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Imperva (NYSE:IMPV)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

Executives

Terrence J. Schmid - Chief Financial Officer, Principal Accounting Officer and Treasurer

Shlomo Kramer - Co-Founder, Chairman, Chief Executive Officer and President

Analysts

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Thomas Ernst - Deutsche Bank AG, Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Saket Kalia - JP Morgan Chase & Co, Research Division

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Erik Suppiger - JMP Securities LLC, Research Division

Daniel T. Cummins - B. Riley Caris, Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Imperva's First Quarter 2013 Financial Results Conference. [Operator Instructions] I would like to remind everyone that this conference is being recorded.

And now I'd like to turn the conference over to the Chief Financial Officer, Mr. Terry Schmid. Please go ahead, sir.

Terrence J. Schmid

Thank you, Sarah. Good afternoon, and welcome to Imperva's First Quarter 2013 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. Again, I am Terry Schmid, Chief Financial Officer of Imperva. With me on the call is Shlomo Kramer, Imperva's Chief Executive Officer.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in Imperva's 10-K filed with the SEC on March 15, 2013.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation expenses. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing Imperva's performance. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's press release regarding our first quarter 2013 results. Press release has also been furnished to the SEC as part of a Form 8-K.

In addition, please note that the date of this conference call is May 2, 2013, and any forward-looking statements that we may make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

Lastly, this conference call is the property of Imperva, and any recording, reproduction or rebroadcast of this conference call without the expressed written permission of Imperva is strictly prohibited.

With that, I'll turn the call over to Shlomo, and then I will provide some further details regarding our financials and our forward-looking outlook. Shlomo?

Shlomo Kramer

Thanks, Terry. I would like to thank everyone for joining us today. We are very pleased with the company's continued strong execution during the first quarter, especially our ability to exceed the top end of our revenue guidance and to achieve 66% year-over-year increase in the number of new customers.

During the quarter, we accelerated our investments in our sales and marketing support and product development infrastructure to take advantage of the demand we are seeing worldwide, as attacks targeting high-value business data and applications continue to increase in sophistication, scale and frequency. We are seeing organization of all sizes losing the battle to protect against hacking data breaches, internal abuse and fraud. These same organizations, too often, also become mired in increasingly complex regulatory standards intended to force them to protect their business assets. The solution in our view is a data center security spec. This complements existing network and endpoint security stacks to form a third pillar of enterprise security. This data center security spec must be built specifically to protect high-value business applications and data assets from theft, fraud and attack from both outside and inside of the organization. Imperva is the only provider to offer comprehensive integrated data center security solution, which we view as a competitive advantage since enterprises seek to minimize security overhead while optimizing protection of their applications and data.

Imperva's integrated SecureSphere suite secures all data usage and business transaction across various systems by providing database file and web application security in the data center, including traditional on-premise data centers, as well as private and hybrid cloud computing environments.

Taking a look at our overall financial performance. During Q1 2013, our total revenue was $28.6 million, up 33% year-over-year and exceeded the high end of our guidance range. This increase was driven by a 52% growth in the recurring service revenues, particularly subscription revenues, which increased 205% year-over-year and now represents 14% of total service revenues compared to approximately 7% last year.

Our combined products and subscription revenue during Q1 grew 27% compared to the first quarter of last year, which we continue to view as a leading indicator of the strength of our business, since a large part of our subscription-based offering is an alternative to our perpetual license offering.

In addition, I think it is important to mention that our combined product and subscription bookings grew faster than revenues during the quarter, further highlighting the growth we are seeing in the overall business.

For our profitability perspective, during the first quarter, we accelerated our investment in our sales and marketing, support and product development infrastructure to further take advantage of the demand we are seeing globally. We have been very successful in attracting and hiring top talent in advance of our expectations, and this led to the company reporting a non-GAAP operating loss of $3.1 million or approximately $600,000 above our guidance range of loss of $2.0 million to $2.5 million. As a result, our non-GAAP EPS loss was $0.13 per share compared to our guidance range of loss of $0.09 to $0.11 per share. Terry will provide additional details later, but we plan to continue making investments in the business given the strength in our pipeline worldwide.

In regard to some of our summary level statistics. During the first quarter, we added 148 new customers, representing growth of 66% compared to last year and evidence that our investments are paying off. We continue to see new customer growth be well balanced across all geographies, and our average deal size continued to increase.

