Rudy Kessinger

Rudy Kessinger sought clarification on whether the 7%-8% baseline growth mentioned by the CFO referred to revenue or current calculated billings for the year, and asked what factors (channel, Q-Flex) need to align for ETM adoption to potentially accelerate the net expansion rate or revenue growth in the current year.

Answer

Joo Mi Kim (CFO, Qualys) clarified that current calculated billings growth is expected to be more or less in line with revenue growth, at 7%-8% for full year 2026. Sumedh Thakar (President and CEO, Qualys) outlined several factors for potential upside, including the maturation of mROC partners launching services around ETM, Q-Flex facilitating VMDR to ETM conversions, and increased federal business opportunities following FedRAMP High authorization. He emphasized that while the current guidance is a baseline, these initiatives offer potential for better performance.

Rudy Kessinger sought clarification on whether the 7%-8% baseline expectation applies to both revenue and current calculated billings growth for the full year. He also asked what factors (channel, Q-Flex) need to align for ETM adoption to significantly improve the net expansion rate or accelerate revenue growth this year.

Answer

Joo Mi Kim, CFO of Qualys, confirmed that current billings growth rate is expected to be more or less in line with the revenue growth rate, around 7%-8% for full year 2026. Sumedh Thakar, President and CEO of Qualys, stated that all factors, including innovation, product releases (Agent Val, identity solution), and partner strategy, need to go right. He emphasized the focus on certifying mROC partners to create high-value services around the Risk Operations Center, driving new business and upsell opportunities. He also noted Q-Flex's positive impact on converting VMDR customers to ETM and the potential upside from federal business post-FedRAMP High authorization.

Rudy Kessinger of D.A. Davidson sought clarification on the 8% billings growth for 2025, asking if it implies a similar rate for 2026, and what factors would give Qualys confidence in delivering stable 10%-plus growth over the next couple of years.

Answer

CFO Joo Mi Kim stated it's too early to predict 2026 billings growth, as it depends on the net dollar expansion rate and new product adoption. CEO Sumedh Thakar identified key growth vectors as converting VMDR customers to ETM, upsells with Eliminate, continued interest in cloud security, long-term federal opportunities, and ROC partnerships, with a laser focus on VMDR to ETM conversion and Eliminate upsells for the next year.

Rudy Kessinger of D.A. Davidson & Co. asked about the consistent revenue outperformance relative to guidance and sought clarity on the drivers for the 6-8% TTM billings growth target, questioning its validity as a forward indicator.

Answer

CFO Joo Mi Kim attributed the revenue beats to strong execution against an initially conservative guidance set amidst macro uncertainty. She affirmed that TTM billings growth remains the best proxy for 2026 revenue and suggested that upside is more likely to come from existing customer expansion than from new business.

Rudy Kessinger from D.A. Davidson & Co. pointed out the sequential drop in the LTM customer count for those with over $500,000 in ACV and asked for an explanation. He also sought more detail on the increased conservatism in the guidance, particularly regarding the net retention rate and new logo bookings.

Answer

CEO Sumedh Thakar stated there was nothing out of the ordinary, noting stable win rates and improved gross retention. He explained that the LTM metric can fluctuate due to the timing of downsells and upsells. CFO Joo Mi Kim confirmed the guidance assumes the net retention rate will hold at 103% for the year but anticipates continued headwinds in new bookings, which is reflected in the 7-8% full-year revenue growth forecast.

Rudy Kessinger of D.A. Davidson & Co. asked for the reasons behind the revenue and billings outperformance in late 2024 and why the 2025 guidance appears conservative in comparison. He also inquired about new logo bookings performance in Q4 and expectations for 2025.

Answer

CFO Joo Mi Kim attributed the 2H 2024 billings strength partly to invoicing cycles and the Q4 revenue beat to favorable deal linearity. She explained the 2025 guidance reflects a stable but lower net dollar expansion rate (103%), a potential short-term negative impact from the partner-first shift, and a disappointing new bookings performance in Q4, which is assumed to continue into 2025 with no expectation of meaningful growth.

Rudy Kessinger sought to understand the drivers of the significant revenue outperformance relative to guidance, asking if it was due to a few large upsells or was broad-based, and clarified the Q4 billings growth outlook.

Answer

CFO Joo Mi Kim attributed the outperformance primarily to broad-based strength in upsells, which drove the net dollar expansion rate up to 103%. She noted the company had been conservative in its forecast due to underperformance in recent quarters. She also clarified that the Q4 guidance for current calculated billings (CCB) growth is expected to be in the 7% to 9% range, similar to revenue guidance, and this applies to the quarterly CCB, not the trailing twelve months.

