Erica Smith - Investor Relations Udi Mokady - Founder, President and CEO Josh Siegel - CFO.

Saket Kalia - Barclays Gabriela Borges - Goldman Sachs Jonathan Ho - William Blair Andrew Nowinski - Piper Jaffray Tal Liani - Bank of America Shaul Eyal - Oppenheimer Erik Suppiger - JMP Gray Powell - Wells Fargo Catharine Trebnick - Dougherty Fred Grieb - Nomura Ken Talanian - Evercore Michael Kim - Imperial Capital.

Good day ladies and gentlemen, and welcome to the Q2 2016 CyberArk Software Ltd. Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I'd now like to introduce your host for today's conference Ms.

Erika Smith, Vice President of Investor Relations. Ma'am, please go ahead..

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

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information.

I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the third quarter and full-year 2016. Our actual results might differ materially from those projected in these forward-looking statements.

I direct your attention to the risk factors contained in the company's Annual Report on Form 20-F filed with the SEC and those referenced in the press release today. CyberArk expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our earnings press release, which can be found at www.cyberark.com in the Investor Relations section.

Also, please note that a webcast of today's call will be available on our Web site in the Investor Relations section. Now, I'd like to turn the call over to our Chairman and Chief Executive Officer, Udi Mokady.

Udi?.

Thanks Erica and thank you everyone for joining the call to discuss our second quarter results. Q2 was another strong quarter for CyberArk and we again exceeded our guidance. Total revenue increased 39% to $50.4 million. We generated non-GAAP operating income of $13.6 million and our net income was $10.5 million.

Many of the high level market trends we talked about before continued through Q2. Cyber security remains a top priority for all organizations. We are seeing more thoughtful, strategic security program to deal with advanced attacks.

Organizations are prioritizing, proven, manageable and measurable solutions that secure the most critical and most vulnerable asset first. These buying trends are playing to our strength and long-term approach we have always been taking to building our business.

Coupled with a broad awareness that privileged accounts are at the center of every major cyber attack, we are seeing strong revenue growth and the rapidly growing pipeline. There are number of execution highlights from Q2 that I want to share, starting with a strong performance in landing new business and expanding existing customer requirements.

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

During the second quarter, the diversification of our business was incredible, we won deals with manufacturing company, truck and motor retailer, large etailers, supermarket chains, security vendors, defense department, hedge funds and service companies just to name a few.

We also continued to build in our success with hospitals, who struggle daily with the threat of cyber attacks including being held hostage by ransomware. During the first half of the year, we increased the size of our cyber lab team.

This team allows us to keep pace with the ever changing threat to help fuel our product development efforts and to help our customers better understand threats related to privileged accounts and credentials. CyberArk lab's recently released their ransomware research finding, which said that more than 23,000 real-world ransomware samples.

Their findings indicate that ransomware has many variance and that an effective mitigation strategy requires the power of least privilege and application profile. Our labs found that CyberArk Viewfinity was nearly 100% successful in preventing ransomware from gaining the permissions necessary to successfully encrypt a file.

In addition, the research identified Viewfinity's great listing capability as an effective way to deal with new previously unknown variance of ransomware. The strength of our solution is being recognized by customers and prospects alike. In fact, Viewfinity was included in nearly 20% of all new business deals in the second quarter.

We were pleased to see Viewfinity also sold as a standalone product in many new engagements. As an example, we won a six-figure Viewfinity deal with a biotech company in Q2 to secure 7000 end points.

This was a strong win on its own, but it also provides opportunity for CyberArk to expand the value of the customer engagement to include core products such as Enterprise Password Vault and Privileged Session Manager.

Securing privileged accounts in public cloud, private cloud and SaaS environments has been a hot-topic of discussion for several quarters. We are starting to see the talks turn into action.

Our customer's ability to use the same CyberArk product to protect privileged account in the cloud and on-premise simplifies security and management of privileged accounts throughout the licensing environment.

