Q2 2024 ZeroFox Holdings Inc Earnings Call

September 6, 2023

Yeah.

Thank you for standing by and welcome to the Fox fiscal second quarter 2024 results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

As a reminder, today's call is being recorded I would like to turn the conference call over to Todd Wohler, Vice President Investor Relations, because you're a box.

Thanks, operator, good morning, and thank you for joining us today to review zero boxes fiscal second quarter 2024 financial results.

With me on the call today are foster, our founder and Chief Executive Officer and Chairman.

And Tim Bender, our CFO .

By now everyone should have access to our earnings press release. This press release as well as supplemental financial information can be found on our Investor Relations website.

During this call we may make forward looking statements, including statements related to our anticipated financial results growth opportunities and external cyber security, our progress to achieving profitability and expected benefits from our acquisitions of <unk> and looking glass. These.

These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties.

Actual results could differ materially from expectations reflected in any forward looking statements.

Please review our earnings press release, and recent SEC filings description of these material risks and uncertainties.

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

Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure with that I'd like to turn the call over to our CEO Foster.

Thanks, Todd Good morning, everyone last month marked our one year anniversary as a public company.

In Q2 was another record quarter for zero box, where we achieved several major milestones we delivered strong revenue growth record.

Recognized an acceleration on our large customer adoption and generated positive free cash flow for the first time.

Furthermore, we announced that we beat our guidance and will raise expectations for the second half of the year.

Our ability to consistently deliver results is a direct reflection of our team's disciplined.

Relentless focus on the customer and our platform's ability to scale with the ever growing external cyber security challenge.

I am going to provide summaries on a few key areas of our performance and continuing progress on our vision.

First I will review highlights from our Q2 results and the continued demand we see for our external cybersecurity platform.

Then I'll spend a few minutes walking you through our growth model and finally, I will share key areas of focus for the second half of the year.

In Q2, we reported solid results across both top and bottom line metrics.

We reported core revenue of $42 million.

An increase of 78% year over year.

We ended the quarter with <unk> of $182 million, an increase of 22% year over year and we saw continued momentum in large enterprise wins with a 35% year over year growth in subscription customers with <unk> greater than $100000.

The Q2 demand environment for both new and existing customers was consistent with prior quarters, except for one exception.

We experienced stronger than forecasted demand for our new on demand response capabilities, which was reflected in our services revenue outperformance.

We believe this was driven in part by recent surge and move it attacks, which have impacted hundreds of organizations to date and that number is still growing.

Customers recognize us as an authoritative organization to help with external cyber attacks and these adversary campaigns are providing us with opportunities to highlight our platform strength.

We helped one of our customers manage through an incident or over 10 million records were stolen and a brazen ransomware attack.

Operator: Thank you for standing by, and welcome to the Zero Fox fiscal second quarter, 2020-24 results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question answer session. As a reminder, today's call is being recorded. I would like to turn the conference call over to Todd Weller, Vice President of Investor Relations for Zero Fox. Thanks operator. Good morning and thank you for joining us today to review Zero Fox's fiscal second quarter. 2020-24 financial results.

We are operating at a scale that is far beyond most organizations in the cyber security industry.

According to <unk> website, they conduct over 900 incident response engagements each year on behalf of their customers. Today, we have over 1100 active response engagements with customers our brand recognition customer trust and proven execution, including our.

Billy to deliver large on demand complex programs were factors in why enterprise customer deal sizes is accelerating.

Todd Weller: With me on the call today, our foster, our founder, Chief Executive Officer and Chairman, and Tim Bender, RCFO. By now, everyone should have access to our earnings press release. This press release as well as supplemental financial information can be found on our investor relations website.

Additionally, demand for our platform based approach remains strong as more organizations look for continuous visibility into their external attack surface.

Intelligence on external threats and the ability to protect disrupt and respond to those threats.

Todd Weller: During this call, we may make forward-looking statements, including statements related to our anticipated financial results, growth opportunities and external cybersecurity, our progress to achieving profitability, and expected benefits from our acquisitions of IDX and looking glass. These statements are not guarantees of future performance, but rather our subject to a variety of risks and uncertainties. Actual results could differ materially from expectations reflected in any forward-looking statements. Please review our earnings press release and recent SEC filings, description of these material risks and uncertainties. Forward-looking statements made today speak only to our expectations as of today, and we undertake no obligation to publicly update or revise them.

The modern security Triple Crown includes endpoint security platforms by crowd strike Sentinel won or <unk> combined with a robust perimeter provider like Palo Alto networks, zee scalar or even akamine.

And an external platform like zero box near.

All of our customers have some sort of internal perimeter and external security combination protecting their organizations.

Simply said our platform and positioning is increasingly resonating with our customers as they look to consolidate their security stacks with a few proven leaders.

Now I'd like to spend a few minutes to take a closer look at an area within our go to market model on how we land and expand but then customer organizations.

Todd Weller: Additionally, non-gap financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for reconciliation of these measures to their most directly comparable gap financial measure.

Typically when customers engage with <unk>, they're looking to solve specific external cyber security problems or use cases.

And this is especially true for reactive customers, where there have been incidents in the recent past.

James Foster: With that, I'd like to turn the call over to our CEO Foster. Thanks, Todd. Good morning, everyone.

Examples of common use cases for zero box include protecting an organization's digital footprint fishing impersonation or account takeovers monitoring the dark web for compromised credentials data leakage or early warning signs of an attack or leveraging threat intelligence data and experts to improve threat prevention.

James Foster: Last month, Mark, our one-year anniversary as a public company. In Q2 was another record quarter for zero-box where we achieved several major milestones. We delivered strong revenue growth, record AR, recognized an acceleration on our large customer adoption, and generated positive free cash flow for the first time. Furthermore, we announced that we beat our guidance and will raise expectations for the second half of the year. Our ability to consistently deliver results is the direct reflection of our team's discipline, our relentless focus on the customer, and our platform's ability to scale with the ever growing external cyber security challenge.

<unk> and response efforts.

Zero box address these use cases and more to a single unified platform.

Our platform capabilities spanned four strategic pillars include a protection intelligence disruption and response in each of these pillars include multiple modulators that are available for purchase.

Examples of our modules include brand protection and domain protection intelligent search.

James Foster: I'm going to provide some ways on a few key areas of our performance and continuing progress on our vision. First, our view highlights from our Q2 results and the continued demand we see for our external cyber security platform. Then I'll spend a few minutes walking you through our growth model and finally I'll share key areas of focus on the second half of the year. In Q2, we reported solid results across both top and bottom line metrics.

Takedowns, NPI removal digital populous protection and on demand notifications.

When customers purchase our platform. There are two primary factors that drive deal scope and size. The first is the number of digital assets. They protect and the second is the number of modules. They can purchase to protect those assets.

And new deals it is increasingly common for customers to protect multiple assets and purchased multiple modules.

For example in Q2, the average number of modules purchased and new deals was just over three.

James Foster: We reported core revenue of $42 million and increased of 78% year-over-year. We ended the quarter with ARR of 182 million and increased of 22% year- and we saw continued momentum in large enterprise wins with a 35% year-over-year growth in subscription customers with ARR greater than $100,000. The Q2 demand environment for both new and existing customers was consistent with prior quarters except for one exception. We experienced stronger than forecasted demand for our new on-demand response capabilities, which was reflected in our services revenue outperformance.

And while new deals frequently include multiple assets the assets being protected typically only represent a small portion of their total digital assets.

This white space provides us with future expansion opportunities.

In addition to increasing asset volumes, we also have the ability to cross sell and upsell our customers additional modules.

For customers that have found zero Fox reactively or because they have experienced a security incident, we typically land with one or two modules within our response power first as they become introduced to the organization.

To put this in perspective, let's walk through a couple of our Q2 deals.

James Foster: We believe this was driven in part by recent surge and move it attacks, which have impacted hundreds of organizations to date and that number is still growing. Customers recognize us as an authoritative organization to help with external cyber attacks and these adversary campaigns are providing us with opportunities to highlight our platform's strengths. We helped one of our customers manage to an incident where over 10 million records were stolen in a brazen ransomware attack.

The first is a six figure new customer win with a fortune 500 company that included several operating lines of business.

This customer chose zero box protect 40 brands 10000, plus demands and hundreds of additional digital assets.

A customer initially purchased nine modules, including brand domain intelligent search data feeds takedowns and more.

This is a big win for zero cost we.

James Foster: We are operating at a scale that is far beyond most organizations in the cybersecurity industry. According to Mandyant's website, they conduct over 900 incident response engagements each year on behalf of their customers. Today, we have over 1,100 active response engagements with customers. Our brand recognition, customer trust, and proven execution, including our ability to deliver a large on-demand complex programs for factors in why enterprise customer deal sizes is accelerating. Additionally, demand for our platform-based approach remains strong as more organizations look for continuous visibility into their external attack surface.

We also had another six figure new customer win with a fortune 500 software company. This customer is also protecting their global footprint and they purchased eight modules out of the gate.

This customer selected zero box to consolidate several of the other external threat intelligence and digital risk protection services point solutions validating our platform approach.

Due in part to the proliferation of ransomware campaigns Q2, we saw a record number of large deals for on demand response services. This included two multi seven figure deals with fortune 1000 companies at a seven figure deal with a new public sector customer.

Shifting gears I'd like to focus on our goals for the second half of the year, we will continue to execute on our strategic plan to expand our platform capabilities grow our customer base and increased adoption.

James Foster: Intelligence on external threats and the ability to protect disrupts and respond to those threats. The modern security triple-crown includes end-point security platforms like CrowdStrike, Sentinel-1, or Trelix combined with a robust perimeter provider like Palo Alto Networks, ZScale, or even Akamine, and an external platform like ZeroFox. Nearly all of our customers have some sort of internal perimeter and external security combination protecting their organizations. Simply said, our platform and positioning is increasingly resonating with our customers as they look to consolidate their security stacks with a few proven leaders.

And we will accomplish this while also further progressing on our path to profitability.

From a platform perspective, while we continuously innovate there are two specific areas I'm going to highlight.

Over the last quarter, we made significant progress completing the integration of looking glass and finalizing our plans for combining the respective platform capabilities.

We also launched a new threat intelligence service that we call our daily intelligence.

<unk> seen some very nice pick up this summer.

James Foster: Now I'd like to spend a few minutes taking a closer look at an area within our go-to-market model on how we land and expand within customer organizations. Typically, when customers engage with ZeroFox, they are looking to solve specific external cybersecurity problems or use cases. And this is especially true for reactive customers where they have been incidents in the recent past. Examples of common use cases for ZeroFox include protecting an organization's digital footprint, sufficient impersonation, or count takeovers, monitoring the dark web for compromised credentials, data leakage, or early warning signs of an attack, or leveraging threat intelligence data and experts to improve threat prevention, detection, and response efforts.

The second area and I'm sure you've guessed it is artificial intelligence.

As I mentioned last quarter, we have nearly a decade of experience implementing various AI capabilities into our platform.

As a reminder, we have over 54 patents issued in our named today and our innovation program is mature.

As adversaries increasingly leverage AI to automate the development of sophisticated attacks, we will continue to evolve the use of our AI to ensure that we can protect our customers for zero box. This is table Stakes.

For example, spear phishing attacks via external platforms like social media and chat platforms are becoming exponentially better and the success rates are rapidly increasing.