Rudy Kessinger asked about the federal assumptions embedded in the Q3 and full-year guidance for 2026, considering the volatility in government spending and recent shutdown threats.

Answer

CFO Matt Brown stated that federal expectations for 2026 are in line with the rest of the business, with no anticipated outsized growth or significant headwinds. Co-CEO Mark Thurmond added that federal performance in Q4 was strong, and they expect continued stability in 2026, with state, local, and SLED segments also showing strength.

Rudy Kessinger asked about the federal assumptions embedded in the Q3 and full-year 2026 guidance, considering government volatility and the recent near-shutdown, specifically how these assumptions compare to last year and overall growth expectations.

Answer

CFO Matt Brown stated that federal expectations in the guide are for performance generally in line with the rest of the business, without anticipating outsized growth or specific headwinds. Co-CEO Mark Thurmond noted strong Q4 federal performance, indicating stability, and expects similar trends in 2026, alongside robust state, local, and SLED performance. Co-CEO Steve Vintz clarified that other quarters in 2025 were less favorable for U.S. federal, which is factored into the 2026 outlook.

Rudy Kessinger asked about the drivers behind the full-year revenue guidance, which implies a modest acceleration, especially considering the conservative assumptions around Federal business.

Answer

Co-CEO and CFO Stephen Vintz explained that revenue is an output of sales, for which CCB is a proxy. He stated that the revenue forecast is influenced by factors like product mix but that the assumptions are appropriate given the sales outlook. He confirmed there is nothing discrete skewing the forecast higher and that it is an extrapolation of current trends.

Rudy Kessinger asked if the public sector guidance cut was due to reduced visibility on new deals or if Tenable has experienced actual contract cancellations or downsizing.

Answer

Co-CEO Stephen Vintz clarified that the commentary applies to both new and renewal business but more so to new deals. He noted that personnel disruptions, particularly on the civilian side of the federal government, have resulted in lower renewal dollars from some agencies. The primary issue remains longer lead times for closing opportunities.

An analyst on for Rudy Kessinger at D.A. Davidson asked for an update on the longer sales cycles mentioned in the previous quarter.

Answer

CEO Amit Yoran described the situation as 'more of the same,' with continued pressure from procurement. However, CFO Steve Vintz highlighted a key positive counter-trend: sales cycles for the integrated Tenable One platform are 'notably shorter' despite higher selling prices, which validates the platform's value proposition.

Rudy Kessinger from D.A. Davidson questioned the conservatism of Varonis' SaaS net new ARR guidance (excluding conversions) of $121.5 million for 2026, given that reps are now freed up from conversions and the company achieved $109.5 million in 2025, asking for assumptions on new logo contribution and net retention rate.

Answer

Guy Melamed, CFO and COO, acknowledged the conservative nature of the guidance as a starting point, agreeing that with reps freed from conversions, they can better focus on new and existing customer sales. He stated that assumptions include an expectation for improved NRR and increased sales to new customers, with the goal to improve performance throughout the year. Yaki Faitelson, CEO, emphasized the doubled platform value as the focus for growth.

Rudy Kessinger from D.A. Davidson & Co. expressed that Varonis' SaaS net new ARR guidance (excluding conversions) of $121.5 million for 2026 appears conservative, especially considering sales representatives are now freed from conversion focus, and asked for more detail on the underlying assumptions for new logo contribution and net retention rate.

Answer

Guy Melamed, CFO and COO, acknowledged the conservative nature of the guidance as a starting point for the year. He agreed that with sales representatives freed from conversion focus, they can better pursue new and existing customer sales, and expects NRR to improve. He reiterated confidence in the guidance and the company's ability to execute and improve throughout the year, with the goal of growing the business. Yaki Faitelson, CEO, added that the expanded platform value, not conversions, is the focus for growth.

Rudy Kessinger questioned if the end-of-life for self-hosted solutions by end of next year might alienate customers unwilling to move to SaaS, suggesting a longer migration timeframe or continued term license options for large strategic customers.

Answer

CEO Yaki Faitelson emphasized the company's long-standing goal to move to 100% SaaS for operational efficiency, superior value (10x more value for 10% effort), and to focus sales efforts on new products and SaaS. CFO Guy Melamed added that reaching the 70-90% SaaS ARR target (now 76%) and the financial benefits of a single code base drove the decision, with the Q3 on-premise performance expediting the end-of-life announcement.

