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Imperva, Inc. (NYSE:IMPV)

Q1 2014 Earnings Conference Call

May 1, 2014 17:00 ET

Executives

Shlomo Kramer - Chief Executive Officer

Terry Schmid - Chief Financial Officer

Analysts

Sterling Auty - JPMorgan

David Kaplan – Barclays Capital

Rob Owens - Pacific Crest Securities

Robert Breza – Sterne Agee

Matt Hedberg – RBC Capital Markets

Shaul Eyal – Oppenheimer

Jonathan Ho – William Blair

Jonathan Ruykhaver – Stephens Incorporated

Erik Suppiger – JMP Securities

Michael Kim – Imperial Capital

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Imperva First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation will conduct a question-and-answer session. (Operator Instructions) I would like to remind everyone that this conference is being recorded and I would now like to turn the call over to Mr. Terry Schmid, Chief Financial Officer. Please go ahead sir.

Terry Schmid - Chief Financial Officer

Thank you, Angela. Good afternoon and welcome to Imperva’s first quarter 2014 earnings call. We will be discussing the results announced in our press release issued after the market close 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, in 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 in this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in Imperva’s 10-K filed with the SEC on February 28, 2014.

During this call, we represent both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation, amortization of intangibles and acquisition related expenses. These non-GAAP measures are not intended to be considered in isolation from, 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 the quantitative reconciliation of those figures, these refer to today’s press release regarding our first quarter 2014 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 May 1, 2014 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of the date. We undertake no obligation to update these statements as a result of new information or future events. Lastly this conference call is a property of Imperva and any recording reproduction or rebroadcast of the conference call without the express written permission of Imperva 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 - Chief Executive Officer

Thanks, Terry. I’d like to thank everyone for joining us today. Our results for the quarter fell short of our expectations. Clearly this was a disappointment to the company since we entered the quarter with a strong pipeline. But we saw extended sales cycles on deals over $100,000 primarily in the United States. Based on our analysis, we believe these results are attributable to sales execution issues in the U.S. and increasingly intense competition globally for large deals from our main competitors.

We will go into both issues in more detail later in the call. Despite these challenges there were some encouraging signs during the quarter, particularly in EMEA where we continue to benefit from improved sales execution. In addition, our strong service revenue growth during the first quarter was again driven by subscription revenue, which increased 124% year-over-year.

Furthermore, our overall high win rates remain consistent and we are still competing for the largest deals that slipped out of the quarter. Now, taking a look at our overall financial performance during Q1 2014, our total revenue was $31.5 million, up 10% year-over-year and primarily impacted by the 15% decline in quarter one. From a profitability perspective during the first quarter, we posted a non-GAAP operating loss of $9.6 million and a non-GAAP loss EPS of $0.36 per share.

Here are some of our perspective statistics. During the first quarter, we added 171 new customers, up 16% compared to 148 during the same period last year. The number of bills greater than 100-K increased 5% to 67 during the quarter compared to 64 during the first quarter of 2013, primarily due to the extended sales cycles for larger deals I just mentioned. We also continue to generate significant portion of our bookings from follow on sales to existing customers as they again accounted for over 60% of our product and subscription bookings in the first quarter. We continue to believe that our existing customer base is less than 10% penetrated and represents a significant long-term growth opportunity for the company.

From a market perspective while customer demand remains solid across all geographies our revenue in the Americas region decreased approximately 1% year-over-year during Q1. As I mentioned, after further analyzing the factors that impacted the results, two things were identified, sales execution challenges and more intense competition for large transactions from our large competitors. Regarding sale execution while the sale of this past year we implemented during 2012 resulted in strong results in the Americas during the past year, we did not close a number of large deals in that region that we had forecasted to close during Q1 because the deals were at earlier stages of negotiation and evaluation than we had expected.

We have taken steps to implement changes to align all of field operations into one organization which we believe we have a positive impact on sales execution by handling greater synergy between the direct sales, general sales, sale development, services and customer success organizations. In addition, we have introduced new focusing tools and processes designed to add additional focus on deal stage and execution and we are driving U.S. sales management to provide greater deal guidance to the teams.

Finally we have also made adjustments to the sales leadership teams in North America. Separately as we’ve previously announced with the pending departure of our former senior vice president of worldwide sales, we have appointed Jason Forget as senior vice president of worldwide field operations bringing all of sales and field operation under common leadership. While we expect the steps that we have taken to address the sales execution challenges will take a few quarters to implement fully, we have already closed a number of deals since the end of Q1.

In addition, we plan to adjust the pace of investments in the business to account for our reduced guidance. This reduced pace of investment is reflected in the Q2 and full year guidance that Terry will discuss in this comments. It is important to note that we will continue to invest in our cloud businesses and customized sky frames at the rate commensurate with the build out of these growing businesses.

