Imperva Inc's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 2.12 | About: Imperva (IMPV)

Imperva Inc (NYSE:IMPV)

Q3 2012 Earnings Conference Call

November 01, 2012, 17:00 PM ET

Executives

Shlomo Kramer -- President and CEO

Terry Schmid -- CFO

Analysts

Lauren Choi -- JPMorgan

Robert Breza -- RBC Capital Markets

Rob Owens -- Pacific Crest

Jonathan Ruykhaver -- Stephens

Rohit Chopra -- Wedbush

Jonathan Ho -- William Blair

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Imperva Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded.

I would now like to turn the call over to Mr. Terry Schmid, Chief Financial Officer. Please go ahead, sir.

Terry Schmid

Thank you, Tom. Good afternoon and welcome to Imperva's third quarter 2012 earnings call. We will be discussing the results announced in our press release issued after the market closed today. Again, I am Terry Schmid, Chief Financial Officer of Imperva. We me on the call is Shlomo Kramer, Imperva's Chief Executive Officer.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend, and other words that denote future events.

These forward-looking statements are subject to material risks and uncertainties that could cause actually results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors and Imperva's 10Q filed with the SEC on August 13, 2012.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation expenses. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing Imperva's performance.

For a complete information regarding our non-GAAP financial information to the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release regarding our third quarter 2012 results. The press release has also been furnished to the SEC as part of a Form 8-K.

In addition, please note that the date of this conference call is November 1, 2012 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

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

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

Shlomo Kramer

Thanks, Terry. I would like to thank everyone for joining us today. We are very pleased with Imperva's strong execution during the third quarter, particularly our ability to achieve non-GAAP operating profitability for the first time as a public company as we've further leveraged the investments made in our global sales and research and development infrastructure.

We were able to achieve this milestone while at the same time continuing to maintain strong revenue growth rates across every geography. From a market perspective, business is driven by the relatively simple needs to protect critical applications and high end and high value data. We believe that the drivers that require the protection of these assets organized online crime, industrial espionage, activism and cyber warfare will continue to mount simply because of the value of these assets.

Regulation and legislation have tended to follow these threats and are essentially a way to force organizations to mitigate these threats. We expect regulations to continue to track the threats and to drive organizations to us.

What's interesting is that providing security for the business assets in the datacenter has little to do with the traditional security controls associated with the underlying network or endpoint infrastructure. The world now is about online transactions and commerce, availability of applications and sharing of data. The solution is therefore not a variant of the network or endpoint security stacks, but a fundamentally different set of technologies that can address these unique assets, threats and use cases in the datacenter.

From a pure security and compliance perspective, Imperva has a significant advantage of being the only broad pure-play vendor in the market. We believe this positions us well to benefit from the underlying growth drivers. Taking a look at our overall performance, during Q3 2012, our total revenue was $26.3 million, up 33% year-over-year and exceeded the high end of our guidance range. This increase was primarily driven by the 41% growth in recurring service revenues, particularly subscription revenues, which increased 231% year-over-year and 37% quarter-over-quarter and now represents over 11% of total service revenues compared to 5% last year.

In addition, our combined product and subscription revenues grew 35% compared to the third quarter of last year, which we continued to view as a leading indicator of the strength of our business. From a profitability perspective, as I mentioned earlier, we achieved non-GAAP operating profitability for the first time as a public company, reporting a non-GAAP operating profit of $0.1 million compared to a loss of $2 million in the third quarter of 2011. This exceeded the high end of our guidance and is a clear evidence that we are continuing to see improving leverage in the overall business.

In regard to some of the summary levels to business, we continue to generate a significant portion of our bookings from follow-on sales to existing customers. Sales to existing customers accounted for over 53% of our product and subscription bookings in the third quarter. We also added 138 new customers representing growth of 33% compared to Q3 of 2011. We continued to see new customer growth well balanced across all geographies and again experienced a positive impact from the expansion of our strategic accounts program as our average deal size continued to increase.

