Good morning, everyone and thank you for joining Tufin’s Fourth Quarter and Full Year 2020 Earnings Webcast. I’m Ryan Burkart, Director of Investor Relations.

And with me today is Jack Wakileh, our Chief Financial Officer and Ruvi Kitov, our Chief Executive Officer. Before we begin, I would like to remind everyone that any statements made in today’s webcast that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company’s future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Tufin’s management team as of today and involve risks and uncertainties, including those noted in this morning’s press release and Tufin’s filings with the SEC. Such forward-looking statements are not guarantees of future performance.

Actual results may differ materially from those projected in the forward-looking statements. Tufin specifically, disclaims any intent or obligation to update these forward-looking statements, except as required by law.

Please note that a reconciliation of any non-GAAP number to the most directly comparable GAAP number can be found in the tables of our earnings press release located in the Investor Relations section of our website. A recording of this webcast will be available on our Investor Relations website shortly after its completion.

With that, I’d like to turn the call over to Tufin’s CEO and Co-Founder, Ruvi Kitov.

Thanks, Ryan and good morning, everyone. Thank you for joining us today.

I hope that all of you and your families are safe and healthy. I’m happy to be here with you today to review our strong Q4 results, reflect on 2020 overall and share our strategy for 2021 and beyond, as we work to drive durable long-term growth and expand our leadership in the security policy management market.

As we achieve these goals, we will also create enhanced long-term value for our shareholders, as well as other stakeholders. To launch this effort, I’m very excited to announce that we begin a transition to subscription revenue model at the start of 2021, which we believe will dramatically improve the quality of our business when complete.

Before I get into further details about subscription and other strategic initiatives, let’s review Q4 and the full year 2020 results. We finished the year on a strong note.

Q4 revenues were a record $31 million, up 21% sequentially compared to Q3 of 2020 and up 3% year-over-year. Product revenue in Q4 was $15 million, up 50% sequentially and 5% year-over-year.

It was very encouraging to see product revenues returned to growth and hit record quarterly revenues in Q4 following a challenging start to 2020. Demand for SecureTrack and SecureChange was strong and we started to see larger deals come back.

We launched SecureCloud early in the year and its momentum continued to build. In fact in Q4, we closed our largest SecureCloud deal to-date.

Renewals will remain strong, which will be increasingly important as we transition to a subscription model and our maintenance revenue grew 6% year-over-year. Overall, I’m pleased with our Q4 results.

Our focus on improving sales execution throughout the year is starting to bear fruit. And last month, we announced that Ray Brancato has joined us as Chief Revenue Officer.

Ray’s experience fits well with our strategy with several transitions to subscription in his track record. Stepping back and looking at the full year 2020, it was really a tale of two halves.

The first half was one of the most challenging in our history as our business was severely impacted by the pandemic. Historically, most of our businesses closed in the last month of the quarter.

So when COVID lockdowns spread in March, and our customers and end-users were tasked with securing a newly remote workforce, it was very difficult for us to close deals and our product revenues were impacted significantly. We responded to the environment quickly by reducing our cost to position the business to manage through the uncertainty.

In addition to the overall challenging environment, we were in the midst of making significant changes to our sales execution processes to allow us to scale up the business over time. The second half of 2020 was dramatically different as the challenges that we faced in the first half began to reverse.

For instance, some of the pressure on budgets that we saw in the first half began to ease. And as a result, we were able to close more large deals, especially in Q4.

Importantly, our efforts to improve sales execution started to pay off and our sales organization and execution today is much stronger than it was a year ago. So, after our challenging start to 2020, largely due to the pandemic, we regained business momentum in the second half.

The overall environment improved and we demonstrated better sales execution as seen in the record quarterly revenue that we’ve produced in Q4. Through it all, the underlying need for our products has grown.

Automation related to digital transformation has been a key driver of our business for several years now. But as we all know, the need for corporations to digitally transform increased significantly in 2020 and it’s not going away.

Large enterprises simply cannot meet the digital transformation goals when it takes them weeks to make a network change. That’s just not fast enough in today’s world.

We continue to see customers come to us, who need SecureChange and SecureApp to automate their network change processes and unlock the power of digital transformation. While the need for automation increased in 2020, the need for security increased even more.

In response to the massive SolarWinds hack late last year, the world was reminded yet again, of the critical need for security. Companies are responding in many ways to increase security.

And one thing, we’re likely to see in the wake of this hack is increased segmentation both on-premise and in the cloud, and more emphasis on zero trust models. More segmentation means more complex networks that are difficult to manage.

And fundamentally, we believe that your security is only as good as the policy that you define and enforce. This is why Tufin’s policy management products are becoming increasingly important in helping organizations manage complex networks and adhere to a zero trust security model.

