Q2 2023 CyberArk Software Ltd Earnings Call
Okay.
Good morning, My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Cyber Ark software earnings Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Erica Smith, SVP Investor Relations and ESG. Please go ahead.
Thank you Andre good morning, Thank you for joining us today to review <unk> second quarter 2023 of the financial results.
On the call today are Matt Cohen, our Chief Executive Officer, and Josh Siegel Chief Financial Officer. After prepared remarks, we will open up the call to a question and answer session. Before we begin let me remind you that certain statements made on the call today may be considered forward looking statements, which reflect managements best judgment based on currently available.
Information I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the third quarter full year 2023, and beyond our actual results might differ materially from those projected in these forward looking statements.
Correct 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 todays press release that are posted on <unk> website.
<unk> expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made today.
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 the updated investor presentation that outlines the financial discussion in todays call.
Webcast of this call is available on our website in the Investor Relations section with that I'd like to turn the call over to our CEO , Matt Cohen Matt.
Thanks, Erica and thanks, everyone for joining the call today.
Momentum continues to build across our business our strong second quarter performance underscores that the three key reasons, we are winning.
First the power of our Danny security platform to drive our land and expand motion our comprehensive portfolio and the depth of our SaaS solutions are continuing to increase the velocity in our business.
Second a Danny security is a non negotiable requirement for organizations. This is only amplified by the ever increasing importance of protecting hybrid and cloud native environments.
And third we are executing against our strategic imperatives accelerating our platform selling motion extending our reach to the channel enhancing our customer success organization and delivering cutting edge innovation.
The strength of our execution and the durability of demand is evident in our performance subscription.
Subscription E R reached $451 million growing 77% year over year.
Total AAR reached 653 million growing 40%.
We added a robust $49 million and net new.
And we exceeded our guidance range across revenue operating loss and EPS with total revenue growing 24% to $176 million non-GAAP operating loss coming in at 6 million and non-GAAP earnings per share of <unk> all above the range.
I am incredibly proud of how we are navigating the macroeconomic backdrop. Our go to market teams continue to adjust their selling approach to overcome the increased deal scrutiny in longer approval cycles that we've seen for several quarters, enabling us to deliver a really well executed performance.
We had a strong new business quarter and customers continue to broaden their cyber ark relationships by new users and expanding to new solutions across the platform.
Our pipeline continues to build at a record pace deals are progressing and our win rates are really strong.
We hosted our impact customer event in May it was great to see so many of you who attended in person and we appreciate those who tuned in to the virtual sessions impact in Boston is our marquee event, but we are also hosting our impact world tour across 20 cities across the world throughout the summer and fall over.
The last few months, we have touched thousands of customers prospects and partners as part of this program. The feedback is resoundingly positive we are helping customers mitigate risk and drive efficiency as they manage the explosion of new identities, new environments and new attack methods.
Moving on to the details of the quarter, we will frame the discussion around growth innovation and profitability.
Starting with our growth drivers a typical organization has thousands of unique identities and those identities have more access today than ever before.
And our recently released a Danny security threat landscape report every organization, we surveyed expect <unk> related compromise in the year ahead.
More than half say this will happen as part of a digital transformation initiative.
Generally of AI is compounding these trends attackers are innovating faster than ever and our more sophisticated further elevating the urgency for comprehensive identity security.
As a result organizations are consolidating across security vendors based on trust, what we referred to as a consolidation of trust. They are choosing long term partners like cyber Ark because of deep domain expertise leadership position breadth of platform and superior technology.
Our differentiation includes our ability to secure all identities human and machine as they access all environments, including hybrid and multi cloud environments, while applying our comprehensive intelligent privilege controls across standing access just in time access and our zero standing privilege approach.
Our most recent product introduction secure cloud access, which provides secure native access with zero standing privileges across multi cloud environments is resonating with customers when.
When combined with just in time access for cloud workloads. It creates the ability for a customer for Craig.
Creates the ability for customers to re imagine their Pam programs in.
In addition, when secure cloud accidents is combined with secrets hubs and conjure cloud developers in the security teams can innovate even faster in the cloud for the workforce. We take this one step further providing privilege controls to the enterprise with secure web sessions and workforce password management.
These are great examples of how our platform is delivering compelling value to customers and driving our long term growth.
Our innovation engine and go to market execution contributed to our strong new business quarter, and 235, new logos, while Pam continues to be the primary landing spot. Our platform has been key to our success with customers increasingly landing with two or more solutions.
Digging into a few wins in the quarter drill.
Driven by cyber insurance requirements and industry, leading Fortune 500 transportation company wanted a solution that would evolve and scale with the company's cloud strategy. In addition to privilege cloud the customer will essentially secure human and nonhuman privilege access across its global multi cloud infrastructure with Sig.
<unk> cloud access and secrets up.
As part of its zero Trust strategy, a leading cyber security company landed with our endpoint privilege manager to remove local admin rights from all end points and helped mitigate the risk of ransomware attacks.
A leading telecommunications provider in South America is embracing our identity security platform to achieve operational efficiencies and measurable risk risk reduction.
This customer is consolidating vendors and we will be using the <unk> platform, including Pam endpoint privilege manager and secrets manager across all seven of its companies.
The velocity of our business is also picking up as customers achieve faster time to value with our SaaS solutions. The success of our land and expand motion as represented by the nearly 40% increase in customers with more than 100000 in annual recurring revenue to approximately 1500 at the end of Q2.
