Q2 2020 Varonis Systems Inc Earnings Call
Greetings welcome to growing systems incorporated second quarter 2020 earnings conference call. At this time, all participants are not listen only mode. A question answer session will follow the formal presentation. If anyone should require operating systems. During the conference. Please press star zero telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host genes are Rusty you may begin.
Thank you operator good afternoon. Thank you for joining us today, John you've noticed the second quarter 2020 financial results with me on the call today, our Yaki Faitelson, Chief Executive Officer, and <unk>, Chief Financial Officer, and Chief operating officer. After preliminary remarks, well open up the cultural question answer session.
During this call we may make statements related to our business that won't be considered forward looking statements under federal securities laws, including projections of future operating results for our third quarter ending September Thirtyth 2020.
Due to a number of factors actual results may differ materially from those set forth in such statements.
These factors are set forth in the earnings press release issued today under the section captioned forward looking statements and decent other important risk factors are described more fully you know reports filed with the Securities and Exchange Commission.
We encourage all investors to read our FCC filings. These statements reflect our views only as of today and should not be relied upon as representing our views any subsequent date.
Onewest expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward looking statements made herein.
Additionally, non-GAAP financial measures will be discussed on this conference call reconciliation for the most directly comparable GAAP financial measures is also available on our second quarter 2020 earnings press release, which can be found at www dot wellness Dot com any investor Relations section.
Also please note that an updated investor presentation as well as a webcast of today's call are available on our website under Investor Relations section.
With that I'd like to turn call over to our Chief Executive Officer, Yaki Faitelson Yaki.
Thanks, Jamie and good afternoon, everyone. Thank you for joining us to discuss so second quarter Twentytwenty, though.
I would cover three talk topics today before I turn the call although today.
First in our beautiful reason for Q2 second what we are seeing into calling environment and finally, how we believe the trends we are seeing you benefit vone. So the long tail.
Well I quoted maintain continued to impact many analysts starts out with dogs, who has been affected I'm proud of 14, which delivered strong financial results in the second quarter across all regions.
The team is executing well industrial environment and customers and prospects outs to me engaged.
Mutually risk assessment in online activities, all well and we continue to see stone inbound interest is always remain diligent in mind, telling the business.
And we believe that did it down.
Oh, no my purchasing bought them we saw in Q2, we continue in the second half Twentytwenty.
As we entered the second part of the you. It is clear that from a competitive and financial standpoint, the only says never being in a better position we believe.
Our unique platform is it must've, India's new world and the transition to a subscription company.
When you use the longest them navigate the commenting violin for me much stronger position.
Within 99% subscription mix into second quarter, almost all revenue today's other Kevin providing us better visibility and over the sorry, shelving <unk> stability.
I don't know to the calling in violin you know we plan to capitalize on the long tail.
On the trends, we're seeing globally.
As we discussed in April companies have no people did from emergence of spin related to employee safety and be just continuity and laser focused on the continued elevated risk on they won't come home environment. The powerful data security platform makes us uniquely positioned to address this risk having to these new enrollment.
The risks stemming from although exposed sensitive data Oh no no.
But reducing them even more urgent today is an example biopic probably the only skus to move it to only about five always says for the 1500 using.
With a handful of remote employees today.
Let's see so the company has to only about 1500, one about almost he said remote employees frequently used unsecured computer to boxes critical data booking themes that obviously 65 and on plans to VPN.
Opens companies sensitive data to enormously he sees the worldwide across all industry Oh facing the same elevated problems.
For the same time.
I think by element is more dangerous the navy.
Companies based extremely sophisticated involved advanced persistent threats from it's down a bit October in hockey as well.
Going for its funding side.
Organized how kills routinely bypassed the let me tell an endpoint.
Witnessing acting director, we then steel threaten to expose data in a whole Detroit.
It is same time.
Employees I won't read about job security customizable Cmos live.
Good morning of employees accessing sensitive data outside of the normal habits.
This is why a lot for me resonating these both new and existing cost them out.
We believe it provides a much data protection lifting and litigation capability.
We are seeing that barneys, he's a very high on the least display only be spending for customers.
And the boss to double digit licensed the customer you clear wasn't now than it was just a few quarters ago.
Before I turn the call to Guy I want to highlight the three important customer wins this quarter that demonstrate the enormous opportunity we haven't found of.
We signed a large global manufacturer in Q2 that needed to show up data security ensure compliance with GDP up.
During the future risk assessment voice was able to demonstrate our superior architecture of an integration.
This new customer purchased more than 10 licenses to support in on blame it on to 65 cloud environments.
Addressing data protection threat detection response and comply.
This is just one example, the for new customers are making larger initial investment in device platform and more quickly the driving value because of all conditions subscription.
Well, we see meaningful increases in adoption of eight by new customers remain significantly underpenetrated visa on existing customer base, which represent a significant go forward opportunity for the company.
A good example lifetime value expansion is an agency.