As I look forward to 2021, I’m optimistic about our opportunities in this growing market. Before we talk about the coming year in greater detail, I want to turn it over to Jack, to run through the financial details from Q4 and 2020.

Jack?

Thanks, Ruvi. Good morning, everyone, and thanks for joining us today.

As a reminder, we issued a press release earlier today that contains our detailed financial results, which you can find on our Investor Relations website. I will only cover some of the highlights in my commentary this morning.

We had a strong Q4, as Ruvi mentioned, and I’m pleased with our results. Our revenue grew meaningfully from Q3 and surpassed Q4 of 2019, providing us now two consecutive quarters of year-over-year improvement.

Our operating expenses for Q4 were down year-over-year and we finished the year with a strong balance sheet. Total revenue was a record $31 million in Q4, up 3% year-over-year, and up 21% compared to Q3 of 2020.

Q4 product revenue grew 5% year-over-year to $15 million, while our maintenance and professional services grew 1% to $16 million in the quarter. Looking at the geographic mix of Q4, the Americas represented 53% of our revenue, EMEA represented 41%, and the remaining 6% came from Asia-Pacific.

Moving to margins and expenses, I will discuss our results based on non-GAAP financial measures. Please note that the GAAP to non-GAAP reconciliation can be found in the tables of our earnings press release located in the Investor Relations section of our website.

Gross profit for the fourth quarter was $26.1 million, or 84% of revenue, compared to $24.8 million or 82% of revenue in Q4 of 2019. Total operating expenses for Q4 were $25.7 million, down $1 million from $26.7 million in Q4 of 2019.

Overall, operating costs were lower as we benefited from certain COVID-related savings like no travel and more virtual events. In addition, we saw a continuing impact from the cost reduction actions we took earlier in the year.

Operating profit for Q4 2020 was $0.4 million compared to an operating loss of $1.9 million in Q4 of 2019. In the fourth quarter of 2020, we used $1.7 million of cash from operating activities compared to a use of $6.6 million in Q4 of last year.

Moving to full-year results, total revenue for 2020 was $100.8 million, down 2% year-over-year. Full year product revenue was $38.7 million, down 18% year-over-year, which was heavily impacted by the pandemic in the first half of the year when it declined 36% and recovering nicely in the second half, down just 3%.

Full-year maintenance and professional services revenues were $62.1 million, up 11% year-over-year. For the full year 2020, the Americas represented 54% of our revenue, Europe represented 40% and the remaining 6% came from Asia-Pacific.

Moving on to non-GAAP margins and expenses, gross profit for the full year 2020 was $82.6 million or 82% of revenue compared to $84.9 million or 82% of revenue in 2019. Total operating expenses for the full year 2020 were $101.1 million, roughly flat compared to $100.2 million in 2019.

Overall, operating costs began the year higher in Q1 of 2020 before we began seeing cost benefits related to the pandemic and the implementation of cost reductions, which impacted Q2 onwards resulting overall operating expenses coming in approximately flat year-over-year. Operating loss for 2020 was $18.5 million, compared to an operating loss of $15.2 million in 2019.

For the full year, we used $17.4 million in cash from operating activities, compared to $9.6 million in 2019. We ended the year with a strong balance sheet.

As of December 31, 2020, we had cash, cash equivalents, restricted cash and marketable securities of $104 million compared with $121.7 million as of the end of 2019. Headcount at the end of 2020 was $533 million compared to $568 million as of the end of 2019.

We reduced headcount modestly in May in response to the economic uncertainty related to the pandemic, but to continue to hire for key positions throughout the year. I’ll hand the call back to Ruvi now for an overview for strategic outlook for 2021 and beyond.

Ruvi?

Thanks, Jack. This is an exciting time for Tufin as we embark on a new chapter of our journey and I want to talk about our vision for the next few years.

Through 2024, as well as some of the key strategic initiatives that we’re working on in 2021, including our transition to a subscription model, which will help us achieve that vision. Before I get into our strategy, I want to remind you all of our mission, which drives our actions and decision-making at Tufin every day, simply put we help the world’s largest organizations, significantly improve their security and agility, and the way we do that is with security policy orchestration.

Our value proposition goes beyond risk avoidance and compliance benefits typically associated with most security companies. With our automation of network change processes, we deliver a very significant ROI in terms of business agility.

We ask customers, what does it worth to your business to be able to deploy application changes on the network in minutes, instead of days more securely and accurately than ever before. The network change process has been a security driven bottleneck.

With Tufin’s policy driven automation, each change can be implemented in minutes, instead of days removing the chance of human error of opening security flows. This can massively accelerate the development and deployment of revenue, generating apps, providing tangible business value.

As I mentioned earlier, we believe that our value proposition will become increasingly important for customers in the post-COVID era. Building on that, I want to talk about how we see the world of connectivity and access evolving over the next few years through 2024.

