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Edited Transcript of TUFN.N earnings conference call or presentation 3-Sep-19 12:30pm GMT

Q2 2019 Tufin Software Technologies Ltd Earnings Call

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Tufin Software Technologies Ltd earnings conference call or presentation Tuesday, September 3, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack Wakileh

Tufin Software Technologies Ltd. - CFO

* 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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* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Gur Yehudah Talpaz

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

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* Jonathan Frank Ho

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

* Saket Kalia

Barclays Bank PLC, Research Division - Senior Analyst

* Shaul Eyal

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

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tufin Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Thank you.

Mr. Ryan Burkart, Director of Investor Relations, you may begin your conference.

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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 Second Quarter 2019 Earnings Call. With me on the call today are Ruvi Kitov, our Chief Executive Officer; and Jack Wakileh, our Chief Financial Officer.

Before we begin, I'd like to remind everyone that any statements made in 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 as of today and involves 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.

A telephone replay of the call will be available shortly after completion of this call. 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.

Now I'd like to turn the call over to Tufin CEO, 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 today.

We had a strong second quarter, and I'm very pleased with our results. We continued to see strong demand across all verticals and geographies. We landed notable new logos, while, at the same time, expanding the business within our existing customer base.

Total revenue was $25.1 million, representing 36% growth year-over-year. This was driven by the increasing needs of large organizations to get a handle of their network security posture and to automate their network change processes.

As a reminder, for those who are new to Tufin, we are the security policy company helping large enterprises manage their network policies, the policies governing who can talk to whom or what can talk to what on the network. We are focused on enterprises which are seeing growing network complexity, dozens or hundreds of firewalls from different vendors, hundreds or thousands of routers and switches, private cloud and SDN technologies, such as VMware NSX and Cisco ACI, public cloud with native security controls and containers running in Kubernetes or Docker, often in multi-cloud environments. This results in complex, fragmented networks that have a huge attack surface that is vulnerable to hackers.

Despite spending millions on firewalls and other security measures, most organizations still lack a unified, comprehensive security policy, governing who can talk to whom and what can talk to what across the entire network. These organizations are also lacking visibility into their security posture. They don't know how they might be exposed from the outside and whether their current configuration is compliant with their own policy. In fact, most companies don't even have a well-defined security policy and are making dozens of changes every week without understanding the security risks inherent in those changes. Without such a policy, enterprises are trying to manage their complex, unwieldy networks with piecemeal solutions and manual processes that only address part of the IT environment and can no longer serve the needs of the modern digital enterprise.

It's becoming more and more clear that large organizations need to adopt a different approach with a security policy layer above all the network and cloud infrastructure, simplifying the increasing complexity and fragmentation of hybrid network environments.

The network change process at most companies is a security-driven bottleneck. With Tufin's policy-driven automation, we use our network-wide Topology awareness, coupled with our change design and provisioning engines, to automate the entire network change process and enable customers to implement network changes in minutes, instead of days, with dramatically better security and accuracy. We have a very significant, largely unpenetrated market opportunity ahead of us, and we're investing for growth in order to capture this great opportunity.

In the second quarter, we continued our investments in sales and marketing, both in terms of hiring and various go-to-market programs. This investment extended to all of our growth engines: the channel program, our growing inside sales team, the U.S. federal market and new territories, like Japan. Some of these investments are now starting to bear fruit with strong growth from APAC and new logos in the quarter.

Our momentum in the large enterprise space continued this quarter as, once again, we closed several deals greater than $1 million. The largest deal of the quarter was a 7-figure deal with a Fortune 500 insurance company, which was a new logo for Tufin. They used a homegrown network monitoring tool and workflows to manage their change processes. And when they decided to migrate from Cisco to Palo Alto Networks, they knew that their internal solution would not support Palo Alto devices. On top of that, their network change process was completely manual, managed with Excel spreadsheets. It took them several days to make changes with frequent downtime. They chose Tufin due to our workflow customization capabilities, our unified security policy and the accuracy of our change design suggestions, which stemmed from our superior Topology mapping capabilities. When you automate an IT process, it's not enough to be 60% accurate, so an automation solution needs to be much more accurate than the human engineer in order to add value and be trusted. We were the only vendor to be able to deliver that level of automation accuracy, which truly added value.

