Cyberark Software Ltd (CYBR) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CyberArk's third-quarter 2016 earnings conference call. (Operator Instructions). As a remainder, this conference call is being recorded.

I would now like to turn the conference over to Erica Smith, Vice President Investor Relations. Ma'am, you may begin.

Thank you. Good morning. Thank you for joining us today to review CyberArk's third-quarter 2016 financial results. With me on the call today are Udi Mokady, Chairman and Chief Executive Officer, and Josh Siegel, Chief Financial Officer. After preliminary remarks we will open the call up to a question-and-answer session.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the fourth quarter and full year 2016.

Our actual results might differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the Company's annual report on 20-F filed with the SEC and those referenced in today's press release. CyberArk expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP measures is also available in our earnings press release, which could 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 good morning everyone. Thank you for joining our call today. We were pleased to again exceed expectations in the third quarter with record total revenues of $55 million, a 37% increase over last year. We also recorded non-GAAP operating income of $14.3 million, non-GAAP net income of $11.8 million and we generated $36.2 million of cash flow from operations for the first nine months of the year.

Our financial performance continues to demonstrate our significant market opportunity, the importance of privileged account security, the strength of our business model and our ongoing commitment to delivering strong profitable growth. The market trends we saw in the first half of 2016 continued into the third quarter. Primarily, security remains a critical IT budget item and privileged account security is high on the priority list.

According to our tenth annual Global Advanced Threat Landscape Survey, privileged account takeover is one of the most difficult stages of a cyberattack to mitigate and one of the most damaging. Independent organizations are also helping raise awareness. In August, the National Cyber Security Centre in the UK joined a growing list of government and industry organizations that have identified managing and protecting privileged access as one of the top ten controls to minimize the impact of cyberattacks.

And in September the FBI published a public service announcement recommending least privileged and whitelisting capabilities like Viewfinity as effective measures to help protect against ransomware attacks. From the broad-based demand for our solution across geographies and vertical markets, we achieved solid growth across all three of our major regions with particularly strong contributions from the US, the UK, Germany, Canada and South East Asia. And we experienced a record quarter in Latin America.

While Latin America is small in comparison to the United States and Continental Europe, global diversification has always been and continues to be a key pillar of our strategy to build an enduring leadership position in cyber security. The diversification of our business demonstrates the breadth of our market opportunity.

We want business with large and small companies alike. A stock exchange, manufacturing companies, banks, a Born in the Cloud e-tailer, two airlines, security software companies, universities, hospitals, law firms and a casino among others.

I'm very pleased to share that we had our best quarter ever in US Federal which represented more than 10% of our business. A few of the highlights include contracts in all three branches of federal government and across more than 15 distinct departments or agencies with a mix of both new and add-on business. Our first significant endpoint privileged security went for Viewfinity in the federal government and our largest ever federal deal. This agency had a patchwork of vendors for privileged account security including CyberArk.

(Inaudible) to standardize on a single solution. Our team did a great job nurturing the relationship and demonstrating the measurable results that we already delivered. CyberArk will now be implemented across this agency with Enterprise Password Vault and Privileged Session Manager. And we have the opportunity to expand the relationship with products like Privileged Threat Analytics, Application Identity Manager and Viewfinity.

As you know we have been building the foundation for a strong federal business for several years and have made significant investments in our team, our channel relationships and multiple product certifications. In mid-2015 after rigorous testing our entire privileged account security solution achieved common criteria certification. And this year we were added to the Department of Defense unified capabilities approved product list. And most recently we received the US Army Certificate of Networthiness.

These achievements are important for our US federal business and beyond. Many other countries value these types of certifications as they independently validate that our products meet high levels of security standards. And we did have success in governments around the world this quarter, signing six-figure deals in Singapore, India, France, Israel and Canada to name a few. In addition, a major UK agency mandated one of their critical infrastructure suppliers use CyberArk to protect their privileged accounts.

This led to a new business deal for Enterprise Password Vault and Privileged Session Manager and also provides us with the opportunity to build a stronger relationship with this important government agency. The combination of our business wins, strong add-on contracts and our expanding pipeline is proof of strong momentum in the important government vertical. We believe we are just getting started in the global public sector opportunity which can be a long-term contributor to our growth.

