Q3 2023 ZeroFox Holdings Inc Earnings Call

December 6, 2022

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Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

Thank you for standing by and welcome to the Zero Fox fiscal third quarter 2023 results conference call.

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At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and as a reminder, today's call is being recorded.

Again, the conference call over to Mark Griffin Senior Vice President of Investor Relations for ICR Mark.

Thank you for standing by and welcome to the Zero Fox fiscal third quarter 2023 results conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session and as a reminder, today's call is being recorded I would now like.

Thank you operator, good afternoon, and thank you for joining us today to review <unk> fiscal third quarter 2023 financial results.

With me on the call today are James <unk> Foster, whereas many of you know him foster.

Again, the conference call over to Mark Griffin Senior Vice President of Investor Relations for ICR Mark.

Foster is the founder and Chief Executive Officer, and Chairman of <unk>.

Also with me on the call as <unk> CFO , Tim vendor after prepared remarks, we will open up the call for questions.

Thank you operator, good afternoon, and thank you for joining us today to review <unk> fiscal third quarter 2023 financial results.

During this call we may make statements related to our business that are forward looking statements under federal Securities Law. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward looking statements.

With me on the call today are GNC foster for as many of you know him foster.

Foster who is the founder and Chief Executive Officer, and chairman of <unk>.

Also with me on the call as <unk> CFO Tim vendor.

Forward looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them.

After prepared remarks, we will open up the call for questions.

For a discussion of the material risks and other important factors that could affect our actual results. Please refer to the risk factors section of our SEC filings available on the Edgar SEC.

SEC's Edgar system, and our website as well as the risks and other important factors discussed in today's earnings release.

Forward looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them.

Additionally, non-GAAP financial measures will be discussed on this call. Please refer to the tables in our press release and other investor.

For a discussion of the material risks and other important factors that could affect our actual results. Please refer to the risk factors section of our SEC filings available on the Edgar.

Portions of our website a reconciliation of these measures to the most directly comparable GAAP financial measure with that I'd like to turn the call over to zero boxes, Chief Executive Officer Foster. Please go ahead.

The SEC's Edgar system, and our website as well as the risks and other important factors discussed in today's earnings release.

Thanks, Mark and good afternoon, everyone, Hi, I'm genuinely excited to speak with you today.

Additionally, non-GAAP financial measures will be discussed on this call. Please refer to the tables in our press release and other investor.

This call represents an important milestone in our journey as we look to capitalize on the significant opportunity we see in external cyber security.

<unk> of our website a reconciliation of these measures to the most directly comparable GAAP financial measure with that I'd like to turn the call over to zero boxes, Chief Executive Officer Foster. Please go ahead.

<unk> had a very nice quarter and given this is our first call as a public company I wanted to start off with the pledge a pledge to be accurate and transparent with you on our business and I believe as you get to know me this become glaringly apparent.

Thanks, Mark and good afternoon, everyone, Hi, I'm genuinely excited to speak with you today. This call represents an important milestone in our journey as we look to capitalize on the significant opportunity we see in external cyber security.

So let's get started.

In August we were able to raise new growth capital complete our strategic acquisition of Rdx and finalize our business combination with the public entity LLS acquisition Corp.

We had a very nice quarter and given this is our first call as a public company I wanted to start off with the pledge a pledge to be accurate and transparent with you on our business and I believe as you get to know me that's become glaringly apparent.

We are proud of the fact that we navigated these volatile equity markets and even though it took a little longer than we had hoped we emerged as the new Republic zero box.

Let's get started.

We believe the zero Fox now has the scale and platform depth to continue to build on our leadership position in the emerging external cyber security market.

In August we were able to raise new growth capital complete our strategic acquisition of Rdx and finalize our business combination with the public entity LNR acquisition Corp.

History has shown the overall cyber security market is large growing and evolving we saw the emergence of significant market opportunities in areas like edge and endpoint security. These markets are now well established and have clear category leaders like crowd strike in San Juan and endpoint and Palo Alto networks and <unk>.

We are proud of the fact that we navigated these volatile equity markets and even though it took a little longer than we had hoped we emerged as the new Republic zero box.

We believe that zero box now has the scale and platform to continue to build on our leadership position in the emerging external cyber security market.

And history has shown that the overall cyber security market is large growing and evolving we saw the emergence of significant market opportunities in areas like edge and endpoint security. These markets are now well established and have clear category leaders like crowd strike and then the one in endpoint and Palo Alto networks.