During the first quarter, the number of deals greater than $100,000 increased 12% to 64, and it is important to note the dollar value of these large deals continues to grow as well.

We also continued to generate significant portion of our bookings from follow-on sales to existing customers as they accounted for over 60% of our product and subscription bookings in the first quarter. We currently believe that our existing customer base is less than 10% penetrated and represents a significant long-term growth opportunity for the company.

Finally, we are well-positioned to maintain momentum as we have a great start to the year and continue to see our pipeline grow at a rate above both our revenue and our bookings growth.

From a geographical perspective, customer demand remains solid across all region. Specifically, in the Americas region, revenue increased 45% year-over-year during the first quarter. We continue to benefit from the strong execution of our channel partner and the investments made in our sales and marketing infrastructure.

In EMEA, our revenue increase of 14% year-over-year was primarily due to a difficult comparison to last year's first quarter related to a large deal recognized in Q1 of 2012. Despite the challenging economics in many regions, we remain confident in our ability to grow in EMEA during the remainder of the year as we add sales resources to cover underserved end markets there. In addition, our booking growth continues to be higher than our revenue growth in this region. And as a reminder, in the fourth quarter of 2012, we closed the largest deal in the company's history in EMEA.

In Asia Pacific, revenue increased 90% in Q1, highlighting the continued execution of our sales team and the strength of our distribution in the region. Booking in the region also continued to grow faster than revenue year-over-year.

Now I would like to provide an update on some of our key initiatives and accomplishments during the first quarter. In regards to the acceleration of investment, as I mentioned earlier, we had a very successful quarter from a hiring standpoint. Overall, we increased our headcount approximately 9% worldwide during the quarter. Some of the key moves we made include hiring a new VP of Product Marketing and Management and increasing our customer support staff by over 30% across 3 support centers. We plan to continue to expand our headcount over the rest of 2013 to build the organization we need to take advantage of global demand.

During the quarter, we also continued to have success expanding deployments within some of our largest accounts. For example, at a large regional bank in Asia Pacific, we received significant orders both for product expansion and deployment services to support their ongoing [indiscernible]. The Imperva deployment began as a database deployment in 2011, and we expanded to include a major verification firewall component in mid-2012. The product order was for expansion into another data center, while the services order was to renew various ongoing components of our services into the new year.

We received an order from a leading U.S. financial institution that has been a customer since 2007. Their initial deployment was for a limited PCI environment, and they have since continued the expansion of their database auditing deployment, much more broadly at the bank. With the Q1 order, this customer has spent over $3 million with Imperva, and they currently estimate they have the capability to cover 25% of the database estate.

As I mentioned earlier, we believe that our existing customer base is less than 10% penetrated and represent a significant long-term growth opportunity for the company. From a comparative perspective, our win-loss ratio in head-to-head competitive deals remains at a very strong ratio. Similar to recent quarters, we had a number of deals in which we won against larger competitors, highlighting the value of our integrated solution and the superior level of support we provide on a global scale. Some of these wins during Q1 include replacement of IBM in 2 different database deals, one with a leading technology company, the other with a major prepaid debit card provider. In both cases, the replacement decision was made due to Imperva's superior audit reporting and product support.

Imperva's verification firewall was selected over the incumbent F5 solution for a new application rollout at the major international consumer electronics company. The decision to move away from the F5 solution was due to Imperva's better accuracy, resulting in fewer false positives and, therefore, lower management overhead, as well as other ease of management advantages. In addition, a leading credit card branch chose Imperva's verification of firewall over F5 to protect a new set payment application due to Imperva's superior performance and more flexible deployment options.

Product innovation also remains a key priority in executing our growth strategy. This is evidenced by our recent release of SecureSphere 10.0, which we believe sets a new standard for both the breadth of security coverage in the data center and extent in Imperva's lead in the depth of application security capabilities.

Highlighted -- highlights of version 10.0 include ThreatRadar Community Defense, the first cloud source for intelligence service that aggregates and validates attack data from web application firewalls to provide enhanced protection to customers against hackers, automated clients [ph] and 0 data text. Gathering live data from web application firewalls deployed around the world and distributing this data in near real time, Community Defense fortifies the entire community against emerging threats, which provides unprecedented insight into the identity of the attackers.

SecureSphere Directory Services Monitoring or DSM, a new product line which enriches Imperva's fire and database security product by providing the ability to audit alert and report on changes made in active directory. DSM will allow organization to continuously monitor critical activity and meet compliance requirements, making it the most comprehensive platform for protecting critical applications and data across various systems in the data center.

