Q3 2020 Cyberark Software Ltd Earnings Call
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Eric Schmidt with Investor Relations. Thank you. Please go ahead Madam.
Thank you Cindy good morning, Thank you for joining us today to review Cyberarks third quarter 2020 financial results with me on the call today are pretty Mccartney, 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.
I remind you that certain statements made on the call today may be considered forward looking statements, which reflect managements 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.
Our actual results might differ materially from those projected in these forward looking statements.
Direct your attention to the risk factors contained in the company's annual report on form 20-F badly the U.S. Securities and Exchange Commission and those referenced in todays press release that are posted to Cybex web site as well as risks regarding our ability to actively begin transitioning the business to a subscription model in 2021 and the duration in scope.
So the 19 pandemic, it's related impact on global economies and our ability to we just in response to the pandemic.
Robert expressly disclaims any application or undertaking to release any problem.
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 todays press release as well as in an updated investor presentation that outlines the financial discussion in todays call.
That's.
This information can be found at www dot fiber dot com in the quarterly results section under Investor Relations 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 over to our chairman and Chief Executive Officer, Woody multi Rudy Thanks, Erika and thanks, everyone for joining the call.
Right.
First of all we hope you and your families are all well.
Well the global pandemic has had a profound impact on all of our lives or community of customers partners and employees have adjusted to the new norm. This is reflected in our third quarter business performance record levels of customer and prospect engagement and business productivity gains I am very excited to discuss our strategy to begin actively transitioning.
The subscription model in twice what they want.
But first I will touch on third quarter highlights and industry trends.
For the third quarter, we reported $107 million in revenue.
$30 million in non-GAAP operating income and non-GAAP EPS of 31 cents per share.
We're pleased with our execution and the momentum in our business in the third quarter, our mix of recurring revenue bookings accelerated driven by increased demand for our solutions. This impacted our reported revenue and profitability, which Josh will discuss later in this call.
As we move deeper into our subscription transition it will be important in the near term to look beyond the headline piano as it is a lagging indicator of our true success, we believe annual recurring revenue or era, which grew 40% in the third quarter, reaching $250 million provides increased visibility into the overall.
Right and the long term growth of our business. This metric demonstrates that we are building a rapidly growing base of high value more predictable recurring revenue.
Industry Tailwinds continue to underpin our business and contributed to our record pipeline growth can remain at the top of C. O insist so priority list delivering a critical layer of protection against hacker innovation, while enabling regulatory compliance digital transformation and cloud migration.
Escalating privileges is the most frequent pathway for attackers, who are more aggressive with the expanded attack surface and worked from anywhere environment demand.
Diminish that risk organizations churn to cyberark as the clear market leader and industry innovator.
There's also a long list of ever changing compliance requirements that our solutions help address as an example, the national Institute of standards and technology or NIST recently introduced standards for secure Zero Trust architecture, which specifies that Pam privilege access management is critical to comprehensive zero Trust security framework.
When it comes to digital transformation, a club migration strategies customers can implement these programs faster smarter and more securely by leveraging these.
These programs have created highly distributed environments and increased automation and application development and business processes, resulting in the proliferation of privileges.
Almost all of the studies, including users machines applications and tools can be privileged under certain conditions are.
Our customers have increasingly asked us to secure additional identity use cases, which is significantly expanding our total addressable market.
Our vision for identity security is taking a SAS deliberate security first approach with the foundation at Penn to provide users with the right level of access and privileges depending on the activity.
Transitioning to a subscription company accelerate this long term vision by lighting Cybex business did these trends.
We have always focused on our customers and delivering a meaningful layer of security that evolved at the pace of their IP and Brian.
This included being ready for when enterprises demand shifted to SaaS and subscription.
In 2020 years of changes have happened in a matter of months COVID-19 and work from anywhere have accelerated digital transformation and cloud migration and significantly increase asked adoption.
Because of our strong execution and business agility, we are in a great position as we begin to actively transition our business next year. In fact, we will enter 2021 quarters ahead of most technology companies, we have gone through similar transitions.
Our financial results show that customers are embracing recurring revenue consumption models without making any changes to our go to market approach year to date more than 35% of our new license bookings were from SaaS and subscription.
In the third quarter. This makes reach over 45% of our new license bookings, including seven of our top 10 license mix license deals.
This dramatic increase in subscription mix was driven predominantly by record SAS demand, we have the broadest most feature rich cloud portfolio to secure privileged access and identity security in the market.
Our ongoing innovation, the breadth of our portfolio and the maturity of our cloud offerings will be a key driver overarching subscription transition program, adding.
I think incredibly valuable SaaS recurring revenue and deeper long lasting customer relationships.
We have been working on a comprehensive readiness program to ensure long execution strong execution throughout this transition.
Dedicated cross functional team is also working to ensure we execute the transition with rigor and focus. We also conducted internal research and engaged one of the leading independent consulting firms, who validated the durability of the man for on premise subscription well be on Covenant COVID-19, and the current economic environment.
