Research Analyst at JPMorgan Chase & Co.
Brian Essex is an Executive Director and U.S. Software Equity Research Analyst at JPMorgan Chase & Co., focusing on technology and cybersecurity sectors. He covers major companies including SailPoint, Fortinet, Rapid7, IBM, Zscaler, and Palo Alto Networks, with a recommendation success rate of 57% and an average return of 11.8% per transaction according to TipRanks. Essex began his career in 2004, holding analyst roles at Morgan Stanley, Goldman Sachs, Invesco, and IANS before joining JPMorgan in 2019. He holds the CFA designation and maintains securities industry credentials, distinguishing himself as a highly regarded analyst in software and security equities.
Brian Essex inquired about the guidance, specifically the impact on ARR from non-SaaS, the methodology, and confidence in the federal sector.
CFO Brian Carolan explained the upfront revenue recognition from federal renewals was a timing shift with no ARR impact. He expressed confidence in the second half of the year.
Brian Essex inquired about the detailed breakdown of guidance, specifically the impact on ARR from non-SaaS components, any changes in the guidance methodology, and the company's confidence heading into the seasonally heavy federal quarter.
Brian Carolan, CFO, SailPoint, expressed satisfaction with the first half results, noting the company is ahead on all guided metrics and has raised ARR, revenue, and adjusted operating income guidance. He clarified that a $7 million revenue recognition shift from Q3 to Q2 was due to the timing of term-based federal renewals, which had a 100% renewal rate, and had no impact on ARR. Carolan emphasized a consistent guidance approach and highlighted record free cash flow and net new logo ARR in Q2.
Brian Essex asked about SailPoint's guidance, specifically the impact of upfront revenue recognition from federal renewals on non-SaaS ARR, any changes to the guidance methodology, and confidence heading into the seasonally heavy federal Q3.
Brian Carolan, SailPoint's CFO, explained that the company is ahead of expectations, raising guidance across key metrics. He clarified that a $7 million timing shift from Q3 to Q2 was due to a 100% renewal rate of term-based federal renewals, with no material impact on ARR. Carolan emphasized a consistent, prudent guidance approach and strong Q2 performance.
Brian Essex asked about the guidance, specifically the impact of upfront revenue recognition from federal renewals on non-SaaS ARR, any changes in guidance methodology given the smaller ARR guidance increase this quarter, and confidence heading into the seasonally heavy federal quarter.
CFO Brian Carolan expressed satisfaction with the first half, noting raised guidance across all key metrics. He clarified that a $7 million shift in revenue was a timing dynamic for term-based federal renewals (achieving a 100% renewal rate) from Q3 to Q2, with no material impact on ARR as these were renewals. Carolan reaffirmed a consistent guidance approach and highlighted strong Q2 performance, including record free cash flow and net new logo ARR.
Requested more details on the large retailer win mentioned in prepared remarks, including the catalyst, what was displaced, the sales cycle length, and how typical this type of deal is.
Such large-scale wins are not atypical and usually involve displacing a legacy vendor that was minimally deployed. This specific win was built on a strong relationship and the customer's frustration with their legacy solution. The deal was closed in 'fairly short order' once the opportunity formally began, validating their high win rate in replacing legacy systems.
Brian Essex of JPMorgan Chase & Co. inquired about the mix between term and SaaS deals, the resulting impact on revenue, and the strategy for migrating maintenance customers.
CFO Brian Carolan explained that Q4 saw more upfront term revenue from renewals, boosting results. For FY26, he guided to 90% of net new ARR being SaaS, creating a near-term revenue headwind. He reiterated that migrating maintenance customers, of which 10% are converted, provides a 2-3x ARR uplift and has contributed 3-4% to net revenue retention, a trend he expects to continue.
Brian Essex from JPMorgan Chase & Co. requested more details on the large retail customer win, asking about the catalyst for the deal, which competitor was displaced, the sales cycle length, and how indicative it is of typical new lands.
