Cyberark Software Ltd (CYBR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CyberArk Software Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over Erica Smith, Vice President Investor Relations.

Please go ahead.

Thank you, Candace.

Good morning.

Thank you for joining us today to review CyberArk's fourth quarter and full year 2017 financial results.

With me on the call today are Udi Mokady, Chairman and Chief Executive Officer, and Josh Siegel, Chief Financial Officer.

After the 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 currently available information.

I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the first quarter and the full year 2018.

Our actual results might differ materially from those projected in these forward-looking statements.

I direct to your attention to the risk factors contained in the company's annual report on Form 20-F filed with the U.S. Securities and Exchange Commission and those referenced in today's press release.

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 to the most directly comparable GAAP financial measures is also available in today's press release, which can be found at www.cyberark in the Investor Relations section.

Also a webcast of today's call will be available on our website.

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

Udi?

Thanks, Erica, and good morning everyone.

Thank you for joining our fourth quarter and year-end conference call today.

During 2017, we delivered against the operational objectives we outlined for you last February.

We continued to set the standard for privileged account security, innovating our solutions and delivering new products.

We simplified and made it more secure for customers in cloud and in hybrid environments.

We expanded our sales and marketing engine.

And while we experienced sales execution challenges in EMEA earlier in 2017, we stayed true to our operating discipline, delivering both growth and profitability.

We had a strong finish to the year, and in the fourth quarter our results exceeded our guidance across all metrics.

Revenue reached a record $80 million and grew 25%, and we delivered operating income of $20 million, or a 24% operating margin.

For the full year, revenue reached $262 million and grew 21% year-over-year.

Operating income was $52 million, or a 20% operating margin.

And we generated a record cash flow from operations of $81 million, or an operating cash flow margin of 31%.

Through 2017, the pace of hacker innovation continued to accelerate.

Ransomware evolved to self-propagate, stealing credentials and completely paralyzing business operations.

High profile breaches demonstrated that hackers can exploit unprotected secrets in the DevOps pipeline to steal information from services like GitHub.

Organizations are increasingly implementing cloud migration strategies, and hybrid environments are now the standard.

And organizations, regardless of vertical, are embracing digital transformation.

They are using applications and development as a competitive advantage to accelerate growth.

In this age of change, one thing has remained constant.

Unprotected, unmanaged privileged accounts are almost always at the center of cyber attacks.

Chief Security Officers today need to prioritize and protect the most critical assets first.

As a result, privileged account security is at the top of priority lists.

Compliance also continues to be a significant driver of our business.

In the fourth quarter, we began to see early indications that organizations are moving beyond planning for GDPR and are beginning to make purchasing decisions.

We ended the year with more than 3,650 customers, signing over 200 customers in the fourth quarter.

Today nearly 30% of global 2000 and more than half of the Fortune 100 are trusting CyberArk to help protect their most valuable assets.

The vast majority of our new business deals in the fourth quarter and throughout 2017 continued to be greenfield.

A few new business highlights from Q4 include a large 7 figure new business deal with a financial services company in EMEA.

We won this business for 3 primary reasons.

First, our proven track record in the world's most demanding institutions, securing privileged accounts in 21 of the 25 largest global banks; second, the breadth of our offering.

The bank was particularly impressed with our ability to protect assets and run in both AWS and Azure.

And finally, our roadmap and track record of delivering innovation; we are viewed as the long term partner who will support their security strategy.

And IT services organization for small to medium sized companies signed a standalone SAS endpoint privileged manager deal.

The organization bought CyberArk after its customers began requesting lease privilege and application control at the endpoint.

The organization sees tremendous value in our solution and intends to offer endpoint protection as a service to their installed base of customers.

This win demonstrates that market awareness has grown significantly, and organizations of all sizes recognize the need to lock down privileged credentials.

Our momentum in U.S. federal continued in the fourth quarter.

Two of our 10 largest new business deals were in U.S. federal, including a 7 figure deal with an agency in the Department of Defense.

As we build critical mass in U.S. federal, we are seeing the network effect positively impact our business.

We were honored to be recognized as a top security solution for government agencies by GSN Homeland Security Awards again this year.

Third party recognition is further validation that our investments in U.S. federal are delivering results.

Our installed base of customers was also an important driver for growth.

During the quarter, our largest add-on deals were evenly split between the Americas and EMEA.

A few fourth quarter highlights include a transportation firm in France required a scalable solution to secure credentials for more than 5,000 users and protect thousands of assets across a hybrid environment in Azure and on-premise.

In a classic land and expand, a financial services company became a customer in 2010, expanded with more licenses in 2013, 2014, and 2016, adding new products along the way.