Regarding the competition for large deals, as we mentioned earlier, we were pleased with our ability to maintain our high win rate for deals that closed within the quarter. So we did see the sales cycle for many deals particularly large deals extend beyond the quarter. Based on our recent analysis we believe that our provisional comparators were more aggressively pursuing large deals during Q1 and this will continue for some time. These large companies primarily complete for the detailed political connections within large enterprises.

While this tactic does not necessarily win these large deals, it has resulted in additional review and approval cycle which did have the effect of extending the overall sales cycle of these deals. We believe that as the purchasing decisions are ultimately made, we can win these deals with our traditional win leads. In response to this increase in competition pressure, we plan to take steps to improve our sales execution in large accounts by recruiting more seasons, large enterprise sales representative as well as targeted executive level involvement from key large deals.

It is important to note that while the more intense competition will impact the timing of the close of large deals, it does reinforce the importance of the data center security solutions we sell as part of our comprehensive security posture to enterprises. These competitors are very large multibillion dollar companies and we believe that the increased effort that they’re putting into competing with us validates what we view as a large market opportunity.

And with the combination of the steps we are taking to improve sales execution ongoing demand for comprehensive integrated data center security solution and our strategy to deliver a best-in-class integrated platform, we can be effective at preventing this crime from persisting long-term. Our 10.5 release, which we announced earlier in the week, makes significant strides in advancing this opportunity. In EMEA we actually continue to benefit from improved sales execution resulting in a 31% year-over-year increase in revenue during the quarter while our bookings course was again significantly higher than revenue course.

Highlighting the continuing strong demand in the region where we have seen intensifying competition from large competitors throughout the world, better sales execution in the EMEA region mitigated the impact of these dynamics. In Asia-Pacific, we achieved solid revenue growth of 27% year-over-year in Q1 despite ongoing economic charges in some countries. Despite our lower than expected first quarter results, I remain confident that Imperva is in position to accelerate quote longer-term, due to our commitment to innovation, momentum of subscription, ongoing correction with hosting providers and growing pipeline opportunities globally.

As well as our comprehensive plan to addressing data center security challenges that cause physical, virtual and cloud deployment. Along those lines, we are very excited about our recent release of SecureSphere 10.5, which is addressing the massive security gaps left by increasing the complex IT infrastructures and is delivering industry leading protection against insider risk.

New SecureSphere 10.5 and unique to our solution is the ability to protect access to SharePoint Five in real-time based on business policy. Unlike other traditional solutions, SecureSphere can control access based on the combination of behavior and contextual factors such as the rate at which data is downloaded, time of day and source IP. This provides SecureSphere share for customers with its ability and proactive control to help protect critical data asset from theft or misuse. We believe this contextual and behavior disabilities with unmentioned industry and further sets us apart from the competition. An example of our competitive advantage in this area comes from the Q1 when one of the world’s largest telecommunication companies. The organization has taken a business decision to expose SharePoint both internally and externally that has unfortunately failed an external security audit for the SharePoint deployment.

Our composition was to disqualify from the view because of an inability protect the full SharePoint architecture including the word font and file based content layout and I underlined at the base. As a reminder this comprehensive coverage uniquely sets our solution apart. Our nobility extends out already significant SharePoint security advantage. That same customer will also be able to benefit from new database security capability in version 10.5. Our focus in this area has been support for very large database deployment and we believe our new features will allow for significant reduction in the total cost of ownership for our data base auditing and security solutions.

This is another area and which we believe we are expanding an existing advantage. In the case of this customer, they also choose for Imperva over the competition for the first phase of the global database auditing deployment. In addition to our PCO advantages, this customer was comfortable with Imperva having already chosen and deployed our web application firewall solution is a global standard. We feel this is a good example of our strategy to offer comprehensive solution for the data center security challenges. In this case solving web application SharePoint and database security on a global scale and we believe this can help us combat the overall comparative dynamics in the security industry.

From a market dynamic perspective, we are very encouraged by some recent development in the web application firewall markets. Leading analyst firm, Gartner, published a new research report for web application firewalls. The report clarifies the difference between web application firewall and network security solutions like intrusion prevention systems and next generation firewalls, and make the case that web application firewalls are worth the investment for enterprisers. We feel this external validation of the value of web application firewalls will be a long-term positive force for the segment.

In version 10.5, we’ve added capabilities that can help us to take advantage of this plan. First we have extended the security advantage of our web application firewall with two new feeds for our threat rate liquidation services. The first is a feed that identifies malicious vulnerability scanners. Each feed was derived from data from Imperva’s cloud source for intelligence services thread data community business. If you recall, we announced community wins last year and is gone from protecting 60 applications a year ago to over 450 today.

