Rubrik (RBRK) Q2 2027 earnings call transcript

I will now hand the conference over to Melissa Frankie, Vice President of Investor Relations. Please go ahead. Hello, everyone. Welcome to rubric second quarter fiscal year 2027 financial results conference call. On the call with me today are Bipplesnja, CEO Chairman and co founder of rubric, and Karen Shoudry, Chief Financial Officer. Our earnings press release was issued today after the market closed and may be downloaded from the investor relations page at www. ir. rubric. com.

Also on this page, you'll be able to find a slide deck with financial highlights that along with our earnings release, includes a reconciliation of gaps to non gap financial results. These measures should not be considered in isolation from or as the substitute for financial information prepared in accordance with gaps. During this call, we will make forward looking statements, including statements regarding our financial outlook for the third quarter and full fiscal year 2027. Our expectations regarding market trends, our market positions, opportunities, including with respect to generative and agentic AI, growth strategies, product initiatives, and expectations regarding those initiatives, and our go to market motions. These statements are only predictions that are based on what we believe today and actual results may differ materially.

Before looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail with our filings with the SEC. Rupert assumes no obligation to update any forward looking statements that we may make on today's call. And with that, I'll hand the call over to Biple.

Thank you, Melissa. And thank you all for joining us today. I'm pleased to report that our second quarter results were truly outstanding. Once again, we exceeded all guided metrics across top line and profitability. And this is not the first time. In fact, it is our 10th consecutive quarter of our performance as a public company. And this quarter, we accelerated. Yes, let me repeat, accelerated net new subscription ARR growth. This is a testament to the strength of our platform and the continued durability of demand for rubrics, agentic cyber resilience. Here are the key numbers.

First, subscription ARR reached 1.66 billion, growing 33% year over year. Second, net new subscription ARR reached approximately 96 million in the second quarter. Third, our subscription revenue was 407 million, growing 37% year over year.

Fourth, our subscription and ARR remained strong at over 119%. And I'm not done yet. Here are two more key numbers.

Customers with 100,000 or more in subscription ARR reached 3,084, growing 23% year over year. And finally, on profitability, we once again made material improvement in subscription ARR contribution margin up about 460 basis points year over year. We generated 66 million in free cash flow this quarter. Very few companies at rubric scale can drive this level of growth plus expanding margin and strong fee cash flow generation. I'm pleased to report we are once again raising our outlook for the year.

Let me start by giving you some context on how the market is evolving and what is driving our confidence in the future of our business. Needless to say, AI is the most transformative technology of our lifetime. What is fascinating to us is that the scale of productivity that AI creates is matched only by the scale of new risks that AI is born.

Meethos and Frontier AI models are proving it every day. Rubric is a participant in entropics project glass van. We built a complete harness to close the loop from vulnerability discovery to code patching. The reason I bring this up is because our project glassing findings underscore our belief that we are in a singularity moment with AI and cyber security. As you might recall from my comments earlier this year, we are no longer in a world of human speed. A few years ago, humans were attacking us and humans were running our business processes. Enterprises have spent billions across thousands of security tools trying to detect and prevent those threats from materializing. These investments are not proving to be relevant anymore.

Today, AI agents are attacking us. These autonomous agents use AI for vulnerability training to find the right malicious combination to intrude, breach, and encrypt at machine speed. If you have yesterday's cybersecurity tools with human speed response, you have a huge mismatch. And at the same time, AI agents are increasingly running business processes, workflows that assume identities, access sensitive data, and take autonomous action. Both threat actors and business operators are now agentic. We have witnessed vivid real-world illustrations of the unprecedented risk that these dynamics force. This includes the recent hugging phase incidents in which we saw an autonomous AI agent exploit a zero-day vulnerability and gain unauthorized access to life systems all without human direction. This clearly demonstrated both halves of the risk companies are grappling with.

And AI orchestrated attacks moving faster than any human speed response and an agent operating well outside the guardrails anyone intended for it. In this new reality, prevention and detection are no longer enough. At the same time, you can't fight AI with the same legacy software you have been using. What you will need is a new approach, preemptive risk assessment, real-time guardrails, and AI speed recovery. In short, agentic cyber resilience. No wonder businesses around the world are turning to rubric for agentic cyber resilience. We deliver rubric as an AI agent, because an agent is the only way to respond to AI speed and effectively collect, monitor and understand information, create recovery plans, ask humans for permission and create outcomes.

