Q3 2021 Tufin Software Technologies Ltd Earnings Call
Greetings and welcome to the <unk> third quarter fiscal 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keeps.
Pat.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Jackie Marcus Investor Relations. Thank you you may begin.
Thank you operator, and good day, everyone. She's been released results for the third quarter of fiscal 2021 ended September 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 two dot com.
With me on today's call I really can talk to the co founder and Chief Executive Officer, and Jack will Chelate, two Sims Chief Financial Officer.
This call is being webcast it 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 in today's webcast that express belief expectation projection forecast anticipation or intent regarding future events and the company's future performance may be considered forward looking statements as defined by the private Securities litigation.
And Reform Act.
These forward looking statements are based on information available to <unk> management team as of today and involve risks and uncertainties, including those noted in this morning's press release and <unk> filings with the SEC.
Such forward looking statements are not guarantees of future performance actual results may differ materially from those projected in the forward looking statements.
Two of them, 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 in 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 really could top movie.
Thank you Jackie and good morning.
Everyone and thank you for joining us today.
I'm very pleased to report another good quarter that demonstrated our ability to serve our current customers. While also adding several significant subscription deals during the quarter.
Our third quarter revenues grew by 9% year over year.
It was largely driven by the 17% year over year increase in product revenues.
We also surpassed our guidance on both the top and bottom lines, what puts us in a strong position to close out the year.
We finished the third quarter with $28 million in revenue with subscriptions, representing approximately 46% of new business bookings for the first nine months of the year against our targeted one third of all new business bookings being sold as subscription in 2020, one with the majority of subscription deals being multiyear deals.
81% of the bookings from new logos and clothing hardware and professional services in the first nine months for subscription compared with our target of reaching 50%.
The end of 2021.
As I reflect on our third quarter.
Made significant progress across our strategic initiatives, we completed the key hires to round out our sales management and we sell more organization is emerging from the challenges of the pandemic ready to invest in their network security solutions.
Discuss our latest product announcements from this morning, and some of our recent customer wins I'd like to now turn the call over to Jack for a deeper discussion of our financials.
Jack.
Thank you Ruby.
We mentioned, we're pleased with our performance in the third quarter as we made continued progress towards our initiatives in subscription based goals.
We're happy with the positive momentum in new business bookings coming from subscription paired with a strong sales pipeline as more companies look to invest in their network security.
As a reminder, we plan to provide a R or on an annual basis since it may have variability between quarters and do plan to share. This metric on our next earnings call.
Let's discuss the third quarter results.
Total revenue was $28 million in Q3 of 2021 which is 9% over Q3 of 2020.
Product revenue increased 17% year over year to 11 $7 million, well maintenance and professional services revenue was up 4% to $16 $3 million.
On a geographic basis, the Americas represented 57% of our revenue Europe represented 36% and 7% came from Asia Pacific.
On a sector basis, we saw a greater percentage of revenue come from financial services and energy customers during the quarter with secondary strengths coming from telcos and healthcare customers.
Moving to margins and expenses I will discuss our results based on non-GAAP financial measures.
Gross profit for the third quarter was $22 $6 million or 81% of revenue compared to $21.6 million or 84% of revenue in Q3 of last year.
Our operating expenses for the quarter totaled $28 million up 24% compared to $22 $6 million in Q3 of last year.
R&D expense for the third quarter was $8 8 million or 32% of revenue compared to $6 $8 million and 27% of revenue in Q3 of last year.
Sales and marketing expense for Q3 was $14 $4 million or 51% of revenue compared to $11 $9 million or 46% of revenue in Q3 of last year.
G&A expense for Q3 was $4.8 million or 17% of revenue compared to $3 $9 million or 15% of revenue in Q3 of last year.
The increase in operating expenses is attributable to the return to pre COVID-19 compensation levels and higher commissions paid as a result of higher bookings.
It is important to note that the increased expenses also reflect the investment in those strategic initiatives that further strengthen our technology platform and enhance our current and future product and services offerings.
