Q3 2020 Ping Identity Holding Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome.
Ping identity third quarter Twentytwenty earnings call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded and if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Mr., David Banks VP of Investor Relations. Please go ahead.
Thanks, everyone for joining us today and welcome to the pain identity Conference call, where we will discuss our results for the third quarter of fiscal 2020 and provide our outlook for the fourth quarter of fiscal year 2020.
I joined the company last month to lead our Investor Relations efforts very happy to be here.
Before we begin I'd like to remind you that shortly after the market close today, we issued a press release announcing our third quarter 2020 financial results.
We also published a supplemental slide presentation to accompany this call.
You may access the press release and presentation on the Investor Relations section of Ping identity Dotcom.
With me today is Andre Durand, our CEO and Raj Donny our CFO.
Today's discussion May include forward looking statements. Please refer to our annual report.
For the year ending December 30, Onest 2019 filed on form 10-K filed with the Securities and Exchange Commission.
And our quarterly report for the quarter ended September Thirtyth 2020 filed on form 10-Q, with the Securities and Exchange Commission, where.
Where you will see a discussion of factors that could cause the companys actual results to differ materially from these statements.
I would also like to remind you that during the call. We will discuss some non-GAAP measures related to pain identities performance.
You can find a reconciliation of those measures to the nearest comparable GAAP measures in our quarterly financial statements.
To ensure we can address as many analysts questions as possible during the call. We ask that you. Please limit your questions to one plus a follow up and with that I will turn the call over to Andre.
Thanks, David and welcome to pain and thank you all for joining us today.
We hope you and your families are safe and healthy as we enter month seven work from home posture in Europe for winter.
I'd like to start by acknowledging the continued efforts of our employees and the continued support of our partners both of whom are vital to ensuring the success of our customers.
As a company we continue to operate in a fully remote environment and expect to do so for the remainder of the year and likely into early 2021.
While there have been a number of learning curves are resiliency and commitment to helping enterprises transition to remote work increased security and accelerating digital transformation initiatives has never been stronger.
I'm pleased to report that we closed another great quarter exceeding our expectations across the board.
We remain confident in our enterprise leadership position and the mission critical nature of our solutions as validated by increasing support across new and existing enterprise customers.
Our annual recurring revenue at the end of Q3 was $242.6 million right.
Representing a 17% growth rate year over year Q.
Q3 revenue was $59.9 million with the subscription revenue representing 92% of total revenue.
Unlevered free cash flow usage was $4.1 million.
Given the pervasiveness of work from home cloud adoption in increasing personalized customer engagement.
Identity security has cemented itself as a cornerstone of zero Trust and.
And customer experience.
Along those lines, we are intensely focused on four core themes.
First a unified hybrid cloud platform.
As enterprises embark on their digital journeys pink provides unparalleled deployment flexibility we call cloud your way.
Through Dev ops pain cloud and Standalone SaaS services can meet enterprises, where they are managing thousands of mission critical applications, all while providing a roadmap to the myriad of hybrid cloud architectures.
In Q3, we launched a new unified administration portal, which will become the centerpiece of kings hybrid cloud platform, helping.
Helping companies administer their global enterprise deployments across customer employee and partner identities.
Second customer identity.
Scalability and performance, our unmatched amongst identity providers, a core pillar of serving tens of millions of users.
We are enterprise proven at handling peak volumes of over 50000 transactions per second with many of our customers.
We are also increasingly to central directory that enables unified profiles across an entire enterprise's digital properties.
Customers have come to expect this level of personalization and ease of use without compromising their security and as a result companies look to paying to enable these experiences.
Third rapid migration from legacy.
Analysts estimates suggest there is between three and $4 billion of annual spend on legacy identity systems.
Having completed hundreds of these migrations for enterprises paying has invested to make these projects easier and less costly for our self service capabilities.
That allow application teams to integrate with the Companys centralized platform.
Finally, expanding and embracing our partner network, which is core to our operations and vital to our customer success.
Our expansive partner network consists of technology and partners such as sale point in Cyberark.
Who collaborate alongside pain in the most complex enterprise environments.
As well as our integration and channel partners, who provide invaluable expertise to our clients both when selecting pain and through the go live process.
Now I'd like to switch gears and highlight a few Q3 customer wins.
On the new customer front Trans Union, a leading credit agency selected team to serve as its global workforce authentication authority.