The second is a feed that identifies common standards, this feed. is powered by Incapsula, which protect 10s of 1000s of websites. It serves as an example of the joint value proposition we expect to occur by both Incapsula and SecureSphere customers as we continue to more fully combine the company. Finally our SecureSphere web application firewall for Amazon web services is now shipping the SecureSphere 10.5. As a reminder, last quarter we announced this product is part of our comprehensive strategy to address data center security for the cloud.

Many of our enterprise customers are making a strong push to move the customer facing application to Amazon web services so that they can realize significant infrastructure savings by managing load peaks with temporal Amazon capacity. With SecureSphere for Amazon web services, customers can replicate their existing on premise security controls as they migrate to the cloud. We also made good progress on the other aspects of cloud security strategies. Specifically, we successfully closed the acquisition of Skyfence and Incapsula during Q1.

We continue to believe that we are at the very early stages of a large and fast growing market of protecting business critical applications in data in the cloud. And that our strategy significantly enhances our effort to be a leader in this market and further positions Imperva for long-term goals. In fact, we have noted an increasing interest in our enterprise accounts for cloud product and we may see an earlier adoption of this product by our customers then we have anticipated. If so, this may have an impact on some sales of our potential licenses later in the year.

Finally, similar to the last few quarters, we continue to have success with our channel partners, in particular our hosting provider partnerships. As a reminder, data center hosting providers using Imperva solution to protect enterprises that are utilizing our partner’s data centers to host their infrastructure. During the first quarter, we continue to see solid momentum in this channel, also the much larger base which in part contributed to the new customer growth during the quarter. Specifically during Q1, one of our large hosting customers achieved an installed base corporate of approximately 80% quarter-over-quarter compared to Q4 2013, which was the continuation of a strong goal plan that begin in the first quarter of 2012.

So in summary, while the results were lower than we expected will remain confident in Imperva’s future due to ongoing global demand for our comprehensive integrated data center security solution, one good global pipeline opportunities, commitments to innovation and ability to execute our plan for addressing the security challenges for the cloud.

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

Terry Schmid - Chief Financial Officer

Thanks, Shlomo. I’ll first start with a more detailed overview of our first quarter financial performance and then provide our outlook for the second quarter and full year 2014. Following my closing remarks, we will open up the call to your questions. As Shlomo mentioned, we are disappointed with the company’s results during the first quarter which were below our expectations. Revenue came in at $31.5 million, which is up 10% compared to the first quarter of 2013 was primarily impacted by the 15% year-over-year decline in product revenue.

As Shlomo mentioned, our results were impacted by sales execution issues in the United States and the more intense competition from our traditional competitors on large deals. Services revenue which represents the recurring piece of our business and consists of maintenance and support, professional services, and training and subscriptions increased 35% to $19.5 million that account for 62% of total revenue compared to 50% during the first quarter of 2013.

The growth in services revenue was primarily driven by the 124% year-over-year increase in subscription revenue to $4.6 million as subscriptions now account for over 23% of services revenue up from 14% last year. Growth of our combined product and subscription revenues was limited to 2% year-over-year, going to $16.6 million due to the decline in product revenue I just mentioned.

In addition, the number of deals over $100,000 increased 5% to 67 during the first quarter compared to 64 last year. Growth in the number of large deals was limited in Q1 due to the extended sales cycles for large deals. During the first quarter, we added 171 new customers and increases 16% year-over-year. Imperva currently has over 3,100 customers and more than 75 countries around the world.

Turning now to non-GAAP expenses and profitability which I remind everyone excludes strong-based compensation and acquisition related expenses. For the first quarter, gross profit was $24.3 million compared to $22.5 million in the same period last year. Our gross margin percentage was 77% during the first quarter compared to 78% last year, primarily because product and license revenue which carries our highest gross margins was lower as a percentage of total revenue compared to the prior year.

In terms of the non-GAAP operating expenses as we mentioned in the last earnings call, we expect both the Skyfence and Tomium 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 center security solutions. As a result, sales and marketing expense during the first quarter increased 27% to $20.6 million and represented 65% of revenue compared to 57% during the first quarter of 2013.

Research and development expenses for the quarter increased 44% year-over-year to $8.2 million and accounted for 26% of revenue compared to 20% of revenue in 2013. In addition, general and administrative expense during the first quarter was $5.1 million up 36% year-over-year. As a result, we reported a non-GAAP operating loss of $9.6 million in Q1, which was slightly below our regional guidance range of the loss of $8.5 million to $9.5 million.

During the first quarter, we reported a non-GAAP net loss attributable to Imperva stockholders of $9.1 million compared to $3.2 million during the first quarter of 2013. Non-GAAP net loss per share during the first quarter was $0.36 per share based on $25.3 million weighted average shares outstanding within our guidance range of loss of $0.33 to $0.37 per share. This compares to a net loss per share of $0.13 during the first quarter of 2013 based on $23.9 million weighted average shares outstanding.

