Cyberark Software Ltd (CYBR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2016 CyberArk Software Ltd., earnings conference call. (Operator Instructions)

I would now like to introduce your host for today's conference, Ms. Erica Smith, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you. Good afternoon. Thank you for joining us today to review CyberArk's second quarter 2016 financial results.

With me today on the call are Udi Mokady, Chairman and Chief Executive Officer, and Josh Siegel, Chief Financial Officer. After preliminary remarks, we will open the call up for 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 third quarter and the full year of 2016.

Our actual results might differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the Company's annual report on Form 20-F filed with the SEC and those referenced in the press release today.

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 earnings press release, which can be found at www.cyberark.com in the "Investor Relations" section.

Also, please note that a webcast of today's call will be available on our website in the "Investor Relations" section.

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

Thanks, Erica, and thank you, everyone, for joining the call to discuss our second quarter results.

Q2 was another strong quarter for CyberArk, and we again exceeded our guidance. Total revenue increased 39% to $50.4 million. We generated non-GAAP operating income of $13.6 million, and our net income was $10.5 million.

Many of the high-level market trends we've talked about before continued through Q2. Cybersecurity remains a top priority for all organizations. We are seeing more thoughtful, strategic security programs to deal with advanced attacks. Organizations are prioritizing proven, manageable, and measurable solutions that secure the most critical and most vulnerable assets first.

These buying trends are playing to our strengths and long-term approach we have always been taking to building our business. Coupled with the broad awareness that privileged accounts are at the center of every major cyber attack, we are seeing strong revenue growth and a rapidly growing pipeline.

There are a number of execution highlights from Q2 that I want to share, starting with a strong performance in landing new business and expanding existing customer deployments.

We ended June with more than 2,700 customers, adding two Fortune 100 companies to our roster. Today, about 45% of the Fortune 100 entrusts CyberArk to protect their privileged accounts.

During the second quarter, the diversification of our business was incredible. We won deals with manufacturing companies, brick-and-mortar retailers, large e-tailers, supermarket chains, security vendors, defense departments, hedge funds, and service companies, just to name a few. We also continued to build on our success with hospitals who struggle daily with the threat of cyber attacks, including being held hostage by ransomware.

During the first half of the year, we increased the size of our Cyber Labs team. This team allows us to keep pace with the ever-changing threat landscape to help fuel our product development efforts and to help our customers better understand threats related to privileged accounts and credentials.

CyberArk Labs recently released their ransomware research findings, which tested more than 23,000 real-world ransomware samples. Their findings indicate that ransomware has many variants and that an effective mitigation strategy requires the power of least privilege and application control.

Our Labs found that CyberArk Viewfinity was nearly 100% successful in preventing ransomware from gaining the permissions necessary to successfully encrypt files. In addition, the research identified Viewfinity's greylisting capability as an effective way to deal with new, previously unknown variants of ransomware.

The strength of our solution is being recognized by customers and prospects alike. In fact, Viewfinity was included in nearly 20% of all new business deals in the second quarter.

We were pleased to see Viewfinity also sold as a standalone product in many new engagements. As an example, we won a six-figure Viewfinity deal with a biotech company in Q2 to secure 7,000 endpoints. This was a strong win on its own, but it also provides opportunity for CyberArk to expand the value of the customer engagement to include core products such as Enterprise Password Vault and Privileged Session Manager.

Securing privileged accounts in public Cloud, private Cloud, and SaaS environments has been a hot topic of discussion for several quarters. We are starting to see the talk turn into action. Our customers' ability to use the same CyberArk products to protect privileged accounts in the Cloud and on premise simplifies the security and management of privileged accounts throughout their IT environment.

CyberArk secures assets running in the Cloud but also integrates privileged account security into DevOps processes, facilitating Cloud migrations and enabling organizations to get the full benefit of the agility and elasticity of the Cloud.

Two examples where we are helping customers with their Cloud infrastructure include a large media company in EMEA which signed an add-on deal for Enterprise Password Vault, Privileged Session Manager, and Privileged Threat Analytics. Using our platform, this organization will be securing its infrastructure, including Windows and UNIX systems, databases, and various SaaS applications like Salesforce.

A Fortune 100 financial services firm is entrusting CyberArk with their mission-critical applications, like online payment, transaction history, and money transfer. This global organization, which is an existing customer, signed a large, seven-figure deal in the second quarter. They will leverage Application Identity Manager to secure credentials for all of their internal systems, including Cloud applications and their DevOps environment. We were proud to be chosen as their trusted vendor in support of these critical business processes.

Application Identity Manager is a key differentiator for CyberArk. We believe it is the only enterprise-ready solution that protects critical business applications by securing and rotating application credentials into real time without latency. During the second quarter, Application Identity Manager was sold in five of the top 10 largest deals, including three new business engagements.