Extended support for IBM's information management system and post-risk SQL, providing enterprise class database in audit protection solution for organization of all sizes, and for NFS, which extends our unstructured data coverage into UNIX and Linux environments.

In addition, with regard to our technology partnership, we recently announced that we have extended the fraud prevention capabilities of the Imperva SecureSphere Web Application Firewall and ThreatRadar Fraud Prevention to include integration with ReputationManager from iovation, a provider of device reputation protection against online fraud and abuse. By partnering with iovation, Imperva's customers can take advantage of the Reputation management -- Manager 360 technology to identify and mitigate against fraud for unique combination of device identification and reputation analysis from the SecureSphere user interface.

Finally, we continue to gain traction with our channel partners, in particular, our hosting provider partnerships. As a reminder, data center hosting providers use Imperva's solution to protect enterprises that are utilizing our partners' data centers to host their infrastructure. In the first quarter, we saw very strong momentum in these channels, which was, in part, responsible for the continued strong growth in our product subscription business.

For example, during the first quarter, one of our large hoster customers -- one of the large hosting customers grew their installed base of customers by 30%. This was the continuation of a trend that began in Q3 2012 due to an adjustment of our business model that allowed the hoster to take advantage of the demand for verification firewall in their customer base. Over the last 3 quarters, this hosting provider has broadened Imperva customer base by more than 160%.

On the cloud product form, our subsidiary, Incapsula, signed an agreement with a new partner that provides security services to small and medium businesses, primarily via their own partnerships with hosting providers. The partner was able to implement a solution within the quarter and turn on service during the last 2 weeks of the quarter. In those 2 weeks, this partner added hundreds of new accounts, while from a revenue recognition standpoint, this had only a minimal impact on our results in Q1. It shows the potential for leverage in the cloud business.

In summary, we were very pleased with our strong execution in the first quarter. The investments we are making in our sales and marketing support and product infrastructure are beginning to pay off as evidenced by the significant growth in new customers during Q1. Our pipelines remain very strong, and we remain committed to investing further -- to grow market share and further expand our technology leadership position.

With that, let me turn the call over to Terry.

Terrence J. Schmid

Thanks, Shlomo. I will first start with a more detailed overview of our first quarter financial performance and then provide our outlook for the second quarter and full year 2013. Following my closing remarks, we will open up the call to your questions.

As Shlomo mentioned, we were very pleased with the company's strong execution during the first quarter, particularly the continued momentum in subscriptions and new customer growth.

Turning to our first quarter financial results, starting with the P&L. Revenue came in at $28.6 million, which is up 33% compared to the first quarter of 2012 and exceeded our guidance of $27 million to $27.5 million. As Shlomo mentioned, we saw a solid growth across all geographies, along with continued traction in further penetrating our existing customer base, as evidenced by the more than 20% year-over-year increase in the number of customers that have purchased multiple products.

Services revenue, which represents the recurring portion of our business and consists of maintenance and support, professional services and training and subscriptions, increased 52% to $14.4 million and accounted for 50% of total revenue compared to 44% during the first quarter of 2012. The growth in services revenue was primarily driven by the 205% year-over-year increase in subscription revenue to $2 million, as subscriptions now account for over 14% of services revenue, up from 7% last year.

In addition, our services and training revenue grew 81% to $2.3 million in Q1 of 2013 compared to $1.3 million in Q1 of 2012. The growth in our services and training revenue is directly tied to the increasing success we are having in larger accounts. Our success in larger accounts and in winning more large deals is also contributing to the seasonality we see in our business. Budget cycles in our larger customers operate in such a way that we do more business with larger accounts in the second half of each fiscal year. This leads to a seasonal drop-off in the first quarter for sales and perpetual license products and then an acceleration over the course of the year. A secondary impact is that we tend to see an acceleration in our services and training business in the first quarter each year as we begin to deliver an invoice for the services associated with the large licensed deals we booked in the second half of the prior year.