During the third quarter, the number of deals greater than the $100,000 increased 30% year-over-year and the dollar value of these large deals continues to grow. Finally, we are well positioned to maintain the momentum as we have entered the fourth quarter with a record pipeline. Similar to prior quarters, our pipeline continues to grow at a rate above both revenue and our booking growth.

From a geographical perspective, customer demand was solid across all regions. Specifically in the Americas region, revenue increased 34% year-over-year. We continued to benefit from the strong execution of our channel partners and the investments made in our sales and marketing infrastructure. We were particularly pleased with the progress we made in the federal vertical which recorded a record quarter in Q3.

Our international regions also continued to grow rapidly during Q3 with revenues increasing 33% year-over-year and accounting for 38% of total revenue. In EMEA, our revenues increased 31% year-over-year despite the challenging economics in many regions. While we are very pleased with the execution during the quarter, we remain mindful of the continuing volatility in the region and believe that Imperva remains well positioned for growth due to the increase in the number of teams covering under-served markets.

In Asia-Pacific, revenues increased 35% year-over-year as we again benefitted from the strong execution of our sales team and the strength of our distribution in the regions. Our performance continues to confirm our belief in the success of our comprehensive integrated solution focusing on the datacenter, supported by the large and growing market opportunity, our strong operating position and our scalable business model.

Now, I would like to provide an update on some of our key initiatives and accomplishments during the third quarter. First, in Q3, we continued to see an increase in the number of global rollout within some of our largest accounts. For example, we continued to expand our deployments within one of the world's largest technology companies with a new rollout of our web application and firewall product to protect 10 additional Internet facing applications.

The expansion is part of an organization-wide initiative to improve online security. In addition, we extended our global rollout of our solution within one of the world's largest telecom companies. This rollout began last year and has continued based on our success of – based on the success of the early phases. In Q3, we saw orders to expand the deployment in three countries as well as orders in two new countries; all but one of the orders in both application security and data security products.

Second, we continued to see momentum in our global channels. During the quarter, we had very strong growth by a number of our (inaudible) and resellers in multiple geographies as the level of engagements increases resulting from the continued recognition of the markets opportunity. We also have good traction with our hosting provider relationships as they continue to consider our service and support to be an important element of their businesses.

As a reminder, Imperva currently has a global network of over 550 partners which originates over 60% of the company's pipeline and fulfills over 90% of the business. Third, our technology alliances showed continued momentum. We signed an agreement with Websense that allows them to resell our five security product as a part of the data loss protection suite. We believe that this arrangement will broaden our reach in the file security market and ultimately help accelerate the adoption of Imperva five security solutions.

We also officially announced our collaboration with Cisco to streamline the deployment and management of the SecureSphere Web Application Firewall in Cisco virtual switching environments. As we mentioned last quarter, we expect that Cisco's support of our Web Application Firewall with also Cisco's customers, a convenient, cost effective option to protect sensitive web applications as well as enable them to meet PCI compliance requirements. We are very excited about this relationship since it represents the first step in our best-of-breed strategy for the data center security stack in virtual environments.

To be more specific, we believe that the enterprise preference for best-of-breed security products will carry over into virtual environments and by capitalizing on the deployment benefits of advanced virtual switching and software-defined networking technologies, Imperva will be positioned to best serve enterprise organizations that want to deploy our world-class security solutions.

Finally from a competitive perspective, our win-loss ratio in head-to-head competitive deals remains strong during the quarter. Similar to recent quarters, we had a number of deals in which we won against large competitors. I want to take a moment to describe a few of our key wins against our major competitors.

As I mentioned earlier, our federal team had a record quarter in Q3, due in large parts to a number of significant competitive wins. We won a large database security deal in a defense agency bidding out IBM and MacAfee. The key factor in the win was our comprehensive solution for multiple aspects of database security, including [rights] management for mobility assessment and access control.

Still in the defense department, we also had a major win over F5 and Trustwave for our Web Application Firewall deployed. We were selected based on our superior security capabilities of our solution. On the civilian side, we won another large database deal this time against IBM and Application Security, Inc. on the strength of our ability to meet the agency's need to mitigate insider threats.

