Q3 2019 Earnings Call
Ladies and gentlemen, this is the conference operator, please continue to hold and the conference will begin shortly.
Greetings and welcome to sell point technologies Holdings, Inc. that caught out 2019 earnings conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press Star Zero when you think you got.
This conference is being recorded.
I'll now turn the conference have a choice is to draw Shati Vice President of financial planning analysis and Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us today to discuss still points third quarter financial results.
Joining me today or sell points CEO and co founder Mort Mclean.
Our Chief operating Officer candidate, Martin and our Chief Financial Officer, Jason.
Please note today's call will include forward looking statements. Because these statements are based on the company's current intent expectations and projections. They are not guarantees of future performance in a variety of factors could cause actual results to differ materially.
Since this call will include references to non-GAAP results, which exclude special items. Please reference this afternoon's press release in the Investor section of Sailpoint Dot Com for further information regarding forward looking statements and reconciliations of non-GAAP results the GAAP results.
Now I'd like to turn the call over to Mark Mclean.
Thanks, Josh and good afternoon. Thank you for joining the call today.
I'd like to share our results for the third quarter 2019.
Total revenue for the quarter was $75.9 million, an increase of 15% over Q3 at 28 team and our non-GAAP operating income was $9 million.
Our company performance was indicative of our extended leadership and identity governance as evidenced by our continued focus on driving innovation across our identity platform and our ability to execute.
I'd like to spend a few moments providing color into each of these areas.
The key aspect of our extended leadership this quarter was driven by our consistent focus on pushing the pace of innovation.
We demonstrated that this quarter from both a build and a by standpoint.
From a build standpoint, Gartner recognized sell point as a leader for the six consecutive time in the latest Gartner magic quadrant for identity governance and administration.
And the 2019 report Gartner credit sell point for being the most innovative vendor in high GA.
Gardener applauded art, AI, driven identity analytics capabilities, and our comprehensive approach to governing all users, including software bots and their access to all applications and all data, including data stored and files.
So point is positioned well ahead of all competitors across both execution and vision and this year's report providing the latest validation of our superior technology and fierce commitment to the market.
We also demonstrated continued leadership by further redefining I didn't he governance driving I'd to innovation from a bike standpoint, with the acquisitions of workers and Overwatch I.D., we're extending our ability to more deeply and dynamically govern access across all cloud resources, including cloud infrastructure like Kws.
And Andrew.
This is particularly important given that these cloud resources now underpinned so many digital transformation efforts underway.
Once these technologies, our integrated into our identity platform organizations of all sizes will have access to a new approach to governing these cloud environments. When that takes advantage of AI and machine learning and integrate seamlessly into their existing identity governance programs with these acquisitions. We're the first I'd a vendor to address this growing.
We need for companies today. This also accelerates our cell point predictive identity vision and approach to the market.
As we said at the beginning of the year. Our 2019 charter has been to help our customers to govern all to govern smart and to govern deep.
In Q3, we continued to deliver on this charter, particularly as we saw more customers choosing to broaden their identity program Sailpoint. This manifested itself in a number of ways.
For some customers. This meant a significant expansion on their existing identity Q4, I didnt email implementation to scale to meet the revolving business needs. For example, this quarter's largest deal in the Americas was.
Was with an existing identity Q customer that extended their identity I Q deployment to help them streamline and automate their provisioning efforts.
Previously the mats compliance for their 300000 identities manually.
In another example, we're seeing more customers pick a holistic approach to their identity governance programs by extending sailpoint into new areas of their business.
For example, a mid sized accounting and advisory firm chose identity now as the foundation for their identity program.
They needed this solution that would ensure proper governance across all of their users and their access to both applications and data.
Our solution the place to previously manual process for governing user access and deliver the ability to govern access to data stored in files.
Similarly, we are starting to see more customers interested in the notion of governing smart and embracing and AI enabled approach to identity governance.
As an example from this quarter a top SaaS solutions company came to us with a need to drive a cloud first approach to IDH within their own business.