Product and subscription revenue, which, as Shlomo mentioned in his remarks, is a leading indicator of the strength of our business, came in at $16.2 million, which represents growth of 27% compared to the first quarter of 2012. This growth rate is an increase over the 25% year-over-year growth in Q1 of last year. Product and subscription revenue growth is increasingly driven by the success of our cloud-based application security products, Incapsula and Imperva Cloud WAF, which we have renamed Imperva Incapsula. In fact, in Q1 of 2013, bookings of our subscription-based application security products were roughly equal to bookings of our ThreatRadar services. It's important to keep in mind that our cloud-based application security products represent a distinct delivery mechanism for bringing our application security products to our customers and are not an adjunct to our perpetual license business. Our cloud security products provide us access not only to additional market segments, such as the SMB market, but we also believe it will continue to become an increasingly important way of delivering application security to any size to enterprise.

During the quarter, we added 148 new customers. This is an increase of 66% year-over-year and highlights some of the success we are starting to achieve from the investments in our sales and marketing, support and product infrastructure.

Turning now to non-GAAP expenses and profitability, which, I'll remind you, excludes stock-based compensation expenses. For the first quarter, gross profit was $22.5 million compared to $17 million in the same period last year. Our gross margin percentage was 79% during the first quarter, consistent with last year and in line with our guidance.

In terms of non-GAAP operating expenses, we increased our investments in sales and marketing and research and development compared to prior periods to support future growth, given the strength of our pipeline. Specifically, sales and marketing expense increased 43% to $16.2 million and represented 57% of revenue compared to 53% during the first quarter of 2012.

Research and development expenses increased 17% year-over-year to $5.7 million but accounted for 20% of revenue compared to 23% of revenue in 2012.

General and administrative expense was $3.7 million, up 15% year-over-year. And as a percentage of revenue, G&A was 13% in Q1, down from 15% in Q1 2012. As a result, we reported a non-GAAP operating loss of $3.1 million compared to a loss of $2.5 million last year and above our guidance range of a loss of $2 million to $2.5 million. This led to a non-GAAP net loss attributable to Imperva stockholders of $3.2 million or $0.13 per share based on 23.9 million weighted average diluted shares outstanding compared to a loss of $2.6 million or $0.12 per share based on 22.3 million shares and above our guidance range of a loss of $0.09 to $0.11 per share.

On a GAAP basis, GAAP net loss attributable to Imperva's stockholders for the first quarter totaled $6.1 million or $0.25 per share based on 23.9 million weighted average shares outstanding. This compares to a loss of $3.3 million or $0.15 per share based on 22.3 million weighted average shares outstanding in the prior year period.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the press release issued today, covering our financial results for the quarter ended March 31, which can be viewed on our website.

Turning to the balance sheet. As of March 31, 2013, we had $109.9 million in cash and equivalents and short-term investments and no debt outstanding. Our cash balance reflects the generation of $7.7 million from cash flow from operations during the quarter.

We ended the first quarter with an accounts receivable balance of $24.3 million resulting in DSOs of 77, down from 103 days in Q4 and 82 days during the first quarter of 2012. As expected, the sequential decrease in DSOs was primarily due to the strong collections during the quarter.

Total deferred revenue increased 33% year-over-year to $46.6 million during the first quarter, driven by our over 90% renewal rates, the growing success of our subscription-based products and continued growth in our installed base and new customer acquisitions.

Now I'd like to finish with some thoughts regarding our financial outlook for the second quarter and full year 2013. As we look to the remainder of this year, we continue to see strong demand for our solutions and believe that Imperva remains in position to grow market share and extend our leadership position. As Shlomo mentioned earlier, we plan to continue to invest in the business due to the strength of our pipeline worldwide. And while there continues to be some level of volatility in the global economy, we are increasing our revenue outlook for the full year 2013.

Starting with the second quarter outlook. We expect total revenue to be in the range of $31 million to $31.5 million or growth of 27% at the midpoint compared to the same period in 2012. Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating loss is expected to be in the range of $500,000 to $1 million. Non-GAAP net loss attributable to Imperva stockholders, excluding the impact of stock-based compensation, is expected to be in the range of $750,000 to $1.25 million or $0.03 to $0.05 per share. The expected loss in Q2 is primarily driven by the ongoing investments in our sales and marketing, support and product development infrastructure. This also assumes a provision for income taxes of $250,000 to $300,000 for the quarter and diluted shares outstanding of approximately 24.3 million.

From a full year 2013 perspective, as I just indicated, we are increasing our revenue outlook, given the over-performance in Q1 and ongoing strength in our pipeline worldwide. We expect total revenue to be in the range of $133 million to $137 million, which represents year-over-year growth of 30% at the midpoint and an increase from our previously announced guidance of $131 million to $135 million.

Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating income is expected to be in the range of $1 million to $3 million, which includes an increase in our sales and marketing and research and development investments to take advantage of the demand we are seeing worldwide. We expect non-GAAP net income attributable to Imperva stockholders, excluding the impact of stock-based compensation, to be in the range of $500,000 to $2.5 million or EPS of $0.02 to $0.09 per share. This assumes a tax provision of $750,000 to $1 million and fully diluted shares of approximately 26.5 million for the full year.

We expect capital expenditures for the full year to be in the range of $2.5 million to $3.5 million. And finally, we continue to expect to generate positive cash flow from operations in 2013.

In summary, we are very pleased with our first quarter execution, which resulted in a strong start to the year. Imperva remains well-positioned to maintain its momentum since we continue to be the only security provider to offer enterprise as a comprehensive, integrated solution that minimizes security overhead while optimizing the protection of their critical applications and data.

With that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll move first to Rob Owens with Pacific Crest Securities.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Shlomo, given your commentary, it seems like you're having a lot of success with your web application firewall on the database side. Maybe just to steer the conversation a little bit to the unstructured side. Given all the growth in unstructured data that we're seeing, why don't you think you're seeing this be more a catalyst to your business or more growth? And I'm assuming the mix stayed relatively the same this quarter, but why isn't that driving more of an inflection at this point?

Shlomo Kramer

I think that this market is relatively early on. We are seeing good early traction with the product. We continue to invest and believe that this segment of our product, when we look at the 5-year horizon, is going to be very important for us. So I'm personally very encouraged with our progress. And as always, I want you to look at this as a kind of 5-year engagement versus a quarter-to-quarter one.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Okay. Great. And then second one for Terry. Maybe you can just walk us through what the quarter looked like. And I know you guys typically have been seeing more back-end-weighted quarters here, but just help us understand a little bit around the close. And then number two, during the quarter -- because I think you guys guided the first week of February last time, so nearly mid-quarter, but what did you see in terms of the velocity of your pipeline that caused you to step on the gas and spend $1 million more in OpEx?

Terrence J. Schmid

So from a linearity perspective, the quarter looked like what we saw last year and to see a change in the close rate of the business in terms of when deals were closed? It was similarly back-end loaded to what we've seen in the past. From the perspective of what we saw specifically during the quarter, that caused us to step on the gas? I wouldn't say it was necessarily driven by an in-quarter recognition of some things going on. The pipeline has continued to grow rapidly, a lot faster than revenue and faster than bookings. I think the operating expenses being higher than what we were forecasting midway through the quarter has more to do with the success of bringing people on board and ramping them up and getting them out in the field and selling rather than having something to do with the specific recognition on our part.

Operator

Next, we'll move to Tom Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

I want to ask you about the -- 2 things about your growth strategy. We've seen this the last few quarters now, I think you've been asked every quarter. Many of the other security companies are seeing a really challenging environment and have consistently been taking down their expectations for growth. Are you observing anything in the market that shows you that kind of demand, drag? Obviously, your pipeline and your bookings are outgrowing, but are you witnessing, maybe it's the smaller deals we're seeing that you're pulling together. Are you seeing something change in the way your customers structure budgets around the security markets? And then the second follow-up question to that would be, what gives you the confidence that those changes in the market aren't going to infect you as your -- affect you, excuse me, as you're targeting faster growth with more aggressive investment than what we were looking at before?

Shlomo Kramer

We haven't seen anything that changed to negative in the market. Quite the contrary, we continue to see the trend of increased awareness with customers to the need of the data center security stack and the fact that the investment in network and endpoint security is not addressing the threats that are very much top of mind for this organization and focus on the data center assets. And I think this heightened sense of urgency gives us a feeling that this is a sustainable positive movement in the market.

Thomas Ernst - Deutsche Bank AG, Research Division

Do think it's merely share shift? Or do you think there is an overall tightening of the total budget pool? Between yourself and the other larger...

Shlomo Kramer

In the category that we are exposed to -- we haven't seen any tightening. We are seeing, again, customers willing to make more strategic, larger commitments to projects and we haven't seen any change in the sales cycle length to close, et cetera. So, no indication to an issue in our category.

Thomas Ernst - Deutsche Bank AG, Research Division

Okay. Sounds good. So with the pipeline growing faster than bookings, growing faster than revenue, what's your philosophy towards investment now? Obviously, it looks like you're ramping up the investment this year. As you look forward, do you want to consistently expand margins from this run rate. The Street models for the out year, for next year in particular, have a pretty material slowdown in revenues and ramp-up in margins. Do you think next year would be a repeat of this year in terms of investing for rapid growth? What's the overall philosophy as you -- if this pattern continues for you?