CEO & Founder Mark McClain noted that such large strategic wins are not atypical and often involve displacing a minimally deployed legacy vendor. President Matt Mills added that a strong relationship and education phase preceded the deal, which progressed quickly once the formal process began due to the customer's pain points with their legacy solution.
Brian Essex, Executive Director and Equity Research Analyst at JPMorgan Chase & Co., asked about the mix of enterprise focus on AI readiness, specifically if cloud-native ISV-based agentic applications are seen as low-hanging fruit for ROI before self-hosted projects. He also inquired about the source of AI spending within IT budgets and what existing spending is at risk of being trimmed.
Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, explained that both ISV/SaaS AI applications and self-hosted/private AI usage are happening concurrently ("an and" scenario). He noted that while SaaS AI provides initial value, profound AI agents require deep integration with existing enterprise applications (payroll, HR, CRM), leading to concerns about data location and security, thus driving deployment in private instances or on-premise data centers, especially in regulated industries like banking, insurance, healthcare, and telecom. Krishna stated that IT budgets are generally growing 2-3% ahead of GDP, with inflation, indicating healthy overall spending. He observed a shift in IT spending from 70% "run the business" and 30% "new projects" to a 60-40 split, with automation and hybrid portfolios benefiting from this shift as companies seek to reduce operational costs and invest in new capabilities.
Brian Essex asked about the mix of enterprise focus on AI readiness, specifically if cloud-native ISV-based agentic applications are seen as low-hanging fruit for proving ROI before pursuing self-hosted projects. He also inquired about the source of AI spending within IT budgets and what existing spending might be at risk of being trimmed.
Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, explained that both ISV/SaaS AI and private/self-hosted AI are being leveraged. While ISV/SaaS applications serve as initial entry points, real value from AI for profound agents requires deep integration with existing enterprise applications, often leading to deployment in client data centers or private cloud instances due to data concerns, especially in regulated industries. He characterized enterprise AI rollout as being in its 'first innings,' expecting growth across SaaS, public cloud, and private AI. Mr. Krishna noted that IT budgets are growing ahead of GDP, typically 2-3 points above real GDP plus inflation, and that this growth is largely additive rather than coming at the expense of other areas. He also highlighted a shift from a 70/30 (run/new) to a 60/40 IT spending ratio, benefiting IBM's Automation and Hybrid portfolios by substituting labor and services with software.
Brian Essex asked about IBM's positioning to address the current administration's shifting spending priorities in the public sector and the company's visibility into these opportunities.
Chairman, President & CEO Arvind Krishna noted that the U.S. federal government's focus is shifting from simple cost-cutting to modernizing agencies with technology and AI. He cited the administration's AI action plan as a positive indicator. Based on high-level conversations with agencies, he expressed enthusiasm and confidence that IBM is viewed as a credible partner for these modernization efforts, providing good visibility into future demand.
Brian Essex asked about the anticipated macroeconomic impact on the new mainframe cycle. He also inquired if IBM would consider taking on more balance sheet risk through its financing arm to ease customer capital expenditure constraints for the new systems.
CEO Arvind Krishna expressed confidence in a strong z17 cycle, suggesting that macro volatility can actually pull forward demand from clients seeking capacity and efficiency. He confirmed that IBM has long offered leasing for its hardware via its financing business, which is a standard practice that does not materially impact balance sheet risk. CFO Jim Kavanaugh added that IBM's capital structure and liquidity are strong, allowing it to support clients while preserving the balance sheet for strategic investments.
Brian Essex asked about customer conversations regarding agentic SecOps and ITOps, specifically whether the focus is on streaming-based analytics, leveraging AI, or displacing legacy SIM solutions.
Chairman and CEO Jay Chaudhry explained that agentic operations cover security operations (combining Avalor, asset exposure management, and Red Canary's agentic tech for outcome-based solutions) and IT operations (expanding ZDX with agentic tech for faster troubleshooting of user and machine-to-machine performance issues). He emphasized disrupting traditional security operations and improving performance detection.