We will adjust our go to market approach that will holistically nurture our customer relationships, putting their success at the center of everything we do.
Matt Cohen is taking on an expanded role in the newly created position of Chief operating officer. He will continue to head the global sales organization and is adding all post sales engagement, including services support and customer success.
This organizational structure will support long term sustainable growth accelerating customer adoption and expansion and at the same time ensure that we deliver best in class customer satisfaction and strong renewals, Matt has deep operational experience and will be an integral part of our subscription transition success.
The field team has done a great job selling sasson subscription to year to date to help accelerate the pace of our transition we will not only rollout comprehensive sales and channel enablement programs, but also shipped our compensation plans in favor of SaaS and subscription sales versus perpetual licensing beginning in 2021.
We will be rolling out attractive new solution packages to incentivize customers to adopt our assessment subscription offerings I'm confident that this transition will reduce friction in the sales process increased cross sell activity and build enduring relationships with our customers by delivering deeper value and stronger security.
Moving into a few deals on the third quarter.
We are seeing unprecedented activity with existing customers, who are increasingly turning to cyberark as a trusted advisor following our prescriptive pad blueprint methodology.
As examples a large UK consumer manufacturing company is building its long term security programs on for Pat and application access manager for develops to protect its fast growing global multi cloud environment.
We are seeing increased traction for a as organizations increasingly shift left integrating security into devops earlier to drive down costs and improve speed to market.
Our largest adaptive went to date is an existing cyberark enterprise customer. This organization understands the power of multifactor single sign on lifecycle management integrated with Penn, which is the foundation of our identity security strategy.
In the third quarter, new business activity and pipeline progression continue to pick up we added more than 190, new logos, including a fortune 500 company and the global 150 Technology company.
While we are seeing increased demand for new cloud solutions, our off premise offerings, including corporate Jackson security continues to meet the requirements of many large enterprises.
A few new business highlights include in a seven figure rip and replace when a large regional bank is modernizing its security program with core pass for operational efficiency without a medic credential onboarding across its mws and on premise environments and will also benefit from our extensive CEQP integrations, including Sailpoint Wallace.
And Blue Prism.
As part of its digital transformation program, a fortune 500 company is rolling out Cyberark privileged club this new Chief Information Security Officer wanted to Mexico must control the environment, while benefiting from the efficiency and tremendous time to value of SaaS delivery.
A large health care system in the U.S. landed with privilege cloud endpoint, Bruce manager and application access manager.
Hospitals are frequently attacked by rest firmware and we provided this customer with peace of mind, given that endpoint privilege manager has been tested against and successfully block over 3 million types of ransomware.
Innovation is a foundational pillar of our strategy and strengthens our leadership position in the market. We were pleased to be named a leader in the Gartner August 2020 Magic quadrant for bridge access management position, both highest in the ability to execute and further and completeness of vision for the second time in a row.
We continued to make ongoing foundational investments in our core architecture that are enabling us to release major innovation in functionality more quickly.
Yesterday's introduction of cyber cloud entitlements manager and power solutions that enhances cloud security is a Prime example of the innovation engine from our Cyberark Lab's team.
As far as new environments and cloud services are deployed thousands of permissions are created that provide a pathway for attackers to gain privilege access. We can now help organizations to take back control of cloud security by transforming how these permissions are secure and manage with continuous visibility in depth analysis and real time remediation.
Finally, I want to provide a bit of color on what we are seeing from customers and partners. After crisis planning and business continuity in early 2020 organizations are deep into strategic planning.
They recognize that long term success is dependent on the speed of their digital transformation programs. This.
This is increasing the sense of urgency to not only implements strong security controls to mitigate risk, but also incorporate technology that will enable the organization to move forward faster.
In every quarter of 2020, our new pipeline generation across all of our solutions has reached another record demonstrating that we are capitalizing on these trends.
We are well on our way to transforming cyber into a high growing recurring revenue company with significant contribution from our SaaS solutions I'm confident that this subscription transition program will further solidify our position as the market leader accelerates EPS adoption build a base of high value recurring revenue and position.
On us to deliver sustainable growth and profitability.
Josh will now discuss our financials in more detail, our subscription transition and outlook for the fourth quarter Josh.
Thanks, Rudy before we discuss the details of the quarter. We wanted to remind you that we posted to the website. This morning that will be helpful. As we walk through our results.
Judy mentioned, we are pleased with the momentum in the business.
The acceleration of our SaaS and subscription offering is beginning to impact our reported revenue and profitability, making the p., though in the near term more a lagging indicator about success the shift in the bookings resulted in total revenue of $107 million in the third quarter compared to $108 million in the third quarter last year, well license revenue in the third quarter was.
$46 million compared with $58 million in the third quarter last year. The recurring portion of the license revenue was $13 million. That's an increase from $4 million last year, driven by even faster recurring license booking growth year to date.
