Imperva (IMPV) Q4 2016 Results - Earnings Call Transcript

| About: Imperva (IMPV)

Imperva, Inc. (NYSE:IMPV)

Q4 2016 Earnings Call

February 08, 2017 5:00 pm ET

Executives

Kim Janssen - Imperva, Inc.

Anthony James Bettencourt - Imperva, Inc.

Terrence J. Schmid - Imperva, Inc.

Sarah Hindlian - Macquarie Capital (NYSE:USA), Inc.

Analysts

Rob Owens - Pacific Crest Securities

Daniel Bergstrom - RBC Capital Markets LLC

Shaul Eyal - Oppenheimer & Co., Inc.

Ken Talanian - Evercore Group LLC

Melissa A. Gorham - Morgan Stanley & Co. LLC

Andrew James Nowinski - Piper Jaffray & Co.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Ugam Kamat - JPMorgan India Pvt Ltd.

Erik L. Suppiger - JMP Securities LLC

Operator

Good day, everyone, and welcome to the Imperva Fourth Quarter and Full Year 2016 Earnings Conference Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Kim Janssen, Director of Investor Relations. Please go ahead.

Kim Janssen - Imperva, Inc.

Thank you. Good afternoon, and welcome to Imperva's fourth quarter and full year 2016 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me on the call is Anthony Bettencourt, Imperva's Chief Executive Officer and Terry Schmid, Chief Financial Officer of Imperva.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in Imperva's 10-Q filed with the SEC on November 4, 2016.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude stock-based compensation, acquisition-related expenses, amortization of intangible expenses, costs associated with the review of strategic alternatives and non-routine stockholder matters, and restructuring costs. 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, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release regarding our fourth quarter and full year 2016 results. The press release has also been furnished to the SEC as a part of a Form 8-K.

In addition, please note that the date of this conference call is February 8, 2017. And any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. Lastly, this conference call is the property of Imperva. And any recording, reproduction or rebroadcast of this conference call without the express written permission of Imperva is strictly prohibited.

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

Anthony James Bettencourt - Imperva, Inc.

Kim, thank you. I'd like to thank you all for joining the call today. By now, you've probably read our earnings release and have seen that in Q4 we delivered revenues of $78.4 million and an operating profit of $11.1 million. These results exceeded our guidance, reflecting continued improvement and execution across our organization. Our restructuring and cost control efforts allowed us to generate non-GAAP operating profit well above our guidance range, and we expect to continue to generate additional leverage in the business throughout 2017.

Before we review our results in greater detail, I'd like to discuss some of our key developments, including the sale of our Skyfence assets to Forcepoint and the acquisition of data masking company, Camouflage. As most of you know, in Q3 we initiated a review of strategic alternatives, which resulted in our decision to focus on those areas of our business that offer the best opportunity for growth. While we continue to believe that the CASB market will be an important part of the evolving cyber security space over the course of the next several years, we feel our best opportunity to create shareholder value is to focus our development and go-to-market efforts on our best-of-breed application and data security products.

The proceeds from Skyfence will also further strengthen our balance sheet and provide us with additional funds to be used opportunistically on M&A opportunities and other investments for our core businesses that will strengthen our position in our key markets. We also announced that in the fourth quarter we acquired Camouflage, a data masking company based in St. John's, Newfoundland. We've partnered with Camouflage last year to provide data masking solutions for our Database Activity Monitoring product, which we expect to become an increasingly important topic with customers.

As a result of the acquisition, we can further integrate Camouflage's capability into our database security solutions, adding value to existing customer deployments for enabling us to win additional customers against competitors. The addition of the Camouflage team will also allow us to extend to new areas. We're excited to welcome the team to the Imperva family and look forward to more innovation coming from this acquisition.

Moving on to our Q4 results. While we had a difficult comparison to the prior year period, our overall performance was driven by improving execution, and we believe that Imperva is in a position to maintain the momentum in 2017. Specifically in Q4, we grew our subscription revenues by 70% year-over-year, driven by the ongoing strong traction of Incapsula, our cloud-based security solution. This resulted in subscription revenues accounting for 32% of our overall business, up from 20% – 21% last year and are becoming a more significant component of our revenue mix.

We also significantly increased our product revenue sequentially and this growth was nicely balanced between both our application and data security offerings. Showing that while the shift to cloud-based application security is the fundamental and accelerating trend in the markets, on-premise appliances are still a critical staple for our Global 5,000 customer base.

And we continued to expand our SecureSphere customer base. During the quarter, we added 218 new customers, bringing our total to more than 5,200. This remains an important growth area, given the cross-selling opportunities for our on-premise customers who seek to add cloud-based application security capabilities to their existing Imperva deployments.

In addition, our restructuring is complete and our efforts are paying off in improved focus and operating efficiencies. We believe that our performance will continue to improve, driven by our focus on our key product categories as well as our commitment to control costs.