Acting tens of thousands of users this.
This hybrid cloud solution, Leverages, pings, SSL, NFV and access capabilities Tran.
Trans Union selected paying for our ability to seamlessly migrate off their legacy site Minder implementation support our hybrid cloud deployment and achieve best in class scale and performance.
During the quarter sharp healthcare expanded with paying to launch a world class digital and unified customer experience while.
While placing a heavy focus on consumer privacy in compliance with the Cures Act.
The pain platform will help sharp better manage data sharing requirements for example, when capturing patient consent to release any data to third parties.
We are proud to work alongside Optive to assist sharp in their customer identity journey.
Third one of the largest manufacturers of pharmaceutical products selected team to serve as the authentication authority for a new employee and partner portal.
Before launching the business was keen to ensure the highest level of security as external users would be accessing the system worldwide.
In addition, this new initiative was set to replace tend to spirit private portals to help the company increased user adoption, ultimately driving better retention and future outreach.
Together with our partner Incyte, we were able to drive quick deployment and time to value.
Finally, a leading Australian bank partnered with pain to provide a modern end to end customer identity platform to improve user engagement and better deliver against security and compliance requirements.
Specifically, they are leveraging pains, SSL MFS access directory and authorization solutions to replace existing IBM infrastructure.
The bank plans to leverage paying to better grow customer reach and market share with a unified policy driven customer view.
Our partner and customer success was on full display at our October annual users conference identify.
This year, we had one hundreds of companies participate in our 20 plus hours of Ping identity content from many paying attention as well as many external speakers.
During the event, we recognize the number of truly extraordinary customers for their work to champion identity across their organizations.
These include Ticketmaster for its authentication and authorization deployment. This serves millions of loyal customers.
And logistics giant DB schenker for its commitment to securing tens of thousands of employees in their rapid transition to work from home.
As I mentioned earlier partners are vital to our success and we are always seeking ways to better align with our customers in.
In Q3, our growth team partnered with a purchase that group to deliver our SSL and NFC capabilities in under 30 days as a healthcare company look to modernize their workforce and partner infrastructure.
We also made a number of exciting product announcements during identify that I would like to discuss in detail.
We are expanding our solution offerings by providing enterprise as new Standalone SaaS services built on paying one.
Our state of the art Multitenant SaaS platform.
The first two services are paying one MSP and paying one risk and are accessible via apiay wise to streamline integration.
Anyone MFS as our new offering to protect customer identities from account takeover compromised credentials fraud and other malicious activities.
While delivering a frictionless user experience for end users.
The solution uses adaptive authentication policies, so that organizations only prompt customers for authentication when needed.
Users can also utilize penguin in the phase for custom transaction approvals.
Such as improving funding transfers for high value transactions.
Pain, when MF, they can be embedded into web and mobile applications, allowing enterprises to brand the end user experience and provide a choice of easy to use authentication methods.
Paying one risk Leverages machine learning to evaluate risks signals and detect threats in real time.
The service is an important part of Zero Trust Securities.
And our goal to achieve password list user experiences.
England risk evaluates multiple signals, including the users behavior device posture and location amongst other signals to understand the level of risk posed by a user attempting to access a particular resource.
If the risk is high in organization may trigger a higher level of authentication through King's MSP authentication service.
Form a block access entirely leveraging our access enforcement services.
As we continue our efforts to deliver exceptional user experiences we launched a new unified administration console to provide enterprise identity teams, a holistic view of their entire team hybrid cloud platform.
This one stop shop allows teams to easily manage their deployment.
Add new environments trial, new products and access the latest training and documentation.
As we look to the future, we're investing in innovation and promises to reshape our industry and we're pleased to announce our intention to leverage the recent show card acquisition to Usher in a new paradigm of individual control over their identity.
Individuals, especially in the customer and consumer context.
Have little to no control over how or where their information is used today.
Our vision is to transform that paradigm to give users more control over their identity.
We call this personal identity and we believe it holds the key to better privacy lower fraud, and better user experiences for both the workforce and customer use cases.
While personal identity is an emerging use case, we're excited by the potential and believe no identity platform will be complete without it in the years ahead.
Speaking of acquisitions as announced earlier this week.
I couldn't be more excited to welcome the symphonic team to pain after.
After a collaborative two year partnership we look forward to having symphonic as part of the pain family.