On a GAAP basis, GAAP net loss attributable to Imperva stockholders for the first quarter totaled $17.4 million or $0.69 per share based on $25.3 million weighted average shares outstanding as compares to a loss of $6.1 million or $0.25 per shares based on $23.9 million weighted average shares outstanding in the prior year period. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the press release issued today covering our financial results for the quarter ended March 31, 2014, which can be viewed on our website.

Turning to the balance sheet as of March 31, 2014, we had $105.9 million in cash equivalents and short-term investments and no debt outstanding. Our cash balance reflects the generation of $3.2 million in cash flow from operations during the quarter. We ended the first quarter with an accounts receivable balance of $28.6 million resulting in DSOs of 82 days compared to 77 days during the first quarter of 2013 94 days during Q4 of 2013.

Total deferred revenue increased 31% year-over-year to $61 million during the first quarter, driven primarily by over 90% renewal rates and the growing success of our subscription-based products. Now, I’d like to finish with some thoughts regarding our financial outlook for 2014 starting with the second quarter. As Shlomo mentioned in his prepared remarks, we expect the steps that we have taken to address sales execution issues may take a few quarters to implement fully and for continuation of longer sales cycles with larger deals.

As a result, we expect total revenue to be in the range of $33 million to $36 million for growth of approximately 10% at the midpoint compared to the same period of 2013. Non-GAAP gross margin is expected to be approximately 78%. Non-GAAP operating losses expected to be in the range of $9 million to a $11.5 million. The operating loss guidance includes the reduced phase of investment to account for the lower revenue guidance. We will target reduced spending levels in the non-revenue generating areas of the business while leaving our planned investments in our cloud businesses, Incapsula and Skyfence at budgeted levels for the year. These businesses are in the early stages of what we believe a very large opportunities meaning to this, investing them aggressively.

Non-GAAP net loss excluding the impact of stock-based compensation, amortization of intangibles and acquisition related expenses is expected to be in the range of $9.5 million to $12 million or $0.37 to $0.47 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.

From a full year 2014 perspective, even though lower than expected Q1 results and expectation for the sales execution challenges and lower sales cycles to persist in the near-term. We now expect total revenue to be in the range of $150 million to $160 million, which represents year-over-year growth of 9% to 16% compared to our previous guidance range of $175 million to $180 million, again driven by the continuation of longer sales cycles and working through the sales execution issues.

In addition, we continue to expect the second half of the year to be stronger than the first half due to seasonality similar to 2013. Also, as Shlomo mentioned earlier, we have seen an increase in interest in our cloud products from our enterprise customers and we may see an earlier adoption of these products of the resulting impact on our results later this year, which is one of the reason we are providing a wider range for revenue guidance than we have in the past. While it may impact the finding of revenues at a general level, we view the transition to cloud products as positive over the longer term.

Non-GAAP gross margin was expected to be approximately 79%. Non-GAAP operating loss is now expected to be in the range of $24 million to $32 million compared to our previous guidance range of $19.5 million to $21.5 million. As I mentioned earlier, this reflects the reduced pace of investment in the business. We will make targeted reductions to our spending plan so the revenue generated capacity will continue to increase over last year and to maintain continued innovation in our products.

We expect non-GAAP net loss excluding the impact of stock-based compensation, amortization of intangibles and acquisition related expenses to be in a range of $25 million to $33 million for a loss of $0.94 to a $1.25 per share based on $26.5 million weighted average shares outstanding for the full year. This compares to our prior guidance of $21 million to $23 million for a loss of $0.78 to $0.85 per share based on $27 million weighted average shares outstanding. This assumes the tax provision of $750,000 to $1 million. We expect capital expenditures for the full year to be in a range of $3.5 million to $4.5 million.

Finally, we continue to expect to generate negative cash flow from operations during 2014. In summary, while we were disappointed with our Q1 results, we remained confident in Imperva’s future due to the ongoing global demand for our comprehensive, integrated data center security solutions, growing global pipeline of opportunity, limited innovation and our ability to execute our plan for addressing the security challenges for the product.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Sterling Auty with JPMorgan.

Sterling Auty - JPMorgan

Yes, thanks. Hi, guys. Couple of questions. The first one is, we are usually skeptical on this side as analysts, we are paid to be skeptical so when we see that head of sales leaving at a quarter where you had sales execution issues, it makes us wonder. Is there any additional color that you can give us into that process in terms of the change?

Shlomo Kramer

So, Ralph’s departure that we announced on April 1st that had been under consideration for some time, it is not linked to the Q1 performance. When we notified us of his final decision on April 1st, we issued press release and announced the transition, but the two events are not link. I understand your skepticism, but the situation with Ralph had been something that had been in discussions for sometime before the end of Q1.

