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CyberArk Software Ltd (NASDAQ:CYBR)
Q4 2019 Earnings Call
Feb 12, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to CyberArk's Fourth Quarter and Full Year 2019 Earnings Call. At this time, participants are in a listen-only mode and after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I'd now like to turn the conference over to your host, Erica Smith, Investor Relations. Please go ahead.

Erica Smith -- Investor Relations

Thank you, James. Good morning. Thank you for joining us today to review CyberArk's fourth quarter and full year 2019 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 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 first quarter and the full year 2020. 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 US Securities and Exchange Commission and those referenced in today's press release. 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 to the most directly comparable GAAP financial measures is also available in today's press release, which could be found on our website in the Investor Relations section. Also, a webcast of today's call will be available on our website in the Investor Relations section as well.

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

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Thanks, Erica, and good morning, everyone. Thank you for joining the call. We had a record fourth quarter, capping off a strong year. We delivered growth and profitability by executing against the plan we outlined this time last year.

We expanded customer penetration by adding a record number of new logos and increasing our add-on business with existing customers. We increased adoption of Application Access Manager and Endpoint Privilege Manager. We established a mid-market sales motion, and we significantly strengthened our leadership position in privileged access management delivering critical functionality and new solutions like Alero. As a result, we exceeded guidance across all metrics. In the fourth quarter, total revenue reached a record $130 million growing 19%. Non-GAAP operating income reached an all-time high of $42 million. And we signed nearly 300 new logos, the largest number in the company's history in a single quarter, ending the year with more than 5,300 customers. For the full year, revenue reached $434 million, growing 26%. Non-GAAP operating income was $123 million, and we generated record cash flow from operations of $142 million.

Our business continues to benefit from strong secular tailwinds that are gaining momentum. IT environments are changing at an unprecedented rate driven by digital transformation and cloud migration strategies. These trends are expanding the attack surface, while at the same time there is a sprawl of privileged activity. As recent examples demonstrate, attackers require privileged access. Ransomware leverages privileged access at the endpoint and is holding organizations of all sizes as well as state and local governments hostage. Cloud Hopper was a multi-year campaign against MSPs where privileged access allowed attackers to steal information from hundreds of companies. And in December 2019, it was reported that a customer -- a consumer brand accidentally left mission critical API keys hard coded, exposed, and vulnerable on GitHub. In the wrong hands, these keys could have provided access to internal systems and ultimately control of the AWS environment.

As a result, Chief Information Security Officers are prioritizing measurable solutions that strike the right balance between flexibility, growth, and risk mitigation. They are putting privileged access management at the foundation of their security and zero trust strategies. A few great customer examples in the fourth quarter that highlight the CISO's view. In a greenfield win, a Fortune 200 pharmaceutical company needed to secure both human and application credentials as part of its digital transformation strategy. We won this marquee new logo because of the breadth of our PAM offering, our strong relationship with Accenture, and how easily our solution can be deployed on AWS. A global insurance company is rapidly migrating workloads to the cloud. We were the only vendor who gave the CISO much needed peace of mind by providing end-to-end security, visibility, and analytics into privileged activity.

Three key competitive differentiators in this rip and replace new business win. First, our solution is battle tested, securing the world's leading enterprises across hybrid environments. Second, our proven track record of delivering innovation that meets the current and future requirements of dynamic, modern enterprise IT. And the third differentiator, was our new Alero solution, which solved a major pain point by enabling a secure, third-party access via biometric authentication without a VPN. A software company needed to remove local admin rights on developer workstations and enhanced its privileged access management program to support its digital transformation strategy. The majority of our business continues to be greenfield. However, in this rip and replace new business example, our SaaS Endpoint Privilege Manager and CyberArk Privilege Cloud outperformed the niche incumbent vendor, particularly given the software company's rapid growth, cloud first strategy, and global footprint.

An existing manufacturing customer has been using Endpoint Privilege Manager for more than four years and has successfully blocked 100% of malware attacks since implementing its least privilege strategy. During the fourth quarter, the manufacturer added EPM users and extended its relationship with CyberArk in a three year deal for CyberArk Privilege Cloud. This 10,000-employee company was not vaulting or rotating privileged credentials with a software solution, which demonstrates our significant greenfield market opportunity and the traction our SaaS solutions are gaining in the market. A large technology company was incredibly happy with the rapid time-to-value of its core privileged access security purchase in Q3. As a result, in the fourth quarter they not only expanded with more PAS users, but also purchased Application Access Manager to secure Ansible Automation, PHP, and Shell Scripts used in digital transformation strategy as well as our new Alero solution for all third-party vendor access as part of its zero trust framework.

Diversification across geographies, verticals, product, and delivery is a critical pillar of our strategy, and we realized the benefits of this diversification in 2019. Revenue growth accelerated in both the Americas and APJ. This strength offset the 16% revenue growth in EMEA during 2019. If we drill down to the major countries, the UK grew faster than the business, while Germany and France both faced macro challenges and underperformed. Overall, our EMEA pipeline has grown nicely with significant opportunity for both new and add-on business, which we believe supports stronger growth in the theater for the full year 2020.