Attackers that have English as a second language for example can now use chat GPT so perfect targeted attack against the individual.

James Foster: ZeroFox addresses these use cases and more to a single unified Our platform capabilities span four strategic pillars, including protection, intelligence, disruption, and response, and each of these pillars include multiple modules that are available for purchase. Examples of our modules include brand protection and domain protection, intelligent search, take down the PI removal, digital populace protection, and on demand notification. When customers purchase our platform, there are two primary factors that drive the scope and size.

The days of receiving a poorly worded E mail from a prince asking you to hold $1 billion for them are long gone.

Now recent advancements in generative AI and large language models are creating new opportunities for us to increase value by more broadly infusing AI in different manner across our platform.

And we're going to leverage these large language models to provide more contextualize intelligence for our customers, making it easier for them to better assess and understand risks and threats.

James Foster: The first is the number of digital assets they protect, and the second is the number of modules they can purchase to protect those assets. In new deals, it is increasingly common for customers to protect multiple assets and purchase multiple modules. For example, in Q2, the average number of modules purchased in new deals was just over three. While new deals frequently include multiple assets, the assets being protected typically only represent a small portion of their total digital assets.

Our customers will continue to receive the benefit of our innovation program in the quarters like they have over the past several years.

While we continue to see a significant growth opportunity in front of US. We also understand the importance of balancing growth with profitability. We were very pleased with our Q2 cash flow performance and we will continue to drive additional efficiency and leverage into the business in the coming quarters.

As Tim will discuss in more detail, we continue to expect that we'll be at or near breakeven. The second half of this year.

James Foster: This white space provides us with future expansion opportunities. In addition to increasing asset volumes, we also have the ability to cross style and upsell our customers additional modules. For customers that have found zero fox reactively, or because they have experienced a security incident, we typically land with one or two modules within our response pillar first as they become introduced to the organization.

With that I want to thank all of our foxes for their energy passion and commitment as we continue to protect our customers around the world Q2 was a record quarter for zero box and we are moving as fast as we ever have.

I'd like to turn the call over to our CFO Tim <unk>.

Thanks Foster.

And false or mentioned zero Fox generated strong Q2 results across both top and bottom line metrics.

James Foster: To put this in perspective, let's walk through a couple of our Q2 deals. The first is a six-figure new customer win with a Fortune 500 company that included several operating lines of business. This customer chose zero fox protect, 40 brands, 10,000 plus domains, and hundreds of additional digital assets. The customer initially purchased nine modules, including brand, domain, intelligence search, data, feeds, takedowns, and more. This is a big win for zero fox.

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

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

For Q2, <unk> reported revenue of $62 2 million, an increase of 42% year over year.

Subscription revenue was $23 2 million, including $4 8 million from looking glass.

James Foster: We also had another six-figures new customer win with a Fortune 500 software company. This customer is also protecting their global footprint, and they purchased eight modules out of the gate. This customer selected zero fox to consolidate several of their other external threat intelligence and digital risk protection services, point solutions, validating our platform approach. Due in part to the proliferation of ransomware campaigns, Q2, we saw a record number of large deals for on-demand response services. This included two multi-seven-figure deals with Fortune 1000 companies and a seven-figure deal with a new public sector customer.

Services revenue was $39 million, consisting of $27 million of recurring revenue from our strategic government customer.

$18 3 million from our own demand response services.

While we expected an improved revenue performance in our services revenue for Q2 are.

Our success in capturing large deals with fortune 500 customers was even stronger than anticipated.

Given our Q2 bookings performance, we expect continued strength in services revenue in Q3.

Our services business continues to be less predictable when compared to our subscription business.

As we look beyond Q3, we would expect services revenue to return to a more normalized historical level.

James Foster: Shifting gears I'd like to focus on our goals for the second half of the year. We will continue to execute on our strategic plan to expand our platform capabilities, grow our customer base, and increase adoption. And we will accomplish this while also further progressing on our path to profitability.

Given the potential for short term volatility we would encourage investors to look at the performance of our services business on an annualized basis to assess our performance and growth potential.

As of July 31 annual recurring revenue was $182 million.

<unk> consists of platform subscriptions, a small amount of recurring on demand services and $83 million from our strategic government contract.

James Foster: From a platform perspective, while we continuously innovate, there are two specific areas I'm going to highlight. In the last quarter, we made significant progress completing the integration of looking glass and finalizing our plans for combining the respective platform capabilities. We also launched a new free threat intelligence service that we call our daily intelligence free that has seen some very nice pick up this summer. The second area, and I'm sure you guessed it, is artificial intelligence.

We ended the quarter with a record high 1300 for subscription customers.

As Foster mentioned in Q2, we saw continued success in winning larger deals.

We ended Q2 with 175 customers with IRR greater than 100000.

Which represented an increase of 35% year over year.

James Foster: As I mentioned last quarter, we have nearly a decade of experience implementing various AI capabilities into our platform. As a reminder, we have over 54 patents issued in our name today and our innovation program is mature. As adversaries increasingly leverage AI to automate the development of sophisticated attacks, we will continue to evolve the use of our AI to ensure that we can protect our customers. For zero-box, this is table stakes. For example, spear-fishing attacks via external platforms like social media and chat platforms are becoming exponentially better and the success rates are rapidly increasing.

Turning to gross margin.

For the second quarter subscription gross margin was 72% consistent with Q1.

Q3, we expect subscription gross margin to be consistent with Q2 levels.

Services gross margin was 18% compared to 24% in Q1 as we indicated on last quarter's call. We expected this margin to decline from Q1 due to a higher mix of notification services attributable to our fortune 500 response engagements.

The Q2 sequential decline was driven by an even higher than expected mix of large deals.

Given the continued impact from large deals in Q3, we would expect services gross margin to be relatively consistent with Q2 levels before returning to more normalized levels.

James Foster: Attackers that have English as a second language, for example, can now use chat GPT to perfect a targeted attack against an individual. The days of receiving a poorly worded email from a print asking you to hold a million dollars for them are long gone. Now recent advancements in generative AI and large language models are creating new opportunities for us to increase value by more broadly infusing AI in different manner across our platform.

Total gross margin was 38% compared to 43% last quarter.

The declining gross margin was driven by the decrease in services gross margin and the higher mix of services revenue.

James Foster: And we're going to leverage these large language models to provide more contextualized intelligence for our customers making it easier for them to better assess and understand risk and threats. Our customers will continue to receive the benefit of our innovation program in the quarters like they have over the past several years.

As we look to Q3, we would expect gross margin to be consistent with Q2 levels with margin improving in subsequent quarters.

We continue to see opportunities to improve our overall gross margin as we scale, our business and our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

Turning to operating expenses total operating expenses were $28 6 million in the quarter.

The increase in expenses versus last quarter was driven by continued investments in research and development, including expenses from our acquisition of looking glass.

James Foster: While we continue to see a significant growth opportunity in front of us, we also understand the importance of balancing growth with profitability. We were very pleased with our Q2 cash more performance and will continue to drive additional efficiency and leverage into the business in the coming quarters. As Tim will discuss in more detail, we continue to expect that we'll be at or near break even the second half of this year.

G&A expense declined sequentially as we did not incur professional fees for the annual audit residual piece back filing requirements and transaction costs in Q2.

Our loss from operations was $4 8 million.

Looking at the balance sheet and cash flow, we ended the quarter with $29 million in cash.

James Foster: With that, I want to thank all of our foxes for their energy, passion, and commitment as we continue to protect our customers around the world. Q2 is a record quarter for zero fox and we are moving as fast as we ever have.

$36 million in accounts receivable 67 million and total deferred revenue and $191 million and total outstanding debt.

In Q2, we generated cash flow from operations of 600000 and free cash flow of approximately 400000.

Timothy Bender: I'd like to turn the call over to CFO Tim Bender. Thanks, Foster. And Foster mentioned zero fox generated strong Q2 results across both top and bottom line metrics.

As expected our Q2 cash flow performance was positively impacted by the timing of collections from our larger customers and lower professional fees and transaction costs.

Timothy Bender: With the exception of revenue and unless otherwise stated, all financial results we will discuss today are non-gap financial measures. Reconciliation between our gap and non-gap results can be found in our earnings release. For Q2, zero fox reported revenue of 62.2 million and then creates a 42% year-over-year. Subscription revenue was 23.2 million, including 4.8 million from looking glass. Services revenue was 39 million consisting of 20.7 million of recurring revenue from our strategic government customer and 18.3 million from our on-demand response services.

Now to our outlook.

Our outlook assumes no material changes in the macro environment.

Demand for our external cyber security platform remains consistent and we anticipate continued near term strength within our on demand services business.

For Q3 fiscal year 'twenty four.

Currently expect revenue to be in the range of 55 million to $57 million.

And non-GAAP loss from operations to be in the range of $6 2 million to $5 4 million.

For fiscal year 'twenty four we currently expect revenue to be in the range of $214 million to $217 million.

Timothy Bender: While we expect it to improve revenue performance and our services revenue for Q2. Our success in capturing large deals with Fortune 500 customers was even stronger than anticipated. Given our Q2 bookings performance, we expect continued strength in services revenue in Q3. Our services business continues to be less predictable when compared to our subscription business. As we look beyond Q3, we would expect services revenue to return to a more normalized historical level.

And non-GAAP loss from operations to be in the range of 27 million to $25 million.

We continue to focus on profitability consistent with what we said last quarter, we expect free cash flow for the remainder of the fiscal year to be at or near breakeven.

On a quarterly basis, our cash flow will be impacted by the timing of collections from our large customers and therefore, we expect cash flow to be negative in Q3, followed by an offsetting positive amount in Q4.

Timothy Bender: Given the potential for short-term volatility, we would encourage investors to look at the performance of our services business on an annualized basis to assess our performance and growth potential. As of July 31st, annual recurring revenue was 182 million. ARR consists of platform descriptions, a small amount of recurring on-demand services, and 83 million from our strategic government contract. We ended the quarter with a record-high 1,304 subscription customers. As Foster mentioned, in Q2, we saw contingent success winning larger deals. We ended Q2 with 175 customers with ARR greater than 100,000, which represented an increase of 35% year-over-year.

We continue to expect that we will achieve quarterly free cash flow on a sustained basis in the second half of fiscal year 'twenty five.

With that we'd like to take your questions operator.

Thank you if you like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

Our first question comes from Joseph Gallo with Jefferies. Your line is open.

Hey, guys. Thanks for the question and congrats on the strong results.

Guidance for the year it looks like it flows through a little bit more revenue than your <unk>. What are you seeing in the market, where macro wise that kind of lends confidence towards doing that thanks.

Hey, good morning, Joe Thanks for the question.

Timothy Bender: Turning to gross margin. For the second quarter, subscription gross margin was 72%, consistent with Q1. For Q3, we expect subscription gross margin to be consistent with 2-2 levels. Services gross margin was 18%, compared to 24% in Q1. As we indicated on last quarter's call, we expected this margin to decline from Q1 due to a higher mix of notification services, attributable to our 4500 response engagements. The Q2 sequential decline was driven by an even higher than expected mix of large deals.

I think.

We had a stronger than forecasted result in Q2, which you acknowledged which we announced this morning.

What we're seeing here is maybe a slight easing of some of the macro pressures we saw in the beginning part of the year.