Through the acquisition the paying data governance in symphonic combined capability delivered with a comprehensive dynamic authorization solution.
Integrated with the broader pain platform enterprises will now be able to centralize authorization and extend identity controls to address global regulatory requirements for privacy.
Hi, and data security, while lowering fraud, and delivering new digital services faster.
This acquisition is a vital component of our zero trust efforts and is expected to become central to organizations seeking better security through identity.
These are exciting times at team as we continue to lead the enterprise identity industry invest in our future serve customers and expand our reach with both channel and technology partners.
Now I'll turn the call over to Raj Donny to walk through the quarter results and updated outlook in more detail.
Raj.
Thanks, Andre I would echo Andreas comments that we are very pleased with our Q3 results and execution and thus remain optimistic about our ability to drive seamless deployments and quick time to value for our customers.
In addition contract durations for both new bookings and renewals has begun to normalize more closely to pre coded levels. Another testament to the prominence of identity with insecurity and zero Trust Roadmaps.
One such renewal and expansion in the quarter was wet longtime customer corelogic, a leading provider of financial data and analytics. The customer was looking to grow its business with a new revenue stream and expanded its customer identity and access management suite of services with us.
We closed Q3 with AMR of $242.6 million, representing year over year growth of 17%.
Growth was driven by strong international bookings in EMEA and Australia.
Continued adoption of cloud solutions, such as MF AG.
And leveraging of the pain platform for the customer use case to accelerate digital business third.
Third quarter total revenue was $59.9 million of which 92% for subscription revenue.
In Q3, our dollar based net retention rate was up 110% calculated on a trailing 12 month basis.
Given the prevailing economic uncertainty driven by code nine teams a number of enterprise customers continued to face and their purchase of our solutions, resulting in slightly smaller deal sizes and a reduction in our dollar based net retention rate.
Unless otherwise stated for the remainder of the PNM now I will refer to non-GAAP metrics you can find a reconciliation of non-GAAP to GAAP numbers and the accompanying press release.
Gross margin for the third quarter was 80% and comparatively our GAAP subscription gross margin was 85%.
Total operating expenses in the third quarter were $40.6 million.
Adjusted EBITDA in the third quarter was $8.3 million, representing a margin of 14%.
Unlevered free cash flow usage was $4.1 million during the quarter better than expected, primarily due to strong cash collections, which offset a typically high quarter of annual prepayments.
Unlevered free cash generation year to date is $10.2 million up 25% compared to the same period in the prior year.
Cloud solutions continues to grow faster than the rate of the overall business and as a result, we saw slightly lower subscription gross margins.
New customer acquisition with our growth team remains a strategic priority in generating pipeline and landing quickly in the global 3000.
As of the ended the quarter, we remained in a strong net cash position with $173 million of cash on hand.
Moving now to guidance for the fourth quarter, we project a are to be between $255 million and $257 million.
We project revenues to be between $67 million and $70 million with annual revenue of between $247.3 million and $250.3 million based on our Q4 expectation.
This revenue range anticipates faster growth in our ratable revenue relative to the overall business as well as some expected impact from shorter term license subscriptions with our customers.
Given the impact that deployment mix and contract duration has on GAAP revenue management continues to believe that our our is the key growth metric of our subscription business.
Finally, we expect fourth quarter Unlevered free cash flow to range between negative $5 million and negative $3 million with a full year unlevered free cash flow expectation of approximately 5 million to $7 million based on our Q4 expectation.
No thats from Sonic will not have a material impact Q4 revenue or a RR our unlevered free cash flow guidance is inclusive of approximately $1 million of increased burden.
Given our success navigating the co good macro environment, we have fully resumed sales and marketing and R&D operating investments that were put on pause in Q2.
These investments are heavily focused on building a world class channel and partner organization, and delivering a new and innovative in cloud and paying one SaaS services.
We expect to improve between $17.5 million and $19 million for the long term incentive plan and approximately $6 million of additional stock based compensation in the quarter in which these awards are first considered probable of meeting vesting requirements, which could be as early as Q4.
This is predicated on the price appreciation of paying stock since the IPO and Vista is ongoing efforts to monetize their long term investment in pain.
We expect that these will be noncash charges.
In closing we remain excited about our opportunity as we are still in the early innings of identity transforming both enterprise security and digital experiences pain.
Paying is disrupting 20 years of enterprise legacy access management, while leading innovation among customer identity solutions.
