Q1 2023 CyberArk Software Ltd Earnings Call

Speaker 2: Good morning, my name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the CyberArk first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session.

Speaker 2: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you Erica Smith, SVP Investor Relations and ESG. You may begin your conference.

Speaker 3: Thank you, Rob. Good morning. Thank you for joining us today to review Cyberworx first quarter 2023 financial results. With me on the call today are Matt Cohen, our chief executive officer, and Josh Siegel, our chief financial officer. After prepared remarks, we will open up the call to a question and answer session.

Speaker 3: Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflects management's best judgment based on currently available information. I refer specifically to the discussion of our expectations in the lease regarding our projected results of operations. For the second quarter,

Speaker 3: full year 2023, and beyond. Our actual results might differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the company's annual report on Form 20-F filed with the U.S. Securities and Exchange Commission and those referenced in today's press release.

Speaker 3: that are posted on CyberWorks' website. CyberWorks expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made today.

Speaker 3: Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as in an updated investor presentation that outlines the financial discussion in today's call.

Speaker 3: We also want to remind you that we provide information for additional color regarding subscription mix bookings, but it should not be viewed as comparable to or a substitute for reported GAAP revenues or other GAAP metrics. A webcast of today's call is also available on our website in the IR section.

Speaker 3: With that, I'd like to turn the call over to our CEO , Matt Cohen. Matt?

Speaker 4: Thanks, Erica, and thanks everyone for joining my first earnings call as Cyborg CEO .

Speaker 4: Since starting my new role about six weeks ago, I have met extensively with our team and with customers and partners from around the world.

Speaker 4: The support, passion, and commitment to our mission is palpable.

Speaker 4: My meetings reinforce that we have amazing people, an impressive base of customers and partners.

Speaker 4: And we are the only vendor tackling the critical security challenge of applying privileged controls to all human and machine identities through a unified, identity security platform.

Speaker 4: We are adding the mission critical controls that stops attacks from progressing a requirement in today's threat landscape.

Speaker 4: Because of our unique value proposition, Cyborg is being prioritized even in today's macroeconomic backdrop.

Speaker 4: And I am pleased with how we are navigating the current environment.

Speaker 4: Subscription AR reached 403 million and grew 84% year over year.

Speaker 4: Total AR reached 604 million and grew 42% year over year. Total revenue growth accelerated to 27% and came in at 161.7 million for the first quarter. And our subscription bookings mix reached 95%, an all time high.

Speaker 4: driven by a demand for our SAS solutions and our platform selling motion.

Speaker 4: Before getting into the details of the quarter, I wanted to talk about the macro environment itself.

Speaker 4: We are pleased that our SAS and subscription bookings outperformed the macro assumptions embedded in our Q1 guidance.

Speaker 4: We did continue to see longer cycles in Q1 and select larger deals downsized.

Speaker 4: reducing the scope of these initial engagements, but we are confident that identity security programs are moving forward because many of those customers are already back in the pipeline, and we expect expansion opportunities as we move through the year.

Speaker 4: The strength of our subscription ARR, our AR guidance, and our ability to maintain our full-year revenue guidance despite a material increase in subscription bookings mix.

Speaker 4: speaks to the durability of demand and the prioritization of our identity security platform.

Speaker 4: Deals are progressing through the pipeline and we are seeing record pipeline growth across the entire portfolio, with strong momentum in our Access, EPM and Secrets business, as well as for our Privez Cloud offering.

Speaker 4: The persistent secular tailwinds of digital transformation, cloud migration, and attacker innovation are only accelerating. AI is a new powerful example of technologies that will shape the cyber landscape. With weaponized AI, organizations become even more vulnerable to attacks that are difficult if not impossible to detect. An assumed breach posture, including implementing privileged controls and least privilege, is one of the best ways to protect against these emerging threats.

Speaker 4: At our impact customer event, taking place in just under two weeks, you will not only hear about AI as an attack vector, but also how we can leverage AI to make our customers more secure.

Speaker 4: Recently, we conducted a survey of 1,500 cybersecurity professionals.

Speaker 4: And 92% consider identity security as mission critical, but only 9% stated that they had a comprehensive strategy in place.

Speaker 4: There is an enormous gap between the level of identity protection and the maturity of organizations, a massive opportunity for us at Cybrox.

Speaker 4: We have architected our platform strategy to capitalize on the secular tailwinds, and our go-to-market engine is built to scale cyborg well beyond our 1 billion ARR target.

Speaker 4: Our recent innovations are gaining traction, workforce password management, secure web sessions, privilege lifecycle management, compliance, flows, conjure cloud and secrets hub. All had key wins in the quarter and are contributing to customer excitement. Our land and expand motion begins with new logos and we signed over 200 customers in the first quarter.