We believe that most large organizations will have a hybrid network and use multi-cloud for infrastructure-as-a-service and platform-as-a-service. We see this already with some customers today, but we think this approach will become nearly ubiquitous with larger enterprises over the next three to five years.

Adoption of Kubernetes-based platforms that run applications anywhere is expected to be pervasive. Gartner predicts that by 2022 more than 75% of global organizations will be running containerized applications in production, up from less than 30% today.

Growth on the cloud alongside existing on-premise networks means that corporate networks will be even more complex and fragmented than they are today making them essentially unmanageable without policy automation. Companies will need comprehensive access policy across all of their organizational networks consisting of multi-vendor, multi-cloud, on-premise and SDN networks, cloud-native platforms, and Kubernetes.

This policy will need to extend beyond the network controls into identity and access management. With that as a backdrop, we see Tufin evolving into the security policy platform over the next several years.

We see Tufin as a unified suite addressing network access policies everywhere on the physical network, across SDN and private cloud and in the public cloud. There are several key product elements to this vision.

First, we expect the Tufin Orchestration Suite will eventually be offered both as SaaS and on-premise. I will talk about how we will get to SaaS in a minute.

We’re also working towards building a larger Tufin marketplace. We will have more third-party and homegrown apps that integrate with other security solutions enhancing the overall value of the Tufin Orchestration Suite.

We plan to add more separately-licensed services leveraging the platform. Some of these will come from Tufin developed apps that will be offered on the marketplace, and some will be developed as separately-licensed features in the Tufin Orchestration Suite.

We are also building a pluggable architecture for wider platform coverage. Today, we developed the code to support the main platforms that we support like Palo Alto, Check Point, Fortinet, Cisco, AWS and Azure.

However, in many networks, there are smaller vendors that have a small footprint, where they – we might not have the manpower required to develop full support for each and every vendor. The pluggable architecture will enable third-party vendors to write extensions using standard Tufin APIs and enable us to provide wider coverage of corporate networks.

Last but not least is actionable network access intelligence. The Tufin suite is uniquely positioned at the network, where we see the configuration of every network device, firewall, and cloud control.

So, we can tell what can talk to what? And who conducted whom at any given moment.

That’s very interesting data, which can be used for predictive analytics and anomaly detection. Especially, once we have a SaaS offering both in SecureTrack, SecureChange and SecureApp.

This is our vision for the Tufin security policy platform in 2024. Now, I want to share with you some of the most important initiatives that we’re working on in 2021 on the road to achieving this vision.

As I mentioned, one of our key goals is to offer the Tufin Orchestration Suite to our customers as a full SaaS product. To do this, we’re building the next generation of the suite, which we’ll call the Tufin Orchestration Suite Aurora.

First, Aurora runs in microservices on Kubernetes. This architecture will enable us to offer SecureTrack, SecureChange, and SecureApp to our customers as SaaS products in the future.

There’s more work to do in the coming years to fully enable SaaS, but key components in their infrastructure will be in place with Aurora. Second, Aurora will also allow for more agile development from our strong R&D team and give us the ability to scale out to the largest networks on earth.

We’ll already a leader when it comes to scalability and this will widen the gap further. In addition, Aurora will give our customers a refresh in the more modern user interface that we think customers will love, find easy and intuitive to use.

We have begun the roll-up process for Aurora, and we have an internal team dedicated to the Aurora migration. So far, this process is going well.

We will continue to migrate customers of increasing size and complexity over the next 15 months. Moving on, I want to give you some further insight into the next steps for SecureCloud, which is a key part of our vision.

SecureCloud is a SaaS product that enables our customers to have visibility and control over security policies in cloud-native, hybrid and multi-cloud environments. We successfully launched SecureCloud in early 2020 and started gaining traction with customers in the second half.

We’ve now closed deals with our first group of large enterprise at early adopters. And in 2021, we’ll be focused on building momentum among a broader set of customers.

In addition to continuing to build pipeline with new customers, we want to ensure that our existing customers are successful with the SecureCloud. We will also be working to expand our presence and the Tufin brand in the cloud market.

One thing that we learned in 2020 is that our customers are looking for vendors that can lead them through their cloud transformation. We believe that SecureCloud is ideally positioned to help our customers navigate this journey.

Finally, we plan to expand SecureCloud to include tighter integration with our other products, expanding cloud-native support beyond network controls and more support for DevOps, DevSecOps and CloudOps Ecosystems. We’re off to a good start with this important new product and we now want to build momentum into our SecureCloud flywheel as depicted on the slide, which will build on itself over time.

Hopefully, that was a helpful overview of our product vision over the next few years, along with some of the specific elements that we’re working on in 2021. Now, I want to switch gears and talk about our business model transition to subscription.

