Cyberark Software Ltd (CYBR) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 CyberArk Software Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Erica Smith.

Vice President of Investor Relations.

Please begin, ma'am.

Thank you, Norma.

Good afternoon.

Thank you for joining us today to review CyberArk's Third Quarter 2018 Financial Results.

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

After prepared remarks, we will open the call up to a question-and-answer session.

Before we begin, let me remind you that during the call today certain statements may be considered forward-looking, which reflect management's best judgment based on currently available information, specifically our expectations and beliefs regarding our projected results of operations for the fourth quarter and the full year 2018.

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

Please see 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 disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today.

Additionally, non-GAAP financial members -- measures will be discussed in this conference call.

A reconciliation to the most directly comparable GAAP financial measures is also available in our earnings press release, which can be found in the Investor Relations section of our website, where you will also be able to find a webcast of today's call.

With that, I'd like to turn the call over to Udi.

Thanks, Erica, and good afternoon, everyone.

Thank you for joining the call today.

The third quarter was another great quarter for CyberArk.

Total revenue reached a record $84.7 million, increasing 31% year-over-year.

We generated record non-GAAP operating income of $21 million, and our net cash from operations was $89.2 million in the first 9 months of the year, already exceeding the cash flow we generated in all of 2017.

Given our strong results, we are raising our guidance for the full year, which Josh will discuss later in the call.

Strong execution and robust market fundamentals drove our results, again, this quarter.

I want to highlight 3 major market trends.

First, awareness and demand for privileged access security is stronger than ever and accelerating across all geographies.

Second, securing privileged access is recognized as critical to the successful execution of digital transformation and cloud migration strategies.

And third, chief information security officers are solving increasingly complex regulatory challenges by focusing on securing the environment and not merely checking a compliance box.

Given our leadership position and the breadth of our solutions, we benefited from these macro trends in the third quarter.

In terms of our strategy, every team across the organization executed well and contributed to our strong performance this quarter and year-to-date.

Innovation has been key to our success.

The simplicity and enhanced functionality of Version10 of our core privileged access security solutions combined with the dramatically simplified new pricing model is accelerating new customer acquisition.

We ended Q3 with over 4,200 customers, adding nearly 200 new logos again this quarter.

Year-to-date, new customer additions have grown by 37% over the first 9 months of last year, accelerating from about 10% in the first 9 months of 2017 and 28% in the first 9 months of 2016.

With the wins in the third quarter, we are honored to be helping secure the world's leading companies, including 50% of the Fortune 500.

A few key new customer wins include, a Fortune 100 technology company will be leveraging our core privileged access solution to secure network security cameras.

We won this Greenfield Internet of Things project because of our investment in the technology integrations that security extend our solution across the IT infrastructure on-premise and in the cloud.

A major insurance company chose CyberArk not only for the breadth of our solutions across core privileged access, endpoint protection and DevOps, but also because we can secure multiple public clouds, including Google Cloud Platform and AWS.

The Chief Information Security officer wanted to consolidate on a comprehensive privileged access security platform to increase control and security over the organization's enterprise hybrid environment.

In the new digital world, every organization is a technology company, and retail certainly is no exception.

In the third quarter, we signed over 20 new retail customers, and the vertical grew by more than 75% compared to Q3 last year.

To respond to increasing competition and higher consumer demand, retailers are securely implementing comprehensive cloud and DevOps strategies.

In a 7-figure new business deal, a large retailer in northern Europe will be leveraging our technology to secure it's privileged accounts globally.

In the hybrid deployment, this retailer is running our solution on-premise in the Americas and in Azure to secure its EMEA environment.

This customer understands that securing privilege is foundational to its comprehensive security strategy.

A large retailer in the U.S. will be leveraging CyberArk, ACTA and SailPoint in a broad identity project to protect its environment on-premise as well as privilege access to AWS and Azure.

Our security-first approach to privilege, our ability to protect the DevOps pipeline and our strong relationships with our technology and advisory partners contributed to this great win.

An existing Fortune 100 retail customer, who first purchased Enterprise Password Vault in 2012 is extending its CyberArk deployment to its next-generation data center in GCP and Pivotal Cloud Foundry with Application Identity Manager, Conjur and Core PAS.

This progressive customer wants full visibility and security of its privileged human users and machine identities.

Our strategic moves over the last 18 months, including the new pricing model, Version10 and our technology partnerships with Puppet, Ansible and Chef will significantly speed the title value for this mission-critical project.

Broad diversification is the foundational pillar of our business.

Our top 10 deals in the third quarter represented 5 different verticals.

But more importantly, they were balanced across the Americas and EMEA, new and add-on business, channel and direct, and included a number of products.

Banking, manufacturing and global government were our largest verticals in Q3, each representing over 10% of the business.

In the government vertical, we won agencies in North America, EMEA and APJ, and continue to see traction with U.S. Federal closing over 40 deals with both new and existing customers.