Rubric also has agentic governance and security built onto our platform to create runtime guardrails for agentic work. This is the same capability we are delivering to our customers with rubric agent cloud which governs and secures our customers own AI agents. As you may know, we operate two complementary product suites onto our single platform, rubric security cloud for cyber resilience and rubric agent cloud for agentic security and governance. These two suites map directly to the two-sided risk enterprises face as they adopt AI, assuming AI powered breach and assuming agentic overreach.

Let me first discuss our opportunity with rubric security cloud or RSC. Our proprietary preemptive recovery engine is the backbone of rubric agentic cyber resilience. Our architectural advantage which combines time series data and metadata allows us to continuously pre-calculate clean points of recovery across on-prem cloud, SaaS, unstructured data and identity before an attack occurs. Rubric's preemptive recovery engine does the work piece time to be able to achieve recovery at AI space in what time. This is how we deliver record fast recoveries with RSC when our customers have breached or their agents get compromised.

And this is why we continually deliver extremely high competitive win rates. Our cyber resilience data protection business continues to benefit from the ongoing transformation towards cyber resilience and consolidation to platforms, not point solutions. Amid an increasingly malicious cyber environment, customers increasingly view rubric's unified single platform approach to cyber resilience as a board level mandatory requirement rather than a discretionary purchase.

Customers can initially adopt rubric in many different ways. Cloud, on-prem, unstructured data, identity, M365, agent cloud, but we initiate the same single policy engine on our single rubric platform. When a customer adopts rubric, they are not just buying a solution. They are stepping into an ecosystem where each additional product adopted makes all existing rubric products more powerful. This is a testament of a true platform built on complementary network effects.

Let me share two of the many illustrative customer wins from the quarter. First, we landed a new logo deal with the US state government agency which displaced its legacy incumbent after concerns around cyber recovery time amidst the rise of cyber threats. The agency chose rubric for enterprise and M365 protection, noting our reliability, compliance threats and the speed of cyber recovery. And second, we won a new global 2000 financial services customers displacing a legacy vendor and out competing a new gen competitor.

This customer selected rubric to protect full data environment including on-premises, data centers, cloud, M365, unstructured data and identity with rubric winning due to the strength of our cyber resilience capabilities across a single platform. In addition to cyber resilience, rubric solved for the customer's tool consolidation needs amid growing tech sprawl.

Turning to rubric flex, our unified platform contract vehicle which we introduced as forward in June. Rubric flex is one license, one contract, one commitment for complete agent cyber resilience. We are pleased with the early reception and have already closed a handful of flex deals.

As an example, one of our largest expansion deals of the quarter was a flex deal with a large US healthcare system extending our platform beyond its existing on-premises footprint to cover M365 cloud and identity data under a single enterprise agreement. This win came against cloud data backup tools with customers citing a single pane of glass across on-prem, cloud, SaaS and identity data as the deciding factor for true cyber resilience.

We believe flex will become the default motion for our largest strategic accounts over time. Turning to identity, our identity resilience business continues to be one of the fastest growing product lines in the company's history. As you might recall, we started our identity journey with the release of identity recovery which provides the rapid recovery of identity services following cyber attacks or operational failures. We then launched rubric identity resilience which enhances risk posture by tracking misconfigurations and high risk or malicious changes within identity services.

We continue to rapidly disrupt the identity protection markets with our recent announcement of the identity roll forward in identity resilience. With these capabilities, identity resilience now gives our customers the ability to recover identity systems to a clean current state without losing legitimate business progress and without leaving a tactical persistence behind. We have been building towards identity for years. Our recent acquisition of a strata identity only accelerators bringing orchestration capabilities that makes our platform complete. There is nothing like this in the market. Let me share one specific example of an identity event. In the second quarter, we won an identity resilience, cloud data and SaaS protection deal with a large online fashion retailer. Displacing is incumbent native backup tools and beating out a point solution competitor.

The customer chose rubric for its mission critical applications across m365 active directory and its e-commerce platform in azure, citing our air-gapped immutable backups and speed of clean recovery in case of a cyber incident.

Let me turn to rubric agent cloud or RAC. As we have discussed in detail at our analyst day, RAC is built around three pillars. Continuous monitoring and observability of sanctions and unsanctioned agents, dynamic runtime security and governance through our semantic AI governance engine or SAGE, and agent rewind which allows our customers to surgically undo destructive agent actions. More recently, we unveiled rubric agent identity, the access plain for that. It governs who can do what with agents, which users and groups can use which agents, which mcp servers and tools those agents can reach, and what scoped access each individual tool calls receives at the moment of action. Agent identity extends existing identity infrastructure that customers already run and federate with Octa and Microsoft AntraID.