Terrence J. Schmid

So, Tom, I think, it's a little early for us to give any commentary on what we might do next year. We're really focused on this year and taking advantage of the growth that we see in the pipeline and the opportunity that's out there. So we fully intend to continue to accelerate our investments and sales here to put ourselves in position to grow along with the market opportunity we see. But relative to what that would mean for 2014, I wouldn't be prepared to say anything about that yet.

Thomas Ernst - Deutsche Bank AG, Research Division

All right. I tried. Last one for your then. You mentioned headcount grew 9% in the quarter and it looks like a lot of the growth is in sales and marketing. How much has your sales and marketing or your sales capacity grown this quarter versus this time last year?

Terrence J. Schmid

I wouldn't give any commentary on what the sales capacity is, but I can tell you that most of the growth in headcount that we see right now is geared towards the sales organization and the marketing team, as well as R&D, but most of it is in the sales organization right now.

Operator

Next, we'll hear from Robert Breza, RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Maybe as a quick follow-up to Tom's comment and question, as you think about the go forward, you talked about the pipeline increasing faster than revenue, faster than bookings. Maybe, either Terry or Shlomo, if you could talk to how you've seen that maybe from a coverage ratio improve? Is it up substantially from where covered ratio might have been maybe a year ago or 12 months ago or 6 months ago? Any kind of color to kind of help us understand the visibility that you guys clearly are having.

Terrence J. Schmid

You're talking about coverage ratio, I assume, based on the number of sales teams that we have in place, coverage of that pipeline?

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Correct.

Terrence J. Schmid

Yes, so it's definitely -- it's definitely improved last -- over last year with a number of teams that we put in place. And the fact that many of them will be ramping up over the next couple of quarters, as they get up to speed. So we definitely have better coverage ratios across the globe. We've been adding resources to every territory, not just one particular. So the pipeline that we see there and that we have been investing toward, we have a better opportunity to take advantage of now, if that's what you're asking about.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

No, that's helpful. And maybe just to drill in a little bit more. Obviously we've -- over the earnings season here, although we're halfway, 3/4 of the way through, people have seen service provider weakness, they've seen government weakness. Maybe if you could just address kind of those verticals, as you guys see them relative to the opportunity?

Shlomo Kramer

So generally speaking, I would say that this segment of the market is -- they're different than other parts of security that are more mature and we are early on in the growth cycle here and there's very little penetration. So it's natural that this is going to behave a little bit differently than more mature and penetrated segments. So again, we are not seeing signs of slow down or major issues across the board.

Operator

Moving on to Sterling Auty from JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

This is Saket here for Sterling. Terry, can you just give a little color on which products are driving the growth in the subscription line and how we should think about that growth through 2013? It sounded like ThreatRadar was strong again. But I think you also said Imperva Incapsula was also maybe growing to a similar size, is that right?

Terrence J. Schmid

Yes. So first off, let me address the fact that we don't give guidance on specific product lines. So over the course of 2013, I wouldn't say anything specifically about what we're seeing here other than the fact that we've continued to see very, very strong growth in our subscription-based businesses. And in 2012, the vast majority of that revenue was derived from subscription-based products, was ThreatRadar products, which are add-on feeds to the -- our on-premise web application firewalls. The point I was making during the script was that we now have roughly equal in terms of the bookings during the quarter are cloud-based application security offerings, which are unique delivery mechanisms, right? This is a way of delivering application security over the cloud. It's not an add on to an on-premise box and they were roughly equal in size in terms of bookings in the quarter. So the obvious implication from that is easy to draw that those product lines are growing faster than ThreatRadar now, which has continued to grow very quickly.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. That's helpful. And then on the pipeline growth that you've seen, I know that you've kind of given qualitative commentary on quarterly activity in terms of how much that came from compliance versus sort of proactive security decisions. How much of the pipeline growth that you've seen is kind of coming from compliance, versus just sort of proactive security?

Shlomo Kramer

First of all, it's a little bit hard to tell because you may have a compliance project that are actually security projects that use compliance budgets. And in general, customers have used compliance as a way to improve their security. So there's cross-pollination both ways. But I would kind of in a rough estimate, I would estimate it continues to be equally divided between the various compliance regulations to pure security project, so 50-50.

