Q3 2021 Cyberark Software Ltd Earnings Call
[music].
Hello, and welcome to the Q3 2021 is Cyprus Arc software Limited earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you I wouldn't I'd like to turn the call over to Miss Erika Smith. Please go ahead ma'am.
Thank you Lisa good morning, Thank you for joining us today to review cyber third quarter of 2021 financial results.
<unk> on the call today, or email party, chairman and Chief Executive Officer, and Josh C, Though chief Financial Officer. After prepared remarks, we will open to call up for a question and answer session. Before we begin let me remind you that certain statements made on the call today, maybe considered forward looking statements, which reflect management's best judgment based.
Currently available information.
I prefer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the fourth quarter and the whole year of 2021 or actual results might differ materially from those projected a need for looking statements I direct your attention to the risk factors contained in the company's annual report on form 20th filed with the U S. A.
<unk> in Exchange Commission and No-one's referenced in today's press release that are posted to sign books website as well as risks regarding our ability to actively transition to business to a subscription model the duration scope of the COVID-19 pandemic, it's related impact on global economy, and our ability to adjust in response to the COVID-19.
Demick.
<unk> expressly disclaims any application or undertakings or at least publicly any updates revisions and forward looking statements. Additionally, non-GAAP financial measures will be discussed on this conference call reconciliations to the most directly comparable GAAP financial measures are also available into the press release as well as it and updated investor presentation.
That outlines the financial discussion in today's call.
We also want to remind you that we provide the calculated headwind calculation for additional color on the impact of our subscription bookings makeshift, but it should not be viewed as comparable to or a substance substitute for reported GAAP revenues or other GAAP metrics a webcast of today's call is also available on our website in the eye.
Section with that I'd like to turn the call over to our chairman and Chief Executive Officer, who Nemo pattern Rudy. Thanks, I would go and thanks to everyone for joining the call you three was another amazing quarter and we were thrilled with our results if I could use only one word to characterize this quarter it would be acceleration.
Extra originally to demand environment and the underlying growth of the company specifically bookings and then the metrics that demonstrates the health overdue.
As examples so kitchen in our room accelerated to 131% reaching $139 million.
Total era growth accelerated the 30th person reaching $344 million.
Regarding revenue growth accelerated to 41%, which is $89 million and new logos added during the quarter accelerated to over 230.
Or stand up for four months in Q3, falling and Grumble second floor was again driven by record says bookings record don't bookings the execution of our subscription transformation and robust demand for identification platform centered on <unk>.
Customers are embracing the subscription model as evidenced by 72% of new license bookings coming from Seth and subscription in the third quarter ahead of our guidance.
Even with the revenue headwind from this mix, we generate a total revenue over $122 million above our midpoint, demonstrating again that our bookings were considerably higher than anticipated.
Right.
One way to think about the growth of the business is to isolate the license line adjusted for the calculated revenue head. This would represent license growth will faster than 50% year over year, which is indicated over overall growth <unk>.
<unk> it was a stellar slaughter.
As we've talked about throughout the year subscription Miss <unk> and recurring revenue demonstrate the progress in the subscription transition and the strong demand for our assess solutions in particular.
The four pillars of growth subscription transition innovation and profitability provided great backdrop for today's discussion let.
Let me start with a group I love starting here because our rules trajectory has never been stronger.
Excellent and our execution and the strong secular dealings of digital transformation cloud migration as a tech or innovation contributed to the acceleration in our business with the acceleration in a tech or innovation, our customers now contend with operator, driven ransomware malware as a service and the ducks on automation supply chains and the Devils five one.
It is no longer enough to have an assume breach mindset instead enterprises have to dig deeper and take an assumed identity posture. They recognize that every identity across you and users applications and bus can be privileged under certain conditions. It is easy to see why customer and prospered interested in our solutions is then.
All time high.
Looking at our geographies, we had another perfect gate across major <unk>, our our major territories.
When you adjust for the calculated revenue headwind every region grew total revenue by over 27% with license revenue, obviously growing even faster across the Americas, EMEA and they'd be Jake with Josh will talk about more.
New business accelerated and we added more than 230 more key customers as I mentioned from law firms to software companies oil and gas to retailers to large government agencies, we want customers across the spectrum demonstrating that every organization regardless of the size of a vertical.
Right that any security password.
We definitely led with Pam and momentum for Brewage cloud continues to build both in the mid market and much deeper in the large enterprise in fact in the third quarter, a fortune 30 company signed our largest annual contract for Brewage club ever a great window demonstrates the increased adoption, we're seeing enterprise customer base.
With our subscription model resonate and stopped taking off customers are adding both more users and more products faster and for customers with large so closest footprints. They are expanding with privilege close to stick your new business units the depths of got pipelines for obligations.
<unk> manager or E. P. M has another record quarter as the crippling effects of ransomware continued to drive demand not only is D. P M and expansion opportunity within our customer base, but it is also proving to be a great landing spot for new logos like large a large food retailer before in the cloud software company and the large local school system.
