CyberArk Software Ltd.

Good day and thank you for standing by. Welcome to the Q1 2021 CyberArk Software Earnings Conference Call. At this time, all participants are in a listen-only mode. please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to turn the call over to speaker today, Erica Smith, Vice President of Investor Relations. Please go ahead.

Thank you, Amy. Good morning. Thank you for joining us today to review CyberArk first quarter 2021 financial results. With me on the call today are Udi Mopati, Chairman and Chief Executive Officer, and Josh Siegel, Chief Financial Officer. After prepared remarks, we will open up the call to a question and answer session. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the second quarter in the full year 2021. Our actual results might differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the company's annual report on Form 20-F filed with the SEC and those referenced in today's press release that are posted to CyberArk's website, as well as risks regarding our ability to actively transition the business to a subscription model, the duration and scope of the COVID-19 pandemic, its related impact on global economies, and our ability to adjust in response to the COVID-19 pandemic. CIDRC expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations to the most directly comparable GAAP financial measures are also available in today's press release, as well as in an updated investor presentation that outlines the financial discussion of today's call. As we outlined at our investor day that we held in March, beginning in the first quarter, we changed the revenue and cost of revenue presentation of our P&L to increase visibility into our subscription transition and the long-term focus of our business. The historic breakdown of this new P&L presentation can be found in the appendix of the Q2 update deck, which can also be found in the quarterly results section of our investor relations websites. A webcast of today's call is also available on our website. With that, I'd like to turn the call over to our chairman and chief executive officer, Udi Bokhari. Udi?

Thanks, Erica, and thanks, everyone, for joining the call. We hope you and your families are safe and healthy. 2021 is off to a great start. We successfully completed the first quarter of our active transition to subscription. We are thrilled with our execution and are well on our way towards transforming Cybark into a fast-growing, recurring revenue company with a comprehensive SaaS portfolio of solutions. A few financial highlights. Total revenue was $113 million in the first quarter, ahead of our guidance with our new subscription revenue line growing 180% over last year. In addition, it was great to see our recurring revenue reach $76 million, or 68% of total revenue. We also generated more than $5 million of non-GAAP operating income and $31 million in free cash flow, both ahead of our expectations. Our revenue outperformance was particularly rewarding given that our subscription booking mix exceeded expectations at 51%. Much of our success this quarter was, again, from the strength of our SaaS solutions. Given the increase in ratable revenue from subscription, we believe that annual recurring revenue, or ARR, can be used to evaluate the strength of the underlying business. Our ARR reached $288 million, up 41% year over year. And even more impressive is that our ARR from SaaS and subscription together grew faster than 250%. ARR, subscription mix, and recurring revenue demonstrate the momentum in the business and the incredible demand for our identity security platform, which is centered on PAM. At our investor day in March, we outlined four pillars that will create long-term value for Cybark, our customers, partners, and shareholders. I will use the same framework of growth, subscription transition, innovation, and profitability to walk through our Q1 results. Let's start with growth. Positive secular tailwinds and excellence in execution are driving our strong growth trajectory. Identity security is at the center of every major industry tailwind, including digital transformation, zero trust, hacker innovation, and compliance. Digital transformation and the explosion of technologies, applications, and automation tools are not only blurring the line between a privileged user and a workforce user, but also between human users, applications, and bots. For customers, this is creating a sense of urgency for cybersecurity. Enterprises have moved beyond the emergency initiatives and build out of 2020 and into strategic execution of comprehensive security programs. And as a result, the flight to trust we saw in the fourth quarter continued in Q1. In the wake of SolarWinds and the Microsoft breaches, enterprises are embracing zero trust and an assumed breach mindset. They are looking to security partners who have comprehensive, measurable security solutions and deep domain experience. As we look at our business, these industry dynamics are making identity security more relevant than ever before. To drive our growth, we are executing well against this opportunity with our land and expand strategy. Early this year, we aligned our business across privilege access management and our two speed loans, DevSecOps and Access. This strategic move has further accelerated our momentum with an immediate impact as seen in our Q1 performance. The increased focus also contributed to another record quarter for pipeline generation across the portfolio, which will fuel our growth throughout the year. We continue to see customers embrace