Q2 2021 Cyberark Software Ltd Earnings Call
Yeah.
Good day, Thank you for standing by welcome to the Ciber Arc software Q2, 2021 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you would need to press star one on your telephone keypad. If you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Erica Smith, Vice President Investor Relations. Please go ahead.
Thanks, Steve Good morning, Thank you for joining us today to review <unk> second quarter 'twenty 'twenty one financial.
With me on the call today are chairman and Chief Executive Officer, and Josh Siegel Chief Financial Officer after prepared remarks.
A question and answer session.
Before we begin let me remind you that.
Speaking on the call today may be considered forward looking statements, which reflect managements best judgment based on currently available information.
Your first specifically to the discussion of our expectations and beliefs regarding our projected results.
Operations for the third quarter and full year 2021.
Our actual results may differ materially from those projected in these forward looking statements.
Your attention to the risk factors contained and the company in Europe.
On form 20-F filed with the U S.
<unk> Securities and Exchange Commission.
Those referenced in todays press release that are posted to <unk> website.
Regarding our ability to actively transition the business to a subscription model the duration and scope of the Covid 19 pandemic it's related impact.
And our ability to adjust in response to the Covid 19 pandemic.
We disclaim any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made herein.
Additionally, non-GAAP financial measures will be discussed on this call reconciliations to the most directly comparable GAAP financial measures are also available in today's press release.
He did investor presentation.
Interest discussion in todays call.
Webcast can also be found on our website in the Investor Relations section with that I'd like to turn the call over to our chairman and Chief Executive Officer Judy.
Thanks, Erica and thanks, everyone for joining the call today, we hope you and your families are all well we had an amazing second quarter one of the best in the company's history.
Our subscription transition right out of the gate in the second quarter with the mix of subscription bookings, reaching 65%. Despite the headwind created by the mixed we achieved total revenue of $117 million.
This revenue level paired with the mix over achievement demonstrates that our bookings were considerably higher than anticipated in our guidance in fact, the underlying business significantly accelerated in the second quarter, driven by record SaaS bookings and robust subscription demand.
Due to our strong bookings grew by 35% to $315 million as of June 30, even more importantly, our subscription <unk> grew faster than 125% year over year.
Recurring revenue reached $81 million, an increase of 32% compared to Q2.2020.
Subscription mix era, and recurring revenue demonstrates the progress in the subscription transition momentum in the business and the incredible demand trends, we are seeing for our identity security platform, which is centered on pad.
I plan to frame, our discussion on the quarter or on the pillars of growth subscription transition innovation and profitability.
So firstly on growth.
Positive secular tailwind and the execution of our land and expand strategy are contributing to the acceleration in our business.
Are there any security is at the center of digital transformation Zero Trust and Hacker innovation. So here are the most important and intertwined trends in cyber security.
With digital transformation and the move to the cloud privilege access is everywhere and every identity across human users application and boss can be privilege under certain conditions.
If you think about zero trust organizations around the world are no longer just strategizing about frameworks. They are implementing programs and allocating budgets, taking an assumed breached mindset that stress nothing and verifies everything.
Our bankers are exploiting the changing landscape and landmark breaches like solar with Microsoft Exchange code Covid colonial pipeline identity compromise and the abuse of privilege access is the common denominator.
What a nice software targeting supply chains and sophisticated reservoir attacks are examples of the severity of the threat landscape and are pushing it very security to the top CIO and Cisco priority list.
Our ability to deliver industrial strength security empower business agility and growth and provide fast time to value is a unique and in demand combination.
This creates a strong market backdrop, our go to market teams are executing and taking full advantage of the scale was to drive growth. We have quickly learned the land and expand approach focused on the value of subscription delivery the ability to leverage a robust and growing partner network and the selling process more aligned with our customers' needs.
With our industry, leading SaaS solutions and focus on subscription sales.
One of those important go to market focus areas was expanding our sales motion to include our identity security vision.
In January we organized our sales team across the identity security pillars of pad and that were to speed those access and desktops.
As evidenced by the acceleration in our business to increase focus and specialized resources are working.
Productivity levels have increased in all regions and our cross sell activity has improved considerably.
At the heart of our business is our robust patent portfolio and in Q2 pads and particularly privileged cloud was the biggest driver of growth the majority.
If our customers land with Pat we added more than 185, new logos across verticals geographies and customer size.
In fact, fortune 500, and global 2000 companies in manufacturing professional services and critical infrastructure landed with privilege cloud in the second quarter, a clear demonstration that large enterprise customers are increasingly protecting the keys to the kingdom leveraging the cloud our cloud.
In fact, the success of fat extended across all portfolio areas as we look across as we look at strong close rates at a meaningful increase in deal sizes as new customers made longer term strategic purchasing decisions with a broader set of our solutions.
Customers are implementing comprehensive with any security programs, including cyber Ark everywhere initiatives relying on cyber across our portfolio of solutions. This is in part because of the maturity of our solutions, but also the flight to trust in today's threat environment customers increasingly want to work with partners, who have real world experience.