After many months of discussions and preparation, we’re now confident that subscription is the right model for us and our customers and that now is the right time for Tufin to make this transition. Given the number of subscription transitions we’ve seen in the software space in recent years, I think you’re all familiar with the general benefits of the model for customers and companies alike, which are outlined here.

In terms of timing, there are a few things that give me confidence that now is the right time for us. First and foremost, we believe that our market is now ready for this change as our customers increasingly want to buy subscription licenses.

We saw customer preferences begin to shift towards subscription in 2020 without any significant action on our part to drive the shift. Our position has been agnostic while most of our customers purchased perpetual licenses.

for the past several years, we’ve allowed those who wanted to purchase subscription to do so. In addition, we’ve spent a significant amount of time preparing for this move, including putting the right team in place to support the transition, which I’ll talk about more in a minute.

I’m confident that both Tufin and our customers are ready to move to subscription. in making this transition, we will be leveraging our existing sales team’s capabilities and adding new incentives to drive this change.

As I mentioned, we already offer subscription options for all products and we’ve been doing so for several years. So, we have solid experience selling subscriptions already.

What has changed is that now we’re incentivizing our sales force to sell subscriptions over perpetual licenses, which along with our customers’ increasing demand for subscription will drive the transition. Initially, our focus will be on selling subscriptions to new logos while transitioning existing customers gradually over time.

At this point, we will not force customers to buy subscription licenses nor will we force them to renew on that basis. for the foreseeable future, we will continue selling both subscription and perpetual, and we expect the entire transition process to happen gradually over the course of about three years, which Jack will talk about in greater detail in a few minutes.

as I mentioned earlier, we are well-prepared to execute the transition and want to give you more insight into the steps we’ve already taken. For many months, we’ve been working through an extensive planning process to create the right transition plan for Tufin.

We’ve been working with top consultants on subscription revenue models and have done in-depth research on many other software companies were made this transition successfully. I personally have been deeply involved in all aspects of this process.

As we talked about on our recent earnings calls, we have been building out our sales organization, which enabled the business to scale up over time. We’ve significantly grown our sales ops, including sales enablement, and deal desk capabilities.

These additions will help us transition smoothly while also allowing us to scale. The last piece of this effort involves leadership.

We recently announced the addition of our new Chief Revenue Officer, Ray Brancato, who joined us in January. We’re very excited to have him on board and I’m confident he has the experience needed to lead the transition effort for us.

Ray had the opportunity to engage with our sales team at our recent sales kickoff. And I’m pleased with the enthusiasm I heard throughout the team about our direction and the plan that we’re implementing to achieve it.

In fact, Ray brings the Tufin extensive experience in transitioning businesses to subscription. Most recently, he was Chief Revenue Officer of AnyVision, a fast-growing private artificial intelligence company, where he led their transition to subscription over the last 15 months.

prior to AnyVision, he held senior leadership roles over the course of 10 years with CA Technologies. He played a central role in transitioning a $2 billion revenue business to subscription prior to Broadcom’s acquisition of CA.

the experience rate gained in these two prior transitions will be extremely helpful in navigating our transition. In addition, earlier in his career, Ray led the sales team for Remedy Software, which was part of BMC.

As many of you know, remedy was one of the original workflow automation solutions for large enterprises and Tufin SecureChange is a modern workflow automation solution for security professions. Ray’s strong leadership skills and his extensive experience with model transitions combined with his specific experience in selling workflow automation solutions to large enterprises, make them an excellent fit for Tufin today.

This gives me great confidence in our ability to execute our transition to subscription and achieve significant growth in the years to come. with that, I will turn the call back to Jack to walk you through some of the financial details of our transition to subscription along with our guidance for 2021.

Jack?

Thanks, Ruvi. I’m also excited about our shift to a subscription business model and believe that it will have a positive impact on our business in the long-term.

Now, I would like to walk you through the key takeaways of this transition process and how we should think of its impact on our business in 2021 and beyond. first, we expect the transition to be gradual.

as Ruvi noted, while we are driving over sales force to prefer subscription over perpetual, we are not forcing new or existing customers to move to subscription. We expected the transition of the vast majority of our business will occur over a period of three years.

to clarify when we refer to subscription, that includes both term licenses and SaaS though keep in mind that the SaaS portion is not very significant currently, as these products were just launched in 2020. in 2021, we will focus on selling subscriptions to new logos initially.

Our goal is to transition at least half of the new business from new logos into subscription for this year. overall, including the transitioning of some of our existing customers, new business with us, we are targeting approximately one-third of our total new business to come from subscription in 2021.

Generally, we expect that the existing customers will take longer to transition and some like government and defense customers; for example, may prefer to remain on perpetual licenses for the longer-term. Traditionally, a majority of our business comes from our existing customer base.