As organizations take a more strategic and broader approach to privileged account security and as they migrate to the Cloud, the emphasis on protecting applications with CyberArk is increasing. We are also seeing this across the ecosystem, with security vendors joining the [C-Cubed] alliance because they recognize the tremendous benefits of securing the privileged accounts inherent in their applications.

The Americas was again our fastest growing region, where we see privileged account security at or near the top of every decision maker's priority list. Our investments in the Americas are delivering important contributions, including increasing our channel sales and driving strong growth for newer regions like Canada.

As we mentioned previously, EMEA lags the US in awareness of the critical role privilege escalation plays in cyber attacks. So, more of our time and investment is in educating prospects about the importance of prioritizing privileged account security. In select larger deals in EMEA, we have seen this education process create more scrutiny of deals and, in some cases, extend sales cycles.

APJ is still small in terms of dollar contribution to the business, but the new leadership team is making an impact growing our pipeline, building a stronger channel, and now extending our presence in Japan.

While each theater is at a different place on the maturity curve, we are seeing strong demand and a healthy pipeline across all geographies. Global diversification has been a cornerstone of our strategy since we founded the Company. Our strong financial results demonstrate that this global strategy is working.

In recent quarters, there has been a material increase in the level of engagement and contribution from our partner community, including advisory firms, value-added resellers, and technology partners. The ecosystem recognizes the enormity of the privileged account problem, and they know that securing these accounts is a key priority for chief information security officers.

In the second quarter, we saw an advisory firm play a key role in two seven-figure deals for new business. The partner who acted as a CyberArk champion in both deals recommended that the companies take a proactive approach to security and deploy CyberArk enterprise wide to ensure the best protection in advance of a breach.

This advisory firm is one of many who are building CyberArk practices that can generate sales activity and deliver services associated with our deployments. We are excited about this momentum, and we believe it can be a significant growth driver of our business.

I want to highlight one of our seven-figure wins at a Fortune 50 company as an example of our leadership position. In this deal, we were up against three incumbent vendors who were entrenched within various parts of the organization.

After a highly competitive and thorough evaluation process, this industry leader chose to displace the three other vendors and install CyberArk Enterprise Password Vault and Privileged Session Manager as a first step to secure its privileged account security enterprise wide. We are thrilled to be working with this company and about the significant opportunity we have to expand the relationship with this important customer over time.

We are excited that HP Enterprise is leveraging the power of our technology as the backbone for its new managed service offering that was introduced just a few weeks ago. This partnership will help organizations address the lack of skilled cybersecurity resources and help CyberArk extend our reach into HP's significant enterprise customer base.

In addition to sales execution, the product development team continues to extend our technology leadership. In June, we introduced Privileged Account Security, version 9.7. A few highlights of this feature-packed version include: the ability to prioritize and simplify the enrollment process of unsecured privileged accounts discovered by Privileged Threat Analytics; new integration options for the CyberArk platform based on the (inaudible) API to support Cloud orchestration and DevOps tools; and a new native transparent user experience for Windows administrators using Privileged Session Manager.

And finally, we held our annual CyberArk Impact events for customers and partners in EMEA and in the Americas last month, hosting more than 700 attendees at the two events. The message was clear from customers and partners. They understand that securing privileged accounts is a top priority, and they are increasing their investment in privilege programs to protect their organization from destructive cyber attacks.

Coming out of the conferences, I am confident that we are just scratching the surface of this tremendous opportunity and that we have a long runway to grow our business for years to come.

I am pleased that we delivered another strong quarter. CyberArk continues to execute on our go-to-market plans and product deliveries. Demand for our solution remains strong, and we believe we are making investments that balance the significant opportunities in this greenfield market with building a profitable organization. We believe our formula will continue to deliver long-term value to shareholders, customers, partners, and employees.

I will now turn the call over to Josh. Josh?

Thanks, Udi. We were pleased to again exceed our guidance for revenue, operating income, and EPS. During the quarter, total revenue increased 39%, to $50.4 million, driven by healthy demand for Privileged Account Security as well as the execution of our land-and-expand strategy.

The license revenue reached $30 million, increasing 35% over the prior year, and representing 59% of total revenue. We continued to see a nice revenue mix between new customers and add-on business. We were also pleased with our continued traction with Viewfinity across all geographies as well as for our on-premise and Cloud delivery models.

Maintenance and professional services revenue was $20.4 million, increasing 45% over the prior-year period and representing 41% of revenue. Our maintenance revenue continues to benefit from the strength of our bookings as well as the value we provide to customers, which we see in our strong renewal rates.

