Q2 2020 Cyberark Software Ltd Earnings Call

The question answer session to ask a question drain the session you'll need to press star. One. Please be advised that today's conference is being recorded if your car any further assistance. Please press star zero.

I'd like to hand, the conference over to Mr., Erika Smith, Vice President Investor Relations. Please go ahead.

Thank you very good morning. Thank you for joining us today to review Cyberark second quarter 2020 financial results with me on the call today or do you Mccartney Chairman and Chief Executive Officer in Josh Siegel Chief Financial Officer. After prepared remarks to open the call up to a question to answer session.

Before we begin let me remind you that certain statements made on the call today, maybe considered forward looking statements, which reflect management's best judgment based on currently available information.

Our first specifically to the discussion or expectations and beliefs regarding our projected results of operations for the third quarter or actual results may differ materially from those projected in these forward looking statement I.

I direct your attention to the risk factors contained in the Companys annual report on form 20-F as filed with the FCC and news referenced in today's press release that are pushing to get Cyberark website is one of those risks regarding the duration scope of the coping 19 pandemic and it's really didn't impact on global economies in our ability to adjust to adjust in response to the.

Looking at 19 Goodnight.

<unk> is frankly disclaims any application undertaking which released publicly any updates or revisions to any forward looking statements made herein.

Finally, non-GAAP financial measures will be discussed in this conference call reconciliations to the most directly comparable GAAP financial measures are also available in today's press release for the supplemental this work information.

Which can be found on our website www dot cyberark dot com and the Investor Relations section also a webcast of today's call will be available on our website in the IR section with that I'd like to turn the call would you were chairman and Chief Executive Officer Liquefied Rudy.

Circuit and thanks, everyone for joining the call.

During the quarter, the safety and well being over employees continue to be our top priority, we evolve their policies and procedures based on the rolling nature of the pandemic in the countries in which we operate.

Our global teams are agile and have adjusted well to today's new normal in fact, we believe reduced travel schedule virtual events and digital marketing have increased the overall productivity and focus across the company.

Before getting into the details of the quarter I want to spend a few minutes talking about the trends we're seeing in the market then discuss our Q2 results in more detail.

I will recap our first ever virtual customer event held two weeks ago and finally, the scope the integration of adaptive and positive response from customers and partners.

We continue to see identity and security I did see identity security as Pam at the top of CIO and Cisco priority list. This was confirmed by customers at our recent impact event held two weeks ago as well as by recent industry out it was reports.

In today's environment, securing privilege access is more important than ever the global pandemic is creating unprecedented enterprise wide risk every geography and every industry is experiencing a sharp increase in attacks from those looking to take advantage of the distractions and disruptions that cobot 19 has created.

Our team is on the front legs in a breach we are off in the second phone call. After the remediation for helping locked down privilege activity rebuilding the integrity of the environment and restoring secure operations.

Recently engagements, we have seen ransomware, including major adding data exfiltration two data encryption tactics.

Deckers move laterally across the network escalate privilege access steel unencrypted files and encrypt vulnerable devices crippling organizations. This better can be seen in the headline grabbing Twitter event attackers compromise internal administrative tools changed email addresses to gain access and hijacked high profile verified accounts based.

On recent from our labs team, we believe the privilege escalation use in the Twitter attack could have been mitigated with time controls, including isolating access session monitoring behavioral analytics at least privileged at the airport.

The Mays Twitter and recent coping 19 vaccine attacks demonstrate that the privilege pathway is the attack vector of choice, putting Pam as a top priority.

Organizations have responded to the pandemic rapidly adjusting how they support employees, how they go to market and service customers after establishing their work from home operations. They are now focused on securing new environments endpoints applications and access across users from I.T. and SAS administrators to developers and third party vendors.

There was a little debate twentytwenty will be viewed as the great digital accelerator as companies embraced cloud and SaaS solutions to deliver efficiency innovation and rapid time to value.

When you look at the quarter. We were pleased to deliver results ahead of all guided metrics with total revenue of $106.5 million non-GAAP operating income of $17 million and non-GAAP EPS of 42 cents per share.

These broader market trends resulted in positive momentum in our business with record recurring license revenue record SaaS bookings record growth in anyway privilege manager as well as strong demand for application axis measure and for our core privilege access security solutions delivered both on premise and in our privilege cloud.

We were particularly pleased with our results, especially given our revenue headwind from acceleration of our SaaS subscription business.

On the new business front, we signed more than 170, new logos, including great logos like a fortune 100 retailer a born in the cloud technology company, a European car manufacturer and various global government agencies.

Our wins in the second quarter work across verticals geographies and customer sites, including the Midmarket demonstrating that every company needs to secure privilege access.

Overall, the impact of the pandemic was inline with our expectations and was contained primarily to the speed of deal progression with prospects, who more closely scrutinized budgets for new IP initiatives.

Josh will talk about the new business dynamics later in the call.

At the same time existing customers are increasingly turning to cyberark as a trusted advisor to strengthen their security posture, given the heightened threat environment as privilege access proliferates through the enterprise their first expanding their Pam footprint with corporate access then extending the deployments based on our PAB blueprint methodology.