They needed a solution that would free up their resource constrained I teaching to prioritize on areas of greatest business risk, while streamlining and simplifying important the times intensive identity governance processes like Onboarding and Onboarding a regular certification of user access.
They purchased identity now alongside identity <unk> to help them drive a comprehensive autonomous and predictive approach to I Gotta governance.
This is an example of a new economy business, finding significant value and identity governance through our cloud identity platform.
It's also speaks to sell point predictive identity, our vision and approach for the future of identity governance, which we unveiled last quarter.
Shifting gears to our execution. This quarter, we continue to see strong interest and identity governance as the number of breaches and regulations continues to increase making identity more critical and relevant than ever in.
In Q3, we saw strong support from our entire partner ecosystem and solid performance from our U.S. business in particular with revenue growth of 23% year over year.
We also saw strong year over year growth in SaaS bookings.
And finally, we are excited to welcome our new Chief revenue Officer, Matt Mills to sell point. This quarter is experiencing leading the sales team built for growth and scale, coupled with a strong background in selling hsas and software solutions into complex enterprise environment makes him an excellent addition to our executive leadership team.
His focus is on scaling our sales operations continuing to penetrate our mid and large enterprise accounts.
Further expanding internationally and broadening our footprint among existing customers.
Taken together his sales leadership will help us to continue to execute as a team as we turn to the last quarter of the year and into 2020.
In summary, we are pleased with our results this quarter, we exceeded our prior guidance experienced strong growth in the Americas and we continue to see interest in our predictive identity vision and approach.
The leader and identity governance, we are well positioned in this market and we'll remain focused on balancing solid execution with continuing to drive increased value for our customers at every stage of their identity journey with us.
With that I'd like to handed over to Jason Who'll discuss the financial results from the quarter.
Thank you Mark and thank you everyone on the line for joining us today.
As Mark noted earlier, we saw a number of positive trends in third quarter and are pleased to be able to X exceed our guidance on both top and bottom line.
Total revenue for the third quarter was $76 million, an increase of 15% over Q3 or 2018.
Subscription revenue increased 34% year over year to $37 million. It was 49% of total revenue for the quarter renewal rates remain consistent with historical trends, which we believed to be attractive relative to industry norms.
Maintenance continues to represent a majority of the dollar growth and subscription revenue, but is bolstered by a growing contribution from faster growing south subscriptions.
License revenue of $27 million was down 4% year over year, what up 39% sequentially and ahead of the expectations built into our previous guidance.
The better than expected license performance was driven by improved execution, particularly in the United States, including a few deals that we had originally expected to close in the fourth quarter.
On a geographic basis, the United States contributed 74% of Q3 revenue international at 26%.
This compares to 70, 70%, the United States and 30% for international in Q3 of 2018.
The mix change was driven by strong performance in the Americas as Mark referenced earlier and bites by several deals that slipped out of the quarter in EMEA and APAC.
Throughout Q4, an early next year, we focus on making sure that our international execution is in sync with the processes that had been a major focus and I've shown good success in the Americas over the past two quarters.
On a combined basis total gross margin for the quarter was 80 per cent compared with 81% in Q3 of 2018.
At a detailed level gross margins for each of our revenue streams are improving but the overall gross margin change reflects a mix shift towards sascar subscription revenue versus a year ago period.
Operating expenses for the quarter were $52 million. This is up 2% sequentially from Q2 of 2019 and up 24% on a year over year basis.
Our operating income in Q3 was $9 million or 12% of revenue.
This compares to Q3 2018 operating income of $12 million and an 18% operating margin.
And finally, we ended the quarter with 1122 employees, a 2% increase during the quarter and 20% up from 936 employees at the end of the third quarter of 2018.
Turning to the balance sheet in cash flow, we ended the quarter with $464 million in cash and cash equivalents compared to $93 million at the end of Q2.
Increase was driven by strong cash collections in the quarter as well as $354 million of net proceeds from the convertible notes offering that we did in September .
On the balance sheet, you'll see the 400 million dollar growth amount of the convertible notes split between debt and equity based on the accounting treatment for the option portion of the notes and you can find more detail in our Form 10-Q filed with the FCC today.
