Barracuda Networks' (CUDA) CEO BJ Jenkins on Q2 2017 Results - Earnings Call Transcript

| About: Barracuda Networks, (CUDA)

Barracuda Networks, Inc. (NYSE:CUDA)

Q2 2017 Results Earnings Conference Call

October 11, 2016 04:30 PM ET

Executives

Maria Riley - IR

BJ Jenkins - President and CEO

Dustin Driggs - CFO

Analysts

Joel Fishbein - BTIG

Jackson Ader - JP Morgan

Gur Talpaz - Stifel

Hamza Fodderwala - Morgan Stanley

Erik Suppiger - JMP

Hamed Khorsand - BWS Financial

Michael Kim - Imperial Capital

Srini Nandury - Summit Redstone Partners

Operator

Good afternoon, and welcome to the Barracuda Q2 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Maria Riley of Investor Relations. Please go ahead.

Maria Riley

Good afternoon and welcome to Barracuda’s second quarter fiscal 2017 earnings conference call. On today’s call, BJ Jenkins, President and CEO, will provide an overview of our second quarter fiscal 2017 performance. Then Dustin Driggs, Barracuda’s CFO, will review our financial results in more detail and provide guidance for our fiscal 2017 third quarter. We will then open the call for your questions.

This afternoon, Barracuda issued a press release announcing the Company’s financial results for the second quarter ended August 31, 2016. A copy of this release and supporting financial materials are available in the Investor Relations section of the Company’s website at www.barracuda.com.

During the call, we will make forward-looking statements such as those containing the words may, expects, believes or similar phrases to provide information which is not historical in nature. These statements involve risks and assumptions and uncertainties. For a more detailed description of these risks, assumptions and uncertainties, please refer to the Company’s filings with the Securities and Exchange Commission, including the risk factors contained in our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to materially differ from those described in the forward-looking statements.

And with that, I will now turn the call over to BJ Jenkins, President and CEO of Barracuda.

BJ Jenkins

Thank you, Maria. Good afternoon everyone and thank you for joining us today to discuss our second quarter fiscal year 2017 results. In the second quarter, we delivered strong results and exceeded our guidance. Our Q2 revenue grew 12% year-over-year to $87.9 million and gross billings came in at $100.3 million, ahead of our guidance range of $96 million to $99 million.

On the bottom line, we achieved non-GAAP EPS of $0.21 per share, which represents a 109% increase over the second quarter of last year. Our results in the quarter were driven by increased renewals and 20% year-over-year billings growth in our core products with public cloud and email security growing at a faster rate. We’re pleased with the progress we’re making in our target areas as we execute our strategy to position Barracuda as a clear choice to help customers protect their email, networks, applications and data across diverse and distributed deployments.

Customers are responding well to our comprehensive platform that spans email security, network and applications security, and data protection solutions that can be efficiently and effectively managed using our centralized management system. We believe our platform is a market leader and that we’re well-positioned to build on our momentum as customers look to adopt new deployment models and move workloads and applications to private, public and hybrid clouds.

Let’s take a deeper look into the recent progress we have made on the key elements of our strategy which include our core product focus areas, email security and management; network and application security; and data protection, as well as our two expanded routes to market, MSPs and public cloud.

First in email security and management, our sales momentum accelerated over last quarter. In the six months since launching Barracuda Essentials, we have added over 1,000 customers with more than 30% of these customers new to Barracuda. We believe Office 365 offers a significant growth opportunity for us and is an area where we continue to invest in solutions that provide differentiated value to customers. Microsoft recently disclosed that there are 70 million monthly active commercial Office 365 customers with some 50,000 small business customers added to Office 365 each month. Barracuda Essentials for Office 365 provides this growing market an additional critical layer of security beyond the basic email protection included in Office 365. This is important as the number and sophistication of email based attacks continue to increase.

Our recent innovations and product offerings provide customers with a robust, easy-to-deploy and manage suite of services to prevent and recover from advanced threats including ransomware and phishing attacks. Last month, we launched Barracuda Email Threat Scan for Office 365, a new cloud-based service that identifies latent threats including hidden advanced persistent threats within email environments. Barracuda Email Threat Scan enables our channel partners to quickly provide customers and potential customers with an immediate view of their email security posture and demonstrate the importance of layered protection. Since launching Email Threat Scan, 99% of verified accounts scanned had at least one advanced persistent threat with an average of 144 threats per account.