Few examples include a global 500 energy company embraced our identity security vision and expanded from a large Pam footprint to Dev ops and cloud security in Q2 with concert cloud secrets hub and secure cloud access and.
In auto manufacturing company, who bought cyber Ark Pam in the third quarter of 2022 was looking to expand with a modern identically security partner during the second quarter. They bought more privilege cloud and added workforce password manager as its first cyber Ark IDENTIKEY solution.
Accenture is one of our most successful advisory partners with a strong cyber Ark identity security practice, given their deep understanding of the security market. We are pleased they will expand their use of <unk> to deliver advanced cyber security controls for clients and also utilize it themselves we look forward to continuing.
To extend our relationship with Accenture.
The channel is extending our market reach with more feet on the street and more services power certifications for endpoint privilege manager cyber Ark identity and secrets management are growing quickly MSP.
<unk> remains a key pillar for the future growth and we are gaining traction with guide point Kendra NTT, among others, who delivered key wins in Q2 and are helping us reach new customer segments.
In fact, BT, a leading British multinational telecommunications company needed a modern scalable security partner as it rapidly scales. Its global managed services operations to help ensure their customers critical identities are protected during the second quarter. They made the strategic decision to leverage sidewalk identify.
As their key access solution.
Moving on to innovation.
At our impact customer event in May we were excited to share how we are at the leading edge of innovation in identity security, including the introduction of AI powered automation and policy creation for APM to.
To help reduce risk and implement least privilege at the endpoint.
<unk> has a long track record of working to stay ahead of both the competition and attackers today. The attackers are leveraging AI to exponentially increase their effectiveness and capacity to change tactics and techniques and procedures continues to increase.
While attack methods are evolving rapidly the common denominator in these attacks remains identities. We are harnessing generative AI to develop new security solutions and enhancements for our customers innovation to combat innovation.
We have a team dedicated to integrating AI across our product portfolio as well as new innovations and we are looking forward to sharing information about our initiatives later in the year.
That impact we also launched secrets hub for Azure and Pam self hosted since launching last year security professionals love the security controls while developers can continue their workflow, but with frictionless protection, making cyber at the secrets backbone of the enterprise.
Cyber secure browser was one of the highlights of the event secure browser is purpose built for the enterprise and deliver security privacy and productivity. It can act as a front end to <unk> identity security platform while.
While also securing the overall browsing experience for privileged users.
One of the areas that our customers are most intrigued by is the ability to stop session hijacking and increasingly dangerous form of attack, where hackers are looking to steal cookies and takeover sessions to harvest critical data and IP.
Moving on to profitability as.
As the dynamics of the subscription transition begin to subside, we are marching towards our rule of 40 goal as you see in our full year bottom line rates are Denny security platform will not only help increase our go to market productivity, but also drive operating leverage by supporting rapid.
Cost effective innovation across all of our product groups.
We have always made disciplined investments to support our growth and I remain very confident in the long term profit goals, we put out at our Investor day, just a few months ago.
In summary, our go to market organization and innovation engine are delivering we are accelerating our platform selling motion, our new platform services and how we leverage our robust partner relationships to extend our reach and drive our growth. We are thrilled with the early adoption of our cloud security solutions and the momentum.
We are seeing in the market securing all identities not just managing human access is a requirement at the center of our customer's cyber security strategies as we look ahead the momentum in our business strong execution in the first half and disciplined investment approach positioned us to confidently raise our full year.
Guidance for <unk> and improve our operating profitability.
I will now turn the call over to Josh who will discuss our outperformance in more detail and provide you with our guidance for the third quarter of the year.
Thanks, Matt we delivered yet another strong quarter, beating our guidance across the board.
Grew an exceptional 40% and reached $653 million at June 30, while the subscription portion increased 77% and reached $451 million momentum continues to pick up and in the second quarter, we added $49 million and net new subscription.
This represents the largest amount of net new subscription.
Outside the seasonally strong fourth quarter of 2022, as Matt mentioned already our identity security strategy is resonating with customers embracing our SaaS solutions and expanded across our platform.
The maintenance portion of annual recurring revenue was $201 million at June 30 in the second quarter, we were thrilled, particularly in today's macro environment to capture an increase in annual maintenance rates, which combined with our strong continues renewal rates demonstrate that our solutions are mission critical and deliver amazing.
Value to our customers like for like the conversion activity is still just represents a single digit percent of our year on year.
Growth.
Total revenue exceeded our guidance it came in at $175 8 million with growth of 24% year on year year to date. Our total revenues grew 25% that's an acceleration from 17% in the first half of last year.
Our subscription bookings mix came in at 95% in the quarter as compared to 88% in the second quarter of last year.
Our growth was well balanced across new and expansion business self hosted subscription duration again came in at the lower bound of our range continue to put pressure on recognized revenue and thats about $3 million.
Moving into the details of the revenue lines for the second quarter subscription revenue reached $106.
Growing 61% year on year and represented 60% of total revenue in the second quarter consistent.
Consistent with our move to a subscription business model perpetual license revenue came in at $5 1 million.
Our maintenance and professional services revenue was $64 6 million.
With $51 6 million coming from recurring maintenance and $13 million and professional services revenue.
The recurring revenue portion reached $157 8 million or 90% of total revenue, that's growing 31% year on year from the $124 million or.
Or just 85% of total revenue in the second quarter last year.