On the product side, AAM had another record year and was included in six of our Top 10 license deals. Securing applications is a priority today as every company across all industries increasingly leverages software to drive productivity, efficiency, and the competitive edge. While the majority of our large enterprise customers continue to prefer to consume our solution as a perpetual license, diversity of delivery is important to our long-term business. We are pleased with the early momentum of our SaaS portfolio. Just yesterday we announced compliance with SOC 2 requirements for EPM and Privilege Cloud, which demonstrates the security and integrity of our SaaS solutions. EPM reached a new record and saw material mix shift toward SaaS, as organizations recognize the importance of locking down privileged access at the endpoint.

CyberArk Privilege Cloud gained traction with certain market segments and verticals. Our new SaaS Alero solution delivers zero trust remote vendor access to increase control and visibility into privileged activity with no VPNs, agents, or passwords. Since introducing Alero at the end of the third quarter, many of our customers have expressed interest in this service, and we are thrilled with the early response. Innovations like Alero have strengthened our leadership position in the market. This year some of our other innovations include Active/Active Vaults for high availability and disaster recovery in our core PAS solution. We can now continuously detect alert and respond to risk-scored privileged activity in AWS. We introduced application credential management in our Privilege Cloud solution. We launched Secretless Broker capability in Application Access Manager, an innovative approach for secret management that frees developers and increases security. We also extended our market reach in 2019 and today have more than 450 channel partners and advisory firms. In the fourth quarter, we added 500 trained professionals across delivery engineers, pre-sale engineers, and sales people, bringing the number of certified professionals to more than 4,500. This partner enablement contributed to our indirect business, which represented about 67% of revenue in 2019.

We also experienced a greater than 50% increase in business influenced by our advisory partners like Deloitte, PwC, KPMG, and Accenture. We were very pleased to have four of our advisory partners present at our Global Sales Kickoff a few weeks ago. Each partner discussed the significant opportunity they are seeing for PAM and their investments in CyberArk practices, setting the stage for continued growth in 2020.

Our C3 technology partners were also a key differentiator in 2019, particularly for digital transformation with RedHat, UiPath, and Blue Prism, risk reduction with Rapid7, Tenable; and cloud migration with AWS and Microsoft influencing deals in 2019. Our success with C3 supports our long held position that security is a team sport.

We were very pleased to add Matt Cohen to the team as Chief Revenue Officer in the fourth quarter. Matt's extensive experience delivering comprehensive go-to-market strategies that will be instrumental to our long-term growth, particularly as we bring multiple delivery options, including our SaaS and perpetual license to market.

2019 was a record year, and I'm proud of our accomplishments. Our strong results demonstrate that we have a tremendous market opportunity to scale and grow CyberArk to a $1 billion revenue company and beyond.

As we look at our objectives in 2020, we are focused on strengthening our alignment and business process across the organization to drive growth and scale the company. We plan to further enhance our strong relationships with advisory, reseller, and technology partners through ongoing enablement programs and joint marketing, win new and add-on business through targeted marketing and sales programs, evolve our customer success organization to ensure privileged access is secured across our customers hybrid IT environment and enhance the support of our SaaS customers. And as always, we will continue to deliver innovation that will not only extend our leadership position, but also deliver a meaningful layer of security to customers.

With that let me turn it over to Josh to discuss our record results and outlook in more detail.

Josh Siegel -- Chief Financial Officer

Thanks, Udi. As you have just heard, we delivered another strong quarter ahead of our guidance, generating record revenue of $129.7 million, which represents 19% year-on-year growth. License revenue reached a record, $76.5 million, growing 15% year-on-year. And that's against the tough compare with license revenue growing 38% in the fourth quarter of last year. Our license growth in the fourth quarter was driven in large part by new business, particularly in the Americas and APJ and in the fourth quarter, license revenue represented 59% of total revenue.

Maintenance and professional services revenue increased by 26% to $53.1 million and represented 41% of total revenue. The professional services revenue associated with this line was $9.3 million or 7% of total revenue. The Americas reached another record of $71.1 million in revenue growing 17% year-on-year. EMEA generated $45.9 million of revenue in Q4, growing 10% year-on-year. As Udi mentioned, EMEA was impacted by macro trends in Germany and France. In addition, the Asia-Pacific Japan region delivered again and capped off a great year with revenue growing by 94% year-on-year and reaching a record $12.6 million in revenue.

We had a strong demand across all verticals in the fourth quarter with government, healthcare, pharma, IT services, and media each growing by more than 40%. 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.

Gross profit for the fourth quarter was $115.6 million, increasing from $98.2 million, generating a gross margin of 89%. That is just a slight decrease from the 90% gross margin in the same period last year, and the 1 percentage point decline was primarily due to our investments in the cloud and our increased use of third-party contractors as we discussed throughout the year.