Q3 was a strong quarter for new logos. At the September, we had well over 2,800 customers. With our wins this quarter, more than 25% of the global 2000 are using CyberArk to help secure the most valuable assets, which is up considerably from about 15% at the time of our IPO just two years ago. In the third quarter new customers continued to buy more products in the initial engagement with nearly 25% of deals including three or more products.

One of our largest deals in this third quarter was with a major European manufacturing Company which purchased Enterprise Password Vault, Application Identity Manager and SSH Key Manager. This was a greenfield opportunity that was also competitive. We won the deal for two major reasons. First the breadth of our offering and our ability to meet the organization's future needs including protecting its ICS and SCADA systems. And second, the strength of our relationship with a value-added reseller.

We continue to be very pleased with our Viewfinity execution. Customers are recognizing that the fundamental endpoint security problem is a privilege problem. During the quarter Viewfinity was sold in more than 15% of our new business deals, both as a standalone beachhead product and as a component of a multi-product deal. In some cases, Viewfinity was the largest portion of the licensed dollars in multi-product deal, a strong indication of the tremendous value endpoint privileged security provides the customers.

Our Viewfinity stats offering is gaining traction in sales engagements including one of our largest new business wins during the quarter. And one of our biggest existing healthcare customers signed a seven-figure standalone Viewfinity deal in Q3. This was the largest deal in Viewfinity's history and illustrates the significant opportunity we have to upsell this product among others into our growing installed base of customers.

Add-on business was an important contributor to our record results in Q3 as well. During the quarter we had multiple seven-figure add-on deals including a large services organization that purchased all seven of our products. Based on our discussions we believe there is significant future opportunity within this account as they implement their security strategy. More and more we are seeing that the breadth of our product offering and the power of the platform helps simplify the rollout of our customer's comprehensive privileged account security programs.

We are experiencing increased demand for our Application Identity Manager product as customers migrate to hybrid Cloud environments. Again in the third quarter Application Identity Manager was included in half of our top ten largest license deals. In one example a large financial services firm licensed Application Identity Manager to address the considerable challenges they face managing privileged credentials for applications and orchestration processes in the Cloud and in DevOps environments. We are pleased to be a critical partner in our customer's Cloud migration.

An important component of our strategy and a big driver of our success in the third quarter is our ecosystem. So far this year we have made exceptional progress strengthening our relationships with value-added resellers, service providers, advisory firms and technology partners. During the quarter we expanded our global channel program. Partners now have access to expand training and technical certification courses designed to increase the number of trained and certified privileged account security experts in the field. We are making great progress and believe -- and have nearly doubled the number of certified CyberArk engineers this year.

In addition, we continue to build our strategic partnerships with leading service providers and advisory firms who have extensive cyber security expertise and senior level relationships with their clients. As privileged account security moves higher up on customer's priority lists more and more IT services and advisory firms including Atos and KPMG are building dedicated practices and service offerings for privileged account security. Atos shows CyberArk as the foundation of its global privileged account security offering.

We are already seeing tangible results from this relationship, winning our first new business deal during the third quarter. The end customer initially purchased Enterprise Password Vault, Privileged Session Manager and SSH Key Manager. On the advisory firm side, CyberArk has had a productive field relationship with KPMG for some time and we are excited that we were able to expand our relationship with them.

We are now working together in a formal alliance with dedicated resources that will help our joint customers strengthen their cyber security posture. These two announcements are further proof of the importance of privileged account security and CyberArk's leadership position in the market. We're also expanding our ecosystem through our C3 Alliance which is gaining traction with a broad set of technology vendors.

And in our field engagements we are increasingly seeing this program reinforce our leadership position in the security market. Together with Alliance members we are significantly strengthening customer's ability to defend against cyber attacks. We are now working with a number of new partners including Proofpoint, RSA and Yubico among others. We are also strengthening and expanding our existing integrations with leading companies like Splunk.

Our record results in the third quarter again demonstrate that CyberArk's market opportunity is large, privileged account security needs to be top priority for organizations of all sizes and that we continue to execute on our business plan to deliver profitable growth.

