Trend Micro Incorporated (4704) Earnings Call Transcript & Summary

[Interpreted] Yes. Thank you. I hope you can see the slide. I would like to follow the top one slide and explain about the performance of Q2. This is a summary of the performance. Net sales, 11% increased and operating income 15% increased, but ordinary income was only up by 1%. This is mostly due to the equity method affiliates [indiscernible] security start-up company, and they suffered a deficit and minus 15% of net income. Well, in overseas business, deferred tax assets have to be taken down and then it has to be built up again. And this is going to be adjusted in the next quarter and this is why we are seeing a negative number for this particular quarter. Pre-GAAP numbers, ForEx impact when this is excluded, the revenue was up by 2%, which was lower than expectation. Our COO, Kevin Simzer, will explain about the main factors behind this later on. The purchase cycle for enterprise business is getting longer and some of the deals did not really materialize in the second quarter. In the macroeconomic level, Fortinet, one of our competitors also provided the similar explanation at their earnings announcement last week. So security investment environment is maybe getting tougher than before. On the next slide, you can see the GAAP-based sales by vision without the ForEx impact, and we're seeing growth in all of the regions. EMEA, Europe growing very strongly as expected. And then we have a number by segment after GAAP. And again, a 13% increase in general for the enterprise business. Now looking at the pre-GAAP number, excluding the ForEx impact, minus 1% for Japan and minus 3% for Americas and no longer double-digit growth for Europe, only single-digit growth this time. Major factors in Japan was a price increase in the previous quarter. There was a lot of front-loading of the sales. So we had double-digit growth in Japan because of that, but now we have less renewals and there was a double-digit growth -- negative top-digit growth and then we ended up with a negative 1% growth. In the Americas, as I mentioned before, the cycle is getting longer. And this is -- these are the 2 biggest factors. And in the third quarter, we are already seeing recoveries. We will be seeing a recovery in this quarter -- current quarter, that is our expectation. And here, again, we have the same GAAP and pre-GAAP numbers and the Enterprise is seeing the biggest decline, pre-GAAP of 2% against 8%. And consumer is 2% against 2%, which means that pre-GAAP sales growth is mostly driven down by the Enterprise business. Now in regard to the subscription business, we have the ARR that is showing healthy growth and several quarters back, it was about 30%, and this is down slightly, and it's over 20%. In the second quarter, there is an increase in the expenses. And on the [ upper end, ] you can see the software expenses, and there's also the wages and the cloud expenses. Of course, as noted here, there is the foreign exchange impact, but we have this situation of the expenses. And we have been hiring. So there has -- and we have stalled the recruitment slightly. We have been more cautious about hiring rather. Consequently, we have been focusing on cost control in this area. And here, the aforementioned situation is reflected. Meanwhile, when it comes to the highlights and lowlights. As for highlights, as already mentioned, we have tighter cost control and the ARR continues to show healthy growth, and Vision One users are showing strong growth. And this will be explained later on. But for the future of our company, we'll be focusing efforts here. Meanwhile, for the lowlights, the enterprise users are going into a slower buying cycle. And in Japan, because of the front-loading due to price increases, there has been a negative impact. And that's all from my side, but we have not made any changes in our annual forecast. And be necessary to achieve better results for the first half, but there will be an explanation made from here onwards about what we are doing. And we believe that it will be possible for us to achieve this annual forecast. With that, I would like to close off my presentation. Thank you very much.

