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spk06: Good day. Thank you for standing by. Welcome to the CyberArk Software Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Erica Smith, Vice President, Investor Relations. Please go ahead.
spk03: Thanks, Steve. Good morning. Thank you for joining us today to review CyberArk's second quarter 2021 financial results. With me on the call today are Udi Mokati, 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 reflects 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 third quarter and 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 U.S. Securities and Exchange Commission, and those referenced in today's press release that are posted to CyberWorks' 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. CyberArk expressly disclaims any application or undertaking to release publicly any state updates or revisions to any forward-looking statements made herein. 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 an updated investor presentation that outlines the financial discussion in today's call. A webcast can also be found on our website in the investor relations section. With that, I'd like to turn the call over to our chairman and chief executive officer, Udi Mokadi. Udi?
spk13: Thanks, Erica, and thanks, everyone, for joining the call today. We hope you and your families are all well. We had an amazing second quarter, one of the best in the company's history. Our subscription transitioned right out of the gates in the second quarter, with the mix of subscription bookings reaching 65%. Despite the headwind created by the mix, we achieved total revenue of $117 million. This revenue level, paired with the mix overachievement, demonstrates that our bookings were considerably higher than anticipated in our guidance. In fact, the underlying business significantly accelerated in the second quarter, driven by record SaaS bookings and robust subscription demand. Due to our strong bookings, ARR grew by 35% to $315 million as of June 30. Even more importantly, our subscription ARR grew faster than 125% year over year. Recurring revenue reached $81 million, an increase of 32% compared to Q2 2020. Subscription mix, ARR, and recurring revenue demonstrate the progress in the subscription transition, momentum in the business, and the incredible demand trends we are seeing for our identity security platform, which is centered on PAM. I plan to frame our discussion on the pillars of growth, subscription transition, innovation, and profitability. So, firstly, on growth. Positive secular tailwinds and the execution of our land and expand strategy are contributing to the acceleration in our business. Identity security is at the center of digital transformation, zero trust, and hacker innovation, three of the most important and intertwined trends in cybersecurity. With digital transformation and the move to the cloud, privilege access is everywhere, and every identity across human users, applications, and bots can be privileged under certain conditions. If you think about zero trust, organizations around the world are no longer just strategizing about frameworks. They are implementing programs and allocating budgets, taking an assumed breach mindset that trusts nothing and verifies everything. Attackers are exploiting the changing IT landscape. In landmark breaches like SolarWinds, Microsoft Exchange, CodeCover, Colonial Pipeline, identity compromise, and the abuse of privilege access is the common denominator. Weaponized software targeting supply chains and sophisticated ransomware attacks are examples of the severity of the threat landscape and are pushing identity security to the top of CIO and CISO priority lists. Our ability to deliver industrial strength security, empower business agility and growth, and provide fast time to value is a unique and in-demand combination. This creates a strong market backdrop. Our go-to-market teams are executing and taking full advantage of these tailwinds to drive growth. They have quickly learned the land and expand approach, focused on the value of subscription delivery, the ability to leverage a robust and growing partner network, and the selling process more aligned with our customers' needs. It comes with our industry-leading SaaS solutions and focus on subscription sales. One of the most important go-to-market focus areas was expanding our sales motion to include our identity security vision. In January, we organized our sales team across the identity security pillars of PAM and our two speedboats, Access and DevSecOps. As evidenced by the acceleration in our business, the increased focus and specialized resources are working. Productivity levels have increased in all regions, and our cross-selectivity has improved considerably. At the heart of our business is our robust PAM portfolio, and in Q2, PAM, and particularly Privileged Cloud, was the biggest driver of growth. The majority of our customers land with PAM. We added more than 185 new logos across verticals, geographies, and customer size. In fact, Fortune 500 and Global 2000 companies in manufacturing, professional services, and critical infrastructure landed with Privileged Cloud in the second quarter. clear demonstration that large enterprise customers are increasingly protecting the keys to the kingdom leveraging the cloud, our cloud. In fact, the success of PAM extended across all portfolio areas as we look at strong close rates and a meaningful increase in deal sizes as new customers made longer-term strategic purchasing decisions with a broader set of our solutions. Customers are implementing comprehensive identity security programs, including CyberArk Everywhere initiatives, relying on CyberArk across our portfolio of solutions. This is in part because of the maturity of our solutions, but also the flight to trust. In today's threat environment, customers increasingly want to work with partners who have real-world experience solving critical cybersecurity challenges. While there are multiple examples from Q2, one I will highlight demonstrates the increased philosophy of our business and our improved expand notion. A financial services company who went deep with privilege access in the first quarter expanded quickly in Q2 to