Finally in the commercial section, we closed a significant multiproduct family deal at a large US retailer beating both F5 and IBM. The key decision factor for the customers as well as our ability to provide the comprehensive solution for both application security and database security in a single management framework.

So in summary, we are pleased with our strong third quarter performance, particularly with the growth of subscription revenues and the ability to achieve non-GAAP operating profitability. We continue to gain market share by demonstrating the benefits of our integrated approach, data security and application security.

Looking forward, we entered Q4 with a very strong pipeline and we remain committed to investing in new product developments to maintain our competitive edge, expand our reach worldwide and leverage our global sales infrastructure in order to accelerate our growth.

With that, let me turn it over to Terry.

Terry Schmid

Thanks, Shlomo. I'll first start with a more detailed overview of our third quarter financial performance and then provide our outlook for the fourth quarter and full year 2012. Following my closing remarks, we will open up the call to your questions.

As Shlomo mentioned, we are very pleased with the company's strong execution during the third quarter, which again translated into our ability to exceed expectations across all key operating metrics.

Now turning to our third quarter financial results, starting with the P&L. Revenue came in at $26.3 million which is up 33% compared to the third quarter of 2011. It exceeded our guidance of $24.6 million to $25 million. As Shlomo mentioned, we saw solid growth across all geographies, along with continued traction and further penetrating our existing customer base as evidenced by more than 20% year-over-year increase in the number of customers that purchased multiple products.

Services revenue, which represents the recurring piece of our business and consistent with maintenance and support, professional services and training and subscriptions increased 41% to $11.7 million and accounted for 44% of total revenue compared to 42% during the third quarter of 2011.

The growth in services revenue was primarily driven by the 231% year-over-year increase in subscription revenue to $1.3 million, as subscriptions now account for over 11% of services revenue, up from 5% in last year's third quarter.

Our combined product and subscription revenues increased 35% year-over-year to $16 million. And as Shlomo mentioned in his remarks, we view this revenue growth as a leading indicator of the strength of our business. Percentage of our business related to recurring service revenue continues to increase due primarily to the growth of subscriptions.

In addition, the number of deals over $100,000 increased 30% to 70% during the quarter, up from 54% last year, again highlighting the strength of our large enterprise and global accounts.

Turning now to non-GAAP expenses and profitability, which I remind you, excludes stock-based compensation expenses. For the third quarter, gross profit was $21 million compared to $15.5 million in the same period last year. Our gross margin percentage was 80% compared to 79% in the third quarter of 2011.

In terms of non-GAAP operating expenses, while we continue to invest in sales and marketing and research and development to support future growth, we have experienced some operating leverage in the model. Specifically sales and marketing expenses increased 22% to $12.6 million. However, it represented 48% of revenue compared to 52% during the third quarter of last year.

Research and development expenses increased 4% year-over-year to $4.8 million but accounted for 18% of revenue compared to 23% of revenue last year. In spite the improved leverage in Q3, we continue to remain committed to enhancing our solution in order to maintain our competitive advantage.

General and administrative expense was $3.5 million, up 33% year-over-year, primarily due to the cost associated with being a public company. As a percent of revenue, G&A was 13% in Q3 consistent with last year.

As a result, we achieved a non-GAAP operating profit of $100,000 in Q3, which was significantly improved compared to a loss of $2 million during the third quarter of 2011 and exceeded our guidance for a loss of $500,000 to $900,000.

Non-GAAP net loss, attributable to Imperva stockholders for the third quarter was $97,000 compared to a loss of $2.1 million during the third quarter last year. Non-GAAP net loss per share during the third quarter was basically breakeven and based on 23.2 million weighted average diluted shares outstanding and exceeded our guidance to a loss of $0.02 to $0.03 per share. This compares to a net loss per share of $0.13 during the third quarter of 2011 based on 16.3 million weighted average diluted shares outstanding in the prior-year period.

