CyberArk Software Ltd.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the CyberArk Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I’d now like to turn the conference over to Erica Smith, Vice President, Investor Relations. Ma’am, you may begin.

[Erica Smith:]

Thank you. Good morning. Thank you for joining us today to review CyberArk’s third quarter 2016 financial results. With me today on the call are Udi Mokady, Chairman and Chief Executive Officer, and Josh Siegel, Chief Financial Officer. After preliminary remarks, we will open the call up 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 fourth quarter and the full year 2016. 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 20-F filed with the SEC and those referenced in today’s press release. CyberArk expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP measures is also available in our earnings press release, which can be found at www.cyberark.com in the Investor Relations section. Also, please note that a webcast of today’s call will be available on our website in the Investor Relations section. Now, I'd like to turn the call over to our Chairman and Chief Executive Officer, Udi Mokady. Udi?

[Udi Mokady:]

Thanks, Erica and good morning, everyone. Thank you for joining our call today. We were pleased to again exceed expectations in the third quarter with record total revenues of $55 million, a 37% increase over last year. We also recorded non-GAAP operating income of $14.3 million, non-GAAP net income of $11.8 million and we generated $36.2 million of cash flow from operations for the first nine months of the year. Our financial performance continues to demonstrate our significant market opportunity, the importance of privileged account security, the strength of our business model and our ongoing commitment to delivering strong profitable growth. The market trends we saw in the first half of 2016 continued into the third quarter. Primarily, security remains a critical IT budget item and privileged account security is high on the priority list. According to our 10th annual Global Advanced Threat Landscape Survey, privileged account takeover is one of the most difficult stages of a cyberattack to mitigate and one of the most damaging. Independent organizations are also helping raise awareness. In August, the National Cyber Security Centre in the U.K. joined a growing list of government and industry organizations that have identified managing and protecting privilege access as one of the top 10 controls to minimize the impact of cyber attacks. And in September, the FBI published a public service announcement recommending least privilege and Whitelisting capabilities like Viewfinity has effective measures to help protect against ransomware attacks. From the broad-based demand for our solutions across geographies and vertical markets, we achieved solid growth across all three of our major regions with particularly strong contributions from the U.S., the U.K., Germany, Canada and Southeast Asia. And we experienced a record quarter in Latin America. While Latin America is small in comparison to the United States and Continental Europe, global diversification has always been and continues to be a key pillar of our strategy to build an enduring leadership position in cybersecurity. The diversification of our business demonstrates the breadth of our market opportunity. We won business with large and small companies alike, our stock exchange, manufacturing companies, banks, a born in the cloud e-tailer, two airlines, security software companies, universities, hospitals, law firms and a casino among others. I’m very pleased to share that we had our best quarter ever in U.S. federal, which represented more than 10% of our business. A few of the highlights include

[Josh Siegel:]