Speaker 4: A few key Q1 wins include a major insurance company with struggling to scale and secure its cloud-first strategy with a point-pan provider. This customer wanted deeper protection and to increase security and control by layering privilege controls across every identity. Our Dendi Security Platform will be deployed globally.

Speaker 4: including secure web sessions, identity flows, identity compliance, and of course, Privilege Cloud. For many customers, the AWS Marketplace is reducing friction in our sales cycle. In the first quarter, a leading healthcare provider leveraged this new route to market.

Speaker 4: to buy workforce password management as well as previous cloud and secrets management to secure the DevOps pipeline.

Speaker 4: Regulation, compliance, and cyber insurance are broad drivers that contributed to our results, including wins in the banking, insurance, and healthcare verticals.

Speaker 4: Early in Q2 we formalized the Cyber Insurance referral program with the leading company and already were receiving opportunities in the pipe. In addition to signing Marquee customers we had a strong expansion quarter for SaaS and subscription.

Speaker 4: Our land and expand motion is accelerating across the identity security platform and the most visible metric is the over 40% increase in customers with more than 100,000 in annual recurring revenue, which reached 1400 customers at the end of Q1. A few examples include an existing IT software company.

Speaker 4: that purchased identity flows to automate PAM workflows in order to increase efficiency and also expanded its protection with workforce password management to provide peace of mind by not only managing but securing employee passwords.

Speaker 4: A Fortune 100 Transportation Company who has been a long time Pam customer and began protecting endpoints in the second half of 2022 cited the threat of weaponized AI and our ability to protect against ransomware as key motivators in a significant Q1 expansion deal.

Speaker 4: The channel is extending our market reach with more feet on the street and momentum is building with partner certifications in cyber-academy and now also in secret management. While still a relatively small contributor to our overall business, MSSP's across APJ, Amia and Americas are helping us move down market.

Speaker 4: and reach customers who rely on managed services to secure and scale their environments.

Speaker 4: On the innovation side, we were recognized by Coopinger Cole as a leader in Prilijac's management.

Speaker 4: Further validation of the strength of our solutions.

Speaker 4: Workforce Password Management is another example where we are setting the pace of innovation in identity security. In the first quarter we announced that Workforce Password Management, used in conjunction with secure web sessions, create an industry first way of accessing sensitive applications.

Speaker 4: The platform effect is accelerating. Today, early access customers are leveraging EPM and Provelege Cloud to discover, review, and automatically onboard all local Windows and Mac OS endpoint Provelege accounts.

Speaker 4: This enhanced capability improves security and lowers risk of credential theft and privilege escalation at the end point.

Speaker 4: Josh will cover profitability in just a few moments, but I wanted to reiterate that as we look into 2023, we will continue to invest with discipline and leverage each of our operating expense lines this year and beyond. Importantly with our growth, we have the ability to be agile in our investment plans.

Speaker 4: and make adjustments as we move through the year. As I've done the round with investors, I've been asked about what will be changing a CEO .

Speaker 4: As we talked about in February with Udi, at the highest level, we're not changing the strategy. We have all the ingredients to execute and deliver growth and profitability.

Speaker 4: That said, there remains areas where we can improve our execution and drive the next level of performance.

Speaker 4: One key focus area is harnessing the data that comes with the subscription transition to drive expansion opportunities, boost productivity, and deliver operational excellence.

Speaker 4: This data combined with the same rigorous programmatic execution that allowed us to shift our entire business model in only five quarters will empower the companies to take customer success to the next level, increase our sales and marketing productivity, and drive more efficiency through our innovation engine as we enhance our Condentance Security platform.

Speaker 4: A second focus area and one that we are all laser focused on is our role as the leader in a Dendi security and fully realizing this tremendous opportunity.

Speaker 4: Consolidation of trust for identity is underway within our customers.

Speaker 4: Identity is more critical than ever. And organizations are increasingly moving towards trusted partners that can secure the broadest set of use across identities and environments.

Speaker 4: With this in mind we are accelerating our platform selling motion, our new platform services and how we leverage our robust partner ecosystem to extend our reach and drive our growth.

Speaker 4: Securing all identities, not just managing human access, is a requirement at the center of our customers' cybersecurity strategies. And with our approach, based on privilege controls, we are best positioned to capture the market. We are becoming the platform of choice for customers and driving deep alignment across the organization while creating a disciplined execution machine.

Speaker 4: We'll help ensure we extend our commanding lead in the identity security market.

Speaker 4: In the first quarter we made great progress, executing our strategy and we delivered strong results as we navigated a challenging macro environment.

Speaker 4: We are executing and on pace to accelerate growth, improve profitability, and generate strong cash flow for the year. I will now turn the call over to Joshua, who will discuss our financial results in more detail, and provide you with our outlook for the second quarter. The increase in our full-year ARR guidance.