Everything loss for Q3 was $5 $4 million compared to an operating loss of $1 million in Q3 of 2020.
Net loss for this quarter was $6 $3 million compared to a net loss of $1 $2 million in Q3 of last year and net loss per share basic and diluted was <unk> 17 cents for Q3 of this year compared to three cents in Q3 of last year.
Turning to the balance sheet and cash flows.
During the quarter cash flow used for operating activities was $8 $7 million versus $4 5 million in the year ago quarter.
We finished the quarter with total cash cash equivalents restricted cash and marketable securities of $92.9 billion down $11 $1 million from the beginning of the year.
I will finish up with a discussion of guidance for the fourth quarter and full year.
For the fourth fiscal quarter of 2021, we expect total revenue between $30 9 million and $56 $9 million and non-GAAP operating result between $4 $9 million loss and zero point $2 million profit.
For the full fiscal year of 'twenty or 'twenty, one we expect total revenue between $106 million and $112 million and we expect non-GAAP operating loss to be between $27 $4 million and $22 $3 million.
We are keenly focused on growing older business, particularly through subscriptions and new logos and believe we're well positioned to execute on our plans.
With that I'll turn the call back over to Ravi movie.
Thank you Jack.
The expanding complexity of today's businesses combined with the increasing sophistication of security breaches.
Need for network security solutions like Tucson is more critical than ever before.
And as we saw with the recent outage at Facebook simple network configuration changes can have serious implications, if they're done without monitoring and without following a well defined policy.
We're hearing more and more from customers and prospects that it budgets are increasing their allocations to network policy and to automation Keith.
Key considerations for our customers today are preventing outages mitigating potential threats to it infrastructure and implementing the U S government best practices against ransomware.
Earlier this morning, we announced our latest product offering the <unk> orchestration suite, our 'twenty one dash III.
This represents an important milestone for both <unk> and our customers with several key pieces of new functionality.
First we've added support for Zee scalar cloud firewall to centralize and simplify sassy policy management.
We've seen a lot of requests for this from our customers with Zscaler, providing more features and competing directly with traditional firewall vendors.
We've also added a new security policy dashboard to provide real time insights into operational security and compliance data that's collected by twofold.
The dashboard highlight security policy violations expired and then certified access rules and policy optimization recommendations.
Finally, with our 'twenty one that's three users can leverage to secure change workflows to automate data center migration by cloning security policies from the old datacenter to the new one and removing obsolete networks from the policy.
These workflows also support data center migrations to the cloud, which are becoming more common.
With Tucson orchestration suite, our 'twenty one that's three we're extending our technological leadership and answering more of a critical means of large enterprises.
Let's spend a few minutes discussing some of our recent deal activity from the third quarter.
The first one is a large diversified utilities company that wanted to increase the efficiency of network operations reduced downtime during changes and automate its compliance reporting and analytics.
They are subject to the Newark regulation and a failed multiple critical infrastructure protection audits as a result, they received finds for every failed audit and we're going to spend a substantial amount annually on manual policy cleanup.
We secure track two of them will help this customer ensure continuous policy compliance and reduce audit preparation time, ultimately, resulting in significant cost savings.
In addition, there were making changes manually to their network security infrastructure, which significantly delayed <unk> projects, including the implementation of a new multibillion dollar electrical grid.
By providing streamlined workflows and change automation and secure change with end to end provisioning the increase their productivity by accelerating change design and delivery, allowing ITE engineers to focus on more strategic operations.
This was also a multi year new logo subscription win for tubing.
We continue.
To expand our presence in Asia Pac this quarter. When the addition of a large financial services customer.
With many entities and offices across Asia, this customer needed a proper process and a solution that could dynamically manage and track is configuration changes against the consistent policy across the entire organization.
We also wanted the ability to easily rollback of change in case that down in there.
While policy management across multiple offices in geographies can create complications tubing was able to dramatically improve the efficiency of their operations.