Thanks, Udi. We again exceeded our guidance for revenue, operating income and earnings per share. During the quarter, total revenue increased 37% to a record $55 million, as we continue to execute our land and expand strategy. License revenue increased 34% year-on-year to $33.3 million, representing 61% of total revenue with a healthy mix of new and existing customers. Maintenance and professional services revenue was $21.7 million, a 42% increase over the prior year period and representing 39% of revenue. Strong renewal rates and prior period license revenue continue to drive maintenance and professional services revenue. Geographically, we had a solid year-on-year growth across the regions. Americas grew revenue 39% to $36.2 million, or 66% of total revenue. EMEA grew 38% to $15.1 million, or 27% of total revenue. While the Asia Pacific, Japan region grew 22% to $3.7 million or 7% of total revenue for the third quarter. We also continued to see broad-based demand across vertical markets. Our fastest-growing verticals for the quarter were government, manufacturing, professional services and telecommunications. As I move through the P&L, all financials except revenues are presented on a non-GAAP adjusted basis. Please see the press release for reconciliation of our non-GAAP to GAAP results. Our third quarter gross profit was $47.7 million, or an 86.8% gross margin. That compares to 86.6% in the same period last year and 87.6% in the second quarter of this year. Our R&D expenses grew 46% year-over-year to $7.3 million, or 13% of revenue. To maintain our leadership position, we are investing in major research and development initiatives that we believe will meet the needs of our customers as the threat landscape continues to change and IT infrastructure evolves. As a reminder, the year-over-year growth comparison was impacted by the two acquisitions we made towards the end of last year. Sales and marketing expense increased 37% year-over-year to $22 million, or 40% of total revenue. We continue to invest in the strengthening our global sales and market engines across both direct and channel sales. G&A increased 61% year-over-year to $4.1 million, or 7% of total revenue as we invest to support scaling the company. In total for the third quarter, operating expenses, they increased 42% -- they increased 42% to $33.4 million compared with $23.6 million for the third quarter of 2015. With regards to headcount, we ended the third quarter with 790 employees worldwide, up sequentially from 734 at the end of Q2 and 581 at the end of third quarter last year. Again, this quarter, our topline overachievement flow through to generate better than anticipated operating income of $14.3 million, or 26% operating margin, ahead of our guidance. This compares to operating income of $11.1 million, or 28% operating margin in the year ago period. The strength of our P&L demonstrates our commitment to expense discipline, while we still continue to invest in the business to capitalize on the significant market opportunity in front of us. Net income was $11.8 million, or $0.33, per diluted share for the third quarter of 2016, up from $9.2 million or $0.26 per diluted share for the quarter of last year. Our effective tax rate for this quarter was 20%. I would point out; we still expect our annual tax rate to be between 22% and 24%. Turning to our balance sheet. We ended the quarter with $275 million in cash, cash equivalents, short-term deposits and marketable securities, that’s an increase from $238 million at year end as we generated $36 million in cash flow from operations during the first nine months of the year. Before I share guidance for the fourth quarter and full year, as a reminder, our guidance does not consider any potential impact to financial and other income and expense associated with foreign exchange gains or losses as we do not try to estimate future movements in foreign currency rates. So, for the fourth quarter of 2016, we expect total revenue of $62 million to $63 million or 21% growth year-on-year at the midpoint. We expect non-GAAP operating income to range between $14.7 million to $15.5 million and non-GAAP net income per diluted share to be between $0.31 and $0.33. This assumes 36.2 million weighted average diluted shares. Our guidance for the fourth quarter reflects continued investment across all areas of the business, particularly in major R&D projects and in sales and marketing to help position and expand the team for strong start to the next year. Because of the overall strength we are seeing in our business, we are raising our full year 2016 revenue guidance to a range of $214.3 million to $215.3 million, or approximately 34% growth at the midpoint. We are pleased to also raise our non-GAAP operating income range to between $53.3 million to $54.1 million and our non-GAAP net income per diluted share of a $1.16 to a $1.18 per share. This assumes 35.9 million weighted average diluted shares. We were very pleased with the overachievement during the quarter and that our outperformance in the topline resulted in stronger than expected profitability. As we enter the fourth quarter, our guidance reflects the confidence we have in the business, our market opportunity and our solid pipeline of activity. I will now turn the call over to the operator for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Sterling Auty with J.P. Morgan. Your line is now open.

[Sterling Auty:]

Yes. Thanks. Hi, guys. If I’m correctly, the message around Viewfinity is probably the most emphatic traction that you are getting that we’ve seen since the acquisition. I’m kind of curious if you can just talk through in the wins that you had in the quarter, what was the problem that the customers were trying to solve when they originally kind of put out the RFP or teams and can you talk about it? And what are the solutions that were shortlisted that you were competing against those window opportunities?

[Udi Mokady:]

Hi, Sterling. It’s Udi. In these wins, these were privileged account security projects and programs, so they were looking to extend the control or the ability to get admin rights to the endpoints. It’s been proven that the attackers need administrative credentials in order to progress in the attack to escalate privileges. And so primarily, it was part of a privileged account security program. There were some stand-alone deals for Viewfinity where again they wanted to tackle the problem on the endpoint first but with privilege in mind. So from a competitive standpoint, we were beating the regular players in the privileged account security space and we complement and could be side by side with the stand-alone endpoint security solutions.

[Sterling Auty:]

Perfect. That’s exactly what I was hoping you would say because when you mentioned endpoints sometimes, I worry that investors confused that you might be competing or as part of a stack where you have to go up against other endpoints, traditional endpoints so that makes perfect sense. And then you made the comments about the expanded channel in terms of the increase in number of certified resellers. But what I wasn’t clear about is, is this increasing the total number of resellers that you’ve got, so increasing coverage or this is just going deeper within the set that you already had?

[Udi Mokady:]

Exactly. It’s the latter. We’ve always emphasized quality versus quantity and we’ve seen such big demand for CyberArk certified engineers out in the field that we just took an extensive expansion of our training program into the existing partner set and they benefit from being able to deploy those personnel and of course the customers benefit from access to this professional staff.

[Sterling Auty:]

All right. Great. Thank you.

[Udi Mokady:]

Thank you, Sterling.

[Operator:]

Thank you. And our next question comes from Saket Kalia with Barclays Capital. Your line is now open.

[Saket Kalia:]

Hey guys. Thanks for taking my questions. How are you?

[Udi Mokady:]

Good morning, Saket. Good.

[Saket Kalia:]

Hey. Good morning, Udi. Actually maybe Udi, I will start with you. Can you just talk about how the business did in Europe? I know that last quarter we talked about longer sales cycles there because maybe that geography lagged the North America just in terms of market adoption. Did that remain the case in the third quarter, or you starting to see any sort of change in terms of that that geography, maybe thinking about privileged access security a little bit differently?