On the edge.

We believe that external cyber security is emerging as the next significant growth opportunity and zero box is well positioned to become the category leader.

Furthermore, one of the fundamental truths I have learned over the course of my career is that customers and the market reward cyber security category leaders.

Zee scalar on the edge, we believe that external type security is emerging as the next significant growth opportunity and that zero box is well positioned to become the category leader.

So what is external fact security.

External cyber security enables customers to expose disrupt and respond to threats outside the perimeter.

Traditionally the focus on cyber security has been on protecting the assets that are owned and controlled by the organization.

Furthermore, one of the fundamental truths I have learned over the course of my career is that customers and the market reward cyber security category leaders.

Owned assets include things like laptops networks systems, and either cloud workloads, however, with digital transformation continuing to accelerate the primary ways that companies interact and transact is now through digital channels and mediums, which require a different approach to cyber security.

So what is external fact security external cybersecurity enables customers to expose disrupt and respond to breath outside the perimeter.

Traditionally the focus on cyber security has been on protecting the assets that are owned and controlled by the organization.

This movement has led to the proliferation of digital assets and data residing on external platforms that are outside the control of an organization. These platforms include things like the surface web deepened dark web social media sites collaboration platforms co chairing sites and even mobile app stores and the result.

Owned assets include things like laptops networks system and either cloud workload.

However, with digital transformation continuing to accelerate the primary ways that companies interact and transact is now through digital channels and mediums, which require a different approach to cyber security.

This movement has led to the proliferation of digital assets and data residing on external platforms that are outside the control of an organization. These platforms include things like the surface web deepens arc web social media sites collaboration platforms co chairing sites and even mobile app stores and the result.

Is that the public attack surface for every organization continues to grow increasing their financial and Reputational risks for these organizations.

Adversaries have taken notice. This is reflected in increased targeted phishing attacks account takeovers credential theft data leakage domain spoofing and Impersonations.

Is that the public attack surface for every organization continues to grow increasing their financial and Reputational risks for these organizations.

All of these pose significant risk to organizations their brands and their assets.

And defending against this external cyber security group of breath is very challenging.

Adversaries have taken notice. This is reflected in increased targeted phishing attacks account takeovers credential theft data leakage domain spoofing and impersonation.

Today organizations have limited visibility to assets in our system. They don't know they own nor control.

I simply can't protect what they can't see and they don't know exist.

All of these pose significant risk to organizations their brands and their assets.

Furthermore, continuous monitoring and protection of this external environment is difficult given our size and dynamic unstructured nature.

And the pending against the external cyber security group of breath is very challenging.

Today organizations have limited visibility to assets in the system. They don't know they own nor control.

We believe the solution to the external stocks for the challenge requires a platform based approach and this is exactly what we have built at zero box.

I simply can't protect what they can't see and they don't know exist.

External cyber security platform is cloud native we combined AI and full spectrum threat intelligence adversary destruction capabilities and response services into an integrated solution that provides continuous protection and continuous response.

Furthermore, continuous monitoring and protection of this external environment is difficult given our size and dynamic unstructured nature.

We believe the solution to the external stocks really challenge requires a platform based approach and this is exactly what we have built at zero box.

The strategic acquisition of <unk> was driven by our view that having a comprehensive technology driven response capability is fundamental to solving the external cyber security challenge.

Our external cyber security platform is cloud native we combined AI and full spectrum threat intelligence adversary destruction capabilities and response services into an integrated solution that provides continuous protection and continuous response.

<unk> is one of the largest providers brief response capabilities in the United States.

Several accolades to include providing services to one of the largest breach response contract ever awarded by the U S Federal government and protecting millions of individuals via our platform today.

The strategic acquisition of <unk> was driven by our view that having a comprehensive technology driven response capability is fundamental to solving the external cyber security challenge.

Historically zero boxes capabilities were pre breach with our three strategic pillars focused on protection intelligence and disruption.

Rdx as one of the largest providers breach response capabilities in the United States.

There are several accolades include providing services to one of our largest breach response contract ever awarded by the U S Federal government and protecting millions of individuals via our platform today.

<unk> acquisition expanded our platform to include now an important fourth strategic pillar post breach response.