And in 2017, the organization made the strategic decision to deploy 2 of our products broadly across the enterprise.

An insurance company in the U.S. expanding with Application Identify Manager and Conjur, securing on-premise applications, containers, and microservices.

Their CTO is focused on cloud, automation, and containers.

They full understand that security is a foundation building block to successfully implementing a digital transformation strategy.

Our solution will empower the organization to move with the speed and agility of the cloud with peace of mind, knowing that its most valuable assets are secure.

We are pleased with the early success we are having securing the DevOps pipeline.

In addition, Conjur is enabling sales of Application Identity Manager.

Customer recognize that our solution can protect modern application development and on-premise applications in production.

In fact, Application Identity Manager was included in 5 of our 10 largest deals for the full year 2017.

From an operational point of view, one of the highlights of 2017 was the successful post-merger integration of Conjur and delivery of our open source version just months after closing the acquisition in May of 2017.

With the Q4 enhancements to our solution, we automated onboarding of AWS credentials, reduced our implementation times, enhanced our user interface, and simplified our pricing.

Organizations are moving faster than ever, and with our Q4 product rollout we significantly enhanced our leadership position, further differentiating us from the competitive field.

In 2017, we also strengthened our go-to-market engine with the globalization of our sales team.

To help support out growth in EMEA, we recently expanded our team, naming Richard Turner as Vice President of Sales for the region.

Rich brings deep sales and channel experience with leading security organizations which we believe will accelerate customer adoption in the region.

While EMEA had a strong fourth quarter, in 2018 we are focusing on executing our globalization strategy and delivering more consistent results.

We also broadened the reach of our sales machine through our partner ecosystem.

We increased traction with advisory firms we understand that protecting privileged accounts is mission critical.

Business influenced by these partners increased by more 30% in 2017.

In the Americas alone, there were nearly 300 advisory consultants focused on CyberArk.

Just two years ago we were in the early days of building these relationships, and today our investments in the advisory firms are delivering tangible results.

Our indirect business represents more than 60% of total revenue, and we ended the year with over 350 active channel partners.

The C3 Alliance program is an increasingly important differentiator in the field.

We now have more than 70 partners and over 200 certified integrations.

Deals across all verticals and customer sizes are being influenced by partners like Tenable, OKTA, ForeScout, among others.

During the fourth quarter, our relationship with Rapid7 influenced sizeable customer engagements, including a 7 figure new business deal with a financial services customer.

In addition, newer DevOps integrations with leading players like Puppet, Jenkins, and Red Hat with OpenShift and Ansible, played an important role in the fourth quarter.

I believe the strength of our culture is an important contributor to our long term success, and we ended the year with more than 1,000 employees.

Our employees have unparalleled experience in privileged account security, and exhibit unwavering commitment to our mission.

This differentiates us from the competition and helps fuel our growth.

We are all aligned in our 2018 objectives to extend our leadership position by further automating and simplifying our solution across on-premise, cloud, and hybrid environments; power digital transformation by securing the DevOps pipeline without sacrificing speed and agility; expand our relationships with existing customers and accelerate new customer adoption by maximizing the effectiveness of our global sales and marketing engine; and extend our reach through our global partner ecosystem and enablement program.

We continue to set the standard in privileged account security by delivering the most innovative solutions and best in class customer support.

The market for privileged account security is rich with opportunity, and we have delivered a 41% compounded annual growth rate over the last 5 years.

We have a robust, rapidly growing pipeline across all geographies.

With our fourth quarter performance, we enter 2018 with strong momentum.

We are investing in our sales and marketing engine to capitalize on this opportunity and deliver sustainable growth and profitability.

With that, let me turn it over to Josh.

Josh?

Thanks, Udi, and good morning everyone.

We were pleased to exceed our guidance for revenue, operating income, and EPS.

In the fourth quarter, CyberArk generated record revenue of $80.4 million, up 25% year-on-year.

Our outperformance in the fourth quarter was driven by demand for our solution from both new and add-on customers, as well as greater than expected year-end budget flush.

License revenue reached $348.6 million, increasing 19% compared to 2016 and representing 60% of total revenue.

Maintenance and professional services revenue was $31.8 million, increasing 35% over last year and representing 40% of total revenue.

In the fourth quarter, the Americas revenue grew 18% to $43.6 million, representing 54% of total revenue.

And EMEA had a very strong finish to the year, with revenue growing 41% to $32.5 million in the fourth quarter, which was 41% of total revenue.

Asia-Pacific/Japan grew 2% in the fourth quarter to $4.2 million, representing 5% of total revenue.

