ForeScout Technologies, Inc. (FSCT) Q1 2019 Earnings Call Transcript

ForeScout Technologies, Inc. (FSCT)
Q1 2019 Earnings Call
May. 09, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the ForeScout Technologies first-quarter 2019 financial results conference call. With us today from ForeScout are Chief Financial Executive and President Michael DeCesare, Chief Financial Officer Criss Harms, and Chief Communication Officer Michelle Spolver. At this time, I would like to turn the call over to Michelle Spolver. Please go ahead.

Michelle Spolver -- Chief Communication Officer

Thank you, operator, and thank you all for joining us on today's conference call to discuss our financial results for the first quarter of 2019 and provide guidance for the second quarter and full-year 2019. This call is being broadcast live over the Internet and can be accessed from the Investor Relations section of ForeScout's website at www.investors.forescout.com. A few minutes ago, we issued a press release announcing our financial results for the first quarter of 2019 as well as guidance for the second quarter and full-year 2019. The release can be found in our Investor Relations website along with supplemental financial information that accompanies today's remarks.

Before we begin, let me remind you that we will make forward-looking statements during this call, including statements relating to ForeScout's guidance and expectations for the second quarter and full-year 2019; the market for our products, including its potential size, maturity, business growth factors and customer demand for our products; our products and services releases; our competitive position; changes in the threat landscape and security industry; the ramping and success of our sales organization; and our growth, profitability and the impact of the SecurityMatters acquisition on our market and opportunity. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply only as of today, and we undertake no obligation to update these statements in the future. For a detailed description of the risks and uncertainties, please refer to our SEC filings as well as our earnings release.

Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these non-GAAP financial measures against the most directly comparable GAAP financial measures in the Investor Relations section of our website as well as in our earnings release. Before I turn the call over to Mike, I'd like to mention that this quarter, we'll be attending the JPMorgan Technology Conference on May 14 and the Bank of America TMT Conference on June 4.

And now let me hand things over to Mike to discuss our business and provide a review of our first-quarter performance.

Michael DeCesare -- Chief Financial Executive and President

Thanks, Michelle, and thanks to everyone for joining us on the call today. We had a great start to the year as we continue to build on our momentum, capitalizing on the market tailwinds, device visibility and control and diversification across our business. I'll share more on this in a few minutes, but first, let review some of the financial highlights from our first-quarter 2019. We grew revenue 27% year over year to $75.6 million, compared to our guidance at the midpoint of $73.4 million.

We continue to see increasing diversification across our business, with international revenue increasing 83% year over year and our vertical mix is shaping to include an increased contribution from noncore verticals. And we remained on track toward our profitability targets, generating free cash flow of approximately $4.9 million and non-GAAP operating loss of $17.8 million. I'm pleased with our strong first-quarter performance, but even more so with the progress that we're making in laying the foundation for longer-term growth. We're diversifying our business across verticals and geographies, driving cross-platform adoption of our products and gaining channel leverage in the go-to-market model, all of which will help benefit our top and bottom lines over time.

Additionally, our product road map will be in shape to bring better predictability to our financial model by introducing Software as a Service solutions such as our forthcoming eyeSegment product, and we plan to layer on additional recurring revenue products over time. Some of the largest companies and government entities in the world rely on ForeScout for device visibility and control. With that, comes the fact that large deals are a component of our business, and timing and composition of these deals can shift and cause quarter-to-quarter fluctuations. Criss will cover how this dynamic is playing out for us for the year.

At a macro level, we continue to have strong confidence in the market demand for our solutions. We have an awesome opportunity in front of us, in which we are still in the very early innings of a large market that is growing rapidly. As we conveyed at our investor day presentation, we estimate that our TAM has grown approximately three times since our IPO about 18 months ago. There are three primary trends that are driving our market opportunity.

The first is the explosion of network-connected devices. We talk about this trend a lot and for a good reason. The number of devices under management by any CIO today has grown exponentially in recent years, and it's only going to continue in the years ahead. The vast majority of this overall growth is coming from IoT and operational technology, or OT devices, which can't support agents and thus, can easily go undetected and unmanaged.

ForeScout's agentless-based solution was built from the start to address this massive heterogeneity of devices and to retain a very strong competitive differentiation. The second trend is increasing interconnectivity. OT devices ranging from PLCs to HVAC systems that were previously air gapped are coming online to corporate networks by the minute. This convergence of IT with OT networks offer substantial benefits, but it also is providing cyber attackers a great opportunity to affect the physical world and impact the safety and operations of people.

As a result, CIOs and CISOs are quickly assuming responsibility of securing these devices. WannaCry was the first wake-up call that highlighted the vulnerability of IT-OT convergence. Since the beginning of the year, LockerGoga ransomware has had numerous industrial and manufacturing companies infecting their OT and IT systems and disabling operations. The ransomware moves the payload laterally around networks, traversing the OT network to the IT network, encrypting files and making systems unusable.