Geographically, we were thrilled with the performance in each region.

The Americas delivered another record quarter, growing by more than 20% in Q3.

The EMEA team has improved consistency across the region, resulting in revenue growing by more 40% in the third quarter.

And in APJ, we have seen an acceleration in deals over $100,000, demonstrating that securing privilege access is moving up on the security priority list in the region.

Add-on business was another important contributor to our record results.

During the quarter, we had multiple 7-figure add-on deals, including a U.S. financial services firm is expanding its initial CyberArk deployment across the global organization.

We originally won a relatively small deal in a new data center to protect Tier 0 critical assets, the most valuable assets for a hacker.

After proving we are a superior solution, we are now ripping and replacing a legacy technology to deploy CyberArk globally across all data centers.

After a data breach last year, a U.K. transportation company has leveraged CyberArk to regain control over its network.

The organization now has a board mandate to implement a cybersecurity program targeted to significantly reduce risk.

Because our solution is measurable, privileged access security was the #1 priority for this customer.

Our strong execution is generating synergies across our advisory, value-added reseller and technology partner ecosystem, which is contributing to our strong performance.

We are putting the customer first, working with our partners to help better secure against cyberattacks.

Value-added resellers recognize that combining our privileged access solution with the C3 Alliance technology partners will strengthen their customer security position.

In the third quarter, our indirect business represented approximately 67% of total revenue.

Our advisory partners are expanding their CyberArk practices and providing customers with valuable and scarce security talent, which can implement our solution and deliver ongoing services.

In the third quarter, about 20% of our business was again influenced by strategic partners, like Deloitte, PwC, KPMG and others.

Our ecosystem is promoting a best of breed approach across a number of security projects, notably in mission-critical digital transformation and cloud migration strategies.

Conjur and AIM play a critical role in cloud migration as well as digital transformation with DevOps and robotic process automation or RPA, both steadily gaining traction.

By bringing together advisory firms, wars and tech partners like Automation Anywhere, UiPath, Blue Prism, Red Hat OpenShift and Puppet and others, we are helping customers across industries securely automate business processes and the DevOps pipeline.

Our innovation has empowered customers to deploy or access CyberArk anywhere, on-premise, in the cloud, as-a-service or through an MSSP.

During the third quarter, a large system integrator partner purchased our multitenant cloud-managed security service provider offering.

This partner has signed its first customers and is in the process of building out its broader MSSP offering.

Our MSSP solution is further extending our reach into the midmarket, and we are looking forward to working closely with this partner and others as they roll out privileged access security solutions.

We recently introduced our first innovation based on the Vaultive acquisition, Privileged Session Manager for cloud.

This solution expands our reach to protect cloud administrators and privileged business users.

Through a transparent, easy-to-use experience, this new functionality extends session isolation, monitoring and control to the most common web applications, cloud and social media platforms.

As part of our Core PAS solution, Privileged Session Manager for cloud leverages our threat analytics and risk scoring capabilities to detect and alert on suspicious privileged-related activity.

The market for privileged access security is rich with opportunity, and we believe the demand has never been stronger.

Technology and attacker innovation are continually changing the threat landscape.

Recent industry disruption and consolidation are also creating near-term opportunities to capture market share.

Our execution in the first 9 months of this year has established a strong foundation to continue to responsibly invest in the business and deliver growth in the fourth quarter and beyond.

With that, let me turn it over to Josh to discuss more details about our record results.

Josh?

Thanks, Udi.

Before we begin reviewing the quarter, I wanted to remind everyone that our third quarter results reflect the modified retrospective approach to disclosure for accounting standard 606.

So as Udi mentioned, we had a record quarter for total revenue and operating income.

We were pleased to again exceed our outlook for all guided metrics.

Total revenue grew by 31% year-on-year, reaching a record $84.7 million in the third quarter.

We generated $46.1 million in license revenue, increasing 29% over the third quarter of 2017, representing 54% of total revenue.

We experienced strong growth across all geographies as well as in our mix for both add-on business and new customers as well as channel contribution, which increased during the quarter.

Maintenance and professional services revenue was $38.5 million, increasing 33% over the prior year period and representing 46% of revenue.

The professional services revenue associated with this line was $6.7 million or 8% of total revenue.

All geographies performed well, again, in the third quarter.

The Americas reached another record quarter, generating $52.1 million in revenue, growing 23% over third quarter last year and representing 62% of total revenue.

EMEA generated another high-growth quarter with $26.3 million in total revenue or 42% year-on-year growth and 31% of total revenue.

APJ recognized $6.3 million in revenue, growing 52% and representing 7% of total revenue.

Beyond geographic diversification, we experienced a broad-based demand across verticals, with 5 verticals growing by 50% or faster.

Those include, manufacturing, insurance, resale, telco and professional services.