Speaker 4: And what is essentially a guidance raised for the full 2023 when you look through the suppression bookings mix, Edwin? Josh, thanks Matt. In the first quarter we delivered exceptional ARR growth once again. Annual recurring revenue grew 42% reaching $604 million at March 31.

Speaker 5: higher than the sequential increase of the $36 million in the first quarter of last year.

Speaker 5: Demand for our staff's offerings, drove our subscription bookings mix up to an all-time high of 95% of total bookings above our guidance framework of 93%.

The 95% compares to only 86% in the first quarter of last year. The maintenance portion of ARR was $202 million at March 31. The decline maintenance was due to lower perpetual license sales over the last two years as a result of our subscription transition.

Like for like, conversion activity still only represented a single digit percent of our year-on-year ARR growth.

Total revenue was $161.7 million with growth accelerating to 27% year on year. While our records description bookings mix resulted in strong ARR growth, it also lowered our total recognized revenue in the first quarter. Normalizing for the higher mix, then we assumed in our guidance framework, our recognized revenue would have been at the high end of our guidance range.

Like every company, we are also navigating the current macroeconomic environment. As Matt mentioned, longer approved sales cycles persisted towards the end of the quarter. Select large deals were downsized, as customers bought for their immediate needs versus longer term planning, which would have contributed to more upside in our performance. For cell-phosis description deals, duration again came in at the lower bound of our range, putting pressure on long-term deferred and recognized revenue. While we signed 200 new logos in the quarter, it was a more challenging environment for new-

in the first quarter.

Consistent with our move to a subscription business model, perpetual license revenue did decline coming in at $3.9 million. Our maintenance and professional services revenue was $65.1 million, with $53.2 million from recurring maintenance, and $11.9 million in services revenue.

The recurring revenue portion reached $145.9 million, now hitting 90% of total revenue. That's growing 37% year on year from $106.9 million in the first quarter last year.

Geographically, the business continues to be well diversified. America's revenue reached $98.4 million growing 31% year on year. APJ grew by 28% to $16.8 million. And EMEA grew by 18% year on year to $46.5 million in revenue.

The Amir region continued to experience some effects headwinds and had a nearly 10 percentage point increase in subscription booking mix to 93% in the first quarter. That's compared to 84% in the first quarter last year, creating a meaningful recognized revenue headwind in the quarter.

All line items of the P&L will be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release.

Our first quarter gross profit was $131.5 million, or an 81% gross margin. That's compared with 82% gross margin in the first quarter last year as a result of lower perpetual revenue and higher SaaS business.

Our operating expenses increased by 24% to $144.1 million and that resulted in an operating loss of $12.6 million. Net loss was $6.9 million or 17 cents per diluted share while overall profitability of the ability continues to be $1.2 million.

significantly impacted by the mixtip to recurring revenue. Our margin profile has begun to improve as we have we we planned. We ended March with over 2,860 employees worldwide including nearly 1,230 in sales and marketing. For the first three months of 2023 free cash flow was $4 million or 3% free cash flow margin.

Turning to our guidance. Our guidance for the second quarter and the full year 2023 balances are strong competitive position, the increased headwind created from our higher than expected subscription bookings mix, and the durable demand for our platform against the uncertainty in the macro environment.

For the second quarter of 2023, we expect total revenue of $175,000,000, which represents 21% year-on-year growth at the midpoint.

We expect the subscription mix to be in the mid 90% range and our perpetual license revenue to be similar to the levels we saw in the first quarter.

The MIPS we are assuming for the second quarter is higher than our initial guidance in February , increasing the headwind to reported revenue. We expect a non-GAAP operating loss of about – of $10.5 million to $6.5 million for the second quarter, and we expect our non-GAAP EPS to range from net loss of $0.19 to net loss of $0.09.

per basic and diluted shares. Our guidance also assumes 41.7 million weighted average basic and diluted shares and about 5.1 million dollars in taxes.

For the full year 2023, given the increase in our subscription booking mix in the first quarter and our expectation that it will remain at this level for the rest of the year, we are still maintaining our guidance for total revenue in the range of $724 to $736 million. The subscription booking mix assumption for the full year is now about 95%.

That's compared to prior expectation in the low 90% range.

Maintaining our Revenue Guidance for the Year at a Higher Mix is essentially a meaningful raise of our full year revenue guidance given the more radical revenue of our SAS and subscription bookings.

We are maintaining our full year operating results to be in the range of an operating loss of $5 million and operating income of $5 million. And we are improving our EPS range to a net income per share of 16 to 38 cents because of increased interest income for the first quarter.

