CyberArk Software Ltd. (NASDAQ:CYBR) Q1 2024 Earnings Call Transcript May 2, 2024

CyberArk Software Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Kath, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 CyberArk Software Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Erica Smith, Senior Vice President of Finance and Investor Relations. Please go ahead.

Erica Smith: Thank you, Kath. Good morning. Thank you for joining us today to review CyberArk's strong first quarter 2024 financial results. With me on the call today are Matt Cohen, our Chief Executive Officer; and Josh Siegel, our Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the second quarter full year 2024 and beyond. Our actual results might differ materially from those projected in these forward-looking statements.

I direct your attention to the risk factors contained in the Company's annual report on Form 20-F filed with the U.S. Securities and Exchange Commission and those referenced in today's press release that are posted to CyberArk's website. We expressly disclaim any application or undertaking to release publicly any statements or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on today's call. Reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as in an updated investor presentation that outlines the financial discussion in today's call. A webcast of today's call is also available on our website in the Investor Relations section.

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

Matt Cohen: Thanks, Erica, and thanks, everyone, for joining the call today. I want to start by acknowledging CyberArk's 25th anniversary, which we celebrated just a few weeks ago. Udi Mokady, Cyberark's Founder and Executive Chair is a visionary who, along with the founding team, identified a market need and fit out to secure the most valuable information within the world's most complex global organizations. Along the way, CyberArk pioneered the privileged access management market, a segment of identity that has become a critical security layer and consistently moved up the CISO's priority list. Since its founding, CyberArk has grown and evolved in many ways. Our success was driven by an unwavering commitment to our mission of securing the world against cyber threats.

So together, we can move fearlessly forward. To execute our mission, we consistently delivered a cutting-edge innovation and transformative value to all our customers. Perhaps most importantly, in a world of constantly escalating threats. We have been relentlessly focused on the security first mindset in every decision we make since day one of our founding. As a result of our strong execution and the trust that our security first mindset has created with customers and partners, 25 years later, we are broadly recognized as the leader in identity security. Today, our unique value proposition to secure all identities with the right level of privileged controls on our identity security platform is resonating with customers. I am confident that we are only scratching the surface of this large and rapidly growing market opportunity.

Our strong first quarter results demonstrate that we built on the momentum we experienced throughout 2023. The durability of demand for our solutions and our execution is highlighted by subscription ARR of $621 million, growing 54% year-over-year. Total ARR of $811 million, growing 34% year-over-year, and Q1 results significantly exceeded guidance across revenue, operating income and EPS. Total revenue growth accelerated to 37%, reaching approximately $222 million. Non-GAAP operating income came in at $33 million, a big improvement from a loss of $12.6 million in the first quarter of 2023, highlighting the operating live beverage in our business model. Non-GAAP earnings per share was $0.75, up significantly from a loss of $0.17 in the year ago period.

We are thrilled to report $67 million in free cash flow for the quarter significantly up from $4 million in Q1 of last year and a proof point of our commitment to profitable growth. The strength of our results and business momentum gives us the confidence to raise our guidance for the full year 2024 on all metrics, which Josh will talk about later. Our ongoing success is fueled by a number of secular tailwinds, including the pace of attacker innovation, digital transformation, ongoing migration to the cloud and exponential increases in human and machine identities. Identity is the common denominator in every major cybersecurity breach. Our research has shown that over 90% of organizations have suffered from an identity-related cyberattack, a significant increase from about 60% in the prior year.

Last quarter, we discussed the extensive security challenges faced by CIOs and CISOs and safeguarding the entire spectrum of identities across IT, developers, workforce and machines. In today's severe threat landscape, customers recognize that merely managing identities without privileged security controls is a risk they cannot afford. The security risks are further exasperated by the rise of AI proliferation of machine identities and increased elevation of access for human identities. As a result, organizations need to undergo a paradigm shift in identity security. They can no longer rely on yesterday's solutions and approaches to address today's problems. We at CyberArk are helping customers secure all identities, human and machine as they access all environments, including hybrid and multi-cloud environments.

