Q4 2023 ZeroFox Holdings Inc Earnings Call

Speaker 1: You.

Speaker 2: Thank you for standing by and welcome to the Zero Fox fiscal fourth 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 and answer session.

Speaker 2: And as a reminder, today's call is being recorded.

Speaker 2: I would now like to turn the conference over to Mark Griffin, Senior Vice President of Investor Relations for ICR. Mark. Sorry.

Speaker 3: Thank you, operator. Good morning, and thank you for joining us today to review Zero Fox's fiscal fourth quarter, 2023 financial results.

Speaker 3: With me on the call today are James C. Foster, as many of you know him, Foster. Foster is the founder, chief executive officer, and chairman of ZorroFox. Also with me on the call is ZorroFox's CFO , Tim Bender.

Speaker 3: After prepared remarks, we will open up the call for questions.

Speaker 3: During this call, we may make statements related to our business that are forward-looking statements under federal securities law, including statements related to our anticipated financial results, growth opportunities, and external cybersecurity, our progress in achieving profitability, and expected benefits from our acquisition of IDX.

Speaker 3: 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 statement.

Speaker 3: Forward-looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them. For discussion of the material risks and other important factors that could affect our actual risk, please refer to the risk factors section in our SEC filings.

Speaker 3: Edgar system and our website as well as the risks and important factors discussed in today's earnings refreshments.

Speaker 3: Additionally, non-GAAP financial measures will be discussed on this conference call.

Speaker 3: Please refer to the tables in our earnings release and on the investor relations portion of our website for reconciliation of these measures to the most directly comparable GAAP financial measure.

Speaker 3: With that, I'd like to turn the call over to ZeroFox's Chief Executive Officer. Foster, please go ahead.

Speaker 4: Thanks, Mark. Good morning, everybody. I'm really excited to speak with you today about our strong close to the fiscal year. The continued significant growth opportunity we see at External Cybersecurity.

Speaker 4: and our focus for the upcoming year on taking a balanced approach between capitalizing on growth and progressing on our path to profitability.

Speaker 4: Let's start with a high-level look at our Q4 performance.

Speaker 4: As the only cybersecurity company to go public in 2022, I'm proud of what our team was able to accomplish.

Speaker 4: We closed out the year on a high note beating the high end of our guidance for the second consecutive quarter

Speaker 4: We ended the year with ARR of 157 million and year-over-year platform ARR grew 27%.

Speaker 4: We also had another strong quarter of new customer wins ending the quarter with over 1200 subscription customers up 20% year over year.

Speaker 4: We saw continued success winning larger deals as well ending the year with 147 subscription customers with ARR greater than $100,000 and increase 25% the over year.

Speaker 4: Overall, we were pleased with the performance, particularly given a continued volatile and uncertain macro environment.

Speaker 4: The demand environment we experienced in Q4 was consistent with what we saw in Q3 and thus far as remaining more stable than the macro environment. That said, like other cybersecurity and technology companies, we've continued to see increased scrutiny on larger deals and longer sales cycles and certain cases in geography.

Speaker 4: The MAM environment we experienced in Q4 was consistent with what we saw in Q3, and thus far as remaining more stable than the macro environment. That said, like other cybersecurity and technology companies, we've continued to see increased scrutiny on larger deals and longer sales cycles in certain cases and geographies, but it has not affected our overall demand.

Speaker 4: We attribute this experience to the resiliency of cybersecurity and our go-to-market execution. We also recognize our smaller size and emerging nature of the market are positive factors.

Speaker 4: Taking a closer look at Q4, we continue to see healthy demand from both new and existing customers across our external cybersecurity platform and service offerings.

Speaker 4: During the quarter, we had several key platform and service wins, including a multi-six-figure deal with a Fortune 100 US grocery chain.

Speaker 4: This deal is a competitive displacement opportunity that we want over key public company competitors.

Speaker 4: The customer is using ZeroFox to protect multiple brands, domains, executives, and mobile apps to detect and disrupt coordinated campaigns across the dark web through our threat intelligence products.

Speaker 4: 0Fox1 is the oldu the strength and comprehensiveness of our platform.

Speaker 4: Differentiated dark web and dark ops capabilities, and our ability to take action against the threats we discovered, including removing bleak data and personal information with our new PII disruption service.

Speaker 4: We signed a six-figure deal with a Fortune 100 retail company that is using zero box to protect and disrupt threats to their corporate and executive social media accounts and demands.

Speaker 4: We also want a six-figure, multi-year deal with a large European critical infrastructure company.

Speaker 4: This was a competitive displacement with the customer selecting ZeroFox for our comprehensive platform across three of our four pillars, including digital risk protection, threat intelligence and disruption.

Speaker 4: Zero Fox Response, our fourth and newest pillar, focused on incident and breach response capabilities, also performed well in the quarter. We had several key wins, including a large deal with a U.S. restaurant chain where we were brought in to leverage our response platform and operations center.

Speaker 4: This was a competitive deal with a customer selected ZeroFox because of our proven track record of delivering market leading breach response services at scale.

Speaker 4: Importantly, in Q4, we started to see early signs of synergies following our Q3 acquisition of IDX.

Speaker 4: For example, our recently launched PII removal disruption service, a joint IDX and zero-fox innovation, with a key required capability for several N-quarter zero-fox platform deals.

Speaker 4: One of our long-standing Zerofox customers, a Fortune 50 media and technology company, also engaged with Zerofox Response for the first time over their legacy incumbent provider.

Speaker 4: We also were able to drive some improvement and response runways by launching marketing campaigns to drive education and the value of the two combined businesses.

Speaker 4: This is an example of how we're leveraging zero-fox with larger and more established go-to-market capabilities to drive teneties.

Speaker 4: While we are pleased with this early progress, we know there is still a lot more work ahead of us.

Speaker 4: Consistent with what we said last quarter, we continue to expect these synergies become more meaningful in a lot of half of this year.