Another significant deal for us was a 7-figure expansion of an existing Tufin account, a large multinational audit and consulting organization. As they considered expanding their Tufin footprint, their key needs were to increase visibility into their security configuration, to automate their firewall cleanup processes, which were required to maintain continuous compliance and to provide support for Cisco Viptela SD-WAN. We demonstrated our ability to continue scaling to the size of their environment, which spans thousands of firewalls and routers and to deliver on their needs, especially as their network evolved and their needs change over time. Having customers come back to Tufin not just to renew their maintenance, but to expand their install base significantly is a strong testament to our land and expand model.

We also had a good quarter in international markets with our strongest quarter ever in APAC driven by our growing efforts and investment in that region. Another growing region for us was Latin America, where we landed one of the largest deals of the quarter, a large retail chain where the CISO was tasked with fixing the overwhelming issues they had with a lack of network visibility, a lack of basic compliance with regulations and a slow, broken network change process. This customer wanted to transform their processes and leapfrog into the 21st century with zero-touch automation, the ability to implement network changes in an agile fashion, while increasing security and avoiding mistakes and outages. Tufin was the only vendor that was able to deliver that as well as a fully distributed architecture that was required to scale to the size of their environment.

A very interesting use case of Tufin solutions came from a large bank in North America, which was another 7-figure new logo deal. They wanted to define a unified security policy and ensure that every change was vetted against that policy before implemented in production and also do that in an automated fashion. They wanted to model several dozens of their complex applications in SecureApp to enable the network team to understand the application architecture as well as improving communication between app developers and security engineers. They bought all 3 of our on-premise products: SecureTrack; SecureChange; and SecureApp, and asked us to integrate our platform with 4 different systems they have: ServiceNow; Cisco Tetration; Qualys; and Infoblox, to enable a change process that was automated end-to-end and able to dynamically adjust the network changes, ensuring a minimal network attack surface. It's very interesting to see how far our customers want to take our automation capabilities. Tufin is truly becoming the security policy platform with integrations that provide value to customers from a wide set of existing products. And all these integrations actually make us more and more sticky in these customer environments.

Moving onto product. We recently announced the general availability of the Tufin Orchestration Suite R19-2. In this release, we extended our capabilities with enhanced visibility and policy control for Cisco ACI, Check Point CloudGuard and Fortinet web filters as well as deeper Palo Alto next-generation firewall support with dynamic address lists and fully qualified domain names. These enhancements will enable us to support a wider range of network device and the capabilities as customer networks become more and more complex and fragmented and require a policy abstraction layer to regain control and compliance.

Before I turn it over to Jack, I'd like to wrap up by saying that I'm very pleased with our second quarter and what we've accomplished to date. We expanded across all markets, landed significant new logos and gained more strategic footprint within our existing customer accounts. We believe that, fundamentally, your security is only as good as the policy that you define and enforce and that the need for policy-centric network automation is greater than ever. We are in the early stages of realizing our potential, and I'm optimistic about our market opportunity and our outlook.

Now I would like to turn it over to Jack Wakileh, our CFO, to discuss our financials in more detail. Jack?

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Jack Wakileh, Tufin Software Technologies Ltd. - CFO [4]

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Thanks, Ruvi. Let's turn to our strong second quarter results and guidance for the remainder of the year.

Total revenue was $25.1 million in Q2 of 2019, up 36% compared to Q2 of 2018. Product revenue increased 31% year-over-year to $10.9 million. And our maintenance and professional services revenue grew 39% to $14.2 million.

