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Edited Transcript of TUFN.N earnings conference call or presentation 12-May-20 12:30pm GMT

Q1 2020 Tufin Software Technologies Ltd Earnings Call

May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Tufin Software Technologies Ltd earnings conference call or presentation Tuesday, May 12, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ruvi Kitov

Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board

* Ryan Burkart

Tufin Software Technologies Ltd. - Director of IR

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Conference Call Participants

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* Gur Yehudah Talpaz

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Hannah Elizabeth Baade

D.A. Davidson & Co., Research Division - Research Associate

* Jonathan Frank Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Robbie David Owens

Piper Sandler & Co., Research Division - MD and Senior Research Analyst

* Shaul Eyal

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Tufin First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Ryan Burkart, Director of Investor Relations. Thank you. Please go ahead.

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Ryan Burkart, Tufin Software Technologies Ltd. - Director of IR [2]

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Thanks, operator. Good morning, everyone, and thank you for joining Tufin's First Quarter 2020 Financial Results Conference Call.

With me on the call today is Ruvi Kitov, our Chief Executive Officer. Our Chief Financial Officer, Jack Wakileh, underwent a medical procedure unrelated to COVID and will be recovering for the next several weeks. He will not be on the call today.

Before we begin, I would like to remind everyone that any statements made on today's conference call that express a 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 Reform Act. These forward-looking statements are based on information available to Tufin's management team as of today and involve risks and uncertainties, including those noted in this morning's press release and Tufin's 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. Tufin 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 numbers 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.

A telephone replay of this call will be available shortly after its completion. You'll find the dial-in information in today's press release. The archived webcast will be available for 1 year on the company's website at tufin.com.

With that, I'd like to turn the call over to Tufin's CEO and Cofounder, Ruvi Kitov.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [3]

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Thanks, Ryan, and good morning, everyone. Thank you for joining us today. I hope that you and all of your families are safe and healthy during these unprecedented times. I'll be speaking today on Jack's behalf since he can't attend the call. We're all wishing him a speedy recovery. In Jack's absence, Ryan Burkart, who you heard at the start of the call and who leads our Investor Relations, will assist in answering some questions later on the call.

I'll start with a quick update on how we've adjusted our operations in the current environment associated with COVID-19, expanding on our press release that we issued a few weeks ago. I'll then touch briefly on our Q1 results, but will spend most of my time discussing the current environment, how we're managing the business and some of the opportunities and risks that we see ahead.

Let's start with our operations. In these challenging times, we remain committed to the support and satisfaction of our clients as well as the health and well-being of our employees and our partners. We've taken several business continuity measures with this in mind. First, we've implemented a work-from-home policy for all our employees and have ensured that all Tufin functions have proper and secure access to the systems that they need to perform their duties. So far, our distributed workforce approach is working well. We postponed some of the planned in-person events while turning others into virtual events. Our sales and professional services teams, which have historically used face-to-face meetings or on-site visits as part of their processes, have successfully moved to operating entirely remotely, using video calls instead of face-to-face meetings. We are monitoring the situation closely, and we'll adjust accordingly as health guidelines evolve, but I'm very confident in our ability to continue to deliver our services and execute the sales processes effectively, however, long the current environment may last.

Moving on to Q1 results. As we previously announced, our business in Q1 was meaningfully impacted by disruptions associated with COVID-19, especially at the end of the quarter. Revenues were $21.2 million in the first quarter, down 5.4% year-over-year. The quarter was progressing well in January and February, and we had a solid pipeline going into March. We are making good progress on the sales execution improvements that we have previously discussed. Onboarding our new VP of Sales Operations and new line managers in North America and improving our sales processes. We successfully closed a few deals that slipped from Q4, and in addition, our new SecureCloud product became generally available in February. Then came COVID-19 in March. As many of you know, given our perpetual license model, more than 50% of our quarterly revenue typically closes in the third month of the quarter, and most of that closes in the last 2 weeks of the quarter. The last 2 weeks of March this year coincided with an unprecedented wave of stay-at-home orders spreading throughout the world in response to the COVID pandemic. This created 2 significant challenges for us. First and most impactful, our customers, specifically network security managers became the main focal point in every organization for enabling remote work. Within a few days, the network and security professionals that we sell to were tasked with mobilizing remote workforces of thousands of employees who, in many cases, have never worked remotely before. This monumental task became the sole focus for many of our customers in the last 2 weeks of March, and that resulted in deals being delayed.