Detailed breakdown of license revenue can be found in the slides on our side, but I would like to highlight the SAS revenue increased nearly 300% year on year, reaching $7 million and that subscription or term based license revenue more than doubled to $5 million in the third quarter.
In total our stuff and subscription license revenue represented about 28% of our total license revenue a significant increase from 7% last year.
Our combined maintenance and professional services revenue was $61 million, increasing 21% year on year. The breakdown of the slide is approximately $50 million from recurring maintenance contracts and $11 million in professional services revenue.
As we begin actively transitioning our business to a subscription model in January 2021, we'll be focusing more on metrics that measure and provide visibility into our business beyond the traditional piano.
These metrics include our total recurring revenue the percentage mix of bookings from SAS and subscription and most importantly annual recurring revenue or they are.
I will start with total recurring revenue. This metric includes that subscription or term based license and recurring maintenance revenue associated with our perpetual license contracts and.
In the third quarter recurring revenue grew to $63 million or 59% of total revenue and that's up 40% from the $45 million and 42% in the third quarter last year.
Our recurring revenue growth is being driven by strong psas and subscription bookings in 2020 as well as our continued strong maintenance renewal rates for our software.
Our next metric, which we are introducing this quarter is the new is a mix of new sat and subscription bookings as a percent of total license bookings, which is an indicator of where the business is heading.
And is the driver of the increase in our deferred revenue.
In total sasson subscription represented more than 45% of our license booking which compares to about 10% last year and brings us to more than 35% of our license bookings from sat and subscription year to date.
This mix has accelerated dramatically throughout the year and gives us strong confidence in our momentum.
As we head into our active subscription transition, including incentivizing our team.
Of course this.
This growth in recurring license revenue bookings is increasing the headwind to our reported revenue.
In the first quarter, our headwind was approximately $5 million in the second it was approximately $9 million and then the third quarter the headwind to revenue from them, but from the bookings mix was about $14 million.
This quarter. We are also introducing the well known metric of a are to provide investors with more visibility into the growth of our Korean business.
They are is defined as the annualized value of that subscription or term based license and maintenance contracts in effect at the end of the reported period.
As of September Thirtyth, our our our was $250 million increasing 40% yeah.
Year on year from the $178 million as of September 2019.
These three metrics demonstrate our success already towards becoming a high growth subscription company.
As already discussed in January we are also implementing a comprehensive sad strategy to support our transition which includes modifying our compensation plans to further incentivize the team to sell recurring revenue rolling out attractive subscription packages.
Strength in our customer success culture and team to ensure long term sustainable growth and shifting our reporting and financial system towards a recurring revenue model as demonstrated by the introduction of our admits a percent bookings.
Historically, most subscription transition have taken companies approximately eight to 10 quarters, given our strong starting point. We believe we are positioned to complete our transition on the earlier side of that timeline.
No I will provide some further color on the business.
We are increasingly seeing are approximately 6300 customers turn to cyberark as a trusted advisor to execute their mission critical identity security programs.
The level of engagement with existing customers is at an all time high with add on business, representing about 77% of license revenue during the quarter.
Woody mentioned, we believe the move to subscription will help accelerate the cross sell motion.
On the new business abroad, we signed more than 190 marquee logos inline with about 200 logos in the third quarter last year we.
We did experience small or new business deal sizes as some new perpetual license customers are making shorter term purchasing decisions because of the economic environment buying only the licenses they need immediately to get started but with plans to expand.
In addition, we saw an increase in SaaS bookings from new customers, which often started smaller before they expand their overall footprint with Cyberark solutions.
Another key area for US is the amount of activity, we see in the market overall, new pipeline generation across geographies and our product portfolio for ourselves and on premises solutions was at a record level again.
The third quarter, which position positions us very well for 2021.
In terms of solution areas application access manager and endpoint privilege manager represented about 9% and 10% of license revenue respectively.
Even faster than we anticipated already about 90% of our E. P. M bookings are per se.
The business was well diversified across geographies.
Americas revenue in the quarter was $63 million, representing 59% of total revenue.
It is worth noting that the Americas had the strongest percentage of hsas and subscription bookings during the quarter, which impacts recognized revenue.
EMEA revenue was $34 million or 32% of total revenue in the third quarter.
P.J. generated $10 million in revenue, representing 9% of total revenue for the third quarter.
In terms of verticals, we experienced strong year on year growth in for natural health care, Telkom pharma and the IP services software vertical.
We also incurred we were also encouraged by the strength in the retail vertical and a large in large part as a result of the digital transformation strategies.
As I move further through the piano all line items will be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release and posted to our website.
Our third quarter gross profit was $89 million or an 84% gross margin in line with our expected decline from 87% gross margin in the same period last year the year on year decline in gross margin is primarily related to the increase in our SAS revenue and bookings mix during the quarter and the incremental cost.