Looking at the geographic mix of Q2 revenue. We have a well-diversified geographical distribution with Americas representing 51% of our revenue; EMEA representing 40%; and the remaining 9% coming from Asia Pacific. As I've said in the past, given the size of our business and the fact that our revenue may be comprised of 7-figure deals in any quarter, we may experience variability by geography on a quarter-by-quarter basis.

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 in the total amount of $2.6 million for the second quarter of this year and $0.8 million for the second quarter of last year. Please note that the 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 second quarter was $20.2 million or 80% of revenue compared to $15.7 million or 85% of revenue for the second quarter of last year.

Non-GAAP gross profit for the second quarter was $20.5 million or 82% of revenue compared to $15.8 million or 86% of revenue for the second quarter of 2018.

Gross margins compressed primarily due to the expansion of the professional services teams to support faster time to value in deploying our solutions with our Global 2000 customers.

As we talked about last quarter, Tufin is addressing a large market opportunity that is primarily greenfield with multiple factors driving an inflection. As a market leader, we plan to invest in this opportunity. To that end, total GAAP operating expenses for the second quarter were $27.9 million, up from $18.1 million for the second quarter of 2018.

On a non-GAAP basis, operating expenses for this quarter were $25.6 million, up from $17.5 million for the second quarter of last year.

Breaking out non-GAAP expenses into line items, R&D expense for the second quarter of this year was $7 million or 28% of revenue compared to $4.8 million and 26% of revenue for the second quarter of last year.

As Ruvi mentioned, we just launched the Tufin Orchestration Suite 19-2, and we're continuing to invest in engineering talent to deliver innovation to our new and existing customers.

Sales and marketing expenses for both the second quarter of this year and last year represented 62% of our revenue. We continue to invest in growing our sales and marketing organization and strengthening our coverage of the Global 2000 accounts.

Our increased investment in APAC is starting to show return, and we saw a 60% increase year-over-year in revenue from that region for this quarter.

G&A expense for the second quarter was $2.9 million or 12% of revenue compared to $1.2 million and 6% of revenue for the second quarter of last year. G&A has risen primarily due to the increased expenses related to being a public company, mostly attributable to the expansion of the G&A staff and the related expenses.

GAAP operating loss for the second quarter was $7.7 million compared to an operating loss of $2.4 million for the second quarter of last year.

On a non-GAAP basis, operating loss for the second quarter was $5.1 million compared to an operating loss of $1.6 million for Q2 of last year.

GAAP net loss was $8.2 million compared to a net loss of $3.1 million for the second quarter of 2018. Net loss per share basic and diluted was $0.26 for the second quarter compared to a net loss per share of $0.38 for the second quarter of last year, and that's based on 31.2 million and 8 million weighted average ordinary shares outstanding, respectively.

On a non-GAAP basis, net loss for this quarter was $5.6 million compared to a net loss of $2.2 million for the second quarter of last year, and net loss per share basic and diluted was $0.18 for the second quarter compared to $0.28 for the second quarter of 2018.

Turning to our balance sheet. As of June 30, 2019, we had cash and cash equivalents of $127.5 million, which includes the funds raised in our IPO. This compares with $26.2 million in cash and cash equivalents as of the end of March of 2019.

Deferred revenue on our balance sheet as of June 30, 2019, was $40 million. That compares to $29.5 million as of June 30, 2018. These figures represent the deferred revenue balance after netting off the portion of the deferred revenue that has not been collected as of the end of June of both years.

The gross deferred revenue as of the end of June of 2019 was $52 million, and this compares with gross deferred revenue of $39 million as of the end of June of 2018.

In the second quarter of 2019, we used $10.4 million of cash from operating activities compared with $10.1 million in the same period of 2018.

Turning to guidance. As we've talked about in the past, we look at the next couple of years as investment years. We plan to spend on strengthening our technological leadership in the market and continuing to grow our sales and marketing organization. As Ruvi said earlier, we continue to see strong demand for our products across all verticals and geographies.

