenue as expected. This was primarily driven by the additional operating costs that we absorbed from our acquisition of Observer and also broad based hiring in all key functions of the business.
In terms of profitability for the quarter, we reported non-GAAP net income of 24 million well above our guidance range of 16 to 18 million note that this result benefited by approximately $2 million due to a stronger us dollar at the end of the quarter, which reduced our international lease liabilities carried on the balance sheet when reported in us dollars since these.
Leases are denominated in local currencies, even without this benefit we still be kind of the range by $4 million.
As a brief reminder, under the new leasing standard assay in 42 that we adopted in 2019 to future payments of all leases are now carrot and our balance sheet denominated in local currencies and as we saw this quarter. This can produce some movement to our reported net income during periods of foreign exchange rate volatility.
Moving to earnings per share non-GAAP earnings per share for the quarter was 38 cents per fully diluted share above our guidance range of 25 to 29 cents based on 65 million shares. The EPS calculation applies the gets converted method to our newly issued convertible notes and as such assumes conversion of approximately 6 million.
And shares associated with our 2024 convertible notes and adds back just under half a million of cash interest associated with the convertible debt.
As an important point when including these additional shares to calculate the enterprise value are performing keep in mind that when using a fully diluted share count associated with the if converted method you must also eliminate the 920 million in debt associated with these notes since the higher share count is based on the premise that the 2024 convertible notes happy.
In fully converted from debt to equity.
On a GAAP basis, we recorded a net loss for the first quarter totaling 74 million or $1.30 per share based on 57 million shares outstanding.
In terms of cash flow, we generated 92 million in operating cash flow and invested 12 mine and capital expenditures, resulting in free cash flow for the quarter of 80 million.
We had very good bookings linearity in the quarter, which helped to accelerate some cash flow into the first quarter.
As well expected cash disbursements of 20 million for the repatriation of observe its intellectual property was delayed which contributed 20 billion to the quarter as compared to our guidance in January.
Absent backed away or free cash flow for the quarter would have been otherwise $60 million still nicely above our guidance range of 50 to 54.
Moving to the balance sheet, we ended the quarter in a very strong position with approximately 946 million in cash and cash equivalents as I. Just noted what we do carry outstanding convertible notes of 920 million. This data is not due until August 2024, and hence we have over four years to either exceed the conversion price of one.
Hundred $53.99 per share or retire the debt through our strong cash flow generated from operations. This debt also has no financial or restricted payment covenants of any kind of terms or how we operate the business or how we put the cash balances to work, that's giving us plenty of operating flexibility in the years ahead.
So now turning to guidance for 2020.
As Jason highlighted in the opening section we're choosing to follow the guidance. The FCC chairman from his comments on April eight and as such under the protections afforded under Safe Harbor, we're engaging in a good faith effort to provide a forward looking view of our business for the remainder of the year.
Given that it is unclear how long the current pandemic may impact the global economy.
Based on our results here in the first quarter, we've made some adjustments to our operating plants and financial assumptions for the remainder of 2020.
It is based on what we know as of today and this could of course change depending on how the cobot 19 pandemic plays out in the months ahead.
The chairman stick on April specifically requested the companies use upcoming earnings calls not just for him to showcase historical reserves that may be relatively less significant but instead, it's an opportunity to address one where the company stands today operationally and financially to how the company's cobot 19 response, including his efforts.
To protect the health and wellbeing of its workforce and Thats customers is progressing.
Three how its operations and financial condition May change as a result of all of our efforts to fight covered my team.
So let me address each of these in term.
And this first question in terms of where the company stands today operationally financially. We believe we are well positioned in all respects our transition to work from problem has been relatively slow above and beyond this with almost $1 billion a cash on hand at a business model, 98% recurring subscription revenue that has historically generated cash for margins.
20% or better we believe its financial model the powers our business backed by strong balance sheet gives us solid foundation to weather the economic challenges that may lie ahead.
To the second question terms or how the company's coping 19 responses progressing including its efforts to protect the wealth and wellbeing of its workforce and as customers note that Gary has already covered this topic quite thoroughly during his prepared remarks and so in the interest of time I will reiterate those comments here.
On the third question in terms of how our operations and financial condition May change as a result of all of our efforts to fight Cobot 19, I think the simplest way to address this question is with our updated guidance for the year.