Geographically the business continues to be well diversified the Americas revenue reached $107 1 million growing 28% year on year ACG grew by 24% to $18 3 million in revenues in EMEA grew by 15% year on year to $50 $4 million of revenue.
The EMEA region had nearly a 13 percentage point increase in subscription bookings mix to 95% in the second quarter from about 82% in the second quarter last year, creating a <unk>.
<unk> recognized revenue headwind in the quarter.
All line items of the P&L will now be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release.
Our second quarter gross profit was $143 3 million or <unk>, 81% gross margin compared to the 82% gross margin in the second quarter last year.
Our operating loss of $5 $6 million came in better than the top end of our guidance as a reminder, we incurred expenses from our impact event in the second quarter of approximately $4 million.
Even with the increase in expenses from impact we are demonstrating leverage in our business with our revenue growing 24% and operating expenses, increasing only 17% year on year.
Net income exceeded guidance coming in at $1 3 million or <unk> <unk> per diluted share.
We ended June with over 29, 2950 employees worldwide, including <unk> hundred sales and marketing.
Six months of 2023 free cash flow was a negative $8 6 million or a negative two 5% free cash flow margin. As a reminder, we expected operating margin free cash flow to be lower sequentially in the second quarter as a result of the impact customer event and other seasonal expenses.
Turning to our guidance for the FERC for the third quarter and the full year 2023, our guidance reflects our strong execution, leading competitive position and platform selling motion and that's balanced against still the uncertainty in the macro environment for.
For the third quarter of 2023, we expect total revenue of 181 5 million to $186 5 million.
Which represents 21% year on year growth at the midpoint.
We expect the subscription mix will continue to be about the 95% level.
non-GAAP operating income in the range of 4 million to $8 million for the third quarter and we expect our non-GAAP EPS to range from 19 to 27 cents per diluted share are.
Our guidance assumes $46 8 million weighted average diluted shares and about $6 million in taxes.
For the full year 2023, we expect total revenue in the range of 726% to $736 million, representing 24% year on year growth at the midpoint of the range and an acceleration from the 18% for full year last year.
We are significantly raising our full year operating results to be in the range.
Breakeven to operating income of $9 million.
We expect our EPS range to be 44 to 63 per diluted share and we expect about $46 4 million a weighted average diluted shares and about $24 million of taxes for the full year of 2023.
On the back of a strong <unk> growth. We are also raising our guidance for annual recurring revenue to now be between $743 million and $753 million at December 31, 2023, that's about a 31% year on year growth at the midpoint of the range.
Overall, we were pleased with our execution, particularly in this macro environment. Our subscription transition is playing out against our Playbooks revenue in the first six months of the year accelerated to 25% growth in our operating margin is improving as we talked about at our Investor day, we are driving towards our near <unk>.
Long term goals as momentum in our business continues to build I will now turn the call over to the operator for Q&A operator.
Thank you 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.
We will go first to second Kelly at Barclays.
Okay, Great Hey, good morning, guys. Thanks for taking my questions here, Hey, Matt Hey, Josh.
And great to hear from you.
I'm here sitting here, Matt maybe maybe to start with you and it's just great to see.
The resilience of the subscription AOR line just to just to the point made earlier in this macro and the continued sort of net new AOR growth. Maybe the question. That's most appropriate to start with is why do you think this space identity, Pam et cetera, It's just doing so much better than other areas.
Security do you feel like Thats, a <unk> specific do you think that identity in general is just a healthier healthier area of security spending any thoughts on why you feel like you feel like <unk>.
Identity in general is just doing so much better thanks.
No. It's a great question and it starts with this idea that we are so thrilled with the results to see the kind of continued growth.
Growth that we're able to achieve and I think when we look at it internally, we kind of map it back to three main causes of our success from this perspective, one certainly is the market we play and as you as you mentioned, we talk a lot about this idea that at the core of where the attackers are trying to get to is identities and as <unk>.
These proliferate through organizations.
The cyber security strategies need to evolve and they need to focus in on identity as the centerpiece of the overall strategy and so that's maybe the market. We play in in the particular area of cyber that we chose to participate in but I think the other two reasons, which are cyber Ark specific are really driving the success.
One is this this ability for us to be able to differentiate in the market with our identity security platform the ability to be able to protect any identity human and non human and machine identities regular workforce users as well as the most privileged user sitting in it.
And be able to do that all from from one platform with one solution set I think that resonates with our customers as they build their longer term plans and point them in the direction of cyber Ark and then the third area and a lot of the team members listening to this call and I will tell you. They are doing a phenomenal job executing out there they are.
Adjusting their execution to the macro environment, we've talked about this a little bit before but they come in and they've changed their changed their value story to make it easier for the customer to buy their mapping to the board initiatives that are out there for example, they're able to pivot a lot of their story to to deal with people like Josh sitting next to me the CFO .
In the company and actually picture value story for them to go side by side with how we're talking to.
To the CIO into the CSO and so I think phenomenal execution kind of rounds out the picture that starts with participating in a great market and having a differentiated solution.
Got it got it that makes that makes a ton of sense, Josh maybe for my follow up for you.
Great to see the upside on the income statement this quarter both in revenue.
And operating income.
And also great to see the operating income guide go up so much for the year I think more than than this quarter's beat maybe the question for you. Though is I think we're taking the revenue guide up slightly at the bottom and maybe.
