Q2 2021 Tufin Software Technologies Ltd Earnings Call
[music].
Greetings and welcome to the children and second quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation and then.
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Please note this conference is being recorded.
I will now turn the conference over to your host Jackie Marcus Investor Relations. Thank you you may begin.
Thank you operator, and good morning, everyone. Two been released results for the second quarter of fiscal 2021 ended June 30th 2021 earlier this morning.
If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors Dot tooth and Dot com.
With me on today's call are Rubicon tough <unk> co founder and Chief Executive Officer, and Jack will Chelate Chiffons Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.
Before we begin I would like to remind everyone that any statements made on today's webcast that express a belief expectation projection forecast anticipation or intent regarding future events and the company's future performance, maybe considered forward looking statements as defined by the private securities.
Litigation Reform Act.
These forward looking statements are based on information available to two things management team as of today and involve risks and uncertainties, including those noted and this mornings press release and tooth and filings with the SEC.
Such forward looking statements are not guarantees of future performance.
Actual results may differ materially from those projected and the forward looking statements.
Tube and specifically disclaims any intent or obligation to update these forward looking statements, except as required by law.
Please note that a reconciliation of any non-GAAP number to the most directly comparable GAAP number can be found and the tables of our earnings press release located in the Investor Relations section of our website.
With that I'd like to turn the call over to <unk>, CEO and co founder Rebecca tough Ruby.
Thank you Jackie and good morning, everyone and thank you for joining us today.
I hope that you and your families are safe and doing well.
I'm pleased to report the tooth and delivered a strong second quarter with 12% year over year revenue growth for a model transition while also exceeding our guidance for the top and Bottomline on.
Our revenue beat was largely driven by 23% year over year growth and product revenue.
Our financial results and the quarter are indicative of the strength of our team our product and our ability to generate a significant return on both time and human capital for our customers through automation and improved security.
We finished the second quarter with $25.7 million and revenue with subscriptions, representing approximately 40% of new business for the first six months, which puts US well ahead of our targeted one third of on new business bookings.
And so the subscriptions and 2021.
61% of the bookings from new logos and the first six months were subscription compared to our target of reaching 50% by the end of 2020 one.
And I'm encouraged by our progress, thus far and 2021 and I believe that we're well positioned for the second half of the year.
And we made significant progress on our business I'm also pleased with our efforts and improve our sales execution as we build on the great team that we have a twofold.
As I mentioned last quarter, we have been hard at work on aligning sales and marketing teams to ensure that we're well positioned to capture new opportunities.
Our Chief revenue Officer, Ray Brancato has made significant strides and driving these initiatives by creating a strong team with key regional higher than the Americas.
Furthermore, our customers and users inspire us to drive innovation every day and I'm pleased to report the success of our fifth annual sustaining that user conference held virtually again this year and which we brought together and nearly one two from customers and partners to hear about security policy automation and our plans for the next 12 months.
The second quarter with a marked improvement for us and provides proof that our shift from a perpetual to subscription license is working but for us and for our customers.
Before I discuss some of our recent customer wins I'd like to now turn the call over to Jack for a deeper discussion of our financials and Jack.
Jack.
And you Ravi well.
We're continuing to make good progress on our initiatives and we remain on track to successfully execute on our transition.
As many of you know we started our shift to a subscription based revenue model beginning in the first quarter of this year and as I mentioned before this shift will allow us to have greater predictability and visibility into our business.
To remind everyone on the call today, we will be providing <unk> on an annual basis since it may have variability between quarters at our scale.
As Louis mentioned earlier, the indications from our sales teams combined with our progress on the percentage of new business bookings coming from subscription gives us confidence and our ability to achieve our annual guidance and long term growth, let's discuss the second quarter results.
Total revenue was $25.7 million and Q2 of 2021, which is 12% above Q2 of last year.
Product revenue increased 23% year over year to $9.7 million.
Maintenance and professional services revenue was up 6% to $16 million year over year.
On a geographic basis Americas represented 46% of our revenue Europe represented 46% and 8% came from Asia Pacific.