Second, we expect subscription to have a significant mix of multi-year deals. This is consistent with the nature of our business as large complex IT infrastructure projects like ours tend to be budgeted for more than one year.

This may result in a lower impact on revenue from the subscription transition than you may have seen with other companies, including our peers. Third, as Ruvi mentioned, we began incentivizing our sales force to sell subscription over perpetual at the beginning of 2021.

This represents a significant change in our sales incentives as prior to 2021. Our incentive structure was such that our sales force generally preferred selling perpetual deals.

Finally, we will be reporting an ARR metric to help you follow our progress in building our recurring revenue, including subscription, which we are focused on as a management team. We define ARR as the annualized value of all recurring revenue related contracts in place at the end of the reporting period.

as such, ARR includes the annualized value of active term-based subscription license contracts, SaaS contracts, and maintenance contracts related to perpetual licenses in effect at the end of that period. please refer to the detailed definition of our ARR in the footnote of this slide, which is posted on our Investor Relations website.

The chart on the right shows our ARR for the last few years. And as you can see, it has been growing steadily, including 13% growth in 2020.

I’m excited to provide you with this metric as I think it will serve as a good indicator of the growth of our business overtime. Initially, we will update this metric annually and provide you with qualitative commentary on our progress on a quarterly basis.

Moving on to profitability. we see a large market opportunity in front of us, and we will continue to invest for growth to capture this opportunity during our transition.

There are a few elements to this. first, we’re making a strategic investment in the model transition itself, which we believe will drive improved long-term growth and operating leverage.

We expect to see these benefits as we are exiting the transition period. we will continue to invest in R&D to maintain and extend our technological leadership position.

As Ruvi mentioned, we are building our next generation SaaS enabled platform and security policy management for the cloud. Our sales force and marketing efforts will continue to grow to capture the opportunity we see and our G&A is now scaled to support the business needs as a public company.

moving on to our financial guidance for Q1 and for the full year. for the first quarter of 2021, we expect revenue of $20.6 million to $24.6 million, and we expect non-GAAP operating loss of $10.6 million to $7.2 million.

for the full year 2021, we expect revenue of $105 million to $113 million and we expect non-GAAP operating loss of $38.4 million to $31.6 million. Please keep in mind that our guidance for Q1 and for the full year 2021 reflects our expectation that approximately one third of our total new business bookings will come from subscription in 2021.

With that, I’ll turn the call back to Ryan and we’ll open the line for questions, Ryan.

Thanks, Jack. We’ll open the call for Q&A now to indicate that you have a question, please click on the raise hand icon at the bottom of your screen.

I’ll announce your name when it’s your turn to ask you a question and you opt to meet yourself at that point. Please limit yourself to one question and one follow-up initially, and then get back in the queue.

I’ll pause for a second now to give people a chance to raise hands. Okay.

Our first question comes from Sterling Auty at JPMorgan. Sterling?

Yes. Thanks, guys and thanks for doing it in this format.

I think it’s very helpful. Just curious, in terms of the discussions that you’ve probably had with your customers – your existing customers around the shift, what’s been some of feedback that you’ve gotten in terms of interest and perhaps, even could you see some of those customers decide to move some of their existing based over subscription, even though you’re not actively looking to force that move.

Hi, Sterling. thanks for the question.

So, when we look at customers, they’ve shifted predominantly to buy software on a subscription basis, right. Virtual software, I think has become an anomaly today.

There’s a lot of benefits to customers. Obviously, there’s less risk, they’re buying one or two years at front.

A lot of them are budgeting the OpEx versus CapEx already. And I think, also it’s a little bit more nuanced, but the subscription model really forces the vendors to pay a lot more attention to customers and provide a high level of customer satisfaction.

And typically, I think customers are learning that vendors that are in subscription work harder to earn their trust and ensure that they’re satisfied.

Yes. That makes perfect sense.

By in chance, is Ray on the call with us?

not today, but we might have on our future call.

All right. That would be great, because I’m curious and maybe, you can give a sense now.

But when a new sales leader comes in, obviously the first thing they do is go and kind of inspect the troops if you will, see the research that they have that to work with, kind of curious what you’re thinking about in terms of maybe, a level of turnover that might be experienced in any potential disruption from that as he kind of takes the reins.

So, Ray’s been on board for a few weeks now. He hit the ground running.

We have been working on sales process improvement throughout 2020. So, I think we’re going to a good place from that perspective.

And from comments I heard from Ray is he’s pretty happy with the team that he has here. The team has been executing well and they had a very good performance in Q4 and I’m happy with that.

So, I don’t think we’re going to see huge changes in the sales organization. I think we’re set up well and with right now, we’re ready for the move to transition – annual transition to subscription.

All right. Sounds good.

Thanks, guys.

Thank you.

Our next question comes from Saket Kalia with Barclays. Saket, are you there?