And continued demand for our platform.

Awesome.

And Tim Congrats on the free cash flow profitability.

How should we think about profitability versus investments for growth or even acquisitions.

Then ultimately kind of combine that with how investors should think about your debt the maturity timeline of bad debt and how those repayments eventually play out thanks.

Timothy Bender: Given the continued impact on large deals in Q3, we would expect services gross margin to be relatively consistent with 2-2 levels, before returning to more normalized levels. Total gross margin was 38% compared to 43% last quarter. The declining gross margin was driven by the decrease in services gross margin, and the higher mix of services revenue. As we looked at Q3, we would expect gross margin to be consistent with Q2 levels, with margin improving in subsequent quarters. We continue to see opportunities to improve our overall gross margin as we scale our business, and our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

Thanks for the question.

We acquired looking last just a little over a quarter ago I think we've got plenty of opportunity to continue to sell into our customer service and.

Realize some upside there in the coming quarters, probably expand our platform.

I don't think about our current cash position, our balance sheet strength as being leveraged for acquisitions in the very near term, although I would say in general we have proven to be an acquisitive company.

Acquiring four companies in the last four years I think maybe just to go back to your other point on profitability.

Timothy Bender: Turning to operating expenses, total operating expenses were 28.6 million in the quarter. The increase in expenses versus last quarter was driven by continued investments in research and development, including expenses from our acquisition of looking glass. GNA expense declined sequentially, as we did not incur professional fees for the annual audit, residual lease back filing requirements, and transaction costs in Q2. Our loss from operations was 4.8 million. Looking at the balance sheet and cash flow, we ended the quarter with 29 million in cash, 36 million in accounts receivable, 67 million in total deferred revenue, and 191 million in total outstanding.

I think we set up we said that we would be at or near breakeven for the rest of the year. So yes, we can.

Cash flow positive in Q2, and we see the opportunity to remain kind of right around cash flow positive for the next two quarters and then we've also put that we'd be cash flow positive on a sustained basis.

Next summer as well so I think all in all we are doing all the things. We said, we're going to do on the cash flow front and I think that balanced approach.

Both and getting leverage back into our model is.

Is the right thing for the business and Joe Tim just to clarify on the on the one question. We don't have to do anything different in our business model as far as our investments for growth.

That's built into our cash flow assumptions. So we're going to continue to invest in sales and marketing on a go to market efforts to drive growth and we think we can do that and manage our operating expenses to deliver the cash flow false or just mentioned.

Timothy Bender: Debt. In Q2, we generated cash flow from our operations of 600,000 and free cash flow of approximately 400,000. As expected, our Q2 cash flow performance was positively impacted by the timing of collections from our larger customers and lower professional fees and transaction calls.

That's right as it relates to the debt the convert the large convertible note is out about two years from today August 2020.

Todd is a due date on that will likely continue the same path that we're doing right now as far as the way we are treating the interest via the Pik and listen we're looking.

Timothy Bender: Now to our outlook. Our outlook assumes no material changes in the macro environment, demand for our external cybersecurity platform remains consistent and anticipates continued near term strength within our own demand services business. For Q3, fiscal year 24, we currently expect revenue to be in the range of 55 million to 57 million and non-GAF law from operations to be in the range of 6.2 million to 5.4 million. For fiscal year 24, we currently expect revenue to be in the range of 214 million to 217 million and non-GAF law from operations to be in the range of 27 million to 25 million.

<unk> performance continues to strengthen we'll have conversations around how you want to deal with that as we get further down the road, but right now 2025 August is when that matures.

Awesome, Thanks for the color and congrats again.

Yes.

Thank you.

Next question comes from Brad Reback with Stifel. Your line is open.

Great. Thanks, very much couple of quick ones. The on demand response business can you give us a sense of what the profitability on a gross margin perspective, it looks like there.

Sure Thanks, Brian It's Tim.

Timothy Bender: We continue to focus on profitability, consistent with what we said last quarter, we expect free cash flow for the remainder of the fiscal year to be at or near break even. On a quarterly basis, our cash flow will be impacted by the timing of collections from our large customers. And therefore, we expect cash flow to be negative in Q3 followed by an offsetting positive amount in Q4.

Historically.

We see we've seen the margins in.

Kind of the mid <unk> this quarter was a little bit lower as we saw some very large deals.

But we had a couple of deals that were materially are substantially larger than what we'd seen in the past. So what we used to define as large deal. We had two deals that were much larger and those compressed margins. So I think as we get back into what would be what we call. It more normalized deal sizes, we would see those margins start working.

Timothy Bender: We continue to expect that we will achieve quarterly free cash flow on a sustained basis in the second half of fiscal year 25.

Our way back up.

Operator: With that, we'd like to take your questions. Operator? Thank you.

As we said in Q2 with the with the beat in the revenue and the large deals that had compression.

Operator: If you'd like to ask a question, please press star 11. If your question has an answer and you'd like to remove yourself in the queue, please press star 11 again.

I will double click on one thing for you Brad I mean, we saw some really interesting growth in our six figure <unk> customers that were north of $100000, which was actually an accelerant over Q1, and so I think when large customers call you to help out in their time of need we're finding that as kind.

Joseph Gallo: Our first question comes from Joseph Gallo with Jeffries. Your line is open. Hey guys, thanks for the question.

James Foster: It congrats on the strong results. Guidance for the year looks like it flows through a little bit more revenue than your QQB. What do you say in the market or macro wise that kind of lends confidence towards doing that? Thanks. Hey, good morning, Joe. Thanks for the question. I think we had a stronger than forecasted result in Q2, which we acknowledged this morning. I think what we're seeing here is maybe a slight easing of some of the macro pressures we saw in the beginning part of the year and continued demand for our platform. Awesome.

An early indicator of trust and that trust. We think we will continue to lead to larger ongoing relationships with those customers as well.

We like that business and we like the fact that we are one of the few trusted providers to get those calls and their time of need.

That's great and going back to the debt.

<unk>.

It would be accurate to say that you have to address that before August of 'twenty four right before the convert becomes current.

Okay.

That's a fair a fair assessment I mean, you don't have to but it's I think it's in best interest of all parties that we do that and that's something we're actively looking at.

Timothy Bender: Tim, congrats on the free cash for profitability. How should we think about profitability versus investments for growth or even acquisitions, and then ultimately kind of combine that with how investors should think about your debt, the maturity or timeline of that debt, and how those retain eventually play out. Thanks. Good question. Well, we acquired looking last just a little over a quarter ago. I think we've got plenty of opportunity to continue to sell into our cost surveys and realize the upside there and the coming quarters from the expanded platform.

Plenty of options there too.

You do you think you'll have plenty of options.

I think this is a really tough that market Brad in general I mean, if you look at the macro I think anybody would say it would be foolish to say anything but we've seen some of the highest interest rates that are out there, but I think as long as we continue to perform we'll have options.

Part of part of next August yes.

That's great thanks very much.

Yes.

Thank you and our next question comes from <unk>, Li with Cantor Fitzgerald. Your line is open.

Timothy Bender: So I don't think about our current cash position or balance sheet strength as being leveraged for acquisitions in the very near term. Although it's a end-general, we have proven to be an inquisitive company acquiring four companies in the last four years. I think maybe to go back to your other point on profitability, I think we set up, we said that we would be at or near break even for the rest of the year.

Good morning, Good morning, Tim Congrats on another strong.

This is an execution.

I'll start on the free cash flow positive about one year ahead of schedule too.

Two quick ones for phosphate and one quick one for Tim. So firstly, you talked about the Sparks principal at the beginning of this fiscal year.

Standing for focus optimization optimization on the platform and extracted and cross selling.

Timothy Bender: So yeah, we had casual positive in Q2 and we see the opportunity to remain kind of right around casual positive for the next two quarters. And then we've also put that we'd be casual positive on a sustained basis next summer as well. So I think all in all, we were doing all the things we said we were going to do on the cash flow front. And I think that balanced approach to growth and getting leveraged back into our model is the right thing for the business.

And obviously, we've seen that play this quarter was wondering like because we hit that.

<unk> already.

If you were to judge on the execution of all until Fox. So far this year what are some of the things that you think is beyond your expectation and things that <unk>.

Fox is to focus on going forward.

Timothy Bender: Yeah, and Joe Tim, just to kind of clarify on the one question, we don't have to do anything different in our business model as far as our investments for growth. That's built into our cash flow assumptions. So, you know, we're going to continue to invest in sales and marketing on our go-to-market efforts to the drive growth. And we think we can do that and manage our operating expenses to deliver the cash flow.

I think the.

Yes.

I think the.

The willpower and fortitude of our employees has just been.

Unbelievable year to date. This is not an easy time to be an employee, particularly in a tech company going through changes and back to offices and the types of things that are happening in kind of the overall economic situation that we're in around the world and so I'm really proud of what our Fox to have been able to do here I mean, when I think about the <unk> and <unk>.

Timothy Bender: Foster just mentioned. Yeah, that's right. As it relates to the debt, the large convertible note is out about two years from today, August 2020. Five is the due date. On that, we'll likely continue the same path that we're doing right now as far as the way we're treating the interest to be of the pick. And listen, we're looking, you know, as our performance continues to strengthen, we'll have conversations around, you know, how you want to deal with that as we get further down the road, but right now, 2025 August is when that matures. Awesome. Thanks for the color. Thank you.

Oxy.

And optimization is really just making everything that we do here at zero Fox better on behalf of our customers I mean, that's our North star that's what we talk about as a company.

And I think.

Q2s results show that we are getting better and stronger as a company and it's because of the effort of our employees.

Okay. That's helpful.

Hello, Paul.

Follow up on that thanks for the color on that on the growth opportunities right obviously.

Brad Reback: Our next question comes from Brad. We back with default. Your line is open. Great. Thanks very much. A couple of quick ones. The on-demand response business. Can you give us a sense of what the profitability on our gross margin perspective looks like there? Sure. Thanks, Brad. You know, historically, we see we've seen the margins in. Kind of the mid 20s. This quarter was was a little bit lower as we saw some very large deals.

A lot of stuff right, you announced Jenny deployment enhancements to breach response platform to monitor southwest the Google.

Partnership about two quarters ago looking glass with your question.

It sounds like it's looking good.

Would you rank these opportunities like the most impactful upside in the near term.

Yes.

And the long term what do you think it's the multiple obviously in the near term versus long term all these opportunities or other opportunities I might I might have missed.

Brad Reback: But we had a couple deals that were materially or substantially larger than what we'd seen in the past. So what we used to define as a large deal. We had two deals that were much larger and those compressed margins. So I think as we get back into, you know, what would be what we call more normalized deal sizes. We would see those margins start working their way back up. But, you know, as we said in Q2 with the with the beat in the revenue and the large deals that had compression.

Well, yes, I appreciate the contextual question.

And to follow us along with detail.

Yes.

Maybe I'll answer it slightly differently I mean, one of the things you heard on our earnings call today is.

Maybe a renewed focus or a first time disclosed focused around our modules and.

And we said that in general new customers signed up with zero box in Q2 averaged about three modules.

And then we spent a little bit of time talking about a couple of customer purchases that had eight or nine modules. So I think there's a really interesting opportunity for us continue to make sure that our customers adopt the full breadth and capability set of our platform.