For the third quarter of 2019, we expect total revenue of $24 million to $26 million. We expect non-GAAP operating loss to range between $4.8 million to $6.3 million.

For the full year 2019, we expect total revenue in the range of $106 million to $111 million, up from our previous range of $105 million to $110 million. For the full year, we expect non-GAAP operating loss to range between $10.7 million to $12.7 million.

With that, I will turn it back to the operator to open it up 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 Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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In terms of your comments around the strength in new logo additions, you gave, I think, a little bit of an examples, but any additional color you can give in terms of either type of industry or type of problem that the new customers are trying to solve as well as what are you seeing in terms of your average deal size with the new customers today versus a couple of quarters ago?

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

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Thanks, Sterling. So when I look at the revenues by different verticals and different geographies, we had the strength across the board. Usually 50% or so is financials and telcos, and that continues to be the case. But if you look at the biggest deals of the quarter, one was a retail chain, another one was a consulting firm, so there's diversification. And customers, really, kind of are a cross section of the Global 2000. There's some finance and telco, but any customer that really has a larger, complex network is going to need Tufin.

And I think the general needs have not really changed much. You're looking at organizations that have fragmented networks. They want to perform digital transformation. They want to move to the cloud. They want to make sense of their networks. So their needs are, first, compliance and, second, to automate the network change process. We're seeing that in all of these large deals. So almost every one of the large deals was an automation project for us. And a lot of those are actually multistage projects. So they will first start with compliance, move to automation and then expand to other parts of their network. So I think that answers maybe that first part. Was there another part to the question?

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Yes. Again, just kind of the average size of those initial deals.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [5]

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So the average size, in general, has not changed much. So we reported on that in our registration statement. So in general, we have big deals. We reported that last quarter, we had several 7-figure deals. We had the same thing in this quarter again. So we had -- ASP was $120,000 overall and $200,000 in the Global 2000, and that has not really changed much in the past 2 quarters.

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Operator [6]

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Next question comes from Saket Kalia with Barclays Capital.

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Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [7]

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Maybe, Ruvi, just for you kind of higher level. I think we all saw the Capital One breach announced during the quarter -- or recently, I should say. Obviously, the biggest driver there was a malicious insider, but there was some mention of policy. So maybe just that we're -- since we're on a public forum, can you just talk about whether this was something that involved Tufin tools at all or whether this is perhaps driving more awareness about policy automation tools in the short time since it's happened?

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

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Thanks, Saket. So from what we can tell from the reports on the Capital One breach, it occurred due to a vulnerability in a Web Application Firewall that was coupled with a misconfiguration in identity and access management roles in AWS. So on the vulnerability side, that's really outside of our domain. If you look at the misconfiguration inside AWS, that's actually something that could be prevented with Tufin Iris.

But I think when you look at the broader picture, Capital One is probably one of the most security conscious banks that are out there. So I think these cases actually can serve as a warning to other organizations that might be complacent, right? Anybody can get hacked, even the most security conscious organizations out there, and you have to maintain constant vigilance, all right? So we believe the Capital One case will definitely raise awareness around security posture and to reinforce the importance of investing in security. And what we do is actually fundamental. If you don't have a well-defined security policy, then you have no visibility and you don't know if you're exposed. So we see Tufin as kind of the first building block of having a good security architecture.

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Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [9]

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Got it. Makes a lot of sense. Maybe for my follow-up for you, Jack. I think you mentioned on the call the gross margin year-over-year, it's gone down because of kind of the build-out of professional services. But I just wanted to zoom in a little bit on license gross margin because I think that ticked down as well, and I didn't think that would be driven by professional service as much. So can you just maybe talk about the mix of license revenue in the quarter, whether there was perhaps a higher mix of appliances versus software or whether there was anything else to note in that cost of license line, if you will?