Saket Kalia - JP Morgan Chase & Co, Research Division

Got it. And then lastly, you said that you grew headcount about 9% this quarter year-over-year, where do you sort of hope to end headcount at the end of 2013?

Terrence J. Schmid

We don't give headcount guidance, but we will continue to grow headcount, I can tell you that and most of those investments will continue to be focused on putting more sales teams in the field and then adding resources to the product development organization to continue to expand our product line.

Operator

Next, we'll hear from Jonathan Ruykhaver from Stephens Inc.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Question on Incapsula, can you provide color on the mix of sales activity between hosting providers versus the activity you see from the enterprise? It sounds like the hosting providers might become a bigger driver to that growth, is that true?

Terrence J. Schmid

I don't know that they are a bigger driver to that growth now. They have performed extremely well. Both are important drivers to the growth in our subscription business. I wouldn't suggest that the hosters are a bigger driver of growth than Incapsula itself. Incapsula is growing very, very quickly.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. Okay. And then on the federal business, you commented last quarter that you were seeing, I think, some new opportunities. Can you comment on what you saw in Fed in the March quarter and what you expect out of that business in the next 2 quarters?

Terrence J. Schmid

So I wouldn't -- we don't give any guidance on a specific verticals. So I'm not going to answer the question about what we'd expect to see. But as we've mentioned in the past, historically, the federal vertical for us has not been a big part of our revenue stream. So it doesn't have an outsized impact on us right now.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Right, okay . And I guess a final question, looking at the growth in customers, it was a pretty big number. Can you talk about that growth between your different products? Was it disproportionate share of that growth coming from any specific product?

Terrence J. Schmid

No, I wouldn't say a disproportionate share is necessarily from application versus data security. I would say that we have -- as we mentioned, Shlomo mentioned in his comments during the call, we do have one of the hosters that we work with, which has grown its head -- its number of customers that are protected by Imperva products by 160% over the last several quarters. A lot of that new customer growth is through that hoster. I'd say that's probably the only item in there that was different than we usually see.

Operator

From Oppenheimer & Co., Shaul Eyal.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Terry, how many -- and again, thank you for the color about deals over 100k being at 64, but did you guys have any deals at the millions, above millions level, this quarter?

Terrence J. Schmid

No. We don't disclose those on a quarterly basis. But we historically have done seven-figure deals.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Got it. Okay. Fair enough. And Terry, how should we be thinking about products, kind of the mix between products and subscriptions like services for the second quarter? I totally get your commentary about the mix this quarter and the driver behind it, but is it going to be kind of about kind of the 50-50 as we think about the second quarter?

Terrence J. Schmid

No, I don't think so. I think, if you look at the seasonality of the business, typically what you see is the low point for product and subscription revenue as a percentage of the overall total is in Q1. And then it shifts back toward product and subscription over the course of the year.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Fair enough. And just one more quick question about the 66% growth in new customers. How many of those were kind of completely -- kind of new greenfield and what's kind of the replacement number associated with that, I got your comments around IBM, kind of F5, but any more color you can assist and then provide us with will be greatly appreciated.

Shlomo Kramer

All of them are new customers to Imperva. And if I understood your question correctly with regard to replacements, we are definitely seeing an increase in the number of replacement both on the data side and on the application side, IBM, and F5. But this is an early market so you should assume that most of these customers are new not only to Imperva but to the category.

Operator

From JMP, Erik Suppiger.

Erik Suppiger - JMP Securities LLC, Research Division

On the pipeline, sounds like you're feeling pretty good there. If I look at the midpoint of your Q2 guidance, it's around 27%, 28%. And then you have a marginal acceleration as you get into the second half of the year. Is there anything about your pipeline that's longer-term in nature or anything that -- any reason why you'd seen a slowdown in year-over-year this quarter and then an acceleration in the second half?

Terrence J. Schmid

The pipeline itself certainly has deals in it that are of a longer term nature. I wouldn't infer anything from the guidance that we're giving in Q2. Year-over-year, I mean, that pipeline itself is skewed in any way like short term. But I would say that if you look historically at the business itself, we do have our lightest quarter in Q1 and then there's acceleration in the business over the course of the year, and sometimes that plays out in the year-over-year growth rates for quarter 2.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. And then one of your partners, A10 Networks, announced some web-app firewall capabilities in their product. Can you comment about how that will change the relationship? And also how meaningful they are as a partner of yours?