Most recently, it crippled the business operations of one of the world's largest aluminum producers and caused the company upwards of $40 million. Finally, the third market trend is automation. As the explosion of both the number and diversity of devices continues, customers have no choice but to automate as it's becoming impractical for a human being to be in the middle of every cyber action decision. It's estimated that by 2021, 70% of large enterprises will be willing to automate up from 5% today.

As you know, ForeScout began in the world of network access control, which leverages automation and behavior analysis to enforce action. This, along with our network segmentation and orchestration capabilities, enables customers to automate by segmenting, blocking and/or sharing information with other cyber security tools and taking appropriate action. Our results demonstrate that we have been capitalizing on these trends. During in the first quarter, we added 1.6 million devices under management, and landed 89 new logos across a variety of industries such as financial services, healthcare, retail, technology, manufacturing and energy.

What's especially noteworthy though is the quality of these as we hit a new record number of new G2K logos. These higher-quality customers bring a longer and larger lifetime value, enabling us to enhance our already impressive and sizable expansion pack. Now let me run through some of the key wins from the first quarter, which demonstrate our strong execution on both the land and expansion fronts across our business. In the retail sector, we landed one of the highest profile brands in the world.

This customer is starting with initial implementation of 40,000 devices in their network and has future plans to cover all global offices, data centers, OT assets in manufacturing and the cloud. We displaced two large legacy network vendors who are unable to successfully provide full device visibility across the company's vast network. ForeScout's agentless technology and our ability to provide fast time to value were just some of the reasons this customer chose us for this initial deployment of eyeSight, eyeControl and eyeExtend for CyberArk. One of the deals landed in the manufacturing space was in Japan with one of the largest automotive companies.

Following the POC a year ago, this customer is now implementing ForeScout's eyeSight and eyeControl product to secure an initial 50,000 devices across their extended enterprise network, including campus wired and wireless and VOT. This was also to largest deal that we have closed in Japan to date. We also continued our momentum in the healthcare vertical, landing a U.S. Fortune 100 health services organization with a global footprint.

The company purchased ForeScout's broad platform, including eyeSight, eyeControl and eyeExtend products, after we demonstrated our ability to close the visibility gaps they were experiencing as a result of multiple acquisitions over the years. The initial deployment of 125,000 devices for the campus network, but there is significant room for expansion with hundreds of thousands of additional devices residing in other parts of the world and other eyeExtend products. While we're excited about landing new customers, it's also important to highlight the significant role expansion plays in our growth story. As we shared with our investor day, the median expansion for our top 20 customers at the end of 2018 was 41 times that of the initial purchase.

As customers increase the number of devices under management with us over time, they often expand into more locations or other areas of their network and enhance their solution with our eyeExtend products. An example of this is a great Q1 expansion deal in the energy vertical with a U.S. Fortune 500 utility company that was previously a SecurityMatters customer. The deal included expanding their SilentDefense OT deployment across additional gas storage and transmission locations, while adding coverage for building automation devices.

It also demonstrates the quick ROI of our acquisition of SecurityMatters, which closed just one quarter prior. Going forward, we anticipate cross-selling eyeSight and eyeControl to this customer to secure their IT environment. We also had some large upsell deals in the U.S. federal government.

The first was related to Phase 3 of CDM, or Continuous Diagnostics and Mitigation program, which is focused on mitigating threats and moving beyond asset visibility to full control. This customer already has more than 2.9 million devices under management with us across 260 locations and utilizes two of our eyeExtend products. In Q1, they expanded their eyeExtend implementation and purchased the IBM QRadar module to enable bilateral information sharing and correlation to take proactive action on incidents that appear on network devices. We also closed an upsell deal on the civilian side of the U.S.

government with a customer who has been using ForeScout alongside a legacy network vendor's competitive product. They chose to go all-in on ForeScout after reevaluating their security needs, which included orchestration capabilities. Exemplifying this differentiation our broad orchestration portfolio provides, this customer purchased seven separate eyeExtend products, including the modules for Palo Alto Networks, Carbon Black, Tenable, CyberArk and IBM BigFix. This last example, in particular, demonstrates how our eyeExtend products are not just add-on products for us, but often the reason that we are winning in competitive situations.

We are continuing to increase the value of our ForeScout platform for our customers by offering ways to share important device data with their existing IT solutions. And in turn, our customers are able to extract more value out of their existing investments. This message is resonating. Overall, adoption of our orchestration products continues to rise with 28% of our customers purchasing at least one eyeExtend product.

We still have substantial runway ahead on this opportunity. Another go-to-market avenue that has really been materializing for us in recent quarters is our business with the global systems integration -- integrators and advisory firms. We invested in enhancing and building these key partnerships to help drive top and bottom-line leverage, and I'm pleased with the early signs of the return. Overall, sourced pipelines of that size has nearly tripled over the past year.

Let me share a few highlights. KPMG powers its asset intelligence discovery assessment called AID with ForeScout. This offering is the cornerstone solution for KPMG cyber and is built on ForeScout and our ITSM orchestration partner. Also, Booz Allen is one of our longest standing and most strategic partners on the CDM program.