I'd like to use this time to review Trend Micro's second phase of the transformation. Trend Micro has been focusing on our transformation in the past 2 years from our on-premise to SaaS platform and also on the business side from the perpetual license to the subscription. But this transformation mainly, we are focusing on attaching and moving our customers to use our SaaS management platform. This is why we believe that customers by using the SaaS platform, they can gain better protection, better solution. But that is just a portion of our product offering that is in SaaS platform. Previously, we revealed true indicator, the SaaS customer growth and commercial ARR because commercial ARR only include the SaaS products ARR. The reason that we review these 2 indicator is because we believe we need to excel our operation on the SaaS technology platform. At the same time, we need to make sure we can compete in a pure subscription license model, SaaS ARR, and that was why we reviewed these 2 type of indicators. Now we believe after Vision One release, which Kevin already explained the significance of this new Vision One, it redefined the XDR and officially announced attack surface risk management capability and introduce Companion AI. All of this is going to bring Trend Micro's business operation and business transformation into a second phase. Why? Because as you can see, originally, we're only focusing on the 35% SaaS products revenue growth. But with Vision One after we integrate all the on-prem product, all the appliances product and a lot more third-party products, we become the best hybrid environment support platform. And also, we can bring all this on-premise product interaction with our customers through Vision One, and therefore, they can all benefit from the overall one-platform strategy and one platform experience. So I keep on emphasizing this is for larger enterprise because we believe that is where the part of [ growth ] going to be. The recent growth of cybersecurity budget mainly are coming from the larger enterprise where they have compliances and they have a lot of cybersecurity risk become their business risk. And when they're facing this type of maybe economic downturn, they need to consolidate all their cybersecurity and focusing on reducing the cybersecurity risk. That's where we believe Trend Micro can help customer consolidate all those and provide one platform experience. So Trend Micro already actually been in this transformation and large enterprise is now 61% of our business. These are -- large enterprise are defined as 500 seats and above. That's where we believe they will have the security operations center. And by that, I would want to introduce a new indicator, we call it hybrid ARR, as our growth indicator. Hybrid ARR because Trend Micro is actually the only antivirus company that has transformed from antivirus to enterprise cyber security risk management company. We were the only one that exists in the leader quadrant and now also in the [ XBR EBR ] leader quadrant. That is the transformation. And a unique part of being an antivirus company, in business sense is that actually antivirus has a portion of our revenue is already in subscription, which is called patent subscription. Usually, if customers pay $100 for antivirus product, 30% of that is a subscription. And next year, they need to resubscribe this 30%. So this 30% of the renewal revenue is very profitable and very important for the antivirus company, and we carry those renewal revenue into our transformation. So if I zoom in into the larger enterprise, which compose a large portion of our ARR, then you can see over the year, this green bar are the pure SaaS subscription ARR, but the blue portion is the perpetual license, which is traditional or the old products that they still have a heavy portion that is in subscription. That is total. When you add them together, that is the hybrid ARR. So those blue part, the perpetual license patent subscription revenue. It's very nice. It's almost like we collecting check, but there's a drawback of it. That is a lack of the interaction with customer and therefore, is very hard to expand from there. If you say, oh, I have my gateway and endpoint. They just use the same patent file, doesn't provide enough reason for customers to use the same -- coming from the same vendor because one plus one does not equal three. But after Vision One, that game has changed. After Vision One, whenever they add more Trend Micro sensor and have more data that is store with Trend Micro and analyzed by Vision One platform, they can better -- have better visibility of their overall cybersecurity risk and faster response, quicker, earlier detection of the threat. That is why we believe the Vision One platform will actually revitalize our original other 65% of the business and stop the bleeding from this perpetual ARR and accelerate more on the subscription ARR part. That's the total -- the reason that we believe in the future, after Vision One, we will be able to use this, we call it hybrid ARR. It's a bigger number overall, but of course, the growth rate will be flatter, not as deep like the pure SaaS part, but I think it's a better indicator of how Trend Micro's business will be growing. So this transformation, of course, will affect our sales process. This whole sales process is going to follow the -- we call it the platform way of accelerating the growth, which is -- we use the onboarding that the process is we try to onboard more customers on to Vision One and then increase their assess time and thereby they will expand to buy more function or sensors from Trend Micro. And during this whole process, we have introduced and built several tools to help us more efficient in this type of way of selling. For instance, cyber risk assessment is a tool that can help bring on the new customer without 0 friction, 0 costing, 0 deployment for customers. They can quickly onboard and see how Vision One works. And after that, we will be navigate them through Vision One and let them understand the platform, what the platform can do for them. And during all of this, we also collect all this information and we were able to provide and customize for each of our customer a better script how our salespeople should approach the customer and how to reduce the cyber risk in the most efficient and effective way. That's the sales with generative AI. So you can see -- now our whole sales process become very data driven, and we monitor all the way from the adoption to the engagement score and the expansion. So the platform adoption metric is what we are going to be focusing on. Just for less than one month we announced this new version of Vision One. We are already starting to see the attach rate, the consumption, the engagement score is expanding, is increasing. And it is something that I'd like to introduce also is we have something very similar to AWS and Azure's committed consumption that we call Vision One credit. They can buy the credit and then they decide flexibly they want to deploy this credit either on endpoint, on server or on gateway or tipping point or different places, we count on this credit deployed or allocation as they consume the Vision One. And the last part, you can see here, the green part. The first week when we announced our attack surface risk management, we see a lot of customers start to allocate the Vision One credit, means they adopt and spend their credits on this new function, and that will be the way that Trend Micro utilizing the One platform experience to expand our business in cybersecurity. So Vision One is not just a beautiful PowerPoint that we talk about all this functionality. Vision One is a true business innovation and a true business renovation for Trend Micro. In the future, I hope we can share with all the investors about how we transform our business from transition from traditional AV to this hybrid AR growth. I know there's a lot of moving parts when we are doing the transformation. And a lot of numbers that need to be clarified and it's very hard to explain all of these different business dynamic change in one hour IR meeting. So we are planning to have an Investor Day in the second half of this year, and I hope that we can meet all of the investors and share with you how are we going to grow with this hybrid ARR on our One platform experience. Thank you.