We expect about 46.3 million weighted average diluted shares and about $21.5 million in taxes for the full year of 2023.

On the back of our strong ARR growth and subscription bookings increase in the first quarter. We are raising our guidance for annual recurring revenue to be between $735 million and $745 million at December 31, 2023, or about a 30% year-on-year growth at the midpoint of the range.

Our free cash flow came in at 3% free cash flow margin. As a result of our performance in the first quarter, we are revising the guard rail for free cash flow margin for the full year 2023 upward to the range of non-gab net income margin to 5%.

above our non-gap net income margin. We expect there to be fluctuations between the quarters, and for example in the second quarter we have cash expenses from our impact customer event and other seasonal expenses that will affect our free cash flow. Overall, we were pleased with our execution, particularly in this macro environment.

90% of our revenue now recurring. We have a more resilient business model that is beginning to deliver strong growth, operating leverage and improving cash flows.

I will now turn the call over to the operator for Q&A operator. At this time I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.

And your first question comes from a line of CKec Calia from Berkeley's. Your line is open.

Okay, hey, good morning guys. Thanks for taking my questions here. Matt, congrats on your first six weeks as CEO .

Okay, hey, good morning guys. Thanks for taking my questions here. Matt congrats on your first six weeks of CEO . Thanks, Ahmed. Good to hear from you.

Yeah, maybe we'll start there since the last couple months have been interesting to say the least for security. I know you spend a lot of time with customers, so maybe the question is, can we just talk about how the March quarter progressed in terms of linearity and conversations?

It's just been such mixed results from other March quarter security companies. Curious what you saw just in terms of progression and maybe if you can comment on just anything that you're seeing more recently. Yeah, sure. I think as we talked about, we're really pleased with the results on the quarter. When we look back into the quarter,

and try to analyze what's occurring, we continue to see this phenomenon where when we show up and we're having these conversations with customers, we are at the top of the list of conversations they want to have. There's a prioritization process, obviously, across the entire tech stack, but even within cybersecurity. And we are a mission-critical solution.

for these organizations. And so while macros are on the mind of everybody, when we're having the conversations with the customers, they understand the importance of their investments in these areas. They understand that actually this is something they need to be implementing and implementing fast in order to secure in this threat landscape.

And overall, we just feel this level of partnership and awareness within our customer base. As we mentioned in the prepared remarks here, we do see approval cycles take a little bit longer. One thing I tell the sales team all the time is, since we're selling something that's needed, let's make sure that we're going out and actually addressing people who might...

approval level, they're able to actually sign off on it. And we see that type of behavior and execution help us throughout the length of the quarter. We also talked for a second there about this kind of downsizing of deals and I just want to hit that head on. You know, what that kind of looks like is more of a, you know, maybe there's a 400 seat expansion deal for PAM. And when the customer gets there, they realize that there's 300.

seats that they can buy right now, they need right now because the denities are proliferating. And maybe there's 100 seats that they need in the summer. And so they'll buy the 300 now and then they'll push off the 100 to later in the summer. Now we never want to see deals go a little smaller and definitely limit a little bit of our upside. But what that actually opens up for us and as a selling team it's actually an exciting fact.

Is a compelling event in the summer to readdress the customer not only now for those hundred seats, but for any other needs that they have. And as a sales team, you're always looking for those moments to kind of open up so that you can go back in. So across the board, that's kind of my sense of what's going on. It's a nice place to be being the type of security company we are, even in this.

You know, tough macro environment. Yeah, absolutely, Matt, and it shows. Josh, maybe for my follow-up for you, a lot of focus on the financial services vertical insecurity this quarter. Can we just talk about how that vertical specifically performed?

And Josh, if you could, maybe go one level deeper into that exposure because of course not all financial institutions are created equal. You know, can you just maybe talk about how much of that mix is regional banks versus other types of financial institutions?

Yeah, thanks, Scott. Second. Actually, I'll start off by saying our financial vertical was up year on year. And overall, what I would also say is that we actually closed deals in the regional bank level already even.

large enterprises from the banks. They have a much larger footprint and a much larger footprint and are going broader across our entire portfolio. So when we look at our pipeline, it's going to be coming from the larger size of the financial enterprises. And I think the other thing that I would say is that as we look...

into our pipe going forward. We're not seeing any degradation of the financial service, financial customer pipeline. And I think out in the field, we're not seeing any tapering off of engagement with...

large financials and with the with the regional financials as well. Very helpful. Thanks, guys.

with the regional financials as well. Very helpful. Thanks, guys. Thank you.

And your next question comes from the line of Roger Boyd from UBS Securities. Your line is open. Great. Maybe a higher level question for Matt. Matt, I'd be curious. You have tons of opportunities and access and EPM and secrets management. But what do you think we are in the Pam adoption curve? Yes.