On the expense side, we are investing in the business to deliver innovation, drive growth, and scale the organization. Our R&D expense grew 34% year-on-year to $17.6 million or 14% of total revenue. Sales and marketing expense for the fourth quarter increased by 27% year-on-year to $46.3 million or 36% of total revenue. G&A increased 10% to $9.6 million or 7% of total revenue. In total, operating expenses increased 26% in the fourth quarter 2019 to $73.5 million, and that's compared with $58.4 million for the same period last year.

Our revenue outperformance and disciplined investments drove record operating income of $42.1 million for the fourth quarter compared to operating income of $39.8 million in Q4 of 2018. Net income reached a record of $37.8 million or $0.97 per diluted share for the fourth quarter of this year, an increase from both the $33.4 million and $0.89 per diluted share for fourth quarter last year.

Now let me summarize our results for the full year 2019, which were also ahead of our guidance across all metrics. Total revenue reached $433.9 million with growth of 26% compared to $343.2 million in 2018. License revenue portion was $237.9 million, growing 24% year-on-year and representing 55% of total revenue. In 2019, approximately 65% of license revenue was generated from existing customers purchasing additional licenses and approximately 35% of revenue from new customers.

As Udi mentioned, we saw a healthy increase in revenue from our newer solutions with Application Access Manager representing about 11% of license revenue and Endpoint Privilege Manager representing about 7% of license revenue in 2019. And that's even with about 60% of the sales being delivered as SaaS and revenue was recognized only ratably. Maintenance and professional services revenue increased 30% year-on-year last year, reaching $196 million and representing 45% of total revenue, and the professional services revenue associated with this line was $36.3 million or 8% of total revenue, and that's consistent with the prior year.

Moving onto the geographies for the full year. The Americas generated $264.8 million in revenue with growth accelerating to 29% in 2019 from the 26% growth rate in 2018. In total, the Americas represented 61% of revenue in 2019. EMEA grew by 16% in 2019 to $129.7 million in revenue or approximately 30% of total revenue. Asia-Pacific Japan revenue growth accelerated to 54% growth from 47% in the prior year, reaching $39.4 million or 9% of total revenue.

For the full year, our business was also well diversified across industries with nine verticals representing at least 5% or more of the business. Banking was again our largest segment, representing 28% of the business in 2019, that's compared to 30% in 2018. Global government was 14%, an increase from the 11% in 2018. Manufacturing was 8% compared to 10% in 2018 and healthcare increased to 7% of the business from 5% in 2018. And during the year, deals over $100,000 increased to 1,020 from 868.

Our gross margin for the full year was 88% consistent with the 88% in 2018. We continued to make disciplined and strategic investments in growth and innovation. So for the full year, R&D represented 14% of total revenue. That's consistent with the 14% in 2018. Sales and marketing represented 37% of total revenue, a slight decrease from the 39% in 2018 and G&A represented 8% of total revenue, also a slight decrease from the 9% in 2018, resulting in strong leverage as well as record operating income and operating margin of $123.4 million in 2019 and a 28% operating margin, which was ahead of our guidance, an increase from $90.5 million or 26% operating margin for the full year of 2018.

Our net income increased to $107.9 million from $76.5 million and our earnings per diluted share increased by 34% to $2.77 from the $2.06 in 2018. Our effective tax rate for the year was 19%, which was in the range that we projected. We ended the year with 1,380 employees worldwide compared to 1,146 at the end of 2018. That includes 656 employees in sales and marketing at the year end, up 21% from the 541 at December 31, 2018. We generated record cash flow from operations in 2019 of $142 million or a 33% cash flow margin.

Now turning to the balance sheet. First, deferred revenue for the full year increased 27% to $190 million at year-end. Also, we ended the year with $1.1 billion in cash and marketable securities, an increase from $451 million at the end of 2018. The increase was driven by the strong cash flow from operations, but also from net proceeds from our November issue of zero-coupon convertible notes of approximately $560 million before the capped call.

So regarding the convertible debt issue, we were pleased to execute this financing at such attractive pricing. The deal is structured as a five year note due in November of 2024. The notes also have a provisional call any time after November 2022 through maturity assuming certain conditions are met. The conversion price associated with these notes is $157.53. That represents a 37.5% conversion premium at the time of issue and are convertible into approximately 3.6 million shares.

Importantly, we also took approximately $54 million of the net proceeds and entered into a capped call transaction, which enables us to participate in any upside beyond the conversion price up to $229.14. Taking into account the capped call, the net proceeds from the financing were approximately $506 million. So for modeling purposes for the full year 2020, we expect to have approximately $17 million in non-cash interest expense related to this offering, which we will be adjusting out of our GAAP financial results and will be reflected in the non-GAAP tables of our financials. We are using the treasury stock method, and as a result, the offering is not dilutive to our EPS in the fourth quarter or the full-year 2019.

