Q3 2024 ZeroFox Holdings Inc Earnings Call

December 5, 2023

Thank you for standing by and welcome to lose your Fox fiscal third 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 and as a reminder, today's call's being recorded.

The conference call over to Todd Wohler, Vice President Investor Relations for Fox.

Thanks, operator.

Morning, and thank you for joining us today to review <unk> zero boxes fiscal third quarter 2024 financial results with me on the call today is foster our founder and Chief Executive Officer, and Chairman along with Tim <unk> 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 loss.

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 for a 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.

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 foster.

Thanks, Todd good morning, everyone.

Q3 was a record setting quarter for zero Fox.

We delivered another strong top line outperformance, while also generating positive free cash flow for the second consecutive quarter.

We believe that our outperformance reflects the growing demand for our external cyber security platform demonstrates our team's consistent execution and validates our balanced approach to growth and increased profitability.

Today I'm going to provide summary on key areas of our results share a few customer success stories and provide update on our one platform vision and discuss our plan to close out this year.

As you may have seen in our press release. This morning, we reported strong results.

We reported core revenue of $44 million, an increase of 89% year over year and we define core revenues total revenue less revenue from our one large government contract.

We ended the quarter with record <unk> of $186 million, an increase of 21% year over year and we accomplished this while also improving profitability and generating positive free cash flow quarter over quarter.

Overall I was very happy with our teams performance in Q3.

Zero box platform is relied upon by enterprise customers to solve their external cyber security challenges and we continue to see demand for our platforms four strategic pillars, including protection intelligence disruption in response.

Our continued success with enterprise customers was reflected in the 27% year over year growth in subscription customers with <unk> greater than $100000 and in general our overall growth in large enterprise deals.

Given the U S federal government fiscal year and during the middle of our Q3 I thought it was relevant to highlight our public sector business. This call would have a very strong performance with record bookings new customers and public sector.

In Q3, we signed an eight figure renewal and expansion with strategic U S. Federal agency that is focused on cyber security.

Through this contract and program zero box of supporting critical cyber threat intelligence cyber defense and security operations across hundreds of federal state and local government organizations.

We also signed a multimillion dollar renewal and expansion with our U S. Cyber defense agency that is using zero box to protect thousands of personnel from advanced digital attacks.

Over the last three years this customer has significantly increased our adoption of our platform and specifically over the last two years has more than quadrupled their IRR with us.

Our team always takes great pride in supporting mission aligned organization with critical capabilities.

We also added two additional six figure customers that purchased six plus modules across our protection intelligence and disruption pillars.

While public sector benefit business benefited from the end of the government fiscal year and its seasonally strong spending.

And believe there are underlying fundamental drivers that give us confidence in our future growth outlook and our one platform approach.

For example, the current geopolitical environment is amplifying the intensity and sophistication of the external threat environment and driving increasing awareness of the critical need for organizations to defend themselves against activity from nation state adversaries and organized cyber criminal groups the.

The days, where insider threats, where a top concern for <unk> are behind us.

Today, our customers are thoughtfully protecting themselves from a myriad of external threats that are beyond their perimeters and most frequently beyond their borders.

Turning to our on demand response services, we experienced another record quarter, resulting in year to date revenue growth of nearly 100%.

Our strong performance was driven by continued high levels of cyber security breach activity, including a significant increase in large scale breaches and our continued success in capturing market share.

We signed several six figure deals as well as three seven figure deals, including one with a large gaming and hospitality company.

The market is recognizing our differentiated vision brand and one platform approach to helping customers navigate the increasingly complex emergency response, and notification requirements, especially for regulated organizations.

Furthermore, these requirements are becoming more stringent with the new SEC cyber security incident disclosure requirements for publicly traded companies.

While we remain optimistic about our response services business. The go to market engine. We are building and the trust, we are creating with our customers and important to remember that the response business is largely reactive and macro driven for example, major events and cyber pent up campaigns like move it log for Jay or the fallout in solar winds are.

Largely time bound and come in waves.

And as you know the great thing about things that come in waves that there may be peaks and valleys, but it's just a matter of time until that next great way.

With that I'd like to change gears and spend a few minutes, providing an update on our vision.

At <unk>, we believe that solving the external cybersecurity challenge and problems that requires a one platform approach. This has been the driving force behind our strategy and the development of our comprehensive unified platform with four pillars of capabilities.

We continue to see adoption of the modern security Triple Crown or security organizations will standardize on internal platforms like Microsoft crowd strike, our Sentinel won edge.

Edge platforms, like Palo Alto networks, or Zee scalar and an external platform like zero box.

Customers have grown tired of the complexity and cost of managing multiple external cyber security products for digital risk protection threat intelligence takedowns, and even external attack surface management.

Dynamic that has intensified in the current economic environment.

We believe that our proven ability to provide an external cyber security platform that unifies protection intelligence adversary disruption and response is a critical component of the success of this organization and it provides us with key competitive advantages.

We also believe that our technical Eas and capabilities from our acquisition of looking Lasse will provide immense value to our customers.

Organizations need to understand their full external risk their vulnerabilities in both digital and cyber Scapes and have detailed information on threat actors that are attacking them.

This and this alone stance of the robust capabilities required organizations to defend themselves from these advanced external threats.

Furthermore, our team is committed to protecting our customers. It's in the DNA of our company and quite frankly, it's what motivates us it's our passion with not just AI data scientists analysts and engineers, we are true cyber defenders for our customers and it's a responsibility that we cherish.

Speaking of our customers, we had a six figure new customer win at a large retail organization that is leveraging the power of nearly our entire platform. This customer purchased seven modules across protection intelligence and disruption post to protect our external attack surface.

