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Tufin Software Technologies Ltd. (NYSE:TUFN)
Q2 2020 Earnings Call
Aug 12, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by. We would like to welcome everyone to the Tufin's Second Quarter 2020 Earnings Conference Call.

[Operator Instructions] Thank you. I would now like to turn the call over to your host, Ryan Burkart, Director of Investor Relations. Please go ahead, sir.

Ryan Burkart -- Director of Investor Relations

Thanks, operator. Good morning, everyone, and thank you for joining Tufin's Second Quarter 2020 financial results conference call. With me on the call today is Jack Wakileh, our Chief Financial Officer and Ruvi Kitov, our Chief Executive Officer.

Before we begin, I would like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Security Litigation Reform Act.

These forward-looking statements are based on information available to Tufin's management team as of today, and involve risks and uncertainties, including those noted in this morning's press release and Tufin's filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Tufin specifically disclaims any intent or obligation to update these forward-looking statements except as required by law.

Please note that a reconciliation of any non-GAAP number to the most directly comparable GAAP number can be found in the tables of our earnings press release located in the Investor Relations section of our website. A telephone replay of this call will be available shortly after its completion. You'll find the dial-in information in today's press release. The archived webcast will be available for one year on the Company's website at tufin.com.

I would also like to inform you that we will be participating in the Oppenheimer, D.A. Davidson, Colliers, and Jefferies virtual conferences in the coming days and weeks. Please reach out to me if you're interested in joining our schedule at any of these.

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

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks, Ryan, and good morning, everyone. Thank you for joining us today. I hope that all of you and your families are safe and healthy. I'm happy to report that our business improved in Q2 compared to the acute disruptions due to COVID-19 that we experienced at the end of the first quarter. We feel that our business is now on the path to recovery, along with the overall economy.

However, general business conditions remain challenging and uncertainty is high due to the ongoing impact of the pandemic on our customers and the economy generally. Revenues were $23 million in the quarter, down 8% year-over-year, but up 8% sequentially. Our product revenues improved 36% from Q1 levels and we continue to see good renewal terms.

On the cost side, we have already seen a meaningful impact from the cost reduction actions we took earlier in Q2 and we ended the quarter with a strong cash position of $109 million. On the product side, we announced the launch of the Tufin Marketplace and our new Vulnerability Mitigation App, both exciting developments that will help our customers capture more value from the Tufin Orchestration Suite and strengthening our competitive advantages.

While we still have work to do as we move forward on the path to recovery and general business uncertainty remains elevated, I am pleased with the progress we made in the second quarter. Most importantly, we remain committed to the support and satisfaction of our clients as well as the health and well-being of our employees and partners.

We are continuing to operate on a nearly fully remote basis and I'm happy to report that we've been able to serve our customers effectively and execute our sales processes well. We expect this operating model to remain in effect for some time as we continue to follow government regulations to mitigate the spread of COVID-19.

The second quarter got off to a slow start as people adjusted to working from home. But as I told you in mid-May, customer interactions returned quickly and we were back to pre-COVID levels of engagement. The back half of the quarter progressed more normally than in recent quarters.

In addition, throughout the quarter, we continued to refine and improve our sales processes, as we discussed earlier this year, to enable the business to scale up over the next few years. This included adding several roles and responsibilities as we expand our sales and marketing initiatives and adjust to the new, more virtual world.

Automation continues to be in focus for our customers and we believe that our automation solutions are becoming more valuable in the new normal environment. We continue to hear that our customers, security professionals remain stressed very thin with additional responsibilities. In addition to the regular workload, they are now tasked with securing a much larger attack surface as huge swaths of the global workforce continue to work from home.

In today's cost conscious environment, increasing security headcount to no extra work is often not an option. Security professionals and companies are instead required to do much more with the same number of people or even less. This is where our automation solutions come in. We help companies achieve mission-critical security objectives with far fewer resources, which are especially scarce to replace.