Geographically, the Americas was our strongest region in the second quarter, growing revenue 58% year over year, to $32.5 million, or 65% of total revenue. EMEA revenue grew 19%, to $14.7 million, or 29% of total revenue, while the Asia-Pacific-Japan region was down slightly year over year, from $3.4 million to $3.2 million.

We also continue to see broad-based demand across vertical markets. Our fastest growing verticals were IT services and software companies, retail, insurance, and manufacturing.

As I move through the P&L, all financials except revenues are presented on a non-GAAP adjusted basis. Please see the press release for a reconciliation of our non-GAAP to GAAP results.

Our second quarter gross profit was $44.1 million, or an 88% gross margin. This was consistent with the first quarter of 2016 and compares to 84% gross margin in the same period last year. The year-over-year increase in our margin was primarily due: to higher margins on the Viewfinity product versus Q2 last year when we were reselling a third-party product at a significantly lower margin; also, leverage in our professional services revenue in the current quarter.

To execute our growth strategy and scale our business, we continue to add headcount across all geographies and departments. We ended the quarter with 734 employees worldwide, up from 692 at the end of Q1 and up from 523 at the end of second quarter last year.

In the second quarter, we continued to invest in extending our technology leadership, with our research and development expenses growing 60% year over year, to $6.7 million. The two acquisitions in late 2015 and ongoing investment in innovation drove the increase in our R&D line.

Sales and marketing expense increased 32% year over year, to $20.2 million, as we expanded our global reach and enhanced our marketing presence across all geographies, as well as for direct and channel sales.

G&A increased 37% year on year, to $3.7 million, as we continue to invest to scale the business.

In total, operating expenses for the second quarter of 2016 increased 38% year on year to $30.5 million, compared with $22.1 million for the second quarter last year.

We were pleased to again demonstrate the power of our business model, with operating income of $13.6 million, or a 27% operating margin, which was ahead of our guidance. This compared to operating income of $8.2 million, or a 23% operating margin, in the year-ago period. The strength of our operating income was driven by our revenue outperformance, as well as our better-than-anticipated gross margin and still keeping with our ongoing expense discipline.

Net income was $10.5 million, or $0.29 per diluted share, for the second quarter, up from $6.5 million, or $0.19 per diluted share, for the second quarter last year.

Our effective tax rate in the second quarter was 22%, within our expected range.

Turning to our balance sheet, we had $259 million in cash, cash equivalents, short-term deposits, and marketable securities, increasing from $238.3 million at year-end.

That comes from generating $21.4 million in cash flow from operations during the first six months of the year, which included approximately $6.5 million as well in tax payments, of which $3.7 million were made in the second quarter.

Before I share guidance for the third quarter and full-year 2016, as a reminder our guidance does not consider any potential impact of financial and other income and expenses associated with foreign exchange gains or losses, as we do not try to estimate future movements in foreign currency rates.

For the third quarter of this year, we expect total revenue of $51.5 million to $52.5 million, or a 30% growth year over year at the midpoint. We expect non-GAAP operating income to range between $10.1 million to $11 million and non-GAAP net income per diluted share of $0.21 to $0.23. This assumes a 36 million weighted-average diluted share count.

Our Q3 guidance of operating income reflects important investments in the business, including: our EMEA and America customer conferences, which were held in July and attracted more than 700 customers and partners; the full run rate of expenses for the 42 employees we added in the second quarter; and ongoing hiring to drive our revenue growth and enhance our product offerings.

We are raising our full-year 2016 guidance revenue to a range of $210.5 million to $212.5 million, or a growth of approximately 32% at the midpoint. This includes a decline in pound sterling at the end of the second quarter which impacted our full-year revenue guidance by about $1 million.

We are raising non-GAAP operating income to be in the range of $48.4 million to $50 million and our non-GAAP net income per diluted share of $1.03 to $1.07. This assumes 35.9 million weighted-average diluted shares.

In the second quarter, we continued to execute our growth strategy and deliver solid operating results. Because of the considerable and rapidly growing opportunity in front of us, we plan to continue making responsible investments in the Company that deliver both strong growth and solid profitability.

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

(Operator Instructions) Saket Kalia, Barclays.

Just first for you, Udi, can you just talk a little bit about the competitive landscape this quarter? I think we all heard Computer Associates, or CA, sound bullish on Xceedium. And presumably, part of that is the rising tide in the privileged account space. But did you see any change in win rates this quarter versus them or any of the other competitors in the space?

I think we're continuing to see that this is a red-hot market, and we were pleased to see that. I think it's definitely the rising tide in those comments.

To the contrary, we continue to see continued leadership and strong win rates for CyberArk as before. The one change I can talk about is we usually saw CA and Dell as the top two competitors, and Dell we see less and less in deals, probably due to the EMC merger and assets being sold as part of that.