Rudy Kessinger asked if the end-of-life announcement for self-hosted solutions might alienate customers unwilling to move to SaaS, and why Varonis isn't offering a longer migration timeframe or allowing customers to remain on term licenses.

Answer

Yaki Faitelson (CEO) emphasized the strategic goal of moving to 100% SaaS for significantly more value with less effort, better platform integration, support, and focused sales efforts on new products. Guy Melamed (CFO & COO) noted that reaching 76% SaaS ARR aligns with their Investor Day targets (70-90%) and highlighted the financial benefits of not maintaining two codebases. He explained that the end-of-life announcement was expedited due to Q3 on-prem performance, with plans to work with customers on migration.

Rudy Kessinger requested data on the percentage of net new SaaS ARR (from new logos and expansions, excluding conversions) that is attributable to protecting cloud and SaaS environments.

Answer

CFO & COO Guy Melamed confirmed that Q2 saw a 'meaningful contribution' from additional cloud platforms and that the company was 'extremely happy' with the performance. While declining to provide a specific percentage, he noted the trend is improving quarterly and is a key focus for the sales force.

Rudy Kessinger of D.A. Davidson & Co. sought confirmation of the raised year-end SaaS mix guidance and asked if the market is nearing an inflection point for Copilot and GenAI adoption.

Answer

CFO and COO Guy Melamed confirmed the year-end SaaS mix guidance was raised from 78% to 80% of total ARR. CEO Yaki Faitelson added that organizations understand the productivity gains from AI tools and that Varonis sees it as a clear driver, with demand for data security expected to increase as AI adoption grows.

Rudy Kessinger from D.A. Davidson asked how Varonis plans to build its cross-sell and upsell pipeline for 2026 while sales reps are so heavily focused on conversions in 2025, in order to sustain its growth profile.

Answer

CFO and COO Guy Melamed emphasized that new business was the primary growth driver in 2024, even with an NRR of 105%, demonstrating the company's ability to grow without a strong upsell motion. He argued that completing the transition will put Varonis in a much better position for upsell by eliminating the current headwind from conversions. The focus is on getting customers onto the superior SaaS platform first, which will naturally open up a healthier base for future expansion.

Rudy Kessinger questioned the commentary that Q3 conversions were similar to Q2, pointing out that the step-down in term and perpetual ARR seemed larger. He asked for clarification on how gross retention has been trending.

Answer

CFO & COO Guy Melamed reiterated that renewal rates are consistently over 90%. He clarified that the larger decline in the maintenance and services revenue line is because more perpetual maintenance customers are converting to SaaS, which doesn't create the same revenue headwind as a term-to-SaaS conversion. He stressed again that the quarter's momentum was driven by new customers and MDDR, not just conversions.

Rudy Kessinger of D.A. Davidson sought clarification on net new ARR, noting that SaaS net new ARR was in line with expectations, which suggested term license net new ARR was below expectations, potentially due to longer deal durations. He also inquired about the calculation mix of consumption-based versus TCV over duration for SaaS ARR, particularly for new SaaS bookings.

Answer

Chief Accounting Officer Danielle Abrahamsen confirmed SaaS net new ARR met expectations but acknowledged that term net new ARR was pressured by large, multi-year new software customers with longer durations, which differed from prior assumptions. She also mentioned a decline in 'other ARR' due to conversions. President and CEO Sanjay Mirchandani explained that quarter-to-quarter variability in ARR is expected due to hybrid solutions and diverse customer deployment models. Danielle Abrahamsen clarified that consumption/utility-based ARR is an immaterial portion, with most SaaS ARR tied to fixed annual subscriptions.

Rudy Kessinger sought clarification on the net new ARR, noting that SaaS net new ARR was in line with expectations, suggesting term license net new ARR was below expectations. He asked about the impact of longer duration on some deals, potentially leading to price and ARR compression for term licenses. His second question focused on the calculation of SaaS ARR, asking what percentage comes from consumption-based models versus TCV over duration, and how ACV bookings would compare if all SaaS ARR was calculated as TCV over duration.

Answer

Danielle Abrahamson, Chief Accounting Officer, confirmed that term net new ARR saw pressure due to large, multi-year new software customers coming in at longer durations, which was not assumed in the guidance. Sanjay Mirchandani, President and CEO, emphasized the need to view ARR on a broader term basis due to quarter-to-quarter variability from hybrid solutions and customer deployment options. Danielle Abrahamson clarified that consumption-based ARR is a small, immaterial portion of the total SaaS ARR.