This is why companies, even in some of the hardest hit industries like offline retail, are looking at Tufin today. Automation has become a big driver for our business in recent years and we expect it to become even more important and valuable to our customers in the COVID-19 era and beyond. The customers who know and use our products see this value today and in some cases are doubling down on their Tufin investment, specifically to increase the security and efficiency gains they've achieved with our products.

One such existing customer is a large U.S. federal government agency that significantly expanded their use of Tufin this quarter with a seven-figure deal. They have been using SecureTrack and SecureChange for a few years, and in doing so, they were able to reduce their network change process time from 20 days in some cases to just a few hours.

To further extend this valuable time savings, they purchase SecureApp to increase the efficiency of the rest of the process, reduce errors, and increase compliance with their internal requirements. This is a great example of our land and expand strategy at work as this customer experienced the value of SecureTrack and SecureChange and is ready to move up our maturity model with SecureApp.

It is also a nice milestone for our U.S. federal government business. You'll recall that we've invested in growing the Federal team over the past couple of years and I'm encouraged that this investment is starting to bear fruit with plenty of opportunity ahead, given the vast scale of the U.S. federal market.

Another customer that expanded their footprint with us in the second quarter was a large financial institution in APAC where Tufin is not only used for compliance and automation, but is also seen as the key component in their digital transformation and SDN-related initiatives. This seven-figure deal consisted of a subscription renewal and an expansion into a larger part of their network, including SDN capabilities.

Our product breadth in SDN including comprehensive support for VMware NSX and Cisco ACI positioned us well to help many of the customers that are increasingly adopting SDN in their next-generation networks and data centers. We are uniquely positioned to enable organizations to manage their SDN and traditional environments as one.

Moving on, I want to talk about two exciting product announcements that we made a few weeks ago. First, we launched the Tufin Marketplace, a digital platform where customers can find and deploy apps and extensions that enhance the overall value of their Tufin implementation. The Marketplace provides apps developed by both Tufin and other software vendors that maximize return on investments in Tufin and in their overall security investment by integrating security policy data with other security technologies and practices.

From effectively prioritizing vulnerability remediation efforts to automatically investigating and blocking suspicious network activity, the Tufin Marketplace offers apps that help users' enhance protection, enable faster detection, and deliver intelligent responses across a wide range of security and IT domains. These apps have the potential to significantly increase the value that we deliver to customers with the Tufin Orchestration Suite and in turn drive higher customer satisfaction and retention over time.

Second, in conjunction with the Marketplace, we launched a new app of our own, the Vulnerability Mitigation App, which targets an immediate and critical need for our customers. Integrated with leading vulnerability management solutions to enrich vulnerability intelligence with real-time network insights, the app allows organizations to ensure effective remediation and automated mitigation using a risk-based approach.

The Vulnerability Mitigation App helps customers' prioritize remediation efforts, prevent exploitation, and accelerate the speed and efficiency of critical security processes all in an automated fashion. The app is integrated out-of-the-box with the most widely used vulnerability management solutions including Rapid7, Qualys and Tenable. This is a significant development for us and one that quickly and directly responds to customers' requests. It is available now as a subscription-based service on the Tufin Marketplace.

I'm very excited about both the Marketplace and the Vulnerability Mitigation App, as they will enable our customers to extract even more value from the Tufin Orchestration Suite at a time when customers are being asked to do more with less. Ultimately, this added functionality should drive higher customer satisfaction and improved competitive positioning for us and our partners in the long term.

With that, I would like to turn the call over to Jack Wakileh, our CFO, to discuss our financials. Jack?

Jack Wakileh -- Chief Financial Officer

Thanks Ruvi. Total revenue was $23 million in Q2, down 8% compared to Q2 of last year. Product revenue decreased 27% year-over-year to $7.9 million, while our maintenance and professional services revenue grew 7% to $15.1 million. Looking at the geographical mix of Q2 revenue, we have a well-diversified geographical distribution with the Americas representing 54% of our revenue, Europe representing 38%, and the remaining 8% coming from Asia-Pacific.