Brian Essex inquired about ZDX and the approach customers are taking to GenAI data protection, asking if Zscaler's platform eliminates the need for separate data discovery and classification tools.
CEO Jay Chaudhry explained that Zscaler offers flexibility, providing its own AI-powered data classification on-the-fly and for data-at-rest, while also integrating with third-party solutions. He emphasized that Zscaler's position in the traffic path makes it the natural policy enforcement point. This strategy is driving strong growth, with data protection ACV up 40% year-over-year.
Brian Essex asked about the progress with the Avalor acquisition in the SecOps market and how customers are evaluating Zscaler's ability to scale, given its processing of over 500 billion daily transactions.
CEO Jay Chaudhry explained that the Avalor acquisition provided the foundational data fabric for new SecOps offerings like Risk360 and unified vulnerability management. He emphasized that Zscaler's key differentiator is its access to this massive, proprietary dataset, which is essential for training effective AI models for advanced capabilities like breach prediction and threat hunting, something competitors without the data cannot replicate.
Brian Essex asked about the competitive pricing environment, particularly how Zscaler is dealing with competitors using flexible pricing or giving away products to win platform consolidation deals.
CEO Jagtar Chaudhry responded that in enterprise cybersecurity, 'good enough' solutions are not acceptable. He emphasized that Zscaler's ability to demonstrate clear ROI by eliminating numerous point products like firewalls and VPNs is a powerful tool to justify cost and close deals, effectively countering competitive pricing pressures. He noted that new and upsell business has actually accelerated.
Brian Essex from JPMorgan Chase & Co. asked about Elastic's competitive positioning against rivals who are focusing on AI-driven efficiencies in data ingestion and storage, particularly within the security space.
CEO Ashutosh Kulkarni asserted that efficient, scalable data ingestion and cost-effective storage have been core strengths for Elastic for many years. He pointed to long-standing innovations like leveraging object storage and the recent introduction of LogsDB for aggressive compression as key differentiators that drive customer wins and improve total cost of ownership, noting that innovation in this area is ongoing.
Brian Essex of JP Morgan asked about the evolution of the SIEM market, specifically regarding enterprise demand for real-time streaming data analysis versus traditional data storage and querying.
CEO Tomer Weingarten stated that customers primarily want data control and real-time processing to combat modern machine-speed attacks. He positioned SentinelOne as a leader in real-time data ingestion and processing, which he believes is the key factor for unlocking AI-driven security insights across all enterprise data, defining the outcome rather than the product category.
Brian Essex of JP Morgan asked about the balance between growth and profitability, inquiring where the company is finding cost savings and where it is investing incremental leverage for the greatest return.
CFO Barbara Larson explained that the company is driving efficiency by realigning teams and making targeted investments in key growth areas like AI, while divesting from non-core areas. She noted investments are focused on AI innovation and strengthening the go-to-market organization.
Brian Essex asked about the company's strategic balance between acquiring new logos and expanding within the installed base, and also requested details on the onetime legal settlement costs.
CEO Tomer Weingarten explained that while the primary focus for sellers remains on new logo acquisition, the significant upsell and cross-sell opportunity within the customer base will be unlocked more gradually. CFO Barbara Larson clarified that the legal costs were a few million dollars related to past M&A, and the company chose to settle proactively to avoid lengthy litigation.
Brian Essex of JPMorgan Chase & Co. asked for more detail on customer conversations following a competitor's outage, the potential impact on pipeline growth, win rates, and whether guidance relies on customer churn from CrowdStrike.
CEO Tomer Weingarten stated that while Q2's strong performance was based on organic momentum, the forward-looking pipeline is strengthening. He noted that partners and customers are revisiting expansion plans and considering SentinelOne as the primary alternative to diversify risk. Weingarten clarified that while some customers have already decided to switch, the full impact will play out over longer sales cycles and is not the sole basis for their growth outlook.