Our differentiation comes from our deep domain expertise and privileged access and retailer privileged controls for each identity group to mitigate risk effectively. We discover, secure and manage across the entire life cycle of each identity group. We are the vendor best positioned to apply comprehensive intelligent privilege controls across standing access, just-in-time access and a zero standing privilege approach, all from a unified identity security platform. Our land and expand motion and the subscription flywheel continues to gain momentum. It all begins with new logos, and we signed nearly 200 customers in the first quarter. While the majority of customers land with PAM, approximately half of these new logos bought two or more solutions with many choosing to secure multiple identity groups from day one.

This speaks volumes about the power of our platform and the importance of identity security. A few exciting new logo examples from the quarter included a deal that perfectly showcases our platform selling motion and new routes to market, which was a financial services company that landed with PAM, EPM for workstations and servers, Conjur Cloud and identity flows in a large seven-figure ACV deal that closed to the Azure marketplace. The PAM market has evolved well beyond securing only high-risk IT personnel. Today, modern PAM programs protect a much broader group of privileged users, including developers, shadow IT and database and cloud administrators. As an example, we have a great customer -- we have great customers in the government and healthcare verticals.

And this quarter, we are excited about our new relationship with NHS resolution. A body of the U.K. Department of Health and Social Care. They kicked off their relationship with CyberArk with Privilege Cloud and Secure Cloud access and are planning to grow their footprint in the future. Each workforce identity is more powerful today than ever and traditional MFA and SSO solutions are easily circumvented. We reimagined workforce identity by wrapping MFA and SSO with more controls to our secure web sessions, workforce password manager, EPM and our new secure browser. This quarter, a large logistics company, pick CyberArk for PAM and workforce identity after a head-to-head competition with a leading IDAS vendor. Our best-in-class security and breadth of our platform were the deciding factors in winning this amazing new logo.

Our customer base is also an important growth vector for CyberArk and our platform selling motion is accelerating expansion deals. Overall, we had a strong quarter of expansion within our base across all our solutions with particular strength in our sequence management business. The world of securing machine identities is changing rapidly. Organizations are grappling with a larger variety and an ever-growing number of machines from applications to bots to workloads to IoT devices. Each one of these machines needs to be secured and managed across the life cycle of multiple identity components from secrets to digital keys to certificates. The proliferation of AI is further accelerating the growth and complexity of machine identities. This is becoming a top security challenge.

Traditionally, managing machines often sits outside the security teams remit of control. However, this practice exponentially increases risk and is unsustainable in today's threat landscape. Customers increasingly realize they need to scale their machine identity security programs beyond local vaults, loosely enforced policies and opensource tools. They need an enterprise-ready machine identity security approach that can scale and is tied into their human identity security program through a single platform. One great win that exhibited all I am describing was with a CyberArk customer who has been with us since 2018. We expanded our long-standing relationship with the Department for Work and Pensions in the U.K. with an expanded program while kicking off a robust secrets management program.

With CyberArk as a key strategic partner, they are focused on aligning their identity security road map for human and machine identities supporting the U.K. government's focus on a stronger cybersecurity posture. We talked earlier about how we are protecting the workforce using a reimagined approach that goes beyond SSO and MFA. And for this approach, it needs to extend also to the endpoint, the most common entry point for attackers. By removing local administration rights and enforcing lease privilege and detecting identity-based threats targeting the workstations and servers, organizations can reduce the endpoint attack surface. This strategy also protects organizations from attackers who turn off EDR agents and proceed quietly without being detected, which is one of the main reasons a multinational food company in Latam signed a high six-figure ACV EPM deal in the first quarter.

This customer is looking to deploy CyberArk everywhere as part of its broader identity strategy. During the past few years, EPM experienced strong growth and recently surpassed $100 million in ARR. This achievement is a testament to the solution's ability to extend adenine security and zero trust to workstations and servers. We are excited about the potential for further growth in our EPM business, both with new and existing customers. We also talked though about the exploding population of developers and the need to start securing them as privilege identities without interfering with their speed of innovation. Our Secure Cloud Access solution or SCA, provides best-in-class privileged controls to hybrid and multi-cloud environments. It applies the principle of least privilege access by granting just in our permissions with zero standing privileges while still allowing developers, data scientists and cloud engineers to work natively and efficiently without having to change their preferred workflows.