Moving to margins and expenses, I will discuss our results based on non-GAAP financial measures. Non-GAAP numbers exclude stock-based compensation expense of $3.5 million for Q2 of 2020 and $2.6 million for Q2 of 2019. Non-GAAP numbers also exclude SEC registration costs related to our shelf filing in Q2 of 2020. Please note that the GAAP to our non-GAAP reconciliations can be found in the tables of our earnings press release located in the Investor Relations section of our website.

Gross profit for the second quarter was $18.7 million or 81% of revenue compared to $20.5 million or 82% of revenue in Q2 of last year. Total operating expenses for Q2 were $23.3 million, down from $25.6 million in Q2 of 2019. Overall operating costs were lower as we benefited from certain COVID related savings like no travel and no in-person marketing events. In addition, as Ruvi mentioned, we have already seen the benefits of the cost reduction actions we took earlier in the second quarter.

Breaking out expenses into line items; R&D expense for Q2 was $6.9 million or 30% of revenue compared to $7 million and a 28% of revenue in Q2 of last year. Sales and marketing expense for Q2 was $12.6 million or 55% of revenue compared to $15.6 million or 62% of revenue in Q2 of 2019.

G&A expense for Q2 was $3.7 million or 16% of revenue compared to $2.9 million and 12% of revenue in Q2 of 2019. Operating loss for Q2 was $4.5 million compared to an operating loss of $5.1 million in Q2 of last year. Net loss for this quarter was $5.2 million compared to a net loss of $5.6 million in Q2 of 2019; and net loss per share, basic and diluted, was $0.15 for Q2 of 2020 compared to $0.18 in Q2 of last year.

Turning now to our balance sheet. As of end of June, we had cash, cash equivalents, restricted cash and marketable securities of $108.5 million compared with $120.5 million as of the end of Q1. We continue to be pleased with our strong cash position and we see it as an important advantage in the current environment.

Deferred revenue on our balance sheet as of June was $40.6 million compared to $43.4 million as of the end of Q1. In the second quarter of 2020, we used $11.7 million of cash from operating activities compared with using $10.4 million in the same period of 2019.

Turning to the outlook, as Ruvi mentioned, the environment remains uncertain due to the ongoing impact of the pandemic on our customers and the economy generally. Given this, our visibility remains lower than normal, and like last quarter, we will not be providing financial guidance for Q3 or the full year at this time. We intend to review providing guidance as soon as we have enough visibility to do so, and we will evaluate this on a quarter-to-quarter basis.

In view of guidance, I do want to provide you with some qualitative commentary to help you frame your models. To be clear, we do not intend to provide commentary such as this on a quarterly basis in the future, but will do so at this point, when we are not providing specific quantitative guidance.

Last quarter, Ruvi broke down our three sources of revenue; maintenance, professional services, and product revenue. I will revisit each of these today. On maintenance revenue, as you know, this part of our revenue base is recurring in nature and our renewal rate on maintenance contracts remain greater than 90% in the second quarter as it has been consistently over the past two years. I'm pleased with the resilience of our renewals in the current environment, and they have confidence that this will continue.

Next, our professional services team continues to be very busy with a healthy backlog of deployment projects. Professional services revenues were down low-single digits year-over-year in the second quarter after having increased year-over-year by over 100% in the first quarter of this year.

Revenue recognition on professional services contracts occurs when project milestones or deployments are complete and timing of these is non-linear throughout the year, resulting in quarter-to-quarter variability. Overall, we continue to expect professional services revenue to remain relatively stable in 2020 on an annual basis.