Speaker 4: Because this is only our second earnings call since going public and some investors are newer to the story, I'd like to spend just a few minutes to provide an overview of external cybersecurity.

Speaker 4: The external cybersecurity category of products helps customers expose, disrupt and respond the threats beyond the device and outside the perimeter. The external cybersecurity category of products helps customers expose, disrupt and respond the threats beyond the device and outside the perimeter.

Speaker 4: Traditionally, the focus of cybersecurity has been on endpoints and firewalls with the goal of protecting own assets with internal security controls.

Speaker 4: However, digital transformation is propelling a proliferation of digital assets and data on external platforms that are outside the control of organizations and not protected by traditional security controls.

Speaker 4: Examples of these platforms include the Surface Web, Deep and Dark Web, social media sites, user platforms, code sharing sites, and mobile app stores.

Speaker 4: As business shifts online, the external attack surface for every organization continues to grow, increasing potential financial and reputational risk.

Speaker 4: And the risk is real. The adversaries are increasingly targeting this external tax service with phishing attacks, impersonations of companies, brands, and executives. Account takeovers, fraud, and even attacking those exposed external platforms.

Speaker 4: At the same time, the volume of threats continues to increase, making it more critical to use actionable threat intelligence for continuous visibility and continuous protection from threats beyond the perimeter.

Speaker 4: The size and scale of the external attack surface is driving a growing need for external fiber-scrady solutions.

Speaker 4: Today, we provide continuous visibility into that entire external attack surface. Robust Threat Intelligent

Speaker 4: protection with the ability to disrupt active threats, and comprehensive response capabilities to assist with investigations, incidents, and breaches.

Speaker 4: So why do we believe that zero-box is well positioned, the capitalizes on the capitalizes on the capitalizes on the capitalizes?

Speaker 4: Three main reasons. The first is our platform. We believe that solving the external cybersecurity problem requires a platform-based approach.

Speaker 4: This is exactly what we have and what we will continue to build upon. Our platform combines patented AI-powered analysis, full spectrum threat and collagen, adversary disruption, and response capabilities into a single, comprehensive solution. Customers want a single pane of glass.

Speaker 4: The second reason is scale. We believe that scale at which we operate and disrupt threats on a daily basis for our customers represents a competitive advantage.

Speaker 4: We also believe that our growing size and customer base will increase the scale advantage over time.

Speaker 4: We believe this will be especially true in less predictable macro environments like we're operating in today.

Speaker 4: We believe this will be especially true in less predictable macro environments like we're operating in today. And the third reason is our experience and focus.

Speaker 4: Solving the external cyber security problem has been our focus since we founded the company just over 10 years ago.

Speaker 4: We continue to innovate and deepen our platform to ensure that we have identified and disrupt every external attack.

Speaker 4: Fistful year 23 was transformational for zero-box.

Speaker 4: We were the only cyber security company to go public last year, and we have the capital required to cross over pre-castle break even late next year. We raised new growth capital, and with the acquisition of IDX, we strategically expanded our platform to include zero-fox response.

Speaker 4: As we look to this upcoming fiscal year, we believe that zero-box has the resources, scale, and platform depth to ensure another successful growth year.

Speaker 4: At the same time, we believe it's important to pursue this growth in a disciplined way that allows us to make progress towards becoming profitable. Looking forward, I would like to outline our top three priorities, and you'll be able to remember these by the Simple acronym F-O-X.

Speaker 4: First is for focus. We will continue to focus on executing our strategic plan to lead and grow our external cybersecurity platform capabilities and customer base.

Speaker 4: Success here will be reflected in quarterly performance metrics with a focus on core growth.

Speaker 4: Second, O is for optimization. We know that the path of profitability is an important area for focus for investors and it's a key area of focus for ZeroFox.

Speaker 4: This year we will continue to optimize our infrastructure to support our near-term growth while laying the foundation to drive operational efficiencies and leverage.

Speaker 4: year we will continue to optimize our infrastructure to support our near-term growth while laying the foundation to drive operational efficiencies and leverage. Our goal is to achieve cash flow.

Speaker 4: break even late next year. Lastly, X represents X-Factor. This year, X-Factor will be executing on driving more meaningful synergies and improving our overall cross selling efforts from our recent acquisitions.

Speaker 4: In summary, our strong fourth quarter capped off a transformational year for ZeroFox. And with the continued energy, passion, and commitment of our Foxes around the world, I believe that ZeroFox is well positioned to execute on our initiatives and further leverage our platform.

Speaker 4: With that, I would like to turn the call over to our CFO , Tim Bender, who will provide more color on our financial performance and our guidance for Q1 and this fiscal year.

Speaker 4: like to turn the call over to our CFO , Tim Bender, who will provide more color on our financial performance and our guidance for Q1 and this fiscal year. Tim, the floor is yours.

Speaker 4: Thanks, Foster. As Foster mentioned, Zero Fox ended fiscal year 23 on a positive note.

Speaker 4: Before we take a closer look at our Q4 results, I wanted to remind everyone that due to the accounting requirements of the transaction,

Speaker 4: Prior periods, financials presented reflect only the results of zero-fox ink on a standalone basis and do not include the results of IDX.

Speaker 4: For comparable purposes, we have provided investors with supplemental financial information that includes historical stand-alone financial statements for both ZeroFox and IDX.

Speaker 4: This information can be found on our investor relations website. Now let's take a closer look at our Q4 results.

Speaker 4: With the exception of revenue and less otherwise stated, all financial results we will discuss today are non-GAAP financial measures.

Speaker 4: Reconciliations between our GAAP and non-GAAP results can be found in our earnings release.

Speaker 4: For Q4, Zero Fox reported revenue of $45.4 million.

Speaker 4: To succeed at the high end of our inferred Q4 guided range. So the Christian revenue was $16.5 billion.

Speaker 4: Subscription revenue consists of revenue from zero-fox platform sales.

Speaker 4: Description revenue consists of revenue from Zero Fox platform sales. This revenue was $28.9 million.

