Q2 2021 Knowbe4 Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and walk on to the Nova for second quarter 2021 results Conference call. Please be advised on today's conference call is being recorded on.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

I'd like to ask a question. During this time simply press star followed by the number 1 on your telephone keypad.

I'd like to withdraw your question press the pound key.

Thank you now it is my pleasure to turn the call over to Kent tool on your I know before vice President of Vista reporting.

As a reminder, our commentary today will include non-GAAP financial measures information regarding our non-GAAP financial results there are limitations and reconciliations of our GAAP and non-GAAP results can be found on our earnings release, which was furnished with our form 8-K filed today with the SEC and May also be found in the <unk>.

Couple of mentoring financial information available on our Investor Relations website at investors don't know before Dot com.

In addition, some of our comments today, including those related to our guidance may contain forward looking statements that are subject to risks uncertainties and assumptions.

Should any of these materialize or should our assumptions prove to be incorrect actual company results could differ materially from those projected or implied during this call. These risks are described in our form 10-Q that will be filed following this call.

These documents can be found on the SEC website at SEC Dot Gov and on our Investor Relations website.

During today's call you will hear prepared remarks from our CEO, Stu Sharman and CFO and co president and credit shrank a trauma.

Lars <unk>, North our Chief revenue Officer, and co President will join our question and answer session.

And with that I will turn the call over to Stu.

Thank you Ken.

And thank you all for joining us today.

We are excited to share on our results with you this morning.

Building on last quarter's strong performance, we exceeded our guidance.

Had a record quarter with over 40% year over year annual recurring revenue growth.

As many of you know I started no before to help organizations manage the ongoing problem of social engineering.

We are the only public company dedicated to securing the human layer.

The emphasis in cyber security has traditionally been on legacy controls. However, the exponential growth in cyber attacks and their relative success proves we cannot solely rely on security software infrastructure.

According to the newest for Horizon 2021 data breach investigations for report 8.

85% of breaches involved a human element.

Ignoring the human element of this equation leaves organizations of all sizes vulnerable.

<unk> is why we are dedicated to helping our customers transform their employees into a successful last line of defense against cyber attacks.

Over the last quarter, you have seen countless examples of the increased threat of social engineering attacks.

This has security professionals around the world on edge in fact, a recent survey from the I S. C. A found that 2 thirds of companies surveyed plan to improve their cyber security defenses in the wake of recent attacks such as the 1 on the colonial pipeline.

We expect many of these organizations to look at securing their human layer with no before.

The regulatory environment continues to evolve to match the growing threat landscape.

And the U S on a federal level, we have seen executive orders from the by the administration to improve security controls.

On the state level, we have seen organizations such as the New York State Department of financial services mandate, the use of security awareness programs.

These actions helped validate our market opportunity and provide a catalyst for new business growth.

I will start by summarizing key results and activities for the quarter.

Second quarter results exceeded our expectations across the board with continued growth and strong free cash flow generation.

Our inside sales motion continues to win both new enterprise and SMB customers across all industry verticals.

This resulted in $241 million in IRR ahead of our expectations and up 42% year over year.

We have established a market leading position in the human centric cyber security space, which is enhanced by our focus on continuing to innovate to meet the needs of our customers.

Our vision for the security awareness markets defines no be force products roadmap.

This includes both exciting new features and new products.

This quarter, we released a new product called compliance plus.

Compliance plus leverages the intellectual property acquired from media Pro as well as New School training module developed in house to expand our reach into the important compliance segment.

We believe there is a strong connection between compliance behavior and security behavior.

This product will help users improve their compliance behavior much like our platform already helps users improve their security behavior.

This is a whole know $3 billion Tam for no before which shows the power of our platform to reach additional adjacencies.

While early so far the ramp in compliance plus has greatly exceeded our expectations given the ease of up sell.

Our technology leadership is a key factor in the strong momentum in our new business wins.

With further penetration in the enterprise market.

We also see strength and best in class retention across our existing customer base.

Customer growth remains strong across both SMB and enterprise with our total number of customers reaching over 41000.

Our current customers are investing in our <unk> platform and adopting our additional fish AAR Kcmg, Hershey and now compliance plus products at record levels.

As the end of Q2, 17% of customers now have multiple products.

Organizations across all verticals and sizes continue to see value in our free tools and thought leadership, Webinars, which we utilized to generate leads for our inside sales team.

As in previous quarters. We also saw customers buy both Gaiam said and fascia together to leverage the immediate risk reduction it's fishy our brings to their organization.

So we do not report the growth for fishy, our compliance plus and <unk> separately, the combined logo growth and revenue growth was triple digits for the quarter.

<unk> of the cross sell success in Q1.

In terms of new business, we saw a number of both greenfield wins as well as competitive displacements.

The Greenfield wins continued to show that the value of security awareness is resonating with customers and our platform stands out from the competition.

Our competitive wins are further proof that our platform and customer support ranks well above our competition.

Additionally, we continue to see success in our enterprise segment, which had several big wins to give you. Some examples of Mega enterprise wins we.

We had a 69000 seats greenfield win with a global insurance company based in the UK.

We displaced a competitor at 1 of the world's largest industrial companies with 62000 seats.

And this deal included both <unk> and fishy are and the customer expects to save 25000 man hours using fishy are in their shock.

A large gaming companies swapped out a competitor in a 50000 seat win also favoring our automation and overall ease of use.

We also had a 50000 seat competitive displacement with a large medical technologies company, that's favored our platforms automation capabilities.

These wins on others demonstrate that our customers continue to embrace not only the considerable risk reduction on our platform brings but also the thousands of hours, we save for the ITT Department in Triaging security events.

Given the shortage in skilled workers our strategy of building time saving products into our platform has paid off.

This also remains a critical focus for our product roadmap.

Yeah.

Our support for over 34 languages continues to be a great selling point for our global customers to.

To give you a few examples this quarter, we won a 45000 seat deal with a global automotive parts supplier in Japan.

30000 seat competitive displacement with a large multinational manufacturing company based in the U S and 25000 seat Greenfield deal with a multinational oil and gas company based in Austria.

Outside of the commercial space. The government segment continues to be a strong vertical for us.

1 state that faced multiple breaches purchased 60000 seats and a greenfield deal with the intent of using our platform as their primary no defense.

We are seeing traction outside of the U S as well.

As an example, we landed at 20000 seat Greenfield deal with the police Department in Australia.

We also continued to see traction in the education sector in a greenfield opportunity or U S. Public school system purchased 12000 seats to upgrade their inadequate internal training.

And across the pond, we sold a 5000 seat deal to a school system in New Zealand.

Our cross sell motion is working well here too as an example, this quarter we saw a large public research University purchased fascia for use in managing its 11000 employee organization.

Before I turn the call over to Krish I would like to thank our employees and partners for their dedication commitment and customer focus it has brought no before to its market leading position today.

I'm incredibly proud of not only our financial results, but the great group of people driving this company and contributing to our communities.

We are as focused as ever on bringing high quality and diverse talent in the door.

This has not gone unnoticed. We were recently included in Fortune's Best places to work for Millennials and moguls list of the top 100 workplaces with the best diversity and inclusion programs.

During the quarter, we also kicked off our sustainability program, including a climate pledge to increase our use of clean energy to 25% globally by 2025 and become carbon neutral as an organization by 2040.

Within the first 3 weeks, 30% on her staff across 11 countries took the climate fledge.

