CyberArk Software Ltd.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good day, and welcome to the CyberArk Software First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Staci Mortenson. Please go ahead.

[Staci Mortenson:]

Thank you. Good afternoon. Thank you for joining us today to review CyberArk's first quarter 2015 financial results. With me on the call today are Udi Mokady, Chief Executive Officer; and Josh Siegel, Chief Financial Officer. After preliminary 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 reflects 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 and 2015 fiscal year. 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, both of which detail factors which could cause our actual results to be materially different from those projected in the forward-looking statements. CyberArk expressly disclaims any obligation 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 to the most directly comparable GAAP financial measures is also available in our first quarter 2015 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. With that, I'd like to turn the call over to our Chief Executive Officer, Udi Mokady. Udi?

[Ehud Mokady:]

Thanks, Staci, and good afternoon, everyone. I'd like to start by thanking all of you for joining us today. Q1 2015 was another exceptionally strong quarter for CyberArk and a great way to kick off the year. Our results exceeded our guidance across all financial metrics. CyberArk reported total revenue for the first quarter of $32.9 million, an 89% increase over Q1 2014. For the first quarter, we also recorded strong non-GAAP net income of $5.7 million, resulting in non-GAAP net income per diluted share of $0.16. During the first quarter, the strong demand and execution trends we experienced in the fourth quarter continued. We have solid deal closure rates while, at the same time, our pipeline development activities were strong. Our achievements in Q1 were driven by our strong execution in a growing market. CyberArk's comprehensive solution and platform approach continues to be a major differentiator, and our prior investments in sales and marketing gave us greater capacity and reach. We have intentionally and carefully managed our business in anticipation of the market growth that we are clearly seeing. Josh will walk through the financial details in a moment, but first, I would like to spend a few minutes sharing some of the highlights and insights from the quarter. Privileged accounts continued to be at the center of all serious security attacks around the globe, and Privileged Account Security is the new layer of protection that is absolutely critical for organizations. As the impacts of these attacks ripple through the market, more organizations are realizing they need better tools to establish and maintain control over their on-premise, cloud and SaaS applications as they are coming to -- and they are coming to CyberArk to help them do it. As noted in the new mandate report, APT30 and the Mechanics of a Long-Running Cyber Espionage Operation, any organization or entity can be a victim of an attack. This underscores a similar finding from our own research that we published in Q4. The fact that this horizontal problem is impacting organizations of all sizes is increasingly reflected in our financial reports. During the first quarter, 4 verticals each contributed more than 10% of our bookings, including financial services, manufacturing, energy and health care. We also saw bookings more than double for multiple verticals, with the largest year-over-year growth coming from health care and from retail. We had several new retailers select CyberArk during the quarter. The impact from Target and other retail breaches from 2013 and 2014 is still evident and is often driving C-level awareness and active involvement. For example, a discount retailer with 800 stores selected CyberArk's Enterprise Password Vault and Privileged Session Manager products to better control access to their PCI-related systems. While compliance was a stated objective, the organization was well aware of the attack activities that have taken place. And our team believes it created even greater urgency around their purchase. A large health insurance company in the northeast selected CyberArk, following their Board of Directors' mandate to do whatever they can to avoid having a problem similar to Anthem's. This was a pattern we saw repeatedly in additional health care deals during the quarter. But the strength of our business really continues to be from the diverse set of verticals we serve, and this was evident again this quarter. For example, a Fortune 100 technology company selected CyberArk Enterprise Password Vault, Privileged Session Manager and our Privileged Threat Analytics to begin rolling out their first ever Privileged Account Security platform. Prior to this purchase, this company had used a homegrown system with limited functionality. They selected CyberArk to provide much broader functionality and increased scalability. In financial services, we closed a large deal in one of the largest banks that is headquartered in Europe and with also a small regional bank in New England. We also added a large telco in Africa as well as a municipal utility company in the U.S. We added a global consumer products manufacturer and also a small chemical company. Every organization is a target. Every organization has privileged accounts. CyberArk believes that every organization needs to protect these accounts. Helping companies gain and maintain control over their IT assets extends beyond just their own network. It also includes protecting organizations against cyber attacks through third-party remote access points. As noted in the recent 2015 Verizon breach investigation report, in 70% of the attacks where they knew the motive for the attack, there was a secondary victim, a second organization that was targeted as a way to advance an attack against their primary target. CyberArk is well positioned to mitigate this risk. Our solutions are designed to protect third-party credentials in a secure vault, isolate third-party privileged sessions to prevent malware from spreading to critical systems, monitor and report all third-party privileged user activity and detect suspicious access patterns to identify attacks. This was the primary business driver behind a Q1 deal to an organization in the arts, entertainment and recreation market. They needed to protect credentials used to establish trusted application connections to third-party suppliers and selected CyberArk's solutions to do it. Those of you who attended the RSA Conference last month heard a lot about products that provide detection of attacks that have bypassed perimeter controls. This approach reinforces one of our core principles