Technology was county pretty became it will picture to customers in 2017 buying for licenses to kind of said department.
In 2019, it took advantage of our subscription offering to expand the bonus but only course all employees.
John maybe pick one for the plans to migrate to obviously 65 was often million for bill in the cloud that we're open to everyone.
And then migration timeline speed you to Cobi, they renewed all Cohen licenses and Burgess seven additional one head of building you as you see good [noise].
Datadvantage data classification for the cloud data centers as well as automation engine.
Them too quickly to mediate open access issues and providing incremental protection.
She is an excellent example.
Our subscription offering coupled with have started you to engage louder customers you can buy more from us overtime during the expansion opportunity moving up base.
We believe this crisis has cemented the need for platform and the trend, we're seeing should drive greater adoption as we look to the back half of the well very encouraged by a unique ability to solve problems that they want intensified with covidien capitalize on the strong chemical telling you that let me turn the call.
Two guy Guy.
Thanks, Jackie good afternoon, everyone. Thank you for joining us today I Hope you and your families are all safe and healthy.
Last quarter, given the uncertainty from coated I spend time on the earnings call, providing some insight into how we think about the business focusing on our recurring revenue.
They are grew 52% compared to the second quarter of 2019, driven by our execution across the three pillars that drive our business first landing new customers second our expansion overtime with existing customers, where we are still extremely underpenetrated and finally the rent.
Those are both subscription and maintenance of our perpetual licenses.
On the new customer front, we continue to see greater license adoption on average compared to the perpetual model.
This is partially due to the ease of consumption under a subscription model, but also due to the fact that we are executing on our strategy of acquiring high quality new logo.
We now see the average number of licenses for a new subscription customer is close to five roughly double what we saw under the perpetual model.
On the expense side, our strategy of acquiring high quality, new logos is also generating greater lifetime value and there continues to be a strong level of engagement from existing customers.
As of June Thirtyth, 58% of our customers with 500 employees or more purchased four or more licenses up from 48% a year ago, and 24% purchased six or more licenses up from 16% year ago.
Rapid growth of these metrics speaks volumes to the value our customers see from a larger adoption of our platform.
Turning to product families, 77% of all customers now purchased two or more up from 74% year ago, and 47% purchased three or more up from 42% a year ago.
And finally, the recurring portion of our revenues allows us to move through this time of uncertainty from a much stronger position.
98% of our total Q2 revenues were recurring in nature.
As I mentioned a are at the end of Q2 grew 52% year over year and renewal rates of maintenance on perpetual licenses continues to be above 90%.
Our dollar base net retention rate or NR was greater than 120% at the end of Q2.
As it this quarter and our are now accounts for the growth in our from all customers and we plan to provide an hour are on an annual basis.
Turning to our second quarter results.
Total revenues was $66.6 million up 12%, despite the headwind from the much higher subscription mix this quarter.
Second quarter license revenues were $34.3 million, which included $34.1 million of subscription revenues or a 99% subscription mix.
Maintenance and services revenues were $32.2 million to remind you. This line item was impacted by our strategic decision to have our channel partners take on more professional services what.
Looking at the business geographically North America revenues grew 15% to $45.8 million or 69% of total revenue.
In EMEA revenues grew 7% to $18.7 million, representing 28% of total revenues.
Rest of World revenues were $2 million or 3% of total revenue.
Turning back to the income statement I'd like to point out that I'll be discussing non-GAAP results going forward, which continues to exclude stock based compensation and associated payroll tax as well as FX gains and losses.
This quarter and going forward, but non-GAAP results are also exclude the amortization of debt discount and issuance costs related to our convertible notes issuance in may.
Gross profit for the second quarter was $57.6 million, representing a gross margin of 86.5% compared to 87.3% in the second quarter of 2019.
Operating expenses in the second quarter totaled $61.6 million as a result, our operating loss was $4 million or an operating margin of negative 6% for the second quarter compared to an operating loss of $8.9 million when operating margin of negative 15% in the same period last year.
Our Q2 operating margin was well ahead of our guidance as we ate meaningfully outperformed on the topline be benefited from cobot related cost savings, primarily due to travel and marketing activities and see continued prudent management of expenses across the business.
During the quarter, we had financial expense of approximately $296000, primarily due to interest expense on our convertible notes, partially offset by interest income.
Our net loss was $4.7 million for the second quarter 2020, or a loss of 15 cents per basic and diluted share compared to a net loss of $9 million or loss of 30 cents per basic and diluted share for the second quarter 2019.
This is based on 31.5 million basic and diluted shares outstanding for Q2, 2020, and 30 point Threemillion basic and diluted shares outstanding for Q2 2019.
We ended the quarter with $326.1 million in cash and cash equivalents marketable securities and short term deposits, which includes 215.8 million of net proceeds from the successful convertible debt offering we placed in early may strengthening an already healthy balance sheet.