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

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

Our third quarter gross profit was $74.9 million or an 88% gross margin, that's compared to 86% gross margin in the same period last year.

We continue to enjoy increased utilization of our Professional Services team resulting in the improved gross margin for the quarter.

To capitalize on our significant opportunity, we are also continuing to invest in growth and scale.

Our innovation has been a cornerstone of our long-term success.

R&D grew by 33% year-on-year to $12.7 million or 15% of revenues.

That was primarily driven by headcount increasing by 21%, which included the acquisition of Vaultive in March earlier this year and currency movements in hedging, which represented approximately $400,000 of the increase in R&D expenses or approximately 4% of the expense growth.

Sales and marketing increased by 12% to $33.9 million or 40% of revenue as we expanded across all geographies to support direct and indirect sales.

Consistent with last year in the third quarter, we again hosted our Annual Americas and EMEA customer events this year in Boston and Berlin, respectively.

We also introduced during the third quarter our new DEFEND event series, which were conducted in 12 cities across the Americas and attended by approximately 1,000 customers and prospects.

In G&A, our expense increased 36% year-on-year to $7.2 million or 8.5% of revenues, as we continue to scale the business to support our growth.

In total, operating expenses for the third quarter increased 20% to $53.9 million compared with $45.1 million for the third quarter last year.

As a result of our record revenues, powerful business model and disciplined investments, we experienced strong leverage in the third quarter delivering operating income ahead of our guidance at $21 million or a 25% operating margin.

This compared to an operating income of $10.7 million or 16% operating margin in the year ago period.

We ended the third quarter with 1,106 employees worldwide, that's up from 1,077 at June 30 and compared with 966 at the end of the third quarter of 2017.

We had 524 employees in sales and marketing on September 30, compared to 513 at June 30 2018 and 468 at the end of third quarter of last year.

Net income was $17.8 million, generating earnings per share ahead of guidance at $0.48 per diluted share for the third quarter of 2018.

That's increasing from the $8.9 million or $0.25 per diluted share for the third quarter of 2017.

We continued to generate cash flow from operations into the third quarter, increasing our total net cash provided by operating activities for the first 9 months to $89.2 million.

This represents a 38% cash flow margin and an increase of 100% over the first 9 months of the prior year period.

As a result, we ended the quarter with a strong balance sheet with $410 million in cash and investments.

This compares to $330 million in cash and investments at year-end.

We ended the third quarter with $136 million in total deferred revenue, a 29% increase from $105 million at year-end and a 59% increase from the $86 million at September 30, 2017.

As a reminder, our deferred revenue primarily consists of recurrent revenue derived from the maintenance and support contracts.

Turning to our guidance.

As a reminder, our guidance does not consider any potential impact to financials, other income and expenses 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 2018, we expect total revenue of $94.8 million to $96.3 million or 19% year-over-year growth at the midpoint.

We expect non-GAAP operating income to range between $27.3 million to $28.5 million or a non-GAAP margin of 29% at the midpoint.

We expect non-GAAP net income per diluted share of between $0.58 to $0.60.

Our guidance assumes $37.9 million weighted average diluted shares and a tax rate of 21% for the fourth quarter.

Given the strength of our execution and the strong demand in our business during the first 9 months of the year, we are pleased to raise our full year guidance.

We expect total revenue to be in the range of $328.9 million to $330.4 million or a growth of approximately 26% at the midpoint.

We are also increasing our guidance for non-GAAP operating income to be in the range of $78 million to $79.2 million or an operating margin of 24% at the midpoint.

We are also increasing our guidance for non-GAAP net income per diluted share of $1.75 to $1.77.

This assumes 37.2 million weighted average diluted shares.

Our guidance for the full year assumes an effective tax rate of approximately 21% for the 2018.

We are also increasing our outlook for cash flow from operations -- from operation margins to be between 8% and 13% higher than our non-GAAP net income margin for the full year.

This compares to the prior guidance range of net income margin to 10 percentage points higher than our net income margin.

As a reminder, the cash flow margin can vary from quarter-to-quarter based on seasonality of the business, tax obligations, cash collection and duration of maintenance contract renewals.

Our execution year-to-date positions us well for the fourth quarter of 2018.

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

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

Josh, maybe for you.

You talked about sort of the strength in multiple verticals.

I think, you talked about some verticals that grew 50% year-over-year.

Can you talk a little bit about the federal government contribution this quarter?

I know that last quarter we had some deals closed.

I'm wondering if that strength is going to continue here in Q3?

Hey, Saket, this is Udi.

I'll jump in first.

I would say that Q3 was healthy in the federal government.

Q2 was the record quarter, and we talked about some of the unique programs that we saw throughout the year.

But we saw continued growth in the vertical.

Year-to-date, it's up 25%, and we had about 40 transaction of both new and add-on business within Q3 itself.

There has been a lot of seating that I'm excited about that happened throughout the year with opportunity for add-on business.