That's really helpful. And then, for my follow-up, for Josh, Josh, it seems like EPS is going up by a little bit more than the beat this quarter. So, can you just maybe speak to any change in spending plans? Or, is this maybe just a tweak as you have a better idea of expense planning halfway through the year?

Actually, it's really the latter. As we get into the second half of the year, we have obviously a lot more visibility to our expense run rate and our hiring expectations for Q3 and Q4. As we talked about in our prepared remarks, we are continuing to invest for Q3 and Q4 and also to invest in Q3/Q4 to start 2017 out on the right foot. But we have a much better handle of what those levels will be now.

And so, we are not changing our spending plan. We are actually right on target.

Got it. Very helpful. Thanks, guys.

Gabriela Borges, Goldman Sachs.

Josh, maybe you could just comment on book to bill? I know you don't comment on it every quarter, but to the extent you can give us any color on what you're seeing in terms of bookings, that would be very helpful.

Yes, we don't comment on book to bill, really, on a quarterly basis, but I can give color that we're certainly above 1. And I think as Udi referred to in his comments the demand is growing, and the pipeline is growing in line with that, as well. And so, from that perspective we're pretty much seeing the types of book to bill that we've seen in the past.

That's very helpful. Thank you. And as a follow-up, if I could, maybe you could just help us think about how to model billings as we go through the year? Is there a seasonality in the business that we should be thinking about as it pertains to year-over-year growth rates?

So, first of all, in terms of billings, we don't really think in terms of billings as a perpetual license Company. We really only have our maintenance renewals as a firm recurring revenue stream, as opposed to kind of the classic SaaS company which has most of its business in a billings format. Our perpetual licenses, we invoice and we recognize in most cases immediately.

But in terms of seasonality, we do see seasonality in the business. If you look back historically, you'll see a second half being higher than the first half, with Q4 typically being the strongest quarter.

And in terms of maintenance renewals, what you would see is typically a bigger increase into Q4 and Q1 for maintenance renewals, which is the closest thing we have to kind of a SaaS bookings perception, because H2 is typically a larger license half, as well. And then, therefore, we would see larger maintenance renewals coming in Q3/Q4.

That's helpful. Thank you.

So, essentially, if you held the licenses constant, you would see kind of deferred going up sequentially less in Q2 and Q3, because they would go up more in Q4 and Q1.

Understood. Thank you.

Karl Keirstead, Deutsche Bank.

This is [Ty], on behalf of Karl. Two questions. One clarification for Josh. Josh, was there any early or delayed [reflection] of deferred revenue into the license line? I know that you had some quarters last year where you pulled forward the deferred revenue into the income statement or some quarters where you deferred the deferred into the balance sheet. Was there any sort of that in this quarter?

It was relatively flat. It was a couple of percent. If we looked at end of Q1, we were roughly 8% of licenses to total deferred. And at the end of Q2, we were closer to 6%.

Got it. And then, you had a nice beat. The beats have gotten smaller over the last couple of quarters, and you're saying that the demand environment still remains strong. But your beats have gotten slightly smaller over the last couple of quarters.

And then, this year also your raise in the annual guide was pretty much in line with the beat that you had in the quarter. How do you correlate that to the fact that you're saying the demand environment still remains strong and you're not seeing any change over the last couple of quarters?

Well, in terms of beats, first of all, it's also -- beats and guidance is also a reflection of our visibility and also our experience for forecasting, as well. So, we're maybe getting -- first of all, we have in line with our forecasting, which has been generating also aggressive growth rates.

And so, I think it's along those lines. It's less the lines around the whole business demand, but around the fact that we just finished our second year as a public Company, our eighth quarter in a row of giving guidance, and we're just getting -- we're getting more visibility into the quarters.

Got it. Thank you.

Jonathan Ho, William Blair.

Congrats on the strong quarter. I just wanted to understand your comments around EMEA and some of the additional scrutiny that you're seeing there. Are you seeing this persist into this quarter? Has there been some type of change in the general customer behavior? I just wanted to get a sense of what's happening there.

I would say that overall in all regions we're seeing a growing demand. I was trying to differentiate between the regions and the maturity level. Americas is definitely -- and we've been consistent on that -- Americas is the most aware of the play the privileged accounts have in defense against major cyber attacks.

And in EMEA, we're finding that there's more education required in the sales cycle. It's part of a market dynamic. And, yes, I think this is the reality.

But the way we balance it out is we're really investing in all regions based on where they're at. So, in the US, stepping on [fielders] that get us further into -- deeper into the regions. And in EMEA and APJ, there's more education involved. But they're really enriching our pipeline. They're really making us diverse in our opportunity.