Speaker 4: Services revenue consists of revenue from response services, as well as revenue from recurring and non-recurring intelligence services.

Speaker 4: As of January 31st, our annual recurring revenue was $157 million.

Speaker 4: AIRR primarily consists of platform subscriptions, as well as a small amount of recurring intelligence services and 83 million from our large government contract.

Speaker 4: We ended the quarter with 1,203 subscription customers. We continue to see a significant opportunity to both land new customers and expand platform capabilities and services within our existing customer base.

Speaker 4: As Foster mentioned, in fiscal year 23, we saw continued success winning larger deals.

Speaker 4: We ended the year with 147 subscription customers with ARR greater than 100,000.

Speaker 4: representing a year-over-year increase of 25%.

Speaker 4: Turning to gross margin. For the fourth quarter, subscription gross margin was 73%. An increase from last quarter, subscription gross margin was 72%.

Speaker 5: While there were some positive impacts from increased efficiencies.

Speaker 5: Subscription gross margin also benefited from the timing of investments.

Speaker 5: From a seasonality perspective, our investments tend to be more heavily weighted to the first half of our fiscal year.

Speaker 5: Given this, we would expect subscription gross margin to slightly decline in Q124 and then increase moderately over the remainder of the year.

Speaker 5: While there is a potential for quarter-to-quarter volatility, our goal is to deliver consistent, moderate subscription gross margin improvement on an annual basis, as we have done so for several years.

Speaker 5: Total gross margin was 41% compared to 40% last quarter. The improvement in total gross margin was driven primarily by the higher subscription gross margin referenced above.

Speaker 5: We continue to see opportunities to improve our overall gross margin as we scale our business, drive greater cost efficiencies, and our higher margins description revenue becomes a greater portion of our overall revenue mix.

Speaker 5: Turning to operating expenses. Total operating expenses were $26 million in the quarter.

Speaker 5: When comparing expense levels to last quarter, keep in mind that Q3 was a partial quarter that reflected three fewer days of expenses.

Speaker 5: Setting this aside, the increase in expensals is primarily driven by increased sales commissions, which is typical in Q4 for us.

Speaker 5: as well as continued investment in R&D and transaction expenses in G&A related to becoming public.

Speaker 5: As we look to Q1-24, we would expect operating expenses to increase slightly in absolute dollars driven by the timing of professional fees for our annual audit, residual transaction related filing costs, and planned investments that should provide operating leverage in the second half of the year.

Speaker 5: Our loss from operations was 7.2 million.

Speaker 5: Looking at the balance sheet, we ended the quarter with $48 million in cash, $30 million in accounts receivable, and $54 million in total deferred revenue. Our total outstanding debt was $174 million, including $157 million in convertible debt.

Speaker 5: The convertible note has a cash interest rate of 7% and a pick rate of 8.75%.

Speaker 5: Consistent with last quarter, we elected the pick option for our second interest payment due on March 15th.

Speaker 5: We believe the PIC option continues to provide us the opportunity and flexibility to prudently invest in the growth of our business.

Speaker 5: Turning to cash flow, cash flow used in operations was $5.3 million. Now to our outlook. As we indicated last quarter, we are providing revenue and non-GAAP loss from operations guidance for Q1 and fiscal year 24. Our outlook reflects our solid Q423 results.

Speaker 5: assumes no material changes in the macro environment and consistent demand for our external cybersecurity solutions.

Speaker 5: and does anticipate volatility within our service business. Our outlook also incorporates my prior commentary regarding the trajectory of subscription gross margin and operating expenses for Q1.

Speaker 5: For Q1-24, we currently expect revenue to be in the range of $44.0 million to $44.6 million.

Speaker 5: and non-GAAP loss from operations to be in the range of 9.8 million to 9.3 million.

Speaker 5: For fiscal year 24, we currently expect revenue to be in the range of $183 million to $187 million and non-GAAP loss from operations to be in the range of $29 million to $26 million.

Speaker 5: As Foster mentioned earlier, we are focused on the path to profitability, and we continue to expect that we will achieve free cash flow break even in the latter part of fiscal year 25.

Speaker 5: With that, we'd like to take your questions. Operator. They're getting crocked up.

Speaker 2: As a reminder to ask a question, please press star 11 on your telephone.

Speaker 2: To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Speaker 4: The first question comes from Joseph Gallo with Jefferies. Your line is now open. Hey Foster, Tim, Todd, really appreciate the question. Obviously there's a lot of factors that impact the revenue guide between macro and the different components of the business following the transaction. How should we think about ARR growth trending versus revenue growth, which is probably a truer reflection of ARR growth.

Speaker 4: revenue growth. Okay that's helpful and then maybe just Tim while I have you just talk through the puts and takes of the guidance you know your revenue guidance I would believe appears prudent I mean you just did 17% growth and I think your full year guide implies you're exiting the year at mid single digits so.

Speaker 5: contract that certainly weighs as an anchor on the overall growth rates. Obviously a very consistent cash flow generating contract but does weigh on overall growth. Again, subscription growth, that line of the business is the strongest performer and I think you'll see that continue through.

Speaker 5: Q1 in the fiscal year, and then we're just really mindful right now of our the services business obviously acquisition It's fairly new for us And there's you know a bit more Volatility in that line of business as it relates to the service revenue or the subscription revenue, excuse me Awesome, and then maybe if I can just sneak in one more

Speaker 4: you know foster what surprised you in your first quarter as a public company and then maybe focusing on the f and fox what are the inputs to the growth algorithm that you're factoring in and what are the biggest opportunities for growth in fiscal 24. Thanks guys. Yeah thanks Joe.

Speaker 5: Well, I mean, outside of the fact that we had a near tech banking meltdown 72 hours ago, throwing a wrench days before our first public earnings call, I think we had a strong Q4 performance. As Tim iterated, we beat the high end of our guidance range.

Speaker 5: I'm pleased with what the team's doing, but we have meaningfully more synergies available to us. But we're being mindful of the growth that we project this year given this uncertainty. And certainly the last 72 hours adding a new element of uncertainty into the macro environment that we have.