Brad Reback: I will double-click on one thing for you, Brad. I mean, we saw some really interesting growth in our six-figure ARR customers that were north of $100,000, which was actually an accelerant over Q1. Right. And so I think when large customers call you to help out in their time of need, we're finding that is, you know, kind of an early indicator of trust. And that trust we think will continue to lead to larger ongoing relationships with those customers as well. So we like that business and we like the fact that we are one of the few trusted providers to get those calls in their time of need. That's great.

And we will spend time there in second half of this year.

Really making sure that customers adopt the platform because ultimately we fundamentally believe and we've got the metrics to back it up that when you adopt more of our platform you are better protected and the results are improved.

Okay and then the last one is for Tim on the financial side. Obviously, you guys should be cash flow positive about a year ahead of my schedule.

Turns off like the puts and takes to make this sustainable.

Brad Reback: And going back to the debt position, it'd be accurate to say that you have to address that before August of 24, right before the convert becomes current. I think that's a fair assessment. I mean, you don't have to, but it's I think it's the best interest of all parties that we do that and we're, you know, that's something we're actively looking at. You do think you'll have plenty of options. I think this is a really tough debt market, Brad.

What are they like Tim that can you give us.

Is it better cash collection, what's driving this upside we're seeing.

A year earlier than expected and for fiscal 'twenty. Five did you mean that like fiscal second half you are free cash flow positive first half it's more on the negative side and that's it for us. Thank you for the kind of team.

Yes, listen I think I think the basic answer is not so maybe it's just really the model is working as we scale certainly the acquisition of looking glass has helped as we picked up some solid revenue with that but I think it's really a scale factor as you start to see.

Brad Reback: In general, I mean, if you look at the macro, I think anybody would say it's be foolish to say anything but that we've seen some of the highest interest rates are out there. But I think as long as we continue to perform, we'll have options prior to prior to next August. Yes. That's great. Thanks very much.

<unk> is right about $100 million of we'll cross that in Q3, So it's model scale in that regard.

Yi Lee: Thank you. And our next question comes from Yifu Lee with Cancer Fitzgerald. Your line is open.

Yes, and then I think as far as 25 you're spot on.

Yi Lee: Good morning, Foster. Good morning, Tim. Congratulations on another strong, consistent execution quartering. Great. I found the three casual positive about one year has scheduled two quick months for Foster and one quick month with Tim. So, Foster, you talked about the spots principle at the beginning of the fiscal year, you know, standing for focus, optimization optimization on the platform and expected in cross selling. And obviously, we've seen that play this quarter was wondering like because we hit the high half the mark already.

We do think and you see in our script and that there is maybe a little bit of volatility in our working capital throughout the rest of this year, but 11, we get into the second half of year I think some of the timing of working capital between our AR collections mitigates.

So a steady free cash flow position.

Makes sense. Thank you very much tenant foster.

Okay.

Yes.

Thanks Pete.

Thank you. Our next question comes from Jonathan <unk> with Cantor Fitzgerald. Your line is open.

Yi Lee: If you were to judge on the execution of the box so far this year, what are some of the things that you think is beyond your expectation and things that, you know, you feel fox needs to focus on going forward. I think the willpower and fortitude of our employees has just been unbelievable year to date. This is not an easy time for being an employee, particularly a tech company going through changes and back to offices and the types of things that are happening in kind of the overall economic situation that we're in around the world and so I'm really proud of what our Fox has been able to do here.

Yes. Thank you good.

Good morning.

So fast are those deals that you decided with eight to nine modules out of the gate, where those deals that had been in the pipe for.

Six months to nine months or so or were they more reactive response is too.

A breach of an external nature, maybe broadly you can just talk about.

How do you think is external issues could impact sales cycles looking out through the through the fiscal year.

Yes, I heard a couple of things Jonathan.

A couple of examples I gave what I would call broad adoption of the platform multiple pillars multiple modules propeller.

Yi Lee: I mean, when I think about the O in Foxy and that O in optimization is really just making everything that we do here at zero Fox better on behalf of our customers. I mean, that's our North Star. That's what we talk about at the company and I think the Q2s results show that we are getting better and stronger as a company and it's because of the effort of our employees. Okay, to follow up on that, thanks for the color on that on the growth opportunities, right?

And what I call long term relationship right not not a near term.

Reactive response only.

For those eight or nine modules in general we've.

Got about a few modules per pillar of our platform. So when I look at customers that are adopting six 789 modules that tells me right off the bat that they've adopted the platform. They have adopted multiple pillars. They understand the consolidated vision and approach that we have and they have gone all in on zero Fox.

Yi Lee: Obviously, you got to have done a lot of stuff, right? You know, you're now in Gen. A.I, determinants, enhancements to bridge response platform to market stock web, the Google cloud partnership about two quarters goal, looking black integration. It sounds like it's looking good. How would you rank these opportunities like the most impactful upside in the near term versus, you know, in the long term? What do you think is the most bonus for you in the near term versus long term of all these opportunities? Well, other opportunities I might, I might have missed. Well, yeah, I appreciate the contextual question. Thank you to follow us along with detail. Maybe all answers are slightly different.

When I see a customer in general that's bought one or two modules that means one or two things quickly. It means that they've got a particular use case, that's causing them some pain and they want to alleviate that pain as fast as possible that can be because they've had an incident. That's because they maybe had an issue inside maybe they wanted to replace a knee.

Each provider.

But there is opportunity for us to then sell the platform vision and maybe earn our seat at the table when someone starts off with just a couple of modules before they move into a full platform. So.

Maybe that answers part of the question I heard kind of how are we thinking about.

Growth in the second half of the year I think it's what I said.

James Foster: I mean, one of the things you heard in our earnings call today is kind of a, maybe a renewed focus or a first time disclosed focus around our modules, right? And we said that in general, new customers signed up with zero fox and q2, averaged about three modules. And then we spent a little bit of time talking about a couple customer purchases that had eight or nine modules. So I think there's a really interesting opportunity for us to continue to make sure that our customers adopt the full breadth and capability set of our platform.

We're seeing an adoption acceleration for large six figure <unk> customers.

And I think that just proves that our problems that we're working on continues to grow I'm a firm believer in cyber and your Asps going up and your adoption in your large customers is going up you're working on a problem that matters and I'll tell ya external cyber matters every seat so kantar.

James Foster: And we'll spend time there a second half of this year really making sure that customers adopt the platform because ultimately we fundamentally believe and we've got the metrics to back it up that when you adopt more of our platform, you are better protected and the results are improved.

<unk> to be worried about getting attacked.

Halfway around the world by nation state actors by cyber criminal groups. There are less worried about an insider threat issue and I remember 15 years ago that was kind of top worry that's not the number one word anymore and external attackers whats keeping these guys up at night and I think we're in the right place at the right time.

Yes, yes, it sounds like what youre, saying the demand trends are pretty strong across the entire platform and so I guess along those lines. How do you. How do you see the sales organization equipped to solid cross protection intelligence disruption or are they.

Timothy Bender: Okay, and then the last one is for Tim on the financial side. Obviously, you guys reach three capital causes about a year ahead of my schedule. In terms of like, you know, the puts and takes to to make this sustainable, what are they like Tim? Like, can you give us, you know, is it better cash collection? What's driving this upside with seeing about a year, you know, earlier they expect it? And for fiscal 25, did you mean, Tim, that like fiscal second half, you are through casual positive? But first half, it's more than they can decide.

Fully up to speed on hand.

Each one of those pillars.

You need to do that to kind of.

Drive that execution, a more platform sale.

I don't think we're ever done Jonathan I mean, I'm, a believer in consistent training and consistent enablement I mean, the analogy here we used some of the best athletes are best.

Yi Lee: And that's it for us. Thank you from the county. Yeah, listen, I think I think the the basic answer is not so maybe second, it's just really the model is working as we scale. Certainly the acquisition of looking glasses helped as we as we picked up some solid revenue with that. But I think it's really a scale factor as you start to see RAR is rate about 100 million and we'll cross that in Q3.

Yes.

Performers of all time still trained daily and so even if you reach the peak of what you do you are the best quarterback to ever play.

The best ever player support antennas, you still practice daily to get better and I think our team and our go to market side of the house. We think is best in class for our space.

Yi Lee: So it's model scale in that regard. And then I think as far as 25, you're spot on, we do think and you see in our script and that there is maybe a little bit of volatility in our working capital throughout the rest of this year. But once we get into the second half of the year, I think some of the timing of working capital between our AR collections mitigates and we're into a steady free cash flow Thank you very much.

That's because we are relentlessly focused on continuing to improve them.

Operator: Thank you.

I would say, though.

Our efforts in the channel always lag our internal sales team. So there is certainly more we can do there.

We are still the baby on the block right. We're still of a small cyber company out there. We're still the last one to go public and so we don't have the footprint of some of the other peers that we have out there thats envious to US right now and so we've got to continue to build brand awareness and our channel continue to enable the channel and make sure they understand our differentiated platform and approach.

Jonathan Ruykhaver: Our next question comes from Jonathan Ruykhaver with Cancer Fitzgerald. Your line is open. Yeah, thank you. Good morning. So Foster, those deals that you cited with eight to nine modules out of the gate were those deals that had been in the pipe for, you know, six to nine months or so, or were they more reactive responses to, you know, a breach of an external nature. And maybe, you know, broadly, you can just talk about how you think these external issues could impact sales cycles looking out through the fiscal year.

Yes. Thanks.

Makes a ton of sense.

Okay.

Yeah.

Thank you there are no further questions at this time I would like to turn the call back over to foster for any closing remarks.

Thank you operator, and as you can tell we had a record Q2, we remain excited about the opportunities in front of us for the second half of the year.

So again, thank you for joining us the call. This morning and have a wonderful Wednesday tiers.

Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.

Jonathan Ruykhaver: Yeah, I heard a couple of things to Jonathan. A couple of examples I gave, what I call broad adoption of the platform, multiple pillars, multiple modules per pillar, and what I call long term relationship, right, not, not a near term reactive response only for those eight or nine modules, like in general, you know, we've got about a few modules per pillar of our platform. So when I look at customers that are adopting six, seven, eight, nine modules, that tells me right off the bat that they've adopted the platform, right, they've adopted multiple pillars, they understand the consolidated vision and approach that we have, and they've gone all in on zero Fox.

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Jonathan Ruykhaver: When I see a customer in general that's bought one or two modules, that means, you know, one or two things quickly, it means that they've got a particular use case that's causing them some pain. And they want to alleviate that pain as fast as possible. That could be because they've had an incident that's because they've maybe had an issue inside. Maybe they wanted to replace a niche provider. But there's opportunity for us to then sell the platform vision and maybe earn our seat at the table when someone starts off with just a couple modules before they move into a full platform.

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Jonathan Ruykhaver: So that's, maybe that answers part of the question. I heard kind of how we thinking about, you know, growth in the second half of the year. I think it's what I said the ye. I mean, we're seeing an adoption acceleration for large six figure A or R customers. And I think that just proves that our problems that we're working on continues to grow on a firm believer in cyber. If your ASP is going up and your adoption and your large customers is going up, you're working on a problem that matters.

Okay.