Flexibility of our architecture, and our ability to integrate with ample blocks presumed management further strengthened the value that we were able to offer them.
This new logo subscription purchase included secure track secure change and the new iPad security policy marketplace, App, which provides strong confirmation of the many opportunities that lie ahead of us in this region.
The last deal I'll mention today is the expansion of an existing relationship with another large energy company that has spent over $3 million with too thin over the past few years.
They've been migrating from checkpoint or Palo Alto and our security and network teams have been short staffed with difficulties to retaining and recruiting talent. So they couldn't keep up with the demand of the business.
Following the colonial pipeline heck, they needed to prove compliance with regulations to the federal government, which only increased the pressure on the network security team.
With secure track, we can ensure tight security posture and easily prove compliance with regulations to the authorities.
The expanded full use of secure track from two business units into three and are now looking actively at secure change for automation as their next step with too thin for all three business units.
As you heard today were making significant progress in shifting our business to a subscription model.
We are seeing positive momentum in a variety of industries and geographies. While also launching critical capabilities that help keep organization safe from outside threats.
I wish to thank our team members for their hard work as we continue to deliver significant value for our customers.
I would now like to turn the call over to the operator to open the line for questions.
Operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up there.
Handset before pressing the star keys in the interest of time, we ask that you each keep to one question and one follow up one moment. Please while we poll for questions.
Yeah.
Thank you. Our first question comes from the line of Sterling Auty with J P. Morgan. Please proceed with your question.
Hi, This is elected Umpqua sterling.
Can you help me understand what's the mix of business from the subscription was this transition in both the months of a new willingness as a new customer.
Yes, Hi, this is Jack.
Like we said he said that.
6%.
Oh.
Business coming from subscription.
Coming from new customers and from existing customers.
You said that for new customers.
Majority of it coming from.
Hello, New logos.
In terms of how much.
New business.
We kicked off our pro <unk>.
Yes.
So the majority of it.
You're going to be subscription deals that we've done this year.
He was looking for.
Yeah.
Okay.
That's going to be around.
30%.
And then the 70 to 80.
80% of them to be.
Yes.
Okay, and then maybe.
Small one.
Our holiday you're seeing the hiring plans going on like you mentioned about the bottler doing checkpoint antibodies do like reading the Lindbergh.
Is that going and.
And on your friend and have you seen an improvement from the previous quarter.
Can you clarify the question are you asking about the.
Acquisition of customers or acquisition of talent.
Acquisition of talent.
So for US you know, where we're investing heavily.
Both on sales front and also on development.
The economy right now is booming, especially in Israel. The high Tech sector is very competitive.
So it's difficult to find good engineers, but we are investing in hiring so there's.
Theres no changes to our plans from that perspective.
Thanks, a lot guys.
Thank you.
Thank you. Our next question comes from the line of socket Calia with Barclays. Please proceed with your question.
Okay, Hey, Ravi Hey, Jack Thanks for taking my questions here how are you.
Good.
Maybe just start with you.
You know some far wall vendors have been talking about more refresh coming and generally it feels like firewall spending has been strong on the whole.
The question is in your experience how does how do the policy management tools behave and those types of backdrops, meaning it.
Does demand typically lag performance in firewall or is it something that we are seeing the strength come through now I would just love some context on sort of what you've seen historically between policy management demand and firewall demand.
Sure. Thanks that good so the two are not directly correlated if you first of all we support not just firewalls, but in general segmentation technologies, including AWS Azure Vmware NSX Cisco ACI, so it's broader than just virals, but.
Think of firewall refresh cycles, we're selling into a broad installed base of let's say the left.
Two five years of purchases. So the fact that somebody is going through a refresh does not increase.
The installed base that dramatically what it does influence that is if there's major purchases. So if somebody's for example, moving into a new data center or Theyre moving between vendors and they.
They are buying a lot of new infrastructure that just happens to be a major ticket items. So if they are spending.