As a reminder, we did the offering to take advantage of an opportunity to strengthen our balance sheet at incredibly attractive terms.
Moving onto guidance, starting with the full year of 2019.
We are increasing our outlook for total revenue for the year to be in the range of $284 million to $285.5 million. The primary drivers of the increased outlook, our subscription revenue, which we now expect to be approximately $141 million for the year up from our previous guidance of $137 million to $138 million.
And license revenue, where we are increasing our expectations to $102 million to $103 million, an increase from the implied outlook, a $100 million to $101 million given on our last call.
These increases are partially offset by services revenue, which we now expect will be approximately 14.5% of total revenue for the year or about half million dollars less than our prior expectations.
For the full year 2019, we expect our non-GAAP operating income to be in the range of $18 million to $19 million, which after you adjust for the approximately $2 million of expense, which we expect to add with the acquisitions of Overwatch ideas Orcas is an increase in full year operating income of approximately $2 million as compared to our pre.
Yes guidance.
For the full year, we expect non-GAAP net income per diluted share 13 to 14 cents.
It's a films 93 million diluted weighted average shares outstanding and a non-GAAP tax provision of $5.1 million, which is based on the revised non-GAAP tax treatment introduced last quarter.
Taken together this implies fourth quarter total revenue in the range of $84.5 million to $86 million non-GAAP operating income in the range of $10 million to $11 million and non-GAAP net income per diluted share of seven to eight cents. This.
This assumes 93 million diluted weighted average shares outstanding and non-GAAP tax expense of $2.7 million.
With that we will now open up the call for QNX operator.
Thank you.
Hi, we will be conducting a question answer session.
Back to ask a question. Please press star one on your telephone keypad.
Information triangle indicate your line is in the question Keith.
You May proceed starch here, if you would like to or maybe a question from the Q.
[laughter] speaker equipment, it may be necessary to pick up your headset for pressing the star case. Your first question comes from that but with RBC capital markets. Please go ahead.
Hey, guys. Thanks for taking my questions. It congrats on the results. The continued success is really good to see.
You noted strong subscription growth I believe you said, 34% and indeed, the obviously you increase your subscription expectations for the year and we've talked about the pass you guys off for a lot of flexibility on how customers purchase, but but it certainly seems like your SaaS business in particular continues as well what we could help us get a sense for how big that is as a percentage.
Of revenue because it seems like it continues to do quite well for you guys.
Yeah. Thanks, Matt. This is Jason we don't breakout the soft piece in particular out of subscription we've talked about potentially doing that at some point and I think given that that is the fastest growing component of revenue we will at the right time overall the subscription piece.
As you know, it's it's still continues to be driven by maintenance, which on once we have a very high retention rate.
And we do continue to add new maintenance to the to the pool every every quarter.
But the SaaS subscription piece is growing faster and becoming a larger piece of the nexsan and again at the right time, we'll split that out as a.
At least a separate disclosure I don't know if it'll be a separate line on the income statement, but well, but we'll disclose it at the rights on.
Okay and then that's helpful. Then the E. G and you also noted it seems like you pulled some Q4 deals into Q3.
I'm wondering can help quantify that in Q4, obviously you raised the full year, which is great Q4 revenue guidance was maybe a tad latest street consensus, but you know maybe maybe some of that is some of that the Q4 deals the pulled in Q3.
Yeah, I mean, that's I think you've hit it on the head there Matt I'm, obviously, you know with a number of large enterprise deals some of those deals can move between quarters.
And we did you don't have some strong momentum it was definitely not more than you know what she noted relative to Q4, but.
You know a little bit of pull in from Q4 to <unk> to Q3.
But overall, just generally strong momentum, particularly in the Americas during Q3.
Great. Thanks like Us [noise].
Thank you. Your next question comes from Melissa I haven't Frenchie with Morgan Stanley . Please go ahead.