I am confident of our continued success as we enter the fourth quarter with a robust pipeline across all geographies. I will now turn the call over to Josh. Josh?

Thanks Udi. We again exceeded our guidance for revenue, operating income and earnings per share. During the quarter total revenue increased 37% to a record $55 million as we continue to execute our Land and Expand strategy. License revenue increased 34% year on year to $33.3 million, representing 61% of total revenue with a healthy mix of new and existing customers.

Maintenance and professional services revenue was $21.7 million, a 42% increase over the prior-year period and representing 39% of revenue. Strong renewal rates and prior-period license revenue continue to drive maintenance and professional services revenue.

Geographically we had a solid year-on-year growth across the regions. Americas grew revenue 39% to $36.2 million or 66% of total revenue. EMEA grew 38% to $15.1 million or 27% of total revenue while the Asia Pacific Japan region grew 22% to $3.7 million or 7% of total revenue for the third quarter.

We also continue to see broad-based demand across vertical markets. Our fastest-growing verticals for the quarter were government, manufacturing, professional services and telecommunications. As I move through the P&L, all financials except revenues are presented on a non-GAAP adjusted basis. Please see the press release for reconciliation of our non-GAAP to GAAP results.

Our third quarter gross profit was $47.7 million or an 86.8% gross margin, that compares to 86.6% in the same period last year and 87.6% in the second quarter of this year. Our R&D expenses grew 46% year over year to $7.3 million or 13% of revenue. To maintain our leadership position we are advancing in major research and development initiatives that we believe will meet the needs of our customers as the threat landscape continues to change and IT infrastructure evolves.

As a reminder, the year-over-year growth comparison was impacted by the two acquisitions we made towards the end of last year. Sales and marketing expense increased 37% year over year to $22 million or 40% of total revenue. We continue to invest in strengthening our global sales and market engines across both direct and channel sales.

G&A increased 61% year over year to $4.1 million or 7% of total revenue as we invest to support scaling the Company. In total, for the third quarter operating expenses they increased 42% to $33.4 million compared with $23.6 million for the third quarter of 2015.

With regard to headcount we ended the third quarter with 790 employees worldwide, up sequentially from 734 at the end of Q2 and 581 at the end of third quarter last year.

Again this quarter our top line over achievement flowed through to generate better-than-anticipated operating income of $14.3 million or 26% operating margin ahead of our guidance. This compared to operating income of $11.1 million or 28% operating margin in the year-ago period. The strength of our P&L demonstrates our commitment to expense discipline while we still continue to invest in the business to capitalize on a significant market opportunity in front of us.

Net income was $11.8 million or $0.33 cents per diluted share for the third quarter of 2016, up from $9.2 million or $0.26 cents per diluted share for the third quarter of last year. Our effective tax rate for this quarter was 20%. I would point out we still expect our annual tax rate to be between 22% and 24%.

Turning to our balance sheet, we ended the quarter with $275 million in cash, cash equivalents, short-term deposits and marketable securities. That's an increase from $238 million at year end, as we generated $36 million in cash flow from operations during the first nine months of the year.

Before I show guidance for the fourth quarter and full year, as a reminder our guidance does not considered any potential impact to financial and other income as expense associated with foreign exchange gains or losses as we do not try to estimate future movements in foreign currency rates. So for the fourth quarter of 2016 we expect total revenue of $62 million to $63 million or 21% growth year-on-year. At the midpoint we expect non-GAAP operating income to range between $14.7 million to $15.5 million and non-GAAP net income per diluted share to be between $0.31 and $0.33. This assumes 36.2 million weighted average diluted shares.

Our guidance for the fourth quarter reflects continued investments across all areas of the business, particularly in major R&D project and in sales and marketing help to held position and expand the team for strong start to the next year. Because of the overall strength we are seeing in our business we are raising our full year 2016 revenue guidance to a range of $214.3 million to $215.3 million or approximately 34% growth at the midpoint.

We are pleased to also raise our non-GAAP operating income range to between $53.3 million to $54.1 million and our non-GAAP net income per diluted share of $1.16 to $1.18 per share. This assumes 35.9 million weighted average diluted shares. We were very pleased with the over-achievement during the quarter and that out-performance in the top line resulted in stronger-than-expected profitability.

