Imperva Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Imperva (IMPV)

Imperva (NYSE:IMPV)

Q4 2013 Earnings Call

February 06, 2014 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

Mark E. Kraynak - Senior Vice President of Worldwide Marketing

Analysts

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

Nandan Amladi - Deutsche Bank AG, Research Division

Joel P. Fishbein - BMO Capital Markets Canada

Saket Kalia - JP Morgan Chase & Co, Research Division

David Kaplan - Barclays Capital, Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Robert Paul Breza - Sterne Agee & Leach Inc., Research Division

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

Jonathan B. Ruykhaver - Stephens Inc., Research Division

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

Michael W. Kim - Imperial Capital, LLC, Research Division

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Imperva Fourth Quarter and Full Year 2013 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded and would now like to turn the call over to Mr. Terry Schmid, Chief Financial Officer. Please go ahead.

Terrence J. Schmid

Thank you, Vicky. Good afternoon, and welcome to Imperva's fourth quarter and full year 2013 earnings call. We will be discussing the results announced in our press release issued after the market closed today. Again, I'm Terry Schmid, Chief Financial Officer of Imperva. With me on the call is Shlomo Kramer, Imperva's Chief Executive Officer. We are also joined today by Mark Kraynak, our Senior Vice President of Worldwide Marketing. After our prepared remarks, Mark will join us in answering questions about the acquisitions and product announcement we made today.

During the course of this call, we will make forward-looking statements regarding the 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 November 12, 2013.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures excludes stock-based compensation and acquisition-related 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 fourth quarter and full year 2013 results. The 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 February 6, 2014, 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 express 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 our execution during the fourth quarter, which led to a strong finish to the year and our ability to exceed our 2013 revenue guidance. Our strong fourth quarter results were driven by the continuing improved overall sales execution performance as the number of bills booked over $100,000 increased 43% year-over-year and we continue to see solid growth across all geographies.

This, along with the combined product and subscription revenue growth of 37% in Q4, highlights the ongoing growing demand for our comprehensive integrated data center security solution.

Looking to 2014, we believe in Imperva is well-positioned to continue gaining market share as a result of our growing global pipeline of opportunities, the ongoing expansion in our global sales resources, commitments to innovation and ability to execute our comprehensive plan for addressing the security challenges for the cloud.

As Terry will detail in a moment, we continue to expect Imperva to deliver strong revenue growth during 2014. And we have increased the preliminary 2014 revenue guidance we shared on our last call. Taking a look at our overall financial performance during Q4 2013, our total revenue was $42.7 million, up 34% year-over-year and above our guidance range. This increase was driven by the success in Americas and EMEA, and the 42% year-over-year growth in the recurring services revenue, particularly subscription revenue which increased 123% year-over-year and now represents 20% of total services revenue compared to 13% last year.

As I mentioned earlier, our combined product and subscription revenue during Q4 also grew 37% year-over-year, which we continue to view as a leading indicator of the strength of our business, due to the large part of our subscription-based offering as an alternative to our perpetual license offering.

For profitability perspective during the fourth quarter, we reported non-GAAP operating income of $3 million and non-GAAP EPS of $0.12 per share, both in line with our guidance ranges and up 98% and 100%, respectively, year-over-year, highlighting the leverage we are able to achieve in the business.

We are pleased with this result since we continue to accelerate our investment in our sales and marketing support and product development infrastructure to further take advantage of the demand we believe we are seeing globally. In addition, we were pleased with our ability to generate $7.5 million in cash flow from operations, up $7.2 million compared to the same period last year.

In regards to some of the summary level statistics, during the fourth quarter, we added 237 new customers compared to 199 during the same period last year. For the full year 2013, we added 718 new customers, representing growth of 30% compared to 2012, and further evidence that our investments are continuing to pay off.

In addition, as I mentioned earlier, the number of deals greater than $100,000 increased 43% to 136 during the quarter, and it is important to note that the overall dollar value of these large deals continues to grow as well.

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

Finally, our overall pipeline growth continues a solid trend upward and we once again have started the quarter with a record pipeline. Our pipeline continues to grow at a rate above both our revenue growth and our bookings growth. From a macro perspective, customer demand remained solid across all geographies and our overall bookings growth once again outpaced revenue growth, as our investment in sales and marketing infrastructure continues to pay off. In the Americas region, revenues increased 40% during the fourth quarter, as we continue to benefit from the combination of strong execution from the channel partners, new sales leadership and the restructured sales organization in North America that we implemented last year.

In EMEA, we continue to benefit from improved sales execution as well, resulting in a 28% year-over-year increase in revenue during the quarter, while our bookings growth was significantly higher than revenue growth, highlighting the continuing strong demand in the region.

In Asia Pacific, we achieved solid revenue growth of 24% year-over-year in Q4, despite ongoing economic challenges in some of the countries.

Now I would like to provide an update on some of our fourth quarter and recent key accomplishments. Of course, the biggest news which we announced today is our comprehensive cloud strategy includes our agreement to acquire Skyfence, our agreement in principle to purchase the remaining stake in Incapsula, and the announcement of our new SecureSphere Web Application Firewall for Amazon Web Services. Each of these developments on its own represent an exciting opportunity for Imperva. Together, they represent the cloud security and compliance offering that is unmatched in the industry.