[Udi Mokady:]

Yes. I think we were pleased to see the great growth, 38% year-over-year. So it’s a healthy region for us. We still feel that this is a region that requires more education in the sales cycle. Obviously that is not going to change for one quarter. It’s more of a long-term effort in educating about the importance of privileged account security but it performed well, especially in the regions that I emphasized, U.K. and Germany which are strong anchors for our EMEA business.

[Saket Kalia:]

Got it. That’s helpful. And then for my follow-up, you mentioned Application Identity Manager in particular has been deployed in the hybrid cloud environments. Can you just remind us why that sort of solution works well in that used case and then is the competitive landscape for that solution different than what you see in the EPV side?

[Udi Mokady:]

Great. So, I will start with the second part, Saket. We always emphasize application identify management as a product and a solution set where we have a big barrier to entry. It’s very complex when you serve a credential to an application. It can’t wait that millisecond that a human can wait for credentials. So, we had to build a very robust solution and fine tune it over many years of working with enterprises and we clearly lead in the overall solution set. But this is a big one for us. What happens with the migration to cloud is the need for agility and elasticity creates additional security risks. The customers, as they are deploying applications in the cloud need the serving of credentials to those applications. And so the deals that we mentioned, AIM was taken, our application identity management solution was taken to protect those applications running in the cloud, to protect the orchestration services that are running. And then automated fashion are creating systems in the cloud, whether it’s servers or databases and others and is expanding, I would say the users of the system into DevOps.

[Saket Kalia:]

Got it. Very helpful. Thanks very much, guys.

[Udi Mokady:]

Thank you.

[Operator:]

Thank you. And our next question comes from Gabriela Borges with Goldman Sachs. Your line is now open.

[Gabriela Borges:]

Good morning. Thanks for taking my question. Udi, I was hoping you could give us some updated thoughts on sizing the EPV opportunities from where we are here in the product cycle. We have the penetration numbers of Global 2000 and Fortune 500, but maybe just an update on how we should be thinking about your market share within privileged access? And then for customers that still aren’t using a PAM solution, what do you think the barriers to adoption is that? Thank you

[Udi Mokady:]

Sure. Sure. Hi, Gabriela. I would say similar to how we talk about it internally in CyberArk. We find that it’s just a greenfield out there on our core products, Enterprise Password Vault, Privileged Session Manager. And even though we have 2,800 customers, that leaves the top 30,000 enterprises out there without a solution. And so it’s a greenfield also for our core products. I would say our barrier is -- I think in the last couple of years we made significant progress in bringing privileged account security to top of mind and we find that top seesaws are aware but it’s different as we look in different geographies. There are geographies where we have to educate much more. I mentioned EMEA and Asia Pacific, Japan. But it’s work in progress and hand-in-hand with our channel partners. There is no basic, I would say pushback to deploying this new layer, especially given the fact that when they look around they will always find a critical mass of enterprises in the vertical that have already done this journey. And so it’s about execution on the opportunity but of course it’s a long-term opportunity.

[Gabriela Borges:]

That’s helpful. Thanks. And Josh, if I could as a follow-up, two quick ones. One is just on, if there is anything unusual for the licenses as a percentage of deferred this quarter? I know we’ve spoken -- has spoken about it fluctuating before in the past. And then just on the framework for investment, we talked about this being a catch-up year and you can see that reflected in some of the headcount numbers. Margins are tracking flattish year-to-date, year-over-year because of the strength in the fundamental so. Just hoping you can give us an update on how comfortable you feel with the intensity of investment at this point? Thank you.

[Josh Siegel:]

Yes. Thanks, Gabriela. So with regard to the deferred revenues, we are actually - the percentage between Q2 and Q3 was very flat in terms of license contribution to that. It was about 6% at the end of Q2 and tracking about 7% of license revenue within that deferred number in Q3 so nothing remarkable there. With regard to the catch-up on the investments, I think this is kind of a theme that we’ve been doing for the last couple of years since we went public and that is we are investing for growth. I think that when we were growing at 37% per year, that we are and we will continue to invest across all regions, across all areas whether it’s GA, sales and marketing and R&D. So, we do expect to continue kind of that journey, looking forward as well.

[Gabriela Borges:]

Thank you.

[Operator:]

Thank you. And our next question comes from Taz Koujalgi with Deutsche Bank. Your line is now open

[Taz Koujalgi:]

Hey guys. Thanks for taking my question. You had a nice quarter but if I look at the guide for Q4, it seems like it’s a bit light seasonally versus a typical Q3 to Q4 growth? Can you comment on that, is that just a reflection of the pipeline that you are seeing today or are you just being extra conservative?

[Udi Mokady:]

Yes. I think if we start again, we are actually thrilled with the fact that we came into Q3 beating our guidance and generated 37% revenue growth with 26% operating margins for the quarter. We raised our guidance for the full year and now expecting 34% year-on-year growth and still -- and also being able to raise a 50% operating margin. So with that, I think we are very pleased and it reflects our view on the market and our opportunity. So, we think that actually the growth rate is really moving nicely for us.