Thank you, Eva and Mahendra. Hi, everyone. My name is Kevin Simzer, and I'm the Chief Operating Officer for Trend Micro. We thought it would be helpful for you to get a better idea of what our long-term plans are for our enterprise and our consumer businesses and a little bit more insight as to where the growth is coming from. Let's jump in. From an enterprise perspective, all of these numbers that I'm about to share are non-GAAP numbers therefore for reference purposes only, and they give you an idea of how we're thinking about the business and where we think the growth is going to come from. All of the numbers are in U.S. dollars. They've been converted at the exchange rate below in order to give you some comparables. From a road to 2025, our long-term plan, we're targeting $2 billion in sales -- gross sales by 2025. We've been transforming the business, and that means we've been driving more and more subscription SaaS business, and that is $1.5 billion target by 2025. Of course, it all comes down to customers. How are we doing -- what have we set for our target there. We've set 100 million protected assets. A protected asset is a desktop or a laptop. It could be a virtual machine in a modern data center. It could be a cloud workload in a hyperscaler or a container. And then ultimately, where it really matters is how are you doing at growing your customer base. And we're targeting 500,000 SaaS enterprise customers by 2025. We feel like the markets that we're in, give us lots of room to expand and grow. We sell in the IT infrastructure buying center. That's where we are selling our endpoint protection, our e-mail security, our network IPS. In the stock buying center, of course, the hottest topic right now is XDR and our market-leading platform is doing well there. From a cloud buying center, we're definitely jumped on this one quickly over the years, and we attached ourselves to hyperscalers, and that's where we're protecting applications that are running in a cloud environment. We're doing all of this with our unified cybersecurity platform, one of the broadest in the market. And it all starts with an attack surface risk management, where we get a good idea of what your overall -- a customer's overall attack surface looks like, we can sprinkle over top of that our threat intelligence and get a good idea of where the most important assets are that you should be protecting and we can provide the protection. From a Q1 perspective, we saw our enterprise sales growth continue to drive forward 9% year-over-year at $334 million. So nice growth continuing to happen within the enterprise space. Our annual recurring revenue, it's really the nucleus of this business that we've been continuing to move more and more of our customers toward $692 million at the end of the quarter. That was up 25% year-over-year. So as that part of our business continues to get bigger, we can see that our gross sales growth will continue to accelerate. From a SaaS enterprise customer perspective, we're up over 373,000 now SaaS customers, that's up 9% year-over-year, and that's with 2 sales motions. Number one is, we are doing health checks and talking to all of our existing customers. And if it's right for them, we will be upgrading them from their on-premise offering to our SaaS offering. As we continue to land new logos, we're also landing more new logos with our SaaS offering. So both of those are helping us to increase that number of SaaS customers. We're doing a really nice job of getting both broader and deeper within our customer base at 68 million protected assets and 29% year-over-year growth. SaaS continues to be quite important for us, and it has been leading the charge from a transformation. But like I said, we are selling in a hybrid environment. But what we can when we can, we've been actually moving aggressively towards our unified cybersecurity SaaS platform. Our SaaS business is now, well, $108 million at the end of the quarter. We finished up 30% year-over-year growth, and that continues to be one of the major growth areas. So we can see as this continues to get bigger, it will have a bigger impact on our top-line numbers. Now if we dive in deeper on what the areas that, that growth came from, you can see it's across all 3 of the buying centers that I laid out there. We continue to do very well in IT infrastructure operations, up 23%. SOC operations and everything to do with XDR is up a whopping 74%, so really, really nice growth there, and that continues. That's been going on. And from a cloud operations perspective, at 16% year-over-year, this is softer than what we have typically seen. In fact, the comparable quarter last year at the same time was up 60%. So we've seen quite a big softening in the cloud operations. We've seen longer sales cycles. We've definitely seen -- projects are there, but longer sales cycles, more approvals needed. And many customers starting to rationalize their spend with hyperscalers, and we see as they rationalize their spend with hyperscaler, it also means that they rationalize their spend around security relative to that hyperscaler. So we're definitely seeing that softening. And that, in particular, is what has impacted us in the Americas. Cloud operations has been our growth engine within the Americas, and we saw that softening the most in the Americas and that had an impact on both our Americas number and also on our overall annual recurring revenue, where that was down a couple of points. A couple of examples. So we thought we would drill into cloud operations a little bit and from a cloud operations standpoint, this is sizable for us. So we're up over 10,500 enterprise customers, that's up 28% year-over-year, and we're protecting 6 million now cloud workloads and applications. So really nice terms of breadth. We've been transforming our go-to-market. And whenever you think of the cloud and you think of go-to-market, you can't help but think of super marketplaces, and specifically, the one that we leaned into the most was the AWS marketplace. Really pleased to see is up over 84% year-over-year. We won the Global Partner of the Year Award from AWS for Marketplace last year based on the success