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Jack Wakileh, Tufin Software Technologies Ltd. - CFO [10]

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Yes. Saket, thanks for the question. So I think you noted out correctly. Product margins depends on the mix of software to hardware. And we did have a little more hardware this quarter, as you may have mentioned. So again, because the revenues are comprised of large deals, where some may have hardware elements and some may not, our product gross margin also fluctuates between quarters. Having said that, we reported overall gross margins of 82%, and that's good for us. But remember, this can fluctuate between quarters. Comparing 82% and if you're looking at Q1, that's 83%. So that's not a big change.

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Operator [11]

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Your next question comes from John DiFucci with Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [12]

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First question is for Ruvi. Ruvi, so the hiring of Larry Alston as the GM of Cloud, I think it's interesting. Are you starting to see a greater uptick in that pipeline? Or is this just -- is this an anticipatory move?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [13]

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So in general, when we're looking at native cloud, customers are very excited about our native cloud solutions, Orca and Iris, but it's early days, right? Both are in early availability right now. We have several customers that are testing them and providing very valuable feedback. And we announced Larry Alston as General Manager of the cloud unit. Very happy to have him onboard. And customers are looking to really accelerate their cloud native adoption, right? So they're looking to integrate Orca and Iris with their DevOps practices and the [CITB] pipeline. They want to allow their security policy to seamlessly be addressed during application development and deployment processes, what's called Shift-Left. So it really helps security teams kind of stay out of the way of dynamic and agile processes in dev environments. Usually, security teams, people look at them as the last mile roadblock. And the way we see it with Orca and Iris, we enable security managers to set a policy, what's allowed and not allowed in the cloud, essentially the guardrails of network connectivity in that environment. And then as developers check in code and config files that might be open up -- they're opening the configuration or they're rerouting cloud connectivity, we set triggers on these changes. And we warn developers and security managers that they might have checked in something that's breaking their policy and they can go back and fix it immediately. So the whole -- the concept here is to have security managers not slowing down app developers. So customers are very excited about that. We have a nice pipeline in the early availability program. We're working with customers, getting their feedback, moving those products forward. So we're optimistic about it.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [14]

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So I guess -- and that's all helpful. But I'm just trying to understand, is this hiring of a new GM of this sort of business unit or area, is it something that -- is it the products themselves are maturing to the point where it will become a more relevant business for you? Or is it because -- just because you just have more demand that you've seen more demand there? I'm just trying to figure out. Like what spurred this hiring?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [15]

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Well, it's 2 different things. I mean, one, when we're looking at the revenues we're expecting, we're not modeling any significant revenue from Orca and Iris in 2019. And we also expect little revenues from both products in 2020. So in the long term, we see them as significant growth engines. But this is a brand-new market. Customers are still figuring it out and trying to -- building out their applications in cloud native world. So it's something that fairly new. A lot of the customers are early adopters there. And they themselves sometimes don't know what they need. But the way we look at it, it's a slightly different sales process because we don't just sell to security managers, we need to sell to DevOps teams, we need to sell to development managers. So it requires a different approach. So it requires a sales specialist and it requires a smaller team that is focused just on that within kind of the bigger Tufin framework. So it's important to keep that in mind. So I think, just taking a product like that, like Orca and Iris, and rolling it out, which is a SaaS product that is sold a little bit differently to the overall sales organization, we felt that it was -- they have a separate cloud unit that focuses on it and is able to engage with customers, speak the language of DevOps organizations and help the greater sales team actually sell that successfully to our large customers.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [16]

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Okay. Fair enough. And if I could just -- a quick follow-up. I think for Jack, but Ruvi, maybe for you, and the question is on automation. I think at your IPO, you said that about 50% of your customers were currently -- had currently purchased automation. And I -- Ruvi, you just said that all large deals this quarter included automation. I guess what percentage of your new customers purchase automation because that's sort of, at least the way we look at it, it's really a distinguishing factor for Tufin?