To just name a few of the Q3 wins.
The base focused and specialized resources from the access in depth Sikov speedboats continued to pay off this border productivity levels increased in all regions and our cross selectivity has improved considerably.
<unk> had another strong growth border in Q3 with both exciting enterprise winds in our base and a broader set of customer Wisden our commercial and emerging markets.
We'll talk more about Ah renovations in a few minutes, but I did any security where access is tightly aligned with Pam is differentiating suburb with customers.
I want to highlight a few more customer examples from the third floor.
In a highly competitive deal an existing financial services customer wanted the benefits of alright, any security platform and will be replacing a legacy access solution with sidewalk I did.
A new financial services customer will be using privilege cloud and conjured to secure secrets. This organization recognized the security both human and nonhuman access was critical particularly as every company becomes a de facto software company or.
Our ability to secure applications anywhere is giving us a nice competitive edge in the depths take up space.
A high profile pharmaceutical company bought privilege bell, but more importantly is committed to implementing a comprehensive identa security program and Pam is just the first step.
A large insurance company expanded with every one of our solutions. They began their journey with sorry broken 20th at expanding their food, Texas program, along the way in Q3, the went deep and drop with suburbs embracing alright, any security platform buying secrets manager Brewage cloud remote access endpoint workforce.
Daddy and climbing Tavis manager, we pride ourselves on our culture building strong lasting relationships and putting the customer at the centre of everything we do this with demonstrates the power of our portfolio and it shows the criticality of our relationships with enterprise customers.
Our partner ecosystem is further extending our reach and driving scale and our go to market. Our certification programs have been stepping up as we focus more and more on leveraging our partners to drive growth.
Year to date through two three was certified close to 20% more professionals than we did in the full year of 2020.
This commitment to invest in comprehensive training programs is a testament to the opportunity and significant growth our channel partners expect a number of our partners are going even deeper enjoy the security and acquiring companies, including the hairs of a group and CDW, making strategic acquisitions in our space.
Next I would like to focus on the subscription transition we made strong progress in outperformed our expectations in the third quarter. Our transition continues to be driven by strong demand for assess solutions and we reached another new record process bookings with particular strength and privilege cloud and endpoint village manager.
Have completed three quarters of our active subscription transition and the number of customers with over $100000. In there are is no more than 760 growing faster than 40% year over year.
As we expected will be began to check the subscription journey customers are getting faster type of value and prioritizing our platform, which will result in higher lifetime value over time, we are thrilled with the progress of our subscription transition and with our success you have to date. We are confident we will exit the transition by the third quarter of 2022.
Our innovation is the foundation of our strategy.
You need to put more distance between us and the competition and further strengthens our leadership position, we announced earlier this week the general availability of secure web sessions, it workforce and customize any solution secure secure web sessions merges the rules of access and Pat we are now the only better in the market that can empower customers was <unk>.
Denise authentication and session protection, including session recording for all types of web applications from business apps to cloud Council's we are pleased to see our innovation recognize the industry experts we were named a leader in the forest away. I. Then you have the service for enterprise and an overall Brewage access management leader by coupons are cool and just yesterday.
We announced that we were named the only visionary and the 2021 magic watering for access management.
We believe we are the undisputed leader and Pam and are leveraging disposition to extend our experts expertise into axis.
I will wrap up my discussion with some comments on the profitability pillar as you've already seen from the acceleration in our business or investments are paying off the.
The headwind on profitability from the subscription transition is obscuring the piano given the strength of our bookings, which gives us more scale and our track record of delivering profitable group profitable growth, we are well positioned to return to strong profitability levels.
To sum up Q3 quickly.
Our business is accelerating on the back of record year over year bookings growth.
<unk> is leading the way and reached a new record quarter this quarter.
Fruits clout, just pushing into the large enterprise and <unk> has moved into the mainstream security discussion.
Our subscription transition is making strong progress.
Our industry, leading a day security platform across Pam access desktops has never been more road.
I will now turn the call over to Josh will discuss our financial results in more detail and provide you our outlook for the fourth quarter and full year 2021.
Josh over to you.
<unk>.
Before we discuss the details of the quarter, we would like to remind you that we posted slides to the website that will be helpful. As we walk through our results as already mentioned, we had a great third quarter, a license bookings growth meaningfully accelerated even in comparison to a strong Q2 2021, we also made significant progress executing.
Both are subscription transition as our identity security strategy in terms of the headlights P&L. We delivered total revenue of $121.6 billion with a 72% big subscription bookings ahead of our guidance framework of us.
70% of snakes.
As you May remember from last quarter revenue above the midpoint of heart guidance and a higher subscription bookings mix demonstrates that are total bookings b R expectations for the quarter.
Subscription revenue, which includes our staff an off premise subscription revenue reached $35.3 billion and represented 29% of total revenue in the third quarter, increasing and 143% from $14.5 million and only 14% of total revenue in the third quarter last year.