$20 million, let's say on refresh they have budget that they can use so it's more of an opportunity to get some budget less than not.
Not necessarily okay, we have a lot of new infrastructure that we need to support them.
So in the past, we haven't seen major upticks or downtick, whether it's you know right before refresh or right. After.
There's some budget that opened but it's not a significant driver for us.
Yeah.
Okay got it that makes sense.
Jack maybe for my follow up for you and apologies if I missed it in your guidance commentary, but can you just remind us what your goals are for subscription mix bye bye.
Right for next quarter and I, just wonder could we actually see that mix you know, maybe just be a little volatile, particularly for Q4, because that's when you typically see that.
<unk> demand for perpetual.
Yes, sure. So maybe I'll just take you back to the beginning of the year, when we announced the move to subscription we said that that early point and you'll remember that we announced the transition of the proactive transition as we announced it also internally right would not come with a lot of.
Mileage before that so we estimated that we're gonna transition around one third of our business for new business to subscription in 'twenty 'twenty. One this was the initial.
Expectation.
With more coming from Utah, obviously.
This was the case, we did even better than the first two quarters in Q3 was so much more.
Subscription business from a new business and as you saw we reported 46% on average versus 33% with Q3 higher than that.
For Q4, we think and we're looking at the pipeline right looking at the pipeline, we think that this trend of.
Majority if you like of our new business coming from subscriptions are going to continue. So you know were 46% now we we may end up equal or a little bit higher for the full year.
Okay, and if I can actually just sneak one more in maybe for you Jack just to just to make sure. It's asked you know I think the revenue guide here for Q4. It was just a little bit wider than what we've typically seen I think of the 6 million spread.
I mean, I think we can guess what why that is but just love to hear you you kind of comment on on why the wider guidance range here in Q4 for revenue that is.
Yes, I mean like I said before we have a lot of multiyear deals in our subscription business right as we've subscription I think I mentioned this on the first question.
Well to you.
So again, we still have large deals even though a lot of it is subscription and the variability in the suite deals that we felt in the perpetual model still exists in the subscription model. So far at this point.
And since you were looking at the pipeline we have a.
At least of those deals we were careful.
I think our guidance, while we believe in our guidance we wanted to be.
In terms of.
Being within the guidance if God forbid some of your deals would slip.
This is the right guidance.
Very helpful. Thanks, guys.
Thanks.
Thank you. Our next question comes from the line of Charles <unk> with.
With Cowen and company. Please proceed with your question.
Thank you good afternoon, Ruby and Jack.
It would appear that customers are most receptive of the shift to a subscription model.
Are you seeing some resistance.
Other customers are 19, more reluctant and if they are reluctant why that would be the case.
Hi, Shaul. Thank you for the question so.
There were not yet converting the existing customer base on math, so we're not doing that proactively although we're keeping that option for the future. The sales forces very incentivized to sell subscription obviously, so we are seeing more and more existing customers.
By subscription as well we've been positively surprised with several accounts, where the sales team was actually able to transition that perpetual renewal into subscription account that's part of the new business expansion. So we're.
We're not proactively trying to move them at this point, but we're actually seeing positive.
Positive movement, there and Oh, if we do decide to transition everybody as in all of the existing perpetual accounts, then we'll reexamine it but at this point, we're not seeing strong resistance yet.
Understood understood and Ruby I was a little late to the call. So apologies in advance of the point was address that.
Any supply chain constraints that you might have seen.
Absolutely.
I'm not really I mean, we have our appliances that some customers decide to purchase we its an option. Some people can deploying appliances. So we've had a longer shipping times, but we've taken that into account, we're ordering a lot more appliances, a lot earlier and we're able to manage that.
Got it understood. Thank you so much I appreciate it.
Thanks, Phil.
Thank you. Our next question comes from the line of Adam Boyer with Stifel. Please proceed with your question.