CyberArk secures assets running in the cloud, but also integrates privileged account security into Web Apps process facilitating cloud migration and enabling organizations to get the full benefit of the agility and the necessity of cloud.

Two examples where we are helping customers with their cloud infrastructure include; a large media company in EMEA, which signed an add-on deal for Enterprise Password Vault, Privileged Session Manager and Privileged Threat Analytics.

Using our platform, this organization will be securing its infrastructure including Windows and Unix systems, databases and various start applications like sales force. A Fortune 100 financial services firm is entrusting CyberArk with their mission critical applications like online payment, transaction history and money transfer.

This global organization which is an existing customer signed a large seven-figure deal in the second quarter. They will leverage application at any manager to secure credentials for all of their internal systems including cloud applications and their [Web App] [ph] environment.

We are proud to be chosen as their trusted vendor in support of these critical disciplines. Application Identity Manager is a key differentiator for CyberArk, we believe it is the only enterprise ready solution that protects critical business applications by securing and rotating application credentials in real-time without late.

During the second quarter, Application Identity Manager was sold in five of the top 10 large deals, including three new business engagements. As organizations take a more strategic and broader approach to privileged account security and as they migrate to the cloud, the emphasis of protecting applications with CyberArk increases.

We are also seeing this across the ecosystem with security vendors joining the thick of the line because they recognize tremendous benefit of securing privileged accounts inherent in their applications. The Americas was again our fastest growing region where we see privileged account security at or near the top of every decision-makers priority.

Our investments in the Americas are delivering its own contributions including increasing our channel sales and driving strong growth for newer regions like Canada. As we mentioned previously, EMEA lacks the U.S. in awareness of the critical role privilege escalation plays with cyber attack.

So, more of our time and investment is in educating prospect about the importance of prioritizing privileged account security. In select larger deals in EMEA, we have seen this education process create more scrutiny of deals and in some cases extend sales timing.

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

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

In recent quarters there has been a material increase in the level of engagement and contribution from our partner company including advisory firm, value-added retailers and technology partner.

The eco-system recognizes the enormity of the privileged account problem and they know that securing these accounts is a key priority for Chief Information Security Officers. In the second quarter, we saw an advisory firm play a key role in two seven-figure deals for new business.

The partner who acts as a CyberArk champion in those deals recommended that the company take a proactive approach to the security and deploy CyberArk enterprise wide to ensure the best protection in advance threats.

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

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

After a highly competitive and thorough evaluation process, this industry leader feels to displace the three other vendors and install CyberArk Enterprise Password Vault and Privileged Session Manager as a first step to secure its privileged account security enterprise wide.

We are thrilled to be working with this company and about the significant opportunity we have to expand the relationship with this important customer over time. We are excited that HP Enterprise is leveraging the power of our technology as the backbone for its new end service offering that was introduced a few weeks ago.

This partnership will help organizations address the lack of skilled cyber security resources and helps CyberArk extend our reach into HP's significant enterprise customer base. In addition to sales execution, the product development team continues to expand our technology leadership.

In June, we introduced Privileged Account Security Version 9.7, a few highlights of this feature packed version include the ability to prioritize and simplify the enrollment process of unsecured privileged accounts discovered by Privileged Threat Analytics.

New integration options for the CyberArk platform based on the rest of API support cloud organization and [Web App] [ph] tools and a new native transparent user experience for Windows administrators using Privileged Session Manager.

And finally, we held our Annual CyberArk Impact events for customers and partners in EMEA and in the Americas last month hosting more than 700 SMBs at the two events.

The message was clear from customers and partners, they understand that securing privileged account is a top priority and they are increasing their investment in privileged program to protect their organization from destructive cyber attacks.

Coming out of the conferences, I am confident that we are just scratching the surface of this tremendous opportunity and that we have a long run rate to grow our business for years to come. I am pleased that we delivered another strong quarter.

