Cyberark Software Ltd (CYBR) 2015 Q1 法說會逐字稿

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.

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 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 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 US 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 application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP 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?

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 recorded total revenue for the first quarter of $32.9 million, an 89% increase over Q1 2014. For the first quarter, we also reported 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 had 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, and they are coming to CyberArk to help them do it.

As noted in the new Mandiant report, APT 30 and the Mechanics of the 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, four verticals each contributed more than 10% of our bookings, including financial services, manufacturing, energy, and healthcare. We also saw bookings more than double from multiple verticals, with the largest year-over-year growth coming from healthcare 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 the stated objective, the organization was well aware of the attack activity that had 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 the Board of Director's mandate to do whatever they can to avoid having a problem similar to Anthem's. This was a pattern we saw repeatedly in additional healthcare 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 at 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 US. 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 the 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 the 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 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. Attackers will get inside the network perimeter. Organizations need to build their next generation security strategy around this core premise.

But, CyberArk believes that focusing exclusively on detection is also a huge mistake. Once an attacker has breached the network perimeter, our Privileged Accounts security products can provide detection of privileges use or abuse, but we also offer proactive controls that can block the attack from progressing, limiting lateral movement and breaking the cyber attack chain.

Our strong results for the quarter and meaningful multiyear levels of growth, combined with the insights I have shared with you today, clearly illustrate the fact that our market is large and continues to grow. They also validate that the investments we have been making in innovation are increasing our differentiation.

We have the most comprehensive, scalable platform that gives our customers confidence that whether they start with an immediate pain point or a more strategic approach, CyberArk can meet their needs. This includes protecting privileged accounts on-premise or in the cloud, and provides a layer of analytics and visibility that is increasingly important for security professionals to quickly be able to cut through the noise.

I am very pleased that CyberArk's market leadership was recognized in the recent IDC MarketScape for Privileged Account Security. We were ranked highest in both capabilities and strategies, and IDC noted that CyberArk is the, quote, pure play big gorilla with the most revenue and the largest customer base. This further reinforces the strength and importance of our market leading solutions.

Our investments in scale and execution are also proving to be effective. The sales teams we hired in the second half of 2014 are already making a meaningful contribution to our results.

The marketing investment has helped broaden the awareness and generate a pipeline of opportunities to feed this growth. You should expect us to continue to invest in the business to drive growth while also aiming to deliver meaningful levels of profitability.

As I travel around the world and speak at industry events like Cybertech in Israel and meet with customers and prospects at a very busy RSA conference, I can tell you that the awareness of CyberArk's market leadership is at the highest point in our history. And I am confident that this is just the beginning.

With that, let me turn it over to Josh. Josh?

Thanks, Udi. I'll start with a more detailed overview of our first quarter, and then I will discuss our second quarter and the 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 benefitted 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 four 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 a 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, where 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 grow.

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 of 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 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 of 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 three 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 to $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 are also 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 over to the operator for Q&A.

Thank you. (Operator instructions.) Saket Kalia, Barclays.

Hi, guys. Thanks for taking my questions here, and nice outperformance against your expectations.

Thank you, Saket.

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 size deals in the pipeline? It sounds like for the last couple quarters you've been seeing some bigger average deal size. I'm just trying to get a sense for how sustainable that is.

Yes. Great, Saket. I would say that the momentum that we described when we described the Q4 really carried into Q1. And so, we saw really solid close rates, acceleration in closing increasing 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 sizes, I believe in Q4 we really gave 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.

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 about hiring maybe 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?

We basically -- on sales and marketing in particular, we tried to frontload 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 -- obviously 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're seeing demand across all those fronts.

So, I think you'll continue to see a increase in headcount each quarter, but it will be frontloaded in the first half.

Very helpful. Thanks very much, guys.

Thank you, Saket.

Jonathan Ho, William Blair.

Hey, guys. Congratulations on another strong quarter.

Thank you, Jonathan. How are you?

Thank you. I just wanted to start out by maybe going back to sort of the sustainability of demand. 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 where there any sort of one-time items that we maybe should be aware of in the first quarter that aren't going to recur later on this year?

I would 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 the 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 healthcare vertical and in the retail vertical, but we also have so many examples of demand outside of those verticals.

So, we're confident that this is just the beginning of the awareness that you can't just keep the bad guys out and the need for a new layer of security. And of course we -- 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.

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? Just want to get a sense for whether that's also a potential driver for the business.

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 solution, where it is the combination, because you need to put the proactive controls on top of the threat analytics. So, I would 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 the session recording and isolation with our PSM and really the other pieces of the solution, and PTA for that real-time detection of anomalies.

Great. Thank you.

Thank you, Jonathan.

Karl Keirstead, Deutsche Bank.

Well, thanks. Udi, that 38% mix from EMEA caught my attention. Congrats. I wanted to ask you how big a focus the non US 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.

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 channel in 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 saw that -- 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.

Got it. And -- oh, go ahead, Josh.

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.

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 SIM 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.

Yes. Yes, okay. So, as was asked earlier, we're really seeing it on the Threat Analytics. It's a product we launched in December of 2013, so it was a relatively new product in 2014. But, our salespeople 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 customers and the partners appreciate the approach when it comes to complementing their previous investment in SIM. 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 anomalous behavior with strong access.

