CyberArk: Notes on Q3 Federal Transactions

Summary: We have seen a recent sell-side research note suggesting a strong Q3 in federal for CyberArk based on a $13.4 million Education Department transaction signed in August. For the reasons noted below, we excluded this transaction from our data set and are skeptical that it represents a significant new booking.

Background: The $13.4 million transaction was one of dozens of modifications on a 10-year data center management contract issued to Perspecta. The contract is for the Education Department's Virtual Data Center and involves providing centralized hosting and management of electronic data and computer applications and related services to support the mission of servicing student loans. Details on the Aug. 12 transaction can be viewed here - click the the second link, modification P00049.

Large contracts for IT services like this one typically include dozens or even hundreds of modifications that frequently provide incomplete information on the transaction details. We caution that it can be risky to draw conclusions about the value and term of subcontractor purchases from the details that are provided on deals like these. In contrast, the awards in our data set are complete contracts for providing a software or hardware solution (not modifications of larger services-oriented deals).

Details: There are also some specific reasons to be skeptical that the Aug. 12 transaction represents a true $13.4 million, one-year support deal for CYBR :

• There is an unusual $9.8 million de-obligation on this contract signed on Aug. 13, the day after the transaction in question. While this de-obligation doesn't specifically reference CyberArk, it does say: "Option Year Four O&M Funding Correction: To correct internal FSA accounting information for Option Year Four funding obligated, funding in the amount of $9,812,237.77 is hereby de-obligated." The only other transaction that references "option year four" on this contract is the CyberArk modification signed the previous day that reads: "1 NGDC CyberArk Support (Option Year Four). FSA accepts the Perspecta Enterprise Solutions proposal dated 07/31/2020 for FSA NGDC CyberArk Support." The overall contract seems to be in the sixth option period, so this suggests the de-obligation may be decreasing funding related to the CyberArk transaction.
• This contract also had a $20 million modification in 2018 that referenced CyberArk (Description: Funding modification and CyberArk Maintenance Support Services). We excluded the 2018 transaction as well because the data showed an unusual eight-year period of performance and it was unclear how much of the obligated value was for CyberArk support and how much for other services in support of the contract's broad overall scope of work.
• The fact that the arrangement with CyberArk appears to be in its fourth option year makes it less likely that the $13.4 million transaction would include substantial incremental revenue for CYBR, as typically an option year will continue support at close to the current level. We view this as more reason to be skeptical of the view that this transaction is the basis for a blow out federal quarter.
• There's also another modification from Aug. 17 that reads "The purpose of this modification is as follows: correct Modification P00049 and add funding for DCIR 6001 Citrix Server Resizing Effort due to COVID-19 Telework..." Modification P00049 is the $13.4 million CyberArk support deal. This description is not completely clear, but it adds to the likelihood that the funding initially obligated in the Aug. 12 transaction was not entirely for CyberArk services.
• A $13.4 million, one-year deal for CyberArk support would be a very significant outlier. Looking at 200 other CYBR transactions in our data set, there are only a handful above $1 million (the largest is $4.2 million).
• The Perspecta contract for operating the Education Department data center generated around $40 million/year in orders the past few years. Considering the broad scope of the Perspecta deal, it would seem like a high ratio going to CYBR if they are in fact generating around $13 million/year on this deal.

Bottom Line: The data on this contract is unusual enough that we think it should be viewed very skeptically. CYBR certainly has a role on this contract, but we think it would be risky to assume this transaction is the basis of a big incremental gain in federal.