[Joshua Siegel:]

Thanks, Udi. I'll start with a more detailed overview of our first quarter, and then I will discuss our second quarter and our full year 2015 outlook. This was an exceptionally strong quarter for CyberArk, starting with the top line. We generated revenue of $32.9 million, up 89% year-over-year and ahead of our expectations. Of the total revenue, we did $20 million in license revenue, increasing 119% over the prior year period and representing 61% of total revenue reported. This high license growth drove our overachievement in total revenue. We especially benefited this quarter from new license sales to new customers and the overall increasing commitment they are making to us. Maintenance and professional services revenue was $12.9 million, increasing 56% over the prior year period, driven by the high rate of renewals from growing installed base, new maintenance revenue from the customers added over the last 4 quarters and the continued trend of larger new and existing customer deployments driving more professional services revenue. Looking at the business geographically. In the first quarter, we saw broad-based growth compared to the first quarter last year. Revenue in the Americas increased 58% to $17.3 million, reflecting 53% of total revenue. EMEA revenue more than doubled to $12.4 million or equaling 38% of total revenue. And Asia Pacific also more than doubled with $3.2 million in revenue or approximately 9%. Turning to the margins. I will review our results on a GAAP basis and, when applicable, on a non-GAAP basis. Non-GAAP numbers exclude stock-based compensation; expenses related to our recent first quarter secondary offering this year; and warrant revaluation expenses, which we reported specifically in the first quarter of last year. Please note that a full GAAP to non-GAAP reconciliation can be found in the tables of our press release. Our first quarter gross profit was $28.7 million or an 87% gross margin compared to an 82% gross margin last year. This reflects the strong leverage in our model created by the increased percentage of license revenue. In regards to operating expenses, we continue to make significant investments in order to fully address the considerable market opportunity in front of us. We believe the investments in product innovation, direct sales, customer success teams and channel partners are paying off and are building the foundation for revenue growth and long-term scale. You should expect us to continue along with our path of investing to drive growth. For the first quarter, R&D expenses grew 27% year-over-year to $4.1 million due to ongoing investment in product innovation. Sales and marketing expenses increased 43% year-over-year to $13.5 million. We are pleased with the tremendous leverage we have gained from the roughly 40% headcount increase we made since first quarter of last year in sales and marketing to drive significantly higher levels of license growth over the last year. General and administrative expenses increased 142% to $3.6 million. This expense growth reflects in part the expenses we have begun to incur for operating a public company, but also a significant part was due to the $1.1 million related to expenses for the secondary offering we completed during the quarter. In total, operating expenses for the first quarter of 2015 were $21.2 million or a 49% increase over Q1 last year. For the first quarter, we showed strong bottom line results also ahead of our expectations, driven again by the inherent leverage from our model as we outperformed on the top line and kept expenses in line with our budget. GAAP operating income was $7.5 million compared to $191,000 in the first quarter of last year. Our non-GAAP operating income was $9 million, resulting in a non-GAAP operating margin of 27% compared to non-GAAP operating income of $347,000 and a margin of 2% in the prior year period. Non-GAAP operating income for first quarter 2015 excludes $465,000 of stock-based compensation and also $1.1 million in secondary offering-related expenses compared with $156,000 of stock-based compensation in the prior year period. Net income on a GAAP basis was $4.2 million for the first quarter of 2015 compared to a GAAP net loss of $1.2 million for the first quarter last year. GAAP net income per diluted share was $0.12 compared to the GAAP net loss of $0.35 per share in the first quarter of last year. On a GAAP -- on a non-GAAP basis, our net income was $5.7 million for the first quarter of 2015 compared to $304,000 for the first quarter of last year. Non-GAAP net income per diluted share was $0.16 compared to non-GAAP net loss per share of $0.14 in the first quarter of 2014, based on 34.8 million and 7.1 million weighted average diluted shares, respectively. During the quarter, we had financial expense of $1.6 million, primarily due to foreign exchange losses, compared with $1.4 million of expense in the same period last year, which resulted mainly from warrant revaluation expenses. As you know, foreign exchange gains and losses can fluctuate and our guidance does not consider any additional 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. Turning to our balance sheet. In the first 3 months of 2015, we generated $14.9 million in cash flow from operations and ended the quarter with $191.7 million in cash, cash equivalents and short-term deposits. We ended the first quarter with 487 employees worldwide compared with 364 at the end of the first quarter of last year. Now moving to the guidance for the second quarter and full year 2015. For the second quarter of 2015, we expect total revenue of $31.5 million and $32.5 million or 50% growth year-over-year at the midpoint. We expect non-GAAP operating income to range between $1.9 million and $2.8 million and non-GAAP net income per diluted share of $0.04 to $0.06, assuming a 35 million weighted average diluted share count. As we discussed last quarter, our second quarter non-GAAP operating margin guidance reflects the full run rate of the headcount increases we made in the first quarter and further second quarter headcount increases expected to drive our revenue growth in the second half of 2015 and into 2016. For the full year 2015, we are raising our guidance and now expect total revenue in the range of $136 million to $138 million, or growth of approximately 33% at the midpoint. We also are raising our non-GAAP operating income guidance to be in the range of $18.7 million to $20.4 million and raising our guidance for the non-GAAP net income per diluted share to the new range of $0.40 to $0.44. This assumes a 35.3 million weighted average diluted share count. Our guidance reflects the strength we are seeing in our business as well as the investments we made during 2014 and continuing to make across customer satisfaction, teams, delivery, products and sales to build a long-term sustainable growth business. In closing, we had an exceptional first quarter for CyberArk. We experienced strong momentum in the business and believe we are extremely well positioned to win in our market. With that, I'd like to now turn the call back over to the operator for Q&A.