Rudy Kessinger asked about the incremental investments being made and their potential to accelerate ARR growth, as well as parameters for the SaaS and term license split in the second half of the fiscal year, specifically regarding SaaS Net New ARR.

Answer

Jen DiRico (CFO, Commvault) clarified that operating expenses remained consistent at 61% of revenue, with gross margin pressure primarily due to SaaS acceleration and term duration shifts. She stated that investments made earlier in the year to accelerate the SaaS motion are paying off, as evidenced by the implied $45 million Net New ARR for the back half of the year, exceeding the initial $40 million target. For the second half, she advised that approximately 60% of Net New ARR will be SaaS.

Rudy Kessinger with D.A. Davidson inquired about the specific areas of incremental investments contributing to the EBIT margin guidance reduction and the potential for these investments to accelerate ARR growth. He also sought parameters for SaaS net new ARR and the SaaS/term license split for the second half of the fiscal year.

Answer

Jen DiRico, CFO, clarified that gross margin pressure stemmed from the accelerating SaaS business and term duration shifts, while operating expenses remained consistent. She stated that investments are focused on accelerating the SaaS motion, which is yielding positive results, with implied net new ARR guidance for the second half exceeding initial targets. DiRico also guided that approximately 60% of net new ARR in the second half would be SaaS.

Rudy Kessinger questioned the Q1 net new ARR mix, noting it skewed more toward term licenses than SaaS compared to recent trends, and asked for color on deal dynamics and the linearity of the quarter.

Answer

CFO Jen DiRico explained that the SaaS business performed as expected, and the outperformance came from the software side, driven by higher close rates on a few large deals in the final week of the quarter. She guided for SaaS net new ARR to be north of $20 million and total net new ARR to be around $40 million quarterly for the rest of the fiscal year.

Rudy Kessinger requested details on the expected seasonality and quarterly net new ARR for fiscal 2026. He also asked what the full-year guidance implies for sales productivity and close rates, questioning whether it assumes flat performance or continued improvement.

Answer

CFO Jennifer DiRico advised that the seasonality for net new ARR in FY26 should be similar to FY25, with a quarterly baseline of $30 million to $35 million being a reasonable expectation. Regarding productivity, she clarified that the guidance is prudent and does not assume 'massive gains,' but reflects confidence in the long-term durability of the business model.

Rudy Kessinger inquired about the extent of Commvault's penetration within its existing customer base and the remaining opportunity for cross-selling and upselling across both term license and SaaS customers. He also asked for the constant currency equivalent of the revised 19-20% fiscal '25 ARR growth guidance.

Answer

CEO Sanjay Mirchandani described the cross-sell opportunity as 'massive,' driven by new offerings that seamlessly integrate into the Commvault Cloud platform for both software and SaaS customers. CFO Jennifer DiRico advised that the best way to understand constant currency growth is by looking at the organic net new ARR added quarterly, which was $38 million in Q3, and noted that formal guidance is based on current FX rates.

Rudy Kessinger inquired about the accelerating growth in term license ARR and the on-premise competitive landscape, and also questioned the seemingly conservative second-half guidance for net new ARR.

Answer

CEO Sanjay Mirchandani attributed on-premise strength to their unified platform strategy, which allows customers to manage hybrid workloads seamlessly, enabling them to win against competitors. CFO Jen DiRico addressed the guidance, stating that while H1 was exceptionally strong, the H2 outlook is consistent with the average net new ARR of approximately $29 million seen over the prior four quarters, maintaining their responsible growth philosophy.

Rudy Kessinger asked for clarification on sales productivity improvements (quarter-over-quarter, year-over-year) and the planned level of sales capacity additions for the upcoming fiscal year.

Answer

CFO Brett Tighe confirmed that sales productivity is up both quarter-over-quarter and year-over-year. He stated that Okta added sales capacity in Q2 and Q3 and plans to continue adding methodically to maintain high productivity and avoid disrupting the current low AE attrition and high tenure. President and COO Eric Kelleher reiterated the importance of a metered approach to capacity additions to ensure continued success and engagement of the field team.

Rudy Kessinger of D.A. Davidson & Co. highlighted the historically tight correlation between cRPO growth and subsequent subscription revenue growth, asking why subscription revenue growth shouldn't be in the 13-15% range seen recently in cRPO.

Answer

CFO Brett Tighe strongly cautioned against this approach, calling it a 'fool's errand to get into the growth conversation' using percentages. He emphatically reiterated his advice to model using the coverage ratio based on absolute dollars, stating, 'that's the mechanics of how the math work.'

