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Imperva (NYSE:IMPV)

Q2 2013 Earnings Call

August 07, 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

Sterling P. Auty - JP Morgan Chase & Co, Research Division

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

Jonathan Ho - William Blair & Company L.L.C., Research Division

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

Erik Suppiger - JMP Securities LLC, Research Division

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

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

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

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Imperva Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded.

And joining us on today's call, we have Mr. Shlomo Kramer, President and CEO; and Mr. Terry Schmid, CFO.

At this time, I will turn the conference over to Mr. Schmid. Please go ahead, sir.

Terrence J. Schmid

Thank you, Shannon. Good afternoon, and welcome to Imperva's Second Quarter 2013 Earnings Call. We will be discussing 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-Q filed with the SEC on May 9, 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. And 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 those figures, please refer to today's press release regarding our second quarter 2013 results. A press release has also been furnished to the SEC as part of the Form 8-K.

In addition, please note that the date of this conference call is August 7, 2013, and any forward-looking statements that we 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. While we continued to show growth in our business during the quarter and met our top line guidance, we had a slowdown in our product revenue growth and did not achieve the top line growth we targeted internally. This slowdown is attributed to the underperformance in our European and South American territories. We do not believe this underperformance in these territories is due to any change in our opportunity in these territories or from issues in the economic environment. Our pipeline growth remains solid in these regions. Rather, we believe it is attributable to sale execution issues.

As you know, beginning last year, we began accelerating our investments in sales and marketing with the majority initially focused in North America. We brought in new sales leadership in North America last year and restructured the sales organization. Those investments have paid off with increased growth in North America, evidenced by the 38% year-over-year growth in revenue. In fact, our team in North America grew bookings 50% compared to the second quarter of 2012, and achieved 110% of our internal trend during the second quarter. The changes we made in that region have paid off.

During the second quarter, we began instituting similar changes in Europe and South America. We have brought new sales leadership on board in both territories, and we believe this transition is one of the factors that led to the underperformance as the new leadership began the process of evaluating and upgrading the organizations. Going forward, we will continue to invest in the sales infrastructure to support accelerating growth in these regions, just as we did in North America.

Our revised profitability guidance reflects the full value of these investments, and we are confident that we can successfully address the sales execution issues as we did in North America. Terry will provide some additional color later, but our confidence is driven by the continued strong pipeline of opportunities worldwide. In addition, Imperva remains in position to benefit from the increasing number and frequency of a tax targeting high-value business data and applications, as organization of all sizes continue to lose the battle to protect their assets against hacking, data breaches, internal abuse and fraud.

As a reminder, we are the only provider to offer such a comprehensive, integrated data center security solution, which we view as significant competitive advantage since enterprises seek to minimize security overhead while optimizing the protection of their applications and data. Imperva's integrated SecureSphere suite secures data usage and business transactions 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 Q2 2013, our total revenue was $31.3 million, up 28% year-over-year and in line with our guidance range. This increase was driven by the success in North America that I mentioned earlier and the 49% growth in recurring service revenues, and particularly, by subscription revenues, which increased 156% year-over-year and now represent 16% of total service revenues compared to approximately 9% last year.

Our combined product and subscription revenue during Q2 grew 21% year-over-year as our strong subscription growth was offset by product revenue growth that, as I said, was below our expectations. We had strong growth in product and subscription revenues in North America, above 40% year-over-year. This was offset by the underperformance in Europe and South America. As I just mentioned, we remain confident in our ability to resume growth during the second half of the year with the changes we are making in Europe and South America.

In addition, it is important to highlight that during the quarter, we closed the largest cloud Distributed Denial of Service, DDoS, prevention deal in Imperva's history with a Fortune 10 company. This, along with the overall growth we are seeing in the business, resulted in our ability to grow combined product and subscription bookings faster than revenues during the quarter. We also grew deferred revenues by 32% compared to the second quarter of 2012, showing the continued strength in our maintenance and subscription renewals.

From a profitability perspective, during the second quarter, we continued to accelerate our investments in our sales and marketing support and product development infrastructure to further take advantage of the demand we believe we are seeing globally. The combination of our ongoing investments, along with a large order that had a higher-than-anticipated mix of low margin third-party product, led to the company reporting a non-GAAP operating loss of $2.1 million, below our guidance range of loss of $500,000 to $1 million. As a result, our non-GAAP EPS loss was $0.10 per share compared to our guidance range of a loss of $0.03 to $0.05 per share. Terry will provide additional details later, but we view this low margin order as an unusual occurrence and expect our overall margins to rebound for the remainder of the year.