Lastly, we recognize revenue of the sales of our products, which as you know, are sold mostly on a perpetual license model. We're seeing elongated sales cycles in large deals, which we attribute to increased scrutiny from customers due to the current uncertain environment. Our pipeline remains healthy and is higher year-over-year. However, as we said last quarter, timing on the monetization of the pipeline remains uncertain, given the environment. Looking forward, we expect sales cycles and large transactions to normalize over time.

With that, I'll turn the call back to Ruvi for his closing comments. Ruvi?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks, Jack. I'd like to wrap up by saying that I'm pleased with the progress we made in the second quarter as we began to recover from the significant impact that COVID-19 has had on our business. We believe that the overall economic environment remains fragile in the near term and we're cautious as to whether the spread of COVID-19 may lead to additional disruptions.

With that said, looking at our own business, we are focused on the work we need to do to propel Tufin along the path to recovery and I remain confident in the long-term opportunity ahead of us. The Tufin Orchestration Suite helps the organization's increase agility by automating network change processes, while improving security posture at the same time. And now we're hearing directly from customers that the increased efficiency and security that we deliver has only become more important in the COVID-19 era.

Our competitive advantages, strong balance sheet, and experienced management team put us in a better position to capitalize on the long-term opportunity that we see ahead. I'd like to thank our customers, our partners, and our investors for their support and I'd like to thank all of the Tufin employees for their hard work at this time.

Now, let's open the line for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from the line of Sterling Auty, J.P. Morgan.

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

Yeah, thanks. Hi guys. So, wonder if you can highlight for us if all of the personnel changes that you wanted to make are complete? So do you have all of the people in the positions that you want and how they started to ramp?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Hi Sterling, this is Ruvi. So thanks for the question. Yeah, so we've completed the personnel changes from our cost reduction perspective that was completed in Q2. And as mentioned on the call, we're seeing the effects of that already in Q2 from a cost perspective. At this point, we're not planning to make any more reductions in staff.

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

Alright, great. And then you talked about the pipeline and sales cycle dynamics. So, can you give us a sense of what the tone of business through the month of July looked like, and how would you characterize the quality of the pipeline? You mentioned it in figure, but how would you talk to the quality of the pipeline versus a quarter ago?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

So July was a good month and we're starting the quarter well. The pipeline is healthy. It's been scrubbed a lot in the past six months. So we feel that it's been well vetted and it's up year-over-year compared to second half of 2019, if you compare at this point. Challenges from our perspective, the timing of the monetization of the pipeline, given the general business uncertainty and the pressures on the budget that we're seeing. So we feel good about the pipeline, but we're cautious on the timing of monetization.

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

Got it. Thank you.

Operator

The next question comes from the line of Saket Kalia with Barclays.

Saket Kalia -- Barclays -- Analyst

Okay, great. Hey guys. Thanks for taking my questions here. Ruvi, maybe for you, can you just refresh us a little bit on the competitive environment and how that's changed, if at all, kind of post COVID-19, if you will?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. Hi, Saket. Thanks for the question. Our market has always been competitive and that hasn't really changed. We continue to see the same companies and competitive deals, but our win rates continue to be very good. So the competitive challenges really haven't changed. It's more of COVID-19 factors that we talked about from our perspective that have impacted the business. From our perspective that's a temporary impact, but it's not due to competitive change.

Saket Kalia -- Barclays -- Analyst

Got it. That makes a lot of sense. Jack, maybe for my follow-up for you. Good to see the expense control, maybe you can just talk a little bit about how much of the expense savings this quarter are temporary, in your view, meaning items that might come back after COVID? And how much of it is sort of -- as a result of the cost reduction actions that were done in Q2?

Jack Wakileh -- Chief Financial Officer

Sure. Hi, Saket. So let's start with the fact that after the close of Q1, we ran our relations for the full year and build the plan for the cost savings and we took actions pretty quickly to make those changes effective as of the beginning of May. This is where -- actually we see the benefits already in Q3, so a big part of those benefits already in Q2.

