Cyberark Software Ltd (CYBR) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the CyberArk First Quarter 2020 Earnings Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would like to hand the conference over to one of our speakers for today, Ms. Erica Smith. Ma'am, please go ahead.

Thank you, Angel. Good morning. Thank you for joining us today to review CyberArk's First Quarter 2020 Financial Results.

With me on the call today are Udi Mokady, Chairman and Chief Executive Officer; and Josh Siegel, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the second quarter. 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 releases that are posted to CyberArk's website, including statements regarding the duration and scope of the COVID-19 pandemic and its related impact on global economies, our ability to adjust operations in response to the COVID-19 pandemic, as well as our ability to integrate, drive adoption and recognize revenue from the acquisition of Idaptive .

CyberArk expressly disclaims any application (sic) [obligation] or undertaking to release publicly any updates or revisions to any forward-looking statements made today.

Additionally, non-GAAP financial measures will be discussed on this conference call. Our reconciliations to the most directly comparable GAAP financial measures are also available in today's press release or in the supplemental historic information, both of which can be found at www.cyberark.com in the Investor Relations section. Also, a webcast is available on our website.

With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Udi Mokady. Udi?

Thanks, Erica. And I want to thank everyone for joining the call this morning. We hope you and your families are staying healthy and safe during this extraordinary time.

The well-being of our global community remains our first priority, and we are continuing to evolve our policies and procedures in response to the COVID-19 pandemic. I want to thank our employees, customers and partners for their continued support and agility and dedication in these times.

We have a lot of ground to cover today. My plan is to start with the Idaptive acquisition and how it directly aligns with our mission, outline our response to the COVID-19 pandemic, provide brief details on the first quarter and recent trends and lastly, review our priorities for the rest of the year before turning it over to Josh.

This morning, we announced the acquisition of Idaptive, an industry-leading identity-as-a-service provider, which includes AI-powered single sign-on, adaptive multi-factor authentication and zero-trust functionality. We are excited about the technology and the team as we work together to deliver the industry's only modern identity security platform.

In speaking with customers, they recognize that the provisioning of privileges, even temporarily, is creating a pathway for attackers to execute sophisticated attacks and in general, is expanding the attack surface.

Together with Idaptive, we will better secure traditional privileged use cases and also extend our solution to adjacent identities that have various levels of privileged access.

If we look broadly, we are seeing privileged access and activities proliferate across all identities, driven by digital transformation, cloud and automation initiatives. We believe our approach to managing these identities with Privileged Access Management at its foundation will significantly reduce risk, simplify operations and improve business agility for customers.

With this acquisition, we also add another SaaS offering to our portfolio, increase our recurring revenue and expand our total addressable market to sell into the $25 billion access management market.

We welcome all of Idaptive's employees, leadership team, and Danny Kibel, Idaptive's CEO, to the CyberArk family and are looking forward to learning from each other.

I would love to talk more about our excitement and vision for Idaptive, but we have limited time today, and I'll move on how our COVID-19 response is progressing.

We delivered uninterrupted customer support while transitioning our staff to remote locations, providing 24/7 service and ensuring customers and partners have the resources required to help keep their businesses up and running.

We are also offering Alero at no cost into June. Delivered as a SaaS solution, Alero offers quick time to value, enabling remote employees and contractors to securely access CyberArk through biometric authentication without a VPN.

Our IT organization worked tirelessly to ensure all of our employees were able to work securely from home as we were closing our global offices in March.

Our security services group has done a great job adjusting and is delivering all services remotely, including consulting, implementation, program delivery, red teaming, cloud and education services. And our sales team has always worked from remote location and is quickly adapting to virtual engagements while marketing has shifted to digital programs.

Our long-standing relationships with existing customers have been easier to transition to virtual interactions. With prospects, we have established a virtual sales motion that is evolving with meetings, demos and proof of concepts happening online. We are building trust with these organizations and demonstrating the value, security and business efficiency of our solutions. In some ways, we are benefiting from having no physical boundaries because digital marketing and virtual events are more efficient, scalable and allow us to extend our reach.

Our quick response, operational agility and focus enabled us to deliver results in line with or exceeding all guided metrics for the first quarter, with total revenue of $107 million, non-GAAP operating income of $22 million and non-GAAP EPS of $0.50 per share.

At the end of the quarter, some companies began making shorter-term decisions due to the uncertainty of COVID-19, which affected our license revenue in the first quarter.

Overall, we were pleased to see the strong deal flow at the end of Q1. We also accelerated pipeline generation significantly late in March, demonstrating that Privileged Access Management is a top priority. In fact, we signed nearly 160 new logos in the quarter, and add-on revenue from existing customers grew by about 25%.