In regard to some of our summary level statistics, during the second quarter, we added 185 new customers, representing growth of 46% compared to last year and evidence that our investments are continuing to pay off. In addition, the number of deals greater than $100,000 increased 36% to 76 during the quarter, and it is important to note that the dollar value of these large deals continue to grow as well.

We also continue 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 second quarter. We believe that our existing customer base is less than 10% penetrated and represents a significant long-term growth opportunity for the company.

From a geographical perspective, customer demand remains solid across North America and Asia Pacific, but as I stated, our performance in EMEA and South America did not meet our expectations. In the Americas regions, revenue increased 38% year-over-year during the second quarter. In EMEA, our revenue increased 18% year-over-year. Despite the continuing economical challenges in many regions, we remain confident that the steps we are taking in EMEA will lead to increased growth similar to what we achieved in North America during the last year.

In Asia Pacific, revenue increased 8% year-over-year in Q2 but were up 23% sequentially, highlighting a difficult year-over-year comparison. We will also be making additional investments in our sales organization in this region as well to increase growth. During Q2, we moved top sales representatives into strategic sales roles focused on banking and compliance requirements, as well as hiring additional dedicated regional sales manager with additional sales resources to be added during Q3 and Q4.

Now I would like to provide an update on some of our key accomplishments during the second quarter. In regards to the continued acceleration of investments, we had a successful quarter from a hiring standpoint. Overall, during the quarter, we increased our headcount approximately 6% worldwide quarter-over-quarter. Some of the key moves we made include adding a new regional Vice Presidents of EMEA, as well as Area Vice Presidents for Northern EMEA and Central and Latin America, in addition to adding a number of new dedicated regional sales people in Asia Pacific. 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 in large accounts with new and expanded deployments. For example, a leading U.S. financial services company, an existing web application firewall and Database Activity Monitoring customer, came under attack from hacktivists. They quickly tested our web application firewall product, confirmed it would stop the anticipated attacks, then expanded their deployment by a factor of nearly 4x to protect against outages. A subsidiary of a Fortune 500 technology company purchased both web application firewall and Database Activity Monitoring for a new deployment to protect patient health care and credit cards data. We were chosen due to our comprehensive approach to the combined application and data security requirements of HIPAA and PCI that they faced.

Finally, as I mentioned earlier, we closed the largest cloud DDoS deal in the company's history with a Fortune 10 company. The company signed a multiyear agreement to add our cloud DDoS service to their existing on-premise data center security deployment. The purchasing decision was driven primarily by the needs to provide Denial of Service attack mitigation for the company's highly distributed web applications.

From a competitive perspective, our win-loss ratio in head-to-head competitive deals remains very strong. 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.

In regard to product innovation, which remains a key priority in executing our growth strategy, as we mentioned on the Q1 call, the company officially released SecureSphere version 10.0 during the second quarter. We continue to believe that version 10.0 sets a new standard for both the breadth of security coverage in the data center and extend Imperva's lead in the depth of application security capabilities. As a reminder, highlights of version 10.0 include ThreatRadar Community Defense, the first cloud source threat intelligence service that aggregates and validates attack data from web application firewalls to provide enhanced protection to customers against hackers, automated client and 0 day attacks. Gathering attack 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.

During the second quarter, we more than doubled the number of application, providing data to Community Defense from 60 to 157. Growth in the number of participating application increases the amount of live data available for analysis and further enhances our ability to protect customers against attacks. SecureSphere Directory Services Monitoring, a new product line which enriches Imperva's file and database security products by providing the ability to audit, alert and report on changes made in active directory. DSM will allow organizations to continuously monitor critical activity and meet compliance requirements, making it the most comprehensive platform for protecting critical application and data across various systems in the data center. In Q2, we saw the first few orders for this new product, an encouraging sign of early traction, highlighting its relevance in today's world of database and file protection.

Finally, similar to last quarter, we continued to have success with our channel partners, in particular, our hosting provider partnerships. As a reminder, data center hosting providers use Imperva solution to protect enterprises by utilizing our partners' data centers to host their infrastructure. In the second quarter, we saw very strong momentum in this channel which was, in part, responsible for the 46% growth in new customers. Specifically, one of our large hosting customers maintained their installed base growth rate of over 30%, adding nearly 40 customers this quarter alone. This was the continuation of a trend that began in Q3 2012, which we described in our earnings call last quarter, in which we attribute to strong demand and some adjustment to our business model with the partner. In the last 4 quarters, this partner has increased their installed base of customers by more than 270%.