Speaker 5: If you look back at the growth numbers that we did put up for Q4, Tim mentioned that our subscription business is far outpacing the rest of our businesses in terms of growth rate. I'd like to draw another proof point towards you here, is the growth in large customers. Our growth in large customers over $100,000.

Speaker 5: and ARR is also outpacing our overall growth. That's a positive factor that I like to make sure everybody's cognizant of is when in general cybersecurity customers pay more for a solution set, we believe that shows that there's a demonstrable problem that's out there and that we have enough trust from our customers.

Speaker 2: Our next question comes from Brad Reebok with Stifel. Your line is now open.

Speaker 4: Great, thanks very much. Foster, you indicated some early synergies on cross-selling with IDX. Can you maybe give us a sense of where the sales force is in training and is everyone fully up to speed or is there still opportunity there? Thanks.

Speaker 5: I appreciate the question, Brad. We have sales kick off in 48 hours. And so we're using that as the foundation as we do every year to re-enable, re-establish the position, re-anchor any of our pricing changes that we have.

Speaker 5: We're using that as a meaningful catalyst to accelerate the revenue synergies for the acquisition of IDX this year. We did, however, see some nice, what I call early synergies in Q4 that we mentioned. The release of this new PII disruption service capability on our platform was a meaningful win for multiple customer opportunities in Q4. I think we were positively surprised at how fast those deals moved through the pipeline.

Speaker 5: and the traction and demand that we saw from those customers. And those were just small single-digit percentages of the total net new customers we acquired in Q4. And so I think our saturation of opportunity is really just looking at a couple points of our total customer base. There's a lot of opportunity, upside and white space that we anticipate tackling this year with...

Speaker 5: in our history, and I know it's a short history for you guys, but Q1's always been our most challenged quarter from a cash flow standpoint, and wouldn't expect that this year would be different. But just like the expense flow, cash flow tends to perform throughout the year, getting better each quarter, and we would expect that to happen again this year.

Speaker 2: That's great. Thanks very much. Please stand by for our next question. The next question comes from Yifu Lee with Cantor. Your line is now open.

Speaker 6: some updates on revenue synergy generations from the platform upsell crosssell. I know firstly you mentioned about a deal between Zill Fox and IVF. What would a media company wonder if you could double click on that one for us?

Speaker 5: on cross-sale revenue synergies? For better, good morning E, for better or worse, in terms of revenue synergies, I think it was minimal in Q4. We were excited to see what I call feature demand within the platform that accelerated sales cycles, but for me to say that just because of that.

Speaker 5: Just because of that feature alone, we want those net deals would probably be doing our platform a disservice as a whole. Where I see revenue synergies really manifesting itself here this fiscal year will be an overall pipeline and demand generation improvement.

Speaker 5: We are seeing consistent trends from Q4, although we're being mindful of what this year could bring in terms of the macro. And then outside of that, we mentioned as we were getting ready to go public, the very small overlap in customers that we had as an organization. When we put on record, it was about 5% or less.

Speaker 5: total customers that overlap between the two organizations, which by definition leaves a lot of upside for cross-sell and up-sell this year. And that's something that we think about when we talk about our X factor is top of mind for performance.

Speaker 5: And quick math would lead you to believe that if you look at our subscription ARR, any meaningful improvement in crosstalk would see an incremental accelerated growth rate there for ARR.

Speaker 6: That makes sense, Foster. Thank you for the call on that. And then on the multi-six-figure deal, we understand that Zillbox is coming from a platform play. I was wondering, you mentioned about the rip and replace. What type of solutions did you rip and replace? How well was the deal cycle? Was the customer concerned with the cost? They want to lower their TCOs, total cost of ownership.

Speaker 5: That's a good thing for cybersecurity as a whole to have multiple solutions and multiple options. It allows customers to get educated on the problem set from multiple points of view. But as an organization, we've been working on this problem longer than our competitors. We've been focused on this problem longer than our competitors. And I think the market is really starting to take note of the differentiated capability set.

Speaker 5: and our multi-pillar strategy within our platform, then it's something that's been asked for by our customers. If I think about innovation, we're a customer-first organization, and our path to innovation really is built on top of customer feedback and customer demand. The competitors that we see, especially in the enterprise, just about every enterprise deal we do is competitive in nature.

Speaker 5: come to this from maybe one of our pillars, maybe they're a DRP pillar or threat intelligence pillar. What we see is some folks don't feel like they're getting the true value. We have threat intelligence companies that we displace on a regular basis, where our constant feedback we hear is they're too expensive and we're tired of searching for data or intelligence.

Speaker 5: We want to understand what's actionable, and we want someone to help us take action immediately. We don't want more work where we need to constantly search for answers. And I think our customers appreciate the proactive nature and protective nature of our platform as opposed to a search-and-find platform.

Speaker 6: I'm going to end it off on two more financial questions I made. The break out between new and existing deals, we understand the macro conditions. Any percentage breakdown between new logos versus existing. And the last one is about the investments. You mentioned it's going to be first half heavy.

Speaker 6: On the new and existing deals, how much of the revenue generation is coming from new logo versus your existing customer base? And the second part is your investment plan.

Speaker 6: You have about 800 classes right now. I was wondering your investment plans for the first half, throughout the year actually.

Speaker 5: So, yeah, so if we think about the revenue mix again, I think it's in line with our growth that we talked about from new customers and existing customers. Most of our revenue does come from existing customers. We have a nice base and we're adding roughly.

Speaker 5: you know, maybe 100 new customers a quarter, but you know, if you think about that number. So it's still, you know, mostly aligned to our existing base because we have a strong customer base in that regard. And then I would say maybe on the hiring plan, I mean, I think our hiring without giving exact numbers, it's again going to be balanced where, you know, we need to see fairly balanced right now that the Affiliate

Speaker 5: the growth in the company and support the growth. So as we grow our revenue, we'll grow our services, delivery commensurate with our margin, keep that in line. Again, talking about adding moderate growth over the course of the year. And then I think G&A will kind of moderate as we become more mature. Sales and marketing is as we add customers and as we continue to grow, we'll have to add capacity.