Second, some customers, whose businesses were very significantly impacted by global shutdowns, implemented immediate budget freezes on all discretionary spending, including new IT spending, which also delayed some deals. These COVID impacts in the last 2 weeks of the quarter resulted in several million dollars of product revenue being pushed out of the first quarter. As a reminder, the revenue components attributed to services and deals that come at the end of the quarter will always be recognized in the following quarters. Therefore, deals that slip at the end of the quarter have a significant negative impact on product revenue. The good news is that the majority of these deals remain in the pipeline. And while we have now closed some of them in Q2, the timing and monetizing of these and other deals on the pipeline is uncertain due to the environment.

The end of Q1 was obviously challenging, and I'm very proud of all the Tufin employees for pulling together so effectively to help our company and our customers in an unprecedented and difficult operating environment. The first quarter ended just 6 weeks ago, but a lot has changed since then.

I want to take some time now to talk about the current environment from our perspective and what we're doing to manage through it. At times like this, it's important to remember the significant value that we bring to our customers. We are the security policy company, and our products help large organizations to increase efficiency by automating manual error-prone network change processes while improving security at the same time. The efficiencies in security are more important than ever in the current environment. All of you that are following the cybersecurity industry know that cyberattacks have increased significantly during this pandemic as bad actors look to take advantage of a much larger attack surface, given the sharp escalation of remote work.

In addition, security professionals are being stretched in as their workflow has increased due to employees working from home and requiring access to various parts of the network. These challenges cannot be simply solved by increasing head count in today's cost-conscious environment. Instead, security professionals and companies need to do more with less. This is where Tufin's automation solutions, which improve efficiency and security will become even more important and valuable to our customers. The abrupt shift to remote work globally, in addition to increasing the attack surface, has also accelerated the trend of large organizations moving workloads to the cloud.

As I mentioned earlier, our new SecureCloud product became generally available in February and is poised to benefit from the accelerated move to the cloud. On a related note, you may have seen the Tufin SecureCloud is now available on the Red Hat Marketplace. This marketplace is a significant milestone in IBM's journey to build a strong ecosystem around Red Hat OpenShift.

We believe that OpenShift is an important strategic compute platform for the future, and Tufin is committed to providing visibility and management for cloud security posture without compromising on the agility and business benefits of adopting a dynamic platform like OpenShift. Now the IBM OpenShift installed base can trial and purchase Tufin SecureCloud on the Red Hat Marketplace. We are excited to be a part of it. Given our product's ability to address some of the key challenges for security teams moving forward as well as the accelerating market for SecureCloud, I'm very confident in the long-term opportunity ahead of us.

Shifting gears to the near term, I wanted to share with you what we're seeing on the ground today. I talked earlier about the impacts that we saw in late March as our customers were dealing with work-from-home challenges. What we've seen since then is reengagement for most customers as they've successfully adjusted to remote work. In addition, we've seen some early signs of budget freezes being eased and spending plans getting reprioritized, and we're seeing that, in many cases, Tufin remains a priority. The strong underlying need for our products and our focus on customer success has helped significantly.

One good example is a 6-figure of change automation deal with a global industrial company that we're working on in the first quarter. The customer had a manual error-prone network change process that took weeks for changes to be implemented. They recently failed the network audit and decided to invest in deeper segmentation and policy control to improve their security posture and automate the change process. The deal was delayed at the last minute in March due to a company-wide budget freeze. The customer's manufacturing plants around the world were shut down, and the company understandably wanted to stop and reevaluate all of its spending. I'm confident that we would remain high on the priority list when spending resume given the increased efficiency that our products deliver, we went forward with the process of deploying Tufin as if the customer has already purchased. I'm happy to report that due to these efforts, which the customer greatly appreciated, we have since closed this deal in Q2 and stayed on the original project schedule.