[Operator:]

[Operator Instructions] And our first question will come from Saket Kalia with Barclays.

[Saket Kalia:]

So first for Udi. Udi, you mentioned nice close rates in the quarter, but can you also just talk about how the pipeline looked exiting the first quarter? And any qualitative commentary you can give around big deals versus sort of average-sized deals in the pipeline? It sounds like the last couple of quarters, you've been seeing some bigger average deals, so I'm just trying to get a sense for how sustainable that is.

[Ehud Mokady:]

Yes, great. Saket, I would say that the momentum that we described in -- when we described the Q4, really carried into Q1. And so we saw really solid close rates, acceleration in closing, increase in scope as we were closing deals, but also new entries into the pipeline. So both ends of the funnel were growing, the new deals entering the pipe but also deals accelerating and closing and exceeding our expectations very much similar to the Q4 momentum. With regards to deal size, I believe in Q4, we really gave out the number. And we had significant growth in the over-100k deals as a metric that we were following. I would say that we saw that continue into Q1. We're not providing a breakdown specifically here but, definitely, a continued increase in the deals over 100k and I would say across the world.

[Saket Kalia:]

That's very helpful. And then just for my follow-up for Josh. Josh, you mentioned the second quarter should really reflect the full impact of hiring from 2014 and some of the hiring that you did here in the first quarter. Should we think that hiring may be slowing in the second half? And maybe as a corollary, could you give us a sense for where you expect headcount to sort of end for the year?