We have run a number of potential financial models to examine the impact to our future financial condition, depending upon the depth and severity. The current pandemic has on the global economy, and we continue to believe that the outlook for our business is solid across the spectrum of these modeling outcomes.
Unlike our traditional guidance, where we can typically rely on a reasonably stable set of economic conditions to persist throughout the annual period.
In this case, we are taking a different approach and broadening our guidance to reflect two very different economic outcomes over the course of the remainder of the year and hence providing investors with a broader view in terms of how we believe that the business will operate under these two disparate sets of assumptions taking into account the key impacts from the crisis.
Gary covered earlier.
Or 38, 41 cents per share using 65 million fully diluted shares outstanding.
This is since depreciation of approximately 9 million net cash interest income of less than a million and an assumed tax rate of 17% under C.N.D. I.
Given the duration trends that we saw into one coupled with the potential for orders to slip as the economy absorbs the full unpack from recent shocks in the second quarter. We now expect you to cash flow free cash flow specifically to be break even to 10 million.
<unk> to cap X. is expected to be 12 million, including 5 million of counteracts associated with our new corporate headquarters, which will largely be offset by dependent allowances just described.
As a final point of reference while we typically don't comment on early results during the current quarter I thought it would be appropriate to highlight the month and people are living iridium villains, new went out of business customer rules in collections all track after above or historical norms for the first month of the quarter when considered in the context of the guy.
Just provided for the second quarter and so while we still have the lion's share that business left to close here in May and June for the quarter upgrade which will likely continue to be turbulent and unpredictable. We are nevertheless, pleased with our start to the quarter and remain hopeful that the path of our business remains to be on target to achieve the high end of our updated outlook for the year.
Yeah.
In conclusion, just signed a very challenging economic environment as a result of the Corona bars pandemic and the resulting economic downturn. We believe that we remain well positioned walk class security compliance capabilities are even more relevant now for customers and prospects around the world with many adjusting to the new work from home paradigm.
Our team continues to execute well delivered strong top and bottom line operating results and we may remain well positioned competitively.
<unk> well, we've remained focused and driving the business through the <unk>. This crisis with an expectation of delivering over 1 billion of revenue. This year on up half the 2 billion over the next several years.
Clearly as we work our way through this crisis. The date of achieving this to go into or milestone could very well be impacted by at least a few quarters.
As the economy rebounds down the road, we will provide an update on this time frame, but nevertheless, we continue to see a significant opportunity and you're driving aggressively toward that target.
We will continue our targeted investments with discipline and we expect these to help us to emerge from this uncertain period stronger than ever and further our opportunity to protect our customers and drawn strong returns for our shareholders in the years ahead.
Before turning it over to be operator questions I would like for request that south side analysts limit themselves. Just one question to help produce the duration to call in to maximize the number of analysts to have an opportunity to ask a question today's discussion.
Thank you very much for taking the time to join us on the call today and with that we would be happy to take your questions operator.
This is Jason I'm going to clarify a quick thing, but Paul said I thought I heard him say $1.46 per share on the net income guide for the years I wanted to be clear then at the dollar 41 to $1.56 just the gate that doesn't come through and the transcript. So that's that I'll put it back to a shelter for a few and I think.
Thank you.
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One for Gary do you talk about the demand for the L.P. that you saw within this environment.
Okay, where we all are in the observing integration process and is that have been impacted by <unk> and any in any way at all.
A great question, we'll quickly so demand for G.O.P., we see a significant amount of interest in <unk>.
Looking at a next generation of D.L.P., and we feel like the capability that we've been driving through the <unk> serve it acquisition and further integration have been on market in terms of meeting those demand those are bigger projects and we see those come into like really in the second half the year.
We're very pleased with the observe it integration weeks no slow down through the work from home transition and honestly I think our productivity probably under developments I'd been higher and so we feel very good about the work that's been done there and the early feedback they were getting from customers.
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For taking like <unk> glad to hear that y'all, well and hope for the same three or four for your family. Paul You would think for the color you give on for a potential renewal implicated in just a due to higher unemployment Gary Wonder if we could focus in on from a newer solutions because that's one of things we picked up in our checks, but you know that there is with work from home a lot of growing interest in some of the the.
You know you're met a cat can be.
<unk>, how do you think about for what you are what are customer telling you in terms of just the number of it patches of products.