We had broad based demand across verticals in the fourth quarter, with insurance, transportation and travel, healthcare, and professional services each more than doubling, and manufacturing, government, and IT verticals also growing by over 40% each.

As I move through the P&L, all financial results will be discussed on a non-GAAP basis.

Please see the full GAAP to non-GAAP reconciliation in the tables of our press release.

The gross profit for the fourth quarter was $70.6 million, or an 88% gross margin.

That's compared to $56.4 million, consistent with the 88% gross margin from the same period last year.

Our research and development expense grew 43% year-on-year to $10.7 million, or 13% of total revenue.

The increase in our R&D expense was driven by enhancing our solution, including increased automation and helping our customers more securely migrate to the cloud and protect hybrid environment.

The increase also included the expenses related to our acquisition of Conjur, which closed in the second quarter of 2017.

Sales and marketing expense for the fourth quarter increased 38% year-on-year to $33.9 million, or 42% of total revenue.

We continued to expand our sales and marketing engine throughout the year to further position ourselves to capitalize on the significant greenfield market opportunity.

G&A increased 27% to $6.2 million, or 8% of total revenue, to support the growth of the organization.

In total, operating expenses increased 38% in the fourth quarter to $50.9 million compared with $37 million for the fourth quarter last year.

We ended the year with 1,015 employees around the world compared to 823 at the end of 2016 and 966 employees at the end of the third quarter of 2017.

There were 491 employees in sales and marketing at year-end, up from 377 at December 31, 2016.

We generated strong operating income of $19.7 million, or 24% operating margin, in the fourth quarter, which beat our guidance.

This compared to $19.4 million, or 30% operating margin, in the fourth quarter of last year.

Net income was $15 million, or $0.41 per diluted share, for the fourth quarter of this year, up from $14.7 million, or $0.41 per diluted share, for the fourth quarter last year.

As a result of the Tax Cuts and Jobs Act 2017 in the United States, CyberArk recorded a one-time adjustment to its deferred tax asset of $6.5 million, which resulted in an increase in the GAAP effective tax rate during the fourth quarter and for the full year of 2017.

Now let me summarize our results for the full year 2017.

Total revenue increased 21%, reaching a record $261.7 million compared to $216.6 million in 2016.

License revenue was $147.6 million, increasing 12% year-on-year, representing 56% of total revenue.

In 2017, just over 60% of revenue was generated from existing customers purchasing additional licenses and approximately 40% from revenue from new customers, which is consistent with the mix in 2016 as well.

Maintenance and professional services revenue increased 34% over last year, reaching $114.1 million and representing 44% of total revenue.

We continue to deliver best in class customer service, and that is reflected in our strong renewal rates that were again above 90% in 2017.

For the year, revenues in the Americas grew 20% to $162.5 million and representing 62% of total revenue.

EMEA grew 20% to $81.8 million, or approximately 31% of total revenue.

Again this year, EMEA experienced more pronounced seasonality, with the fourth quarter representing 40% of the region's annual revenue.

Asia-Pacific/Japan revenue grew 30% and reached $17.4 million, or 7% of total revenue.

For the full year, our business was also well diversified across industries.

Banking was again our largest segment, representing 29% of the business compared with 31% last year.

Global government was 10% of the business.

That was up from 9% last year, and I would point out that U.S. federal had a record year and we're also gaining momentum in governments across Europe and in Asia-Pacific/Japan.

Manufacturing was 10% of the business this year, also up from 9% last year.

And the diversification of the business is continued evidence that all organizations need privileged account security.

During the last year, we saw deals over $100,000 increase 27% to 659 from 519.

We also have 92 deals over $500,000.

That's including a record number of million dollar deals for the year.

This compares to 53 deals over $500,000 in 2016.

We saw an increase in larger deals from both our existing customers and expanding with CyberArk, as well as from new customers landing with broader protection of their environments.

Our gross margin for the full year was 86.5% compared to 87.4% the prior year.

And the slight decline in our gross margin was in line with planned increase in expenses for our cloud offering for Endpoint Privilege Manager, increase in the mix of third party contractors for professional services delivery, and our investment in partner enablement.

We generated operating income of $51.9 million for the year, or a 20% operating margin, which was again ahead of our guidance.

For the full year, currency movements in the shekel, British pound sterling and the euro impacted our revenue and operating expenses with a net impact of a $3 million reduction in our operating income for the full year.

This compared to $58 million, or a 27% operating margin, in 2016.

Our net income was $41.9 million, or $1.16 per diluted share, in 2017 compared to $45.2 million, or $1.26 per diluted share, in 2016.

Our effective tax rate for the year was 25%.