Moving on to our guidance for the first quarter of 2020 and the full year. As a reminder, our guidance does not consider any potential impact to financial, 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 first quarter of 2020, we expect total revenue to be in the range of $106 million to $110 million. Our revenue guidance for the first quarter takes into account the tough growth compare from first quarter last year, particularly in the Americas and APJ, the mix of perpetual and SaaS business which we estimate will be about $3 million impact on revenue in the first quarter, as well as the performance in EMEA for 2019. We expect non-GAAP operating income to range from $16.5 million to $19.5 million, and non-GAAP net income per diluted share of $0.35 to $0.41. This assumes 39.6 million weighted average diluted shares and a tax rate of approximately 21%.

We are also initiating our guidance for the full year 2020, which reflects the strength of our pipeline and our overall opportunity. We expect total revenue in the range of $511 million to $519 million or growth of approximately 19% to the midpoint. We expect our gross margin to be approximately 86% to 87% for the full year. We expect non-GAAP operating income to be in the range of $109 million to $115 million and non-GAAP net income per diluted share of $2.26 to $2.38. This assumes 39.8 million weighted average diluted shares, and assumes guidance for the full year -- also assumes an effective tax rate of approximately 21% for 2020.

We typically experience a sequential revenue decline in the first quarter, moderate sequential growth then in Q2 and Q3, and Q4 is our largest revenue quarter of the year.

On the expense side, we typically see a step-up in the expenses in the third quarter as a result of typical increase in employee expenses. We also wanted to point out that we are moving our Americas customer event to the second quarter this year, so that will result in a shift in marketing program expenses from the third quarter as we've seen in prior years, to the second quarter this year. We also expect capital expenditures to be in the range of $7 million and $8 million, which represents just under 2% of revenue at the midpoint.

As we look at the full year 2020, we expect our cash flow from operations margin to run between 5 percentage points to 10 percentage points higher than our non-GAAP net income margin. We recommend analysts to evaluate our cash flow on an annual basis given that our free cash flow from operations can vary quarterly based on seasonality of the business and taxes -- and payment of taxes. As an example, we just paid approximately $3.8 million of taxes already in the first quarter of 2020, which will impact our cash flow from operations. We do not plan to provide quarterly updates on guidance for cash flow from operations.

We are pleased with our 2019 results, which position us well for profitable growth in 2020 and beyond. We are looking forward to the year ahead. And with that, I'll now turn the call over to the operator for QA.

Questions and Answers:

Operator

[Operator Instructions] Thank you. And your first question comes from the line of Saket Kalia with Barclays. Go ahead please. Your line is open.

Saket Kalia -- Barclays -- Analyst

Hey, guys. How are you doing? Thanks for taking my questions here.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Absolutely. Hey, Saket.

Saket Kalia -- Barclays -- Analyst

Hey, Josh. Hey, Udi. So I'll just keep it to one. And maybe I'll -- maybe it's for you, Josh. Can you just talk about how you think about the SaaS part of the business here in 2020? I know you mentioned it's roughly a $3 million impact here in Q1, and clearly the vast majority of the business is still traditional perpetual license, but what sort of assumptions did you make about how some of the core PAS business comes in between perpetual versus SaaS in 2020 as part of that revenue guide?

Josh Siegel -- Chief Financial Officer

Yeah, good. Thanks for the question, Saket. So I think what we're trying to do here is really infuse new technologies to be consumed in the form of SaaS and we're seeing that. Last year we saw EPM growing at SaaS consumption almost 60% of the bookings were done in SaaS. That was a big increase from the year before, and we anticipate that to continue to grow. This year we're starting out the year with three bona fide SaaS products with Alero and as well with the Privilege Cloud as well in addition to the Endpoint Privilege Manager.

The way we look at it from a financial perspective for 2020, we still believe it will be less than 10% of total revenue from SaaS, but we do see it's off of small numbers. So we see it's a large increase. Already in 2019 we've almost doubled the AAR from SaaS and subscription business on our books. And as you pointed out and we've called out on the call, it's already -- it's kind of already changing our view on how we look at each quarter. And so already in Q1, we're assuming about $3 million kind of going through ratable SaaS business incrementally than what we've seen, for example, in Q1 last year.

So, I would look at it -- and in terms of the Privilege Cloud, what we really see is that's still being more of a sweet spot for our commercial market space and creeping up into some of the smaller or medium enterprises that are contemplating looking at SaaS products, but overall we see it growing off of a small base in 2019 and still being though within about 10% of our revenue.

Saket Kalia -- Barclays -- Analyst

Got it. I'll get back into queue. Thank you.

Operator

And our next question comes from the line of Melissa Franchi with Morgan Stanley. Go ahead please. Your line is open.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay. Good morning and thank you for taking my question. I have another one for Josh. I wanted to dig into the margin outlook for 2020. By my calc, I'm calculating 30% growth in expenses next year, that's an acceleration. Can you talk about what's driving that acceleration? Is it a function of the fact that maybe perhaps you under invested a little bit in 2019 and now you're kind of catching up?