These are just a few examples of the great work, we're doing behind the scenes.

I look forward to giving you an update in the quarters to come and with that I would like Chris.

Chris to discuss our financial trends.

Thanks, Dave.

Good morning, everyone.

As a quick reminder, on.

Otherwise noted all numbers, except revenue mentioned during my remarks on non-GAAP.

As he also on SKU, because we see strong performance across the business with <unk> for Q2 accelerated versus the first quarter to 42% year over year.

This was actually driven by another strong quarter for New logo addition.

Right and F&B and continue to cross sell to existing logos and global expansion.

Our platform continue for bed across all geography to customers of all sizes and industry.

I wanted to remind everyone that keep it all flow model is the ability to efficiently scale the customers of all sizes from organization, but less than other fee.

Addressed by <unk>.

Channel partners.

New customers.

Several hundreds of thousands of employees.

By our hybrid inside sales model.

Since day, 1 we are focused on 4 pillars for growth.

New logo expansion.

Selling to existing customers.

International expansion and finally channel expansion.

We saw success in each of these areas throughout the quarter.

Our fourth pillar of growth is new logo expansion.

Today about 87% on logos on in the SMB space.

We defined as less than 1000 employees and about 13% on it.

Enterprise space, which we define as greater than 1000 employees.

Both of these segments saw significant growth over the past few years.

To give you a sense for the magnitude enterprise logos now represents 5000 Korean decline worldwide for our 41000 customer base.

Considerably just from a few years ago that enterprise customer.

Ben on the 2000 customers.

In Q2, we saw robust growth that was evenly balanced between enterprise and SMB customers.

We are particularly proud of the success, we are seeing in the Mega enterprise fee of greater than 10000 feet.

This is a proof of not only on our ability to move up market with our current go to market model, but the strategic importance on some of the largest albeit this is the world now placing on platform.

Still provided a few of the many deals we closed and the Mega Anne on the enterprise market this quarter.

This company as I've said on a significant penetration on the enterprise market or the last couple of years.

Our second pillar of growth.

It's cross selling to existing customers.

Because we see strong interest among both new and existing customers in the power of our global platform.

As of Q2 about 17% of our customers have a bulk bid multiple products.

Strong interest among new customers that purchased multiple products within the first budgets.

To give you some perspective.

In 2019, we add about 2300 customers on about 80% of our 30000 customers with multiple products.

Day, approximately 7000 customers or about 17% of all of 41000 customers now have multiple products.

As you can see we have made tremendous progress here.

We have committed to bringing innovative products to our customers and ultimately driving shareholder value.

Larger compliance plan in early Q is yet. Another example of our ability to innovate on the human layer and add complementary product to our platform.

Though it's still early in the non compliance plus so that the results we saw from fishy.

In the first month of sales.

Compliance is seen by many customers as an easy add on to round out on the organization compliance needs.

It's also adding approximately $3 billion to our global debt.

As a reminder.

We don't bundled up from the preferred to cross sell the product as a result.

Liam pricing will add on product versus discounting.

As a result.

<unk> represents approximately a 45% increase in EBITDA for SMB customers.

And 35% for enterprise was.

Standard non QM status there.

On multi product strategy has seen considerable traction with the combination of fishy.

And Casey MGIC and now the addition of compliance.

Yes, we're here.

Lifeblood and Casey MGIC combined has seen triple digit revenue.

And triple digit logo growth.

Our third pillar of growth.

<unk> is expanding internationally.

Penetrating international markets remains 1 of the key pillars of our growth strategy.

On international revenue growth reached 95% year over year to yet another record breaking quarter.

Domestically, we also see strong momentum with about 36% year over year growth.

On the international expansion, we continue to focus on investment on hiring key talent in marketing sales content and customer simple BMA.

We have made several key hires in the UK, Germany, Australia, and Japan laying the foundation of talent to scale across the globe.

Lastly, our fourth pillar for growth as Jonathan expansion.

We also continue to focus on expanding our channel presence to activate growth both internationally as well as domestically.

We are investing in hiring a number of key resources in our channel team and building marketing and distribution capability for our China partner.

Throughout the quarter, we have made great progress in growing both on number of channel partners and the deal volume generated through them.

Now let me give you some details on the quarter.

Both new and existing customer business, the ongoing problem and the solution engineering worsened over the last year.

Currently support our customers with our platform reach which includes.

Integrated capabilities that on security event.

Security office patient add automation and good luck.

In the second quarter total annual recurring revenue.

<unk> reached $241 million up 42% year over year.

Yeah.

Was driven by another strong quarter for new logo additions and continued expansion of cross sell to existing logos.

Our total customer count for the quarter grew to over 41000 up.

From about 33000 in Q2 of last year.

Low churn and gross dollar retention for the quarter were both comparable to historical levels.

Gross dollar retention, which on our key has been world class can see a mix of SMB and enterprise.

For the highest levels we have seen.

In Q2 total GAAP revenue grew 43% year over year, reaching $59.4 million, which was bad ahead of our expectation.

We can't give you executed at a high level and remain focused on our full pay down of the growth.

Jonathan Firstly, the vast majority of our revenue was derived from North America.

At the same time, we believe day, the sizable addressable market for low deploy internationally and we continue to invest in both EMEA and APAC and both lower pulp up on them and expanding our channel relationships.

Approximately 15% of our revenue is now derived from international market, representing a 95% increase in international revenues year over year.

Why don't you spend only in our international expansion, which represents the base Lodge and executable Tam clearly our strategy of investing in these markets is producing results.

Since Q2.2020, we have added approximately 36, new head to the Nova for its management team.

Over the past 2 years, we've opened offices in Australia, Japan, Norway and Dubai.

Also completed building our share for the center in the Netherlands.

Help drive long term support for our clients and sales teams.

We have also accelerated our hiring plan to ensure we have the right resources in place to execute on our international expansion.

As part of our philosophy of running the business, we remain focused on sustaining a high growth rate with strong margins.

Second quarter non-GAAP gross margins improved to 85, 9% from 85% a year ago as we gain efficiency with scale.

As we scale on international businesses, we expect non-GAAP gross margin in the low to mid <unk> long term.

Total non-GAAP operating expenses for the quarter was about $46.5 million versus about $33.9 million for the same quarter last year.

While we continue to invest in headcount across the business on.

On April drove the vast majority of the expense increase this quarter.

Sales and marketing as a percentage of revenue was lower year over year as we scale the business.

As you know we are still in the early stages of international expansion and you should expect to see additional resources deployed to support that growth.

As an example, you are listing a first know the book on confidence in EMEA in September.

We expect to invest in both sales and marketing internationally over the upcoming quarters.

G&A costs increase reflects our continued focus support life as a public company and to assist items net expansion.

Yes, investing across legal finance into lauded and HIV.

As we see you made considerable investment in non technology platform.

Our launch of compliance plan is yet another example of our evolving product roadmap.

August early August seeing the strong demand for the product.

In fact, we have always the best beneficiary on wall at the same time and it's nonprofit.

Non-GAAP operating income in the second quarter was about $4.5 million and non-GAAP operating margin was approximately 7.6% quarter.

Quarterly non-GAAP net income was $3 for Mindy.

On non-GAAP net income excludes stock compensation expenses.

Amortization of acquired intangibles.

On acquisition and integration related costs.

Turning to cash flow on balance sheet items.