I’m. Can you hear me?

Can you see me?

Yes, yes, yes.

Okay, excellent. Hey, thanks for taking my questions here and thanks for holding it in this format as well.

Maybe, I’ll start with you, Jack. Very helpful disclosure, just on some of the mechanics of the transition.

We’d just love to dig a little bit deeper into the accounting if we can. I think you said in your remarks that this is probably going to be a little bit more of a term license transition as opposed to SaaS, right.

SaaS is still very small. So maybe, you could just clarify that for us.

And perhaps just as importantly, around the term license contracts, can you just remind us around the accounting? What’s the carve out can be like, is there a – are there any cancellation clauses, especially since these are multi-year, any detail just sort of the accounting behind term that you can sort of level set for us?

Yes. Absolutely, Saket.

So, when you’re looking at SaaS and subscription, the accounting treatment is different. SaaS, which is a small piece, like you mentioned, is recognized over the period of the contract, right over the term of the agreement and its revenue is recognized over that period – periodically, monthly or whatever the agreement says.

subscription that’s more like perpetual right, based on ASC 606, which we have adopted perpetual – sorry, subscription is going to be recognized product upfront. And then the support piece is going to be recognized over the term of the contract.

So, pretty much like perpetual Saket, for subscription deals. Obviously, the piece that’s going to make a difference is that the scope of subscription deals may be smaller than perpetual deals to begin with.

But in terms of accounting, like a one-year deal subscription, there’s the product, which is the majority of that contract – of the value of the contract. That’s going to be recognized upfront, just like perpetual.

And if you have multiyears and we do expect some multiyears for subscription in our planning. again, that’s expectation, the same thing, even if it’s a three-year deal, then you’re going to take product out of the three years, recognize it completely upfront.

And then the remaining support piece is going to be recognized over those three years just like answer in the respondent.

Got it. That’s really helpful.

Ruvi, maybe, for you, a lot of helpful detailed some sort of the vision here, one of the things that we’ve seen with other subscription transitions in the past as customers more willing to buy additional product or perhaps vendors maybe dabbling in bundling, right to sort of encourage adoption of more product, anything that that’s factored into your plan or anything that’s sort of on the horizon just around building adoption of kind of different Tufin products, if you will, as part of the transition.

Thanks, Saket. So, when you think of our products, we have four main products, right; SecureTrack, SecureChange, SecureApp and SecureCloud.

We charge an optional license for provisioning that enables customers to put changes automatically from securechange. Historically, we added more and more functionality for free within the products for any customer that had a valid support contract.

moving forward, I think it makes sense that any significant and differentiated capabilities that we have that are new, will be separately licensed features or products, and we will build a much wider suite of products. Over time, I think it’s going to drive higher lifetime value from customers and it’s going to strengthen the lining spend model for sure.

Very helpful. Thanks, guys.

Thank you.

Our next question from Andrew King with Collier’s. Go ahead, Andrew.

Can you hear me?

Yes.

Great. Thanks, guys.

So with your transition to subscription, can you talk a little bit as to how that might have any impacts on one-year sales cycle, then also your engagement level with your current customers?

Sure. so, we have already now, when we’re looking at subscription, we’re incentivizing the sales force to move to subscription and they’re working on transitioning some of their deals to subscription.

So, we’re expecting some of the perpetual deals that we have in the pipeline to move to subscription that might impact some of the bookings that we have in Q1 and throughout the year, and we’re factoring that into our guidance.

Great. And then can you just talk a little bit as to really where the customer demand is coming in for SecureApp and SecureCloud, primarily within industries or any particular threat areas?

Sure. So when you think of SecureApp and SecureCloud, SecureApp enables application connectivity management for customers to be able to visualize what their apps look like on the network.

And SecureCloud really gives visibility in policy management for workloads that are in the cloud or in Kubernetes. It’s not driven by any specific vertical or industry.

It’s really any large organization that is moving infrastructure as a service or platform as a service to the cloud or to Kubernetes on premise. They’re going to need policy management within those environments.

So it’s really customers taking a look at their entire state, understanding that they can’t really run a fragmented policy one for the on-prem and another one for the cloud. That’s a key driver for SecureCloud.

And for SecureApp, the driver is primarily a visualization of application connectivity.

Great. Thank you.

Thanks.

Our next question comes from Joe Gallo with Jefferies. Joe, are you there?

Yes, I’m here. Can you guys hear me?

Yes.

Sorry about that. So, Jack, I have two questions for you.

Really appreciate all the detail today, but I’m looking for a little more granularity when it comes to revenue recognition. So if we assume a three-year term license deal, how does the in-quarter recognition compared to the typical first-year perpetual deal plus maintenance?