Let me now discuss a few more Q4 highlights that show the progress we have made as a company. Then, I'll turn it over to Terry to walk you through the financials. We booked 203 deals over $100,000 in the quarter, up 23% compared to 165 deals in the fourth quarter of last year. These numbers are evidence that while average deal sizes have come down compared to last year, our customers are increasingly committed to Imperva technology.

On the customer front, we continued to regain our traction, and as I mentioned above, we saw continued interest in our application security products both on-prem and cloud-based. One of the largest U.S. insurance companies continue to deploy our on-prem based application security offerings, allowing them to leverage the Web application firewall as the enforcement component of their own fraud prevention efforts.

One of the largest private sector banks in India deployed Imperva's application security solution, replacing the legacy (8:02). And one of the largest European banks deployed our cloud-based application security platform. Our data security products also performed well. Key deals included one of the largest international banks, added to their already sizable deployment of Imperva data security platform. A large multi-line healthcare enterprise deployed our data security platform with a purpose of providing critical need of database auditing and monitoring.

And one of the largest kidney care companies in the U.S. chose Imperva's data security platform and CounterBreach in order to better understand the vulnerabilities across their (8:35) enterprise. We also continued to advance the capabilities of our industry-leading product portfolio. We added a new data center in Russia, enhancing the performance of our cloud-based application security offering, and we delivered Version 1.2 of CounterBreach with enhancements focused on streamlining the handling of (8:53) incidents for enterprise security teams.

I would now like to take a moment to talk about the Imperva team. I'm extremely proud of how the worldwide Imperva team executed in a very challenging time for the company. Our attrition did increase slightly in Q4. That increase is primarily due to the restructuring we did during the quarter. The worldwide team pulled together, put their heads down and performed well despite the distractions over the last six months.

It's my pleasure and privilege to work with this team. We all look forward to a successful FY 2017. In sum, we're excited about Imperva's future and remain focused on executing our strategy, to increase shareholder value by taking full advantage of our leading platform, where we are a leader in application and data security.

With that, let me hand this call over to Terry. Terry, over to you.

Terrence J. Schmid - Imperva, Inc.

Thanks Anthony. I'll first start with a cough and then a more detailed overview of our fourth quarter and full-year financial performance, and then provide our outlook for the first quarter and full-year 2017. Following my closing remarks, we will open up the call to your questions. As Anthony mentioned, we were pleased with the company's fourth quarter execution, particularly our ability to exceed top and bottom line guidance.

Revenue came in at $78.4 million, which is up 8% compared to the fourth quarter of 2015 and well above the high-end of our guidance range of $69 million to $71 million. Services revenue, which consists of maintenance and support, professional services and training, and subscriptions, increased 36% to $49.8 million and accounted for 63% of total revenue.

The growth in services revenue was primarily driven by the 70% year-over-year increase in subscription revenue to $25.4 million. Subscriptions accounted for 32% of total revenue during the quarter, up from 21% in Q4 2015. Incapsula continues to be the largest contributor to subscription revenue, representing the fastest growing part of the subscription revenue stream and the most significant growth driver.

Similar to prior quarters, the ongoing slow-down in our product revenues continued to have an impact on ThreatRadar, which is a WAF-related product, during the fourth quarter. Maintenance and support revenue was $21 million during the quarter, an increase of 15% over the same period last year, while our professional services and training revenue was $3.4 million in the fourth quarter of 2016.

During the quarter, our combined product and subscription revenues were $54 million, up 6% year-over-year. As expected, product revenue declined 20% – 21% year-over-year to $28.6 million, which reflected the ongoing impact of extended sale cycles, primarily related to the larger deals, as well as a difficult comparison to last year. In regards to the macro environment, while customer demand remained solid across geographies, the 1% year-over-year decrease in the Americas region reflected the continued decline in product revenue, as well as a difficult comparison to last year.

In India, the company continued to see the benefits from the new team in the region, as well as ongoing momentum in subscription revenues. The 13% year-over-year growth in total revenue reflects a very difficult comparison to Q4 2015, when we reported close to 48% year-over-year growth. We continue to believe we remain well positioned to take advantage of the growing opportunity in the region, particularly given the new cyber security regulations going into full effect in May 2018.

In the Asia-Pacific region, the 45% year-over-year growth of revenues in Q4 continues to highlight the ongoing traction we are seeing from our new leadership in the region. On a GAAP basis, net loss for the fourth quarter totaled $9.8 million or $0.30 per share based on 32.7 million weighted average shares outstanding. This includes $8.1 million in restructuring charges related to the cost savings initiative we announced last quarter, which was in line with our expectations.

I will turn now to non-GAAP expenses and profitability, which I remind everyone exclude stock-based compensation, acquisition-related expenses, amortization of intangible expenses, restructuring costs and cost associated with the review of strategic alternatives and non-routine stockholder matters. For the fourth quarter, gross profit was $64.9 million, compared to $60.1 million in the same period last year.