Solving critical cyber security challenges, while there are multiple examples from Q2, one I will highlight demonstrates the increased velocity of our business and our improved expand motion.
A financial services company with deep with privilege access in the first quarter expanded quickly in Q2 to secure servers with endpoint privilege manager in a high six figure ACB deals.
The increase in reservoir attacks like colonial pipeline is accelerating demand for endpoint privilege manager, which has been proven in our lab to be 100% effective in blocking more than 3 million types of ransomware and counting.
I want to highlight a few more customer examples from the second quarter that demonstrate the power of our identity security strategy.
An existing hospital customers, what's been locking wed been locking down endpoints with <unk>. Since 2019 is now displacing their legacy Penn vendor to modernize their environment with privilege cloud.
They are further expanding the size of our footprint by implementing contract to secure the Dev ops pipeline as well as our access solutions, including vendor axis.
Our CECO integration, such as Sailpoint and service now as well as our ability to secure a broad set of cloud use cases were key contributors to this great expansion deal.
One of our Pan financial services customers in Europe was modernizing its identity stack and big <unk>, MFA and SSO identity solutions in a highly competitive situation. They recognize the criticality of identities and wanted identity access from a trusted partner, who would empower the business provides strong security controls and deliver.
<unk> quickly.
In the seven figure annual deal a European professional services company embraced our identity security platform by nearly all of our SaaS solutions across our portfolio.
This new logo will benefit from increased security and ease of use across all it does is protecting humans and nonhuman across privileged access and depths across the.
The breadth of our portfolio and our ability to secure modern and traditional applications were key to winning this new logo.
In a highly competitive win against a well recognized Dev ops solutions and existing endpoint privilege manager customer Distrusting conjure secrets manager to secure its CIC deep pipeline with.
With cyber this fortune 500 transportation company not only wanted the scalability and agility of culture, but also the peace of mind from knowing that the mission critical applications running its business are truly secure.
Attackers are increasingly targeting applications in the application and developers, which is contributing to the strong momentum for Congress secrets manager.
We are typically the second call. After an incident response firms in a post breach situation and there are a number of examples every quarter in Q2, a leading company who had just been hit by ransomware purchase privilege cloud through AWS and was up and running in a matter of hours quickly getting their business operation.
Our partner ecosystem of advisory firms, Fars and Ctrip technology partners is further extending our reach and driving scale in our go to market.
Our advisory firm partners are investing in some of our practices training and dedicated resources. Another demonstration of the strong market demand trends in the industry.
Seeking partners like Red hat, we collaborate with on automation and Dev ops as well as AWS cloud. These are new ipads differentiate our solutions in the field and allow our customers to maximize the right investments.
Moving on to the second strategic pillar, which is our subscription transition.
We performed ahead of our expectations our transition strategy was set in motion in January and since then customers partners and employees have embraced the new selling strategy in <unk>.
Just the second quarter of our active transition, we reached 65% subscription booking mix much faster than we anticipated our transition continues to be set and we were thrilled to reach a new record for SaaS bookings across every one of our SaaS products with particular strength in privileged cloud and endpoint.
Each manager.
In fact every geography and every SaaS product so an increase in subscription mix compared to the first quarter of 2021, giving us confidence that the subscription pricing adopted cross verticals and regions.
While the active subscription transition is relatively new we already have more than 675 customers with over $100000 in Aero and increase of 39% from June of last year.
We also continue to see great progress in our customer success program, and we are well on our way towards delivering transformative value to our customers.
We are thrilled with the progression of our subscription transition and after analyzing the path forward. We are confident we will reach our goal of 85% of bookings from subscription and exit the transition by the end of 'twenty 'twenty two.
Said another way instead of an eight to 10 quarter transition, we now expect to complete the transition in eight quarters.
Moving onto our innovation Center, which is the foundation of our strategy and strengthens our leadership position in the market.
We were pleased to be named a leader in the July 2021, Gartner Magic quadrant for privilege access management position, both highest in ability to execute and furthest in completeness of vision for the third time in a row.
The power and differentiation of our data security strategy is demonstrated by dynamic privilege access and secure web sessions, which we introduced at our impact event in June.
The response from our customers has been overwhelmingly positive dynamic privilege access extends our existing Justin tied capabilities to multi cloud and hybrid workloads.
Every enterprise Iot environment has both static and dynamic privilege access and customers require a solution that secures boat.
Secure web sessions as part of our access speed bump and delivers continuous authentication and session protection, including session recording for all types of web applications from business apps cloud causes. This solution was described as a game changer Friday any security by customers who attended our event.
We are the only vendor offering.
This essential capability required to achieve zero trust.
I will wrap up with some comments on the profitability pillar.
Our go to market engine is firing on all cylinders and our innovation machine is extending our leadership position.
As we looked into the strong market fundamentals acceleration of our business and improved close rates and productivity. We made the decision to increase our investments in the second half of 2021, particularly in go to market to drive growth in 2022 and beyond.
We have not changed our philosophy around investments, we critically evaluate our investments to ensure they deliver a strong return and long term value.