And I think, as we mentioned, the global government space is now continuing to be in our top 3 largest and has grown very nicely throughout the year.

Got it.

That's really helpful.

Udi, maybe for my follow-up for you, more of a product question.

Last quarter you talked about introducing the privilege cloud to really future-proof CyberArk's leadership.

I think some of the deal examples that you talked about in your prepared remarks also talked about hybrid deployments and such.

Realizing it's early, can you just remind us how the privilege cloud is different than your traditional EPV?

And what some of the early feedback has been on privilege cloud?

Sure, absolutely.

So the examples we gave in our prepared remarks are absolutely existing -- are existing solutions that currently extends into cloud deployments, either securing cloud assets or being deployed in the cloud in some of the examples that I mentioned.

And those are customers that are taking existing CyberArk products and deploying them in the cloud or to secure cloud assets.

The privilege cloud is really brand new, the CyberArk Privilege Cloud, and very early, but we're making early progress with early customers and pipes.

The main difference there is that the customer will not deal with installation of the infrastructure itself of CyberArk.

They will -- they are able to consume it as-a-service.

And obviously, it's more oriented towards smaller organizations.

But it -- like you said, it's future proofing us to the world where more and more customers will trust the cloud as the place that they want to put the keys to the IT kingdom.

And so we see it as a very important long-term opportunity for us.

Our next question comes from Melissa Franchi of Morgan Stanley.

I think I'll start with maybe an update on the simplified pricing model and new bundles.

I know you've said in previous quarters that you've seen an easing of sale cycles with the new simplified pricing, but you weren't yet receiving the full benefit from that.

So can you just maybe give us an update of the benefits that you saw in Q3?

If you've seen any changes?

And then also if you're seeing any impact to ASPs from the new bundles?

Josh, you want to?

Yes.

hi, Melissa.

So with regard to the new pricing, we obviously are seeing with our new business deals a real shift up.

We're already up over 90% of our new business deals in the third quarter.

We're buying off of the new price list with the simplified pricing.

And if we kind of look at total all the add-on and the new combined, we are close to 70% in the third quarter using the new pricing model.

So we really got great traction.

I think customers are getting it and we're using it.

I think in terms of impact on ASP, we're not seeing a big change or -- impact on ASP at this point yet.

What we are seeing like, you called out early on, is that a nice qualitative improvement on the sales cycle since where it's accelerating new customers' acquisition and we think it's tied in as well to the success that we've had with new customers.

And it also in a quicker way and easier way brings us to conversations around our other products in addition to Core PAS.

So overall, we like the decision we made there, and we're well on our way for being fully adopted.

Okay, great.

And then just one follow-up for you, Josh, on margins.

And margins came in well ahead of expectations in Q3.

Is that simply because revenue came in ahead and that fell through to operating margins?

Or was there anything to think about in terms of the timing of investments or maybe the investment plan coming in a little bit lower than what you're expecting and the reason for that?

Yes.

So first of all, the revenue did flow through to the bottom line, which we really like to try to make happen.

Also we had a benefit that we also saw in Q2.

We had a nice benefit on the gross margin with our strong 88% gross margin contributing at least an another percent down to the bottom line, with efficiencies that we're getting in our globalized services group that we started at the beginning of this year.

I think on terms of spending, we're pretty much on track.

There were some -- I would say, actually -- we actually worked hard and we had a lot of marketing programs in Q3, and we looked at a lot of them and actually negotiated well, and we were in line or under on those program spending that we did through basically just good purchasing discipline.

Our next question comes from Gabriela Borges of Goldman Sachs.

This is a medium-term outlook question, either for Udi or for Josh.

When looking at some of the volatility that you've seen in license revenue over the last 6, 7 quarters in part due to the European execution initiative that you called out over a year ago now, my question is, how should we think about a normalized run rate or normalized growth rate for license revenue over the medium term given all of your positive comments on growth acceleration?

Thanks, Gabriela.

I'll start here.

I think that we -- first of all, we're talking about obviously 2019 and beyond in terms of license growth.

We are an enterprise software in house and Q4 is an important quarter for us to really know and be an indicator for going into next year, let alone, the next several years.

But I think the way we look at it, and I think Udi might be able to add to this is, we look at where the market is going, where the industry analysts are talking about, where Core PAS is and what is the opportunity.

And we definitely see ourselves as a leader in the competitive space and to be able to take our piece of that.

So I think that we still, as we talked about earlier in the year, see ourselves with an opportunity in the early stages of the game to be a high grower, which requires growing in license as well as our support contracts, and we are going to also invest to try to keep that momentum going.

Right, good.

The follow-up is on the earlier comment on your cloud products that one of the big differences between on-prem versus as-a-service is the customer wouldn't have to deal with the installation of any of the backend infrastructure themselves.

I'm wondering if that maybe gives you an opportunity on the pricing front?