secure servers with endpoint privilege manager in a high six-figure ACV deal. The increase in ransomware attacks like Colonial Pipeline is accelerating demand for endpoint privilege manager, which has been proven in our lab to be 100% effective in blocking more than 3 million types of ransomware and counting. I want to highlight a few more customer examples from the second quarter that demonstrate the power of our identity security strategy. An existing hospital customer who has been locking down endpoints with Cyborg since 2019 is now displacing their legacy plan vendor to modernize their environment with privileged cloud. They are further expanding the Cyborg footprint by implementing Conjure to secure the DevOps pipeline as well as our access solutions, including vendor access. Our secret integrations, such as SailPoint and ServiceNow, as well as our ability to secure a broad set of cloud use cases were key contributors to this great expansion deal. One of our Pan Financial Services customers in Europe was modernizing its identity stack and big cyber MFA and SSO identity solutions in a highly competitive situation. They recognized the criticality of identities and wanted identity access from a trusted partner who would empower the business, provide strong security controls, and deliver value quickly. In the seven-figure annual deal, a European professional services company embraced our identity security platform by nearly all of our SaaS solutions across the portfolio. This new logo will benefit from increased security and ease of use across all identities, protecting humans and non-humans across privilege, access, and DevSecOps. The breadth of our portfolio and our ability to secure modern and traditional applications were key to winning this new logo. In a highly competitive win against a well-recognized DevOps solution, an existing endpoint privilege manager customer is trusting Conjure Secrets Manager to secure its CICP pipeline. With CyberArk, this Fortune 500 transportation company not only wanted the scalability and agility of Conjure, but also the peace of mind from knowing that the mission-critical applications running its business are truly secure. Attackers are increasingly targeting applications and developers, which is contributing to the strong momentum for Condor Secrets Manager. We are typically the second call after an incident response firm in a post-breach situation, and there are a number of examples every quarter. In Q2, a leading company who had just been hit by ransomware purchased privilege cloud through AWS and was up and running in a matter of hours, quickly getting their business operational. Our partner ecosystem of advisory firms, VARs, and CQ technology partners is further extending our reach and driving scale in our go-to-market. Our advisory firm partners are investing in cyber practices through training and dedicated resources, another demonstration of the strong market demand trends in the industry. CQ partners like Red Hat, who we collaborate with on automation and DevOps, as well as AWS, CloudBees, and UiPath, differentiate our solutions in the field and allow our customers to maximize their IT investments. Moving on to the second strategic pillar, which is our subscription transition. We perform ahead of our expectations. Our transition strategy was set in motion in January, and since then, customers, partners, and employees have embraced the new selling strategy. In just the second quarter of our active transition, we reached 65% subscription booking mix, much faster than we anticipated. Our transition continues to be SaaS-heavy, and we were thrilled to reach a new record for SaaS bookings across every one of our SaaS products, with particular strength in Privilege Cloud and Endpoint Privilege Manager. In fact, every geography and every SAS product saw an increase in subscription mix compared to the first quarter of 2021, giving us confidence that the subscription pricing will be adopted across verticals and regions. While the active subscription transition is relatively new, we already have more than 675 customers with over $100,000 in ARR, an increase of 39% from June of last year. We also continue to see great progress in our customer success program, and we are well on our way toward delivering transformative value to our customers. We are thrilled with the progression of our subscription transition, and after analyzing the path forward, we are confident we will reach our goal of 85% of bookings from subscription and exit the transition by the end of 2022. Said another way, Instead of an eight to ten quarter transition, we now expect to complete the transition in eight quarters. Moving on to our innovation pillar, which is the foundation of our strategy and strengthens our leadership position in the market. We were pleased to be named a leader in the July 2021 Gartner Magic Waterman for Privilege Access Management, positioned both highest in the ability to execute and furthest in completeness of vision for the third time in a row. The power and differentiation of our identity security strategy is demonstrated by dynamic privilege access and secure web sessions, which we introduced at our impact event in June. The response from our customers has been overwhelmingly positive. Dynamic privilege access extends our existing just-in-time capabilities to multi-cloud and hybrid workloads. Every enterprise IT environment has both standing and dynamic privilege access, and customers require a solution that secures both Secure Web Sessions is part of our access people and delivers continuous authentication and session protection, including session recording for all types of web applications from business apps to cloud consoles. This solution was described as a game changer for identity security by customers who attended our event. We are the only vendor offering this essential capability required to achieve zero trust. I will wrap up with some comments on the profitability pillar. Our go-to-market engine is firing on all cylinders, and our innovation machine is extending our leadership position. As we looked into the strong market fundamentals, acceleration of our business, and improved close rates and productivity, we made the decision to increase