Our strong balance sheet subscription business model and track record of balancing growth and profitability provide us with great confidence to continue to execute to our plan.
With that I will turn it over to the operator for your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad.
Withdraw your question. Please press the pound key.
Your first question will come from the line of Phil Winslow with Wells Fargo. Please go ahead.
Hey, guys. Thanks, guys for taking my question I was wondering if you could give us some more color on the call. It the employees last partner side of your business are going to be the b to C side. There is sort of what trends are good solid year to date and sort of how your expectations for for Q4 and I guess.
Revenues from a color coded economic recovery perspective, how would you think about those sort of 21.
Phil This is Andre speaking both of those use cases remain strong.
We have as I've said before that investing in leaning into the customer use case, which is a smaller market, but growing faster.
That said, our our platform has always been designed to serve both used cases, it's our it's our belief that a single identity platform should be able to serve all identity use cases, that's been our our design goal our architecture and our historical.
Realities really since the inception of the company so in the current environment we.
We certainly have seen.
I would say in earnest interest in adopting the zero Trust identity security model I think more of that has to do with the reality of the workforce use case.
Where where all of a sudden now users our remote and no longer kind of on the corporate networking and they're looking for architectures that don't have to have the workforce VPN back into the corporate network. So we do see zero Trust.
Which has been incoming for some time have kind of been increased focus on the workforce used case.
But likewise cobot has also impacted a desire to simplify digital experiences across the omnichannel.
For customers and so we see companies looking to consolidate a lot of silos or fragmented customer experiences.
And then rally around the pain platform to facilitate that consolidation.
So I hope it is actually had kind of I would say a positive influence on both on both sides of that equation. The customer use cases growing faster for us and that is by design as we leaned into it.
Great. Thanks, guys.
The next question will come from the line of Adam Tindle with Raymond James. Please go ahead.
Okay. Thanks, Good afternoon, I just wanted to start on the air our question and around customers, taking a phased approach where they have smaller initial purchases.
I'd imagine that's going to be a catalyst to future quarters as they expand but maybe Raj just to start is there a way to help us size that cohort I think can make some assumptions around maybe normalized down on new customer growth I think it could become a pretty material catalyst, but any way to corral or help us size that number and as a follow up.
Bond Dray, how does that play out it seems like that demand would not be perishable, but I'm just wondering what you're seeing and if there is anything like pricing that would compete that away because if not I would imagine we'd see air on growth acceleration in 2021.
Yes, Hey, Adam. Thanks. This is Raj here so.
So certainly we started seeing the the phasing in of the typically larger deals star.
Starting with Covidien back in Q1.
It's it's this we're starting to see the cycle now in terms of.
Phase two and beyond in in Q, what we saw in Q3 and into Q4. So typically what I'd say is we're seeing the larger deals are are being phased in over.
Over call it four to six quarters. So like I said, we're we're seeing that now customer engagements really strong.
That that pipeline is still intact, it's all part of a a customer's roadmap and zero Trust and.
And they selected paying for that journey. So it's just a matter of of time in terms of of the phasing in of of those but I would expect that to continue over the next few quarters.
And Adam This is Andre here I don't we don't have any expectations that this demand is perishable. We think this is dynamic brought about by.
Budget budgeting in the coated environment.
And.
It's fair to say, we serve a large enterprises.
Every sector to varying degrees has been impacted.
And budgets have been impacted.
And that's not new we saw that in Q2, we saw that in Q3.
I think as Raj reports and as we reported we are now starting to see kind of phase two indoor phase three either be discussed are closed.
And when companies do make commitments to paying on what would typically be a larger.
A larger deal for us that is typically a multiple use case and multiple product or multiple capability commitment they've got a road map to a larger vision.
Strategically selected paying for that vision, they just have a reality of.
What they can deploy in any one quarter.
Makes sense. Thank you.
Your next question will come from the line of Jonathan Ho of William Blair. Please go ahead.
Hi, there I just wanted to maybe start out with the show card on opportunity can you maybe just help us understand how that potentially can play out and maybe give a few examples of how you could build out the consumer identity market and Im assuming this is not going to be a direct to consumer type of.
Offering, but maybe just help us understand the business case around it. Thank you.
Yes, thanks, Jonathan.
This is an entirely new paradigm to be clear, so and it hasn't been talked about by us. So I guess, if you're in the identity industry deeply embedded in the identity in street is a conversation.