Our maintenance that professional services revenue was $63.3 billion with $53.6 million from recurring maintenance and nine $6 million and professional services.
We continue to have a strong renewal rates on our maintenance renewal business.
Recurring revenue, which includes our subscription and maintenance related on perpetual license revenue reached.
$8 $9 million or 73% of total revenue growth, 41% year on year from $62 $9 million and 59% of total revenue in the third quarter last year.
With a 72% mix a subscription bookings is clear the subscription transition is ahead of schedule.
Economically the headwind created by the myths was approximately $16 million in the third quarter, when we compare life for like to the mix in the third quarter of 2020.
Normalising for the mischief growth and the license portion of our business our staff on premise subscription and perpetual accelerated again in the third quarter to over 50% those illustrative of the underlying growth in the business.
Taking the calculated revenue headwind into consideration total revenue growth accelerated at 29% year on year.
Moving on to the annual recurring revenue, we experienced I've talked largest ever sequential increase in the subscription portion, adding about $29 million in the third quarter, and reaching $139 million representing over 40% of the total are total a R. R was 344.
$4 million growing 38% year on year doesn't acceleration from the second quarter of 2021.
The maintenance portion was $206 million that September 3rd.
We had another great new business quarter, both in terms of new logos and business trends, we time or the 230, new customers with 85% of them opted for subscription compared to about 59% in the third quarter of last year, New business deal sizes also increased to get in the third quarter.
Geographically the business continues to be a well diversified America's generated $68 $2 million in revenue represented 56% of total revenue. The Americas again had the strongest percentage of subscription bookings during the quarter EMEA at 39 $7 billion in revenue or 33% of total.
A P J generated $13.7 billion in revenue or 11% of total revenue with an increasing mixed obsess and subscription if.
If we look across the Geography's adjusted for the calculated revenue headwind created by the mix each region would have grown by over 27% in total revenue with our licence line growing even faster than 50% in the America as an AP J and approximately 30% anemia.
Online items other pinel will now be discussed on a non-GAAP basis. Please see the full gas gab reconciliation and the tables about press release.
Our third quarter gross profit was $102.5 million or 84% gross margin consistent with the 84% gross margin in the third quarter last year, we continue to make investments to drive innovation and growth, resulting in operating expenses of $102 $4 million, 34% increase year on year opera.
Waiting income was $130000 in the quarter, which was better than the midpoint of our guidance. It is important to remember that are operating income is lowered by about $1.5 million from F X rays, and approximately $16 million of headwind.
Like for like basis, neutralizing the calculated revenue headwind and foreign exchange are operating margin would have been approximately 12% in the third quarter of 2021.
Over 70% of our operating expenses are related to head count. So the third quarter, we surpassed 2000, cyberark employees and in the third quarter of 2075 worldwide.
Of our total employee count 925, <unk> sales and marketing.
Net loss of the third quarter was about $2.4 million or six steps for basic and diluted shares.
In the first nine months of 2021 free cash flow was $47.1 million or 13% free cash flow margin. This cash flow contributed to a strong balance sheet and we ended the quarter with $1.2 billion in cash and investments.
Turning to our guidance are guidance for the fourth quarter reflects the robust industry toe is a record booking strong execution year to date and improve productivity for the fourth quarter of 2021 would expect total revenue of $140 billion to $148 billion, we expect a non-GAAP operating income of about $5.5 million.
211, and a half million dollars for the fourth quarter, we expect our EPS to range from non-GAAP net income of six 221 cents per diluted ship. This guidance assumes about 68% a subscription bookings mix and then calculate a revenue and profitability headwind of approximately $28 million for the fourth quarter.
21.
So if you isolate our licence lines of SaaS on premise description and perpetual then normalize growth rate taking into account the calculated revenue headwind for the quarter is about 24% year on year.
Similarly for the total revenue growth rate would be about 19% at the midpoint of the ranch, taking the headwind into account.
Our guidance also assumes 41.7 billion diluted shares.
For the full year of 2021, we expect total revenue in the range of $491.6 million to $499.6 million that makes assumptions underlying our guys for the full year to 65% from subscription bookings and a revenue headwinds for the full year is now approximately $68 million. This represents an increase.
Two of our prior guidance, which assumed a mix of 64% from subscription bookings and a 63 million dollar headwind to revenue.
Taking the calculated revenue headwind into account a revenue growth rate would be approximately 22% of the midpoint of the range and if you isolate our licence lines of staff and the subscription and perpetual the normalized growth rate is over 30% for the full year, taking the calculated headwind into account.
I want to emphasize the increasing both are total revenue guidance and are mixed indicates that we are again, increasing the bookings assumptions underlying our guidance for the full year this raises above and beyond the bookings b in the third quarter.
No moving down the P&L, we expect non-GAAP operating income to be between $13 $1 million to $19.1 million. We expect our non-GAAP net income per diluted share to be in the range of 11 cents to 25 cents for the full year, we expect about 49 million weighted average diluted shares in about third.