We finished June with cash and cash equivalents of approximately $257 million, representing our continued focus on maintaining a high level of capital efficiency and use of cash.

No. This balance includes the net proceeds of approximately $156 million from our recent IPO.

Free cash flow for the first half of the year was approximately $33.7 million driven by strong cash collection as for net sales performance is ahead of plan and an efficient go to market model.

From a result, you can see that we are highly resilient and cash Genuity SaaS model and strong balance sheet supporting our balance of top line growth and expanding profitability.

We continue to expand our resource pool invest in new products and capabilities.

Maintaining.

Sustainable profitable growth as we lead this new category is cybersecurity.

And on to guidance.

We ended the third quarter with strong customer and business momentum.

This momentum is seen across all other segments and international markets.

For the third quarter of 2021, we expect total revenue in the range of $60.5 million to 61.5 million on approximately 35% to 37% year over year growth.

For the full year 2021, we are raising our total revenue guidance to $237.5 to $239.5 million on approximately 36%, 37% year over year growth.

This revenue guidance is up from our original guidance of 229 to 231 million issued last quarter.

We expect free cash flow margins to be greater than 20% for the full year.

This is also up from our previous guidance of 12% to 15% issued last quarter.

As a reminder, there is seasonality in our free cash flow, which can cause results to vary quarter to quarter.

For modeling purposes, you can assume a non-GAAP diluted weighted average share count of between 178 and 181 million shares for Q3.

As a reminder, our Q2 GAAP weighted average share counts were impacted by the timing of the adaptation of our dual class structure on it.

No.

As we look forward for the rest of the year, we are seeing continued growth and momentum in the business and we are laser focused on maintaining our market leadership in the most importantly security dedicated to human endpoint.

At this time I'd like to ask a question simply press star 1 on your telephone keypad candidates star 1 to ask a question.

Our first question comes from the lineup, Rob Owens with Piper Sandler.

Great. Good morning, and thank you guys for taking my questions I still want to unpack a little bit the new logo acquisition, you talked about more specifically about what youre seeing in the enterprise market.

Channels into those customer some of the strength youre seeing overall on my sense is those are most likely competitive displacements rather than greenfield, but if you could expand on that that'd be great. Thanks.

Okay.

Yeah, Rob.

Debt is very good question for sales.

I'll throw it over to Lars in a second let me just comment on that.

There is still a significant amount of greenfield on enterprise as well, especially international.

But lars isn't.

As in the trenches. He has a better view on those enterprise sales force could you hop in.

Hey, Rob.

So.

A question are you talking specifically.

<unk> plus and then there are adjacent products or was it just start in general.

I think it was in general relative to the whole product set but the more you want to expand on the complaints for success that'd be great.

So.

SMB for us is still pretty much greenfield opportunity occasional competition with.

With enterprise.

There's really.

2 areas that we go after.

Marketing team.

<unk> provides.

No.

Very strong AE leads for our sales teams to go after and then more.

What part of that go to market is we're actively going after business with.

From our competitors.

With compliance plus.

That's going to be probably more.

This competitive displacement.

Then.

Greenfield in the enterprise space I think in SMB again, it will probably follow the same trends as being greenfield opportunity.

And maybe just since I've got you could you touch a little bit on your split activities. It really feels like there was a lot of momentum as it related to education and state and local government this quarter. Thanks.

So obviously in the news there's been a lot of attacks against the sled market and that always that always helps us with our products but.

Our product is 100% horizontal it's relevant to any size organization.

And then any vertical market so.

We really don't have any concentration in any specific vertical.

Alright, thank you.

Your next question comes from the line of Joel Fishbein with tourists.

Okay.

Hey, Thanks for taking the question I just have 1 too on the.

Could you talk a little bit on about the new product compliance plus if you can give us a little bit of color about the differences between <unk> and compliance costs and then also whats the go to market and cross sell opportunity looks like.

Okay.

Okay.

It really is a tool that you use to.

Keep track of all of the controls for specific correct.

<unk>.

Take it easy example, PCI.

The payment card industry to have 200 controls.

Check your firewalls once a month and you need to do that.

A test done upload evidence so auditor's can look at yes debt wash correctly.

That's what case.

Manages.

Compliance plus on the contrary.

Yes.

Essentially.

All employees A&D organization.

Compliance training modules that they have to step through and.

Those are things like privacy.

Yes.

Data protection.

Actual harassment, there's a whole raft of different compliance training. These people literally by law on each step through so.

<unk> plus is super easy to sell.

Shell and also deploy you can literally within a minutes.

For your existing platform turn it on and roll it out.

Great and then in terms of the cross sell opportunities and go to market that would be really helpful.

Sure.

If you look on the existing customer base, which is now.

Just heard 41000 plus.

It was relatively easy for us to go back to these people and say Hey, what are you currently doing for compliance training.

And very often debt is in.

On an existing vendor.

It's quite expensive and it's not that hard for us to come up with a competitive bid.

Plus pricing push.

Based on a lot of market research and was positioned to be disruptive.

So it's very easy for an existing customer to look at that and say Wow.

For moving.

Okay.

Great. Thank you.

Your next question comes from the line of Brian Essex with Goldman Sachs.

Hey, good morning, and thank you for taking the question Chris I was wondering if maybe you could just touch on IRR for debt given your comments on that.

Cash chain cross sell upsell.

For seasonality I guess embedded in that and was wondering if we could dig in maybe a little bit to some other moving parts underneath it whether it was.

On.

Revenue mix or linearity that that might have.

Maybe not for linearity, but.

Customer size large deals that might have affected that compared to last quarter.

Thanks, Brian Let me answer the later part question flow. So if you look at our growth as I said in excess of 42% and if you look at the trend, especially in the last year, especially.

Since Q2, Cologuard shutdown last year Youre seeing.

Real acceleration.

Now to unpack the AAR growth I'd go back to on 4 key pillars of growth.

Each of them has been contributing significantly to that growth.

First let's talk about enterprise and within the <unk>.

Price itself there are 2 distinct stories that are emerging.

1 is if you look at enterprise.

For the last couple of years as you can see almost half of E on outcomes in the enterprise side.

But especially in the last year and after 2 years.

Mega side on the Enterprise book has significantly accelerated and a couple of reasons for that Brian 1 is the international story the power of the platform the capabilities of the platform the multi language capabilities embedded on that platform cost drive lock more mega.

On enterprise traction towards the platform and that has been.

Driver.

Sure.

On the enterprise Holistically.

That itself is also a combination of on international growth as we and other expanding significantly into EMEA as well as APAC.

The second key part I would say on the AOR and packing is really what you are seeing in this cross sales story.

And just to remind everybody just a couple of years back we were largely a single product tenant on the platform and with the launch of <unk> Fishy and now compliance plus we are really providing significant platform capabilities to our global clients, which of course drives.

A lot more interest in the platform and the cross sell capability and the other thing we have done a great job Brian is really.

Cross selling at scale right now we've got 7000, plus customers now have multi product capabilities on the platform, which is an incredible testament to not only the platform strength, but across the motion and finally.

I think the channel expansion as well as international expansion has really contributed to that upsizing of our AOR growth that.

<unk> seen in the last quarter.

Now the last part of your question the seasonality now the way I think about seasonality is early on and low because history. We were largely in F&B shop. So there was very little seasonality in the business given we are largely going after <unk>.

Greenfield opportunity F&B.