Any view on what you're seeing in terms of Greenfield, Brownfield, Shiff Desass in this current environment will be helpful as well. Thanks. Yeah, I think sometimes we get so excited about the newer areas that we forget to talk about the opportunity in Pam. You know, I think that when we are continually excited about.

is both the new opportunities, the new prospects out there, not even just in the low end of the market, but even in the sweet spot of the enterprise space. We see the movement towards more mature PAM programs and all that brings. And then within our base.

we actually feel that we're under-penetrated. And the reason for that is that when we started out, there was only a certain type of user that needed a privileged account. And so if you were that type of user within the core IT department, we were gonna sell you a license. And now as we start to see this notion,

of any user can become privileged at any time. The business user actually needs privilege access management. A lot of functions outside of Core IT need it, as well as the developer and the development community, the DevOps group. You start to understand a little bit more about how much more room there is to run within our customer base themselves. And so when you combine both the room to run in the customer base as we...

brought in the circle of users that we can bring under the the Pam umbrella and we look out and see both Mid-size enterprise all the way down to mid-market really starting to adopt new and modern Pam approaches It really speaks to the the market opportunity that's ahead of us and our ability as the leader in Pam to go out and capitalize on

there and any change that you might be seeing is a little more conservative versus a quarter ago. Thanks.

in light of the macro with new logos probably potentially being harder and longer approval cycles than Matt was referring to before and so we're still persisting with that within our guide but at the same time we're seeing record pipeline.

raise the guide effectively, not just on the ARR that you pointed out, but by keeping the revenue guide at the same level, despite really increasing the mix of SAS and subscription by a couple of percentage points.

And your next question comes from a line of Adam Borg from Steveholt. Your line is open. Thanks so much for taking the questions. Maybe for you Matt, I know you talked a little bit about Business Script, but would love to hear anything more about the platform motion, how that's progressing, and if you're more about that at live, at the customer event in a couple weeks, then I have a follow. Thank you.

Sure, Adam, and thanks for the question. Good to hear from you. So I do get excited about this platform selling motion because I think it represents kind of the maturity or the nature of the market now that we're selling into. We talk a lot about this idea that there is multiple types of identities that need to be secured and multiple types of environments that they're going after that need to be protected. And so

all of those identities as they go after not just now on-prem infrastructure but hybrid and cloud infrastructure, customers are waking up to the fact that you can't plug in multiple point solutions to be able to solve all those problems. They actually want an integrated approach.

that they can count on to make sure that all identities are secured. And so our entire approach with the platform is meeting that market need, talking to the customers in that context to make sure that actually we can actually do things that those point solutions, even when needed together, can't do because it's one integrated motion. So as you know, we've been focused on ramping up the sales team and making sure that they can position that.

Our marketing team is out there messaging that and I just get really excited by the opportunity of ours to be able to go do that. You heard us use this phrase in the prepared remarks around consolidation of trust and what we mean by that is that the customer themselves are looking to consolidate their vendors down to partners that they can trust.

And we feel like we're well positioned in that environment, well positioned within the identity space to take advantage of that market trend.

Super helpful. And maybe just as a quick follow-up, you did talk about adding over 200 new logos in the quarter, a little bit down year on year. Talked about the Top4Macro and record pipelines. So if they think about 2023, are we really looking at this as more of an upsell year? And if so, are we reorienting any go-to-market efforts back to the base? Thanks again. Yeah, sure. No problem. So when we think about new logos, I want to just paint a couple of different things here. One is...

the actual deal size of the logos that we are closing is getting bigger, not smaller. The ability to be able to sell multiple products to those new logos beyond PAM continues to trend in the right direction. And overall, the contribution, the net ARR contribution from new logos actually was really strong in the quarter. For more information, visit www.plastics-car.com

So, although the absolute number of new logos and we always want to be planting as many seeds as possible for the future, although that occurred in the quarter, we actually are pretty happy with the contribution from the new business. And so we don't actually see a need to shift our overall go to market approach. We can go focus on building.

and planting pipeline for new logos, even if it closes a little bit slower, it will come to us eventually, at the same time as we can upsell and cross-sell within the base. The final thing I'll just say is within our new logo business, within our customer business, our win rates continue to be really strong. So although, again, the overall number at 200 may be a little bit less than we would have liked.

Overall, we're actually really happy with the new customer business that we're seeing. Excellent. Thanks again. And your next question comes from a line of Angie's song from Morgan Stanley . Your line is open. Hi. Congratulations, Matt, on your first few weeks of CEO . And thank you for taking my question. Thank you again.

