CyberArk Software Ltd.

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.

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?

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?