In cloud infrastructure for our SAS business, including about $1 million, which is related to adapt.
We continue to make strategic but disciplined investment in the business to drive long term growth.
R&D grew by 33% year on year to $20 million to enhance our solutions and expand our SAS portfolio like yesterday's introduction of the cloud entitlements manager.
Sales and marketing increased 18% to $47 million to expand the reach of our global sales team with the increased partially though offset by the reduced travel spending.
Gee, they expense was relatively flat and $9 million in total operating expenses for the third quarter increased 18% to $76 million, which includes about $5.5 million and operating expenses associated with the adaptive acquisition.
Our operating income was $13 million or a 12% operating margin and in total adaptive lowered our operating margin by about 4%.
As a reminder, the approximately $14 million revenue headwind had a corresponding impact on our operating income normalizing for the headwind from the bookings mix, our operating margin would have been approximately 22% in the third quarter.
Over 70% of our operating expenses are related to head count. We ended the third quarter with 1661 employees worldwide and up our total employee count.
757 employees are in sales and marketing.
Net income was $12 million or 31 cents per diluted share for the third quarter of 2020, that's compared to $26 million or 65 cents for the third quarter 2019.
We were pleased to generate $63 million in free cash flow from operations or 20% margin for the first nine months of 2020. This cash flow contributed to our strong balance sheet. We ended the quarter with $1.1 billion in cash and investments.
We also ended the third quarter with $220 million into in total deferred revenue. That's a 28% increase from the 177 million at September Thirtyth 2019.
Approximately 15% of total deferred revenue or $34 million as it related to recurring SaaS contract and that's compared to only 4% at September Thirtyth 2019.
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 try to estimate future movements in foreign currency rates.
For the fourth quarter 2020, we expect total revenue of $125 million to $135 million, which assumes about $18 million in revenue headwind from our increased mix of hsas and subscription bookings projected for the fourth quarter 2020.
We expect non-GAAP operating income to range between $25 million to $33 million and non-GAAP net income per diluted share of 50 to 67 cents.
Our guide our guidance also assumes 40 million weighted average diluted shares and a tax rate of 23% for the fourth quarter and for modeling. The full year, we would expect 39.7 million weighted average diluted shares and a tax rate of 21%.
Given the momentum in the business.
We plan to still add between 35 to 45 people in the fourth quarter, including key hires to expand our sales and engineering organizations and position cyberark to deliver future growth.
We're not providing guidance for 2021, but to assist you in modeling we expect our business next year to follow trends similar to other subscription transition stories. Our successful execution will be marked by strong growth in our mix of Hsas and subscription bookings, hey, our AD, resulting deferred.
Revenue.
This growth will nicely expand our base of recurring business, even with the delay and recognize revenue from a higher ratable recurring mix. We expect total revenue to increase next year up from 2020 levels. This.
This will be against a backdrop of ongoing investments to drive long term growth that will cause a near term decline in our operating margin in terms of free cash flow. We anticipate that will continue to be in line with our non-GAAP net income margin to five percentage points above net income margin over a 12 month period.
As we exit the transition period, we expect a meaningful acceleration of revenue growth improving operating margins and cash flow generation.
We are already beginning to see our recurring business its bad illustrated by more than 400% growth in SaaS deferred revenue and our $250 million and they are we are confident that our strategy to begin actively transitioning to a recurring revenue model in 2021 will make growth more durable.
We'll add profitable, which will drive value for Cyberark, our customers partners and shareholders.
We want to wish you and your families health and safety.
I'll now turn the call over to the operator for today.
Operator.
[laughter].
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press, the pound or hash key and please standby, while we compile documentary roster.
Your first question comes from Saket Kalia.
Your line is open how many.
Okay, Great Hey, guys. Thanks for taking my questions here can you hear me, okay by the way.
Yep.
Okay, great awesome, So maybe maybe for you.
Maybe just to dig into some of the components of the subscription transition here.
I think you mentioned salesforce incentives in 2021 to help drive that higher mix of recurring maybe without getting too specific can you. Just go one level deeper into what that might entail and and maybe oh.
Others that you've looked out to maybe think about how to model that that.
Those sales force incentives.
Sure So I get that first of all good morning.
As you can tell we're very excited about the transition and the momentum we have going into this now with $250 million and they are our growing 40% and the fact that 45% of our Q3 license booking was from from recurring. So we're this is without any changes. So we did this in the <unk> as we called it with infusion or another we're actively.
Transitioning.
We're like you said, we're going to put programs in place we're working on them to incentivize the reps in 2021 I think we we have a lot of examples are examples out there.
So where we moved from making it neutral for them throughout this past year to actually making it a net positive for for for the Rep.
Due to to promote our solutions or our subscription for for Oh for on on Prem in parallel the other side of it is force rolling out the subscription packages that will incentivize the.
The customers and we're seeing healthy demand and we're really excited about.