We see multiple synergies with IDEXX first rdx accelerates, our multi pillar platform roadmap, while rdx provided us with core capabilities around response. It also enhances capabilities across all of our other strategic pillars. One example of this is our recent launch of <unk> removal. This is a new.

Historically zero boxes capabilities were pre breach with our three strategic pillars focused on protection intelligence and disruption.

<unk> acquisition expanded our platform to include now an important fourth strategic pillar post breach response.

Options service that helps organizations combat data broker web sites that include personal identify information of individuals' listed for sale on the Internet. This is an important capability for our customers and zero box.

We see multiple synergies with IDEXX.

Rdx accelerates, our multi pillar platform roadmap, while rdx provided us with core capabilities around response. It also enhances capabilities across all of our other strategic pillars. One example of this is our recent launch of <unk> removal. This is a new disruption service that helps organizations combat data broker website.

The second synergy is accelerating globalization today, nearly 100% of Rex's business is in the U S. We see an opportunity to leverage <unk> International go to market capability to globalize. The full solution on this front, we recently announced the expansion of our response services to now support multinational organization.

That include personal identifying information of individuals' listed for sale on the Internet. This is an important capability for our customers and zero box.

Yes.

And last but not least we see an opportunity to accelerate revenue.

By cross selling and up selling our traditional capabilities to the new combined customer base.

While we are still in early stages of integrating zero box <unk>. We are excited about the progress we are making and the pace of our combined innovation, we would expect to see <unk> become more meaningful over the next fiscal year.

<unk>.

And last but not least we see an opportunity to accelerate revenue by.

Now I'd like to change gears and discuss our third quarter, even though we operated in a partial quarter I'm very pleased with our results and our execution. This is especially gratifying given the current challenges in the macro environment.

By cross selling and up selling our traditional capabilities to the new combined customer base.

While we are still in early stages of integrating zero box <unk>. We are excited about the progress we are making and the pace of our combined innovation, we would expect to see IV extra Gs become more meaningful over the next fiscal year.

We reported total revenue of $43 million and as you heard already we launched several new joint capabilities.

We are continuing to see healthy growth and demand from both new and existing customers.

Now I would like to change gears and discuss our third quarter, even though we operated in a partial quarter I'm very pleased with our results and our execution. This is especially gratifying given the current challenges in the macro environment.

Other cyber security category leaders have reported signs of increased scrutiny on deals lengthening of sales cycles and softness in Europe , we too have seen signs of this however, given our smaller size in emerging market. We are seeing consistent demand in North America and the rest of the world of course, excluding Europe .

We reported total revenue of $43 million and as you've heard already we launched several new joint capabilities.

We have continued to see healthy growth and demand for both new and existing customers.

Looking forward I'd like to outline our three main priorities for the remainder of the fiscal year, we are in our Q4.

Other cyber security category leaders have reported signs of increased scrutiny on deals lightening of sales cycles and softness in Europe . We have seen signs of this however, given our smaller size in emerging market. We are seeing consistent demand in North America and the rest of the world of course, excluding Europe .

Youll be able to remember these by the central academic <unk> ex <unk>.

First efforts for focus we will focus on executing our strategic plan to lead and grow our external cyber security platform capabilities and customer base.

Looking forward I'd like to outline our three main priorities for the remainder of the fiscal year, we are in our Q4.

Success here will be reflected on our quarterly performance metrics.

Second Owens for optimization as a new public company, we will continue to optimize our infrastructure to support our near term growth. While also laying the foundation to efficiently scale the business over the next several years in anticipation of driving operational efficiencies leverage and free cash flow.

Youll be able to remember these by the simple acronym <unk>.

First <unk> focus we will focus on executing our strategic plan to lead and grow our external cyber security platform capabilities and customer base.

Success here will be reflected on our quarterly performance metrics.

Lastly access for IDEXX.

Oh, it's for optimization as a new public company, we will continue to optimize our infrastructure to support our near term growth. While also laying the foundation to efficiently scale the business over the next several years in anticipation of driving operational efficiencies leverage and free cash flow.

We will continue to thoughtfully and rapidly integrate our two organizations to realize the cost efficiencies and revenue growth that we know where possible.

These goals will not be achieved overnight. However, with the continued energy passion and commitment of all of our boxes around the world I am confident that we will continue to set the gold standard and external cyber security.

Lastly access for IDEXX.

We will continue to thoughtfully and rapidly integrate our two organizations to realize the cost efficiencies and revenue growth that we know where possible.