Lately, especially in last year and half 2 years, given via evenly balance now between SMB and enterprise you will see some level of seasonality any are but that's less part to do with no before but more work to do but.

The overall software sales motion that company's fees, which have a large enterprise mixing them.

But right now sitting today.

The seat right now we don't see.

Well I don't expect any other typical seasonality.

And we believe that we have really strong robust growth ahead of us.

Got it that's helpful. And then maybe if I could just touch on net retention rates as you increase your percentage for your mix of large enterprise.

On improved cross sell upsell can you maybe give us an understanding of what the rate of improvement is there I understand that you regularly.

Regularly disclose it but just trying to get an understanding of.

How that how the churn and cross sell and up sell it might be impacting your net retention rate, we're seeing consistent improvement there.

Absolutely.

Just like I.

I think there are 2 key components of net dollar retention and as you mentioned, we don't comment on net dollar retention every quarter, but the 2 most important ingredients of any net dollar component is 1 is your growth slash logo retention rate and the second part of course is the ability.

<unk> 2 to cross sell now let's talk about the flow spot now growth slash logo retention for the Qunar case, it's a world class number given the mix of SMB and enterprise that we have reached the highest levels, we have seen annual before.

Excellent excellent progress on that site.

Second part of it is the cross sell motion.

Just to remind everybody.

<unk> motion from a sales perspective as all of these for land large so we get 100% of the employees at any client upfront.

So cross sell is 1 of the key drivers of growing our net dollar retention and in that case as you see the trend quarter on quarter. It has nothing but being an amazing sales execution right.

Right now 17% of all.

<unk> 1000 global customers have got cross sell capabilities. So you are.

Seeing that momentum and given that as I said net dollar retention is a component of these 2 ingredients both of them are trending.

On a positive direction.

Great. Thank you very much.

Your next question comes from the line of D J Hynes with Canaccord.

Hey, Thanks, guys and congrats on the strong results.

I wanted to ask about <unk> and what Youre seeing in terms of attach at.

Land and maybe it's part of that you could touch on trend and initial asp's.

Okay that is a question for sales.

I'm going on on this 1 straight to Lars.

So I can't speak on specific attachment rates, but.

Our attachment rate is.

In ever increasing each month.

Since we since we initially.

Put the product out and we also we drive a lot of games and drive a lot of incentives for our sales team.

To increase those attachment rates and we've had a lot of success with that.

Maybe Chris can talk about a little more specific on the numbers.

Yes, I think just to add some more color on in terms of the attachment rates.

Now I think of attachment rates across.

For the cross sell motion as well.

On the <unk> uplift meant motion now if you look at fishy are.

And you compare what we are seeing we are seeing very very strong.

Hatchment rates when customers actually buy both can stack on tissue together and that ranges anywhere between say, 35% plus depends.

Depending on whether you on SMB or enterprise and of course, <unk> is actually much larger than the enterprise side, given the size of the accounts and the seats. We're talking about so overall I think the attachment rates have been strong and growing given the cross sell motion and the aorta attachment rate also it's been.

Very very encouraging and trading up.

Perfect. That's helpful. Thanks, and then.

As you think about compliance vis vis the go to market model is is the playbook always going to be to lead with security and then work to cross sell compliance or is there an effort on would there be an effort to kind of sell compliance standalone as well.

Let me grab that 1.

For the moment essentially have this huge customer base that we can mine.

It is most efficient for simply go back to existing customers and say check this out.

And save some money because your existing for Andrew is twice as expensive.

Ultimately, we would probably also starch and we are doing the initial testing and marketing to just go this is a shepherd.

Campaign, if you will and derive a leach specifically to the <unk>.

Compliance management slash HR and it.

And drive that as a separate go to market strategy for the moment, we have enough work for it.

In the existing customer base to keep us busy.

Perfect. Thank you guys.

Hey, Brad P J.

Your next question comes from the line of Hamzah firewall with Morgan Stanley.

Hey, guys. Thank you for taking my question first question maybe for.

For <unk> I'm, just curious I know, it's hard to kind of break down exactly but to what extent would you say that this more recent acceleration, particularly in the area of growth is coming from.

Perhaps a stronger spending environment that we're seeing from these recent cyber attacks or.

Moving to natural acceleration.

Coming off of some of the maybe some of the modest weakness you might have seen in the middle of last year due to the Covid shutdown.

Generally speaking on.

What we're looking at is the market, becoming aware of the fact that day.

Bad actors essentially grab for humans as their first attack vector and simply send phishing e-mails highly scaled these days and very sophisticated.

Try to get in.

That's 1 of the successful.

It's really more than 50% of them are caused by fishing. So.

It's time for some money for the bad guys too and what we're looking at here is.

Organizations start to understand it they absolutely need a strong last line of defense.

Is employees being on their toes with security top of mind.

And then the media.

Debt currently have been giving enormous airplane for.

For things like colonial pipeline and ransomware debt is straight debt is.

Second tailwind for US just are there.

Got it that's helpful. And then maybe my follow up for Chris Chris You mentioned, 13% of your customer base is now enterprise.

And then the <unk>.

For a little over 50% of era.

If you do the math.

That's about a little over $20000 in terms of error for customer among that large enterprise cohorts about 4 to 5 times. The overall how is that you know over 20000, there on a per customer grown in the past couple of years and where do you think this can go you think that can go to 30000.

For 50000 kind of whats for the potential there.

Yes, so I think that 2 parts for that question 1 net.

And it would be helpful to understand that if you look at the enterprise total year Enterprise story is not.

Q2, 2021 storey only re slotted initially moving from of course F&B to I would say the small to mid size enterprise customers and over the last year and half 2 years, we have really tried to migrate up to woods. The mega size, so given that.

We already have as you said in excess of 5000 plus enterprise.

Customers.

Average is a mix between the smaller enterprise customers and now the Mega size enterprise customers from a trend perspective of course, our trend has been growing and the trend has been positive and the trend has been positive because of 2 reasons, 1 as I said not only be the motion.

Moving towards the upper end of day on the enterprise side, but also is also the addition of the international logos Bear we are more enterprise for us than SMB for us that'd be where in the U S.

Second part of your question is Youre seeing a lot more cross sell motion on the.

In the enterprise space.

And that of course adds.

To your overall average var for enterprise, but we are still early in that motion, but that motion has been growing.

Every quarter for the last year year, and a half and we do see definitely an upside ability to the average.

On enterprise as we get knock on the additional mega size or midsize enterprise customers domestically and internationally, but also cross sell now 3 additional products to that base.

Okay. Thank you.

Your next question comes from the line of Ethan Lee with Cowen.

Congrats on a strong set of results and thank you for taking my question.

2 quick questions, maybe start with you first.

So in light of the recent large GDP related sign on Amazon in Europe I was wondering if there's any flow.

Flow through benefits you are seeing or hearing from the channel soon really.

Weighted to regulatory all compliance front.

Not necessarily directly from the channel however.

You do need to remember that internationally, we are 100% channel and.

The focus on data privacy, especially in Europe.

For the G D P R.

Instead of you in compliance sample check the box requirement at this point in time organizations.

Literally be forced to view it as a component of their day to day operations and that.

Is where we come in with.

The training for employees to begin with.

And then with the case for them to your sheet product to actually track compliance and reported on it.

That gives you a bit more efficient ability.