Rudy Kessinger asked about current sales productivity levels relative to the past, the productivity gains assumed in FY'26 guidance, and if the strong Q4 momentum has continued into Q1.

Answer

CFO Brett Tighe confirmed productivity was at a multi-year high but did not provide a specific comparison to past periods. Regarding Q1, he noted that February is typically a slow month due to sales kickoffs and territory assignments, so it's too early to draw conclusions about momentum for the full quarter. CEO Todd McKinnon added that the sales team was very excited at the recent kickoff meeting.

Rudy Kessinger asked for quantification of the 'additional conservatism' related to the security breach that was included in past guidance and has now been removed.

Answer

CFO Brett Tighe explained that the conservatism was applied across revenue, cRPO, and operating margin but declined to provide a specific number. He reiterated that the large beat in FY'25 was an anomaly due to the unique uncertainty at the time and should not be the benchmark for future expectations, also citing the company's natural maturation.

Rudy Kessinger of D.A. Davidson asked why the full-year revenue guidance was not raised more significantly, given the very strong net new ARR performance in Q2.

Answer

CFO Barbara Larson acknowledged the strong Q2 results and the improved second-half revenue outlook. However, she emphasized that the company is remaining mindful and incorporating prudent assumptions for the back half of the year.

Rudy Kessinger asked what the second-half net new ARR growth would have looked like if the benefit from competitive displacements of CrowdStrike were excluded.

Answer

Tomer Weingarten (CEO) responded that it's difficult to isolate that specific impact. He explained the primary shift was a structural increase in 'consideration' for SentinelOne, even among customers who didn't switch immediately. He characterized the benefit as a gradual, sustained improvement rather than a one-time spike, suggesting the trend is here to stay.

Rudy Kessinger of D.A. Davidson & Co. sought to quantify any material new business directly attributable to the CrowdStrike outage in the last six weeks, attempting to reconcile claims of displacements with comments about long sales cycles.

Answer

CEO Tomer Weingarten declined to quantify the impact, stating it's still a work in progress with a significant existing book of business. He confirmed that some customers, including marquee names, have decided to switch but emphasized that the process takes time for testing and deployment planning. Weingarten stressed that SentinelOne is working at the customer's pace and is not 'ambulance chasing,' but supporting those who are re-evaluating their security posture.

Rudy Kessinger of D.A. Davidson & Co. inquired about the large Southeastern Regional Bank deal, asking when the revenue step-up would begin. He also asked for a timeline on resolving technical issues with the major social media client and questioned the potential scale of that account. Finally, he requested an update on retail scan volume trends for Q2 and early Q3.

Answer

President, CEO & Director Bryan Lewis confirmed that invoicing for the regional bank's expanded contract began in July (Q3), so the revenue increase should be reflected for the full quarter. Regarding the social media client, Lewis stated that while there is no exact timeline for a fix, both parties are highly motivated and engineering teams are actively working on a solution. He noted that retail volumes were down 20% year-over-year but were more than offset by an 85% year-over-year increase in the banking vertical.

Rudy Kessinger asked for the revenue percentage from retail in Q1, the driver behind the record-high deferred revenue and RPOs, and for updates on the large social media and regional bank customer rollouts.

Answer

Executive Bryan Lewis explained that retail and retail banking now represent roughly equal portions of revenue. He attributed the growth in deferred revenue to a strategic shift towards upfront quarterly or annual payments from clients, which improves billing efficiency. Regarding key clients, Lewis stated the social media company's usage is variable but ongoing, while the large regional bank deal terms are finalized and now in the procurement stage.

Rudy Kessinger asked for clarification on the significant Q4 revenue strength and subsequent Q1 slowdown, an update on the large social media customer, and confirmation of expectations for higher adjusted EBITDA in 2025.

Answer

CEO Bryan Lewis attributed the Q1 slowdown to a sharper-than-normal seasonal drop in retail transaction volumes, not a one-time event in Q4. He noted the social media client deal is now with procurement for finalization. CFO Adam Sragovicz confirmed the company expects adjusted EBITDA in 2025 to improve upon 2024, with the magnitude dependent on Q4 performance.

Rudy Kessinger from D.A. Davidson & Co. sought clarification on the 25% year-over-year increase in price per transaction, asking if it applied across the board or only to new business. He also inquired about the current size of the sales pipeline compared to previous quarters and if it contained any needle-moving deals.