As we enter the fourth quarter our guidance reflects the confidence we have in the business, our market opportunity and our solid pipeline of activity. I will now turn the call over to the operator for Q&A. Operator.

Thank you. (Operator Instructions) Sterling Auty, JPMorgan.

In terms of the fund, if I'm hearing correctly the message around Viewfinity is probably the most emphatic around the traction that you're getting that we've seen since the acquisition. I'm kind of curious if you can just talk through, in the wins that you had in the quarter what was the problem that the customers were trying to solve when they originally put out the RFP or came to you to talk about it? And what are the solutions that were short-listed that you were competing against to win those opportunities?

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

Perfect. That's exactly what I was hoping you would say because when you mentioned endpoint, sometimes I worry that investors confuse that you might be competing or part of a stack where you have to go up against other endpoint traditional end point. So that makes perfect sense.

Absolutely.

And then separately, you made the comments about the expanded channel in terms of the increase in number of certified resellers, but what I wasn't clear about is, is this increasing the total number of resellers that you've got, so increase in coverage? Or this is just going deeper within the set that you already had?

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

Saket Kalia, Barclays Capital.

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

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

Got it, that's helpful. And then for my follow up, you mentioned Application Identity Manager in particular is being deployed in the hybrid Cloud environment, can you just remind us why that sort of solution works well in that use case? And then is the competitive landscape for that solution different than what you see in the EPV side?

Right. So I'll start with the second part, Saket. We always emphasize Application Identity Manager as a product and a solution set where we have a big barrier to entry. It's very complex. When you serve a credential to an application it can't wait that millisecond that a human can wait for credentials. So we had to build a very robust solution and fine-tune it over many years of working with enterprises. And we clearly lead in the overall solution set but this is a big one for us.

What happens with the migration to Cloud is the need for agility and elasticity creates additional security risk. The customers as they are deploying applications in the Cloud need the serving of credentials to those applications. And so in the deals that we mentioned AIM was taken, our Application Identity Management solution was taken to protect those applications running in the Cloud, to protect the orchestration services that are running, and in an automated fashion are creating systems in the Cloud, whether it's servers or databases and others and is expanding I would say the users of the system into DevOps.

Gabriela Borges, Goldman Sachs.

Udi, I was hoping you could give us some updated bullets on sizing the EPV opportunity from where we are here in the product cycle. We have the penetration numbers of Global 2000 and Fortune 500. Then maybe just an update on how we should be thinking about your market share within privileged access.

And then for customers that still aren't using a PAM solution what do you think the barrier to that option is there? Thank you.

So I would say similar to how we talk about it internally in CyberArk. We find that it's just a greenfield out there on our core products, Enterprise Password Vault, Privileged Session Manager. And even though we have 2,800 customers, that leaves the top 30,000 enterprises out there without a solution and so it's a greenfield also for our core products.

I would say a barrier is, we've made is the -- I think in the last couple of years we made significant progress in bringing privileged account security to the top of mind and we find that the top [SISOs] are aware. But it's different as we look in different geographies.

There are geographies where we have to educate much more, I mentioned EMEA and Asia Pacific, Japan. But it's work in progress hand in hand with our channel partners. There's no basic, I would say, pushback to deploying this new layer especially given the fact that when they look around they will always find a critical mass of enterprises in their vertical that have already done this journey. And so it's about executing on the opportunity. But of course, it's a long term opportunity.

That's helpful. Thanks. And Josh, if I could, as a follow up, two quick ones. One is just on, if there's anything unusual for the licenses as a percentage of deferred this quarter? I know you've spoken about it fluctuating before in the past.

And then just on the framework for investment. We talked about this being a catch up year and you can see that reflected in some of the headcount numbers. Margins are tracking flattish year-to-date, year over year because of the strength in the fundamentals. So just hoping you give us an update on how comfortable you feel with the intensity of investment at this point. Thank you.