our investments in the second half of 2021, particularly in go-to-market, to drive growth in 2022 and beyond. We have not changed our philosophy around investments. We critically evaluate our investments to ensure they deliver a strong return and long-term value. And as a result, we expect a return to the profitability levels that we were on before we entered the transition period. To recap, before looking ahead, we had an incredible second quarter, one of the best in the company's history. The underlying business accelerated. Each of our SaaS solutions reached record bookings, Identity security across spam, access, and DevSecOps is becoming a security requirement pushed forward by major industry tailings, digital transformation, zero trust, and hacker innovation. And our subscription transition strategy is delivering results. Our outperformance in the first half of the year gives us incredible confidence in our ability to execute and the strong demand environment supports our growth. As a result, we are raising the full-year booking assumptions underlying our guidance above and beyond our beaten Q2, which Josh will discuss in more detail. We are well on our way towards transforming the business into a fast-growing, durable subscription company with our cloud solutions leading the way, which will unlock tremendous value for our company, 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 third quarter and full year. Josh? Thanks, Udi. So 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. As Udi mentioned, we had a great second quarter with an acceleration in the underlying business, particularly for PAM, and all of our subscription transition metrics came in better than we expected. In terms of the headline P&L, we delivered total revenue of $117 million with a 65% mix of subscription bookings. That's well ahead of our guidance framework of a 55% mix. As Udi also mentioned, revenue above the midpoint with a higher subscription bookings mix was because of the stronger than anticipated total bookings for the quarter above what we guided for in May. Subscription revenue reached $27.1 million and represented 23% of total revenue in the second quarter. That's increasing 101% from $13.4 million in subscription revenue and only 13% of total revenue in the second quarter last year. Our combined maintenance and professional services revenue was $62.9 million, with $53.5 million coming from recurring maintenance and $9.3 million in services revenue. Total recurring revenue in the second quarter reached $80.6 million, or 69% of total revenue, growing 32% from $60.8 million and only 57% of total revenue in the second quarter last year. The mix of subscription bookings as a percentage of new license bookings really demonstrates the pace and success of the transition. We are moving faster than we planned through the transition, as you can see by our 65% subscription booking mix. Economically, the headwind created by the mix was approximately $13 million in the second quarter when we compare it like for like to the mix in the second quarter last year. Normalizing for the mix shift, the licensed portion of our business, our SaaS, on-prem subscription, and perpetual would have grown over 35% in the second quarter, which really supports the growth we are seeing in our business. Taking the headwind into consideration, total revenue growth would have grown 22% year-on-year. At June 30, 2021, Our ARR was $315 million, growing 35% year-on-year and representing an acceleration from the organic growth rate in the first quarter of 2021. We closely monitor the subscription portion, which grew 128% year-on-year to approximately $109 million and represented over 35% of total ARR at the end of June. Sequentially, we added nearly $22 million of SaaS and subscription ARR in the second quarter compared to the first quarter this year. On an organic basis, this was the strongest sequential increase in subscription ARR in the company's history. The maintenance ARR was $206 million at June 30, 2021. So we're thrilled with the new business momentum in terms of number of new logos added and a healthy increase in new business deal sizes. A bit more detail, about 83% of our more than 185 new logos were subscription. That's compared to about 50% in the second quarter of last year. Geographically, the business continues to be well diversified. The Americas generated $69.5 million in revenue, representing 59% of total revenue. The Americas, again, had the strongest percentage of subscription bookings during the quarter. EMEA had $36 million in revenue, or 31% of total revenue. APJ generated $12 million in revenue or 10% of total revenue with an increasing mix of SAS and subscription. Online items of the P&L will be discussed now on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release. Our second quarter gross profit was $97.9 million, or an 84% gross margin compared to 85% gross margin in the second quarter last year. We continued to make disciplined investments in the business, resulting in operating expenses of $95.9 million, a 30% year-on-year growth, and operating income was $2 million in the quarter. Three main items that impacted our operating income. First, the $13 million headwind lowered our operating margin by about 9 percentage points. Second, higher expenses from foreign exchange rates lowered our operating income by about 2%. And third, a full quarter of expenses from adaptive this year versus last year. On a like-for-like basis, neutralizing the headwind, FX, and adaptive, our operating margin would have been approximately 15% in the second quarter of 2021. Over 70% of our operating expenses are related to headcount. We executed even better than we expected against our aggressive hiring plan to invest in the business, ending the second quarter with 1,969 employees worldwide. And of our total employee count, 881 employees are in sales and marketing. Net income was $250,000, or one cent per diluted share, for the second quarter. In the first half of 2021, free cash flow was $45.2 million, or a 20% free cash flow margin. This cash flow contributed to our strong balance sheet, and we now ended the quarter with $1.2 billion in cash and investments. We also increased deferred revenue by 22% year-on-year