For some time now, we've seen our customers begin to take advantage of cloud-based services to reduce costs and increase flexibility. However, despite these benefits, cloud-based applications and data services often poses significant security and compliance risk to an organization. The reason is that cloud services often run critical applications and store business-critical data but the majority of existing security controls do not cover cloud deployments because they were designed for on-premise applications. The result is a significant security gap which our strategy comprehensively addresses.

The first aspect of this strategy is Incapsula, which is positioned for externally facing production applications like online banking, online gambling -- gaming and retail applications. Further, Incapsula appeals to customers that prefer to use cloud delivery model for their application security. Five years ago, we anticipated that Web application firewall market would itself be ready to take advantage of cloud delivery models so we invested in Incapsula as a majority owned subsidiary. Incapsula commenced operation at the end of 2009, initially targeting midsized enterprises and SMBs that needed application security and compliance solutions but did not have the size or resources to deploy our SecureSphere Web Application Firewall appliances into their own website infrastructure. Since then, we've seen great traction and an expansion of the target customer to include traditional enterprises, as evidenced by 2 of our key wins in Q4.

A large regional bank in Asia Pacific signed a multiyear deal for Imperva to provide Web Application Firewall and DDoS protection across a highly distributed collection of externally hosted sites and Amazon Web Services infrastructure. We beat out Akamai for the deal with a solution that includes both Incapsula services and SecureSphere Web Application Firewall for AWS, which incidentally, is another aspect of the strategy we announced today. We won based in our superior security technology and better support for the Amazon environment.

We also closed a deal with one of the world's largest music publishing companies that purchased Incapsula to protect the sites of their artists around the world. We again beat Akamai, which was the incumbent content delivery network based on ease-of-use and superior security capabilities. The customer plans to protect over 1,000 websites using the Incapsula solution.

As a result of traction in the mid-market and deals like these, Incapsula achieved significant revenue growth reaching $3.1 million in 2013, both 272% growth over 2012, and has been the primary driver behind Imperva's overall strong growth of subscription revenues. Our strategy here has borne fruit and we are bringing them fully in-house to allow for scale as they experience hyper growth.

The second aspect of this strategy is our new SecureSphere Web application Firewall for Amazon Web Services. Similar to Incapsula, this product is also mainly for externally facing production application, but for customers that want to replicate their on-premise solution in the cloud or that prefer a do-it-yourself model for application security. We are seeing a recent strong push by enterprise customers to move the customer-facing applications to Amazon Web Services so that they can realize significant infrastructure savings by managing load peaks with temporary Amazon capacity. These customers expect to replicate their existing on-premise security controls for those applications, including SecureSphere when they do this.

In fact, we supported a Fortune 500 consumer electronics company that deployed the customer-facing applications to Amazon for the 2013 holiday season, with an early availability version of SecureSphere Web Application Firewall for Amazon Web Services. This was in addition to the large regional bank in Asia Pacific that I mentioned earlier.

The third component of this strategy is our agreement to acquire Skyfence. In contrast to Incapsula and SecureSphere for AWS, Skyfence is aimed at internally facing corporate applications that are moving to Software-as-a-Service delivery models. Another way of thinking about this is employee and back-office-oriented applications that happen to be open to access from the Internet as your employees and partners can access them anywhere in the world. This, of course, brings with it not just security challenges, but also regulatory and compliance challenges as it moves responsibility for housing the data to a third-party.

Founded in 2012, Israeli-based Skyfence has developed a solution which allows realtime visibility and control over corporate use of SaaS applications which enforces security policy, protections sensitive data from external and inside threat, as well as ensure compliance with standards. Skyfence's product is currently in beta testing with selected customers and has shown very promising results.

There are 3 primary use cases for the Skyfence solution. The first is managing compliance in the cloud. Skyfence generates an audit trail for all user access ranging for logging events to a full activity log and enables enforcement of the necessary separation of duties between the SaaS administrator and IT security. Administrator can generate activity reports for both internal and external compliance audits and exposure reports for forensic analysis.

The second is controlling cloud application that are used without corporate approval, also referred to as shadow IT. To accomplish that, Skyfence will automatically detect which cloud applications are in use and provide risk scores and usage metrics to enterprise IT.

The third is the prevention of cyber intrusions. The weakest link in many cloud application security is the abuse of legitimate user accounts. Skyfence identifies and protects against account-centric's attack, including attack takeovers, man-in-the-middle attacks, DNS poisoning and brute force attack.

Strategically, our agreement to acquire Skyfence is similar to our Incapsula strategy from 5 years ago, where we acceded a new company because we recognize that cloud delivery will change the Web application security landscape. In the case of Skyfence, we believe that internally facing corporate application would substantially change the landscape for security and compliance solution. And so we are investing in this space early to put us in the best execution position possible. Terry will provide additional details regarding the financial impact of the acquisition, but I believe it is important highlight that Imperva pioneering the third pillar of enterprise security with a new layer of protection designed specifically for physical and virtual data centers. During the past 5 years, we have proven that our market focus and strategy were correct as we have achieved greater than 30% compounded annual growth for our revenues and a growing list of blue chip customers.

We currently believe that we are at the very early stages of a large and fast-growing market of protecting business-critical application and data in the cloud and that our comprehensive strategy here significantly enhances our effort to be a leader in this market and further positions Imperva for long-term growth.