With that I'd like to turn the call over to our CFO , Tim builder, who will provide more color on our financial performance nuances of the transaction and Q4 guidance Tim the floor is yours.

Thanks Alastair.

I would like to echo fosters excitement around the significant milestones we achieved in becoming a public company.

With that I'd like to turn the call over to our CFO <unk>, who will provide more color on our financial performance.

And I'm, even more excited about the opportunity we have to remain a market leading external cyber security company.

Ounces of the transaction and Q4 guidance, Tim the floor is yours.

Before we take a closer look at our third quarter results. There are few on a few important points I would like to be sure to level set. So you can better understand our story and measure our future progress.

Thanks Alastair.

I would like to echo fosters excitement around the significant milestone, we achieved and becoming a public company.

First as far as <unk> mentioned earlier Q3 represents a partial period the transaction closed on August 3rd and Accordingly, our Q3 results reflect the combined operations of <unk> and <unk> from August four through October 31.

And I'm, even more excited about the opportunity we have to remain a market leading external cyber security company.

Second due.

Due to the accounting requirements of the transaction the spec LNR was deemed the accounting acquirer. However, zero Fox Inc. Is the predecessor entity for reporting purposes.

First as far as mentioned earlier Q3 represents a partial period.

The transaction closed on August 3rd and Accordingly, our Q3 results reflect the combined operations of <unk> and <unk> from August four through October 31.

This means that prior period financials presented reflect only Bruce also Bureau, Fox and quite a standalone basis and do not include the results of <unk> <unk> to.

Second due.

Due to the accounting requirements of the transaction the spec LNR was deemed the accounting acquirer. However, zero box, Inc. Is the predecessor entity for reporting purposes.

To assist us to assist investors with this lack of comparability. We have provided supplemental financial information that includes historical Standalone financial statements for <unk> and <unk> <unk>.

This means that prior period financials presented reflect only Bruce also Bureau, Fox and quite a standalone basis and do not include the results of <unk> Dx.

This information can be found on our IR website.

Now, let's take a closer look at our third quarter third quarter fiscal 2023 results.

To insist to assist investors with this lack of comparability. We have provided supplemental financial information that includes historical Standalone financial statements for <unk> and <unk>.

With the exception of revenue and then unless otherwise stated all financial results. We will discuss today are non-GAAP financial measures.

Reconciliations between our GAAP and non-GAAP results can be found in our earnings release.

This information can be found on our IR website.

For Q3 zero Fox reported $43 million in revenue.

Now, let's take a closer look at our third quarter third quarter fiscal 2023 results.

Subscription revenue was $15 2 million.

With the exception of revenue and unless otherwise stated all financial results. We will discuss today are non-GAAP financial measures.

Subscription revenue primarily consists of revenue from the <unk> platform.

Services revenue was $27 8 million.

Reconciliations between our GAAP and non-GAAP results can be found in our earnings release.

Services revenue largely consists of revenue from breach response services as well as revenue from investigative and intelligence services that accompany zero box platform.

For Q3 zero Fox reported $43 million in revenue.

Subscription revenue was $15 2 million subscription.

As of October 31, our annual recurring revenue was $153 million.

Revenue primarily consists of revenue from the <unk> platform.

We ended the quarter with 1138 subscription customers.

Services revenue was $27 8 million.

Services revenue largely consists of revenue from breach response services as well as revenue from investigative and intelligence services that accompany zero box platform.

We continue to see a significant opportunity to both land new customers and expand platform capabilities and services within the existing customer base.

As of October 31, our annual recurring revenue was $153 million.

Turning to gross margin.

For the third quarter non-GAAP subscription gross margin was 72%.

We ended the quarter with 1138 subscription customers.

non-GAAP total gross margin was 40%.

We continue to see a significant opportunity to both land new customers and expand platform capabilities and services within the existing customer base.

We see opportunities to improve our overall gross margin as we scale our business.

Drive greater cost efficiencies.

Our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

Turning to gross margin.

For the third quarter non-GAAP subscription gross margin was 72% and non-GAAP total gross margin was 40%.

Turning to operating expenses.

Total non-GAAP operating expenses were $23 million in the quarter.

We see opportunities to improve our overall gross margin as we scale our business.

We continue to invest in R&D to drive innovation and remaining market leader.

Drive greater cost efficiencies.