Jonathan Ruykhaver: And I'll tell you external cyber matters every see so continues to be worried about getting attacked, you know, halfway around the world by nation state actors by cyber criminal groups. They're less worried about an insider threat issue. You know, I remember 15 years ago, that was kind of top worry. That's not the number one word anymore. And actual attack is what keeping these guys up at night. And I think we're in the right place of the right time.

Jonathan Ruykhaver: Yeah, it's probably what you're saying is the demand trends are pretty strong across the entire platform. And so I guess along those those lines, how do you, how do you see the sales organization to quit to get to sell across protection intelligence disruption or they, you know, fully up to speed on hand. And you'll be able to see each one of those pillars or doors that work that you need to do that to kind of. Drive Data Acquisition of a more platformer's sale.

James Foster: I don't think we're ever done, Jonathan. I mean, I'm a believer in consistent training and consistent enablement. I mean, the analogy here we use some of the best athletes are the best, you know, performers of all time, still trained daily. And so even if you reach the peak of what you do, you're the best quarterback to ever play. You know, you're the best that ever play your sport in tennis. You still practice daily to get better.

James Foster: And I think, you know, our team and our go-to-market side of the house, we think it's best in class for our space, but that's because we're, let's see, focused on continuing to improve them. I would say, though, our efforts in the channel always lag our internal sales team. So there is certainly more we can do there. You know, we're still the baby on the block, right? We're still the smallest cyber company out there.

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James Foster: We're still the last one to go public. And so we don't have the footprint of some of the other peers that we have out there that invest us right now. And so we've got to continue to build brand awareness in our channel, continue to enable the channel, and make sure they understand our differentiated platform and approach. Yeah. Makes a ton of sense.

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Thank you for standing by and welcome to the Zero Fox fiscal second quarter 2024 results Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

As a reminder, today's call is being recorded I would like to turn the conference call over to Todd Wohler, Vice President Investor Relations, because you're a box.

Thanks, operator, good morning, and thank you for joining us today to review <unk> fiscal second quarter 2024 financial results with me on the call today are foster our founder Chief Executive Officer, and Chairman and Tim Bender Our CFO .

By now everyone should have access to our earnings press release. This press release as well as supplemental financial information can be found on our Investor Relations website.

These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties.

Actual results could differ materially from expectations reflected in any forward looking statements.

Please review our earnings press release, and recent SEC filings description of these material risks and uncertainties.

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

Thanks, Todd Good morning, everyone last month marked our one year anniversary as a public company.

In Q2 was another record quarter for zero box, where we achieved several major milestones we delivered strong revenue growth record.

Recognized an acceleration in our large customer adoption and generated positive free cash flow for the first time.

Furthermore, we announced that we beat our guidance and will raise expectations for the second half of the year.

Our ability to consistently deliver results is a direct reflection of our team's disciplined our relentless focus on the customer and our platform's ability to scale with the ever growing external cyber security challenge.

I am going to provide summaries on a few key areas of our performance and continuing progress on our vision.

First I'll review highlights from our Q2 results and the continued demand we see for our external cybersecurity platform.

Then I'll spend a few minutes walking you through our growth model and finally, I will share key areas of focus for the second half of the year.

In Q2, we reported solid results across both top and bottom line metrics.

We reported core revenue of $42 million, an increase of 78% year over year we.

The Q2 demand environment for both new and existing customers was consistent with prior quarters, except for one exception.

We experienced stronger than forecasted demand for our new on demand response capabilities, which was reflected in our services revenue outperformance.

We believe this was driven in part by recent surge and move it attacks, which have impacted hundreds of organizations to date and that number is still growing.

Customers recognize us as an authoritative organization to help with external cyber attacks and these adversary campaigns are providing us with opportunities to highlight our platform strength.

We helped one of our customers manage through an incident, where over 10 million records were stolen and a brazen ransomware attack.

James Foster: Thank you.

We are operating at a scale that is far beyond most organizations in the cyber security industry.

Operator: There are no further questions at this time.

James Foster: I like to turn the call back over to Foster for any closing remarks. Thank you, operator. And as you can tell, we had a record Q2. We remain excited about the opportunities in front of us for the second half of the year.

Billy to deliver large on demand complex programs were factors in why enterprise customer deal sizes are accelerating.

Unknown Executive: So again, thank you for joining us to call this morning and have a wonderful Wednesday. Cheers. Thank you for your participation. This does include the program and you may now disconnect. Everyone have a great day. Thank you. [inaudible] and thank you for your time[inaudible] and thank you for your time . .

Additionally, demand for our platform based approach remains strong as more organizations look for continuous visibility into their external attack surface intelligence on external threats and the ability to protect disrupt and respond to those threats.

Operator: Thank you for standing by and welcome to the Zero Fox fiscal second quarter, 2020-24 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers presentation, there'll be a question in the intercession. As a reminder, today's call is being recorded.

Todd Weller: I would like to turn the conference call over to Todd Weller, Vice President and best relations for Zero Fox. Thanks operator. Good morning and thank you for joining us today to review Zero Fox's fiscal second quarter, 2020-24 financial results. With me on the call today, our Foster, our founder, Chief Executive Officer and Chairman and Tim Bender, RCFO. By now, everyone should have access to our earnings press release. This press release as well as supplemental financial information can be found on our investor relations website.

Todd Weller: During this call, we may make forward looking statements, including statements related to our anticipated financial results, growth opportunities and external cybersecurity are progress to achieving profitability and expected benefits from our acquisitions of IDX and looking glass. These statements are not guarantees of future performance, but rather our subject to a variety of risks and uncertainties. Actual results could differ materially from expectations reflected in any forward looking statements. Please review our earnings press release and recent SEC filings, description of these material risks and uncertainties.

The modern security Triple Crown includes endpoint security platforms by crowd strike Sentinel won or <unk> combined with a robust parameter provider like Palo Alto networks, Zee scalar or even akamine.

And an external platform like zero box nearly all of our customers have some sort of internal perimeter and external security combination protecting their organizations.

Simply said our platform and positioning is increasingly resonating with our customers as they look to consolidate their security stacks with a few proven leaders.

Todd Weller: Forward looking statements made today speak only to our expectations as of today, and we undertake no obligation to publicly update or revise them. Additionally, non-gap financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for reconciliation of these measures to their most directly comparable gap financial measure.

Now I'd like to spend a few minutes to take a closer look at an area within our go to market model on how we land and expand within customer organizations.

Typically when customers engage with <unk>, they're looking to solve specific external cyber security problems or use cases, and this is especially true for reactive customers, where there have been incidents in the recent past <unk>.

James Foster: With that, I'd like to turn the call over to our CEO Foster. Thanks, Todd.

James Foster: Good morning, everyone. Last month, Mark, our one-year anniversary as a public company. In Q2 was another record quarter per zero box where we achieved several major milestones. We delivered strong revenue growth, record AR, recognized an acceleration on our large customer adoption and generated positive free cash flow for the first time. Furthermore, we announced that we beat our guidance and will raise expectations for the second half of the year. Our ability to consistently deliver results is the direct reflection of our team's discipline, our relentless focus on the customer and our platform's ability to scale with the ever growing external cyber security challenge.

<unk> and response efforts.

Zero box addresses these use cases and more to a single unified platform.

Our platform capabilities spanned four strategic pillars, including protection intelligence disruption and response in each of these pillars include multiple modules that are available for purchase.

Examples of our modules include brand protection and domain protection intelligent search.

James Foster: I'm going to provide some ways on a few key areas of our performance and continuing progress on our vision. First, I'll review highlights from our Q2 results and the continued demand we see for our external cybersecurity platform. Then I'll spend a few minutes walking you through our growth model and finally, I'll share key areas of focus on the second half of the year. In Q2, we reported solid results across both top and bottom line metrics.

<unk> thousand <unk> removal digital populous protection and on demand notifications.

And new deals it is increasingly common for customers to protect multiple assets and purchased multiple modules.

For example in Q2, the average number of modules purchased and new deals was just over three.

James Foster: We reported core revenue of $42 million and increased of 78% year-over-year. We ended the quarter with ARR of $182 million and increased of 22% year- and we saw continued momentum in large enterprise wins with a 35% year-over-year growth in subscription customers with ARR greater than $100,000. The Q2 demand environment for both new and existing customers was consistent with prior quarters except for one exception. We experienced stronger than forecasted demand for our new on-demand response capabilities, which was reflected in our services revenue outperformance.

And while new deals frequently include multiple assets the assets being protected typically only represent a small portion of their total digital assets. This.

This white space provides us with future expansion opportunities.

In addition to increasing asset volumes, we also have the ability to cross sell and upsell our customers additional modules.

For customers that have found zero Fox reactively or because they have experienced a security incident, we typically land with one or two modules within our response power first.

<unk> introduced to the organization.

To put this in perspective, let's walk through a couple of our Q2 deals.

The first is a six figure new customer win with a fortune 500 company that included several operating lines of business.

This customer chose zero box protect 40 brands 10000, plus demands and hundreds of additional digital assets.

A customer initially purchased nine modules, including brand domain intelligent search data feeds takedowns and more.

This is a big win for zero costs were.

James Foster: We are operating at a scale that is far beyond most organizations in the cybersecurity industry. According to Mandyant's website, they conduct over 900 incident response engagements each year on behalf of their customers. Today, we have over 1,100 active response engagements with customers. Our brand recognition, customer trust and proven execution, including our ability to deliver a large on-demand complex programs for factors in why enterprise customer deal sizes is accelerating. Additionally, demand for a platform-based approach remains strong as more organizations look for continuous visibility into their external attack surface.

We also had another six figure new customer win with a fortune 500 software company. This customer is also protecting their global footprint and they purchased eight modules out of the gate.

This customer selected zero box to consolidate several of the other external threat intelligence and digital risk protection services point solutions validating our platform approach.

Due in part to the proliferation of ransomware campaigns Q2, we saw a record number of large deals for on demand response services. This included two multi seven figure deals with fortune 1000 companies and a seven figure deal with a new public sector customer.

James Foster: Intelligence on external threats and the ability to protect, disrupt and respond to those threats. The modern security triple-crown includes end-point security platforms like CrowdStrike, Sentinel-1, or Trelix combined with a robust perimeter provider like Palo Alto Networks, Zscaler, or even Akamine, and an external platform like ZeroFox. Nearly all of our customers have some sort of internal perimeter and external security combination protecting their organizations. Simply said, our platform and positioning is increasingly resonating with our customers as they look to consolidate their security stacks with a few proven leaders.

And we will accomplish this while also further progressing on our path to profitability.

From a platform perspective, while we continuously innovate there are two specific areas I'm going to highlight.

Over the last quarter, we made significant progress completing the integration of looking glass and finalizing our plans for combining the respective platform capabilities.

We also launched a new free threat intelligence service that we call our daily intelligence.

<unk> seen some very nice pick up this summer.

James Foster: Now, I'd like to spend a few minutes taking a closer look at an area within our go-to-market model on how we land and expand within customer organizations. Typically, when customers engage with ZeroFox, they are looking to solve specific external cybersecurity problems or use cases. And this is especially true for reactive customers where they have been incidents in the recent past. Examples of common use cases for ZeroFox include protecting an organization's digital footprint, sufficient impersonation, or count take orders, monitoring the dark web for compromised credentials, data leakage, or early warning signs of an attack, or leveraging threat intelligence data and experts to improve threat prevention, detection, and response efforts.