For the first six months of 2020, we use $10.8 million of cash from operations compared to generating $3 million of cash from operations in the same period last year, reflecting the revenue shortfall in the first quarter due to the impact of Cove, it and the headwind from the subscription transition.
We ended the quarter with 1574 employees and 9% increase from the second quarter of 2019.
Moving to our guidance for the third quarter of 2020, we expect total revenues of 68 million to $71 million, we expect our non-GAAP operating loss to range between negative $3 million to negative $2 million and non-GAAP net loss per basic and diluted share in the range of 14 cents to 11 cents.
This assumes a tax provision of 500000 to $700000 interest expense associated with the convertible notes of approximately $800000 and 31 point Sixmillion basic and diluted shares outstanding.
To provide more color on guidance first the low end of guidance considers the possibility of a broader macroeconomic volatility for the foreseeable future given the potential direct and indirect effects of covance.
With that said given Q2 results and what we see in the market we plan to gradually resume investments in the business for 2020.
Second I want to remind everyone that we will be more apples to apples in the second half of the year, starting in Q3, where the subscription mix was 74% in 2019.
As a result, a our our percentage growth will naturally be impacted.
In summary, our philosophy of running the business has not changed we wanted to take advantage of the opportunities in front of us in order to accelerate growth, while showing non-GAAP operating margin improvement as well as cash flow generation.
We are pleased with our second quarter result, and as we look to the back half of the year. The team is focused on executing on a strong close to 2020.
Thanks for joining us today, and we hope you and your loved ones remain safe and healthy with that we would be happy to take questions operator.
At this time, we will be conducting a question and answer session.
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Participants using speaker equipment, maybe necessary to pick up in your hands it before Christian just turkeys.
One moment, please while we pull for questions.
Also we do ask each participant in Q2, please limit themselves to one question and one follow up question as well.
Our first question is from Sterling Auty.
With Jpmorgan. Please proceed with your question.
Yeah. Thanks, Hi, guys Yaki I'm wondering if you could give us a little bit more color on your statement that the priority for spending on barone. It solutions has started to increase I'm, particularly interested I understand the environment and the demand for but is this existing budget that was already there for.
Our solutions that are now just closing deals are you seeing that companies are actually taking budget from other projects to purchase your solutions.
And please make sure your lines are.
I need it.
Yes no.
So again so.
We just saw that the after a lot of urgency form walk from home to Ed VPN capacity and you know urgency around the laptops and things of this nature and lot of the adoption of Officethree hundred 65 and teams you starting to have this just Q threes.
Go people walking remotely can access along a lot of data in many repositories on Graham and.
And the in the cloud and customers understand that in order to.
Not to have diminishing returns from this very fast the Judy digital transformation scarcity or.
The talent, they need tremendous visibility and automation and that really at this point. We are the only one that provided so in terms of the but yes, it's not.
Completely earmarked about we just see that the organizations have a lot on budget for data protection.
And inside the release can cloud.
[noise] cloud security and we can get a we can almost always weekend.
Funded Varonis project for my one of these budgets so.
It's just the you know everyday that goes by becoming.
Bigger and bigger priority and you see all do all closing the cloud connected to the on Prem and data Spall organization understand if they don't have something like that in place they have huge risk.
Well make settlement and one follow guy.
Just a little bit is around so linear, but obviously given the dynamic we would expect that to push some of the business later in the quarter, but just given the strong revenue and subscription results can you comment anything to linearity as a whole.
So there was nothing unusual in terms of linearity like similar enterprise companies, where we're we're.
Backend loaded, but there was nothing unusual this quarter compared to our norm.
Great. Thank you.
Thank you.
And our next question is from second Calumet from Barclays. Please proceed with your question.
Okay, Great Hey, guys. Thanks for taking my questions here.
Maybe maybe first for you yaki a longer term product question.
But I guess now that the transition a subscription is largely complete I think you said, a 99% mix in the quarter.
How are you sort of thinking about new product introductions in the next six to 12 months as as part of the sort of easier consumption model and what areas could they sort of touch on from a high level.
Yes, So you know philosophy the company what to do mostly innovate and thankfully willing to space. The there is just so much meat on the bone you know, though we believe the there is no ahead of us than behind the so you have.
Different platforms and also you can go very deep in each one of the use cases that.
We cater to an integration between the product so you know.
We put a lot of photons to 65 and as you which is you know massive problem for customer brings a lot on content automation and a.
Behavior of any any abnormal behavior with user behavior analytics. So really in terms of innovation, we feel that we're firing on all cylinders and the most of the areas we play on the heavy.
A lot of.
In other ways that we can innovate and adds value to our customers and also integrate all the functionalities, maybe I don't think nothing's happening is that every repository. That's starting to is a lot of data that they use a using we can apply the same.
The same game plan of the whole platform you know is datadvantage classifying Dana.
Analytics and so forth. So we feel that we can innovate to lower than we have a lot of innovation, becoming the next years.
Got it got it maybe as my follow up for you Guy.