Our gross margin percentage was 83% during the fourth quarter, which was above our guidance, primarily due to cost efficiencies from increased usage of our Incapsula network. In terms of non-GAAP operating expenses, total operating expenses were $53.8 million during the fourth quarter, relatively consistent on an absolute basis with last year, as well as with Q3 2016, highlighting our ongoing commitment to control overall costs.

Combination of our revenue and gross margin over-performance, along with our focus on cost management, resulted in Imperva reporting a non-GAAP operating profit of $11.1 million, which was significantly better than our guidance of a profit of $900,000 to $2 million. In addition, non-GAAP earnings per diluted share during the fourth quarter was $0.32 per share based on 33.1 million weighted average diluted shares outstanding, which was also well above our guidance of $0.01 to $0.04 per share.

I will now quickly highlight our results for the full-year 2016. Total revenue was $264.5 million, an increase of 13% compared to 2015. During the year, subscription revenue grew 81% to $84 million and accounted for 32% of total revenue, up from 20% in 2015. In addition, growth of our combined product and subscription revenues was (15:09) 11% to $170.8 million, which reflected a 19% year-over-year decline in our product revenue due to the impact of extended sales cycles, primarily related to larger deals compared to 2015.

During the full-year 2016, non-GAAP gross margin was 81%, non-GAAP operating loss was $900,000 and non-GAAP net loss was $0.07 for the year based on 32.3 million diluted shares. 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 December 31, 2016, which can be viewed on our website.

Turning to the balance sheet. As of December 31, 2016, we had $261.1 million in cash and cash equivalents and short-term investments and no debt outstanding. Our cash balance reflects the generation of $8.9 million in cash flow from operations during the quarter. During the fourth quarter, CapEx was $2.8 million.

During the full-year 2016, we generated $22.5 million in cash flow from operations and $5.7 million in free cash flow, which included $6.9 million related to leasehold improvements. We are very pleased with our ability to generate cash while at the same time invest in the business to support the company's growth.

We ended the fourth quarter with an accounts receivable balance of $62.6 million, resulting in DSOs of 72 days, an improvement from the fourth quarter of 2015. Total deferred revenue increased 22% year-over-year to $130.5 million during the fourth quarter, driven primarily by the growing success of our subscription-based products.

Short-term deferred revenue, which more accurately tracks the growth in our business, grew 31% year-over-year during the quarter. As a reminder, our deferred revenue balance does not include the full benefit from the growth in our Incapsula business as many of our customers are billed monthly and the revenues directly flow to the income statement.

As Anthony mentioned, we entered into an asset purchase agreement with Forcepoint to sell the assets used in the Skyfence Cloud Access Security Broker business of Imperva for approximately $40 million in cash, subject to potential working capital and other adjustments as are set forth in the purchase agreement. On completion of the asset sale, Imperva will no longer operate the Skyfence business. The closing of the asset sale is subject to several closing conditions. We intend to consummate this transaction as soon as practicable and currently anticipate that the closing will occur during the first quarter of 2017.

Anthony also mentioned the acquisition of the assets of Camouflage. While we are not disclosing the terms of the deal, it is not material to our financial statements.

Now, I'd like to finish with some thoughts regarding our financial outlook for 2017, starting with the full year. As we highlighted on the Q3 earnings call, we implemented a restructuring initiative to better position Imperva to compete and win in the evolving marketplace. While this included the reduction of operations, marketing and general and administrative expenses, as we realigned our cost structure for the current environment, we plan to continue to invest in R&D in order to maintain our competitive advantage.

As a reminder, we made no reductions to sales capacity and we do not believe that our restructuring impacts our ability to hit our growth targets for 2017. As a result, we expect absolute operating expense to increase year-over-year, but to decline as a percentage of total revenue.

From a full-year 2017 perspective, we expect total revenue to be in the range of $316 million to $319 million, which represents year-over-year growth of 20% at the midpoint. We view this guidance as a solid starting point for the year, given the challenges of 2016 as well as the fact that it includes our Q4 over-performance.

Non-GAAP gross margin is expected to be approximately 80%, consistent with 2016. Non-GAAP operating profit is expected to be in the range of $17.8 million to $19.2 million, an improvement from a loss of $900,000 in 2016, reflecting the impact from our cost reduction initiatives. We expect non-GAAP net income, excluding the impact of stock-based compensation, amortization of intangibles, acquisition-related expenses and restructuring costs to be in the range of $11.2 million to $12.2 million or $0.31 to $0.34 per share based on 36 million weighted average diluted shares outstanding for the full year. This assumes a tax provision of $6 million to $6.5 million for the year.

We expect capital expenditures for the full year to be in the range of $15 million to $20 million compared to $16.8 million in 2016. Finally, we expect to generate positive free cash flow for the year, highlighting our commitment to both grow the business, while at the same time operating the company in a manner that consistently generates cash.

Now, turning to our outlook. For the first quarter, we expect total revenue to be in the range of $67 million to $69 million. Similar to the past years, the first quarter is typically down sequentially from Q4 due to the seasonality in the license business. Non-GAAP gross margin is expected to be approximately 80%. Non-GAAP operating loss is expected to be in the range of $500,000 to $1.9 million, reflecting the investments we were making in sales and marketing as well as the typical increase in cost early in the year associated with payroll taxes and sales kick-off.