In summary, we continue to believe that Imperva remains in position to benefit from the increasing number and frequency of threats targeting the data center. We believe that the strength of our pipeline globally provides evidence that growth will resume in the second half of the year and beyond, as we build out and reorganize the sales infrastructure needed to support our next stage of growth in Europe and South America. In addition, we continue to expect our commitments to investment in product development and sales and marketing to further 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 second quarter financial performance and then provide our outlook for the third quarter and full year 2013. Following my closing remarks, we will open up the call for your questions.

During the second quarter, revenue came in at $31.3 million, which is an increase of 28% compared to the second quarter of 2012, and in line with our guidance range of $31 million to $31.5 million. As Shlomo mentioned, we were disappointed with the underperformance in Europe and South America and we believe the steps we are taking to increase growth will pay off in the second half of the year. We'd also like to reiterate that we do not believe that there is a change in the overall opportunity for Imperva in these regions or that the economic environment in Europe is a driver of our underperformance there.

Services revenue, which represents the recurring portion of our business and consists of maintenance and support, professional services and training and subscriptions, increased 49% to $15.7 million and accounted for 50% of total revenue compared to 43% during the second quarter of 2012. The growth in services revenue was primarily driven by the 156% year-over-year increase in subscription revenue to $2.5 million, as subscriptions now account for 16% of services revenue, up from 9% last year.

In addition, our services and training revenue grew 58% to $2.5 million in Q2 of 2013, compared to $1.6 million in Q2 2012. The growth in our services and training revenue is directly tied to the increasing success we are having in larger accounts. As a result, our combined product and subscription revenue came in at $18.2 million, which represents growth of 21% compared to the second quarter of 2012.

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 renamed Imperva Incapsula last quarter. As Shlomo mentioned, during this quarter, we closed our largest-ever deal for our cloud-based DDoS prevention offering with a Fortune 10 technology company. In fact, in Q2 of 2013, bookings of our subscription-based application security products for the cloud were greater than the bookings of our ThreatRadar services for the first time. It is 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 they're not an adjunct to our perpetual license business. Our cloud security products not only provide us access to additional market segments such as the SMB market, we also believe will continue to become an increasingly important way of delivering application security to any sized enterprise.

During the quarter, we added 185 new customers overall. This is an increase of 46% year-over-year and highlights some of the success we are achieving from the investments in our sales and marketing, support and product infrastructure, along with the traction we are seeing with our hosting provider channel.

Turning now to non-GAAP expenses and profitability, which I remind you excludes stock-based compensation expenses. For the second quarter, gross profit was $24.1 million compared to $19.2 million in the same period last year. Our gross margin percentage decreased to 77% during the second quarter, primarily due to a large order that had a higher-than-normal mix of low-margin, third-party products associated with the deal. We believe this to be an unusual occurrence and expect to return to gross margin levels around 80% for the remainder of the year.

In terms of our non-GAAP operating expenses, we continue to increase our investments in sales and marketing and research and development compared with prior periods to support future growth, given the strength of our pipeline. Specifically, sales and marketing expense increased 45% to $16.6 million and represented 53% of revenue compared to 47% during the second quarter of 2012. Research and development expense increased 27% year-over-year to $5.9 million and accounted for 19% of revenue, consistent with Q2 of 2012.

General and administrative expense was $3.6 million, up 7% year-over-year. And as a percentage of revenue, G&A represented 12% in Q2, down from 14% in Q2 of 2012. As a result, we reported a non-GAAP operating loss of $2.1 million compared to a loss of $300,000 last year and below our guidance range of a loss of $500,000 to $1 million. This led to a non-GAAP net loss attributable to Imperva stockholders of $2.3 million or $0.10 per share based on 24.2 million weighted average diluted shares outstanding compared to a loss of $400,000 or $0.02 per share based on 22.6 million shares last year and below our guidance range of a loss of $0.03 to $0.05 per share.

On a GAAP basis, GAAP net loss attributable to Imperva's stockholders for the second quarter totaled $5.9 million or $0.24 per share based on 24.2 million weighted average shares outstanding. This compares to a loss of $1.5 million or $0.07 per share based on 22.6 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 June 30, which can be viewed on our website.