We are incredibly excited about the solution. And in the first quarter, we continue to see excellent traction with the offering. And a deal with a major retailer, the customer broadly deployed CyberArk SaaS solutions and a continued move to the cloud, but they cited secure cloud access as the most important differentiator and signed a high six-figure ACV deal that also include Privilege Cloud, secrets and workforce identity. Q1 was an exciting quarter for our focus on innovation and new releases. Last year, we discussed our plans to expand our routes to market and increase our market reach through MSPs. According to Gartner, 40% of security customers are expected to consume solutions to a managed service by 2026. To accelerate this channel, we recently launched the CyberArk MSP console.

By providing MSPs with a single command center, this console is a key step in helping our MSP partners build managed services that secure their customers' human and nonhuman identities. We are also very excited about the general availability of CyberArk Secure Browser, the industry's first identity-centric secure browser. It is purpose built for a cloud-first world and protects our customers against emerging threats while enabling productivity and ease of use across all CyberArk solutions. Secure Browser is designed to help protect customers from fast-growing attack methods like cookie harvesting and browser-based attacks, both at and beyond login. It is natively integrated with our workforce solutions, providing a seamless unified user experience and serves also as a direct access portal to our entire platform.

We believe Secure Browser will not only enhance security for our customers, but also drive adoption of our solutions. Lastly, CyberArk has recently received FedRAMP High Authorization for two of its SaaS solutions, Endpoint Privilege Manager and workforce identity. Our investment in FedRAMP High highlights CyberArk's commitment to help the public sector implement strategies that adhere to zero trust principles and move to a more secure and efficient future. As excited as I am to talk about all these great developments, I'm even more excited by what we have in store for our customers and all of you at Impact in Nashville in just a few weeks. We have a tremendous lineup of truly innovative developments to talk about. So please tune in, and we look forward to seeing many of you there.

Josh will go deep deeper into the P&L in just a moment, but I wanted to emphasize that although most of my comments this morning focused on the potential for tremendous growth, we remain equally committed to delivering profitability and cash flow. This was evident in our Q1 results, and we remain well on track to deliver on the long-term targets we introduced last year. In summary, our momentum from 2023 continued in the first quarter, and we kicked off the year with a strong first quarter. I will leave you with four main takeaways. First, demand for our solutions remain strong, and identity security is at the top of CISO's priority list. Second, our unified identity security platform is meeting a clear customer requirement to apply the right level of privileged controls to every identity, human and machine.

Third, our security-first approach is a clear differentiator for CyberArk in the market, helping us win deals. And fourth, we have a long runway for growth and are making disciplined investments to capture a bigger share of a large and growing market opportunity. Josh, I'll turn the call over to you.

Josh Siegel: Thanks, Matt. Q1, another strong quarter for CyberArk. We exceeded expectations across all of our guided metrics. We reported strong ARR and revenue growth drove significant operating margin expansion and generated healthy free cash flow. Our strong results highlight the durability of demand for our solutions, the ongoing adoption of our broader identity security platform and the power of our business model as we scale. Moving into the results. Total revenue growth accelerated to 37% year-on-year, reaching $221.6 million and significantly exceeding the top end of our guidance, demonstrating the continued momentum in our business, ARR reached $811 million, that's growing 34% year-on-year. We added $37 million in net new ARR, and that's compared to the $34 million in the first quarter of last year.

Subscription ARR grew 54% and reached $621 million and is now 77% of total annual recurring revenue. Maintenance ARR was $190 million and like-for-like conversion activity still represents about a single digit of our year-on-year growth. Our strategy of upselling and cross-selling new solutions has been a significant factor in our strong growth. This is demonstrated by the fact that at the end of the first quarter, the cohort of customers with an ARR of more than $100,000, grew to over 1,780 customers and for the cohort of more than $500,000 ARR, they grew to over 300 customers. Now moving into the details of the revenue lines. For the first quarter, recurring revenue reached $205.8 million, growing 41% year-on-year and accounted for 93% of total revenue.