Good to see the net revenue retention at at 120% can you just maybe touch on anecdotally a of course, what are your sort of thing from customers on gross retention and then what what licenses or perhaps driving a bitter part a bigger part of the upsell cross sell performance does it make sense.
Absolutely second so thanks for the question, we're very happy with the Q2 and are being larger then then 120% and I think it's indicative of what we've said kind of all along the fact that customers existing customers are not just renewing but our expanding and our move to subscription really allows our existing customers to.
Consume more of the platform, we see many customers by Officethree 65 licenses. There there are lot under the Datadvantage product family, whether its automation engine Theres Theres a lot of our 26 licenses offering I'm really allows our existing customers to continue to buy so overall.
I think it really reflects kind of the commentary on the environment and really the need for the platform, but also at the same time. It shows the tremendous opportunity we have to expand within our existing customer base. So over overall with where we're pleased that up with those results.
Very helpful. Thanks, guys.
Thank you.
Our next question is from Brent soon with Jefferies. Please proceed with your question.
Thank you Yaki and just curious if you could talk little more around the work from home portfolio and what Tailwinds, you're seeing there are and then for for guide just on a me Oh the growth rates on a lot slower than what you're seeing in North America can you just talk about.
How you see a fall through were coming potentially for for that region in the back happening here and what do you think needs to happen for growth accelerate thanks.
Some form for the walk from home there are several critical aspects. One is a massive adoption of 365 and teams and behind teams teams is is the client that enable a lot of collaboration on top of.
Well I'm like shell point in a lot of configuration as you read the which because our customers and you know every organization into all that use it has no visibility whatsoever, and it's much harder to manage the data protection and understand everything that's going on the other thing that we see is as you and a double U.S. yeah.
A lot of dose.
Organizations.
He walking Louise day on the is involvement turning a lot of.
A lot of workloads, there that connected to the on Prem and who are the p. and other it.
And mechanics, so open to the world and create tremendous problems for customers.
So this is something in terms of data protection and infrastructure protection that is urging for customers to.
Turning to our customers to manage and industry 65 repository to just going very very fast something that would have taken you know three four years take now six months in parallel the data is growing rapidly on claim.
The other issues that customers walking from you know from home office says that though.
Unsecured people online a lot of the time that all it a lot of advanced persistent spread this is really haven't for cyber crime. So we see a lot of a compromise the machines, it's very easy flow it sophisticated hockey very easy to bypass the endpoint in the use of space the use of permission.
Ones, though trying to access and the.
Still.
And still a lot of data so we really see that a slowdown from all of these aspects.
Organization understand that the heavy stories, but here we call. It like stationary released that is constantly increasing and they need to do something in order to fix it so philosophy the top monies that.
No.
Just the 360 fives, but we have no many licenses Dalian to classification licenses shell 0.1 drive.
It could change in and arguably be this should be dotcom sales you know we can go to customers and do fairly larger deals for the whole suite 65, and Oh you environment. This is huge and also protect the data on brand that is going all the connectivity to the cloud.
So we just see you know an environment that you need to really collaborate people accessing data from all the place in the last thing that we see Unfortunately, a lot of the times is the you know insiders employees, though.
Scale that theyre going to lose their jobs and this kind of environment, sometimes they're doing things. These data that we should end and organizations are very much afraid of we do want to make sure that they can maintain the they can.
Maintained a customers and employees and business partner data protected and they will protect their competitive edge beefing Silenor is taking a lot of data wheezing. When he leaves will you know well what four we get filed this is a huge problem for the organization. So this is another thing that.
Who sees just the you know very at times very problematic.
A behavioral form inside sales and sometimes even you know Cleveland uses administrators and Devops people <unk>.
No. This is just an environment if you don't have something like Vacone.
It's virtually impossible to protect these digital assets and go infrastructure.
Just to give some color on the second question on EMEA EMEA in Q2 actually grew 7% and if you look at kind of the history of the EMEA through a through the subscription transition when we announced the transition at the beginning of 2019, the European team was slightly.
Lower to adopt and we gave a lot of commentary on that last year. So so a and the north American team was much quicker to to adopt the transition obviously, we're starting to see now I'm kind of the flywheel effect on both territories, but we're very happy with the pipeline in Europe, we're happy with the team there.
And we feel that we have a tremendous opportunity.
To capture market share.
Thanks.
And our next question is from Rob Owens with Piper Sanders. Please proceed with your question.
Great. Thank you guys for taking my question I'm wondering if you could update us relative to hiring specifically sales capacity and if we are seeing this inflection.
Around your business do you have the capacity to meet demand in the second half and I guess to that end of this work from home environment. Maybe you can also talked about sales productivity. Thanks.
No we use we started to higher costs.
[music].
Every department in on the Conkin sales support customer success.
Engineering, we feel there is a lot of demand, but also what changed the company changed completely using Neil you know became a well most 100% subscription business, we hi renewals and they want and the platform plays really working you know we have a clear path to get menu for customers.
Oh away a to get more than a.