On a sector basis financial services and insurance providers represented our strongest industries during the quarter with secondary strengths from business services and consulting customers.
The complex nature of these businesses necessitates a complete solution that is driven by inflammation.
Moving to margin and expenses I will discuss our results based on non-GAAP financial measures.
Gross profit for the second quarter was $25 million or 80% of revenue compared to $18.7 million or 81% of revenue in Q2 of last year.
Our operating costs for the quarter totaled $28.1 million.
Up 21% compared to $23.3 million and the year ago period.
R&D expense for the second quarter was $9.2 million or 36% of revenue compared to $6.9 million and 30% of revenue in Q2 of last year.
Sales and marketing expense for Q2 was $13.8 million or 53% of revenue compared to $12.6 million or 55% of revenue in Q2 of last year.
G&A expense for Q2 was $5.1 million or 20% of revenue compared to $3.7 million or 16% of revenue in Q2 of last year.
I would like to remind you that in Q2 of 2020, we took some cost reduction actions, which impacted our operating expenses in Q2 and Q3 of last year.
Following that we saw a continuous improvement and the business and the third and fourth quarters of last year and resumed hiring again and returned to pre COVID-19 compensation level operating loss for Q2 was $7.6 million compared to an operating loss of $4.5 million and Q2 of last year.
Net loss for this quarter was $8.2 million compared to a net loss of $5.2 million and Q2 of last year and net loss per share basic and diluted was <unk> 22 cents for Q2, this year compared to 15 and Q2 of last year.
Turning to the balance sheet and cash flows.
During the quarter cash flow from operating activities was a net outflow of $11.2 million.
Versus $11.7 million and the year ago quarter.
We closed the quarter with total cash cash equivalents restricted cash and marketable securities of $101.9 million down $2.1 million from the beginning of the year. We believe we remain well positioned to continue to pursue the strategic transition to subscription while continuing to serve our existing customer base.
We are managing our cash well and are actively investing in both our people and areas and which we believe will help expand our suite of products and services in the coming quarters, turning now to guidance for the third quarter and full year.
For the third fiscal quarter of 2021, we expect total revenue to be between $23.5 million and $27.5 million and non-GAAP operating loss to be between $10.3 million and $6.9 million.
For the full fiscal year of 2021, we expect total revenue to be between 105 and $113 million.
And non-GAAP operating loss to be between 34 and $23.6 million.
We are continuing to improve our business operations and efficiencies and I'm happy to see our continued progress and reducing our expected operating expenses for the year.
With that I'll turn the call back over to Ravi Ravi.
Thank you Jack.
With all of you have seen recently hackers and bad actors have not wasted any time and going after organizations of all sizes and various ways and most visible being the recent ransomware attack and cassia and its customers.
The security challenges that large enterprises and organizations face are only getting worse and malicious actors are well positioned to attack any company.
While this is the current state of security and parallel many large companies are looking for ways to achieve digital transformation and accelerate their transition into the cloud and.
The second quarter, we released <unk> orchestration suite, our 21 day or two which contains significant new capabilities around automation and software defined networking and axis decommissioning.
With version R..21 has to we now have deeper integration with Vmware, enabling vmware too from customers to automate more types of changes and their environment and to troubleshoot connectivity problems that we encounter.
We've also added automated access decommissioning that streamlines the process of removing underlying rules and network objects. Once access is no longer deemed appropriate or necessary day.
Commissioning access is typically a complicated task that requires visibility into the implications of potential changes to avoid break and valid connections and disrupting applications.
Two of and customers now have controlled and well documented method of removing access ultimately minimizing the risk of outages, while maintaining the highest security posture.
We also released another app on the tusa marketplace called the rule lifecycle management App. This app simplifies and manages the rule review and recertification process by automatically identifying expiring or expired and network rules and mapping them to their owners, enabling a simple recertification or decertification of axis.
Yes.
I would now like to highlight some of the interest and deals that we saw on the quarter.
The first one was a large financial institution, which is on twofold for several years now.
Last year, the expanded from secure track and to automation with secure change, including and integration with service now for their workflow.