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Jack Wakileh, Tufin Software Technologies Ltd. - CFO [17]

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John, I'll take that. So yes, you're right. I just want to be more accurate. We said that 50% of our Global 2000 customers have automation, while the other 50% did not. But if you're looking at the long list of our customers, there's a long tail that has not been purchasing automation so far, right? So this is the potential -- this is the upside potential that we discussed also during our IPO roadshow.

And in terms of how much we sell now, so 80% of our business -- the way we measure it, we're looking at automation business, either new landing with automation or upsell of any other product, nascent products to existing automation customers. So if you look at those combined, we're talking about mid-80s of our business, 85%, if you like, being automation-classified.

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Operator [18]

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Next question comes from Shaul Eyal with Oppenheimer.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [19]

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Congrats on another set of solid results and guide. Ruvi, we are seeing some changes within the competitive landscape. Those have started a few months back, specifically as it relates to one of your competitors out of Israel where we have seen more recently some senior management departures. Are you seeing that also as a type of near-term opportunity to go and displace some customers, some of the 7-digit wins and new logos that you have mentioned on your prepared remarks? Does that have anything to do with that as well?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [20]

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So I think I mentioned that last time as well. We don't really like to comment about our competitors. I think the competitive landscape remains largely the same. We're seeing strong demand from our customers on all geographies. Most of the large deals that we closed were net new, so not displacements of competitors.

So I mentioned this also in my prepared remarks. We win due to the breadth and depth of our automation capabilities as well as our scalability and change accuracy. So we're continuing our tradition of innovation, right, being first to market. That positions us as the market leader. However, we believe that still most customers today, most large organizations don't have a change automation solution, so there's a huge greenfield opportunity ahead of us.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [21]

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Fair enough, fair enough. And also as we think about your entire European operations and what appeared that you guys have, like, a good quarter. But in the U.K., we have heard from some anecdotal data points about some softness, specifically maybe in the U.K. stemming from some growing political uncertainty. Are you guys seeing anything coming out of your U.K. operations, specifically? And maybe what's happening in Europe from that angle?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [22]

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So we -- I think Europe is doing well for us. We haven't really seen any change in the environment due to the macro concerns. It doesn't mean there won't be, but we haven't seen anything so far. And we specifically look at the possibility of Brexit, from our perspective, if businesses move out of the U.K., they're going to move their infrastructure to other locations that will have the same problems. So overall, on the business, it shouldn't affect it. So we're not seeing any softness there. We're actually expanding the team there. So from our perspective, it's nothing that so far has had impact.

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Operator [23]

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Next question comes from Andrew Nowinski with Piper Jaffray.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [24]

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Congrats on a nice quarter. Just first question. Billings came in a little bit lighter than we expected. Looks like the average duration may have come down a little this quarter. Was that why billings were a little lower? Or is there more to do with the higher mix of hardware?

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Jack Wakileh, Tufin Software Technologies Ltd. - CFO [25]

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Yes. So Andrew, you're looking -- if you're looking at the deferred revenue and from there trying to look at the bookings, so a few points here. Remember, we forecast revenues, and this is -- anything coming from deferred revenues is based on multiple earning streams from previous quarters, and this is how our model actually works. And again, going back to the cycle of deferred revenue bookings, where you probably came out with this question from, there are a few parts. So first, we did a small, I would call it, a technical adjustment to the way to our billing practices on professional services contracts. We did this to better align with the billing of specific milestones. So we've seen customer ask for this approach. They're not happy to be invoiced upfront on projects that will be delivered over the time -- over few months. So we applied this change only recently.