And as a result, we expect to return to the profitability levels that we were on before we entered the transition period.
To recap before looking ahead.
We had an incredible second quarter, one of the best in the company's history.
The underlying business accelerated.
Each of our SaaS solutions reached record bookings identity security across Pan access in depth SEC ops is becoming a security requirement push forward by major industry tools digital transformation Zero Trust and hacker innovation.
And our subscription transition strategy is delivering results.
Our outperformance in the first half of the year gives us incredible confidence in our ability to execute and the strong demand environment supports our growth as a result, we are raising the full year bookings assumptions underlying our guidance above and beyond our beat in Q2, which Josh will discuss in more detail.
We are well on our way towards transforming the business into a fast growing durable subscription company with our cloud solutions, leading the way, which will unlock tremendous value for our company our shareholders our customers and our partners.
I will now turn the call over to Josh will discuss our results and outlook for the third quarter and full year.
Josh Thanks, Uzi, so before we discuss the details of the quarter. We wanted to remind you that we posted slides to the website that will be helpful. As we walk through our results.
As Rudy mentioned, we had a great second quarter with an acceleration in the underlying business, particularly for Pam and all of our subscription transition metrics came in better than we expected in terms of the headlight P&L. We delivered total revenue of $117 million with a 65% mix of subscription bookings that.
Well ahead of our guidance framework of a 55% mix as Judy also mentioned revenue above the midpoint.
With a higher subscription bookings mix was because of the stronger than anticipated total bookings for the quarter above what we guided for in May.
Subscription revenue reached $27.1 million and represented 23% of total revenue in the second quarter, that's increasing 100 or 1% from.
From $13.4 million in subscription revenue and only 13% of total revenue in the second quarter last year.
Our combined maintenance and professional services revenue was $62.9 million with $53.5 million coming from recurring maintenance and $9.3 million and services revenue.
Total recurring revenue in the second quarter reached $86 million or 69% of total revenue growing 32% from $68 million and only 57% of total revenue in the second quarter last year.
The mix of subscription bookings as a percentage of new license bookings really demonstrates the pace and success of the transition we are moving faster than we planned through the transition as you can see by our 65% subscription booking mix.
Economically the headwind created by the mix was approximately $13 million in the second quarter, when we compare it like for like to the mix in the second quarter last year.
Normalizing for the mix shift the license portion of our business, our SaaS on Prem subscription and perpetual would have grown over 35% in the second quarter.
Which really supports the growth we are seeing in our business.
Taking the headwind into consideration total revenue growth would have grown 22% year on year.
At June 30, 'twenty 'twenty, one hour a R. R was $315 million growing 35% year on year, and representing an acceleration from the organic growth rate in the first quarter of 'twenty 'twenty one.
We closely monitor the subscription portion, which grew a 128% year on year to approximately $109 million and represented over 35% of total a or are at the end of June.
Sequentially, we added nearly $22 million of SaaS and subscription a or are in the second quarter compared to the first quarter. This year on an organic basis. This was the strongest sequential increase in subscription a are in the company's history.
The maintenance a R. R was $206 million at June 32021.
So we're thrilled with the new business momentum in terms of number of new logos added in a healthy increase in new business deal sizes, a bit more detail about 83% of our more than 185, new logos, where subscription that's compared to about 50% in the second quarter of last year.
Geographically the businesses could the business continues to be well diversified the Americas generated $69.5 million in revenue representing 59% of total revenue. The Americas again had the strongest percentage of subscription bookings during the quarter EMEA had 36 million.
In revenue or 31% of total a P J generated $12 million in revenue or 10% of total revenue with an ink with an increasing mix of SaaS and subscription.
All line items of the P&L will be discussed now on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release.
Our second quarter gross profit was $97.9 million or an 84% gross margin compared to 85% gross margin in the second quarter last year.
We continued to make disciplined investments in the business, resulting in operating expenses of $95.9 million or 30% year on year growth in operating income was $2 million in the quarter.
Three main items that impacted our operating income first the 13 million dollar headwind lowered our operating margin by about nine percentage points second higher expenses from foreign exchange rates lowered our operating income by about 2% and third a full quarter of expenses from adapted this year versus.
As last year.
On a like for like basis, neutralizing the headwind FX and adaptive our operating margin would've been approximately 15% in the second quarter of 'twenty 'twenty one.
Over 70% of our operating expenses are related to head count we executed even better than we expected against our aggressive hiring plan to invest in the business ending the second quarter with 1969 employees worldwide and.
And of our total employee count 881 employees are in sales and marketing.
Net income was $250000 or one cent per diluted share for the second quarter.
In the first half of 'twenty 'twenty, one free cash flow was $45.2 million or 20% free cash flow margin. This cash flow contributed to our strong balance sheet and we now ended the quarter with $1.2 billion in cash and investments.
We also increased deferred revenue by 22% year on year to $275 million at June 30, our SaaS deferred revenue grew by 136% to $63.6 million and that's compared to only $27 million at June 32020.