Answer

Executive Bryan Lewis clarified that the price increase was specific to new business signed in Q3 compared to new business from the prior year, not an across-the-board hike for existing clients. He added that he is 'much happier' with the pipeline now than three quarters ago and confirmed that the company is in proof-of-concept discussions with large, potentially needle-moving prospects.

Rudy Kessinger from D.A. Davidson asked for more details on new confidential federal IT security work, the status of the deal pipeline for H2, and the expected trend for net working capital in the second half of the year.

Answer

Executive VP & CFO Mark Bendza stated he could not quantify the confidential work but described it as a meaningful new revenue stream. Executive Vice President of Security Solutions Mark Griffin detailed a strong pipeline of over $4.6 billion, with significant award decisions expected in Q4 2025 and Q1 2026. Bendza added that while the working capital tailwind will moderate, he expects robust free cash flow to continue in H2, driven more by higher adjusted EBITDA.

Rudy Kessinger of D.A. Davidson & Co. asked for more specific details on the expected sequential decline in cash gross margins throughout the year and inquired what the DMDC program's revenue would be if it were recognized on a net basis.

Answer

EVP and CFO Mark Bendza projected an approximate 600 basis point decline in cash gross margin from the first half to the second half of 2025. He attributed this to the ramp-up of lower-margin revenue streams within the DMDC program and a GAAP accounting nuance for TSA PreCheck costs that does not reflect a corresponding cash outflow, which helps explain why cash flow is expected to outperform adjusted EBITDA.

Rudy Kessinger inquired about the current revenue run-rate for the TSA PreCheck program and sought details on the drivers for positive cash flow in Q1 and for the full year 2025.

Answer

EVP and CFO Mark Bendza confirmed the methodology for calculating TSA PreCheck revenue was correct but noted that locations are still ramping and the average number of centers was lower in 2024. Regarding cash flow, Bendza stated that Q1 will benefit from the reversal of a Q4 working capital buildup. For the full year, he explained that Telos can achieve positive free cash flow even at a breakeven adjusted EBITDA level, primarily due to favorable working capital changes that will more than offset capital expenditures.

Rudy Kessinger questioned the significant shortfall in 2024 revenue compared to the potential outlook provided a year ago and asked about the risk within the 2025 forecast, particularly for the large DMDC and DHS programs. He also asked about the TSA PreCheck ramp and whether Telos is achieving its target market share at existing locations.

Answer

EVP & CFO Mark Bendza attributed the 2024 revenue shortfall to contract protests that delayed revenue recognition on won contracts. He expressed higher confidence in the 2025 forecast of $60 million to $85 million for the large programs, as they are now won and ramping. Regarding TSA PreCheck, Bendza stated that based on the productivity of current locations, the company is on track to capture its pro-rata market share once the full network of 500 locations is rolled out and mature.

Rudy Kessinger followed up on the lowered ARR guidance, asking how the vulnerability management (VM) business trended and noting that the overall growth math implies that declines in the non-D&R business may be worsening.

Answer

CEO Corey Thomas clarified that the guidance adjustment reflects a change in deal profile for the exposure management business, not necessarily a worsening decline. The company is seeing fewer small, high-volume upgrades and more large, strategic, and 'chunkier' platform deals. While these larger wins are positive, their timing is less predictable, leading to a more prudent forecast. He stressed the primary focus remains on the large D&R market opportunity.

Rudy Kessinger of D.A. Davidson asked about the volatility in security revenue growth, seeking color on what drove the Q2 acceleration and how to model it going forward. He also requested details on competitive displacements related to Fastly's new DDoS and bot mitigation products, including which vendors were being replaced.

Answer

CFO Ron Kisling attributed past volatility to dislocations with a few large customers in 2024, noting that the business outside the top 10 has been stable. He said the recent acceleration reflects recovery in the top 10 and strong new customer acquisition. CEO Kip Compton added that on competitive displacements, Fastly is seeing two patterns: customers consolidating standalone bot solutions onto Fastly's platform and the new bot capabilities unlocking broader platform deals with new customers.

Rudy Kessinger questioned the slow growth in security, asking when to expect an acceleration from new products. He also asked if the strong performance from top 10 customers was due to permanent share gains or one-time events.

Answer

CEO Todd Nightingale stated that security growth does not yet reflect the impact of new bot and DDoS products and that the goal is to exceed the market's mid-teens growth rate. He confirmed the top 10 customer growth was from sustained share gains, not one-time events, driven by the Edgio situation and a high-touch success model, while reiterating the strategic focus on revenue diversification.