From a fundamental perspective, the drivers of our business early in Q1 in today's COVID-19 world and longer-term remain essentially unchanged. But COVID-19 is accelerating many of the themes contributing to the long-term growth of Privilege Access Management.

Our customers have immediate needs as they transition and secure business operations and remote employees. Customers added laptops at unprecedented pace, and employees are accessing corporate resources from any and everywhere. This has not only expanded the attack surface, but it has placed incredible strain on organizations, especially IT and security.

In response, we are seeing growing demand for our SaaS portfolio, which aligns directly with this new business paradigm. We are looking forward to adding Idaptive to this mix.

As an example, late in the first quarter, a large U.S. financial services company turned to CyberArk to secure its remote employees, significantly expanding SaaS users for Endpoint Privilege Manager.

EPM locks down the endpoint, provides application control and improves IT efficiency by reducing help desk call volume. EPM also stops ransomware progression, and we have already seen an uptick in ransomware attacks like Maze that is used to encrypt and exfiltrate data. The long-term fundamentals for EPM are strong, and our pipeline is growing as customers secure new endpoints and strengthen security controls.

Momentum also continued to build for our Privilege Cloud. In one example, a utility company in the U.K. undergoing its digital transformation, it is moving off of a competitive solution to Privilege Cloud and became a new CyberArk customer in Q1.

We have incredible interest in our Alero solution, including the COVID-19 free subscription. A European transportation company who participated in the free offer recognized the fast time to value and signed a longer-term commitment for more than 1,500 global users.

Alero combines zero-trust access, biometric authentication and just-in-time provisioning to allow customers to easily and securely access CyberArk without a VPN. When combined with Idaptive's IDaaS offering, we believe Alero will be that much more powerful.

Securing applications is at the core of digital transformation strategies, which are only accelerating with COVID-19. We had a strong quarter for AAM with a number of great wins, including a cross-sell example at a federal agency customer who will secure secrets for the development of its most critical applications running in Red Hat OpenShift.

Core Privileged Access Security is the lion's share of our business today and is even more relevant in organizations designing their enterprise security strategy in the COVID world. We saw excellent acceleration in customer expansion in Q1, which reinforces this point.

In a 7-figure deal, a pharmaceutical customer implemented the next phase of its CyberArk program with Core PAS. All business users and remote offices will now access applications and network resources through CyberArk.

With the abrupt business changes in March, applications and infrastructure were deployed without full testing or security. Attackers are being more aggressive, exploiting the situation. In this elevated threat landscape, pipeline generation across our solutions accelerated late in Q1 as companies realized they needed to adjust their past strategy to accommodate these changes. There have also been an uptick in our remediation services engagements. While we are not a remediation firm, securing privileged access is one of the first steps in gaining control over a breached environment.

Our labs team accelerated its work to analyze new attack vectors and vulnerabilities created by the remote work environment. We recently published the team's findings that a motivated attacker could easily launch a widespread data-theft campaign using an image file in Microsoft Teams. Working closely with Microsoft, the immediate risk associated with this attack vector was quickly mitigated.

At the RSA conference back in February, we met with hundreds of customers, prospects and partners who reaffirmed 3 main themes: first, PAM is the foundation of a comprehensive security program. Second, we have a long runway for growth. And third, the sprawl of privilege access and activity is a major pain point and security concern. This feedback from RSA strengthened our commitment to deliver a modern identity security platform.

Over the last few weeks, we have critically analyzed our business and want to share with you some of the major risks and opportunities over the next few quarters.

Early in the second quarter, we have continued to win new logos, and we have had a lot of new business activity, including significant pipeline generation. However, we expect the new business environment to be more challenging near term. We have established a virtual sales motion, and the team is building trust with prospects. We are well positioned, but this is a new process for both us and the prospects.

We also anticipate business will slow down in certain industries that are in survival mode like retail, travel and oil and gas.

On the opportunity side, we sell into the enterprise and have strong established relationships with a roster of nearly 5,500 loyal customers, including many of the world's leading companies, and added about 500 more customers from Idaptive today.

We also benefit from the diversification of our business across verticals, geographies and delivery. While the verticals I mentioned have been impacted more acutely, we have mature opportunities and a growing pipeline in banking, insurance, health care, global government, pharmaceuticals and utilities that are less affected.

We also have a broad portfolio of solutions that are aligned directly with the current environment, like Endpoint Privilege Manager, Alero and Privilege Cloud. Application Access Manager secures digital transformation initiatives and Core Privileged Access protects against advanced attacks.

Lastly, we have a truly global footprint, which will help cushion against the potential volatility as economies open.

For the remainder of the year, our R&D team will deliver innovation in our Cloud and Core Privileged Access Solutions. Sales and marketing will strengthen our virtual sales motion and digital programs. We will focus on delivering high levels of customer and partner satisfaction while enhancing our customer success team.