We've been working closely with them on moving our government customers beyond asset visibility to control use cases, including eyeControl product as well as the adoption of our eyeExtend products. Lastly, our engagement with Accenture on OT opportunities has increased nicely. Accenture has one of the most advanced OT security practice in the system integrator community. At our investor day, we laid out our substantial opportunity in the OT space, which we believe significantly increases our TAM of addressable devices.

OT networks are not limited to industry that you might associate with industrial control systems. The reality is almost every industry has a potential OT security need, and it's very natural cross-sale of our existing IT customers. For example, modern office buildings and data centers often contain building automation systems such as HVAC, power, access control, emergency systems and elevators. Many organizations lack visibility and control into these systems, opening them up to the possibility of cyber attacks that can cause serious disruption and impact safety as well as spread to their IT network.

Though still very on, our sales force is making good traction in selling the OT use case and the IT-OT cross-sell opportunity. As I said at the start, we have a massive opportunity ahead of us and are successfully laying the foundation for continued long-term success. We're increasingly seeing the value of our device visibility, control and orchestration offerings resonate with a wider audience around the globe. The investments that we've made in expanding our technology platform are in the very early stages of bearing fruit, with exciting offerings still to come.

And the traction we're seeing with our partner network is a testament to the strength of our technology portfolio, and an asset in driving leverage in our go-to-market model. With that, let me now turn the call over to our chief financial officer, Criss Harms, to discuss in detail financial results for our first-quarter 2019 as well as guidance for the second quarter and full-year 2019. Criss?

Criss Harms -- Chief Financial Officer

Thanks, Mike. Thanks to everyone for joining us on our call today. Following Mike's remarks, let me dive deeper into ForeScout's first quarter of 2019 financial results and our outlook for the second quarter and full-year 2019. I'll begin by reminding you that except for the revenue results which are GAAP, all financials we will speak about are non-GAAP, unless stated otherwise.

As Michelle mentioned at the start of this call, non-GAAP to GAAP reconciliations of these financials can be found in our earnings press release and supplemental financial information, both located on our Investor Relations website. As Mike shared, we had a solid start to the year, as we executed well across our business to capitalize on our growing market opportunities. Total revenue for Q1 2019 was $75.6 million, an increase of 27% on a year-over-year basis. License revenue, which we formally called product revenue, was $37.7 million in Q1 2019, an increase of 27% on a year-over-year basis.

As a reminder, license revenue is the upfront revenue that we recognize from the sale of eyeSight, eyeControl, the eyeExtend products and SilentDefense. We also recently separated out our maintenance and professional services segment revenue into two segments, subscription and professional services. Subscription revenue represents all the ratable revenue in our business, which currently is comprised of our support and maintenance contracts but will also include revenue from our Software as a Service products in the future. This totaled $33.8 million in the first quarter, growing 28% year over year.

And finally, professional services revenue in the first quarter grew 15% year over year to $4.1 million. Looking at Q1 revenue mix by region. The geographic mix of revenue was Americas at 70% of total revenue, compared to 79% in Q1 2018. EMEA was 15%, and APJ was 15%, compared to 14% and 7% in Q1 2018, respectively.

As Mike discussed, we saw strong geographic diversification this quarter, with some of the notable deals Mike highlighted coming from the regions outside the Americas. Our investments in our international sales organization are continuing to pay dividends. Our gross margin for Q1 2019 was 77%, an increase of approximately 300 basis points year over year and a decrease of approximately 400 basis points sequentially. The year-over-year change in gross margin was driven primarily by shifts in the license revenue mix between our software products and our hardware products as the revenue mix across license revenue, subscription revenue, professional services revenue was relatively consistent year over year.

Whereas the quarter-to-quarter change in gross margin was driven by both the license revenue mix between our software products and our hardware products and the total revenue mix shift on license revenue, subscription revenue and professional services revenue. You'll find the specific movements identified in the MD&A section of our 10-Q. But broadly, the year-over-year change is best characterized as less hardware products in the license revenue mix than there was an Q1 2018. Quarter-over-quarter change is best characterized as less license revenue than the total revenue mix, which is a typical cyclical shift from Q4 to Q1 as well as more hardware products in the license revenue mix in Q1 2019 than there was in Q4 2018.

Margin for our license revenue was 81%, an increase of approximately 500 basis points year over year and a decrease of approximately 500 basis points sequentially. The characterization of those changes I just described, so I'll refer you to that commentary. As a reminder, while margin for our license revenue has benefited from customers purchasing more of our software-only products, we anticipate some quarterly variations depending on the form factor purchasing choices of our customers. Our margins on maintenance and professional services revenue, which we used to call services margin, are now two segments, subscription margin and professional services margin.

Our subscription margin was 86% in Q1 2019, a slight decrease of approximately 100 basis points year over year and 100 basis points sequentially. Professional services margin was negative 41%, an improvement of 400 basis points year over year and a decrease of 1,200 basis points sequentially. As a reminder, professional services comprises a very small portion of our business, and we offer these services only in conjunction with product sales. Total operating expenses for Q1 2019 were $75.8 million, an increase of 31% year over year.