The question is what were some of the puts and takes the new sort of considered when thinking about how does the AUR success is going to flow through the revenue line does that makes sense.
Yes, yes, it does that it and thanks for the question and yes, we are thrilled that we were able to able to racy.
Our guide for the full year by $7 million and we're also happy that we're able to pass.
Eek up the revenue full year as well and when we think about kind of the takedown on the IRR.
One of the things that we want to preserve for the back half is that we our pipeline has been growing at record at record levels and but we're also seeing a very heavily weighted towards SaaS and so we want to we want to while we are getting that increase in the <unk>. We also want to preserve that the second half could could eat.
<unk> EBIT above our 95%.
SaaS and subscription mix and we want to we want to.
Consider that.
I think we're.
Where could we will definitely see a role as to those into 2024.
We'll move next to Jonathan Ho at William Blair.
Hi, there and let me congratulate my yes.
Strong performance on the quarter.
Wanted to maybe dig into maybe individual products was there anything that sort of surprised you in terms of strength on the quarter or that stood out relative to your expectations.
Hey, Jonathan it's Matt here, so listen I think across the board. It was it was a strong quarter. We saw really good performance back in the Pam business itself, particularly on the privilege cloud front, we saw strong <unk>.
Growth in APM and secrets.
In the identity and access space, especially in some of the areas that we say differentiate us there scared web sessions secret.
Workforce password manager and some of the areas. There. So I think it was one of the quarters, where we were kind of strong across the board.
We highlighted in the prepared remarks, some of the newer stuff because I think maybe that's probably where we were a little more surprised you know kind of the intake of our of our secure cloud access solution for protecting native cloud environments.
Maybe took us a little bit by surprise in terms of how quickly it's being brought into deals even more so into the pipeline of deals looking forward.
We saw the SaaS side of the secrets business conjure cloud and secrets hub start to take off and so I would tell you. It was a strong quarter across the board and with really nice signs on some of the newer innovations that we were able to talk about at at impact.
We'll go next to Rob Owens with Piper Sandler.
Great. Thanks for taking my question.
Last quarter, you did note some downsizing of deals and just curious given the puts and takes with the economy. What you guys are seeing now in terms of deal size.
Yes, so I think we talked about it a little bit in depth last quarter, and we talked about two things. The downsizing of deals. We also talked about though that the component parts that were were downsized maybe were put into the back half of the year pipeline and we're ready for expansion motion.
The deals first of all.
<unk> doubled down on that or come back to that the deals that we saw happen in Q1.
Other component parts still do sit in the back half of the year and actually are progressing really nicely.
So we're really happy with that I think what I would say as it related to the second quarter here is the team did a better job of actually positioning the right deal upfront for the customer based upon a better understanding of their budgets based upon a better understanding of what they needed to procure and maybe werent seeking out the super sized.
Deal to begin with and in that case, we didnt see as much downsizing.
At the end of the quarter, we actually just saw a strong performance strong execution and the ability to be able to kind.
Deliver against the close rates that we would expect so I would say that the market itself continues to stabilize around us we feel like we're in a strong position vis vis the macros at the moment.
And I wouldn't say, there's been any change in trends of a dramatic nature.
Great and I guess building on that if I look at <unk> <unk>, Our guide for the second half.
This year implies about 45% of your air would come in the first half of the year <unk> 55 in the back half and that's about a five point shift from last year, which was 46%. So what's implied in that <unk> guidance as we kind of contemplate the second half and any help around Q3 versus Q4, it would be great. Thanks.
Yeah, Thanks, Rob So I mean.
Essentially we're guiding.
Implies a flat net new <unk> for.
Subscription business, because we anticipate definitely.
Some reduction on the maintenance side of the or.
Yes.
You may get to $10 million for the second half so.
We're looking at.
Flat on the net new <unk>.
And we're glad that we were able to achieve overachieve on the net new <unk> for the first half and the take is the decline in the maintenance business.
For the second half and then I would just add that I think we see a normal seasonal kind of split between Q3 and Q4 consistent with prior years.
Great. Thank you guys.
We'll go next to Andrew Salom at Morgan Stanley .
Hi, everyone. Thanks, so much for taking my question today. So could you just talk a little bit about the success that you've been seeing with bundling.
What percentage of customers bought multiple products this quarter.
Yes, so we continue to see not just through bundling by the way, but just through selection and the deal process. We continue to see customers have purchased multiple solutions. When we when we talk about new logos generally speaking, it's greater than 50%. It can even tick up higher than that that are buying more than one solution.
They're landing spot.
And certainly that trend continues if not more in the in the base as we expand our customers kind of in that in that land and expand motion. So what we generally see though is as the customers have a prioritization process at one level, they're focused in on core Pam controls and then they're looking ahead to what are they going to do <unk>.
Or what are they going to do in parallel and for some customers it's about locking down.
The least privilege on the endpoint until <unk> becomes a priority for other customers. They are seeing this need to really understand the nonhuman component the machine identities and so secret management becomes a priority kind of side by side with Pam and then and then for some they're really looking to swap out there there are legacy.
IDP and thinking about access and their understanding that actually they can do that with data security platform from cyber Ark, so each customer pool would be a little bit different but in general customers are wanting to either start or expand with more more than just Pam.
And we're really happy with that we also do do a nice job, though of ceding some of our more innovative products into our packages. When you buy privilege cloud you get a little bit of workhorse password management, you get a little bit of the.