CyberArk continues to execute on our go-to market plans and product delivery, demand for our solution remains strong and we believe we are making investments that balance the significant opportunity in this greenfield market with building a profitable organization.

We believe our formula will continue to deliver long-term value to shareholders, customers, partners and employees. I will now just turn the call over to Josh.

Josh?.

Thanks Udi. We are pleased to again exceed our guidance for revenue operating income and EPS. During the quarter total revenue increased 39% to $50.4 million driven by healthy demand for privileged account security as well as the execution of our land and expand strategy.

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

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

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

We also continue to see broad based demand across vertical market. Our fastest growing verticals were IT services and software companies, retail, insurance and manufacturing. As I move through the P&L all financials except revenues are presented on a non-GAAP adjusted basis.

Please see the press release for a reconciliation of our non-GAAP to GAAP result. Our second quarter gross profit was $44.1 million or an 88% gross margin; this was consistent with the first quarter of 2016 and compares to 84% gross margin in the same period last year.

The year-over-year increase in our margin was primarily due to higher margins on the Viewfinity product versus Q2 last year when we were reselling a third party product at a significantly lower margin, also leverage in our professional services revenue in the current quarter.

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

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

Sales and marketing expense increased 32% year-over-year to $20.2 million as we expanded our global reach and enhanced our marketing presence across all geography as well as for direct and channel sales. G&A increased 37% year-on-year to $3.7 million as we continue to invest the scale of the business.

In total, operating expenses for the second quarter of 2016 increased 38% year-on-year to $30.5 million compared with $22.1 million for the second quarter last year. We are pleased to again demonstrate the power of our business model with operating income of $13.6 million or a 27% operating margin which was ahead of our guidance.

This compares to operating income of $8.2 million or 23% operating margin in the year ago period. The strength of our operating income was driven by revenue out performance as well as our better than anticipated gross margin and still keeping with our ongoing expense discipline.

Net income was $10.5 million or $0.29 per diluted share for the second quarter up from $6.5 million or $0.19 per diluted share for the second quarter last year. Our effective tax rate in the second quarter was 22% within our expected range.

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

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

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

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

Our Q3 guidance of operating income reflects important investments in the business including our EMEA and America customer conferences which were held in July and attracted more than 700 customers and partners.

The full run rate of expenses for the 42 employees we added in the second quarter and ongoing hiring to drive our revenue growth and enhance our product offering. We are raising our full year 2016 guidance revenue to a range of $210.5 million to $212.5 million or a growth of approximately 32% at the midpoint.

This includes the decline in pound sterling at the end of the second quarter which impacted our full year revenue guidance by about $1 million. We are raising non-GAAP operating income to be in the range of $48.4 million to $50 million and our non-GAAP net income for diluted share of $1.03 to $1.07.

This assumes 35.9 million weighted average diluted shares.

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

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

[Operator Instructions] Our first question comes from Saket Kalia from Barclays. Your line is now open..

Hi, guys. Thanks for taking my questions here..

Hey, Saket..

Hey Udi, hey Josh.

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

So I think we're continuing to see that this is a red hot market and we are pleased to see that I think it's definitely the rising tide in those comments to the contrary we continue to see our continued leadership and strong win rates for CyberArk as before.

The one change I can talk about is CA and Dell as the top two competitors and Dell we see less and less and deals are probably due to the merger and assets being sold as part of that..

That's really helpful. And then, for my follow up for Josh.

Josh, it seems like EPS is going up by a little bit more than the deep this quarter, so can you just maybe speak to any change in spending plans or is this maybe just a tweak, either you have a better idea of expense planning halfway through the year?.

Yes. Absolutely thanks, Saket. Actually it's really the latter, as we get into the second half of the year we probably see a lot more visibility to our expense run rate in our hiring expectations for Q3 and Q4 as we talked about in our prepared remarks.

We are continuing to invest for Q3 and Q4 and also to invest in Q3, Q4 to start the 2017 on the right foot. But we have a much better hand of what those levels will be now and so we are not changing our spending plan we're actually right on target..