Putting that in place I think be on top of this on the go to market from.
The alignment that we're having in the organization, having mass now as Chief operating officer with both sales, but also.
Services customer success and support everything that is in the lifecycle.
Of the of customer care.
He is going to be very strong for us to drive value and I would say the life with with our customers and and and wood and aligning our strategy with what's best for our customers. So we're very excited about putting this in place in terms of more and more details on the on the incentive packages I would say, we're we're focused on Q4 now and.
In finishing the year strong I will provide more details on on the on the on the packages.
Beginning of the year.
Got it kind of pets, that's really helpful.
Josh maybe for my follow up for you.
It's probably early to ask this but out of curiosity.
How are you thinking about the mix of of license or license revenue between recurring and nonrecurring in the next couple of years. I think you mentioned you've had about 20% here in Q3, I think you mentioned about 45% of bookings.
You know in Q3 as well as you know.
Understanding it will not be necessarily a straight line sort of getting to your target. How do you think about that target long term of recurring versus nonrecurring in that license revenue line.
Yeah, sure Hi, Saket good to talk to you again.
So you know we I mentioned also in my prepared remarks, you know when we think about the transition and we look at it we looked at a lot of other examples and so forth. You know this is usually an eight to 10 quarter transition while we.
When we think that we're going to be at the earlier a side of that for a lot of the reasons that we just talked about now in terms of where we are going into the transition.
And so you know for the most part we see and we see kind of the success. The success point of coming out of that transition at being more than 85% recurring revenue.
And you know so it's kind of going from where we are today at the end of a 45% or two you know getting well into the high Eightys, where we kind of can see you know already the other side of that transition.
And I thinking that when we think about next year you know our sales cycle still is a six to nine months sales cycle. So a lot of the pipeline for H. One next year is already intact.
So I think that it'll be a little bit slower at first on on on gaining those percentage point and then as we get into the middle of the transition you know, we'll see a pickup towards subscription, but because we will still be selling perpetual there will be lumpiness. So there may be some quarters that it said it that it fluctuates or is a bit.
Volatile and then of course you know.
As we get to the back end, it's going to be you know a kind of a more of a linear tail hitting up to the into the high Eightys and then I just want to be mostly on the percentage of recurring revenue.
A in terms of the mix shift of the bookings and I just want to confirm just met the success of the transition is 85% in the mix of license bookings.
Correct.
Got it got it very helpful guys I'll get back in queue. Thanks, a lot. Thanks.
Thanks, I guess.
Hi, Cindy and we'll take our next call.
No question.
Your next question comes from Cortina Baloney.
Good morning team. Thank you for taking the questions.
Just at the highest level is I digest some of the newer metrics in some of the headwinds that you quantified as a result of the business I'm moving to a SAS and subscription form factor this quarter I wanted to get your perspective on a product level, so with E N N.
In total about 20% of your license revenue that implies about 80% of the business is still tied to the bread and butter hi, So I'm wondering if you can talk to the speed or velocity at which the pad business is accelerating and how we should see that manifest.
Manifest and impacting your numbers and I have a follow up for Josh.
Oh, absolutely I think where we're at we're excited of course to see the the entire piece.
Grow into a subscription a part of that is more and more on our privilege cloud or a solution, but yes, you're right, we're seeing great demand for Pam on both.
Form a form factors and so as a as part of this plan are.
We will serve customers that want to consume a privilege access management on premise, but in a subscription model and of course.
Service this great growing demand for for our purpose cloud. So we saw great uptake for privilege cloud in a in the drop the year and definitely in Q3 and its taking place in the pipeline I think originally we were looking at a mid size or two to customers due to the lower end of the enterprise.
Well, we saw that it's also going beyond that and even some of the examples I gave this morning world of Fortune 500.
Taking on privilege access management as a service.
That's very helpful and Josh just a follow up I had a question for you regarding the cash flow and cash flow impact as we look towards the next eight to 10 quarters as you read this ticket that's true I transitioned.
You did talk.
Talk about a roughly five point increase on net income margins and the right way to think about cash flow and cash flow yield but.
At a qualitative level what are some of the puts and takes a lot that you are considering in the cash flow profile from here between invoicing and billings durations from some of these new work form factors that you're going to be introducing and that's it from me. Thank you.
Yeah. Thanks put them up for that are you know that if we think about the puts and takes obviously a as we sell more and more psas were looking at a more annual payment terms, which is pretty traditional in that environment. So that's certainly something that we're considering and a in our calculation free cash flow forecast.
As we're thinking about as we're thinking about a subscription as well it's less it's good subscriptions were still seeing a more that will that will make a multiple year payments upfront, but as we saw already in 2020, there's been a kind of an increase towards annual payments.
We anticipate that that trend will continue as we go into 20 2021 as well so both the stats for sure which is the standard way for those are for that to be sold and then even on the on Prem subscription we anticipate more that are going to annual payments as well, what we thought when we talk about duration.