More recently, a potential new logo customer in the consumer discretionary space has taken critical steps to continue to move forward on a 7-figure deal with us despite deep cost cuts and cash conservation measures elsewhere in their business. These examples underline my confidence that the need for our products remain strong. Our overall 2020 pipeline reflects this trend as well as it remains in a position of healthy growth year-over-year. At the same time, despite some signs of recovery, a great deal of uncertainty remains in the market. While we have reengaged more deeply with many customers at all levels in recent weeks. And while our pipeline is healthy, our visibility on the timing of pipeline conversion to closing business is reduced. Some companies in the most affected industries will not be able to make large IT investments this year as their focus will be shifting to remaining of float given how significantly their businesses have been impacted, although these segments represent a small portion of our business. Others will move forward with IT investments, but on an unpredictable sales cycle that could require more approvals and more time than before.

As we previously announced, given the uncertainty around the impact of COVID-19 going forward, we have withdrawn our financial guidance for the year and have been diligently reviewing all aspects of our operations and cost structure. We have recently taken some actions to reduce costs in order to preserve our strong cash balance and maintain a position of strength when economic conditions recover. These actions included modest head count reductions, temporary compensation reductions, a temporary hiring freeze and cuts in nonessential spending. We took a careful and balanced approach to cost reductions to ensure that we extend our technological leadership and high level of customer service to be in a position to reaccelerate growth when conditions improve.

Now I'll turn to our Q1 financials and help frame our financial outlook in lieu of quantitative guidance. Total revenue was $21.2 million in Q1 2020, down 5.4% compared to Q1 of 2019. Product revenue decreased 45% year-over-year to $5.8 million, while our maintenance and professional services revenue grew 31% to $15.4 million. Looking at the geographic mix of Q1 revenue, we have a well-diversified geographical distribution, with the Americas representing 54% of our revenue, Europe representing 40% and the remaining 6% coming from Asia Pacific.

Moving to margins and expenses. I will discuss our results based on GAAP financial measures and, where applicable, non-GAAP financial measures. Non-GAAP numbers exclude stock-based compensation expense of $3.7 million for Q1 2020 and $1 million for Q1 2019. The non-GAAP numbers also exclude $0.3 million associated with the reorganization in 1 of our subsidiaries. Please note that a GAAP to non-GAAP reconciliation can be found in the tables of our earnings press release located in the Investor Relations section of our website.

GAAP gross profit for the first quarter was $15.7 million or 74% of revenue compared to $18.4 million or 82% of revenue in Q1 of 2019. Non-GAAP gross profit for the first quarter was $16.2 million or 76% of revenue compared to $18.7 million or 83% of revenue in Q1 2019.

Gross margins compressed primarily due to lower product revenues this quarter and a higher mix of maintenance and professional services revenue, which carried a lower gross margin.

Total GAAP operating expenses for Q1 2020 were $32.9 million, up from $22.7 million in Q1 of 2019. On a non-GAAP basis, operating expenses for Q1 2020 were $29.5 million, up from $21.8 million in Q1 of 2019.

As we spoke about consistently prior to the emergence of COVID-19, 2019 and 2020 were intended to be investment years for Tufin to take advantage of the large market opportunity we see ahead of us. Accordingly, we increased spending throughout 2019 and kept hiring through Q1 of 2020. Much of the increase in expenses you see in Q1 of 2020 reflects those spending decisions that we made in the second half of 2019. Looking forward, as I mentioned, we have reduced overall expenses to better align spending with the current uncertainty and lack of visibility to preserve our strong cash position.

Breaking out non-GAAP expenses into line items, R&D expense for Q1 of 2020 was $8.8 million or 41% of revenue compared to $6.4 million and 28% of revenue in Q1 of 2019. Sales and marketing expense for Q1 of 2020 was $16.6 million or 78% of revenue compared to $13.1 million or 58% of revenue in Q1 of 2019. G&A expense for Q1 of 2020 was $4 million or 19% of revenue compared to $2.4 million and 11% of revenue in Q1 of 2019. The increase in G&A expenses is primarily driven by expenses related to becoming a public company.