This brings user and group context into every access decision. Rubric agent identity completes the RAC governance model. As a reminder, in RAC, we are building a complete agent security and governance platform across agent visibility, agent identity, agent runtime security and agent rewind. This is extremely valuable for our customers as they don't have to buy point solutions from many vendors then stitch them together by themselves. While early, we are pleased with the momentum of RAC and continue to see proof of concept engagement convert into production deployment. We now have over 15 and growing RAC customers. One of our larger RAC wins came from a long time platform customer already relying on rubric for cyber resilience across on-prem, cloud and M365 workloads.

As this large retailer scales AI coding agents across engineering, the customer expanded on to RAC, extending the same platform it already trusts for recovery into agent governance. The customer noted the appeal of agent rewind to undo destructive agent actions at machine speed and says to secure those same agents in real time with AI.

In summary, as I look back onto the quarter, three things are standout. Number one, AI speed breaches and agent coverage are no longer hypothetical, they are inevitable. Companies are waking up to a new reality that AI agents can and will attack at machine speed and increasingly compromise enterprise agents resulting in massive insider attacks. This is exactly why agent cyber resilience, not legacy prevention, detection and recovery is becoming the board level standard.

Number two, every part of our platform is compounding on the power of complementary network effect. Data protection, identity resilience and agent security and governance are in three separate beds. They are one flywheel. This quarter shows customers consolidating on to the rubric platform rather than buying another point solution.

And finally, number three, the results prove the model, not just the moment. Accelerating net new era, expanding margin and raise outlook show our confidence that this is a durable execution at a scale. With agent KI adoption is still early, our opportunity ahead is far larger than what we have captured so far.

In closing, as always, I want to thank my fellow rubric and for outstanding innovation and execution. I also want to thank our customers and partners for their continued trust. And of course, you, our shareholders for your continued support. It is still early innings in this era of agent cyber resilience. And I strongly believe rubrics best is yet to come.

With that, I'm pleased to pass it over to our key financial officers, Karen Choudry.

Thank you, Bipple. Good afternoon, everyone. And thank you for joining us today. We had a strong second quarter, exceeding all our guided metrics and demonstrating continued execution in the large and growing cyber resilience market. We are pleased to once again raise our outlook for the year.

Let me start by briefly recapping our second quarter of fiscal 2027 financial results and key operating metrics. And then I'll provide guidance for the third quarter and full year fiscal 2027. All comparisons, unless otherwise noted, are on a year-over-year basis. We are very pleased to have ended the second quarter with subscription ARR of 1.66 billion growing 33% year-over-year. We added approximately $96 million in net new subscription ARR in the quarter. We did not see any material impact to our subscription ARR from rising hardware costs or supply constraints. As a reminder, we are primarily in the business of selling software, either in the cloud or self-hosted. Moving along, our differentiated land and expand model benefits from multiple avenues to gain new customers and grow our footprint after the initial contract.

Expansion occurs through data growth in existing applications, securing more applications and identities, adding more security products or adding rubric agent cloud. As a result, we continue to see strong subscription net retention rate of over 119% in the second quarter. We are very proud of the high customer retention and expansion dynamics of our business. All vectors of expansion are healthy contributors to our NRR, highlighting the meaningful runway we have to more deeply penetrate our customer base.

We ended the second quarter with 3,084 customers with subscription ARR of 100,000 or more up 23%. These larger customers now contribute 88% of our subscription ARR, which continues to grow as we become an increasingly strategic partner to our enterprise customers. Customers with subscription ARR of $1 million or more grew over 57%. For the second quarter, subscription revenue was $407.2 million, up 37%. Subscription revenue in the second quarter, primarily benefited from stronger ARR growth as well as more upfront revenue in the quarter, including higher RSCP and material rights.

Material rights related to our cloud transformation contributed approximately $4.7 million to subscription revenue in the quarter, compared to $8.5 million in the prior quarter. Our other revenue category includes services as well as hardware sales in some regions, such as APAC, that have not been fully transitioned to our partners. In Q2, other revenue benefited from the higher price and volume of hardware due to business strength in those regions. Please note that our subscription ARR does not include sales related to other revenue. Total revenue was $427.3 million, up 38%. Revenue normalized for material rights increased 43%.