We've been able to successfully automate their network change process and that resulted in their expansion to use secure track and secure change last quarter to also monitor and automate changes and their cloud environments as well as an initial purchase of secure app to manage access control between applications.
Another significant deal this quarter was with a large bank debt. So our help to solve their limited visibility and lack of control.
They had a firewall vendor that was failing and caused a large outage across the entire organization and they were in the process of migrating to another firewall vendor.
There were also using <unk> and competitor that was not providing enough value.
We're able to demonstrate our ability to manage policies across their entire infrastructure and even an uplift safely migrate from one vendor to another.
Their key needs, where the ability to automate network policy changes across the complex and fragmented infrastructure as well as and their cloud environment.
This is both from new logo and a subscription win for <unk>.
And in addition, during the quarter, we closed a unique opportunity with a large financial services technology company.
Their team lack visibility and could not manage their network infrastructure efficiently and needed a solution that was both cloud based and on premise.
The customer ended up purchasing secure track insecure change.
And what's interesting about this customer is that they are a fast growing company with about $500 million and annual revenues and several thousand employees clearly below the global 2000 low steel was found on closed by our inside sales team and four months for an annual subscription of over $200000.
And it underscores the potential that we have beyond the global 2000, and while we're very focused on the high end of the market in terms of functionality and scalability.
More than one third of our business today comes from accounts below the global 2000, and we believe there is a significant opportunity for <unk> and the mid market as well.
Before we open the lines for questions I want to reiterate and I'm happy with our progress on our stated goals. The heightened state of awareness around cyber security has magnified the importance of using software from clear market leaders that have the resources and capabilities to protect our own IC operations.
Our products standup to the challenges of today and the potential threat of Tomorrow, we will accomplish our goals with the support of our dedicated employees customers investors and other value stakeholders and I'm excited about the next chapter of Tucson is a recurring revenue company.
And now I'd like to turn the call over to the operator to open up for questions.
Operator.
Thank you.
At this time, we'll be conducting a question and answer session.
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Our first question comes from Catherine <unk>, Nick with Colliers. Please proceed with your question.
Thanks for taking my question and nice quarter, Yeah could you more elaborate more on the mid market.
Yes.
Alright, sure and hear me.
Yeah. Thanks.
Yeah elaborate more on the mid market and how your sales plans are to reach that market and then little bit on are these new regional managers hired and the last quarter have been hired over the last six months and spray spin on board. Thank you.
Okay.
Hi, Katherine Thanks for the question so.
And so far I've been focused primarily on the global 2000, and we have a field sales managers, we have named accounts.
And we have and inside sales team thats been handling the mid market, but frankly quite small team and we have and invested a lot and and so that's an area of growth for us moving forward.
And on the new sales managers, we replaced some of the sales leaders and the U S and we're happy with the people we have on board right now and.
And it's part of the changes that are.
Ray has been instituting since he came on board.
Alright. Thanks.
Yeah.
Thank you. Our next question comes from Adam Borg with Stifel. Please proceed with your question.
Hey, guys. Thanks, so much for taking the question.
Maybe really just for you and you talked a little bit about this and the prepared remarks, but I guess just given the threat landscape and just the overall increase and fragmentation of networks I guess in your conversations with customers and prospects, where does security policy bags and automated automation really state in terms of other competing cyber security priorities. Thanks, so much.
Hi, Adam and thanks for the question. So I think security policy management and security policy automation is high and its priorities and.
We're seeing a return to.
Interest levels that we've had pre COVID-19 at this point.
And so theres a lot of need for what we do especially as people want to automate their change process and they realize that it's very difficult to.
And to manage their network effectively without sounding like Cooper.
Obviously, we don't solve every cyber security challenge and people have various priorities, but we see the need for what we do coming back after obviously a difficult year and 2020 the.
The demand is now back to where it was pre COVID-19 levels.
That's really helpful and maybe just a quick follow up.
It's been great to see that like on the handful of apps or so that you've released on the marketplace and I was just curious kind of which of these apps do you think we should focus on in terms of where you think you'd see the most interest over the call. It. The next six to 12 months and if you can just remind us what kind of uplift these apps provide.