The identity suite and that helps us so that when we go back for the expansion motion the customers are already familiar with our products and they are ready to to adopt and expand later, so that's a little bit around how we see that that world packaging, but also just the very nature of how customers are buying more than one product from us.
We will take our next question from Gregg Moskowitz Mizuho.
Okay. Thank you very much for taking my question and nice job executing in the Q2, Matt I think everyone would agree that generally the AI is spawning more cyber attacks and that this is only going to increase and you spoke in your prepared remarks about innovations that youre working on in this area, but it <unk>.
Something that you would look at as an incremental revenue opportunity for <unk>, but what are your thoughts here.
Yes, it's an interesting topic and <unk>.
One that comes up in almost every conversation at this point in time and the nice thing about what we're talking about is it's very practical and real we're not talking about some some some missed a mythical thing we're talking about what's happening out there in enterprises today are threat landscape.
Talking with <unk> and security practitioners of thousands of enterprises around the world It was over and over 85% of them that we're anticipating a a generative AI based attack in the year ahead. So on that kind of offensive side, we certainly see this ability for attackers to to innovate and.
Innovate by really making their existing attack methods more effective and I think that kind of sets the stage to a degree for how we will operate from a defensive perspective, if theyre, making their existing attacks, which are generally targeting identities more effective with AI, then we need to make our existing solutions.
AI enabled to be able to protect against those attacks and I said it in the prepared remarks, but but fight innovation with innovation. So for sure there'll be some new pockets of innovation creativity, where we might create some new solutions that harnessed. The power of the data, we're collecting to be able to do analytics better and provide that insight.
Into the product suite, but in general I would tell you. Our strategy is let's go make our solutions more effective let's go make our solutions easier to deploy so that they can cover more identities and let's make sure that we understand how attackers are using AI and defend against that using <unk>.
What we believe is the primary mechanism, we have which is intelligent privilege controls.
We'll go next to Brian Essex with J P. Morgan.
Hi, good morning, and thank you for taking the question.
I wanted to follow up on Rob's.
Question.
Particularly with regard to.
Some of the dynamics around IRR and conversions I actually had a little bit of a spike in perpetual this quarter, but.
And Josh I think you noted what about four points help on.
On convergence for subscription era.
Yes.
Can I ask about the comment that.
$10 million decline anticipated for maintenance in the back half of the year. So maybe if you could unpack a little bit.
How conversions from a from the installed base are trending.
Approaching knows and what expectations might be in the future quarters for that versus new logo adds.
Sure sure.
I'll start and then maybe Josh will jump in and add some color, but first of all I wanted to just say the perpetual business itself.
Didn't grow it actually was pretty consistent quarter over quarter and that's what we're seeing now which is really kind of an absolute number versus even a percentage and as we look out into the pipe going forward, we see perpetual at best flat and maybe even trailing down a little bit as we go forward. So the perpetual business definitely is.
<unk>.
Seeing its last its last notes here at <unk>.
I think we're good with that obviously I think from a from a conversion perspective, I am not sure Josh actually gave a number but he he talked about single digit impact from conversions in terms of our of our overall growth and I think that continues to be the case, you've heard me talk about this maybe before but we believe fundamentally that we're.
Adding such a big upside when people do convert meaning not what we charge for the like for like although that's a that's incremental as well we get we get two to three X on maintenance rates for like to like conversion. We also create such a strong compelling buying opportunity to expand into new products and even to up sell existing <unk>.
<unk> that were not coming out customers with a stick in saying you have to convert we're actually approaching them and figuring out when it makes sense to slot it into their roadmap and.
And since we're such as core security control and we want customers primarily to go to SaaS. It takes a little bit of planning to figure out when that customer should go and I think it is going to materialize over the next two to three years and it's not going to be any big jump in any given quarter as we kind of move forward. So I think thats, how we see the kind of conversion Act.
<unk> happening I would say on the maintenance decline what we are seeing is not that's not due to some big uptick in conversions. That's due to the fact that we're not selling much perpetual anymore and just think about we were 95% in this quarter and the year before we were in the upper <unk>, you're starting to really ticked down.
And the new maintenance that's coming in.
And when we look towards the back half of the year, we see 95% or better we are anticipating the maintenance they are coming down pretty strongly.
In respect of that of that kind of tail off now in Q2, we were able to see some nice realization from a from a captured rate perspective renewal rates overall were actually in the best shape they have been.
Ben.
Price increases got started to materialize its way through and helped us to the tune of maybe a $1 million.
So we didn't see as much tail off here in Q2, but we definitely see it starting to kick in in the back half of the year.
We will take our next question from Eric Keith at Keybanc capital markets.
Thanks for taking the question.
Great to see the great results there.
Part of me Josh.
Josh I could just first any uptick and noise in the market or any change in sales cycles at all as it relates to hash itself managed boundary offering or auctions upcoming families.
Dave I just wanted to ask on M&A matches.
If there's any areas of interest for you as you look to kind of accelerated product road map and that's it. Thanks.
Yes sure Greg.
Questions in from a competitive landscape perspective, we haven't seen any change in that would be across the entire portfolio specific to the two areas you talked about.
From our secrets management harshly perspective, harsh evolved and then kind of on the Pam side with Husky boundary. We don't see any difference in the competitive dynamic there and I'll just take a second there that maybe doubleclick and try to help explain a little bit of our competitive posture against Akshay.