Then there 10 licenses and who spend more time, which then starting to see these direct correlation between the value that we give them and how much the by so want to innovate want to make sure that customer success is working really well. So just there but the short answer is that we are hiring because all the organization.
And there you know we have a great team in place in the adopted fast to working from home and so far we don't see any impact to productivity.
And just to give some color on the on the quota carrying reps.
We talked at the end of Q1 about the hiring freeze, we we continue to higher quota carrying reps or across the different geographies. Because we saw the opportunity ahead, and we will continue to do that going forward. So we feel we have the right capacity to meet demand and we will continue to do that.
Great. Thank you.
Our next question is from Matt Hedberg with RBC capital markets. Please proceed with your question.
Hi, guys. Thanks for taking my questions Yaki, you know when we talk to partners. It showed that you're increasingly being brought into deals in a post covered world anyone of the bigger drivers that we hear from this expanded use of collaboration tools, which you talked a lot on this call I'm wondering can you give us a few examples of how customers that moved to applications like Microsoft.
And so then made aware of around us and might partners start to increasingly drive demand for you guys.
Yes, so when when you starting to use extensively Microsoft teams you have you know channelling.
One dive in a lot of dating show point online.
In all of just the commission in configuration in actually be that its configuration that it's not like a human even we'll do the configuration that so hard to maintain on pretty much like the computer doing it knowing the just impossible to understand who can access what people can access.
No from outside the <unk> their organization and once you starting to have a lot of data.
Organizations I understand the Dave's zero visibility they have no ability to remediate the data to understand what is critical and they are coming to us and you know they are coming to us so a lot of organic.
Web search and where we know the working very well did you see.
We see a lot of lot of interest there and in terms of the part now I think what happened was either we the not a big impact to average sales price.
In the.
And drastic increasing customer lifetime value would be chemists subscription business, let's think about m. If they are the they Hamlin Kay and then the good the good 20 gain the next year before now is they will do you know whatever choose a number six teekay 70 K. This is what the customer will buy every year and then they can buy another 60 can another 60 case.
And you know and three years. Later this is 200 K. you very strategic customers are willing to to spend a lot of time with each so they can really implement professional services and we just see that the the partner ecosystem I understand it and they understand that this is where the market.
He is going this is a top priority for organizations. Once you install it the customers understandably really get a lot of value and we are mutually you know not contested youre coming media.
You can maintain the managing the pricing is working very well. So I think the do you know it's a market that is evolving but it's a big market customers understand the partners understand it and over time, we can get a lot of revenues former customers that most.
The time, though you know delighted with the value that we get so we don't see thankfully smoking working well for everyone.
That's great and then Guy when you guided the Q2 quarter. There was a fair amount of conservatism just stay stuff a lot of the announcing kogan, obviously, you're coming off a very strong quarter I assume July has been strong as well as you as your has your methodology on guidance change since last quarter I mean, I effectively is there.
How do you think about the potential risk of coal that are uncertainty relative to kind of how you guided the Q2 quarter.
Well to remind everyone and we've always guided in a in a thoughtful in responsible way and you're right. When we guided in Q2. The guidance was much more of an extrapolation of the end of Q1 and not so much the improvement we saw in April because there were a lot of a lot of uncertainties. When we guide and then.
It was really reflected in Q2 Q.
Q3 guidance is much more based on the Q2 customer behavior, we're really pleased with the performance we saw in Q2.
But at the same time, there's always kind of that thoughtful in responsible way in the way in the way we guide so I'm kind of if you think about the third.
A third quarter.
If there is incremental macroeconomics volatility that could impact us it's reflected in the low end of the guidance, but with that being said I can tell your I can tell you we're going into Q3 with much more confident than Q2.
Super helpful. Congrats on the results.
Thank you.
And our next question is from Alex Henderson Needham. Please proceed with your question.
Great. Thank you very much I was hoping you could talk about what the risk assessment pipeline looks like and what the appetite in the field is.
Are you still seeing a record.
Numbers.
So it's been requests and.
How does the close rates look on that and then second piece of it was I was hoping you can give us an update on the automation engine uptake rate.
You've given us a lot of detail on various subscriptions, but.
That's a key piece of it.
<unk>.
I'll try and cover all of those components first of all one thing to note and I know, we talked a lot about that throughout the quarter is that the risk assessments that we have we're holding our virtual we've done that before cobot. We're doing it now obviously all of our risk assessments now are being done versus.
But we haven't seen any impact our pipeline is really strong very healthy we feel very good about the second part of the year with the pipeline that we have generated in terms of the closing if you remember our are kind of sales cycle is between three to nine months and on the larger deals it's up to 12 month.
So as expected only a small portion of that pipeline that was related to covert was was closed in Q2.
But the pre covert pipeline was closed in kind of similar sales cycle. So we haven't seen much of a change there and that was a very encouraging.