Looking at the components of opex, sales and marketing expense for Q1 2019 was $48.9 million or 65% of revenue, an increase of 35% year over year. This reflects continuing investments in our direct and channel selling resources as well as sales engineering and sales enablement teams, and the impact of RSA in the first quarter of this year compared to the second quarter of last year. Our research and development expense was $15.4 million or 20% of revenue, an increase of 25% year over year, reflecting continuing investments in our development teams. General and administrative expense was $11.5 million or 15% of revenue, an increase of 21% year over year, reflecting additional investments in infrastructure related to being a public company.

Operating loss for Q1 2019 was $17.8 million or 24% of revenue, compared to a loss of $13.9 million or 23% of revenue in Q1 2018. As a reminder, both the operating expenses associated with the SecurityMatters acquisition and the timing of our RSA expenses had an impact on the year-over-year changes in operating margin. Net loss was $18.2 million, compared to a net loss of $14.6 million in Q1 2018. Net loss per share was -- for Q1 2019 was $0.41, compared to a net loss per share of $0.38 in Q1 2018.

We ended the first quarter with total deferred revenue of approximately of $178.1 million, an increase of $6.6 million sequentially. The combination of revenue plus sequential changes in deferred revenue provided Q1 billings of $82.2 billion. Free cash flow in the first quarter was positive $4.9 million, compared to $22.1 million in Q1 2018. Free cash flow margin was 6%, compared to 37% in Q1 2018.

A reminder that our quarterly free cash flow and the associated free cash flow margins do fluctuate year to year and quarter to quarter, reflective of the timing of large deal invoicing and associated collection cycles. Changes from Q1 2018 to Q1 2019 are reflective of those dynamics. From a cash perspective, we finished the first quarter with cash, cash equivalents and investments of $127 million. Moving on to guidance.

We are raising our full-year 2019 revenue guidance by the overachievement we delivered in Q1 as we feel very good about the pipeline, market and our competitive positioning. As Mike discussed, large deals are a component of our business, and timing and composition of those deals can shift and cause quarter-to-quarter fluctuations. As we think about our guidance for the second quarter, our most recent pipeline review indicates that a handful of deals that we initially expected to close in the second quarter are now expected to close in the latter part of the year. As such, for the second-quarter 2019, we expect total revenue to be in the range of $75.3 million to $78.3 million, representing year-over-year growth of 14% at the midpoint.

We expect operating loss in the range of $20.8 million to $20.0 million, and loss per share to be in the range of $0.48 to $0.46 based on approximately 45.4 million weighted shares outstanding. For the full-year 2019, we now expect total revenue to be in the range of $365.3 million to $375.3 million, representing year-over-year growth of 24% at the midpoint. Operating loss in the range of $15.6 million to $11.6 million. And loss per share in the range of $0.41 to $0.34, based on approximately 45.5 million weighted shares outstanding.

Before I turn the call back over to Mike, I'd like to share a few modeling points. First, for the Q2 license revenue mix, we expect eyeExtend to comprise a much smaller percentage of our license revenue mix compared to Q2 2018 where we saw a large eight-figure eyeExtend deal. Second, for Q2 operating loss, there are two points to keep in mind. First, we anticipated lower gross margin on a year-over-year basis, given the lower eyeExtend contribution.

Second, we anticipate investing in R&D at a higher rate than current models have, primarily driven by our investments in our future SaaS products. Both of these are reflected in our Q2 op loss guidance. Third, looking at Q2 billings, the year-over-year comparison will be skewed by billing dynamics that impacted Q2 2018. As a reminder, in Q1 2018, we had a nonstandard large eight-figure deal that was built in Q1 2018, but the revenue was not recognized until Q2 2018.

And such, Q1 billings were much higher and Q2 billings were much lower than they would have been without this nonstandard transaction. So with regards to Q1 and Q2 2019 billings, we expect sequential billings growth this year to track closely to revenue growth. Lastly, as we have previously discussed, we anticipate our quarterly revenue seasonality to follow that of a traditional enterprise software company, with a more back-end loaded year driven by typical enterprise budget cycles. We currently expect that Q4 revenue will increase in the high-teens sequentially over Q3.

With that, let me turn the call over to Mike for some closing comments. Mike?

Michael DeCesare -- Chief Financial Executive and President

Thanks, Criss. We had a good start to 2019, have solid pipeline in place and are well-positioned to capitalize on the growing tailwinds for device visibility. I'm pleased with the sustained momentum we've seen in our business, particularly as we continue to see increasing diversification within our customer base and a growing footprint with the largest enterprises in the world, further validating the need for our solutions. Thank you again to everyone for joining us today and for the continued support from our investors, our employees, our customers and our partners.

We will now open the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Fatima Boolani of UBS.

Fatima Boolani -- UBS -- Analyst

Criss, I'd like to start with you on the second-quarter guidance. Just with regards to your comments around deal slippage. I wanted to unpack that a little bit and wanted to understand outside of typical enterprise procurement delays and things like that, are there any other factors start caused this degree of slippage into the back half? Just trying to diagnose if it's really sort for intrinsic or extrinsic, and then a follow-up, if I can.