$13.5 million in taxes.
We wanted to briefly mentioned our current thoughts at the time and the transition and Ah.
Our growth given our success year to date, we expect to exit the transition earlier and we now expected to complete the transition in the third quarter of 2022 versus the fourth quarter of 2022, as we outlined in our August call.
Also given the acceleration of our growth and our record bookings. This year, we expect annual recurring revenue to grow about 37% year on year as an increase from our private framework of 35%.
The third quarter was a great quarter at another important step in the execution of our subscription transition at our identity security strategy, our business has accelerated which you see in our results and recurring revenue growth rates. As we look ahead, we are a great position to deliver long term growth and profitability I will now turn to.
Over to the operator for Q&A operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Yeah first question comes for an online a packet clear with Barclay.
Okay, Great Hey, good morning, guys and thanks for taking my questions here.
A second good morning.
Good morning, <unk> <unk>, maybe just to start with you.
Feels like you and the team had been talking about broader identity versus just privilege here a lot more recently I was just wondering if you could just talk about how the non privileged part of the business is doing a neat touch within the prepared remarks, but maybe just go one double beeper, how was the nonprint, which part of the of the business.
Doing with access and and and and depth sack off for example, and in what extent do you think customers want to buy both of these parts of the portfolio does it does that makes sense yeah absolutely.
So I would say we're excited by the performance of all parts of the business and the fact that privilege cloud SaaS is is leading the way, but as I mentioned Identi security on our message is really resonating with with customers. If you look at the other elements of what you are calling the non privileged first of all we had the EPS have a record quarter.
<unk>.
This this quarter and is proving to be also a new lending point landing spot for us for new customers and really gets also the drivers that are related to zero trust and rent somewhere and then we we look at the access a desk checkup speedboats. They have the power of both appealing to our existing customer base.
And that has resonated with the added security message, but also having a that the speedboat overlay effort that is getting them into into new accounts and again into the into the up so more and more of our customers are buying of the wide. The white portfolio I gave the example of the customer.
All of our products that is that is happening and I would say that in every conversation and pipeline build it's across the entire portfolio I think with some of the.
With some of the bundling, they're actually getting a taste of elements of access for example in in.
In early deals and and again I'm excited that.
The <unk> access management pieces is on fire and leads the way and and with the customer loyalty, we have the opportunity to upsell and get those new.
Landing spots.
Got it got it that's great Josh maybe maybe for my follow up for for you.
It sounds like we're going to we're going to exit the transition.
A quarter earlier than what you'd originally expected can you just remind us sort of what that means from mix or or anything for mix perspective, or just anything we need to keep in mind from a modeling perspective, just kind of given that that earlier that earlier exit.
Yeah. Thanks.
I mean, the main thing is is that when we talk about transitioning out of.
Into a poorly subscription company, we're talking and kind of put the threshold that when we get into past, 85% of our bookings coming from assess the subscription. So when we talk today about moving that that quarter in from from Q4 of them in the last fall to know Q3, we're talking about.
Out.
That threshold of 85% or more subdued book is coming from.
Coming from Saas's description in the third quarter already and what that means is that.
You'll continue to see.
The percentage going to perpetual.
Decreasing.
Particularly.
Over next year, and then and then of course, there will be after that kind of a tail.
Of the remaining perpetual business happening after that third quarter, but.
It's it's really we set out of the playbook.
At the beginning of the year, and we're really glad to be able to keep improving on that playbook quarter to quarter round.
Absolutely thanks, very much guys.
Thank you.
Your next question comes from the lineup Adam Bork what Stifel.
Hey, guys. Thanks, so much for taking the questions maybe just on secure web sessions to start it seems like an interesting product and you know talk about that in the prepared remarks, uhm, but I'm. Just curious how are there any particular users or verticals, where you'd think something like this would be boy demanded.
No absolutely we're very excited about it.
We see the proliferation of programs that you have more and more cases, where a business user is actually provision in the organization is worried about having no control over the session. So I would say one major part is iced tea like functions in a in a business user whether they're using HR applications or a business application like like a sales.
For us or or or a success factors and others. But then also the folks using a web sessions for for administrative like functions like like the web consoles and and others. So there are elements that are like in their element of business users and if there was a bit of vertical.
We actually see it applying cross.
Ross verticals all companies of course, the the more regulated.
Will tend to want to put those those controls even even.
Even faster.
And and the beauty of it is that it can run on any single sign on solution. So it doesn't have to adjust attached to the sidewalk and it gives us the opportunity.
To sell the solution and apply these these pam like controls to all all companies across the that even have identity management in place.
That's really helpful and maybe just as a quick follow up and the flight deck you talk about the booking by vertical interest interesting interesting to see that over the last couple of quarters banking and financial it becomes a smaller part of the mix in other areas are growing faster in manufacturing stands out so I'd love to hear more about what's leading to access your thing and <unk> well I'll call your left traditional vertical thanks.