Now turning to our guidance for the third quarter 'twenty 'twenty. One we expect total revenue of $116 million to $124 million, we expect a non-GAAP operating loss of about 6 million to non-GAAP operating income of $1 million for the third quarter, we expect our EPS to range from non-GAAP net loss of <unk> 19 cents.
To a loss of two cents per basic basic share. This guidance assumes about a 70% of subscription bookings and a revenue and profit at boat profitability headwind of approximately $14 million for the third quarter of 2021.
Our normalized total revenue growth for the third quarter, taking a calculated headwind into account is over 25% at the midpoint of the range and if you isolated our licensed lines of SaaS on Prem subscription and perpetual the normalized growth rate for the third quarter calculated to be 40% year on year.
Our guidance also assumes $40.2 million weighted average basic and diluted shares.
Our guidance for the full year 'twenty 'twenty, one reflects the robust industry tail wins and strong close rates. We expect total revenue in the range of $484 million to $496 million and the mix assumption underlying our guidance for the full year is 64% from subscription bookings and a rep.
The new headwind for the full year is now approximately $63 million. This represents a significant increase from our prior guidance, which assumed a mix of 57% from subscription bookings and a 45 million dollar headwind.
Given the transition we wanted to provide more color on our growth rate, taking the calculated headwind into account, which would approximately 19% at the midpoint of the range for total revenue and if you isolate our license lines, a SaaS subscription and perpetual the normalized growth rate would be over 25% for the full year.
I want to emphasize that the combination of higher bookings mix and revenue headwind represents a significant increase in the booking assumptions underlying our guidance for the full year.
Now moving down the P&L, we expect non-GAAP operating income to be between 7 million to $17 million. We expect our non-GAAP net income per diluted share to be in the range of one cent to 26 cents and for the full year.
We expect $40.8 million weighted average diluted shares and about $12 million in taxes.
We are increasing our investments in the second half of the year to ensure that we can capitalize on the growth opportunity our leadership position in fundamental strength of the business.
We also want to provide a few updates on the timing of the transition and free cash flow guardrails for the full year as Judy mentioned on the timing of the transition. We now expect to complete the subscription transition in eight quarters, meaning we should cross over our targeted 85% threshold of bookings from subscription already by the fourth.
Warner of 'twenty 'twenty two.
Lastly on cash flow, while we do not intend to guide for cash flow. We did want to provide more granularity given that we're already halfway through the year. Currently we expect our free cash flow to be between five and 10% of the non-GAAP net income margin for the full year with third quarter free cash flow lower than you expected quarter of 'twenty.
Lower than the second quarter of 2021 because of typical seasonality.
Second quarter was great growth is accelerating and our subscription transition is well underway. We are confident that our investments will drive growth and innovation in 'twenty to 'twenty two and beyond.
With that I'll now turn the call over to the operator for Q&A.
Operator.
Thank you Sir as a reminder to ask a question you will need to press star one on your telephone keypad telephone drawing your question press the pound key.
Your first question comes from the line of socket Calia of Barclays.
Okay, Great Hey, guys. Thanks for taking my questions here.
Maybe maybe just to start with you.
Yes, it's great to see the overall revenue upside in the quarter, but I think so I think what was really interesting to see the revenue guide unchanged for the year, despite the higher subscription mix and sort of all the commentary on better bookings. So I was wondering if you could just maybe double click into what you feel.
Like is driving that underlying better bookings backdrop, because I think we heard that last quarter as well. So could you just go one level deeper into whether this is coming from a change in the competitive environment or whether this is related to maybe some of the breach activity that we've seen I'm curious what do you feel like is driving that better bookings activity.
Absolutely.
Good to talk to you here today, we talked about in the past a lot about building a record pipeline I would say we are executing against this this record pipeline. So it's a combination of the demand environment, the market leadership and favorable competitive environment and strong execution, how we organized to execute around it the transition.
It's really happening.
<unk> the sales team really embraced the SaaS and subscription and with the increased demand of wrong and we're working on it and executing rates I mentioned, the speedboats really complementing our Pam.
Core business and <unk>.
Very pleased to see the demand for privileged cloud move.
Move up due to upmarket like the examples I've I've, given where large enterprises are also adopting a privilege cloud it gives us the opportunity also for quick time to value.
For them, so I would say all of the above the execution against the growing demand environment, then and I'd, probably add that the E. P. M. Specifically is getting strong demand driven by by ransomware, Walt but I would also say that the rest of the solutions are considered critical in this kind of threat environment and.
A strong pillar of zero Trust.
Got it got it that's super helpful. Josh maybe for my follow up for you.
Yes.
Sure.
I think I think we understand sort of the revised profitability it feels like youre investing really to.
Continued growth if you will I think.
Going into into future years can you just go a little bit deeper into.
Well all of those investments are to be in go to market is there anything in that sort of revised operating income guide that maybe has to do with the changing mix or just maybe one level deeper into sort of the revised operating income guide because maybe for me that was a little unexpected given the unchanged revenue guidance. So just maybe one level deeper if you can.