Turning to the geographic mix of revenue, revenue from the Americas grew 33% to $299 million, revenue from outside the Americas grew 52% to $129 million.

Before turning to gross margins, expenses, and profitability, I would like to note that I'll be discussing results on a non-gap basis going forward. Our non-gap gross margin was 81% in the second quarter, compared to 81.6% in the year ago period. Our gross margin benefit from greater scale in our customer support organization offset by lower material right related revenue and revenue mix. We continue to expect gross margins in our long-term target range of 77 to 82% as we discussed at our analyst day. As a reminder, we look at subscription ARR contribution margin as a key measure of operating leverage. We believe the improvement in our subscription ARR contribution margin demonstrates our ability to drive operating leverage and profitability at scale.

Subscription ARR contribution margin was 14% in the last 12 months and at July 31 compared to 9.4% in the year ago period and improvement of 460 basis points. The improvement was driven by higher sales, the benefits of scale, and improving efficiencies and cost management across the business.

Free cash flow at 65.7 million dollars compared to 57.5 million dollars in the second quarter of fiscal 2026. The increase was primarily driven by higher sales and improved operating leverage.

Turning to our balance sheet, we ended the second quarter in a strong cash position with 1.75 billion dollars in cash, cash equivalents and short-term investments and 1.13 billion dollars in convertible debt.

Let me now provide some context on our guidance. We are confident in our outlook driven by the robust cyber resilience market, a differentiated technology platform, and the scaling of our emerging products such as identity resilience. This momentum coupled with our consistent and effective execution positions us to achieve strong subscription ARR growth ahead.

We plan to continue making operational investments across two key areas. First, we will continue to invest in R&D to accelerate innovation in the large but developing markets of data, security and AI.

Second, we will invest in our go-to market, specifically targeting regions and verticals that we believe offer the most attractive ROI. These go-to market investments will also focus on scaling our newer innovations, including our identity resilience platform and rubric agent cloud.

Now, turning to our guidance for the third quarter and full year fiscal 2027. In the third quarter, we expect a revenue of $429 million to $431 million up 23% or up 31% when normalized for material rights. We expect material rights related to our cloud transformation to contribute approximately two to three million dollars to revenue in the third quarter.

We expect non-gap subscription AR contribution margins of approximately 14%. We expect non-gap earnings per share of seven to nine cents based on approximately 230 million weighted average shares outstanding. For the full year fiscal 2027, we expect subscription AR in the range of $1.88 billion to $1.885 billion reflecting a year-over-year growth rate of approximately 29%. We expect total revenue for the full year fiscal 2027 in the range of $1.685 billion to $1.693 billion. As a reminder, in fiscal 2027, the substantial reduction in material rights revenue will represent a meaningful headwind to our reported revenue growth.

We expect material rights related to our cloud transformation to contribute approximately 18 million dollars to revenue for the full year. Revenue growth normalized for material rights is expected to outpace our subscription ARR growth rate. In terms of profitability, we plan to continue to stay focused on capturing the market opportunity in cybersecurity and AI while balancing growth with improved efficiency. Based on our current investment plans, we expect non-gap subscription ARR contribution margins of approximately 15.5% for the full year fiscal 2027.

We expect non-gap earnings per share of 47 to 53 cents based on approximately 228 million weighted average shares outstanding for the full year. We expect free cash flow of $323 million to $333 million. As always, we have included additional modeling points in our investor presentation.

In closing, we are very pleased with our strong second quarter results and remain confident in our ability to deliver durable and efficient growth as a market leader in cyber resilience.

With that, we'd like to open up the call for questions.

I think there's some questions out there just around how big that was. So just for everybody's benefit, can you just walk through how much of this quarter's ARR came from inorganic? Sure, socket. Thanks for the question. I'll just clarify here that in the most recent report quarter Q2, there was zero ARR from Strata acquisition and also clarify that in the guidance we provided there's assumption of zero ARR as well. So both zero and the quarter, zero for the year.

Sure, Fatima. So let me take the first part of the question. So obviously, very pleased with the first of performance, including Q2. As you know, we accelerated net near growth. And when I look at the guidance, we, we took the guidance up by the full beat in Q2 as well as raise some more. So totally, when you look at the last guide versus this kind, it's about 24 to 25 million higher.