Non-GAAP net loss, excluding the impact of stock-based compensation, acquisition-related expenses, amortization of intangibles and restructuring costs is expected to be in the range of $700,000 to $2.1 million or $0.02 to $0.06 per share. This outlook assumes a provision for income taxes of approximately $100,000 for the quarter and weighted average shares outstanding of approximately 33.5 million shares.

In summary, we are very pleased with our execution in the fourth quarter, particularly our ability to significantly improve our operating leverage, while also growing the top-line. We continue to believe that we are taking – we are well positioned to take – to reaccelerate Imperva's growth in the longer term – sorry, there's some problem here on my script.

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

Question-and-Answer Session

Operator

Thank you We'll take first Rob Owens with Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Great. Thank you and good afternoon, everyone.

Terrence J. Schmid - Imperva, Inc.

Hey, Rob.

Rob Owens - Pacific Crest Securities

Guys, if we look at the success in the large deal metrics, I think it's safe to assume that that's on the product side, not on the Incapsula side, given the business model there. And so, the question really is that if we think about your run rate business, I know you've got tough comps, still tough comps in Q1 relative to sizeable deals historically, is it safe to say that, that product business from a run rate perspective is growing close to what you're seeing in terms of those large deal metrics or is there something that would set that off really trying to think about how I model the back half of the year from that perspective. Thanks.

Terrence J. Schmid - Imperva, Inc.

Thanks, Rob, for the question. I would answer it this way. So, the large deal metrics are actually are more influenced right now by the commitment that, in particular, large enterprises are willing to make to our subscription business, actually. That's been the biggest driver for growth year-over-year in the large figure deals, the $100,000 plus deals.

Going forward, I think that's probably going to continue to be true. Now, some of those deals are one-year deals, some of them are multi-year deals, but all of them are six-figure plus deals. So, actually, the growth year-over-year in six-figure deals is largely being driven by our Incapsula business to be honest with you.

Rob Owens - Pacific Crest Securities

And that's on an ACV that's actually what you're getting paid or how should I think about that metric, Terry?

Terrence J. Schmid - Imperva, Inc.

Sure, we're (23:54) getting paid. That's the TCV, but we don't do (23:56) multi-year deals very rarely anyway unless we get paid upfront on the multi-year deal.

Anthony James Bettencourt - Imperva, Inc.

(24:02).

Rob Owens - Pacific Crest Securities

Okay. And then, to that end, given you have three quarters experience of more kind of the new run rate, if you will, as to whether people are moving to the cloud or not. Would you then expect kind of 2017 to play out in similar fashion from a product growth perspective as to what you've seen in the last couple quarters?

Terrence J. Schmid - Imperva, Inc.

I mean it's an interesting question. So, maybe actually (24:23) if you wanted to jump in on that one, that's fine. I think the difficulty with comparing 2017 to 2016 is almost similar to comparing 2016 to 2015, Rob. So, if I look at the way the business is going to grow year-over-year on the product side, yeah, probably similar. Although what we would expect to see is improvement on the data security side over and above what we saw in 2016 relative to 2015. So, that business never really weakened per se. It was the one that was most influenced by the buying behavior and patterns that changed in 2015. So, I would expect to see a change there going forward. The Web Application Firewall business is the one that's being primarily impacted by the move to the cloud.

I've given you a long answer, I'll try to make it a little bit shorter. Yeah, the trends that we saw in 2016 probably carry on into 2017, although you should see better performance out of our data security business than what we had in 2016.

Rob Owens - Pacific Crest Securities

All right. Thank you, guys. Thanks for the color, Terry.

Operator

Next, we'll move to Matt Hedberg with RBC Capital Markets.

Daniel Bergstrom - RBC Capital Markets LLC

Yeah. Hi. It's Dan Bergstrom for Matt Hedberg. Thanks for taking my questions. See, with subscriptions a third of revenue now as that approach is 50%, should we think about the business model any differently? You pointed out short-term deferreds in the script there. And then, on the restructuring, there were no changes to the Incapsula resources go-to-market, right?

Terrence J. Schmid - Imperva, Inc.

We made no changes to the Incapsula go-to-market R&D. Incapsula, we are investing – continuing to invest in that business, it's very important for the business going forward. With respect to the subscription business, I actually don't quite understand what you're asking me.

Daniel Bergstrom - RBC Capital Markets LLC

It's just anything you wanted us to keep in mind as that approaches 50% of revenue, just the growing subscription?

Terrence J. Schmid - Imperva, Inc.

I can't actually think of anything (26:15) off the top my head. I think Incapsula is becoming increasingly important. I think we have initiatives underway with other areas of our subscription business that are important, but I think the trajectory, I can say this, generically, the trajectory of the subscription business is going to continue to move in that direction. I don't know what other color to add to that.

Daniel Bergstrom - RBC Capital Markets LLC

Thanks, Terry.