Turning to the balance sheet, $330 million in cash deposits and marketable securities.

That is up from $295 million at the end of 2016.

Deferred revenue for the full year increased 43% to $105 million.

More than 90% of our deferred revenue is from maintenance and professional services contracts, consistent with year-end 2016.

For the full year, we also generated record cash flow from operations of $80.7 million, resulting in a 31% cash flow margin.

This compared with $56.3 million in cash from operations in the full year of 2016, or a 26% cash flow margin.

Moving on to our guidance for the first quarter of 2018 and the full year, please note that the guidance takes into account ASC 606.

For the first quarter of 2018, we expect total revenue of $68.3 million to $69.8 million, or 17% growth at the midpoint of the range.

We also expect non-GAAP operating income to range between $9.2 million to $10.4 million, and non-GAAP net income per diluted share of $0.19 to $0.22.

This assumes 36.5 million weighted average diluted shares and a tax rate of approximately 23% for the quarter.

For the full year 2018, we expect total revenue in the range of $312 million to $316 million, or a growth of approximately 20% at the midpoint.

We expect our gross margin to be approximately 87% for the full year.

We expect non-GAAP operating income to be in the range of $54.5 million to $57.5 million, and non-GAAP net income per diluted share of $1.18 to $1.24.

This assumes 36.7 million weighted average diluted shares.

Our guidance for the full year assumes an effective tax rate of approximately 22% for 2018, which takes into account the lower tax rate in Israel as well as in the U.S.

As a reminder, we typically experience a sequential revenue decline into the first quarter, moderate sequential growth into Q2 and Q3, and Q4 is our largest revenue quarter of the year.

We also want to provide you with a bit more color on some of the line items as well as the impact of the new revenue recognition accounting standard, ASC 606.

Please note that the impact of 606 is an estimate based on the information we have today.

For 2018, we will be using what is referred to as a modified retrospective approach to disclosure.

Given our perpetual license model, we expect the total revenue impact to be relatively small.

In 2017, approximately 1% of total revenue was related to term-based licenses.

Beginning in 2018 under 606, for the majority of term-based licenses, the revenue will now be recognized in period of delivery rather than pro rata over the contract period.

Because of 606, at this time we are forecasting that our starting balance for deferred revenue will be reduced by approximately $4 million.

We currently estimate that we would have recognized approximately $1 million to $2 million of that deferred revenue in 2018 under the old revenue recognition model.

From an expense point of view, we will be expensing commissions of the period that the licenses or services are delivered.

Maintenance and services contracts typically run between 1 and 3 years, with the majority for 1 year.

The impact of this change is reflected in our guidance.

Based on the guidance we provided today, we estimate that our expenses will benefit from approximately $2 million related to commissions for the full year of 2018.

As I noted before, the guidance we provided already is in accordance with ASC 606.

In terms of other line items in 2018, we expect total expenditures to be in the range of $10 million to $11 million; capital expenditures to be the range of $10 million to $11 million, which represents approximately 3% of revenue at the midpoint of the revenue range.

This includes approximately $5 million in leasehold improvements related to our offices in London, Singapore and the United States, as well as our global headquarters in Israel.

As we look at the full year 2018, we continue to expect our cash flow from operations margin to run between our non-GAAP net income margin up to 10 percentage points higher than our non-GAAP net income margin.

And that is in line with the range we provided for 2017.

We recommend analysts evaluate our cash flow on an annual basis, given that our cash flow from operations can vary quarterly based on seasonality of the business and taxes.

We do not plan to provide quarterly updates on guidance for cash flow from operations.

In 2018, we remain committed to delivering sustainable growth and profitability.

Our key areas of investment will continue to be in sales and marketing to capture market share and grow our business, and R&D to continue to extend our leadership position.

We believe we are well positioned for the future.

And now I'll turn the call over to the operator for a Q&A.

Operator?

(Operator Instructions) Our first question comes from Saket Kalia of Barclays.

Josh, maybe just to start with you, I know deferred revenue may start to move around a little bit in 2018, given 606.

But if we look at the ending balance here in Q4, it looks like we saw a bigger increase in long term deferred than we have in the past.

I guess how much of this was perhaps customers opting for longer term maintenance contracts versus perhaps maybe having a higher deferred license?

Actually, it's around our support and maintenance contracts.

As I pointed out in the remarks, we continue to have very high maintenance renewals for our contracts.

We did see an increase -- some increase in our multiple year maintenance renewal contracts, and you see that in the long term deferred revenue jump.

And also there is the seasonality of our renewals happening in Q3 and Q4 because that is a bigger piece of our product and our maintenance starts as well in the second half of the year.

