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?

Thank you. At this time, we'll be conducting our question and answer session. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. In order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Saket Kalyo with Barclays. Saket, your line is open.

OK, great. Hey, good morning, guys. Thanks for taking my questions here. Hey, Saket. Good morning. Hey, Udi. Hey, good morning. Maybe for you first, Udi. Can you just talk about your thoughts on new entrants into this market? And maybe just specifically to call out Okta and what your thoughts are on maybe, you know, the puts and takes for a broader identity platform like Okta, you know, entering the PAM market. Any thoughts on that?

Sure, sure. Look, we are the pioneer and the leader in a very hot space that's growing in importance. I think recent breaches really highlight the importance. So we've expected more competition and entry. We've always been, like I like to call it, productively paranoid about our leadership position and hence invested in continued breakaway innovation to further accelerate our leadership. I think specifically the journey we took to identity security gives us a major advantage. We think... that coming from PAM, where we put security first and following the proliferation of privilege across both human and non-human infrastructure is giving us major advantages as we expand into identity security and looking at it as a security problem. I talk to enterprise customers all the time, and they won't compromise on security when it comes to the keys to the IT kingdom and the keys to the cloud kingdom. And so we're going to continue to break away and lead with the broad expansion into identity security, but with PAM as a major advantage and at the center of it.

Got it. That makes sense. Josh, maybe for my follow-up for you, thanks for some of the detail on the ARR components in the quarter. I was wondering if we could just zoom into the maintenance piece just a little bit. I believe maintenance is a bigger piece of that ARR pie, if you will. How did that component of ARR maybe compare versus your expectations? And anything to keep in mind for sort of modeling those two pieces through the rest of the year?

Yeah. Hi. Thanks for the question. You know, I think maintenance came in about where we anticipated with regard to this came in about 70% of the total AAR. I think on the flip side, we saw AAR come in a bit better than we anticipated with that 41% growth really coming from the SAS and the subscription component, which was now 30% of that AAR. And that's compared to 12% if we look back in the first quarter of last year. So, you know, we're pleased with that. And so I think on maintenance, you know, we're getting the right renewal rate that we expected to get, but really the bonus is coming from doing better on the SAS side. Very helpful. Thanks, guys. Thanks, Edgar.

Our next question comes from the line of Sterling Audio with J.P. Morgan. Sterling, your line is open.

Yeah, thanks. Hi, guys. So I'm just curious what kind of pushback you may have gotten. So the mix in subscription was better than you expected, which I don't think comes as a surprise to many of us that have watched a lot of the transitions. But where you got pushback, where did it happen and why did it happen in terms of customers not wanting to choose subscription or SaaS?

So, hey, starting first of all, we're excited with the strong start to the subscription transition. I think it beat our expectations. And so as the first quarter that is chewing on some old pipeline, you can say we have some old pipeline that we expected to continue to sell as perpetual, but very pleased with how the mix is. has outperformed and very pleased with how it's looking in the current full-year Q2 and full-year pipeline. So I would say no pushback, but actually better than expected transition and really the way we wanted to start this year.

All right, great. And then, Josh, maybe one follow-up for you. I want to make sure I understand the full-year EPS guide. Has anything really changed in your expense outlook, or it's just the mixed going more subscription that would potentially weigh a little bit more on EPS?

Yeah, that's startling. It's really actually even below the operating income line. It's really around the taxes. As we kind of finished Q1 and we saw what happened in Q1 and we were forecasting taxes for the rest of the year, when you're hovering at the net income levels, then we actually end up with a higher tax rate around globally. So we just adjusted for our projected tax provision.

All right, perfect. Thank you.

Thanks, Jeremy.

Our next question comes from the line of Fatima Diwani with UBS. Fatima, your line is open.

Good morning. Thank you for taking my questions. Josh, I wanted to start with you on the Americas performance. So appreciate you quantifying that headwind for us as it relates to the model transition that seems like it's more concentrated in the Americas. But even if we adjust for that headwind, we're still looking at a sort of flattish performance in the Americas relative to much better performance in your other geographic theaters. So wondering if you can talk to any other marketplace dynamics or go-to-market motion factors dynamics that would explain that slattish year-on-year growth adjusted for the headwind.

Fatima Odi here. I'll start. So actually, when we looked at it and you touched it, we're actually excited to see that it's the faster mover in the transition with the heaviest weight on SAS. I would say some specific elements of this quarter. I mean, Americas is coming off a record 32% growth Q4, and it was the fastest of the region. And so we're pleased with where we are in the Americas, especially when we see the great pipe, the great start of Q2, and are optimistic for the rest of the year. And I guess I would add there, I would just add on a specific in terms of markets, you know, last year in the first quarter, we had a very strong federal spend that was out of cycle. And, you know, that didn't repeat in this quarter.