Brian Essex from JPMorgan Chase & Co. questioned the acquisition of ONAM, asking how it will compete with legacy solutions and how it might complement or potentially cannibalize CrowdStrike's existing LogScale offering within the Next-Gen SIEM platform.
Founder & CEO George Kurtz expressed excitement for the acquisition, stating it will supercharge the Next-Gen SIEM business. He explained that ONAM provides a modern data pipeline with in-pipeline detection capabilities, allowing analysis to begin before data even enters the Falcon platform. Kurtz reiterated CrowdStrike's disruptive SIEM pricing, where customers don't pay for CrowdStrike-generated data, and stated that ONAM, combined with this model, will be a tremendous value for customers and disruptive to the market.
Brian Essex inquired about the sales go-to-market efforts, asking how compensation and focus have changed post-disruption and what the response has been from the salesforce.
CEO George Kurtz reported a great response from both the salesforce and customers, stating the focus is back on innovation, platform consolidation, and the value of offerings like Charlotte AI. He emphasized that customers are eager to expand their relationship with CrowdStrike, as evidenced by the rapid adoption and consumption of FalconFlex licenses.
Brian Essex asked about the growth dynamics of emerging products, noting that Cloud and Identity security appeared to decelerate faster than Next-Gen SIEM and questioning if this was related to customer incentives.
CEO George Kurtz addressed the question by highlighting the strategic importance of Identity protection, citing that 79% of modern attacks are non-malware based. He confirmed that Identity and Cloud were popular choices for customers using the Customer Commitment Program (CCP) packages, viewing this as a positive 'seeding' of the customer base that will create renewal and upsell opportunities in the second half of the year as the incentives expire.
Brian Essex inquired about the trends observed in customer churn and the durable factors driving platform adoption, especially given the resilient gross retention rates post-incident.
CEO George Kurtz stated that conversations with large customers have centered on CrowdStrike's superior technology and its effective handling of the July incident, which has built trust. He noted that while some churn might occur in the very small MSP segment, the corporate business had its best quarter ever. The primary drivers for adoption remain the platform's ability to stop breaches and lower customers' total operational costs.
Brian Essex inquired about the competitive landscape post-incident, seeking insight into pipeline dynamics beyond the pushed deals and the nature of C-level conversations that are extending sales cycles.
CEO George Kurtz reported that customer conversations have been positive, emphasizing CrowdStrike's transparent response and the continued desire for platform consolidation. He shared an anecdote of winning a next-gen SIEM deal post-incident, stating that customers recognize the value of the platform and want to do more with CrowdStrike.
Brian Essex of JPMorgan Chase & Co. asked for an update on the evolution of Okta's specialized sales force, its impact on productivity, and how it drives confidence for the remainder of the year. He also inquired about channel productivity.
President & COO Eric Kelleher expressed strong confidence, noting that Q2 results reflected increased productivity from the specialization strategy, leading to a record pipeline generation. CFO Brett Tighe added that both AE-sourced pipeline and channel-sourced pipeline saw nice growth, with partners involved in all of the top 20 deals of the quarter.
Brian Essex from JPMorgan Chase & Co. inquired about developer-side demand for authenticating AI agents, specifically mentioning OAuth for MCP, and asked how Okta is positioned to capitalize on this 'agentic demand' and its potential pricing model.
CEO Todd McKinnon expressed excitement for 'Auth for GenAI,' a product in developer preview designed for AI agents. Regarding the new MCP protocol, he noted it is very early, but Okta is actively working to integrate OAuth standards. He clarified that Auth for GenAI will use a usage-based pricing model similar to Auth0, while monetization for MCP-related features is to be determined.
Brian Essex asked about the enterprise conversations driving longer-term contracts and how this trend impacts visibility into future cRPO acceleration.