GAAP operating loss for Q1 of 2020 was $17.3 million compared to an operating loss of $4.3 million in Q1 of 2019. On a non-GAAP basis, operating loss for Q1 of 2020 was $13.3 million compared to an operating loss of $3.2 million in Q1 of 2019. GAAP net loss was $17 million compared to a net loss of $4.4 million in Q1 of 2019. Net loss per share, basic and diluted, was $0.48 for Q1 of 2020 compared to a net loss per share of $0.54 in Q1 of 2019, and that's based on 35.5 million and 8.3 million weighted average ordinary shares outstanding, respectively. On a non-GAAP basis, net loss for this quarter was $13.2 million compared to a net loss of $3.4 million in Q1 of 2019, and net loss per share, basic and diluted, was $0.37 for Q1 of 2020 compared to $0.41 in Q1 of 2019.

Turning now to our balance sheet. As of March 31, 2020, we had cash, cash equivalents and restricted cash, $120.5 million compared to $121.7 million as of December 31, 2019. As I noted, we're pleased with our strong cash position, and we see it as an important advantage through these challenging circumstances that our industry and the world face right now.

Deferred revenue on our balance sheet, as of March 31, 2020, was $43.4 million compared to $35.6 million as of December 31, 2019. In the first quarter of 2020, we generated $0.5 million of cash from operating activities compared to $11.9 million in the same period of 2019.

Turning to guidance. As previously announced, we have withdrawn our prior guidance for fiscal year of '20, and given a lower visibility at present, we will not be providing financial guidance for the full year or for Q2 at this time. However, I do want to provide you with some qualitative commentary to help you frame your models and understand how we are moving forward strategically. To be clear, we do not intend to provide commentary such as this on a quarterly basis going forward, but we'll do so at a point where we're not providing quantitative guidance. In addition, please keep in mind that the following forward-looking statements are based on information available to Tufin as of today and involve risks and uncertainties, in particular, those related to uncertain economic impact of COVID-19.

As many of you know, our revenue comes from 3 sources: product revenue, maintenance revenue and professional services revenue. First, on maintenance revenue. This part of our revenue base is recurring in nature, and our renewal rate on maintenance contracts remain greater than 90% in the first quarter as it has been consistently over the past 2 years. Thus far, we have not seen indications that COVID-19 will impact our renewal rate.

Next, our professional services team is currently working entirely remotely and is very busy as our customers remain highly engaged with our products. Professional services revenue grew 109% year-over-year in the first quarter, with a healthy backlog of deployment projects. We expect professional services revenue to remain relatively stable in 2020, though we could see variability from quarter-to-quarter as timing and completion of deployment projects is difficult to predict.

The more challenging element of revenue to forecast is the revenue generated from sales of our products which, as you know, are sold mostly on a perpetual license model. Historically, product revenues comprised approximately 50% of total revenue on an annual basis with some fluctuation between quarters. Naturally, we have less visibility into the timing of product revenue due to our professional license model in such uncertain times. We have looked at several scenarios, and in the negative scenario is COVID-19 continues to impact our business significantly over the next 6 weeks, our product revenues could be affected.

As we've mentioned in the past, our primary focus is large organizations, and 68% of our revenue in 2019 and 65% of our revenue in Q1 of 2020 came from Global 2000 customers. With all the good work done by our sales and marketing teams, our pipeline remains healthy and higher year-over-year, though the timing and monetization of this pipeline is very uncertain in the current environment.

Looking at our current 2020 pipeline by industry, following the changes due to COVID-19, here are the top 5 exposures by percentage of our overall pipeline. Financials account for 27%, telecommunications account for 14%, governments account for 10%, business services account for 9% and manufacturing accounts for 7%. Looking at the industries that have been hardest hit by COVID-19, I can tell you that retail accounts for 5% of our current 2020 pipeline, oil and gas is 1% and travel and hospitality is less than 1%.

Moving on to our expense structure. As I mentioned, we have taken steps to reduce costs to better align our spending with the current uncertainty and lack of visibility. We expect that the actions we've taken to date will reduce our operating expenses by approximately 20% in the second half of 2020 compared to our prior spending plans. But importantly, they do not diminish our ability to execute our strategy, serve our customers and achieve our long-term growth. Despite our cost reductions, we expect to generate an operating loss in Q2 and for the full year of 2020, due to our continued investment in key areas. We will continue to monitor the situation and may increase investments in key areas, with visibility and economic conditions improve.