Great. Thanks for taking my question Mark I, just wanted to discuss how did the initiatives you have in place to target. The Midmarket I know earlier in the year you were sort of on over index on the Midmarket, but do you feel like you've now kind of struck the appropriate balance between investing in the enterprise opportunity your core opportunities.
Also investing in the mid market and then the second question related to that is the that strengthen identity now that it seems like you're seeing to what extent is that coming really from enterprises adopting I doubt any now and extending their identity I cute appointments with that first is on the midmarket coming in at the new customer. Thanks.
Thanks wasn't thanks for the call couple of points you on the first one I'd say, we feel the best about the momentum we have and the Midmarket and North America and the balance between the two markets I'd say and in general kind of getting the tuning that we've talked about coming out of Q wants you to in kind of the mix of efforts Mark.
Any efforts you know opportunity generation efforts to kind of make sure. We are appropriately balanced to where we see the opportunity I think were farthest along in North America, there and making good progress and the other geographies of the World and then I think as you as you see that relative to I'd identity now, we do still see a higher correlation of I Didnt see now in the Midmarket and I'd like you in the.
Largest of enterprise customers, but as we've said many times if we do see exceptions, we see some pretty large organizations comfortable with where I didn't see now is to meet their needs and we have some fairly midsize companies, who have very complex requirements that feel a best suited tied to the I Q. So that we always want to be careful to not completely correlate no.
Turning now to made and I've been to execute a large but in general that still brings true for many of the accounts were working with today [noise].
That's helpful. Thank you.
Thanks Melissa.
Thank you. Your next question comes from Brent till with Jefferies. Please go ahead.
Hi, Thank you, but it's this is Howard on for Brian could you could you give us some more color on how the I'd be acquisitions of orcas and Overwatch idea, how do you improved functionalities and the marketability of the other predictive identity platform and they're not on pricing for the pretty good about any platform.
You know is gonna be.
Tiered basis, and then do you know could you share any near term targets for you for expected adoption among your existing existing installed base. Thank you.
Okay, I think hard about three questions I'll do my best [laughter] teach them part I might ask Jason help with the financial when there if I need it on the first part of kind of the functionality. We were we were pretty careful to say that while we saw some great capabilities. There we're going to spend the remainder of this year kind of.
Picking and choosing the things that we think our most helpful to extending our particular value prop the common threat theme across those two companies and their relevance to us and identity is around kind of stronger governance of cloud. They both companies have some very strong capabilities about how best to help manage the cloud the rapidly adopted cloud environments.
And our enterprise class customers, whether mid or large enterprises and for now that's where we're focused on a I think from a from a and just to be careful [laughter] on the term predictive identity, we want to be careful not to correlate that to a single product that is a kind of a vision that is going to cover a lot of our pro.
Products and so over time, you know things like identity AI some of the capabilities that are coming in through these and continued enhancements we made to our core platform. All are about delivering on that predictive ideally vision I will draw you backed ideally I itself, when we talked about that as a kind of drive forward on.
Active we did highlight that that's where we're getting to leverage machine learning and I'd artificial intelligence capabilities to streamline and make more efficient a lot of the governance processes, our customers are doing and both orcas and overwatch kind of build on that they have built in AI and machine learning capabilities. So they dovetail very nicely into that story and that strategy.
From a from a penetration rate you know volume of sales were just not commenting on how much we think thats going to affect next year, yet we're still building. Our plans. We we commented in the press release it wouldn't have any material impact on revenues in the rendered 19, I think Jason highlighted a little bit of expense addition, in Q4 for that but we will kind of factor that into the guy.
Should we give for 21, we're prepared to give that up at that point.
Okay, great. Thanks, a lot.
Thank you Brett.
[laughter].
Howard Yeah Brett.
[laughter] sorry. Thank you next question comes from Shull aisle with Oppenheimer. Please go ahead.
Thank you good afternoon, guys. Congrats on all the improved performance.
Yeah got great execution in the U.S., but as as we think about the international opportunity maybe EMEA EMEA. This quarter, specifically is that is it self inflicted ER or is it driven by some of the macro uncertainty is that any country specific well then the EMEA region.