Yeah.
No absolutely I think I think historically cyber saw the the more regulated.
Vertical jump.
Jumping into the Fray earlier.
The trend over the last couple of years as privilege access management is an niv any security considered best practice across all all vehicles and you see and you see a catch up this quarter, we saw energy.
The energy vertical global government manufacturing more more than more than doubled and and so I I would say we're continued to be applicable to all verticals. There. Some vertical that are that are faster.
Chop FA catch up mode and.
And and of course, we have a very strong customer base in the financial and the financial sector and that will continue.
Your next question comes from the line of Hanta Idlewild up with Morgan Stanley.
Hey, guys. Thank you for taking my question, where do you first question for you I was wondering if you could comment a little bit about the growth and opportunity you're seeing and.
Machine the machine identity in particular, just given the the rise of the open source tools any sort of comment there.
Yeah, and I wanted to.
To add on my my earlier answer your before I talked about a lot about the opportunity and our access speed boat. That's that's very much in the secrets management World.
There is growing awareness definitely after solar winds and like you mentioned the proliferation of of the.
The devops pipeline as as the place where where.
<unk> are going after.
And if you sold a human secret already she's totally strong.
Machine to machine types, you could you can get.
Similar access or even or even deeper and so it's it's definitely applicable to.
All companies and we're seeing that grow out we see more and more customers also want to leverage the fact that they can buy our secrets management solution and leveraged privilege cloud as as as a solution to do I pass through and.
And of course.
A lot of the the self hosted customers are expanding to the secrets management and we will now consume this in the in the subscription model. So you're right. That's a growing trend where there are there is a proliferation of secrets across across applications and machines and and if we had these special glasses we.
Would see yet.
A big proliferation of credentials on the human sites, but an even faster and and probably out of control on the on the on the development side on the application side and we're going after it.
And a couple of just a quick follow up for for Joshua thumb on the.
Are are how should we think about the puts and take with subscription versus maintenance and the obviously.
Maintenance, there's gonna be a bit of a drag this given the transition coke like I I should we think about kind of modelling that over the next few quarters.
Yeah absolutely.
We'll get to see still very high growth of the subscription piece of the R. A R. R that we that we've been seeing we saw grow to 131%.
Third quarter.
And Mason is off the perpetual will kind of continue to trends kind of flat.
At some point.
As we get to the transition quarter will start to.
Go you would could go potentially minus.
Sequentially, So I think the.
The way, we kind of look at it as we can consider already the subscription piece of the business already crossing over the 50% in the.
The first half of next year.
Today, it's around 40% of the total way.
Iron and grown to more than 50% of it in the first half of next year.
In terms of the exact.
<unk>.
Of when.
Whether the medicine. This will start to go negative. It's later on in next year and it really depends on on the mix.
Right.
Super helpful. Thank you.
Your next question comes from the lineup Raw Pinewood Piper Sandler.
W.
Mr. I want your line is open Sir.
Your next question comes from the line Brian <unk>.
In fact.
Okay, great. Thank you very much. Thank you for taking the question and great to see the acceleration results.
I was wondering if I could follow up on homes is question actually four Q is historically banner Ah relatively heavy perpetual license quarter. So maybe if he could.
Give us a little bit more color around what the previous changes an incentive compensations to skew the efforts towards SaaS.
What what the impact is.
With regard to what you typically see or has typically seen in a perpetual side and then how do we think about progress with the installed base with regard to kind of transitioning to assess what do you see in your pipeline and maybe.
Any any anything you can call out with with regard to potential volatility on a perpetual side and <unk>.
So Brian I'll start with your with your with your second piece I think the way we approached [laughter].
The way we approach this transition was always always do right by by the customer and and follow the trend I think we were we were even surprised like I alluded to that existing.
Self hosted customers.
Are embracing and.
Without us having to the person they see that as part of their roadmap. So you see that in the right timing.
They also consider and look for ways to adopt our program called solution. Some examples and like I gave him the script or some very large.
Type of our customers that were self hosted that bought our prove its cloud for new business units offer M&A, where they want to put these controls fast and up and running quickly and so that bill and others are excited to adopt other south solutions like R E P M or or or identity and look at privilege cloud is.
The solution as they start to to downsize their their data center, but we will allow them to do it in the right time.
For them and of course.
Every new solution out here has been SAS and we're seeing those.
Those adopted in terms of.
Incentive we of course.
Put out the program at the beginning of the year Incentivising the team to sell SS and and subscription with that always do right by by the customer and so existing existing customers that.
Have had on business lined up for Q4, we are definitely expecting that yes.
So.
Add Brian edition.
Addition, we set out to what Rudy just said, we send out a clear playbook for transitioning and included the incentives to the to the sales teams as he just pointed out but it also included a full blown education package of how do we move through.
Going from selling perpetual too so just ask the subscription.