In closing, these are unprecedented times, and uncertainty is widespread, including our market. Like many of you, we don't know how long the pandemic will last or what the shape will be of the economic recovery when it comes, but we are confident in a few things. The Tufin Orchestration Suite helps large organizations increase agility by automating network change processes while improving security posture at the same time. The increased efficiency and security that we deliver has only become more important in the COVID-19 era, and the need for these will not subside with a pandemic, and economic recovery will come.

Our recent cost reduction actions, along with our long-standing competitive advantages, strong balance sheet and experienced management team put us in a better position to take advantage of the recovery. I'd like to thank our customers, our partners and our investors for their support and all the Tufin employees for all their hard work.

Now let's open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Shaul Eyal from Oppenheimer.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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Ruvi, thanks for the clarity about the current state of the service. I wanted to ask whether Iris and Orca have seen any impact from COVID-19? I know it's a small chunk of the business. But just wondering if Iris/Orca-related projects or sales are seeing delays or actually some acceleration? And I have a follow-up.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [3]

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Thanks, Shaul, and hi, everyone, after the prepared remarks. So we're seeing rising interest in SecureCloud, which is the combination of Iris and Orca. And our pipeline there is growing. So we're seeing customers rethinking the way they work. In large organizations, we think that the adoption of having applications in public cloud infrastructure as a service is going to accelerate. So we're seeing customers continue to roll out their cloud projects. And they're getting higher priority compared to other projects. It's interesting because even if you look at a smaller-sized company like Tufin, when we moved to work from home, we actually found that some of our applications are located on-premise. So we were required to beef up our WAN links to the data center and our VPN licenses. So the next thing that we ask ourselves internally was why are these applications not on the cloud? So while we're too busy to move these applications to the cloud right now, that will be our inclination the next time we look at these applications. We believe that similar discussions are taking place in many companies right now.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [4]

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Understood. And I had a question. I just want to make sure that I got it right. So you are -- you did talk about an operating loss for the second quarter, I understand the fact that you're reducing expenses by approximately 20% in the second half. What about second half operating losses or even operating income? Second half specifically, any views at this point or too early?

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Ryan Burkart, Tufin Software Technologies Ltd. - Director of IR [5]

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Shaul, this is Ryan. So at this point, it's a little bit earlier. It's a little bit early to comment on that. We do expect an operating loss for the full year. In the past, we have had small operating profits in the fourth quarter. But again, I think it's a little bit too early to comment specifically on operating loss in the back half. We will see the full impact of the cost reductions start to hit in the third quarter of this year and then going forward.

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Operator [6]

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Your next question comes from the line of Jonathan Ho from William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [7]

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I just wanted to start off by asking you to give Jack our best wishes for a speedy recovery. Just taking a look at maybe some of the customer behavior that you're seeing out there. Is this now more pressured by budget situations or project reprioritization? Just wanted to get a sense around how you're thinking about like maybe normalization throughout the course of the year?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [8]

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Jonathan, so it's interesting -- COVID is impacting customers in various ways. Generally, what we're seeing is secular trends that existed previously are actually getting accelerated. So some of these -- the things that impact us, managing security policies using automation is one thing that happens to be what we do and shifting workloads to the cloud. I think also the crisis caused people to think more deeply about how they do things, including work, obviously. So the new environment unshackled a lot of mid-level managers and allowed them to implement changes that were unthinkable in some ways a few weeks ago. So in automation, obviously, there's a lot of efficiency gains from taking network change processes that took weeks and shrinking them down to minutes, and efficiency is more important right now in a resource-constrained environment. So security professionals have to deal with a lot of challenges from work from home that didn't exist before. But the efficiency gains from automation, that have been clear for a long time. So what's happening right now is network security professionals are being empowered to think about how to implement new and better processes like automation. The old hierarchy and processes have been disrupted by COVID is actually an opportunity for people to change things.

