It’s very rare for startup founders to remain CEO three years after taking their company public. So investors should give serious consideration to investing in a company whose CEO ran it for 34 quarters post-IPO.
The company is Newton, Mass.-based CyberArk — a cybersecurity software provider — that recently reported rapid revenue growth for its first fiscal quarter and forecast more of the same for 2023.
After developing his successor for nearly four years, Executive Chair Udi Mokady last month passed the CEO baton to Matt Cohen — who gained 18 years of increasing management responsibility at PTC, a Boston area provider of design software.
Given the untapped opportunity in CyberArk’s market and its ability to win and keep customers more effectively than rivals owned by short-term oriented private equity firms, I expect the company to keep exceeding investor expectations.
(I have no financial interest in the securities mentioned in this post).
CyberArk’s Performance and Prospects
CyberArk reported strong growth in the fiscal first quarter and expects that to continue. According to SiliconAngle, CyberArk reported a 27% increase in revenue to about $162 million and an adjusted loss of 17 cents per share — 13 cents less bad than the year before.
Most of the growth came from cloud-based services. Its maintenance and professional services revenue was $65.1 million — the same as the year before. Its annual recurring revenue (ARR) increased 42% to $604 million.
Strong growth is expected for the current quarter and full year. Specifically, CyberArk’s revenue is expected to grow 21% in the second quarter to $172.5 million — the midpoint of its guidance. For the full year, the company guided for 23% growth — to $730 million — the midpoint if its guidance range.
CyberArk is optimistic about its results and its future. “Our results in the first quarter demonstrate the durability of our business model and the mission criticality of our Identity Security platform. Demand for our SaaS solutions remains strong, resulting in our subscription bookings mix reaching an all-time high of 95%, higher than our guidance framework,” CEO Matt Cohen said in the company’s earnings release.
Turning An Idea Into A $6 Billion Public Company
Mokady has set the stage for Cohen’s tenure as CEO. He did that through his decision to focus the company on a difficult problem that mattered to customers, his aim to take the company public, his long-term orientation and hunger for learning and winning, and his decision that it would be better to develop his own successor while things were going well.
Picking the right problem
In a May 17 interview, Mokady said, “I have been CEO for 18 years and ran CyberArk as a public company for 34 quarters before taking on my new role as Executive Chair. I wanted it to be a built to last company. To do that I decided to solve a complex security problem that touched the plumbing.”
The complex problem Mokady referred to is so-called privileged access management (PAM) — protecting hackers from getting control of the account of an employee with access to most of a company’s systems — such as a database administrator (DBA) or chief information security officer.
It took some time for CyberArk to discover this opportunity.
As early CyberArk investor Erel Margalit, founder and chairman of Jerusalem Venture Partners told me in December 2017, “It took the founders time to translate their technical excellence into products and messaging. They had good sales in Israel but they could not get success in the U.S. Through trial and error, they realized that they should protect companies against someone who is impersonating the DBA. They came up with a strong metaphor: ‘the enemy within.’”
Building CyberArk to last
Once CyberArk began winning customers, they began asking ‘How do we know you will be around in the future?’ Mokady told me, “They wanted the company to be built to last and that is why I thought an IPO was critical.”
Many years after the company’s 2014 IPO, he asked himself ‘Can Udi be CEO forever?’
CyberArk followed the example of Aron Ain — then CEO of Kronos, the Lowell, Mass-based workplace management software provider that the Boston Globe chose as 2018’s best place to work — who has a strong CEO and became executive chair.
As Mokady told me, “Nine out of 10 CEOs wait for an external event to solve that problem. I decided to make the change when the sky was blue. I hired a strong chief operating officer — Matt Cohen. We worked together to create a well-defined role which puts him in day-to-day charge of customers, partners, and strategy.”
Mokady’s ability to let go sprang from his desire to develop people who were willing to grow. “I could not understand why venture capital firms put caps on what an executive could do. They would hire a vice president of sales for a $10 million company and then replace the person when the company got much bigger. I think people are always growing. I would help someone grow from an engineer, to a sales engineer, to chief revenue officer. I wanted to develop people who were willing to grow, learn, and seek mentors — to always be learning,” he said.