So, we do see some seasonality in our deferred revenue going up in this part of the year, but it's really reflecting support and maintenance contracts.

And the percentage of the deferred revenue related to deferred licenses is still under 10%, the same number that it's been tracking for the last really 1 to 1.5 years.

Got it.

That's really helpful.

Maybe for my follow up for you, Udi, very nice 2018 revenue guide.

I guess the question is, as you contemplated this revenue level for 2018, how did you think about competitive win rates qualitatively and also the ramp in productivity from some of the sales changes that we made here in 2017?

Yes, Saket.

So obviously we're -- thank you.

We're very pleased with the Q4 performance and the momentum it carries into the new year.

And of course, the guide really reflects, first of all, our confidence in our market leadership.

We believe our competitive leadership has strengthened, particularly with version 10 with Conjur, with EPM and a lot of the things that we did on the technology front, and definitely on the go-to-market.

We've globalized our sales force.

There are still things that are in motion, but we believe we're entering stronger and have the ability to execute on that.

And of course, we look into our pipeline, and that's the basis for our confidence.

And our next question comes from Melissa Franchi of Morgan Stanley.

Udi, I just wanted to ask you about EMEA because the growth was notable this quarter, and I'm just curious.

I know that you mentioned GDPR, but I just would like to hear your comments on to what extent that was actually contributing to the acceleration in the quarter, or is it largely just simply because of new sales leadership and better execution?

Hi Melissa.

No, I would say that the GDPR comment is more as we look into the future in terms of early signs of it moving from something looming to something that customers are more and more making decisions on and something that will be more of a tailwind into 2018.

The Q4 results were very much CyberArk execution, sales team execution, channels, and the budget flows we typically see, especially in Europe in Q4.

So we put a lot of energy in putting things back on track and executed well.

Okay, that's helpful.

And then just one for Josh.

Thinking about the guidance for OpEx in '18, it does call for an acceleration in growth despite the commissions benefit.

So I'm just wondering if you can maybe put a little bit more color behind where exactly you're investing in.

And then when do you expect to start to see leverage from those increased investments?

Yes, I would say that the increased investment's going to be really divided into sales and marketing for half of it and into R&D for half of it.

On the sales and marketing, we talked about the opportunity ahead of us, and we want to make sure we get it right and not leave it on the table.

With our R&D investment and the migration to the cloud and the changing in the IT environment, there are lots of things that we're moving forward to in the development side as well.

And that's where we're taking the -- we're making sure that we're positioned well for the opportunity into the next year.

With regard to the impact from 606, actually it's a nominal impact, also on the revenue side but also even around the expense side.

So that's not really impacting much the operating margin.

And our next question comes from Sterling Auty of JP Morgan.

This is actually Ugam Kamat on for Sterling this morning.

So the EMEA growth, it was really phenomenal, I mean, 40% year-over-year growth.

Should we assume that most of the execution issues that you were facing in this region in the early part of the year have been ironed out, or do you believe that it is still work in progress?

Thank you, Ugam.

I would say most, but we're still focusing on getting more consistency.

And so there's still work we're doing in place.

And we think there's a lot we could do to work closer with the channels and get more consistency.

So I would say work in progress, but in the right direction.

And obviously, we're very pleased with Q4.

Okay, and just a follow up.

On the operating margin guidance, how much FX impact are you estimating for 2018?

Given the weakening USD and your R&D is Israel, I think it would have some amount of impact on your operating expenses.

Yes, you're right.

As you know, we have our shekels in -- our expenses in Israel are in shekels, and so that will impact our R&D expense in particular.

And in terms of the margin impact, I mean, it's basically -- it's between $1 million to $2 million.

And our next question comes from Gabriela Borges of Goldman Sachs.

Udi, you mentioned a couple of times during the prepared remarks on automating and simplifying the solution.

Maybe tell us a little bit more about some examples of why you're automating and simplifying.

And do you think this will help extend privileged access adoption outside of maybe the traditional cohorts and traditional verticals that have adopted?

Thanks.

Yes.

Thank you, Gabriela.

It's been -- a few things have been strategic for us on the...

(technical difficulty)

Ladies and gentlemen, please stand by.

(technical difficulty)

Thank you.

Gabriela, I think we were cut off, but the point was to really do what's best for our customers in scale and automation not just for their on-premise environments, but really join them in the journey to the cloud with more automation.

That's helpful.

And actually, the cloud question was my follow up too.

So to what extent are you seeing new business coming to the company because customers have decided to go to hybrid deployments or cloud deployments, at which point they decide to implement a privileged access project?

Just give us a sense as to what extent that's becoming a piece of new business.

Absolutely.