CEO Todd McKinnon explained that longer contract durations are a direct sign of strategic, platform-level commitments from customers. When enterprises decide to replace dozens of legacy identity products with Okta, the conversation shifts from tactical to strategic. These large-scale displacements, often involving a multi-year implementation plan with a GSI partner, naturally lead to longer-term commitments, providing greater visibility.
Brian Essex asked for a breakdown of the 15% of bookings from new products between new and existing customers, and where the larger opportunity lies.
CEO Todd McKinnon estimated the majority of new product bookings came from upsells to existing customers, though he noted some significant new logo wins with multi-product suites. He sees the larger opportunity in expanding within the existing base, especially large enterprises. CFO Brett Tighe added that as new products mature, they will increasingly become a vehicle for landing new customers.
Brian Essex requested more detail on the guidance caution related to the U.S. Federal business, asking what real-time softness or stability Tenable is observing.
Co-CEO and COO Mark Thurmond explained the caution stems from distractions related to the new administration, including hiring freezes and personnel changes, which create uncertainty around the timing of transactions, though budgets and projects are not being canceled. Co-CEO and CFO Stephen Vintz noted that the public sector is about 15% of total sales, and the full-year model reflects a slightly lower contribution due to this caution.
Brian Essex of JPMorgan Chase & Co. inquired about the expected penetration of Tenable One for the remainder of the year and what factors could accelerate the company's billings growth back to double-digit rates.
CFO and Co-CEO Steve Vintz explained that exposure solutions now represent over 20% of total sales, with the Tenable One platform being the primary growth driver due to strong market demand. He suggested that even a modest increase in the sales mix of Tenable One, currently 30% of total sales, could accelerate overall growth, noting the U.S. Federal market remains a temporary headwind.
Brian Essex inquired about the specific business drivers behind the increased caution in the 2025 guidance and how this outlook impacts the free cash flow forecast.
Co-CEO Stephen Vintz explained the caution stems from macro uncertainty, particularly in the U.S. Public Sector, where leadership disruption is causing less visibility and longer procurement cycles. He noted that while top-of-funnel demand is strong, the company is taking a prudent approach. Vintz confirmed that despite the top-line caution, the outlook for operating income and free cash flow is reiterated due to the natural leverage in the business.
Brian Essex from JPMorgan Chase & Co. questioned how changes to federal business incentives impacted Q3 results and inquired about the balance between margin expansion and growth.
CEO Amit Yoran stated the strong federal quarter played out as expected, without the unusual issues of the prior year. CFO Steve Vintz highlighted consistent margin expansion, reaffirming a long-term target of 35%+ free cash flow margins and expecting several hundred basis points of margin expansion annually.
Brian Essex of JPMorgan Chase & Co. asked for more detail on the U.S. Federal sales cycle, specifically wanting to understand if the bottleneck was related to procurement, sponsorship, or personnel turnover.
CRO Marcus Jewell explained that the sales cycle bottleneck is not a technical or sponsorship issue, but is occurring at the final stage related to the flow of funds. He attributed the delays to significant personnel changes within government agencies and the time required for newly approved budgets to be allocated and processed through procurement systems.
Brian Essex from JPMorgan Chase & Co. asked about the size of the federal business as a percentage of revenue and the selection criteria for the next CEO, such as technical versus sales expertise.
CEO Yossi Carmil stated that the federal sector constituted about 20% of total business at the end of 2023 and that the new Cellebrite Federal Solutions unit aims to expand the addressable market. Executive Chairman Thomas Hogan explained the CEO search is casting a wide net for the 'best leader possible' without initially over-indexing on specific criteria, focusing on finding a leader to guide the company to over $1 billion in ARR.
Brian Essex of JPMorgan Chase & Co. asked for details on the services guidance for the year and questioned if firewall refreshes result in flat subscription revenue attach rates.
CFO Christiane Ohlgart stated that the services billings-to-revenue conversion takes time, and while they are being prudent with the guide, they are confident in stronger product revenue for the year. She confirmed that customers sometimes consolidate multiple devices into one, which can impact the attach rate, making it critical to upsell other solutions like SASE. CEO Ken Xie added that accelerating product revenue is a leading indicator for future services growth.