From an IRR perspective relative to call it the baseline and secure track offering and thanks again.
Sure So I think the.
And if theres various apps.
And so we released on the marketplace. The one that probably has the biggest near term potential as the BMA and the vulnerability mitigation app.
Which competes with some of the things that other vendors have done on the space.
And so it's on entry our entry into looking at vulnerability management and prioritizing vulnerabilities a lot of customers have asked us to and the capability and and now we've added debt with this app on our overall all of these apps the ones that are paid for the role on an annual subscription basis. So they are all additive from an IRR perspective and.
We have a lot of interest from customers so far.
Thanks, so much.
Thank you. Our next question comes from Shaul Eyal with Cowen. Please proceed with your question.
Thank you.
Hey, guys. Good morning, good afternoon.
My first question and movie or Jack is about hiring.
And how did your hiring numbers during the past six months back against your initial plans are you and line ahead or behind and I have a follow up.
Okay.
Hi, Sean Thanks for the question so.
And so far it's been a mixed bag, where we're hiring aggressively it's hard to fight and talent.
So many cyber security companies that are.
And they're trying to hire people right now so it's been challenging but we've been we've been meeting and our numbers, but it's not easy.
Got it got it.
And maybe on on top of that.
What is maybe the one or two points worthy of note that ray is doing differently since joining too thin.
That wasn't present prior to his car.
<unk> Board.
So theres a lot of things that raise focused on I think.
What we're doing is low.
More than anything else is the alignment between sales and marketing.
To drive better go to market processes. The programs the campaigns. The sales plays we're simplifying and improving some of the processes.
And there is and executive sponsorship program to engage with key decision makers. So it's a variety of things, it's not one or two things that really make a huge difference, but it's many different initiatives that we're driving with ray and so on the other executives of <unk>.
Got it good job. Thank you Robby.
Thanks, Joe.
Thank you. Our next question comes from Jonathan <unk> with Baird. Please proceed with your question.
Yeah, Hey, guys congrats on the execution.
I'm wondering if you can.
And talk about facility.
Some of the issues that you had last year just in terms of qualify idea on obtaining financial commitment.
Some of the improvements you've seen a lot of those.
Thanks.
What has changed and how you see that playing out as we go it's a debt.
For the rest of the year.
Hey, Jonathan Thanks for the question. So overall I think there is just an improvement of <unk>.
The attitude of buyers people are opening up their opening new projects theyre coming back and projects that were frozen.
On the sales cycle is shorter so we're seeing the processes get faster the time that it takes.
For various stages and the sales process and shorter than it was before.
And so.
And we've learned how to do this virtually and some cases, we're meeting people physically but now.
Customers are coming back in terms of demand to where they were before and the processes are no longer taking as long as they did in 2020 I don't know if that answers the question fully or if you wanted to focus on other areas.
Yes.
And.
Maybe you can give us some some color on what youre seeing and in terms of how renewal rates.
And <unk> and that also I think important would be.
And maybe some color on the percentage of new business that you see coming from subscription and term in the quarter, how that's progressing.
Yeah, Hi, this is Jack.
No.
First part of the question renewable trends there are no changes, we've been saying, we're above 90% renewables and were in line.
And with what we've been saying and Thats going on at the same levels.
For the second question, Yes, and we will go back to the beginning of the year. We said that we are targeting one third of our business to come from subscription we gave the update and the first quarter and now on the second quarter were sharing that we.
Around 40% of our new business coming from subscription on.
On a comparative level software and Thats for six months. So we're looking at the first half we are well ahead of this role and we're very happy with this.
We'll also share debt.
Early on the year, we share that we're expecting to have at least half.
Of our new logo business coming from subscription so I can share debt. We're also on target.
On this metric as well.
Okay. That's helpful. And then just a final quick question I have just large deal activity you guys opt and benefit from some bigger transactions and profit growth was quite healthy and can you just touch.
Touch on that day, but whether that influence that growth.
Sure. So yes, we have seen a return on some large deals.