[Taz Koujalgi:]

Got it. And then secondly, can you comment on the linearity in the quarter? It seems like the DSO inched up slightly in the quarter.

[Udi Mokady:]

Yes. It inched up slightly but still at 44, well kind of comfortably even below what I think is the enterprise software range for DSO. So, we are comfortable with that. It did inch up. I would say compared to how we’ve seen it this year, the linearity has been roughly the same. But if we were to look at it kind of on a year-on-year basis, we have seen also in Q2 we mentioned it. We have seen more back ended, a little bit more back ended order intake than we saw last year.

[Taz Koujalgi:]

Got it. Thank you, guys.

[Udi Mokady:]

Thank you, Taz.

[Operator:]

Thank you. And our next question comes from Rob Owens with Pacific Crest Securities. Your line is now open.

[Rob Owens:]

Great. Following on that last comment, little more backend order intake, is that a function of deals size as you are moving up market and seeing larger deals, or is that just kind of a general economic comment?

[Udi Mokady:]

I think it’s probably a combination of both. We saw some -- we had some significant nice sized deals come in, as we do every quarter. We are seeing still an increase in our over 100k deals year-on-year and sequentially. And I would say that also we’ve talked about EMEA where we’ve definitely have seen more back ended this year compared to past years and I think that’s really around the education side of things.

[Rob Owens:]

Great. Thanks for the color. And then relative to your maintenance and service gross margin, can you help me understand, I guess the sequential trend in there? It down ticked about 4 points sequentially. Was there something an aberration there, or just kind of the normal go-forward run rate at 70%?

[Josh Siegel:]

Well, it actually -- we did some fluctuations. If you go back, historically you will see some lumpiness in quarters and it reflects also the demand that we have for professional services. And if we have to that quarter will go up to get subcontractors and third-parties to fulfill that demand in providing those services. Actually in Q3, we had a bigger usage of using third-party for providing that type of -- those types of services. I think Udi mentioned before we are actually, really very much investing more and more in trading because of the demand we have for implementation and for our channels.

[Rob Owens:]

And again, does that typically speak to larger deals, direct deals, things of that nature?

[Josh Siegel:]

It’s across all of the deals. We typically have -- we’ve been pretty consistent on doing 7%, 8% of our revenue on professional services and we see it across all our deals.

[Rob Owens:]

Great. Thanks for the color.

[Operator:]

Thank you. And our next question comes from Shaul Eyal with Oppenheimer. Your line is now open

[Shaul Eyal:]

Thank you. Hi. Good afternoon, guys. Congratulations on strong set of results.

[Udi Mokady:]

Thank you, Shaul.

[Shaul Eyal:]

Thank you. Sure. On the big federal win, can you talk to us about the sales cycle, was that a six, nine, 12 months of transaction and can it lead to incremental business down the road with that branch or others?

[Udi Mokady:]

Absolutely. It was about a six months sales cycle and definitely -- we mentioned the two products that they purchased and add-on opportunities there to up-sell the rest of the products, especially with the deep relationship we have and their satisfaction with the measurable impact we are making for them.

[Shaul Eyal:]

Got it. So along the same line --

[Udi Mokady:]

And as you recall, it was an up-sell to an existing customer.

[Shaul Eyal:]

Sure. Sure.

[Udi Mokady:]

They kind of had a little of several solutions and went out for an RFP to create the standard and selected CyberArk.

[Shaul Eyal:]

Got it. Understood. Now on that big win also with this major European, I think industrial or manufacturing company, I think you’ve -- reason it went by the breadth of your offerings and also the existing relations went far. What products specifically, if you can share with us stood out versus the competition that enabled you also to win it?

[Udi Mokady:]

They started with our core platform and products with Enterprise Password Vault and with PSM and through proof-of-concept they just saw that these are the market-leading solutions when they have security in mind and to really create a major resilience within their infrastructure. And of course similar to your previous question of satisfied customers there would lead to an opportunity for add-on business.

[Shaul Eyal:]

Got it. Thank you. Congrats.

[Udi Mokady:]

Thank you very much.

[Josh Siegel:]

Thanks, Shaul.

[Operator:]

Thank you. And our next question comes from Fatima Boolani with UBS. Your line is now open.

[Fatima Boolani:]

Good morning. Thank you for taking the question. I just wanted to double-click on the Viewfinity traction. It’s clearly tracking well ahead of your expectations from what I infer from your comments around the momentum you are seeing in the base. But can you help us understand how you are managing your existing relationships to whom you had previously resold the Avecto product?

[Udi Mokady:]

Absolutely. Hi, Fatima. I would say that naturally after acquiring Viewfinity and really integrating it into our solutions, it has become and of course, we selected what we believe was the better product to acquire. So it became part of our platform and we push it hard on all fronts, including of course no opportunities but also places that in the past we resold to with the products that we don’t know.