to $275 million at June 30. Our SaaS deferred revenue grew by 136%. to $63.6 million, and that's compared to only $27 million at June 30, 2020. Now turning to our guidance. For the third quarter of 2021, we expect total revenue of $116 to $124 million. We expect a non-GAAP operating loss of about $6 million to non-GAAP operating income of $1 million for the third quarter. We expect our EPS to range from non-GAAP net loss of $0.19 to a loss of $0.02 per basic share. This guidance assumes about a 70% of subscription bookings and a revenue and profitability headwind of approximately $14 million for the third quarter of 2021. Our normalized total revenue growth for the third quarter Taking the calculated headwind into account is over 25% at the midpoint of the range, and if you isolated our license lines of SAS, on-prem, subscription, and perpetual, the normalized growth rate for the third quarter calculates to be 40% year-on-year. Our guidance also assumes 40.2 million weighted average basic and diluted shares. Our guidance for the full year 2021 reflects the robust industry tailwinds and strong close rates. We expect total revenue in the range of $484 to $496 million. And the mixed assumption underlying our guidance for the full year is 64% from subscription bookings, and our revenue headwind for the full year is now approximately $63 million. This represents a significant increase from our prior guidance, which assumed a mix of 57% from subscription bookings and a $45 million headwind. Given the transition, we wanted to provide more color on our growth rate, taking the calculated headwind into account, which would approximately 19% at the midpoint of the range for total revenue. And if you isolate our license lines of SaaS subscription and perpetual, the normalized growth rate would be over 25% for the full year. I want to emphasize that the combination of higher bookings mix and revenue headwind represents a significant increase in the booking assumptions underlying our guidance for the full year. Now moving down the P&L, we expect the non-GAAP operating income to be between $7 million to $17 million. We expect our non-GAAP net income for diluted share to be in the range of $0.01 to $0.26, and for the full year, We expect 40.8 million weighted average diluted shares and about $12 million in taxes. We are increasing our investments in the second half of the year to ensure that we can capitalize on the growth opportunity, our leadership position, and fundamental strength of the business. We also want to provide a few updates on the timing of the transition and free cash flow guardrails for the full year. As Udi mentioned, on the timing of the transition, we now expect to complete the subscription transition in eight quarters. meaning we should cross over our targeted 85% threshold of bookings from subscription already by the fourth quarter of 2022. Lastly, on cash flow, while we do not intend to guide for cash flow, we did want to provide more granularity given that we're already halfway through the year. Currently, we expect our free cash flow to be between 5% and 10% of the non-GAAP net income margin for the full year, with third quarter free cash flow lower than the expected quarter of 20, lower than the second quarter of 2021 because of typical seasonality. Second quarter was great. Growth is accelerating, and our subscription transition is well underway. We are confident that our investments will drive growth and innovation in 2022 and beyond. With that, I'll now turn the call over to the operator for Q&A. Operator?
spk06: Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of Faket Kalia of Barclays.
spk12: Okay, great. Hey, guys. Thanks for taking my questions here. Udi, maybe just to start with you, it's great to see the overall revenue upside in the quarter, but I think what was really interesting was to see the revenue guide unchanged for the year despite the higher subscription mix. and sort of all the commentary on better bookings. So I was wondering if you could just maybe double-click into what you feel like is driving that underlying better bookings backdrop, because I think we heard that last quarter as well. So could you just go one level deeper into, you know, whether this is coming from a change in the competitive environment or whether this is related to maybe some of the breach activity that we've seen? Curious what you feel like is driving that better bookings activity.
spk13: Absolutely, Saket, and good to talk to you here today. We talked in the past a lot about building a record pipeline. I would say we're executing against this record pipeline. So it's a combination of the demand environment. the market leadership and favorable competitive environment and strong execution and how we organize to execute around it. The transition is really happening strongly. The sales team really embraced the disaster subscription. And with the increased demand environment, we're working on it and executing great. I mentioned the speedboats really complementing our PAM. core business, and very pleased to see the demand for Privileged Cloud move up to upmarket, like the examples I've given where large enterprises are also adopting Privileged Cloud. It gives us the opportunity also for quick time to value for them. So I would say all of the above, the execution against a growing demand environment, and I'd probably add that EPM specifically is getting strong demand driven by Ransomware, but I of the solutions are considered critical in this kind of threat environment and a strong pillar of zero trust.
spk12: Got it. Got it. That's super helpful. Josh, maybe for a follow-up for you, you know, I think we understand sort of the revised profitability. It feels like you're investing really for continued growth, if you will, I think. you know, going into future years. Can you just go a little bit deeper into, you know, will all those investments sort of be in go-to-market? Is there anything in that sort of revised operating income guide that maybe has to do with the changing mix? Or just maybe one level deeper into sort of the revised operating income guide? Because maybe for me, that was a little unexpected given the unchanged revenue guide. So just maybe one level deeper if you can.