Do include application axis manager and endpoint privilege manager.

As an example, a large existing S&P 500 customer described the foundation of its security strategy as Cyberark everywhere.

In the second quarter. This customer added more than 2000 core privilege access users to provide visibility in access across this data centers and azure environments. This customer will also leverage application axis measure to secure its robotic process automation or RPH initiative as well this kubernetes and Jenkins.

As I highlighted SaaS bookings accelerated in the quarter and I want to highlight a few of our wins.

And existing endpoint polluters magic customer purchase privilege club to lock down the privilege pathway Alere for third party access and application axis manager to secure its applications as well as its vulnerability management solution.

In a competitive rip and replace deal for endpoint privilege manager a major U.S. insurance company chose cyberark to secure more than 130000 endpoints with our assess solution because of our enterprise skills to support the new work from home.

Yeah or work from anywhere imperative as well as our ability to block ransomware and present credential theft at the input.

Hey, global offer was reducing its data center footprint and consolidating infrastructure because of the increased risk of this consolidation. This customer prioritized. It's comprehensive pant program and purchased our three SaaS solutions and point privilege manager Cyberark pubic cloud and Alere.

As well as application axis magic to secure its devops environment.

Well interest has increased for Pam delivered as a service and specific verticals the midmarket and the low end of the enterprise I want to highlight that we continued to see strong demand in the large enterprise for on premise delivery.

However, with the macro uncertainty in the first half of 2020 more customers are asking for the flexibility of subscription pricing for their on premise deployments, which contributed to our record recurring license revenue and bookings in the second quarter.

From a geographic perspective, while our business continues to be well diversified we were very pleased with HP Jays revenue growth of 20% in the record in the second quarter, including early traction in Japan.

Our partner ecosystem continued to play a key role in our success in the second quarter and about 65% of our revenue was from indirect sales.

Our advisory partners like Deloitte, Pwc, KPMG and Accenture continued to influence new and add on business CQ Alliance partners like automation anywhere Blue prison, and you I path in robotic process automation.

Tenable in Rapidseven, and vulnerability management, and Red hat and Dev ops help differentiate cyberark in the market.

I'd like to make a few comments on our cyberark impact customer event.

In fact event is always very rewarding for me. It is the world's largest gathering of cyber security professionals dedicated to securing privilege access.

Hi, conducting a virtual event, we were able to extend our reach and engage more than 11000 individuals globally. This year I spent considerable time chief information security officers discussing the threat landscape and how we can help mitigate customer risk.

Our customer base view cyberark as a trusted advisors that delivers a meaningful layer of security essential to the business and execution of their long term strategic goals.

In meeting after meeting they reinforce that relies on cyberark as a critical partner in securing their business success.

During the event I shared our vision for identity security, which directly aligns with the trends we're seeing in the market.

In today's mobile digital and cloud world, along with remote Workforces axis continues to grow exponentially.

All these entities human applications machines, and automation tools can become privileged under certain conditions.

This expands the attack surface if not properly secured.

We believe the traditional approach to managing identities is no longer sufficient our identity security strategy will provide customers with peace of mind, knowing that privileged access management is that the foundation of our platform, while also reducing user friction with intelligent access from adaptive.

We're taking a unique modular approach to our identity security platform, which will allow customers to leverage their investments in other technologies.

Early feedback from impact on the acquisition of adaptive and our strategy has been incredibly positive from customers and partners alike.

The integration of adaptive is well on its way and our first step is to offer adaptive AI, driven multifactor authentication across our products and solutions.

Adaptive team hit the ground running winning new customers and building pipeline, even with virtual introductions.

As we look at the remainder of the year, we expect the uncertainty of the global pandemic to continue to create some level of headwind, particularly with new customers with that said we are in a market that is rich with opportunity. We are benefiting from work from anywhere and digital transformation paradigms demonstrated by the record quarter for our assess solutions.

As well as the strong momentum with application axis manager.

Our customers are turning to cyberark to reduce Chris with core privilege access.

We have a robust growing pipeline of new opportunities as a loyal base of existing customers, we are making smart investments and they're executing our strategy and infusing the business with more and more recurring revenue I am confident that this combination will drive long term growth and shareholder value.

Before turning the call over to Josh We hope that all of you are safe and well during this challenging time, Josh will now discuss our financials in more detail and the outlook for the third quarter.

Thanks.

We're pleased to deliver results ahead of our guidance total revenue was $106.5 million compared to 100.2 million in second quarter last year license revenue came in at $47.9 million in the second quarter 2020, compared to $52.2 million last year as already mentioned October related.

Headwinds persisted for new business sales in the second quarter, we also experienced positive trends, including our best every quarter for assess increased engagement and expansion deals with existing customers had record pipeline growth across our portfolio from both existing and new customers.

If we dig deeper into the drivers of license revenue existing customers continue to move forward with their mission critical Pam programs and add on business representing over 75% of license revenue during the second quarter.

We're pleased to sign more than 170 love those well we did see the combination of these customers, making shorter term purchasing decisions because of the economic environment and an increase in SaaS bookings resulted in smaller average new business deal sizes and second quarter.