Yeah, Thanks, Ann and I will certainly go into that so.
First of all.
We did extra hires in Q2, we were able to even overachieve on our on our internal.
Internal targets for hiring because you know we were considering the very tight and competitive job market out there and with over 116 net additions.
We started we're starting into the H two in a in a strong position from the hiring perspective, and and you know we'll continue to be doing that as we go into the into the second half and it's going to be really stepping on the gas on the go to market hires in the second half and it's and it's coming from and the other part that I would.
Dive into.
The other part I would dive into is that we overachieve in <unk> in Q2 bookings are our guidance as you pointed out as well and as we pointed out several times. This morning that is already we believe we're beating out our original internal forecasts on bookings were for age two and that's really going to drive up.
You know our variable a variable amounts as well into H two so when we consider where we are on our on our on our position for hires are going into the second half when we when we consider our targets for our go to market hires going into the second half and increased.
Expenses related to the fact that we actually are booking more business.
In Q2 with <unk> and are expected to do so more in the second half will go up we're seeing.
Our rise and that's what's contributing to the kind of under the hood to that to that change in the operating expenses and I will just add that nothing changed in our approach to run a highly efficient profitable business, but as just mentioned exiting Q2 with such a with such growth and and the fastest transition to subscription adoption.
Across our SaaS by the enterprise and the favorable competitive landscape and market fundamentals, we believe that they really justify increased investment in go to market and scaling of the company to support the acceleration of the business and build with the momentum that we've been talking about today.
Got it very helpful guys. Thanks, I'll get back in queue.
Thank you. Your next question comes from the line of Sterling Archery of J P. Morgan.
Yeah. Thanks, Hi, guys. So I wanted to ask the subscription transition question. This way obviously the mix is much better than you originally expected, but who is not choosing subscription, especially when you talk about the new customers coming on.
What's the profile of the company and says you know what subscription is just not for me.
Yes.
I'll start I I would say that that were primarily.
Very pleasantly surprised by the adoption across regions and across our verticals and as I mentioned in my prepared remarks, we even have.
Critical infrastructure companies.
And and large global 2000, and fortune 500, adopting it and it's happening across the board and across our geographies and as Josh mentioned, 83% of the new logos, where SaaS and subscription. So it's really happening if I. If I were to point to verticals that we expect them to be laggards in the adoption is probably the low.
<unk> government vertical is where we expect it to be the later on the on the adoption and want to distill kick off more in in perpetual.
And again under government you can you can also put some highly regulated.
Our verticals, but but it's happening and within the regions.
A P. J is is is is adopting it but will be slower in adopting our SaaS and subscription.
Makes sense and then Josh one follow up for you I missed if you said it but you've given us kind of a great view.
<unk> on what revenue would have been if you didn't do the transition, but what about free cash flow I think first half year to date, you're down about $5 million, but in the perpetual maintenance I would imagine you'd collect just a much bigger portion of the value. Then you do under subscription even if you don't have an exact number can you just give us a framework.
Mark of how to think about that.
Yeah, I mean, you're right.
On the SaaS and subscription model theres much more annual payments.
Then in a in a classic perpetual maintenance motto and also let's remember that a perpetual the perpetual piece is getting a getting more money for the license portion as compared to our typical annual contract. It's usually you know an annual contracts. So it could be two to three years breakeven.
You get to kind of the the perpetual.
Perpetual size, so I I know.
The other piece that obviously, you know as it correlates to head, but I cant give you necessarily a framework I mean, but there is some impact on cash flow relative to the mix of SaaS and subscription I would probably.
You know when we think about it.
You know correlated to on that.
We've always been talking about kind of cash flow being around zero to 10% above net operating margin, but what we're seeing is still the same percentage over net operating margin, but a lower net operating margin. So.
That's where I would that's why I would correlate the difference.
Yes that makes sense. Thank you so much.
Our next question comes from the line of Jonathan Ho.
Hi, Good morning, let me Echo my congratulations as well.
Can you give us a little bit more color on the multi product deals that you're seeing or I or platform purchases and make it easier for our customers either to buy up on or to add on you know sort of additional <unk>.
Overtime.
Yes, absolute Jonathan I think we gave we gave some examples on the call customer that starts with the with privileged cloud Azure Z P M faster and we've seen it with the with the examples of customers going broad on the AWS security.
Our solution so.
With the combined packages, we see everyone. Every every company every customer can land with third party access MFA and and this is so so they get a good bite on the.
On the on the offering depending on how they are all day, London and from there we can show value and extend so it's definitely the power of the identity security platform and are taking place.
Got it got it and are you seeing any evidence of potentially pent up demand from Covid 19, or maybe companies that are taking a little bit more of a strategic review over their portfolio and then now looking for either your SaaS solutions or the add onto some of these other solutions on the privilege cloud side. Thank you.
Absolutely the absolutely the latter I would say it is.
Companies are being more strategic there in the new normal and it's time for them.
Even with regards to to solar winds in events of that type, but the first was kind of a reactionary what do we do to patch and Sol and we're seeing customers across the board the very strategic across.