Now turning to a deal highlight in Q4. We continue to see traction with some of our largest existing accounts, as well as strong headwind ratio in competitive deals. Some highlights include a Fortune 250 energy company that selected Imperva to replace and consolidate their existing Lumigent's BeyondTrust, and IBM Guardium deployments. The primary use case is privileged user monitoring for regulatory compliance. The key selection driver was ease-of-use and ability to successfully roll out as the scale needed for the deployment.

A top 10 global investment bank selected Imperva over IBM and McAfee for the first phase of an anticipated global database security and auditing deployment. Key drivers were compliance with Sarbanes-Oxley and Monetary Authority of Singapore technology risk management regulations. We were selected on the depth of our successful experience with similar global database security and auditing deployments.

A global specialty retailer of food and beverages extended their implementation of SecureSphere for SharePoint from 10,000 to 175,000 users, allowing them to offer security to over 19,000 stores in 60 countries. Their main use cases are monitoring and protecting access to SharePoint, as well as auditing and protecting all file data without impacting critical systems or user experience. The customer originally chose Imperva because our solution was able to comprehensively secure SharePoint's Web, file and database components.

A major North American auto manufacturer selected Imperva over both F5 and McAfee for Web application and database security because of the value of our integrated solution. This customer also purchased ThreatRadar application services and plans to participate in community defense, reinforcing the value of our market-leading security innovation.

Similar to last few quarters, we also continue to have success with our channel partners. In particular, our hosting provider partnerships. As a reminder, data center hosting providers using Imperva's solution to protect enterprises that are utilizing our partners' data centers to host their infrastructure.

In the fourth quarter, we continue to see solid momentum in this channel off of a much larger base which in part contributed to the new customer growth during the quarter. Specifically, one of our large hosting customers achieved an install base growth rate of approximately 28% during Q4, which was again the continuation of a strong growth trend that began in the third quarter of 2012.

During the full year 2013, this partner had increased their install base of customers by almost 170%.

Before I turn it over to Terri, I wanted to mention that we also completed a small purchase of the technology assets from a company called Tomium Software, which will help Imperva accelerate and expand our mainframe data security solutions. We have been OEM-ing at the mainframe database auditing agent technology from Tomium and ownership will allow us to expand the feature set we include on the mainframe to include other parts of our data security suite.

In addition, we believe ownership will eliminate the perceived risk of losing access to the mainframe technology agent and improve our competitive position in the market against IBM and McAfee.

So in summary, we had a strong finish to 2013, and we were very pleased with the continuing growth of our subscription revenue and improved sales execution globally. Looking forward, we have entered 2014 with a very strong pipeline of opportunities worldwide, driven by the increase in sophisticated attacks by hackers and malicious insiders, along with an increasing number of regulation, governing business applications and data that enterprise must comply with.

In addition, we are very excited about the momentum of our strategy to address the security challenges cloud adoption represents for data center asset, given the announcement we made today regarding Skyfence Amazon Web Services and Incapsula. We believe that Imperva is well-positioned to offer our customers a range of options to address the cloud security challenge which we expect to result in improved competitive position and accelerated course.

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 fourth quarter and full-year financial performance and then provide our outlook for the first quarter and full year 2014. Following my closing remarks, we will open the call to your questions. As Shlomo mentioned, we're very pleased with the company's strong execution during the fourth quarter which resulted in our ability to exceed our revenue guidance.

Now turning to our fourth quarter financial results, starting with the P&L. Revenue came in at $42.7 million, which is up 34% compared to the fourth quarter of 2012, and exceeded our guidance of $41 million to $42 million. As Shlomo mentioned, our overall sales execution improved during Q4 as the number of deals booked for over $100,000 and the combined product and subscription revenue continued to show strong year-over-year growth. Services revenue, which represents the recurring piece of our business and consists of maintenance and support, professional services and training and subscriptions, increased 42% to $18.6 million, and accounted for 43% of total revenue compared to 41% during the fourth quarter of 2012.

The growth in services revenue was primarily driven by the 123% year-over-year increase in subscription revenue to $3.8 million, as subscriptions now account for over 20% of Services revenue, up from 13% last year.

Our combined product and subscription revenues increased 37% year-over-year to $27.9 million. And as Shlomo mentioned in his remarks, we continue to view this revenue growth as a leading indicator of the strength of our business as the percentage of our business related to recurring services revenue continues to increase due primarily to the growth of subscriptions. In addition, the number of deals over $100,000 increased 43% to 136 during the fourth quarter, up from 95 last year. During the full year of 2013, the number of deals over $100,000 increased 34% to 373, up from 278 in 2012. Again, highlighting the strength of our large enterprise and global accounts.

During the fourth quarter, we added 237 new customers, an increase of 19% year-over-year. For the full year ended December 31, 2013, the number of new customers added increased 30% to 718 as compared to 2012. Imperva currently has over 3,000 customers in more than 75 countries around the world.

Turning now to non-GAAP expenses and profitability, which I remind everyone excludes stock-based compensation and acquisition-related expenses. For the fourth quarter, gross profit was $34.9 million compared to $25.6 million in the same period last year. Our gross margin percentage was 82% during the fourth quarter, up from 80% last year and above our expectations primarily due to a higher than forecasted mix of virtual appliances during the quarter.