On a GAAP basis, GAAP net loss attributable to Imperva stockholders for the third quarter totaled $1.9 million or $0.08 per share based on 23.2 million weighted average shares outstanding. This compares to a loss of $2.7 million or $0.48 per share based on 5.6 million weighted average shares outstanding in the prior-year period.

A reconciliation of GAAP to non-GAAP financial measures have been provided in the financial statement tables included in the press release issued today covering our financial results for the quarter ended September 30, which can be viewed on our website.

Turning to the balance sheet, as of September 30, 2012, we had $111.7 million in cash and equivalents and short-term investments and no debt outstanding. Our cash balance reflects the generation of $1.3 million of cash flow from operations during the quarter. We ended the third quarter with an accounts receivable balance of $26.7 million resulting in DSOs of 93 days during Q3 compared to 86 days in the second quarter of 2012. The increase in DSOs was primarily due to the strong revenue growth during the quarter.

Total deferred revenue increased 50% year-over-year to $38.3 million during the third quarter, driven by over 90% renewal rates, the growing success of our subscription based products and continued growth in our installed base and new customer acquisitions.

Now turning to outlook, starting with our fourth quarter. We expect total revenue to be in the range of $29.5 million to $30 million or growth of 27% to 29% compared to the same period in 2011. Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating profit is expected to be in the range of $500,000 to $800,000.

Non-GAAP net income attributable to Imperva stockholders excluding the impact of stock-based compensation is expected to be in the range of $300,000 to $600,000 or $0.01 to $0.02 per share.

Since we expect to be profitable during Q4, which assumes approximately 27 million fully diluted shares which include the impact of invested options compared to 23.2 million shares during Q3 where we generated a slight net loss. This also assumes the provision for income taxes of $250,000 to $300,000 for the quarter.

From a full year perspective, we are increasing our guidance to reflect the strong performance in Q3 and continuing momentum we are seeing. During the full year 2012, we expect total revenue to be in a range of $102 million to $102.5 million, up from our prior guidance of $99.5 million to $101.5 million. This represents growth of 30% to 31% compared to last year.

Non-GAAP gross margin is expected to be approximately 79%. Non-GAAP operating loss is expected to be in the range of $1.8 million to $2.1 million which is an increase from our prior guidance of a loss of $2.7 million to $3.1 million.

We expect non-GAAP net loss attributable to Imperva stockholders, excluding the impact of stock-based compensation to be in the range of $2.4 million to $2.7 million or a loss of a $0.11 to $0.12 per share, in line with our previous guidance of a loss of $2.3 million to $2.7 million or $0.11 to $0.13 per share. This assumes the tax provision of $900,000 to $1 million for the full year.

We expect capital expenditures for the full year to be in the range of $2 million to $2.5 million. And finally we continue to expect to generate positive cash flow from operations in 2012.

Before turning it over to the operator for Q&A, I wanted to make a few comments on fiscal 2013. While we are still in the midst of our planning process, we are currently comfortable setting an initial full year revenue growth rate of at least 25% in light of the fact that global economic activity continues to remain volatile.

We also expect to achieve a non-GAAP operating margin of approximately 5% as we continue to increase our investment and our sales and marketing infrastructure in order to further accelerate our growth and increase market share globally. We plan to give further details regarding our 2013 expectations as we gain additional data in the quarters ahead.

In summary, we are very pleased with our third quarter results which were driven by the combination of new account wins, expansion within existing customers and traction from recent product introductions. Imperva remains well positioned to maintain this momentum since we continue to be the only security provider to offer enterprise as a comprehensive, integrated solution that minimizes security overhead while optimizing the protection of their data.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Sterling Auty with JPMorgan.

Lauren Choi -- JPMorgan

Hey, guys. This is Lauren Choi for Sterling. I just had a couple of questions. I guess first, you talked about strength in all geographies, I guess some of your competitors as well as network security guys are seeing pockets of weakness. What do you think is, I guess – why are you guys seeing such strength in all geographies and is it execution from your part or is it certain things that you're spelling that's doing really well, if you could just give us some color on that?