In terms of the automation engine automation engine is consumed by customers very nicely. It's part of the Datadvantage product family. So we don't provide the attach rates, but I can tell you that part of the reason that we moved to the subscription model was because customers wanted to consume more of our licenses that were good.
Our towards automation and the automation engine was there was a big component of that we're seeing customers are enjoying the value of that product and we plan to continue to sell that going forward and customers are definitely enjoying it.
Great. Thank you very much further clarity and thanks for the great quarter.
Thank you. Thank you.
Your next question is from Shaw from Oppenheimer. Please proceed with your question.
Thank you good afternoon, good afternoon, guys congrats on the quarter.
Yaki last quarter, I've asked you about hey trends or any and you heard discounting.
Can you provide us with the latest update I think also in light of.
Commission strategy I think I mentioned, that's lost time, whereby saves people could be penalized if they provide to higher discounts so any chance on that front, what's what's the latest.
Regarding the.
I think the pricing is holding you know extremely well so.
Very surprised how well when customers already decide to buy and they understand that they needed. The just the you know the negotiating but.
Almost all the time, we get the placement that we want the pricing is really holding very very well.
And so just to give some color on the grading system that you you mentioned you're right. When we when we announced this transition at the beginning of 2019. We also introduced the grading system, where reps can make more than what they sell if they sell at the right discount or they get penalized if they're selling at a higher discount and I can tell you that that grading.
System has worked very well for us it allows our reps to do the right thing. So the company and allows them to make more money when they do things that are in favour of the company and that's been holding very well for us.
Got it got it and he actually oral garlock, another one I couldn't be little tricky.
Really long term here, so I'm talking about the road to 1 billion revenue.
You might have spoken about it and the path really some years back without committing to a specific timeframe and in the meantime model has changed coal that appear more recently it would appear access to be benefiting you.
Absent reasonable and as it can be found a are you still thinking longer term about this revenue threshold and again without commenting specifically.
To a timeframe could be seven years could 10 years, who knows.
But even get accelerated a little bit.
Oh.
Thank you think about it all the time anything that the main thing is.
No what happened with the subscription and just all the Asian and their ability to communicate so much the customer lifetime value and all you know we need less volume in order to get there I believed that we have a lot of the investments and the.
A big part of the organisation.
To that part of the organization that means to being placed in order to get to these billion dollar goal already in place anything or the fact that we moved in one year to be a.
Subscription business and you know the cloud platforms, all very well for us and regulation isn't all saving them cities Apds that.
Giving a lot of how time to just traditional security I believe that we increased drastically opportunity to get to the billion below his strategic goal and this is something that we think about 24, we said.
Thank you good luck.
And our next question is from Ams up quite a lot from Morgan Stanley. Please proceed with your question.
Hi, guys. Thank you for taking my question I Wonder if you could comment a little bit more about early pipeline trend you're seeing in Q3, and what was specifically the vision around Nok, giving a full year or I guess, you know Q4 guidance.
I think that Covisint, and we talked a lot about that through kind of the results of Q1 and.
Throughout Q2.
Covert initially at the end of March when customers are kind of focused on the work from home and the VPN. We were impacted and then we started seeing kind of the pipeline build and we started seeing kind of the purchasing pattern go back to to the normal trends that we used to CNN and I think Q2 is.
The results are reflective of those trends continuing.
With that said there is still uncertainty with Covidien. That's why we're giving guidance for Q3 I think the guidance that we're providing isn't kind of the same manner in a responsible and thoughtful way.
And where are we looking at the pipeline for the second part of the year, we're very optimistic and going into Q3 with much more confidence that we than we had going into Q2.
Got it and clearly the ANRR was really strong could you comment a little bit more about the new customer business growth.
But that still decline year on year, and when would you expect that to maybe rebound two year on year, but that's it. Thank you.
I'll started used to go to bigger customers the thousand classes.
Okay very well.
But you also have.
No massive customer base that is under penetrated the near the neither products and really balancing market penetration and the expansion and we feel very comfortable and the and fairly happy with the way that its Walton circle.
And just add to that in last year results, we still had a 56% subscription mix. So when you compare this quarter at the last quarter it still not apples to apples, but like you said the strategy is to go the larger customers and thats working very well.
Thank you.
Our next question is from Jason manner with William Blair. Please proceed with your question.
Thanks. Good afternoon, guys is there any change in the mix in the quarter between enterprise and SMB and then also.
If you could comment on average deal size and the outlook for U.S. federal for Q3.
So when we look at the strategic type customer. The we have we shifted about three years ago to customers with more than 1000 employees and the shift was mainly because conducting a risk assessment for a 400 user shopping and a 1500 user shop basically takes the same time.
Yes, obviously, the customer lifetime value from the larger customer is much greater and.
That was really the reason of us going up abandoned and being able to sell more of the licenses and have those customers consume more we obviously have a small business, but just to keep in mind. The reps there are selling to that small business and I would say about companies with less than 500 employees.