Thanks Gabriela. So with regard to the deferred revenues we're actually -- the percentage between Q2 and Q3 was very flat. In terms of license contribution to that it was about 6% at the end of Q2 and tracking about 7% of license revenue within that deferred number in Q3. So nothing remarkable there.

With regard to the catch up on the investments, I think this is kind of the theme that we've been doing really for the last couple of years since we went public and that is we are investing for growth. I think that when we were growing at 37% per year that we are continuing to invest across all regions, across all areas whether it's [G&A], sales and marketing and R&D. So we do expect to continue kind of that journey looking forward, as well as we looking forward as well.

[Pav Kujagi], Deutsche Bank.

You had a nice quarter, but if I look at the guide for Q4, it seems like it's a bit light seasonally versus a typical Q3 to Q4 growth. Can you comment on that? Is that just a reflection of the pipeline that you're seeing today or are you just being extra-conservative?

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

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

Yes, it inched up slightly but still at 44, well, kind of comfortably even below what I think is the enterprise software range for DSO. So we're comfortable with that. It did inch up.

I would say compared to how we've seen it this year, the linearity has been roughly the same. But if we were to look at it kind of a year-on-year basis we have seen, also in Q2, we mentioned that we have seen more back-ended, a little bit more back-ended order intake than we saw last year.

Rob Owens, Specific Crest Security.

Following on that last comment, a little more back in an order intake, is that a function of deal size as you're moving up market and seeing larger deals or is that just kind of a general economic comment?

I think it's probably a combination of both. We saw so -- we had some significant nice size deals come in as we do every quarter. We are seeing still an increase in our over $100,000 deals year on year and sequentially. And I would say that, also we've talked about EMEA where we definitely have seen more linear, more back-ended this year as compared to past years and I think that's really around the education side of things.

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

Well, actually, it kind of -- we could do see some fluctuation. If you go back historically you'll see some lumpiness in quarters and some -- and it reflects also the demand that we have for professional services, and if we have to that quarter go out to get subcontractors and third parties to fulfill that demand in providing those services. Actually in Q3, we had a bigger usage of using third party for providing those types of services. I think Udi mentioned before, we're actually really very much investing more and more in training because of the demand we have for implementation and for our channels.

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

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

Shaul Eyal, Oppenheimer & Co.

Congratulations on the strong set of results. Udi, quick question on the big federal win. Can you talk to us about the sales cycle? Was that a six, nine, 12 months stuff transaction and can it lead to incremental business down the road with that branch or others?

Absolutely. It was about a six months sales cycle. And definitely we mentioned the two products that they purchased and there was an add-on opportunity there to upsell the rest of the products especially with the deep relationship we have and their satisfaction with the measurable impact we're making for them.

Got it. So, along the same line, on that --

And as we recall it was an upsell to an existing customer.

Sure, sure. Yes.

It's just that they kind of had a little of several solutions and went out for an RFP to create the standard and selected CyberArk.

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

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

Fatima Boolani, UBS.

I just wanted to double click on the Viewfinity traction. It's clearly tracking well ahead of your expectations from what I infer from your comment around the momentum you're seeing in the base. But can you help us understand how you're managing your existing relationship to whom you had previously resold the Avecto product?

Absolutely. Hi Fatima. I would say that naturally after acquiring Viewfinity and really integrating it into our solutions, it has become -- and of course, we selected what we believe was the better product to acquire. So it became part of our platform and we push it hard on all fronts including, of course, new opportunities but also places that in the past we resold to with the product that we don't own.

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

Well, in fact, as we know the Sterling continued to decline and we do do some portion of our business in Sterling invoicing. We do expect actually -- we did include in our guide even though we did raise our guide for the year, we did include that there would be some erosion in the UK, in the UK sterling transaction. I didn't call it out in the prepared remarks, but probably it'd be about roughly up to a $1 million of additional revenue because of the depreciation of the sterling.

And just to be clear, so that's the accumulative $2 million headwind for the full year of 2016?

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

Jonathan Ho, William Blair & Company.

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

And I'll start maybe and Josh will add some color. But right now the deals that I talked about were pretty straight forward license deals where the Cloud represents another form of asset to secure. And our go-to-market is very much hybrid. We'll work with the customer with assets that they have on premise and with their ongoing migration to the Cloud.