Very helpful. Josh, since I have you, any high-level modeling points or expectations you could point us to as it relates to the subscription revenue and subscription ARR mix between SaaS and on-prem? And to the extent the performance this quarter is changing your mix expectations specifically for that category. And that's it for me. Thank you.

Yeah, thanks. You know, we're still seeing a really SaaS-heavy on the AAR. So, you know, we're still using kind of a two-to-one ratio of SaaS versus on-prem subscription. And, you know, at this point, I would continue looking at it that way.

Your next question comes from the line of Rob Owens with Piper Sandler. Rob, your line is open.

Great, and thanks for taking my question. As we look towards Q2 and ARR, noting that you bought Adaptive a year ago, any puts and takes around how we should think about growth? And I know you said you were over 30% from an organic perspective this quarter. Are you sticking to that kind of guardrail? And then number two, I'll ask them both up front, given it's been a year since the acquisition, maybe an update on how Adaptive is doing. Thanks.

Sure. I'll start with the latter question on adaptive. I think we've invested the last several quarters on really integrating it to create 1 plus 1 equals 11 with being part of connected into PAM and part of the identity security portfolio. And we've also invested in putting overlay sales effort there. So we are It's still early innings for adaptive standalone, but we're seeing it, and some of the examples I've given, really play well in the cross-sell, up-sell motion with existing customers, and also as a new landing front for us, as a tip of the spear, as Matt called it, in the investor day. And so it's an early, young speedboat within CyberArk, But it's really taking off well. And, Rob, you know, on the AAR growth question, you know, we're still very much looking at 30% growth for the year on AAR. And, you know, we started off nicely on the first quarter with 41%, 30-plus percent organically, and we see that continuing through the year. All right, thanks.

Your next question comes from the line of Hamza Farawala with Morgan Stanley. Hamza, your line is open.

Hey, guys. Thank you for taking my question, and good morning. I just had a question on sort of the Salesforce productivity ramp. I know that you had just started to really introduce incentives around selling SaaS with the Salesforce in Q1 and had some new product announcements I'm wondering, you know, how do you see that ramp sort of progressing, particularly in the back half? And, you know, how should we think about sort of ARR growth in relation to that?

You know, hi, Hamza. Yeah, you're right. We really continue to ramp our capacity on the sales front into the first quarter. And, you know, we have, you know, still six to nine-month sales cycles, and we're excited about the, you know, kind of the record, continued record growth that we have in pipeline, and we'll be continuing to expand our sales teams globally. and going into each of the quarters through the second half of the year. They do take two to three quarters to ramp, so we always anticipate future growth by bringing them on board earlier. And I would say that when we look at the big hirings that we did in H2 of last year, In Q3, Q4, and certainly the ones for the first half of last year, we already are seeing them really fully productive at this point. And we actually saw a nice increase in productivity into this first quarter from our sales teams, and I think it has to do with the ramp-up that we did last year on the sales teams. And I would add that, like I mentioned in my notes, they're really on board with the SAS subscription. I mean, almost all of the reps have subscription deals in their pipe. Some have only subscription deals in their pipe, and that's why I noted that we're very pleased with how we kicked it off from the beginning of the year.

And just maybe a brief follow-up for Josh. I was wondering if you could maybe give – more concrete sort of inorganic contribution from adaptive. I think last quarter the organic growth was somewhere in the high 30% range. Was that fairly consistent this quarter as well?

The inorganic impact on revenue from adaptive?

On ARR. Oh, on ARR.

I think the The impact was, again, I said it was about 41% growth, and it was about 30, just over 30% growth from an organic perspective.

Thank you.

Your next question comes from the line of Greg Moskowitz with Mizuho. Greg, your line is open.

Okay, thank you very much for taking the questions. Maybe to start with Udi. How was, I know you called that one interesting customer example, but more broadly, how was adoption of Privileged Cloud this quarter among both mid-market and enterprises, and how do you see this evolving over the course of 2021?

Thanks. Yeah, absolutely. A super strong quarter for Purpose Cloud. I would say that we're beginning to see the lines blur into how big and how large enterprises can be in adopting it. And even financial verticals and very large accounts. And so it's becoming the larger force within new PAM deals is landing in Privilege Club.

All right, that's great to hear. And then, Josh, can you tell us roughly what AAM was as a percentage of either revenue or license bookings and just kind of how that compares to your expectations?