You know I think we'll we'll we'll have a lot more visibility into that as we as we get into the first quarter of next year, and we and we begin ER and we get it. We begin this transition are actively you know for the most part what we've seen in the last year is a you know the the transit.
One has been a pretty stable around two years.
For for boats asset subscription.
Very clear thank you.
Your next question.
I'm sorry. Your next question comes from Sterling Auty from JP Morgan.
Yeah, Thanks, Hi, guys and welcome to the recurring SaaS subscription world. It's good to have you here. So I just want to level set on on some understanding in terms of metrics and and how you're thinking about the transition when you talk about that the average transition takes eight to 10 quarters what.
Do you mean in terms of what that means to be complete.
Yeah, Hi, Charlie it's Josh So I'll start what we see that being complete is a is when we get a bookings mix of our when we get to a new license booking mix above 85% of the mix in recurring revenue.
Okay. Good because I think that's important because I think a lot of investors I've been fortunate to cover most of the subscription transition, but I think a lot of the investors. You know look at you know the completion of the transition is when you've gotten back in terms of a revenue run rate equal to or above.
Of what you had prior to the move and I'm just kind of wondering within that usually takes onetime through your customer base to get them to consider moving to subscription so under that type of guys. How long do you think it would take for all of your multiyear customers at least have one shot to move.
Over to subscription.
You know, we actually we actually addressed most of our customers every year and you know we see probably you know half of our customers coming back to us and buying a new licenses or you know on an annual basis. So I I certainly think that you know.
If if if we were to look at the kind of historical how how much contact we've had with the with our customers you know probably over a you know a a couple of years to two plus year window, we're going to see customers return to us or for new licenses.
All right perfect that makes sense. Thank you guys.
[music].
Your next question comes from Rob Owens with Piper Sandler.
Great. Thank you guys for taking my question first of all just wanted to touch a little bit on EPS somebody opportunity might be seeing there around recent ransomware outbreaks.
Oh, absolutely I would say that we've.
We've seen a decrease or increase demand we've seen the the fact that the EMD as you don't need to know what the malware is in order to block it from from from accessing and encrypting. So it's a tremendous success against ransomware samples weve tested it against almost 3 million or.
More than 3 million samples and with a 100% a.
Blocking now that's in the labs in the field, we have huge adoption for free B.M. already for us for many years in the last couple of of months, we've seen increased demand for it because of the direct correlation there is no. The perimeter has dissolved they're more endpoints out there and and customers to extend the privilege for.
Production to to us the endpoint and and of course as Josh mentioned earlier, primarily consuming our endpoint privilege manager in through two cents more than 90% of of of the business deals in Q3 were SAS reset cpms, it's become a very very important product.
Then solution for us.
Great and then as you look towards.
The fourth quarter and where the pipeline sits is are you anticipating I think you mentioned six nine months sales cycles, and that's going to lead to some noise in the first half, but as you look at the fourth quarter Guide are you at.
She is spending a snap back and license at this point or to Hsas continue assessing subscription to be increasing percentage of the license mix. Thanks.
I think you know one.
Well, we're looking at Q4 in terms of the pipeline, we really have a very robust pipeline both on the on the perpetual a add on the SASSA subscription mix. So you know at this point it would be hard to say it'll be a snap back in one direction or the other but you know we're really focused on a you know just take.
The advantage of the really a record pipeline for us in terms of opening new opportunities and also and also the size of the opportunities.
All right. Thank you.
[noise]. Your next question comes from Andrew Nowinski with D.A. Davidson.
Great. Thank you.
At a high level I know I understand why a customer transition to a term based subscription during the cold period with a tighter spending constraints, but why would a customer choose a term based subscription versus a perpetual license to go outside of the cobot environment looking in that kind of 2021. It seems like it has to be more expensive for that customer over a.
Three year period.
So I'll start Andrew and actually that's why and when we talked last quarter, we really wanted to to test it out and be very thorough before we we actively a a transition and we did a combination of both our checks with with customers and also an external leading consulting firm and the and the and the answer was very it was very.
Clear this is how they're they're buying other software solutions. This is how their oriented in terms of their budgeting andr and their spend towards towards Opex and so the it's becoming the the exception to buy in a perpetual license model and this way were act.
The aligning with how they want to to buy and and spend it also gives them Oh.
Of course is the cut the common the common model in the industry and it also gives the customer more flexibility. They feel that they are they are buying what they are going to to use.
And that it's going to better align them with the fact that it's a subscription model that is that the customer that the vendor needs to prove a oh outcomes and customer success, which were which we continuously do and are eager to do so I think it's a win win on all fronts and the combination of having the Saskatoon.
All you want but also the on premise subscription really allows us to cater to a to do all of their the all of their preferences.