Michael DeCesare -- Chief Financial Executive and President

This is Mike, I'll take that one if you don't mind. When we started -- we feel really good about the pipeline, big deals are a part of our business and we've been tracking them very closely. When we started the year off, we had expectations on a handful of deals that we thought at least some of those would naturally materialize for the second quarter. And as we look out across the -- kind of what's happened in the year so far, for different reasons, just a number of those deals now appear to be more naturally on track for the back half of the year.

To try to give you a little bit more color on that. There's -- that they may be a mix of both land and expand. They would cover both international and U.S. There's not a single trend inside of those.

Fatima Boolani -- UBS -- Analyst

Understood. And then maybe just on the profitability front. Just about two months ago you had your Analyst Day, you sort of walked us and sort of painted this path toward positive operating margins. And so I just want to sort of bring that back and try to understand what other investments beyond R&D are being factored into your profitability guidance because you had a lot of dynamics around improving sales productivity.

That was sort of bringing operating leverage into the model. So I want to understand some of that Delta on the operating margin because it's certainly a lot lower than we were looking for, just wanted to take that apart a little bit more closely. And that's it for me.

Criss Harms -- Chief Financial Officer

In terms of the overall outlook on our path toward profitability, what we shared at the analyst, there is no meaningful change to communicate. We are still on track. As it relates to kind of the dynamics that are in play for Q2 and the impact it has on the op loss guidance for Q2, the things I wanted to call out to is, one, the revenue numbers are lower than what's on the consensus model. That's the biggest driver.

Second, there's a little bit of a mix shift. I think most of the consensus models are a little bit too jaded by the role that the eyeExtend product played in Q1 -- excuse me, Q2 2018 and have those margins a little too high for Q2 and so we're calling that out. And then the third, from an opex perspective, sales and marketing and G&A I think are appropriately positioned. It was a general theme of the R&D being under, and so I wanted to call that out.

That's really I think the key points to take away from both the macro, the 2019 and specifically, as a place for Q2.

Fatima Boolani -- UBS -- Analyst

If I can just sneak in a follow-up. In terms of sales capacity, do you have comfort in the current levels of capacity that you have? Or should we anticipate there should be sort of a ramp in rep hiring, in capacity hiring as we progress through the year?

Michael DeCesare -- Chief Financial Executive and President

Yes. No, consistent with the theme I just hit upon, look, we feel like we are tracking very well against our sales productivity, the investment levels that we have been making and plan to make through the rest of the year, follow the -- that path to profitability and investing at levels below where our top line is going. Nothing has changed at those levels. There was another facet I wanted to hit on.

Perhaps as Mike's adding to it, I'll remember what it was.

Criss Harms -- Chief Financial Officer

No. I'm good. He nailed it.

Operator

Our next question comes from Sterling Auty of J.P. Morgan.

Sterling Auty -- J.P. Morgan -- Analyst

So I'm sure a bunch of folks are going to pile on the deals moving later in the year. You mentioned just not materializing until later. Well, can you just give us a little bit more insight, choose one or two of them and just kind of walk through why. Is it they need more signatures, the project timeline has shifted, there's other technology priorities? Why do you think they're materializing later in the year?

Michael DeCesare -- Chief Financial Executive and President

So first, understand that every one of those deals is still in pipeline. It's just our -- we had an expectation that a couple of them would have been far enough along to be in guidance by this point, that's the major issue for us, right? We have high degree of confidence they close to the year. We had originally thought they would be more naturally suited for Q2 and they just slipped a little bit. So I said earlier kind of there's not really a single flavor to them in the sense that they span different industries and different figures for us and things like that.

There's not really anything there that could be thrilled into. I guess the one that I would share with you, Sterling, is I'll just give you one example. As you know we had one very large account -- by the way, it's also worth pointing out, in every one of those deals, we have the technology win already. We've already been awarded the business.

The question now is what I would call the business win, which is when we actually get the money and the commitment toward timing. So that's why we have a fairly high degree of confidence that they will materialize in the back half of the year. But I'll give you color on one as an example. They were evaluating us for the IT side of their network.

We still feel very well positioned to win that deal. But in the middle of the evaluation, they chose to make the deal larger and evaluate the OT in parallel. There are now new players in the customer that have to evaluate the technology and the IT side needs to stand still a bit until the other part of the business can catch up. So it's very positive for us because it could be a larger initial deal and a larger customer over time, but it has impacted timing.

Each of them has their own little nuance them, but that's probably the one that would be kind of the most descriptive.

Sterling Auty -- J.P. Morgan -- Analyst

All right. Great. And then just separate, can you kind of characterize what the performance was in the federal vertical versus commercial in the quarter? And how does the pipeline break down that way?

Criss Harms -- Chief Financial Officer

So it's worth noting that in Q1 we did not have a single deal that was material in the quarter. So it wasn't that there was a single transaction that kind of made it for us from a quarterly perspective. The mix of federal was strong. As I called out in the prepared remarks, there was two significant deals worth calling out, the Booz Allen in the U.S.

government vertical for us. We still continue to be very well positioned in CDM. As we have talked about, that CDM, kind of all of the civilian agencies of the U.S. government have now moved from the visibility face of the control phase.