In fact, the net near our growth rate implied by the new guidance for the year is 700 basis points over the previous guide went from seven to 14%. Obviously, we run the business, as we have said many times on an annual network basis, a sales compensation as well, the plans have changed over the last year on an annual basis as well. So it's really the annual number we focus and run the business for. We have a multi-product motion with multiple products doing really well.

And it's obviously the half time in the year, we still have two quarters to execute, feel pretty confident about the numbers we put forward and the pipeline we have to execute it.

Just to add a little more color Fatima on that, if you look at where we started the fiscal year, in terms of our net new ARR for the year, we have in two quarters, we have raised the net new ARR by 45 million, which is more than 10% from the beginning of the year number that we projected.

And that is without any inorganic. I mean, as Kiran said, we added zero ARR from Strata acquisition and Strata acquisition is also not part of our projections of zero in the projection and zero in the quarters. So we are accelerating our business. And if you look at this particular quarter, our net new ARR grew 35% year over year, which is a significant acceleration from our past quarter. I'll just add one more thing, Fatima.

This is Kiran on the and we have talked about in the past as well in terms of the cloud net new ARR. We obviously have had a very successful run with the migrations. It is wrapping up this year. So when you look at the cloud net near our growth, as of last quarter, we were reporting out the adjusted number without migrations and we grew 20% year over year in terms of the cloud net near growth. You'll see provided that in the press release and the investor presentation as well.

If you look at our strategy, we have three pillars of products from data to identity to AI. And why are we doing AI? Because AI agents assume identity and work on sensitive data. And that's why you need to have a comprehensive agent security and governance platform as folks are adopting agents. As you know, businesses will have two kinds of agents. One is custom agent that is custom built for their business workflow. And those take time to build because you need to have harmonized data structures, harmonized ontology and context on the data before you can really design an agent take business processes custom to your business. But coding and search has become too widely adopted use case within enterprise when it comes to AI.

But when customers deploy these agents to do coding or search, they are worried about these agents taking destructive action or not following security protocols of the business. And that's why we focused on building agent security and governance. But agent security and governance, everybody is taking a point solution approach. We are taking a comprehensive approach from agent visibility. So telling what sanctioned or unsanctioned agents you have to agent identity, which actually gives you the control and access playing for that agent so that at runtime to MCP proxy, we are enforcing only the right set of data is being touched by the right user. Then we have agent runtime security with our semantic governance engine stage, where we are looking at the agent intent and stopping actions that are not aligned to the business process and rules.

And then finally, agent take bad actions, you can undo those actions. So we are taking a comprehensive approach to agent security and helping our customers go on the agent journey. They are mostly around coding and search so far. Just to give you a sense, one of a large US healthcare technology firms bought rubric and the CIO was involved in that purchase to ensure that their agent uses is compliant.

And they were worried about, since it's a healthcare company, they were worried about data leakage and compliant with the healthcare data and with our rubric agent cloud, they will be able to securely expand agentic uses across the organization because they are now have both ability to secure the access in runtime, understanding the intent of the agent, as well as the ability to rewind. So these are the kinds of things our customers are coming to us, just like we have delivered data resilience and identity resilience, we are not delivering AI resilience.

Sure, Greg. I can clarify that. So what I think we spoke about the previous quarter as well. We have a cloud business as well as a non cloud business and the non cloud business is largely directed towards folks who are in the regulated industry, government agencies as such on prem, who do not want to use the cloud. And that business has started to grow. Obviously, we went through a period of migrations when there were there was a piece of the non cloud business, which was moving to cloud, but that has largely been done now. So going forward, you'll see the non cloud business grow as well. We saw that last quarter, we saw this quarter and going forward too.

So the total net new growth for subscription ARR is going to be a combination of the cloud as well as non cloud. Just to add a little bit of a color, Greg, given the geopolitics and given all the things that we are seeing around the world in terms of security, every country is now concerned about containing their supply chain and economic infrastructure.

And as you can imagine, digital infrastructure and AI infrastructure is an important economic infrastructure. And that's why folks are working on digital embassies and containing data containing infrastructure in their own sovereign realm. And this whole sovereign cloud and sovereign infrastructure is actually driving some trend towards non cloud rubric sales. And that's what you see around regulated industries, sovereign sensitive industries, defense government, and overall geopolitics concerns is driving non cloud sovereign deployment.