we've seen and now the AWS marketplace represents our largest channel to market. In terms of a customer win, this is an existing customer of ours in the U.S. They're a software company in the data analytics space. They had a new project and in bringing that new project on board, they were looking for a little bit more visibility across their infrastructure, but they felt like they had too many tools. And we ended up winning this expansion project and it was displacing CrowdStrike and Rapid7 in this account. So the customer decided to consolidate security tools into Trend and remove CrowdStrike and Rapid7. So a nice example of us expanding with the breadth of our platform. From a SOC perspective, we're up over 8,700 stock customers now. So we've really been doing a nice job of leaning into this quite heavily 86% year-over-year growth. And we have an optional package that a customer could pick up and that is a managed XDR package. And that is because we're seeing this shortage of cybersecurity professionals in the industry continue to really cause challenges for many of our customers. So we are now offering up a managed XDR offering. So that gives -- in some cases, we might be a second set of eyes with our security practitioners. We might help them with 7x24. We might have to help them with off-hours coverage or in sometimes prime time. So that's an offering that we have in place. And because we've seen more and more activity in and around managed service -- managed security service providers, and global systems integrators wanting to actually help customers with this shortage of skill set. We decided to jump in and do even more here. We closed an acquisition in Q1 of small little technology tuck-in called Analyze, brought us a number of security practitioners, specifically in the SOC space. They brought us a platform that helps us with what's called a SOAR offering. So really a lot more automation that we can build into the security operations center. Ultimately with the goal of making our enterprise customers more effective in their SOC. We have an example of winning a customer. This is in the AMEA region, actually in financial services, specifically insurance. So heavy compliance, a lot of security and they had multiple, multiple vendors, and they ended up with wanting to rationalize their endpoint and ultimately deploy an XDR offering, so they could, in fact, get more visibility as to what was going on across their enterprise. We ended up winning this business. We displaced Symantec on the end point which we've done many times, but that's a -- this is a customer example where we displaced Symantec. And then in terms of competing for the XDR, we competed against Palo Alto, CrowdStrike and Sentinel One, and we ended up winning out against those 3. So just to show you the strength of our platform and how that can all come to bear and help our customers. Okay. Over to the consumer business. In this particular case, because the majority of our consumer business is in Japan, we thought we should talk in terms of Japanese yen. We have a long-term plan for this business as well. Our road to 2025 shows 60 billion in gross sales, we feel like is a good target and that means that we will continue to grow our consumer business. In fact, not only grow will also grow the customer base, 18 million paying consumer customers by 2025, and we've really got this focus in on the non-personal computer, the non-PC part of the market. We feel like that represents some open opportunities for us and to help customers out. So we're targeting 25% of our entire installed base to be non-personal computer. Up until now, we've been really focused in on go-to-market innovation, and we've been fixated on new channels to market. So Mobile has been our biggest growth over the last several years, and that will continue as we continue to do well in terms of protecting consumers on their mobile devices. So that's been the biggest part of our growth. We've been looking for alternate channels, in particular, the telco space in the AMEA region, and we've been doing well at securing a number of telcos who would like security to be built into their offering. Because we are one of the unique cybersecurity companies that has both an enterprise business and a consumer business, and because we all went through COVID together and everybody is still working in a hybrid work environment, where they're working at home sometimes, maybe all the time or they're working in the office some time. So we found that some of our enterprise customers wanted an offering that would help them with those workers that are working at home. They have their work computer, and that's fully protected. But what about the other devices on that home Wi-Fi, how can they protect those? Well, that's exactly what our consumer offering does. So we're packaging that up for our enterprise customers, and we think that's going to actually be very helpful in terms of driving some more growth within the consumer business. Finally, we continue to do a lot of innovation in around the consumer space. And one of the areas that we're seeing is around identity protection. That's an area that we have done -- we have been offering, and we're continuing to expand on that. And then we're doing some very, very innovative things around NFT and what that could potentially mean for the future. So lots of stuff going on in terms of helping us to drive additional growth within the consumer business. From a Q1 performance standpoint, very, very nice growth, up -- for the quarter, we finished at $15.2 billion, that's up 8% -- 8.1% year-over-year and very pleased that we saw growth across all the geographies that we do business with. And in the areas that we feel we've invested in, that is around mobile and telco channels being increasingly important to us. We're seeing our AOV start to increase as we expand our overall size of wallet and what consumers are spending with us as we add additional capability within our platform. And that's going to be another area that we will continue to grow and expand on. With that, I'll finish. Thank you very much. I hope you found this helpful I appreciate your time. Thank you.