<unk> proofpoints with with a change of work and and how you're thinking about that I got Paul relative to that but the the turn commentary that you do.
Yeah. So great question filled so as we transition to work from home, we didn't see very positive demand and pipeline build as it relates to our Cosby solution or browse race relations solution and M.R.I.T.M. solution.
And.
Second half a marches people got we oriented and then working into April we've just seen broadly a lot of engagement from our sales team around these capabilities and products as as customers rethink their overall security infrastructure to support a work from home environment, We didn't see it and it was mentioned briefly into prepared remarks things like.
Insider threat management Dean purchasing deployed in in really short periods of time, because you had.
Employees, who had never work from home before they never had laptops before and so do enable and fully secure these people they needed some form of M.I.T.M. solution. So there were some very specific examples where we saw accelerated sales cycles, we'll have to see how that that plays out through Q.T. on their mind or the or the we feel good about.
The demand profile.
Gloss these capability that enable a very different security architecture supporting people working from home.
Yeah, I think tier tierpoint on and just turn and furloughs.
We are definitely sitting and it's very consistent with the financial crisis back in 2009 is to you have companies that are affected and then just continue earlier than normal renewal and of course buying new things from performance and did a lot about this was in the quarter over 60% of the total Mina pay him from out of business in the quarter. That's certainly do have companies that are affected.
Layoffs or for us in some case.
Very large percentage of the overall workforce that then in the near term affects the renewal value because we in most cases adjusting renewal valued reflect the folks that are actually working and using email systems day in down but it is interesting that if you think at the intersection of that and diagram. We do have customers, who have had fertilizer layoffs, but nevertheless also have a workforce.
It needs to work remotely that have come in and and executed add on purchases for things like met or a casting at other things health and able to work from home while at the same time, you know seeing a compression in the down here the existing business and that's OK. We're fine with that you know for us where a strategic supplier. These folks and were quite competent just like we saw in the recovery from 2009.
That as a their businesses get back on line they'll hire folks back and ultimately that increases the value of our original subscriptions back to where they started and again, it's the economy kicks and ultimately grow from their over time.
Right.
Thank you.
My next question comes some while to pitch it from C.D. takes go ahead.
Hi, Thanks, Gary wondering how he was helpful commentary there on new and out on business as it relates to lie just sort of course email you know technology displacement in in in any business from the market share perspective.
Did you see in terms of that as as the Covenant pack started they cold in the quarter and and and what do you. It's I mean as it relates to your guide and you know during the rest year round, a core share gains in in the email market.
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What drove.
Q1.
Wins in core I was really what was happening the threat environment. So we thought the beginning of the quarter and was exacerbated as we got to the end where as sort of actors moved to cope with lures. We saw many of the incumbent solutions not responding adequately do that and we saw than be aggressive move.
Moves in purchases like we had.
We literally had a fortune 100 company demand that we moved over a weekend because they were I would call and getting snopes and so.
So we see this opportunity through the remainder of the year to to continue to take share because because our overall overall advocacy and as we noted in are prepared remarks, we can do all this remotely we don't have to see people, we don't at the physically touch anything and so we feel good about how that fits into.
The broader demand opportunity and talk and commented on how we factor that into guidance. Yeah. I mean overall I think that we don't expect a threat environment to change in fact, I think these these new lures and the like seem to be persisting and so that'll continue to drive this catalyst for just described and of course there continues to Vince.
Opportunity to go into this mantech install base and drive change, particularly where they've especially on record of said that smaller customers are no longer considered to be part of their core framework as they drive their business going forward and so many of those customers were on 234 or five year prepaid contracts, we do see a litany of them coming along over the course of.
Not only here in the second quarter, but of course, the remainder of the year that we think will help fuel core share hip gained in our favor and of course, we I think is we've shared past calls often when we bring someone over himself core emailsecurity to replace existing vendor, we often have the opportunity to sell other capabilities along with it and so what might have been $100 too.
One vendor are can easily be two or $300 to us just using that as sort of a a relative factor. So we can get two to three times the value selling a broader products that as we also convert over that core email market share from whoever the incumbent vendor is over to Brooklyn.
Great. Thank you.
Thanks. Thanks.