We had another six figure new customer win with a fortune 500 financial services company that purchased four modules across protection and disruption pillars as well this.

This company selected zero box based on our ability to protect multiple digital asset types, including brands domains and a large number of credit card been numbers given our ability.

And proven capability to do takedowns and disruption at Internet scale.

We were also able to showcase our full capabilities for our new healthcare customer. This organization initially purchased the zero box platform for digital protection. However, during the sales process. They had an urgent need for on demand response services and capabilities and they selected the <unk> incident and.

Breach response capabilities.

This resulted in a multimillion dollar deal in Q3 this customer experience the full value of our one platform vision in action as we demonstrated our ability to disrupt and respond to aggressive external cyber attacks and Furthermore, protect them from those future tax going forward.

Another example was with an existing technology customer. This customer initially selected <unk> several years ago to protect its high value digital assets in Q3, the customer significantly expanded the number of digital asset protected and added on demand response capabilities, resulting in a six <unk> increase in their work.

Current spend in short I'm very pleased with our team's commitment to solving customer problems and the pace of innovation of our organization.

As a cyber security company the pace of innovation is critical to ensuring we stay ahead of our customers' relentless adversaries.

In Q3, we delivered significant advancements to our fishing and domain protection and global threat intelligence capabilities, specifically in the area of physical security intelligence.

As we have always done we will continue to leverage innovations in AI and machine learning to improve our ability to detect and disrupt threats.

Large language models generative AI and various other types of computer vision deep learning and machine learning capabilities are commonplace in the <unk> platform.

For example, we are now using LMS and generative AI to help us enhance our finished intelligence and alerting capabilities as well as evaluate risk for key alerts and attacks we identify.

Shifting gears I'd like to turn our focus to the goals for Q4 as we close out what has been a strong and transformative year for zero box.

We will continue to execute on our strategic plan to expand our platform capabilities in preparation for next year, we will grow our customer base and we will continue to increase adoption.

We will also continue to prudently invest in our go to market engine, our services to support and enable customers and to optimize our business to improve efficiencies and profitability.

We were very pleased with our Q3 cash flow performance and believe this trend reflects our commitment to balancing growth and profitability.

Now before I turn the call over to Tim for a detailed review of our Q3 financial performance I would like to share one more customer story with you.

I've always enjoyed meeting with customers and hearing their goals and challenges it personally been rewarding.

In Q3, I had an opportunity to meet with one of our top 10 customers who is also on the Fortune 10 list.

During our discussion this customer described our offering is unbeatable as a marketplace and highlighted the significant ROI. They are generating using the zero box platform each and every day.

They even went so far to say that zero box, we're saving them hundreds of millions of dollars per year.

We ended up agreeing to expand our scope for the third consecutive year and zero box also agreed to help automate and streamline another key external challenge with our platform with them.

To me there is nothing more powerful than the validation of this kind of direct customer feedback, particularly from a customer of the size and sophistication.

Feels really good to know that our platform works. Our team is committed and that's what we're doing is really helping people and organizations around the world in short I Love this industry with.

And with that I want to thank all of our boxes for their energy passion and commitment throughout Q3, and certainly before that.

And now I'd like to turn the call over to our CFO Tim Miller.

Thanks Alastair.

As far as <unk> mentioned <unk> generated strong Q3 results across both top and bottom line metrics.

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

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

This is the first quarter, where we can truly present comparative year over year financial information.

Although the year ago quarter excluded three days as our <unk> transaction closed on August three 2022.

For Q3 zero Fox reported revenue of $65 million, an increase of 45% year over year.

Prescription revenue was $23 7 million, an increase of 51% year over year.

And services revenue was $41 3 million, an increase of 42% year over year.

Services revenue consisted of $20 7 million.

Recurring revenue from our strategic government customer and $20 6 million from our own demand response services.

The significant outperformance in services revenue was driven by another record quarter of on demand response bookings as we benefited from continued high levels of cyber breach activity and continued success winning enterprise deals.

As you've heard from foster we feel well positioned to continue winning enterprise service opportunities.

However, given our significant performance in Q3, we currently anticipate a sequential decline in <unk> services revenue.

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

Because of the unforeseen nature of response services, 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 October 31 annual recurring revenue was $186 million, an increase of 21% year over year.

<unk> consists of platform subscriptions.

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

We ended the quarter with a record high 1330 subscription customers as.

As Foster mentioned in Q3, we saw continued success winning larger deals. We ended Q3 with 182 customers with <unk> greater than 100000.

Which represented an increase of 22, 7% year over year.

Turning to gross margin for the third quarter subscription gross margin was 73% up from 72% in Q2.

For Q4, we expect subscription gross margin to be consistent with Q3 levels.

As expected services gross margin of 18% was consistent with Q2.

Services gross margin continues to be impacted by a higher mix of notification services driven by the mix of large deals.

Given the continued impact from large deals in Q4, we would expect services gross margin to be relatively consistent with Q3 levels.

Before returning to more normalized historical levels over the course of fiscal year 'twenty five.

Total gross margin was 38% consistent with Q2 as.

As we look to Q4, we would expect gross margin to increase slightly from Q3 levels driven by a higher mix of subscription revenue.

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

Turning to operating expenses.

Total operating expenses were $27 million in the quarter.

The sequential decrease in operating expenses was driven by lower R&D and G&A expenses, resulting from acquisition cost synergies.

Our loss from operations was $2 5 million a significant improvement from $4 8 million in Q2.

Looking at the balance sheet and cash flow, we ended the quarter with $30 million in cash $38 million in accounts receivable.