spk13: Yeah, thanks. And I'll certainly go into that. So, First of all, we did extra hires in Q2. We were able to even overachieve on our internal targets for hiring because we were considering the very tight and competitive job market out there, and with over 160 net additions, We're starting into the H2 in a strong position from the hiring perspective, and we'll continue to be doing that as we go into the second half. And it's going to be really stepping on the gas on the go-to-market hires in the second half. And it's coming from – and the other part that I would dive into – The other part I would dive into is that we overachieved in Q2 bookings. Our guidance, as you pointed out as well, and we pointed out several times this morning, that is already, you know, we believe we're beating out our original internal forecast on bookings for H2, and that's really going to drive up, you know, our variable amounts as well into H2. So when we consider where we are on our on our position for hires going into the second half, when we consider our targets for our go-to-market hires going into the second half, and increased expenses related to the fact that we actually are booking more business in Q2 and are expecting to do so more in the second half. We're seeing a rise, and that's what's contributing to the kind of under the hood to that change in the operating expenses. And I will just add that nothing changed in our approach to run a highly efficient, profitable business. But as Josh mentioned, exiting Q2 with such growth and the faster transition to subscription and adoption across of SaaS by the enterprise and the favorable competitive landscape and market fundamentals, uh we believe that uh they really justify increased investment in go-to-market and scaling of the company to support the acceleration of the business and build with the momentum uh that we've been talking about today got it very helpful guys thanks i'll get back in queue thank you your next question comes from the line of sterling autry of jp morgan yeah thanks hi guys so
spk10: I want to ask the subscription transition question this way.
spk12: Obviously, the mix is much better than you originally expected, but who is not choosing subscription, especially when you talk about the new customers coming on?
spk10: What's the profile of the company that says, you know what, subscription is just not for me?
spk13: Yeah, I'll start. I would say that we're primarily very pleasantly surprised by the adoption across regions and across verticals. And as I mentioned in my prepared remarks, we even have critical infrastructure companies. and large global 2,500 adopting it. And it's happening across the board and across geographies. And as Josh mentioned, 83% of the new logos were Assassin subscriptions. So it's really happening. If I were to point to verticals that we expect them to be laggards and In the adoption, it's probably the global government vertical is where we expect them to be the later on the adoption and want to still kick off more in provincial. And under government, you can also put some highly regulated verticals, but it's happening. And within the regions, APJ is adopting it, but will be slower in adopting SAS institutions.
spk12: Makes sense. And then, Josh, one follow-up for you. I missed it if you said it. But you've given us kind of a great view on what revenue would have been if you didn't do the transition. But what about free cash flow? I think first half year to date, you're down about $5 million. But in the perpetual maintenance, I would imagine you collect just a much bigger portion of the value than you do under subscription. Even if you don't have an exact number, can you just give us a framework of how to think about that?
spk13: Yeah, I mean, you're right. On the SAS and subscription model, there's much more annual payments than in a classic perpetual maintenance model. And also, let's remember that the perpetual piece is getting more money for the license portion as compared to a typical annual contract. It's usually you know, an annual contract, so it could be two to three years break-even before you get to kind of the perpetual size. So I know the other piece then, obviously, you know, as it correlates ahead, but I can't give you necessarily a framework. I mean, but there is some impact on cash flow relative to the mixed assassin subscription. I would probably... you know, when we think about it, you know, correlated to, you know, we've always been talking about kind of cash flow being around zero to 10% above net operating margin, but what we're seeing is still the same percentage over net operating margin, but a lower net operating margin. So that's where I would correlate the difference. Yep, that makes sense. Thank you so much.
spk06: Your next question comes from the line of Jonathan Ho.
spk07: Hi, good morning. Let me echo my congratulations as well. Can you give us a little bit more color on the multi-product deals that you're seeing or platform purchases? And, you know, does SaaS make it easier for customers either to buy upfront or to add on, you know, sort of additional products over time? Yeah, absolutely, Jonathan.
spk13: I think we gave some examples on the call. A customer that starts with Privage Cloud adds EPM faster, and we've seen it with the examples of customers going broad on the identity security solution. So with the combined packages, we see everyone, every customer can land with third-party access, MFA, and SSO. So they get a good bite on the offering, depending on how they landed. And from there, we can show value and expand. So it's definitely the power of the identity security platform taking place.
spk07: Got it. Got it. And are you seeing any evidence of potentially pent-up demand from COVID-19 or maybe companies that are taking a little bit more of a strategic review over their portfolio and then now looking for either your SaaS solutions or the add-ons of some of these other solutions on the privileged cloud side? Thank you.
spk13: Absolutely the latter. I would say companies are being more strategic. They're in the new normal and it's time for them. Even with regards to solar winds and events of that type, first of all, it's kind of reactionary. What do we do? uh to patch and solve and uh we're seeing customers across the board be very uh strategic across uh across the how they're going to secure their their future and um and looking to be more programmatic and uh and definitely faster in adopting uh adopting in cloud um and uh we can see that also in the in the new logos where where deal sizes have uh have increased as they take a larger bite because they're being more strategic. They want to start a PAN or an identity security program. Great. Thank you.
spk06: Your next question comes from the line of Hamza Fadawalla of Morgan Stanley.