In terms of non-GAAP operating expenses, while we continue to invest in sales and marketing, and research and development to support future growth, we also continue to experience some operating leverage. Specifically, sales and marketing expense during the fourth quarter increased 39% to $21.6 million and represented 51% of revenue compared to 49% during the fourth quarter of 2012. Research and development expenses for the quarter increased 26% year-over-year to $6.3 million and accounted for 15% of revenue compared to 16% of revenue in 2012. Despite the continued improved leverage in Q4, we remain committed to enhancing our solution in order to maintain our competitive advantage.

General and administrative expense during the fourth quarter was $4 million, up 14% year-over-year, but as a percent of revenue, G&A was 9% in Q4 2013, down from 11% in Q4 of 2012. As a result, we achieved a non-GAAP operating profit of $3 million or 7% of total revenues in Q4, which was significantly improved compared to $1.5 million during the fourth quarter of 2012, and in line with our guidance.

During the fourth quarter, we reported a non-GAAP net income attributable to Imperva stockholders of $3 million compared to $1.6 million during the fourth quarter of 2012. Non-GAAP net income per share during the fourth quarter was $0.12 per share based on 25.9 million weighted average diluted shares outstanding and at the high end of our guidance range. This compares to net income per share of $0.06 during the fourth quarter of 2012 based on 25.4 million weighted average diluted shares outstanding.

On a GAAP basis, GAAP net loss attributable to Imperva stockholders for the fourth quarter totaled $9.4 million or $0.38 per share based on 24.7 million weighted average shares outstanding. This compares to a loss of $700,000 or $0.03 per share based on 23.6 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 and year ended December 31, 2013, which can be viewed on our website.

I will now quickly highlight our results for the full year 2013. Total revenue was $137.8 million, an increase of 32% compared to 2012, and above the high end of our guidance range. The strong growth was driven by the 47% increase in services revenue which benefited from the 143% increase of subscription revenue. Non-GAAP gross margin was 79% and non-GAAP operating loss was $2.6 million compared to a loss of $1.1 million in 2012.

Non-GAAP net loss per share attributable to Imperva stockholders was $0.12 for the year based on 24.3 million shares compared to a loss of $0.06 per share based on 22.9 million shares in 2012.

Turning to the balance sheet. As of December 31, 2013, we had $115.1 million in cash and equivalents and short-term investments and no debt outstanding. Our cash balance reflects the generation of $7.5 million in cash flow from operations during the quarter. We ended the fourth quarter with an accounts receivable balance of $44.4 million, resulting in DSOs of 94 days compared to 103 days during the fourth quarter of 2012, and 94 days during Q3 of 2013. Total deferred revenue increased 36% year-over-year to $63.1 million during the fourth 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.

Before I talk about our financial outlook, I wanted to provide some additional details on the acquisition of Skyfence, asset purchase of Tomium Software and purchase of the remaining stake in Incapsula.

In regards to Skyfence, under the terms of the agreement, we have agreed to a purchase price of approximately $60 million, of which we will pay approximately $2.8 million in cash and $57.2 million or approximately 1.2 million shares of Imperva's common stock. In addition, I wanted to note that Shlomo and Amichai Shulman, our CTO, are currently shareholders of Skyfence, but they will be receiving only common stock as part of the transaction.

Skyfence was founded in 2012 and they did not generate any revenues during the past year. As Shlomo mentioned earlier, we currently believe that we are at the very early stages of a large and fast growing market for protecting business-critical data in the cloud, and that the acquisition significantly enhances our effort to be a leader in this market and further positions Imperva for accelerating growth long-term.

With regard to Tomium Software, we purchased certain technology assets for $8 million, of which we paid $4.7 million in cash and $3.3 million or 60,556 shares in common stock. Given that Tomium's revenue base was very small and that Imperva accounted for almost all of its revenues, we do not expect the purchase to have a material impact on our revenues.

In addition, since our intent to not only keep the current employees but to also add additional resources to both Skyfence and Tomium, we expect the acquisitions to add approximately $11 million to our non-GAAP operating loss in 2014, as we further accelerate and expand both the SaaS and mainframe data security solutions.

Finally, we are paying stock valued at approximately $5.8 million for our remaining stake of Incapsula. This was a previously negotiated price which was set when the company was formed.

Now I'd like to finish with some thoughts regarding our financial outlook for 2014, starting with the full year. We've entered the year with good momentum and Imperva remains in position to increase market share, extend our leadership position and benefit from our strategy to address the security challenges cloud adoption represents for data center assets.

While there continues to be some level of volatility in the global economy, we are increasing our outlook for the full year 2014, as compared to the initial views we shared on last quarter's call. We expect to provide quarterly updates to our outlook over the course of the year as we continue to gain more data points and visibility.

From a full year 2014 perspective, we expect total revenue to be in the range of $175 million to $180 million which represents year-over-year growth of 27% to 31%. This is an increase from our previously announced preliminary guidance for a baseline growth rate of at least 25% and is of a higher base due to the overperformance in Q4. I think, it's also important to mention that we continue to expect to experience seasonality with the second half of the year being stronger compared to the first half, similar to 2013.

Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating loss is expected to be in the range of $19.5 million to $21.5 million, which reflects the addition from Skyfence and Tomium that I mentioned earlier. In addition, during 2014, we will be increasing our investment in Imperva's R&D and sales and marketing functions to drive accelerated development of our data security solutions, more aggressive marketing activities and growth in our sales infrastructure.

As we did in 2013, we will be focusing more on driving the development of expanded product functionality and additional sales and marketing infrastructure to support what we believe is a growing opportunity rather than driving leverage in the business model in 2014.

While we have no specific products or programs to announce today, we will be focusing these additional investments in the areas of expanding the product features and offerings in our database products for high-end enterprise deployments; developing additional products and features for our cloud-based products and for cloud-based deployment environments; and expanding our marketing programs and investment in sales coverage and infrastructure to take advantage of an increasingly mainstream understanding of the need for a focused data center security strategy within enterprises.

We believe that the acquisitions announced today and increasing investment are critical to driving accelerated top line growth in future years. We believe we can drive to a breakeven operating margin in the fourth quarter and to improve operating margin in 2015.

We expect non-GAAP net loss attributable to Imperva's stockholders, excluding the impact of stock-based compensation, amortization of intangibles and acquisition-related expenses, to be in the range of $21 million to $23 million, or a loss of $0.78 to $0.85 per share. This assumes a tax provision of $750,000 to $1 million, and weighted average shares of approximately $27 million for the full year. We expect capital expenditures for the full year to be in the range of $3.5 million to $4.5 million. And finally, we expect to generate net cash flow from operations in 2014, with the additions of Skyfence and Tomium, as well as the increased investment in Imperva's existing business that I mentioned earlier.

Now turning to our outlook for the first quarter of 2014. We expect total revenue to be in the range of $36 million to $37 million or growth of approximately 28% at the midpoint compared to the same period in 2013. Non-GAAP gross margin is expected to be approximately 79%. Non-GAAP operating loss is expected to be in the range of $8 million to $9 million. The operating loss guidance includes the addition of Skyfence and Tomium for the full quarter, as well as our increase in spending for Imperva's existing business. Non-GAAP net loss attributable to Imperva's stockholders, excluding the impact of stock-based compensation, amortization of intangibles and acquisition-related expenses is expected to be in the range of $8.5 million to $9.5 million, or $0.33 to $0.37 per share. This assumes a provision for income taxes of $200,000 to $300,000 for the quarter and weighted average shares outstanding of approximately $25.5 million.

In summary, we are very pleased with our fourth quarter execution, which resulted in a strong finish to the year and our ability to exceed revenue expectations. We're also very excited by the opportunity of our announced acquisitions given Imperva to expand our product offering, both within the enterprise and to additional and fast growing cloud-based environments and deployments. Imperva remains well-positioned to maintain its momentum due to the ongoing demand for our integrated solutions, as well as our comprehensive plan for addressing the security challenges for the cloud.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Rob Owens with Pacific Crest.

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

If I look at your product and service number, the growth is the highest it's been in over 2 years. It's clear that you're seeing an inflection here in the back half. So maybe you can talk just about what the environment's like right now? Shifting for more of a missionary sale to being a budgeted item. And just where this market is? Because I know you've been there a long time. I think, you were convincing customers earlier on it's important. It seems like given the news and everything else that's going on, the market's coming your way?

Shlomo Kramer

We definitely see that the market is increasingly becoming mainstream. I would say that is both reflected by the traction we believe we see with customers, as well as acceptance, increased acceptance. We believe we see that with the analysts, the industry analysts and others, so yes, I fully agree that the forces that we believe we are seeing is increasingly mainstreaming of the data center security category.

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

And then, in terms of the product and license revenue, if you could, can you give us any sense of what's being driven by new customers and existing customers' follow-ons? And I guess, to that end, help us understand to a degree how penetrated you are into some of your larger customers?

Terrence J. Schmid

Sure. So I don't -- things really in the fourth quarter and in the second half of the year didn't fundamentally change from where they've been before. So we're significantly -- we have a lot of runway left in our customer base. We still think we're 10% or less penetrated into them. And some of our larger customers, our larger accounts, we're certainly more penetrated than that and we've got more databases covered than 10%. Some of them we have a lot of success. We sold a lot of products and services too. But fundamentally, I would still add that our penetration into our existing customer base is still very, very light. There's not a typical rollout or way a customer purchases, it's not a typical purchasing pattern, but we do have a good understanding of what their needs are and we still got a lot of room to grow there.

Operator

We'll go next to Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank AG, Research Division

On the acquisition that you made of Skyfence, given this is a softer product that's cloud-based relative to your traditional products that are appliance-based, is there going to be any change in your go-to-market strategy and your channel structure?

Mark E. Kraynak

So this is Mark Kraynak, I'll answer that. So I think, first, I might need to make a correction. Skyfence offers both an appliance-based version of their product and a cloud-based version, and that's because different customers are going to want to consume it differently. Some industries are more sensitive about putting certain security controls out in the cloud so they might use appliances on premise. Other industries might take a different view of that and prefer the ease of use of a cloud deployment. So from that perspective, they offer both. If you look at the rest of our business, it's actually very familiar to us. We offer on-premise appliances, virtual appliances and cloud-based services through Incapsula. So I don't really see any change in our go-to-market strategy due to the form factor for Skyfence.