Within the advanced threat landscape, ransomware is a growing and significant threat to all businesses. In a recent survey conducted by Osterman Research, nearly 50% of participating companies have been hit with ransomware in the last 12 months and 34% had a phishing attack that successfully infiltrated their networks. A critical layer in ransomware defense is a comprehensive and integrated data protection strategy. Having a solid and integrated backup, email archiving and recovery strategy can make the difference between a company that has to pay a ransom or lose their files and a company that is able to restore data quickly with minimal business impact.

Given our unified, multilayer email security, archiving and backup solutions, we’re well-positioned to equip customers with a comprehensive approach to minimize and quickly recover from these attacks. To help Office 365 customers further build their defenses against ransomware, we recently launched SharePoint Online backup as part of our Essentials for Office 365 product suite and our Barracuda Cloud-to-Cloud Backup.

Our SharePoint Online backup solution offers a granular backup and recovery tool to recover deleted, corrupted or stolen files that have been locked up by ransomware without having to perform a full recovery of the SharePoint environment. We now offer data protection solutions for Microsoft Exchange Online, OneDrive for Business and SharePoint Online along with archiving and advanced email security for Office 365 in an integrated solution managed from a single pane of glass.

Improving the security posture against malicious attacks across email deployment models is a critical concern for customers and is driving adoption of our advanced security solutions. In fact, 77% of our Essentials customers have selected a subscription that includes our best-in-class advanced threat detection solution.

Let me share with you a couple of recent notable wins that further demonstrate our leadership in email security. The first is Hillsides, a non-profit organization that provides high quality care, efficacy and services that promote safe, permanent environments for young people. Hillsides was using MX Logic, a cloud-based email security solution that was acquired by McAfee and is in the process of being discontinued. They were looking for an alternative solution to protect their email and selected Barracuda Essentials for Office 365 including our cloud-based email security and message archiving because of the advanced security functionality and the cloud-based management capabilities.

The second customer is Buffalo Wild Wings, a restaurant chain that has used our Barracuda message archiving solutions for a number of years. They migrated their email from on-prem to Office 365 and purchased Barracuda Essentials for Office 365 with all three cloud components for security, archiving and backup. This customer also deployed our Barracuda backup virtual solution due to the ease and flexibility of the Barracuda cloud control management solution.

Moving to network and application security, we achieved another solid quarter with record billings for a next generation firewall and web application firewall solutions. As organizations increasingly adopt virtualization, software-defined networks and cloud applications, they are forced to start thinking about protecting their IT infrastructure in a much more distributed way. Expanding our next generation firewall technology to further align with the security needs of the cloud era, we recently launched version 7.0 of our next generation Firewall F-Series. Our new next generation firewall can be natively deployed in public cloud platforms and is designed to enable an intelligent network perimeter that offers fast, secure, reliable and affordable access to business applications from anywhere and any device without the need to backhaul traffic to headquarter locations.

Moving to data protection, in September, we announced Barracuda Backup version 6.3, which offers key enhancements that enable faster backup and recovery, improved cloud support and expanded capacity and the unified solution that protects physical, virtual or cloud environments. The enhancements boost backup speed and recovery performance by up to three times for file server backups which is especially important today given the increase in ransomware attacks. We continue to push innovation in cloud environments and updated our Cloud-to-Cloud Backup offering for Office 365 customers by adding the option to offload data to Amazon Web Services for long-term data retention.

Moving beyond our core product focus areas, we also continue to expand and improve our routes to market. In the MSP channel, we continue to expand the products available via our Intronis MSP solutions and added new partners. Over the past year, we have added Barracuda Essentials for Office 365, backup and next generation firewall solutions. These offerings are attracting new MSP partners and we believe are catalyst to grow sales. In the second quarter, we added 160 new partners onto the Intronis platform.