Operator

Next, we'll move to Shaul Eyal with Oppenheimer.

Shaul Eyal - Oppenheimer & Co., Inc.

Thank you. Good afternoon, guys. Congrats on the strong execution and improved outlook.

Anthony James Bettencourt - Imperva, Inc.

Thanks, Shaul.

Shaul Eyal - Oppenheimer & Co., Inc.

Terry, from a restructuring process perspective, is it fair to say that you're mostly done or would there be additional steps to further restructure this business, if needed?

Terrence J. Schmid - Imperva, Inc.

We don't have any plans right now to do any further restructurings. So, what we undertook in the fourth quarter is what we plan to do, we got it done. I think it has had a beneficial impact on the business in the areas where we wanted it to and it has had, we believe, no impact on our ability to grow the top line.

Anthony James Bettencourt - Imperva, Inc.

And we're also being very prudent going forward on the expense line.

Terrence J. Schmid - Imperva, Inc.

Yeah.

Anthony James Bettencourt - Imperva, Inc.

And we're continuing to act accordingly.

Shaul Eyal - Oppenheimer & Co., Inc.

Yeah.

Terrence J. Schmid - Imperva, Inc.

We are committed to generating more leverage out of the business and believe we can do that going forward.

Shaul Eyal - Oppenheimer & Co., Inc.

Absolutely, fair enough. And maybe a question for Anthony. On Skyfence, on the asset sale to Forcepoint. Can you tell us if the asset was, I don't know, examined, looked at by (27:44) additional candidates other than Forcepoint?

Anthony James Bettencourt - Imperva, Inc.

We're not going to comment other than the deals with Forcepoint are great. They're a wonderful company. I think that fills (27:56) fairly well in their portfolio and it enables us a good chance to focus.

Shaul Eyal - Oppenheimer & Co., Inc.

Fair enough. Thank you so much. Good luck.

Terrence J. Schmid - Imperva, Inc.

Thanks, Shaul.

Operator

And next, we have Ken Talanian with Evercore ISI.

Ken Talanian - Evercore Group LLC

Hi, guys. Thanks for taking my question. So, first off, I was wondering if you could just walk us through the mix of your business between application database file and Incapsula for the year. And then, how should we just think about the relative growth contributions for those parts going forward?

Terrence J. Schmid - Imperva, Inc.

I'll take that. Thanks for the questions. So, we don't break those down, but we do give some qualitative information around the – directionally where things are going and nothing has really changed there.

On the Web application firewall side, on the on-premise business, we actually had a very good fourth quarter, but I don't think that's indicative of a changing the trajectory of people moving application security from on-premise to the cloud. We still think that is an important thing that's happening in the marketplace, and we're well positioned for it. So, Incapsula should continue to grow.

Our subscription piece of the business should continue to become a larger component of the revenue stream. The data security piece of the business, 2016 doesn't look good necessarily compared to 2015. But I think we've talked about the anomalies of 2015 in the past. So, I'm not going to regurgitate that information here. Going forward, we are committed to data security, because that is an important component of how companies are protecting themselves, and I think that business is going to look better for us in 2017 and beyond.

Ken Talanian - Evercore Group LLC

Okay. And I also noticed that your GAAP sales and marketing dollars, they actually decreased during the quarter versus 3Q on an absolute dollar basis. I'm curious, was that all marketing and then could you just walk us through the drivers for leverage on that line going forward?

Terrence J. Schmid - Imperva, Inc.

So, sequentially, one quarter over the other, the primary drivers are just through reduction in our marketing expenses. We did not take expenses out of the sales organization outside of some of the operational functions of sales. We didn't reduce capacity. We didn't take people out of the field. There seems to be a perception in some places where we did...

Anthony James Bettencourt - Imperva, Inc.

Yeah. In fact, we talked about today (30:05) that someone assumed we did, which...

Terrence J. Schmid - Imperva, Inc.

We didn't (30:07).

Anthony James Bettencourt - Imperva, Inc.

(30:08).

Terrence J. Schmid - Imperva, Inc.

Yeah.

Anthony James Bettencourt - Imperva, Inc.

There's obviously an error in that note, so.

Terrence J. Schmid - Imperva, Inc.

Yeah. Many times we've said we didn't take any capacity out. We didn't do anything that we believe inhibits our ability to achieve our growth targets over the course of 2017. So, think about that as taking things out of areas, as we've said in the past, that reflect where we're at as a company and what we want to do going forward. Hopefully, that is helpful to you.

Ken Talanian - Evercore Group LLC

Okay, great. Thanks and congrats again.

Anthony James Bettencourt - Imperva, Inc.

Thank you.

Operator

We'll move next to Melissa Gorham with Morgan Stanley.

Melissa A. Gorham - Morgan Stanley & Co. LLC

Great. Thanks for taking my question. So, Terry, the large deals that you talked about coming largely through Incapsula, can you maybe just give a little bit more detail on like who the customers are that are purchasing those large deals? Are they existing customers that are coming back and adding Incapsula, and then when they're buying Incapsula, are they also purchasing additional solutions like SecureSphere?