Great. Thank you and then you know octa announced a partnership with Hashi Corp. back in August has that put any or have you seen any increase in competition I'm on your time on your contract business as a result of that partnership in OCC, that's sort of pushing more into the desktop space. Thanks.
Sure, we haven't really seen a an impact of of that I think we.
We do a lot of Ah partnerships and in our CEQP to increase our stickiness and lead into to customers. So I would say with a with both we haven't seen an increase in a in competition, but definitely not related to up to this to this partnership we do compete with how she on the Devops side and it's a it's a it's a car.
Since it's also a a good to have another vendor that pushes the need to secure a secrets in modern modern applications that we come to it really from a same security and a platform for all types of secrets.
Thank you very much thank you.
Your next question comes from Hamza Fodderwala with Morgan Stanley.
Hi, guys. Thank you for taking my question. So if we just look back at kind of the disclosure you guys gave last quarter right. So it seems like the Psas in terms description was just about a quarter of license revenue that jumped up to 28.
For Sun in Q3.
It seems like that that mix. It was an incremental 5 million dollar headwind versus what you were expecting when you gave the Q3 guidance. So if we adjust for that it seems like.
The revenue came in just slightly above the mid point of the of the Q3 guidance. I'm wondering is there anything else that you would call out that perhaps drove revenue below the high end of what you guided from from a macro our pipeline perspective and at what point did you really see the.
The pipeline mix shift really accelerate towards that.
Yes, since we spoke back in August.
Yeah, I I will start so I would say we're pleased with the with.
With the results and the and the strong industry Tailwinds, we saw driving driving us to to this result of 45% SASSA subscription in a in our license booking and and of course, you talked about the headwind. The other data point I would add is we had a tough compare.
Compare here when it comes to the Americas us that particularly federal the Americas grew 34% then in Q3 of a of 19 driven by the largest ever.
Federal quarter for Us and and this year Q1 was art was our large I will call the CDM spend where where the government can spend outside.
Outside the fiscal <unk> or fiscal cycle in Q3.
It was not a strong federal quarter and so we saw that we saw the spend elsewhere in the year and I think that that creates a tough compare on on that if we if we double click on a on a year over year.
Got it and just as we look into Q, who are I'm wondering how you feel about the pipeline visibility.
Q4 versus you know when we spoke back in Q3, and any sort of directional commentary on on our and Q4 as well and that's it for me.
Well any direction on on what I didn't hear the last part on there are I mean.
That seems to be the main metric that we should focus on so I'm wondering if you.
You know if you guys I know you don't provide guidance, but any directional commentary on how we should think about that into Q4.
Yeah, So with regard to the pipeline as I kind of said earlier, you know where were hitting record levels of of opening a pipeline opportunities are really for this entire year both across across all the geographies and also across a existing customers and also across so new customers and across all by product line.
And so we go into Q4, we feel you know, we're feeling of where they were in a good position a very good position with.
With the pipeline that we have in Q4 body and of course as you know we have.
I've long sales cycles, so actually as it goes into a 2021.
As well when we think about a you know they are with the mix shift or for the fourth quarter and it was asked a couple of minutes ago as well you know we anticipate you know kind of the headwind that where it was that we're talking about no that we gave it a in our prepared remarks.
Of around $14 million.
Are we believe.
The headwind for this quarter would probably show an increase in mix shift towards new license bookings, a a bit higher than where we were this quarter and obviously then that would relate to a seeing a nice growth and they are as well.
Yeah, and I want to emphasize that the pipeline is moving nicely so far and we see strong not only in the in the opening but also through as the progression through the sales cycle.
Got it thank you.
Your next question comes from Jonathan Ho.
Hi can you hear me okay.
Yes, Hi, Jonathan Hi.
Hi, So just wanted to start out with the transition from on Prem to assess how much can you really influence that you know from a customer perspective, and you know.
I know like you're seeing the trend moving this direction, but can you push the customer harder like I just want to get a sense for how much influence you have on on that side of the equation.
Yeah, Jonathan I'm, absolutely first of all we have the ability to to introduce new packages, especially to to new customers that that that will include a subscription of course, a SAS is a is a sad and but that but but also new packages to to existing accounts.
Summers.
It gives them the the the excitement of of not looking modularly at the different product components, but actually having a use the ability to transition to a user base.
A subscription as a as really an opportunity for a for them and for US as we really increased our portfolio over the years to really create a a I would say a win win packages for them. So yes, we say, yes, we we think that we we've succeeded with being.
I would say just infusing passively infusing a.
We were very bullish that.
That was an active transition we can we can make it happen and that will come out very strong from a from this.
Got it and you referenced sort of the new identity use cases, where you were starting to see on customers pulling demand can you talk about where you're maybe seeing the highest demand and how much of an uplift it could be if you start adding on some of these newer use cases. Thank you.
Yeah, I would say really since since the acquisition of a by adaptive and and having the stronger full identity security positioning were seeing our customers first of all the the proliferation of privilege is really on on on their mind, so they're expanding from from from secured.