$88 million in total deferred revenue and $194 million and total outstanding debt.

In Q3, we generated cash flow from operations of approximately $1 8 million and free cash flow of approximately $1 6 million.

Our Q3 cash flow performance was positively impacted by the timing of collections from our enterprise customers and also reflects our focus on improving profitability.

We are committed to enhancing our financial position and are considering various options to strengthen our balance sheet manage our convertible debt and optimize our capital structure.

We will continue to focus on sustaining our strong business fundamentals and improving profitability.

Now to our outlook.

Our outlook assumes no material changes in the macro environment.

Demand for our external cyber security platform remains consistent.

And assumes that no incremental outsized response deals close within the quarter.

For Q4 fiscal year 'twenty four we currently expect revenue to be in the range of $56 million to $58 million.

non-GAAP loss from operations to be in the range of $5 8 million to $4 8 million.

For fiscal year 'twenty four we currently expect revenue to be in the range of $228 7 million to $230 7 million and non-GAAP loss from operations to be in the range of $21 4 million to $20 4 million.

We continue to focus on profitability.

System with what we said last quarter, we expect free cash flow for Q4 to be at or near breakeven and as we begin to look at fiscal year 'twenty. Five we now expect that we will achieve free cash flow on an annual basis.

To conclude we are pleased with our <unk> results for which we again exceeded top and bottom line expectations and are raising guidance for Q4.

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

Thank you if you'd 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 you said that Youre, assuming macro stays the same in your guidance.

<unk> full year revenue by more than the beat in the quarter, which was really impressive. So maybe just talk through where some of the incremental positivity is coming from <unk> and then just on macro.

How are your customers thinking about their calendar 'twenty four budgets.

Yes, good morning, Joe Thanks for the question.

I think we'll tag team this one here.

So on the macro I think you'd see us execute here now we haven't really strong Q3, and so timing of subscription as well as some of those large services deals will help us.

Not only with the foundation for Q4, but we see some opportunity as you saw it's a raise.

Guidance above beat for Q4, so I think thats exactly what we did.

Yes.

In general what the macro environment that we're seeing right now we haven't really seen a slowdown in large deals and we've seen some of the pressures maybe in other parts of the world that we're there and previous quarters.

Improved in the last quarter or so so I think we're pretty pretty bullish about Q4 and decided to kind of finish out the year strong.

And Joe just Tim I missed your second half of the question on the I think you are asking about catalog calendar 'twenty versus next year's budgets.

Just as far as like the macro conversation like when Youre talking to your biggest customers right. You said youre, assuming macro stays the same but how are they feeling how are they thinking about calendar 'twenty four budgets that fresh P&L that you can attack.

Again, I think its similar just again.

Our platform strong and will compete at that level and I think from that standpoint customers see the value in our platform and we're going to continue to win customers. So I don't think theres any real material change as it relates to how customers thinking about spending on external next year.

Okay. Thanks, and then.

I double click on that for you Joe too is we as an organization.

<unk> continued to try to strike a healthy balance between growth and profitability and so going into Q4 profitability.

It's still a top area that we're continuing to optimize the business around we had nice growth in free cash flow quarter over quarter, and we're going to continue to refine and improve the business. There we're not done growing profitability year that's for sure.

You must have a crystal ball because that kind of leads into my second question was.

Great to see the second straight quarter of free cash flow positive and strong margin performance, you mentioned synergies being a large driver of the margins how should we think about incremental synergies or leverage as we enter calendar 'twenty four.

Ultimately.

Yeah. Thanks, So we did have a nice outperformance in the quarter right I mean, our subscription gross margin ticked up a point quarter over quarter between Q2 and Q3.

A little earlier than we had in our plan, which was which was nice to see we think that will have the ability to continue to kind of continue to run that ahead of plan or maybe even tick up a little bit in the next couple of quarters.

Our long term plan for this organization continues to pick up our subscription gross margin in a meaningful fashion in the coming years.

We think we've been able to improve margin by 1% to two points roughly every year year and a half for the last half a decade and we can continue that that same cadence for the next half a decade, so thats kind of point.

Point number one and I think it was.

In terms of profitability right.

The market has said and the market is rewarding those organizations that continue to find optimizations, we acquired looking glass two quarters ago. I mean, when you think about acquisition synergies we've done a really nice job with that organization. We've got really strong talent, we brought into the fold, but our acquisition synergies and the tail around some of those things is going to take.

Quarter still to play out they had some leases and some other long tail contracts that we've synergize our platforms, but we've just got to let those things run out. So you will see improvements in overall operating expenses G&A and other areas of the business continue to play out in the coming quarters, which will result in.

Higher chance for profitability.

Thanks.

Yep.

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

Great. Thanks, very much deferred revenue contribution was very strong in the quarter I think it was positive $21 million can you guys talk to where those payments came from.

Sure. Thanks, Brian.

I'd say they are driven by two certainly enterprise quality deals at foster mentioned in.

The talking point earlier, we had that large eight figure public sector deal that was a nice renewal that came in.

Kind of towards the middle ended the quarter and then we mentioned the large breach response.

With a large gaming company in that well came in late and of course, so those two alone.

Were the significant contributors to the increase in deferred revenue.

I will say that the public sector customer that Tim just referenced.

Was not only a renewal and expansion, which was nice to see that we will able to continue to kind of expand the adoption.

Expand the value of that the government getting to that program and then on that large gaming contract.

It was also nice to see that we extend that protection from kind of a regulated one year requirement to a two year contract with that organization. So we are seeing our customers kind of.

Yes.