That's a very positive thing for ForeScout on continuing to advance our footprint and therefore, benefiting from the revenue that comes with those. Comply to-Connect still sits in a relatively similar place to where it was last quarter where it's a congressional mandate, so it is mandated be implemented a close the DoD, but it has not been centrally funded yet. And so it still kind of sits in that same spot. We do have agencies that are customers already and are more eager to implement and are buying our products kind of around that, but we're still waiting for that central funding as a big step in this process longer term.

Operator

Our next question comes from Melissa Franchi of Morgan Stanley.

Melissa Franchi -- Morgan Stanley -- Analyst

A question for you, Mike. This quarter, you guys separated eyeSight and eyeControl versus CounterACT, which was bundled together previously. Just wondering how that changed buying behavior and what he saw this quarter? And then particularly wondering if it's having any impact to ASPs?

Michael DeCesare -- Chief Financial Executive and President

So first of all, in the first quarter, I can't think of a single transaction where the customer did not buy both eyeSight and eyeControl. So we did that for two reasons. The first is there is a set of customers that want to start with visibility, and we believe that we can get those customers to buy our product quicker and begin to implement more quickly by only requiring them to buy visibility initially, and that they want to come back and evaluate and buy control later on. That gives us that flexibility, although the vast majority of the big enterprise customers are going to be buying both at the same time.

The second thing that it does for us is it sets us up for the upcoming product we have called eyeSegment. Our belief is that customers will deploy visibility first, what's on my network, use as a major role in the world of network segmentation, second, making sure that devices of like type are together, and that once customers have confidence that they have devices of like type and network segments, that they will be more willing to automate, which is where eyeControl comes in. So it helps us what kind of the journey that customers take on that product set. But no substantial difference on buying behaviors in Q1.

Melissa Franchi -- Morgan Stanley -- Analyst

Perfect. And then just a follow-up for Criss on the large deal volatility. Just to clarify, were there any large deals that got pulled forward for Q2 into Q1? And then what's your level of confidence in the deals that got flipped from Q2 into Q3 or Q4, what's the level of confidence in those deals actually closing in the second half of the year? Is there risk that they could potentially slip into FY '20?

Criss Harms -- Chief Financial Officer

Yes. So no major pull in a deal to get to Q1. So let's address that directly. As it relates to the second half of the year, kind of reiterating some of the points Mike hit upon.

Those deals are ones where we've already got the tech win. There are kind of each nuanced elements to why we still feel we're going to close those deals in 2019, we just weren't prepared to put them into our guidance for Q2. So inclusive of that, as we're looking at that second half of the year, we feel like we've got plenty of pipeline for the coverage of what we need to do. Those deals are part of the portfolio that we look at.

Those, we still have a very high degree as we're assessing the deals that are taking shape of the cross-expansion and land -- and land is getting larger, we feel like there's plenty of pipeline to deliver upon the guidance we've given you for the full year.

Operator

[Operator instructions] Our next question comes from Alex Henderson of Needham.

Alex Henderson -- Needham and Company -- Analyst

I wanted to address the slope that you described into the fourth quarter. You have a large business in the federal segment of the marketplace, and so you have a different seasonality than the average company that's selling predominantly to enterprise. Does it imply to anything about the federal that you are implying more of a fourth-quarter spike and a little less in the third quarter? Or should we be reading into that any concern around the pipeline in the federal segment of the market?

Michael DeCesare -- Chief Financial Executive and President

This is Mike. I'll take that. There is not a concern around the pipeline in the federal part of our market. The reality is that we have the benefit of coming into our entire federal business on the back of two congressional mandates.

So it's less kind of bumpy, so to speak, for us, than it might be for companies that are trying to sell to the U.S. government for the first time. With that said, there is quite a bit of uncertainty within Washington, D.C. these days.

There is more movement of executives than you would typically see. And there is a chance that some of the projects that we are working on will get funded for 2020 U.S. government versus have the money materialize in 2019, just to recognize that the U.S. government 2020 starts on October 1, which means they could naturally land in our fourth quarter.

And we're just still working through a lot of that. It's not as much as on us as what they would call the color of money, the way -- the type of money that gets allocated to some of these projects gets allocated on different timelines. But overall, we feel really good about this. The CDM agreement moving from the visibility to the controller enforcement space is a big, big plus up for ForeScout and we've really barely started to scratch the surface yet in what we'll expect out of Comply to-Connect.

The pipeline's very strong.

Alex Henderson -- Needham and Company -- Analyst

So if you are to take the pipeline of activity as opposed to the deals you expect to be funded and therefore visible to close, is the pipeline in the government vertical stronger than it as it accelerated? Or is it continuing at about the same cadence?