Yeah sure. Okay I'm. Thanks for the question getting bids to have you on the call look I think there are two or three comments I'd make a with that question. Thank firstly you know as we highlighted over the last couple of quarters. You know we've been working hard to get demand Jan you know and other activities back on the pace, we want them to be were probably.
Not quite as far along in a me is we are in North America and in that regard you know there's work still going on there to get all of what Weve, especially learned in North America up and running as appropriate enemy and we're also obviously tailoring our actions to that local market I think we did see some longer deal cycles in EMEA and the quarter nothing concerning.
I think it's you know we always watch those things just to see if there are macro uncertainty factors or its you know something else I think at this point as we've looked at the quarter. You know I don't I don't think I'd highlight for any particular factor I think we do as Jason highlighted earlier, we had some pulling in the business we saw some slippage another place.
As in so I don't know that there's anything particularly notable to highlight for you. There you know we continue.
To drive hard in Europe , and for that matter in Asia, as well to be bigger contributor to the business.
Got it that's a that's understandable. Thank you for the color camp and as we think about the partnership the expanding partnerships landscape I anything to highlight this quarter I recall last quarter. There with it was couple of notable transactions, that's where you know push by I think what do you why one of them so anything specifically at this.
Quarter, well just steady as she goes.
I show its Mark I think I'd categorize it more as steady as she goes I mean, we're really pleased with a particularly the momentum with with all of those large global aside partners. We've named up before you know KPMG is you why and Pwc and Accenture and Deloitte, all all performing really well with us and we continue have good momentum.
With many of the reseller partners around the world as well so I wouldn't say, there's anything new to highlight just you know very pleased with the momentum all of them have good strong growth in their identity practices and a and we just feel great about the momentum.
Thank you so much good luck.
Thanks, Joe.
Thank you. Your next question comes from Walter Pritchard with Citi. Please go ahead.
Hi couple of questions just as we think about next year, I know, you're not giving guidance, but with with Hsas and expanded product portfolio. In this area is it is at the time that you think you push more aggressively on driving some of the larger customers to your SAS offerings and actually start there and then I've a follow up.
Yeah, well. So this is Jason I'll take this and Martin can may have something.
Here, but you know we see some of that dynamic already that but customers own expectations are trending more towards south in all sorts of products that they use.
Does that come through in our business as well.
You know Robin to talk about 2020 plan yet well.
As we finalize those and then communicate them. So you are on our call early next year, but you know that that's the trend is happening already in happening over time and no. One we constantly watching nor will we respond to as as appropriate you know based on on.
What we're seeing in the market.
Great and then just maybe you can look at Q4 in any comments on the third quarter here on can you talk about sort of large deals how much in contribution you saw in the in the third quarter and then on the fourth quarter side from a your comp perspective can you just remind us sort of the the large deal impact from year ago, and how that affects has we're looking.
As it grows in the license, especially.
Yeah I'll comment on on Q3, and then I may turn to some of my colleagues for year over year compare [laughter] on Q4 since I know some of it but wasn't here to I can't give commented quite quite as easily.
It was pretty typical for for a Q3 for US you know we did have some large deal.
We did have said activity it.
You know, we're always strong of a large enterprise and so you expect that particularly as we get to the second half the year, but pretty typical.
Maybe a little bit less than last year I think last year. We had you know some more even more large deal activity as a percentage of the mix, but otherwise pretty typical.
[laughter], Yeah, and I guess I'll comment I think fourth quarter as we look at it is looking to be a pretty typical quarter mix wise as well and I'd comment that Walter as it relates to that you know the mix a large and mid sized deals is at this point you know, it's obviously early in the quarter for us, but who knows we look at the pipe and thinking about the guide we've given you we feel good.
About that mix and it's healthy it continues to be in the direction. We've seen it go a and so at this juncture I'd say nothing to highlight for you in terms of the that contribution.
[laughter].
Okay. Thank you.
Thank you.
Once again, if you wish to ask your question. Please press star one on your telephone and wait Fantasy announced your next question comes from Yun Kim with Rosenblatt Securities. Please go ahead. Thank you congrats on solid quarter, just following up on earlier Howard's question.