So while there's large trends that are being accelerated by COVID-19, that helps our business in the long term. In the near term, there's a challenge of constrained budgets. So what we're seeing is actually 2 opposing forces. We have increasing demand on one side due to the trends I've spoken about and limited budget availability on the other hand. So we don't know how exactly it's going to play out in the near term. But in the long term, I'm confident that the trends toward automation and cloud security policy management are going to win out.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [9]

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Got it. And then just in terms of a follow-up, can you maybe quantify some of the expense control measures that you're taking and the potential impact there on the P&L?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [10]

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Sure. So when we faced the pandemic and the impact from COVID, we built multiple scenarios for the future. So as you know, the perpetual license model, coupled with the fact that we have a high concentration of large deals, they receive more scrutiny at this point in terms of large deals. They're both impacting the visibility into new business bookings, I would say, in the short to midterm. And since 2020 was planned and budgeted an investment year, we were increasing hiring and spend through the year and our initial guidance for the year had a $25 million non-GAAP operating loss. So when we were thinking about it, we wanted to be in a position where under the worst-case scenario of having the pandemic last through the end of 2021, we would still be able to weather the storm and come out strong with a healthy balance sheet.

So cost-cutting we implemented was balanced, and we have the following in mind. First, we want to maintain a strong commitment to customer services and support. We want to continue the investment in extending our technological lead, and we want to also maintain the ability to reaccelerate quickly when economic conditions improve. So while we did cut costs, we're continuing to invest in the long term, given that we still expect -- we're investing in the long term. And because of that, we still expect to generate an operating loss in 2020.

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Ryan Burkart, Tufin Software Technologies Ltd. - Director of IR [11]

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And just to add to that from a quantification standpoint, Ruvi mentioned this in his prepared remarks, but we reduced -- the actions we've taken reduced our overall expenses by 20% relative to our prior spending plans, and we haven't broken that down further by segment.

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Operator [12]

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Your next question comes from the line of Rob Owens from Piper Sandler.

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Robbie David Owens, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [13]

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Maybe just a little bit more color on what you're seeing geographically. You have a pretty even mix between the U.S. and Europe or North America and Europe. And as things start to unfold and you even mentioned some of those budgets in time. Maybe you could give us some color just relative to what you're seeing in the U.S. versus EMEA?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [14]

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Rob, right now, when COVID started impacting, at first, I think it was impacting Europe sooner than the Americas. The shutdowns actually started a little bit later in the U.S. But for us, the large deals were all concerted in the last 2 weeks. So the impact being -- ended up being pretty evenly distributed. We're seeing a lot of interest being picked up again. So people are back. And most customers were having good engagement with conversations. And there's interest levels that are rising.

In terms of geographic distribution, I would say it's pretty evenly distributed. There's no one region that is really behaving differently from the rest.

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Robbie David Owens, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [15]

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And is your large deal exposure equally weighted then between EMEA and North America?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [16]

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I think it's no different from the past. In general, I would say, we have larger deals historically in the U.S. than in Europe. Just bigger concentration of -- at the very top of the Global 2000 isn't in the Americas. But that mix has remained the same now in the pipeline as it was, let's say, in the last 2 years.

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Operator [17]

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Your next question comes from the line of Gur Talpaz from Stifel.

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Gur Yehudah Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [18]

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First off, my best to Jack, I'm wishing him a very speedy recovery here. Ruvi, I know you're not necessarily seeing it today, but do you see any potential long-tail benefit here from the rapid growth in firewall appliances over the past few months? And then I think more broadly, what are your views on vendor fragmentation in this environment?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [19]

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Thanks, Gur. So there is growth naturally, a lot of people are deploying VPNs to a much greater extent than they did before. And we might benefit a little bit. But from our perspective, when we're thinking about our total addressable market, it is not really -- it's not related to a local event, like a single quarter or 2, where people happen to buy more firewalls. We're selling into the entire installed base, right? So the network security platforms that people have bought over the last 5 years. So there might be a short-term benefit there. But we get questions and often, people ask, " Okay, is Palo Alto or Fortinet or Check Point have a strong quarter, what does that mean for you? It's really meaningless because those 2 are not directly tied to each other.

I think in terms of vendor fragmentation, I think we're focused on the big 4 or 5 network security vendors from a platform perspective in terms of the platforms we support. I think all of them are going to survive and do well. Very small vendors usually are not prevalent in large enterprises, so they're not a major focus for us.