Terrence J. Schmid - Imperva, Inc.

So, just let me clarify something that I said. I didn't say that the growth was largely through Incapsula. What I wanted to be clear on is it wasn't just on-premise. So, Incapsula is becoming increasingly important. We're doing more big deals with Incapsula. That isn't just – that isn't the only driver of growth there. Some of them came in other areas as well. Sometimes, it's to existing customers who already own Imperva. Sometimes, it's to customers that are brand-new and their only introduction so far has been to buying Incapsula, and that's the first thing we bid – (31:30) sold them, but it is all everything that we talked about there was – don't distract me.

Anthony James Bettencourt - Imperva, Inc.

Actually, Melissa, you bring up a really, really good point. Thank you. And that is we're seeing a lot of interest in hybrid.

Terrence J. Schmid - Imperva, Inc.

Yeah.

Anthony James Bettencourt - Imperva, Inc.

We're seeing a lot of our customers that deployed SecureSphere who then also – there's certain assets they want to have on-prem. Other assets that are probably less critical, they're very happy to use the flexibility of Incapsula. So, you're going to see us – we talked about it late last year. You're going to hear us talk about a lot this year of hybrid deployments and hybrid products that really make the interoperability of those products quite good. So, you'll see a lot of that. Thank you for bringing that up.

Melissa A. Gorham - Morgan Stanley & Co. LLC

Great, thanks. And then, just one additional on the Americas results this quarter, you noted that it was relatively maybe underperforms the other regions. Is there any changes that you think you need to make in Americas to get that to return to growth or you've already made the changes and you just need to see improved sales productivity?

Anthony James Bettencourt - Imperva, Inc.

Actually, this is Bettencourt. We did make a change and we're seeing – what we're seeing – the numbers might not show up. We're seeing great execution. We're seeing great progress. So, very happy with the organization. If I think about Mr. Mooney's sales management team kind of across the globe, very solid good execution (32:50). We had our sales kick-off last week. Again, it's a very bullish team as we go into FY 2017.

Melissa A. Gorham - Morgan Stanley & Co. LLC

Great. Thank you.

Operator

Next, we have Andrew Nowinski with Piper Jaffray.

Andrew James Nowinski - Piper Jaffray & Co.

Great. Thanks for taking the question. Maybe just one on your guidance here. So, if you look back on 2016, the original guidance didn't quite play out as expected as a 25% level. But I guess can you just walk us through what might be different this time around and why the guidance at 20% for 2017 might be more conservative than last year's?

Terrence J. Schmid - Imperva, Inc.

I can give you a very simple answer to that off the top of my head, which is the comparisons are different and easier going forward as we get out of Q1. That's reason number one, right. We had a challenging 2016 relative to 2015. The market dynamics in 2016 don't look anything like what (33:44) the market dynamics were in 2015, where the spending environment was more robust. People were making decisions very quickly and buying in large chunks. We're not – we don't have that same environment to compare ourselves to from 2017 to 2016.

I think there has been a lot of stabilization in the market. I think there is still an incredibly heightened awareness of the need to buy security products. So, we certainly are still selling into a market that's – if you look across the universe of IT spending environment, security is still one of the best. It is still one of the best. But it compares to a spending environment of 2016 that's easier, so if you're thinking about year-over-year comparison. I think that's the primary driver of why we're going to – why we're comfortable with the guidance that we gave and we believe we'll get there.

Anthony James Bettencourt - Imperva, Inc.

I think we've all seen – of course seen an increasingly important role that subscription revenues play in our business...

Terrence J. Schmid - Imperva, Inc.

Certainly (34:38).

Anthony James Bettencourt - Imperva, Inc.

And that growth continues to be good.

Terrence J. Schmid - Imperva, Inc.

Substantial and it's a big business – it's a third of our business now and expanding beyond that. So, we go in there every quarter knowing more and more about what we're going to do from a revenue perspective. (34:49) it's a great point you made (34:50). Thank you.

Andrew James Nowinski - Piper Jaffray & Co.

Okay. And then with regard to the two acquisitions, were they a loss in terms of the revenue lost and gained? I guess I'm just trying to understand whether that 20% number would have actually been higher if you still had Skyfence in the mix.

Anthony James Bettencourt - Imperva, Inc.

No. In fact, first off, an acquisition and a disposition of assets, not two acquisitions. And again, everything is baked into our guidance.

Andrew James Nowinski - Piper Jaffray & Co.

Okay, got it. Thanks.

Anthony James Bettencourt - Imperva, Inc.

Thank you.

Operator

Next, we'll move to Sarah Hindlian with Macquarie.

Sarah Hindlian - Macquarie Capital (USA), Inc.

All right, great. Thank you, guys. Congratulations on the quarter and thanks for taking my questions. So, looking at this Camouflage purchase you're doing on data masking, it looks very interesting. Can you talk about what you were seeing with your OEM relationship that drove this decision? And then, I wanted to talk a little bit also, if you could give us some color on how the competitive environment feels today on the core business taking into account that difficult comp you had last year.