On the product side application excess manager and employee privilege manager represented about 15% and 9% of license revenue respectively.

As Woody mentioned EM at a record quarter consistent with our strategy more than 75% of our ATM bookings were for Sess, making the revenue contribution from this solution lagging indicator of its overall success.

In the second quarter, we generated record record revenue recurring license revenue of $12 million or 25% of license revenue about our recurring license revenue breaks down to 10% of license revenue from Hsas and just over 15% of license revenue from on Prem scripts.

One deals.

For comparative purposes in the second quarter 2019, our recurring license revenue was 2.5 million or just 5% of license revenue in total.

Taking a step back from revenue I want to talk briefly about bookings and pipeline second quarter was a record for SaaS and subscription bookings our strategy to infuse the business with more recurring revenue is working however, a record set us as subscription bookings resulted in an over 9 million dollar revenue.

Headwind for the second quarter, reducing our total revenue growth rate by about 9%.

In terms of the pipeline, we had a strong growth in the second quarter across new and add on customers, our SaaS portfolio application excess manager and our core privilege access security solutions.

We have also seen an overall shift in the pipeline towards more SaaS subscription deals as customers look for more pricing flexibility because of the macro environment more efficiency from softer surgery and increased automation from digital transformation strategies as food you talked about earlier.

Our combined maintenance and professional services revenue was $58.6 million, increasing 22% Yearonyear 48.7 million came from our maintenance contracts as our renewal rates continued to be strong during the quarter reinforcing that pattern is mission critical within the security step.

In total our recurring revenue, which combines maintenance hsas and subscription was about 57% of total revenue in the second quarter, that's compared to about 41% in the second quarter of last year.

The professional services revenue associated with this line was $9.9 million or 9% of total revenue consistent with past period levels.

The business was well diversified across geographies the Americas revenue in the quarter was $64.5 million, representing 61% of total revenue.

From 61.8 million in the second quarter last year.

EMEA revenue was $30.4 million or 28% of total revenue in the second quarter also up from 20.7 million last year.

Hey, PJ generated $11.6 million in revenue, representing 11% of total revenue and growing 20% year on year up from 9.7 million in the second quarter of last year.

In terms of verticals, we experienced strong year on year growth in insurance farm it sooner close telecom and health care during the quarter. We did close deals in the industry is impacted by the global pandemic, but not surprising the bookings in retail and transportation and travel declined as a percentage of total.

During the second quarter.

As I move through the piano all line items will be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation the tables of our press release and posted to our website.

Our second gross profit our second quarter gross profit was $90.7 million aren't 85% gross margin. That's has declined from 88% gross margin in the same period last year.

The decline is primarily related to the increase in our SaaS revenue mix during the quarter, including the acquisition of adaptive as well as ongoing investments in our cloud infrastructure.

We continue to make disciplined investments across the business R&D grew by 34% year on year to 19.5 million as we made key investments to deliver innovation enhance our SaaS solutions.

Sales and marketing increased 18% to $45.4 million to extend the reach of our sales team globally.

And GNS increased 10% year on year $2.8 million.

So in total operating expenses for the second quarter increased 21% to $73.8 million.

And that's compared with $61.2 million for the second quarter last year.

Still our operating income was ahead of our guidance at $16.9 million or 16% operating margin.

Including ours in our results that I just summarized.

Approximately six weeks of revenue and expenses related to the acquisition of adaptive overall as Judy mentioned, we were pleased with the early traction of adaptive total adaptive revenue recognized in the quarter net of the purchase price accounting adjustments was approximately 1.5 million in SaaS revenue and $300000 and professional services.

It is totaling $1.8 million.

For context, if we have not made any accounting adjustments total revenue from adaptive for the same six week period would've been approximately $2.7 million in the quarter.

The impact to our expense line from adaptive was approximately $1.1 million in cost of goods, knowing our gross margin by about one percentage point and an additional $2.8 million in operating expenses and total adaptive lowered our operating margin by approximately 2%.

Over 70% of our operating expenses related to headcount. We ended the first quarter with 1637 employees worldwide, including about 125 employees from the acquisition of adaptive. This is up from 1254 employees at June Thirtyth 2019.

Our total employee count 752 employees are in sales and marketing compared to 588 at the end of second quarter last year.

Net income was $16.7 million or 42 cents per diluted share for the second quarter 2020, as compared to $23 million or 59 cents for the second quarter 2019.

We were pleased to generate $53 million in cash flow or 25% margin for the first half from 2020.

This cash flow contributed to our strong balance sheet and when we ended the quarter was $1.1 billion in cash investments. This cash balance reflects the approximate the 67 million dollar payment during the second quarter related to the acquisition of adaptive.

We ended the second quarter $226 million in total deferred revenue, that's a 30% increase from $174 million at June Thirtyth last year.

Approximately 12% of total deferred revenue were 27 million is related to recurring SaaS contracts, that's compared to 3% of total deferred related to SaaS contracts at June Thirtyth last year.