Sterling Auty - JPMorgan

I got you. Shlomo, on the increased competition from the large competitors, how much of that is on the database security part of the business and how many much of that is on the web application firewall? And when you say the increased competition mentioned kind of the politics, but how much of that is also those large vendors trying to do a classic, we can bundle that solution into a larger deal at a higher level of the organization?

Shlomo Kramer

I will take that Sterling. So it’s certainly more prevalent on the data side of the business than on the application side, but there is still has been some increase in competition and pressure on the application side. But on the data side of the business, it’s not really a matter of necessarily them trying to bundle and give it away. It’s really been a situation where they continue to push on the account, fly executives in, use whatever connections and political influence they have to drag the sales cycle out hoping to win by attrition basically. But we continue to battle for these. But if you look at our discounts for example, they’ve held steady, it hasn’t necessarily kind of pricing in on the very large deals. Certainly the discounts are largely than on the less large deals. But we are – it’s not about bundling necessarily, it’s about bringing to their whatever political resources they can to extend that sales cycle as long as possible.

Sterling Auty - JPMorgan

Last question. The changes mentioned in the U.S. sales management, are those complete, meaning are all of the people in the seats, or is there still some recruiting that needs to be done?

Shlomo Kramer

The management changes that I would make some – some realignments there. Those are done, but we still have recruiting to do in the field.

Sterling Auty - JPMorgan

Okay, thank you.

Operator

We’ll now go to David Kaplan with Barclays.

David Kaplan – Barclays Capital

Hello, everyone. If we can just start with one on – I should go back to the competitive pressures. So besides the sales cycle getting longer and using the pressure that you mentioned just now, Terry. Are you seeing that pressure is also on the pricing side once the deal is closed? And if you are seeing that, what kind of confidence do you have that you will be able to at some point, once the traction picks back up again or the deals start closing again that you will be able to get the pricing that you were getting?

Terry Schmid

So it really has – most of these deals are in about pricing with very large ones certainly have a pricing dynamics different and the discounts will be larger on those that’s just more a function of the size and the deal than about the competitive pressures, that’s always been case, again with these competitors of ours are not using price to try to win these deals. They don’t want to undermine the economics of this for themselves anymore than we want it to happen. So what they’re doing is trying to get as many opportunities in the account to disrupt the sales cycle and make it much more difficult for us to closing that deal. They go higher and higher in the organization, and that has created more hoops for us to jump through. But they are competing necessarily on price or trying to give things away.

David Kaplan – Barclays Capital

Okay. And so then just following up on Shlomo’s comments when he was talking earlier, you seem to have confidence that you will be able to get back to the growth that you were at. What is it that gives you that confidence given what you are seeing in the market today?

Terry Schmid

Yes, I’ll start with that one and Shlomo can add if he has something to add. I believe what Shlomo said is that we can reaccelerate growth. We did not say necessarily. What you just said which was go back to the prior levels. We’re not saying it isn’t, we’re not saying it is, but I just want to be clear on what Shlomo’s comments were.

David Kaplan – Barclays Capital

Fair point.

Terry Schmid

And what gives us confidence is we understand what the problems are. We believe we have good leadership in place on a sales side. We believe we have a compelling product portfolio, and we know we’re selling to a growing market as Shlomo mentioned in his comments. Multibillion dollar companies are working really hard to be successful in these markets that we sell into, and I think that validates the opportunity and we know we have a better technical product. We always win for the most part when it’s head to head on the technical piece. So, we think we understand what needs to be done, we know it will take several quarters to make it happen, but we have the right products and we think we have the right management team to get it done.

David Kaplan – Barclays Capital

Okay. And just a last one, a quick accounting one, G&A picked up a little bit this quarter. Is that related to the acquisitions and if it is, do you see that coming back down to the levels where it was or somewhere in between in next year 2015?

Terry Schmid

I don’t have any comment about 2015, but I certainly think we will have a high level of legal expenses in G&A based on some of the activities we have going on right now. Some of those expenses were – will the expenses in G&A related to the acquisitions have been backed out for non-GAAP purposes. So it is an increase in legal and accounting fees for other things that we’ve had going on.

David Kaplan – Barclays Capital

Okay, great. Thanks so much.

Operator

We’ll take our next question from Rob Owens with Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Thank you. So relative to your mix for the quarter than can we deduce that is more skewed towards the application side this quarter rather than the 50-50 and that most of those push outs are just on the data side, are you also seeing them on application side as well?

Terry Schmid

Most of the push outs are on the data side rather than the application side although, we’re seeing a little bit as well.

Rob Owens – Pacific Crest Securities

Given the heightened awareness that we have seen in this space over the last six months, are you seeing increased inquiry levels, are you seeing deal sizes that actually push up into larger – deals of larger scope and scale?