Nandan Amladi - Deutsche Bank AG, Research Division

And a quick follow-up, if I may, for Terry, the Q1 guidance implies a sequential decrease in revenues of 15%. Obviously, it's still early in the year. How much of this is conservatism versus seasonality or other factors?

Terrence J. Schmid

I don't think the guidance is any different than what we typically see in the seasonal dip in Q1 from Q4.

Operator

We'll go next to Joel Fishbein with BMO Capital Markets.

Joel P. Fishbein - BMO Capital Markets Canada

I have a follow-up, too, on Skyfence. Terry, do you expect any revenue from Skyfence in '14 or is it still in ramp mode? And then, just as a follow-up to that, what metrics or will you break that out going forward as it gets material or how are you thinking about that?

Terrence J. Schmid

So it's very minimal revenue impact. It's reflected in the guidance that we gave. They're in the very early stages of what they're doing. As far as metrics for Skyfence that we would break out later, we don't intend to specifically call Skyfence out or how they're doing. Their subscription-based product would be part of our subscription and services reporting and their appliance products would be part of what we report in product and license revenue.

Joel P. Fishbein - BMO Capital Markets Canada

All right. And do you expect to sell it into the same person that you're currently selling your current products into in your customer base?

Mark E. Kraynak

So in terms of the Skyfence product set, I think, it's going to be a lot of overlap between the buyers. So typically, we sell to enterprise security, sometimes enterprise IT infrastructure. Those are the same people that have this problem that are tasked with securing the corporate applications that move to the cloud. And some of them are also tasked with figuring out what's in use. We talked about the shadow IT use case. That's another one that's appealing to our customers. So we think we can derive some leverage for Skyfence by having our sales team help them find deals. Because it's an early market, we think they're going to have to operate somewhat independently. So they'll have their own sales force.

Operator

We'll go next to Sterling Auty with JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

This is Saket sitting in here for Sterling. A couple, if I may. Shlomo, how is the Web solution for AWS priced? Is it on a subscription base or per instance? And then, how do you sort of think about the potential size of that opportunity?

Shlomo Kramer

So let me start with the second one. We are seeing early signs of contraction for that solution. And on top of the -- so we are optimistic about the potential here. In terms of pricing, on top of the regular pricing, obviously, the AWS includes also a time-based pricing and we introduced that as well into the equation. So basically, you can buy this to address temporarily the best needs in your capacity, which is what customers expect.

Saket Kalia - JP Morgan Chase & Co, Research Division

I see. Right. And then, I guess, my follow-up to that is, I guess, how do the competitive landscape change as you go into the public cloud? And sort of a similar question around Skyfence, how does the competitive landscape change now that, that's under your belt as well?

Shlomo Kramer

So that's a good question there. And I think that the cloudification of data center changes, we believe, changes everything. It's a very significant underlying driver in the IT, and would influence in a big way, security solutions. And we are very early on. I believe that we are, today, introducing a security strategy that no one else has in the market and we are attacking this very big opportunity head-on. So I would say that this very significantly changes the landscape of where we stand versus our traditional application and securities in competition that focuses, still focuses only on on-premise solutions.

Operator

We'll go next to David Kaplan with Barclays.

David Kaplan - Barclays Capital, Research Division

Can you talk a little bit about the move from the subscription-based -- sorry, from the revenue model of -- you talked on the call about -- sorry, lost my train of thought for a second. From the professional license -- sorry -- for the professional licenses subscription-based offerings, do you see that move continuing and how does that fit in with some of the acquisitions? What models are they running? Are they running perpetual licenses or are they running subscription models and so when we think about the profitability going forward, maybe not in the first year of the acquisition 2014 but '15 and onward, do you see your model moving more towards that in a gross margin leverage in that type of model?

Terrence J. Schmid

So what we're not experiencing right now is a move from a perpetual license to subscription. We're seeing growth in both. And based on the use case of the application that's required to be protected or audited, that's where we sell to. So we are not experiencing a transition from 1 model to the other at the moment. That may happen later on but that's not currently where we're at. I think, over time, and I'll let Mark address more of the pricing model and how that model is going to be brought to market by Skyfence, that's certainly going to have a subscription component to it, it's going to be very, very critical and important to how that business grows. And as you can see, our business and subscription products is more than doubling every year. So it's going to become more and more important to the business over time. Right now, it isn't a threat to the perpetual license stream. That may change over time. But right now, we're not seeing a transition from one to the other. It's just subscription business is growing faster and becoming more and more important to us. I'll go ahead and let Mark talk about the pricing models that we'll go to market with on Skyfence.

Mark E. Kraynak

So Skyfence is a subscription model. It grows with the size of the organization. Incapsula is also a subscription model, you probably already knew that. And I think, the dynamics are going to be similar. We'll see -- Skyfence, I believe, will be a high-growth business, so it will impact by adding to our subscription line but I don't see that it's going to be taking away from another line as it's doing that. Amazon, just to cover that off, today, we have a combination model, you can buy subscription or you can buy a license. And how that plays out, is going to be a direct result of how the market wanted to play out. But again, I don't think there, that it's going to take away from the other part of our business, that will be incremental in the new environment.

David Kaplan - Barclays Capital, Research Division

Okay. And as far as the gross margin progressions going forward, as we think further out?