Now turning to our guidance as a reminder, our guidance does not consider any potential impact to financial other income and expenses associated with foreign exchange gains or losses, as we do not trying to estimate future movements in foreign currency rates.

So for the third quarter of 2020, we expect total revenue of 107 $215 million, which assumes about $9 million in revenue headwind from our increased mix obsessed and subscription bookings expected in the third quarter 2020, as compared to the bookings mix from a year ago.

We expect non-GAAP operating income to range between $8 million to $15 million and non-GAAP net income per diluted share of 19 to 33 cents.

Our guidance assumes approximately $3 million in SaaS revenue from the acquisition of adaptive net a purchase price accounting adjustment and approximately $8 million expenses for the full quarter.

Our guidance also assumes 39.8 million weighted average diluted shares tax rate of approximately 23% for the third quarter.

And then aren't in the near term, we expect ongoing economic uncertainty and the rolling nature of the global pandemic to impact our ability to predict our results, particularly for new business and various industries. In addition, while we have a robust pipeline. We also do not have full visibility into potential budget flush for the fourth quarter at this time as a result in there now.

Providing guidance for the full year 2020, we did want to provide though a bit of Colorado hiring in the back half of the year and we expect to add approximately 30 to 35 people in the third and fourth quarters each.

We continue to see strong momentum in our business and a real business need for reducing risk both from new and existing customers. We are making the right investments in the business across our cloud solutions, adding four privilege access and we believe well positioned cyberark to accelerate growth as the environment improves.

I'll now turn the call over to the operator for today.

Operator.

You'd like to ask a question at this time. Please press star one on your telephone keypad, if he would like to withdraw your question press. The pound keep your first question comes from shall evolve with Oppenheimer. Please go ahead.

Thank you good afternoon, guys. Congrats on a one result.

What are your Josh I have a question that could be a bit tricky here.

So we understand that SAP is gaining steam now whether it's a product agility.

And flexibility that it wasn't noted also by the in his prepared remarks.

No we get understanding that cyberark carries a dominant it's the on premise business model can you maybe qualitatively talk about the potential long term impact module absent have you looked into it we have.

Yeah, and privilege cloud the level now by that.

It's coming as a platform.

Maybe slightly more me the modular matter, depending on the customer, but do you have a rough estimate about the potential longer term revenue uplift that you could be seeing from a gradual Mike Glenn.

Scripts and model.

So I would say so first of all <unk> I think thanks for the thanks for the congrats and we're we're really pleased about.

The quarter, and especially the ability to a two to accelerate the the SaaS contribution.

I would say, yes, the majority of the customer base as consumed our on premise solution and the infusion strategy is really working we're seeing more and more adoption and while in parallel we're increasing our SaaS portfolio. So it's coming coming together, we've been increasing ourselves portfolio growing a growing adoption.

And we expect more of that.

With with adaptive I think the overall as we've seen a other companies we believe that both customers and of course a of the financial.

Strength here, a will benefit from the fact that at the more and more we have a recurring subscription as we expand our our offerings the more value both our customers will get and and of course Cyberark will benefit. So strategically this is going in the right.

In the right direction the way the customers want to buy because that's that's been very important for us deliver on Prem deliver SaaS based on how the customer wants to buy but in the long term I think we will benefit from the fact that a theirs is a great portfolio and and we can get.

This this loyalty and growth with a subscription.

For sure. Thank you for that and also no Josh the Oh, the few dozens of Oh then.

We will be added within the second half period.

Your head count, that's most R&D or some sales and marketing what are you expecting to to fill those positions.

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Yeah National.

I don't pay the majority will be R&D and then the second place will be on the sales front as we start to think about already in the second half a building or sales capacity for next year.

R&D and sales.

Thank you for that good luck.

Thanks, so thanks.

Next question comes from stuck Italia with Barclays.

Hey, guys. Thanks for taking my questions here.

Maybe maybe first for you Rudy.

Maybe a little higher level can you talk about the competitive landscape a little bit I guess more specifically are you seeing anything from some of the players that were acquired well.

Within the last 18 months or perhaps others.

That have changed in the last couple of or just talk a little bit the competitive landscape as you see it over over the last couple of quarters Oh sure second thought thanks, I'll first of all I would say that in general we don't see a real change in the in the competitive landscape.

Landscape Cyberark has really been a extending our market leadership both in a in Pam again, with our growing innovation and growing SASSA portfolio, but further now with our a identity security vision after acquiring a adaptive I think we continue to two to break away.

And and lead this this market I think in this environment the strong financial position has become even more important for.

For customers and so on top of course of the of the technology and leadership in the space, we benefit from from being that stuff that trusted customer that customers. In this environment can continue to Oh, two investing I I would say that the opposite applies to the feedback ones that find its harder to invest in enough.

Nation in this in this environment. So I'd say overall continued market leadership.

Some vying for for kind of the distant top two and three.

Position between themselves.

Got it it makes a lot of sense, maybe for my follow up for you Josh Josh can can you just maybe remind us of the cash flow profile for your staff and on Prem subscription contracts if you will.