Terry Schmid

Our pipeline in some of the deals we’re working on now being growing through larger in scope and scale, but that’s been going on for a while, that’s not phenomenon, it’s not been recently due to breaches or something like that. We have had the opportunity to compete in larger deals that we’ve won. But I’m not sure it’s – I’m not sure I understand what you loop are looking for rather between that phenomenon and awareness.

Rob Owens – Pacific Crest Securities

Yes. And lastly, as you’ve scrubbed the pipeline, you’d mentioned putting these processes in place to kind of scrub deals and understand where they are. Number one, have you completed that process such that your pipe is scrubbed relative to Q2 guidance and then in constructing your guidance, did you assume similar close rates to Q1, when do you think we will see some increase in terms of when that plays out relative to your guidance?

Terry Schmid

I’d say I’ll answer your question like this. The guidance that we have given reflects the fact that we expect – it will take few quarters for the sales and execution changes that we have been making to have an impact and for those sales cycles to stay longer for the near-term. So we’re not expecting any immediate turnaround. We have done a number of things already introducing new processes and tools within the sales organization for forecasting. But it will take some time for those things to have an impact on the business.

Rob Owens – Pacific Crest Securities

Alright, thanks guys.

Operator

And we’ll now go to Robert Breza with Sterne Agee.

Robert Breza - Sterne Agee

Hi, thanks for taking my questions. The two questions I guess, one, can you talk about some of the deals that slipped, I think in Shlomo’s prepared remarks you talked about closing some of those deals. I was wondering if you could help kind of provide some color around that. And in the Q&A here you talked about Ralph leaving and that not being linked to the disappointing Q1 results. I guess as you knew that he was possibly leaving, maybe did you foresee this happening, or did you start to take these steps before he left, just trying to understand some of the procedures and processes you undertook when you knew that he was going to leave, even though that I guess they weren’t linked. Thanks.

Terry Schmid

Yes, so, Ralph’s departure for the company is not late to our Q1 results. So, the things we are discussing now that we are implementing as a result of what happen in Q1 or specifically addressing the issues that we found after the end of the quarter. They’re not things that we were necessarily implementing because Ralph was departing. There really is not a link there. Did you have a first part of the question, I don’t remember if you did.

Robert Breza - Sterne Agee

The other part of the question was I think in Shlomo’s prepared comments he talked about already closing some of the deals that had slipped, I was wondering if you could just provide some color around those deals that maybe had slipped that you had already closed.

Terry Schmid

So, I’m not going to give any details on what those particular deals are. That comment was really meant to make sure people understand that those deals are still in play, some of them have closed already, some of them will move into different quarters in the current quarter and all of our expectations are reflected in the guidance that we gave as to win those deals will ultimately closed.

Robert Breza - Sterne Agee

Do think any of those deals I guess would be lost, or like you said they’re still in the pipeline?

Terry Schmid

Well in our prepared remarks we said that we expect to win them in our traditional win rates. So…

Robert Breza - Sterne Agee

Okay.

Terry Schmid

We don’t win 100% of the deals that we compete in, but we have a very hiring rate.

Robert Breza - Sterne Agee

Great, thank you.

Operator

We’ll now go to Nandan Amladi with Deutsche Bank.

Unidentified Analyst

Hi, it’s actually (Taz) on behalf of Nandan. Thanks for taking my question. First one is, did you see this weakness towards the end of the quarter or was it more evenly spread during the quarter?

Terry Schmid

We do most of our businesses as you guys know in the last couple of weeks we reported. We are very backend loaded. So for us – when the quarter closes is really the best time for us to understand what we are, many of these deals go right up until the last day. So, we did not see this coming over the course of the quarter if that’s what you’re asking.

Unidentified Analyst

Yes. And then, was it limited to any specific vertical, or can you point out any vertical that solves this more than others or…

Terry Schmid

Yes, it’s not really about a vertical. There was not a particular vertical that contributed to it.

Unidentified Analyst

Got it. And then based on your guidance, you’re guiding to the same growth in total revenue that you had for Q1. Does that imply a negative product growth in Americas again in Q2?

Terry Schmid

I would not address a specific territory, but we are definitely taking into account where we take these deals are right now and what the impact would be on product revenue year-over-year.

Unidentified Analyst

Got it. And then just one last one. As you mentioned, you saw the competitors getting more aggressive in this quarter. What – I mean, as you analyze the situation, what changed on their side? Did you – was there a change in leadership in those companies, or why do you think these guys got more aggressive in Q1 versus the previous quarters? And why do see this just in the U.S., I mean you saw healthy growth in Europe and Asia, why specifically the U.S. and what changed from you competitors perspective?

Terry Schmid

So I can speak for the strategy, I don’t know, so, you don’t test them, what Shlomo said in his prepared remarks was that it is globally there competing much more intensity having to be in U.S. in Q1 where we saw the biggest impact, it’s also a biggest market. But it is something that they are doing around the world.