Oh, the classic iced tea and.
And developer type of a of users to two definitely the personnel behind that are administrating a cloud.
And the cloud or a console weve had before with adaptive we can really give them a smooth way too.
To do that and put these controlled under the.
The looking and excited about the business users that are actually having privilege or whether they are met as they are unemployed from HR departments with the who is administering the HR system or somebody from from fine. So the ability for for Cyberark to expand the controls to all types of users I would say that this is a a.
Multi what we're saying about multi vertical.
Just a a most of the dialogue that I've seen has been with the large enterprises and leveraging the second we have a 6300 customers to have these oh to have these conversations with.
Your next question comes from Gregg Moskowitz with Mizuho.
Pretty much yeah, hi, guys Woody I guess, that's my first question you've got excited about the new subscription packages and I'm sure. The new I haven't title mics manager product, that's going to be a an important part of that can you elaborate on how you make me look to want to go to market with these packages next year.
I'm really excited that you brought up to the cloud antagonist manager.
The launch was the launch was yesterday, but we've been sharing it with customers for a couple of months and is Oh it's.
It's really right, where the puck is going because they are seeing that the cloud identities come with thousands of Oh permissions and and a human on on their own can really figure out how to put a control over it.
And this this way with AI, we and the solution here, we have the opportunity to to give them at least privilege approach for cloud immediately remediate access effect access and so they're very very very excited about that so that's another example of a of the.
This is a solution that goes into.
Goes goes into the.
The mix the mix here in terms of the type of Ah packages I don't have a specific will elaborate on nicks next year.
But given the broad portfolio.
We can create different landing points for for customers with the with the mix of our solution.
Okay terrific. Thanks Beauty and then just for Josh it's interesting that saffron prescriptions made up more than 45% of new license bookings.
This quarter versus only 10% a year ago I think we all get the 14 point headwind on on recognize revenues this quarter, but what impact does this mix shift have on license bookings in absolute dollars or license bookings growth for that matter, how should we think about that.
So what does have impact on license bookings for.
I didn't hear the last part a an unlicensed bookings growth. So if it's a 14 point headwind on recognized revenue growth you know Chris.
Really there's a an impact to your license bookings growth rate as well from that from this next chapter and just kind of wondering how we should be thinking about that part of it.
Yeah, I mean actually.
I mean, the way we think about it is first of all in in Q4, where it will we're looking at a bigger headwind you know based on the mix shift or a that were that were anticipating you know we're not breaking out the different license license bookings from from other types of bookings or as part of as part of our guide.
But really you know and the other day, it's going to be what's going to be important is how quick do we get to a you know growing our AE. Our you know at the end at a nice levels that we want and that's going to really you know that's really going to dictate you know the strength of the business.
So I can't I can't give out what what we expect the license bookings growth will be but Ah you know we're we're.
We've talked about in Q4 being about an 18.
Million dollar headwind in the guidance, we gave for total revenue.
Okay. That's helpful. Thank you.
Your next.
Question comes from Eric <unk> with Goldman Sachs.
Hi, Good morning, it's Brian Essex, Hey, Thanks for taking the question and I apologize. This has been asked before but you know we do you can you can you maybe touch on the difference between annual contract value or what you're seeing SaaS versus license and.
How do you anticipate that might drive a more effective customer adoption of the platform.
Just you want to take that.
Ah, Yes, sorry, I was on mute.
So actually we're seeing on the status of scripts inside of the recently a increase on the annual contract values are that we're getting on a on the SASSA subscription piece. Overall. So you know we you know they typically though when we see our SAS customers, they're going to.
Start smaller, but they expand or much more quickly and you know we're still new in this game. So you know.
Bear with us, but you know at this point in this year, what we've seen is that they've actually increased off of us off of a smaller number at the beginning of this year. When we first started selling more sad and subscription.
Got it and then how might that compare to the way that I get from what I understand you know on the license side.
There was a little bit more you know phasing of deals or you know.
Lowering of the initial contract signed an expansion is it similar to what you're seeing on the license side or is it is it materially different because of the different way that that that platform might be concerned.
No I think it's similar I think that the you know customers, particularly new customers they come in and and a and they start in a certain area, where they want to Oh. The high is a high risk area. If it's in a it's a privilege cloud and then they've got a they have a map of where they want it looks bad you know over and over over the net.
A couple of years and move out within their infrastructure. So I think we expect it to be fairly similar with the SAS, either the SAS offerings or or with Oh buying on premise in subscription pricing.
Got it that's helpful. Thank you.
We would now like to turn the call back to Mr. Udi Mokady.
Thank you Cindy I want to thank everyone here I want to thank our customers partners and employees for contributing to our success in the third quarter as a subscription company I'm confident that we will build even deeper relationships with our customers and partners and again, thanks, everyone for the time today and I look forward to talking soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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