But as I stated at identify.
We as individuals or consumers as we engage with companies.
We do have a little control over what information is shared now there is regulation that is enforcing companies have.
A better consent capture and then also consent enforcement meeting once they capture users consent to share they need to make sure that they that they apply that consent appropriately and sharing data pain actually sells and enables companies to ensure that they are not violating a lot of this privacy policy.
The entire notion that individual in the future.
Can begin to collect.
Pieces of their identity information onto their phone.
An into an identity wallet and then present that information when requested or required in interactions with other businesses.
It fundamentally changes the privacy model makes the individual an active participant in the management control of their identity and their privacy.
Where this gets really interesting.
Especially.
In the.
Is in what we'll call the registration or identity verification side of of the identity use cases companies spend a tremendous amount of money.
Verifying your identity before you before they allow you to authenticate.
And there's a lot of friction in new customer relationships as customers basically registered to create an account with companies.
The concept that a user could show up with a verified identity.
Skip registration.
And establish a relationship with and accompany in a matter of seconds is.
He is a completely new paradigm and to do so in a privacy, enabling way is going to lower the friction both for end users and for businesses and.
It's going to simultaneously improve the privacy for the for the end user.
So this is a model that we think.
We will have applicability in all identity use cases.
When.
When employees new employees show up to a company. They also have to verify identities not just the customer consumer use case.
But we also believe that it has significant value in the customer consumer use case.
Got it thank you Thats very helpful.
Just in terms of the contract duration I think you said that it's on your.
Moved back to a normalized state, but I mean, just want to confirm that maybe we've already passed the bottom point here and why.
Whether that can sort of sustain at more normalized contract durations.
Yes, it's a good it's a good question Jonathan this is Raj so.
As we talked about in Q1, when we had the cobot shock to the system, everyone sort of retracted back to what's the what's the minimum they could do right realizing that identity in.
As mission critical to everything and.
And we saw that bounce back a bit in Q2 Q3 actually we side.
We saw a normalize back to sort of pre coated levels now I don't know if that's the bottom but.
But we certainly.
Feel that in those conversations with customers that.
The the feeling we get anecdotally in these discussions.
Is that.
The same that we felt prior to covance.
Great. Thank you.
Your next question will come from the line of Kelly of Barclays. Please go ahead.
Okay, Great Hey, guys. Thanks for taking my questions here.
Andre maybe for you and I apologize. If this has already been addressed I joined the call late but can.
Can you just talk about the legacy identity infrastructure out there from the likes of legacy a site minder for like an Oracle access manager for example, I guess, how are customer sort of approaching the prospect of ripping and replacing these.
Heavy sort of kind.
Kind of systems I missed the pandemic and maybe qualitatively how does your pipeline of those types of displacements look like here in the coming quarters that makes sense.
Does the fact that I would say that.
As we've discussed before web access management, the legacy Oracle access manager site minor and other products probably is one of the stickiest products.
In the identity suite, because they do tend to touch every application.
We had seen a trend and have been seeing a trend of a modernization of those products as they become largely unsupported.
By the legacy vendors.
In CHS case in particular broad com.
Which is.
According to their playbook as really turn the screws on some of the renewals of those products. So I would say that there has been a general.
Desire indoor acceleration to move off of those products, even though they are a heavy lift.
At the same time.
So I would call the tailwinds have been increasing for that.
At the same time in the cobot environment large.
Large replacement projects in general come under budget scrutiny in companies ask is this the highest priority of something that we need to do.
And so we've seen both puts and takes on that front that said, we estimate that theres a three to 5 billion dollar legacy market still in existence in the large enterprise market at some point does need to be replaced and we believe that the pressure to replace grows everyday with these large enterprises.
They will hold off as long as they can but all of the all of the trends are heading towards a moment in time, where they just will not be able to hold on to that legacy any longer.
As I've said before it's become brittle.
Got it that's very helpful. Roger maybe for you.
Just maybe to piggyback off the last question on on on on.
Contract duration.
This will assume that a little bit on renewals, specifically and and.
I guess, what I mean, there is for for renewals that are that are maybe three years in length are they continuing to sort of renew with their prior duration or are you seeing some of those.
Maybe contract, perhaps or change given the pandemic.
That's a good question socket, because we tend to focus so much on duration of new EMR right, but that the renewal EMR has a very significant impact on revenue as well.