Going forward, while we will see a significant part, maybe the bigger part of the savings continue with us for the next month, you have to keep in mind that there is still a few things that we will continue to invest in and especially things that we already talked about and mentioned in the past, like sales operations and sales enablement. So these investments are going to continue and offset some of those savings.

So Saket, it's going to help, we should expect Q3 expenses to be in the ballpark as Q2 if you'd like and this is pretty much consistent in previous years Q2 and Q3, pretty much similar in expenses. We're going to see the total this year and obviously it's going to be subject to the visibility that arises from how commissions and bookings end up. And if it further helps, for Q4 if you like, opex is normally a seasonally bigger quarter and this is going to drive expenses higher than previous quarters. So looking at Q4, it's going to be less than Q1 before we made those changes, but higher than Q3.

Saket Kalia -- Barclays -- Analyst

That's very helpful. Thanks a lot guys.

Operator

The next question comes from the line of Andrew King with Colliers Securities.

Andrew King -- Colliers Securities -- Analyst

Hey guys, thanks for taking my question. I just wanted to dig in a little bit into the demand trends that you've been seen, specifically from the finance and the government verticals as COVID continued and sort of what you expect to see especially if there is a second wave coming forward in this fall? Thanks.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Hi, thanks for the question. So demand is -- we're seeing good demand, and like we said, the pipeline is healthy. In terms of finance and government, finance -- and also telco have been resilient, strong verticals for us. We're seeing strong demand in both of those. U.S. federal government, we closed a major deal that we mentioned and we're seeing a lot of interest. I think government specifically in state and local is being stressed with COVID-19. So that might be impacted.

Andrew King -- Colliers Securities -- Analyst

Great. And can you just -- digging sort of into the finance, just with the resurgence of COVID in the fall, that could possibly up the number of bankruptcies that they're seeing in the small and medium businesses which could then cause them to split or shift budgets. Can you just sort of talk about any impact that you would see that that would have directly on you?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. So, from our perspective, if you think of our target markets, we're primarily focused on the Global 2000s. So we reduce the complexity of large networks for large customers. So SMB, while we sell some in the small-medium business space, the vast very our customers and our revenues actually come from Global 2000 companies and those have been very resilient. The vast majority have a strong cash balance. So we don't think that will actually have a significant impact from that perspective.

Andrew King -- Colliers Securities -- Analyst

Got it. Thank you.

Operator

The next question comes from the line of Brent Thill with Jefferies.

Joe Gallo -- Jefferies -- Analyst

Hey guys, this is Joe on for Brent. Really appreciate the question. And Jack, really appreciate the breakout of revenue components. It was pretty close, but I just want to specifically ask, did maintenance decline sequentially or was it up?

Jack Wakileh -- Chief Financial Officer

Maintenance was up. Services, you're talking about services, that's generally maintenance and renewals and professional services, this was up. You can see it in the numbers that we published. It was up around 15%, you can see it in the numbers, and that's offset the decrease in the total revenue.

Joe Gallo -- Jefferies -- Analyst

Yeah. I just meant the maintenance without professional services, I was talking about, and that number was up? Okay. Okay, thank you. And then just, could you remind us, I appreciate the no guidance, but could just remind us how much of license is recurring or term in 3Q and 4Q, if any? And then, has Secure Cloud become more meaningful?

Jack Wakileh -- Chief Financial Officer

Yeah. So maybe I'll answer the third piece, Ruvi, and you can take it for the Cloud. So we haven't been reporting term license business in the past, but we have been saying that this comprises a small portion of our business and it's still there. It's not changing much as long as we have not yet decided strategically to change our model to term license. It's there -- a lot of it's on a qualitative data, if you like, it comes mostly in automation.