Regarding sales and marketing, we expect to spend more in absolute dollars to increase our go to market capabilities. Since we see a lot of white space and external cyber security.

And our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

Turning to operating expenses.

Total non-GAAP operating expenses were $23 million in the quarter.

Taking a deeper look at G&A expenses.

They were impacted by increased costs directly attributable to the transaction, we expect to absorb some additional nonrecurring transaction costs in the fourth quarter. However, after that we expect to see a more normalized run rate in fiscal 2024.

We continue to invest in R&D to drive innovation and remaining market leader.

Regarding sales and marketing, we expect to spend more in absolute dollars to increase our go to market capabilities. Since we see a lot of white space and external cyber security.

Our non-GAAP loss from operations was $5 8 million.

Taking a deeper look at G&A expenses.

Looking at the balance sheet we.

We ended the quarter with $53 million of cash $29 million in accounts receivable and $53 million in total deferred revenue.

Our total outstanding debt was $171 million, including $150 million in convertible debt that was raised as part of the transaction.

Our non-GAAP loss from operations was $5 6 million.

Provisions of the convertible debt provides <unk> the option to pay interest in cash or to pay it in kind, thereby adding to the convertible note balance the.

Looking at the balance sheet we.

We ended the quarter with $53 million of cash $29 million in accounts receivable and $53 million in total deferred revenue.

The cash interest rate of 7% in the pick rate is 875%.

Our total outstanding debt was $171 million, including $150 million in convertible debt that was raised as part of the transaction.

For our first interest payment due on December 15, we elected the pick option.

We reported $4 $4 million of interest expense in the income statement, which reflects the pick rate on the convertible debt and rising rates on our senior Bank note, which has a variable interest rate.

Provisions of the convertible debt provides <unk> the option to pay interest in cash or to pay it in kind, thereby adding to the convertible note balance the.

The cash interest rate of 7% in the pick rate is 875%.

We believe the pick option will provide us the opportunity and flexibility to prudently invest in the growth of our business.

For our first interest payment due on December 15, we elected the pick option.

In our financial statements, you will see a $699 million goodwill impairment charge.

We reported $4 4 million of interest expense in the income statement, which reflects the pick rate on the convertible debt and rising rates on our senior Bank note, which has a variable interest rate.

This charge was attributable to the accounting treatment for this fact, we're in LNR was the accounting acquirer, but zero Fox is the surviving entity.

We believe the pick option will provide us the opportunity and flexibility to prudently invest in the growth of our business.

The August 3rd closing day market valuation was used to determine the initial goodwill and.

And the subsequent decline in our stock price as of October 31 led to the impairment charge the.

In our financial statements, you will see a $699 million goodwill impairment charge.

The important takeaway is that this impairment impairment charge has no impact on the operations of <unk>.

This charge was attributable to the accounting treatment for this back where in LNR was the accounting acquirer, but zero Fox is the surviving entity.

Turning to cash flow.

The August started closing day market valuation was used to determine the initial goodwill and.

Cash flow used in operations was $22 million.

Again, the cash flow presentation reflects the aforementioned accounting treatment for the <unk> the.

And the subsequent decline in our stock price as of October 31 led to the impairment charge the <unk>.

Cash used in operations includes approximately $14 million in advisory legal and other transaction costs associated with the categories.

Important takeaway is that this impairment impairment charge has no impact on the operations of <unk>.

Turning to cash flow cash flow used in operations was $22 million.

As indicated earlier, we expect some additional impact from transaction costs in the fourth quarter and similar to our G&A expense would expect these to moderate and normalize in fiscal 2024.

Again, the cash flow presentation reflects the aforementioned accounting treatment for the <unk> the.

Cash used in operations includes approximately $14 million in advisory legal and other transaction costs associated with the capital raise.

Now to our outlook.

We are certainly cognizant of the macro environment. However, based on what we are currently seeing we remain confident in achieving our Q4 outlook.

As indicated earlier, we expect some additional impact from transaction costs in the fourth quarter and similar to our G&A expense would expect these to moderate and normalize in fiscal 2024.

Based on our Q3 achievements, we are raising the low end of our previous guidance for the second half of fiscal year 'twenty three by $2 million. So we now expect revenue to be in the range of $84 million $286 million.

Now to our outlook.

We are certainly cognizant of the macro environment. However, based on what we are currently seeing we remain confident in achieving our Q4 outlook.

During our Q4 earnings call, we anticipate providing you with full year guidance for next year.