Michael DeCesare -- Chief Financial Executive and President

I'm not sure I understand the difference between those 2. We have a very strong pipeline of U.S. government business and it's also worth noting that in addition to the DoD and the civilian side of the U.S. government, we're also increasing our presence in various state and local, which also we would classify as U.S.

government, but is a third kind of leg to that stool. There's not a notable difference from where it has been historically. It's strong. It's mostly into existing customers.

It's a good mix of eyeSight, which is the visibility tool, as well as our orchestration modules. And just a reminder again on CDM, we're the only vendor that was baked in to every phase of CDM. So kind of regardless of what pieces of that might get funded first or second, we have a seat at the table. So we feel pretty good about that business.

Again, the only uncertainty for us in this is that we're still working through how much of this can materialize for the end of '19, which would be Q3, versus how much of this might more logically fall into Q4 2019, which is actually Q1 2020 of the U.S. government. Hope that makes sense.

Operator

Our next question comes from Walter Pritchard of Citi.

Unknown speaker

It's Jeremy on for Walter. So billing has declined, looking at this quarter, but you did call out the nonstandard deal last year that created a tough comp. So can you just help us understand what normalized growth would have been excluding that one deal?

Criss Harms -- Chief Financial Officer

Yes. It would have been in the -- kind of pro forma basis, high-20s, kind of very consistent with where the revenue growth was.

Unknown speaker

High-20s, billings growth year on year?

Criss Harms -- Chief Financial Officer

Yes, on a pro forma basis. but Jeremy, I didn't -- I'm not -- I didn't do that math, I'm approximating it.

Unknown speaker

OK. When you say pro forma, that's just excluding the one deal?

Criss Harms -- Chief Financial Officer

Exactly, yes.

Unknown speaker

Got it. OK. And then can you update us on what the CounterACT growth was? I know you changed the product name, but I guess the equivalent over the combination of visibility and control?

Criss Harms -- Chief Financial Officer

Yes. No, it was low double digits, kind of consistent with where it was in Q3 and Q4.

Unknown speaker

OK. Is that progressing as you had expected? Because I know you'd mentioned, I think last quarter at Analyst Day, that you expected an acceleration there?

Criss Harms -- Chief Financial Officer

The -- look, it's difficult for me to answer the question the way you're asking it because a CFO, I'm always striving for us to be doing better. Is it consistent with the structure we've put into our -- the guidance that allows us some flexibility? The answer is yes, which is why we overachieved on our guidance. Our expectation is that it will continue to accelerate individually and collectively with eyeExtend and with SilentDefense into the second half of the year? Yes, those are implicit in the guidance and the cyclical shape you've got between Q4. So yes to all of those points.

Operator

[Operator instructions] Our next question comes from Tal Liani of Bank of America.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

I'm asking almost the same questions that someone else asked, but I want to ask it differently. You missed 2Q guidance, but you are raising. You're not keeping -- not only you're not keeping the guidance for the year, you're raising the guidance for the year. So that means you have some kind of confidence on the materialization of the contracts in the second half.

Can you share with us what is -- what kind of arrangement you have for these contracts? What are you increasing the guidance for the year? And what's the risks that it doesn't materialize? I just want to understand on what basis you're increasing the guidance.

Michael DeCesare -- Chief Financial Executive and President

This is Mike. I'll take that. I think, as we said, in the second quarter, this is a deal timing issue for us, right? When we started off the year, had a substantial pipeline, we had a number of larger deals that we thought at that point were much more naturally going to close in the second quarter, and we're now realizing that they need a little bit more time in the oven before they're going to be done. As I've mentioned, we have tech win in those accounts, meaning that they've chosen us.

So it's very -- it's not common for a customer to award a technology win to a vendor and then not to buy their product for an extended period of time. So that gives us a high degree of confidence. We've also got 50% of our sales organization, as we mentioned, at the end of 2018 is ramped, which means they've been in their territory for more than a couple of years. So many of these deals are into accounts that we've had the same account manager on the same accounts for a longer period of time, which gives us more visibility.

So obviously, we would not raise 2019 if we did not have a very high degree of confidence. The building of pipeline, the maturation of our reps, the success we're seeing in some of the international territories that were kind of later high risk for us from a cohort perspective are all giving us that confidence.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

And from a revenue recognition point of view, from expense recognition point of view, is there any different margin profile for these deals? Or is it -- does it come with the same margin profile of the existing revenues?

Michael DeCesare -- Chief Financial Executive and President

It's the same. In our pipeline, I mean obviously deals move in and out of the quarters. They'll be customers that want to buy hardware from us and customers that want to buy softwares. There's customers that just want to buy our eyeExtend products that only are delivered as software.

So certainly, each deal has its own composition and margin profile, but in aggregate, there's nothing unique about that set of deals that's any different than the others and we have in our pipeline.

Operator

Our next question comes from Joshua Tilton of Berenberg.

Joshua Tilton -- Berenberg Capital -- Analyst

So we've heard a lot of talk around securing OT environments from you and many of your peers this quarter. So it kind of appears though that the spend on securing these environments are still very small. So what do you think needs to happen to drive the incremental investments form new customers on securing the OT side of their business?