We also continue to build on our strong momentum in public cloud including growing our pipeline of new public cloud opportunities and expanding our footprint within the Fortune 1000, a relatively new customer base for Barracuda. During the quarter, we added 11 new Fortune 1000 customers, bringing the total to 40 Fortune 1000 customers now using a Barracuda solution in their public cloud deployment. We continue to see growth in sales of our solutions through both AWS and Azure. And I would like to share with you two customer examples that represent Barracuda’s momentum in public cloud.

First, we secured a six-figure competitive win with one of the largest online banks. This customer was looking for a solution that would allow them to automate management of their large cloud environment on AWS. They needed a solution that could be deployed automatically and provisioned directly through AWS marketplace. After an extensive evaluation of several vendors including the incumbent on-prem provider, this customer selected Barracuda’s web application firewall, because of the robust functionality of our cloud-enabled solution and our AWS security competency certification.

The second public cloud win during the quarter is with the publicly-traded, consumer-focused financial lending and services company that was looking to build out a new mobile app and a true hybrid deployment between on-prem and Azure. The company selected Barracuda over several of our competitors and implemented our Barracuda next generation firewalls and Barracuda web application firewalls to meet the strict security requirements for both local and cloud environments. Barracuda’s ability to integrate with Azure ExpressRoute and our ability to offer customers a single solution for both network and application security for their hybrid architecture were key differentiators for us.

To summarize, we are pleased with our financial results and continued execution of our strategy to positioning Barracuda as a clear choice to help customers solve their most pressing security needs even as they look to adopt new deployment models and move applications and workloads to the cloud. We remain focused on bringing new innovative solutions to market that fortify the security fabric across public, private and hybrid cloud deployments and can be centrally managed from a single pane of class. We believe we are well-positioned to build on our momentum and lead the market in our targeted focus areas.

With that, I will now turn the call over to Dustin for a more detailed review of our second quarter financial performance and third quarter guidance.

Dustin Driggs

Thanks BJ. Revenue in the quarter was $87.9 million, an increase of 12% year-over-year and 1% sequentially. Our total subscription revenue was $66.9 million, which accounted for 76% of total revenue.

On a geographic basis, we derived 76% of total second quarter revenue from the Americas; revenue from EMEA was 18% of total revenue; and APAC was 6% of total revenue. Our number of active subscribers in the second quarter exceeded 298,000, which was an increase of 14% year-over-year. Renewal rates, which we calculate on a dollar basis, were 96% in Q2 and our average contract lengths were consistent with the prior quarter.

Turning to our second quarter billings, our core product billings grew 20% year-over-year to $58.1 million with the related subscription ARR growing 50% over the prior year to $146 million. Our legacy on-prem billings were in line with our expectations at $39.1 million with the related subscription ARR at $117 million. And lastly, our non-core billings were $3.1 million, a 27% decrease over the prior year, reflecting the discontinuation of CUDA Drive as well as Barracuda Phone System which we announced the end of sale during the quarter.

Customer and partner satisfaction essential to everything we do at Barracuda and we are working with RingCentral and 3CX to provide an alternative solution to help make the transition easier for our customers and partners.

Moving back to billings, total gross billings for the quarter were $100.3 million and total subscription ARR was $270 million, which represents a 23% increase over the second quarter of last year. Please refer to the supplemental presentation posted on our website for a breakout of our billings and ARR and a reconciliation of billings to revenue.

Returning to the P&L, our non-GAAP gross margin in the second quarter was 80.6%, which represents a 30 basis-point increase sequentially and a 130 basis points decrease from the second quarter of last year. Non-GAAP operating expenses in the second quarter were $52.2 million or 59% of revenue compared with 69% of rev -- in the second quarter of last year and 60% in the prior quarter. We ended the second quarter with headcount of 1,489 compared with 1,487 at the end of last quarter.

Non-GAAP research and development expenses in the second quarter were $15.7 million or 18% of revenue compared with 19% of revenue in Q2 of last year and 19% in the prior quarter. Non-GAAP sales and marketing expenses for the second quarter were $29.5 million or 34% of revenue compared with 42% of revenue in Q2 of last year and 33% in the prior quarter. Non-GAAP general and administrative expenses for the second quarter were $7 million or 8% of revenue compared to 9% of revenue in Q2 of last year and 8% in the prior quarter.