In other words, can you expand your share of wallet at the customer, while also allowing the customer to realize better TCO on the pro services side or on the installation side?

Does that maybe give you an opportunity to expand your TAM or expand your pricing with your as-a-service offering?

Thanks, Gabriela.

Udi, I'll take it.

I think the biggest opportunity and, again, like I said, it's the long-term one.

It's the ability to reach out further down market with the customers who do not want to deal with the installation and really consume this as a service.

The biggest benefit and back to pricing right now is the adjustment we've done, and we're very pleased with how it's kicking in for the enterprise customers and, of course, those on the midmarket that buy off of it where we're making it very easy for them to quantify their use in a bigger and accelerated lend for CyberArk.

That's how we see it today.

But obviously, the lower the installation phase, the lower the installation cost, the easier it is for us to expand our reach.

Our next question comes from Shaul Eyal of Oppenheimer.

Udi, if I look at the 200 new logs you discussed and disclosed -- the number you disclosed this quarter, you've indicated also to any new retail customer that makes it 10% out of the total for this quarter.

Is it fair to assume the majority are mostly high-end and mid-end enterprise customers.

And probably, how many products on average have each of the new 200 logos acquired?

Is it the typical Core PAS product or there is already an EPM and Conjur, potential IAM bundled into those -- some of those new contracts?

Thanks, Shaul.

I would say that the majority are enterprise customers in -- I would say, in our focused markets, but we do see a pickup in the higher-end side of the mid-market as part of it.

But the majority are enterprise.

And as we alluded, we for the first time put out our footprint in the Fortune 500, and we're happy to say that we're now fitting 50% of the Fortune 500.

With regards to the product mix, now that we've really unified the Enterprise Password Vault and PSM and the products into Core PAS, I'd say most of these customers would land with Core PAS and it also is aligned with how we recommend to go about in really securing their major and burning risks around retaining control over the network and cloud, but -- and several of these did include AIM, Conjur and EPM.

It's still really depending on the level of the customer.

It's still -- those are still products that make it into seating, and if not in the seating, they're part of our add-on sales motion.

Got it.

And maybe one for Josh.

Given strong results this quarter, linearity anything out of the ordinary, maybe there was some business that actually you guys have decided to push into the fourth quarter?

Or if it was pretty much steady as she goes?

I would say we had a good linearity in Q3 and it actually has tracked well from the Q2 as well in terms of linearity.

And so we're -- and I think you also see it reflected in our cash flow as well and the lower DSO that we were able to achieve.

Our next question comes from Sterling Auty of JPMorgan

Wonder if you could just go into a little bit more detail around the EMEA region.

You've seen nice consistency out of the geography for several quarters now.

Wondering if you can maybe highlight, whether it's marketing programs or other items that's been driving the consistency?

And what we should expect from here?

Thanks, Sterling.

I really think I -- it's one of the items I'm very pleased on.

The strategic moves we made and how they contributed to the overachieve.

And part of it is optimizing and globalizing the sales force.

And our theory that was, let's take the successful sales motion that we did in the Americas and expand it to EMEA, while pushing consistency in that, and that's really what's been happening.

The one truth page out there is more and more information security officers in Europe, and I personally have the opportunity to talk to them, are trying to combine the heavy regulatory requirements that they have with addressing risk, becoming really much more oriented towards, "Okay if I have to comply, I'll also raise the value I'm going to deliver to the organization by really solving true risk assets." And privileged access has been really -- been elevating in the top priority, as we have discussed in the Americas market.

So the combination of being consistent, being very focused on reducing risk for our customers and training our channel partners to sell-through risk and the growing market awareness, a lot of it driven by our marketing programs over the years, and in the year, have been contributing to that consistency.

Our next question comes from Fatima Boolani of UBS.

Udi, maybe to start with you.

In your prepared remarks, it sounded more like you were having maybe more outsized success on the expansionary side, and to that extent, I'm actually wondering what sort of multiplier you're seeing on lifetime customer spend?

And to what extent are your sales cycles actually shifting and, frankly, benefiting from the bundled approach?

And then a follow-up, if I may.

Fatima, I would say that one big header in this quarter is diversification.

But it was -- so geographic diversification, vertical diversification that we talk about.

But also in the mix of new and add-on, it was about 40% new, 60% add-on business.

So definitely a healthy contribution from new and from add-on.

In that add-on business, I agree with you, it's customers that are becoming more strategic with CyberArk.

We're excited also to see that we are part of their cloud journey.

It's securing the -- a very increasing footprint in the cloud.

And again, whether it's for human users or for the application users, like Conjur and AIM.

And I'll say we're pleased with the focus we've been giving with our customer success team on generating more lifetime opportunity from these major accounts.

And of course, there is a lot more to be done on this journey.

Got it.

And Udi, you also mentioned sort of a marquee win, excuse me, with a MSSP customer.