Got it. Very helpful. Thanks guys..

Thank you..

Our next question comes from Gabriela Borges from Goldman Sachs. Your line is now open..

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

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

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

Yes. So, first of all, in terms of billings, we don't really think in terms of billings as a perpetual license company.

We really only have our maintenance renewal as a firm recurring revenue stream as supposed to kind of the classic SaaS company, which has most of this business in billing format perpetual licenses we invoice and we recognize in most cases immediately.

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

But in terms of maintenance renewals what you would see is typically a bigger increase into Q4 and Q1, for maintenance renewal which is the closest thing we have to kind of a SaaS booking perception because H1 is typically a larger license, H2 is typically a larger license half as well, and then, therefore, we would see larger maintenance renewals coming in Q3, Q4..

That's helpful. Thank you..

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

Understood. Thank you..

Our next question comes from Karl Keirstead from Deutsche Bank. Your line is now open..

Hey, guys. This is Tyson behalf of Karl. Thank you for taking my question. Two questions one clarification for Josh.

Josh was there any fully or deliberate result before revenue into the license plan, I know that you have some quarter/where you pull forward the deferred revenue into the income statement or some quarter for you defer the deferred into the balance sheet.

Was there any sort of that in this quarter?.

It was relatively flat, there was a couple of percent if we look at -- end of Q1 we were roughly 8% of license to total deferred and at the end of Q2, we were closer to 6%..

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

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

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

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

Got it. Thank you..

Our next question comes from Jonathan Ho from William Blair. Your line is now open..

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

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

And in EMEA, we're finding that there is more education required in the sales cycle. It's part of the market dynamic. And yes, I think this is the reality and the way we balance it out is we're really investing in all regions based on where they're at. So in the U.S.

stepping on and still there is that get us further into -- deeper into the regions and in EMEA and APJ there is more education involved but they're really enriching our pipeline, they're really making us diverse in our opportunity..

Got it.

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

Yes. I'll start with the qualitative side and then Josh will explain why we can't give quantitative side.

But on the qualitative, I think what's especially exciting about Viewfinity is, as we looked at the opportunity as an add-on business, but it's also really a net new landing of new opportunities that are pure Viewfinity opportunities because we're capturing, we're playing in privileged accounts security for the end point and very often those were additional budgets and within the customer base.

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

And from a quantitative perspective, it's still small as we -- as our total revenue numbers growing so aggressively, so this piece is still small in terms of a percentage piece. But for your question, do we see it as it can be a major product? Yes, we do.

And as we look out the medium and longer term, we see customers in fact; there were several cases where customers only bought Viewfinity product in the second quarter. And we also see it being part of -- if you look at the first half out of several of our largest deals as well.

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

Great. Thank you..

Thank you..

Thank you. Our next question comes from Andrew Nowinski with Piper Jaffray. Your line is now open..

Thanks. Congrats on a nice quarter.

You mentioned a lot of instances of winning -- of wins by securing cloud applications, just wondering if you can give us any color on the percent of revenue drive from cloud based environment? And are you selling Enterprise Password Vault in an as a service form factor is that sold still on in the same on-premise form factor?.

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

And in terms of the percentage, yes I would add on the Viewfinity which we offer both in SaaS -- as a SaaS product and also as a perpetual product.

We actually are seeing really very much -- both SaaS and perpetual if we kind of look at H1, it was very close to half and half customers picking it up from a SaaS -- in a SaaS way and 50% picking it up in perpetual.

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

But as we start with our core products in the perpetual vault and PSM and AIM as we highlighted in this call today, we're definitely seeing that more and more customers are talking, they love the fact that this is a -- made for hybrid environment.

And so we can support their on-premise and their cloud environment with the same solution and the message is really out there now..

Great. Got it. Okay, thanks.

And then, last quarter you talked about how CyberArk was adding or you added DoD approved, or got approval on the DoD approved product list, given the government's fiscal year ended December 31, can you share any color on your pipeline within this side and how much you're factoring the guidance for the September quarter?.