It absolutely hit against our expectations. And actually now when we look at revenue, you know, with our much larger percentage coming from SaaS and subscription and so forth, it becomes a little bit less relevant when looking at the product mix on a revenue because there's now a change for whether it's happening perpetually or subscription basis. But I will say that from a bookings perspective, AAM absolutely had a nice growth rate year on year and absolutely contributed at the levels, even at the levels that we anticipated, even a bit higher. Okay, great. Thank you.

Your next question comes from the line of Brian Essex with Goldman Sachs. Brian, your line is open.

Great. Thank you. And good morning. Thank you for taking the question. Udi, I had a couple for you. You mentioned your prepared remarks of flight to trust. And maybe if you could just update us in terms of how customer buying patterns may have evolved as you enter this year. I think last quarter you noted a number of customers that came on at abbreviated attach rates or maybe didn't do end-to-end solutions, kind of chewed up their deals. But What is the tenor of buying pattern in 2021, what you're seeing in the pipeline? Are you getting more end-to-end and higher attack rates now? And is that more prevalent on the SaaS platform?

Yeah, it's definitely more prevalent on the SaaS platform where we see the progression in the cross-sale move faster. I think the commentary last year or earlier in the year, we talked about the customer kind of looking to do the basics as they transition to work from home. And now we're seeing them be much more back to their strategic programs. We already saw that in Q4 and it competed in that. in Q1 and commentary and things we're seeing in deal cycles, both related to SolarWinds and also related to being back on track, is that they're looking to do deeper programs, whether like in the commentary, really following our blueprint when it comes to add-on and looking at multiple products and solutions, but also in new customers. We're seeing them be more strategic in about going deep in PAM and other areas in identity security. I would say that the average deal size is up and SAS deal size are similar to historic perpetual deal size, which is great.

Your next question comes from the line of Andrew Norinsky with DA Davidson. Andrew, your line is open.

Great. Thank you. Good morning, everyone. So I just want to start off with a high-level question. You touched on the SolarWinds and Microsoft Exchange attacks.

I'm just wondering if you could maybe put a finer point on how they may have impacted, if at all, the Q1 results and how they may have had an impact on your pipeline going forward.

I think the really important news is that they create a long tail for CYBARC. It's just one of those events that has multiple years of return where if anybody needed a reminder that privilege, no matter how you dissect an attack and no matter how they first entered, a network or cloud environment, what are they looking for? Lateral movement, escalation, and it's all about credentials and movement. So we see it creating the long tail of awareness and the field is feeling that, both in PAM and also as we've expanded PAM into identity security, because there are other examples there in those attacks of attacking other elements of identity. And then specifically there were some examples in Q1, and I gave the example of the telco where it helped reinforce or accelerate a deal or at least expand the deal size into a more strategic buy. But I think the important thing is the long tail we get.

Got it. Thank you. And then when I look at your new customers you added, it looks like over 170 this quarter. I was wondering if you could just break out how many came by way of adaptive purchases and how your new logo ads performed, excluding the adaptive customers you added relative to your expectations.

I'll jump in. Actually, I think on the new customers, the overwhelming majority were from our core pass, and actually a large percentage of them were coming in off of our subscription and our SaaS business as well. I think 30% of, if we look even back over the whole last year, 30% of the incremental ARR that we've added has come from new customers, and, you know, probably still 90-plus percent are coming from organically. And it's important to add that many of the new packages we introduced in the year actually include adaptive components in them, like multi-factor authentication and single sign-on. So it's attached to many of the new logos. Great. Thank you.

Your next question comes from the line of Tal Liani with Bank of America. Tal, your line is open.

Hey, guys. I have a question about next quarter guidance. It seems like the revenues are just slightly under street expectations in EPS as well. Would you mind to give us the context of the accounting impact on the migration to SAS? Maybe give us the context of ARR for next quarter just to make a comparison of like the like. Thanks.

Hi, Tal. Thanks for the question. You know, I think from, you know, really if you're talking about the accounting, you know, we talked about, you know, the headwind as it relates, you know, to our SaaS and subscription rate. For the subscription, you know, for the subscription side of the business on-prem, term-based licenses. We're looking at it going out between 50% up front, and for the new packages, it's closer to 70%. 30% upfront and 70% pro-rata over time. And on SaaS, obviously, it's fully ratable. So that goes, obviously, into the headwind calculation for the guidance. And we're pleased with the guidance to be able to, one, increase our anticipated subscription bookings mix and still really come in at what we anticipated on a revenue perspective for Q2. So from that perspective, what it really supports, and we think about it also from an annual basis, it really supports the fact that our pipeline is growing nicely. It's actually, when you think about our subscription mix and the increased headwind performance, For the quarter and for the full year, we're actually really raising our expectations for the business, you know, for the next nine months. So we're excited about what we're able to get to.