our SaaS solutions with Privileged Cloud and Endpoint Privileged Manager among the fastest-growing offerings in our portfolios. Enterprises continue to run in a hybrid world, resulting in strong demand for our on-prem spam offering, but more often than not, in a subscription package versus the perpetual purchase of the past. I'm hearing from customers that one of the ripple effects from SolarWinds is that chief information security officers increasingly recognize the criticality of access, DevOps, and cloud entitlements as key risk points that need to be secured, which is contributing to our record pipeline growth in these areas. Our investments in customer success over the last year are also paying dividends as the pace of engagement with existing customers remains at an all-time high. A number of customer examples from the first quarter demonstrate the power of our strategy. In a highly competitive field, a wholesale distributor expanded with workforce identity as part of its strategy to modernize access, secure its employees, and deliver operational efficiencies. This customer recognizes that the explosion of SaaS applications is extending Privilege access to all employees, making security equally as important as a seamless user experience. I love this win for two main reasons. First, the customer embraces our identity security strategy, and second, it demonstrates the increased sales velocity from our SaaS portfolio. This whole accelerator realized fast time to value, ease of use, and unparalleled scalability after buying Privilege Cloud in just the fourth quarter of 2020. paving the road for workforce identity expansion just a quarter later. It was a great win. The SolarWinds Orion attack was a catalyst for an existing Telco customer to significantly expand its PAM deployment and reduce its attack surface with Secrets Manager, a key win against a competitive DevOps platform. A large grocery store chain is following our blueprint methodology as part of its identity and access management modernization. We are protecting this customer's Robotic Process Automation, or RPA, strategy with Secrets Manager, while also significantly expanding its PAMP protection with the rollout of Privage Cloud. Our new business progression and close rates continue to improve in the first quarter. We landed over 170 new customers, and about 70% of these wins were subscription deals, up significantly from about 57% just last quarter. We want logos across all industries, including retail, global government, and financial services. As examples, a U.S.-based retailer is replacing an incumbent PAM vendor that couldn't scale to meet the requirements of its hybrid environment. We're helping this customer secure across Google Cloud and Azure, as well as all servers and databases in its on-premise environment. A consulting organization was looking for an identity security partner committed to delivering innovation that would evolve in step with its long-term strategy to secure its AWS and Azure multi-cloud environment, the DevOps pipeline, and its machine identities. In the first step of its cyber program, the company is rolling out Privileged Cloud and Secrets Manager to secure homegrown applications as well as other software like Tenable's vulnerability management solution. As we look ahead, the sales capacity we added in 2020 has ramped to productivity, and we are growing the team to keep pace with the accelerating demand environment. Our partner ecosystem of advisory firms, VARs, and C-Cube technology partners is further extending our reach and will help us drive scale in our go-to-market. Moving on to the subscription transition, feedback from customers, partners, and our own employees has been incredibly positive. The levers we introduced earlier this year are working, creating both push and pull in the market. Customers were already pulling us towards subscription in 2020, and the new packages we introduced in mid-January, combined with the maturity of our SaaS offerings, have accelerated that motion. The sales incentives, as well as the deal desk and deal scoring, are helping push Cyborg towards our goal of becoming a subscription company. This is reflected in our new pipeline generation, which is overwhelmingly geared towards recurring subscription bookings, heavily weighted towards SaaS. Geographically, the Americas had the strongest mix of recurring bookings, which impacted our recognized revenue, which Josh will discuss. We are pleased with the subscription traction in EMEA and APJ, both trending ahead of our expectations. The subscription transition is reducing friction in the sales process and increasing our cross-selectivity, as you saw in some of the earlier customer examples. Tim is already shifting towards delivering transformative value and building deeper, more enduring relationships, which will generate higher lifetime customer value. I couldn't be more pleased with where we are coming out of the first quarter in terms of the transition. Now moving on to our innovation pillar, where we continue to step on the gas around our innovation engine. In the first quarter, we made considerable progress, evolving our portfolio into a unified, comprehensive identity security platform centered on privilege. We've integrated multi-factor authentication with our privileged portfolio to provide our customers with significantly enhanced security controls. Customers are embracing zero-trust frameworks, and while our just-in-time capabilities are solving enterprise use cases today, we are continuing to enhance our offering. Our investments in