More of the platform and feel more comfortable where they're also doing larger TCE based contracts. In addition to the ACB large HCV based contracts.

That's great and foster maybe switching our focus to subscription revenue.

Should we think about the long term sustainable organic growth rate for that line.

Yes.

Yeah look I think we're right now if you look at the lines were in the Twenty's, Brad we see an opportunity to improve that in the coming quarters.

For fiscal 'twenty five right.

We think that theres going to be an opportunity to grow from the mid to the kind of upper twenty's.

Just based on what we've got right now the key is.

Balancing profitability right, we need to be cognizant and recognize.

The market and where we think we will get recognized and rewarded on that balance of profitability as I was telling Joe just a second ago.

I think we've done a really nice job in the last two quarters, putting up consecutive back to back free cash flow quarters, where we grew at almost double quarter over quarter here in Q3, but we're not done yet and I think the market will expect us to continue to grow that profitability line on a quarterly basis and once I think we've reached the right level of prop.

Stability will continue to make sure we optimize our growth as well and get efficient growth. So I think we would we would start with probably low <unk> next year and try to outperform.

Perfect. Thanks very much.

Yes, Brad.

Yes.

Okay.

Thank you.

Next question comes from equally with Cantor Fitzgerald. Your line is open.

Hi, good morning, and congrats on another strong executed quarter on vending momentum of free cash flow generation.

I guess two questions one for Tim.

So thanks for publishing that external cyber threat report, especially the ones on the middle East.

Conflicts.

It has the elevated.

Helping the pipeline.

Building generation to add smaller deal expansion activities and is there any pushback from customers in terms of like let's say budget concerns because we are still challenging macro environment.

I heard a couple of things there and good morning as well.

I was I was talking to somebody yesterday, maybe something comes to mind I think it's relatively relevant.

The number of attacks and the number of successful data breaches that are out there continues to rise right locked at 3.0.

It has been the most successful.

Threat actor and kind of affiliate group, we've seen in this space in 20 plus years.

And.

And Theres changes that's happening out of the macro and one of the things we were talking about.

Reported yesterday was that the number of financial services companies targeted by <unk> and its affiliates in 2023 on a pro rata basis up 50% and so.

There are some tactics and techniques that are changing I think the threat actor groups are changing and their targets are changing and this combined with like another really interesting thing that we continue to monitor on our side given that amount of large breach response work. We do we see customers in general about 60% of the time still paying ransom Ware, alright, and so there's this imbalance in the <unk>.

That's happening right now on what exactly to do when you've got the U S. Federal government and the FBI, saying don't pay ransomware, yet the majority of customers that we engage or know of still paying it and still getting hit.

I think it becomes a real challenge and probably the most concerning staff that we've been monitoring inside from our Intel teams as organizations that have been hit with ransomware once and pay get hit 80% of the time within three years.

Yes, and so.

Theres a causation of course correlation lying on are you getting hit again, because you paid or youre getting hit again, because you still haven't covered the basics and as we've said here like the basics require three fundamental <unk>.

Of your Tech stack now to protect yourself, you've got to have something on the inside on the endpoint you got to have something that separates the impact from the outside and you've got to have something on the outside protecting your external attack surface and.

We see a lot of our customers that have adopted that kind of modern security triple crown, but theres still a lot of customers out there working on the basics and as still trying to drop adopt those three things.

Thanks for the color on that process. It sounds like that's the agent banks U S type of situation and then moving on there is a recent attack on a let's say.

Cloud native ads anti player on their customer support system.

That happened this quarter within our public disclosure.

They mentioned that because client list compromised right that there may be susceptible to be elevated phishing attacks going forward right I'm.

Im thinking back.

Our services off of ICL Fox.

External protection Ssp's response rate do you think there could be additional opportunity in addition to dish.

I think you mentioned is a gaming company.

<unk>.

And in addition.

I think there is one.

One of the things that we see.

And the new SEC notification requirements are.

Helping to highlight what I called visibility at the board level makes it to the board to understand their security program framework, they've adopted it making sure they understand the notification requirements kind of a liability now at the board level, we're getting this right.

The challenge so far though is it's very very difficult to adhere to that SEC requirement and have full details that bat. For example, if you have been compromised or if there's been an incident and you've got just a few days to provide some level of notification.

Most are 100% of the time the customers that we work with you don't have your arms around the full potential problems that within a few days. So what happens is you notify that something has happened and that youre working on it and then ultimately the way. This is going to play out in the market, yes, when my opinion here and everyone's going to say its worst unexpected because.

We're going to set expectations on Hey, we're looking into this we're trying to get our arms around this and.

I think very few will come out and say the sky has fallen.

They get their real arms around it so they'll just say something's happened, we're looking into it and when they come back it will be while it's large and this is what it looks like and this is how it moved around internally.

If I can just.

And for the finance question, if I can expand on the SEC disclosure requirements.

Within four days right.

Fast health like let's say the client with a compliance requirement.

To get the disclosure right, what they need the info the Intel.

To communicate to the public in such speed.

Yes.

I'll just point out one example, because its public I mean in general we can't really comment Charles tremendous amount on our response deals, but the client makes a public on their behalf and we have a little bit more leniency.

Caesars as an organization putting their 8-K in Q3 that they had hired zero box to help with their response services and so that's a great example of them.

Organization with a strong security program.

Good capabilities to identify and help kick off the response and then Poland trusted third parties to help and then the 8-K that and I think that's an example, where I think regulation could actually help here on the market where.

They are being asked to move quickly and in general Youre going to have to work with partners to help with that and then disclose what that looks like and they disclosed that again zero Fox had been brought in to help with the response notification and protection side of the house, we are proud of that one.