Speaker 5: in our sales and marketing functions to handle new customers, handle our growth in customers, and to drive growth for the upcoming and future years. And then R&D is just we want to be balanced in our investment. Again, we have a strong and robust platform, but as Foster mentioned, there's competition out there, so we want to continue to innovate as well as keep our platform, keep our strong platform.

Speaker 2: as it's a driver of our revenue. So I think we're balanced there. I don't think we're over-investing in growth. I think it's the right balance to handle our revenue growth. Thank you for that. I show no further questions at this time. I would now like to turn the conference back to Foster for closing remarks.

Speaker 5: Thank you, operator. As you can tell, we are very excited about the opportunity in front of us. I want to emphasize that we are focused on taking a mindful approach that allows us to capitalize on the growth opportunity we see this year while also making progress on our path to profitability. Again, I want to thank everybody for joining us today and a special thanks to those that ask questions.

Speaker 7: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.

Speaker 1: I you.

Speaker 2: Thank you for standing by and welcome to the Zero Fox fiscal fourth 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 and answer session.

Speaker 2: And as a reminder, today's call is being recorded. I would now like to turn the conference over to Mark Griffin, Senior Vice President of Investor Relations for ICR. Mark. Thank you, Mark.

Speaker 3: Thank you, operator. Good morning and thank you for joining us today to review Zero Focas fiscal fourth quarter 2023 financial results.

Speaker 3: With me on the call today are James C. Foster, as many of you know him, Foster. Foster is the founder, chief executive officer, and chairman of DuraFox.

Speaker 3: Also with me on the call is ZeroFox's CFO , Tim Bender. After prepared remarks, we will open up the call for questions.

Speaker 3: During this call, we may make statements related to our business that are forward-looking statements under federal securities law, including statements related to our anticipated financial results, growth opportunities, and external cybersecurity, our progress in achieving profitability, and expected benefits from our acquisition of IDX.

Speaker 3: 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 statement.

Speaker 3: Forward-looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them. For discussion of the material risks and other important factors that could affect our actual results, please refer to the risk factors section in our SEC filings and on the SEC's EDGAR system and our website as well as the risks and important factors discussed in today's earnings refreshments. Thank you.

Speaker 3: Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and on the investor relations portion of our website for reconciliation of these measures to the most directly comparable GAAP financial measure. With that, I'd like to turn the call over to ZeroFox's Chief Executive Officer. Officer, please go ahead. Thanks, Mark. Good morning, everybody. I'm really excited to speak with you today.

Speaker 5: about our strong close to the fiscal year, the continued significant growth opportunity we see in external cybersecurity, and our focus for the upcoming year on taking a balanced approach between capitalizing on growth and progressing on our path to profitability.

Speaker 5: Let's start with a high-level look at our Q4 performance. As the only cybersecurity company to go public in 2022, I'm proud of what our team was able to accomplish. We closed out the year on a high note, beating the high end of our guidance for the second consecutive quarter. The end of the year with ARR of 157 million.

Speaker 5: ending the year with 147 subscription customers with ARR greater than $100,000 and increase 25% the over year.

Speaker 5: Overall, we were pleased with the performance, particularly given a continued volatile and uncertain macro environment.

Speaker 5: The demand environment we experienced in Q4 was consistent with what we saw in Q3, and thus far is remaining more stable than the macro environment. That said, like other cybersecurity and technology companies, we've continued to see increased scrutiny on larger deals and longer sales cycles in certain cases and geographies, but it has not affected our overall demand.

Speaker 5: We attribute this experience to the resiliency of cybersecurity and our go-to-market execution. We also recognize our smaller size and emerging nature of the market are positive factors.

Speaker 5: Taking a closer look at Q4, we continue to see healthy demand from both new and existing customers across our external cybersecurity platform and service offerings.

Speaker 5: During the quarter, we had several key platform and service wins, including a multi-six-figure deal with a Fortune 100 US grocery chain. This deal was a competitive displacement opportunity that we won over key public company competitors.

Speaker 5: The customer is using Zerophox to protect multiple brands, domains, executives, and mobile apps to detect and disrupt coordinated campaigns across the dark web through our threat intelligence products. Zerophox 1.0 will do the strength and comprehensiveness of our platform.

Speaker 5: differentiated dark web and dark ops capabilities, and our ability to take action against the threats we discovered, including removing leaked data and personal information with our new PII disruption service.

Speaker 5: We signed a six-figure deal with a Fortune 100 retail company that is using ZeroBox to protect and disrupt threats to their corporate and executive social media accounts and demand.

Speaker 5: We also want a six-figure, multi-year deal with a large European critical infrastructure company.

Speaker 5: This was a competitive displacement with the customer selecting ZeroFox for our comprehensive platform across three of our four pillars including digital risk protection, threat intelligence, and disruption. ZeroFox Response, our fourth and newest pillar, focused on incident and brief response capabilities, also performed well in the quarter.

Speaker 5: We had several key wins, including a large deal with a US restaurant chain where we were brought in to leverage our response platform and operations center.

Speaker 5: This was a competitive deal with a customer selected ZeroFox because of our proven track record of delivering market leading breach response services at scale.

Speaker 5: Importantly, in Q4, we started to see early signs of synergies following our Q3 acquisition of IDX. For example, our recently launched PII removal disruption service, a joint IDX and ZeroFox innovation was a key required capability for several in-quarter ZeroBox platform deals.

Speaker 5: One of our long-standing Zerofox customers, a Fortune 50 media and technology company, also engaged with Zerofox Response for the first time over their legacy incumbent provider. We also were able to drive...

Speaker 5: some improvement and response rent weights by launching marketing campaigns to drive education and the value of the two combined businesses. This is an example of how we're leveraging Zero Fox is larger and more established go-to-market capabilities to drive synergies.