Hey, guys. Thanks, so much for taking the question My first one maybe a two parter for Ruby So just remind us when you when Congress upgrade, let's say 'twenty one dash three from older versions of Todd is there any pricing uplift I guess, that's part a and then part B you know, it's nice to see that the scale of cloud firewall integration coming I know that was in a row.
Matt for some time I'm just curious about the NAND on this in your install base I know you kind of alluded to that in the prepared remarks, but is that a driver for upgrades you think to the latest version.
Thanks, Adam.
So 'twenty one to three is as a standard released its not a special niche. So we're not charging customers more for it.
Now specifically on this scalar and we announced the integration with the scalar cloud firewall today, it's becoming more popular no. We're adding support for visibility now and we're gonna add automation for Zee scalar down the road.
It's the first of the SaaS is DRAM players and we're considering others on what's next.
A lot of demand, there's a lot of demand right now for the scale of it but if you look at our assessing this new one it's pretty diverse there is a lot of different vendors and customers are asking for more and more of those.
So is this guy was interesting because in some cases with their web firewall they are competing directly with.
Palo Alto checkpoint fortinet.
And more and more customers are starting to use them.
Very helpful and maybe just as a quick follow up it's nice to hear that the weight in the APAC region. Although it is still a small part of the business.
I'm just curious how you're thinking about the opportunity in APAC going forward and the opportunity to expand presence since you've signaled there. Some other opportunities are there. Thanks so much.
Sure. So you know the APAC business is fairly small for us at this point, it's below 10%. We believe that there is growth opportunity there sure.
There's a lot of countries that we're just opening or the demand is.
In the early stages. So we believe there is significant opportunity there and we are continuing to invest in Asia Pac.
Great. Thanks again.
Thank you.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.
Our next question comes from the line of Jonathan Ho with William Blair. Please proceed with your question.
Hi, Good morning, just wanted to understand given your comments around customer spending prioritization, how do we think quantitatively or qualitatively about the improvement in pipeline.
Okay.
Hi, Jonathan So the pipeline has been improving and you're seeing some of that in the results of Q3, we have a healthy pipeline for Q4 and also for 2022.
So we're feeling pretty good about the pipeline and the conversion rates are and.
And we're hoping for that to continue.
Got it and then just in terms of the key hires that you've recently.
Completed whats made the most difference and as we start to look towards 2022, you know how do we think about maybe the trajectory of the business you know just given these new hires thanks.
Sure. So you know ray.
Brancato came on board earlier this year at the beginning of the year and has made several changes so three of our area of the piece in the U S. Essentially all the <unk> are new so they have been hired in the last few months, we will southern new VP of sales operations. So those are some key hires that remained.
It's tough to say, which you know which ones make the most of the <unk>.
I think they're all making an impact and it's all additive so.
I'm seeing that and improved execution within the sales team you're seeing that in some of the results.
And I'm looking for that to continue from this point forward.
Yeah.
Great. Thank you.
Thanks, Jonathan.
Thank you. Our next question comes from the line of Andrew King with calling your Securities. Please proceed with your question.
Hey, Thanks for taking my question, a really nice quarter I just wanted to get an idea is as we're seeing more companies start to return to post pandemic action can you just talk about how the customer conversations are changing and how you see the scale say called changing versus how it was pre COVID-19.
Sure. So you know we're seeing demand coming back I think demand now is that pre COVID-19 levels.
A lot of interest.
The need for what we do is was always around but I think during the pandemic.
A back seat to more urgent items like work from home.
And now that people are done with that and we're turning the corner on Covid.
We're seeing a lot of projects a lot of interest in security policy automation.
So the demand is back and the.
The team is executing better which is sort of visible in our results.
Great. Thank you.
Thanks.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Kitamura.
For any final comments.
Thank you operator.
As you heard today, we're very pleased with our business in the quarter and the progress that we've made so far in 2021 and our transition to subscription.
We are executing against our goals and strategic initiatives.
Turning to bring industry, leading solutions to our customers I look forward to sharing more of our progress and our plans for 2022 early next year. Thank you all for joining us today.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.