That's compared to 90% in the first quarter last year. Subscription revenue was $156.2 million, growing 69% year-on-year and representing 71% of total revenue, while the primary driver of our outperformance was bookings, we did experience an increase in average contract duration on our self-hosted subscription deals relative to our guidance. Maintenance and services revenue was $62.4 million. Of that, recurring maintenance revenue was $49.6 million. Our maintenance renewal rates remained strong and in line with historic levels. Professional services revenue was $12.8 million. From a geographic perspective, all regions showed healthy growth, Americas revenue was $124.5 million, growing 27% year-on-year. EMEA revenue was $74 million, up 59% year-on-year, partly benefiting from our bookings and the longer duration that I spoke about earlier.

APJ revenue was $23 million, growing 37% year-on-year. Moving to the P&L, all line items will be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release. First quarter gross profit was $185.7 million or 83.8% gross margin compared to 81.3% in the first quarter last year. The expansion of our gross margin, primarily driven by revenue outperformance. In the first quarter, our operating income was $33 million. The operating income outperformance was driven by three main factors, the revenue outperformance, the timing of certain marketing-related expenses that we now expect to incur in the second quarter, and three, we did experience a slower hiring pace, particularly in R&D. Net income came in at $35 million or $0.75 per diluted share, also significantly outperforming our guidance.

We ended March with 3,070 employees worldwide including approximately 1,300 in sales and marketing. We continue to see healthy growth in our quota-carrying sales reps, particularly our fully ramped ones. We were thrilled to deliver strong cash flow of free cash flow, $66.8 million in the quarter. While we do not guide to cash flow quarterly, I would remind investors that cash flow is seasonally stronger for us in the first quarter and particularly this year, the strong cash flow is partly a function of strong bookings and renewals in the fourth quarter of 2023. For the remainder of the year, we expect cash flow to follow typical seasonal patterns that's lower in the second and third quarters and an uptick from the third quarter to the fourth quarter.

Turning now to our guidance. For the second quarter of 2024, we expect total revenue of $215 million to $221 million, which represents 24% year-on-year growth at the midpoint. We do expect SaaS to make up a bigger portion of our overall subscription mix in the second quarter, impacting recognized revenue in period. We expect non-GAAP operating income in the range of $12 million to $17 million for the second quarter. As a reminder, we will hold our Impact customer events in a couple of weeks, and our Impact World Tour will also begin in June increasing our planned marketing expenses for the quarter. We are also seeing a stronger hiring pace, which is reflected in our guidance. We expect our non-GAAP EPS to be in the range of $0.34 to $0.44 per diluted share.

Our guidance also assumes 48.1 million weighted average diluted shares and about $10.2 million in taxes. For the full year 2024, we are increasing guidance across all our metrics. We now expect total revenue in the range of $928 million to $938 million, representing 24% year-on-year growth at the midpoint. And as we look at our pipeline for the remainder of the year, SaaS continues to lead the way. Reflecting our continued commitment to driving operating leverage, we are increasing our full year operating income to a range of $90.5 million to $99.5 million. We expect our non-GAAP EPS to be in the -- between $1.88 to $2.07 per diluted share we expect about 48.1 million weighted average diluted shares and about $51 million in taxes for the full year of 2024.

We are also raising our annual recurring revenue now to be in the range of $975 million and $990 million at December 31 or about 27% year-on-year growth at the midpoint. We are significantly also increasing our free cash flow guidance for the full year 2024 to now being in the range of $115 million to $125 million. To sum up, we are thrilled to kick off 2024 with another strong quarter of results. Demand for our solution is robust, our platform delivers tremendous value and identity security remains a business imperative. We believe we are well positioned to execute on our targets. I will now turn the call over to the operator for Q&A. Operator?

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