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

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

Yes, I think Jonathan it's exactly over time because I can relate back to when similar regulations were introduced in the US market. We saw it continue to support the education and be another form of demand driver. So it doesn't turn things around on the dime but it's part of the long-term education of the market as they look for prioritizing project as they look for justifying projects internally, this will be very helpful, this specific one in the UK market, but of course we're seeing similar things pop up around the world.

Got it. And just one last one --

And the FBI example is just adding strength to commentary that they've put out in the past. And as we commented, we feel that the US market is well educated on the importance of privileged account security. A very healthy market for us.

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

Yes, I think in terms of growth we're continuing to invest on the OpEx side to take advantage of what we still think is early innings of a greenfield opportunity and keeping stake at our leadership position. I don't think we're not yet talking about 2017. So I think the dynamics right now, I don't think -- I think a good look would be, as anything, what leverage have really changed in the last three or four quarters. And I think it's been pretty really stable in terms of what we've seen.

Gray Powell, Wells Fargo.

Have you seen any change in initial order values which I think have historically averaged around a $100,000? And then generally, how do repeat purchases compare to those initial buy-ins?

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

Yes, exactly.

Yes. We're still -- we actually saw a really healthy mix of new customers and add-on. We actually -- I think even Udi noted it before we had -- several of our largest deals this quarter were actually add-on deals. So we saw some interesting update there on the add-on business. And on the new customers, we're seeing as well a slightly larger percentage of new customers. I think we reported 25% of new customers are buying three or more products. So, that's going to also, as we look forward, obviously give us a bigger platform of our existing customer base already having some licenses of more of our products.

So I think over time it's easier to sell more licenses of the same product than it is to have them bring out a new product. So I think that that's going to create also some good repetition of add-on sales.

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

I think, again, being a proactive security solution we're not dependent on any headlines out there. I think when it comes to the professionals in the security field they more and more are talking about their security strategy, and when you talk to chief security officers their security strategy is behaving as if you've been breached. That's how they work. So they're not really affected of whether a major breach made it to the newspapers or not. But if we do look at reports out there, it's continuing to escalate. It's not making major news as much except for DNC and things of that sort. But the amount of attacks are not decreasing and from the smart customers that we deal with, they're working hard to how do they protect against attacks that make it through the perimeter.

Andrew Nowinski, Piper Jaffray & Co.

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

Actually this record deal that I talked about was a classic perpetual license and it was add-on business to an existing customer. So it would be just a normal. We just emphasized it because we're very pleased to be executing well and I would say in line with our expectation with Viewfinity.

So as a perpetual sale we'll be enjoying the maintenance contract on that going forward.

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

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

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

Yes. We added here the news of new partnerships. But HP is certainly in motion that they've been long-standing partners and, yes, we've had deals in the quarter and also pipeline deals with them in EMEA and also elsewhere around the world.

Gregg Moskowitz, Cowen and Company.

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

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

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

Thank you. I think this is especially in the financial services that is very well educated. I think it adds incremental scrutiny around privileged account security. But this is probably the most well-educated vertical out there. So I wouldn't call it a breakthrough regulation for our space. This is a well-educated sector that is taking it very seriously.

I think I can also add commentary that in the financial services we're seeing what we think is the right way to go where even legacy customers that came to us historically because of regulation and compliance are now much more strategic about looking at privileged account security as a strategic critical layer on the inside and strengthening areas that they didn't protect before, which leads to add-on business for us in the financial sector. And of course financial services that don't have it are well-aware that this should be top of the mind.

Erik Suppiger, JMP Securities.

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

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

Josh?

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

So just to be clear, it doesn't sound like it's necessarily tracking ahead of plan, for the year you still think it'll be in the range that you had discussed?

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

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

Yes. I think I made commentary last year that with the great success the demand for our staff and for CyberArk expertise has been outweighing supply and we of course always look for ways to help get our new layer out there. And we definitely decided to invest in global training and be more programmatic about it to dramatically increase the amount of professionals out there.