And for this year, we're really focused on incentivising them to to quote add to create new pipeline.
Saas's subscription which has been definitely.
Definitely a half day for US we we see the majority of our new pipeline coming out is to ask the subscription that I think is also indicative of what we look at <unk>.
85% of our new logos from the third quarter.
We're we're SaaS versus.
Subscription based new logos, specifically around Q4, we do anticipate seeing it.
More perpetual business in queue for it it's not really related to the two compensation are accepted Plaza is just add Q4 is our largest quarter. It also we sell to enterprises. So there's typically budget plus and both and deal with that are that are opening and closing in the fourth quarter and those will be too.
Be more add ons deals.
With existing customers and adding on more more licenses and their occurred.
Installed base, which is most likely going to be a perpetual installed base. So we do expect to see in the fourth quarter.
Pick up in perpetual, but then again as we go into next year, we'll we'll start to see.
More and more.
In fact, the subscription because most of the new pipeline. This year has been created assess the subscription and that has the ability to move it on target to the third quarter.
Of getting over 85%.
Got it that's helpful. Maybe just real quick for a follow up given the pull forward in and.
No expectation for completion of your transition.
Thoughts on that how you think about spending I mean, great innovation on the platform, we see the elevated R&D costs sales and marketing spend is also elevated relative historical growth rates, but but how do you think about when we might start to see to inflict and inflection back to kind of.
Double digit profitability operating margins and better profitability, given that shipped and timeline forward.
Yeah I think.
It's it's basically it's basically a shift I mean, the way the mechanics work at a transition is going to be.
All the way through the transition quarter.
And an excellent following is usually the the trough of the of the operating Larges and then you start to see some so increasing once two quarters. After after that after you through the transition so.
Early fast that we bring in the transition and then we get faster we can get back there but.
Can't control. The fact is going through the transition to the end of that.
That quarter, it's still going to take once two quarters afterwards before we start to see it rising.
The rise is not going to be in a single quarter is going to be gradual over several quarters post that transition.
Okay very helpful. Thank you.
Your next question comes from the line of Jonathan how with William Blair.
Hi, Good morning, just wanted to I guess start with a P. M. So just given the success that you're seeing there is there any chance to your thinking around how large E. P. M could be as a product area I just wanted to get a sense for that.
Jonathan It's one of the areas, where we're again.
They're all our children. So we're excited about all of them, but but EBM.
Is one of those that has the it's a best practice of reducing reducing risks and removing reached remedies, but it also is very effective against around somewhere so we think the opportunity is great.
And we.
We finally got to a point, where the awareness is there for us to further step on the gas and and and Leverages. This growth engine. So I am not going to we're not going to refine the town numbers, we put out there because we saw this opportunity but it is it is it is maturing and and like I said, becoming a a mainstream aware.
<unk> that have a strong and and foreign control to put in place both as part of a wider approach access management program, but also but also stand alone.
We've put things in place that also bring it more as a as a lending spot for us both and how the our sales team works, but also the type of channels.
That are expanding in and taking us there and even down to the mid market with with generals like CDW that that can bring this.
Two into the mid market.
Your next question comes from the liner Jonathan Rock paper with fur.
Yeah, good morning, and congrats on the strong performance <unk>, it's great to see the success. Your appear we can see with privilege Klopp I'm wondering if you could talk a little bit more detail about the the adoption triad you've seen in terms of new customer acquisition versus installed base expansion and what you're seeing in terms of.
Those adoption trying to Ah cross commercial versus large enterprise.
Yeah, I would say that.
We're very excited to see the acceleration and the and the new logos and part of that is the solutions are more of them before the attack surface is expanding and we built this.
Of this this record pipeline over the past 18 months that we're converting I think.
We're seeing.
The look of love those more lending spas with EPS with and of course with access and and with.
And with Pam and the.
The speedboat structure really provides a more.
Subject matter experts to take the opportunity and and then as I mentioned before.
We have been investing in the channel and the channels programs and those are paying off for those for.
For those landing so those those include.
The CDW, but they also include doing more with with the AWS and and others now now with regards to.
Enterprise versus commercial if I understood, it's really going after both enterprises has been our sweet spot, but with these extended channels were able to go.
Further further down market and and and it's and.
And it's moving from the highly regulated too to the less regulated part of.
Of the mid market, which is exciting.
And and maybe you could talk about that question that commercial where where are you in terms of driving that enable name amongst your channel partners, that's something that becomes more.
<unk> what is it a dry but about things as we'd like in the 2022.
I think I think we want we want to excel in both enterprises is the Holy Grail for for sidewalk, It's where we coming from and we have the strongest customer base, but we saw that we cannot double down our efforts on the commercial without without distracting the enterprise focused again, because it's incremental.
Types of of channels and a focus team that.
That is going after the commercial space and so yeah, you'll you'll see you'll see it continues to be a major source of growth.
Of course, the larger the larger deals and the larger ASB is coming from from the enterprise.