I'll also add Greg that there's ample demand in both these markets, both the cloud and the non cloud. So we run the business on subscription ARR. That's the primary metric we focus on, and the mix of cloud non cloud will play out depending on the quarter. We have given some modeling points to guide for the second half in terms of cloud non cloud contribution, which should help you with the modeling.

So can you just talk about the incremental demand you're seeing for cyber resilience or RAC in response to meet those and maybe how that started materialized in the quarter or the outlook. Thank you. Thanks, Eric. So we have been saying for the last six, seven years saying prevention and detection of cyber attack is not sufficient. Folks have to assume breach and prepare for cyber recovery and cyber resilience. And meat holes and frontier AI models have been a huge inflection point for our industry. What meat holes has demonstrated is the vulnerability chaining will make low priority vulnerability into a P zero problem. And as a result, and these models are so smart, that there is no real time between inclusion and breach.

So you cannot stop breaches. You cannot detect or prevent pretty much anything if the vulnerability exists. So the real strategy is fast recovery of what we call machine speed recovery and touching without human intervention. So the whole industry is now aligned to our original vision of assumed breach and delivered machine speed recovery. So we are seeing acceleration in terms of the customers coming to us, having concerns about meat holes, deploying cyber resilience capability that can deliver preemptive recovery engines, which delivers AI speed recovery. That's the conversation. And so that's the first part of the agent cyber resilience where AI is attacking you. At the same time, your agent that you're deploying in your enterprise can get compromised and that could lead to a significant insider attack.

So folks are also worried about resilience for these AI agents. And that's why we have a complete agentic resilience platform with rubric agent cloud that delivers both security and governance of AI agents.

Thank you, Eric.

So let me start by giving you where we are. So yes, we have more than 15 paying customers for RAC. So and we are seeing a strong proof of concept to production deployment trend on RAC.

You talked about the competition and noise in this particular market. Yes, there is competition for point solutions. So observability companies are providing visibility into agent. Identity companies are providing access and governance into agents. Pretty much not many people are doing watching intent of AI agent with AI. That's unique that we brought into the marketplace. And obviously, agentic rewind is our heritage. So if you look at rubrics strategy, instead of having our customers buy four or five point solution and switch them together to have complete visibility and control on AI agents, they could buy rubric platform, which has visibility, identity, runtime security, as well as agent rewind all on a single platform. So we are taking a very long term platform approach because we believe that this particular market requires comprehensive platform because the risk with agents are very high.

And we want our customers to deploy agents with confidence and get the benefit of the productivity that AI delivers.

If this is good and I'll just add that we're very pleased with the progress so far. But the focus here is on finding the right product market fit and making a customer successful. So there's minimum assumption of RAC in this year's ARR and we'll keep you updated as the week year progresses.

So, Junaid, just to give you the market and product fan, Rubik does have a product that utilizes our customers existing infrastructure to deliver cyber resilience. Having said that, we are a software company and we are in the business of selling software and our customers have the opportunity to deploy cloud data protection across their many vendors that they might have in terms of their hardware supply chain.

Plus, if you look at where our business is today, Rubik is not a point solution on data center. That is a smaller part of our business. If you look at our overall business around cloud, M365 identity and all and rack all of the products that we are selling. So, that's the reason that we have no material impact from hardware cost rising or supply chain issues.

Kiran, do you want to give some?

No, I didn't. Just to reiterate, enterprise protection is a smaller part of the business. We had shared some data at our analyst in June as well. So, just in terms of the scale of that business. So, we have a, we have a multi-product company with different avenues for growth and customers can protect data across different workloads and the cloud as well as on-premise.

Thank you, bottom. So, if you look at data security, the risk on the data security comes from user interaction on data that is your identity. And that's why we built the complete identity resilience platform. It's still early days for us in identity and penetration in our customer base is still very early. Obviously, we started with identity recovery as the first product and then we built identity resilience that brings the risk aspect of the identity. And in that risk aspect, misconfigured identity privilege escalation, sensitive data, exposure because of the privilege escalation and this is where we bring the DSPM flavor into identity. And we have a significant opportunity with identity. Just this quarter, we close the largest international identity deal in Rubik's history with an existing customer.

The customer had the requirement of recovery in hours and their current solution was recovering in days, like seven days. And so, this deal was a very high priority CIO CISO level deal and Rubik identity resilience provided that solution to the customer. So, as you can see, identity data and the whole AI resilience, we are delivering the complete package to our customers to be ready for me, those or whatever comes next.