Turning to the balance sheet. As of June 30, 2013, we had $110.4 million in cash and equivalents and short-term investments and no debt outstanding. Our cash balance reflects the use of about $800,000 from cash flow from operations during the quarter. We ended the second quarter with an accounts receivable balance of $27.1 million, resulting in DSOs of 79, up slightly from 77 days in Q1 and down from 86 days during the second quarter of 2012. Total deferred revenue increased 32% year-over-year to $48.3 million during the second quarter, driven by 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 third 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, with a particular emphasis on the European and South American territories.

Starting with the third quarter outlook. We expect total revenue to be in the range of $34 million to $35 million or growth of 31% 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 $1 million to $1.5 million or $0.04 to $0.06 per share. The expected loss in Q3 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 approximately $300,000 to $400,000 for the quarter and diluted shares outstanding of approximately 24.5 million.

From a full year 2013 perspective, we expect total revenue to be in the range of $135 million to $137 million, which represents year-over-year growth of 30% at the midpoint. Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating loss is expected to be in the range of $1.5 million to $2.5 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 loss attributable to Imperva stockholders, excluding the impact of stock-based compensation, to be in the range of $2 million to $3 million or a per share loss of $0.06 to $0.10 per share. This assumes a tax provision of $1 million to $1.25 million in fully diluted shares of approximately 24.4 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 believe Imperva remains in position to grow above our Q2 performance in the second half of the year and beyond due to the strength of our pipeline and our restructuring efforts in Europe and South America and continued demand worldwide for our comprehensive, integrated security solution.

And with that, we'd be happy to take your questions. Shannon?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So the low margin deal that you referenced in the call, can you tell us specifically what was the third-party product that was actually included? And did that deal hit both the product and services gross margin or just product?

Terrence J. Schmid

Yes, it's -- we resell product from a company called Net Optics, their load balancers that sit in front of our high-end appliances. It only affected the gross margins in the quarter on product. And again, as I said during the prepared remarks, we don't sell very many product -- we don't do very many deals with Net Optics on them. And in the future, if it's a deal of that magnitude, we'll structure it differently so that doesn't have an impact on our gross margins going forward.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

If you look at the services gross margin, it feels like it's steadily come down over the last 4 quarters. Is there something structurally different in the way you're going to market, the pricing? Or how should we think about the gross margins on the service subscription side like going forward?

Terrence J. Schmid

Well, what we're doing there is we have been, over the course of the last several quarters, adding capacity to the professional services organization so that we can deliver on the backlog that we have there, as well as the fact that we are engaged in larger deployments now, particularly on some of the large database deals that we do. So we've had to add capacity to be able to deal with those large deployments. My expectation is that the trend will stabilize over the next couple of quarters, but it's really driven by the need to add capacity so that we can deal with large deployments and pull some of the backlog down that's been sitting in our backlog for quite a while.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Last question. Shlomo, the changes in sales leadership, you mentioned some of the disruption. Traditionally, when you make changes, when you come down a level, it takes 3 quarters to see that change actually start to show improvement. Why should we see improvement -- or what gives you the confidence that we'll see improvement so quickly in September?

Shlomo Kramer

So we are looking to see improvement and the improvement is going to be gradual, as you said, over the next 3 quarters. But we are hopeful that we are going to start to see that improvement already in Q3.

Operator

And we'll hear next from Rob Owens of Pacific Crest Securities.

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

Focusing a little bit internationally on your selling motion and some of your missionary selling tactics. Just want to understand what you're seeing in terms of traditional verticals, but more importantly, some of the new verticals that you're beginning to open up. And then obviously, it was a little challenging, just maybe where you're seeing some of the friction in the sales process. Is it a function of the economy? Or just maybe a little more color would be great.

Shlomo Kramer

So we don't believe this is related to the economical situation but rather to sales execution and the ability to, on the one hand, drive the partnership and the channel to deliver a leveraged sales model, and on the other hand, to close these very large deals that we are seeing in the pipeline. And I would say that on both ends, there's very similar profile in, say, the EMEA type of sales execution requirements to the North America sales execution requirements with the same use cases, same drivers, same deal profile. We are just having a better sales execution in North America in the last quarter than -- in the last few quarters than we had in EMEA, and hence, the changes.