It’s pretty much the same, Joseph. If you have a $300,000 deal, let’s say, $100,000 deal is a one-year subscription, and then you’re selling upfront $300,000 for a three-year deal.

So for that deal, let’s start with the $100,000. For the $100,000 deal one-year, the subscription suppose just on the numbers, suppose product is mid-70%s and support is mid-20%s, right, that’s 100% of the deal.

Then you’d recognize all of the mid-75% if you like product upfront, just like we’re doing perpetual, and the remaining 25% is going to be spread over the term of the contract, which is one-year, right? If it happens in December, there’s going to be zero revenue for that year.

If it happens in January, then all of the services – supports also would be recognized in the same year. When you go to our $300,000 deal three years prepaid upfront, actually it doesn’t have to be prepaid upfront.

There are criteria in accounting, which qualify a deal to be committed enough to be recognized upfront. And this is the case in a $300,000 for three years, you would – the same level assume that all of the product right in this case, $200,000-plus is going to be recognized upfront in the quarter on the date of closing the deal.

And then the remaining $100,000 if you like or less is going to be recognized over a period of 36 months.

Okay, awesome. That’s helpful.

And then just in regards to the maintenance associated with those deals, is that recognized in the product line or in the maintenance line? And then maybe just help us think about how you see the maintenance line trending over the next couple of years.

So in terms of revenue, that’s maintenance, right? It’s different than SaaS.

Some companies have this as a product, once a part of SaaS. For subscription, that’s going to be maintenance just like perpetual.

Okay. So subscription’s maintenance will be allocated to the maintenance bucket still?

Correct.

And then are you trying to transfer maintenance contracts, current existing maintenance contracts to subscription? Or is it just maintenance is recurring, so you’re fine with the existing customers staying on maintenance?

So that goes back to the move, the transition itself. Currently, I think Ruvi mentioned that earlier, we’re focusing on transitioning new business, new business bookings that are coming in.

We’re less focusing going back to existing contracts and trying to transition them. So we’re focusing primarily on new logos this year.

We’re expecting transition to come from existing customers for their new expansion business, if you like, but not for their installed base. At some point, we may consider this as well.

Makes sense. Very helpful, guys.

Thank you.

Our next question comes from John Weidemoyer with William Blair. John, you there?

I am. Can you hear me okay?

Yes.

Great. So I just wanted to start out with maybe the impact to cash flow from a shift to subscription and whether or not you think there’s anything that could have effect on that side.

Hi, John. So just like I answered the revenue question, the impact on revenue or bookings, if you like, that would be a similar impact on cash flow, namely perpetual deals for us are paid upfront.

Single year perpetual, sorry, subscription deals are going to be paid upfront. So they are pretty much similar as a perpetual deal would behave in terms of cash.

We’re going to collect it upfront, no impact on cash flow in this sense. The impact on the cash flow is obviously going to come from the fact that subsequent deals may be smaller in size and reflect less – lower revenue and that’s going to roll down to the cash flow.

Got it. And then I guess one thing I’m trying to understand a little bit better is that you’ve talked about all of these major trends, like zero trust, digital transformation, shift to cloud automation.

And these are clearly top of mind investment areas for a lot of the companies and enterprises out there. I guess, given your size and scale, like why can’t Tufin grow even faster.

Like what’s sort of holding back that growth? And just – like, I can’t imagine these areas are slowing down or not being prioritized.

Like, can you just help us understand why? Just given your guidance and given there isn’t that much of a revenue headwind from the shift to subscription, you’re not going to see even faster growth in 2021.

All right. So I think when you look at Sunburst hack, really demonstrates the depth and breadth of malicious hacking in spying.

No one is safe in every large company. It’s potentially a target.

So I agree with you, it’s going to put more emphasis on security investment for large organizations and companies. They’re going to invest in security across the board, from endpoint to identity to access control.

I expect that to be a tailwind. And I expect that to be more so when economic recovery starts.

So that’s on the one hand. On the other hand, we’re coming off of a tough year within COVID, and also a lot of changes that we made to sales process and our move to subscription.

So we’re taking all those factors into our guidance and we’re comfortable with the guidance that we gave.

Hey, Jonathan, do you have another one? Good.

I’m all set. Thank you.

Okay, great. All right.

Next question comes from Rob Owens at Piper Sandler. Rob, do we have you?

Hey, Rob, are you there?

I am. Can you hear me now?

Sorry.

Yes, yes.

Technology. Couple of things with regard to the transition.

I guess, first of all, did you quantify what the headwind on Q1 estimates might be relative to the transition? Understanding it’s small, but just try to put it in perspective.

Yes, I think staying small is maybe a good way to put it for Q1. for us, Rob, it’s difficult to estimate the headwind like UT companies, more mature into the transition would provide.

And for us, there are a few factors here to look at right before we try and estimate the so-called headwind. So, the pace of the transition of our existing customers is something that we feel still be too early for us to try and predict, right.