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Gur Yehudah Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [20]

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That's helpful. And then you touched a bit on this in the prepared remarks, but I wanted to expand on it. Can you talk about what you're seeing from a policy growth and complexity standpoint as customers transition their workforce?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [21]

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Sure. So customers have -- there's 2 issues here. There are cyber threats and complexity as well. So in terms of cyber threats, as you're moving to work from home, a lot of times it say, it's a completely different environment. We've had customers that had to move 40,000, 50,000, 60,000 employees all of a sudden within a span of 2 or 3 days, to working from home, where those people used to go to an office. We had one customer with tens of thousands of developers in India, and some of them didn't even have network connectivity or laptops. So those are significant challenges. But in general, in some cases, people are connecting to their office via their personal computers that might not be as secure as home -- the laptops issued by the work. There's a rising -- there's a rise in phishing attacks around things that are -- people are anxious about, like PPP loans, furlough benefits, new vaccines, et cetera. That hackers can infiltrate on employee's laptop and potentially use the VPN connection then to access the data center. I think that is a higher risk. In a work-from-home scenario, home WiFi is not secure. There's a lot of issues that are solely popping up or trends that are accelerating now that people are working from home. So that's one challenge.

On the other hand, there's a lot of network change requests driven by this work from home. So all of a sudden, people need to access to things they didn't need before because of the work-from-home scenario. So people that we work with, network security professionals are inundated with network change requests actually much more than before. So that's driving more strain on the work processes, the change orders. So people understand that they need to actually handle, at least in the short to midterm, a higher volume of change requests. So that is on the one hand, and that -- the backdrop here is that most organizations are not going to invest in actually hiring a lot more people for the security departments. So they need to do more with less people. And that's obviously where we come in. So I think in the mid- to long term, that's going to drive more demand for Tufin.

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Operator [22]

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(Operator Instructions) Your next question comes from the line of Andy Nowinski from D.A. Davidson.

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Hannah Elizabeth Baade, D.A. Davidson & Co., Research Division - Research Associate [23]

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This is Hannah on for Andy. Could you provide more detail on the dynamics of the customer reengagement process? How long has this process taken from the reengagements you've seen so far?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [24]

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Hannah, are you asking about the cost cutting measures?

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Hannah Elizabeth Baade, D.A. Davidson & Co., Research Division - Research Associate [25]

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No. I'm speaking to the customers that have had to pause due to a budget constraint or a brief reassessment and spending, and then were able to kind of reenter your pipeline. I was curious on how long that process has taken on the successful reengagement you've seen so far.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [26]

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Okay. Understood. So from about mid-March, I would say, that's when the process started on in terms of the impact of COVID. And I think that was felt throughout the world with the work-from-home orders for essentially almost all countries. And on our side, I think from the -- after the first week of April, we've seen some customers reengage, and we've seen that trend pick up. I would say throughout April, it was just a steady increase. Now in May, we're seeing more engagement. Now not every single customer has reengaged, some customers in heavily affected industries like travel or just things that have to do with discretionary spending, those deals have been delayed further, but that was a small part of our pipeline. So most of the customers that we were speaking with previously that simply were not returning our phone calls during the last 2 weeks of March, have now gotten things in shape, have work from home more or less sorted and are now back working on their projects and reengage with us.

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Hannah Elizabeth Baade, D.A. Davidson & Co., Research Division - Research Associate [27]

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That's great color. Just one follow-up. Have you seen any changes in customer payment terms since the outbreak?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [28]

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Not really. So we've seen some customers that have asked for better payment terms, and we've been happy to oblige, that's from our perspective. There's a few requests where we've approved extended payment terms on a case-by-case basis. We're being flexible. I think that's important for customers as they're going through very challenges in financial and purchasing processes. But it has not been a major issue because, keep in mind that we're working with Global 2000 customers and not small companies.

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Operator [29]

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There are no further questions at this time. I'll turn the call back to you for any closing comments.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [30]

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All right. So just want to thank everyone for joining the call today. And reiterate the fact that although we had a difficult Q1, and I think that's something that everybody felt and everybody is feeling the impact of COVID, we have some uncertainty in terms of visibility into the next few quarters, which is why we pulled the guidance. But I'm very confident in the long term -- in our long-term opportunity and our ability to succeed. Thank you very much.

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Operator [31]

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That concludes today's conference call. You may now disconnect.