Are they annually in advance or any other modeling and I'm just maybe comparing contrast that for us to your traditional perpetual license slash maintenance model if you will.

Yeah. Thanks.

Absolutely. So when we think about our Oh, we think about assassins subscription, where where typically going to be seeing cash on annual basis for the for those projects.

Jason for those and for those transactions, where as in perpetual we saw the perpetual upfront together with a with a one year or greater maintenance contracts. So.

I think thats one of the things that we'll see different so one respect will be will be spreading out a little bit in cash over over the contract of assess and subscription terms. We were pleased in the first six months that.

Generating $53 million and cash flow from operations its eight percentage points above our net income margin and that's kind of as we continue to build out itself more and more so.

That's that's kind of playing out nicely for us so we.

We see.

Over time, we're going to be building in kind of a lot of future cash flow off of the so step up of the new sasson subscription contracts.

Got it makes a lot of sense. Thanks, guys.

Right.

Next question comes from Sterling Auty with Jpmorgan.

Yeah. Thanks, guys you mentioned a couple of times the pipeline I'm just wondering if you can you at least.

Qualitatively describe where the pipeline sets versus pre Kobe or maybe a year ago and what you're seeing in terms of sales cycles.

Yeah, I certainly I'll start here, what we're seeing actually this year a pipeline is really across all of our products at across even a existing and new customers. We're seeing really record growth in the pipeline, so and that was not impacted by cold and we saw in Q1.

And we saw continue a as well into Q2 and that's compared to Q1 in Q2 of last year. So.

We're pleased to see really where are the openings are coming from and the pipeline developing and progressing and again not just for core passed but also for application to access manager for us for our new SaaS products.

And for and of course Threepl.

The likes.

I think.

No I think one one of the things also we look at it and you know its coverage of growing as well, which you know in this environment. We also we also like to see.

Absolutely and then one follow up you mentioned kind of coming in after incident response has happened as kind of a first call are you actually being brought in directly by the incident response companies and if so who are you seeing the most traction with.

Yeah, starting yeah, Hi, Yep Yep, it were often invited either by the customer or recommendation from from the into incident response from its very it's very interesting and and often gives us the the opportunity to help in the recovery and of course I get that trusted advisor position to that later.

Follows on with privileged access management as a as the layer. So so when it's not driven by customer I I would say incident response firms that invite us. The most is probably mandiant, but we've seen a we've seen several others invite us including I I would say vendors that have instant response arms that other calls it.

Got it thank you factor.

Next question comes from Fatima Boolani with you'd be yes.

Good afternoon. Thank you for taking the questions. What do you I'll start with you I think on a number of different occasions in the prepared remarks.

We will get to the pandemic impact to new logo.

And the business progression.

So I just wanted to get a little bit more detail on what where or what are some mitigating factors around new logo and new business activity, particularly yes, the priority for pan in pads projects has catapulted.

The front of the line and then I have a follow up for gosh, Yeah, No a absolutely. So I I first of all I think we're really pleased to see the add on business muscle really behave normally and and Ah and with a with normal cycles and and be such a such a big lift for us and also with the ability.

The bring it on and so the new logos in this environment I think we were very happy with that but what we are seeing and I think it's a it's natural in across the board, but you can be and Pam can be a very high priority, but just given the environment. They are much more there's much more scrutiny in a priority much more scrutiny and looking for.

For for budgets and longer a approvals and and and so that's that's kind of the new normal on the on the new no new logos and therefore, we're factoring that and making sure we have a wider pipeline like Josh.

Like like like Josh mentioned in that we're factoring for right no longer cycles. When it comes to a when it comes to new accounts, but again, there's there's some mitigating factors on the fact that they'll be up to the SaaS portfolio to to address some of them that we can offer subscription pricing to some of them. So there's just drawing mitigating factors.

Fair enough I, Josh a question for you I will get the sequential compression in gross margins I think you talk surreal about 100 basis points of that 300 basis points compression.

Got it I'm wondering what the other dynamics were a that caused that level less compression.

Gross margins, particularly if the recurring license and that's largely to PDL versus soft this quarter just wanted to parse that impact out as to why the impact to gross margins would be some dramatic and that's it from thank you.

Yeah, Thanks for that absolutely, 1% coming from adaptive and then really the you know the other a person to have coming from the SaaS business.

From Cyberark, because we cyberark.

Really increased its us on EM.

Started to sell into a narrow and and privilege cloud. So we saw.

Really large uptick on the organic cyber assess product so that also impacted as well on the gross margin.

Very helpful. Thank you.

Next question comes from Brian Essex with Goldman Sachs.

Hi, Good morning, Thank you for taking my question.

Quick question on deal progression and that's the nature of some of the large deals that you're seeing on the privilege access side, particularly with regard to suddenly consulting firms that you called out.

As partners, how many of those deals are larger.

With respect to like Deloitte and Accenture.

How many are kind of multivendor larger deals versus explicit.

That's deals and how often is this kind.

Kind of.

[music].

And your consolidated effort on behalf of the customer to just revamp their again.

I guess.

Wow.