That makes sense and then my follow up question is maybe for Crystal alive for leaving yourself jump ball question is the proof point. They reported last week was wondering if you are seeing any like change of controls noise that I guess no before taking opportunity of.

Lately.

This was for a question for correct correct, yes.

It could be a large or even yourselves.

It's a proof point to related.

I can start with just a general comment.

We are cash.

Before.

Still heavily investing in the platform the international multi lingual.

They were on the opposite spectrum on <unk>.

0.2 is currently moving too.

<unk> is generally focused on cost cutting.

No.

Yeah.

We don't we see them now and then but I think Lars can expand a little bit more on exactly where and how we see proof point today.

Yes. Thank you.

We.

I really can't speak on any specific competitor, but I'll I'll answer this way first.

We rarely see.

Competition in SMB, it's mostly greenfield.

On the enterprise side.

When we are involved in new business in a bake off type scenario.

Net case, we rarely lose 2 competitors, we win those hands down.

Yeah.

The other part of our go to market and in enterprise as I mentioned before is that we're actively going after our competitors existing customers.

Sometimes in those cases, when we're going after that business, we'll see them bundling the product kind of a scramble just to keep just to keep the business in house.

And Thats, where we will occasionally lose the sale, but we're we're winning a lot more of those than we're losing.

And not only do we view the competition is competition, but.

With our go to market, we also view the competition as opportunity.

Yes, Thank you license to again for the market color.

Yeah.

Your next question comes from the line of Jonathan <unk> with Baird.

Yes, good morning, and congrats on the strong performance.

A product question when you when you look at.

Product development and I'm wondering if you could just talk about the emphasis you are placing on improving existing products for us that building out new Skus, obviously, something like fish plant is a nice improvement to fishy are but maybe not as directly monetize about so just kind of curious how you how you look at that dynamic and that trade off.

Absolutely.

We have a really strong feedback loop with our existing customer base Jonathan.

Yeah.

Data stream, if you will.

Great insight into the features that day I would like to see and.

Fish for lip Asia, Great example from custom.

Customers coming up with Hey, it would be great if.

We also have are on product team that is sure.

Super focused on GAAP.

Our customers are.

Fantastic platform.

At a very competitive price so.

For people, who don't exactly know what fish flip is.

And then an administrator.

She is a malicious email come in.

A few clicks they can turn to that particular malicious email into a fishing template for everyone else.

So you can immediately see who avoid have fall on for this particular attack.

Very handy.

So for popular feature.

Does that answer your question Jonathan.

Yes, it does.

I have a follow up it is somewhat along the same lines, but you you introduced artificial intelligence capabilities into the core of Cam set.

On product recently I'm curious, how you see that differentiating and then maybe any color you can provide on product road map that leverages.

In the future it will be interesting to hear.

And update their true absolutely.

Absolutely.

For the last 5 years, we've been.

Very focused on making the platform AI enabled and you will see more and more AI and machine learning driven features.

Things like suggest that training modules for employees similar to what Youre seeing on Netflix we think you'll like this.

Also suggest it training modules that we present to the administrators or they can roll it out for their users.

Apart from that we have now 60 patents and a lot of them are.

<unk> focused on AI related to security awareness. So we are.

Very heavily investing in that particular direction.

And we'll provide more and more AI enabled.

Functionality and a core platform itself.

Okay. That's helpful. Thank.

Thank you.

You bet. Thank you.

Your next question comes from the line of Tyler Radke with Citi.

Hey, good morning, Thanks for taking my question I was curious just given the strength that you've seen in the business. The last couple of quarters as well as the strength you've seen in kind of cross sell and up sell.

Where are we at in terms of your head count growth plans this year, particularly in our.

Quota carrying reps have you kind of accelerated those based on the strength that you've seen are you leaning more into the channel just help us understand kind of the increased investments that you're making given the strength in the business.

I'll take a quick stab and then I'm on now give Laurie.

Opportunity to give some more detail.

And now before we have a similar rural Ash sales force that's half of our employees are on sales.

And we are definitely <unk>.

Even increasing our outreach in the recruiting area, where we're hiring more recruiters. So we can expand our outreach, especially international but large has for more detail on.

Actually we're in.

How much for it.

Different groups Lars yes.

So we've pretty much been on a very consistent.

Head count growth plan net debt matches our growth in <unk>.

I would say youre going to see a lot more acceleration in the international markets as we grow those.

And then.

With the introduction of some of the Adjacencies.

Better coming along as well as the compliance plus.

Youre going to see us a lot more efficient with head count because for instance, like compliance plus we really don't need to add head count to sell the product. It's really just in other SKU on the new sale and then <unk>.

<unk> can easily just.

Add that up our cross sell that to our existing base and then as far as delivering it.

Delivering CMP is really just flipping.

Flipping a switch and turn it on in the console. So we're not going to need additional.

We're not going to need additional.

Customer success managers.

To deliver that.

Thank you.

Your next question comes from the line of Roger Boyd with UBS.

Hey, Thank you very much for taking my question and congrats on the results I was wondering on free cash flow. If you could talk through the puts and takes on the upside there I think part of the Capex came in a little light again I'm wondering.

Maybe you could talk about your PP&E spending plans for the rest of the year and maybe if you're thinking about anything differently as it relates to office space in remote work long term.

Krish.

Surely.

So I can add a little bit color on on on a free cash flow I think 1 thing to understand is that since I think the beginning since 2 fund to this company has always wanted to maintain.

On balance between growth and FTF and that that is basically ingrained into every employee's DNA with.

You are at the front desk.

The CEO.

But that will continue going forward now if you look at seasonality in terms of FCS you do see some level of seasonality in Fcs.

Especially.

You can look into the later half of the year.

At the same time, we had never been a day capex intensive business right.

We are going to actually increase some capex in <unk> H, 1 as we actually build out some of our facilities in anticipation for our employees to come back into a hybrid moored in Q4, but none of this is going to be really large to create any significant.

<unk> imbalance in our PPE expense over the last couple of years.

Perfect. Thank you very much.

And at this time I will turn the call back over to Mr. Chairman and CEO for closing remarks.

Yeah.

Yeah.

Thank you very much for attending.

We appreciate your interesting know before weighted.

Look forward to an exciting back half of the year.

Thank you that in today's conference call you may now disconnect.

[music].

[music].

Ladies and gentlemen, thank you for standing by and walk on to the note before second quarter 2021 results Conference call. Please be advised on today's conference call is being recorded on.

Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

We would like to ask a question. During this time simply press star followed by the number 1 on your telephone keypad.

I'd like to withdraw your question press the pound key.

Thank you now it is my pleasure to turn the call over to Kent till on your I know before vice president of Investor reporting.

As a reminder, our commentary today will include non-GAAP financial measures information regarding our non-GAAP financial results there are limitations and reconciliations of our GAAP and non-GAAP results can be found on our earnings release, which was furnished with our form 8-K filed today with the SEC and May also be found in the <unk>.

Implementation financial information available on our Investor Relations website at investors don't know before dot com and.

In addition, some of our comments today, including those related to our guidance may contain forward looking statements that are subject to risks uncertainties and assumptions should any of these materialize or should our assumptions prove to be incorrect actual company results could differ materially from those projected or implied during this call. These risks are the <unk>.

Scribed in our form 10-Q that will be followed following this call.

These documents can be found on the SEC website, SEC Gov and in our Investor Relations website.

During today's call you will hear prepared remarks from our CEO, Stu Sharman and CFO and co president and credit shrank a trauma.