Got it thanks for that.

And then on the.

Financing my Avatar financing I'll take questions.

On the balance sheet cash right.

This update was that you guys could get to free cash flow positive next fiscal 'twenty five right.

Wondering if you could help us on any financing.

Raises.

You're anticipating.

Within the next 12 months and help US with can you. Please kind of help us with the free cash flow seasonality.

A more modeling question.

Thank you very much.

Yeah, I'll start maybe in reverse order as far as some seasonality and timing of cash flow again.

We said it.

We believe we've got certainly the ability to be free cash flow positive next year Q1 is always our most challenging quarter. This Q1 was was indeed more challenging than most but in general Q1.

Tends to be.

Our toughest quarter from a cash flow generation standpoint than we tend to turnaround in Q2 Q3, Q4, So I would expect to see that same trend next year.

As it relates to financing.

Nothing necessarily as planned at this point I think that's a larger conversation we started touching one last at the last call.

And we'll leave it at there for that posture. If you had any other comments on financing.

Look we have a convert that matures and roughly 18 months from now beyond 18 months from now.

We've just put up the best quarter in company history.

Third consecutive quarter and.

I think this improved profitability will actually help our optionality.

We will show the sustainability of the company that we built and I think we needed to do some blocking and tackling here. The last six months last couple of quarters around improved profitability, making sure we saw synergies realized here.

Financial statements not just envision decks and I think we've done those things, which which will help us on the financing front.

In general we're always looking for new investors and we're open for business.

Nine for every day Monday through Friday so.

Okay. Thanks for that.

Tim.

Thanks Colin.

Thank you I'm showing no further questions I'd like to turn the call back over to foster for any closing remarks.

Thank you operator, Q3 was another strong quarter for zero box, whereas you've heard we've made significant progress on many fronts.

We remain excited about the opportunities in front of us and look forward to closing out our fiscal year 'twenty four on a very strong note again I want to thank everybody for joining us. This morning have a great day twos tiers.

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

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Thank you for standing by and welcome to the Zero Fox fiscal third 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 answer session and as a reminder, today's call is being recorded I would like to turn the conference call over to Todd Wohler, Vice President of Investor Relations for Fox.

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

Opportunities and external cyber security, our progress to achieving profitability and expected benefits from our acquisitions of <unk> and looking glass.

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 for a 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.

With that I'd like to turn the call over to foster.

Thanks, Todd good morning, everyone.

Q3 was a record setting quarter for zero Fox, we delivered another strong top line outperformance, while also generating positive free cash flow for the second consecutive quarter.

Today, I'm going to provide summaries on key areas of our results share a few customer success stories and provide updates on our one platform vision and discuss our plan to close out this year.

As you may have seen in our press release. This morning, we reported strong results.

We reported core revenue of $44 million, an increase of 89% year over year and we define core revenues total revenue less revenue from our one large government contract.

Overall I was very happy with our teams performance in Q3.

In Q3, we signed an eight figure renewal and expansion with strategic U S. Federal agency that is focused on cyber security.

Through this contract and program zero box of supporting critical cyber threat intelligence cyber defense and security operations across hundreds of federal state and local government organizations.

We also signed a multimillion dollar renewal and expansion with the U S. Cyber defense agency that is using <unk> to protect thousands of personnel from advanced digital attacks.

Over the last three years this customer has significantly increased our adoption of our platform and specifically over the last two years has more than quadrupled their IRR with us.

Our team always takes great pride in supporting mission aligned organization with critical capabilities.

We also added two additional six figure customers that purchased six plus modules across our protection intelligence and disruption pillars.

While public sector benefit business benefited from the end of the government fiscal year in its seasonally strong spending we believe there are underlying fundamental drivers that give us confidence in the future growth outlook and our one platform approach.

The days, where insider threats, where a top concern for <unk> are behind us.

Today, our customers are thoughtfully protecting themselves from a myriad of external threats that are beyond their perimeters and most frequently beyond their borders.

Turning to our on demand response services, we experienced another record quarter, resulting in year to date revenue growth of nearly 100%.

We signed several six figure deals as well as three seven figure deals, including one with a large gaming and hospitality company.

Furthermore, these requirements are becoming more stringent with the new SEC cyber security incident disclosure requirements for publicly traded companies.

Largely time bound and come in waves.

And as you know the great thing about things that come in waves that there may be peaks and valleys, but it's just a matter of time until that next great way.

With that I'd like to change gears and spend a few minutes, providing an update on our vision.

We continue to see adoption of the modern security Triple Crown, where security organizations will standardize on internal platforms like Microsoft crowd strike, our Sentinel won edge.

Edge platforms, like Palo Alto networks, or Zee scalar and an external platform like zero box.

Customers have grown tired of the complexity and cost of managing multiple external cyber security point products for digital risk protection threat intelligence takedowns, and even external attack surface management.

A dynamic that has intensified in the current economic environment.

We also believe that our technical Eas and capabilities from our acquisition of looking Lasse will provide immense value to our customers.

Organizations need to understand their full external risk their vulnerabilities in both digital and cyber Scapes and have detailed information on threat actors that are attacking them.

This and this alone sensor the robust capabilities required organization to defend themselves from these advanced external threats.

Speaking of our customers, we had a six figure new customer win with a large retail organization as leveraging the power of nearly our entire platform. This customer purchased seven modules across protection intelligence and disruption post to protect our external attack surface.

We had another six figure new customer win with a fortune 500 financial services company that purchased four modules across protection and disruption pillars as well this.