spk08: Hey, guys. Thanks for taking my question. So just one from my end for Josh as well as Udi. A lot of great color on the demand environment, larger deal sizes. It seems like there's a lot more strategic conversations around the product portfolio. If I triangulate that to ARR, so this quarter you added $27 million in that new ARR. That was almost double versus last year in Q1. If we think about the back half, given everything that you're saying about demand environment, should we expect if demand is improving, that that net new ARR should be growing into Q2 and Q3 and Q4? Does that make sense?
spk13: Yeah, Hamza, I'll start. Definitely, I mean, overall for the year, we see ARR growing 35%. And so we liked our accelerated organic ARR to 35% level Q2, and we see for the year to continue growing ARR and having an annual growth of about 35%.
spk08: And, Josh, if I can just follow up on that. So definitely growing 35%. That seems like to be a bit of an uptick versus what you guys were saying before of 30% plus growth. Is that a fair assessment?
spk13: Yeah, that's correct. And we're seeing that uptick because of the acceleration that we had on an organic basis in Q2, and we're glad to do that.
spk08: Okay. Thank you so much.
spk06: Your next question comes from the line of Rob Owens of Piper Sandler.
spk13: Great. Good morning, everybody. Thanks for taking my question. I think Hamza beat me, too, because I was going to try and pin Josh down on a number for the year on ARR. So 35 looks like a good number. I guess at a high level, Udi, what's the transition mean either for customer acquisition?
spk09: Is subscription getting you into new areas or new segments of the market? And then how do you think longer term about customer wallet share and what their shift to SaaS is doing from that perspective. And any quantification would be great. Thanks.
spk13: I would say the subscription removes resistance in procurement cycles, again, for the majority of the verticals that are adopting subscription. And we're really playing in broad markets, both verticals and geography already. I would say that the SaaS element, the SaaS delivery takes us further into mid-market, what we call the commercial segment as an easy landing point. And, of course, it is in line with the strategy we're seeing across enterprise where a lot of them want a SaaS-first solution for security. So I would say it's having the right solutions and the right timing right now where the market is ready to adopt BAM and identity security. And, of course, the motion, as I mentioned earlier, really allows us to show quick time to value We honed a lot the customer success message that I talked about and get quicker into that add-on business with SAS customers. And I guess secondarily for Josh, you did see strong acceleration in that subscription ARR, especially on a sequential basis. If we kind of unpack the different elements, though, term was up just modestly on a quarter-over-quarter basis, especially relative to the growth in subscription ARR.
spk09: Was there anything to do with duration?
spk13: And I realize there's a lot of moving parts on these numbers as we get two and three layers deep, but was there a duration issue or anything else we might be aware of there? Thanks. Yeah, Rob, it's not about duration, just doing more bookings of SAS and subscription deals. And also, I think we mentioned this before, we're SAS-heavy on that, so more of the ARs coming on the SAS side. But it's just doing more bookings. All right. Thanks, guys.
spk06: Your next question comes from a line of Adam Borg of Stiefel.
spk04: Hey, thanks so much for taking the question. Udi, maybe just for you, just obviously with the U.S. federal government taking cybersecurity a lot more seriously with the EO and other actions, I'm just curious kind of what you're seeing more in this vertical. And as you think about the fiscal year ending 3Q, are we expecting to see some type of acceleration in 3Q, or do we think that any tailwind from the federal sector would be more of a 22 event? Thanks.
spk13: Absolutely. So I think we have a great long-term opportunity in global government, including U.S. federal. And we are excited to see principles of PAM, principles of least privilege, of zero trust. in both the executive order and in proposed legislation. So we believe there'll be long-term returns on that. We're not expecting outsized returns in Q3 because of the time it takes for these initiatives to seep in. But again, certainly long-term opportunity for global governance.
spk04: Great. That's really helpful. And maybe just a quick follow-up. Just on Endpoint Privilege Manager, it's nice to hear the continued traction there. Can you just remind us of the mix that that represents of total ARR? Thanks so much.
spk13: I think I have the mix of revenue. About 20% of total ARR of the annual current revenue. Great. Thanks so much.
spk06: Your next question comes from the line of Brian Essex of Goldman Sachs.
spk10: Hi, good morning, and thank you for taking the question. Maybe, Udi, if we can dig in a little bit, I think there's some commentary about the favorable competitive landscape. What is driving that favorable shift. And I think in your prepared remarks, you noted a nice win against the DevOps peer. Maybe you could dig into that a little bit as well and give us a better insight into what was the approach of the peer? What did that competitive environment look like and what drove the win there?