Anthony James Bettencourt - Imperva, Inc.

So, first on Camouflage, the OEM relationship is quite good and it gave us a lot of insight into the marketplace and showed us what the demand might be. And at that point, we decided we're much better off having the asset in the Imperva portfolio than not, and we also liked the team (36:07). There is a lot of other things we could do with the technology and that team up there as it relates to the bigger hole around data security. So, that's with regards to Camouflage.

With regards to the competitive landscape, it hasn't changed all that much. If I think about Web app firewall technology, we're the only company up into the right again with Gartner three years in a row. That hasn't changed. The demand for the products, as we begin to map to (36:30) hybrid, so as we begin to think about SecureSphere plus Incapsula, it puts us in a very good position vis-à-vis the competitors. If I go over to data security, again, it'd be the very same as last quarter's call.

We have a great leadership position technically with regard to our DAM product, and when we add CounterBreach, that gives us an extra step-up where now (36:51) we're starting to see deals take place, the brand-new customers are beginning to (36:54) buy both at the same time. And that's a unique offering that no one else can touch in the marketplace. So, I think we're really well positioned competitively. I think what you saw in Q4 was better execution, and that execution will continue to improve as we go forward, just given the dynamics of the company.

Sarah Hindlian - Macquarie Capital (USA), Inc.

All right. Great. That's very helpful. And can I ask one more question just about the international business? Looks like it's doing better.

Anthony James Bettencourt - Imperva, Inc.

Yeah.

Sarah Hindlian - Macquarie Capital (USA), Inc.

Any more changes there or does it feel like that's stabilized now and the focus is now on North America?

Anthony James Bettencourt - Imperva, Inc.

I'll tell you what – I'll go back to our story (37:26). If I think about Michael Mooney's sales management team, David Woodcock in APAC was – or EMEA Head when I joined, we moved him, it was a strategic move. We thought he'd be able to make a big impact, he's done an incredible job. Spencer Young, we brought in about a year ago, I suspect, has done an amazing job at recruiting and stabilizing the team and is now growing. So, I think, from a management team we're great and I think from an execution standpoint, we're getting better and better.

Sarah Hindlian - Macquarie Capital (USA), Inc.

All right. Thank you, guys. Congrats.

Anthony James Bettencourt - Imperva, Inc.

Thank you.

Terrence J. Schmid - Imperva, Inc.

Thanks, Sarah.

Operator

Next we'll take Taz Koujalgi with Deutsche Bank.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Hey, guys. Thanks for taking my question. Two questions. One is, Terry, Q1 guide, you're guiding to 16% revenue growth at the midpoint, but I guess if you assume normal growth in services, you're guiding to product licenses being down sequentially.

Terrence J. Schmid - Imperva, Inc.

Product sequentially?

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Yeah.

Terrence J. Schmid - Imperva, Inc.

It's always...

Anthony James Bettencourt - Imperva, Inc.

Yeah.

Terrence J. Schmid - Imperva, Inc.

Yeah, it's always down Q1 from Q4 (38:26).

Anthony James Bettencourt - Imperva, Inc.

The seasonality of Q1 as opposed to Q4, that's normal.

Terrence J. Schmid - Imperva, Inc.

Yeah.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Got it.

Terrence J. Schmid - Imperva, Inc.

So, that's typically what you would expect to see. So, if you think about seasonality in our business and anybody – I can't say anybody, that's too broad a stick (38:39). Most people that are selling into the enterprise, from a software perspective, be it cloud based or whatever it may be, see seasonality drop in bookings from Q4 to Q1.

If a big chunk of your business is still perpetual license, that's going to manifest itself in a decrease in the perpetual license piece of the business. But the subscription piece of the business, so long as we're still growing and doing, will continue to grow. So, yes, it does imply that because that's typically what we see.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Got it. And then if you look at the long-term deferred as a percentage of deferred, it's been going down for the last few quarters, what's driving that?

Terrence J. Schmid - Imperva, Inc.

We have not had a focus on multi-year contracts. I could give you a bunch of history of Imperva, that's not really necessarily important right now. If you think about the growth of a subscription-based business, how is growth reflected? How do you measure growth? You measure growth by the short-term growth in deferred – the short-term deferred revenue growth. That's how you measure whether the business is strong. Long term can measure stickiness and commitments of companies to the business. I'm not telling you that we don't have that. I believe we have that from our customers.

Our focus right now has been growing the ACV, the annual contract value of our customers and not giving additional incentives for a really great product and giving additional discounts to have a flat business year-over-year. We don't focus as much on multi-year contracts as somebody who maybe doesn't have as much technology as we do, if I can put it that way. I can be more descriptive if you need me to be.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

No, that's helpful. Just one last one, if I can sneak one in. You're guiding to 20% growth for the year. If you exclude Skyfence, what would the organic growth be for 2017?