Non-GAAP operating income more than doubled year-over-year to reach $16.3 million in the second quarter which demonstrates the flexibility of our business model. We reported better than expected non-GAAP operating income partly attributable to a one-time R&D tax credit as well as timing of filling open headcount as we align resources across our product portfolios and geographies. Given the opportunities we see in the market coupled with our growing momentum in our core focus areas including email security and the cloud, we’re increasing our investments in the second half of FY17 in sales and marketing, and R&D in order to further improve our market position and capitalize on the growing opportunities.

Returning to Q2 results, the non-GAAP tax provision was $4.9 million in the quarter. Our non-GAAP net income in the second quarter was $11.4 million or $0.21 of earnings per share on a diluted share count of 53.3 million.

Turning to GAAP results, we reported second quarter GAAP net earnings per share of $0.05. This compares to a GAAP net earnings of $0.05 per share in the last quarter and a loss of $0.04 per share in the same quarter of last year.

Now, let’s turn to adjusted EBITDA, a non-GAAP measure that adjusts for the changes in deferred revenues and costs as well as for certain non-recurring costs. In the second quarter, we generated $24.7 million of adjusted EBITDA or 28% of revenue, up from $17.7 million in the same quarter of last year. Cash flow from operations for the second quarter was $20.5 million, which compares to $22.3 million generated in the second quarter of last year. Capital expenditures in the second quarter were $1 million. Adjusted free cash flow in the second quarter was $20.3 million, which compares to $21.1 million in the second quarter of last year.

We closed the quarter with cash, cash equivalents and marketable securities of approximately $180 million. During the second quarter, pursuant to our stock repurchase plan, we repurchased a total of 464,238 shares in the open market at an average weighted cost of $14.99 per share for a total of approximately $7 million in consideration. As of the end of the quarter, under our current $50 million share buyback authorization, we repurchased a total of 2 million shares at an average weighted cost of $13.33 per share for total consideration of approximately 26 million. And finally, deferred revenue at the end of the quarter was $398.9 million compared with $389.9 million at the end of the second quarter of last year.

And now turning to guidance, for Q3 FY17, we expect billings to be in the range of $97 million to $100 million. We expect revenue to be in the range of $85 million to $87 million. Guidance for non-GAAP operating income for the third quarter is between $10 million and $12 million. Non-GAAP EPS for the third quarter is expected to be between $0.13 and $0.15 per share with an assumed share count range of 54 million to 55 million shares.

Given our performance in the second quarter and current outlook for the third quarter, we are updating our guidance for fiscal year 2017. For FY17, we expect revenue to be in the range of $345 million to $349 million. Guidance for non-GAAP operating income for the year is between $51 million and $54 million. Non-GAAP EPS for the fiscal year is expected to be between $0.66 and $0.69 per share with an assumed share count range of 53.5 million to 54.5 million shares.

That concludes our prepared remarks today. Now BJ and I are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first questioner today is Joel Fishbein from BTIG. Please go ahead, sir.

Joel Fishbein

Good afternoon guys and congrats on a nice quarter. Two things; number one, I see that the appliance, which I know is not a core focus, has been very stable the last several quarters, and just wanted to get, BJ, any thoughts there, if you do have visibility on the appliance side of the business or don’t? And then, I have one follow-up for Dustin.

BJ Jenkins

On the appliance side, we focus the business on some core areas, we still think on-prem devices like the next generation firewall and backup so that you have quick recoveries have a place to grow and those businesses, on-prem, have done well for us the past quarters. And so, we have seen stabilization there. We are investing in those platforms on-prem where we’ll be adding things like advanced threat detection to the physical email gateways. We just announced some enhancements for the backup devices for better performance of backups and more capacity ranges that people can use. So, we do think we’ve seen stabilization there and we think in those two areas in particular we’ll continue to see appliance sales do well.

Joel Fishbein

And then Dustin, just as a follow-up on the guidance side, the mid-point of the guidance, if you take, is down sequentially. I am just a little bit confused about, if you got momentum in the business and the revenue has been accelerating, why the conservative or why the guide that would be down sequentially is, are we missing something or any help there would be really helpful?