What happens with these development groups that are going on in harshly offers a fabulous developer platform across the board developers get started they are using the <unk> tool set and they need to actually manage secrets in a in a local vault. So they.
There are at least no longer hard coding secrets into the applications. They are building and they're setting up a Hershey vault instance for example locally for their work group as they work on their project and what happens at enterprises is alright that one harshly vault becomes multiple harshly vaults and then there is other development efforts going on and it's in AWS <unk>.
<unk> store, our Microsoft key vault and you end up with this kind of bolt sprawl across the enterprise and at some point in time security gets involved and says great that youre not hard coding your your passwords anymore into into your applications, but how do we actually manage policy on the back end at an enterprise grade at an enterprise scale, how do we make sure.
That those passwords are actually being rotated how do we make sure that the other policies are being implemented and now they have a decision to make do they actually go and upgrade and basically swap out tool sets to a more.
Bigger offerings from <unk> or do they bring in a security vendor that they're already used to dealing with on their pan portfolio and expand with us into secrets and that's the competitive fight that we have and it's a competitive fight that we're very confident in that we can become the enterprise backbone for secrets not only in those modern scenarios, but also back.
Into the legacy applications that we're able to provide options around and in the multi cloud environments that we're able to deliver secrets through with our secrets hub now as they move into the boundary, it's not really Pam and it would be the same answer than that I would pivot on over into what we're seeing around okta, which is.
They are they are coming at it from an ease of use perspective, and a light light use case scenario perspective.
I think it maybe has some some room to play down market.
For people, who are just getting started on their Pam journey, but we don't see that as a current competitive threat within our market our enterprise customers are not talking about.
Pitches around okta as Pam solution.
We will keep an eye on it when it finally comes out and see what it looks like and we'll be ready to respond, but I'm, giving you a little bit of a longer answer here because it's an area that we feel we're strongly positioned against and.
And we continue to see that dynamic.
Beneficial for us.
From the second question perspective, I think when we think about M&A, it's kind of similar to some answers we've given in the past we continue to look at we have a clear vision for our identity security platform and where it will go over the next three to five years and we always are looking and trying to understand is there a <unk>.
Organic method to significantly accelerate any component parts of that at any security vision, we're sitting on a $50 billion Tam. So we don't need to go someplace else with our acquisition strategy, but we might be to accelerate key component parts and you hear us talk about cloud and you hear us talk about.
Access and endpoint in these non human areas and they're really exciting areas and were always looking to see if theres a good match between us and something out in the market with a realistic value valuation that can help accelerate our organic roadmap and get us to market faster and thats, how we think about the kind of M&A approach going forward.
We'll take our next question from Roger Boyd at UBS.
Great. Thanks for taking my question and again, congrats on the very nice execution.
This is definitely a difficult environment for customer additions, but Matt I think you mentioned, 235% in the quarter, which is certainly an impressive result last quarter you made the comment that you're expecting maybe fewer but bigger land. This year wondering if that was still the case this quarter and then again with the record pipeline any color on what youre expecting from a new logo perspective through the <unk>.
End of the year.
Yes, sure. Thanks, and I think it's a really important point, because it's really sequentially up 15% new logos from Q1 to Q2.
That's a good sign for US we did see in Q1, we mentioned it that it was harder to go land and I think in any macro environment that that's a headwind youre always a little harder to close the deals with a new customer they take a little bit longer we definitely saw an uptick here in Q2, which is nice.
We certainly expect it to continue into Q3 and Q4, but the secondary point you made absolutely played out once again, which is our average selling price in average deal size for those new logos was up pretty dramatically in Q2 and helped fuel our results and so the ones we are landing our laterals.
Ending with much more of the identity security portfolio and.
And they're making a bigger bet on cyber Ark and so that's why we look at the new logo quarter and related new business quarter in Q2, and we're really really happy with the step function change we saw versus Q1.
Okay.
We'll go next to Joshua Tilton at Wolfe Research.
Hey, guys. Thanks for.
Taking my questions and I'll Echo my congrats.
On a great quarter.
I actually just have one for me.
Any updates on how we should think about free cash flow for the balance of the year and maybe what are some of the puts and takes around outperforming free cash flow in the back half.
Yes, Josh Thanks for the question is.
Well first of all we're glad we are in line with our expectations as we reported through the.
The first half of the year.
And I think that and we are certainly in line with where we are for full year with full year expectations.
When you asked about puts and takes this is still a transition year.
So some of the puts and takes around duration on the on.
The self hosted.
And of course on the maintenance as well.
<unk>, which can create some headwind.
Or or tailwind.
On the free cash flow as it relates to billings as we see in both of them certainly.
In Q2, we saw we saw some reduction.
<unk>.
And duration.
The subscription as I've talked about that as it impacted revenue in any way maintenance, we're seeing decline over already for the last year. Since we started our transition for the last two years, we're seeing the decline where we did a lot of three year deals going down now to one year deal and Thats, our initiatives to renew maintenance contracts.
Only on a one year basis as opposed to a two year three year basis. So.
Sure.
We are in line with what we expect for this year and.
And those are the puts and I would just add just jumping in.
I think for sure first of all like Josh said that the quarter played out as we expected I think we were pretty clear upfront that this was going to be.
Not the not the strongest cash flow quarter, given the dynamic of our of our quarter as Asian.
<unk> expenses in some some other areas around insurance and other areas that we talked about but I want to reiterate that I.