Yes. I would just say that as we mentioned the certifications were part of our long-term approach to continuing our market leadership and being strong in the federal phase we saw. We saw good government business in this quarter as well and we saw government business including Department of Defense around internationally.

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

Okay. Thank you..

Thank you. Our next question will come from Tal Liani from Bank of America. Your line is now open..

Hey, guys. I want to go back to a question someone asked Josh at the beginning.

If I calculate inside billing, inside booking at revenues plus changes in the third, I'm getting the billings only grew 3%, revenues grew 39%, so why isn't this an important factor when I'm trying to predict whether the following quarters are going to be stronger or weak and I think that Josh said he thinks about second and third quarter, you don't mind to repeat that?.

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

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

What we talked about earlier on the call is, if we think about our deferred revenue seasonality, which obviously would impact your billings calculation as you are doing it. Typically, we see our maintenance renewal going to defer seasonally heavier in Q4 and Q1, because it absorbs the H2 seasonality of heavy license booking and heavier business.

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

So when we think, so the deferred -- so when you say about the -- I mean that -- was that clear Tal?.

Yes, yes, absolutely. I have one follow-up question. When we look at the last six months where -- I'm trying to understand the sensitivity of the orders, the revenues, some kind of economic cycle. So when you look at the last six months, we have some percent about the economy in January and February then we had the Brexit.

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

Yes. So I mean what we can tell you is that, if we look sequentially the seasonality was very similar in terms of the order rate between kind of the first two months of the quarter of Q2 and the third month and if we look at Q1 it was very similar. I won't say that if we look at Q2 this year compared to Q2 last year it was more back ended..

And what you attributed to?.

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

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

Got it.

The answer that you gave is, you gave me the revenue number, did you look at units, demand unit wise and not revenue wise, would you answer the same that there was different linearity this year versus last year or was it the same? I'm just trying to isolate the current impact and trying to see the real demand?.

I think its -- I would say from, I mean we're not box movers, so we don't really measure units. But in terms of getting customers, in terms of border accounts and so forth, I would say that it might have been more back ended at this Q2 versus a year ago, but I think, first is Q1, it was very similar..

Got it. Thanks..

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

Thanks Udi..

Thank you..

Our next question comes from Shaul Eyal from Oppenheimer. Your line is now open..

Thank you. Hi, good afternoon guys. Congrats, solid results this quarter.

Udi, are you beginning to have more conversations with customers or there is no big picture discussions from their perspective on the topic of identity as a service, is it something which is becoming slightly more frequent in the conversation?.

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

What we do as we gain more C level access and now more and more CIO access, as we leave ourselves into the cloud conversations and we do ask them about their long-term cloud plans and how they would like to secure credentials and that's for the earlier question most -- vast majority of customers want to secure, they use our solution on-premise although we do make them available to run in AWS or on in Azure.

And so we really give them the full optionality -- they're in-line with their progress. One big thing that we actually announced yesterday is our solution that were more and more also part of the Web Apps environment that we don't just secure our credentials in the assets and the SaaS application.

We're helping them automate and orchestrate the migration to cloud so that all the accounts were already be managed as they do that. So that's why we're really weaving ourselves into that -- what they really care about right now is the migration project..

Got it. This is very helpful. Thanks for that. And then as a follow up if I may and I thought of it in advance because I've missed the initial 16, 20 minutes of the call.

Did you provide any metrics about contract sizes, the deal size just before?.

Hi, Shaul, its Josh. No, we didn't actually provide any in the prepared remarks, but qualitatively we had a very good quarter in terms of over 100K deals and large deals, that we're in line or higher than our growth rate..

Got it. Thank you so much..

Thank you..

Our next question is from Erik Suppiger from JMP. Your line is now open..

First off, on the cash flows, your cash flows in the quarter were below the target range, I think you've given in the past for cash flow margin versus your net income margin.