Michael DeCesare -- Chief Financial Executive and President

So I think the interest in securing OT is rising very quickly. Literally in the last 12 months, I can even tell you the number of customers that I've sat in front of where the CIO or the CISO didn't own OT security a year ago and now does. So I would say that one of the factors and why there's been less spending kind of pouring into that part of that world is for a lot of the IT executives that we traditionally call on, it's a relatively new set a responsibilities. So they're still figuring it out.

Very common is, CISO takes over OT security, kicks off a project to evaluate products, and just there's a lot of that in the process right now. The other side of this though is you have to recognize, the names that you might have heard of -- we acquired SecurityMatters, but the name that you might have heard of in the space are all relatively small companies. And when large enterprises are thinking about securing the crown jewels of their company, the operational things, the things that face customers, there's a high degree of hesitance to give too big a chunk of money or a commitment to a company that is very, very small. That's why we're so confident in our own position in this space is we come to the table being public, having finished last year free cash flow positive, almost $300 million of revenue.

So we believe in this space that we get to be the 800-pound gorilla, we get to come in with a more financially viable solution for organizations, and that's definitely reflecting itself in the activity we're seeing in the pipeline.

Joshua Tilton -- Berenberg Capital -- Analyst

That was helpful. And then maybe just a follow-up to previously asked question. So the investor day, you mentioned in 2018 that the sales force may have been a little too focused on the extended modules over the CounterACT sales, but you believe that you've adjusted the focus for 2019. So maybe were the mix between CounterACT and extended modules in line with your expectations for the quarter?

Michael DeCesare -- Chief Financial Executive and President

Listen. There's always things that we can be doing better, and sales execution is certainly -- sales ramping and productivity is always one of those areas that both Criss and I spend a lot of time on. As I talked last year, we saw a very, very quick traction and success with our extended modules. So for the account managers -- understand the typical company our size, when an account manager joins the company, they don't get a list of installed accounts.

They get a list of greenfield accounts that they have to break into. So when we came up with such as strong cross-sell opportunity as eyeExtend, our sales organization pivoted and flocked to it fairly quickly. And that's what was kind of exemplified in our result that we saw on both Q2 and Q3 of 2018. I definitely think we've got that back in check.

I -- our head of sales and marketing is very on top of this. We're very methodical about how many new logos they're chasing versus the expansion opportunity. But both are important to us, and we have to be good at both of those.

Criss Harms -- Chief Financial Officer

Just recapping numbers, eyeExtend last year was 24% of our license revenue, and I had highlighted that with that big eight-digit deal, I felt it was a high percent relative to what we expected for 2019. My expectations were closer to that mix being more of an 80/20 this year, with 20% coming from eyeExtend. So specific to Q1, it came in right around the 20% level, just under. So it was consistent with the expectations we had for the year and for the quarter.

Operator

[Operator instructions] Our next question comes from Alex Henderson from Needham.

Alex Henderson -- Needham and Company -- Analyst

I wanted to go back to the issue associated with the timing of the closure of these deals into the back half. It's pretty easy to come to the conclusion that those transactions will in fact close, but the other side of the coin, when these deals get pushed out, it notoriously causes some diminishment of growth because it requires sales capacity to push them to close and push them to the revenues. Have you adequately thought through the impact that it has on your sales team's ability to do the secondary deals or third deals as a result of their timeline here? Or alternatively, is the deal size increasing enough to offset the impact of them spending more time closing deals that were expected in the first half?

Michael DeCesare -- Chief Financial Executive and President

So I would caution not to read too much into the handful of deals that's in the second quarter. There are new customers in that, so certainly, those customers haven't bought our products yet. But there's expand opportunities inside of that as well. We have a very good pipeline.

We've been working this for many years to build pipeline. So we are not dependent on those deals in the second half for us to be able to be successful. We're just pointing out to you that we had maybe a sense that they were going to close a little bit earlier, and now we've got to a high degree of confidence that they're going to close in the back half of the year. So it doesn't have a material impact on kind of the overall productivity.

We've got hundreds of sales reps. We feel good about those transactions in the second half of the year.

Alex Henderson -- Needham and Company -- Analyst

So that would be -- you feel like you -- the deals are large enough that they would absorb any capacity issues?

Michael DeCesare -- Chief Financial Executive and President

I feel our pipeline is large enough where we can still achieve our capacity expectations without those deals closing in the second quarter.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Michelle Spolver for any closing remarks.

Michelle Spolver -- Chief Communication Officer

All right. Thanks, operator. Thank you, everybody, for joining the call. And I'm sure it's a busy day for everybody too.

Just a reminder that Criss, and Mike and I are, as always, available for follow-up questions. We look forward to continuing to engage with you through the quarter. Thanks so much. Have a good day.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Michelle Spolver -- Chief Communication Officer

Michael DeCesare -- Chief Financial Executive and President

Criss Harms -- Chief Financial Officer

Fatima Boolani -- UBS -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Alex Henderson -- Needham and Company -- Analyst

Unknown speaker

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Joshua Tilton -- Berenberg Capital -- Analyst

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