And so you could say that there was a bottleneck because of good reasons and our performers in previous years that we were addressing with the global training efforts. And the results are definitely enable two things -- customers to deploy faster and our channels to be more central to deployments and to the expansions out there.

It's strategic for us to continue to go hand in hand with our channel partners and for them to deliver the prime amount of services that are related to it. And the most important thing is to secure our customers, and so having professionals out there is top priority for us and hence the efforts here.

You would expect your contribution to remain in -- I think you said the 7% to 8% of revenue range?

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

Catharine Trebnick, Dougherty & Company.

One question on the competitive landscape. We did in our fieldwork did hear quite a bit about some of the competitors out there, are you just tromping these guys or is there enough room in the end and can you give us some color on just the overall demand for you versus some of the competitors? Thanks.

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

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

As we've kind of talked about it in past quarters as the perpetual software license company where an upward of 95 plus percentage is perpetual licenses, we don't look at billings internally because differed revenue is really a reflection of the support and maintenance contracts. And there are cases when licenses do go in there, but it's not something we plan and guide towards.

So we -- it's important that our deferred revenues grows because our support maintenance contracts should grow as our license base grows. But internally we don't look at it as (inaudible) business as much as we look at overall revenue growth and internally at our pipeline growth as well.

Ken Talanian, Evercore ISI.

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

I didn't hear the second part --

How many users, Viewfinity users of a deal that size?

Okay. So we're definitely very early within our customer base. When we acquired Viewfinity they added 300 net new customers to us. So from the 2,800, that was about 300 is existing Viewfinity customers. And of course, we've been selling in the past three quarters since really putting it in our offering, but we're early on. So it's primarily open ground and we're scratching the surface there, just like we're scratching the surface with a lot of upsell opportunity on the rest of the products like AIM and PTA and SSH Key and others.

With regards to Viewfinity typically because it brings privileged account security to the endpoint, then it typically the license is based on the amount of regular users that the organization has. They won't necessarily take it up front to all of them, although in some cases it just becomes a gold standard in the rollout to the endpoint. I don't know the specifics on the seven-figure one to give exact color on that, but typically it's based on the amount of employees in the organization.

Okay, great. Out of curiosity, you mentioned traction with hybrid Cloud deployments, are you developing any native Cloud solution, for example, something that would sit in an AWS or an Azure?

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

[Mike Feldman].

Great quarter. So operating margin is now expected to be roughly 25% for the full year, that's a very strong number, how should we think about margins longer term? Is 25% a good base, should we expect fluctuations around that number or do you expect to continue to invest and bring that number down? And then with regards to headcount you've grown your headcount about in the range of 30% to 40% year over year for the last couple of years, do you plan to keep growth at those levels?

Does it change as you add more channel partners? How should we think about that? Thanks.

So with regard to the operating margin, yes, we're very excited about being able to flow through our beat on the top line and increase our operating margins respectively to the numbers that we're reporting, 25%. As you know, we -- that was a flow through from the beat on our top line. If we add -- I don't want to comment on 2017 yet and we'll get there when we talk to you in February and we'll talk about our view then. But I think I mentioned already and we can mention again that we are continuing to invest to make sure that we're able to grow the opportunity and really revenue growth is still our priority since we are a greenfield opportunity.

We still think that we're in the first half or the earlier part of that greenfield opportunity. And we have a leadership position. So we want to make sure that we're able to keep that. And also on our scale, I think the revenue growth is important. It's fluctuated over the last couple of years. But overall the good news is that we've seen very good leverage of the model. So I think that's my discussion.

The operating margin with regard to headcount, again kind of -- we'll talk about -- that will be a leading part of the discussion and when we think about next year. We have been growing consistently over the last three quarters, as you pointed out 30% to 40%. And it's been in line with our revenue growth. We will continue -- headcount is about almost 70% of our OpEx. It's 65% to 70% of our OpEx. So as we invest it's going to be coming out in headcount as well.

Michael Kim, Imperial Capital.

Just following up on the federal business and the nice contribution this quarter. How should we think about the progression of the federal business over the course of the year? And do you think we should sort of see it a step higher in your fiscal third quarter (inaudible) with the federal fiscal year end?

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

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

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

Great. Thank you very much.

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

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

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

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