When you do we leased some subset of the put a divide that any product suites next year.
You expect that to to the fails to focus more on the current installed base initially, especially those with <unk>.
Or do you expect to target to put it if I did any product suite to both new and existing customers.
It will definitely be a mix of both there's there's definitely momentum in some of our largest most advanced customers I've only been just say largest mid size and advanced customers that are pretty mature in there the deployment of identity and how how sophisticated <unk> they understand the problem they.
See a lot of advantage of using AI to help them streamline and automate some of the more mundane aspects of what they're doing so they can focus more time and energy on the on the challenging outliers. If you will but also as it as it comes to new Greenfield opportunity areas. Some of the enhanced that's where we're bringing to market in 2000.
He we think we'll be very applicable to greenfield customers as well, particularly with some very sophisticated things are going to doing around roles and I think that will help us to be more.
More articulate I think to a brand new customer of advantages. They can get from some of the is advanced analytics and advanced machine learning capabilities in a brand new deployments as well as what we already can articulate is that an existing customer can get a lot of value when they bring AI on top of their existing deployment. So next year will be even more blended this year frankly it has been.
More of a motion with existing accounts with without installed base counts, but it'll be more blended between installed in new and 20.
Just curious on D. I Didnt <unk> today.
The traction with Doug <unk> to customers.
Customers.
Frankly, a bit of both I'm, probably up I'd say honestly say, a little more with I didn't hear acute customers deserve the more longer term more deeply deployed customers. Therefore, they they sort of seeing some of the challenges of the manual operations. They still have to do around the product and if we can help them with some of those things with intelligence that.
That is a lot of traction to them. So it is definitely applicable in both were seeing interest from both sets of installed customers, probably a little stronger on the Q side.
Just one last question can you just talk about.
How much contribution the federal government made in the quarter and where you are in terms of monetizing on the federal government opportunity, especially in regards to CDN. Thanks.
Yeah, I'll start that and maybe off campus in health care as well I mean, it was a good said quarter for us not out of the ordinary for Q3 upside is obviously a strong vertical for us in general and ER. We continue to see a lot of opportunity there came on what's going out anything.
Going to city I know I think my comment was CDM as a as same as I've said previously which is it.
Encouraging to us that quarter by quarter, we're continuing to capitalize on that opportunity. It's for us on the civilian Department Agee's agency side of the World. It's been a good contributor to our business and we were able to capitalize on that in third quarter, particularly with the normal you're in federal budget process and so you know our team continues to focus there there is.
Still business in front of much to go get 'em, we will work hard to go get that in succeeding quarters as we go forward.
Great. Thank you so much.
Thank you.
Thank you.
Next question comes from Tyler Wood with Northland Securities. Please go ahead.
Thanks for taking my question just one for me when you look at the beat on the corridor was there any notable increase and competitive displacements and as you know churn from legacy competitors about at the rate youre expecting or have we seen any increase there. Thank you.
Yeah. This again, no I think and the high level comment would be the normal mix of competitive displacements continued in Q3 that is we can tend to do a nice job now and for those legacy players where that we're we've been capitalizing on the reality is that those are older an.
The ones and the customer shops were able to capitalize on those nicely that trend continued and Ah. It's obviously as you appreciate based on prior comments an area of selling focus worse and it will continue to be as we go forward, we see that as an opportunity to contribute to the business for many quarters pick huh.
Thanks, that's helpful.
Thank you once again, if you wish to ask a question. Please press star one on your telephone.
Well pause briefly to limit questions to add to the Q.
<unk>.
Weve reached the end of the question and answer session I'll now turn the call back over to Miss them off the claim for closing remarks.
Well I'd like to thank everyone for joining us on the call today. We appreciate your interest in the company. We're pleased again with the results and we're looking forward to I'm talking to you guys again after the close of the year. Thank you very much.
Thank you. This concludes today's conference and you May now disconnect. Your lines at this time. Thank you for your participation.
[noise].