And lastly, the entire company is focused on the smooth integration of Idaptive.

In this new world, people and technology are more tightly woven together than ever, expanding the attack surface. Security and PAM are not discretionary spending, particularly as attackers become more aggressive.

April and early May have been strong. We are pleased with the close rates, and the number of opportunities progressing through the funnel is increasing for both new and add-on business.

While we face near term uncertainty, we also have an opportunity to strengthen the company and emerge stronger. As a result, we plan to continue to hire for key positions and invest in the business. But we will do it the CyberArk way, balancing our investments against our top line expectations, which Josh will discuss in a few minutes.

The acquisition of Idaptive positions CyberArk to deliver the industry's only modern identity security platform, further separating us from the competition.

We are closely monitoring the COVID-19 situation and are confident that our leadership position, strong market fundamentals, experienced leadership team and long-term strategy will position the company to accelerate growth when the business environment stabilizes.

I will now turn the call over to Josh to discuss our financials and outlook for the second quarter. Josh?

Yes. Thanks, Udi. I want to reiterate what Udi said at the beginning of the call and wish everyone health and safety during the unprecedented time.

For the first quarter, total revenue was $106.8 million, up 11% from $95.9 million in the first quarter last year. Since we typically close around 60% of our business in the last month, including a high percentage in the last 2 weeks of the quarter, we were pleased to deliver revenue in line with guidance, even with the rapid decline in the business environment during March due to COVID-19.

License revenue was $51.7 million compared to $51.3 million in the first quarter of 2019. As the selling environment changed, we did see some deals canceled or pushed, and certain deals were downsized late in the first quarter. Even with the uncertainty, we closed a tremendous amount of deal volume late in Q1.

Add-on business increased to 79% of license revenue in the first quarter. That's compared to 63% from add-on business for the full year 2019. We are very pleased that recurring SaaS and subscription revenue more than doubled in the first quarter to 15% of license, and that's compared with 7% in the first quarter of last year.

Subscription revenue represented 10% of license, driven by increased demand from Core PAS and Application Access Manager as a subscription, up significantly from 4% of license in the first quarter last year.

In addition, we were pleased with the performance of our SaaS portfolio, including our Endpoint Privilege Manager, Privilege Cloud and Alero Solutions.

SaaS revenue increased to about 5% of license revenue. That's up from 3% of license in the first quarter last year. The mix towards SaaS and subscription impacted or lowered our revenue by about $5 million in the first quarter of 2020. That effectively impacts our license growth rate by 10%.

To give you more color on the product side, Application Access Manager and Endpoint Privilege Manager each represented about 7% of license revenue.

Maintenance and services revenue was $55.2 million, growing 24% from the $44.7 million last year, and professional services revenue associated with this slide was $9.1 million or 8% of total revenue.

Geographically, the Americas generated $69.9 million in revenue, increasing 13% year-on-year and representing 65% of total revenue. EMEA grew 8% year-on-year to $27.4 million or 26% of total revenue, and APJ generated $9.5 million in revenue, increasing 11% compared to the first quarter of last year, and that represented 9% of total revenue.

In terms of the verticals, global government was our fastest-growing vertical in the first quarter. We also experienced strong year-on-year growth in insurance, pharma, transportation and energy.

As Udi mentioned, we expect COVID-19 related macro and business challenges to persist in segments of energy, retail and travel. For additional color, last year in 2019, energy was about 7% of total bookings, retail was 5% and transportation and travel represented additional 3% of the business.

All the line items of the P&L will now be discussed on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release.

Our first quarter gross profit was $92.5 million or an 87% gross margin. That's compared to 88% gross margin in the first quarter last year as a result of the lower license mix, including the increase in SaaS revenue in the first quarter of 2020.

If we move down the P&L, R&D expense grew by 30% year-on-year to $18.3 million. Sales and marketing increased 19% to $44.7 million, and that includes $500,000 in nonrecurring cancellation charges related to transitioning our global customer events to virtual. G&A expense increased 5% year-on-year to $8 million.

In total, operating expenses for the first quarter increased 20% to $70.9 million, and that's compared with $59.3 million for the first quarter last year.

Our operating income was ahead of our guidance at $21.5 million or 20% operating margin. As a reminder, over 70% of our operating expenses are related to headcount.

In January and February, we were executing well against our aggressive hiring plan, and we ended the first quarter with 1,490 employees worldwide. That's up from 1,204 a year ago, or more than 100 employees since December 31, 2019. Of our total employee count, 696 employees are in sales and marketing compared to 567 at the end of first quarter last year.

Much of the outperformance in our operating income in the first quarter was related to our deliberate slowdown in hiring in March, lower travel expenses as well as variable compensation.

Net income was $19.6 million or $0.50 per diluted share for the first quarter compared to $21.5 million or $0.56 per diluted share for the first quarter last year.