So you'd see, also our large customers buying term license and also the smaller customers buying license. There is no specific segment that makes up our term license, it's across the board. And we're seeing -- and we're seeing more interest in the market, I would say, but the fact that it's a small portion did not change it.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks Jack. I'll take the Cloud question. I think you're -- the question is around Secure Cloud. So there is a lot of interest in Secure Cloud. Our team is very busy. They're doing a lot of demos. There is a lot of customers in the trial program, demand is building. We've said in the past, we don't expect it to be meaningful from a revenue standpoint this year. So there is not much more to report at this point.

Joe Gallo -- Jefferies -- Analyst

Okay, thanks guys.

Operator

The next question comes from the line of Jonathan Ho with William Blair.

Jonathan Ho -- William Blair -- Analyst

Hi, good morning. I just wanted to maybe talk about your new products. When we look at sort of the marketplace, how do we think about the monetization model?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks, Jonathan. So, when we look at marketplace in general, we're looking it as part of our partnering strategy of Tufin as a hub. It's primarily -- it's aimed at increasing the Tufin value in terms of long-term stickiness and cross functional utilization. Most of the apps will not be directly revenue generating. Notable exception of the Vulnerability Mitigation App, which is a paid for subscription service.

But if we think of why we're doing it, in general, customers are looking to have tighter integration between different security solutions that they brought or they have different systems. Broadly, they often complain about the divergence of the security market, so a lot of customers want to reduce the number of vendors and they want all these systems to actually talk to each other. So they would like to actually cross-pollinate disparate data that exists in separate systems, so they can gain a more holistic and comprehensive view of the infrastructure from a security perspective.

So what we've done is, partnered with some of our existing partners and added new partners. We have a great initial group of partners that represented in the marketplace with Palo Alto Networks Cortex, Cisco Tetration, IBM Resilient, Infoblox and others. So some of those apps are developed by them, some of those apps are developed by us. It's -- the important thing in the marketplace is, for customers to be able to use much more of their security solutions in a cross-functional way and gain more insights from the data they'd have in various systems.

Jonathan Ho -- William Blair -- Analyst

That makes sense. And then maybe in terms of the vulnerability management product, can you talk a little bit more about how this differs from some of the partners like the stand-alone vulnerability management vendors you were referencing? What do you do that's different than what a traditional VM does? Thank you.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. So it's integrated with the vulnerability management solutions, it doesn't compete with them in any way. Actually it integrates with Rapid 7 Nexpose, Rapid 7 InsightVM, the Qualys VMDR, Tenable.io, Tenable.sc. We actually use the feed and the data from those and couple it with what we have in our systems. Like, so we combine CVSS score, accessibility exposure and the value of assets to help customers prioritize remediation efforts and when patching isn't an option, we integrate it with SecureChange for immediate and automated initiation of mitigation by removing assets, right.

So if you think of one of the challenges people have is, at scale you end up actually with a huge number of high and critical vulnerabilities, right. And with a limited team, you need to decide how to prioritize and what to patch first. It's nearly impossible to actually patch everything immediately. So we help prioritize.

And the other interesting point is that, it can actually be integrated with no guest [Phonetic] policies. So we can provide key criteria for decisions. For example, if somebody wants to connect like Network A to Network B, should that be allowed? Maybe your -- that connection will be a rule that will allow an access from a vulnerable server to a mission critical asset and you don't want to do that.

So it's actually combining the vulnerability data with the knowledge that we have on -- in terms of access and policy of what can talk to what and who could talk to whom. So those two things overlaid with each other, are much more powerful and they give more insight to the user.

Jonathan Ho -- William Blair -- Analyst

Great. That makes a ton of sense. Thank you.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks.

Operator

The next question comes from the line of Rob Owens with Piper Sandler.

Rob Owens -- Piper Sandler -- Analyst

Great, and thank you guys for taking my question. Can you just talk a little bit about how the quarter played out then from a linearity perspective? And just looking at those big deals, maybe help us out around, with only two of the larger deals in the quarter and maybe are you seeing the return of big deals either this quarter versus the prior or how the pipeline shakes out? Thanks.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure, thanks. So, if we're looking at the quarter, what we said, it started slow and then it built and improved as customer started coming back. And if we're looking at large deals, seven-figure deals, we had a couple of big ones and we mentioned that on the call, they were impacted. So when we look at the large deals, we're seeing customers taking longer to evaluate and approve very large deals.