Got it. And then, relative to Viewfinity, it seems like you guys were highlighting some strength in the adoption of that this quarter. Can you maybe give us a sense of how much Viewfinity can contribute to the business? Is this a pretty significant add-on that you see longer term? And what sort of opportunity you see as a standalone product?

So, I'll start with the qualitative side, and then Josh will explain why we [can't] give quantitative side. But on the qualitative, I think what's especially exciting about Viewfinity is we looked at the opportunity as an add-on business, but it's also really a net new landing of new opportunities that are pure Viewfinity opportunities. Because we're capturing -- we're playing in privileged account security for the endpoint, and very often those are additional budgets within the customer base.

So, I think we really saw that this quarter, a great contribution in the new business. And on top of, of course, continued success in rolling it out to our sales personnel and to our channels to take it also as add-on to the customer base.

And from a quantitative perspective, it's still small, as our total revenue number is growing so aggressively. So, this piece is still small in terms of a percentage pieces.

But for your question, do we see it as it can be a major product? Yes, we do. And as we look out the medium and longer term, we see customers -- in fact, there were several cases where customers only bought Viewfinity product in the second quarter. And we also see it being part of -- if we look at the first half -- part of several of our largest deals, as well.

And so, we are optimistic that this will be something that will be a double-digit contributor over the medium term.

Great. Thank you.

Andrew Nowinski, Piper Jaffray.

Congrats on a nice quarter. You mentioned a lot of instances of wins by securing Cloud applications. Just wondering if you can give us any color on the percent of revenue derived from Cloud-based environments? And are you selling Enterprise Password Vault in an as-a-service form factor? Or, is that sold still in the same on-premise form factor?

We sell it as an on-premise factor, and that's -- we're still seeing that 99% of organizations want to secure and still hold onto their credentials. In some cases, the vault is hosted or sold as a managed service by a partner, and you saw our announcement on the partnership with HP on that front. So, it can come with a total package.

And in terms of the percentage --.

I would add on the Viewfinity, which we offer both in a SaaS product and also as a perpetual product, we actually are seeing really very much both SaaS and perpetual. If we kind of look at H1, it was very close to half and half, customers picking it up in a SaaS way and 50% picking it up in perpetual.

Obviously, as we're just starting to sell it, from a revenue perspective, as I just mentioned in the earlier answer, it's still a small number. But over time, we see this growing under both vehicles: perpetual and SaaS.

To start with our core products, Enterprise Password Vault and PSM and AIM, as we highlighted in this call today, we're definitely seeing that more and more customers are talking. They love the fact that this is made for hybrid environments. And so, we can support their on-premise and their Cloud environments with the same solution. And the message is really out there now.

Right. Got it. Okay. Thanks. And then, last quarter you talked about how CyberArk was adding -- you added the DoD approved -- or got approval on the DoD approved product list. Given the government's fiscal year-end is September 30, can you share any color on your pipeline within the fed and how much you're factoring into guidance for the September quarter?

I would just say that, as we mentioned, the certifications were part of our long-term approach to continuing our market leadership and being stronger in the federal space. We saw good government business in this quarter, as well, and we saw government business including departments of defense around internationally.

With regards to the federal quarter, I'll just comment that it's healthy pipeline, as I said in the past.

Okay. Thank you.

Tal Liani, Bank of America.

I want to go back to a question someone asked Josh at the beginning. If I calculate implied billings by looking at revenues plus changes in deferred, I'm getting that billings only grew 3%. Revenues grew 39%. So, why isn't this an important factor when I'm trying to predict whether the following quarters are going to be strong or weak? And I think that Josh said a few things about second and third quarters of the year. If you don't mind to repeat that?

Thanks for the question. First of all, one thing about billings is we don't really look at our business from a billings perspective, because as a normal SaaS company, which 80% or 90% or 100% of its business is recurring, then that's a very important metric to be looking at regularly.

In our case, where we're a perpetual software company and only a third of our revenues are based off of kind of a billings approach, our maintenance renewals for that matter. So, we don't necessarily focus on billings as a key metric.

What we talked about earlier on the call is if we think about our deferred revenue seasonality, which obviously would impact your billings calculation as you're doing it, typically we see our maintenance renewals go into deferred seasonally heavier in Q4 and Q1, because it absorbs the H2 seasonality of heavy license bookings and heavier business.

So, on those other quarters, the sequential increase, if there's no additional license impact on the deferred revenues, the maintenance increase will be a bit less than what we've seen historically going into Q4 and Q1.

And when we think --. So, the deferred --. So, when you say about the --. Was that clear, Tal?

Yes. Yes, absolutely. I have one follow-up question. When you look at the last six months, there were --. I'm trying to understand the sensitivity of the orders or revenues to kind of economic cycles. So, when you look at the last six months, we had some concerns about the economy in January and February. Then, we had the Brexit.