Allow us to take this opportunity to outline where we stand financially. We have a durable business model that generates significant cash flow from operations.

In the first quarter, cash flow was $33.8 million or a 32% cash flow margin. And we are pleased that the margin exceeded our forecast of 5 to 10 percentage points above our non-GAAP net income margin of 18.3% in the first quarter. This cash flow contributed to our strong balance sheet, and we ended up the quarter with $1.2 billion in cash and investments. This cash balance will be impacted by the approximately $70 million related to the acquisition of Idaptive.

We also increased deferred revenue by 23% year-on-year to $211 million, approximately 5% of total deferred revenue related to recurring SaaS contracts. And this compares to $171 million in March 31 last year and 3% of total deferred related to Saas.

Turning to our outlook. We have a robust, mature pipeline, more salespeople given the hiring in Q1, and believe we have adjusted well to the new remote selling environment. However, we are only about 8 weeks into the major effects of the COVID-19 pandemic, global shutdowns, business uncertainty and resulting economic downturn.

At this point, while there is positive momentum and a real business need for PAM, we have limited visibility into our customers' decision-making processes and lack data on close and conversion rates in this environment. As Udi mentioned, certain industries have been impacted harder than others, and we expect customers to make shorter-term decisions, which could lower deal sizes. In addition, we are seeing more budget and project scrutiny, which we could believe will lengthen sales cycles. Our solution is very sticky. And while we have a strong renewal rates, we do anticipate that the current uncertainty may have some moderate impact.

All of these factors make it difficult to predict the timing of when deals will close. As a result, we are withdrawing our revenue, non-GAAP operating income and non-GAAP EPS guidance for the full year 2020.

With that said, the management team remains committed to delivering profitable growth. The more than 100 employees we added in the first quarter position us well for this year. While we intend to hire key roles in the remainder of 2020, we only plan to add about 30 to 35 people in both the second and third quarters.

We will monitor the COVID-19 situation closely. And given our high gross margins and that most of our expenses are related to headcount, we have flexibility to adjust our hiring to better align with the top line as we move through the year.

While our cash flow from operations will be impacted by the current economic environment, it is too difficult to forecast at what level. As a result, while we expect to generate positive free cash flow for the year, we are withdrawing the guardrails that we have previously discussed.

We are providing guidance for the second quarter, which reflects our mature pipeline of opportunities with 6 to 9-month sales cycles and our strong deal closing activity for April and May.

While still considering the pervasive uncertainty in the market and changes in the business environment due to COVID-19, we have widened the range for second quarter guidance and expect total revenue of between $95 million to $105 million. We anticipate approximately $58 million in maintenance and services revenue for the second quarter. We expect to generate non-GAAP operating income to range between $7 million to $16 million and non-GAAP net income per diluted share of $0.17 to $0.35. This assumes between $3.5 to $4.5 million in additional expenses this quarter related to the approximate 130 people from Idaptive who joined CyberArk today.

Our guidance does not assume onetime integration expenses or incremental revenue from the acquisition of Idaptive in the second quarter as we have not yet completed the purchase price accounting review.

We estimate 39.4 million weighted average diluted shares and an effective tax rate of about 24% for the second quarter.

Idaptive is a great acquisition. The company brings a world-class IDaaS platform and deep identity expertise. With Idaptive, we are also expanding our portfolio with another SaaS solution, which we expect to more than double our SaaS AAR, adding approximately $16 million to $18 million to our $13 million AAR from existing SaaS solutions.

We believe that with our strong balance sheet, powerful financial model and balanced approach to growth and profitability, CyberArk will be able to successfully navigate the COVID-19 situation and will be well positioned as the environment improves.

I will now turn the call over to the operator for Q&A.

(Operator Instructions)

And your first question comes from the line of Saket Kalia.

Maybe first for you, Udi. Congrats on the deal. Can you just talk a little bit more about the strategy for Idaptive a little bit? It sounds like it's potentially the same buyer as your Core PAM Solution. But how do you sort of envision privileged identity and perhaps what we'll call non-privileged identity sort of meshing together over time?

Yes. Thanks, Saket. First of all, we're very excited. We've been working on the strategic process for a while to execute our vision to deliver a modern identity security solution and further take us to be this modern identity security company. We believe that the access issue is a security issue. We saw a proliferation of privileges in the PAM world.

We're also seeing prudentials as the primarily attack point for the beginning of attack cycle. So we're taking a security-first approach to managing identities. And with Idaptive, it allows us to cater to the security-oriented enterprise customers that we work so closely with today, and those that want to approach managing identities as a security issue. And again, from a single best-in-class vendor.

And of course, it will take us to -- beyond security, it expands us to securing business users and taking even a bigger part in the digital transformation strategies that our customers are ongoing.