Across the other going to secure their future and and looking to be more programmatic and definitely faster and adopting adapting and cloud.
And we can see that also in the new logos where were deal sizes have.
<unk> increased as they as they take as they take on larger bite because they are being more strategic they want to start a pan.
Or an identity security program.
Great. Thank you.
Your next question comes from the line of Hamzah <unk> of Morgan Stanley.
Hey, guys. Thanks for taking my question. So just one for.
For Josh as well as the Moody's so.
Great color on the demand environment larger deal sizes. It seems like Theres a lot more strategic conversations around.
The product portfolio.
If I triangulate that to.
So this quarter you added $27 million that was.
Like almost double versus last year in Q1, if we think about the back half given everything that you're saying about demand environment should we expect.
If demand is improving that that net new air or should be growing into Q2, and Q3 and Q4 does that does that makes sense.
Yeah, Hamzah I'll start definitely I mean overall for the year, we see a AAR are growing 35%.
And so we had we liked our accelerating organic AAR from a 235% level Q2, and we see for the year or two.
To continue growing AAR and having an annual growth of about 35%.
And Josh if I can just follow up on that so definitely growing 35% that seems like to be a bit of an uptick versus what you guys were saying before a 30% plus growth does that is that a fair assessment, yes, that's correct and and we're doing we're seeing that uptick because of the acceleration that we had on an organic basis.
In Q2, and we're glad to do that.
Okay. Thank you so much.
Your next question comes from the line of Rob Owens with Piper Sandler.
Great. Good morning, everybody. Thanks for taking my question I think Hamzah beat me to it because it's going to try and pin Josh the number for the year on IRR. So 35 looks like a good number I guess it.
At a high level, what's the transition mean, either for customer acquisition is it.
Subscription getting you into new areas or new new segments of the market and then how do you think longer term about customer wallet share and what their shift to SaaS is doing from that perspective, and any quantification would be great. Thanks.
Hi, Rob.
I would say the subscription removes a resistance.
Procurement.
Cycles again for those.
The majority of the verticals that are adopting.
Subscription.
And we were really playing in broad markets, both verticals and geography.
Already.
I would say that the SaaS element the SaaS delivery takes us further.
Two into mid market.
What we call the commercial segment, there's an easy as uneasy.
Ending point and of course it is in line with the strategy, we are seeing across enterprise, where a lot of them want.
SaaS versus solution for for security, So I would say, it's having the the right solutions.
And the right timing right now with where the market is ready to adopt Hammond and identity.
Any security and of course, the motion as I mentioned earlier really allows us to show quick time to value.
Much we hold a lot the customer success muscle that that I talked about.
And get and get quicker into that add on business with.
SaaS SaaS customer.
Customers.
And I guess secondarily for Josh you did see strong acceleration in that subscription, especially on a sequential basis.
Kind of unpack the different elements. So term was up just.
Modestly on a quarter over quarter basis, especially relative to the growth in subscription <unk> was there anything to do with duration and I realize there's a lot of moving parts on these numbers as we get two and three layers, Steve but was there a duration issue or anything else, we might be aware of there. Thanks.
Yeah, Rob it's not about duration are just are just doing more bookings of SaaS and subscription deals in and also I think we mentioned this before we're SaaS abbvie on that so more of the E. R is coming on the on the on the SaaS side.
But it's just doing more bookings.
Alright, thanks, guys.
Your next question comes from the line of Adam Borg of Stifel.
Hey, thanks, so much for taking the question.
Maybe just for you just obviously with the U S. Federal government cyber security a lot more seriously with E O and other actions I was just curious kind of what you're seeing more in different vertical and if you think about the fiscal year ended <unk> <unk>.
We can see sometimes.
Some type of acceleration in <unk> Q, what do we think that any tailwind from the federal sector would be more about 'twenty two of that thanks.
Absolutely.
I think there's we have a great long term opportunity in global government, including.
Including our U S federal.
And we are we are excited to see our principles of Pan principals of least privilege of zero Trust in both the executive order and proposed legislation. So we believe there will be a long term returns on that we're not expecting outsized returns.
In Q3 because of the time it takes for these initiatives to the sea.
Ben but again, certainly long term opportunity for for global government.
Great. That's really helpful and maybe just a quick follow up just on endpoint privilege manager. It's nice to hear the continued traction there can you just remind us of the mix that that represents a total AAR. Thanks, so much.
Until I have the mix of revenue.
About 20% of our total a R.
Annual recurring revenue.
Great. Thanks, so much.
Your next question comes from the line of Brian Essex of Goldman Sachs.
Hi, good morning, and thank you for taking the question.
If we can dig in a little bit I think there was some commentary about the federal favorable favorable competitive landscape.
What what is driving that.
That's favorable shift and I think you know in your prepared remarks, you noted a nice win against the Dev ops here, maybe if you could dig into that a little bit as well and give us a better.
Better insight into what was the approach of the peer what did that competitive environment look like and what drove the win there.
Sure So I'll take a broader brush on the competitive environment and then we can dive into.