And maybe are there any areas where the speed or data advantages increasingly makes M&A more attractive, maybe than just the organic incubation model? Thanks.

Thank you. In terms of Rubik's strategy, we always took a platform strategy because we believe that the complementary network effects of the Rubik platform is very powerful to our customers because they are not just buying a solution from Rubik. They are entering into an ecosystem of solutions where each additional product that they buy from Rubik increases the value of all existing product that they already have with Rubik. And this is the power of our platform. So, we always take this approach that we want to look at teams, technologies, products that we can bring in and integrate into our platform so that our customers continue to have a seamless experience.

Having said that, we are not dogmatic. We are always looking at new opportunities with the lens saying, can we accelerate our roadmap? Can we accelerate our customers' journey to AI, customers' journey to more of AI transformation? And so, we are always looking both organic and inorganic. But so far, we have found opportunities where we can accelerate our roadmap by finding teams' technologies' products to build into the Rubik platform.

And if I'm looking at your guidance and the model points in the deck, it looks like non-cloud ARR should be growing around 10% this year, give or take, whereas in prior years, it was declining. And I know everybody likes to focus on cloud ARR, but like all else equal, isn't growth in non-cloud a good thing? Like, is there is any difference in the gross margin profile or the expansion potential of these products? I guess I'm just asking because I'm a little bit confused why people sent an overly focused on the cloud metric.

That's a great question. And I think earlier on the call, I answered as well, for us, we have two businesses. We have a larger cloud business, which is represented by the cloud ARR and a smaller, but now growing non-cloud business as well. We started our cloud transformation, where we started building cloud products and marketing them about a few years back, after several years of deep R&D, which really allows our customers to manage data sources, wherever they set cloud, non-cloud, and SaaS applications, all from the cloud. But we also understand that there are some regulatory and geo-requirements for which customers would want to self-host. And we respect that. And people talked about earlier, there's an opportunity in sovereign clouds in governments and in some regulated environments as well.

So we will sell those markets fully as well. So you should expect that both these businesses are growth drivers, but we focus on a total subscription era. Really the mix at this scale, we are 99% cloud. Maybe there's a little bit more in terms of contribution, but for us, both are important businesses, albeit the non-cloud business smaller. I would say obviously from a margin perspective, the non-cloud business would have a higher margin because the customer is self-hosting and we are not hosting it for them.

Sure.

So as we mentioned in the prepared remarks, there was no material impact from hardware pricing or supply chains on our subscription ARR and that was the case the last quarter as well as the quarter before. So we saw the same phenomenon this time as well. On your question on lead times, actually, we are not in the hardware business per se. There is a small portion of hardware which we sell and that's largely in regions which are smaller, like in some regions in Asia Pacific, and we did see lead times actually get better from the start of the year. But no material impact the subscription ARR.

Maybe for you, can you help us understand what's driving the strength and your identity resilience business today? And is that demand primarily? Is that incident driven? Is it proactive? And are these mostly greenfield deployments or these competitive displacements? So as you know, hackers are not breaking in. They are logging in because identity has become the weakest link in cyber attacks. And once these attackers get in, lots of times they actually destroy identity systems or do a ransom or encrypt the identity system or have long-term persistence in the identity system and that becomes their host to attack other places. So identity systems have become also ground zero for cyber. And so customers are looking for identity resilience to understand misconfigured identity, identity recovery to recover after a cyber attack.

Also, your persistence in terms of the malicious identity, you want to roll back and roll forward identity system and roll forward only legitimate identity changes so that you can bring back your identity system in a clean state. So this has become a significant problem. Historically, only regulated industries, customers bought identity recovery systems. And now the cyber attack and on the rise and everything else that is happening, particularly now with Mito's and and other AI models, identity has recognized as a significant weakness. So we are seeing both brownfield as well as white space customers that never bought identity resilience or recovery they're buying into it. We are very excited about this market. We identified this market early and built onto our same platform that is giving data protection with identity.

Now we are connecting the dots across data, identity and AI. And so that's the power of the platform we are bringing to bear to solve this problem.

I will now turn the call back to the Paul Sia for closing remarks. So thank you, everyone, for joining us today.

I truly appreciate your time and questions. We are very excited about agentic cyber resilience and the opportunity ahead of rubric. As I said, in the prepared remarks that these are early innings for rubric. The best of rubric is yet to come. Thank you so much.