Josh Siegel -- Chief Financial Officer

Yeah, hi, Melissa. Thanks very much. So when we look at where we're going to be investing faster than the business, it's really going to come in three areas. The first and largest area will still be -- is really in sales and marketing. Right now I would attribute roughly if we look at these kind of the six points that you're referring to, probably half of that is going to be faster investment in sales and marketing, and that's really just a reflection of the opportunity that we see in the marketplace and we see that every year, we try to keep investing in sales and marketing.

The second place would be R&D and that really goes to some of the things that Udi talked about, our continued innovation and also our -- looking at the new technologies that we're putting out there. So we have also the on-prem perpetual and now the new SaaS technology products that were out there. And I would put that at roughly a 2% of that 6%. The other piece on R&D is that we do have a little bit of impact from the FX as well. So that 2% gets a share of the shekel increased -- stronger shekel rate as well. And then the third piece, about 1% I would put at the cost of goods. And that really goes to again our increase in SaaS products and the fact that we're investing more and more in our vehicle to be able to third-party host these SaaS products and going into the cost of goods.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay, that's very helpful. Thank you.

Operator

And your next question comes from the line of Sterling Auty with J.P. Morgan. Go ahead please. Your line is open.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi, guys. I'll dive into the EMEA comments. I think you called out France and Germany in particular, how much of this is end market just macro? You've done a good job improving execution through the years in the region. Is there any other changes that you can make to kind of bolster what you're seeing in that marketplace? And what have you kind of factored into your guide?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Hi Sterling, Udi here. So, yes, definitely, I think in Germany clear macro headwinds that we saw throughout the year and especially in Q4, and the same applies for France. So kind of the two -- two strong and foreign European economies were a drag on us, whereas the UK actually outperformed the rate of the business. We always -- even when we have macro, we always combine and put attention to our own execution. And there actually France specifically has a lot of new headcount that was added throughout the year that we expect to perform much better and improve our, I would say, contribution from the region in 2020. So we still expect that. We've factored that in our guide for sure, but like I said, overall, we're optimistic that we'll have a better year in EMEA.

Sterling Auty -- J.P. Morgan -- Analyst

Thank you.

Operator

Our next question comes from the line of Jonathan Ho with William Blair. Go ahead please. Your line is open.

Jonathan Ho -- William Blair -- Analyst

Hi, good morning. I just wanted to maybe start a little bit with the competitive landscape. Are you guys seeing any sort of shifts there or any other improvement or worsening of the competitors that are out there? Thank you.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Hi, Jonathan. I would say no major change since -- in the last year. Probably slightly more competitive rip and replace that we've been seeing and we gave some examples on the call, but still most of the opportunities out there I would say more than 60% of the businesses is greenfield opportunities and so we see the same competition. And I would say that our leadership is even stronger with our new Alero, which is a very exciting use case for the entire customer base and every prospect and with our strategic investment in AAM especially for dynamic applications. So I would say, strengthened -- stronger leadership position and no change from the competitors themselves.

Operator

And our next question comes from the line of Rob Owens with Piper Sandler. Go ahead please. Your line is open.

Rob Owens -- Piper Sandler -- Analyst

A question, as we unpack the guidance for the coming year and the implied acceleration that is in the guidance relative to Q1 versus kind of the total year yet being mindful of increasing SaaS, curious what else might drive that acceleration outside of the comps? And with regard to the SaaS revenue, is that one year upfront? Is that multiple years? I'm just curious what the free cash flow or the operating cash flow per year guidance impact might be? Thanks. And that was one question, but two parts.

Josh Siegel -- Chief Financial Officer

Yes, so, Rob, I'll answer the second one because I still remember it. Yeah, basically in terms of the average duration on the SaaS, we're getting around 18 months to 20 months so far historically on those contracts. And I think your first question was related to expanding from the Q1 guide to the full year and the opportunity. And absolutely, when we look at the full year, we're looking at the full year pipeline and the opportunity and the investments that we made toward the back half of last year and going into the first quarter of this year. And I think as Udi talked about the competitive environment is still the same, there hasn't been a major transition there. The market is still growing, and we're seeing numbers certainly at the 20% level. And we feel comfortable that we really be able to stay with that and take the opportunity during the year and we're pleased with the full year guidance of 19% at the midpoint and be able to do that as well with 22% operating margin.

Rob Owens -- Piper Sandler -- Analyst

Great. Thank you.

Josh Siegel -- Chief Financial Officer

You are welcome.

Operator

Our next question comes from the line of Fatima Boolani with UBS. Go ahead please. Your line is open.

Fatima Boolani -- UBS -- Analyst

Thank you for taking the questions. I have a cash flow question as well, so for you Josh. Appreciate the annual color on the cash flow guidance, but as I think about how the business mix is shifting, you're adding more subscriptions into the mix, you have seen general trend toward annual invoicing, I'm wondering why the cash flow guidance of 5% to 10% higher than net income margins is still sort of intact relative to history. If you can just help me unpack some of the drivers and then certainly the drivers in deferred revenue growth there that would be really helpful. Thank you.