With that wed like to take your questions operator, please poll for questions.

As a reminder to ask a question you need to press Star one one on your telephone.

Please standby, we compile the Q&A roster.

During our Q4 earnings call, we anticipate providing you with full year guidance for next year.

Our first question comes from the line of Brad Reback from Stifel. Your line is open.

With that we'd like to take your questions. Operator, Please poll for questions.

As a reminder to ask a question you need to press Star one one on your telephone.

Glen can you guys hear me.

Please standby, we compile the Q&A roster.

Loud and clear Brad and Jeff.

Great great. So.

As we think about.

Our first question comes from the line of Brad Reback from Stifel. Your line is open.

The guide for four Q and some of the commentary around the optimization. Obviously you didn't provide an op income.

Range, but any thoughts.

Glen can you guys hear me.

Should we be in the same ballpark or are there. Some of these one time items that may cause us to deviate significantly in fourth Q.

Loud and clear Brad and Jeff.

Great great. So.

As we think about.

Sure.

The guide for four Q and some of the commentary around the optimization. Obviously you didn't provide an op income.

Hey, Brian This is Tim I'll take this one listen I think.

From a opex standpoint listen what we talked about we're going to continue to make investments, but as we think about our opex first of all.

Range, but any thoughts.

Should we be in the same ballpark or are there. Some of these one time items that may cause us to deviate significantly in fourth Q.

Partial quarter, albeit a few days will have an impact on.

In Q4, so we'll see a little bit more there.

And then as it relates to kind of the mix I think G&A will tick.

Hey, Brian This is Tim I'll say listen I think.

Slightly away from the transaction and some of those costs.

From a opex standpoint listen what we talked about we're going to continue to make investments, but as we think about our opex first of all.

And trickle away, but again Q4 is generally a strong quarter for us from a sales standpoint, so you might see it.

Partial quarter, albeit a few days will have an impact on.

Tick up in sales and marketing, but I think all in all kind of that opex number it should be relatively consistent.

Q4, so we will see a little bit more there.

And then as it relates to kind of the mix I think G&A will tick.

That's great and then fostered over the years, you've very effectively have used M&A to help augment your product set obviously IDEXX being the biggest but some other smaller ones historically.

Slightly away from the transaction and some of those costs.

Start to trickle away, but again Q4 is generally a strong quarter for us from a sales standpoint, so you might see it tick.

What's your philosophy.

Up in sales and marketing, but I think all in all kind of that Opex number it should be relatively consistent.

Now as it relates to M&A going forward.

Okay.

That's great and then fostered over the years, you've very effectively have used M&A to help augment your product set obviously IDEXX being the biggest but some other smaller ones historically.

Yeah, Brad Thanks for the question.

I don't believe it's fundamentally changed in the previous years.

In General My bar when it comes to M&A is incredibly high.

Starts with making sure the culture of the team that we acquire and merge with us on par or better than ours.

What's your philosophy here.

Now as it relates to M&A going forward.

Okay.

Raise the bar every single time, I think we have a tremendous amount of work to do with <unk> we are.

Yeah, Brad Thanks for the question.

Yes.

I don't believe it's fundamentally changed in the previous years.

Focus solely on execution here in Q4, and setting us up with a strong foundation for next year, when we get through integration and we find new opportunities, we'll we'll kind of evaluate and address them as we see them.

In General My bar when it comes to M&A is incredibly high.

It starts with making sure the culture of the team that we acquire or merge with us.

Is on par or better than ours.

Raise the bar every single time, I think we have a tremendous amount of work to do with <unk>.

That's great. Thanks, very much guys.

Thanks, Brett.

Our.

Thank you one moment for our next question.

Focused solely on execution here in Q4, and setting us up with a strong foundation for next year.

Our next question comes from the line of Joseph Gallo from Jefferies. Your line is open.

We get through integration.

We find new opportunities, we'll we'll kind of evaluate and address them.

He fostered Tim congrats on the results and getting the combined company outdoor and publicly reporting its kind of feel good and congrats on the results in a tough time.

Jim.

That's great. Thanks, very much guys.

Thanks, Brett.

Thank you one moment for our next question.

I've got a few questions if I may, but maybe just to start with foster.

So can you just talk about the condos you are having with your current customers what does their budgets look like I know you said, you've largely missed a lot of the macro but maybe just drill down into that.