Dustin Driggs

So, there is a couple of things to think about. I think on the revenue side, the way that we are thinking about the next quarter is, there is one less revenue day effectively in Q3, compared to Q2. So, there is a sequential impact from the revenue perspective. And then the other thing that we’re taking into account from a guidance on the revenue side is the fact that we did discontinue the CUDA Drive, as well as the Barracuda Phone System, so there is an impact from revenue perspective as we think out to Q3 and in the second half as a result of those discontinuations. Those are the main drivers that we’re thinking about from a…

Joel Fishbein

Can you give us that number, so that would be helpful?

Dustin Driggs

Yes. I think the impact from the discontinuation is between $1 million and $2 million on the revenue for Q3.

Joel Fishbein

Okay, great. Thank you.

BJ Jenkins

It’s BJ; let me add one more thing. The renewal pool too for this quarter is driven in large part as a reflection of our past performance, and last year in Q3, it was our worst performing quarter. So, there is about a $3 million smaller renewal pool. A lot of that revenue is obviously a reflection back on the business and we feel really good about where the business is at and where we’re going, but that’s what’s driving the revenue guidance for Q3.

Joel Fishbein

Okay, great. Thank you.

BJ Jenkins

Thanks Joel.

Operator

Our next questioner today is Sterling Auty from JP Morgan. Please go ahead.

Jackson Ader

Hi. This is Jackson Ader on for Sterling. Just a couple of questions from us. First, do you mind just drilling down on how much of the growth in the quarter that you’re seeing in the business is coming from the virtual environment and more specifically the virtual firewall?

BJ Jenkins

Let me start. I think there are a number of areas where we’ve -- I’ll start by saying, there has been strong demand for security in our part of the market, in the mid-market, but that demand shifting into SaaS security offering, MSP and public cloud, and we worked very hard to position the products to take advantage of that shifting demand. Virtual firewalls is one place where that’s happening. We see that happening in a couple of areas though. The first is obviously email where we focused and in six months we’ve signed up over a 1,000 customers onto our cloud delivered email security and management platform. And so, we see it happening there.

On the firewall side, we see it happening, the move to virtual and cloud in two forms. The first is in public cloud and it’s a smaller business for us today, but it’s been growing very, very rapidly and it’s a place where we feel we have leadership and in AWS and then Microsoft Azure and I think we gave some of the examples there.

I would say in public cloud, those tend to be longer sales cycles. We are getting larger customers there as they are evaluating moving their applications from on-prem to public cloud. The other place with firewalls though is virtual on-prem and we do see a rise in that amount of deployments that are done virtually. And the fact that we could manage the physical devices and the virtual devices on-prem and in public cloud from a single pane of glass is definitely helping us penetrate the market faster in that space.

Jackson Ader

And then just a quick follow-up for you Dustin, the increased investments in sales and marketing, and R&D in the back half of this year, is there going to be I guess either a weighting towards third quarter versus fourth quarter or any other seasonality there?

Dustin Driggs

So, I think there is a couple of things that we want to think about when we think about the guidance. So, we are increasing our EPS guidance for the year. So, we’re still seeing leverage through the year from an EPS perspective. And when we think about the investments that we are making in Q3 in particular, we are thinking probably a little more than half of the investment will be in sales and marketing. And those are typically going to be longer lead times in terms of the return to the billings lines. So, we are looking at headcounts, particularly in areas like public cloud where it may take between three to six months for those sales people to ramp to full productivity where they’re returning investments back to the billings line. But we feel like we see -- we have some visibility into our core focus areas in Office 365 and in a public cloud. So, we feel it’s the right time to invest there. So, little bit more than half of the increase would be in sales and marketing, and then the remainder would be in the R&D line.

Operator

Our next questioner today is Gur Talpaz from Stifel. Please go ahead.

Gur Talpaz

Great. Thanks for taking my question and congrats on the quarter. BJ, I was hoping you could elaborate a bit on the relationship here with Microsoft. It’s clear you’ve got a good relationship on the Azure side. You talked a lot about email; Microsoft obviously offers its own email security solutions. Can you talk about how you balanced out that relation in terms of the co-op petition both on Azure and with Office 365?