Josh Siegel -- Chief Financial Officer

Yeah, so I think that again we're still talking about that piece of the SaaS and the subscription being under 10% of the expected revenue this year. So we still see the overwhelming majority coming from perpetual with our maintenance and services component. So we, at this point, don't really see that as going to impact it outside of that range, and we are getting more than a year contract on average from our subscription business, which in some cases are paid annually, but also still in many cases are paid full upfront, even if it's two or three years. So we're still comfortable with that.

The deferred revenue growth from 2019 is still the majority coming from our maintenance and support contracts. The overwhelming majority is still above 90%, but again as we creep into one more percent and one more percent of SaaS and subscription business, it does -- it can impact certainly when we look at revenue from a quarter-to-quarter perspective.

Operator

And our next question comes from the line of Gregg Moskowitz with Mizuho. Go ahead please Your line is open.

Gregg Moskowitz -- Mizuho -- Analyst

Okay, thank you. Hi, guys. So this was a record net new logos quarter, as you pointed out earlier. How much of this is a function of the mid-market rollout in 2019 as compared with having stronger advisory relationships and more direct sales capacity as well?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

I would say there was -- hi, Gregg, Udi here, I would say there was definitely contribution from the new mid-market motion but a lot of these were enterprise accounts and really executing on our global reach to the enterprise. Yes, the -- we're super excited about the contribution of the advisory muscle. Some of that is new logos, but a lot of that is also bringing existing customers into program. So it's a combination of reaching into the mid-market, but we were there before, but it has accelerated, but a lot of these new logos are in our sweet spot enterprise.

Gregg Moskowitz -- Mizuho -- Analyst

Great, thank you.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Catharine Trebnick from Dougherty. Go ahead please. Your line is open.

Catharine Trebnick -- Dougherty & Company -- Analyst

Thank you for taking my question. Can you discuss more global federal and US federal and the contribution of US federal and then the strength -- what kind of strength you're seeing into 2020? Thank you.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Absolutely. Hi, Catharine. We talked a lot about it following a very -- a record Q3 in '19 where we really saw our federal programs kick in and privileged access management as part of CDM and defend funded programs where definitely in plan to expand a lot of the existing customer base within federal, but then -- but also it's still very much greenfield on both core privileged access management and definitely with our growth engines, Application Access Manager, our Alero, our Endpoint Privilege Management. So it's an important part of the business and that was just on federal.

In the rest of the world, I think we saw -- we talked a lot that it's becoming our second -- global government is often our second or third largest vertical in a given quarter and that includes the fact that we sell globally APJ governments, European governments, Canada, on top of the US federal. So it's definitely part of our opportunity. And I think the beauty is that we invested -- we have the certifications in place. We continue to invest and the team is going after it.

Catharine Trebnick -- Dougherty & Company -- Analyst

Thank you.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Gur Talpaz from Stifel. Go ahead please. Your line is open.

Gur Talpaz -- Stifel -- Analyst

Okay. Thank you for taking my question. Udi, you provided some interesting customer commentary on the call. With application credentials in AAM, are you seeing greater interest here in centralized application user security management? And how do you think about the AAM opportunity within the installed base?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Could you just repeat the first part?

Gur Talpaz -- Stifel -- Analyst

Yeah, it's are you seeing greater interest in sort of centralized application and user security management within the base?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah, so absolutely. I think, the motion with AAM is super-exciting because there's a security driver and there's a digital transformation driver. The suite now really includes our solution for legacy applications, but a bigger and growing motion is our solution for dynamic application management. And yes, that's very often driven in both directions. Chief Security Officer and the security team wants a centralized way of managing these credentials and rolling out applications in a secure way, and developers just want to get the work done. So we invested a lot in making it very easy for the developer, but also this connection of the AAM to our full platform so that Chief Security Officer sees the benefits of a holistic solution for both applications and humans. And so, yeah, it's an important growth engine for CyberArk. It had a record year, it was 11% of 2019 license revenue and it's an important piece for us.

Josh Siegel -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Tal Liani with Bank of America. Go ahead please. Your line is open.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Hi, guys. Can you hear me?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah, Tal.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Okay. Hope you can hear me now. I want to ask a question about the revenues. One of the answers you gave, Josh, was about the growth in recurring revenues versus perpetual. And I'm trying to understand if it's the same product that is now being shifted from perpetual to recurring and this is why the decline is related to the shift in the business model. The question is whether you see any slowdown in the core business? And then not related to that, you see growth in new types of businesses and net-net, you're growing nicely, or that it's more just shift in the business model, which has different implications for the core business.

Josh Siegel -- Chief Financial Officer

Yeah, so first of all in 2019, the shift to the recurring business was primarily around the Endpoint Privilege Manager, which has always been one of our kind of growth engines and faster growing off smaller base product. So it really wasn't a move from the core biz. And as we kind of look into 2020, we'll see some movement from -- with the Privilege Cloud SaaS, but particularly to incremental group of customers for what we're seeing to the commercial markets that might have bought on-prem subscription and maybe to some larger -- to smaller enterprises.