And this – and if you remember the larger piece of our businesses is based on existing customers, so that small changes in the rest of the material can have a big impact on that headwind. That’s one factor.

Another factor is the fact that we are expecting multi-year deals for subscription committed, and this can also have an impact – a different impact on revenue, right. I just explained to the colleagues that we’re going to recognize full revenue for three years, and if it’s committed upfront.

So, that’s another moving target year. So as you can see, there are a few layers of estimates for a company like us at this early stage of the transition to come up with enough vision – sorry, visibility into the headwind.

But having said that, like you were saying, we are expecting several million dollars for this year and a smaller piece in Q1. You have to remember the Q1, in the pipeline, we have deals that are – have been opened as perpetual from previous years, right.

So, Q1 is going to have a smaller impact, but for the full year, you should expect the order of several million dollars.

Sure. And just to level set, can you break out pro services either for the fourth quarter of 2020 as a percentage of sales, so we can understand what the actual maintenance component is in the line?

I’m not sure we have – we provided that professional services. We’re showing product and services, I’d rather stay with what we’re providing, so that I don’t have to take actions with 6-Ks and if I’m going to be, but pretty much if you’re looking at our previous filings, perspectives and 20-F if you take the percentage there, it’s pretty much the same over the past years.

Okay, great. And Ruvi maybe, quantify just where the pipeline sits as you look at 2021 versus where we were last year in terms of size of deals, quality, maybe, just give us some anecdotal color, that’d be great.

Thanks.

Sure. We feel comfortable with the pipeline at this point in the year.

I think it’s difficult to compare to pre-COVID. But it’s been improving steadily since the business began recovering the second half of 2020.

All right. Thank you.

Thanks.

Our next question comes from Andrew Nowinski with D.A. Davidson.

Andrew, if you’re there, go ahead.

Great. Thank you.

So number one, I guess I just want to start with a clarification. I think on one of the prior questions you had talked about cash flow, I didn’t catch it though.

Will this transition have a negative impact on your cash flow?

It may have a negative impact, Andrew, to the extent – just to accommodate the factor of subscription deals being smaller than perpetual deals, right. In terms of selling and collecting revenues that’s not going to have an impact.

I explained earlier that a subscription deal be 20 year or committed three years, it’s going to be collected upfront. So that’s just the same as a perpetual deal of cash would behave.

The impact is going to come from the fact – from the headwind deflect, from the fact that the piece that will transition to subscription is going to create less business for us this year.

Okay. So, you’re not concerned with cash position and the impact it would have on your cash coming, because you were burning cash for the last few quarters.

I’m just want to make sure that you’re comfortable with the – where we’re at with cash position.

Yes. I mean accounting for the cash expected, we’re accounting for the impact of the cash from the transition.

But like I explained, it’s only relating to the part, where subscription deals are smaller than perpetual deals.

Okay. And then you had a – you did have a good Q4 as it relates to product revenue.

I assume most of that was perpetual. Just wondering if you could parse out the contribution from the large $1 million deals in Q4 from that product line and maybe, compare that to prior quarters?

Yes. So Q4, like you’ve seen, we experienced a good quarter and this was coming from large deals that we started to see coming back.

It’s still not at the level that we were in the good quarters of earlier 2019 or even end of 2018. We still are not there, but certainly, compared to a week seven-figure deals at the beginning half of 2020, we certainly are seeing a recovery and we still have more to expect on multiyear deals – sorry, on seven-figure deals.

I just want to add to that. I think with the move to subscription over time, I would expect that reliance on very large deals to be smaller, because the average subscription deal is going to be smaller than the average perpetual deal.

So, I see this actually is another benefit of the move to subscription that we will have fewer large binary deals every quarter, and that will lead to lower variability as a result.

Understood. Just one more quick question.

Other vendors like Palo Alto have tried to; it looks like they’re trying to extend some of their capabilities with Panorama to manage other vendor firewalls, which seems to be more competitive to Tufin, being more of a neutral vendor that then integrates with all vendors. If I’m just wondering if you view them more as a competitor now going forward with that additional integration.

Not really. It’s not capability that enables them to really manage all their vendors’ firewalls.

So, I don’t think they’re entering into our space and we don’t see them as a competitor. They’re a partner to us.

Got you. Thank you.

All right. It looks like there are no further questions at this point.

Thank you everyone. So, I’m going to turn the call back to Ruvi now for his closing remarks.

Ruvi?

Thanks, Ryan. Just want to thank everyone for joining the call today.

Really appreciate you spending a little bit more time with us than usual. I’m very excited about the opportunities ahead and our transition to subscription.

I hope you’ll find today’s call to be a good overview and I look forward to speaking with all of you very soon. Thanks again, and have a great day.