BJ Jenkins

Yes, I think we have taken a partnership approach with them in the Office 365 space. They are investing heavily in improving their security offerings every day. So, I think they are investing in raising their game and we are investing on top of that to continue to raise our game and add value to customers. And that helps Microsoft achieve their goal of moving more customers into this environment which is what they ultimately want. So, we have done joint marketing with them. They understand what we are trying to do on top of their platform. We work through their APIs. We’ve had interactions with them on how to improve the things we do on their platform. So, it’s definitely been a partnership approach. And we appreciate the things that they are doing to improve security for their customers. The threat scan is a perfect example of this, because there is not perfect security today for customers and we all have to work better to improve it. We developed this product and used Microsoft’s APIs. And as we’ve rolled it out, it’s been very interesting for us to see that over 99% of accounts have some form of latent threat in them. So, there is a need for this investment, I think Microsoft realizes this working well in partnership with us. And we are really excited about the fact that in six months we have signed up a 1,000 customers; over 300 of them have been net new to us; 77% of those customers have signed up for an advance threat detection subscription. And I think that speaks to the opportunity we have here and one of the reasons why as Dustin just indicated, it’s a place where we’re going to invest to try and to capitalize on customers moving there.

Gur Talpaz

That’s good color. And then, with regard to the Fortune 1000 accounts you noted, we’ve historically thought about you guys as more of an SMB focused player but clearly you’re making -- maybe pushing upstream pretty successful here. Can you talk about what’s driving that? We saw some growth last quarter, accelerated this quarter to a certain degree, what’s helping you push kind of that shift?

BJ Jenkins

Well, certainly having two partners like Microsoft and Amazon specific, I think what they’re spending and getting customers to be comfortable with their platform is helping us. And in fact, a lot of the leads and opportunities we get, come directly from Microsoft and Amazon. I think the second thing that’s happened there is we have two products who really are architected for public cloud platforms and the requirements that customers have in public cloud and that’s secured productivity, traffic management and the highest security posture and integration into AWS and into Microsoft Azure. And so for our NG and WAF products, we really feel like we have a leading architecture, we have leading product features that meet the customer requirements that are bringing quick time to value for those customers and helping Microsoft and Amazon move them onto the platform. And the third part about it that we like is it’s not a huge change in our selling motion; we’re not moving to a traditional enterprise selling motion. We have a dedicated public cloud group. But if you think about it, they do most of their demos not at the customer site but through a shared screen in Azure or AWS. And so, it’s the sales model that we’re very comfortable, the sales motion that we’re very comfortable with and I think it plays well. And so we -- this is an incremental market for us and we’re excited about the progress we’ve been making there.

Operator

Our next questioner today is Melissa Gorham from Morgan Stanley. Please go ahead.

Hamza Fodderwala

Hi. This is Hamza Fodderwala in for Melissa Gorham. Couple of quick questions, so, on the macro front, one of your peers, you may have heard, negatively preannounced citing some macro issues, particularly in UK and Latin America. These markets are likely small for you, but how would you characterize the overall health of the security spending environment?

BJ Jenkins

I think the majority of our demand is what we would consider the mid-market or SMB market. And I think the demand in that part of the market has been steady, but it’s shifting as we’ve talked about where customers are moving from traditional on-prem towards more software, virtual, SaaS, MSP or public cloud deployed models. And so, this is part of the transition we’ve been going through to get our products in the right part of where that demand is going. And I think it’s early days in this cloud evolution and this move but the signs we’re seeing in email and in public cloud are very good.

Hamza Fodderwala

And then on that comment, I guess with customers moving more from appliances to cloud-based solutions like you mentioned, when can we expect these transition periods will stabilize and growth can sort of return to the pre fiscal year ‘16 levels?

BJ Jenkins

I think this is -- we’re in a transition and we are working our way through things like the discontinued product lines that we have but I -- we know where we’re going. We can see where we’re going, we feel good about where we’re going. And if you look at the last three quarters, the areas that we’re focused on where we believe the customers want to go which is SaaS, MSP and public cloud, the early signs are good. So, if you look at the email data, security data we cited, the network security data was another record quarter for us there. The early signs of this data are good and we think bode well for future.

Hamza Fodderwala

And then, just one more quick one if I may, on the macro front, EMEA was relatively weak. Was this primarily macro driven or was this something related to execution?

