CyberArk Software Ltd.

Hello, and welcome to the Q3 2021 CyberArk Software Limited Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Ms. Erica Smith. Please go ahead, ma'am.

Thank you, Lisa. Good morning. Thank you for joining us today to review CyberArk's third 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 the call up for 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 fourth quarter in the full year of 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 20F, filed with the U.S. Securities and Exchange Commission, 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. CIDARC 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 in today's call. We also want to remind you that we provide the calculated headwind calculation for additional color on the impact of our subscription bookings mix shift, but it should not be viewed as comparable to or a substitute for reported gap revenues or other gap metrics. A webcast of today's call is also available on our website in the IR section. With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Udi Mopati. Udi?

Thanks, Erica, and thanks everyone for joining the call. Q3 was another amazing quarter and we are thrilled with our results. If I could use only one word to characterize this quarter, it would be acceleration. Acceleration in the demand environment, in the underlying growth of the company, specifically bookings, and in the metrics that demonstrate the health of the business. As examples, subscription ARR growth accelerated to 131%, reaching $139 million. Total ARR growth accelerated to 38%, reaching $344 million. Recurring revenue growth accelerated to 41%, reaching $89 million, and new logos added during the quarter accelerated to over 230. Our standoff performance in Q3, following an incredible second quarter, was again driven by record SaaS bookings, record total bookings, the execution of our subscription transformation, and robust demand for our identity security platform centered on privilege access management. Customers are embracing the subscription model, as evidenced by 72% of new license bookings coming from SaaS and subscription in the third quarter, ahead of our guidance framework. Even with the revenue headwind from this mix, we generated total revenue of $122 million above our midpoint, demonstrating again that our bookings were considerably higher than anticipated in our guidance. One way to think about the growth of the business is to isolate the license line adjusted for the calculated revenue headwind. This would represent license growth of faster than 50% year-over-year, which is indicative of our overall growth. Simply put, it was a stellar quarter. As we have talked about throughout the year, our subscription myths, ARR, and recurring revenue demonstrate the progress in the subscription transition and the strong demand for our SaaS solutions in particular. The four pillars of growth, subscription transition, innovation, and profitability provide a great backdrop for today's discussion. Let me start with growth. I love starting here because our growth trajectory has never been stronger. Excellence in our execution and the strong secular tailwinds of digital transformation, cloud migration, and attacker innovation contributed to the acceleration in our business. With the acceleration in attacker innovation, our customers now contend with operator-driven ransomware, malware as a service, and attacks on automation and supply chains and the DevOps pipeline. It is no longer enough to have an assumed breach mindset. Instead, enterprises have to dig deeper and take an assumed identity posture. They recognize that every identity across viewing users, applications, and bots can be privileged under certain conditions. it is easy to see why customer and prospect interest in our solutions is at an all-time high. Looking at our geographies, we have another perfect game across our major territories. When you adjust for the calculated revenue headwind, every region grew total revenue by over 27%, with license revenue obviously growing even faster across the Americas, EMEA, and APJ, which Josh will talk about more. New business accelerated, and we added more than 230 marquee customers, as I mentioned, from law firms to software companies, oil and gas to retailers, to large government agencies. We want customers across the spectrum, demonstrating that every organization, regardless of size or vertical, needs our identity security platform. We typically land with PAM, and momentum for Privage Cloud continues to build, both in the mid-market and much deeper in the large enterprises. In fact, in the third quarter, a Fortune 30 company signed our largest annual contract for Privage Cloud ever, a great win that demonstrates the increased adoption we are seeing in our enterprise customer base. With our subscription model resonating and SaaS taking off, customers are adding both more users and more products faster. And for customers with large self-hosted footprints, they are expanding with Privage Cloud to secure new business units, the DevSecOps pipelines or applications, Endpoint Village Manager, or EPM, has another record quarter as the crippling effects of ransomware continue to drive demand. Not only is EPM an expansion opportunity within our customer base, but it is also proving to be a great landing spot for new logos like a large food retailer, a bar-in-the-cloud software company, and a large local school system, to just name a few of the Q3 wins. The increased focus and specialized resources from the Access and DevSecOps speedboats continue to pay off this quarter. Productivity levels increased in all regions, and our cross-sell activity has improved considerably. Access has another strong growth quarter in Q3, with both exciting enterprise wins in our base and a broader set of customer wins in our commercial and emerging markets. I will talk more about our innovations in a few minutes, but identity security, where Access is tightly aligned with PAM, is differentiating Cyborg with customers. I want to highlight a few more customer examples from the third quarter. In a highly competitive deal, an existing financial services customer wanted the benefits of our identity security platform and will be replacing a legacy access solution with CyberArk