And this -- what this has done actually, it created a backlog for us. So some of the PF is now unbilled. So if you think of it in terms of RPO, then there's an additional fees to the RPO now that is not in deferred revenues, where, in the past, our RPO was equivalent to our deferred revenues. So this is one part to this change. And then the other part is around timing of renewal business and maintenance business. So as you know, some of our business comes in on multiple years' contracts, and this can cause fluctuations between quarters. So if you have a comparable quarter where you have signed multiple-year contracts that are significant and you're comparing a quarter that you may not have had this phenomena, and you had more 1-year contracts, then this also can create a fluctuation when you're looking at bookings and deferred revenues.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [26]

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Okay. Great. And then you mentioned one of your largest deals in the quarter, was that a customer that migrated from Cisco to Palo Alto? Is that typically how you acquire new customers when they change firewall vendors? And then when you kind of look at your pipeline, what kind of visibility do you have with regard to those types of deals?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [27]

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Okay. So it's -- it happens that, sometimes, people move from one firewall vendor to another, and then they decide to buy Tufin as well. But it is not the main catalyst of why people buy Tufin. So sometimes, it's easier for them to buy it that way because maybe they have a $20 million, $30 million or $40 million project, so they have a funding for something that they might have wanted to do for a while. But the main reason people buy Tufin or they look to buy Tufin is that they simply have a broken network change process, right? They're noncompliant. They don't have visibility over changes. They don't have a well-defined policy. A lot of times when we meet customers, they know that they are in trouble and they know that they need something like Tufin. And many customers actually need something like Tufin and don't have the money to buy it for a while. So it's more of an opportunity for them to get funding more than anything else. And the way we're looking at our pipeline, I don't think it's -- I don't think it really affects it significantly. So it's not -- in short, sometimes, it's a catalyst for somebody to finally be able to buy it, but it's not a reason for them to need Tufin.

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Operator [28]

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Next question comes from Jonathan Ho with William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [29]

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I just wanted to see if you could give us a little bit of additional detail on R19-2 and maybe what initial customer reception has been and, perhaps, maybe what this means in terms of further differentiation for your solution.

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

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Thanks, Jonathan. So I think the biggest effort of R19-2 was enhanced visibility and accurate Topology modeling for Cisco ACI. So we're investing heavily in Cisco ACI support. And we're going to continue actually doing that in R19-3 as well. So in 19-2, we're helping customers speed up their ACI migration process. A lot of customers are thinking about ACI or purchasing ACI, need to move into ACI and actually have a policy. So with 19-2, they're able to view and manage changes, also search for various ACI components and see them, for example, on a Topology map, like EPGs, contracts, bridge domains and other items. So Cisco ACI customers essentially can expedite troubleshooting in hybrid network environments. And the network Topology map can now show an accurate Topology with ACI in it. So we have ACI connectivity both for ingress and egress traffic. So just kind of to boil it down, a lot of value, and this really is for ACI customers, and more to come next quarter. So that's a significant piece of effort.

And other things that we've done included enhanced support for other strategic vendors. So in Palo Alto, we added support for Panorama high availability, which a lot of customers were asking for. Also external dynamic lists and fully qualified domain names. So it's quite technical, but in essence, we're going beyond what we call basic support for managing firewall rules. We're supporting advance use cases, typically, the ones that larger customers want. We also have more enhancements around automation to support for Check Point CloudGuard and Azure and full automation for Fortinet web filters. So we're constantly focused. And as a big focus item for us in 19-2 was to continue and further the leap that we have on automation, both in terms of depth and breadth. So customers are very excited about it. A lot of the requirements for 19-2 actually came from our customers. And it's about having better visibility in automation across all the major platforms.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [31]

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Got it. And then just in terms of -- if you can provide any high-level color on how much business this quarter came from existing versus new logos, I would just appreciate that.

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Jack Wakileh, Tufin Software Technologies Ltd. - CFO [32]

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Yes. This is Jack, Jonathan. So yes, I think we're -- it's consistent with what we've been reporting in the past and specifically in the roadshow. We're around half-half with -- it can fluctuate between 60-40 to 50-50, and we're within this range.