I said in the prepared remarks, I'll say it again.
The cash flow story starts to kick in in 2024 and accelerate in 2025% to 2027, and we are extremely confident in the $200 million of cash flow that we put out for 2000 $25 million to $375 million in cash flow for 2027, and we're right on track with that as we get into next year.
And expand from there.
Super helpful. Thank you guys.
We will take our next question from Adam Borg with Stifel.
And thanks, so much for taking my questions.
Maybe just from out of the channel.
MSP opportunity in particular, you talked about that a little bit maybe talk more about the opportunity for partners to introduce managed Pam offerings and how that can broaden your reach even more downmarket and then I've a follow up.
Yes, I mean, I think this is MSP market for us.
I don't know how to describe it other than it's captivated us I think we've been always looking at it you heard me talk about our last quarter with some excitement and Youll hear me talk about it now I think it's because it's actually broader than what we thought I think when you start out you think MSP as you think down market Oh, it's going to help us reach a bunch of new logos I think what we're seeing actually.
Is it playing out as a dynamic across upper end of the enterprise enterprise corporate all the way down and it's because this growing trend that organizations really can't afford to sustain and support the vast spend on it specifically on cyber that's going on within there.
Enterprises, and so Theres a recent Gartner report that came out that estimated something like 30 or 40% of the cyber spend will move to MSP in the next three years and I think that trend line kind of feels real to us. The exciting piece is what you just said, which is if you get in to the MSP as the back.
One of their offering and they build and embed their value added services around it it's a very sticky approach and so we see our MSP is not only by the way wanting to bring our <unk> cloud its generally a SaaS motion wanting to bring our <unk> cloud to market, we see as we mentioned about BT looking.
Over into our access solution portfolio, we see.
Creasing uptake on our secrets management in nonhuman side, and so we really believe that actually it's a great way to reach all types of customers, obviously to go out and find new customer segments down market, but also to get the broader portfolio adopted out into the market and.
I think you can hear it as I start talking I, just think it's going to be such a strong growth driver for us going forward early days early days, but I can point to specific wins in Q2 that we would not have had if we didn't have the great MSP partnerships that we've built up.
That's great I appreciate that maybe just as a quick follow up just on the vertical mix in the quarter.
I did see that financial services still your top mix, but I think it ticked down sequentially I do think the definition may have changed as well so maybe anything to call out there on what youre seeing in your largest vertical again really appreciate it. Thanks.
Yes, I'll just jump in.
Big growth verticals were.
Manufacturing and we also saw nice growth in retail as well and probably followed up by pharma Bank.
Banking was in financial is still strong.
And our vertical mix overall, we always like to go back to the fact that we're really well diversified across many verticals I think we have now.
<unk> verticals.
5% more of more of the business.
The Pi and <unk> and <unk>.
We see them move around in the quarters, but overall, we continue to be really strong across no matter, where the enterprise sits.
Great. Thanks, so much for the color.
We will go next to Trevor Walsh with JMP Securities.
Great. Good morning team. Thanks for taking my question just a quick one for me, Matt maybe best for you that John Josh feel free to chime in as well you mentioned in your prepared remarks about the telco deal in South America and it was more of a consolidation play just curious if you could.
Dive in a little bit deeper there was that was there a displacement involved or if there were how many other tools approximately meaning without naming names of course, but just just give us a sense maybe of when you do see that consolidation notion kind of how it's how it's playing out kind of what's the what's the <unk>.
Critical mass of tools around identity that might be there to start and what is that.
It's going to look like when the customer gets to their kind of their end state. Thanks.
Yes, sure on that particular deal it was consistent with what we would normally see on a bigger enterprise offering which is yes, we are displacing legacy.
Legacy Pam tool.
And consolidating.
Access and secrets in that particular case.
I think what we what we see in general when we land a new enterprise logo is that customers are foundational on our on our privileged controls on our Pam offering and then as I mentioned earlier there for taking up a couple of other solutions in order to be able to get started on their on their journey we use this.
Phrase and we use it a lot because it's the foundation of how we view the market, which is it's a consolidation of trust that it's happening and that can happen with a new logo that can also happen with an existing customer as we expand the footprint and its the idea that it's not about just that we offer all of these things in the market and maybe we can give a better.
<unk> point, because you are buying it from one vendor that's the traditional vendor consolidation and one throat to choke. It's really the idea that our customers Trust us as a core security control in their stack. They know that were security <unk>. They know that actually our mindset every day when we wake up is that we're in partner.
Shipped with them to secure their enterprise and so as they look to understand within the identity space. How they can consolidate how they can how they can get to a vendor that they trust in this increasingly threat landscape.
It's again hard to operate and they look and they say I know cyber Ark I Trust cyber are come talk to our cyber Ark and that's a that's a really interesting place to be too because we're actually receiving the inbound and saying Hey can you come talk to us versus having to always be out there positioning ourselves. So it's a great position to be in and that was.
Excellent deal that we're really proud of that they delivered down there in the Latam team.
We'll go next to Alex Henderson at Needham <unk> Company.
Great. Thanks.
Thanks for the call.
<unk> seen strong execution, you guys have been delivering quarter after quarter after quarter.
I was hoping you could.
Move to a little bit broader view of the world from that.
And then just looking at what cyber Ark is seeing.
Talk to us about what Youre hearing from the C suite at your customers.
In the marketplace, there seems to be too specific dynamics that have set up.