<unk> <unk>, our Chief revenue Officer, and co President will join our question and answer session.

And with that I will turn the call over to Stu.

Thank you Ken and thank you all for joining us today.

We are excited to share on our results with you this morning Bill.

Building on last quarter's strong performance, we exceeded our guidance.

We had a record quarter with over 40% year over year annual recurring revenue growth.

As many of you know I started no before to help organizations manage the ongoing problem of social engineering.

We are the only public company dedicated to securing the human layer.

The emphasis in cyber security.

Traditionally been on legacy controls.

Over the exponential growth in cyber attacks and their relative success proves we cannot solely rely on security software infrastructure.

According to the newest for Horizon 2021 data breach investigations report.

85% of breaches involved a human element.

Ignoring the human element of this equation leaves organizations of all sizes vulnerable.

<unk> is why we are dedicated to helping our customers transform their employees into a successful last line of defense against cyber attacks.

Over the last quarter, you have seen countless examples of the increased threat of social engineering attacks.

This has security professionals around the world on edge in fact, a recent survey from the I S. C. A found that 2 thirds of companies surveyed plan to improve their cyber security defenses in the wake of recent attacks such as the 1 on the colonial pipeline.

We expect many of these organizations to look at securing their human layer with no before.

The regulatory environment continues to evolve to match the growing threat landscape.

In the U S on a federal level, we have seen executive orders from the Biden administration to improve security controls.

On the state level, we have seen organizations such as the New York State Department of financial services mandate, the use of security awareness programs.

These actions helped validate our market opportunity and provide a catalyst for new business growth.

I will start by summarizing key results and activities for the quarter.

Second quarter results exceeded our expectations across the board with continued growth and strong free cash flow generation.

Our inside sales motion continues to win both new enterprise and SMB customers across all industry verticals. This.

This resulted in $241 million in IRR ahead of our expectations and up 42% year over year.

We have established a market leading position in the human centric cyber security space, which is enhanced by our focus on continuing to innovate to meet the needs of our customers.

Our vision for the security awareness markets defines no be force products roadmap. This.

This includes both exciting new features and new products.

This quarter, we released a new product called compliance plus.

Compliance plus leverages the intellectual property acquired from media pro as well as New school training modules and developed in house to expand our reach into the important compliance segment.

We believe there is a strong connection between compliance behavior and security behavior.

This product will help users improve their compliance behavior much like our platform already helps users improve their security behavior.

This is a whole know $3 billion Tam for <unk> for which shows the power of our platform to reach additional adjacencies.

While early so far the ramp in compliance plus has greatly exceeded our expectations given the ease of upsell.

Our technology leadership is a key factor in the strong momentum in our new business wins.

With further penetration in the enterprise market.

We also see strength and best in class retention across our existing customer base.

Customer growth remains strong across both SMB and enterprise with our total number of customers reaching over 41000.

Our current customers are investing in our <unk> platform and adopting our additional TCR Kcmg, Hershey and now compliance plus products at record levels.

As the end of Q2, 17% of customers now have a multiple products.

Organizations across all verticals and sizes continue to see value in our free tools and thought leadership, Webinars, which we'll utilize to generate leads for our inside sales team.

As in previous quarters, we also saw customers by both <unk> and fishy are together to leverage the immediate risk reduction it's fishy our brings to their organization.

So we do not report the growth for fishy, our compliance plus and <unk> separately, the combined logo growth and revenue growth was triple digits for the quarter.

A continuation of the cross sell success in Q1.

In terms of new business, we saw a number of both greenfield wins as well as competitive displacements.

The Greenfield wins continued to show that the value of security awareness is resonating with customers and our platform stands out from the competition.

Our competitive wins are further proof that our platform and customer support ranks well above our competition.

Additionally, we continue to see success in our enterprise segment, which had several big wins to give you. Some examples of Mega enterprise wins we.

We had a 69000 seats greenfield win with a global insurance company based in the UK.

We displaced a competitor at 1 of the world's largest industrial companies with 62000 seats.

And this deal included both <unk> and <unk> and the customer expects to save 25000 man hours using fishy are in their sock.

A large gaming companies swapped out a competitor in a 50000 seat win also favoring our automation and overall ease of use.

We also had a 50000 seat competitive displacement with a large medical technologies company, that's favored our platforms automation capabilities.

These wins on others demonstrate that our customers continue to embrace not only the considerable risk reduction on our platform brings but also the thousands of hours, we save for the it department in Triaging security events.

Given the shortage in skilled workers our strategy of building time saving products into our platform has paid off.

This also remains a critical focus for our product roadmap.

Yeah.

Our support for over 34 languages continues to be a great selling point for our global customers to.

To give you a few examples this quarter, we won a 45000 seat deal with a global automotive parts supplier in Japan.

30000 seat competitive displacement with a large multinational manufacturing company based in the U S and a 25000 seat Greenfield deal with a multinational oil and gas company based in Austria.

Outside of the commercial space. The government segment continues to be a strong vertical for us.

1 U S state that faced multiple breaches purchased 60000 seats and a greenfield deal with the intent of using our platform as their primary no defense.

We are seeing traction outside of the U S as well.

As an example, we landed at 20000 seat Greenfield deal with a police department in Australia.

Yeah.

We also continue to see traction in the education sector.

Greenfield opportunity a U S public school system purchased 12000 seats to upgrade their inadequate internal training.

And across the pond, we sold a 5000 seat deal to a school system in New Zealand.

Our cross sell motion is working well here too as an example, this quarter we saw a large public research University purchased Fisher for use in managing its 11000 employee organization.

Before I turn the call over to Krish I would like to thank our employees and partners for their dedication commitment and customer focus it has brought no before to its market leading position today.

I'm incredibly proud of not only our financial results, but the great group of people driving this company and contributing to our communities.

We are as focused as ever on bringing high quality and diverse talent in the door.

This has not gone unnoticed. We were recently included in Fortune's Best places to work for Millennials and moguls list of the top 100 workplaces with the best diversity and inclusion programs.

During the quarter, we also kicked off our sustainability program, including a climate pledge to increase our use of clean energy to 25% globally by 2025 and become carbon neutral as an organization by 2040.

Within the first 3 weeks, 30% on her staff across 11 countries took the climate pledge.

These are just a few examples of the great work, we're doing behind the scenes.

I look forward to giving you an update in the quarters to come and with that I would like Chris to discuss our financial trends.

Thanks, Dave.

Good morning, everyone.

As a quick reminder, on there.

Otherwise noted all numbers, except revenue mentioned during my remarks on non-GAAP.

As he also skew because we see strong performance across the business with <unk> for Q2 accelerated versus the first quarter to 42% year over year.

This was actually driven by another strong quarter for new logo ambition.

It's price and F&B and continue to cross sell to existing logos and global expansion.

Our platform continue for bed across all geography to customers of all sizes and industry.

I wanted to remind everyone that keep it all flow model is the ability to efficiently scale to customers of all sizes from organization, but less than other fee.

Addressed.

Channel partners.

2 customers with several hundreds of thousands of employees so by our hybrid inside sales model.

Since day, 1 we are focused on 4 pillars for growth.

New logo expansion.

Selling to existing customers.

International expansion and finally channel expansion.

We saw success in each of these areas throughout the quarter.

Our fourth pillar of growth is new logo expansion.