This company selected zero box based on our ability to protect multiple digit asset types, including brands domains and a large number of credit card been numbers, given our ability and proven capability to do takedowns and disruption at Internet scale.

<unk> response capabilities.

This resulted in a multimillion dollar deal in Q3 this customer experience the full value of our one platform vision in action as we have demonstrated our ability to disrupt and respond to aggressive external cyber attacks and Furthermore, protect them from those future tax going forward.

Current spend in short I'm very pleased with our team's commitment to solving customer problems and the pace of innovation of our organization.

As the cyber security company the pace of innovation is critical to ensuring we stay ahead of our customers' relentless Abbas areas.

In Q3, we delivered significant advancements to our fishing and the main protection and global threat intelligence capabilities, specifically in the area of physical security intelligence.

As we have always done we will continue to leverage innovations in AI and machine learning to improve our ability to detect and disrupt threats.

Large language models generative AI and various other types of computer vision deep learning and machine learning capabilities are commonplace in the zero box platform for.

For example, we are now using LMS and generative AI to help us enhance our finished intelligence and alerting capabilities as well as evaluate risk for key alerts and attacks we identify them.

Shifting gears I'd like to turn our focus to the goals for Q4 as we close out what has been a strong and transformative year for zero box.

We will continue to execute on our strategic plan to expand our platform capabilities in preparation for next year, we will grow our customer base and we will continue to increase adoption.

We will also continue to prudently invest in our go to market engine, our services to support and enable customers and to optimize our business to improve efficiencies and profitability.

We were very pleased with our Q3 cash flow performance and believe this trend reflects our commitment to balancing growth and profitability.

Before I turn the call over to Tim for a detailed review of our Q3 financial performance I would like to share one more customer story with you.

<unk> always enjoyed meeting with customers and hearing their goals and challenges it personally been rewarding.

In Q3, I had an opportunity to meet with one of our top 10 customers who is also on the Fortune 10 list.

During our discussion this customer described our offering is unbeatable as a marketplace and highlighted the significant ROI. They are generating using the zero box platform each and every day.

Even went so far to say that zero box was saving them hundreds of millions of dollars per year.

We ended up agreeing to expand our scope for the third consecutive year and zero box also agreed to help automate and streamline another key external challenge with our platform with them.

To me there is nothing more powerful than the validation of this kind of direct customer feedback, particularly from a customer of the size and sophistication.

Feels really good to know that our platform works. Our team is committed and that what we're doing is really helping people and organizations around the world and short I love this industry with.

With that I want to thank all of our boxes for their energy passion and commitment throughout Q3, and certainly before that.

And now I'd like to turn the call over to our CFO Tim Miller.

Thanks roster.

As far as Evan mentioned <unk> generated strong Q3 results across both top and bottom line metrics.

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.

This is the first quarter, where we can truly present comparative year over year financial information.

Although the year ago quarter excluded three days as our <unk> transaction closed on August three 2022.

For Q3 zero Fox reported revenue of $65 million, an increase of 45% year over year.

Subscription revenue was $23 7 million, an increase of 51% year over year.

And services revenue was $41 3 million, an increase of 42% year over year.

Services revenue consisted of $20 7 million.

Recurring revenue from our strategic government customer and $26 million from our on demand response services.

As you've heard from foster we feel well positioned to continue winning enterprise service opportunities.

However, given our significant performance in Q3, we currently anticipate a sequential decline in <unk> services revenue.

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

As of October 31st annual recurring revenue was $186 million, an increase of 21% year over year.

<unk> consists of platform subscriptions.

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

We ended the quarter with a record high 1330 subscription customers as.

As Foster mentioned in Q3, we saw continued success winning larger deals. We ended Q3 with 182 customers with <unk> greater than 100000.

Which represented an increase of 24% to 27% year over year.

Turning to gross margin for the third quarter subscription gross margin was 73% up from 72% in Q2.

For Q4, we expect subscription gross margin to be consistent with Q3 levels.

As expected services gross margin of 18% was consistent with Q2.

Services gross margin continues to be impacted by a higher mix of notification services driven by the mix of large deals.

Given the continued impact from large deals in Q4, we would expect services gross margin to be relatively consistent with Q3 levels.

Before returning to more normalized historical levels over the course of fiscal year 'twenty five.

Total gross margin was 38% consistent with Q2 as.

As we look to Q4, we would expect gross margin to increase slightly from Q3 levels driven by a higher mix of subscription revenue.

Turning to operating expenses.

Total operating expenses were $27 million in the quarter.

The sequential decrease in operating expenses was driven by lower R&D and G&A expenses, resulting from acquisition cost synergies.

Our loss from operations was $2 5 million a significant improvement from $4 8 million in Q2.

Looking at the balance sheet and cash flow, we ended the quarter with $30 million in cash $38 million in accounts receivable.

$88 million in total deferred revenue and $194 million and total outstanding debt.

In Q3, we generated cash flow from operations of approximately $1 8 million and free cash flow of approximately $1 6 million.

Our Q3 cash flow performance was positively impacted by the timing of collections from our enterprise customers and also reflects our focus on improving profitability.

We are committed to enhancing our financial position and are considering various options to strengthen our balance sheet.

Our convertible debt and optimize our capital structure.

We will continue to focus on sustaining our strong business fundamentals and improving profitability.

Now to our outlook.

Outlook assumes no material changes in the macro environment.

Demand for our external cyber security platform remains consistent.

And assumes that no incremental outsized response deals close within the quarter.

For Q4 fiscal year 'twenty four we currently expect revenue to be in the range of $56 million to $58 million.