[Joshua Siegel:]

We basically, on sales and marketing, in particular, we tried to front-load the hiring and the planning on the hiring first quarter, second quarter and third quarter. And so we would expect that the second half would be lighter than the first half in terms of headcount. So from that perspective, that's the case. I think that we don't actually -- we're not going to give out -- we haven't really talked about hiring numbers for the year-end, but I will say that we had a nice increase in our headcount through the first quarter. And we are investing across all of our areas, not just in sales and marketing, but also in R&D and also in G&A, and in our professional services teams because we are seeing demand across all those fronts. So I think you'll continue to see increase in headcount each quarter, but it will be front-loaded in the first half.

[Operator:]

And our next question will come from Jonathan Ho with William Blair.

[Jonathan Ho:]

I just wanted to start out by maybe going back to sort of the sustainability of demand. I mean, clearly, we're seeing an inflection point here in terms of your business. Did you get any sense that this is maybe short-term reactionary buying either because of the retail breaches in 4Q or Anthem in terms of the 1Q breach? Or were there any sort of onetime items that we maybe should be aware of in the first quarter that aren't going to recur later on this year?

[Ehud Mokady:]

I will say that we're seeing increased awareness. We still have the base drivers that we had all these years that have to do with compliance and regulatory drivers. They still exist across the board and very often into the further east you go, including Europe and other regions. But the real -- on top of that, the real pickup that we also described last year has to do with increased awareness on the connection to major breaches. I would say that there may be some verticals that have really awakened driven by recent breaches. And I mentioned our phenomenal growth on the health care vertical and then the retail vertical, but we also have so many examples of demand in -- outside of those verticals. So we're confident that this is just the beginning of the awareness that you just can't keep the bad guys out and the need for a new layer of security. And of course, there are markets where we still need to educate more and there's still a lot of execution to do. But even as you walk around the RSA floor, it's become a common understanding for anybody in the security industry that breaches will happen, and then what do you do then? How do you really protect from that lateral movement? And that gives CyberArk, really, the opportunity to execute on that demand.

[Jonathan Ho:]

Got it. And then as we think about the Privileged Threat Analytics component and sort of the new version that you guys have released, I'm just wondering, is this sort of the tip of the spear now where, in the past, you would lead with the Enterprise Vault and now you can lead with Privileged Threat Analytics as well. I just want to get a sense for whether that's also a potential driver for the business?

[Ehud Mokady:]

So again, we're excited about the pickup with Privileged Threat Analytics because it really rounded up our product offering, expanding us from proactive protection to that detection of really meaningful alerts. We're seeing our sales team really succeed with selling it as a solution, where it is a combination because you need to put the proactive controls on top of the threat analytics. I would say it's really a combination, and that's how we market it. It's very often a major differentiation point for CyberArk. But still, the bread and butter is walking in. And I mentioned the Fortune 100 account. And you walk in, and the Fortune 100 accounts have no real security layer on this strong access to their IT systems. So we still very much have demand for securing credentials in the Enterprise Password Vault, creating a session, reporting in isolation with our PSM and, really, the other pieces of the solution, and PTA for that real-time detection of anomalies.

[Operator:]

And now we'll take a question from Karl Keirstead with Deutsche Bank.

[Karl Keirstead:]

Udi, that 38% mix from EMEA caught my attention. Congrats. I wanted to ask you how big a focus the non-U.S. expansion is. Obviously, you want to chase after opportunity that's there, but you're still a young company, obviously. You don't want to stretch your resources too far, too quickly. So just wanted to get a sense for how you're thinking about the pace of investments and expansion in EMEA.

[Ehud Mokady:]

Yes, Karl. I think it's really built into the CyberArk DNA that we've always set forth as a global company. We've been investing not just in EMEA, but also in Asia even when we were a private company, really leveraging the fact that we can work with value-added resellers, but top that also with feet on the street. So we have our own employees in 23-plus countries but we've sold in over 65 countries. So we don't feel that it stretches us too thin as we invest in the challenge parallel to our own team to go global, and it's very much part of our strength. Many of our deals can start off in Singapore and end up in New York or really expand from Spain into South America. And so being global and always investing in that global reach has worked well for us. And of course, we take a balanced approach as we put these investments. But being long-term thinkers, we see this pay off. I think in one of the previous earnings calls, we gave the example of South Africa, a region where we originally just sold based on channels. And as we put in additional resources of our own, we saw not just expansion into South Africa, but you heard the telco example today was outside of South Africa, but in the continent. And so that's the approach we take.