We kind of -- I've always -- and Alero, which is in for 2020 as well, again, we expect that to grow faster than the business as it's a new product. So I think overall when we look at the business, every year over the last several years, we are always kind of looking at kind of what we called in the past, even emerging products like our Endpoint Privilege Manager, our Application Access Manager as growing faster than the business in general. And we don't necessarily -- and this year we have the Privilege Cloud as well, we don't necessarily see a slowdown with our core business. We see it growing with the market.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Got it. And I know I only have one question, but I wanted to ask, if you don't mind, to repeat the reasons for the lower operating margin. You went over it quickly. Thanks.

Josh Siegel -- Chief Financial Officer

Yes, so there is a -- if you take the 6% on the operating margin, half of that is sales and market 2% would be -- 2% of the 6% would be R&D, which some of it is FX and then 1% on cost of goods related to our continued investment in deploying cloud infrastructure.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Andrew Nowinski with D.A. Davidson. Go ahead please. Your line is open.

Andrew Nowinski -- D.A. Davidson & Co -- Analyst

All right, thank you. So I had a question on your billings. Q4 typically is heavy maintenance renewals, but it looks like billings decelerated down to about 16.5% in Q4, below the 20% market growth rate that you had mentioned. So I was wondering if you could comment on whether renewal rates may have changed, or if there were any other factors impacting that growth rate? Thanks.

Josh Siegel -- Chief Financial Officer

No. Andrew, renewal rates are still at the 90% plus level and deferred revenues grew by 27% year-on-year. So there was nothing remarkable that I would point out. I'd have to kind of really dig a lot deeper to see if there was something seasonal in the quarter.

Andrew Nowinski -- D.A. Davidson & Co -- Analyst

Okay, thanks.

Operator

Our next question comes from the line of Gray Powell with BTIG. Go ahead please. Your line is open.

Gray Powell -- BTIG -- Analyst

Great. Thanks for taking the question. I just want to follow up on an earlier question on the macro environment and how it's factored into guidance. Should we expect EMEA revenue trends to improve from the pace of 2019 or should we expect current trend lines just to continue? We're just trying to clarify something that I thought I heard you say earlier in the Q&A.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah, I'll take it. This is Udi. Yes, we expect them to improve in the back half of the year as we get returns from investments from hiring we did at the end of this year -- at the end of '19 and hiring we are doing in the first -- from the start. So yes.

Gray Powell -- BTIG -- Analyst

Got it. And that's baked into the guidance?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah and as we think -- when we think about the macro, obviously, that's not in our control, and it is -- we're coming out of '19 seeing that. So that's baked into the first quarter guidance. And as we kind of move forward, we'll see -- we'll be able to adjust. And it also has a component in the full year guidance as well.

Gray Powell -- BTIG -- Analyst

Okay. I got it, got it. That makes sense. Thank you very much.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Imtiaz Koujalgi [Phonetic] with Guggenheim Partners. Go ahead please. Your line is open.

Imtiaz Koujalgi -- Guggenheim -- Analyst

Hey guys, thanks for taking my question. I had a question about the duration of your contracts. If I look at fiscal '17 and fiscal '18, I think the duration went up quite a bit based on the long-term deferred mix. It steadied in fiscal '19. How should we think about duration in fiscal '20? Do you think the long-term deferred mix remains at the same level or should that change in fiscal '20?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah, I think at this point we don't see any evidence of it necessarily changing behavior between what we've seen historically and 2020. But I think the SaaS contracts we see will be shorter duration and the maintenance we see as combination of one year and multiple years. It's hard for us to really say that it's going to change dramatically.

One thing that we are seeing more of is that in the multiple year contracts there is -- even on the maintenance, there is more of a shift to annual payments to some degree. So that would make it longer term, but I think right now, I would take the trend that we saw in 2019 and build off that.

Imtiaz Koujalgi -- Guggenheim -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Erik Suppiger with JMP Securities. Go ahead please. Your line is open.

Erik Suppiger -- JMP -- Analyst

Yes. Thanks for taking the question. One, I'm just curious, what are you assuming in terms of AAM and EPM contribution in 2020. Will we start to see those approach 20% contribution? Then secondly, I understand Asia did well, but do you have any reason to think that some of the virus issues are going to be causing any disruption there?

Josh Siegel -- Chief Financial Officer

Okay. Yeah, hi, Erik. I'll take the first one. We're not going to guide by product, but we absolutely do expect AAM and EPM to grow even possibly faster than the business. However on the flipside, we're seeing, certainly on the EPM, it's going to be on a SaaS basis. So the average deal sizes will be smaller, and it will be recognized ratably. So we can't necessarily say how that's going to shake out from the revenue perspective, but we do see them becoming bigger and bigger, more -- connected to more and more deals. And certainly from a opportunity perspective even grow faster than the business.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

And I'll take the question on APJ. So obviously our number one priority is our employees in the region and their families, and part of the regions they've taken steps to reduce travel. We're watching it closely. China is a very small percentage of our business. So at this point, we don't see it having a major impact on our results.