Fear after the Florida that print that people are cutting back on spending.
Conversely, the software companies seem to be.
Talking about an improved normalization.
Stability.
So what are you seeing from the aggregate.
C suite about what their intentions are on.
Overall spending on security.
Sure I'll comment from my Vantage point and really it's coming from my conversations like you said with the C suite of customers that still happens day.
Day in and day out and what we see out there is that.
The C suite understands that the threat landscape is getting worse they understand that.
Work from home are now hybrid work makes things harder they understand that digital transformation can't slow down more and more of their understanding that all this great work, that's being done by developers to build modern applications are being done kind of outside the purview of the security organization and the controls that have been put in place and so what you.
C. As I think actually awareness of the need of the cyber security spend full stop cyber or expand but cyber security spend is going up it's even more on on the board agenda and you see regulation coming out here in the U S that actually even pushes that even further to say around disclosure requirements and making the board may be <unk>.
Even more aware so I think cyber is a topic believe it or not continues to elevate and its importance.
Think that in this macro environment. The C suite does have to make difficult decisions and they need to prioritize and to be honest, that's where they look towards the experts in their organization to say how can we do primary risk reduction, whereas the threats most severe and what are the tool sets.
We have in house or I mean in house that are going to drive us to a better security posture.
And I think then in those cases, they're certainly willing to spend and we saw it in our results we see it in our pipeline and I think that the.
Then becomes to a degree within cyber spend haves and have nots for the time being because.
In a more tight environment, they are going to make more discriminating choices, we're lucky to be.
Part of the choice and we're happy with that position.
We'll move next to Rudy Kessinger at D. A davidson.
Hey, great. Thanks for taking my questions just one for me.
Matt you've talked about this a little bit but.
I think it gets applied more to the new customer side, you've talked about 50%, 60% landing with two plus products I guess I'm curious with the existing customers. How much emphasis are you putting on the cross sell motion take the comparisons out of it you've talked about building those roadmaps with with those perpetual customers to migrate them potentially with multiple products, but if you look at your existing.
<unk>.
Subscription customers, what kind of expansion rates are you seeing with that installed base and how much emphasis placed on the cross sell motion.
Yes, no I think it's the.
At some level the backbone of our growth story, we still see.
By the way strong upsell of Pam seats.
<unk> and theyre expanding to more and more users become privileged they need to expand out but I would tell you that the sales team as is.
Eating eating their dinners off of the cross sell motion because it is the compelling story in the market. It's a compelling story of our identity security platform Hey, you are protecting it protect the workforce you are protecting.
The on Prem environment protect the cloud protect the hybrid that lift and shift environment Youre doing human now you need to start doing non human and machine identities. So I would tell you that we are.
Thrilled I would use that word with our expansion selling capabilities our expansion selling performance.
And I think that's what sets us up for such a strong future I think at our Investor day, we talked about an $8 billion Tam within our install base.
And those motions to be honest are easier than going and landing a new logo and so when we have that kind of well lubricated and working the growth story really takes off from the base.
We will take our final question from Andrew Nowinski at Wells Fargo.
Great. Thank you for squeezing me in so there were many instances this quarter, where I think privilege escalation was used as part of that move it file transfer breach I'm wondering if that had a positive impact on your quarter or the pipeline. Then I was also hoping you could comment on the fed the pipeline you have in the fed given that we're heading into the fiscal year on there. Thank you.
<unk>.
Yeah sure I'll take them, Joshua said to my side not talking too much but.
I think when we think about.
The kind of threat landscape listen when we understand a little bit more about any of these any of these well publicized breaches. It comes back to privilege escalation. It comes back to credential theft. It comes back to the things that we add cyber are due and so I would tell you that.
It's always a help it always is a tailwind and never drives a deal in the quarter more or less obviously, there's a few there's a few deals that come with someone who is particularly breached and they need to recover quickly and that's a quick sales cycle, but it's the second part of what you said it drives the pipeline expansion the pipeline growth.
That we see out there in the market because because any of these breaches by the way. The same thing we would say about generative AI. It causes organizations to have to think the way we want them to think which is assumed bridge and the minute you assumed breach as an organization, it's not enough to detect it's not enough to lock down the perimeter you have to.
Actually implement controls that stopped somebody once they get inside because you have to assume they are already inside and then move it breached and kind of the play out of that just reemphasize is that factor into your second question here before we wrap we continue to see a fed environment.
That's consistent with what we've seen before now we talked about before it's kind of become more ordinary course of business that happens each quarter versus some big big buildup that happens at the end of the year people are having to buy each quarter because the priority is evident.
We embedded our fed guidance, our fed business into our guidance for Q3.
We're happy with our overall fed business, where overall global government, which I think is 11% of our of our overall vertical mix by the way I would highlight we see.
Strong growth potential in the sled business to state and local areas. We closed a really nice deal in Q2 at a state entity. It was a large deal adopting the full identity security suite. So we see that as a growth driver as well, even when you get beyond the traditional federal market.
And that does conclude our question and answer session I would like to turn the conference back over to Matt Cohen for closing remarks.
Yes, so I want to end by by really thanking our employees for their hard work. Their commitment you heard me talk about their execution and I'm incredibly proud by everything that everybody does it cyber Ark I want to thank our partners for helping us drive the business and of course, our customers and thank you for all the.
Formative questions and we'll talk to you soon thanks.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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