[Joshua Siegel:]

I was just going to add to that, Karl, and tie it back to Saket's earlier question about the headcount. When we look at expanding our teams, we're expanding them globally and pretty much proportionally around the world also in EMEA and in Asia Pacific.

[Karl Keirstead:]

Got it. Okay. I'd love to ask a follow-up, if I could. Udi, you were talking a little bit earlier about some of the takes from RSA. One of the takes for me was the customer and partner focus on threat intelligence analytics sort of next-gen SIEM vendors. And I may have missed it earlier on, but can you give a little color as to the early traction you're getting on CyberArk's Threat Analytics module? I'd appreciate that.

[Ehud Mokady:]

Yes, yes. Okay, yes. So as was asked earlier, we're really seeing it -- the Threat Analytics, it's a product we launched in December of 2013, so it's kind of a relatively new product in 2014. But our sales people are really -- and channels are becoming more and more comfortable with weaving it as a full solution to our customers. And they really appreciate the -- the customers and the partners appreciate the approach when it comes to complementing their previous investment in SIEM. And so CyberArk basically says, "We're not going to listen to everything that happens in the network. We're going to alert the customer on an anomalous behavior with strong access." So somebody walking in, in the house, but also has the master key. And the customers appreciate that as a meaningful alert. And the integrations we've made with the SIEM products, some of them you mentioned, we're exhibiting at RSA, where we can feed our alert to these solutions or our customers can consume it directly through our dashboard. But we believe it's -- again, as I said, we believe it's more than just detection. We really stand out with having the proactive protection and, on top of that, have the analytics to detect a privileged anomalous behavior.

[Operator:]

And now we'll take a question from JPMorgan's Sterling Auty.

[Sterling P. Auty:]

I wanted to go back on the headcount item. Josh, can you tell us, or remind us, what was the -- at least, the total headcount at the end of the year? And what was the total headcount at the end of the first quarter?

[Joshua Siegel:]

Right. The total headcount at the end of the first quarter a year ago -- is that what you are talking about?

[Sterling P. Auty:]

Well, at December...

[Joshua Siegel:]

It was 364 at March 31, 2014. And at the end of the year, we were at 430 approximately.

[Sterling P. Auty:]

And how about the end of this quarter that you just reported?.

[Joshua Siegel:]

487.

[Sterling P. Auty:]

Okay. Fantastic. And can you give us a sense of the timing of those hires as we layer in the expenses from that increase? Or in other words, was it more back half quarter weighted so we feel more the expense brunt in June? Because, obviously, given the margins that you just put up, it would seem like a pretty healthy expense increase to get down to the [indiscernible] that you did.

[Joshua Siegel:]

Yes. That's kind of the point that I wanted to make is that a lot of these hires came in pretty much in the middle or towards the end of the first quarter. So I wanted to be able to set up that the -- that is why there might be some deleverage in the model in the second quarter because you will feel the full brunt of that headcount in the second quarter. So I would -- on average, probably, towards the middle -- towards the end of the middle of the second month.

[Sterling P. Auty:]

Okay, great. And then back on the linearity. Given the drop in the DSOs, the collections, et cetera, can you comment -- was the quarter actually, perhaps, more front-end loaded in terms of deal closures?

[Joshua Siegel:]

We actually had a solid quarter. We went into the year with a strong pipeline. And we had pretty good linearity for our first quarter of the year, better than we have had in the past.

[Sterling P. Auty:]

Okay. And then last question, and I'll jump out. In terms of the new customer deals that you saw in the quarter, any sense of the mix of products that they're buying? So in other words, where they starting primarily with CyberArk Vault? Or given the larger portfolio you have, were you finding that they're buying multiple products in the first purchase?