I think it's been a strategic investment for CyberArk for the last couple of years, to leverage our market leadership and the awareness around what we do also to customers that are going on the migration.

There are many fronts where this is coming in.

It could be, of course, existing customers that take us to migration.

But to your question, a lot of new as they're looking to migrate and they want to be able to trust the cloud platform, be able to secure their applications.

It's coming in on the inbound side, a lot of it from our own sales force marketing but also from the advisory firms that consult them on migration.

I believe in the last call we gave an example of a recovery, of a customer that was recovering from a massive breach where they decided to recover into Azure.

And it was a new customer for us.

We helped them with the recovery and doing it all deployed in Azure.

And our next question comes from Rob Owens of KeyBanc Capital.

Wanted to circle back just on the margin front and understand why '18 sets up as an investment year, especially given some of the success you've seen over the last 6 months in Europe, so any help there would be great.

Thanks.

Hey, Rob, I'll start.

This is Josh.

And before -- I'll get to that in a second.

I did want to make a correction on the FX answer I gave a couple of questions ago.

And it wasn't -- I did mean $1 million to $2 million, but it's basically the OpEx guidance includes about a 1.3 -- on the operating margin a 1.3% erosion of the margin because of the increased shekel rate for 2018.

So there's a little bit in that, but that's offset by 606 to some degree, understanding the puts and takes there.

So again, the spirit of the question is just you've seen success after going through a bit of a sales reorg in Europe.

And it seems like you're investing even more this year.

Why wouldn't it be somewhat of a consistent investment where we'd see some margin growth with the revenue growth versus what appears to be more of an investment year?

Thanks.

Yes.

Well, I think we're basically making sure that we capture the opportunity, which we see as very large.

And we want to -- we're doing it both on the sales and marketing and R&D side.

It's not the -- in terms of a growth year relative to 2017, the differential is a lot less than prior years.

But in fact, we do want to make sure we get it right with the hirings that we're doing across the sales and marketing organization and across the development.

And so we see it, continued investment, given the fact that the opportunity still allow us to grow in this area.

Is there anything reflected in your win rates at this point, or I guess the top of the funnel in terms of the numbers of bats that you're getting that would suggest that you're ceding share in the market?

I think if we look at the number of bats, it actually supports our continued investment in the sales and marketing organization.

So we're getting more bats.

We're getting more at bat, and we want to make sure that we're taking a swing on all of them.

Great.

And then the second -- it didn't seem like there was as much discussion around EPM this time, understanding AIM was strong during the period.

So just curious about an update on that front.

Yes, Rob, it's Udi.

Absolutely, both of them; we're very pleased with AIM.

And we highlighted that because we're very excited about our play in DevOps security, but it was a great year for EPM.

We talked about some customers where the driving force is protection against ransomware.

We've had customers where it's really all about preventing the initial stage of the attack and privilege escalation.

So it's a great product for us, and very often it's one of the products where we have standalone deals and an opportunity for more add-on business.

And our next question comes from Fatima Boolani of UBS.

Udi, I wanted to drill into a comment you made in your prepared remarks around 2017 being the year where you simplified your pricing.

I know CyberArk typically has a reputation of being perhaps more addressable to higher end organizations, larger enterprises and perhaps more on the regulated industry side.

But I wanted to hear your perspectives on specific pricing changes you've made to broaden your addressability, and what incremental steps you're taking this year as part of your investment envelope to broaden the scope of the product offering.

And then a follow up for Josh, if I may.

Great.

So Fatima, definitely from a -- I would say from a position of strength we saw that many of our customers were increasingly buying EPV and PSM together.

It's also our professional security recommendation as what we call that is doing the basics, doing the core combined with our privilege threat analytics.

So we made it easier for customers to have a starting point around our core products and then a stepping stone for expansion.

And I would say it's good for both enterprises, but it's also a good preparation as we further go down market.

And just to drill in on that a little bit more around the pricing environment vis-a-vis competitors, there's been some consolidation in the space.

Any comment you can share or perspectives you can share on what the pricing environment and the discounting environment has been and what that's shaping up to be this year?

Sure.

Sure, Fatima.

So I would say as we indicated in the past, no real change in the enterprise environment.

As we were getting deeper down market and further into midmarket, that's where we saw some of the pricing pressure that we indicated in the past.

For that, we also executed on bundling prices earlier in the year.

And so I would say that segment of the market has more pricing pressures.

Sometimes it, I would say, comes in waves, whereas in the enterprise our leadership is very clear.

And we're focused on the customer, so everything we did here is to make sure that they -- that from the get-go they get the right security solutions in place to really protect themselves against advanced attacks.