[Interpreted] I would like to explain about the status of business in the Japan region. I will start with this slide. This is the focus area for this fiscal year, and I'm showing you the slide once again, just to go over this again. In the enterprise business, there was a global press release, which started on the 3 July for this business, so we're focusing on attack surface risk management, ASRM, and also XDR. And below that, you can see a whole range of different sensors. According to a third-party like Gartner, well meshed architecture is necessary according to them for security because different things are connected and there are so many sensors being required, but we have been working for 35 years as an antivirus company, which means that we already have many sensors, and we are also able to integrate all of them. So this is a huge advantage for Trend Micro. And depending on the environment of existing users -- the hybrid environment, we can also provide XDR for the enterprise business. We will be very strongly focused on XDR. We want to promote the use of XDR. And that, in turn, will visualize the company's risk through attack surface risk management. There are regulations that you need to comply with and in the Western countries, for example, Europe, cybersecurity report has to be done within 72 hours, otherwise there is a penalty. In the United States, it should be in within 24 hours. There is no such regulation for Japan, but many vendors claim to be able to do this, but unable to. However, our platform can do this in a speedy and efficient manner within 72 hours or 24 hours of reporting, visualization, all of this is possible. We have a huge advantage which we will be talking about. Now whether you had a consumer business, we want to achieve a 25% outside of PC. So beyond device security, we will be delivering more value of services. And this is the focus of our transformation. And this is the second quarter progress for the enterprise business. And the first point is cybersecurity platform penetration. Compared to the end of last fiscal year, we have seen a 70% increase in the number of large enterprises using our XDR. Japan is lagging behind U.S. and Europe, but the number is definitely going up. And also of note, our focus customers now have projects, including top management, and we are engaging in dialogue with these enterprises -- enterprises projects. And as Kevin has mentioned today, CrowdStrike [indiscernible] users even are coming back to us or converting to us. So XDR and Vision One are really driving such replacements. XDR and Vision One users are definitely seeing new value or more new values, which means that the annual trading volume per customer is growing at 36% year-on-year. So Vision One and XDR are definitely generating new values and enterprises need to visualize company risks, especially large enterprises have this responsibility to the society, and they definitely need to do this. And this movement has started in Europe and the United States, and it's also coming to Japan driving the growth. And the second bullet point here is managed XDR service. We are increasing the number of partners. And Trend Service One is directly provided as a service from us. And Japan was lagging behind, but we made announcement in June. In the middle of June and before the end of the month, we already had 2 or 3 contracts with a direct service provided by Trend Micro. So the environment is becoming more complex and cybersecurity has been supported by expertise and efficiency is becoming more important. And this is why this is happening. For the consumer market or beyond device security, we have seen this kind of growth in Japan. And as you know, we have large consumer sales in Japan. And for each quarter, we have continued to grow so that for our consumer business, so 10% is represented by this, and we are seeing constant growth in beyond device security. There are several challenges, which we faced. For example, for smartphones, the prices are a bit high, but we have quite a few features and so in regard to the revenue per customer, we have solidly continued to increase, and we have home network security which is a subsidiary of [indiscernible] Electric. Now our routers have been incorporated for services to be deployed and we have also enhanced our support services. We have now e-mail that introduces the utilization and we're able to look at increasing track record of this. We're also preparing a diagnostic service for security measures. And on a sampling basis, we have done this to some customers. And we have been able to understand better the situation. So we have gotten a lot of feedback about having regular services like this deployed. And so therefore, we're making the preparations for services here to be provided. And right now, there are a lot of cases of fraud in Android, talking about memory lacking, and there has been spam mail that has been sent to customers about lack of memory. And so therefore, we are focused upon this. And we have implemented measures in this regard. So in our consumer business, we have been increasing the percentage represented by our newer initiatives. And with that, I would like to close off my presentation. Thank you.