How did your order flow or purchase flow, how did it change when the economy went through the cycles? Meaning, did you see --? Was linearity kind of as expected through the quarters, the last two quarters, intra-quarters? Or, did you see ups and downs in the demand level based on the economic cycles? I'm trying to understand the sensitivity of orders to economic cycles.

What we can tell you is that if we look sequentially, the seasonality was very similar in terms of the order rates between kind of the first two months of the quarter of Q2 and the third month. And if we look at Q1, it was very similar.

I will say that if we look at Q2 this year compared to Q2 last year, it was more back-ended.

And what do you attribute it to?

Well, there was some contribution by Brexit, actually, in Q2, because we do 10% of our business in the UK. So, the orders and the deliveries that happened in the last four or five days of the second quarter were hit by the 10-plus-percent depreciation in sterling.

And I think also last year, actually, in Q2 -- at least from CyberArk's perspective; I'm not sure for other companies -- but from CyberArk you would see that we actually had quite a difficult compare. Both Q1 and Q2 last year were super-high growth rates; I think around 70%.

Got it. But that's -- . When you answered it, you gave me the revenue numbers. If you looked at unit demand -- unit-wise and not revenue-wise -- would you answer the same, that there was different linearity this year versus last year? Or, was it the same? I'm just trying to isolate the currency impact and try to see the real demand.

I think it's --. I would say from --. We're not box movers. So, we don't really measure units. But in terms of getting customers, in terms of order count, and so forth, I would say that it might have been more back-ended this Q2 versus a year ago, but I think versus Q1 it was very similar.

Got it. Thanks.

And I think, Tal, it's important when we talk about privileged account security is customers are really longing for measurable and meaningful security layers in this environment. And so, we're finding consistent and growing demand for our solutions, again, despite some of the turns in the economy.

Great. Thanks, Udi.

Shaul Eyal, Oppenheimer.

Congrats. Solid results this quarter. Udi, are you beginning to have more conversations with customers or at least big picture discussions from their perspective on the topic of identity as a service? Is it something which is becoming slightly more frequent in a conversation?

I think our strategy with regards to the broad identity space has been to partner. And so, in this case, whether the customers want to use identity management solutions or identity as a service, we partner with them and we're securing the credentials that are inherent into their on-premise or Cloud infrastructure.

What we do do is, as we gain more C-level access and now more and more CIO access, is we weave ourselves into the Cloud conversations, and we do ask them about their long-term Cloud plans and how they would like to secure credentials.

And as to the earlier question, most -- the vast majority of customers want secure. They use our solutions on premise, although we do make them available to run in AWS or in Azure. And so, we really give them the full optionality there, in line with their progress.

One big thing, that we actually announced yesterday, is our solution that we're more and more also part of the DevOps environment, that we don't just secure credentials in the assets in the SaaS applications. We're helping them automate and orchestrate the migration to Cloud so that all the accounts will already be managed as they do that. So, this way, we're really weaving ourselves into that. What they really care about right now is the migration projects.

Got it. This is very helpful. Thank you for that. And then, a follow-up, if I may? And I apologize in advance, because I've missed the initial 15-20 minutes of the call. Did you provide any metrics about contract sizes, deal size, just before?

It's Josh. No, we didn't actually provide any in the prepared remarks, but qualitatively we had a very good quarter in terms of over-$100,000 deals and large deals that were in line or higher than our growth rate.

Got it. Thank you so much.

Erik Suppiger, JMP.

First off, on the cash flows, your cash flows in the quarter were below the target range, I think, you've given in the past for cash flow margin versus your net income margin. And I was curious, is that all because of the accounts receivable? And why is the accounts receivable up notably in the quarter?

With regard to the cash flow, first, if we look at it for the second quarter, we're up $4.9 million; for the half, we're up $21.4 million. And for the half, that's a 22% cash flow margin.

One of the things that we've talked about in past quarters, Erik, as you know, is that we'll be showing lumpy quarters on cash flow. And it's really important to look at us from an annual basis. One of the lumps that we had in Q2, specifically, was an additional $3.7 million in taxes that we had to pay in Q2, and most of that was related to back years, not even things related to 2016.

So, from that perspective, we feel comfortable that we're on track for the year. Today, we're at 22% cash flow margin for the half, and we feel pretty comfortable that we're still -- we'll fall, as we get to the end of the year, within the [5 plus] 15% over our net income margin.

Okay. And then, secondly, last quarter you had talked about the percentage of new deals in the quarter that included three or more products. I think it was around 30%. Can you give us any update on what kind of multi-product deals you had with new customers?