So Brian I think it would be hard to generalize, but if I would if I. If we look at the engagements very often what the the big four in the consulting firms do for US is actually drive the pan practice at those firms.

We may have a beachhead at the account or were coming together to the account and they will drive a Pam program and so how do we see that we see that phase very often it could be part of a a larger identity initiative and and more and more in recent years. There's a there's a Pam first approach, let's get the less secure the keys.

The Kingdom first before before doing the others, but you're right in some cases, if you if you zoom out we can see that.

That that is part of a larger identity.

Initiative, and then that in these firms.

The group that's a that's working the time effort is also collaborating with their you know the Deloitte Pwc everything a team that that's doing identity.

With our expansion to do identity security and with the acquisition of adaptive we of course, so we'll continue a modular approach and end to collaborate with other identity initiatives that have started with other vendors, but believe will also be able to take a an even greater share of those identity programs.

Got it that's very helpful and maybe just as a follow up for Josh.

What a little bit finer point on the guidance <unk> third quarter operating expenses elevated costs relative to adopt is.

Seemed to be higher than this quarter, you could just kind of.

Where we should expect you know I guess outside of sales and marketing R&D headcount.

Well mindshare on it but how we're thinking about spending for.

Expansion integration relative to other.

Actual opex increases throughout the business.

Yes, Hi, Brian Thanks for the question I'm, So as we called out on the call. It we're talking about $8 million.

Total expenses of which six.

That's right.

Oh I'm sorry.

Oh, yeah, because if you recall when we talked about the increased expenses in the first.

For Q2 was only for six weeks. So that's the jump in expenses for the full quarter, a adaptive and when we think about where we're going to see those increased expenses is really going to be on the on the R&D from the recruit.

Talked about the majority of the of that counts will be on the R&D side.

And as well as a and sales and the R&D is really focused on still building out our SAS infrastructure for our SaaS products, but also for the integration of adaptive.

Adaptive products would cyberark products. So I would say, it's going to come out into R&D. You then and then next in sales.

That's helpful color. Thank you very much.

Next question.

One comes from Jonathan Ho with William Blair.

Hi, good morning, Congrats on the strong quarter I just wanted to maybe started out with the cross sell opportunity that you're seeing with adaptive and your core products and maybe how often do you think you know that she will be purchase together well adapted be sort of a separate spear I'm trying to understand how you think about that go to market.

<unk>.

Yeah, Hi, Jonathan it's relatively new but the timing for US was grade because we we announced the acquisition in May.

We're able to to gear up a initial integration and then really come out with it in in our impact event and really does the water with with customers. So I you know I think kind of kind of ideal to have an acquisition begin to integrate and then have the opportunity to showcase it too to our customers. So I think the this strategy right.

I will will and is really to leverage the amazing customer base that are that we have and they've they've selected a cyberark oh for for this critical layer in Pam and now extend a with adaptive to other other use cases around their regular users as I mentioned in my prepared.

Our remarks first out of the gate will all will be offering integrated.

A. I must say a into the into the Cyberark solutions, but we'll be able to upsell of the rest of the the adaptive suite to the cyber customers in parallel we're going to keep the the muscle.

That is that a and enhance the adaptive muscle to two also go after a standalone opportunities, but that that would be but that would be a new a new element for us where where really the the bigger a access to market is leveraging our customer base.

Got it.

That makes a ton of sense and just as a follow up when we think about the opportunity in the mid market I think you called that out as an area. That's awesome strength. This quarter you talk about maybe the dynamic here and what's making that market more attractive. Thank you.

I think I think what what we're seeing is a is that yes, we can be very strong and where we were coming from in in the enterprise space.

The Pam demand is also growing in the lower in the smaller enterprise and the high end of the of the Midmarket and the fact that Cyberark now has.

A SaaS portfolio mix it makes it.

Easier for us to go after that.

That market as well so I would say dynamics are obviously smaller deal sizes, but off often a shorter and shorter sales cycles and and nicely augmenting the the enterprise approach, which is still the the most strategic.

For us to keep the leadership and a and expanded.

Next question comes from Rob Owens. Please state your company your line is open.

Yes, it's Rob Owens from Piper Sandler and good morning, guys.

Thank you for the visibility in and around the headwinds created by the SaaS business and I. Appreciate you unpacking that for us, but can you give me a sense of relative to the Q3 guide in the headwinds given your commentary around pipeline why it would be a flat quarter over quarter headwind in terms of dollar amount.

Hi, Hi, Rob as Josh.

Good morning, I think.

Yeah.

I think you know again, we're anticipating a you know certainly some transition headwind.

Also in in the into Q3 guidance and I think what we've tried to do here when we when we gave a range on guidance was really to capture also you know knowing that were not certain exactly where that mix is going to come out. The pipeline is growing as you said, it's robust we we have good visibility.

Particularly on the and yet our customers on the on the on the existing customers, but as we've said in the call when it comes to new customers.

You know the progression through the pipeline in the visibility for when those are going to close becomes that becomes a bit harder to predict and then on top of that you have the you have the mix of.