And into Dev ops, I think <unk> has been consistently.
Extending our market leadership position with the innovation arm.
And coupled closely with an expanding and growing our go to market arm and you can see it in our results for the third year in a row in the Gartner Magic quadrant really having the top leader position I think in the same time.
We've seen the traditional Pam vendors.
Kind of switch hands on on private equity in and we're seeing we're seeing disruption there and so we're not waiting and pushing pushing ahead on <unk> and then with our extension into identity.
Security, we have we have the broad offering with them at the center, but the ability to push the full.
Are there any management suite.
And and and Dev ops and then in that realm, we obviously can counter the axis players in the Dev ops players, but we win on having a security first mindset with the customer and the fact that they trust us with Bam at the center of the.
The example that I alluded to in our win on the Dev Ops front is exactly where customers no longer.
Especially after solar winds in the increased threat environment.
I would say more control kind of shifting back to.
Security first mindset for the customer and here. They wanted the security vendor to be the one securing all of it and then have the ability to secure all types of application and really differentiates us.
And in the market with our secrets management that needs to be agnostic to whether it would be.
The chosen developer platform.
Our partnership with <unk>.
With Red hat.
And the ability to integrate all of that into into their parents and so having the Pam platform and and being able to secure broad broad all types of applications was led us to this win in many wins on the on this front.
Okay. That's helpful and I was going to ask you about central products I think you hit that.
And then maybe just a quick quick follow up.
The deal you announced the transaction announced AWS.
Purchase a privilege cloud our privileged cloud being purchased through AWS.
How significant is AWS as the channel is that more down market and how does that kind of lead to follow ons do you have a lot of visibility.
The increase of cash after privilege card purchase through that channel. Thanks.
No. That's a great question and I would say that AWS is a new <unk>.
For us, but we're very we're very excited about it because it complements side, it's actually an inclusive channel that works on top of all our other channel partners, especially where where our customers have existing AWS relationships and are able to buy through to the marketplace. So that was a great example, we put out there.
Where the demand was for sidewalk we helped.
The customer.
Our recover from ransomware into our privileged cloud and the ability for them to buy that through through AWS really accelerated the whole the whole cycle and we have multiple.
Multiple integrations with AWS, where we're moving up in the in the partnership with them and we're going to invest more in this and this go to market to be able to.
To replicate.
Those sort of wins again in complement to our existing channels.
Got it very helpful. Thank you.
Thanks.
Your next question comes from the line of Jonathan <unk> of Baird.
Yeah, Hey, guys congrats on the strong performance.
It's really great to hear how well privilege cloud is doing.
I'm curious if you can.
Well give us some color on GAAP.
It's been about a year since the acquisition.
Add some early traction.
Yes.
Do you feel about the Covid.
Especially with the secured in person messaging.
Yes, I think I think it's.
We're very excited about this speedboat and other are how they're performing.
And and I would say this is a really a kind of a breakout.
It was a breakout quarter for them in in the muscle of both landing new logos and and also creating add on opportunities within within within our customer within our customer base. So I would say, it's a it's a newer part of the business, but the speed both us as well on its way.
With the strong progress.
In the market.
We invested a lot with integrating our solutions and our ability for our customers to really see success from from leveraging the connectivity to Japan to vendor access in and the other things that we brought.
Due to the table and the customers are very excited about what we announced that at our impact event with <unk>.
Secure web sessions, and our ability to give them Pam like controls for all types of for all types of users and so that this will be available in the second half of the year end and we expect that to give us a an increased competitive.
Advantage in and a good y on Y adopt identity security as a strategy.
Yes, no that's great to hear.
Yes.
You touched on some of these dynamics earlier.
You look.
Okay.
In the quarter peeling back the layers.
No.
Impacts or dynamics as well.
Maintenance that we should be aware of in the quarter. So like in the <unk>.
Yeah, Jonathan I actually I think there was nothing seasonal that I would point to everything.
Everything on the maintenance side behaved. According to plan and just we exceeded plan on in terms of the business coming from SaaS and subscription.
I wanted to take this one opportunity, though to the question earlier around the percentage of a S. R for E. P. M. I said it was about 20%.
It's about 20% of the subscription E. R. R component that we have so I just wanted to clarify that.
Thanks, Thanks, guys.
Your next question comes from the line of Roger Boyd of UBS.
Hey, Thank you just a quick question on perpetual and your expectations for.
The back half year relative to the strong booking mix and 35% of our growth can you talk about if there's anything changing from an incentive standpoint in the first half second half or is it just more of that go to market is hitting its stride bundles are coming online and customer demand is just organically growing that line.
Yeah.
So I think like we talked about we're expecting again, a growing mixing in in.
In Q3 with the 70% the mix and then in Q4, we're expecting more add on business coming with.
Perpetual in terms of the team.
They're all incentives intended to sell our SaaS and subscription we kicked that off in January they're all they're all trained all regions are running in and pushing that so the the only nuance, which is a positive one as we expect add on business from existing customers and in Q4, which.
It will be it will be.
An increase in perpetual into that mix.