Shlomo Kramer

We see the security issues that we are solving for organization to be very high on the priority list. We are protecting the key business applications and high value data and that today is kind of the target of fairly major attacks. So we see that the budgets are remaining and we are not seeing deals slipping or being canceled.

Lauren Choi -- JPMorgan

Great. And then just next question, I guess linearity in your quarter, just give us a sense of the linearity in the quarter? And then was there anything that was more back-ended than usual?

Terry Schmid

The linearity in the quarter was consistent with what we seen this year, which has been more backend loaded than what we saw last year, but consistent with what we've seen in the first three quarters of the year.

Lauren Choi -- JPMorgan

Okay, great. And I guess the last question is, it looks like at the midpoint of your operating margin guidance, you guys are above what you previously guided but EPS is relatively the same as below. So I wanted to understand like underneath the operating income, there's just really those taxes that are going up or is there something else going on there?

Terry Schmid

Mostly just a little bit of an increase on where we think the tax provision will be in the fourth quarter.

Lauren Choi -- JPMorgan

Okay, great. Thanks, guys.

Operator

We'll take our next question from Tom Ernst with Deutsche Bank.

Unidentified Analyst

Hey, guys. This is actually (inaudible) for Tom. Just a couple of questions from me. What was the growth across the different product categories, what is consistent as you see some in the last quarters or did the WAF outperform the database product?

Terry Schmid

In any given quarter, one product certainly outperforms the other. We didn't see anything unusual in the behavior. Both were still growing very, very nicely.

Unidentified Analyst

Got it. Was there any large deals (inaudible) 0.5 million in the quarter and how did that compare to Q3 of last year?

Terry Schmid

So as I said in the commentary at the beginning, we saw very nice growth in our large deals which we classify as $100,000 or over. So we continue to see growth there in large deals.

Unidentified Analyst

Were there any deals above 0.5 million in the quarter?

Terry Schmid

So we only just closed deals that were over $100,000. Growth has been very nice in large deals.

Unidentified Analyst

Okay, thanks. Just one last question from me. So you spoke about how you're hiring (sales team) to drive your large deals and I think by the end of the year, you plan to have headcount for that deal to be almost 10% of your total sales and marketing headcount. Can you talk about how you're cracking for high for that team and are we on track for reaching that 2%...?

Shlomo Kramer

We are on the right, absolutely.

Unidentified Analyst

Okay. And how much – what is the headcount percentage at the end of Q3 for that team?

Shlomo Kramer

So we're not disclosing number of teams, but we are continuing to build out both the strategic accounts team as well as the overall number of sales teams to address the demand that we are seeing in the market.

Unidentified Analyst

Okay, perfect. Thanks. That's it from me.

Operator

We'll take our next question from Robert Breza with RBC Capital Markets.

Robert Breza -- RBC Capital Markets

Hi. Thanks for taking my questions and nice quarter. Shlomo or Terry, can you talk a little bit about as you guys look to go into next year, you gave preliminary guidance. How are you thinking about headcount growth and – not necessary by segment, whether it's sales and marketing and R&D and clearly you're investing to drive sales growth. But can you talk to us about how you see headcount growth going forward? Is it moderately higher than your revenue growth rate or do you expect to see more productivity improvements through the overall headcount? Thanks.

Terry Schmid

Our expectation and we would probably give more color on this as we get into next quarter, but our overall assumption is that we expect to become – as I said, we expect to have a 5% operating profit margin for the full year, at least 5% operating profit margin. So that would indicate that overall, the spending that we're going to do will be – there will be more leverage in the business model next year than this year. That being said, we do expect in sales and marketing and R&D to continue to invest resources in those and grow those next year compared to this year, I think, relative to G&A because G&A will slow down because we've been a public company for a while. But you can expect us to invest in sales and marketing and R&D next year to support the accelerating growth rates.

Robert Breza -- RBC Capital Markets

And maybe as a follow-up, do you see those investments being particularly to one geography or how do you see kind of the investments just not quantitatively but just qualitatively, do you see more on the US side or more on Europe, how do you think about the geographic split?

Shlomo Kramer

The demand that we are seeing is well balanced across all geographies. So our investment on the sales side is going to be well balanced as well.