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Maybe before the question for Paul obsolete, Brooklyn duration coming down you are certainly being pumped the bowl they'd your customers <unk> <unk> you know something from all of our company Apollo be really helpful. To me. If you could walk me through how you. When you will team is generally approaching there anymore.
<unk> chopped industry, maybe a little bit what you fall in terms of from a month over mumps between bomb March and April I'm I'm heading into May I modified.
<unk> Yeah no. That's just that's great question. So <unk> is you know well Sarah but just for the benefit of the the broader interfaces investors that may be listening, we have a a separate dedicated team that does nothing but handle renewals to the company and so we don't have our sales team that would go out and you could drive near ride on business.
Balls at all except where they may need to assist here and there and so our engagement is said to look after all these customers.
Having a pandemic or whether it's just a normal natural course, a business and it helps drive and software really positive relationships with all these folks so naturally first and foremost we are seeing customers that you're may have historically done a three year deal or a two year deal pretty pay where they get a bit at a discount for that almost all of them seem to now be saying, Hey, you know what I want to do when you're deal now that of course.
Change your price per users can go up a little bit cause that discount associated with the prepayment goes away, but it enables them to conserve cache, because obviously, they're saving a fair amount of dollars that they could then use for an emergency fund of one sort or another for us we're okay with that because what that means is that if we were to do a three or pay pretty pay this year that means we.
Shouldn't have another opportunity to renew and have another billings event for three years, if they just do a one year deal not only I'm getting a little bit more in terms of price per user, but they're going to renew again next year. So that helps boast her buildings in the in subsequent you're 21. So so there's that I think do you ever finger is kind of you know first is to stand out is that when we are interacting with these costs.
Comers not only for those that are looking to move shorter duration. Yeah. The thing that we run into his folks that are have for our laws are layoffs and so naturally will make adjustments to reflect back that lower user account sort of that's a a fair and equitable way of handling. If you will are downsizing to devalue the contract, but I will tell you and it's hard to predict what will happen here, but in the 2009 financial.
Chrysler's, where customers that would downsize their contracts and literally within six months at heart attacks on the meaningful number of those workers and so then we get on an add on to to re sized <unk> upward that that value of the renewal accordingly, and so it'll be interesting to see how it plays out this time around but again shortening duration in terms of going for.
Multi year to a single here and then adjusting to lower user accounts are kind of classic. Examples we do occasionally have requests for special payment terms in a like for quite frankly, <unk>. We don't we're in a business of financing our customers quite frankly, and so our view is that look if you want to go get alone go to the back and get alone.
I'm happy to do what I can to help you up and actually in terms of how you structure the business, but you know we're not we're not going to give you 180 they'd payment terms <unk> finance for business, that's not what we do.
Oh, Thank you so much I appreciate boss.
And.
The next question comes sounds lab in some type of family teach go ahead.
<unk> gear, you mentioned about the internal revenue being pretty strong quote.
Past quarters, and I was just wondering if you may get a little more tolerant don't in April <unk>, how you get into thinking in terms of the guidance maybe four.
Yeah, He indicated well growth in the quarter was was good at 29% representing 20% of overall revenue we did see a more significant impact as we got to the middle part of March and we've seen less bounced back in Europe in April.
So and we in talking discuss how we'd thought about that more broadly in our guidance, but we're being relatively cautious and if you go back to our prepared remarks. We noted that are prepared remarks that were being more cautious about Europe, given what we've seen that's fine.
It would probably do anything but.
No no it's for them.
<unk>.
Thank you.
My next question constant Steve Kaneka from wherever he last sheet security needs. Please go ahead.
Right back, but for the class at Yeah back to have my question. The most of my question doesn't have.
Maybe maybe a little bit more color would be interesting, though when you think I think about walking to work from home.
Do you guys.
<unk> or maybe.
Well what month 18 months.
Whenever we can't to get you know whatever we need to to get better business environment.
If you think about you got a bunch of.
Aren't in the fire in terms of emerging product that can play in events and you know already peace out.
Yeah, you call about I.T., you know personal mail protect that not be helpful. Either you're coming out with a unified the offering later this year I presume that multi doctor I'm wondering how that it's going to be differentiated you know from the bigger the L.P. players out there, but if you fast for download 12.
And you kind of maybe rank ordering this afternoon to think about what what's going to be most confessing to liven grow what what pops up to you what do you see it to look out.