So that would be add on business, not any sort of conversion or maintenance revenue.
It'll it'll be mostly a add on there will be still even some new business because let's remember that the pipeline is still rolling out from a historical old old pipeline going into the going into the back half of this year.
But it'll.
It'll be a combination, but mostly probably add on with some new business.
Got it okay. Thank you very much.
Your next question comes from the line of grid Moscowitz of Mizuho.
Alright, Thank you for taking the questions.
Guys I know you introduced some new subscription packages at the beginning of the year and we'd love to hear some more about how that's tracking so far.
Yes, I would say that.
All new pipeline.
Basically containing and of course the deals that closed within the cycle as it is on the new is on the new packages that combine privileged threat analytics multi factor authentication and.
Often vendor a vendor access into into the mix as a higher value for a customer to adopt the new the new package of what they get from from the get go in.
We're seeing it both in pipeline and also in and of course deals that were closed within our newly created pipeline.
Alright, that's very helpful. Thanks, Judy and then for Josh to the acceleration of go to market investments in the second half is this primarily greater sales capacity or will there be other aspects of go to market such as channel enablement marketing et cetera, I think he might be significantly ramping as well.
Well when we think about the incremental piece, it's really across all of the functions and go to market. It's heads on this it's a quota carriers, but definitely also related to overlays and and channel managers and the likes but really around the go to market engine.
Perfect. Thanks very much.
Your next question comes from the line of Catherine <unk> of Colliers.
Thank you for taking my question.
And good quarter I could you.
For me, maybe the top five C. Three.
Three players on your alliance that really help you drive.
Revenue or cross sell upsell within some of your account.
Sure.
I mentioned I mentioned, a few I would put up a.
Red hat, and Sailpoint, and you Ipass and cloud the cloud piece, Bobby add proof point in there.
Well, if I if I go for top top five.
And with all of them, there's really great collaboration in the field and also integration and on top of that the CQ the power of the CTO of alliances.
As a as really is really strong because the priority. There there are deals where customers want integration with the Io with their Iot devices, and we have partners too.
To support that like for scale.
And so it's also the power of the variety and also the focus on the top and like I mentioned earlier, we shouldnt at AWS are in there as a as a top as a thought partner and.
For example on the call with service now so I'm beyond them beyond the five right because that.
People multiple partners there.
No. Thank you very much.
Your next question comes from the line of Alex Henderson of Needham.
Thank you.
So.
Sure.
Transition here has resulted in a pretty steep reduction in operating margins year over year about 20% down to about 1%.
Obviously that process continues out into 'twenty, two and I know you don't give guidance for 'twenty two but.
The Street is a significant increase in EPS model for 'twenty two yes, I think your slide deck from your analyst day showed a decline in operating margins from 'twenty one to 'twenty two.
A decline in operating margin still in order.
Given the accelerated pace that you've already achieved or alternatively, we will not.
Moderate a little bit more because you are already further into the process.
Could you give us some directionality too to margins for 'twenty two based on your expectations around the transition achieving 85 excuse me.
The 85% by the end of the year fourth quarter that would be very helpful. Thanks.
So thanks Alex.
I think nothing has changed in terms of the fundamental economics behind the transition or the transition of the model transition and the context that.
Operating margin.
Takes a hit as you transition through the model.
And get to the to the other side of 85% to 90% coming from bookings and it.
And it continues that way until you get to that point. So what we've what we talked about today is that we're we're excited that we're able to move that point up two more certainty to being by the fourth quarter of 2022. So we do anticipate the operating margin to follow through a transition model too.
Two to potentially go down through the transition into 2022.
What we liked though in terms of moving the.
The transition table up is that will come when we will be able to now come out of the transition faster and typically you'll then see the rebound of operating margin going up post post the the last transition quarter. So when we get to the end of 'twenty two the way the model works on these transition.
As then would would then be able to too.
Two.
To rebound and go and return to the profitability earlier rather than later.
And I would I would add we're still fundamentally.
So fundamentally sound on being able to achieve again coming out of the transition.
Of quarters on the other side of the transition to return to our our rule of 40 targets.
After that and so basic.
Basically moving it up to a quarters is basically moving is moving where we're going to come out back to profitability sooner.
Super and the accelerated hiring I think also adds to that.
And 'twenty, two though right.
Yeah, but it's all part of if we think about even the guidance.
For this year economically.
Our guide is still talking about.
You know.
If you consider the headwinds coming into 20% revenue growth of 13% operating margin and obviously, whatever we hire and this year is going to go into next year, but but fundamentally we're still we're still focused on being able to hit the transition and then afterwards be able to rebound to.
Our rule of 40 company.
So going into the following year.
Great transition thanks.
Thank you.
This concludes the Q&A session I will now turn the call back over to CEO Udo Mecate for closing remarks, great.
Great.
Scott.
I want to thank our customers partners and employees for contributing to our strong second quarter and supporting our fast transition to a subscription company I'm confident that as we execute our strategy, we will build even deeper relationships with our customers and partners again, thanks, everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.