Terrence J. Schmid

So we gave gross margin guidance for 2014 of 80%. Beyond that, you know that, that's reflective of the businesses that we bought, but I don't think what we've acquired and when it gets to scale is going to fundamentally impact our gross margin position.

Operator

We'll go next to Matt Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

I guess, as a follow-up to an earlier question, I'm wondering if you can talk about the size of the cloud-based security market in terms of the TAM relative to your traditional on-prem market?

Mark E. Kraynak

So the overall cloud-based security market, I'll kind of throw 2 stats out at you. For overall cloud services, Gartner estimates the overall spend on cloud services, not necessarily security, over $100 billion, growing pretty fast. For SaaS itself, the subcomponent of that, 2014, they're expecting $24 billion in spend. In 2016, $33 billion. So pretty fast growth of the underlying assets that we'd be protecting. So we will look at the opportunity for security for that market to be some cut of that. In a mature security market, I'd expect it to be between $5 billion and $20 billion. It's early days. We're not at that level of penetration, but it'll give you an idea of how, at least, we think about the opportunity going forward.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And then, when do you think Skyfence will start to generate revenue, it sounds like it's still in beta?

Terrence J. Schmid

It will generate some small revenue this year. That's reflected in the guidance that we gave you.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

That's great. And then, Terry, maybe on the accelerating product revenue, which is good to see this quarter, how should we think about that relative to your 2014 guidance between 27% and 31%? Should the mix between sort of the growth on license and product change much?

Terrence J. Schmid

I don't think it'll change much as a percentage of the overall total. I think, it will be relatively stable. And I think, we'll continue to see a lot of the driver coming from subscription business, just as we did in 2013. But I don't think it's going to fundamentally shift from what it was overall for the year 2013. Individual quarters may vary, of course.

Operator

We'll go next with Robert Breza from Sterne Agee.

Robert Paul Breza - Sterne Agee & Leach Inc., Research Division

Maybe just a follow-up to Matt's question. If you think about the overall market size, and Mark, it's helpful to get the growth rates, but specifically looking at like some of the specific areas with mainframe, et cetera, how much would you say this expands your total addressable market with these acquisitions and further movement of Incapsula inside?

Shlomo Kramer

So again, this a very early market in kind of moving of data center assets to the cloud, but we believe this is a very significant market down the road. And think about salesforce, Workday, NetSuite, all these assets out there in the cloud being accessed without any control by the organization or who's doing that and what they are doing. It's a very significant, we believe, problem that will create a significant market.

Terrence J. Schmid

Rob, one of the other things you mentioned was the mainframe piece of the business and how that would expand our market opportunity. That doesn't necessarily expand our opportunity but it makes us much more competitive in the most competitive deals that we're in which are the very large database deals and very large enterprises. So what that does is it doesn't necessarily increase the market opportunity but it should increase our success rate in those very large deals.

Robert Paul Breza - Sterne Agee & Leach Inc., Research Division

That's helpful. Terry, maybe as a follow-up quickly. Just as you think about all the acquisitions, how do you think about the headcount, maybe? I'm not sure if you mentioned that during your prepared remarks but how many people are you taking on through the acquisitions?

Terrence J. Schmid

So I didn't mention it in my prepared remarks and we're not disclosing how many we're taking on and how many we're adding, but we definitely are going to invest in both of these businesses that we're acquiring in addition to Incapsula. So we're taking on, when the deal closes, the remaining piece of Incapsula. We have plans to invest substantially in Incapsula they're in hyper growth mode and we need to make sure we're behind that hyper growth and ahead of the curve in terms of building out the organization and the operating capacity of that service. So we'll be investing heavily there and not just headcount but in the ability to deliver capacity. And Skyfence is a new business and they're entering the phase as a new business where we really need to put resources into that business and it will be across the board, we'll be adding sales resources, marketing resources, R&D resources over and above where they're at today, substantially more than what we're acquiring now. And the Tomium piece of the business, while relatively small, also requires a good piece of investment including headcount to expand the offerings that we have available in these large enterprise database environments. So I know it's not the detail you want on the headcount but we will be making substantial investments in both programs, spending in headcount, spending in all 3 of those areas.

Operator

We'll go next to Jonathan Ho with William Blair.

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

Just wanted to understand a little bit better, as we think about Incapsula and Skyfence, is this going to be sort of a new cloud platform that, even beyond the services that you've acquired, down the road, you'll continue to add more services and maybe sort of bolster the security capabilities in or around this platform?

Mark E. Kraynak

So this is Mark. In a nutshell, yes, they're going to continue to add different services and offerings. Incapsula would be -- they've been doing that for a while and I think they'll continue to do it. An example would be the added load-balancing offering. They've added a 2-factor authentication offering recently. So I would expect they'll continue to add things to the service to meet the demands of their customers. Skyfence is early days. They're still building out their solution. It's just coming out of trials now but I think it's safe to say that they will find the need to add other features and capabilities and continue to do that over time in order to win that market.

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

As you add more and more of these capabilities, are you seeing sort of more traction with the large enterprises? I mean, can you maybe talk to the target markets that this opens up or what these services potentially appeal to longer-term?