Yeah, I think the the thing at work sided about a nice and I do believe.
This paradigm and working from home actually accelerates demand in this area.
I believe to customers will accelerate their moved to the cloud. So his result of that we will see benefits or a core.
That's a positive so we'll sneak continued feed those benefits over the course the next three to five years second is.
How customers ultimately protect the clouded as they get their more fully from a I.T. strategy pointed deal and we believe that drives demand for our cats be solution.
And then finally I would say V. investments are we making duty integration of insider threat into an overall you'd if I.D.L.P. set of capabilities that roll out later this year, we feel like we're really well positioned there to take advantage of a very large very significant market and I think it play they'd much bigger.
They don't work from home World, where D.L.P. a class cows vehicle you give a primary and key use case I'm, having visibility I'll be down to the endpoint given that you're not on the corporate network anymore, you bring that together as well with our zero trust capabilities with the men networks acquisition that we did I think.
All of these capabilities really set us up for long term really interesting Grove and I do believe that while the pandemic is painful for many organizations around the world I think this forced to work from home will accelerate the adoption of a lot of these capability so well.
19 is extremely painful for many organizations around the world. They do believe were very well positioned to come out of this in a very strong position.
Oh, thank Barry.
<unk>.
Thank you.
I mix I think comes some <unk>. Some I can send me. Please go ahead.
Hey, I. Thank you for taking my question I guess that's question it from Holland I I'd like to <unk> net income for the poor here. So you mention that year, we evaluating your spending plan since given the macro environment, but you're comparing contrasting you're going to continue to invest in product development. So.
Wondering what that means for your spending intentions, and and and tells the marketing and particularly related to do I sound capacity for the four year.
No that's great question.
We're in a in a very fortunate position and then given the fact that we have 98% recurring revenue in generally strong where it all right that we think will persist as I described you know even in a.
<unk>.
Economic outcome, if Kobe 19, where to really persist problematically across the are for the whole year and so it gives us a strengthen our business loan with many people don't and so while we have obviously moderate is on the margins spending in a number of areas, including a Broadway just sales marking investments <unk>, it's only in a fairly small.
All amounts I always think the biggest helps marking investment that we curtails is our travel budgets sales people, obviously, you're not nationally traveling here and there to see customers and yet we have found in our virtual engagements with customers have been highly effective and so as we think about you know kind of how we reach.
<unk> and the best friend and on the Gulf War basis, we're going to continue to make a fairly meeting for investments in sales and marketing over the course of the year. We have moved a lot of our marking spend two of the digital format. In fact, I think every mentioned that Powerpoint protect which is our annual user conference will.
Be done virtually was supposed to in in in person as we've done traditionally but there none of it is we will continue to build the size and scale of a sales organization around the world both in the U.S. and all of our international geography is which I think well positioned that's very well as the crisis ultimately a users.
That's a bit later this year or whether it takes or sometime in 2021, I think that'll set us up quite well as the market comes back around.
Okay. Thank you.
<unk>.
Oh next but some kind of <unk> <unk> piece go ahead.
Yeah. Thanks for taking the question when it just the new and better understanding of home with dynamics with the office to 65 and.
19 hadn't seen and pick up in terms of customer adopt him about this and 65 and and talk about reppen number of customers migrating over.
Still feel like that that trend is continuing.
We do we continue to see brought adoption of off the street 65 and.
Seeing hitting the current environment meeting many customers that went off at 365 and began utilizing the court capabilities of office, we 65 for security they moved to prove flying and specifically what happened is that the threat actors move there tray crafts all around <unk>.
<unk>.
Many of the Microsoft accounts very much hurt by that.
They gave an example earlier on the call of out of customer that moved quickly. We had another customer same thing over the weekend. They were Microsoft account I'm getting smoked and they just felt like they had to do something quickly and we moved them over a weekend. So we do continue to see move adopted 365, and we find that is it very compelling way to go contended you take share.
Thank you.
Thank you okay.
It makes because sometimes some Daniel my kids Some bank of America. Please go ahead.
Yeah. It's interesting question I'm just wondering if you can discuss the pipeline pressure a little bit from a product perspective, you characterize it. It's it's across the border didn't you pronounce for something you're more discretionary or complex products.