Yes, we saw that more than 20% of new customers had three or more products. I can say that it's slightly lower because of a good reason. We saw Viewfinity, as I mentioned earlier, really expand our landing of new business. So, it can kind of lower the average for a good reason, that Viewfinity is expanding and landing new accounts.

But it's still over 20% and with continued contribution from the growth engines that we talk about: PTA, Viewfinity, and AIM.

Okay. Very good. Thank you.

Gray Powell, Wells Fargo.

First of all, congratulations on the quarter. So, I just had a couple of follow-up questions. I know you've received a few questions on billings, but maybe this might be the right way to think about it. So, for Q3, your revenue guidance implies 30% year-over-year growth. If I go back three months, for Q2, you originally guided to 32% growth and then you beat it.

So, are you seeing any material change in your pipeline? Or, just how do you feel about the demand environment today versus three months ago?

We're seeing a material change in our pipeline going up, not --. As we look at our pipeline, again it's we look at it for more than just one quarter at a time. We look at it over multiple quarters. So, from a pipeline environment, it supports very much Udi's comments as it relates to the demand environment.

Perfect. Okay. That's very helpful. And then, just in Europe, do you see any regulatory tailwind from the potential -- or, I guess, regulations that will require companies to start disclosing whether or not they've been breached in 2017?

That's a great question, because we're fresh from our annual customer event in Europe, and there was actually a whole session that this was discussed. I think we're seeing that some of the customers are getting ready for this, but it's still early.

So, I think, as we've said in the past, we think it's going to be a positive for CyberArk if more and more organizations will actually have to disclose breaches, and we'll get the education level as it is here in the US.

It's still early, but, yes, we're seeing companies begin to contemplate what does it mean for them. And here, they do gravitate to measurable solutions, with things they can show that they're making an impact. That was actually the name of our customer event; we called it CyberArk Impact.

Got it. Okay. Thank you very much.

Catharine Trebnick, Dougherty.

A couple of questions. One, let's start with follow-on orders. What type of uptake did you see in terms of add-on deals? You just discussed that 20% or more had three products or more this quarter. But what about add-on deals? And any specific verticals that accelerated any new add-ons?

In terms of the revenue, we saw half the business come from existing customers and half the licenses come from new business, and that's very consistent to what we've seen in the last 18 months.

I think the verticals were very diverse. I think that's one of the highlights for this quarter. So, diversity in new, but also diversity in the add-on business.

If I were to highlight the most prominent in this quarter in business, in general, it would be banking; the high-tech industry -- we saw a lot of software companies, which we also mentioned, even security companies come to us; insurance; and also retail. Those were some of the top performing, including continued deals in the healthcare space.

Okay. Thanks a lot. And then, I'll catch you back after the post call.

Fred Grieb, Nomura.

So, I just wanted to circle back on the deferred portion of license revenue. I think historically you guys have said that it was about 10% to 15% of the deferred balance came from license. You mentioned this quarter it was 6%. Should we be thinking about that 6% as sort of a new base level to go forward? Or, is there a chance that license revenue could see a headwind as the deferred balance from license revenue increases back to that 10% to 15% historical range?

This is Josh. Actually, we've seen it at 10% to 15%, but we've seen it as low as 5%, as well. I think when we've started to talk about this metric over the last three or four quarters, we've seen it go from kind of 5% to 20%, even.

If we look at it, I think Q2 last year was about 20-plus-percent in licenses, and now we're around 6%. It was 8% at the end of Q1. It was 8% at the end of December 31, at the end of Q4.

Do I know what the right number is? I don't, really. I can't give you the right number, because it's not something we build for our model. We don't plan for deferred license revenue. We plan to get orders that are recognizable immediately.

But the nature of our business is that there will be customers that -- or there will be transactions that for US GAAP purposes we won't be able to recognize. That's good for the customer or good for us in the sense that that's the way the negotiation happens.

So, I can't necessarily guide to a number, but if we look back historically over the last 24 months or 36 months we'll see it between 5% and 20%.

Got it. Yes, that's super-helpful color. And then, I guess one follow-up on that. Is there any kind of typical pattern to which contracts end up having that deferred license component, either a certain geography, a certain size deal, or maybe deals in a certain industry that that typically crops up?

You know what? It comes in all colors and flavors. There is a lot of deals that will be smaller -- $50,000 to $100,000 -- deals that might be related to collectability risk or to wanting certain features that are going to come out the following quarter.

And then, of course, in terms of -- they are a fewer amount but they make up probably a larger piece of the total amount in large deals -- larger than $100,000 deals -- because they usually require more contract negotiation. And when there's more contract negotiation, that's where they may get into an installation plan or an SOW that requires development. Or, acceptance testing is usually the number one criteria for when we have to defer.