So beyond the security will also take us to the digital officers, to the CIOs in companies.

Got it. That's really helpful. Maybe for my follow-up for you, Josh. Helpful commentary there at the end in terms of the ARR kind of addition that Idaptive brings. Can you just dig into the profile just a little bit more? Particularly interested in billings here and growth rate. So can you talk a little bit about what are the billings terms here in terms of annual in advance versus sort of multiyear upfront? What's sort of the average contract duration? And what sort of the growth rate that Idaptive has seen over time, sort of broad brushes? Sorry, there was a lot there. Does that make sense?

Yes. It makes sense. And let's remember, this is very new. I think we're about 15 hours after close, formally. So we're still absorbing. But I think those questions are pretty straightforward. I mentioned today already in the call that we're looking at adopting another, very quickly, $16 million to $18 million of ARR already.

I think with regard to their selling patterns, what we at least saw in the data is that their contracts are roughly just over a year on average. So call it 14 to 15 months on average is kind of what they've been experiencing. And when they bill, they typically are billing 1 year upfront, so they're collecting 1 year at a time.

And with regard to the growth rate, I think that's something that they're pretty fresh into the game being so low for the last 1.5 years as an organization. And I know in the last year, it's been certainly into the double digits growth. But I think let us -- I think we'll be able to talk a lot more about the growth expectations in the next couple of quarters as we absorb them into CyberArk.

Your next question comes from the line of Fatima Boolani.

I trust you are all healthy and safe. Josh, I...

(technical difficulty)

(Operator Instructions) Your next question comes from the line of Shaul Eyal.

I had a question on Idaptive, also building on Saket's prior questions. So Udi, that transaction completely makes sense, completely in line with prior transactions, whether it's Conjur, Infinity, others, price, people, culture, product, et cetera, correct me if I'm wrong. I imagine you knew some of the Idaptive team from their prior Centrify days. Were you targeting just the IDaaS piece that was spun out last summer, if I'm not mistaken? And also, does that get you into elevated competition maybe with some other various providers as the swimming lanes within the broader identity arena are gradually blaring?

Shaul. Yes, they were -- Idaptive were spun out of Centrify before, and we were laser-focused and interested in Idaptive as a stand-alone company because it's been a growth engine focused on creating a modern platform for identity as a service. And we wanted our foray into this market to be with a fresh and a modern platform to execute on our strategy, and we're very excited about the team. A lot of the team members are actually identity experts, but the fact that many of them are super familiar with the PAM market is an extra bonus. And in our conversations, it's going to make the integration even more powerful as we -- they understand both markets.

With regards to, I would say, extended competition, we're taking a security-first approach in this and focused on our enterprise customers, but we'll continue to integrate and work alongside many of our partners in identity that -- especially with our joint partners.

And so I think in enterprises, we find -- can work with multiple vendors. We'll focus on really the Core Privileged Access Management expanding to adjacent identities and we'll continue to integrate with various partners. And competition is reality in identity, like in most tech verticals.

And your next question comes from the line of Rob Owens.

Great. Udi, your commentary with regard to buying centers and the targeting of customers that are managing identities as a security issue. How fragmented is this market relative to buying centers? And how much is the thesis that you see convergence over time versus kind of where things are right now? Curious on that front.

No, Rob, it's a great question because I would say the identity spaces is a gradual convergence, and it's not happening overnight. Here in CyberArk, we wanted to future-proof our leadership position. And like I said earlier, and do that while entering in it with an acquisition of a truly modern platform. If you're joining the game, join it with a truly modern platform, but it is early in the conversion. So we expect that a subset of customers will already at day 1 want a unified solution, but over that -- over time, there will be more a focused approach where the CSO views -- the Chief Security Officer would want to manage all identities in a security-first approach.

And of course, we tested the water for a while and with close customers and partners. And many of them were telling us, if CyberArk had it, we would buy it from you.

And our next question comes from the line of Melissa Franchi.

Just shifting to the business and what you're seeing from a pipeline perspective, Udi, you talked about seeing an acceleration in the pipeline in April into May. Can you just give us a little bit more color around what was driving that acceleration? And to what extent is that impacted by maybe some more pent-up demand from disruption in March?

Yes. So I think, Melissa, I would say that we even saw acceleration in pipeline in those last 2 weeks of March and into April and May. I think the importance of that and why we gave it so much attention is, of course, for the long -- the mid- and long-term business, but also really puts it up there, the Privileged Access Management is one of those high priority programs, especially as companies are being disrupted and moving into a work-from-home environment and stepping up their digital transformation. So really, it was important in that sense.