spk13: Sure. So I'll take a broader brush on the competitive environment and then we can dive into DevOps. I think Cybark has been consistently extending our market leadership position with the innovation arm. and, you know, coupled closely with an extending and growing go-to-market arm, and you can see the results for the third year in a row in the Gartner Magic Water and really having the top leader position. I think in the same time, we've seen the traditional pound vendors kind of switch hands on private equity, and we're seeing destruction there. And so we're not waiting and pushing ahead on PAM. And then with our extension into identity security, we have the broad offering with PAM at the center, but the ability to push the full identity management suite. And DevOps. And in that realm, we obviously can counter the access players and the DevOps players, but we win on having a security-first mindset with the customer and the fact that they trust us with them at the center. The example that I alluded to and our win on the DevOps front is exactly where customers no longer, especially after SolarWinds and the increased threat environment, I would say more control kind of shifting back to a security first mindset for the customer. And here they wanted a security vendor to be the one securing and have the ability to secure all types of applications. and really differentiates us in the market with our secrets management ability to be agnostic to what is the chosen developer platform. Our partnership with Red Hat and and the ability to integrate all of that into their PAM. And so having the PAM platform and being able to secure broad all types of applications has led us to this win and many wins on this front.
spk10: Okay, that's helpful. And I was going to ask you about Centrify, so I think you hit that. And then maybe just a quick follow-up. You know, the deal you announced, or I guess the transaction you announced, AWS, you know, purchase of Privileged Cloud or Privileged Cloud being purchased through AWS. How significant is AWS as a channel? Is that more down market and how does that kind of lead to follow-ons? Do you have a lot of visibility to increase the cash after Privileged Cloud is purchased through that channel? Thanks.
spk13: That's a great question. I would say that AWS is a new channel for us, but we're very excited about it because it complements, it's actually an inclusive channel that works on top of our other channel partners, especially where where our customers have existing AWS relationships and are able to buy through the marketplace. So that was a great example we put out there where the demand was for SideRock. We helped the customer recover from ransomware into our privilege cloud, and the ability for them to buy that through AWS really accelerated the whole cycle. And we have multiple integrations with AWS. We're moving up in the in the partnership with them, and we're going to invest more in this global market to be able to replicate those sort of wins, again, in complement to our existing channels.
spk10: Very helpful. Thank you. Thanks.
spk06: Your next question comes from the line of Jonathan Rookhiver of Baird.
spk05: Yeah, hey, guys. Congrats on the strong performance. So it's really great to hear how well Privileged Cloud is doing. But I'm curious if you can give us some color on Adaptive. It's been about a year since the acquisition. It seems like you've had some early traction there. I'm just curious how you feel about the positioning there, especially with the security-first messaging.
spk13: Yeah, I think it's, you know, we're very excited about this speedboat and how they're performing. And I would say this is really kind of a breakout quarter for them in the muscle of both landing new logos And also creating add-on opportunities within our customer base. So I would say it's a newer part of the business, but the speedboat is well on its way with strong followers in the market. uh the we invested a lot with uh integrating um our solutions and uh our ability for our customers to really see uh success uh from from leveraging the connectivity to uh to pan to vendor access and and the other things that we brought to the table. And the customers are very excited about what we announced at our Impact event with secure web sessions and our ability to give them PAM-like controls for all types of users. And so this will be available in the second half of the year, and we expect that to give us a chance an increased competitive advantage and a good why on why adopt identity security as a strategy.
spk05: Yeah, no, that's great to hear, Rudy. And I think you touched on some of these dynamics earlier, but when you look at net new ARR in the quarter, peeling back the layers, any seasonal impacts or dynamics around maintenance that we should be aware of in the quarter and also looking at 3Q?
spk13: Yeah, Jonathan, actually, I think there was nothing seasonal that I would point to. Everything on the maintenance side behaved according to plan, and just we exceeded plan in terms of the business coming from SaaS and subscription. I want to take this one opportunity, though, to the question earlier around the percentage of AIR for EPM. I said it was about 20%. It's about 20% of the subscription ARR component that we have, so I just wanted to clarify that. Thanks.
spk05: Thanks, Todd.
spk06: Your next question comes from the line of Roger Boyd of UBS.
spk09: Hey, thank you. Just a quick question on Perpetual and your expectations for the back half here relative to the strong booking mix and 35% ARROW growth. Can you talk about if there's anything changing from an incentive standpoint in Persep at the second half, or is it just more the go-to-market students' stride, bundles are coming online, and customer demand is just organically going that way?
spk13: So I think like we talked about, we're expecting, again, a growing mix in Q3 with a 70% mix. And then in Q4, we're expecting more add-on business coming with Perpetual. In terms of the team. They're all incentive to sell SaaS and subscription. We kicked that off in January. They're all trained. All regions are running and pushing that. So the only nuance, which is a positive one, is we expect add-on business from existing customers in Q4, which will be an increase in perpetual into that mix.
spk09: So that would be add-on business, not any sort of conversion of maintenance revenue?