Rudy Kessinger asked for clarification on the exclusion of TikTok's U.S. revenue from guidance, questioning if the traffic is still currently flowing. He also inquired about the benefits Fastly saw in Q4 and has baked into its 2025 guidance from the shutdown of competitor Edgecast (Edgio).

Answer

CEO Todd Nightingale confirmed that as of the call, TikTok's U.S. traffic is still running normally but was prudently excluded from guidance beyond Q1 due to uncertainty. Regarding Edgio, he noted that Fastly won over 10 new logos, is working to onboard more shared-customer traffic, and sees a better pricing environment in 2025 as a result of reduced competition.

Rudy Kessinger requested a breakout of the Q4 revenue guide between top 10 and non-top 10 customers, asked if Q4 would be the trough for top 10 revenue contraction, and sought details on the guided Q4 gross margin compression.

Answer

CFO Ron Kisling indicated that headwinds with certain large customers will continue in Q4, likely bringing the top 10 concentration down slightly, but stated they believe they are nearing the end of major declines. He explained the sequential gross margin decline is driven by investments for increased international traffic, which currently has lower margins, and the absence of prior-year onetime benefits.

Rudy Kessinger of D.A. Davidson asked for a quantification of the ARR impact from two customer contractions and sought to understand the potential size of the cross-sell opportunity with the Knock Knock acquisition.

Answer

CFO Jorge Martell quantified the year-over-year ARR contraction from the two customers at approximately $3 million. CEO Victor Limongelli addressed the Knock Knock opportunity as a long-term strategic play, explaining the goal is to offer a complete FIDO authentication solution (hardware and software) to grow with customers as they adopt the protocol over the next 5-10 years, thereby preventing churn and capturing future growth.

Rudy Kessinger asked for quantification of the ARR impact from two customer contractions, the risk of further contraction, and the potential size of the upsell opportunity with Knock Knock.

Answer

CFO Jorge Martell quantified the year-over-year ARR contraction from the two customers at approximately $3 million and suggested any further contraction would likely be more muted. CEO Victor Limongelli described the Knock Knock opportunity as a long-term strategic play to provide a complete FIDO hardware and software solution, ensuring OneSpan can grow with its customers as they adopt the new protocol, similar to the previous shift from hardware to mobile authentication.

Rudy Kessinger of D.A. Davidson requested quantification of the ARR contraction from two large customers, asked about the risk of further contraction, and sought to understand the size of the upsell opportunity presented by the Knock Knock acquisition.

Answer

CFO Jorge Martell quantified the year-over-year ARR contraction from the two customers at approximately $3 million. CEO Victor Limongelli addressed the Knock Knock opportunity, describing it as a long-term strategic play to offer a complete FIDO authentication solution (both hardware and software). He believes that while the adoption rate is hard to predict, FIDO will eventually be used by all customers, and this acquisition positions OneSpan to grow with them over the next 5-10 years.

Rudy Kessinger from D.A. Davidson requested quantification of the ARR impact from two large customer contractions and asked for an assessment of the upsell and cross-sell opportunity presented by the Knock Knock acquisition, specifically what percentage of the installed base could be targeted.

Answer

CFO Jorge Martell quantified the year-over-year ARR contraction from the two customers at approximately $3 million. CEO Victor Limongelli addressed the Knock Knock opportunity, explaining that FIDO is a critical, growing authentication protocol. He positioned the acquisition as a long-term strategy to provide a complete hardware and software solution, enabling OneSpan to grow with its entire customer base as they inevitably adopt FIDO over the next 5-10 years.

Rudy Kessinger from D.A. Davidson asked about the expected cadence of net new ARR for the remainder of the year given the low Q1 result. He also inquired about capital allocation priorities, weighing potential M&A against shareholder returns like buybacks.

Answer

CFO Jorge Martell projected that Q2 ARR growth would be in the mid- to low-single digits due to a tough year-over-year comparison, with an expected re-acceleration in the second half. CEO Victor Limongelli stated that the Board will consider further shareholder returns like buybacks in addition to the dividend. Regarding M&A, he said the focus would be on modest, targeted acquisitions on the Security side to add capabilities for their extensive banking customer base.

An associate for Rudy Kessinger asked for more detail on the net retention rate (NRR) and new logo expectations embedded in the fiscal 2025 guidance. He also inquired about expectations for free cash flow generation moving forward.