[Fatima Boolani:]

That’s really helpful. And just a question for Josh. With respect to the currency movements, last quarter you very helpfully highlighted that the weakness in the pound sort of impacted the topline. I’m wondering if there were any dynamics playing out this quarter and how that shakes out into your revised upward guidance. And that’s it for me. Thank you.

[Josh Siegel:]

Yes. Thanks, Fatima. In fact, as we know the sterling continued to decline and we do some portion of our business in sterling invoicing. We do expect actually -- we did include in our guide. Even though we did raised our guide for the year, we did include that there would be some erosion in the U.K. sterling transaction. I didn’t called out in the prepared remarks but it will probably about roughly up to a $1 million of additional revenue because of depreciation of the sterling.

[Fatima Boolani:]

And just to be clear, so that’s a cumulative $2 million headwind for the full year of ’16?

[Josh Siegel:]

It would be -- now remaining in the number that I’m giving $1 million.

[Fatima Boolani:]

Understood. Thank you.

[Operator:]

Thank you. And our next question comes from Jonathan Ho with William Blair. Your line is now open.

[Jonathan Ho:]

Hi. Congratulations on the strong quarter. I just wanted to start out with a little bit of more color in terms of this shift to the public cloud. Can you talk about how this maybe impacts you from a license and revenue recognitions standpoint, if you start to see more business particularly from the end product move to the public cloud?

[Udi Mokady:]

Yes. So, Jonathan, hi. Thank you, first of all. And I will start and then maybe Josh will add some color. But right now the deals that I talked about were pretty straightforward licensed deals where the cloud represents another form of asset to secure. And our go-to market is very much hybrid. We will work with you -- we will work with the customer with the assets that they have on premise and with their ongoing migration to the cloud.

[Josh Siegel:]

Yes. So to follow, the used case that Udi is talking about here is really selling our aim and a perpetual model. So there would not be a real impact on our revenue recognition for that used case.

[Jonathan Ho:]

Got it. Got it And then just in terms of -- some of the framework controls that you guys called out, particularly with the U.K. side, how has that sort of historically driven I guess adoption or how does that translate into an additional demand over time?

[Udi Mokady:]

Jonathan, it’s exactly over time because I can relate back to when similar regulations were introduced in the U.S. market, we saw it continued to support the education and be another form of demand driver. So it doesn’t turn things around on the dime but it’s part of the long-term education of the market as they look for prioritizing projects, as they look for justifying projects internally. This will be very helpful. This specific one in the U.K. market but of course we are seeing similar things pop up around the world. The FBI example is just adding strength to commentary that they’ve put out in the past and as we commented, we feel that the U.S. market is well educated on the importance of privileged account security, a very healthy market for us.

[Jonathan Ho:]

Got it. And then just one last question for me. As we start to look towards 2017, are there any sort of early hints that you can give us, maybe the comfortability of sustaining growth or any shifts in seasonality either on the revenue or expense side that we should be thinking about?

[Udi Mokady:]

Yes. I think in terms of growth, we are continuing to invest on the OpEx side to take advantage of what we still think are early innings of a greenfield opportunity and keeping stake at our leadership position. I don’t think -- we are not yet talking about 2017. So, I think the dynamics right now, I don’t think -- I think a good look would be what levers that we would change in the last three or four quarters and I think it’s been pretty much fairly stable in terms of what we’ve seen.

[Jonathan Ho:]

Great. Thank you.

[Udi Mokady:]

Thank you

[Operator:]

Thank you. And our next question comes from Gray Powell with Wells Fargo. Your line is now open.

[Gray Powell:]

Great. Thanks for taking the questions. Have you seen any change in initial order values, which I think have historically averaged around $100,000? And then generally how do repeat purchases compare to those initial buyers?

[Josh Siegel:]

Yes. So, I think overall, if we look at the last several quarters, we are still -- we are tracking very much as we have tracked. So, I wouldn’t say there is any remarkable change. In terms of repeat, was the second part about repeat buyers?

[Gray Powell:]

Yes, exactly.

[Josh Siegel:]

Yes. So, we are actually -- a really healthy mix of new customers and add-on. We actually -- I think even Udi noted it before, we had several of our largest deals this quarter were actually add-on deals. So, we saw some interesting uptake there on the add-on business. And on the new customers, we are seeing as well a slightly larger percentage of new customers. I think we reported 25% of new customers by three or more products. So that’s going to also, as we look forward, obviously give us a bigger platform of existing customer base already having some licenses of more of our product. So, I think over time it’s easier to sell more licenses of the same product than it is to have them bring on a new product. So, I think that that’s going to create also some good reputation of add-on sales.

[Gray Powell:]

Got it. That’s very helpful. And then just one more if I may. So there has been an increase in breach headlines in the last month or so. Have you seen any significant change in customer engagements and just curious if that has any influence on your expectations for Q4 linearity? Thanks.