That's really helpful.

And Josh, just a question on your CapEx guidance, just wanted to understand what's going in there.

It's a little bit of a step up from the past, so I wanted to understand if it's building out your other service capabilities or really what's going into that step up.

And that's it for me.

Thank you.

Yes.

So first of all, I called out that there is about $5 million of the CapEx is which related to leasehold improvements for really offices around the world that we're building out as part of our expansion in the U.S. and in Europe, in Singapore and also as well in Israel.

And then I would say we are also expanding in our IT infrastructure and our related CapEx as well in that area.

And Fatima, I wanted to also -- you asked about consolidation.

Yes, we've seen some of our smaller competitors get acquired by other small competitors.

So overall, we see that as a net positive and, again, a sign for this market and demand out there.

And we actually expect consolidation to continue within the competitive landscape.

And our next question comes from Gur Talpaz of Stifel.

So Udi, in August you hired Ron as a Chief Revenue Officer.

Can you talk about the impact he's had on the organization?

And then more broadly, can you talk about the visibility you now have into the broader global sales pipeline?

Yes, Gur.

Thanks.

Yes, actually we didn't hire, we promoted because Ron --.

Good.

Yes.

Yes, Ron was leading the Americas and has been with us for many years and was really the natural candidate to take over the globe.

And so he's been doing a great job.

I think we're seeing the results.

And to your second part of the question, it was -- we also saw the advantage of globalizing the last non-globalized department in CyberArk where, especially with some of the large enterprise accounts, we were always serving them in the different regions, but now really getting that alignment in supporting their needs around the world.

And that's in line with the fact that we have a globalized services and support organization.

And so, that's working hand in hand very well.

That's great.

And then an apology to Ron for the misstatement.

Okay.

I want to rephrase one of the prior questions.

Udi, how often do you see customers coming to you and choosing you because your solutions support their vision of a future cloud deployment?

So maybe they deploy on-premise now, but because you have this vision and these products that support the natural migration to the cloud, they're picking and deploying you on-premise now but their future plans call for you to be deployed in other parts of their network.

Thank you.

Absolutely, it's becoming very common.

I think every prospect and customer meeting we walk into, they're either in some hybrid form or in some migration form.

And they look at those two angles that you talked about, our ability to be deployed in the cloud, and of course we have the Amazon Machine Image and the need to be installed on Azure.

So they look at that capability even if they're not contemplating to do it now.

And the second aspect which is super strategic, they look at our ability to support their vision for deploying their applications in containers and microservices.

And now the combination of AIM and Conjur is a super differentiator for us for our ability to take them into that journey.

We saw it.

We saw it in Q4 already, and we're seeing that with a lot of our customers.

And our next question comes from Jonathan Ho of William Blair.

I just wanted to start out with your comments regarding the advisory channel.

Can you maybe give us some thoughts about how far we are in terms of that opportunity?

And do you see this helping more on kind of the lead gen side of things for core privilege, or is this helping you more with the add-on solutions or both?

Both.

I think we've made -- as I mentioned, we've really made a long way with the advisory firms.

They've recognized two things.

They've recognized that privileged account security is a business opportunity for them to really make an impact on their customers.

And they've recognized that CyberArk is the company that's going to be out there for the long run, that's really investing for the long run, and they can partner with us and expect to have this long term partnership.

They bring to the table the ability to have C level access, to have risk-based discussions.

And so we saw their impact both in new leads but also in existing accounts becoming more strategic and growing deeper.

The other element of it was our investment in training and enablement.

And so while they saw the opportunity we also invested in them, and I think that's how we saw the fruit.

And a big part of their practices these days is taking the customer through the cloud journey.

And more and more it involves not just the basic cloud infrastructure, but also the DevOps evolution of how do you run your applications in the cloud and understand that they need to address secrets management and our solution for that.

Got it, got it.

And then just given the turnaround that's already been taking place in EMEA, I guess where do you see the incremental opportunities for Mr. Turner to I guess drive additional growth or additional improvement in the region?

Yes, absolutely.

We think it's work in progress, and one of the basic things is to achieve consistency.

So we had a great Q4, and we see a healthy pipeline.

Rich brings great experience, especially on the channel front.

We've already cherry picked and partnered with the best channels out there.

But we can do much more with them and get them more self-sufficient and, as I alluded to in the past, keep us closer in the loop, especially for add-on business within customers, ensure that we're in there and that we are strategic for them.

And so, he walked in and he sees a great opportunity making an impact on CyberArk.

And our next question comes from Shaul Eyal of Oppenheimer.

This is Tanner on for Shaul.

Congrats on the strong quarter.