Additional color, I would say, it's the variety of new prospects, add-on business and really opportunities coming along and increased interest in our -- in momentum for our SaaS solution, EPM very much because you have many more endpoints right now that are at the point of start for the employee, but also for the attacker, increased pipe and demand for our Privilege Cloud and for our Alero. But like I said earlier, across products, it includes our Core PAS Solutions. And we just see it as indicative that this is -- when you have to choose, what are you going to do, PAM is one of the top priorities for CSOs.

Got it. That's very helpful. And then one follow-up on the Idaptive acquisition. Udi, could you just maybe give us a little bit more details around how the technology is differentiated? I know you said that this is going to be targeting a more security-oriented buyer relative to maybe some of the other players in the market. But can you put a finer point around what Idaptive offers from a technology perspective relative to maybe OKTA or Microsoft?

Yes. Yes. I think -- like Josh said, it is early, and it is a much a younger company, but it was both born in the cloud really in the most modern environments and also born with security in mind because of their roots coming out of the PAM market. So the components that they have really include artificial intelligence elements to make sure that sessions are analyzed and as they apply a multifactor authentication and single sign-on. Life cycle management. They have behavior analytics capabilities. So in the root, everything is about this -- we need to enable access to these employees, but this access can also be a point of start of attack, which is really much the CyberArk mindset.

And so I think the customers who trust CyberArk with securing privileged access would now be able to make sure that they're also blessing regular user access with the type of controls and security mindset that we deliver. And of course, we need to integrate this together. We're going to integrate them also with our Alero, and it's going to be very powerful.

And your next question comes from the line of Sterling Auty.

I'm curious what the sales coverage ratio was through the March quarter, seems how you had such good success. And what's going to be the strategy given the economic environment in terms of managing that in the coming quarters?

Sterling, it's Josh. So we actually had very, very strong coverage in terms of numbers for the first quarter. Not only did we come out of the year in 2019 with capacity to meet a 2020 -- let's call it a non-COVID year, we also continued to hire into the first quarter. So overall, the capacity for the -- we're bringing on already in the first quarter is for the second half of this year and already into 2021. So I mean, basically, the coverage was very high, higher than usual, even.

And basically, as we -- I think as we discussed in the prepared remarks, we'll be actually looking at -- we've reduced already, starting at the end of March, kind of hiring trends towards the end of the first quarter. We're looking to probably the incremental growth of 25 to 30 people each of Q2 and Q3. And that's going to be our lever based on how we see the economic environment changing.

I mean one of the things that we're also tracking very closely with regard to our coverage, because we want to make sure that we come out of here -- come out as strong as possible once the external issues are behind us is the fact that our pipeline, which Udi talked about, really has been growing very nicely, and that's presenting us a future -- and that's presenting us kind of where we want to have the coverage going forward, which is why we're very happy to keep building as we speak.

Okay. And then on Idaptive, the $16 million to $18 million, is that a full year run rate? Or is that what you're expecting to come to CyberArk for the remainder of 2020?

And then more specifically, what are you expecting the acquisition to contribute here in the June quarter?

Yes. So the $16 million to $18 million is what we would be immediately acquiring in contractual AAR already today to add to the $13 million of SaaS AAR that we already have. And what was your second question, Sterling?

How much revenue would you specifically expect in the June quarter from the acquisition?

Yes. So we're still -- we haven't even -- we're just starting now the PPA because as we said earlier, this deal closed less than 15 hours ago. So we don't anticipate -- right now, we're not building in any significant revenue for the quarter or for the 6 weeks of this quarter based on what the PPA is expected to be.

And your next question comes from the line of Gregg Moskowitz.

So regarding the Idaptive transaction, can you share with us the integration time line on delivering an AI-based solution across PAM and IDaaS? And then also since Idaptive is a SaaS model, I was curious if this transaction could accelerate a transition to a subscription model for your core business. How should we be thinking about that?

Gregg, Udi here, I'll start. I would say that we're working on the integration. We really plan to unveil more of the joint offering and story in our July impact event, which has moved into -- to be a virtual trade show, and put the systems together. Again, through the due diligence, we've already mapped out a strong connection points, immediately -- immediate things like multi-factor authentication to our -- to the CyberArk customers and leveraging their AI platform in conjunction with our threat analytics, but there's more to come. There's going to be integration with our Alero as well.

With regards to the subscription transition, I would say, we're very pleased that this will basically double our SaaS ARR, and we've seen the momentum grow on our SaaS products. And so we're executing on this strategy that we call to infuse the business with SaaS and now including Idaptive, but we're not undergoing a subscription transition at this time. But we regularly evaluate the demand, our pricing. And again, this infusion is working.

And your next question comes from the line of Gur Talpaz.

Great. With Idaptive, have you contemplated any impact here on partnerships within the C3 Alliance? And then just more broadly, as we sort of push forward here, how do you think about your philosophy about M&A versus partnership as you look to the future?