Brian Essex inquired about the dynamics driving maintenance and services revenue, specifically the sequential decline and the expected growth trajectory for the rest of the year.
CAO and incoming CFO Christiane Ohlgart explained the sequential decline was primarily due to Q1 having two fewer days than Q4 and a slight lag in recognizing revenue from recent acquisitions. Founder, Chairman, and CEO Ken Xie added that strong FortiGate billing growth, which outpaced overall billing growth, is a positive indicator for future service revenue.
Brian Essex asked for the key assumptions behind the full-year billings guidance, including the expected contributions from the upgrade cycle, SecOps, SASE, and product refresh, as well as the implied exit rate.
CAO Christiane Ohlgart explained the guidance includes a significant upsell component and incentives to drive new logos. She stated the current assumption for product revenue growth is around 10%. Regarding the trajectory, she indicated the company expects a more moderate build throughout the year rather than a spike in billings growth in Q4.
Brian Essex requested more detail on the upcoming firewall refresh cycle, asking about the timing of customer conversations, the mix of customers involved, and the potential magnitude of the event.
CFO Keith Jensen stated that the end-of-life for these products begins in the second half of 2026, but they expect the refresh cycle to start in 2025 as larger enterprises conduct POCs. He noted the magnitude in 2026 is the largest they've ever seen, significantly larger than a similar lift in 2023, and is unusually dominated by both entry-level and mid-range firewalls. An unnamed executive added that enterprise customers often refresh about a year before end-of-life, while smaller customers wait longer.
Brian Essex of JPMorgan Chase & Co. asked for an update on the Chief Revenue Officer search and its potential impact on go-to-market strategy, as well as the impact of foreign exchange fluctuations on the business.
CEO Sumedh Thakar stated there is no set timeline for the CRO hire, as the focus is on finding the right fit for a partner-led strategy. CFO Joo Mi Kim noted that the impact from FX was not material on revenue or expenses during the quarter due to the company's hedging program.
Brian Essex of JPMorgan Chase & Co. inquired about the Quantum product refresh cycle, asking about its penetration into the installed base and whether customers are reassessing their network architecture as part of the process.
CEO Nadav Zafrir positioned Quantum as a critical instance within the broader 'connectivity fabric' platform. CFO Roei Golan added that the company is in the middle of the refresh cycle, which has 'huge potential' and is expected to last at least until 2026, driven by both existing customers and competitive replacements.
Brian Essex asked CEO Nadav Zafrir to outline the specific initiatives and benchmarks he is implementing to drive a more forceful reacceleration of growth within the company.
CEO Nadav Zafrir explained his focus is on accelerating growth through expanded go-to-market spending, fostering a culture of urgency, and shifting compensation to prioritize ARR and subscriptions. He emphasized that accountability for ambitious targets extends to every employee, including R&D.
Brian Essex asked about the impact of the recent FedRAMP authorization, seeking details on visibility into Q3 federal spending and the federal sector's readiness to adopt data security.
CFO & COO Guy Melamed called the authorization a 'great milestone' but stated it's too early to expect a material impact on Q3 results, noting the federal sector is about 5% of ARR. CEO Yaki Faitelson added that FedRAMP certification is also valuable for commercial sales, as it serves as a testament to the company's high security standards.
Brian Essex of JPMorgan Chase & Co. asked about the go-to-market motion for securing Agentic AI in applications like Salesforce and whether there would be less friction compared to the Microsoft environment.
CEO Yaki Faitelson explained that the proliferation of Agentic AI in any environment, including Salesforce, puts the data security problem front and center. He stated that to safely enable AI, organizations need Varonis to automatically right-size permissions and monitor activity, suggesting the need is universal and fundamental, regardless of the specific application.