Robert Breza -- RBC Capital Markets

Great. Thank you.

Operator

And we'll go next to Rob Owens with Pacific Crest.

Rob Owens -- Pacific Crest

Great, thank you, and good afternoon. Terry, I want to dig in a little bit more on the DSOs. You talked about linearity being backend weighted all year. Do you think this is the new kind of normal that you guys are seeing or are you just seeking these $1 million types of deals come in the last few years of the quarter and that's what skewing the metric?

Terry Schmid

I think that the – I don't know if it's the new normal or not. It certainly has been the behavior this year. But I think it is – you're on to something where it is a function of the fact that we do a larger percentage of our deals, our large deals which do tend to come in the latter half of the quarter. So I do think that that's a contributing factor.

Rob Owens -- Pacific Crest

Because if we look at the strength over the entire report here, the only one that probably sticks out is DSO. So can you help us think about where you hope that range would be maybe for the fourth quarter?

Terry Schmid

I hope to see it back into the mid to low 80s.

Rob Owens -- Pacific Crest

And then second is, you talked a little about your success in the federal vertical and it was a record with your federal team. From a go-to-market perspective, any new partners, anything to be considered, is that direct, is that typically going through partners? And can you give us a sense of how that pace is on a year-over-year basis, is that actually growing as a percentage or growing faster than the rest of the business? Thanks.

Shlomo Kramer

So our partnership model in the federal is similar to the commercial where it's a direct touch model. We are very much involved in the last years, in conjunction with our partners and the deal is fulfilled for the partners. And the growth has been significant. It's been a very strong quarter for us.

Operator

And we'll take our next question from Jonathan Ruykhaver with Stephens.

Jonathan Ruykhaver -- Stephens

Yes, good afternoon. A couple of quick questions. First one is how should we think of growth between services and license in the current quarter? It would appear that with continued high renewal rates and continued adoption of cloud services that our rate for services should be similar to what you've been posting as of late. But, however, that would suggest licensed growth year-over-year moderates back to the low 20% rate. So do you expect accelerated growth on the cloud Web App Firewall side to continue to cannibalize license revenues or is this just more some of the assumption on your part?

Terry Schmid

I'm not quite sure I understand your assumptions about product license.

Jonathan Ruykhaver -- Stephens

If you assumed that services continues to grow close to 14% year-over-year, that would imply license revenues are about – license revenue growth year-over-year is about 20% in the current quarter?

Terry Schmid

Product license growth has been accelerating over the course of this year, I'll tell you that. And the position that our subscription business is in right now is complementary to our license business. It's not cannibalizing that business, which is why when we present the numbers and we discuss them, we want people to understand the combination of the two is the full set of security applications that we bring to market and is what's the relevant metric for us in terms of how our business is growing as a leading indicator.

Jonathan Ruykhaver -- Stephens

Yes, I understand that. I'm just trying to understand the dynamic in the current quarter around the deceleration in license growth that's implied based on your guidance for the top line?

Terry Schmid

I'm still not quite sure, but I get where you're going but…

Jonathan Ruykhaver -- Stephens

I guess we can take that later. The other question I had is between Threat Radar Reputation Services and the cloud Web Application Firewall, what is making the greater contribution to subscription revenues?

Terry Schmid

The greater contribution is coming from threat radar, which is in the cloud-based security applications.

Jonathan Ruykhaver -- Stephens

Okay. And then I guess looking at subscription services in general, can you provide some color on the mix between and market adoption across service provider enterprise and midmarket?

Terry Schmid

We haven't talked about that in the past. So we haven't disclosed how it breaks out across those company sizes.

Jonathan Ruykhaver -- Stephens

Would you just say that both the activity you're seeing is coming from a new segment in the marketplace?

Terry Schmid

A new segment? The (inaudible) security services are geared to new segments for us in general, so…

Jonathan Ruykhaver -- Stephens

New segments, I mean the different size of an organization typical to – outside of large enterprise historically you sell into?