[Ehud Mokady:]

I would say as -- especially the ones who we're seeing the uptick in more than 100k deals, we see the combination of buying the Enterprise Password Vault and Privileged Session Management very often. And that would be coupled with -- and that would be often coupled with a third product and, again, more and more with our Privileged Threat Analytics. So I think when customers take a security approach, they understand that they don't want to just vault the credentials, they also want to get the benefits of the isolation layer that the session management provides and, therefore, I would say the attacks will never make it or cannot make it to their production systems. And of course, our model is very much -- Josh mentioned the customer success team, is no matter how we landed, we really want to work with the customer to make sure, first, they use what they purchased from CyberArk, but that we guide them throughout the full solution set. And I think Josh mentioned, we continue to see that 30% of customers come back and buy more from us.

[Operator:]

And we'll now go to Rick Sherlund with Nomura.

[Richard G. Sherlund:]

First, Josh, I'm trying to make sense of the guidance for Q2. It looks like to get to the operating number, you've got about a $5 million sequential increase in OpEx. And it looks like your headcount grew about 13% sequentially in the first quarter. So first, am I doing the math right? Is there something more going on here than just the headcount growth that would account for, what's that, like a 25% sequential increase in OpEx?

[Joshua Siegel:]

Well, I mean I think that we are going to have -- we're going to see that increase in headcount from the first quarter. We're also seeing a significant headcount in the second quarter, as well, increase, much of that also happening towards the beginning of the quarter. As I said in the earlier question, we are looking to bring in most of our heavy -- or front-load the recruit to the first half of this year. And the other thing is as we go into the second quarter, we're also ramping up our sales and marketing activities not just on the headcount, but also on the programs as well. And we see -- we're really ramping up the team there and they're ramping up the program, so we're showing an increase in budget as well on the activity side.

[Richard G. Sherlund:]

Josh, you're confident that you can find the people that fast and spend the money on these programs effectively that quickly?

[Joshua Siegel:]

Well, we have the people engaged, we have a plan in place and we've been effective until now. And actually, we're really quite pleased with the type of efficiency that we've gotten out of the sales and marketing teams that we've brought on even in the last 6 months. As Udi mentioned earlier in his remarks, we already saw the benefit of a lot of the sales teams that we brought in even in Q3 and Q4 already make an impact in the first quarter.

[Richard G. Sherlund:]

And for Udi, could you comment on -- out in the field, the sales cycle, it would certainly seem like the sales cycle is compressing. Do have any metrics you can share with us on that? And just in terms of the competitive environment, is there anyone in particular that you're encountering more so than maybe you did before?

[Ehud Mokady:]

So first, I would say when we balance it out on a global perspective, I would say that it's still a 6- to 9-month sales cycle. Again, there are quicker ones and, definitely, in our U.S. business, we're seeing even more -- much more awareness than in other regions than -- but there was a little bit more education. And also a lot of work with the channel. With regards to the competitive landscape, I won't say that there is any major change that we're seeing in the field itself, but from the marketing perspective, there's probably much more, many more, let's say, emphasis by vendors on the privileged angle. We see that as a compliment. We created a very hot space, and there are vendors that try and emphasize more and more the privileged angle. And again, we're very pleased with the IDC report that really reflects what we're seeing, that really clearly positions CyberArk as the leader by far in the market.

[Operator:]

[Operator Instructions] And our next question will come from Shaul Eyal with Oppenheimer.

[Shaul Eyal:]

Two quick questions on my end. Udi, the great performance that we've seen, are these market share gains from existing vendors? Or is it all greenfield opportunities or basically a combination of both?

[Ehud Mokady:]

I would say the minority included also -- replaced from some existing vendors, but the majority of the business is really greenfield opportunities. I deliberately mentioned the Fortune 100 company because I personally dove down to really understand that. Can you even find a major technology company that's in the Fortune 100 space that is putting a privileged account security layer only in 2015? And again, they're not alone there because everybody was focused on perimeter security and trying to keep the bad guys out. So I would say most of the deals are greenfield where we come in and there's no solutions or manual solutions or some small homegrown efforts to contain credentials. And it's an opportunity that we're going after. And everything I just said actually applies not just cross-vertically but also geographically. And I think relating to the prior question, that's why we're also very passionate about doing everything we're doing cross-vertical and across the globe.