Last quarter you mentioned 60% of your sales came from the channel, and this has been at the high end of your historical range.

Just wondering what percentage of deals were through this channel this quarter, and have your channel initiatives continued to pay dividends this quarter?

Yes.

Actually, as we mentioned, it was 60% now as well.

And so we're seeing it as a healthy mix.

Got it.

Thanks for the clarity.

And just as a follow up, cloud seemed to accelerate this quarter for not only cloud service providers but also for some of your peers in the broader cybersecurity group.

Just to follow up on prior questions and not to beat a dead horse, but what are some of the trends you're seeing and win rates for your cloud complementary offerings, if you want to call it.

And is this a dynamic you're molding your 2018 investments around, particularly within the channel?

Yes, absolutely.

I think as I said, it's something we started a couple of years ago really investing in and to be part of our customers' journey.

And it really -- and we're there to start with however they want to.

If they're still securing their on-premise environment, we help them with that and show them the path towards the hybrid and the cloud migration.

But very often, we're landing and we're joining them just as they're looking at how do they secure their cloud environment and their application environment.

And that's become a great source, also as per the earlier question, of new lead generation for us.

Some of the investments we've done on the partnering side, and as I mentioned we extended our C3 Alliance to really add this incredible flavor of partnering with the DevOps tools, what's called continuous integration, continuous development tools like Puppet and Chef and Jenkins, and basically deliver to the customers instant integration so that CyberArk can be there to secure them as they embark on this DevOps journey.

The channel partners themselves are seeing that opportunity.

And so we're consistently enabling them to land in a similar fashion.

And our next question comes from Gray Powell of Deutsche Bank.

I just had a couple if I can.

Maybe to start, I just want to make sure that I have the 606 revenue impact correct.

Were you saying that it's a $1 million to $2 million benefit to revenue per quarter in 2018?

No.

Let me make it clear.

For 606, we expect to see $1 million to $2 million less in revenue for the year and about $2 million less in expense for the year.

Got it.

Okay, that's helpful.

And then I'm going to try to follow up on some of the other questions.

But, I mean, you guys clearly have a best in class enterprise grade product.

We hear that a lot of the growth is more coming from the middle market or more price sensitive customers.

So how do you target those customers without impacting your core installed base of large enterprises?

Is it more the bundling or is more like on sort of a feature set and maybe less functionality for middle market customers?

No.

No, I would say that our growth is actually very much coming from the enterprise play, and both -- a lot of greenfield on the enterprise and add-on to the enterprise.

And we're going further downstream, so it's an added wave for us.

And some of the investments we've made in simplifying products for the enterprise are fruitful for us as we go further down market.

So we're actually leveraging those investments, and we're continuing to invest in simplification and automation.

And they serve both the enterprise customer but also our journey further down market.

Got it.

Okay.

Thank you very much.

Thank you.

And our next question comes from Gregg Moskowitz with Cowen & Company.

You've always -- Udi, you've always expressed excitement around the potential of Conjur.

But if anything, you sounded to me on this call anyway as perhaps even a bit more amped up, if you will, around Conjur and secure DevOps as an opportunity.

How is the customer response to Conjur thus far compared to your original expectations when you acquired the company?

And when do you expect it to really being contributing to revenue?

I think we've presented it in two large customer conferences and then in various conferences afterwards.

And to previous questions, you can see that whether they're already in the midst of it or contemplating it, it just strengthens their belief that CyberArk is the company with the vision to where this market is going and are ahead of the curve to go with the journey for them.

Tangibly I can say that 5 of our 10 largest deals had our application identity management with Conjur in it.

Some of it was still application identity management securing more legacy type applications, but those decision makers wanted to know that we can support them in the journey as they move their applications to containers and into cloud.

So that's the source of our excitement.

It's the today, but it's also the future and how it supports our today application identity management offering, but also the path forward.

Okay, that's very helpful color.

Thanks, Udi.

And then just a follow up for Josh.

And I know that you don't, of course, explicitly guide to license revenue.

But just as part of your 2018 guidance, any sort of high level color or thoughts about how we should be thinking license growth over the course of the year?

It's right, we don't break out our license by -- or by revenue.

But I think that we have been pretty consistent with our breakout for percentage of license as compared to the total pie over the last few years.

And we don't see that shifting materially.

Thank you.

And that concludes our question and answer session.

I'd like to turn the conference back to Udi Mokady for any closing remarks.

Great.

Thank you very much.

I want to take this opportunity to really congratulate the CyberArk team and our channels on the strong finish of 2017.

I want to thank our partners, customers, and employees who really contribute every day to our success.

And thank you all for joining us this morning.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone have a great day.