Speaker 5: While we are pleased with this early progress, we know there is still a lot more work ahead of us. Consistent with what we said last quarter, we continue to expect these synergies to become more meaningful in the latter half of this year.

Speaker 5: Because this is only our second earnings call since going public and some investors are newer to the story, I'd like to spend just a few minutes to provide an overview of external cybersecurity.

Speaker 5: The external cybersecurity category of products helps customers expose, disrupt, and respond to threats beyond the device and outside the perimeter.

Speaker 5: Traditionally, the focus of cybersecurity has been on endpoints and firewalls, with the goal of protecting owned assets with internal security controls.

Speaker 5: However, digital transformation is propelling a proliferation of digital assets and data on external platforms that are outside the control of organizations and not protected by traditional security controls.

Speaker 5: Examples of these platforms include the Surface Web, Deep and Dark Web, social media sites, user platforms, code sharing sites, and mobile app stores.

Speaker 5: As business shifts online, the external attack surface for every organization continues to grow increasing potential financial and reputational risk. And the risk is real.

Speaker 5: The adversaries are increasingly targeting this external attack surface with phishing attacks, impersonations of companies, brands and executives, account takeovers, fraud, and even attacking those exposed external platforms.

Speaker 5: At the same time, the volume of threats continues to increase, making it more critical to use actionable threat intelligence for continuous visibility and continuous protection from threats beyond the perimeter.

Speaker 5: The size and scale of the external attack surface is driving a growing need for external cybersecurity solutions.

Speaker 5: Today, we provide continuous visibility into that entire external attack surface. Roboss Threat Intelligence.

Speaker 5: protection with the ability to disrupt active threats, and comprehensive response capabilities to assist with investigations, incidents, and breaches.

Speaker 5: So why do we believe that ZeroFox is well positioned to capitalize on this opportunity? Three main reasons. The first is our platform. We believe that solving the external cybersecurity problem requires a platform-based approach.

Speaker 5: This is exactly what we have and what we will continue to build upon. Our platform combines patented AI-powered analysis, full-spectrum threat intelligence, adversary disruption, and response capabilities into a single, comprehensive solution. There's one single pane of glass.

Speaker 5: The second reason is scale. We believe that scale at which we operate and disrupt threats on a daily basis for our customers represents a competitive advantage.

Speaker 5: We also believe that our growing size and customer base will increase this scale advantage over time.

Speaker 5: We believe this will be especially true in less predictable macro environments like we're operating in today. And the third reason is our experience and focus.

Speaker 5: Solving the external cyber security problem has been our focus since we founded the company just over 10 years ago. We continue to innovate and deepen our platform to ensure that we have identified and disrupt every external attack. Global Year 23 was transformational for ZeroFox.

Speaker 5: We were the only cybersecurity company to go public last year, and we have the capital required to cross over free cash flow breakeven late next year.

Speaker 5: We raised new growth capital and with the acquisition of IDX, we strategically expanded our platform to include ZeroFox Response. As we look to this upcoming fiscal year, we believe that ZeroFox has the resources, scale, and platform depth to ensure another successful growth year. At the same time, we believe it's important to pursue this growth in a disciplined way that allows us to make progress towards becoming profitable.

Speaker 5: Looking forward, I would like to outline our top three priorities, and you'll be able to remember these by the simple acronym F-O-X. First is for focus. We will continue to focus on executing our strategic plan to lead and grow our external cybersecurity platform capabilities and customer base.

Speaker 5: Success here will be reflected in quarterly performance metrics with a focus on core growth. Second, O is for optimization. We know that the path to profitability is an important area for focus for investors and it's a key area of focus for ZeroFox.

Speaker 5: This year, we will continue to optimize our infrastructure to support our near-term growth while laying the foundation to drive operational efficiencies and leverage.

Speaker 5: Here we will continue to optimize our infrastructure to support our near-term growth while laying the foundation to drive operational efficiencies and leverage. Our goal is to achieve cash flow.

Speaker 5: break even late next year. Lastly, X represents X-Factor. This year, X-Factor will be executing on driving more meaningful synergies and improving our overall cross selling efforts from our recent acquisitions. In summary, a strong fourth quarter capped off a transformational year for ZeroFox.

Speaker 5: And with the continued energy, passion, and commitment of our foxes around the world, I believe that Zero Fox has well positioned to execute on our initiative and further leverage our platform. With that, I would like to turn the call over to our CFO , Tim Bender, who will provide more color on our financial performance and our guidance for Q1 and this school year. Tim, floor is yours. And with that, I would like to turn the call over to our CFO , Tim Bender, who will provide more color on our financial performance and our guidance for Q1 and this school year.

Speaker 5: Thanks, Foster. As Foster mentioned, Zero Fox ended fiscal year 23 on a positive note.

Speaker 5: Before we take a closer look at our Q4 results, I wanted to remind everyone that due to the accounting requirements of the transaction, prior periods financials presented reflect only the results of XeroFox Inc. on a standalone basis and do not include the results of IDX. For comparable purposes, we have provided investors with supplemental financial information electronic communication.

Speaker 5: that includes historical standalone financial statements for both ZeroFox and IDX. This information can be found on our Investor Relations website.

Speaker 5: historical standalone financial statements for both ZeroFox and IDX. This information can be found on our investor relations website. Now let's take a closer look at our Q4 results.

Speaker 5: With the exception of revenue, 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.

Speaker 5: For Q4, Zero Fox reported revenue of $45.4 million. This exceeded the high end of our inferred Q4 guidance range.

Speaker 5: For Q4, 0 Fox reported revenue of 45.4 million. The six needed the high end of our inferred Q4 guided range. So, the description revenue was 16.5 million.

Speaker 5: Subscription revenue consists of revenue from ZeroFox platform sales.

Speaker 5: Services revenue was $28.9 million. Services revenue consists of revenue from response services as well as revenue from recurring and non-recurring intelligence services. As of January 31, our annual recurring revenue was $157 million.