innovation that help customers secure their cloud environments are paying off. Cloud Intelligence Manager is building momentum. Our tighter integration between our Conjure Secrets Manager solution and Privage Cloud offering is strengthening our customer security posture as they move more and more applications to the cloud and adopt cloud-dative approaches to application development. Our CQ partnerships are extending our reach, demonstrated by recently being named Partner of the Year by Red Hat. We will be rolling out exciting offerings as we move through 2021, and I can't wait to preview many of these at our upcoming Customer and Partner Impact event in June. Finally, we are making strategic investments this year to drive growth, innovation, and scale, and Josh will discuss our profitability pillar in more detail. I wanted to emphasize that we have not changed our approach to investment, and building a durable business model is part of our DNA, a guiding operating principle of Cybrock. We remain committed to delivering profitable growth and returning to the rule of 40 once we are through the transition period. As I look into the remainder of 2021, we have major industry tailwinds driving our business. In the wake of the recent cybersecurity attacks and the accelerating pace of hacker innovation, our solutions are a business imperative, and we are seeing a heightened sense of urgency across PAM, Access, and DevSecOps. Our go-to-market machine is executing well. We are extending our leadership position and delivering innovation at a record pace. We are well on our way towards transforming the business into a fast-growing subscription company, and our cloud solutions are leading the way. With our strong execution in the first quarter, we are in a great position to unlock tremendous value for us, our shareholders, our customers, and our partners. I will now turn the call over to Josh, who will discuss our results and outlook for the second quarter and full year. Josh? Thanks, Udi. Thank you. Before we discuss the details of the quarter, we wanted to remind you that we posted slides to the website that will be helpful as we walk through our results. The appendix of the text contains the historic breakdown of the revenue and cost of revenue lines and the new presentation of our P&L that we discussed at our investor day in March. We are making this change to the P&L to increase visibility into the success of our subscription transition and the direction of our business. So moving into our results, our strong business momentum continued in the first quarter. We were pleased to beat our revenues, operating income, and EPS guidance, particularly given that we also exceeded the expectations for the percentage mix of subscription bookings. Total revenue was $113 million with a 51% subscription booking mix, up from $107 million and approximately 20% subscription booking mix in the first quarter of last year. Subscription revenue reached $25 million and represented 22% of total revenue in the first quarter, increasing 180% from $9 million in subscription revenue and 8% only of total revenue in the first quarter last year. As anticipated, given the shift in our sales motion towards a recurring subscription business model, perpetual license revenue did decline and was $27 million for the quarter. Our combined maintenance and professional services revenue was $61 million, with $51.6 million from recurring maintenance and $9.8 million in professional services revenue. During the subscription transition period, it is important to evaluate additional metrics that provide increased visibility into the momentum and health of the business. They include total recurring revenue, percentage mix of bookings from subscription, and annual recurring revenue. In the first quarter, total recurring revenue reached $76 million, or 68% of total revenue, growing 41% from $54 million and increasing from the 51% of total revenue in the first quarter last year. Our recurring revenue growth is driven by strength of our subscription bookings from SaaS and on-prem subscriptions, as well as our continued strong maintenance renewal rates for our mission-critical software. The mix of subscription bookings as a percentage of new license bookings is an indicator of pace and the success of the transition. In the first quarter, the mix was about 51% of new license bookings. That's compared to the mix in our guidance, which assumed only 47%. This compares to about 20% in the first quarter last year. Please note, as we move through the transition, the subscription mix will level set all deals to an annual value, including the perpetual bookings. The headwind created by the mix of bookings was about $11 million in the first quarter. Taking the headwind into consideration, our first quarter total revenue would have grown by about 16% year-on-year. It is critical to keep in mind that the headwind is calculated based on the annualized bookings mixed year-on-year. At March 31, our ARR was $288 million, growing 41% year-on-year from $205 million in the first quarter last year. On an organic basis, excluding the contribution from adaptive, our annual recurring revenue still grew faster than 30% in the first quarter of 2021. Another important metric that we watch closely is the growth of just the subscription portion of ARR, which includes our SaaS and on-prem subscription contracts. We were pleased that our subscription portion grew faster than 250% year-on-year to about $88 million, representing over 30% of total ARR at March 31. That's up from $25 million, or 12%, at March 31 