Part of their selling processes to train and improve their selling ability. So they can then move out to the to the field and sell to the larger enterprises. So we've not neglected the small business, but it's a small portion of our business and that strategy has been working very well.
In terms of federal Q3 is their largest quarter, we have very good team in place and we will obviously provide more commentary it ended the quarter.
What what happened also in the last night to for you is that the sales forces the cell campaign just becoming.
Most strategic could you know a bit simpler and much more predictable. So it makes sense for us to go you know up market.
And the spend time with these customers so the just buying much more.
Courses civilians.
And you see evidence of that in your trends on average deal size.
For the last three years.
Well in terms of a ASP is obviously with this transition it's not truly apples to apples, but I can tell you that when you think about new customers and the way they bought perpetual licenses in the initial sale they would buy between two to three licenses and what we're seeing now is that with the subscription.
Model that that we're offering new customers, they're buying closer to five licenses. So so almost double that and our existing customers. They're also they're embracing this transition and they're embracing this model and they're buying a a lot of the licenses.
The buying it through subscription so overall I would say that we're very happy with this change because it allows us to sell more overtime thought to our customers.
Thanks.
Our next question is from girls tops pads with Stifel. Please proceed with your question.
Okay, great. Thanks for taking my questions Yaki, you talked about the path to double digit licenses can you walk us through what that past looks like and then guy a follow up to that how should we think about customer lifetime value and the age of subscription. Thank you bye.
I think that.
Customer although this the you know just.
A lot of them need almost everything that we have.
So as I said you know 365, you can have these five six licenses. This is after you have five six licenses to you.
On premise environment for you know for Windows, Uniques, and classifying the data and.
All the user behavior analytics, the but we have so it's really a lot of the same functionality fully defined a defined a day to stores.
And because of the fact that we're not selling anything silo too I team a lot of it's coming from the C. So there's a policy to protect their whole enterprise, it's much easier for us to expand and will be subscription in the way the sees the platform now.
We see this you know my view a budgeting and.
Much more predictable adoption rate cause the enterprise.
And just to add on the customer lifetime value one of the things that kind of drove this transition was the fact that we saw customers wanting to consume double digit licenses.
And what we have seen over the last couple of years is is we started seeing customers getting there, but it was much much harder under the perpetual model with this shift to to subscription and the fact that the initial purchase as has been close to five which is a great number to start with for our customers because it provides them.
Our automated license at least and they can they can see the value of the product, but it also allows them to continue to to consume those licenses in the years following that and our are being greater than than the 120% just is indicative of how our existing customers are consuming more of this licenses and how.
We can generate higher customer lifetime value.
Overtime with this model.
Thank you.
And our next question is from Nick Mariachi with Craig Hallum. Please proceed with your question.
Hi, This is Nick mariachi on for Chad Bennett, Thanks for taking my questions I'm, how should we think about the or our growth for Q3 and throughout the second half the year now that we're comping off a higher mix of subscription and then how should we think about contribution from new versus existing customers in terms of the guide for Q3. Thanks.
So in terms of the a our growth one of the things that we talked throughout the year is the back is the fact that when you move so quickly.
And through this transition.
And you get closer to the second part of the year HR, our should have an impact because were starting to be more apples to apples. So we have a 74% subscription mix in Q3 2019, and they are our would obviously have an impact because it's much more apples to apples.
In terms of the new and existing customers I can tell you that we're happy with both of their contribution and if you talk if we're thinking about new customers I talked about this.
Some of the other previous questions. We're seeing increased number of licenses, which is very healthy in our existing customers with kind of the NR being a larger than the 120 is also indicative of how they're consuming I think the metric that kinda points out how much more we have to sell to our existing customer base.
Is that the number of customers with more than 500 employees, who have four or more licenses and or six or more licenses and when you look at that growth its growth, it's growing very nicely over the last year, 58% for four or more licenses versus 48% last year.
And 24% on the six or more licenses versus 16 last year, so very nice growth there.
At the same time and not less important it shows how much more we have to sell to our existing customer base.
Got it thank you.
Our next question is from Eric Supermajor from JMP. Please proceed with your question.
Yes, thanks for taking my question.
One.
Can you talk a little bit about.
Timing to get to breakeven do you have any thoughts in terms of from when we might see breakeven earnings or if you don't want to share the timing.
Can you talk little bit about your criteria for balancing between your growth investments.
How are your how you're making that decision.
A profitability is always something that is very important for us and we tied to balance not to strike the balance between.
Go simple stability, obviously, the move to subscription you really give us the flywheel to be overtime.
Much more.
Coffee volume remote would be well away and the this is something that we're going to do so we know now just a timeline, but anything that you see how we behave well always adjusting.
Spend to it the topline and but what's going on now is that if we sell that we have we this high renewal rate you our profitability in the future and just want to make sure that we can do it at the larger scale.
Okay. You also talked about how you have much higher confidence in the pipeline.
Entering Q3.
Can you can you quantitatively compared to here of the size of the pipeline from Q3 to Q2, though any metrics around that.