Part of the business, which is.
Which is really embracing the.
Any security Ah messaging and appreciating the innovation.
We put in place.
Your next question comes from the line of Roger Boy with you B S.
Hi, Thank you for taking my questions I was wondering if you could talk a little more about the adapter customer base and what you're seeing that these customers in terms of their willingness to upsell, the Pam and and just general recognition of of your strategy of a privilege access centered identity security strategy.
Yeah, but also with you I think the biggest motion as upsetting the Pam customers on on the on access and and and are thus checkups and secrets management. So that that's the that's the of course, the majority of our 7000 customers and and and we formed those those deep relationships.
Where they're they're happy.
To explore covering that proliferation of privilege into our workforce users into their.
Their suppliers into the third party elements and to Secrets management, the motion of the pure I adapted customers from from.
From the acquisition of the most of the most important piece of Alaska over the last year was to make sure. They are happy and and growing and then also introduce additional elements of them on the on the <unk> site, but like I said, the bigger motion as is expanding with our Pam customers across it.
For it.
Your next question comes from online of Greg, Michael Ipswich Mass and Huh.
Okay. Thank you for taking the question congratulations had a very good quarter. So <unk> I know that existing customers have a loyalty incentive to move too fast and with all of this except that you're seeing with respect to the overall subscription transition I'm wondering if you're also seeing more migrations from on premise too. Thanks.
Okay, Yeah, yeah. So so.
We incentivize obviously are salespeople, but but the number one thing is to follow the and allow the customers to execute the strategy in in their in their face, but the of course, they they see the new bundle.
Packages and that that's incentivising them to.
To look at our at our subscription, which really even if they're on on premise customer to get more value with with add on business coming into the subscription.
Packages the move from it for an on from customer to adopt.
Move to SaaS is.
It is more is more gradual among the enterprise is.
But we found herself pleasantly surprised like some of the examples I gave him the fortunate 30.
A customer.
That more and more enterprises are also Mike.
Migrating and taking on privileged cloud, we'll see that as a pathway over the coming years and one of the strength of sidewalk is really giving customers optionality on how on how to consume.
Any security portfolio.
Your next question comes from online a prop orange with Piper Sandler.
Great. Thank you guys for taking my question and I apologize for the technical difficulties earlier I swear it wasn't user error. So.
<unk> and your prepared remarks, you talked about SaaS striving more users and driving more users faster is that SaaS adoption comments or is this democratization of of privilege by fast and the fact that there's broad replicability now, especially given the attack surface.
I think we're seeing the classics the classic benefits of SaaS, where there's quicker typed a valued customer.
That does not have to install and go through the process of taking care of the infrastructure and and we deliver success packages and and so they they get up and running they see it's working they see that it alleviated a lot of it gave them both security but also.
The ability to manage their infrastructure faster and then you have a fast surpassed two to the upsell of more users approach cloud or or add on business on other elements of the portfolio. So I would say the benefit of faster time to to value faster type two.
To innovation in an overall quicker path to.
Add on sale, but work, but it's all it's all very real and sidewalk, we put the customer on the center and and the entire organization is all about creating customer value.
Your next question comes from the line of K keep trying with Oppenheimer.
Hey, guys, so great quarter, I guess not that you're getting close to the end of the transition would either be question.
Is you're gonna have a hardcore of customers or are still stuck on perpetual and what is it that you're gonna do about it meaning are you going to terminate what is the time went by which you will stop offering perpetual and what are the odds that meet point or late next year, you actually raise prices on your.
Or a maintenance in order to.
Push that last bastion of customers into the subscription model.
Yes, we have the we have I think I think our constitution puts the customer for so and the customer loyalty has has really worked for us. So I think it's going to be.
Much more on the on the carriage side versus versus versus the stick.
For them to see more value in the subscription packages a taste of other elements of the portfolio as they as they pick up.
Elements of the subscription packages and an overall, we're seeing that they.
They are open to it especially as.
As the.
They are auto maintenance renewal.
Right with with Cyberark and are open to.
To to expand and take on the subscription packages and of course.
Let's remember that maintenance is is a great.
Recurring recurring revenue for us.
As well and and and the opportunity is out there to gradually bring them onto the subscription journey and definitely to lead with Seth to disaster.
That's the.
And to the prior question, that's where they're going to see even even greater greater value in the transition.
I Dunno, Joshua if you want to add anything on.
Yeah, I think you're covered the points in the main issue is as they add more and more sales they're going to be really instead did.
Because of our great subscription packages.
Kind of move there current installed base.
To an add on sales to be subscription based in and it's also a form of a tech upgrade for them. If they want to know reverse and get that checked upgrade.
For their installed base on perpetual so we see a happening pretty pretty naturally, but there will be a tail.
Once four.
But it's happening naturally as we see that today.
Your next question comes from a line of Catherine Travnik with called your security.