Shlomo Kramer

So perhaps Incapsula is a good example because we have more history with that. Originally, Incapsula was launched to address of these smaller organizations, SMBs and small enterprise. But we have seen, as we've stated earlier, a significant success in the largest enterprises. For example, their ability to develop deliver application level DDoS protection for the largest organizations in the world. So absolutely, we're definitely seeing, I think, this cloud-based security requirements relevant to the entire spectrum of customers, from the smallest one to the largest organizations in the world.

Operator

[Operator Instructions] And we'll go next to Jonathan Ruykhaver with Stephens Inc.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Shlomo, you mentioned your DDoS, I'm just curious, DDoS attacks seem to be increasing in frequency and complexity. I'm just curious, what you're seeing in that regard and how much of a driver is DDoS to your business today?

Shlomo Kramer

So DDoS is one of the key drivers to the Incapsula business, for example. And there, we are seeing the DDoS campaign intensifies when the attackers attack in bigger volumes. So attacks of 100 gigabits are not rare anymore, not only bigger volume but far more sophisticated. So it's not only network-based attacks but sophisticated application-level DdoS attacks. And in both cases, both the ability to address the volume, as well as the ability to address the sophistication of modern application-level DDoS attack, Incapsula has a unique advantage. And because of that, we see hyper growth there.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Can you talk about how Incapsula performs relative to Prolexic? I mean, it was my understanding that Prolexic was doing more and more business with large banks, Internet and SaaS companies. Is that an opportunity you serve at that high-end or do you need to do more with Incapsula to get that segment of the market?

Mark E. Kraynak

So Prolexic solution is very much focused on 1/2 of DDoS problem which is the network problem. Indicators are they do a pretty good job there. What we've seen change in the threat environment is the more significant attacks have morphed, they might have a network component but there's also an application level of component. And we believe our technology and the feedback from our customers is that our solution is far superior to Prolexic for application DDoS. So it is a competitive market. And they've now, as a part of Akamai, kind of haven't seen exactly what's going to come out of that. But we feel pretty confident going into our customers and talking to them about the reality of today's DdoS and how our solution technically is superior. And it's proven itself. We've defended against some of the largest DDoS ever recorded in the last 6 months or so.

Operator

We'll go next to Rohit Chopra with Wedbush.

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

Terry, I just wanted to ask you about gross margin, 82%, and you talked a little bit about virtual. Can you just tell us what actually drove that? Were there some large deals? What's actually happening there and can that be driven higher in the future? And I understand you've given guidance for '14 but just wanted to get a sense on the gross margin first.

Terrence J. Schmid

So the significance of virtual appliances in the fourth quarter as a percentage of total unit shipments is certainly affected by some large deals. It varies quarter-to-quarter. So I wouldn't try to make a prediction about what the directionality is going to be on virtual appliances over the course of the year in any given quarter. But I would say, for the full year, the guidance that we gave for the 80% gross margins accounts for the fact that we are going to be spending money above the gross margin line on Skyfence, developing some of the operating components that we need there and that's balanced out by what's probably going to be a slight improvement in the mix from virtual appliances, it keep things steady at 80% over the course of the year.

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

Okay. All right. And then, the other question I had was I just wanted to get sense, and I know Skyfence is just sort of coming out of stealth mode, but I just wanted to get a sense were there any customers in beta? I know there's some that you guys have sort of put out a press release on or maybe Skyfence did on Virgin, but are there any other significant kind of test partners that come with any of the acquisitions?

Mark E. Kraynak

So on Skyfence, yes, they have all their customers in trials and nobody that were in that were able to disclose or talk about it publicly today. But yes, their trials were certainly more than just 1.

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

Okay. And then, Terry, just a question that I always give you, ramping OpEx, there was a little bit of leverage in this past quarter but given that all the expense ramp started in Q1 earlier, are you satisfied with where you are? Do you think you're on track or maybe a little bit behind with the amount of leverage you're getting given where revenues is, say, today and into the upcoming quarter?

Terrence J. Schmid

I may not answer in a way you're asking it but I will say I'm satisfied with the investments that we made over the course of the year and the impact that they had on accelerating revenue over the second half of the year, in particular. And I think, that, that's reflected also in the fact that we think those investments have been successful because we raised our guidance for 2014 to the 27% to 31% range, with the midpoint at 29%. So I definitely say that we think the investments that we made and accelerating those investments and putting more sales infrastructure in was absolutely the right thing to do to drive growth.

Operator

We'll take our last question from Michael Kim with Imperial Capital.

Michael W. Kim - Imperial Capital, LLC, Research Division

Hoping you could talk a little about file activity monitoring, are you starting to see maybe a greater focus on unstructured data and maybe a ramp in bookings in the pipeline and especially larger-sized deal opportunities?

Shlomo Kramer

So we continue to be pleased with the ramp-up of this product line, both overall, as well as kind of more strategic and a large deal that we see in the pipeline, so -- although it's moving in the right direction.

Michael W. Kim - Imperial Capital, LLC, Research Division

And I know you don't typically talk about individual areas but do you see this unstructured data opportunity as something that sort of crosses the 10% threshold sometime over the next year or 2? Or is it maybe a little bit longer terms in that?

Terrence J. Schmid

I wouldn't even attempt to tell you what that means, when and when that would happen.

Operator

At this time, we have no further questions in queue. So I will turn the call back over to management for any additional or closing remarks.

Terrence J. Schmid

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

Operator

That does conclude today's conference. We thank you for your participation.

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