And, Josh, is there a number? Is there a number, like this quarter you gave the number of what's the impact of accounting. Is there a number for next quarter?

For the headwind? Yes. Yeah, the headwind is 10%. $9 million for Q2. Got it. Thanks.

Your next question comes from the line of Jonathan Rycover with Baird. Jonathan, your line is open.

Yeah, good morning. Hey, guys. So last year, you talked pretty consistently about strong pipeline growth, but you noted the challenges to deal with sizes and also conversion rates, particularly within certain verticals. So I'm just curious if you could comment on those dynamics entering 2021. Where do you continue to potentially see challenges in the business?

Yeah. Hey, Jonathan. I would say we're seeing a return to normalcy on that front and the ability for us to – the pipe was building great, and I think this quarter we also showed strong execution on that pipe. And I would say that from a close rate perspective, we could probably talk about record – record close rates in this quarter. And so more and more signs of return to normal. And then, of course, the more opportunity for acceleration because we have a growing SaaS portfolio and a growing number of customers that we can take them through the SaaS journey in process.

That's good to hear, Eric. The follow-up I have is on DevSecOps, and I'm wondering, Udi, how you see the growing influence of that center as a buyer of security impacting privilege? Is it really starting to highlight the need for what you do more than what you've seen in the past?

Yeah, I think this is probably one of the most strategic things we've made when we started both organically and inorganically, expanded and created the DevSecOps speedboat. There's no enterprise customer that doesn't have that movement happening where we're on top of securing their human and putting human controls. They're seeing the expansion of privilege in their application environment and and the need to secure secrets. So it's a very strategic element. It was in many of our largest deals included our DevSecOps solutions. And I would say it creates a great bridge for our customers to have an inroad to the developer side and the DevOps side. And so our CISO customers are very pleased that they can bring this value to the developer audience and, again, keep them secure while making it very transparent for them to manage secrets. That's great to hear.

Thank you.

Thank you.

Your next question comes from the line of Josh Tilton. Please state your company name, Josh. Your line is open.

Yeah, this is Josh Tilton from Barenburg Capital Markets. Just two quick ones from me. I was hoping that you could comment on the pricing environment and access management over the last year. If I remember correctly, I believe Adaptive was using pricing as a differentiator. Have you been able to improve pricing at all since the acquisition?

Thanks, Josh. I think we're taking a different approach. And, of course, as a standalone, that was a differentiator for Adaptive. The differentiator now is very much the fact that if we land an access customer, we can take them on the full identity security journey and into PATH. And so in some cases, the pricing changed also because we've included it in new packages. And in general, we're going to differentiate on value.

And just to follow up on that, you mentioned, I believe that you completed the integration of MSA with the privileged portfolio. Do you guys have any indication of what percentage of customers are using PAM today without MSA? And also, what are you guys seeing as the uplift ASP if a PAM customer looks to implement MSA for that PAM product suite?

I don't think I have that fully handy here, but it's a big part of, yes, there are customers or many customers where the MFA projects were taking too long. And when we come in with the opportunity to put MFA in front of them, it's a great landing spot. for them to secure probably the most important access they have in the organization, and then an opportunity for us to expand to all users. So it's a big opportunity within the customer base. Thank you.

Your next question comes from the line of Jonathan Ho with William Blair. Jonathan, your line is open.

Hi, good morning. I just wanted to maybe start out with some of your commentary on the non-human opportunity. Can you talk a little bit about how big that market could be and maybe, I guess, relative to the more traditional use cases, you know, how big of an opportunity you see there?

Yeah, thanks, Jonathan. I think in the past we talked about the non-human opportunity being as big as the human side. And I think every day that goes by is another shift left day for the world and technology. Applications are growing exponentially, no matter what industry it is. So across industry, we see them becoming more and more software companies. And And we have that great bridge of securing one of the most important elements in DevSecOps, but with a win-win, transparent to the developer and a good control point for the security professionals. So we see that only becoming more and more critical, and that's why we – We, of course, put it in the speedboat, a whole speedboat behind it because of this critical opportunity.

Got it. And then just relative to the shift to subscription, are you mainly seeing this as an opportunity to replace existing solutions, or is there a lot of greenfield opportunity that's coming from this as well?