[Udi Mokady:]

I think -- again, being a collective security solution, we are not dependent on any headlines out there. I think when it comes to the professionals in the security fields, they more and more are talking about their security strategy. When we talk to Chief Security Officer, their security strategy is behaving as if you’ve been breached. That’s how they work. So they are not really affected of whether a major breach made it to the newspapers or not. But if we do look at reports out there, it’s continuing to escalate. It’s not making major news as much except DN, CN news of that sort. But the amount of attacks are not decreasing and from the smart customers that we deal with, they are working hard to how they protect against attacks that make it through the parameter.

[Gray Powell:]

Got it. All right. That’s it for me. Thank you very much.

[Udi Mokady:]

Thank you.

[Operator:]

Thank you. And our next question comes from Andrew Nowinski with Piper Jaffray. Your line is now open

[Andrew Nowinski:]

All right. Thanks. You talked about having the largest deal in Viewfinity history. I think you said it was sold as a SaaS offering. Was that a 12-month contract and then what is the average contract length of Viewfinity deals?

[Udi Mokady:]

Hi. No, actually, this record deal that I talked about was a classic perpetual license and it was add-on business to an existing customer. So it’s just a normal. We just emphasize it because we are very pleased to be executing well and I would say in line with our expectation on Viewfinity. So as a perpetual sell, we will be enjoying the maintenance contract on that going forward.

[Andrew Nowinski:]

And then if you do get a SaaS deal with Viewfinity, what are the typical contract lengths on the SaaS deal as you win?

[Udi Mokady:]

We are seeing -- we are getting SaaS deals as well with Viewfinity customers and we are seeing both one and three years.

[Andrew Nowinski:]

Okay. Thanks. And then last quarter you announced the partnership with HP, can you just provide any color on the early traction with that partnership and whether it contributed in the quarter?

[Udi Mokady:]

Yes. We added here the news of new partnerships but HP is certainly in motion. They’ve been an longstanding partners and yes, we’ve had deals in the quarter and also pipeline deals with them in EMEA and also elsewhere around the world.

[Andrew Nowinski:]

All right. Thanks.

[Udi Mokady:]

Thank you.

[Operator:]

Thank you. And our next question comes from Gregg Moskowitz with Cowen and Company. Your line is now open.

[Gregg Moskowitz:]

Great. Thank you. And let me add my congratulations as well. I guess first question is just a follow-up to one of the last ones that was just asked. Josh, what was the mix of on-premise to cloud deployments of Viewfinity this quarter?

[Josh Siegel:]

I would have to go back and look. But if we kind of look at it over the first nine months we had about a 50-50 rate, about half of it coming on cloud and half of it coming from perpetual.

[Gregg Moskowitz:]

Okay. Got it. And then Udi, the New York State Department of Financial Services recently announced stricter security standards for financial services companies and really much of it discusses the importance of securing privileged accounts. How do you see this playing our and what do you think it means for CyberArk specifically going forward? Thanks.

[Udi Mokady:]

No, thank you. I think this is, especially in the financial services that is a very well educated, I think it adds incremental scrutiny around privileged account security but this is probably the most well educated vertical out there. So, I wouldn’t call it a breakthrough regulation for our space. This is a well educated sector that is taking it very seriously. I think I can also add commentary that in the financial services we are seeing a, what we think is the right way to go where even legacy customers that came to us historically because of regulation and compliance are now much more strategic about looking at privileged account security as a strategic critical layer on the inside and strengthening areas that they didn’t protect before, which leads to add-on business for us in the financial sector. And of course financial services that don’t have it are well aware of it, this should be top of mind.

[Gregg Moskowitz:]

Very helpful. Thanks, Udi.

[Udi Mokady:]

Thank you.

[Operator:]

And our next question comes from Erik Suppiger with JMP Securities. Your line is now open.

[Erik Suppiger:]

Yes. Thanks for taking the question.

[Udi Mokady:]

Hey Erik.

[Erik Suppiger:]

First on the Viewfinity, I think that declined from 20% of new deals to 15% from last quarter to this quarter. Any discussion why that came down? It sounds like that’s doing quite well. And can you give us any sense? You said at the beginning of the year that that would contribute probably $7 million to $9 million during the course of the year. I assume we are ahead of that. Can you give us a sense for the contribution at least relative to your expectations?

[Udi Mokady:]

Yes. So, Erik, I will start with the first one. I don’t think it’s really significant. The significant is that we saw maybe less deals but bigger dollars out of Viewfinity and I think that’s a very important trend. So it’s trending in the right direction. It’s making its way to our largest deals and we are able to bring it to some very large deals. With regards to the $7 million, $9 million I leave that to Josh.