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

Great. And then on linearity, I know your quarters have been very back-end-weighted with more large deal in the back end. And Terry, DSO came down this quarter, which could suggest maybe more of a linear type of layout. Were you soft into quarter's end? Or was it just better collections on your part?

Terrence J. Schmid

The DSO is a reflection of our collections on our part, not a change in one area.

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

So this should be a more normalized range moving forward?

Terrence J. Schmid

Yes. We have a substantially smaller percentage of our total AR that is sitting in the greater than 60, greater than 90 buckets.

Operator

And our next question will come from Jonathan Ho of William Blair.

Jonathan Ho - William Blair & Company L.L.C., Research Division

With the 185 new customers that you guys saw, can you just talk a little bit about where those customers are coming from? Is this mainly North American driven? Are there any specific verticals and any opportunities that you're seeing out there?

Terrence J. Schmid

The biggest driver of the growth has been the success that we're having in the hosting business with the new -- effectively, it's a subscription model. So 40 of the customer account growth there came from the hosters. Beyond that, I don't think that there's -- I wouldn't characterize it as any particular vertical that's lending the most strength to that new customer growth. As we've said in the past, this is a horizontal and vertical problem. Everybody faces the same issues, so I don't think there's a concentration in one particular vertical there. And I think if you looked across that, you'd basically see a similar geographic distribution of new customer adds as you do on the revenue line.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. And can you just talk a little bit about the competitive environment? Have you seen that shift at all? And has that sort of impacted any of the sales execution or changes in sales folks?

Shlomo Kramer

No. The competition has -- that has not changed during the last quarter. And our win-loss ratio have remained in the same range that they've ranged in the last few quarters and are very strong. So we believe we are in very good -- continue to be in very good shape.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. So just in terms of the, I guess, the sales execution challenges, would it be safe to say that, I mean, given your expectation that EMEA could potentially grow at a similar rate to North America, that a lot of this is just getting those deals in a situation where you can still participate and just getting the sales channel to bring those in front of you?

Shlomo Kramer

Yes. You touched on the 2 main challenges of the sales execution. We're kind of working with building the right channel, as well as closing the larger deals -- the enterprise deals. And both are very similar challenges in North America to EMEA. And again, we are hopeful that we could -- we'll be as successful in EMEA as we have been in North America during the last year.

Operator

And our next question will come from Nandan Amladi with Deutsche Bank.

Unknown Analyst

It's actually Taz [ph] on behalf of Nandan. Just want to get some more color on the sales execution issues you're talking about in South American and Europe. Was there deals that slipped that would likely come back in Q3? Or do you guys see a higher turnover of salespeople left the company? What exactly happened there in terms of sales execution?

Terrence J. Schmid

With respect to deals slipping, we didn't really see deals slip more than we typically do. I don't think there was -- I would pin it on our asset deals slipping out of Q2 and into Q3 necessarily. And I think one indicator of that is, effectively for the full year, we've narrowed our guidance range and effectively pulled the bottom up on that. So we're comfortable that the deals that are out there are still ours to have and that we'll execute well in Europe going forward. But I wouldn't pin it on an abnormally high number of deals slipping out of Q2 and into Q3.

Unknown Analyst

So the shortfall was just deals not coming in, not closing as the deals you have closed in those regions?

Terrence J. Schmid

Yes. And part of it's -- part of the -- we're talking about on sales execution side is hygiene as well, right? It's understanding where that pipeline's at and when it's really going to close and where we really stand in those deals and how well we're going to close them. So we don't feel like what we're seeing here is that we're losing deals necessarily. We definitely feel like we've got additional management talent there that'll help us to have better hygiene and a better understanding of what the reality of the closing time of those deals is. So there is some slippage there but I don't think that it is abnormally high.

Shlomo Kramer

So again, at the end of the day, it's a question of sales productivity and it's very different in Europe than in North America. And there's no reason for that. And since productivity comes from both ends, it's the access to the market, and channels and partners are the key part of that. As you know, we are a channel-based company and more than 50% of our pipeline comes from the channel. And if we don't have the right channel, then that gets hurt. And it is on the closing deals and not holding it from one quarter to another. And as you know, quite a lot of our revenue come from large deals that require enterprise sales capabilities and this needs to also be improved in EMEA.