Terrence J. Schmid - Imperva, Inc.

So, our guidance reflects the transaction that we've announced today with Skyfence.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

I'm sorry. I didn't catch that. So, the organic growth...

Terrence J. Schmid - Imperva, Inc.

The guidance that we – everything that we said, from a guidance perspective, assumes that Skyfence is not part of the business. I think we've been saying for a couple of – several quarters that Skyfence, from a revenue perspective, has not been a meaningful part of the business.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Yeah.

Terrence J. Schmid - Imperva, Inc.

I can tell you right now we have been losing money on Skyfence.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Was it growing revenue on a revenue basis?

Anthony James Bettencourt - Imperva, Inc.

Let me make one last comment, so we could close the questions off, because I think we're done answering them. The Skyfence assets, it was a great product for us. We needed to focus. Again, when we went back and went through our process, there was a lot of learnings that took place. One of which was, we've got a great position in data and application security.

Skyfence really didn't quite fit the sweet spot of either (41:17) for us, and as we had discussions with companies like Forcepoint, we began to realize that companies such as Forcepoint would give it much better care and feeding, and really take care of the asset, and that was the decision point. So, done answering your questions, I really appreciate you calling in though.

Imtiaz Koujalgi - Deutsche Bank Securities, Inc.

Thanks, guys. Thank you.

Anthony James Bettencourt - Imperva, Inc.

Sure.

Operator

And would you like to take any more questions?

Anthony James Bettencourt - Imperva, Inc.

Terry, question for me though (41:45).

Terrence J. Schmid - Imperva, Inc.

Like you've answered all of mine than (41:48) anybody else. We have time, if anybody is – if there's nobody in the queue that's fine, we can finish the call.

Operator

We do have a few more in the queue, if you'd like to move on.

Anthony James Bettencourt - Imperva, Inc.

Okay.

Terrence J. Schmid - Imperva, Inc.

Yeah, sure.

Operator

Okay. Sterling Auty with JPMorgan.

Ugam Kamat - JPMorgan India Pvt Ltd.

Hi. This is Ugam Kamat on for Sterling Auty. Thanks for taking my question.

Anthony James Bettencourt - Imperva, Inc.

Of course (42:07).

Ugam Kamat - JPMorgan India Pvt Ltd.

So, one last one on the Skyfence product. Does this sale include only the CASB solution or does it include other solutions as well?

Terrence J. Schmid - Imperva, Inc.

It's only the Skyfence product. So, everything associated with Skyfence has been sold and acquired by Forcepoint.

Ugam Kamat - JPMorgan India Pvt Ltd.

So, it includes only CASB or did it have any other solutions with it?

Anthony James Bettencourt - Imperva, Inc.

I'll go back to – I'm going to give you an answer, listen carefully. We've sold the Skyfence assets to Forcepoint, that is it.

Ugam Kamat - JPMorgan India Pvt Ltd.

All right. And on second, we saw an uptick in the product revenue in the fourth quarter. I'm just wondering about which part of your business drove this increase in appliance revenue. Was it the Web Application Firewall or the data security, like which was the primary driver for the increase?

Anthony James Bettencourt - Imperva, Inc.

Yes, yes to both.

Ugam Kamat - JPMorgan India Pvt Ltd.

All right.

Anthony James Bettencourt - Imperva, Inc.

Yes to both.

Ugam Kamat - JPMorgan India Pvt Ltd.

Okay. Thanks a lot.

Anthony James Bettencourt - Imperva, Inc.

Thank you.

Operator

We'll move next to Erik Suppiger with JMP.

Erik L. Suppiger - JMP Securities LLC

Yeah, congratulations on a great quarter.

Terrence J. Schmid - Imperva, Inc.

Thank you.

Erik L. Suppiger - JMP Securities LLC

Terry, I was wondering – on the model, if I look at the guidance for the year, it looks like you probably end the year with an operating margin around 10-ish percent. Is there opportunity for upside to that, given that you're starting the year at close to negative 1% or so? It seems like we could see better leverage in that. Or how are you looking at that?

Terrence J. Schmid - Imperva, Inc.

I'm looking at that right now as the guidance that we gave right now is where we see our business going at the moment. I wouldn't add any additional color on top of that.

Erik L. Suppiger - JMP Securities LLC

Okay. On the competitive front, have you seen any change from F5 with their competing SaaS solution Silverline competing with Incapsula?

Anthony James Bettencourt - Imperva, Inc.

No. Again, when we talk about the real competitive landscape for Incapsula, we talk about two other companies and F5 has never ever been in that family of discussion.

Erik L. Suppiger - JMP Securities LLC

Okay. That's it. Thank you.

Anthony James Bettencourt - Imperva, Inc.

Thank you.

Operator

There are no further questions in our queue. At this time, I'll turn the call back over to our speakers for any final or additional comments.

Terrence J. Schmid - Imperva, Inc.

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

Operator

And everyone, that does conclude our conference call for today. We do thank you all for your participation, and you may now disconnect.

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