I think that the commentary is that the pipeline is healthy and we feel good about it we don't really quantify the pipeline, but I can tell you that going into this quarter. We are feeling more confident than we did last last quarter I think it's a it's reflective of kind of the Q2 purchasing patterns that we saw and how we've.
The increased.
In that line of customers that needed need the product and our purchasing purchasing us. So I think overall, we feel very good about the second part of the year pipeline.
Very good thank you.
And our next question is from Srini Nandury Summit Redstone partners. Please go seems just.
Alright. Thank you for taking my question guys I'm looking at.
The competitive landscape I bet.
Are you seeing any of the new vendors such as fast so out of Korea are showing up in any of your deals what about companies such as Ah you know CA broadcoms eastern are all alternatives or even proof point that have a DLP as well as kasper solutions, which are actually going after the insider threats any color would be helpful. Thank you.
Hi, no we don't see them everything related to just stay.
The data sales from any.
No I talk so data protection or classifying to scale you know we.
None couple spent time, even more Oreo.
Loan and just then we don't see.
The cost be vernola, unless the confusion. So so far we don't see any change in the competitive landscape.
Thank you.
Mhm.
Your next question is from Daniel Itas Wedbush Securities. Please proceed with your question.
Yeah. Thanks.
So my question just in regards to when you start to think about.
Licenses and some of the trajectory is this still feel like.
Tim.
Absolutely, we can get too in terms of those metrics.
For a typical customer.
I am I don't think we heard you cleared the did you ask if we can get to double digit licenses within customers.
Yep.
Yeah, I think the path to to double digit licenses per customer as much clearer now than what it was when we had the perpetual model I think the fact that new customers are consuming more in that first initial purchase and we're seeing our existing customers consume licenses through that model as well.
Has given us a way more confidence in our ability to to get a double digit licenses per customer and the adoption of 365 and also due to coffee make it a much faster because you have.
Faster adoption and customers understand that they need protection for all the data stores and we need the real protection because.
The risky.
Is a huge so this is something that accelerating this is a another like platform sale that you can go on since four five licenses.
In one chunk is an absolute on you and you see something that the big shortcuts to get those customers too.
More than 10 licenses.
Just on that point quite Bard upside with Azure Anita.
You're seeing even so the next step of the.
Cloud transition.
Is that more and more.
When you think about what you're seeing with both new and existing customers just a massive report back where you guys benefit.
This is one button, but not only that you know all the successful VPN form Oxyfuel net dogs. This is another huge one you see very sophisticated advanced persistent threats and model will enhance the will became.
So much more dangerous like you have a lot of sophistication of mid October.
Today, the though at the end of the day, 90% of the time when they are trying to get these two data and databases exposure is unstructured data. So if I look at the just the demand drivers, though this many in each one of them, becoming a stronger and stronger so it's all of them, but we threesixty.
Five you have these.
You know telematics acceleration in adoption and you see walk integrated these just the on Prem and you have this information spore then in the mix, sometimes you have Microsoft teams that.
You know increasing the security problem and this is where we really benefit that no. We we just think that we just see that customers are coming in in an absolute can buy you know for five licenses to maybe before they will be two one year and then another two and then another so this is a as I said, it's it's a short cut down.
The demand.
The demand is coming from it we will you know the demand is coming from the fact that data is below the place people accessing form home networks. There is a lot of blow them IP and you need a lot of visibility and automation. So everything that was a demand engine. Just in case can be became so much so much more.
Great. Thanks.
And we have time for one final question and that last question.
She June.
Julia with D.A. Davidson.
Proceeds question.
Hey, guys. Thanks for a sneaking in at the and I too just really quick watch.
First let your services makes decreasing totally makes a lot of sand so awful lot more onto the partners.
From your perspective, how how do you do that without having a meaningful impact on customer success or customer satisfaction, what have you seen so far.
Then on the and our our number last quarter I think you're seeing a 105% abolished for such action customers is 120% for all can you just help us understand the difference in what you provided us as an EMR last quarter versus this quarter. Thank you.
So regarding customer success customer success was a tremendous focus for us in the last year when we moved the.
A subscription and what we didn't really architected a lot of processes that can walk.
With the partner just to make sure that they can adhere to all the standouts. The that you know we demand from our customer success and it's working well for US. We managed to you know to just architect the working model will just all the checks and balances to make sure to the custom.
As a hobby the project.
A advancing a according to plan.
In terms of in our Q1 and our our showed year over year expansion of subscription era, and the Q2 and our our accounts for subscription A.R. and maintenance of perpetual and really accounts for timing.
Q2 is a much larger sample and therefore is much more reflective of the overall of the business.
Great. That's helpful. Thank you guys.
Thank you.
We have reached the end of the question answer session and I'll now turn call over to change the rest here for closing remarks.
Well, thank you very much for your interest today.
Everyone safe and healthy and we look forward to speaking with all of you soon have a good night. Thank you.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.