If you think back to the three years ago, and Q4 17 only did have.
Several subscription term licenses that were multi year.
We had a fair amount of those that were three are but also foreign five year rate and so on so those will drive rack as.
As as those terms unfolds, but what we are seeing at the time of renewal.
We're pretty much back to where we were before in terms of whether whether customers were renewing for.
For single Euro multi year.
According to their preference that's that's.
Pretty much back.
Got it very helpful. Thanks, guys.
Sure.
Your next question will come from the line of Gray Powell of BTG. Please go ahead.
Great how BTG. Please go ahead.
For sure.
Seems to be maybe.
Next question will come from the line of Matt Hedberg of RBC. Please go ahead.
Hi, guys. Thanks for taking my question.
I guess following on the prior question I have to imagine Covidien is increasing.
Your new business pipeline really at an accelerated rate I guess I'm wondering if you could talk a bit more about the health of that pipeline and is this just a function of macro stability that could ultimately reduce some of the phase in nature that you're seeing or are there actually things that.
Perhaps you can control that could accelerate these deals a bit.
Hi, Matt. This is Andre the pipeline has largely returned to pre co bid levels at this stage.
When we look at our balance or mix between new and base business the new.
Out of that business has obviously also been very very strong actually recently now.
We haven't had conversations get internally about is that cobot impact and then all of a sudden we're seeing kind of strong demand on the new front.
The second part of your quit repeat the second part of your question.
Well it just is it a function of macro stability that ultimately sort of like operates this way with pension is a very healthy pipeline for years or are there things that you guys can do.
Seek to control that I guess, a follow up to that would be Roger you mentioned that you're accelerating your resume spending.
Maybe it's maybe it's a function of increased reps or even more tenured reps just sort of curious on that side of the house.
I would say it is macro stability that we do is we do believe is impacting the close rate and or the size of those initial deals and the experience that we've had with phased in deals with.
With respect to the actions, we can take to control aspects of closure rate.
We like many others continue to focus on customers that are expanding customers that we already have a relationship with.
Tends to be less friction associated with the sales cycle foreign expansion and so we along with other companies. When we entered into coded nature that we were paying attention to all of the expansion opportunities.
That said, we did not make a wholesale jump to focus on simply base business, we experienced in Q2 and in Q3, a healthy amount of new business, we know that new lands equal future expands.
So focusing too heavily while we probably could accelerate some closure with increased focus on base. If it comes at the expense of landing new customers. We also don't like that trade off.
And then maybe then.
Just sort of what you to ask Roger question. Roger a question about the hiring I mean could you could you double click on that a bit in terms of where you're focused I imagine sales and marketing and R&D, but maybe a bit more color there and how do you kind of think about the rate of new rep additions as we prepare for for next year.
Yes, absolutely. So we we felt pretty good coming into this year with with our hiring plan for on for wraps and.
This year has been a good strong year in terms of getting those reps seasoned and.
And enabled to be productive next year. So we feel good about the about the sales capacity now our growth team, which weve highlighted in the past as has been doing phenomenally well and that team as we've talked about is focused on.
Let's say to the Fortune 1000 down to the global 3000, we've also been investing.
In our cloud products Andre mentioned several innovations around the paying one platform in terms of our services that we're offering there that are new and as well as our pin cloud platform. So.
The combination of all of those things, where we're investing and.
Certainly from a rep specific standpoint.
We are continuing to to grow that investment in the growth team as well as.
Putting a real fine focus on on our channel investments in enabling our partner network there too.
I'd say just in terms of.
Of in general the other areas of spending.
Around R&D around cloud hosting an infrastructure in advance of.
What is expected to be significant growth there as we enable our customers to to go about their cloud journey and and in our support teams.
Thanks, a lot guys.
Sure.
Our next question comes from the line of Pat Zelnick of Credit Suisse. Please go ahead.
Great. Thank you so much guys and my question actually Raj follows what Matt was just asking you.
So you say that the growth team is doing phenomenally well, yet if I look at your Q4 air our guidance. It implies further deceleration year on year.
Whether I just looked at the absolute numbers or trends in that dollar ads in a are actually referred back to where they were in the first half and.
At the same time, your sales and marketing productivity seems to be deteriorating relative to the new and expansion business that you're adding so what might I be missing that gives you that confidence to resume investing in sales and marketing and how should we think about productivity relative to the new way or are that you are adding going forward.