Shlomo Kramer

No, that's only the cloud services expand our markets also to smaller organizations that can't afford implementing an appliance (inaudible) in front of the applications. So in that sense, to implement.

Jonathan Ruykhaver -- Stephens

Okay, good enough. Thank you.

(Operator Instructions). We'll go next to Rohit Chopra with Wedbush.

Rohit Chopra -- Wedbush

Thanks very much for taking the question. I wanted to ask about Cisco, Shlomo, you mentioned and they were assigned as a partner I think about a quarter or maybe just more than a quarter ago. So has the training been done and do you expect revenue to be coming over the next few quarters? Is that what we should expect?

Shlomo Kramer

So we are in the early stages here. We have been doing activities in the field with Cisco and we are seeing good direction from these activities. But this is a long-term partnership and it's really very early stage right now. But it's long term, but we definitely see that as strategic for us.

Rohit Chopra -- Wedbush

Strategic, yeah, of course. And then I wanted to ask you about the sales teams once again. You didn't mention if they began to contribute this quarter and you've done a lot of work over the last couple of quarters. So I just want to get a sense. The revenue growth that you saw, would you be able to say that those sales teams are beginning to have an impact or are we still early stage with that hiring?

Terry Schmid

Those hires are relatively recent. So we – the first time we discussed this was two calls ago that we were going to ramp up this program. We've hired the people to ramp it to what we had talked about at that point in time. But it's a two or three quarter proposition to get somebody fully productive.

Rohit Chopra -- Wedbush

So the growth is still in front of us. And Terry, I want to ask you one more time and I think you mentioned something about this that the gross profit being up. Can you just give us a sense of what the key drivers were there – what the key drivers were for that, if you don't mind?

Terry Schmid

So it's mostly product mix. We're seeing product mix shift over time to more high capacity appliances which have higher margins and we've seen product mix shift to virtual appliances.

Rohit Chopra -- Wedbush

Okay. And then obviously less OEM, because OEM did had a negative impact last quarter?

Terry Schmid

We did have one deal that had a large OEM component last quarter, but we did not – we didn't see a same impact this quarter.

Rohit Chopra -- Wedbush

Thanks very much.

We do have a follow-up question from Rob Owens with Pacific Crest.

Rob Owens -- Pacific Crest

Great. Thank you. Just one more guys if I may. Terry, as we think about your initial guidance for 2013, the 25% relative to the shape of the year. Should it be similar to what we saw this year with about 21% of revenue in the first quarter? And the reason I ask is, is there any new product releases or anything from a timing perspective that might weigh the shape of the year differently? Thanks.

Terry Schmid

No, I wouldn't – there are no new product releases that would impact our traditional seasonality.

(Operator Instructions). We'll go next to Jonathan Ho with William Blair.

Jonathan Ho -- William Blair

Hey, guys. I just wanted to get a little bit of more color around the upsell opportunities that you're seeing into your existing base. Can you just maybe give us a sense of how this has been trending and whether you've been successful in going back to the existing base and either penetrating other segments with existing products or selling new products into that base?

Shlomo Kramer

No. So we sell into the data center. So upsell is extremely important. Nobody – it's very rare that an organization would start with a bowl in the ocean type of project. We usually start with a smaller project and then expand dimensions. One is from a footprint perspective and the second is from a used case perspective and we see good success in both. For example, in Q3, sales to existing customers accounted for over 53% of our product and subscription volumes. And that's been pretty consistent.

Jonathan Ho -- William Blair

Got it. And can you also talk a little bit about the competitive landscape. Have you seen any shift from some of the larger competitors that are out there, maybe getting more aggressive or are things relatively stable?

Shlomo Kramer

I would say stable, the same competitors, the same environment. We haven't seen any major changes.

Jonathan Ho -- William Blair

Thank you.

Operator

And at this time, we have no further questions. I'd like to turn the call back over to our speakers for any closing remarks.

Terry Schmid

All right. Well, thanks everybody for joining the call today and we appreciate your continued support and interest in Imperva.

Operator

And this does conclude today's conference. We appreciate your participation. You may disconnect at this time.

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