The second area and I'm sure you've guessed that is artificial intelligence.

As I mentioned last quarter, we have nearly a decade of experience implementing various AI capabilities into our platform.

James Foster: ZeroFox addresses these use cases and more to a single, Our platform capabilities span four strategic pillars, including protection, intelligence, disruption, and response, and each of these pillars include multiple modules that are available for purchase. Examples of our modules include brand protection and domain protection, intelligence search, take down the PI removal, digital populace protection, and on demand notification. When customers purchase our platform, there are two primary factors that drive deals scope and size.

As a reminder, we have over 54 patents issued named today and our innovation program is mature.

For example, spear phishing attacks via external platforms like social media and chat platforms are becoming exponentially better and the success rates are rapidly increasing.

Attackers that have English as a second language for example, can now use chat GPT to perfect a targeted attack against the individual.

The days of receiving a poorly worded E mail from a prince asking you to hold $1 billion for them are long gone.

Our recent advancements in generative AI and large language models are creating new opportunities for us to increase value by more broadly infusing AI in different manner across our platform.

And we're going to leverage these large language models to provide more contextualize intelligence for our customers, making it easier for them to better assess and understand risks and threats.

James Foster: The first is the number of digital assets they protect, and the second is the number of modules they can purchase to protect those assets. In new deals, it is increasingly common for customers to protect multiple assets and purchase multiple modules. For example, in Q2, the average number of modules purchased in new deals was just over three. And while new deals frequently include multiple assets, the assets being protected typically only represent a small portion of their total digital assets.

Our customers will continue to receive the benefit of our innovation program in the quarters like they have over the past several years.

As Tim will discuss in more detail, we continue to expect that we'll be at or near breakeven. The second half of this year.

James Foster: This white space provides us with future expansion opportunities. In addition to increasing asset volumes, we also have the ability to cross sell and upsell our customers additional modules. For customers that have found zero Fox reactively, or because they have experienced a security incident, we typically land with one or two modules within our response pillar first as they become introduced to the organization.

I'd like to turn the call over to our CFO Tim <unk>.

Thanks Boster.

And false or mentioned zero Fox generated strong Q2 results across both top and bottom line metrics.

James Foster: To put this in perspective, let's walk through a couple of our Q2 deals. The first is a six figure new customer win with a Fortune 500 company that included several operating lines of business. This customer chose zero Fox protect 40 brands, 10,000 plus domains, and hundreds of additional digital assets. The customer initially purchased nine modules, including brand, domain, intelligence search, data feeds, takedowns, and more. This is a big win for zero cost.

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

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

For Q2, <unk> reported revenue of $62 2 million, an increase of 42% year over year.

Subscription revenue was $23 2 million, including $4 8 million from working class.

James Foster: We also had another six figure new customer win with a Fortune 500 software company. This customer is also protecting their global footprint and they purchase eight modules out of date. This customer selected zero Fox to consolidate several of their other external threat intelligence and digital risk protection services point solutions validating our platform approach. Due in part to the proliferation of ransomware campaigns, Q2, we saw a record number of large deals for on demand response services. This included two multi seven figure deals with Fortune 1000 companies and a seven figure deal with a new public sector customer.

Services revenue was 39 million consisting of $27 million of recurring revenue from our strategic government customer.

$18 3 million from our own demand response services.

While we expected an improved revenue performance in our services revenue for Q2 are.

Our success in capturing large deals with fortune 500 customers was even stronger than anticipated.

Given our Q2 bookings performance, we expect continued strength in services revenue in Q3.

Our services business continues to be less predictable when compared to our subscription business.

As we look beyond Q3, we would expect services revenue to return to a more normalized historical level.

James Foster: Shifting gears, I'd like to focus on our goals for the second half of the year. We will continue to execute on our strategic plan to expand our platform capabilities, grow our customer base, and increase adoption. And we will accomplish this while also further progressing on our path to profitability. From a platform perspective, while we continuously innovate, there are two specific areas I'm going to highlight. The last quarter, we made significant progress completing the integration of looking glass and finalizing our plans for combining the respective platform.

Given the potential for short term volatility we would encourage investors to look at the performance of our services business on an annualized basis to assess our performance and growth potential.

As of July 31 annual recurring revenue was $182 million.

<unk> consists of platform subscriptions.

All amount of recurring on demand services and $83 million from our strategic government contract.

We ended the quarter with a record high 1300 for subscription customers.

As Foster mentioned in Q2, we saw continued success winning larger deals.

James Foster: We also launched a new free threat intelligence service that we call our daily intelligence brief that has seen some very nice pick up this summer. The second area, and I'm sure you guessed it, is artificial intelligence. As I mentioned last quarter, we have nearly a decade of experience implementing various AI capabilities into our platform. As a reminder, we have over 54 patents issued in our name today and our innovation program is mature.

We ended Q2 with 175 customers with IRR greater than 100000.

Which represented an increase of 35% year over year.

Turning to gross margin.

For the second quarter subscription gross margin was 72% consistent with Q1.

Q3, we expect subscription gross margin to be consistent with Q2 levels.

James Foster: As adversaries increasingly leverage AI to automate the development of sophisticated attacks, we will continue to evolve the use of our AI to ensure that we can protect our customers. For zero-box, this is table stakes. For example, spear-fishing attacks via external platforms like social media and chat platforms are becoming exponentially better and the success rates are rapidly increasing. Attackers that have English as a second language, for example, can now use chat GPT to perfect a targeted attack against an individual.

The Q2 sequential decline was driven by an even higher than expected mix of large deals.

Given the continued impact from large deals in Q3, we would expect services gross margin to be relatively consistent with Q2 levels before returning to more normalized levels.

James Foster: The days of receiving a poorly worded email from a prince asking you to hold a million dollars for them are long gone. Now recent advancements in generative AI and large language models are creating new opportunities for us to increase value by more broadly infusing AI in different manner across our platform. And we're going to leverage these large language models to provide more contextualized intelligence for our customers making it easier for them to better assess and understand risk and threats.

Total gross margin was 38% compared to 43% last quarter.

The declining gross margin was driven by the decrease in services gross margin and the higher mix of services revenue.

As we look to Q3, we would expect gross margins to be consistent with Q2 levels with margin improving in subsequent quarters.

We continue to see opportunities to improve our overall gross margin as we scale, our business and our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

James Foster: Our customers will continue to receive the benefit of our innovation program in the quarters like they have in the past several years. While we continue to see a significant growth opportunity in front of us, we also understand the importance of balancing growth with profitability. We were very pleased with our Q2 cash more performance and will continue to drive additional efficiency and leverage into the business in the coming quarters. As Tim will discuss in more detail, we continue to expect that we'll be at or near break even the second half of this year.

Turning to operating expenses total operating expenses were $28 6 million in the quarter.

The increase in expenses versus last quarter was driven by continued investments in research and development, including expenses from our acquisition of looking glass.

G&A expense declined sequentially as we did not incur professional fees for the annual audit residual piece back filing requirements and transaction costs in Q2.

Our loss from operations was $4 8 million.

Looking at the balance sheet and cash flow, we ended the quarter with $29 million in cash.

James Foster: With that, I want to thank all of our foxes for their energy, passion and commitment as we continue to protect our customers around the world. Q2 is a record quarter for zero box and we are moving as fast as we ever have.

$36 million in accounts receivable $67 million in total deferred revenue and $191 million and total outstanding debt.

In Q2, we generated cash flow from operations of 600000 and free cash flow of approximately 400000.

Timothy Bender: I'd like to turn the call over to CFO Tim Bender. Thanks, Foster. As Foster mentioned, zero fox generated strong Q2 results across both top and bottom line metrics.

As expected our Q2 cash flow performance was positively impacted by the timing of collections from our larger customers and lower professional fees and transaction costs.

Timothy Bender: With the exception of revenue and unless otherwise stated, all financial results we will discuss today are non-gap financial measures. Reconciliation between our gap and non-gap results can be found in our earnings release. For Q2, zero fox reported revenue of $62.2 million and then creates a 42% year-over-year. Subscription revenue was $23.2 million, including $4.8 million from looking glass. Services revenue was $39 million consisting of $20.7 million of recurring revenue from our strategic government customer and $18.3 million from our on-demand response services.

Now to our outlook.

Our outlook assumes no material changes in the macro environment.

Demand for our external cyber security platform remains consistent and we anticipate continued near term strength within our on demand services business.

For Q3 fiscal year 'twenty four we currently expect revenue to be in the range of 55 million to $57 million.

And non-GAAP loss from operations to be in the range of $6 2 million to $5 4 million.

For fiscal year 'twenty four we currently expect revenue to be in the range of $214 million to $217 million.

Timothy Bender: While we expect it to improve revenue performance and our services revenue for Q2. Our success in capturing large deals with Fortune 500 customers was even stronger than anticipated. Given our Q2 bookings performance, we expect continued strength and services revenue in Q3. Our services business continues to be less predictable when compared to our subscription business. As we look beyond Q3, we would expect services revenue to return to a more normalized historical level.

And non-GAAP loss from operations to be in the range of 27 million to $25 million.

We continue to focus on profitability.

<unk> with what we said last quarter, we expect free cash flow for the remainder of the fiscal year to be at or near breakeven.

Timothy Bender: Given the potential for short-term volatility, we would encourage investors to look at the performance of our services business on an annualized basis to assess our performance and growth potential. As of July 31st, annual return revenue was 182 million. ARR consists of platform subscriptions, a small amount of recurring on-demand services, and 83 million from our strategic government contract. We ended the quarter with a record-high 1,304 subscription customers. As Foster mentioned, in Q2, we saw continued success when in larger deals. We ended Q2 with 175 customers with ARR greater than 100,000, which represented an increase of 35% year-over-year.

We continue to expect that we will achieve quarterly free cash flow on a sustained basis in the second half of fiscal year 'twenty five.

With that we'd like to take your questions operator.

Thank you if you like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

Our first question comes from Joseph Gallo with Jefferies. Your line is open.

Hey, guys. Thanks for the question and congrats on the strong results.

Hey, good morning, Joe Thanks for the question.

Timothy Bender: Turning to gross margin. For the second quarter, subscription gross margin was 72%, consistent with Q1. For Q3, we expect subscription gross margin to be consistent with Q2 levels. Services gross margin was 18%, compared to 24% in Q1. As we indicated on last quarter's call, we expected this margin to decline from Q1 due to a higher mix of notification services, attributable to our 4500 response engagements. The Q2 sequential decline was driven by an even higher than expected mix of large deals.

I think.

We had a stronger than forecasted result in Q2, which you acknowledged which we announced this morning.

What we're seeing here is maybe a slight easing of some of the macro pressures we saw in the beginning part of the year.

And continued demand for our platform.

Awesome.

And Tim Congrats on the free cash flow profitability.

How should we think about profitability versus investments for growth or even acquisitions, and then ultimately kind of combine that with how investors should think about your debt the maturity timeline of bad debt and how those repayments eventually play out thanks.

Timothy Bender: Given the continued impact on large deals in Q3, we would expect services gross margin to be relatively consistent with Q2 levels before returning to more normalized levels. Total gross margin was 38% compared to 43% last quarter. The declining gross margin was driven by the decrease in services gross margin and the higher mix of services revenue. As we looked at Q3, we would expect gross margin to be consistent with Q2 levels with margin improving in subsequent quarters.