Oh. Thank you for taking my question, an excellent quarter Rudy could you tried to quantify add the new business. How much is that really being driven by the acceleration or organizations really undertake zero trust architectures.
Yeah sure are covered.
I couldn't give a number but I would say that all the great. The strong business drivers out there our business.
Zero Trust and also the protection against rent somewhere are are strong drivers for for our business and and even in the executive order and and other elements, it's very clear that.
Least privilege and and putting Pam controls is really a basic tenant to to achieve good <unk> Zero Trust. So I would say it's.
It's in every customer conversation definitely at CIO is just so level. They they liked the connection of how cyberark with Pam at the center, but also the full identity security approach is is part of them at getting to to a zero trust or executing on this New York Trust framework and it says so.
A great. It's a great driver on top of all the enablement, we provide and and of course, the proactive protection that can get with.
With with our solution I always wanted to just be enabled inside because I think the beauty of this portfolio is that we both are retroactive security layer, but we're we're also really allowing them to to get digital transformation going in connected suppliers connector a remote workforce allow their their their IP too.
To transform.
And Modernise and so it's all a.
Part of the supporting Tailwinds for Us, but zero trust frameworks are right out there.
Your next question comes from a line of Joshua <unk> kind of a Wolf research.
Hey, guys. Thanks for taking my question for my first one I was kind of hoping when we think about the the broader identity space can you just comment on the demand environment, but specifically compare and contrast, the demand for privilege access management versus the demand for access management and maybe how does this compare to six months or even a year ago.
Yeah. So so so.
So I would say a year ago, we didn't have this combined.
Motion of going after the existing customer base I I think we benefit from the two worlds right now where for a customer looking too.
To put in that critical layer of privilege access management Subroc is the market leader go to US we have to go to market the reach and.
And the opportunity to really capture that that demanded demand as a strong and the strongest I can I can recall.
For Prozac as management access as a new motion for us and.
It's it's Ah.
A huge growing market because of the need to enable digital transformation and we can write it and the way we're doing it with very much centered on our customer base.
Trust us on Pam, So I would say, they're both as strong demand Pam.
Is is definitely.
The one that resonates the most with a C. So as a layer that they they must have a need to present too.
To the board and and I would say, even a basic pillar of their cyber security strategy. So Pam as more of cyber security driven our Pam customers Trust us with the expansion to the rest of the portfolio and access gets the driver of digital transformation in enablement, which is.
Which is also here to stay.
Your next question comes from the line of Cats <unk> Securities.
Securities.
Yeah I was thinking my question can you comment on your Fred performance in this quarter and any products that that's short skirts and doesn't work at all.
Absolutely. So I would say I would say the federal for US was not that we didn't see the same levels of budget flushed like in previous years, we mostly attribute that to the new administration and budget, but.
Fairness is stronger than ever I mentioned, the the executive order that.
Touches elements of zero Trust in these prevision and.
I would say a lot of engagement with various agencies and with our with our partners in the federal market.
Can share of that the global government.
Vertical if we if we look at it in a full bucket grew.
More than 100% for us in in Q3.
And it's it's very much led by led by privilege access management as as the major.
I would say grower in this in this segment.
There were many agencies many governments still need to do the basics around for which access management also mentioned that.
The sled vertical does the state and local in education vehicle performed performed really well in the in the corner.
Your next question comes from the line of my C cough with Needham and company.
Hey, guys. Thanks for squeezing me in here Uhm first question I just wanted to touch on the Crosstown motion. Obviously, we're talking about customers once they come to set for subscription are are incentivised to continue down that track with their add on sales curious do you guys have an update at this point.
To give us a sense for that cross sell motion where customers are typically going to next what's the where they congregating to within cyber org portfolio.
So it really it really varies on I would say that.
Pam.
You're up your Pam customer.
Would would typically.
Expand to eat PM is that kind of the next stage of a Pam program you have secured servers, but you left your endpoints in <unk>.
Expose with Overprivileged just hold the next the next step in the cross selling and I did mentioned earlier, but we're also partnering with the with the E. B R and the X D R companies.
Actually make it.
So that the E. P M list together and nicely with with our partners on on that front, and then and then from from that far, but they're executing on a Pam or night Danny program.
There's the expansion two secrets management, because it's the other the other side of of privilege.
And.
And then Ah securing their.
Locations, and then of course to to to access.
And so I would say that if I, if I had to generalize that would be that would be of course four four.
488, Pam Pam customer in a new account.
We're actually seeing that we can land with with multiple products is against the awareness of both what's the best practice in.
And Pam and and the bundled elements of identity security, we can lend with more.
At this time I'd like to turn the comic over to Mister <unk> Makani for closing remarks.
Thank you Lisa Thanks, everyone I want to thank our customers partners and employees for contributing to our strong third quarter and supporting our transition to a modern subscription company I'm confident that as we execute our strategy, we will build even deeper relationships with our customers and partners. Thanks, everyone.
This concludes today's conference you may now disconnect.
[music].