Yeah No. Good question. The one thing that we noted in that prepared remarks was what we're seeing on some of the larger archiving opportunities that have large data set that require a pretty big engagement to move that data from the incumbent solution to prove blind. So while we feel very good about the long term opportunity in that particular market.
We can't get those deals will likely progress more slowly, but if they indicated in an earlier question. We're seeing really nice pipeline build in some of the neural capability that are driven from.
The desire to rethink security architecture as it relates to work from home. So can be R.A.T.M. solutia and you know those kinds of capabilities, we see nice pipeline belt.
Yeah, and I think differing that I'd add is obviously, an impact and industries, which is scary articulated earlier reflects roughly 20 per cent of our historical install base those folks when you're doing very significant furloughs as I mentioned earlier, we do have cases, where people because they have work from home they might be buying something to help and they black but for most people in the impact.
Industries your their of their hunkering down and just trying to figure out how to get through this period and so I find that we had developed associated with with those businesses. In particular is tougher to stage. So the good news is I don't view them as projects that are lost and then I'm quite certain in most cases will come back around it's just a question, but that time anyway.
Yeah.
I think it.
Thank you.
Next crescent come from <unk>. Thanks go ahead.
Great. Thank you and thanks for all the color on guided me a cool that outlook you touched on that sort of prior question, but historically it seemed like you prefer shorter term durations.
In class solution, you don't incentivize your sales force to land the longer term contracts. So despite the shorter duration, you've seen customers taking on more products on the initial deal than they were last year. At this point you your bundles and I know you added two more this quarter as well, which would presumably set you up for a strong.
Under renewal period once we get through this.
Yeah, Let me start and then I'm sure Gary has a few things to add so just just fits into the durations in general Yeah. We share for eight years, we've been public were always awfully happier with shorter duration contracts. It means that price per user on Ah products is higher and it means we were any of those customers every year, which is.
In terms of how we drive or current cash flow. It's also just one more natural point of engagement with the customer on an annual basis. So so as we look at things. We we do originally model build the business around an average duration given our history and so the fact consideration has certainly changed and shortened changes that are outlook.
And hence how that drives spellings and cash flow sweet size, the business and hence the need to take our cash flow ranges down for the full year, but that said I think that as we think to 20 Wanna beyond you know if they're slower duration then we're to persist for a longer period of time I do that is only a a positive for us and how we operate the business better over the longer term.
And they on the comment a multiple products, we didn't see good adoption of bundles in a p. zero P., one that we had some nice p. twos and the one thing that we as they noted isn't that prepared remarks, we're starting to see as we move into this Kobe world, We're starting to see a more.
It's wrong or demand around consolidating spend and the bundles help facilitate that so we feel really good about where we are with respect to having those bundles, helping customers consolidates van and driving broader adoption across our product line.
Give them know that bundled structure.
Okay. Thanks, guys.
<unk>.
The next because sometimes some <unk> some V.T.I.T. go ahead.
I Ain't tension woke me, yeah, maybe <unk> the opportunity for sure game typically how're you feeling about Samantha and have you seen any change in a piece of those customer conversation. They were just given incremental o'clock volumes and uncertainty on on their products up.
Mhm, Yeah, we've seen there's been really good outreach from the semantic base as they decide what they want to do not as many of you are aware of semantic get clarify are brought kind of big clarify that they now decided that email is strategic but we haven't seen that really change the behavior of the incumbent customer.
So there's been good dialogue, both on the email side as well as on the D.L.P. side, and we still see it as it pretty significant opportunity yeah, and I would say that you know just generally if I reflect on yeah. We have weekly calls with the sales organization, where we go through the Lady of larger more important details that they're working on if.
Reflect on the deals that they're working on you know in and around you know Symantec is just one example, you know the the degree to which those products had fallen behind what anyone would consider to be reasonable market standards. Prior to the acquisition, which was quite significant and at least for now it's not clear that despite the change in statement by.
There's been any change in.
The vector of the investment or maybe if there's a change in the investment their shirt certainly hasn't been a change in the outcome in terms of quality caliber Africa scene of products as expressed by the customer which at our best versus the only thing that matters and so I as I mentioned earlier I didn't think it will have some interesting opportunities to drive semantic displacements Ah.
This year and before to having to have been you know one part of what helps drive the new one and our business over the course of second third and fourth quarter of the here.