Terrence J. Schmid

I'll add one more thing to that. So with respect to the slippage and the fact that I'm saying we didn't see a big difference there in deals that slipped, we came in within the guidance range that we gave. So we're not talking about an order of magnitude here. We're disappointed in the sales execution in these 2 territories, and we expect the performance to improve there in these 2 territories over the course of the balance of the year. But we're not talking about substantial enough miss where we didn't come in within the guidance range that we gave you guys earlier. So we're disappointed with the underperformance but it isn't orders of magnitude away from where we expected it to be.

Unknown Analyst

Got it. Then on the guidance, you initially account for the shortfall in this quarter, it seems like you're increasing your OpEx for the year by about $2.5 million compared to what you guys guided last quarter. What changed in terms of your pipeline or your outlook from the top line that you're increasing that OpEx guidance by about $2 million in a span of 3 months since you gave us the last guidance?

Terrence J. Schmid

Yes, I would attribute it mostly to the fact that transition activities in sales organizations cost money in and of themselves. We've still seen solid pipeline growth there as well. There's not a change in the pipeline picture for us, which is why we're trying to make it clear that what we're not dealing with here, from our perspective, is a macroeconomic issue in Europe. Dealing with an execution issue on our side, we have to make changes there. And some of those changes will cost more money than we expected to spend on those organizations going forward. That's a driver of that, a big one.

Operator

And our next question will come from Robert Breza of RBC Capital Markets.

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

Shlomo, I was just -- wanted to dig into the whole sales force execution side of things. I mean, obviously, you guys made changes in North America, making changes here now in both Europe and South America. I was wondering if you could just be a little more specific. Are you putting in like new layer -- I mean, obviously, you're changing out some of the management. But are you putting in new layers of management, some new review processes? Just trying to get an understanding of the changes you're making and what gives you the confidence going forward.

Shlomo Kramer

Yes, so basically, in both areas, we -- in both regions, we've replaced the leadership, so that's a replacement of existing layer of management. And in EMEA, we have expanded also the -- as we've stated in the prepared remarks, we also expanded the next level of management and we added area VP. So it's a combination of what we believe is significant upgrades to the top level leadership, as well as adding more strength in the next level of management.

Operator

And we'll hear next from Erik Suppiger of JMP Securities.

Erik Suppiger - JMP Securities LLC, Research Division

Yes, Terry, can you give us a little more color on the deal with third-party products? Can you give us a sense for the size of that?

Terrence J. Schmid

I'm not specifically going to give the size of the deal, but I will tell you it's the largest deal that we did in the quarter and that most of the product on that deal was from a third party, and I'll tell you a little bit, was for the third-party products. And a little bit about the deal dynamics on that particular deal was it was a fairly fast-moving deal. And over the last week of the quarter, the final quote came through and the bill of materials on the order. And the order doubled in size in that period of time and it was all just third-party products. So it was not the kind of deal that we saw coming. But from the customer's perspective and the way they ordered the product, it's logical. They were buying load balancers to sit in front of higher-end appliances. They bought a number of higher-end appliances last year that didn't have these load balancers sitting in front of them, so it was a bit of a catch-up order for them.

Erik Suppiger - JMP Securities LLC, Research Division

Were you planning for them to buy more of your product, and in place of that, they hired -- they bought more of the third-party product? Is that what happened?

Terrence J. Schmid

I wouldn't characterize the deal that way. I wouldn't say that's -- no, they didn't replace product that we were going to buy. It was just the deal influx over the course of the quarter.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. What about the vertical markets? I think last quarter, about 1/3 of your business was banking and then some government and tech. Can you give us a breakout on that?

Terrence J. Schmid

There wasn't a big fundamental shift in the vertical market makeup over the course of the quarter. Banking and finance was still the largest at about 1/3, followed by technology, telecom, government and military and health care.

Erik Suppiger - JMP Securities LLC, Research Division

And then the split between web app firewall and database, was that still half and half or in the ballpark?

Terrence J. Schmid

So what we've – in the individual quarter, we talk don't talk about it necessarily because each quarter can be different. Over the course of a year, they tend to be 50 -- they tend to be evenly sized and I don't see a reason that that's changing going forward. Database security tends to be stronger in the second half of the year.

Operator

And moving on to Shaul Eyal of Oppenheimer & Co.

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

Two quick questions in my end. Still kind of staying with kind of the European mis-execution. Can you kind of show with us what regions or kind of what countries, specific countries in Europe you have seen some of the softness? Is it Western Europe, Eastern, Southern part? Or was it kind of broad based in Europe?

Terrence J. Schmid

We'd characterize it more as broad based. I wouldn't pin it on any one particular area in Europe.