Speaker 5: ARR primarily consists of platform subscriptions as well as a small amount of recurring intelligence services and 83 million from our large government contract.

Speaker 5: We ended the quarter with 1,203 subscription customers.

Speaker 5: We continue to see a significant opportunity to both land new customers and expand platform capabilities and services within our existing customer base.

Speaker 5: As Foster mentioned, in fiscal year 23, we saw continued success winning larger deals. We ended the year with 147 subscription customers with ARR greater than $100,000, representing a year over year increase of 25%.

Turning to gross margin. For the fourth quarter, subscription gross margin was 73%. An increase from last quarter, subscription gross margin was 72%.

While there were some positive impacts from increased efficiencies, subscription gross margin also benefited from the timing of investments.

From a seasonality perspective, our investments tend to be more heavily weighted to the first half of our fiscal year. Given this, we would expect subscription gross margin to slightly decline in Q124 and then increase moderately over the remainder of the year.

While there is the potential for quarter-to-quarter volatility, our goal is to deliver consistent, moderate subscription gross margin improvement on an annual basis, as we have done so for several years. Total gross margin was 41% compared to 40% last quarter. The improvement in total gross margin was driven primarily by the higher subscription gross margin referenced above.

expenses were $26 million in the quarter.

When comparing expense levels to last quarter, keep in mind that Q3 was a partial quarter that reflected three fewer days of expenses.

Setting this aside, the increase in expenses is primarily driven by increased sales commissions, which is typical in Q4 for us.

as well as continued investment in R&D and transaction expenses in G&A related to becoming public. As we look to Q1-24, we would expect operating expenses to increase slightly in absolute dollars driven by the timing of professional fees for our annual audit residual transaction-related filing costs.

and planned investments that should provide operating leverage in the second half of the year. Our loss from operations was $7.2 million. Looking at the balance sheet, we ended the quarter with $48 million in cash, $30 million in accounts receivable, and $54 million in total deferred revenue. Our total outstanding debt was $174 million, including $175 million in cash.

and flexibility to prudently invest in the growth of our business.

Turning to cash flow, cash flow use and operations was $5.3 million.

Now to our outlook. As we indicated last quarter, we are providing revenue and non-GAAP loss from operations guidance for Q1 and fiscal year 24.

Our outlook reflects our solid Q423 results, assumes no material changes in the macro environment and consistent demand for our external cybersecurity solutions, and does anticipate volatility within our service business.

Our outlook also incorporates my prior commentary regarding the trajectory of subscription gross margin and operating expenses for Q1. For Q1-24, we currently expect revenue to be in the range of $44.0 million to $44.6 million and non-GAAP loss from operations.

to be in the range of $9.8 million to $9.3 million. For fiscal year 24, we currently expect revenues to be in the range of $183 million to $187 million and non-GAAP loss from operations to be in the range of $29 million to $26 million. As Foster mentioned earlier, we are focused on the path to profitability.

And we continue to expect that we will achieve free cash flow breakeven in the latter part of fiscal year 25. With that, we'd like to take your questions. Operator? As a reminder, to ask a question, please press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again.

Please stand by while we compile the Q&A roster. The first question comes from Joseph Gallo with Jefferies. Your line is now open. Hey Foster, it's Tim Todd. Really appreciate the question. Obviously, there's a lot of factors that impact the revenue guide between macro and the different components of the business following the transaction. How should we think about ARR growth trending?

Okay, that's helpful. And then maybe just, Tim, while I have you, just talk through the puts and takes of the guidance. Your revenue guidance, I would believe, appears prudent. I mean, you just did 17% growth, and I think your full year guide implies you're exiting the year at mid-single digits. So, one, how should we think about your...

weighs as an anchor on the overall growth rates. Obviously, a very consistent cash flow generating contract, but does weigh on overall growth. Again, subscription growth, that line of the business is the strongest performer, and I think you'll see that continue through Q1 in the fiscal year. And then we're just really mindful right now of the services business. Obviously, acquisition is fairly new for us, and there's a bit more volatility in that line of business as it relates to the service revenue, or the subscription revenue, excuse me.

near tech banking meltdown 72 hours ago, throwing a wrench days before our first public earnings call. I think we had a strong Q4 performance.

As Tim iterated, we beat the high end of our guidance range. I'm pleased with what the team's doing, but we have meaningfully more synergies available to us. But we're being mindful of the growth that we project this year, given this uncertainty, and certainly the last 72 hours, you know, adding a new element of uncertainty into the macro environment that we have. If you look back at the growth numbers that we did put up for Q4, we can effectively see a dramatic growth growth peak that grew over two- Har parliament

Tim mentioned that our subscription business is far outpacing the rest of our businesses in terms of growth rate. I'd like to draw another proof point toward you here is the growth in large customers. Our growth in large customers over $100,000 in ARR is also outpacing our overall growth. That's a positive factor that I'd like to make sure everybody's cognizant of.

when in general cybersecurity customers pay more for a solution set, we believe that shows that there's a demonstrable problem that's out there and that we have enough trust from our customers to solve it on their behalf. So that's a very important metric that we keep a close eye on.

Thanks, guys. Thanks, guys. Please stand by for our next question.

Please stand by for our next question.

Our next question comes from Brad Reebok with Stifl. Your line is now open. Great. Thanks very much. Foster, you indicated some early synergies on cross-selling with IDX. Can you maybe give us a sense of where the sales force is in training and is everyone fully up to speed or is there still opportunity there? Thanks.

I appreciate the question, Brad. We have sales kick off in 48 hours. And so we're using that as the foundation as we do every year to re-enable, re-establish the position, re-anchor any of our pricing changes that we have. We're using that as a meaningful catalyst.

to accelerate the revenue synergies for the acquisition of IDX this year. We did, however, see some nice, what I call, early synergies in Q4 that we mentioned. The release of this new PII disruption service capability on our platform was a meaningful win for multiple customer opportunities.

