On the surface CyberArk Software Ltd. (NASDAQ:CYBR) appears to have a lot of things going for it. It’s part of a sustainable, long-term secular growth trend, has transitioned to a subscription model that has the potential to increase revenue over the long term, and appears to have momentum at its back.
Even so, the share price of the company hasn’t been rewarded for the performance of CYBR, as it’s still trading at less than what it was in the latter part of 2020 as I write.
It seems to me that investors are holding back from a couple of things. First, they may want to see more than a couple of quarters of improved revenue, and second, they could be waiting for gross profit to exceed operating expenses in order to turn it to an operating gain.
Last, It’s possible there is a little confusion among investors concerning the prolonged transition from a perpetual licensing to a subscription-based model, and the differences between the two and how it impacts the numbers.
In this article we’ll look at some of the numbers, the underlying trend it competes in, and what it’ll take for its share price to reflect its current momentum.
Macroeconomics, Secular trend and spending
When looking at the reasons behind the company not being rewarded for its recent performance, it probably involves several things. First, investors are still looking at the weak economic environment that it’s operating in, and which is likely to get worse in 2023.
Second. While it faces economic headwinds, investors are probably overly concerned about the impact macroeconomics has on the secular security trend which is going to continue on for years into the future.
Third. Taking into account macroeconomics vs. the secular security trend, investors may be thinking in terms of CIO’s easing up on spending until things are economically better and having more clarity.
Assuming the latter to have merit in the thinking processes of investors, it would be the incorrect way to view the sector because spending on cybersecurity isn’t considered to be discretionary spending, i.e., spending is increasing in the market, not decreasing.
While that doesn’t guarantee CyberArk is going to be rewarded with that additional spending, it does mean the overall cybersecurity sector is going to continue to grow. And without a doubt, CYBR is going to get a sizable piece of the increasing spend, as evidenced by the last couple of quarters.
Some of the numbers
Total revenue in the third quarter was $153 million, up $31 million from the third quarter of 2021. For the nine-month period ended September 30, 2022, total revenue was $423 million, against the $352 million in the same period last year.
Subscription revenue accounted for $74 million in revenue for the third quarter, up more than double from the third quarter of 2021, which generated $35.2 million in subscription revenue.
Revenue from Perpetual license fell to $13.8 million, down from the $23 million from last year in the same reporting period.
Revenue from Maintenance and professional services was flat at $64.6 million.
As for annual recurring revenue (ARR), that climbed to $512 million in the in the first nine months, with subscription revenue accounting for $301 million of that, or 59 percent of total ARR. Last year, subscription revenue was $139 million, or 40 percent of ARR revenue.
Looking ahead, the company guided for fourth quarter revenue of $169.9 million to $176.9 million, approximately 15 percent year-over-year at midpoint. Operating income is projected to be in a range of $2 million to $8 million, with EPS to come in at $0.07 to $0.20 per share.
Full-year guidance is for an operating loss of from $18.5 million to $24.5 million. Again, I think investors are in wait-and-see mode on how the transition to subscription revenue impacts the bottom line of the company over the long term.
The other thing to consider is the company was trading at about $116.00 in mid-June 2022, and has since jumped to about $165.00 before pulling back. With its business model firmly understood and the performance over the last couple of quarters, it’s likely investors have already priced it in.
CYBR is competing in a sector that is in a secular trend that is going to continue on for the foreseeable future. It has a transparent business model that looks to be gaining momentum, but must prove it has legs beyond a couple of quarters, as well as the products to meet growing demand.
I think the market wants to see the boost in revenue accompanied by profits before bidding the share price of the company up. For that reason I think the next couple of quarters will be important for CYBR, as if it continues to execute, it should result in the numbers moving toward profitability as it continues to scale its subscription business.
Based upon its share price over the last couple of years, I see the number it needs to sustainably blow past is about $165.00 per share. If it can break out beyond, then it’s liable to meet expectations of the bulls.
That said, I tend to think it needs to pull back closer to $140.00 per share or under to attract more investor interest. Assuming it comes near to that level, and the company continues to deliver, that will likely be the springboard needed to drive the value of the company over the next year or two.
If it fails to maintain momentum, it will result in its share price taking a big hit, which in my opinion, would result in providing an excellent entry point for investors.
Depending on how subscription revenue does over the next couple of quarters, along with losses, the share price of CYBR could remain under some downward pressure in the near term, but further out, this is a good company offering quality products in a sector that will continue to grow in demand over at least the next several years.
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