And non-GAAP loss from operations to be in the range of $5 8 million to $4 8 million.

For fiscal year 'twenty four we currently expect revenue to be in the range of $228 7 million to $230 7 million and non-GAAP loss from operations to be in the range of $21 4 billion to $20 4 million.

We continue to focus on profitability.

To conclude we are pleased with our <unk> results for which we again exceeded top and bottom line expectations and are raising guidance for Q4.

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

Thank you if you'd like to ask a question. Please press star one one is.

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 you said that Youre, assuming macro stays the same in your guidance.

<unk> full year revenue by more than the beat in the quarter, which is really impressive. So maybe just talk through where some of the incremental positivity is coming from <unk> and then just on macro.

Are your customers thinking about their calendar 'twenty four budgets.

Yes, good morning, Joe Thanks for the question.

I think we'll tag team this one here.

So on the on the macro I think youll.

See us execute here now we had a really strong Q3, and so timing of subscription as well as some of those large services deals will help us.

Not only with the foundation for Q4, but we see some opportunity as you saw it's a raise.

Guidance above beat for Q4, so I think thats exactly what we did.

Yes.

Improved from the last quarter or so so.

I think we're pretty pretty bullish about Q4 and decided to kind of finish out the year strong.

And Joe just Tim I missed your second half of the question on that.

Youre asking about catalog calendar 'twenty of our next year's budgets.

Yes, just as far as like the macro conversation like when Youre talking to your biggest customers right. You said youre, assuming macro stays the same but how are they feeling how are they thinking about calendar 'twenty four budgets is that fresh P&L that you can attack.

Again, I think its similar just again.

Our platform strong and will compete at that level and I think from that standpoint customers see the value in our platform that we're going to continue to win customers. So I don't think theres any real material change as it relates to how customers thinking about spending on external next year.

Okay. Thanks, and then.

I double click on that for you Joe too is we as an organization continue to try to strike a healthy balance between growth and profitability and so going into Q4 profitability.

It's still a top area that we're continuing to optimize the business around.

Nice growth in free cash flow quarter over quarter, and we're going to continue to refine and improve the business. There we're not done growing profitability year that's for sure.

You must have a crystal ball because that kind of leads into my second question, which is just.

That's helpful.

Yeah. Thanks, So we did have a nice outperformance in the quarter right I mean, our subscription gross margin ticked up a point quarter over quarter between Q2, and Q3, a little earlier than we had in our plan, which was which was nice to see we think that will have the ability to continue to kind of continue to run that ahead of plan or maybe even tick up a little bit in the next couple of quarter.

<unk>.

Our long term plan for this organization continues to tick up our subscription gross margin in a meaningful fashion in the coming years, we think we've been able to improve margin by 1% to two points roughly every year year and a half for the last half a decade and we can continue that that same cadence for the next half a decade, so thats kind of point.

One and I think it was.

In terms of profitability right.

Quarters still to play out they had some leases and some other long tail contracts that we've synergize our platforms, but we've just got to let those things run out so you will see improvements.

Overall operating expenses G&A and other areas of the business continue to play out in the coming quarters, which will result in.

Higher chance of profitability.

Thanks.

Yes.

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

Great. Thanks, very much deferred revenue contribution was very strong in the quarter I think it was positive $21 million can you guys talk to where those payments came from.

Sure. Thanks, Brian.

I would say they are driven by two certainly enterprise quality deals a saucer mentioned in.

The talking point earlier, we had that large eight figure public sector deal that was a nice renewal that came in.

Kind of towards the middle end of the quarter and then we mentioned the large breach response with the.

With a large gaming company in that well came in late in the quarter. So those two alone.

Were the significant contributors to the increase in deferred revenue.

I will say that the public sector customer that Tim just referenced.

Was not only a renewal, but an expansion which was nice to see that we will able to continue to kind of expand the adoption.

Expand the value that the governor is getting into that program and then on that large gaming contract.

It was also nice to see that we extend that protection from kind of a regulated one year requirement to a two year contract with that organization. So we are seeing our customers kind of.

Adopt more of the platform and feel more comfortable where they're also doing larger TCE based contracts. In addition to the ACB large HCV based contracts.

That's great and foster maybe switching our focus to subscription revenue.

Should we think about the long term sustainable organic growth rate for that line.

Yes.

Yes look I think we are right now if you look at the lines were in the twenties, Brad we see an opportunity to improve that in the coming quarters.

For fiscal 'twenty five alright.

We think that theres going to be an opportunity to grow from the mid to the kind of upper <unk>.

Just based on what we've got right now the key is.

Balancing profitability right, we need to be cognizant and recognize the market and where we think we will get recognized and rewarded on that Alex of profitability as I was telling Joe just a second ago.

Stability will continue to make sure we optimize our growth as well and get the patient growth. So I think we would we would start with probably low <unk> next year and try to outperform.

Perfect. Thanks, very much thanks.

Thanks, Brad.

Yes.

Okay.

Thank you.

Our next question comes from equally with Cantor Fitzgerald. Your line is open.

Hi, good morning, Tim.

And congrats on another surely executed quarter on vending momentum with free cash flow generation.

Yes, two questions.

Lastly, I want to turn so.

So thanks, a lot publishing the external cyber threat report, especially the ones on the mill.

<unk> constant conflict.

Has the elevated environment.

Net health and a pipeline building.

Building generation helix.

<unk> expansion activities and is there any pushback from customers in terms of like let's say budget concerns.

We are still not challenging.

Challenging macro environment.

I heard a couple of things there and well look.

I was I was talking to somebody yesterday, maybe.

Nothing comes to mind I think it's relatively relevant then.