I think we were positively surprised at how fast those deals moved through the pipeline and the traction and demand that we saw from those customers. And those were just small single digit percentages of the total net new customers we acquired in Q4. And so I think our saturation of opportunity is really just looking at...

couple points of our total customer base. There's a lot of opportunity, upside and white space that we anticipate tackling this year with the team from IDX and the technologies that are in our platform now. That's great and then Tim you had mentioned some seasonality on expenses. How about helping us with seasonality on cash flow? Thanks. Sure.

I mean, I think typical for Xerofox in our history, and I know it's a short history for you guys, but Q1's always been our most challenged quarter from a cash flow standpoint, and wouldn't expect that this year would be different. But just like the expense flow, cash flow tends to perform throughout the year, getting better each quarter, we would expect that to happen again this year.

That's great. Thanks very much. Please stand by for our next question. The next question comes from Yifu Lee with Cantor. Your line is now open.

Thank you very much. Congrats on the strong finish of Foster and Tim, first year as a public company. A couple of questions for Foster or Tim. Starting with the IVX, I was wondering if you guys could give us some updates on revenue synergy generations from the platform of sell cross sell. I know Foster you mentioned about a deal.

John deal between Jill Fox and IBS what would a media company wonder wonder if you could double click on that one for us on Cross-cell revenues energy Good morning for better or worse in terms of revenues energies

I think it was minimal in Q4. We were excited to see what I call feature demand within the platform that accelerated sales cycles. But for me to say that just because of that feature alone, we won those net deals would probably be doing our platform a disservice as a whole. Where I see revenue synergies really manifesting itself here this fiscal year.

will be an overall pipeline and demand generation improvement. We are seeing consistent trends from Q4, although we're being mindful of what this year could bring in terms of the macro. And then outside of that, we mentioned, as we were getting ready to go public, the very small overlap in customers that we had as an organization. What we put on record was about 5% or less per few authors, not really all of the names but mostly the GDHmm, number of British sharpener on the side of it. That whole program and design experience faith in the community, how they're looking at it and how they're developing it and how they're getting it done. I hope that's helpful and as always,

total customers that overlap between the two organizations, which by definition leaves a lot of upside for cross-sell and up-sell this year. And that's something that we think about when we talk about our X factor is top of mind for performance. And, you know, quick math would lead you to believe that if you look at our subscription ARR, any meaningful improvement in cross-sell, up-sell would see an incremental...

and incremental accelerated growth rate there for ARR. That makes sense, Foster. Thank you for the call on that. And then on the multi-six figure deal, we understand that Zillbox is coming from a platform play. Was wondering, you know, you mentioned about the rip and replace. You know, what type of solutions did you rip and replace? How long was the deal cycle? Was the customer concerned with the cost? They want to lower their TCOs, total cost of ownership. That's why they went to Zillbox. Can you give us more color on that multi-six figure rip and replace deal?

Yeah, thanks for that question. A couple thoughts come to mind. We're in a competitive market and I think that is...

That's a good thing for cybersecurity as a whole to have multiple solutions and multiple options. It allows customers to get educated on the problem set from multiple points of view.

But as an organization, we've been working on this problem longer than our competitors. We've been focused on this problem longer than our competitors. And I think the market is really starting to take note of the differentiated capability set and our multipillar strategy within our platform. And it's something that's been asked for by our customers.

If I think about innovation, we're a customer first organization, and our path to innovation really is built on top of customer feedback and customer demand. The competitors that we see, especially in the enterprise, just about every enterprise deal we do is competitive in nature. Come to this from maybe one of our pillars. Maybe they're a DRP pillar or a threat intelligence pillar.

What we see is some folks don't feel like they're getting the true value. We have threat intelligence companies that we displace on a regular basis, where our constant feedback we hear is they're too expensive and we're tired of searching for data or intelligence. We want to understand what's actionable, and we want someone to help us take action immediately. We don't want more work where we need to constantly search for answers.

And I think our customers appreciate the proactive nature and protective nature of our platform as opposed to a search and find platform. That makes sense. And then I'm gonna end it off Tim on like two more financial questions I made is like the break out between new and existing deals, we understand the medical conditions, right? Any percentage breakdown between new logos versus existing? And the last one is about the investments. You mentioned it's gonna be first half heavy.

first half of fiscal point 4 heavy. You have about 800 boxes at the moment. What's your hiring plans, investment plans, etc. And that's it for me. Thank you gentlemen.

Yee, would you mind clarifying the first part of that question again? We have a little bit of a timeline here. On the new and existing deals, how much of the revenue generation is coming from new logo versus your existing customer base? The second part is your investment plan.

You have about 800 classes right now. Was wondering your investment plans for the first half, throughout the year actually. So yeah, so if we think about the revenue mix, again, I think it's in line with our AR growth that we talked about from the...

New customers and existing customers most of our revenue does come from existing customers. We have a nice base And we're you know Adding roughly, you know You know, maybe a hundred new customers a quarter, but you know if you think about that number So it's still you know, mostly aligned to our existing base because we have a strong customer base in that regard

And then I would say maybe on the hiring plan, I mean, I think our hiring without giving exact numbers, it's again gonna be balanced where we need to see the growth in the company and support the growth. So as we grow our revenue, we'll grow our services, delivery commensurate with our margin, keep that in line. Again, talking about adding moderate growth over the course of the year.

And then I think, you know, G&A will kind of moderate as we become more mature. Sales and marketing is, you know, as we add customers and as we continue to grow, we'll have to add, you know, capacity in our sales and marketing functions to, you know, handle new customers, handle our growth in customers, and to drive, you know, growth for the upcoming and future years. And then R&D is just we want to be balanced in our investment. Again, we have a strong and robust platform.

I show no further questions at this time. I would now like to turn the conference back to Foster for closing remarks. Thank you, operator. As you can tell, we are very excited about the opportunity in front of us. I want to emphasize that we are focused on taking a mindful approach that allows us to capitalize on the growth opportunity we see this year.