So, somebody walking 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 SIM products. Some of them you mentioned were exhibiting at RSA, where we can feed our alert to these solutions or 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 privileged anomalous behavior.

Great. I appreciate those answers. Thank you.

Thank you, Karl.

Sterling Auty, J.P. Morgan.

Yes, thanks. Hi, guys. 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?

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

Well, just (multiple speakers).

Was [364] at March 31, 2014. And at the end of the year, we were at 430, approximately.

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

487.

Okay, fantastic. And can you give us a sense of the timing of those hires as we layer in the expenses from that increase? So, in other words, was it more back half quarter weighted, so we'd 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 (multiple speakers).

Yes. So, that -- 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 that is why there might be some deleverage in the model in the second quarter, because you will feel the full brunt of those headcount -- of that headcount in the second quarter. So, I would -- on average probably towards the middle to the end of the middle of the second month.

Okay, great. And then, back on the linearity, given the drop in the DSOs, the collections, etc., can you comment, was the quarter actually perhaps more frontend loaded in terms of deal closures?

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

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, were they starting primarily with CyberArk Vault or, given the larger portfolio that you have, were you finding that they were buying multiple products in the first purchase?

I would say especially the ones who -- and 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 attacks will never make it -- or cannot make it to their production systems.

Got it. Thank you.

And of course, our model is very much -- I just mentioned the customer success team. It's -- no matter how we land it, we want to work with the customer to make sure first they use what they've purchased from CyberArk, but that we guide them throughout the full solution set. And I think Josh mentioned that we continue to see that 30% of our customers come back and buy more from us.

Thanks.

Rick Sherlund, Nomura.

Hey, thanks. And wow, what a tremendous quarter. 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?

Well, 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 frontend 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.

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

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 six 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.

Okay. Thank you. And for Udi, could you comment on, out in the field, the sale cycle? It would certainly seem like the sales cycle's compressing. Do you 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?

So, first, I would say -- when we balance it out on a global perspective, I would say that it's still a six to nine month sales cycle. Again, there are quicker ones. And definitely in our US business we're seeing even more -- much more awareness than in other regions than -- but, there is a little bit more education and also a lot of work the channel.

With regards to the competitive landscape, I wouldn'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, I'll say, emphases by vendors on the privileged angle.

We see that as a compliment. We created a very hot space and there are vendors that try to 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.

Thank you.

Thank you, Rick.

(Operator instructions.) Shaul Eyal, Oppenheimer.

Thank you. Hi. Good afternoon, guys. Great results, great outlook. Two quick questions on my end. Really, 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?

Well, I would say the minority included also replays from some existing vendors. But, the majority of the business is really greenfield opportunities.

I deliberately mentioned the Fortune 100 company because I personally drilled down to really understand that you can 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 reverse security and trying to keep the bad guys out.

So, I would say that most of the deals are greenfield. When we come in, there is no solution 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.

Got it. This is great. And one additional question that I keep asking 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?

Oh, no. Yes, I think we've discussed it 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 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 an important buyer for us also in Q1.

Got it. This is great. Keep up the great job. Congrats.

Thank you, Shaul.

Thanks, Shaul.

Erik Suppiger, JMP Securities.

Yes, congratulations. 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?

It could come down also early in the middle of the year, because what happens is, as 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. Then, as we -- and then it scales out very quickly once in the higher revenue quarters.

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

Yes. 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 benefitted from in the first quarter is that we actually executed very well on the license side. And that -- so, that took up any of the extra expense that we had from the first quarter.

Do you think that would reverse in the second quarter?

No, I think, again, it has to do within 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.

Okay. And then, on the other expenses, I think you had $1.6 million of impact from exchange. First off, 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?

Yes. So, 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 a 100% level. And that 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.

Should we be modeling that to be neutral, zero, as we go forward?

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.

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 there anything else that would cause expenses to level off as you get into the second half of the year?

Yes, it had to 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.

All right, very good. Thank you.

Thank you.

Sterling Auty, J.P. Morgan.

Yes, thanks. 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.

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 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 -- of setting the goals and then delivering against those goals. And that's kind of 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 50% year-on-year growth for this guidance. And we feel that that's going to provide a very good first half for the year.

So, if we are flat or slightly down or, well, 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?

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 on the license piece for Q2. In terms of us being able to guide towards it right now, it would be flat to a bit down.

Okay. Thank you.

But, 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 minds, is what signals the strength and the momentum in 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 on track record of setting these goals and delivering against those goals.

Got you. Thank you.

Thanks, Sterling.

Michael Kim, Imperial Capital.

Hi. Good afternoon, guys. Sorry if I'm repeating a question. I've been jumping between a couple 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 PK starting to pick up more visibility in the market?

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 a 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 manager. 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 that 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.

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 or the earlier products?

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 at the application credentials, SSH Key Manager, OPM and others.

So, it's really a variety. Our expanded is always -- very often includes also something from the first products that they brought, because privileged accounts are so built into a wide array of pieces of the IT infrastructure that they usually cannot cover it in the first bite in most deals.

Got it. Great. Thank you very much.

Thank you, Michael.

Thank you.

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.

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 have discussed throughout the call, our strong product and to go 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.

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