Identity. A new financial services customer will be using PrivX Cloud and Conjure to secure secrets. This organization recognized that securing both human and non-human access was critical, particularly as every company becomes a de facto software company. Our ability to secure applications anywhere is giving us a nice competitive edge in the DevSecOps space. A high-profile pharmaceutical company bought Privileged Cloud, but more importantly, is committed to implementing a comprehensive identity security program, and PAM is just the first step. A large insurance company expanded with every one of our solutions. They began their journey with Cybark in 2010, expanding their privilege access program along the way. In Q3, they went deep and broad with Cybark, embracing our identity security platform, buying secrets manager, privilege cloud, remote access, endpoint, workforce identity, and cloud intelligence manager. We pride ourselves on our culture, building strong, lasting relationships, and putting the customer at the center of everything we do. This win demonstrates the power of our portfolio, and it shows the criticality of our relationships with enterprise customers. Our partner ecosystem is further extending our reach and driving scale in our broader market. Our certification programs have been stepping up as we focus more and more on leveraging our partners to drive growth. Here today, through Q3, we certified close to 20% more professionals than we did in the full year 2020. This commitment to invest in comprehensive training programs is a testament to the opportunity and significant growth our channel partners expect. A number of our partners are going even deeper into identity security and acquiring companies, including the Herzog Group and CDW, making strategic acquisitions in our space. Next, I would like to focus on the subscription transition. We made strong progress and outperformed our expectations in the third quarter. Our transition continues to be driven by strong demand for our SaaS solutions, and we reached another new record for SaaS bookings with particular strength in Privileged Cloud and Endpoint Privileged Manager. We have completed three quarters of our active subscription transition, and the number of customers with over $100,000 in ARR is now more than 760, growing faster than 40% year over year. As we expected when we began the subscription journey, customers are getting faster types of value and prioritizing our platform, which will result in higher lifetime value over time. We are thrilled with the progress of our subscription transition and with our success year to date, we are confident we will exit the transition by the third quarter of 2022. Our innovation pillar is the foundation of our strategy. continues to put more distance between us and the competition, and further strengthens our leadership position. We announced earlier this week the general availability of Secure Web Sessions, a workforce and customer identity solution. Secure Web Sessions merges the worlds of Access and Pan. We are now the only vendor in the market that can empower customers with continuous authentication and session protection, including session recording for all types of web applications, from business apps to cloud consoles. We are pleased to see our innovation recognized by industry experts. We were named a Leader in the Forrester Wave Identity as a Service for Enterprise and an Overall Proven Access Management Leader by Kuperinger Co. And just yesterday, we announced that we were named the only visionary in the 2021 Magic Quadrant for Access Management. We believe we have the undisputed leader in town and are leveraging this position to extend our expertise into access. I will wrap up my discussion with some comments on the profitability pillar. As you have already seen from the acceleration in our business, our investments are paying off. The headwind on profitability from the subscription transition is obscuring the P&L. Given the strength of our bookings, which gives us more scale and our track record of delivering profitable growth, we are well positioned to return to strong profitability levels. To sum up Q3 quickly. Our business is accelerating on the back of record year-over-year bookings growth. SaaS is leading the way and reached a new record quarter this quarter. Privileged Cloud is pushing into the large enterprise, and EPM has moved into the mainstream security discussion. Our subscription transition is making strong progress. Our industry-leading identity security platform across PAM, Access, and DevSecOps has never been more relevant. I will now turn the call over to Josh who will discuss our financial results in more detail and provide you our outlook for the fourth quarter and full year 2021. Josh, over to you. Thanks, Udi. Before we discuss the details of the quarter, we would like 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 third quarter. Our license bookings growth meaningfully accelerated even in comparison to a strong Q2 2021. We also made significant progress executing both our subscription transition and our identity security strategy. In terms of the headline P&L, we delivered total revenue of $121.6 million with a 72% mix of subscription bookings ahead of our guidance framework of our 70% mix. As you may remember from last quarter, revenue above the midpoint of our guidance and a higher subscription bookings mix demonstrates that our total bookings beat our expectations for the quarter. Subscription revenue, which includes our staff and on-premise subscription revenue, reached $35.3 million and represented 29% of total revenue in the third quarter, increasing in 143% 14% of total revenue in the third quarter of last year. Our maintenance and professional services revenue was $63.3 million, with $53.6 million from recurring maintenance and $9.6 million in professional services revenue. We continue to have strong renewal rates on our maintenance renewal business. Recurring revenue, which includes our subscription and maintenance related on perpetual license revenue, reached $88.9 million, or 73% of total revenue, growing 41% year-on-year from $62.9 million and 59% of total revenue in the third quarter last year. With a 72% mix of subscription bookings, it is clear the