Unidentified Analyst

Got it. Thank you.

Operator

And we’ll now go to Matt Hedberg with RBC Capital Markets.

Matt Hedberg – RBC Capital Markets

Yes, thanks. We are calling back on 4Q. I think you said you entered the quarter with a record pipeline. I’m wondering – were some of these stalls was it more from new or add-on sales?

Terry Schmid

Both.

Matt Hedberg – RBC Capital Markets

Both.

Terry Schmid

But most of it will be in new accounts, but where we are fighting for a new name.

Matt Hedberg – RBC Capital Markets

Got it. And from a product perspective, I know an area that we have talked about in the past is file-based security, kind of getting off some of the competition here. Is that – can you give us an update on how you think about file-based security as it relates to data and application?

Terry Schmid

We talked about that in the past, 80% of the data is in the data center on structured data and much of that has a great deal of value and needs to be protected. So our expectation is over time that file security is something that organizations are going to have to implement put in place like they do with data security and application security so, I think it’s an important part of an overall posture rather than new data center security.

Matt Hedberg – RBC Capital Markets

That’s great. And then maybe one last one, you know you guys are in a lot of different markets; cloud, on prim, etcetera. Is there a risk that given the size of these markets and the size of Imperva that you guys are spread a little too thin at this point or is that not an issue?

Terry Schmid

I don’t know that I would consider that necessarily we have, one of the keys to data center security is to be able to address, however, that data center is set up or how those customers are interacting with their data. These are all important. This is important to us to the data center security company to be able to deliver that security on those auditing capabilities regardless of how the customer has their data center setup whether it’s theirs or whether they’re using somebody else. This is – so, we think it’s important to address the overall market.

Matt Hedberg – RBC Capital Markets

Great, thanks, Terry.

Operator

We’ll now go to Shaul Eyal with Oppenheimer.

Shaul Eyal – Oppenheimer

Thank you, hi, good afternoon, Shlomo and Terry. So, the new growth rate indicates 9% to 16% year-over-year growth. I believe Gardner, IDC, some of the other industry research firms still see the database security market growing at around 20%, some even suggested north of 20%. In your view, do you still see the database security market growing at around the space and Imperva in ways lagging a little bit given some internal issues. Is that still the case?

Terry Schmid

I don’t think we would characterize the overall market as having changed. We have internal execution issues that we will address resolve those issues, but I think the market opportunity for data security is strong and as it was before.

Shaul Eyal – Oppenheimer

Thank you.

Operator

We will now go to Jonathan Ho with William Blair.

Jonathan Ho – William Blair

Good afternoon. Can you describe in a little bit more detail some of the changes that you intend to make on the sales side, I know you’ve in the past talked about in Europe adding more regional managers, is there a similar practice that you can describe or talk about in terms of the changes that you’re going to make in the U.S.?

Terry Schmid

Some of the structuring that we did in India was already done in North America. I think the primary changes are going to be how we – how the managers interact with the people that are in the field and what tools they use to understand where deals are at, and how they interact with those field people to help them prioritize and work on the deals that have the greatest impact in any given quarter. So a lot of it is around process and methodology and then supporting tools to make sure that we have adequate information to understand moving upward where those deals are at. So, it isn’t necessarily the structure of the organization. We’ve made some changes and that they are necessarily structure all the personnel changes, but it’s really about process and how we managed deals.

Jonathan Ho – William Blair

And then, in terms of the behavior from the competitors in terms of maybe getting a little bit more aggressive, have you ever seen this type of behavior in the past, like several years ago or any time in the company’s history, and just trying to understand again whether this is behavior that can persist for long period of time or do you think this is more short-term in nature?

Terry Schmid

I don’t know necessarily what their plans would be for how they want to behave, but I know that they are things that we can do from a spells execution perspective to make ourselves better able to manage the competitive environment on a given deal, some of that has to do with bringing different types of sales person on board, who has more experienced in larger accounts and understanding the competitive dynamics there, and how to do that so that’s one of the things that you will do. I think for us to be successful here, we need to assume, it’s kind of persist and we need to be better at executing in these deals and more effectively countering what these large competitors do.

Jonathan Ho – William Blair

Great, thank you.

Operator

(Operator Instructions) And we’ll now go to Jonathan Ruykhaver with Stephens Incorporated.

Jonathan Ruykhaver – Stephens Incorporated

Yes, hi, I’m just curious. You hear about all this focus on the Advanced Persistent Threats, the Target breach; Neiman Marcus, and the technologies that deal with detection, and I’m just wondering, do you think there is any dynamic around security spending shifting away from projects that address prevention and more budget going to detection and that could be a dynamic that’s impacting spend on Imperva?

Terry Schmid

That’s not something that we’ve been using the issues with, we dug in to understand what happened in Q1, the issues that we saw the once that we mentioned here on this call.