So in terms of the multiple elements in the subscription transition, but if we talk about new logos, there are more and more types of organizations that are just happy to land in a SaaS delivery. And like I mentioned earlier, we were pleasantly surprised that it's continuously moving up in terms of the type of enterprise. So it gives us, from a new logo perspective, it gives us a way to bring faster time to value for those customers and then bring them across the portfolio faster. In terms of conversions, of course, there are conversions, even though it's a small company, it's a small piece, there are conversions of customers to subscription. And when we do that, we, again, want to bring them value and to get them into a bigger piece of the portfolio. And so that's where the packages kick in, where they're actually getting more value and getting better security because they get the right products in place. Thank you. your next question comes from the line of alex henderson with medium and company alex your line is open hi team you have mike secos on the line here for alex henderson um i did want to follow up on this record pipeline that you guys have to see if you could give this big unit order of magnitude um or at least provide some additional color i guess with this model transition underway and the bigger push on subscription and higher adoption rates of stats uh are you seeing

I guess, increased velocity in the sales cycles and customers moving quicker from the top of the funnel down to the final deal.

Yeah, thanks. I would say we still talk about a six- to nine-month sales cycle, but beginning to see the advantages and value, like you're talking about, of customers, of higher velocity sales, when it comes to SaaS customers and their ability to get a faster time to value and then faster adoption and our ability to push across. So faster, we're not changing our kind of our six to nine month general approach, but we are very optimistic that this is one of the upsides of this transition. And I would add that, you know, we're seeing much better close rates going into the first quarter of this year. So that – Udi mentioned it before, and I'll mention it again. And when we think about the record pipeline, I would also say what we like about it is that it's – First of all, going across all aspects of the pipeline, new customers, existing customers, across each of the geographies and across each of the product lines that we're talking about, whether it's privilege, access, or DevSecOps. And, of course, one of the other things that we're tracking very closely is, is it supporting our transition goals? And we're really pleased to see the pipeline supporting that. the transition goals, meaning that we're seeing record increases in our SAS pipelines, as well as our subscription packages, including and especially our new subscription packages.

Your final question comes from the line of Eric with JMP Securities. Eric, your line is open.

Yeah, thanks for squeezing me in. First off, Your contribution from subscription bookings, I think, was 20% in the year-ago quarter. It expanded to 51%. It seems like that's moving very quickly. What will it take for you to accelerate your timeline for reaching that 70% to 80%? I think you would. suggested it would be 8 to 10 quarters out. So what do you think the likelihood of that happening before the end of fiscal 22? And then secondly, I think you had indicated that your headwind projected for Q2 is about $9 million. I think it was $11 million in the March quarter here. Why will it be coming down in the June quarter from the March quarter?

Yeah, thanks, Eric, for those questions. I'll start with the second one. Basically, as we moved last year, if you think about it on a year-on-year basis, we already started to see some increases last year between Q1 and Q2 on the percent subscription. YOU KNOW, THAT'S IMPACTING THE MATH. YOU KNOW, WE LOOK AT WHEN WE LOOK AT THE HEADLINE, WE LOOK AT IT YEAR ON YEAR. SO WE'RE NOT DOING IT FROM A CUMULATIVE PERSPECTIVE. WE'RE LOOKING AT IT AS, OKAY, WE'RE TAKING THIS YEAR'S Q2 versus the scenario from Q2 a year ago. And already Q2 a year ago, we started to have more subscription business on a natural basis. So that's why, you know, we see a slight decline in the headwind, but, you know, we're still supporting the strong revenue growth. With regard to your first question on moving in the goalposts, You know, we're real pleased where we started the first quarter because it really set us up well for being able to establish firmly that the transition is happening, that it's certainly happening definitely within our original goalposts of 8 to 10 quarters. We're able to move up a couple percentage points in Q1. We also were able to move up a couple of percentage points already for Q2 and for the year. I think Q1 is still one quarter of work. But, you know, we'll see how Q2 goes and we'll be able to, I think, based off of the first half of the year, really reevaluate again, you know, the full transition period. But, you know, I think in order to bring it in, we'll want to see, you know, we'll want to see how more than just one quarter behaves on the transition. But so far, we like what we see.

This concludes our question and answer session. I will now turn the call back over to Udi Mukadi for closing remarks.

Great. Thank you very much. I want to thank everyone who joined us today. I want to thank our customers, partners, and employees for contributing to our strong first quarter and supporting our transition to a subscription company. I am confident that as we execute our strategy, we will build even deeper relationships with our customers and partners. Again, thanks, everybody, for joining today.

This concludes today's conference call. Thank you for participating. You may now disconnect.