[Josh Siegel:]

Yes. Erik, we are actually -- we feel very good about the integration of that acquisition, the product launch with our sales force. I think we are very much on track for the types of revenue numbers and bookings numbers that we want to see out of that product. So, we gave out the kind of $7 million to $9 million at the time to give people an understanding of the contribution that it was going to contribute. As you are hearing and qualitatively, we are very much on track but we don’t break out necessarily this product but we are not going to break out all of our products. But in terms of the volume, we are very much on track to where we expect it to be this year.

[Erik Suppiger:]

So, just to be clear, it doesn’t sound like it’s necessarily tracking ahead of plan. For the year, you are still thinking it will be in the range that you had discussed.

[Udi Mokady:]

I think -- again, I don’t want to come -- we don’t talk about -- I don’t want to really give specific numbers for each of our products because we don’t do it for our other products as well. But at the same time we know that in terms of the contribution and our plan building, it is on track. So there is a pipeline and the ability for it to exceed and we feel very comfortable about where the numbers are. That’s about how I can answer.

[Erik Suppiger:]

That’s just fine. And then secondly, in terms of the training of your partners, can you discuss how much of a bottleneck the professional services, is in terms of being able to meet customer demand? In which case if you add, if you start to train your channel partners to start filling more of that role, will that enable you to accelerate the growth in a notable way?

[Udi Mokady:]

Yes. I think I have made commentary last year that with the great success, the demand for our staff and for CyberArk expertise has been outweighing supply and we of course always look for ways to help get our new layer out there. We definitely decided to invest in global training and be more programmatic about it to dramatically increase the amount of professionals out there. So, you could say that there was a bottleneck because of good reasons and outperformance in previous years that we were addressing with the global training efforts. And the results definitely enabled two things

[Erik Suppiger:]

You would expect your contribution to remain and I think you said the 7% to 8% of revenue range.

[Josh Siegel:]

Yes. I mean that’s what we’ve been modeling. First of all, where we have been tracking if we go back historically? And frequently, a lot of the -- even as we move forward and as we’ve been scaling, we’ve been tracking at pretty much the same rate because a lot of the professional services at our channel levels is also growing even faster than our rate is.

[Erik Suppiger:]

Very good. Thank you very much.

[Operator:]

Thank you. And our next question comes from Catharine Trebnick with Dougherty. Your line is now open.

[Catharine Trebnick:]

Hi. Thank you for taking my question. One question on the competitive landscape. We did in our fieldwork did hear quite a bit about some of the competitors out there. Are you just trumping these guys more? Is there enough room in the end and can you give us some color on just the overall demands for you versus some of the competitors? Thanks.

[Udi Mokady:]

Hi, Catharine. I think we are definitely seeing -- as continuing with very high win rates in the market. We work hard and we worked hard to get there and we are continuing to work hard to really open big gaps. I think when customers take privileged accounts security seriously and see it as a strategic component, they want the company that is investing in it with long-term in mind and with the most robust solutions. So, yes, we continue to see continued high win rate. It is a growing market and a fast-growing market. So there are of course rooms for other companies to make a living in this space and that’s fine.

[Catharine Trebnick:]

All right. Thank you. And the second question is your billings were up 36% year-over-year compared to 3% last quarter. Is this really a metric the street should use for your company? Can you give us more background on that? Thanks.

[Josh Siegel:]

Yes. Thanks, Catharine. As we’ve kind of talked about in past quarter is that perpetual software license company where in upward of 95 plus percent is perpetual licenses. We don’t look at billings internally because deferred revenue is really a reflection of the spot maintenance contracts and there are cases when licenses do go in there. But it’s not something we plan and build and guide towards. So it’s important that our deferred revenues grows because our spot maintenance contract should grow as our license base grows. But internally, we don’t look at it as the heart of our business as much as we look at overall licensed overall revenue growth and internally at our pipeline growth as well.

[Catharine Trebnick:]

All right. Thank you.

[Operator:]

Thank you. And our next question comes from Ken Talanian with Evercore ISI. Your line is now open.

[Ken Talanian:]

Hi guys. Thanks for taking my question and congrats on the quarter. So, first off, I was curious how far penetrated are you in your existing customer base with the Viewfinity line? And then you mentioned a seven-figure deal there. How many users or what kind of size organization are you selling to with the deal of that size?

[Udi Mokady:]

So in your second part, how many users, Viewfinity users of the deal of that size? Okay. We are definitely very early within our customer base. When we acquired Viewfinity, they added 300 net new customers to us. So from the 2,800 that was about -- about 300 is existing Viewfinity customers and of course we’ve been selling in the past three quarters since really putting it in our offering but we are early on. So it’s primarily open ground and we are scratching the surface there just like we are scratching the surface with a lot of up-sell opportunity on the rest of the products like AIM, and PTA, and SSH key and others. With regards to Viewfinity, typically because it brings privileged account security to the endpoint then typically the license is based on the amount of regular users that the organization has. They won’t necessarily take it up-front to all of them although in some cases it just becomes a gold standard in the rollout to the end point. I don’t know the specifics on the seven-figure one to give exact color on that. But typically it’s based on the amount of employees in the organization.