Brian Essex of JPMorgan Chase & Co. inquired about the more aggressive 'stick' phase of the SaaS conversion, asking how investors can get comfortable with customer retention during this period and what specific learnings from the past year give management confidence.
CFO and COO Guy Melamed stated that customer benefit is the priority, highlighting that the SaaS product is superior and the MDDR offering is a key value-add available only with SaaS. He noted that for 2025, sales commissions are structured to incentivize conversions while still prioritizing new business. CEO Yaki Faitelson added that the rapid innovation on the SaaS platform and the necessity of automated security for AI makes the move compelling for customers, reducing resistance.
Brian Essex referenced a previous analogy about the SaaS transition's 'carrot' phase going so well that the 'stick' wasn't needed, and asked if this is still the case and how much runway remains with easier customer conversions.
CEO Yaki Faitelson affirmed that the SaaS platform's value proposition, especially the automated outcomes and MDDR capabilities, creates a strong appetite for conversion among customers. CFO & COO Guy Melamed added that being just under two years into the transition and on track to hit nearly 50% SaaS mix demonstrates the healthy progress, all while significantly increasing free cash flow generation.
Brian Essex asked for details on the strong product revenue growth, seeking to understand the mix between market share shifts, pricing increases, and hardware refresh cycles.
CEO Nikesh Arora explained that product revenue growth is driven by both hardware, which grows steadily at 5-8%, and a significant inflection in the software firewall business. He stated this acceleration is fueled by the AI trend, as customers moving to the cloud to leverage AI models require robust security for cloud traffic, thereby boosting software firewall demand.
Brian Essex questioned how leveraging AI across the platform, particularly in cloud security, impacts Palo Alto Networks' competitive standing and win rates against point solution vendors.
CEO Nikesh Arora explained that the company's platformization strategy provides the harmonized data necessary to build effective AI agents. Chief Product Officer Lee Klarich added that the new Cortex Cloud connects security from code to cloud to SOC, enabling proactive, real-time security. Nikesh Arora concluded that the cloud security market is shifting toward run-time protection with agents, a trend that favors their integrated approach.
Brian Essex asked about the integration between Cortex and Prisma Cloud, its market timing, typical sales motion, and overall competitive positioning.
Chairman and CEO Nikesh Arora and Chief Product Officer Lee Klarich responded. Nikesh positioned the integration as critical for the shift towards real-time cloud security (CDR). Lee added that the integration, launched earlier in the year, connects Prisma Cloud's posture data with Cortex's runtime protection, enabling superior threat detection and automated remediation in cloud environments.
Brian Essex inquired about the health of the market spending environment for both enterprise customers and MSPs, and asked for a decomposition of the dollar-based net retention rate, including whether it has reached a trough.
President and CEO John Pagliuca affirmed that demand for cyber resiliency remains a necessity, keeping the pipeline strong despite anecdotal reports of longer deal cycles. EVP and CFO Tim O'Brien suggested the dollar-based net retention rate is likely at a trough, with steady gross retention, and expects improvements to be driven by cross-sell opportunities and a 1-2% pricing increase in 2025.
Brian Essex asked about the state of engagement with Adlumin's reseller partners post-acquisition and inquired about Adlumin's competitive positioning and key differentiators in the crowded XDR and MDR market.
President and CEO John Pagliuca described engagement with Adlumin's resellers as 'enthusiastic,' noting they appreciate the backing of a public company and access to N-able's broader portfolio. He detailed Adlumin's competitive advantages, highlighting its cloud-native, AI-powered architecture, its endpoint-agnostic capabilities, and its unique ability to separate the XDR software from MDR services, offering more visibility than 'black box' competitors.
Brian Essex inquired about the macroeconomic conditions affecting N-able's MSP customer base, including business health and consolidation trends, and asked about the sustainability of recent cost controls in sales, marketing, and G&A.