subscription transition is a Economically, the headwind created by the mix was approximately $16 million in the third quarter when we compared like-for-like to the mix in the third quarter of 2020. Normalizing for the mix shift, growth in the license portion of our business, our SaaS on-premise subscription, and perpetual accelerated again in the third quarter to over 50% and is illustrative of the underlying growth in the business. Taking the calculated revenue headwind into consideration, total revenue growth accelerated to 29% year-on-year. Moving on to the annual recurring revenue, we experienced our largest ever sequential increase in the subscription portion, adding about $29 million in the third quarter and reaching $139 million, representing over 40% of the total. Our total ARR was $344 million, at September 30th. We had another great new business quarter, both in terms of new logos and business trends. We signed more than 230 new customers, with 85% of them opting for a subscription compared to about 59% in the third quarter of last year. New business deal sizes also increased again in the third quarter. Geographically, the business continues to be well diversified. The Americas generated $68.2 million in revenue, representing 56% of total revenue. The Americas, again, had the strongest percentage of subscription bookings during the quarter. EMEA had $39.7 million in revenue, or 33% of total. APJ generated $13.7 million in revenue, or 11% of total revenue. If we look across the geographies adjusted for the calculated revenue headwind created by the mix, each region would have grown by over 27% in total revenue, with our license line growing even faster than 50% in the Americas in APJ and approximately 30% in EMEA. All line items of the P&L will now be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release. Our third quarter gross profit was $102.5 million, or an 84% gross margin, consistent with the 84% gross margin in the third quarter last year. We continued to make investments to drive innovation and growth, resulting in operating expenses of $102.4 million. That's a 34% increase year on year, and operating income was $130,000 in the quarter, which was better than the midpoint of our guidance. It is important to remember that our operating income is lowered by about $1.5 million from FX rates and approximately $16 million of headwinds. On a like-for-like basis, neutralizing the calculated revenue headwind and foreign exchange, our operating margin would have been approximately 12% in the third quarter of 2021. Over 70% of our operating expenses are related to headcount. So in the third quarter, we surpassed 2,000 cyber-market employees, ending the third quarter with 2,075 worldwide. Of our total employee count, 925 are in sales and marketing. Net loss for the third quarter was about $2.4 million, or $0.06 per basic and diluted change. In the first nine months of 2021, free cash flow was $47.1 million, or 13% free cash flow margin. This cash flow contributed to our strong balance sheet, and we ended the quarter with $1.2 billion in cash and investments. Turning to our guidance. Our guidance for the fourth quarter reflects the robust industry tailwinds, our record bookings, strong execution year-to-date, and improved productivity. For the fourth quarter of 2021, we expect total revenue of $140 million, to $148 million. We expect a non-GAAP operating income of about $5.5 million to $11.5 million for the fourth quarter. We expect our EPS to range from non-GAAP net income of $0.06 to $0.21 per diluted share. This guidance assumes about 68% of the subscription bookings mix and a calculated revenue and profitability headwind of approximately $28 million for the fourth quarter of 2021. So if you isolate our license lines of SaaS, on-premise subscription, and perpetual, the normalized growth rate taking into account the calculated revenue headwind for the quarter is about 24% year-on-year. Similarly, for the total revenue, the growth rate would be about 19% at the midpoint of the range, taking the headwind into account. Our guidance also assumes 41.7 million diluted shares. For the full year of 2021, we expect total revenue in the range of $491.6 million to $499.6 million. The mixed assumption underlying our guidance for the full year is 65% from subscription bookings, and our revenue headwind for the full year is now approximately $68 million. This represents an increase from our prior guidance, which assumed a mix of 64% from subscription bookings and a $63 million headwind to revenue. Taking the calculated revenue headwind into account, our revenue growth rate would be approximately 22% at the midpoint in the range. And if you isolate our license lines of SAF and subscription and perpetual, the normalized growth rate is over 30% for the full year, taking the calculated headwind into account. I want to emphasize that increasing both our total revenue guidance and our mix indicates that we are, again, increasing the bookings assumptions underlying our guidance for the full year. This raise is above and beyond the bookings fee in the third quarter. Now, moving down to P&L, we expect non-GAAP operating income to be between $13.1 to $19.1 million. We expect our non-GAAP net income per diluted share to be in the range of $0.11 to $0.25. For the full year, we expect about $40.9 million weighted average diluted shares and about $13.5 million in taxes. We wanted to briefly mention our current thoughts on the timing of the transition and on ARR growth. Given our success year-to-date, we expect to exit the transition earlier, and we now expect to complete the transition in the third quarter of 2022 versus the fourth quarter of 2022 as we outline in our August call. Also, given the acceleration of our growth and our record annual recurring revenue to grow about 37% year-on-year. That's an increase from our prior framework of 35%. The third quarter was a great quarter and another important step in the execution of our subscription transition and our identity security strategy. Our business is accelerating, which you see in our results, and recurring revenue growth rate. As we look ahead, we are in a great position to deliver long-term growth and profitability. I will now turn the call over to the operator for Q&A. Operator?