Answer

CFO Jorge Martell projected the 2025 NRR to remain within the historical band of 106% to 108%, despite some noise from end-of-life products. He also stated that while cash flow generation was remarkably strong in 2024, the company expects more 'modest increases' in 2025 as it invests in the Security software business, product development, and channel expansion.

Rudy Kessinger of D.A. Davidson sought direct clarification on whether the 'close to 90%' gross retention rate was above or below 90%. He also asked for color on the growth rate of core streaming cloud revenue, given the strong growth of DSP products.

Answer

CFO Rohan Sivaram directly answered that the gross retention rate was 'marginally below 90%.' CEO Jay Kreps confirmed that the DSP portion of the business is outgrowing core streaming. He explained that the core streaming growth rate is a combination of new use cases and optimization headwinds, with the latter being more pronounced in recent quarters, particularly among large accounts. This optimization pressure does not affect the new, growing DSP workloads.

Rudy Kessinger asked if the fiscal 2025 guidance incorporates an assumption of higher sales productivity, given that it is the second year of the new go-to-market model.

Answer

CFO Rohan Sivaram noted that go-to-market efficiency improved significantly in 2024 and that this focus will continue. He stated that the company is confident in its current sales capacity to meet 2025 targets, following strong hiring in the latter half of 2024, without directly confirming an assumption of increased per-rep productivity.

Rudy Kessinger asked if the 82% subscription gross margin is a sustainable run rate and what the margin profile of DSP products looks like. He also asked if win rates include renewals.

Answer

CFO Rohan Sivaram indicated the strong gross margin profile is sustainable, driven by scale and a shift to multi-tenancy, noting that DSP products are largely multi-tenant and will be a tailwind. CEO Jay Kreps confirmed that win rates do include renewals but would be equally high without them.

Rudy Kessinger asked for more color on the nature of workload growth within large strategic accounts and questioned the magnitude of the full-year ARR guidance raise relative to the Q1 beat, asking if any deals were pulled forward.

Answer

CEO Matt Cain described growth in strategic accounts as Couchbase becoming a platform for tens or even hundreds of applications, driven by both developer adoption and top-down appreciation for TCO. He clarified that no deals were pulled forward and attributed the strong Q1 to solid execution and high Capella consumption. He stated the updated full-year guidance reflects a prudent and balanced approach in the current environment.

Rudy Kessinger questioned if the guidance philosophy for the fiscal 2026 ARR forecast was different from the prior year and asked about the expected ARR linearity between the first and second halves of the year.

Answer

CFO Gregory Henry confirmed the guidance philosophy remains consistent, factoring in the renewal pool, upsell potential, and migration conversions, with a slightly higher migration rate expected. Regarding linearity, he contrasted fiscal 2025's back-end loaded nature (approx. 30% first half, 70% second half) with the expectation that fiscal 2026 will be 'much more balanced,' similar to the 40/60 split seen in prior years.

Rudy Kessinger asked for a quantification of the Compute segment's growth if not for the legacy business headwinds and inquired about pricing trends in the Delivery segment, particularly since the Edgio bankruptcy.

Answer

CFO Ed McGowan clarified that the slowdown from higher growth rates was entirely due to the legacy compute bucket, as expected, while the core Cloud Infrastructure Service continues to grow very fast. On delivery pricing, he described a mixed bag, with some encouraging moderation in price declines for large media customers, but noted the market remains competitive. He suggested it's possible to see continued moderation over time.

Rudy Kessinger questioned the drivers behind the implied 20-21% year-over-year decline in Q4 delivery revenue, asking how that is possible if traffic is still growing. He also asked for justification of the increased CapEx spend relative to the compute revenue guidance.

Answer

CFO Ed McGowan attributed the steep delivery decline to a difficult year-over-year comparison from the Lumen and StackPath acquisitions and historically slow traffic growth. He explained that even with slightly better pricing, low single-digit traffic growth cannot offset price declines. Regarding CapEx, he noted the increase is for a combination of factors beyond just compute, including delivery build-outs and infrastructure, and includes timing shifts between quarters.

Rudy Kessinger sought clarification on Q3's year-over-year consumption growth rate relative to Q2's and asked for an updated timeline on when AI applications might be deployed at scale.

Answer

CFO Michael Gordon did not directly compare the Q3 and Q2 YoY growth rates but reiterated that Q3's YoY growth was lower than the prior year and the seasonal rebound was more muted. CEO Dev Ittycheria maintained that the industry is still in the very early days of AI, and while he cannot predict a specific timeline, he is confident that scaled AI apps will emerge over time.