Our next question comes from the line of Joseph Gallo from Jefferies. Your line is open.

He fostered Tim congrats on the results and getting the combined company outdoor and publicly reporting its kind of feel good and congrats on the results in a tough time.

How your customers are thinking about their spend environment next year, and where external threats fall in the priority stack for those customers.

I've got a few questions if I may, but maybe just to start with foster plus.

So can you just talk about the condos youre, having with your current customers what does their budgets look like I know you said, you're largely missed a lot of the Mac or maybe just drill down into that and how your customers are thinking about their spend environment next year, and where external threats fall in the priority stack for those customers.

Yes, thanks for the question Joe.

It's a fair question I think some of our customers are still evaluating or waiting to be giving guidance from their executive teams on what full fiscal year budgets will look like next year.

Feedback from our customers that were part of the critical modern security Tech stack.

Yes.

Yes, thanks for the question Joe.

I firmly believe and what we tell our customers what we tell wall Street, and more importantly, where we see a breath arising.

I think it's a fair question I think some of our customers are still evaluating or waiting to be giving guidance from their executive teams on.

Can attack the inside of your network that can attack the perimeter and try to get inside or they can attack the asset beyond that traditional parameter.

Full fiscal year budgets will look like next year.

We get feedback from our customers that were part of the critical modern security Tech stack.

We have seen an increase in those attacks I think our customers have taken note and also seen alongside of US that we are adding a material a critical value to their stack and so I think where they are evaluating right now from our point of view as well they get new budgets overall their budget stay relatively consistent and then.

I firmly believe and what we tell our customers what we tell wall Street, and more importantly, where we see a breath of rising breath can attack the inside of your network. They can attack the perimeter and try to get inside or they can attack the asset beyond that traditional perimeter. We have seen an increase in those attacks I think our customers have taken note and also.

I'd also say and anytime went on an economic situation looks like it's less certain in the future than the past people look for consolidation place and I think zero box has got a potential advantage here, where we are a platform. We're no longer a product company and we've got the opportunities to help our customers.

Alongside of US that we are adding a material a critical value to their stack.

I think where they are evaluating right now from our point of view as well they get new budgets or their budget stay relatively consistent and then I would also say and anytime went on an economic situation looks like it less certain in the future than the past people look for consolidation place and I think zero box has got.

Solid eight on a single pane of glass, where the combined expanded vision of being that unified external cyber security platform.

That's great to hear and then maybe just as my second question for Tim maybe just since your first call with US like how should we think about your guidance methodology and then in your fourth quarter guidance does that imply things get better or worse or stay the same as it relates to macro and then if you could maybe just provide some guardrails.

Potential advantage here, where we are a platform we're no longer a product company and we've got the opportunity to help our customers consolidate on a single pane of glass with a combined expanded vision of being that unified external fabricated platform.

Yes.

On.

How to think about profit inflection in the future and what kind of underpins that forward leverage and what's going to be a tougher environment.

Okay, that's great to hear and then maybe just as my second question for Tim maybe just since your first call with US like how should we think about your guidance methodology and then in your fourth quarter guidance does that imply things get better or worse or stay the same as it relates to macro and then if you could maybe just provide some guardrails on.

Sure as I heard a couple of several questions. So.

Take them in kind of the order.

It Hasnt been in my head I guess first.

Macro environment, we talked about that and maybe kind of affects our guidance listen we know.

How to think about profit inflection in the future and what kind of underpins that forward leverage and what's going to be a tougher environment.

<unk> has a lot going on.

We see other companies reporting we're certainly cognizant cognizant of the impacts that we're seeing but.

Sure as I heard a couple of several questions. So.

As we sit here today, our demand remained steady and so we're going to be a prudent that we think about our growth.

Take them in kind of the order.

Hasn't been my head I guess first is the macro environment, we talked about that and how maybe kind of affects our guidance listen we know.

And I think how that dovetails into profitability again.

Okay.

<unk> has a lot going on.

To invest in growth, but we're going to do so prudently we know that profitability.

We see other companies reporting we're certainly cognizant cognizant of the impacts that we're seeing but as.

It will be an important metric for us.

As we sit here today, our demand remained steady and so we're going to be prudent that we think about our growth.

As we get into providing you fiscal 'twenty for guidance, we'll update you at that time, just in general as it relates to our guidance we're going to.

And I think how that dovetails into profitability again.