Yes, I think it's a it's a good question Brad right at Mina and basically we're seeing the on we're seeing the headwinds and the tailwinds of cold here and.
We spent this year on enablement of our Salesforce. So we do feel like that that productivity will improve going forward.
We've also seen.
Quicker time to productivity for our growth reps, who are who are selling are leading with our cloud products. So investing there we feel like we'll will lead to a quicker time to productivity.
When we think about the.
Colvin World here that we've lived in this year and we look at the sequential increase in an A.R.R.
What we're guiding to in Q4.
As you know a healthy almost doubling of.
Of the netting our we generated in Q3. So those are all the signs I would point to in terms of.
What gives us confidence going into Q4 and beyond.
Great maybe just a follow up for you how would you characterize the size of your renewal opportunity in Q4 and into next year. I mean, if customers are signing shorter duration deals is it fair to assume then that that.
At renewable portfolio actually grows in size and gives you more shots on goal so to speak for Upsells and expansions.
Well, we're continually talking to our customers we've been investing in our customer success group for for several years now and have great coverage over our snowball in that regard so.
So you know everything from making sure that that new customers are are getting value for money and getting time to value or is super important for that group and we stay in constant contact with them to make sure that.
There are up sell and.
And cross sell opportunities that were identifying them early on in order to add value to the customer so.
So.
It just doesn't happen at a renewal point and then you know traditionally renewals were regardless of the initial term of the deal historically renewals were typically one year, we just started to see.
Over the last couple of years, where it where certain renewals were more longer durations to and.
And like I said earlier, we're actually seeing now that the that the pattern of of renewal duration is sort of reverting back to.
The weighted average basis what.
Well, we were seeing or pre co that so I don't I don't see any sort of specific renewal duration issue or.
Or opportunity there that's different from anything else, we've had in terms of up sells and cross sells.
Awesome. Thanks, so much for the very full explanation Raj sure of that.
Your next question will come from the line of credit Pals BTG. Please go ahead.
Okay. Great. Thanks can you can you hear me this time.
You have again, great all right all right that's great.
Boats into work better when they're not on mute.
Yes.
Okay. So.
Can you talk about the.
Linearity that you saw in Q3, and then with the recent macro volatility and potential for locked down so at least in Europe could you give us any color.
On what you saw in October and just sort of like overall visibility on your pipeline today.
So Greg the first part of your question was around linearity can you just.
Expound on that please.
Yes, just like monthly trends.
What what you saw.
In terms of your pace of bookings between July August and September.
Yes, we.
We had a what is fairly typical for us where.
We get off to.
A pretty reasonable start in the quarter and then just given what Q3 is typically for US there, especially with our international business that tends to be a low and in the middle of the quarter and then we finished very strong at the end of the quarter. So so I wouldn't say that there was anything out of the ordinary.
We have a monthly focus was.
Likely have a quarterly focus and we're executing well to that.
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With regards to your second question around around Q4.
Where we continue to have a strong pipeline as Andre mentioned and and we executed well in the months so.
So, let's see what happens with what some of these macro trends that you mentioned and some of the shutdowns.
Internationally, but.
But certainly from a from beginning of quarter, we're on track.
Got it okay. That's really helpful. Thank you very much.
The thing that Krishna.
Question will come from the line of Walter Pritchard of Citi. Please go ahead.
Hi, Thanks question on the South side any.
Any update there on revenue revenue from south.
Total in and take that you've seen any change there anything in particular driving that and how are you thinking about as you go into 2021.
Yes, sure Walters Raj I'll take that so as you know, we we disclosed our ratable revenue every quarter in footnote two and.
And we continue to see a gradual shift.
Shift towards ratable.
That's that's.
One because we've been investing that way and we were certainly really excited about all the new innovations we have.
Weve unveiled here over the last couple of quarters being.
Our paying one services and pain cloud. So we continue to see good adoption and good pipeline build behind that.
And and so.
And also with our customers right in terms of their desire to to embark on on their cloud journeys and all of them are are different and and you know.
It's our van it's to our advantage to help them navigate through that complex hybrid cloud world to get them to their desired state and we feel like we are in a architecturally differentiated way to to help them get there.
So we did see a fair amount of ratable revenue growth, our ratable revenue grew 24% year over year in Q3.
In Q2 that that growth is 22% and.