Thanks for the question.

We acquired looking last just a little over a quarter ago I think we've got plenty of opportunity to continue to sell into our customer service and.

Realize some upside there in the coming quarters from the expanded platform. So I don't think about our current cash position our balance sheet strength as being leveraged for acquisitions in the very near term, although I would say in general we have proven to be an acquisitive company.

Timothy Bender: We continue to see opportunities to improve our overall gross margin as we scale our business and our higher margin subscription revenue becomes a greater portion of our overall revenue mix.

Acquiring four companies in the last four years.

Maybe just to go back to your other point on profitability.

Timothy Bender: Turning to operating expenses, total operating expenses were 28.6 million in the quarter. The increase in expenses versus last quarter was driven by continued investments in research and development, including expenses from our acquisition of looking less. GNA expense declined sequentially as we did not incur professional fees for the annual audit, residual lease back filing requirements, and transaction costs in Q2. Our loss from operations was 4.8 million.

I think we set up we said that we would be at or near breakeven for the rest of the year. So yes, we can.

So positive in Q2, and we see the opportunity to.

Main kind of right around cash flow positive for the next two quarters and then we've also put that we'd be cash flow positive on a sustained basis.

Some are as well so I think all in all we are doing all the things. We said, we're going to do on the cash flow front and I think that balanced approach.

Both and getting leverage back into our model is.

Is the right thing for the business and Joe Tim just to clarify on the on the one question. We don't have to do anything different in our business model as far as our investments for growth.

Timothy Bender: Looking at the balance sheet and cash flow, we ended the quarter with 29 million in cash, 36 million in accounts receivable, 67 million in total deferred revenue, and 191 million in total outstanding, in depth. In Q2, we generated cash flow from our operations of 600,000 and free cash flow of approximately 400,000. As expected, our Q2 cash flow performance was positively impacted by the timing of collections from our larger customers and lower professional fees and transaction calls.

That's built into our cash flow assumptions. So we're going to continue to invest in sales and marketing on our go to market efforts to drive growth and we think we can do that and manage our operating expenses to deliver the cash flow false or just mentioned, yes, that's right as it relates to the debt the convert the large convertible note is out about two years from today.

August 2020.

Todd is a due date on that will likely continue the same path that we are doing right now as far as the way we are treating the interest via the Pik and listen we're looking as our performance continues to strengthen we'll have conversations around how you want to deal with that as we get further down the road, but right now 2025 August is when that.

Timothy Bender: Now to our outlook. Our outlook assumes no material changes in the macro environment. Demand for our external cybersecurity platform remains consistent and anticipates continued near-term strength within our own demand services business. For Q3 fiscal year 24, we currently expect revenue to be in the range of 55 million to 57 million and non-GAF loss from operations to be in the range of 6.2 million to 5.4 million. For fiscal year 24, we currently expect revenue to be in the range of 214 million to 217 million and non-GAF loss from operations to be in the range of 27 million to 25 million.

Matures.

Awesome, Thanks for the color and congrats again.

Okay.

Thank you. Our next question comes from Brad Reback with Stifel. Your line is open.

Great. Thanks, very much couple of quick ones. The on demand response business can you give us a sense of what the profitability on our gross margin.

Spectrum it looks like there.

Sure Thanks, Brian It's Tim.

Timothy Bender: We continue to focus on profitability. Consistent with what we said last quarter, we expect free cash flow for the remainder of the fiscal year to be at or near break even. On a quarterly basis, our cash flow will be impacted by the timing of collections from our large customers. And therefore, we expect cash flow to be negative in Q3 followed by an offsetting positive amount in Q4. We continue to expect that we will achieve quarterly free cash flow on a sustained basis in the second half of fiscal year 25.

Historically.

We see we've seen the margins in.

Kind of the mid <unk> this quarter was a little bit lower as we saw some very large deals.

We had a couple of deals that were materially are substantially larger than what we'd seen in the past. So what we used to define as large deal. We had two deals that were much larger and those compressed margin. So I think as we get back into what would be what we call a more normalized deal sizes, we would see those margins start work.

On their way back up but as we said in Q2 with the with the beat in the revenue and the large deals that had compression.

Operator: With that, we'd like to take your questions, operator. Thank you. If you'd like to ask a question, please press star 11. If your question has an answer, and you'd like to remove yourself in the queue, please press star 11 again.

I will double check on one thing for you Brad I mean, we saw some really interesting growth in our six figure <unk> customers that were north of $100000, which was actually an accelerant over Q1.

Operator: Our first question comes from Joseph Gallo with Jeffries. Your line is open. Hey guys, thanks for the question and congrats on the strong results. Guidance for the year looks like it flows through a little bit more revenue than your QQB. What do you see in the market or macro wise that kind of lend confidence towards doing that? Thanks. Hey, good morning, Joe. Thanks for the question. I think we had a stronger than forecasted result in Q2, which we acknowledge this morning. I think what we're seeing here is maybe a slight easing of some of the macro pressures we saw in the beginning part of the year and continued demand for our platform.

And so I think when large customers call you to help out in their time of need we're finding that is kind of.

An early indicator of trust and that trust. We think we will continue to lead to larger ongoing relationships with those customers as well.

So we like that business and we like the fact that we are one of the few trusted providers to get those calls and their time of need.

That's great and going back to the debt position.

It would be accurate to say that you have to address that before August of 'twenty four right before the convert becomes current.

Okay.

I think Thats a fair a fair assessment I mean, you don't have to but it's I think it's in best interest of all parties that we do that and that's something we're actively looking at.

Joseph Gallo: Awesome. Tim, congrats on the free cash for profitability. How should we think about profitability versus investments for growth or even acquisitions? And then ultimately kind of combine that with how investors should think about your debt, the maturity or timeline of that debt, and how those retain and eventually play out. Thanks. Thanks a good question. Well, we acquired looking last just a little over a quarter ago. I think we've got plenty of opportunity to continue to sell into our cost of our base and realize the upside there and the coming quarters from the expanded platform.

Plenty of options there too.

You do you think you'll have plenty of options.

I think this is a really tough that market Brad in general I mean, if you look at the macro I think anybody would say it has to be forced to say anything but we've seen some of the highest interest rates that are out there, but I think as long as we continue to perform we'll have options.

Part of part of next August yes.

That's great thanks very much.

Yes.

Thank you and our next question comes from <unk>, Li with Cantor Fitzgerald. Your line is open.

Joseph Gallo: So I don't think about our current cash position or balance sheet strength as being leveraged for acquisitions in the very near term. Although I would say in general, we have proven to be a positive company acquiring four companies in the last four years. I think maybe to go back to your other point on profitability, I think we set up, we said that we would be at a near break even for the rest of the year.

Good morning, Good morning, Tim Congrats on another strong consistent execution, great I'll start on the free cash flow positive about one year ahead of schedule too.

Two quick ones one quick one for Tim. So firstly, you talked about the Fox Crystal ball at the beginning of this fiscal year.

Standing for focus optimization optimization on the platform and extracted and cross selling.

Joseph Gallo: So yeah, we had casual positive and Q2, and we see the opportunity to remain kind of right around casual positive for the next two quarters. And then we've also put that we'd be casual positive on a sustained basis next summer as well. So I think all in all, we were doing all the things we said we were going to do on the cash flow front. And I think that balanced approach to growth and getting leverage back into our model is the right thing for the business.

And obviously, we've seen that play this quarter was wondering like because we hit the halfway.

Mark.

Already.

To judge on the execution of all until Fox So far this year.

Some of the things that you think is beyond your expectation and things that.

Jill Fox needs to focus on going forward.

Joseph Gallo: Yeah, and Joe Tim, just to kind of clarify on the one question, we don't have to do anything different in our business model as far as our investments for growth. That's built into our cash flow assumptions. So we're going to continue to invest in sales and marketing and our go-to-market efforts to the drive growth. And we think we can do that and manage our operating expenses to deliver the cash flow falls we just mentioned.

I think the.

Yes.

I think.

The willpower and fortitude of our employees has just been unbelievable year to date. This is not an easy time to be an employee, particularly in a tech company going through changes and back to offices and <unk>.

Types of things that are happening in kind of the overall economic situation that we're in around the world and so I'm really proud of what our Fox to have been able to do here I mean, when I think about the O and Foxy.

Joseph Gallo: Yeah, that's right. As it relates to the debt, the large convertible note is out about two years from today, August 2020. Five is the due date on that. We'll likely continue the same path that we're doing right now as far as the way we're creating the interest to be of the pick. And listen, we're looking, you know, as our performance continues to strengthen, we'll have conversations around, you know, how you want to deal with that as we get further down the road. But right now, 2025 August is when that matures.

Timothy Bender: Awesome. Thanks for the color. Thank you.

Oh and optimization is really just making everything that we do here at zero box better on behalf of our customers I mean, that's our north star that is what we talk about it as a company and I think the.

Q2s results show that we are getting better and stronger as a company and it's.

The effort of our employees.

Okay.

Hello, Paul.

To follow up on that thanks for the color on that on the growth opportunity is right obviously.

Brad Reback: Our next question comes from Brad. We back with default. Your line is open. Great. Thanks very much. A couple of quick ones. The on-demand response business. Can you give us a sense of what the profitability on our gross margin perspective looks like there? Sure. Thanks, Brad, it's Tim. You know, historically, we see, we've seen the margins in kind of the mid 20s. This quarter was a little bit lower as we saw some very large deals.

<unk> stopped right you announced Jenny deployment enhancements to breach response platform market southwest.

Google Com partnership about two quarters ago looking glass with your question.

It sounds like it's looking good.

Would you rank these opportunities like the most impactful upside in the near term.

Yes.

And the long term what do you think it's got multiple obviously in the near term versus long term. All these opportunities are the opportunities I might I might have missed.

Brad Reback: But we had a couple deals that were materially or substantially larger than what we'd seen in the past. So what we used to define as a large deal. We had two deals that were much larger and those compressed margins. So I think as we get back into, you know, what would be what we call more normalized deal sizes. We would see those margins start working their way back up. But, you know, as we said in Q2 with the with the beat and the revenue and the large deals that had compression.

Well, yes, I appreciate the contextual question.

Thanks.

US along with detail.

Yes.

Maybe I'll answer it slightly differently I mean, one of the things you heard on our earnings call today.

Is.

Kind of maybe a renewed focus or a first time disclosed focused around our modules.

And we said that in general new customers signed up with zero box in Q2 averaged about three modules.

And then we spent a little bit of time talking about a couple of customer purchases that had eight or nine modules. So I think there was a really interesting opportunity for us continue to make sure that our customers adopt the full breadth and capability set of our platform.

Brad Reback: I will double put on one thing for you, Brad. I mean, we saw some really interesting growth in our six-figure AR customers that were north of $100,000, which was actually an accelerant over Q1. Right? And so I think when large customers call you to help out in their time of need, we're finding that is, you know, kind of an early indicator of trust and that trust we think will continue to lead to larger ongoing relationships with those customers as well. So we like that business and we like the fact that we are one of the few trusted providers to get those calls in their time of need. That's great.

And we will spend time there in second half of this year.

Okay and then the last one for Tim on the financial side. Obviously, you guys reached free cash flow positive about a year ahead of my schedule.

Turns off like the puts and takes to make this sustainable.