[Shaul Eyal:]

Got it. Sounds good. One additional question that I keep asking you from time to time but on the Accuvant and FishNet combo and merger, what are you guys seeing from that angle? Any change, any acceleration, what's the status?

[Ehud Mokady:]

No -- I think we discussed this before, and we keep close tabs on it. I think we're seeing that actually happen pretty smoothly. And from our perspective, we're actually seeing that we're continuing to work with the kind of the same people from both parts of the companies, both from FishNet and Accuvant. And since they were both resellers, the relationship continued. And they were important VAR for us also in Q1.

[Operator:]

Our next question comes from Erik Suppiger from JMP Securities.

[Erik Suppiger:]

First off, on the gross margin, as you look forward, is there any reason why that would come down at all? Or should we be modeling for that to sustain at these levels?

[Joshua Siegel:]

It could come down also early in the middle of the year. Because what happens is part of the gross margin is around our professional services. And so we do a lot of recruiting of our professional services folk in the first, second quarter and they may -- and there'll be a delay on the revenue side. So there could be, in the middle of the year, some impact on the gross margin. And then as we -- and then it scales out very quickly once -- in the higher revenue quarters.

[Erik Suppiger:]

So it could come down, and then it would come back up as we get into 2016?

[Joshua Siegel:]

Yes. I mean, what we've seen typically is, in the first half of the year, it's a bit on the southern side of 85%, and then we see it go up in the second half of the year. What we benefited from in the first quarter is that we actually executed very well on the license side. And so that took up any of the extra expense that we had from the first quarter.

[Erik Suppiger:]

Do you think that would reverse in the second quarter?

[Joshua Siegel:]

No, I think -- again, it has to do with in the second quarter now, we'll have even more cost of goods personnel than we did in the first quarter on our books. So based on the guidance that I gave for the second quarter, there could be some small downtick.

[Erik Suppiger:]

Okay. And then on the other expenses, I think you had about $1.6 million of impact from exchange. First off, just do you hedge? Or what is that FX impact resulting from exactly? And are you forecasting that to remain at that level for the remaining quarters of the year?

[Joshua Siegel:]

Yes. So that -- this specific $1.6 million is related to mostly the euro and is a translation of our euro receivables that we did not hedge. So we do hedge our euro receivables, but not at 100% level, and that one reflects the piece that we did not hedge. Going forward, again, we don't -- we're not going to guide towards the impact of the FX. We do have a hedging program in place, which goes towards our euro/sterling, where we're typically short because of the A/R receivables, and then we are long on the shekel. So we hedge that as well. But in the financial income line, what you're seeing there is the balance sheet translation of the -- mostly the euro erosion.

[Erik Suppiger:]

Should we be modeling that to be neutral to 0 as we go forward?

[Joshua Siegel:]

Yes. I would say less than what it was in the first quarter, but I can't obviously -- we're not going to be 100% hedged on that. So I don't know which way the currency is going to go in the next quarter. So there could be movement, positive or negative, on our balance sheet. So I can't really guide to that.

[Erik Suppiger:]

All right. And then lastly, the OpEx, it does take a step-up and then it flattens out as you get into the second half. And I presume that's a function of much more limited hiring. Or is there anything else that would cause expenses to level off as you get into the second half of the year?

[Joshua Siegel:]

Yes. It has to do more with the level of hiring. As we know, 70% of our expenses are around the employee-related expenses, so that certainly drives a big piece of it. But it will increase -- expenses will increase in the back half of the year also because of variable rate, variable commissions and things like that.

[Operator:]

And we do have a follow-up question from Sterling Auty with JPMorgan.

[Sterling P. Auty:]

I wanted to talk about the revenue guidance for the June quarter. So if we look at March, the result that you just put up, it showed the same seasonal pattern as what you saw in March of 2014. But if we look at the way you've guided for June, it's below the seasonal pattern that you've seen the last couple of years for June, and just wondering how we should reconcile that.