Yes, Gur, great to hear from you as well. So obviously, we're super passionate about our C3 Alliance. We put a lot of energy behind it. And the field partnerships are very important for us. So yes, we put a lot of thought into it. We have the strategic initiative to future-proof CyberArk as spaces converge. And hence, the decision to expand from privileged access to covering broader elements of access, but in our unique way in security.

We really believe that we can continue many of our field partnerships with identity players. For example, if you take Microsoft, one of the unique attributes of Idaptive is it does not force the customer to choose a directory and migrate from a Microsoft active directory. So we can come and piece and really complement what our customers are doing with Microsoft.

And we're probably having those conversations as we speak now, this is so fresh. I think similarly with Ping, we have a good relationship. And I think we will find those use cases that we complement each other in the enterprise. On top of that, the C3 is really -- C3 Alliance is really broad and includes other elements like DevOps partners and our partnership with Red Hat. And there are so many other flavors that, of course, will continue to be super strong.

And our next question comes from the line of Brian Essex.

Great. Maybe, Udi, if I could follow-up on Idaptive as well. I think the presentation you have indicates that they have over 500 customers. Maybe just a sense of how much overlap there is in that customer base? What the profile is, and the potential opportunity for you to penetrate those and maybe an accelerated rate?

Yes, they have about 500 customers. The overlap is actually relatively low, about 30 accounts. And so there is an opportunity to go after the rest of those accounts. And of course, in the coming days, the teams will be partnering and looking at what are the best ways to do that. We're even more excited, obviously, about taking them to our 5,500 customers and the opportunity there. We think that's an even bigger force, especially given our very tight relationship with our customer base.

Your next question comes from the line of Jonathan Ho.

Just wanted to maybe start out with understanding a little bit of better color around the Alero free offering and maybe some of the opportunity that you see there, particularly around conversion rates as well.

Yes. Absolutely. I think first of all, we came out of it from doing the right thing. I think like many companies, that was the mindset is, okay, our customers are all deploying and trying to land on their feet in this environment. And what are they going to need to do, they're going to need to enable their employees to access their IT infrastructure from remote. And so Alero was very much born to enable remote vendor access. But if your employees are remote, they are exactly in that kind of situation. So instead of -- so the right thing to do was to give a long free trial of Alero that really solved their day 1 and day 30 and even day 60 issue for our customers to deploy, and allow their employees to get access to CyberArk remotely. And obviously, we gave some examples, doing the right thing pays off, and it was much, much appreciated, and we saw a growing pipeline of Alero, I would say, interest.

And I don't have conversion rates ready for you now, but I would say it's early in the process, but it's been a successful campaign. And we'll probably know more in a few quarters.

And your next question comes from the line of Daniel Bartus.

Maybe for both of you, Udi and Josh, just wondering if you guys can comment on the competitive landscape. Any changes, either traditional players emerging stronger under the new ownership that many of them have, or even players like OKTA moving into your space a bit more? And maybe you can just discuss if there's been any change in win rates in this environment.

Obviously, I think this environment actually creates a differentiation between, I think, vendors that are strong and can really ensure their customers that they're going to be the for the long run and folks who have a shorter runway. So we believe that even before Idaptive, we built a strong position. Just a report a week ago from KuppingerCole put us as the leader in the PAM space, really a fresh report there. And they want a company that can give them the 24/7 support global reach. So I would say, in these times, it's actually differentiated us further from other players in PAM, and probably no significant change in win rates, but really in a good place.

And your next question comes from the line of Catharine Trebnick.

Udi, could you give a little more color on how you've transitioned the team to a virtual sales process? And how that has impacted your close rate?

Absolutely, Catharine. So first of all, I was really -- and I told them this many times because we do much more communicating than ever, that I was super pleased with how the team adapted quickly into this environment. We've already had -- of course, the sales organization is globally spread and was kind of used to this remote environment, but we've had to have other departments like R&D and -- deploy.

I think with our global presence, we were kind of able to see a little bit into the future because we saw kind of the -- our Singapore offices and how they responded, then we saw Israel and the local government regulations and kind of had a heads up on what's coming into the U.S. and got ready for that. So I would say really minimal disruption to all employee productivity and especially the sales.

We did see, as we mentioned at the end of Q1, we did see that it was some deals were harder to close, especially large, new business deals or some deals were shrinking in size. But we looked at it closely, and they all stayed in the pipeline. And so things were closing, including 7-figure deals, including in -- really in the last 2 weeks of the quarter and things closed early into Q2 and remained in the pipe. So we feel like the team adjusted really well and everything that also Josh and I mentioned here is we're very pleased with the pipeline buildup and the activity levels.

And your next question comes from the line of Andrew Nowinski.