Number of attack and the number of successful data breaches that are out there continues to rise right locked at 3.0.

It has been the most successful.

Threat actor and kind of affiliate group, we've seen in the space in 20 plus years.

And.

And Theres changes that's happening out of the macro and one of the things you were talking about.

With a reported yesterday was that the number of financial services companies targeted by <unk> and its affiliates in 2023 on a pro rata basis up 50% and so.

There are some tactics and techniques that are changing I think the threat accurate groups are changing and their targets are changing and this combined with like another really interesting thing that we continue to monitor on our side given the amount of large breach response work, we do we see customers in general about 60% of the time still paying ransom ware right and so there's this imbalance in the <unk>.

Market Thats happening right now on what exactly to do when you've got the U S. Federal government and the FBI, saying don't pay ransomware, yet the majority of customers that we engage or know of still paying it and still getting hit.

So.

Theres a causation of correlation correlation lying on are you getting hit again, because you paid or are you getting hit again, because you still haven't covered the basics and as we've said here like the basics require three fundamental <unk>.

Of your Tech stack now to protect yourself, you've got to have something on the inside on the endpoint you got to have something that separates the impact on the outside and you got to have something on the outside protecting your external attack surface and.

We see a lot of our customers that have adopted that kind of modern security triple crown, but theres still a lot of customers out there working on the basics and is still trying to drop adopt those three things.

Thanks for the color on that process. It sounds like Thats, the agent bank, but U S type of situations and then moving on to <unk>.

The attack on a let's say.

Cloud native ads anti player on their customer support system.

That happened this quarter within our public disclosure.

Dan mentioned that because client list compromised right that Dan maybe suspect of both to be elevated phishing attacks going forward right.

Going back to <unk>.

Is this also backfill Fox.

Protection Thats all speech response rate do you think there could be additional opportunity in addition to dish.

I think you mentioned is a gaming company they help.

And in addition.

I think there is.

One of the things that we see.

And the new SEC notification requirements.

Helping them to highlight what I call the visibility at the board level. Thank you to the boards understand there.

<unk> program framework, they've adopted making sure they understand the notification requirements kind of a liability now at the board level for getting this right. The challenge. So far though is it's very very difficult to adhere to that SEC requirement and have full details that fat. For example, if you have been compromised or if there has been.

On an incident and you've got just a few days to provide some level of notification.

Almost 100% of the time of the customers that we work with you don't have your arms around the full potential problems that within a few days. So what happens is you notify that something's happened and that you are working on it and then ultimately the way this is going to play out in the market, yes, when my opinion here and everyone's going to say its worst unexpected because.

We are going to set expectations on hey, we're looking into this we're trying to get our arms around this and.

I think very few will come out and say the sky has fallen before they get the real arms around it. So they'll just say something's happened, we're looking into it and when they come back it will be while it's large and this is what it looks like and this is how it moved around internally.

Yes.

And for the Finance question can you expand on the SEC disclosure requirements because the climate within four days right.

Is it still fast health like let's say the client with a compliance requirement.

To get the disclosure, but what they need the info the Intel.

To communicate to the public in such speed.

Yes, I mean, I'll just point out one example, because its public I mean in general we can't really.

Comment a tremendous amount on our response deals, but the client makes a public on their behalf and we have a little bit more leniency.

Caesars as an organization putting their 8-K in Q3.

They had hired zero box to help with their response services and so that is a great example of them.

Organization with a strong security program.

They are being asked to move quickly and in general Youre going to have to work with partners to help with that and then disclose what that looks like and they disclose that again zero Fox had been brought in to help fulfill response notification and protection side of the house, we're proud of that one.

Got it thanks for that and then.

Financing my Avatar.

I'll take questions with 10.

On the balance sheet cash right.

The last update was that you got.

To get to free cash flow positive.

Fiscal 'twenty five right.

Wondering if you could help us on any financing.

<unk>.

Raises.

Youre anticipating.

Within the next 12 months and help US with can you. Please help us with the free cash flow seasonality.

Modeling question and that's it for us Thank you very much.

Yes. Thank you I'll start maybe in reverse order as far as some seasonality and timing of cash flow again.

Said it.

We believe we've got certainly the ability to be free cash flow positive next year.

Q1 is always our most challenging quarter.

Q1 was indeed more challenging than most but in general Q1.

Tends to be.

Our toughest quarter from a cash flow generation standpoint, and then we tend to turnaround in Q2 Q3, Q4, So I would expect to see that same trend next year.

As it relates to financing.

Nothing necessarily as planned at this point I think thats a larger conversation we started touching one last at the last call.

And kind of leave it there for that posture. If you had any other comments on financing.

Look we have a convert that.

Matures and roughly 18 months from now beyond 18 months from now.

We've just put up the best quarter in company history.

<unk> third consecutive quarter and.

This improved profitability will actually help our optionality and we will show the sustainability of the company that we built and I think we needed to do some blocking and tackling here. The last six months last couple of quarters around improved profitability, making sure we saw synergies realized here.

Our financial statements not just envision decks and I think we've done those things, which which will help us on the financing front.

In general we're always looking for new investors and we're open for business.

9% for every day Monday through Friday so.

Thanks for that.

Tim Thanks for color.

Thank you I'm showing no further questions I'd like to turn the call back over to foster for any closing remarks.

Thank you operator, Q3 was another strong quarter for zero box, whereas you've heard we've made significant progress on many fronts.

We remain excited about the opportunities in front of US I look forward to closing out our fiscal year 'twenty four on a very strong note again I want to thank everybody for joining us. This morning have a great day twos tiers.

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

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