Still not at the level, where it was if you look at the first couple of quarters of 2019, but there are several factors that are influencing large deals from our perspective and part of it is the move to subscription. So when we're looking at deals that previously would have closed.
And the perpetual deal some of those deals are not closing as one year deals. So obviously there is if you think about it some headwind in terms of.
The large deals, but we've had seven figure deals this quarter, we had quite a few six figure deals. So we're seeing more large deal activity and we expect moving forward fewer large deals as we move to subscription because the ASP is going to go down as we're looking at one year deals.
Right, Okay understood. Thank you.
Thanks.
Thank you. Our next question comes from Jonathan Ho with William Blair. Please proceed with your question.
Hi, Good morning, I, just wanted to understand a little bit better the guidance that you provided for Q3, and Q4 and sort of the linearity. That's implied there. It seems like you raised guidance for.
For the full year on but I think the Q3 guidance was maybe a bit below the consensus and so is this.
And the share of timing.
Can you just to understand sort of and how the pattern maybe deviates this year relative to last year.
Hi, Jonathan sure so.
Q3, we didn't guide to Q3, so analysts had all sorts of numbers and there from our perspective, we have a very regimen and process of how we're guiding it's based on our forecast and we're comfortable with the guidance for Q3 and for the year.
And in general and we're looking at Q4 and the entire year. The guidance is based on an annual outlook and pipeline Q4 is always our biggest quarter. So at this point there is all sorts of factors and when we look at Q4.
Large deal closes the mix of multi year versus one year.
So we're comfortable with the guidance that we gave for both Q3 and the year.
Okay. So theres no.
Deliberate change or or something thats offer and expectation standpoint.
Shifting business more to the fourth quarter than the normal I just wanted to verify that.
Yes, that's right.
Okay, and then in terms of on.
And I guess to the perpetual to subscription shift it seems like you're executing well ahead of plan here can you give us a sense of.
You originally were targeting sort of 50% like how do you think about sort of the opportunity set now that you are tracking well ahead of that expectation and.
Or are you sort of shortening the timeframe to reach the end goal at this point.
Hi, Joe This is Jack so originally and we shared when we moved to subscription we share that we're looking at 11 and 12 quarters of transition to be able to have the vast majority. We said that we don't expect 100% transition and some of our customers will still want to consume perpetual basis, but the very vast majority oil and gas.
B at this space, beating our internal Kpis on on this transition.
And can be shortened by a couple of quarters and the impact is going to be.
Felt and and.
Growth right. So once we have a substantial part of our business being subscription we can see thereafter accelerated growth driven by the new models. So this is one impact that can happen and it can happen instead of like 12 or more quarters out it can happen earlier.
It's difficult to see.
Orders with meeting this number two quarters.
A little bit early to say.
That's going to be a trend like where like 20% ahead.
And when measuring those kpis and if this 20%.
Consistent that persists.
And then you should take a couple of quarters out of the plan and expect the transition of the vast majority 900 and quarters, but its early to tell two quarters only and hopefully this is going to be.
<unk> and <unk>.
Even overachieve.
Fantastic Congrats on the channel quarter. Thank you.
Thanks.
Thank you. Our next question comes from Rob Owens with Piper Sandler. Please proceed with your question.
Yes, thanks for taking my question.
And with the accelerated shift to subscription.
And maybe help us a little bit with what that revenue headwind looks like on a year over year basis. So if we were at the same levels of perpetual that you weren't on June 20, what what the growth might have been.
Okay.
Yeah, Rob this is Jack.
We did not share that.
Impact or actually the headwind at the beginning of the year and we said it's difficult for us to calculated and.
And still now and only two quarters into the strategies and actual reported and happened to the transition it's difficult for us to calculate the headwind per day.
Full year, there are a few factors.
It's going to impact the headwind the pace of.
Transition to subscription obviously as being the main factor, but then we also have the mix of multi year deals versus single Euro deals, we expect less to no headwind when we closed on multiyear deals and we had.
Substantial multi year deals.
For the first half of the year, we said we have a balanced.
And our fair share of multi year deals if you like out of total so this valuable makes it difficult for us at least as we start on the this out and started early this year.