I was curious, is that all because of the accounts receivable and why is the accounts receivable up notably in the quarter?.

With regard to the cash flow, first, if we look at it for the second quarter we were up $4.9 million for the half, we were up $21.4 million and for the half that's 22% cash flow margin. One other things that we talked about in past quarters, Erik, as you know is that we will be showing lumpy quarters on cash flow.

And it's really important to look at us from an annual basis, one of the lumps that we had in Q2 specifically was an additional $3.7 million in taxes that we had to pay in Q2. And that -- most of that was related to back year, it's not even things related to 2016. So from that perspective we feel comfortable that we're on track for the year.

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

Okay. And then, secondly, last quarter you had talked about the percentage of deals -- of new deals in the quarter that included three or more products, it gives us around 30%.

Can you give us any update on what kind of multi-product deals you had with new customers?.

Yes. We saw that more than 20% of new customers had three or more products. I can say that its slightly lower because of a good reason. We saw Viewfinity as I mentioned earlier, really expand our landing of new business.

So it can kind of lower the average for a good reason that Viewfinity is expanding and landing new accounts, but it's still over 20% and with continued contribution from the growth engines that we talk about PTA, Viewfinity and AIM..

Okay. Very good. Thank you..

Thank you..

Our next question comes from Gray Powell from Wells Fargo. Your line is now open..

Great thanks. First of all congratulations on the quarter. So I just had a couple of follow up questions. I know you've received a few questions on billings, but may be this -- might be the right way to think about it.

So for Q3 your revenue guidance implies 30% year-over-year growth, if I go back three months for Q2, you originally guided to 32% growth and then you beat it.

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

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

Perfect. Okay. That's very helpful.

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

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

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

But yes, we're seeing companies begin to contemplate, what is this mean for them and here they do gravitate to measurable solutions where things they can show that they're making an impact. That was actually the name of our customer event we call it, the CyberArk Impact..

Got it. Okay. Thank you very much..

Thanks Gray..

Our next question comes from Catharine Trebnick from Dougherty. Your line is now open..

Okay. Thank you for taking my question. Couple of questions, one, let's start with follow on orders, now what type of up tick did you see in terms of add on deals -- you just discussed that 20% or more, three products more this quarter, but what about add-on deals of any specific verticals that accelerated any new add-on? Thank you..

In terms of the revenue we saw half of the business come from existing customers and half of the licenses come from new business. And that's very consistent to what we've seen in the last 18 months. I think the verticals were very diverse I think that's one of the highlights for this quarter.

So diversity in new, but also diversity in the add-on business.

If I were to highlight the most prominent quarter in business in general with the banking these high-tech industries, there is a lot of software companies, you also mentioned even security companies come to us, insurance and also retail those were some of the top performing including continued deals in the healthcare side..

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

Thank you. Our next question comes from Fred Grieb with Nomura. Your line is now open..

Hey thanks.

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

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

If we look at it, I think Q2 last year was about 20% plus in licenses and now we're around 6%, it was 8% at the end of Q1, it was 8% at the end of December 31 in Q4. So I know what the right number is, I don't really, I can't give you the right number because it's not something we built for our model. We don't plan for deferred license revenue.

We plan to get orders that are recognizable immediately. But the nature of the -- of our business is that there will be customers that or there will be transactions that U.S. for GAAP purposes we won't be able to recognize that's good for the customer or good for us in the sense that that's the way the negotiation happen.

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

Got it. Yes. That's super helpful color.

I guess, one follow-up on that, is there any kind of typical pattern to which contracts end up having that deferred license component either certain geography or certain size deal or maybe it feels on a certain industry that typically crops up?.

It comes in all colors and flavors. There is a lot of deal that will be smaller 50 to 100k deals that might be related to collectability risk or to warning certain features that have to come out the following quarter.

And then, of course, in terms of -- there are fewer amount but they make up larger -- probably a larger piece of the total amount in large deals, larger than a 100k deals because they require more contract negotiation.