Shlomo Kramer

I don't say -- we've been competing with content delivery vendors, F5, Citrix and others, hardware, and A10 is another, not necessarily big entry to that list. And we'll -- I think we'll be successful, hopefully, in competing with them as well. And they haven't been a significant partner for us. There's no way, no influence from that direction.

Operator

Next, we'll hear from Dan Cummins, with B. Riley.

Daniel T. Cummins - B. Riley Caris, Research Division

Let's see -- Terry, could you talk about linearity for the March quarter? Just curious if you saw any softness that you weren't expecting, in particular in month 3. And if so, if anything has kind of wrapped over and closed, adding to confidence on Q2. And I'm just curious if you could elaborate a little bit more about your sales to or distribution through the cloud service providers and in particular, if you're seeing any demand pull-through from Amazon?

Terrence J. Schmid

So on the last one, I wouldn't have any comment to make specifically about Amazon. Linearity in the quarter was very much the same as we've seen in the past 5 or 6 quarters. There wasn't much of a change in the distribution of bookings over the course of the quarter with it being back-end loaded. I didn't notice any unusually strange behavior in terms of softness toward the end. Some deals pulled in, some deals went out, but no more than we usually see at the end of the quarter. So from our perspective, we didn't see any unusual behavior per se in the first quarter. As far as the second quarter goes, in the middle of the quarter, we don't talk about what's happening in the quarter. So I wouldn't have any comment to make on the second quarter yet outside of what we said in our guidance, on the script and on the press release.

Operator

[Operator Instructions] We'll take a follow-up question from Tom Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

Two quick follow-ups. Did you say that the headcount growth was 9% in the quarter? So quarter-over-quarter, or was that a year-on-year number?

Terrence J. Schmid

Quarter-over-quarter.

Thomas Ernst - Deutsche Bank AG, Research Division

Quarter-over-quarter, that's what I thought. And then the number of -- the new customer growth was pretty dramatic, 66%. At the same time, maybe this was a tough comp, but the number of deals over 100k was a more modest 10% type of growth. So can you reconcile those for us? Are you incenting people to go out and win new customers? We recognized the penetration is low in existing customers, or is that just volatility in the data?

Terrence J. Schmid

We don't incentivize our sales people to get new customers. And I think what you're seeing now is what's reflected in that year-over-year growth rate in new customers is really something we've been talking about here, which is the success we're having in the hoster accounts with the new model we introduced. And which -- and those, by definition, are smaller booking sizes. So those aren't going to be the 100k-plus deals.

Operator

Next, we'll hear from Rohit Chopra from Wedbush.

Rohit N. Chopra - Wedbush Securities Inc., Research Division

I know there's a question asked about Amazon, but can you just address partners in general? Are you seeing some of your partners such as Cisco or whoever, driving more deal flow? Is that actually happening? And the other question is can you talk about how the expenses skew across the quarters? Is it more front-end loaded, back-end loaded, where should we -- what should we think about there?

Terrence J. Schmid

On the expense question, we certainly see an increase in operating expenses over the course of the year as we bring headcount on and fully ramp them up and they're on for full periods, although we are accelerating these investments right now and bringing people on board, which is the source of the guidance that we gave for the second quarter relative to where you guys were at. But operating expenses will increase over the course of the year. A lot of that is driven by the successes that we have on the quarter, on bookings, and will be commission driven. But it skews more towards the Q3 and Q4. As we increase this operating expenses. From the partner side, I would say the Cisco relationship is still early and we're still working on that one. It has not -- hasn't had any big impact on our operating results to date.

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Okay. And then maybe just a quick follow-up for Shlomo. Can you just talk about any desperation out there on the competitive front? I know you've highlighted a lot of deals that you've won. But is there anybody out there that you're noticing is desperate? We see that when we call the channel, but I just want to get a sense from you on what you're seeing out there?

Shlomo Kramer

I don't know if desperate is the word but we continue to have very strong win-loss ratio against our competitors and they are trying -- continue to try whatever means they have in order to combat the product and focused advantages that we bring to the table. But that's, I think, in terms of trending, there's no change last quarter than previous quarters.

Operator

I show no further questions at this time. I'd like to turn the conference back over to the presenters for any additional or closing comments.

Terrence J. Schmid

Great. Well, thank you, all, for joining the call today. We appreciate your continued support and interest in Imperva.

Operator

Once again, that does conclude today's conference. We thank you, all, for joining us.

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