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Operator [33]

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(Operator Instructions) We have a question from Gur Talpaz with Stifel.

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Gur Yehudah Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [34]

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Ruvi, I was hoping you'd give us a bit more color here on international growth, which was impressive, especially in Latin America and APAC. When did you start making the investments in the region? And then when you kind of look forward, how do you feel about the future growth opportunities?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [35]

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Thanks, Gur. So yes, so we're really seeing strength across all the geographies. And APAC was strong for us. We're continuing to make investments there. Some of our growth engines are actually international expansion, right? So we're seeing some nice growth in APAC. But keep in mind, it's still early days. The growth is off of a small base. Also seeing this traction in Latin America in the quarter. I mentioned one of the large deals was actually in Chile. Continuing to see a lot of more opportunities in Latin America. But overall, when we're looking at North America and Europe, they were solid as well. So we have a well-diversified strength geographically, and we're continuing to make more investments. So there's other areas, and I mentioned that before, Japan and a few more territories that we've hired people. So expect more to take place there in the next few quarters.

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Gur Yehudah Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [36]

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Okay. That's helpful. And then when looking on the product side at Iris and Orca, still clearly in the evangelical stage there and kind of a future growth opportunity. But have you seen any change in the marketplace here recently in terms of awareness and the nature of the conversation you're having with the customer, especially in the wake of things like the -- like, with the Twistlock acquisition?

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [37]

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Yes. So I mentioned that, I think, in one of the other questions. So customers are adopting more and more cloud infrastructure technologies. They're looking of -- for different ways to incorporate it into their security infrastructure. But it also means that we're seeing a lot more customers running firewalls in the cloud, also looking for security solutions around cloud-native security controls, right? So they want to have tighter control over traffic going into and out of their cloud applications. Some customers are still approaching the cloud with a lift and shift mindset. They're trying to take their existing tools and processes into the cloud. A lot of times, that results -- they're buying cloud firewalls from their traditional firewall vendors and then they try to integrate that with their ticketing processes with ServiceNow and others. A lot of those customers are typically interested in Tufin and buying SecureTrack, SecureChange and SecureApp and actually manage connectivity and security policy changes in the traditional sense for their cloud environment. So that's one set of customers.

But the ones that you're asking about, I think, are the ones that are really embracing the DevOps mentality, right, moving their -- moving into cloud-native applications with a CI/CD toolchain. They're letting developers and DevOps teams manage cloud in Kubernetes infrastructure, right? So in those environments, we're seeing more interest in Iris and Orca, depending on whether it's a container-based application or not. So it's interesting to see both approaches. And it's even funny to see organizations where you have a customer where certain teams are cloud-native and other teams are traditional. And I think, in some ways, it depends on the sensitivity and the risk appetite of that specific team. So you might have a large financial where you have a very risk-averse team. They have something that they will never put up on the cloud, so they're going to use -- or if they put it in the cloud, they want to have a technically managed process. And they're going to use our traditional Tufin Orchestration Suite, while another team is working on something maybe that is less risky, and they're willing to actually go cloud-native and be more experimental. And they know that there might be a period of time, maybe a couple of minutes, when somebody will make a configuration change. There might even be a mistake, and they're willing to live with that mistake and let Iris and Orca identify those mistakes, report them to the security managers and developers and have the developers fix things immediately. So it's interesting. We have customers that are literally buying Tufin Orchestration Suite for their -- for some cloud apps and interested in Iris and Orca for other apps within the same company.

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Operator [38]

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(Operator Instructions) We do not have any telephone questions at this time. I will turn the call over to the presenters.

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Ruvi Kitov, Tufin Software Technologies Ltd. - CEO, Co-Founder & Chairman of the Board [39]

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All right. Thank you very much, everyone. Happy to have you on the call today. And looking forward to another great quarter. Thanks, everyone. Buh-bye.

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Operator [40]

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