And when there is more contract negotiation that's where they make it into an installation plan or an SOW that requires development or acceptance that is usually the number one criteria of when we have to defer..

Got it. Perfect. Thanks a lot..

Thank you. Yes..

Our next question comes from Ken Talanian with Evercore. Your line is now open..

Hi, guys. Thanks for taking my question. Sorry, I don't want to beat the dead horse on cash flow here. But just one question on that, has there been any change in the amount of contracts that are getting paid upfront, the number of contract, I mean the support contracts..

All of our support contracts Ken are paid upfront. What could change from quarter-to-quarter and we don't see any trends here. But again, it's not sometimes -- we cannot plan for it. But, there could be quarters that might have a little bit more three-year contract that are close to one-year contract.

But, from our perspective all contracts are paid upfront and most of them are not one-year contract. But, if there was something that was three years that could sway it up for the quarter. But, I don't know we are not seeing any trends that would change. Again, I think the way we look at our cash flow business is on a annual basis.

And today, we are generating 22% cash flow margin in the first six month of the year against a 19% net income margin.

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

Okay. And as a follow-up, you demonstrated a nice leverage in the quarter particularly on self-marketing. So, one, can be take -- assume this duty embarked with channel partners. And how far do you think you are along with ramping the current base of channel partners..

So, I will start on the leverage and let Udi talk about our partner program. So, in Q2 specifically, we were able to really benefit from the leverage on the gross margin line. We saw our gross margin grow on year-on-year basis from 84% to 88%. And it was really from two components.

The lion share of the component was the fact that we started to generate revenue off of Viewfinity, which we've always -- which we in the past or in Q2 last year, we generated revenue from the product that we resold, but was at a very low margin, because we resold our competitors product.

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

So we were able to leverage off that gross margin. And then, the second point is that we continue to be able to run with a very disciplined OpEx model to generate more revenue, but within our budget and that's most of that, you get the extra benefit of beating out our forecast and it's going for the bottom..

And Ken on the opportunity within the channel, I saw things were very early, I'm very pleased that we were diverse -- I guess, the diverse and types of accounts, the value-added resellers, integrated the advisory firms as I mentioned in the prepared remarks for the contributing. But were still early innings and what we are expanding our channel play.

Our focus before is quality of partners, not the quantity, we are just doing more and more and building stronger CyberArk business within the partners. And as they are seeing the contribution to their business, they are investing more. So, we are really on a strong trajectory but there is much more to this..

Great. Thanks very much..

[Operator Instructions] Our next question comes from Michael Kim with Imperial Capital. Your line is now open..

Hi, good afternoon guys. I'm sorry if you have covered this earlier.

But, can you talk about, if you are seeing more greenfield in opportunities with the mid-market customers are -- you are seeing a lot of the earlier demand from large enterprise and the government?.

Yes. Sure, Michael. I think -- first of all, we are still seeing a strong greenfield opportunity and customers evolve sizes and shapes. I think the major point we highlighted is really the diversity across verticals. They all IT infrastructure, therefore they are on a service account and the security is there.

In terms of where our marketing and sales are focused, it's still primarily on the enterprise side. But, we are seeing more and more demand from end market side with our customers..

And then, also just on capital allocation priority, historically you have been pretty disciplined on integrating acquisition.

Are you seeing more opportunities as markets seem to be consolidating certain markets or certain segments in? How are you seeing your focused opportunity is evolving?.

First of all, I agree, we are very pleased with how we integrated the acquisitions we made last year. They are even from both companies and [indiscernible] in our customer events that I mentioned both in the EMEA and in the Americas. We are off to a good start. We are continually looking and evaluating the opportunities out there.

But, we are going to be very, very selective..

Okay, great. Thank you very much..

Thank you..

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

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

I want to thank our customers for trusting CyberArk with their most valuable assets and our global employees that continue to work hard, great value for our shareholders. Thank you very much for joining us today..

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