Today about 87% of on logos on in the SMB space.

Which we define as less than 1000 employees and about 13% on it.

Is it price space, which we define as greater than 1000 employees.

Multi segment saw significant growth for the past few years.

To give you a sense of the magnitude enterprise logos now record day 5000 Korean decline worldwide for all 40.

41000 customer base.

Oh Consumedly just from a few years ago bed on enterprise customers.

Ben on the 2000 customers.

Thank you for you we saw a robust ADR growth.

Was evenly balanced between enterprise and SMB customers.

We are particularly proud of the success, we are seeing in the Mega enterprise speeds of greater than 10000 feet.

This is a proof of not only on our ability to move up market with our current go to market model.

The strategic important some of the largest all debt issues. The world now placed on our platform.

Still provided a few of the many deals we closed at the Mega AA or the enterprise market this quarter.

This company is on trend of significant penetration on the enterprise market over the last couple of years.

Our second pillar of growth is cross selling to existing customers.

We plan to see strong interest among both new and existing customers in the follow up on a global platform.

As of Q2 about 17% of our customers have about bid multiple products.

Song interest among new customers purchasing multiple products based on the first budget.

To give you some perspective.

In 2019, we add about 2300 customers on about 80% of our 30000 customers with multiple products.

A day, approximately 7000 customers or about 17% of all over 41000 customers.

On multiple products.

As you can see we have made tremendous progress here.

We are committed to bringing innovative products to our customers and ultimately driving shareholder value.

Larger compliance plus in Q is yet. Another example of our ability to innovate on the human layer and add complementary product to our platform.

Though it's still early in non compliance.

The results we saw from fishy.

In the first months of sales.

Compliance is seen by many customers as an easy add on to round out on the organization to compliance needs.

It's also adding approximately $3 billion to our global debt.

As a reminder, we.

We don't bundle our products, we preferred to cross sell the product adds as a result in premium pricing for add on product versus discounting.

As a result, especially on represent approximately a 45% increase in <unk> for.

For SMB customers and 35% for enterprise was a standalone gms that debt.

On multi product strategy has seen considerable traction with the combination of officially on.

And Casey MGIC and now the addition of compliance.

Yes for a year fish.

Clients Love.

Casey MGIC combined has been shipped.

Triple digit revenue.

Triple digit low load growth.

Our third.

Hello growth is expanding internationally.

Penetrating international markets remains 1 of the key pillars of our growth strategy.

Our international revenue growth reached 95% year over year.

To yet another record revenue quarter.

Domestically, we also see strong momentum with about 36% year over year growth.

On the international expansion, we continue to focus on investment on hiring key talent in marketing sales.

Content and customer support.

Several key hires in the UK, Germany, Australia, and Japan laying the foundation of talent to scale across the globe.

Lastly, our fourth pillar for growth as Jonathan expansion.

We also continue to focus on expanding on shallow present to activate growth both internationally as well as domestically.

We are investing in hiring a number of key resources in on channel team and building marketing and distribution capability for our China partner.

Throughout the quarter, we have made great progress.

Progress in growing both on number of channel partners.

On the deal volume generated through them.

Non that give you some details on the quarter.

Both new and existing customer business the ongoing problem in low solution engineering work for the last year.

We currently support our customers with our platform reach which includes integrated tier for believes that on security event security orchestration and automation.

Good luck.

In the second quarter total annual recurring revenue.

<unk> reached 241 million.

42% year over year.

Yeah.

It's driven by another strong quarter for new logo additions.

And continued expansion of cross sell to existing logos.

Our total customer count for the quarter grew to over 41000 up.

From about 33000 in Q2 of last year.

Low <unk>.

<unk> gross dollar retention for the quarter will growth comparable to historical levels.

Gross dollar retention, which had on our key has been world class can see on mix of SMB and enterprise.

The highest level we have seen.

In Q2 total GAAP revenue grew 43% year over year, reaching $59.4 million, which was bad on that.

My expectation.

We can't give you execute at a high level and remain focused on our full pillars of growth.

Jonathan Thirdly, the vast majority of our revenue was derived from North America.

At the same time, we believe there is a sizable addressable market for low deploy internationally and we continue to invest in both EMEA and APAC in both low the Copa net.

Expanding on channel relationships.

Approximately 15% of our revenue is now derived from international markets, representing a 95% increase in international revenue year over year.

Why do you still only in on international expansion, which represent the debate lodge and executable Tam clearly on strategy of investing in these markets is producing results.

Since Q2.2020, we have added approximately 36, new head to the Nova for international team.

Over the past 2 years, we've opened offices in Australia, Japan, Norway and Dubai.

We also completed building a shed for the center in the Netherlands to help drive long term support for our clients and sales teams.

We have also accelerated our hiring plans to ensure we have the right resources in place to execute on our international expansion.

Second quarter non-GAAP gross margins improved to 85, 9% from 85% a year ago.

As we gain efficiency with scale.

As we scale lines national businesses, we expect non-GAAP gross margin in the low to mid eighties lockdown.

Total non-GAAP operating expenses for the quarter was about 46.5 million versus about $33.9 million for the same quarter last year.

While we continue to invest in head count across the business on.

Our IPO on April drove the vast majority of the expense increase this quarter.

Sales and marketing as opposed to Moody's revenue was lower year over year as we scaled the business.

As you know we are still in the early stages of international expansion and you should expect to see additional resources deployed to support that growth.

As an example, we're hosting our first Nordic bulk on confidence in EMEA in September.

We expect to invest in both sales and marketing internationally over the upcoming quarters.

G&A cost increased reflect continued net book to support life as a public company.

To assist items net expansion.

Yes, investing across legal finance into lauded and HIV.

As you see we have made considerable investment in our technology platform on.

Larger compliance plan is yet another example of our evolving product roadmap.

Although still early August seemed strong demand for the product.

In fact, we are always the best day officially on wall at the same time in its ramp up process.

Non-GAAP operating income in the second quarter was about $4.5 billion and non-GAAP operating margin was approximately 7.6%.

Quarterly non-GAAP net income was $3 for Mindy.

On non-GAAP net income excludes stock compensation expenses Amitabh.

Amortization of acquired intangibles and.

Acquisition and integration related cost.

Turning to cash flow on balance sheet items.

We finished June with cash on cash equivalent of approximately $257 million, representing our continued focus on maintaining a high level of capital efficiency and use of cash.

No. This balance includes the net proceeds of approximately $156 million from our recent IPO.

Free cash flow for the first half of the year was approximately $33.7 million driven by strong cash collection as for net sales performance is ahead of plan and an efficient go to market model.

From a result, you can see that we are highly resilient and cash Genuity SaaS model and strong balance sheet supporting our balance of top line growth.

Spanning profitability.

We continue to expand on resource pool investing in new product and capability.

Maintaining.

Sustainable profitable growth as we lead this new category is cybersecurity.

And on to guidance.

We ended the third quarter, but strong customer and business momentum.

This momentum is seen across all other segments and international markets.

For the third quarter of 2021, we expect total revenue in the range of $60.5 million to $61.5 million or approximately 35% to 37% year over year growth.

For the full year 2021, yeah, raising our total revenue guidance to 237, 5 to $239.5 million on approximately 36% to 37% yield or yield growth.

This revenue guidance is up from our original guidance of $229 million to $231 million issued last quarter.

We expect free cash flow margins to be greater than 20% for the full year.