From founder to public company CEO
How did Mokady learn how to run a public company? He used the metaphor of riding a bicycle up a long, steep hill. “On the road from Tel Aviv to Jerusalem there is a hill called Motza. My brother biked up the hill on the highway. I asked him how he did it. He said, “I put my head down, I didn’t look up or down. I stayed to the left of the line,” Mokady said.
CyberArk’s investors were very strict about monitoring quarterly results when the company was privately held so Mokady was prepared for that part of running a public company. The VCs held him accountable for meeting his quarterly forecasts and explaining if the company fell short. “When we went public, we had that muscle. We wanted to be public to build a long-standing company. We call it as it is. We develop forecasts from the bottom up and we are realistic and data-driven. We look at our pipeline and closing rates. We are playing the long-term gain. We do not use short-term appeasements.”
Why customers prefer CyberArk’s long-term focus
CyberArk’s long-term focus gives the company an advantage over private equity-owned rivals who have a short-term orientation. “All of our PAM competitors are owned by PE firms. They have short-term orientation. They are not investing in R&D and not investing in markets. Unlike them, we are expanding into Europe, Middle East, and Africa (EMEA) and Asia-Pacific Japan (APJ),” Mokady told me.
CyberArk does not rest on its laurels. “By contrast, we are — to use a phrase from Great by Choice — prudently paranoid. We never take anything for granted. We worry more than you should. If you think about how the competition might change or the macroeconomic situation might evolve, you will over achieve,” he said
Customers appreciate CyberArk’s loyal to them. As he said, “We are not forcing them to switch from using our software on premises to in the cloud. We tell them the advantages of using the software as a service and let them know that we will be ready when they are ready to adopt the cloud. By contract, our PE-owned competitors give customers a deadline by which they must switch.”
How CyberArk is managing macroeconomic headwinds
Macroeconomic trends are helping CyberArk. “Despite macroeconomic challenges, our product is a high priority for customers. It is a must-have, rather than a nice-to-have. It is Cybersecurity and Infrastructure Security Agency recommended along with multi-factor authentication to protect against identity-based attacks.”
CyberArk tries to protect itself against nation-specific problems. “We are well-hedged geographically. We started on an island and are export-oriented. 30% of our business is in EMEA, 10% in APJ, 60% in Americas — the U.S., Canada, and Latin America,” he said.
CyberArk — which is hosting IMPACT 23, an identity security conference from May 22 to 24 — sees AI as a help and a threat to its customers. “AI can reduce the time it takes to write security policies. AI also introduces the ability for attackers to create attacks uniquely designed for each person. Polymorphic malware will be more likely to evade behavioral-based protection,” according to Mokady.
The PAM market is not maturing. He explained, “There is a proliferation of privileged administrators in human resources, sales, finance. It is all over the world. When we first came up with the idea of focusing there, we did not realize it would be so robust. But we had a long-term orientation and thought that if we solved a difficult and critically-important problem” our solution would be difficult to copy and the problem would not go away quickly.
What makes Israeli entrepreneurs stand out
Margalit attributed Israel’s startup success to two key factors. As he said, “Israel is a nation of immigrants who have nothing to lose. And to build successful companies, our startups must expand globally. Therefore, our entrepreneurs must be comfortable understanding and working with people from different cultural backgrounds. To [be perceived as] intelligent in the U.S., I needed to sound like an American. It’s the same in France and China.”
Mokady sees himself as having an advantage over U.S. CEOs. “As an Israeli, I have a hunger to conquer the world. When I meet U.S. CEOs, they say they operate globally — but that means having an office in London. They are afraid of international.”
He takes a staged approach to entering new markets. “When we go into a new country, we start small. For example, I did not know anything about German resellers so I hired an expert. When we go into a new market, we do not go in all at once with massive hiring as others have done. We partner with a reseller. If that goes well, we hire a sales person. If that pays off, we hire a team. My board tells me don’t push too hard. Keep it real.”
Where CyberArk Stock Goes From Here
CyberArk’s stock trades 29% below its October 2021 peak of $202 — but the stock is up 11% so far in 2023.
The average analyst sees 24% upside to the stock. Specifically, 25 analysts offering 12-month price forecasts for CyberArk have a median target of $180, according to CNN Business.
Customers seem happy with its product. Gartner
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If the company can sustain expectations-beating growth and Cohen can maintain Mokday’s hunger to conquer the world, CyberArk investors will be better off.
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