I'm speaking on behalf of Hamza Fadarwala here at Morgan Stanley . So I guess, Matt, just a question for you. It's been a couple of months since the transition of CEO has been announced. Could you just talk to us about your top three priorities for the company as Cyber Arts scales beyond that $1 billion in ARR?

by around like fiscal year 25. Yes, sure. No, I always love to talk about that. And I think it's been a really fun last six weeks or so. I've had the opportunity to travel around the world and go see employees in different locations. I was able to spend my first day as CEO over in our Israel.

talking about, they're looking for a platform provider. They're looking for someone that can secure not just privileged users, traditional PAM, but that can actually secure the workforce, secure the non-human identities. And even more and more secure their cloud environments.

And so the first priority for sure is our expansion, continued expansion, to own our leadership position in identity security. And that really is the anchor point for everything else that we go and look at. We have a second focus, and it's core to us, which is to get our go-to-market engine ramped up, fully ramped from a productivity perspective.

us because it's fundamental to our DNA is to make sure that we're scaling efficiently through these next couple of years. We want to make sure that we're delivering the right level of profit back into the investor community, into our shareholders. And the best way to do that is to exit the subscription transition fully, which...

And your next question comes from a line of Rob Owens from Piper Sandler. Your line is open. Great. Thanks for taking my question this morning. Just one from me. Want to touch a little bit around the partner ecosystem, the indirect contribution you guys see overall. And maybe some of the green shoots and opportunities. I know you mentioned AWS Marketplace. But.

Just are you seeing channel shift expansion through some of these CSPs? Thanks Yeah, sure. No, thanks. Great. Great question. And you know, I think one of our differentiators in the market is our partner ecosystem You know, we've always had a strong indirect component to our business We run generally speaking in the upper 70s sometimes even touching the lower 70s

outside of PAM and actually embracing access and secrets management. So they're bringing the full cyberarc story to market. But we also see newer types of partners emerge. And we did mention the AWS Marketplace, which is a great way to kind of lubricate the sales process and actually partake of what one might call found money in this macroeconomic economy.

But we see even in the enterprise space that more and more IT organizations and security organizations really do not want to be in the business of managing their solution stack. And so they're looking for even bigger SIs, telcos to actually one-off manage service.

their security environment and we have great partnerships as many of you know with the biggest SIs, we've built up the telco program and we have the MSPs so as that market starts to mature and accelerate we can take advantage of it. Now it's a minimal part of the overall business at the moment but it's one of the areas that were exceptionally well wrap-180...

Hello, I have two questions. One is

We hosted Microsoft on Friday and we see them in more and more and more markets in cybersecurity, extremely successful business, and I'm wondering how do you see Microsoft if at all in the market and how is competition against them? And the second question is for Josh, great success on revenues, great success on the market.

sustainability and stability, but margins are still negative. What's the outlook for margins? Great, I'll take the first one, Josh. So, you know, Microsoft, as you said, is a formidable software organization, and they've built up a strong cybersecurity core within their overall approach.

They've been, frankly, in a kind of coopetition motion with us for a very long time. They're a good partner in a lot of ways, and sometimes we see them show up within our customer base. What we've seen, though, is that the minute the conversation kind of turns to

core security, like real security. For example, PAM, there really isn't a choice that comes up between Microsoft versus CyberArc. The CISOs, the CIOs, they understand that to do PAM right, to do core security right, they actually need the type of depth of solution that only CyberArc can provide.

I think we also see them kind of emerging other areas of the business though. We took the flight to them, if you will, when we entered into access. And, you know, for basic MFA and single sign-on, I think there are very credible force out there. And as you've heard us talk about before, when we're competing in the access market versus Microsoft, or Octa for that matter,

Our differentiation again is the applicability of privilege controls or deeper security to even the commoditized MFA or SSO market. And what that means is solutions like secure web sessions or workforce password management that become these security bodyguards that can sit against a single sign owner MFA solution where there's comparability between their solution and ours.

You even saw them lately enter in and kind of validate the EPM or the Endpoint Privilege Management Market. Actually, to be honest, that's kind of thrilling for me because the biggest problem we have on EPM is not customers, once they understand it, wanting to buy our solution. It's getting customers to be aware.

to begin with that they need the solution. And Microsoft entering into a market like that is actually wonderful news for publicity. When we get into deep conversation about features and functions and capabilities, I think our solutions come out on top. And so that's my view on the Microsoft landscape. Again, I'm.

I'm very respectful of them and I think they kind of helped the market overall, but we feel pretty confident when we're ahead to head against them. And Todd, do your second question. So we're pleased that we're following our playbook through the transition and which kind of drove the...

and that gross margin next year, 24, and further into 25. So we're on the right track for continuing, following our playbook post-transition, getting the benefit of the accelerated revenue on the top line. And then as Matt pointed out earlier in one of the earlier answers, we are...

totally focused on making sure that we think about scaling efficiently and that's going to drive those expansions of the margins already this year that you're seeing in the guide and then next year and going forward.

focused on making sure that we think about scaling efficiently and that's going to drive those expansions of the margins already this year that you're seeing in the guide and then next year and going forward. Got it. Thank you.