Create the mechanism on the formula for calculating the headwinds. This is why we did not share. It. Nevertheless, we did say that we're expecting.
And impact of several million dollars for the full year 2021.
Moving from the transition.
Great and I understand Theres theres term their SaaS theres, a lot of different moving components, but if you could unpack a little bit relative to the balance sheet and deferred revenue.
Why it declined more I guess Q2 versus Q1 this year as compared to last year, especially on that short term category. We just assume that with the shift to subscription we would see more carved out too.
And to the balance sheet. So maybe help me with some of those mechanics on the deferred revenue line.
Yeah. So yes, there is a good point I think it's good to clarify that you should remember that subscriptions accounted for just like a perpetual deal in terms of accounting, we apply $6 six.
Which requires a full recognition of the product.
The license part and only the support part of the Swift subscription gross deferred revenue and is recognized over that so subscription versus perpetual there is no change in accounting.
And it contributes to the first and the same mechanism that perpetual contributes obviously subscription deal single year deals that are going to be smaller.
And that's the headwind question, but in terms of the accounting it has the same <unk>.
And as <unk> of impacting license recognized revenue versus deferred revenue, so thats not a change your price.
Youre, referring to SaaS, where you should see a bigger impact on deferred revenue and to the other question of why the decline so I did it decline.
We did not share numbers, but when you think on deferred revenue. If we hadn't had this low year in 2020. So obviously this had an impact.
On the on the.
No deferred revenue coming from services, that's added to the deferred revenue and other moving.
Factor is going to be the PSP is can fluctuate between quarters and depend on it depends on delivery of PFS.
And this can be lumpy between quarters and have.
Impact on the surgery.
Alright, thank you for the color.
Thanks, Rob.
Thank you. Our next question comes from circa Calia with Barclays. Please proceed with your question.
Hey, guys. Thanks for taking my questions here.
Jack maybe maybe first for you.
You mentioned and sort of multiyear vs versus annual annual deal can you just talk about maybe how how different the multiyear mix was this quarter versus your expectation and then secondly, just remind us how the Rev. Rec there works on a multiyear deal versus an annual <unk>.
Neil.
Sorry, there's a lot there does that makes sense.
It does makes sense I'll happy to address both pieces.
And so on the mix itself.
Just to give you a color were and when you originate and <unk>.
<unk> wise, we are around 60%, 40% single versus multi year.
Otherwise, 60% being single, 40% being multiyear obviously for counting deals because of the large deals on multiyear deals then it's much more vast a single.
Deals when you are counting deals and not the right. So that's the first part I hope discoveries.
And if any color on on what you are asking.
And then.
And you are asking about how this hit the book in terms of revenue how is it recognized so let me I'll give you an example.
On a single Euro deal.
As the recognized just as a perpetual deal based on 606, so think of the.
100, 100 dollar deal subscription single year, you would see approximately 70% going to license 30% going to.
Services maintenance and thats going to be recognized over the.
And the term of the contract.
And thats going to be a three year deal at $300.
100 than the 300 dollar deal is going to be recognized again, just like a multiyear perpetual and the multiyear maintenance and a perpetual deal youre going to see out of the 300 around 45% going into the license into the product and 55% going into the maintenance and that's going to be recognized over the 36 months.
Okay got it got it and maybe just a clarification there. It's a very helpful by the way, but just to clarify how did that 60, 40 mix sort of compare versus your expectation and the quarter, meaning how much because the revenue came in above the high end on the guide, which is which is great to see I'm just curious if the multiyear mixed here was maybe.
One of the factors to consider.
And against our plan I think we share this in the past socket and we said that we're expecting a balance of 50 to 60.
So it's a little bit ahead, but it's not.
And double what we expected.
Okay got it very helpful. Thanks, guys.
Thanks.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to will be Qatar for closing remarks.
Thank you operator as I mentioned in my remarks, we're achieving our targets and continue to execute on our strategic objectives, we believe our products and services standup against today's and Tomorrow's challenges and rise above the competition.
We look forward to updating you on our progress on our next earnings call. Thank you all for joining today.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.