For example, in the past we had instances where the Head of Network Security or the CISO could sign off on a deal. Now you might need the CFO for large transaction. So naturally that process will take longer, and in some cases, decision makers decided to go for smaller transaction actually to ensure that the deal will get through the approval chain.

Now if you look at the deals below $1 million. They've been resilient. So there is strong opportunity there. Some customers are also interested in subscription, which is already mentioned on the call. So those tend to be less than seven-figures initially. So there's plenty of opportunity for that part of the business. And normally, over time we expect that to normalize with the broader environment, when we talk about the seven-figure deals.

Rob Owens -- Piper Sandler -- Analyst

Thank you.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thank you.

Operator

[Operator Instructions] The next question comes from the line of Gur Talpaz with Stifel.

Gur Talpaz -- Stifel Financial Corp. -- Analyst

Okay, great. Thanks for taking my questions. Ruvi, you talked about a nice SDN win. More broadly, can you talk about what you're seeing from NSX and ACI and then why you're well positioned in these areas?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. Thanks Gur. So if you look at NSX and ACI, it's interesting -- it's a slightly different dynamic. I think VMware NSX is actually very focused on security. VMware, in general, you saw that with some of our acquisitions lately. And Cisco is selling ACI primarily as part of their next generation network strategy. So while Cisco ACI has some security controls, I think primarily Cisco is, they're basing the security on other partners that will get plugged in to the ACI infrastructure.

So when people buy Cisco ACI, a lot of times it's in conjunction with a Palo Alto or Checkpoint or Cisco Firepower than when they're buying VMware NSX. It's -- they're using the NSX distributed firewall more than they would at Palo Alto or Checkpoint. And also we're seeing it slightly different because VMware NSX is typically in a data center, right, it's where VMware plays and Cisco ACI is actually -- because it's part of the next generation network, it's probably throughout the network and not just in a data center. So it's interesting because Cisco has a huge sales force that's able to push ACI across the board. Some customers have turned on ACI capabilities; some customers, it's just part of their network. So the bought it, but they're not necessarily using it for SDN yet.

So customers that are looking for security inside their data center and SDN, I think the VMware NSX customers are more advanced from that perspective, also because NSX came out earlier than Cisco ACI and Cisco ACI customers are now getting more and more interested in what's happening within ACI and on the periphery. So you might have enterprise firewall in the ingress or the egress of Cisco ACI and also plugged into the fiber part of itself.

So there's a lot of opportunity there for us. Because NCX and ACI essentially, you have the network now completely virtualized but the same challenges exist, who can talk to whom or what can talk to what, that extends not just the physical servers also the virtual environment inside the data center which component should be able to talk to each other. So the policy question is still very important in the SDN world and so we're seeing a lot of growth there, both on the Cisco ACI side and the VMware NSX side.

Gur Talpaz -- Stifel Financial Corp. -- Analyst

That's really helpful. And then, speaking of different environments, can you talk about how you view the emergence of cloud delivered network security, especially as we move into kind of a more of a post-COVID world in the future? Thank you.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. It's very interesting because we're seeing actually the cloud vendors themselves focus more and more on security. I think Microsoft has the new Azure Firewall which is essentially firewall-as-a-service. We see them investing a lot in it. I think the Microsoft distributed firewall will be in direct competition to Palo Alto and Checkpoint and others. So they are becoming a stronger player in cloud security and it's going to be built into, into their cloud service. So as a service and maybe that's somewhat of a differentiation for them.