You know whether or not to going to go on off the office SASSA or one of the subscription or on a perpetual. So no I think we feel we feel comfortable with where we are on the guidance. We tried to provide arrangement captures kind of a few different types of scenarios for us and.

And.

Yeah, we like we like where are we like where where it's heading over the next several quarters based on the pipeline.

Great and then following up given we are in the third quarter any high level thoughts around the U.S. federal opportunity and would you expect this to be a normal U.S. federal quarter or do you think that's a cobot will have an impact on that thanks.

Yeah, I think I think we're is that it's a new normal for everyone. So I think it the first federal quarter in this.

In this in this environment.

We've we've had we've had a lot of success throughout the year in.

In in federal and so.

Again, we're counting on <unk> on a on a close to normal in a in this a normal or in the new normal environment.

And and leveraging some of the Oh, <unk> I would say access to customers that the that we've gotten worse.

We're also in investing in in.

Getting our our SaaS products.

Oh fed fed ready to be able to take that too to the federal law a market as well.

Is there any timeframe around when those might be fed ready and how long it typically takes.

It's a it's a process I I'm not ready with an answer yet and adaptive has just gone onboard but super important for us some some of them. It's a pipeline like so some of our solutions already in play and now we're adding up a adaptive to the fed ramp mix, but we successfully sold of course, our core Pam.

Our application office manager R M a.

To to the federal markets Super Super strategic an important for us.

Next question comes from Hamzah butter, along with Morgan Stanley.

Hi, how are you.

So I just.

First question Rudy I wanted to dig into a little bit more on the.

Prioritization of Ham and the more distributed work environment as far as what you saw in Q2.

Did you start to see that increased demand and prioritization sort of come later in the quarter and the expectation that.

It will start to trend translate more to the actual result.

In the back half for next year as budgets start to come back is that the progression that you see as it relates to Europe and portfolio I have a what do you hear so I would say that the the linear already is building the already in our in our quarterly sales and and not really the.

In a reflection of the panel opportunity as we as we it was we walked into cold weather. It was important for us to see.

First you saw organization is really just just trying to get that initial conductivity going but that was Ah, but that was last the last quarter. In this quarter. We saw that when you when you engaged with the customer they understand that the perimeter basically evaporated overnight and there is no perimeter and and it's it may take.

One step it could take two steps, but ER and the tanker can get a privilege access to the heart of their IP infrastructure. So the priority is up there. It's also.

In a I would say the analyst in the industry are putting it really as the top thing.

To do but with a new account, we obviously have to have to go through.

The the regular education and prioritization that are that we need to the we need to go through I think it's a it's only getting up there over if I look if I reflect that a couple of quarters. A go in terms of Oh of awareness I look at meetings that at impact with Chief Security Officer as they start with this is my.

Most critical.

Control. Some say you know this allows me to this somewhat sleep at night Cisos don't really sleep, but so we're seeing we're seeing that.

Continue and well, but we have to navigate the the cobot environment when it comes to to new logos.

Next question comes from Andrew Nowinski with D.A. Davidson.

Great. Thank you.

Congrats on a on a nice quarter in a tough environment.

I wanted to start with a high level question I just looked like the Twitter attack that happened. This quarter was largely a privileged access management attacks I'm wondering if that resulted.

And any improvement in the pipeline when it hit a because it does highlight why panel such a high priority yeah, Yeah, Andrew a I think once every couple of months. There's there's just an event that is a super bowl commercial for for Pam.

But I think when in the in the C. So community. It's this will be an incremental effect because they they get it. So I wouldn't say that this would would dramatically drive ER will drive pipe a pipe is growing because the the awareness of there. It's just another example.

For for organizations to to help prioritized is to just get into the nitty gritty of understanding that two hops and your <unk> and it's down to privilege access to defend from from a takeover. So I would say it's another it's another positive and it kind of kind of latching onto the to the education of of past events in.

This reports and so.

Next question comes from Daniel BARDA. Please go ahead.

Hey, guys. Thanks for taking the question on I guess I'll, just ask one true Rudy nice quarter on that.

Outside of the business curious as the competitive landscape change there at all and who are you seeing most in the market competitive.

Side of the business. Thanks.

Oh, absolutely so when I answered earlier that no change in the competitive landscape I kinda referred to the regular Pam vendors when it comes to to Pam, but you're right at your point the the one vendor we see with regards to to securing a secrets is hashi, which which comes from the I would say the device.

All up or the developer a world and less from a from security.

We've seen great growth, especially in and that's the most strategic piece of our portfolio in the product lines that securing modern applications based on our acquisition of conjure in 2017, the dynamic applications and securing a secrets and more coming in more form a firm.

Security, we see them often ceded through through open source in a in accounts.

But we get a lot of wins when it's a security driven approach and a it's a very important piece of our portfolio and we can tell a full pam.

A story and a and platform deliver a full pad platform to the customer for humans and for for applications and we'll continue to invest in this line will and also in content investment in partnerships like the partnership with Red hat.

Next question comes from Daniel Ives with Wedbush Securities.

Thanks, just a question in terms of hiring I mean can you talk about maybe just are you getting a lot more inbound from a sales perspective than you were just may be talking about the type.