Your next question comes from a line of Eric Keith from Keybank Capital Markets. Your line is open. Hey guys, hey Matt, hey Josh congrats on a strong quarter year. Josh, are you guys ready? I just can continue the conversation on the margins.

A couple things. It's great to see the maintenance of the margins just given the increased mixture to the radical side of the business. But curious one, just bigger picture, does any change in your thoughts on the pace of investments for this year, just given some of the macro and any change your hiring plans on number one?

Well, to that, I think you change your kind of guidance a little bit on the free cash flow. A head of net income margin, where I think it was previously kind of in line with net income margins. So curious to change there, given some of the, what seems like duration pressure that has been bailings a little bit? Sure, sure, Eric. I'll take the first part here.

and that was because we were taking into account both the macro backdrop and also our need to drive leverage back into the business. And I think we continue to see that play out. We added roughly 95 heads in Q1. And

We will look towards the rest of the year and continue to make strategic investments in go-to-market, where we feel like there's opportunity to go capture. And then throughout the rest of the company, to round out our ability to be able to, for example, deliver on the identity security platform vision, drive and support the scaling of the overall operations.

So I think we're measured in our head count hiring. We're consistent with what we were talking about. And our belief is going forward, this is a lever that we can pull in any direction that we need to. So we're very agile in our approach. And we'll make the decisions really quarter to the back quarter. Should we accelerate more? Should we cut back a little less?

And that's the beauty of the model that we're operating under. Yeah, Eric. With regard to the cash flow, first of all, we're pleased that we're able to come in already now in the second quarter and start to go up on our cash flow margin guidance to, as you pointed out, net income.

margin to net income plus net income margin plus 5% on a non-gap basis. And I really think it's, you know, we have more visibility than we did three months ago. And Q1 tracked well, and I think it's a reflection of one where Q1 ended up, but also as we look at the guide.

And we look at our pipeline going forward, and our success with renewals and our expectations there, we feel comfortable that we'll be even a better place on cash flow than we said three months ago. Great. Thank you both.

Your next question comes from the line of Brian Essex from JP Morgan. Your line is open.

Hi, good morning and thank you for taking the question. I guess maybe from Matt, what might be helpful is, you know, in the onset of the pandemic, you know, we saw a pretty meaningful pause and spend, and we saw downsizing, deal-facing, shorter contract theorations. They were at a waste, it's not thatlar? or your positive.

Could you maybe compare and contrast what you're seeing now versus what you're seeing then? I recall right after that we had SolarWinds and Log4j and everyone kind of trued up, realized the value of PAM and kind of trued up the deals and you saw reacceleration. How does the recognition of the critical nature of PAM and the process of approval when it comes to efficiency of PAM and the way that the data is represented is condoms? Congratulations, you've been very BASIC. You have earned

and coverage insight, customer base, how do things differ now compared to when we saw that pause a few years ago? Yeah, as we look back on Q1 and out towards the year ahead, we don't see that pause in business. We see our...

ability to be able to generate record pipeline. We see our ability to be able to go out and be at the top of the list of priority at our customers. We see the conversations continuing to progress as we've been talking about and I do think I pull it back to where you hit which is

We are in a different place in terms of our portfolio, our solutions, and the maturity of the market, and an understanding of the critical nature of the solutions that we sell. You know, the recognition of what it really means to secure identities and the importance of identity.

in the attack vector is, in protecting against the attack vector, it's just tremendously better. It's a good position to be in, and I think we show up now with a broad base of solutions and a platform.

to sell and it lends itself to better customer conversations and a better market backdrop despite macros being on everybody's mind.

Right, right, that makes sense. And maybe we could just circle back to one of the comments made on feed expansion. Any impact this quarter or recently from headcount reductions in your customer base and how they might be thinking about rationalizing their labor footprint and how that might impact your business?

their decision on headcount and what they need to buy from CyberArk. So that's not one of the things that we worry too much about. Great, that's a helpful color. Thank you. Your next question comes from the line of Jonathan Rickhaver from Cantor Fitzgerald. Your line is open. Good morning. Thank you. So in the past the company has emphasized the sales motion for adaptive or access is largely install-based adoption. So the question I have is given your large enterprise install base, I would think that some portion, if not a large portion of those organizations have an existing.

more often than not actually have multiple solutions throughout different divisions, through acquisition, through other kind of vendor sprawl that's happened within their organizations on the access side. And so we do feel like there is this rich opportunity within our customer base to rip and replace legacy solutions. Obviously competing against those...