So maybe just a follow-up on your prior question regarding sales coverage. I appreciate your efforts to control spending, but I was just wondering if you're slowing hiring on sales reps now, would this have an impact on your calendar '21 growth trajectory, sort of exacerbating the COVID impact that we're seeing right now?

Sorry, I didn't hear the last part, Andrew.

I said if you slow hiring now on sales reps, which presumably will take 12 months to reach full productivity, would this have an impact on your calendar '21 growth trajectory of sort of making the COVID impact or extending the COVID impact into next year?

Okay. Thanks, I get it. Well, actually, I think we're in a good position because we -- as I said earlier in the call, we actually ended 2019 with the right capacity for 2020. And so as we add a new coverage in 2020 in the first quarter and we're not -- that's a good position as well as we go, hopefully, to a post COVID world environment. And the truth is that we have a lever over the next 9 months. And we're continuing to be prudent, but certainly choosing to invest where necessary so that we're in a position not to exacerbate for 2021.

Okay. Got it. And then just a follow-up on the Alero integration with Idaptive. Does it require -- do you need to have that integrated first before you start selling the Idaptive solution once the deal closes? Or is that just something that will happen throughout the course of the year?

That would be something that happens throughout the course of the year. We do not need to integrate it to sell Idaptive. Idaptive have a full robust solution set. We're looking for ways to bring even additional power and value over time.

And your next question comes from the line of Erik Suppiger.

Yes. So I was a little surprised by Idaptive. Obviously, Centrify is a PAM provider. Can you discuss why you're in a position to see better synergy between Idaptive and your -- you versus what Centrify was able to do when it was part of Centrify?

Yes. I think the biggest change there is Centrify's acquisition by Thoma Bravo. And they have basically 2 different behaving elements: one, a PAM vendor kind of -- and not a leader in this space. And then they put a strong team to develop a modern identity-as-a-service solution that, of course, is going after the major leagues and addressing an extended TAM.

And so we actually were looking at the broad market and what is our best way and foray to enter and enter it, and we're incredibly excited by how they were built out. And that in our hands and with our market leadership and with our credibility and strong business model, we can give them the energy and attention to bring this to market. So a high-quality asset that was given, I would say, limited go-to-market energy. And with us, we can really take this broadly.

And your next question comes from the line of Alex Henderson.

Great. The primary question I want to ask is around the work-from-home phenomenon. Obviously, you guys get a clear benefit from that as people scrambled. But as that has now kind of plateaued as a dynamic and is now receding, was that part of the reason why your business accelerated in late March and April, and therefore, that dynamic is starting to become less of a positive?

And the second question I had for you is identity, obviously, is critical in the container world and it's the route of security in that environment. But it's more around the identity of applications than necessarily individuals. Can you talk about whether there's any capabilities on that front within Idaptive and how you plan to play there? Or is that just going to be off of Conjur?

No, no. Thanks, Alex. I think the work-from-home shift basically brought home the fact that there is really no more perimeter and that identity is the new perimeter. So I think the work from home, even -- and we all hope it will be this way, even if we're seeing gradual return, really brought it home that the new modern company doesn't really have a perimeter. And that's what we've been saying all along is that you have to operate, assuming an attacker will be able to get to your core assets. And so Privileged Access Management is elevated because you actually have no boundary anymore with such a broad attack surface with distributed endpoints and employees. And even as the employees come back, it's -- it will be very clear that, okay, attacks start on the endpoint and very quickly jump into critical assets and cloud infrastructure. And you need that last layer of defense to make sure that there will never be strong access to that infrastructure. So we were pleased to see that acceleration because it was highly -- it was in the top -- remained in top priority and got prioritized. But we think the PAM opportunity is a long-term opportunity as such an essential layer.

With regards to the second question, I think it's great because I should have emphasized it more. I think the combination of Idaptive and what CyberArk has to -- brings to the table is we can really cover human identity and then machine identity in one platform. And machine identity, we've been doing with our AAM, with our Application Access capabilities, really securing our containers and applications. And we've done that for the humans that needed privileged access.

And with Idaptive, we can go for all units, all types of users, and again, as we integrate, put it all under one platform. Idaptive also brings other assets in this world, like access to cloud consoles and cloud assets. So we're going to have additional joint use cases, both for human identities and for machine identities.

And now I would like to turn it back over to Udi Mokady for any closing remarks.

All right. First of all, thanks, everyone, for joining the call this morning. I want to thank our customers, partners and employees. I'm incredibly proud of how the -- our entire team quickly adapted to working from home and remained productive during this difficult time that impacted every aspect of our lives. I also want to thank our customers and partners who trust CyberArk to secure their IT infrastructure. We're working hard to reduce the impact of this pandemic on their business, and we'll stay close to them. Thanks, everyone.

And ladies and gentlemen, this concludes today's conference call, you may now disconnect.