[Interpreted] I have 2 questions. The first one is a longer sales cycle. What is the outlook of the situation? I understand that it's a bit slow right now, but you are engaging discussions with clients -- customers. So is the situation improving or not?

[Interpreted] I can cover that one, Mahendra. So a couple of different things maybe to add on the sales cycle. The one thing is that we maintained our guidance for the year. And the reason why we did that was a couple of different things. One is the reason -- it was a couple of different reasons. Number one is we're seeing our pipeline, our sales pipeline to be larger than what we've normally seen. So it's about 20% larger than what we normally -- what we would normally run for a second half. So that's definitely giving us confidence. And then the other thing that I mentioned around the longer sales cycles, I also mentioned increased approvals being needed and some of the procurement process modifications that many companies have put in place in order to more tightly control their expenditure. The one thing we did there was we introduced in the second half some sales incentives and the sales incentives are designed in the second half to close business earlier in the half. So we don't end up -- we try to avoid the situation that we found ourselves in, in Q2 where deals were trying to close in the last week, and we just didn't have all the signatures in place. So there's a couple of different things that we've done as we go into the second half that we feel give us the confidence to keep our guidance in place. We do see the economic backdrop just like everybody else, but we feel confident.

[Interpreted] The next question is about ARR. In 2025, JPY 1.5 billion is the target. And currently, it's JPY $722 million, according to my understanding, is it correct? If this is the case, you need to grow quite fast every year. And maybe that is why you're talking about Vision One. And there are 2 sub-questions to this. Now 23% growth rate, this is slower than before. And is this mostly affected by ARPU or net increase? What is the factor behind this? And secondly, Vision One and other initiatives, when will they start to accelerate the growth of ARR, what is the timing of this driving ARR?

So Kevin, maybe you can go ahead with this also?

Maybe I can start and others can jump in. So you're doing the math correctly. We -- our current published annual recurring revenue is $722 million. It grew at 23% year-over-year and it would have been higher if we would have closed the deals that we closed in Q2. But directionally, the point we were chasing by putting visibility on our ARR is that we've got this core of our business which is growing at a much faster rate than the rest. So that's really what we were trying to do. We do feel like -- we know what the plan looks like in order to get there, we will have to increase the overall growth rate. And in the chart that I showed, I actually laid out what we would have to do. And it really is going to be around Vision One our attack surface risk management, our XDR unified platform. And we do feel that, that will be able to allow us to accelerate our growth rate as we move into the next 10 quarters that we have in order to hit our 2025 target that we've laid out for ourselves.

I think that is the part that's in Kevin's slide talking about the expansion part. We believe with Vision One because there is a correlation between all the different products and when they work together is working much better. And that's why after Vision One even our on-prem product and SaaS product and appliances product will be becoming much easier to expand those business within the same customer base.