Can you kind of walk us through the broader MSSP opportunity, and how we should think about the potential for maybe cannibalization on the lower end of the customers as you increasingly partner with MSSPs and typical systems integrators and service providers?

I would say, true to our strategy also in partnering, we really go for quality versus quantity.

And so the MSSPs have been cherry-picked, and they have to qualify to be able to really deliver true service to our customer.

So we really don't see a risk of over-cannibalizing with too many MSSPs out there.

It's still an early CyberArk offering with the first MSSPs out there.

And for us, strategically, it's our way to reach further into mid-market and allowing us to focus on the enterprise opportunity, so I think there is going to be a healthy equilibrium of whether it's a partner making it easy for their existing customers to sign off to CyberArk by joining the MSSP offering or really extending our reach by going further mid-market than we would on our own organically.

And again doing that with qualified partners really ensures that we keep a healthy equilibrium.

Our next question comes from Andrew Nowinski with Piper Jaffray.

Just want to ask about the competitive environment.

It's been getting a little noisier.

There's been a number of acquisitions in the space.

Can you just give us an update on the landscape and whether those acquisitions may have opened up some more opportunities for CyberArk?

Yes, absolutely, and thanks for the congrats.

I would say, if we look over the last 12 months, CyberArk really strengthened its leadership position.

And again we see the execution and results, and a lot of it is the proactive measures that we've taken in our strategy, Version10, our simplification, our pricing and strategic M&As that we have done to really break us away from other vendors.

But definitely the changes in the competitive landscape with the M&As in the last few months add, I would say, to turmoil within our competitive landscape.

We've had -- we've seen Francisco Partners as a private equity firm pick up 4 distinct vendors in the market BeyondTrust, Bomgar, Leiberman, Avecto, and expect disruption there.

We've seen CA get acquired by Broadcom.

And so -- yes, we do expect to see further opportunity from that disruption.

And true to us, we -- we're going after the leadership regardless of that and we'll further capitalize on that opportunity.

That's great, thank you.

And then I just want to ask about the -- some of your partnerships with OKTA and SailPoint.

I'm wondering have you seen any new customer wins as a result of those partnerships yet?

Absolutely.

I think we gave one example in the prepared remarks.

But we've been doing joint events referring each other.

It's been a very healthy partnership out in the field that is adding, I would say, to each of the company's pipelines.

Our next question comes from Gur Talpaz of Stifel.

Udi, I want to ask about the release of path 10 -- suite path 10.2 back in March.

So how important has this been in driving some of the strengths that you noted on the call?

But more specifically, not just for the broader platform, for products like Conjur, where you noted a bunch of pretty interesting wins?

Absolutely.

So I think one of the unique things that go with 10.2 and beyond is that customers can integrate their Conjur environment into their on-premise environment and have a unified way to manage credentials if they choose to do that for their on-premise environment and also for their cloud and native cloud architecture based applications.

We're now out there with 10.5.

We've been continuously -- from Version 10 and beyond, it's all been about simplification, automation, making it easier for our customers to install; making it is easier for our customers to deploy, manage, introduce more and more automation.

So we really think it's become a big differentiator.

It's become a big piece, as Josh mentioned, of the acceleration in the new logos.

And we've been really working closely with customers to make sure that every additional dot release is continuing that thread of simplification and automation, and we're excited about it.

Okay.

That's really helpful.

Within the public cloud, specifically, where do you think we are in terms of the customer lifecycle process?

Meaning, do you think we're still pretty firmly in the evangelical phase or are we starting to kind of push past that?

I would say we're really a true, I would say, compass for that, because we touch so many different verticals in -- all over the world.

And I would say there's no customer that's not dabbling one way or another with cloud and in one -- and anywhere on the scale of just being very early and trying to see what they can do, because they are highly regulated, to those like the retail example I gave that just see it as a big differentiator a way to lower cost and move workloads into the cloud.

So I think it's -- the journey is very much advanced.

It really differs between different companies.

But in all of them, we are able to latch in at whatever phase they are in, and say, okay, first of all, let's make sure you have control of your network and that you have control over your cloud and join that transformation journey.

Our next question comes from Jonathan Ho of William Blair.

I just wanted to maybe start with the resellers and channel leverage.

I just want to understand a little bit better, what type of opportunity you see there just given the pickup in terms of the third-party generation of leads?

And then maybe what the SIs and influencers are doing on your behalf as well that's maybe a little bit more than what they did in the past?

Absolutely.

I think, Jonathan, just like in the early years, we had to really evangelize why privileged access is such a critical security layer.

And over the past year, just like it came up to the top with customers, we're really seeing it come to the top with our channel partners and to the top in terms of what they're seeing from their -- hearing back from their customers, but also in what they're seeing as an opportunity for their own revenue generation.

And we team up with them and we create business plans really depending on the strength of the VAR.

Is it a company that is going after the services opportunity?

Is it a company with a strong reach in new markets for us?