last year. This clearly highlights our tremendous success in growing our recurring subscription business. Our ARR growth this quarter was driven by both existing as well as new logos. Geographically, the business continues to be well diversified. The Americas generated $61.3 million in revenue, representing 54% of total revenue. And for the year-over-year comparison, the Americans again had the strongest percentage of SAS bookings during the quarter, which lowered our recognized revenue in the period by about $8 million. EMEA grew by 40% year-on-year to $38.3 million. APJ generated $13.1 million in revenue. That's increasing 39% compared to the first quarter of 2020. All line items of the P&L will be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release. Our first quarter gross profit was $95.5 million, or an 85% gross margin. That's compared to 87% in the first quarter last year. Our gross margin is being impacted by two factors. First, the headwind from our subscription bookings mix. And second, the increased cloud expenses related to delivering our SaaS services. Moving down the P&L, we continue to make disciplined investments in the business. R&D grew by 39% year-on-year to $25.4 million as we invest to deliver innovation. Adaptive expenses contributed about $2.1 million to the year-on-year increase in expenses. Sales and marketing increased 20% to $53.8 million as we expand our go-to-market engine across all geographies. G&A increased 37% year-on-year to $10.9 million to scale the business. In total, operating expenses for the first quarter increased 27% to $90.1 million. Our operating income was $5.4 million in the quarter. Operating income was lowered by about $1.2 million net from foreign exchange rates. As a reminder, the approximate $11 million revenue headwind had a corresponding impact on our operating income Taking the headwind into account, our operating margin would have been approximately 13% in the first quarter of 2021. Over 70% of our operating expenses are related to headcount. We executed well against our aggressive hiring plan to invest in the business, ending the first quarter with 1,808 employees worldwide. Of our total employee count, 832 employees are in sales and marketing. Net income was $3.8 million, or $0.09 per diluted share for the first quarter. In the first quarter, free cash flow was $31.3 million, or a 28% free cash flow margin driven by strong collections from our fourth quarter bookings. This cash flow contributed to our strong balance sheet, and we ended the quarter with $1.2 billion in cash and investments. We also increased deferred revenue by 23% year-on-year to $260 million, Our SAS deferred revenue grew by over 300% to $48 million compared to $11 million at March 31 last year. Turning to our guidance, for the second quarter of 2021, we expect total revenue of $111 to $119 million. We expect a non-GAAP operating loss of about 3.5 to non-GAAP operating income of $3.5 million for the second quarter. We expect our EPS to range from non-GAAP net loss of 11 cents per basic and diluted shares to net income of 6 cents per diluted share. Our guidance also assumes 39.6 million weighted average basic and diluted shares and 40.7 million weighted average diluted shares. We are assuming $2.5 million in taxes for the second quarter. This guidance assumes about 55% of subscription bookings and a revenue and profitability headwind of approximately $9 million for the second quarter of 2021. Our guidance for the full year of 2021 reflects the strength of our pipeline, our overall opportunity, and an assumption for the mix of our bookings. We expect total revenue in the range of $484 to $496 million. While we are maintaining our revenue range because of our stronger than anticipated total bookings, and our higher subscription bookings mix in the first quarter, as well as our robust subscription pipeline growth, we are increasing our subscription mix assumption to about 57%, and our revenue headwind increasing to approximately $45 million. This compares to our prior guidance, which assumed a mix of 55% and a $39 million headwind to revenue. Our upward adjustments to the mixed percentage and headwind represent an increase in our bookings outlook for the full year, illustrating the strong first quarter performance as well as our confidence in the robust demand environment and execution of our strategy. We expect non-GAAP operating income to be between $20 million to $30 million and We expect our non-GAAP net income per diluted share to be in the range of $0.39 to $0.64. For the full year, we expect about 40.9 million weighted average diluted shares and about $10 million in taxes. As Udi mentioned, and we discussed at Investor Day, we are not changing our investment philosophy and are planning for profitability levels to snap back quickly. after we exit the transition, which we continue to expect to be in between 8 to 10 quarters, so exiting in the fourth quarter of 2022 or by mid-2023. In terms of free cash flow, we were thrilled with the outperformance in the first quarter, which reflected the strength of our perpetual bookings in the fourth quarter and our strong cash collections for maintenance. For the full year 2021, considering the seasonality in our business, we continue to anticipate that our cash flow margin will be in line with our non-GAAP net income margin. Our performance in the first quarter strengthens our conviction that we are making the right level of investment to drive growth and innovation in 2021 and beyond. I will now turn the call over to the operator for Q&A. Operator?