Erik Suppiger -- JMP -- Analyst

Josh, can I just come back? Is there a goal or a target of getting contribution from both AAM and EPM to 20%-ish at any point or can you give us just kind of some color around where that might go?

Josh Siegel -- Chief Financial Officer

You know we obviously, we have our own internal goals of growing those pieces of the business and we have overlay teams that are focused on those specific sides of the business. But Erik, I don't want to get -- we're not going to get to a position where we'll guide specifically to those products because it would just be too hard for us to do that. But absolutely, we expect it to be a bigger piece of -- a bigger -- more and more opportunities each year.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

And I would say, I think the beauty is that all products can win. We have such a greenfield in pure privileged access management and the customer now has the ability to, especially as we go down mid-market, they can consume even privileged access management as a cloud service, which is an exciting offering for us. And the growth engines can behave like growth engines on top of that, both for new customers and add-ons. So the way we look at it internally is all products winning and making sure that the growth engines are at a high pace.

Erik Suppiger -- JMP -- Analyst

Thank you.

Operator

And our next question comes from the line of Nick Yako with Cowen. Go ahead please. Your line is open.

Nick Yako -- Cowen and Company -- Analyst

Hey, guys, thanks for taking my question. With Matt taking over as the head of the sales organization, anything you can share around his strategy or new initiatives he hopes to implement in 2020?

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Yeah, absolutely. First and foremost, I would say Matt came -- I'm excited and we're excited to have Matt join here, and he was super pleased to see the quality of the team, the quality of the customer base and the market opportunity. So he is staying focused on retaining the things that have worked, and then we were very selective in bringing Matt on board so that he will really help us build the best path to a $1 billion and beyond scalable organization. And he is focused on those things that have to do with scaling the business.

I'll name a few, but one of his first priority is on the channel front further strengthening and leveraging our global channels. I mentioned the advisories attending our sales kickoff. We just really have the partners here to build this even bigger. Another one, and he has tremendous opportunity there is in customer success is how do we refine our customer success, one, for scale and also for stronger cross-functional alignment like you need in a company with increasing services oriented offering, the more SaaS solutions we have out there. And there are additional elements around our demand generation engine, refining our market segmentation that he is working on, and so yes, we're very excited to have Matt on board and just work with us to take this to the next level.

Nick Yako -- Cowen and Company -- Analyst

Great. Thank you.

Josh Siegel -- Chief Financial Officer

Thank you.

Operator

And our last question comes from the line of Howard Smith with First Analysis. Go ahead please. Your line is open.

Howard Smith -- First Analysis -- Analyst

Yes. Thank you for squeezing me in here. So I just wanted to follow up on some of your mid-enterprise initiatives. I know it's still small, early days. But could you talk a little bit about whether the competitive environment you see there is different than your traditional set of competitors that you've talked about? And also in terms of go-to-market strategy, is that purely kind of a channel approach that's helping support those strong channel numbers or do you target some of those direct?

Josh Siegel -- Chief Financial Officer

Yes, absolutely, Howard. I would say that mid-market we do encounter the smaller players in PAM that don't really play on the enterprise front like [Indecipherable], but are seeing great wins, especially now that we have the optionality to offer the SaaS solution to that market. So the go-to-market is very much leading with -- especially in 2020, leading with Privilege Cloud, so software-as-a-service solution for PAM to this market. And you're right, more of a channel focus to this -- to this market segment.

Howard Smith -- First Analysis -- Analyst

Great, thank you, and congrats on a great year.

Josh Siegel -- Chief Financial Officer

Thank you very much. Thanks, Howard.

Operator

And with that, I'd like to turn the call back over to Udi Mokady for some closing remarks.

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Thank you, James. I want to thank our customers, partners, and employees who contributed to CyberArk's record results in 2019. And thank you everyone for joining our call today. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Erica Smith -- Investor Relations

Udi Mokady -- Founder, Chairman & Chief Executive Officer

Josh Siegel -- Chief Financial Officer

Saket Kalia -- Barclays -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Jonathan Ho -- William Blair -- Analyst

Rob Owens -- Piper Sandler -- Analyst

Fatima Boolani -- UBS -- Analyst

Gregg Moskowitz -- Mizuho -- Analyst

Catharine Trebnick -- Dougherty & Company -- Analyst

Gur Talpaz -- Stifel -- Analyst

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Andrew Nowinski -- D.A. Davidson & Co -- Analyst

Gray Powell -- BTIG -- Analyst

Imtiaz Koujalgi -- Guggenheim -- Analyst

Erik Suppiger -- JMP -- Analyst

Nick Yako -- Cowen and Company -- Analyst

Howard Smith -- First Analysis -- Analyst

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