ZeroFox Holdings, Inc.

Thank you for standing by, and welcome to the ZeroFox Fiscal Third Quarter 2024 Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. And as a reminder, today's call is being recorded. I would like to turn the conference call over to Todd Weller, Vice President of Investor Relations for ZeroFox.

Thanks, Operator. Good morning, and thank you for joining us today to review ZeroFox's Fiscal Third Quarter 2024 financial results. With me on the call today is Foster, our founder, chief executive officer, and chairman, along with Tim Bender, our CFO. By now, everyone should have access to our earnings press release. This press release, as well as supplemental financial information, can be found on our investor relations website. During this call, we may make forward-looking statements, including statements related to our anticipated financial results growth opportunities in external cybersecurity, our progress to achieving profitability, and expected benefits from our acquisitions of IDX and Looking Glass. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Actual results could differ materially from expectations reflected in any forward-looking statements. Please review our earnings press release and recent SEC filings for a description of these material risks and uncertainties. Forward-looking statements made today speak only to our expectations as of today, and we undertake no obligation to publicly update or revise them. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Foster.

Thanks, Todd. Good morning, everyone. Q3 was a record-setting quarter for ZeroFox. We delivered another strong top-line outperformance while also generating positive free cash flow for the second consecutive quarter. We believe that our outperformance reflects the growing demand for our external cybersecurity platform, demonstrates our team's consistent execution, and validates our balanced approach to growth and increased profitability. Today, I'm going to provide summaries on key areas of our results, share a few customer success stories, and provide updates on our one-platform vision and discuss our plan to close out this year. As you may have seen in our press release this morning, we reported strong results. We reported core revenue of $44 million, an increase of 89% year-over-year, and we defined core revenue as total revenue less revenue from our one large government contract. We ended the quarter with record ARR of 186 million, an increase of 21% year over year. And we accomplished this while also improving profitability and generating positive free cash flow quarter over quarter. Overall, I was very happy with our team's performance in Q3. The ZeroFox platform is relied upon by enterprise customers to solve their external cybersecurity challenges. And we continue to see demand for our platform's four strategic pillars including protection, intelligence, disruption, and response. Our continued success with enterprise customers was reflected in the 27% year-over-year growth in subscription customers with ARR greater than $100,000, and in general, our overall growth in large enterprise deals. Given the U.S. federal government's fiscal year-end during the middle of our Q3, I thought it was relevant to highlight our public sector business this call. with a very strong performance with record bookings, new customers, and public sector ARR. In Q3, we signed an eight-figure renewal and expansion with a strategic U.S. federal agency that is focused on cybersecurity. Through this contract and program, Xerofox is supporting critical cyber threat intelligence, cyber defense, and security operations across hundreds of federal, state, and local government organizations. We also signed a multimillion-dollar renewal and expansion with the U.S. Cyber Defense Agency that is using Xerovox to protect thousands of personnel from advanced digital attacks. Over the last three years, this customer has significantly increased their adoption of our platform and specifically, over the last two years, has more than quadrupled their ARR with us. Our team always takes great pride in supporting mission-aligned organizations with critical capabilities. We also added two additional six-figure customers that purchased six plus modules across our protection, intelligence, and disruption pillars. While public sector business benefited from the end of the government fiscal year and its seasonally strong spending, we believe there are underlying fundamental drivers that give us confidence in the future growth outlook and our one-platform approach. For example, the current geopolitical environment is amplifying the intensity and sophistication of the external threat environment and driving increasing awareness of the critical need for organizations to defend themselves against activity from nation state adversaries and organized cyber criminal groups. The days where insider threats were a top concern for CISOs are behind us. Today, our customers are thoughtfully protecting themselves from a myriad of external threats that are beyond their perimeters and most frequently beyond their borders. Turning to our on-demand response services, we experienced another record quarter, resulting in year-to-date revenue growth of nearly 100%. Our strong performance was driven by continued high levels of cybersecurity breach activity, including a significant increase in large-scale breaches and our continued success in capturing market share. We signed several six-figure deals as well as three seven-figure deals, including one with a large gaming and hospitality company. The market is recognizing our differentiated vision, brand, and one platform approach to helping customers navigate the increasingly complex emergency response and notification requirements, especially for regulated organizations. Furthermore, these requirements are becoming more stringent with the new SEC cybersecurity incident disclosure requirements for publicly traded companies. While we remain optimistic about our response services business, the go-to-market engine we are building, and the trust we are creating with our customers, it's important to remember that the response business is largely reactive and macro-driven. For example, major events and cyber cleanup campaigns like MoveIt, Log4J, or the fallout from SolarWinds are largely time bound and come in waves. And as you know, the great thing about things that come in waves is that there may be peaks and valleys, but it's just a matter of time until that next great wave hits. With that, I'd like to change gears and