Got it. Perfect. Thanks a lot.

Ken Talanian, Evercore.

Sorry. I don't want to beat the dead horse on cash flow here, but just one question on that. Has there been any change in the amount of contracts that are getting paid upfront? And by contracts, I mean the support contracts?

All of our support contracts, Ken, are paid upfront. What could change from quarter to quarter -- and we don't see any trend here -- but, again, sometimes we can't plan for it, but there could be quarters that might have a little bit more three-year contracts, as opposed to one-year contracts.

But from our perspective, all support and maintenance contracts are paid upfront, and most of them are one-year contracts. But if there was something that was three years, that could sway it up for a quarter.

But, no, we're not seeing any trends that would change.

And again, I think the way we look at our cash flow business is on an annual basis. And today, we're generating a 22% cash flow margin in the first six months of the year, against a 19% net income margin. And we had a very, very strong Q1.

Last year, if you looked at our cash flow, you would see that Q1 and Q2 were strong and Q3 was very weak in terms of cash flow, and it had to do with the seasonality of, again, the maintenance renewals, which I talked about, which are heavier in Q4/Q1. And also last year, in Q2 we had a big increase in license revenue in the deferred.

Okay. And as a follow-up, you've demonstrated some nice leverage in the quarter, particularly on sales and marketing. So, one, can we assume this is due to your work with channel partners? And how far do you think you're along with ramping the current base of channel partners?

So, I'll start on the leverage, and I'll let Udi talk about our partner program.

So, in Q2, specifically, we were able to really benefit from the leverage on the gross margin line. We saw our gross margin go on a year-on-year basis from 84% to 88%, and it was really from two components. The lion's share of the component was the fact that we started to generate revenue off of Viewfinity, which we in the past -- or in Q2 last year -- we generated revenue from the product that we resold, but it was at a very low margin, because we resold a competitor's product.

So, we benefited, really, two ways in this quarter from the Viewfinity sales. One is that we got high margin on the Viewfinity. And last year, we had a bit of an easier compare, so to speak, because we had a high percentage of the competitive product in the Q2 of last year, where we talked last year the 84% being slightly lower than our target because of the sale of the competitor to Viewfinity that we resold. So, we were able to leverage off of that gross margin.

And then, the second point is that we continue to be able to run with a very disciplined OpEx model to generate more revenue but within our budget line so that you get the extra benefit of beating out our forecast and it going to the bottom line.

And Ken, on the opportunity within the channel, I still think we're very early. I'm very pleased that we're diverse -- get diverse in types of channels: the value-added resellers, the system integrators, the advisory firms, as I mentioned in the prepared remarks, really contributing. But we're still early innings, and we're expanding our channel play.

Our focus, as I mentioned before, is quality of partners and not the quantity and just doing more and more and building stronger CyberArk practices within the partners. And as they're seeing the contribution to their business, they're investing more.

So, we're really on a stronger trajectory, but there's much more to do.

Great. Thanks very much.

(Operator Instructions) Michael Kim, Imperial Capital.

Sorry if you covered this earlier, but can you talk about if you're seeing more greenfield opportunities with the mid-market customers? Or, are you seeing a lot of the earlier demand from large enterprise and the government vertical?

Sure, Michael. I think, first of all, we're still seeing a strong greenfield opportunity in customers of all sizes and shapes. I think the major point we highlighted is really the diversity across verticals. They all have IT infrastructure; therefore, they all have privilege accounts and the security is there.

In terms of where our marketing and sales are focused, it's still primarily on the enterprise side, but we are seeing more and more demand come from mid-market type of customers.

And then, also, just on capital allocation priorities, I think historically you've been pretty disciplined on integrating acquisitions. Are you seeing more opportunities as the market seems to be consolidating in certain markets or certain segments? And how are you seeing your focus opportunities developing this year?

First of all, I agree. We're very pleased with how we integrated the two acquisitions we made last year. They were even -- both companies and the founders were prominent in the customer events that I mentioned, both in the EMEA and the Americas. So, we're off to a good start.

We're continually looking and evaluating the opportunities out there, but we're going to be very, very selective.

Okay. Great. Thank you very much.

I'm showing no further questions at this time. I would now like to turn the call back over to Udi Mokady for any further remarks.

Thank you. Q2 2016 was another great quarter for CyberArk. We have a tremendous opportunity in front of us, and we are more confident than ever in our mission to deliver a new layer of security to protect privileged accounts.

I want to thank our customers for trusting CyberArk with their most valuable assets and our global employees and partners that continue to work hard to create value for our shareholders.

Thank you very much for joining us this evening.

Thank you. Ladies and gentlemen, that does conclude the program for today. You may all disconnect. Everyone, have a great day.