CEO John Pagliuca stated that the MSP channel remains healthy, with a vast majority planning for growth driven by security and disaster recovery demand. EVP and CFO Tim O'Brien explained that G&A cost levels are sustainable, while sales and marketing expenses are expected to grow in line with revenue going forward. He also noted that capitalized commissions contributed to the year-over-year reduction in S&M spend.
Brian Essex inquired about the go-to-market changes, asking about the extent of headcount changes in the sales force and the team's current maturity level. He also asked for context on the relatively wide range for the full-year revenue guidance and the primary factors that would lead to achieving the upper end.
CEO Eric Friedrichsen stated he is pleased with early results from the new strategy, noting the 9% growth in customers spending over $100k. He clarified the main change was freeing up sellers from account management duties rather than a major headcount shift, and that the team is adequately staffed. Regarding guidance, he explained the range reflects the timing uncertainty of when the strategic shift will fully impact results, but he believes there is significant upside from focusing on large customers.
Brian Essex asked about the monetization strategy and customer penetration plans for the Cecilia AI platform, as well as the expected timeline for reaching cash flow breakeven.
CEO Eric Friedrichsen highlighted strong early feedback for Cecilia AI, noting its security features are designed to encourage adoption in the conservative legal industry. He shared an anecdote of a large firm calling it "light years ahead" of competitors but cautioned that it will not have a material revenue impact in the near term. Regarding profitability, Friedrichsen stated the primary goal is accelerating growth, with revenue expected to outpace expense growth next year through strategic resource shifts rather than just adding costs, putting the company on a path to sustainable profitability.
Brian Essex asked for an explanation of the divergent revenue growth trends between North America and international markets, and inquired about which region holds the most excitement for future growth.
CEO Corey Thomas explained that geographic performance varies, with Europe and APAC showing strength last year while North America faced weaker budget cycles. He clarified that the expected improvement in North America for 2025 is not based on a macro recovery but on having a full year to sell a more robust and expanded product portfolio. He emphasized that trends are highly specific to industries and sub-regions rather than broad, continent-level dynamics.
Brian Essex of JPMorgan Chase & Co. asked for details on the partner ecosystem, given that 90% of new ARR is sold through it, and questioned if the partner mix was a contributing factor to elongated sales cycles.
CEO Corey Thomas stated he does not believe the partner mix is the primary contributor to longer deal cycles. Instead, he attributed the elongation to the significant increase in the average size of deals in their pipeline. He explained that larger deals inherently face more budget scrutiny in the current environment, and the company's focus on larger D&R deals through partners has shifted the pipeline mix accordingly.
Brian Essex asked about the specific go-to-market enablement required for CyberArk's direct sales and channel partners to sell Venafi, and the expected timeline for this to impact growth. He also inquired about any potential deferred revenue write-downs.
CEO Matt Cohen reported that sales training began immediately, with strong pipeline already being built for the next year. He highlighted unexpectedly high demand from partners for training, noting the full impact on growth will likely materialize through 2025 due to typical sales cycles. CFO Joshua Siegel confirmed there would be no material deferred revenue write-down from the acquisition.
Brian Essex inquired about partner initiatives, such as the Instagram integration, and their impact on platform volume. He also asked about the role of data analytics as a value proposition for studio operators.
CEO Rick Stollmeyer noted the Instagram integration was in beta and that partner growth, while steady, was a key component of the tripling of promoted offer sales year-over-year. He explained that the company's strengthening data science capabilities are currently used internally but are on the roadmap to be surfaced to customers to help them grow their businesses.
Brian Essex requested a breakdown of ARPS growth between pricing increases versus customer migration to higher tiers, inquired about the international customer mix, and asked for an update on the Google Reserve integration.
CFO/COO Brett White and CEO Rick Stollmeyer clarified they don't break out ARPS components but noted that up-tiering was a significant factor. Brett White stated international revenue is 20% of the total and growing faster, with a similar focus on high-value subscribers. Rick Stollmeyer added that Google Reserve shows steady growth but is not yet a material portion of bookings, though it validates the consumer partnership strategy.