What are they like Tim can you give us.

Is it better cash collection, what's driving this upside we're seeing.

A year earlier than expected and for fiscal 'twenty five did you mean chips in that.

Fiscal second half you are free cash flow positive first half, it's more on the negative side and thats. It for us. Thank you for the kind of team.

Yes listen.

I think I think the basic answer is not so maybe it's just really the model is working as we scale certainly the acquisition of looking glass has helped as we picked up some some solid revenue with that but I think it's really a scale factor as you start to see.

Brad Reback: In general, I mean, if you look at the macro, I think anybody would say it's before to say anything but that we've seen some of the highest interest rates that are out there. But I think as long as we continue to perform, we'll have options prior to prior to next August. Yes. That's great. Thanks very much. Thank you.

<unk> is right about $100 million, we'll cross that in Q3, So it's model scale in that regard.

Yi Lee: And our next question comes from Yifoo Lee with Cancer Fitzgerald. Your line is open. Good morning, Foster. Good morning, Tim. Congratulations on another strong, consistent execution, according. We're in great style in the free casual process about one year has scheduled two quick months for Foster and one quick month for Tim. So Foster, you talk about the Fox principle at the beginning of the fiscal year, you know, standing for focus, optimization optimization on the platform and extract in cross selling.

And then I think as far as 25 Youre spot on we do think you see in our script.

There is maybe a little bit of volatility in our working capital throughout the rest of this year, but 11, we get into the second half of the year I think some of the timing of working capital between our AR collections mitigates.

Yi Lee: And obviously we've seen that play this quarter was wondering like because we hit the high half the mark already. If you were to judge on the execution of the Fox so far this year, what are some of the things that you think is beyond your expectation and things that, you know, the Fox needs to focus on going forward. I think the willpower and fortitude of our employees has just been unbelievable year to date.

Into a steady free cash flow position.

Makes sense. Thank you very much tenant roster.

Okay. Thanks.

Thanks Pete.

Thank you.

Our next question comes from Jonathan <unk> with Cantor Fitzgerald. Your line is open.

Yes. Thank you good morning.

So foster those deals that you decided with eight to nine modules out of the gate, where those deals that had been in the pipe for.

Six months to nine months or so or were they more reactive response is too.

A breach of an external nature, maybe broadly you can just talk about.

Yi Lee: This is not an easy time for being an employee, particularly a tech company, going through changes and back to offices and the types of things that are happening in kind of the overall economic situation that we're in around the world, and so I'm really proud of what our Fox has been able to do here. I mean, when I think about the O in Foxy and that O in optimization is really just making everything that we do here at zero Fox better on behalf of our customers. I mean, that's our North Star. That's what we talk about as a company.

How do you think is external issues could impact sales cycles looking out through the through the fiscal year.

Yes, I heard a couple of things Jonathan.

A couple of examples I gave what I would call broad adoption of the platform multiple pillars multiple modules propeller and.

And what I call long term relationship right not.

Not a near term.

Reactive response only.

So those eight or nine modules in general we've.

Yi Lee: And I think the Q2's results show that we are getting better and stronger as a company, and it's because of the effort of our employees. So to follow up on that, thanks for the color on that on the growth opportunities, right? Obviously, you got done a lot of stuff, right? You know, UNNAS Genai, the poigness, enhancements to bridge response platforms, market stock web, the Google Cloud partnership about two quarters goal, looking black integration.

Yi Lee: It sounds like it's looking good. How would you rank these opportunities, like the most impactful upside in the near term versus, you know, in the long term? What do you think is the most bonus for you in the near term versus long term of all these opportunities? Or other opportunities I might, I might have missed. Well, yeah, I appreciate the contextual question. The thing to follow us along with detail. Maybe all answers slightly differently.

Each provider.

But there is opportunity for us to then sell the platform vision and maybe earn our seat at the table when someone starts off with just a couple of modules before they move into a full platform. So.

Maybe that answers part of the question I heard kind of how are we thinking about.

Growth in the second half of the year I think it's what I said.

Yi Lee: I mean, one of the things you heard in our earnings call today is kind of a, maybe a renewed focus or a first time disclosed focus around our modules, right? And we said that in general, new customers find up with zero fox and Q2 averaged about three modules. And then we spent a little bit of time talking about a couple customer purchases that had eight or nine modules. So I think there's a really interesting opportunity for us, continue to make sure that our customers adopt the full breadth and capability set of our platform.

We're seeing an adoption acceleration for large six figure IRR customers.

And I think that just proves that are the problems that we're working on continues to grow I'm a firm believer in cyber and your asps going up and your adoption in your large customers is going up you're working on a problem that matters and I'll tell ya external cyber matters every seat so continues to be worried about getting attacked halfway.

Yi Lee: And we'll spend time there a second half of this year really making sure that customers adopt the platform because ultimately we fundamentally believe and we've got the metrics to back it up, that when you adopt more of our platform, you are better protected and the results are improved.

I think we are in the right place at the right time.

Yes, yes it is.

Timothy Bender: Okay, and then the last one is for Tim on the financial side. Obviously, you guys reach three castle closets about a year ahead of my schedule. In terms of like, you know, the person takes to make this sustainable. What are they like Tim? Like can you give us, you know, is it better cash collection? What's driving this upside with seeing about a year, you know, earlier than expected? And for fiscal 25, did you mean to that like fiscal second half, you are three castle positive.

What youre, saying is the <unk>.

And trends are pretty strong across the entire platform.

So I guess along those lines how do you how do you see the sales organization equipped to solid cross protection.

Disruption or are they.

Fully up to speed on <unk>.

Each one of those pillars.

You need to do that.

Drive that execution, a more platform sale.

I don't think we're ever done Jonathan I mean, I'm, a believer in consistent training and consistent enablement I mean, the analogy here, we used some of the best athletes to invest.

Timothy Bender: But first half, it's more than a negative side. And that's it for us. Thank you from the kind of team. Yeah, listen, I think I think the basic answer is not so maybe second, it's just really the model is working as we scale. Certainly the acquisition of looking glasses helped as we as we picked up some solid revenue with that. But I think it's really a scale factor as you start to see RAR is right about a hundred million and we'll cross that in Q3.

Performers of all time still trained daily and so even if you've reached the peak in what you do you are the best quarterback to ever play.

The best ever player Sport antennas, you still practice daily to get better and I think our team and our go to market side of the house. We think is best in class for our space.

Timothy Bender: So it's model scale in that regard. And then I think as far as as 25 you're spot on, we do think and you see in our script and that there is maybe a little bit of volatility in our working capital throughout the rest of this year. But once we get into the second half of the year, I think some of the timing of working capital between our AR collections mitigate some and we're into a steady free cash world to this. Thank you very much.

That's because we are relentlessly focused on continuing to improve them I would say, though.

Yi Lee: Thank you.

Our efforts in the channel always lag our internal sales team. So there is certainly more we can do there.

We are still the baby on the block right, we still have a small cyber company out there. We're still the last one to go public and so we don't have the footprint of some of the other peers that we have out there thats envious to US right now and so we've got to continue to build brand awareness and our channel continue to enable the channel and make sure they understand our differentiated platform and approach.

Jonathan Ruykhaver: Our next question comes from Jonathan Ruykhaver with Cancer Fitzgerald. Your line is open. Yeah, thank you.

Yes, Thanks makes a ton of sense. Thank you.

Okay.

There are no further questions at this time I would like to turn the call back over to foster for any closing remarks.

James Foster: Good morning. So Foster, those deals that you cited with eight to nine modules out of the gate were those deals that had been in the pipe for, you know, six to nine months or so, or were they more reactive responses to, you know, a breach of an external nature. And maybe, you know, probably you can just talk about, you know, how you think these external issues could impact sales cycles looking out through the fiscal year?

Thank you operator, and as you can tell we had a record Q2, we remain excited about the opportunities in front of us for the second half of the year.

So again, thank you for joining us the call. This morning and have a wonderful Wednesday tiers.

Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.

James Foster: Yeah, I heard a couple of things to Jonathan. A couple of examples I gave what I called broad adoption of the platform multiple pillars, multiple modules per pillar. And what I call long term relationship, right, not, not a near term reactive response only for those eight or nine modules, like in general, you know, we've got about a few modules per pillar of our platform. So when I look at customers that are adopting six, seven, eight, nine modules, that tells me right off the bat that they've adopted the platform, right, they've adopted multiple pillars.

James Foster: They understand the consolidated vision and approach that we have. And they've gone all in on zero fox. When I see a customer in general that's bought one or two modules. That means, you know, one or two things quickly. It means that they've got a particular use case that's causing them some pain. And they want to alleviate that pain as fast as possible. That could be because they've had an incident that's because they've maybe had an issue inside.

James Foster: Maybe they wanted to replace a niche provider. But, but there's opportunity for us to then sell the platform vision and maybe earn our seat at the table when someone starts off with just a couple modules before they move into a full platform. So that's maybe that answers part of the question. I heard kind of how are we thinking about, you know, growth in the second half of the year. I think it's what I said, the ye.

James Foster: We're seeing an adoption acceleration for large six figure A or R customers. And I think that just proves that our problems that we're working on continues to grow on the firm believer in cyber. If your ASP is going up and your adoption and your large customers is going up, you're working on a problem that matters. And I'll tell you external cyber matters every see so continues to be worried about getting attacked.

James Foster: You know, halfway around the world by nation state actors by cyber criminal groups. They're less worried about an insider threat issue. You know, I remember 15 years ago that was kind of top worry. That's not the number one word anymore and external attack is what's keeping these guys up at night. And I think we're in the right place at the right time. Yeah, it's probably what you're saying is the demand trends are pretty strong across the entire platform.

James Foster: And so I guess along those those lines, how do you, how do you see the sales organization to quit to to sell across protection intelligence disruption or they, you know, fully up to speed on hand and handling each one of those pillars or doors that work that you need to do there to kind of. Drive Data Acquisition of a more platform sale. I don't think we're ever done, Jonathan. I'm a believer in consistent training and consistent enablement.

James Foster: I mean, the analogy here we used some of the best athletes are the best, you know, performers of all time, still trained daily. And so even if you reach the peak in what you do, you're the best quarterback to ever play, you know, you're the best that ever player in your sport in tennis. You still practice daily to get better. And I think, you know, our team and our go-to-market side of the house, we think it's best in class for our space, but that's because we're, let's see, focused on continuing to improve them.

James Foster: I would say though, our efforts in the channel always lag our internal sales team. So there is certainly more we can do there. You know, we're still the baby on the block, right? We're still the smallest cyber company out there. We're still the last one to go public. And so we don't have the footprint of some of the other peers that we have out there that are in view of us right now. And so we've got to continue to build brand awareness and our channel, continue to enable the channel and make sure they understand our differentiated platform and approach.

James Foster: Yep, makes a ton of sense.

Operator: Thank you.

Operator: Thank you, there are no further questions at this time.

James Foster: I like to turn the call back over to Foster for any closing remarks. Thank you, operator. And as you can tell, we had a record Q2. We were made excited about the opportunities in front of us for the second half of the year.

Operator: So again, thank you for joining us to call this morning and have a wonderful Wednesday. Cheers. Thank you for your participation. This does include the program and you may now disconnect. Everyone, have a great day.

Q2 2024 ZeroFox Holdings Inc Earnings Call

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