BJ Jenkins

EMEA revenues were flat and our billings, we feel like we’re in a good position for the second half of the year. Just to maybe take you through a quick history, we changed our leadership last year for both Asia and Europe, and we had a significant improvement in performance in Asia and we’re starting to see that ramp in Europe also. So, we feel good about the position we’re in, in Europe. We’ve seen strong demand from our traditional markets like Western Europe and the Middle East has been coming back for us. So, we feel good about Europe’s position for the second half.

Operator

Our next questioner today is Erik Suppiger from JMP. Please go ahead.

Erik Suppiger

Can you comment on what size your public cloud business is? And can you also give us a sense for when customers, existing customers are migrating to some of the cloud products, how does that relate to a deal size?

BJ Jenkins

So, Erik, we haven’t given out how large the public cloud business is, but it’s not significant at this point but it’s very rapidly growing. I will say, we have -- getting close to 1,000 customers in public cloud and the ASP is larger than our traditionally ASP. We’re also seeing what I would call land and expand characteristics around that where the customer starts with a specific application or small portion of a test of that application. And then as they get comfortable with the deployment of that app in public cloud, we see a rapid expansion in how much we bill for the year. And this has held true for not only mid-market customers but for enterprise customers also. So, we think we it bodes well for the future of that business where customers start small and then they grow rapidly and that start small is bigger than our average ASP right now.

Erik Suppiger

I am surprised that the ASP is larger. Can you expand is that because the customers are generally larger or what is it that’s creating a larger ASP with the initial purchase?

BJ Jenkins

Primarily it’s the WAF and the NG tend to be larger ASPs for us in general. We do have some people who deploy these hourly but for the most part, most of these customers today are buying one year licenses and bring them to market. And these are -- there is a higher mix towards larger customers too than we have in our traditional business. So, yes, we’re seeing more enterprise side customers despite the fact that we got 40 Fortune 1000 customers and one of the wins we’ve talked about was a six-figure win which is a large win for us.

Operator

Our next questioner today is Hamed Khorsand from BWS Financial. Please go ahead.

Hamed Khorsand

Hi, just trying to figure out. So, last quarter you provided a billings number and then a guidance for this quarter that suggested slight softness to being flat. This quarter, you’re providing a similar kind of guidance. What is the handicap that you’re trying to suggest that you’re not comfortable with the kind of guidance you’re providing in billings?

BJ Jenkins

Well, you’ve got to think about the model here and the transition we’re going through. There is a number of things as you think about billings guidance for Q3 that I want you to think about. The first is we are still working our way through discontinued products. So, there is a headwind as Dustin spoke about $1 million to $2 million in the quarter that we’re dealing with. In Q3, there is one less selling day and this is a daily business still for us; and so, one last selling day has an impact on the business. And then finally, when you think about our business model, we drive a large part of the business off the customers renewing at a very high rate on an annual basis. And last year, we had a significant sequential drop off Q2 into Q3. And we had our worst quarter in last year in Q3, which provides the renewal pool that we use going into this quarter. And so, the renewal pool for Q3 is $3 million smaller than the renewal pool was in Q2. And so that’s what drives as we look at billings where billing is going to fall. With that said, we feel really good about the results in Q2 and the areas that we outlined, and they’re going to drive we think good growth for us in Q3, when you look at that guidance range versus last year’s performance.

Hamed Khorsand

Okay. And were there any particular areas where you saw any acceleration in business that you were surprised then that have continued into Q3?

BJ Jenkins

Well, certainly, we’re happy with the continued progress in email and in public cloud. So, the momentum we’ve seen in our email security and management has continued and with the launch of the Threat Scan, we think this is a great way for our partners to build pipeline and for us to show our customers where they may have latent security risks that our security tools can help them with. So that’s been a good area and we’ve continued as we’ve talked a lot, I think on this call to see the progression in public cloud. Again, it’s early days for the evolution of public cloud, but we see a number of customers interested testing, trying, and our pipeline has been growing rapidly there.

Operator

[Operator Instructions] Our next questioner today is Michael Kim from Imperial Capital. Please go ahead, sir.