[Ken Talanian:]

Okay. Great. And out of curiosity you mentioned traction with hybrid cloud deployments. Are you developing any native cloud solution for example something that would set an AWS or an Azure?

[Udi Mokady:]

So right now -- we’ve answered in the past that our solutions have been certified to run on AWS and on Azure. So, if customers want to deploy that way and to have zero IT footprint, they can. We still find that with the importance of these credentials that most customers want to have it either on-premise within their data centers or -- and that’s a growing and exciting area for us or as something that is managed by a managed service provider like the HP and other examples we’ve given in the past.

[Operator:]

Thank you. And our next question comes from Tal Liani with Bank of America. Your line is now open.

[Mike Feldman:]

Hi, guys. Great quarter. This is Mike Feldman filling in for Tal Liani. Thanks for taking my question.

[Udi Mokady:]

Hi, Mike.

[Mike Feldman:]

Hey. Operating margins are now expected to be roughly 25% for the full year. That’s a very strong number. How should we think about margins longer term? Is 25% a good base? Should we expect the fluctuations around that number or you expect to continue to invest in bringing that number down? And then with regards to headcount, you’ve grown your headcount in the range of 30% to 40% year-over-year for last couple of years. Do you plan to keep growth at those levels? Does it change as you add more channel partners? How should we think about that? Thanks.

[Josh Siegel:]

Yes, Mike. It is Josh. So with regards to the operating margin, yes, we are very excited about being able to flow through our beat on the topline and increase our operating margins respectively to the numbers that we are reporting, 25%. As you know that was a flow through from the beat on our topline. I don’t want to comment on 2017 yet and we will get there when we talk to you in February and we will talk about our views then. But I think I mentioned already and we can mention again that we are continuing to invest to make sure that we are able to grow the opportunity and really revenue growth is still our priority. Since we are a greenfield opportunity, we still think that we are in the first half or the earlier part of that greenfield opportunity and we have a leadership position. So, we want to make sure that we are able to keep that and also at our scale, I think the revenue growth is important. It’s fluctuated over the last couple of years but overall the good news is that we’ve seen very good leverage of the model. So, I think that’s my discussion of the operating margin. With regard to headcount, again, we will talk about -- that will be a leading part of the discussion when we think about next year. But we have been growing consistently over the last three quarters as you pointed out 30% to 40% and it’s been in line with our revenue growth. We will continue. Headcount is about almost 70% of our OpEx, at 65% to 70% of our OpEx. So, as we invest it’s going to be coming out in headcount as well.

[Operator:]

Thank you. And our next question comes from Michael Kim with Imperial Capital. Your line is now open.

[Michael Kim:]

Hi. Good morning, guys. Just follow-up on the federal business and the nice contribution this quarter, how should we think about the progression of the federal business over the course of the year and do you think we should sort of see a step higher in your fiscal third quarter coincide kind of with the federal fiscal year end?

[Udi Mokady:]

Yes. Hi, Michael. I think and we’ve been very consistent about it. This was a vertical that we were very underpenetrated couple of years back and we’ve been consistently investing in it and doing the right things with our own staff, with channel partners and with the investments in the certification. And like we’ve seen in other verticals as you start to build critical mass success reach success. So this is going to be a continued important vertical for us. We are of course running a marathon and not a sprint. So, we would like to set the expectation that this is a long-term opportunity for us. But yes, we expect to continue to grow it over the years in U.S. federal and even beyond that to start replicating the success to the public sectors around the world, especially those that appreciate the Common Criteria Certification. That’s about 18 countries that appreciate the value of the Common Criteria Certification.

[Michael Kim:]

And are you starting to see a leverage, you are working with some of the federal system integrators and some of the larger primes and are they enabling you to bid on contracts with some of their customer relationships and allowing you to have more opportunities?

[Udi Mokady:]

Yes. I think there is a mix of federal integrators but also there are security value-added resellers that are working and selling to the federal government. So, I think it’s a combination of those and focus security of ours that are going after this industry.

[Michael Kim:]

Great. Thank you very much.

[Udi Mokady:]

Great. Thank you. And I just want to add a minor correction to an answer I gave earlier about the European manufacturing company and there was a question on which products they acquired as new business for us. So they did purchase Enterprise Password Vault like I said but the second and third product actually were Application Identity Manager and SSH Key Manager. And so this was an example we gave to the fact that more new customers are including three or more products in their initial purchase. So the correct products are Enterprise Password Vault, Application Identity Manager and SSH Key Manager.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Udi Mokady, Chairman and Chief Executive Officer for closing remarks.

[Udi Mokady:]

Great. Thank you. I want to thank you customers, partners and our employees who all contributed to delivering our record results in this third quarter. We are looking forward to speaking with all of you over the coming weeks. And thank you for joining us this morning.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.