And overall ratable revenue was 34% of total revenue for Q3. So we continue to see that trend as we talked about before when.
Thats an expectation we continue.
To believe will will occur in the future as enterprises go through.
Gradual.
The transition to more cloud.
Okay, and I guess, just the application is.
The implication there that you are seeing that.
Uptick as a percentage within that ratable.
Yes, Thats right.
Okay actually.
So just to be clear, yes, where our SaaS businesses are growing at a significantly faster rate than the overall business in that that's been the case for several quarters now.
Got it okay. Thank you.
Mhm.
Your next question will come from the line of Catharine Trebnick of Colliers Securities. Please go ahead.
Oh, Thank you very much for taking my question My has more to do with macro environment in many of the conversations I've had with.
Now procurement officers that large financial banks, then and health care and retail.
They are saying that they are really not going to spend much more money 2021.
And they already have so many tools on site and they just can't imagine, adding any more tool. So can you rationalize how you.
Your growth opportunity with that type of feedback and then getting and this is with almost 25 different very senior procurement officer I'm, just trying to rationalize your growth and how you fit in but they are saying thank you.
Thanks, Catherine this is Andre.
So we are absolutely hearing and seeing the same thing.
What we are seeing is a desire for vendor consolidation and replacement or modernization of several legacy vendors.
And movement to paying so while you we should consider this a wallet share shift from legacy spend.
To a modern partner in the case of pain.
I personally been involved in several conversations that played out pretty much exactly what you were describing budgets might be flat year over year.
We're being asked to find ways in which we can reduce cost where possible.
We also have a desire to reduce the complexity of our vendor landscape.
But the business demands have not slowed down at the same time, we're being pressed to onboard new applications.
Accommodate new use cases for the business units that are not supported by our legacy environment.
And so we see those companies in dialogue to essentially consolidate several legacy vendors and and replace them with paying so.
So we look at our growth is not necessarily bound by flat budgets by a transition from legacy tipping.
All right. Thank you very much.
Your next question comes from the line of course deltas of Stifel. Please go ahead.
Chris Eurobond for Gore.
Andre can you talk about the level of demand for the CPI security use case that you saw during the quarter and how we should think about that opportunity evolving going forward into 2021.
Yeah. Thank you, it's I would say the interest level and all things Apiay security have been high since we introduced that product and have not changed.
As I reported in Q2 and it was also consistent in Q3, while Ace Apiay security tends to be one of the top three conversational topics that csos understand is incoming and important an important.
I would say vector of future attacks.
It also suffered from not being a top three priority in the cobot environment. So we so we have experienced that new deals around apiay security have been postponed in many cases through Q2 in Q3, we took the opportunity in Q2 and Q3 to fully.
Deploy enterprise wide several extremely large.
Apiay security deployments protecting in some cases hundreds in other cases thousands of ipi.
And fully validate improve the scalability of that solution with our early customers that signed in Q4 in Q1 as we introduce that product.
It is our expectation that that is that is an emerging market.
We do not see it going away.
All of my customer interaction are validating that increasing awareness of the exposure of guys and the lack of visibility into the traffic of CPI is is a growing concern.
To the security groups of many of these large enterprises, but this is an emerging technology and emerging space and in tight budgets and cold the time, if it did not make the top three at least in the last couple of quarters. My expectation is that in 2021 like all new technologies that are incoming as things return and companies.
Get the high priority projects under their belt.
They will get to the CPI security and we've introduced paying several new products in new categories over the course of our history Ive seen this trend before when.
When you have this level of interest in a new product, it's not a matter of if it is a matter of when.
That's great. Thanks, guys.
The next question will come from the line of Michael Romanelli Mizuho Securities. Please go ahead.
Yes, Thanks, Hi, guys, maybe just one quick one for me most of my questions and I'm ready ready address I'm just sort of wondering if you saw any change at all with respect to just customer churn in the quarter. Thanks.
We really didnt identity continues to be mission critical for these enterprises and.
If anything you know as Andre mentioned, you see more and more wallet share going from traditional security budgets towards identity. So.
So we really have continued to see strong retention as we always have in our history.
That concludes our questions for today.
I'll now turn the call back over to the presenters for closing remarks.
Thank you I want to thank everyone for joining todays earnings call I wish you guys. All the best of health, we look forward to continuing to carry out our mission providing updates on the business as the year progresses. Thank you.
Concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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Okay.