two significant competitors in that space, but not having to replace those competitors in that space in order to be able to win. From time to time, we're in a conversation about a replacement for sure, but it really is the opportunity here to go in and rip and replace.

those solutions. I also want to emphasize the notion and the connect your point of how we differentiate or compete that our solutions in that portfolio, for example, secure web sessions, can sit on top of any IDP. And so, you know, even if there is an embedded Microsoft account, we can go in and still talk to them about our overall identity security story.

and we can talk to them about how they can still take advantage of a more secure way of doing single sign-on and connect it back to privilege controls and back to the overall identity security platform. And so that becomes our special sauce when we're differentiating. It's not my SSO is better than your SSO. It's my identity security platform with strong SSO and MFA can...

keep you more secure than their SSOMFA. And again, that's becoming more and more of our talk track, our teams becoming more and more comfortable with that talk track, and that will be what drives the growth going forward as we continue to increase our position in that space against, as you said, two very formidable competitors directly in the access space.

Your next question comes from the line of Hany Kutari from Barrett. Your line is open. Hey, yeah, this is Hany Kutari from Barrett. Thanks for taking my question. Congrats on the first quarter of my, so one for you and one quick follow for Josh. Madhu Manchur about AI that's shaping the cyberlands.

little bit more about AI as a driver this past quarter and in terms of the pipeline what do you see in terms of the opportunity ahead and then one quick follow for Joshua

Yeah, I think in any market there are things that help to educate the market, sometimes through fear that gets the market more ready and understanding of new solutions that they need. And I think AI, because it's captivated so much attention.

helps with that from a market perspective. For sure, we, and we're gonna talk about it at our impact event, which hopefully many of you will join. We're gonna talk about this idea of what does a weaponized AI look like and what is the attack path and what can you do about it? But the reason why we're emphasizing it is.

is not because right now the notion of weaponized AI is the single most important attack path for organizations, but what it does is it wakes organizations up to the notion that detecting threat is not enough.

We actually need to control the threat and the only way to be able to do that in some cases is Is by controlling or securing identities and so I'll give an example here Which is you know at the at the endpoint and this is what the customer that you were referring to was talking about at the endpoint You would be silly to not have an edr installed but let's be clear We believe in it if our own IT department was in

that approach and figure out your attack path to be able to get in, get credentials, and actually turn on the turn off the EDR itself so that no longer can detect. Our EPM solution...

removes the ability to be able to make changes on the local endpoint, on the local desktop, on the local server. And by doing that, you're actually ensuring your investment in your EDR system because you're now going to make sure that it's available to do what it does really well, which is to detect and respond.

And so the AI concept is more of a concept at this point in time, although we'll talk through some more details. But what it does is it wakes organizations up, it shakes them and says, assume breach.

Assume that they're going to get in. Now, what do you do to control? And that's where CyberArt comes in, because we're all about security and control. Your next question comes from a line of Andrew Nowinski from Wells Fargo. Your line is open.

in discarding might have prevented some of the downsizing of deals. And is that a tool you would consider using to get some of these deals over the finish line throughout the course of the summer?

Andrew, hi. I don't think that that you know, I think you're referring kind of to our pricing with regard to the gross margin.

Yeah, I mean, I just yeah, I mean if the deals were downsized, I'm just wondering if you could have offered any better more aggressive pricing on it to help, you know, get the full deal size. I'll let Matt take that a second. I think from our perspective, Grow Smart, we would not have seen that as necessarily the tactic, but I'll let Matt talk on the pricing.

Yeah, listen, I think that we're operating in a tough macro environment and we're always price conscious across the board and we're understanding with our customers when budget is a core concern and we're working with those customers to make sure that we can fit within their budget while we're getting as a partner or as a vendor our value. We continue to see good pricing even in this environment, by the way we see good pricing on our renewals within this environment. And ultimately we don't want to force or give away seats.

if we feel confident that those seats are still going to come our way just a month or two months or five months later. Certainly for certain customers, you're trying to get them to buy in and you're trying to get them to take their first bite. And when that happens, you're aggressive or you work with them on price. But overall, I'm pretty confident in how we approach the market from a pricing perspective. We're flexible and we need to be. But at the end of the day, we're actually creating a business for the long run and we want to make sure that we're delivering value and then we're receiving the right level of value back in the deals that we sell.

And we have reached the end of our Q&A session. I will now turn the call back over to CEO Matt Cohen for some final closing remarks. Thanks. So I want to thank our employees for their hard work and commitment and our customers and partners for their continued support. As I said, it's been a wonderful six weeks so far. We're looking forward to seeing many of you, hopefully all of you, over a week from now at our customer impact event where we're going to be able to talk.