Is it an advisory firm where they really influence the Fortune 500 vendor selection and have built practices around that?

So I would say, it's more and more elevating.

We are measuring internally the -- those that not just generate leads, but also are influencing, like the advisory firms, and it's really in the right trajectory.

For specifically on system integrators, we've seen system integrators include the CyberArk offering in their responses when -- in RFP responses and others when they're going after even larger transformation projects, like new data centers and digital transformation.

We've also seen them go after the services opportunity with CyberArk.

Some of them are also on -- are adopting our MSSP offering.

Got it.

Thank you for the color.

I also noticed that you talked about IoT opportunities, particularly on the security camera market.

I think this is one of the first times that you've talked about privilege within this context.

Can you maybe talk about this in terms of the growth opportunity, is this a large portion of your business today in terms of being able to target that or on the pipeline side?

And maybe give us a color around the opportunity set that you see here?

Yes.

It's a great one.

We gave an example of Fortune 100 company, where that was the landing point, was their concern about their IoT devices, and in this case cameras and the ability to control and rotate credential on these devices so that they won't be the landing spot for attacks.

We view that as a very early opportunity for us.

And I would say, it's very nascent, and it's out there.

The more enterprises themselves have that IoT sprawl the more we can go after it.

One of our partnerships is with ForeScout, who are -- who have the capability to detect and discover these devices, and CyberArk can be the company to rotate credentials and secure administrative access to these devices.

So it's early, but it's out there.

Our next question comes from Howard Smith of First Analysis.

My first question has to do going back to kind of Fatima's question on new versus add-on.

With the larger install base and all the opportunity there, do you see a kind of medium-term trend toward more of your business each quarter coming from the installed base versus new or not?

Hi, Howard, it's Josh.

We actually have been pretty consistent over the last, I think, year almost, or 2 years, with being about a 60-40 mix.

60% of our license revenue coming from existing customers and 40% coming from new customers.

We do see a little bit of shifting in there from quarter-to-quarter, but it's been pretty consistent and we saw that into Q3.

And if we looked at the first 9 months of the year, it's also hovering around close to the 60-40 mix.

So as you've pointed out yourself, we actually have a huge market opportunity within our installed base and we view it as a big market opportunity.

I think, at this point, where we also only have 4,000 -- we have 4,200-plus customers, but we only have that much and we see that as a big greenfield opportunity as well.

So I can't really predict exactly what the percentage will be going forward, but it's been pretty consistent over the last year plus at this level and given the greenfield opportunity on the new customers and on the existing installed base, we're really investing in the same tone going forward in both.

Our next question comes from Gray Powell of Deutsche Bank.

I just wanted to circle back on the license growth.

I mean, if I look year-to-date, growth is coming in at about 27% in license.

That's well above even the best quarters that you had last year, and it's closer to the 2016 trend line.

So I was wondering if you could just kind of high level talk about the top drivers of the improvement?

And is it more -- would you say it's more of the execution and things that you're doing on your side like the new bundles or is it more just an improvement in the overall market?

Absolutely.

I would say that it's executing and really seeing the fruits of strategic moves we've made, coupled up with increased demand.

The globalizing of the sales and optimizing of the sales and support organization.

Everything I mentioned about Version10, the simplified pricing, the strategic M&As we've done particularly EPM, Conjur, Vaultive that gave us a -- strengthened our cloud play, both on the human side and applications, coupled with the market fundamentals, with privilege really moving up in priority, even in third-party recommendations like I mentioned last time in some of the government conferences and others.

Digital transformation initiatives really rising up and compliance, I would say rising, but being addressed more in a risk-oriented fashion.

So we're executing against that and the past investments have allowed us to really overachieve here.

Our next question comes from Catharine Trebnick of Dougherty.

Can you discuss -- you've had such great grades, following on Gray's (sic) [Gray's] question here, what are you doing in terms of training?

It seems like that even though you simplified the product and the pricing, it still is pretty complicated.

And what steps are you doing to implement training of your resellers and the people at the advisory firms, et cetera, that are helping you drive this growth?

As I said, I think training is an ongoing initiative.

We set a goal to really increase the ecosystem of CyberArk-certified engineers out there.

We put up some numbers in previous quarters where we've significantly increased the footprint out there.

We see there's a good sign that our training courses in -- when we do our customer events are always completely booked and oversold.

There is strong demand for CyberArk talent out there, and we're continuing to invest in going after it, also in train the trainer programs so that we can further bring our training programs to market.

And we are hearing consistent feedback from customers and partners that everything we've done on 10, from a product perspective and everything we've done on pricing simplification is really helping them.

Our next question comes from Erik Suppiger of JMP.

Your channel, I think, you said contributed to or influenced 67% of your deals.

I think that's up from where it's been historically.

Can you give us a sense, do you think that that will continue to elevate from that level?