[Joshua Siegel:]

Yes, actually we had a very strong March quarter that exceeded our expectations. And so typically, we might -- we had guided towards a bigger decrease between the Q4, which was also an exceptionally strong quarter, to the first quarter this year. So now that we overachieved on the first quarter, we're looking at -- it turns out that we could end up being a bit flat towards -- on the second quarter, which is not typical that we've seen in the past. And that has to do with, really, the overachievement that we did in the first quarter. We do a very -- we look at it very closely in terms of forming our guidance, and we have a good track record of determining setting of the goals and then delivering against those goals. And that's kind of the way we treat it. So I would say that in terms of the second quarter, we're going into it with a very healthy pipe. We're showing a 50% year-on-year growth for this guidance. And we feel that that's a -- that's going to provide a very good first half for the year.

[Sterling P. Auty:]

So if we are flat or slightly down, or down versus the $32.9 million, would you expect all of that to come in the software license? Meaning that you signed up a bunch of -- you had a very strong license quarter here in June, so you'll start to recognize that maintenance revenue in the June quarter. So I would imagine the maintenance and professional services should be up sequentially. Is that a fair estimate?

[Joshua Siegel:]

Yes. That's a -- yes. Maintenance and support services will be up to consider the Q1 licenses, as you said. And then it would be the -- on the license piece, for Q2, in terms of us being able to guide towards it right now where it would be flat to a bit down. But I mean I think what's important is when we look at it from an annual basis, we feel really comfortable about the fact that we've been able to raise the annual guidance meaningfully, which really, in our mind, is what signals the strength and the momentum of our business. And when we think about the guidance, we think about it in terms of the visibility that we have. And we want to really be sure that we do a thorough bottom-up analysis when we deliver these numbers so that we can continue our track record of setting these goals and delivering against those goals.

[Operator:]

Our next question will come from Michael Kim with Imperial Capital.

[Michael W. Kim:]

I'm sorry if I might repeat any question, I've been jumping in between a couple of calls. But specific to kind of some of the newer products, are you seeing maybe a shift in some of the lead-in products? Or is it primarily focused on EPV and PSM? Or is PTA starting to pick up more visibility in the market?

[Ehud Mokady:]

So in the land, in the new customer, we're still seeing Enterprise Password Vault and the PSM as kind of the one-two punch. As I mentioned earlier, we're seeing PTA kind of really enter as part of the solution, especially in security and risk-related deals. And of course, we also have the SSH key manager that we launched at the end of last year, the application identity measure. So we have a full set of products that are often part of the land or as we expand within an existing account. I think the tech deal example I gave of a Fortune 100 company was exactly Enterprise Password Vault, Privileged Session Manager and rounded by the Privileged Threat Analytics but, of course, not -- we have different mixes.

[Michael W. Kim:]

And is the expand part of the business a growing part of that mix coming from these newer products? Or is it new licenses of the existing line? Are they earlier...

[Ehud Mokady:]

So it's actually very robust because we would see a customer increasing the use of Enterprise Password Vault, PSM, if that was the land or expanding -- and/or also expanding into new products like the application credentials, SSH key manager, OPM and others. So it's really a variety. Our expand is always, I would say -- very often includes also something from the first products that they bought. Because privileged accounts are so built into a wide array of pieces of the IP infrastructure that they usually cannot cover it in the first bite in most deals.

[Operator:]

And that does conclude our question-and-answer session for today. And I'd like to turn the conference back over to Udi Mokady for any additional or closing remarks.

[Ehud Mokady:]

So first of all, thank you, everybody, for the questions. As you can tell, Q1 2015 was another very successful quarter for CyberArk. As Josh and I discussed throughout the call, our strong product and go-to-market execution in a growing market continues to drive our business forward, and we believe these factors will provide us with continued success in coming quarters. As always, I thank our customers for placing their trust in CyberArk, and our employees and partners that continue to work hard to create value for our shareholders. Again, thank you for joining us this afternoon. Thank you.

[Operator:]

That does conclude our conference for today. Thank you for your participation.