Michael Kim

Can you talk a little bit about maybe changes in the competitive landscape in public cloud? And specifically, I think at Ignite Microsoft previewed a new WAF offering for Azure. And kind of curious how those kind of changes might affect your current relationship?

BJ Jenkins

I actually think -- and as you know Michael, Amazon has had a WAF out for quite some time. And I think it actually helps overall, because it increases the awareness and need that customers have to deploy this type of security. And so, one of the wins we talked about in the script was a six-figure win one of largest online banks in the world in Amazon who already had a WAF and they had a different incumbent on-prem WAF provider. They tested the incumbence, they tested Amazon’s WAF and they tested ours, and they went with ours. And they did that -- done [ph] feedback, it’s because we have the best security protection for that customer in the public cloud; the way it’s integrated, it can be easily deployed and easily managed in the public cloud. So, my expectation is the same thing will happen with Microsoft. And Microsoft, the relationship has been great. They let us know they were developing this; we know that there is some base level features that customers want. But they need partners really to provide that full security protection for the customers. So, I think this brings more awareness to the category and ultimately it helps us.

Michael Kim

And then just on Essentials for Office 365, did you typically find most of the new customers buying advanced threat protection at the same time that they switched over Essentials or were they typically a follow-on sale?

BJ Jenkins

Most of them have bought the subscription at the time of sale. So, I would say in the mid market, there has been a growing awareness for the need for advanced threat detection which has been I think a positive change in the last 12 months for our business. So, when you think about that 77% attach rate, the majority of that is being sold at the time we sign the customer up for the Essentials package. The other thing I just mentioned there is certainly ransomware is on the top of our customers’ minds these days, in the mid market as we can see probably the largest threats that’s out there and there is a growing awareness in that customer base that backup is the best way to fight this and not pay ransomware or lose your files. And so, having integrated backup in the Essentials package, being able to manage all of those through a single pane of glass is proven we think to be a good value proposition as we signed up new customers.

Operator

Our last questioner today is Srini Nandury from Summit Redstone Partners. Please go ahead.

Srini Nandury

BJ and Dustin, can you talk about the competition in the backup space little bit, particularly from Veeam and Commvault? Are you also seeing any disruptions in the Dell installed base due to the EMC acquisition? And I have follow-up please.

BJ Jenkins

So, a little bit different. Commvault tends to operate in more enterprise type accounts, so we don’t see them as often. Veeam, we see very, very frequently and I would say there is a number one company we run into now, specifically in the accounts we are going after; with the release of our Vx product, we feel like we have been in a better position to compete. And really when a customer needs both the virtual and a physical solution with disaster recovery, we tend to compete very well with them. So, I feel like we’ve improved our competitive posture versus Veeam but we are certainly seeing them a lot.

We haven’t -- much difference in Dell right now, but I think it’s almost too early to tell as a lot of the changes are happening in there in the process I think of completing that sale and spinning out the assets. So, I think we’ll probably have some better color on what’s going on competitively with them next quarter.

Srini Nandury

Okay, thanks for the color on that. On your email protection business, obviously you are seeing larger and larger deals in Fortune 1000 as you alluded to in the script. I was kind of wondering are you seeing Proof Point at all in there, are you going head-to-head in some of the larger accounts and have you seen any wins against them recently?

BJ Jenkins

Yes, we definitely are running into Proof Point and Mimecast more often. I wouldn’t say we’re going into enterprise in that space, our largest wins are selling the 10,000 to 15,000-employee type of category. And we compete very well there. We on a feature basis, we either have parity and some space where we’re leading we think with the threat scanner and with integrated backup we’re actually differentiated from Proof Point and Mimecast. And so, we think we can -- and selling at a better price, the more disruptive price, I think we’re well-positioned in that, into mid-market and the upper end of the mid-market to compete with both of those folks and we’re seeing them more now.

Operator

This ends our question-and-answer session. I would now like to turn the conference back over to BJ Jenkins for any closing remarks.

BJ Jenkins

Well, first, I just want to say thanks to all the employees, partners and customers of Barracuda for their continued support and I also want to thank everyone who joined the call today for taking the time. And we look forward to talking to you soon and keeping you updated. Thanks everyone.

Operator

The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines.

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