And then secondly, did you much influence or much effect from GDPR here in the September quarter, since that's the first quarter -- full quarter that that's been in effect?

So I'll start with the last one and we'll come back to the channel.

I think we see anecdotal connections to GDPR where customers have cited that it has been a driver.

But I think the bigger overarching driver for our business has continued to be the risk-oriented approach.

And compliance is -- I would say, compliance is being consumed in a smarter way.

There are -- beyond GDPR, there is GDPR, niche, PCI, SOX there are continued strong compliance drivers, and more customers are addressing them with things that will really move the needle on reducing risk.

But in EMEA, they definitely bring it up, but it's more anecdotal.

I also want to note that we're hearing U.S. organizations and North America organizations looking at GDPR as something that they have to look at.

But again, in our conversations, they then combine it with less reduced risk.

We think that GDPR will be more of a steady drumbeat for business over a long period of time.

Erik, and if we kind of return back to the channel question.

Yes, it was up in Q3.

It was in the mid to just above the mid-60s.

And clearly, that's a level that's also driven by the advisory firms that are contributing healthy as well to this space.

And I think, though that overall our strategy is pretty much the same.

If we think about the year to date, it's still around the 60-40 level, which is similar levels that we saw in 2017.

So I'm not going to jump the gun yet and say that we have a new level of channels because we do get some lumpiness depending if certain deals may go through a channel.

But overall, we're happy with the way the channels executed with us and for us in the third quarter.

And we're keeping -- we're sticking with it and investing heavily in this area.

Next question comes from Kenneth Talanian of Evercore ISI.

Could you give us a sense for how your large deals tracked in the quarter and how they're tracking in the pipeline?

Yes.

We increased in large deals across the board.

If you look at our over-$100,000 deals, they increased dramatically, I think, faster than the rate of the business growth.

And if you look at also, if you go up into the next levels, above $0.5 million also increasing very nicely.

I think -- every quarter we have several 7-figure deals and over -- and larger deals.

And overall, we're pleased where the large deals are because it's not just happening in one area too, it's really happening -- the growth in our over-$100,000 deals are happening across each of the regions, also in Americas, also in EMEA and also in APJ.

So that's really sending a strong statement about the footprint that our customers want to take with us.

And if we think about the pipeline.

Absolutely, in order for us to keep growing the business and we look at the health of our pipeline, we see a continued traction in developing large deals in our pipeline as well.

It's going to be -- it's part of the cornerstone of our growth.

The good news is that we continue to really have a diversified group of deal sizes.

And overall we're -- our average deal size has been pretty stable, both on add-on and new customers.

So we think we're in a good place there.

Great.

And, I guess, it's not exclusive -- specific to large deals, but could you give us a sense which verticals are you seeing the greatest increase in interest or if you want to describe that as pipeline?

I think -- well, if we talk about -- if you talk about the third quarter, the largest vertical growths were insurance, manufacturing, retail.

We had three verticals, which are still -- which were over 10% of our pie, banking as it usually is, global government, also manufacturing in the third quarter.

And if we look at our large deal split, we're going to see it in every vertical.

There isn't -- I don't think there is one of our key verticals, one of our top 7 or 8 verticals that we're not doing large deals in on a regular basis.

Our next question comes from Daniel Ives of Wedbush.

How penetrated do you think your installed base is today, I mean just given the success you are seeing, if you had to estimate?

How penetrated is our installed base?

Yes.

On your solution set?

I think if we look across all of our customer base we're -- we kind of -- we view it as still under 1/3 in a deployment rate.

And that's -- we were talking about it earlier -- on one of the earlier questions.

We are seeing consistently 60% of licensed revenue coming from our existing customers.

We also are still very much on track and seeing a 1/3 of our customers coming back each year, and that grows obviously as we keep acquiring new customers.

That 1/3 -- that number goes up each year and we see them coming back and buying either more of the same licenses or crossing over to new licenses.

We're -- we still feel though that we're under the 1/3 mark.

Our next question comes from Gregg Moskowitz of Cowen and Co.

Udi, I just had a follow-up on your success in retail.

When you look at the deals that closed this quarter combined with the pipeline, would you say that you're now seeing an inflection in retail or is this something that was also significantly ramping in the first half of the year?

I think the biggest jump is in comparison to last year.

And I think the unique element is that they're embracing cloud and digital transformation.

I think the inflection point is more of these retailers, obviously, for all the reasons we understand, understand that, that's their way to really jump on the wagon with increased competition and also to differentiate.

But they are also a prime target of attackers as we know.

And so the biggest change has been our ability to latch on -- our ability to latch on their digital transformation initiatives, and I would say it started throughout the year.

At this time, I would like to turn the call back to Udi Mokady for closing remarks.

Thank you.

In closing, I would like to thank our customers, partners and our employees worldwide for contributing to our record third quarter results.

Thank you, everybody.

And good night.

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

You may disconnect.

Have a wonderful day.