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

Got it. And the Fortune 10 kind of significant win that kind of you mentioned, can you kind of maybe share with us kind of just what vertical is it coming from?

Terrence J. Schmid

No, not without giving more information than we should.

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

Okay. Shlomo, you mentioned kind of the Imperva Incapsula kind of really beginning to kick in. As we start kind of thinking about the second half of kind of this year and kind of heading into 2014, should we be kind of expecting kind of the Incapsula kind of really to continue with kind of the same level of growth rates we have seen over the past few quarters or even kind of accelerate?

Shlomo Kramer

The business is starting, and definitely, we are seeing -- continue to see strong demand in the pipeline. But I wouldn't want to give any additional guidance above what we've -- what Terry gave.

Operator

[Operator Instructions] And our next question will come from Dan Cummins of B. Riley.

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

I apologize if I missed this but, Terry, the professional services and training component of services, the number that, I guess, you'll put in the Q, maybe you can just give us the round number. I'm sorry, also I may have missed subscription revenue. And then just characterizing your growth rate, accelerating or decelerating on recurring revenue.

Terrence J. Schmid

So we don't give guidance on the growth rate for recurring revenue. Both subscriptions and services and training were $2.5 million of revenue in the quarter.

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

Okay. If I could just ask a follow-up. I think you mentioned distribution through the hosting companies, but you're not yet talking about an OEM relationship, is that correct? And is that something that you're still discussing?

Terrence J. Schmid

I don't know that we were ever discussing an OEM relationship with hosters, so...

Shlomo Kramer

So the hosters are terming on and selling this service to their customers so they're, in a sense, a channel here. I'm not sure what you are referring to when you talk about an OEM relationship in this context.

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

I was talking about perhaps a layer of a security stack for cloud service providers. I think some of your competitors have talked about that opportunity.

Shlomo Kramer

Essentially, that's the way that we operate today with our hosting partners and that's the primary way I expect that to continue is that that's an optional component of the hosting stack that these hosting providers provide to their customers. So that's the way that we see our hosting partners prefer to offer the solution.

Operator

And our next question will come from Rohit Chopra of Wedbush.

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

I had a couple questions. One, Shlomo, you didn't talk a lot about displacements compared to last quarter. So I just wanted to get a sense, are you still out there displacing some of the other vendors? Or are they becoming a little bit more aggressive? And then maybe you can also talk about partnerships in the same breath. And then I had a question on Terry on guidance.

Shlomo Kramer

Yes. So no, we continue to displace our competitors in the market quite successfully and we continued to do that in last -- in Q2 as well. And in general, we continue to be, as I said earlier, in a very good competitive position and our win-loss ratio continue to be very strong. And in terms of partnership, again, we discussed a little bit the -- obviously, a lot of our success is built on channel-based company based on partnership, both the security channel, we continue to see good progress. We talked about the hosters. So things are moving in the right direction on the partnership front as well.

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

Okay. And then, Terry, a little bit of a tougher question. So last quarter, you increased your OpEx. There's a lot of investments that were going to be made and you said there was a lot of opportunity in the pipeline, deferred had grown over 30%, but you also increased the top end of guide this quarter. There are some adjustments you need to make in South America and Europe but you did increase investments but the guide is still -- the top end is still the same. The bottom end, I understand, you brought it up. But this time, you're talking about large deals, big opportunities, deferred growing 32%, 33%. Why not take up the top end of guide if you're increasing OpEx again and there's just so much more opportunity this quarter?

Terrence J. Schmid

Because the OpEx increase is really tied to the transitional expenses, to a large degree, in EMEA and South America, right? So it's not a lot -- some of that spend is in purely adding sales capacity, right? Some of it associated with making changes to the organization itself. And then some of it is adding resources to the sales organization with their management resources, they're designed to facilitate improvements and productivity among the sales force but those can take a little bit longer to have an impact. So it's not the kind of thing where you spend those dollars and I'd be immediately comfortable guiding higher on the top line.

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

So it's not necessarily front-line resources? It's sort of back end as well?

Terrence J. Schmid

Yes.

Operator

And it does appear there are no further questions at this time. Gentlemen, I'll turn the conference back over to you for any additional or closing comments.

Terrence J. Schmid

Thank you all for joining the call today. We appreciate your continued support and interest in Imperva. Thank you. Bye.

Operator

And that does conclude today's teleconference. Thank you all for your participation.

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