We have our internal plans, where we're again, we're stretching for growth we know thats important for the security of software company of our.

And it felt like we were.

We're going to invest in growth, but we're going to do so prudently we know that profitability. It will be an important metric for us and as we get into providing you fiscal 'twenty for guidance. We'll update you at that time, just in general as it relates to our guidance we're going to.

Our size and scale, but again I want to do that like you said in the full macro where we're being conservative where we're taking an approach that sees what's happening in the larger macroeconomic conditions.

That's helpful. And then maybe if I can squeeze in a clarification, but so you gave a $153 million of IRR.

We have our internal plans, where again, we're stretching for growth we know thats important for a security software company of our.

$83 million of that I believe is OPM, you could probably subtract out a handful of millions low single digits for the rest of <unk>.

I think that gets you to like a mid to high sixties.

That's helpful and maybe if I can squeeze in a clarification, but so you gave a $153 million of IRR.

Core zero Fox IRR number am I thinking about that correct. If I look at kind of the supplemental <unk> had.

$83 million of that I believe is OPM, you could probably subtract out a handful of millions low single digits for the rest of <unk>.

Is that imply call it a low 30% IRR growth rate and then I would imagine that implies that that's an acceleration versus the 24 last quarter. So is that true and then what drove that inflection when most other vendors have seen kind of a moderation in growth rates and that's all for me. Thanks guys.

I think that gets you to like a mid to high sixties.

Core zero Fox IRR number am I thinking about that correct. If I look at kind of the supplemental you have had there.

Yes, Thanks, and Joe I think you answered some of your question. Yes, you are thinking about it correctly. So the different individual components are fairly 0.1. So.

That is correct and then the growth is accelerating as you have seen so.

We just again.

Yes.

The combination of a couple of factors one is <unk>.

Yes, Thanks, and Joe I think you answered some of your question. Yes, you are thinking about it correctly. So the different individual components are fairly <unk> one so.

Our base might be a little bit smaller than some of our competitors, but again, we're seeing real nice.

Band, especially in our enterprise customer base, and so thats what drove the higher IRR.

That is correct and then the growth is accelerating as you have seen so.

I would add on to that too Joe two points of clarification Thats Foster.

We just again.

Sure.

The combination of a couple of factors one is maybe our base might be a little bit smaller than some of our competitors, but again, we're seeing real nice.

One I would think about zero Fox revenue is all revenue that one federal government contract that looks very different.

Put all of that and of course security bucket and evaluate the growth rate there and I think that growth rate will still come back to what you had alluded to.

And especially in our enterprise customer base, and so thats what drove the higher IRR.

I would add onto that to Joe two points of clarification Thats Foster.

And then two in general our philosophy as the new Kid on the block here is to make sure that we are using conservativism.

One I would think about zero Fox revenue is all revenue that one federal government contract that looks very different.

As a part of our guidance methodology and as a part of our planning in the future, allowing us to do exactly what we did here this quarter, which.

Put all of that and of course security bucket and evaluate the growth rate there and I think that growth rate will still come back to what you had alluded to.

Beat our Q3 and for guidance and raised for Q4.

And then two in general our philosophy as the new Kid on the block here is to make sure that we are using conservativism.

I think youll be able to judge us on our performance in quarters to go.

That's the kind of.

The framework, we want to put forth.

As a part of our guidance methodology and as a part of our planning in the future, allowing us to do exactly what we did here this quarter, which.

Beaten raise great day here great to hear thank you.

Thank you.

Beat our Q3 and for guidance and raise for Q4.

Now I'd like to turn the call back over to James Foster for any closing remarks.

Youll be able to judge us on our performance in quarters to go.

Operator as you can tell we are very excited about the opportunity in front of us. So those investors that are looking for even more information tomorrow morning, we will be presenting at the Raymond James Technology Conference and as you can access that webcast via our Investor Relations site.

That's the kind of.

Kind of framework, we want to put forth.

Beaten raise great day here great to hear thank you.

Yeah.

Thank you.

I'd like to turn the call back over to James Foster for any closing remarks. Thank you operator.

And again I want to thank everybody for joining us today tiers have great day.

As you can tell we are very excited about the opportunity in front of us. So those investors that are looking for even more information tomorrow morning, we will be presenting at the Raymond James Technology Conference and as you can access that webcast via our Investor Relations site.

And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

And again I want to thank everybody for joining us today tiers have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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