spk13: It'll be mostly add-on. There will be still even some new business because let's remember that the pipeline is still rolling out from, you know, a historical old pipeline going into the back half of this year. But it'll be a combination, but mostly probably add-on with some new business.
spk09: Got it.
spk13: Okay.
spk09: Thank you very much.
spk13: Thanks.
spk06: Your next question comes from the line of Greg Moskowitz of Muzuho.
spk01: All right. Thank you for taking the questions. Guys, I know you introduced some new subscription packages at the beginning of the year, and, you know, we'd love to hear some more about how that's tracking so far.
spk13: Yeah, I would say that all new pipeline is basically containing and, of course, deals that close within the cycle is on the new packages that combine previous threat analytics, multi-factor authentication. and often vendor access into the mix. So it's a higher value for a customer to adopt the new package of what they get from the get-go. And we're seeing it both in pipeline and also in, of course, deals that were closed within newly created pipelines.
spk01: All right, that's very helpful. Thanks, Judy. And then for Josh, so the acceleration of go-to-market investments in the second half, is this primarily greater sales capacity, or will there be other aspects of go-to-market, such as channel enablement, marketing, et cetera, that you might be significantly ramping as well?
spk13: Yeah, when we think about the incremental piece, it's really across all of the functions in go-to-market. It's heads, it's quota carriers, but definitely also related to overlays and channel managers and the like, so really around the go-to-market engine. All right, perfect.
spk01: Thanks very much.
spk06: Your next question comes from the line of Catherine Trevenick of Colliers.
spk02: Oh, thank you for taking my question. And good quarter. Could you just pull apart for me maybe the top five C3 players on your alliance that really help you drive, you know, revenue or cross-sell, up-sell within some of your accounts? Thanks.
spk13: Sure. So I mentioned a few. I would put up Red Hat and SailPoint and UiPath and CloudBees. Probably add Proofpoint in there as well if I go for top five. And with all of them, there's really great collaboration in the field and also integration. And on top of that, The power of the CQB Alliance is really strong because there's variety. There are deals where customers want integration with their IOP devices, and you have partners to support that, like Forescale. And so it's also the power of the variety and also the focus on the top. And like I mentioned earlier, we should add AWS in there as a top partner. And I gave an example on the call with ServiceNow. So I'm beyond the five, right, because there are multiple partners there.
spk06: No, thank you very much. Your next question comes from the line of Alex Henderson of Needham.
spk11: Thank you. So your transition here has resulted in a pretty steep reduction in operating margins year over year from about 20% down to about 1%. Obviously, that process continues out into 22, and I know you don't give guidance for 22, but the street has a significant increase in EPS model for 22, yet I think your slide deck from your analyst day showed a decline in operating margins from 21 to 22. Is a decline in operating margins still in order given the the accelerated pace that you've already achieved, or alternatively, will that moderate a little bit more because you're already further into the process? If you could give us some directionality to margins for 22, based on your expectations around the transition achieving 85, excuse me, the 85% by the end of the year, fourth quarter, that would be very helpful. Thanks.
spk13: So, thanks, Alex. You know, I think, you know, nothing has changed in terms of the fundamental economics behind the transition or the transition of the model transition and the context that Operating margin takes a hit as you transition through the model and get to the other side of 85% to 90% coming from bookings, and it continues that way until you get to that point. So what we talked about today is that we're excited that we're able to move that point up to more certainty to being by the fourth quarter of 2022. So we do anticipate the operating margin to follow through a transition model to potentially go down through the transition into 2022. What we like, though, in terms of moving the transition table up is that we'll be able to now come out of the transition faster, and typically you'll then see the rebound of operating margin going up post the last transition quarter. So when we get to the end of 22, the way the model works on these transitions would then be able to – to rebound and go and return to the profitability earlier rather than later. And I would add, you know, we're still fundamentally sound on being able to achieve, again, coming out of the transition, a couple of quarters on the other side of the transition to return to our Rule 40 targets. after that. And so basically moving it up to eight quarters is basically moving where we're going to come out back to profitability sooner.
spk11: Super. And the accelerated hiring, I think, also adds to that pressure in 22, though, right?
spk13: Yeah, but it's all part of, if we think about even the guidance for this year economically, right? Our guide is still talking about, you know, if you consider the headwind coming into, you know, 20%, you know, revenue grew up to 13%, you know, operating margin. And obviously, whatever we hire in this year is going to go into next year. But fundamentally, we're still we're still focused on being able to hit the transition and then afterwards be able to rebound to a rural 40 company going into the following year. Great transition. Thanks. Thank you.
spk06: This concludes the Q&A session. I will now turn the call back over to CEO Udi Mukaddi for closing remarks.
spk13: Great. Thank you for taking the time. I want to thank our customers, partners, and employees for contributing to our strong second quarter and supporting our fast transition to a subscription company. I'm confident that as we execute our strategy, we will build even deeper relationships with our customers and partners. Again, thanks, everyone.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
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