Sales personnel that you're looking for in the field, the especially given the broader sounds Burke.

Yeah.

That I would say that the people are very amazingly adjusting I look at our sales team. They adjusted amazingly to this to this environment and also credit to to the customers and prospects out. There people are engaging people are meeting people are having a proof of concepts. So I would say.

We've always hard very dynamic.

People and as you look in this environment and as we as we bring on the new type of sale persona is one that's able.

To navigate an environment, where you can have a series of face to face meetings, where you are leveraging the technology partnership you're leveraging the big four so it's more of people who know how to auto part of how to work in a team or an ecosystem.

To.

To drive value all across a you've seen an increase in.

Great contribution in our indirect business and so really that that's a great way too to navigate this environment levers the access that the channel partners have bring value and and close the deal.

Next question comes from Girl Wortel pads with Stifel.

Okay, great. Thanks for taking my question Woody you talked about a large QEPM displacement I was hoping you could talk about what you're actually displacing and then more importantly, how do you view the overall displacement opportunity across the business as we look into the future. Thank you.

I agree.

Think about that as as I was answering the competitive landscape. One one attributes were saying again, there's there's a lot of greenfield out there.

But there is a there is a displaced when customer turned when customers turn off a strategic I would say, we're seeing a displacement across the board and that in that specific example, we we I believe we we've responded really replaced a another technology.

That could not a scale I can't recall if that was that that example is beyond trust or psychotic, but it was one of them.

When it came to the ability to to scale and that's been a big advantage for US again, when when the customers go for a full.

And program M. has been a big one on on displacements, there's also more and more or see a broadcom CA type displacements going on and we had some.

Some important.

Wins in a in the quarter on that front.

But that was that was up I was classic Pam.

Next question comes from Gregg Moskowitz with Mizuho.

Okay. Thank you congrats on the quarter I think it's a big deal that fastened subscription made up 25% of license revenues versus 5% a year ago and that passes.

What percent of deferred versus I think you had 3% a year ago and you know you mentioned that more customers were requesting on premise licenses to be delivered as a subscription.

Now that this is in motion when I'm wondering is why not go on offense and actually try to sell more term licenses and I realize that there's a near term cash while headwinds, but conversely, a more on premise subscription contract would drive obviously more recurring revenue within very likely a higher LTV as well. So your perspective on that way that would certainly be appreciated.

Yeah, Greg It's a great question and you're right. We're very pleased unlike das said, we're very pleased to see that part of the business.

Celebrate and and and again the infusion with SAS, which is was was was very very deliberate but then also seeing that that the customers. They wanted on prem, but as a subscription as a as another way to to increase our recurring revenue. So we're very pleased with that but right now it's for that.

For example for the on Prem as subscription it's hard for us to determine how much of that is of that acceleration is quoted.

Related and how much is gonna be that the new normal where they want to to go out term based on for the for the on Prem. So actually what we did that is we put together a cross functional team here at Cyberark led by a medco and RCR Roe.

To determine.

How this or if this will persist what are their buying patterns going into into the future and right now the leading strategy is is we're going to sell to the customers, how and where they want to buy do they want perpetual do they want.

On trend, but subscription do they want of course, the SaaS portfolio, which we are we are.

Promoting and an after we finish that deep dive will decide to your point is do we further accelerate on on that strategy.

Great. Thank you.

Thank you.

Next question comes from Catharine Trebnick with Colliers.

Oh, Thanks for taking my question.

Could you.

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For the quarter.

Thank you.

Yes.

Could you at least give us a little bit more available.

Traditionally do well second half the year on license revenue, especially Q4.

Yes, Hi, Kathryn.

I think basically if you want it for for further breakdown into a into license and and and maintenance you know I would follow I would follow the the.

The model, which is basically you know maintenance will continue to be a what we what we carried.

Last quarter with the with the additional with the additional licenses.

Going forward and I.

I would say that this imagine its will probably grow in line at at.

About 20% of the licenses.

That will do for next quarter.

Alright, thank you.

And also a kind of a finer tuna finer point on professional services, we're still running really the 7% to 9% of.

That number of total revenue will be in professional services.

Alright, Thank you very much.

Yep next question comes from Taz Koujalgi with please state your company mine it's open.

Hey, guys. Thanks, taking my question operational, but Josh you mentioned that must chose to go with.

Subscription for your on Prem offerings can Neil.

Can you tell us how much yield compression happens when when customers choose a.

Subscription formfactor versus Oh, yes on Prem how much is a deal size lower you go from a perpetual to a subscription.

Yes, Hi, Ted you know kind of depends on how long of a subscription contract. It take a you know if they're taking a three year then it's going to be pretty close.

Very much too to a perpetual.

Transaction and if they're taking a one year, it's going to be closer to.

Probably half of that.

Got it thank you.

At this time I'll turn the call over to the presenters.

Hi, everyone would be back again, I just want to thank our customers partners and employees for continuing a and contributing to our success in the second quarter and to everyone here, a stay safe and a and b well. Thank you.

This concludes today's conference call you may now disconnect.

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