One final point just on it. I'm not sure if you picked up on it in my chart, but on that one chart where I did talk about the Vision One attachment where I showed the 31% and laid out what it meant to be a highly engaged customer. A highly engaged customer actually adds $100,000 -- $98,000 to our overall ARR. That's a highly engaged customer. The difference between a highly engaged customer and a low engaged customer, where we have a lot of those. We do have a lot low engaged, which we will be working on and really focused on, it's 4x, it's 4 times. So we do feel, like Eva said, laid out with our Vision One recent release that we will be in a much, much better spot to be able to improve our overall engagement score as we move forward. So that will drive our ARR up.

[Interpreted] Now we will unmute the next person. If you're unmuted, please identify your name and affiliation.

[Interpreted] my name is Segawa. May I ask the question?

[Interpreted] Yes, we can hear you. Please go ahead.

[Interpreted] I have 2 questions. First, now with the first half over in regard to the profits going down, could you give us some idea about this? Why this came about? And also, you mentioned about cost control. But do you have this situation because costs were more difficult to control or -- in regard to the profit levels that you've achieved, is it despite the fact that you carried out cost controls that went down to this level?

[Interpreted] Well, when you look at the first half and the second half, and we disclose the numbers. And when we look at the profits there is the pre-GAAP numbers difference. That's the biggest reason, and we had not been able to achieve the pre-GAAP goals and that has been reflected in our profit levels. And as already explained, in net sales for the second half, we believe that improvement will take place. And as for cost control, it's not reducing costs, but rather there was the COVID situation last year that still continued. But this year, we're looking at focusing on productivity so that we can be more productive. Does that answer your question?

[Interpreted] Second point I'd like to ask about is in regard to net sales. In case of Europe and the United States, you've talked about longer sales cycle. And what about America and Europe, when you look at the situation of pre-GAAP, I believe that you can look at the growth that you can expect that -- could you tell us about the details here? And also you mentioned about slowing down of the economy. And Kevin mentioned about the slippage of the large deals and if that explains the situation, that's fine, but as you move forward with Vision One, is this going to be a major driver for the future?

Kevin.

So a couple of different questions in there, and I'll take the last one first. And the short answer is, yes, Vision One our attack surface risk management, XDR unified cybersecurity platform will be a major thrust for us in the second half and beyond. That is what we're really going to get as -- I like the way Eva described it, where she talked about sort of the second phase that we're in now, where we're going to be much, much more focused in on that. And we feel like this new release of our unified platform is going to position us very, very well for that. Regarding the slowdown, there is no question that we are seeing companies, the reason why they're putting these additional process steps in place in order to control some expenditure is not because they don't believe that they need cybersecurity. Cybersecurity is very resilient in economic slowdowns, but people are still going to be questioning any and all procurements and we are seeing more approvals being needed, in particular, where we saw that was in the Americas and in Europe, where we definitely had the majority of the deals push from Q2 to Q3. We saw that slowdown start to happen and more due diligence being needed on those procurements.

I'd like to also answer about the cost. Actually, part of the cost increase is because of our business transform into more toward larger enterprise sales. Originally, if you acquire a new enterprise customer, of course, the acquisition cost is much higher than you try to acquire other business which is [indiscernible] scalable business, right? So the acquisition of the enterprise customer are much higher and the support, [ the SE, ] the core personnel, all those costs will be high. The way to expand and to start to be profitable is this type of enterprise customer is a need to up the average [indiscernible], we need to generate more revenue from the same customer, and that's why we have to mentioned by Vision One and using Vision One to expand this business onto the same -- from the same customer. That's how we will be improving our business and our profitability.

[Interpreted] What were the sizes of the deals that were shifted from the first -- second quarter to the third quarter? Can you please talk about those deals?

We had in my -- in the video part of my recording, yes, I talked about, I just zeroed in on 6 rather large transactions that moved from Q2 into Q3. The 6 transactions were over $1 million and one that was over $5 million. The largest in the Americas. So they were large transactions that would have had a big impact on our Q2 performance, had they landed. Maybe I'll just finish just because you brought it up, we did close 4 of the 6 that pushed in the month of July, just for your information. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]