Got it okay. Thank you very much.
Thank you my next <unk> some cooking hind teach go ahead.
Yeah.
The them at Boston from the polar on the other little private from a guided I'd like to to guide.
We can find to keep them. So when you already do weights and then you're.
<unk>.
Yeah.
Second quarter Guy, it's consistent with kind of like characterize the the higher outcomes are very good too you know anchors for our execution for the year. So it assumes a duration that's consistent with what we saw on Q1 in terms of you know go contracts and it assumes that are.
Overall error and retention rate continues to be over 90%, although a little bit below our historical norms.
Oh.
What about the building you're going out on business and keep 221 <unk>.
Yeah. So so as we are talking about also the <unk>.
And there's baseline outlook, we build that higher end range, we're assuming that the overall new an add on Christmas is actually down slightly from what we closed in 2019, you know given the fact it'd be affected industries are off line and not buying new stuff for the most bar given the fact that larger more complex deals in archiving are likely different.
We're now and so I'm pleased that we're able to put up you sort of results in the world, where our overall new an add on recurring revenue you know you're over here actually isn't growing now because drunk growth, obviously, but continued to drive the long term growth growth fly real for the company is we have more sales people in quarter capacity, we wouldn't start number to go out but again in in.
Current environment, we're looking in the baseline assumption for it to be slightly down year over year.
Thank you.
Mmm <unk>.
Final question comes from crack a smile must <unk> piece go ahead.
Good afternoon Viking. Thank you very much for taking the question Paul I kind of question I'm billings and and I know you don't I could things anymore, but you know he wanted to come in a bit lower than where consensus was when I was curious.
Able to discern after looking at it can't get information as well, it's kind of what you saw in the last couple of weeks at Mark. If you were able perhaps to to estimate the net impact of Kobe 19 on on buildings you know in the corridor.
In this quarter meeting meeting to one.
He won't exactly.
Yeah, I mean, it's harder to specifically preview impacted and so if you're trying to say hey, what would've buildings band and we know how to cope with 19 crisis, obviously, they they would've been higher probably measurably higher because the duration would've been 10% higher on both new land on and and renewal. So that's a pretty big factor itself.
I would have expected as I looked at how are they all seem performed all the way up until the middle of March or that we would have seen it better close right and and little or no project referral in the last couple of weeks Tomorrow. So you know in that alternate universe, where over 19 didn't end up happening, we would have delivered or a measurably higher billings number in the first quarter.
But I think we're it's always important to keep in mind is if you look at the new assumptions that we have for the year. Both the the higher end assumption with the 1.3 going around and <unk> and then the lower much more.
Conservative assumption based on a more challenged economy for the year at one point O. 5 billion, yeah, what I'm pleased with his given the dynamics of the there's a small what we built over the last 10 years, Yeah. The company will deliver when I think are actually pretty remarkable results under either of those scenarios, which then gives us a great foundation or to the question earlier about investments and sales.
Marketing, we can continue to not only you know retain all the great employees that we already have will continue to hire in what is obviously a great set up for us in terms of hiring because a lotta people either aren't hiring or laying people off even here in silicon Valley and so it gives us a chance to go really build out and can continue to grow a world class teams.
So it's up for a a tremendous a next step forward as we think about where we take the business when the pandemic finally comes to to a close.
Very helpful Thankful.
Oh.
<unk>. This is Jason I've wanted to make just a quick analysis of the we just filed a an additional eight k. for May K. just hit a couple of minutes ago that provides the 2020 guidance as well as a reconciliation to the non-GAAP measures to just wanted to point that out to everybody on the the call on the web cast today without from a a color to Gary for closing remarks, great I want to take a moment.
I think everyone for joining us on the call today, we're very pleased with their queuing results and as we look ahead into a rapidly changing environment. We plan to continue to further our progress with our people centered approach to cyber security in compliance, while continuing to support the health and safety of our employees and customers. We also believe we remain well positioned to drive attractive returns for shareholders and we look.
Forward to talking to you or next call into the same mini view virtually on the conference circuit. This quarter, we wish you all well in the weeks and months ahead as we pressed forward through this crisis.
Towards better drives that inevitably lay ahead. Thanks, so much for during the summer holiday, we think that.
Thanks to close today's call. Thank you for your participation you may now disconnect.
Yeah.
Mm.
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