We're hearing about other cloud companies that are thinking about similar things. So eventually, I believe all the cloud vendors will have high quality security infrastructure built into their platforms and then customers will have a choice of, "Okay, in the cloud, do I buy a Palo Alto or Checkpoint or a Microsoft Azure Firewall." And it won't be -- it won't be like a second hand firewall, it will be a serious firewall there. And with that choice, I think we'll actually see even more fragmentation.

So if today customers are saying, "Wait, I'm going to the cloud. If I'm serious about it, I need a Palo Alto or Checkpoint." The cloud providers themselves will have strong security in the cloud as well. So we will see customers deploy all sort of security solutions in terms of segmentation of the cloud. If you look at Tufin, at the end, when you have fragmentation like that, you're going to need a policy management solution that's going to be even more important, and that's a major opportunity for us.

Gur Talpaz -- Stifel Financial Corp. -- Analyst

Many thanks Ruvi and I appreciate the insight.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks, Gur.

Operator

Your final question comes from the line of Andrew Nowinski with D.A. Davidson [Phonetic].

Andrew Nowinski -- D.A. Davidson -- Analyst

Great, thank you. Good morning, everyone. So I just wanted to ask a follow-up question on the pipeline. It sounds like, Ruvi, I think you said it's taking longer to close deals. So I'm wondering if you factor that in, when you talk about the pipeline being up year-over-year relative to the second half of 2019, which is presumably a time period when sales cycles are shorter?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Sure. So if we look at the cycles that are longer, it's primarily in very large transactions, seven-figure deals. They require more signatures today, they're more complex. Sometimes that means those deals actually become a little smaller or the cycle take longer. It's not something that we're seeing across the board in other deals.

But from a pipeline perspective what we mentioned is it's healthy, it's up year-over-year and it's been scrubbed and well vetted. So we believe that if you look at sales execution issues that we had in the fourth quarter, we put a lot of focus and effort on making sure that we're following our process diligently, and that's why we feel pretty confident about the pipeline.

Andrew Nowinski -- D.A. Davidson -- Analyst

Okay, great. And then maybe just one more follow-up question on the big U.S. federal win that you had this quarter, sounds like that was with an existing customer. And given that we're heading into the fiscal year-end of the federal government, I'm wondering, do you think that that win could lead to other perhaps new agencies deploying Tufin this quarter?

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

It's a good question. Federal business can be a very big business for us over time. I mentioned this before, the U.S. government's IT budget is $100 billion annually. Obviously it's not all applicable to us, but it's a very big opportunity for us. And at least within the government, this customer is going to be a case study for us. So we're definitely looking to replicate that.

And in general we're particularly well suited for government market. If you think of all the regulation in government agencies, everything that they need to adhere to, we help them ensure they're compliant, increase their efficiency and security at the same time. So at this deal is a nice validation of the opportunity in federal.

But also, we mentioned this previously, the government is not immune from the impact of COVID-19, especially state and local. So there is lot of government opportunities we're working on and we're hoping to replicate and extend the success that we had with this deal to other government agencies.

Andrew Nowinski -- D.A. Davidson -- Analyst

That's great, thanks a lot.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thanks.

Operator

I will now turn the call back over Ruvi for closing remarks.

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Thank you. And thank you, everyone, for joining the call today. We appreciate your time and interest in the Company and we look forward to speaking with you again soon. That's it, stay healthy, everyone.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Ryan Burkart -- Director of Investor Relations

Ruvi Kitov -- Chairman, Chief Executive Officer and Co-Founder

Jack Wakileh -- Chief Financial Officer

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

Saket Kalia -- Barclays -- Analyst

Andrew King -- Colliers Securities -- Analyst

Joe Gallo -- Jefferies -- Analyst

Jonathan Ho -- William Blair -- Analyst

Rob Owens -- Piper Sandler -- Analyst

Gur Talpaz -- Stifel Financial Corp. -- Analyst

Andrew Nowinski -- D.A. Davidson -- Analyst

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