spend a few minutes providing an update on our vision. At Xerofox, we believe that solving the external cybersecurity challenge and problem set requires a one platform approach. This has been the driving force behind our strategy and the development of our comprehensive, unified platform with four pillars of capabilities. We continue to see adoption of the modern security triple crown, where security organizations will standardize on internal platforms like Microsoft, CrowdStriker, Sentinel-1, edge platforms like Palo Alto Networks or Zscaler, and an external platform like ZeroClock. Customers have grown tired of the complexity and cost of managing multiple external cybersecurity point products for digital risk protection, threat intelligence, takedowns, and even external attack surface management, a dynamic that has intensified in the current economic environment. We believe that our proven ability to provide an external cybersecurity platform that unifies protection, intelligence, adversary disruption, and response is a critical component of the success of this organization, and it provides us with key competitive advantages. We also believe that our technical EAS and capabilities from our acquisition of Looking Glass will provide immense value to our customers. Organizations need to understand their full external risk, their vulnerabilities in both digital and cyberscapes, and have detailed information on threat actors that are attacking them. This and this alone stands for the robust capabilities required for organizations to defend themselves from these advanced external threats. Furthermore, our team is committed to protecting our customers. It's in the DNA of our company, and quite frankly, it's what motivates us. It's our passion. We're not just AI data scientists, analysts, and engineers. We are true cyber defenders for our customers, and it's a responsibility that we cherish. Speaking of our customers, we had a six-figure new customer win with a large retail organization that is leveraging the power of nearly our entire platform. This customer purchased seven modules across protection, intelligence, and disruption pillars to protect their external tax service. We had another six-figure new customer win with a Fortune 500 financial services company that purchased four modules across protection and disruption pillars as well. This company selected Xerofox based on our ability to protect multiple digital asset types, including brands, domains, and a large number of credit card bin numbers, given our ability and proven capability to do takedowns and disruption at internet scale. We were also able to showcase our full capabilities for a new healthcare customer. This organization initially purchased the Xerofox platform for digital protection, however, During the sales process, they had an urgent need for on-demand response services and capabilities, and they selected ZeroFox for both incident and breach response capabilities. This resulted in a multimillion-dollar deal in Q3. This customer experienced the full value of our one-platform vision in action as we demonstrated our ability to disrupt and respond to aggressive external cyber attacks and, furthermore, protect them from those future attacks going forward. Another example was with an existing technology customer. This customer initially selected ZeroFox several years ago to protect its high-value digital assets. In Q3, the customer significantly expanded the number of digital assets protected and added on on-demand response capabilities, resulting in a 6x increase in their recurring spend. In short, I'm very pleased with our team's commitment to solving customer problems and the pace of innovation of our organizations. As a cybersecurity company, the pace of innovation is critical to ensuring we stay ahead of our customers' relentless adversaries. In Q3, we delivered significant advancements to our phishing and domain protection and global threat intelligence capabilities, specifically in the area of physical security intelligence. As we have always done, we will continue to leverage innovations in AI and machine learning to improve our ability to detect and disrupt threats. Large language models, generative AI, and various other types of computer vision, deep learning, and machine learning capabilities are commonplace in the Xerofox platform. For example, we are now using LLMs and generative AI to help us enhance our finished intelligence and alerted capabilities, as well as evaluate risk for key alerts and attacks we identify. Shifting gears, I'd like to turn our focus to the goals for Q4. as we close out what has been a strong and transformative year for Xerovox. We will continue to execute on our strategic plan to expand our platform capabilities in preparation for next year. We will grow our customer base, and we will continue to increase adoption. We will also continue to prudently invest in our go-to-market engine, our services to support and enable customers, and to optimize our business to improve efficiencies and profitability. We were very pleased with our Q3 cash flow performance and believe this trend reflects our commitment to balancing growth and profitability. Before I turn the call over to Tim for a detailed review of our Q3 financial performance, I would like to share one more customer story with you. I've always enjoyed meeting with customers and hearing their goals and challenges. It's personally been rewarding. In Q3, I had an opportunity to meet with one of our top 10 customers who was also on the Fortune 10 list. During our discussion, this customer described our offering as unbeatable in the marketplace and highlighted the significant ROI they are generating using the XeroFox platform each and every day. They even went up so far to say that XeroFox was saving them hundreds of millions of dollars per year. We ended up agreeing to expand our scope for the third consecutive year, and XeroFox also agreed to help automate and streamline another key external challenge with our platform with them. To me, there is nothing more powerful than the validation of this kind of direct customer feedback, particularly from a customer of this size and sophistication. It feels really good to know that a platform works, a team is committed, and that what we're doing is really helping people and organizations around the world. In short, I love this industry. And with that, I want to thank all of our foxes for their energy, passion, and commitment throughout Q3 and certainly before that. And now I'd like to turn our call over to our CFO,