Jonathan Ruykhaver – Stephens Incorporated

Okay. The other question I have is how should we think of the potential cannibalization of licensed business longer term due to the success of Incapsula. And also, as we go through the year, just as organizations look to deploy more production applications from AWS, instead of internally, is that a dynamic that meets core license growth over time at Imperva?

Terry Schmid

Well I think the transition from on-premise application security to cloud-based application security will change the nature of the revenue stream for Imperva, yes. And necessarily results in lower license revenue, but accelerating growth in subscription revenue.

Jonathan Ruykhaver – Stephens Incorporated

Right.

Terry Schmid

I don’t – I think over the life of the customer, it should be relatively the same economic value to us if not more on the subscription side, assuming a low churn rate so, there is – we guys all know from modeling out companies that have tried to made it a change from a license model to a subscription model, there is a delicate balance managing that. But I think ultimately it’s a good think for Imperva that our subscription products become more successful.

Jonathan Ruykhaver – Stephens Incorporated

Right. Okay, good enough. Thank you.

Operator

We will now go to Erik Suppiger with JMP Securities.

Erik Suppiger – JMP Securities

Thank you. So it sounds like you are going to be recruiting some more seasoned sales people and you have ramped up the sales expenses of the OpEx for your June quarter in a notable way. Do you have some visibility in terms of where you are going to be attracting these people from or how quickly do you think you can ramp that up?

Terry Schmid

I won’t try to make a prediction for that on this call, where they are going to come from (indiscernible).

Erik Suppiger – JMP Securities

Is the hiring the primary reason why you have such a big step up in expense from Q1 to Q2?

Terry Schmid

In which area?

Erik Suppiger – JMP Securities

Well, just when I model to your guidance, it implies that I had my OpEx into aggregate growing kind of 33, I’m sorry, the increase in about more than $3 million sequentially and I was just trying to understand if you must have some visibility in terms of how many people you’re bringing on or what.

Terry Schmid

The part of it is that you have a full year of expense for people that we brought on in Q1, and you have a full quarter of expense for the acquisitions that we did at Skyfence, Incapsula, and Tomium. So, didn’t necessarily a big ramp-up in hiring is the full quarter cost of the phase that we did in Q1

Erik Suppiger – JMP Securities

Okay. And then you had also mentioned that you were seeing some kind of increased competition on the web firewall side. F5 has been the primary competitor there. Is it the F5 that is doing things differently or is there something else on the competitive front that’s at hand?

Terry Schmid

It’s the same competitors that we have experienced in the past.

Erik Suppiger – JMP Securities

Say that again.

Terry Schmid

It’s the same competition that we have been completing against. There is not a new competitive dynamic there that we’ve been talking about.

Erik Suppiger – JMP Securities

Okay. And then lastly, based on your guidance, it looks like as you mentioned a very strong second half to the year. It looks like on a sequential basis probably a stronger sequential increase in the September quarter than at least as good as your year ago December quarter sequential growth. Is your visibility at this point into the second half – can you compare how that would compare to what you had at this point last year? The nature of the question is have you seen so many deals slip into the second half of this year that you feel very confident about that second half or where does that growth assumption come from?

Terry Schmid

The full year reflects what we think our visibility is in the second half of the year so, going beyond that, I would not say anything else. Our guidance is reflective of our confidence level and what we see the pipeline and how to deal with layout.

Erik Suppiger – JMP Securities

Okay, very good. Thank you.

Operator

We’ll now go to Michael Kim with Imperial Capital.

Michael Kim – Imperial Capital

Hi, good afternoon, guys. Can you talk a little bit more about why you are consolidating the sales group with the field ops organization, what the advantages are and rationale and so how you came about that strategy change?

Terry Schmid

Well, so what we were looking at for there is more synergy between the groups. The opportunity as we address large accounts. It’s important in large accounts to be able to pull disparate groups apart individuals from across the company to the sale, any professional services help and you need the sales teams help, sometimes you need support people to weigh in. So, what we’re trying to do is to make sure that we have common leadership of all of these functions to address really what we need to have is much better execution in large accounts. That’s really why we are having them all in one organization and I guess it’s a fairly common thing to do.

Michael Kim – Imperial Capital

Great. And then, certainly recognize the importance of large deals. But with the customer penetration, I think you called that still less than 10%. Are the sales cycles shorter for the smaller add-on sales and is there an intent to focus more on increasing the penetration with the existing customers beyond the large deals?

Terry Schmid

We’re not necessarily focused on existing customers above attracting new customers, they’re both important to the growth of the company and I would say that our – in general, sales cycles with existing customers tend to be shorter, yes.

Michael Kim – Imperial Capital

Great, thank you.

Operator

And there are no further questions at this time. So, ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect.

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