This is also up from our previous guidance of 12% to 15% issued last quarter.

As a reminder, net seasonality in our free cash flow, which can cause results to vary quarter to quarter.

For modeling purposes, you can assume a non-GAAP diluted weighted average share count of between 178 and 181 million shares for Q3.

As a reminder, our Q2 GAAP weighted average share counts were impacted by the timing of the adaptation of our dual class structure and IPO.

As we look forward for the rest of the year, we are seeing continued growth and momentum in the business and we are laser focused on maintaining our market leadership in the most importantly security dedicated to human endpoint.

At this time I'd like to ask a question simply press star 1 on your telephone keypad are candidates star 1 to ask a question.

Our first question comes from the line of Rob Owens with Piper Sandler.

Great. Good morning, and thank you guys for taking my questions, Steve wanted to unpack a little bit the new logo acquisition, you talked about more specifically, what's youre seeing in the enterprise market.

Channels into those customers some of the strength Youre seeing overall on my sense is those are most likely competitive displacements rather than greenfield, but if you could expand on that that'd be great. Thanks.

Okay.

Yes, Rob.

Debt is very good question for sales.

I'll throw it over to Lars on the second let me just comment.

That there is still a significant amount of greenfield on enterprise as well, especially international.

But lars.

On the tranches she has a better for you on those enterprise sales force could you hop in.

Hey, Rob.

So.

Are you talking specifically.

<unk> plus and <unk>.

Our adjacent products or was it just start in general.

It was in general relative to the whole product set but the more you want to expand on the complaints plus success that'd be great.

So.

SMB for us is still pretty much greenfield opportunity occasional competition with.

With enterprise.

There's really 2 areas that we go after our.

Marketing team.

Abides by ton.

Very strong leads for our sales teams to go after and then more.

What part of that go to market as we're actively going after business with.

For a more competitors.

With compliance plus.

That's going to be probably more.

Competitive displacement.

Then.

Our greenfield in the enterprise space I think in SMB again, it will probably follow the same trends.

Greenfield opportunity.

And maybe just since I've got you could you touch a little bit on your split activities really feels like there was a lot of momentum as it related to education and state and local government this quarter. Thanks.

So obviously in the news there's been a lot of attacks against the sled market and that always that always helps us with our products but.

Our product is 100% horizontal it's relevant to any size organization.

And then any vertical market so.

We really don't have any concentration in any specific vertical.

Alright, thank you.

Your next question comes from the line of Joel Fishbein with tourists.

Hey, Thanks for taking the question I just have 1.2 on the.

Could you talk a little bit about the new products. The compliance plus if you can give us a little bit of color about the differences between tasty MGIC and compliance costs and then also what the go to market and cross sell opportunity looks like.

Okay.

Okay.

Really is a tool that you use to.

Keep track of all the controls for specific.

For regulation.

Take an example PCI.

Payment card industry to have 200 controls.

Check your firewalls once a month and you need to do that.

Test done upload evidence so auditor she can look at yes debt wash correctly.

What <unk> manages.

Compliance plus on the contrary.

Yes.

Essentially.

All employees A&D organization.

The compliance training modules that they have to step through.

Those are things like privacy.

<unk>.

Data protection.

Actual harassment so there's a whole raft of different compliance training. These people literally by law on each step through so.

<unk> plus is super easy to sell.

<unk> and also deploy <unk>.

Literally within minutes.

The existing platform turn it on and roll it out.

Yes.

Great and then in terms of the cross sell opportunities and go to market that would be really helpful.

Sure.

If you look at the existing customer base, which is now as you just heard 41000 plus.

It was relatively easy for us to go back to these people and say Hey, what are you currently doing for compliance training.

And very often debt is in.

On an existing vendor.

It's quite expensive.

And it's not that hard for us to come up with a competitive bid.

<unk> plus pricing plus.

Just on a lot of market research and was positioned to be disruptive.

So it's very easy for an existing customer to look at that and say Wow.

We're moving.

Okay.

Great. Thank you.

Your next question comes from the line of Brian Essex with Goldman Sachs.

Hey, good morning, and thank you for taking the question.

I was wondering when you think of this debt.

For debt given your comments on attach and cross sell up sell.

Seasonality I guess embedded in that and was wondering if we could dig in maybe a little bit to some other moving parts underneath it whether it was.

Revenue mix or linearity that that might have.

Maybe not the linearity, but.

Customer size large deals that might have affected debt compared to last quarter.

Thanks, Brian Let me answer the later part question flow. So if you look at our growth as I said in excess of 42% and if you look at the trend, especially in the last year, especially.

Since Q2 cohorts shutdown last year Youre seeing.

Real activation.

Now to unpack the AI growth go back off for key pillars of growth.

Each of them has been contributing significantly to that growth.

First let's talk about enterprise and within the price itself. There are 2 distinct stories that are emerging.

1 is if you look at the enterprise.

For the last couple of years as you can see almost half of <unk> on outcomes in the enterprise side.

But especially on the Lafayette and after 2 years.

Mega side of the enterprise for Us has.

Secondly, accelerated and there are a couple of reasons for that Brian 1 is the international story the power of the platform capabilities for the platform the multi language capabilities embedded down debt platform of course drive lock more mega enterprise attraction towards the platform.

And that has been.

A driver.

Hi.

On the enterprise Holistically.

That itself is also a combination of international growth as we and other expanding significantly into EMEA as well as APAC.

The second key part I would say on the AOR and packing is really what you are seeing in this cross sales story.

And just to remind everybody just a couple of years back we were largely a single product tenant on the platform.

For the launch of <unk> Fishy, and now compliance plus we are really providing significant platform capabilities to our global clients, which of course drives a lot more interest in the platform and the cross sell capability and the other thing we have done a great job.

<unk> is really cool.

Cross selling at scale right now we've got 7000, plus customers now have multi product capabilities on the platform, which is an incredible debt. So many did not only the platform strength, but our cross sell motion and finally.

The channel expansion as well as international expansion has really contributed to that upsizing of our AOR growth that.

That you are seeing in the last quarter.

Now the last part of your question the seasonality now the way I think about seasonality in early on in <unk> history, we were largely an SMB sharp so those beta low seasonality.

Seasonality in the business given we were largely going after.

Our greenfield opportunity SMB.

Lately, especially in last year and half 2 years, given via evenly balance now between SMB and enterprise you will see some level of seasonality.

But that's less part to do with no before but more Dr do bid.

Overall software sales motion that company's fees, which have a large enterprise mixing them.

But right now sitting today.

On the seat right now we don't see.

Don't expect any other typical seasonality and.

And we believe that we had really strong robust growth ahead of us.

Got it that's helpful. And then maybe if I could just touch on net retention rates.

You increase your percentage or your mix of large enterprise.

On improved cross sell upsell can you can you maybe give us an understanding of what the rate of improvement is there I understand that youre regularly disclose it but just trying to get an understanding of.

How that how the churn and cross sell and upsell might be impacting your net retention rate, we're seeing consistent improvement there.

Absolutely.

Just like.

There are 2 key components of net dollar retention and as you mentioned, we don't comment on net dollar retention every quarter, but the 2 most important ingredients of any net.

Important is 1 is your growth slash logo retention rate and the second part of course is the ability to cross sell.

Now, let's talk about a close block now our growth slash logo retention, but youre not cases for world class number given the mix of SMB and enterprise that we have reached the highest levels, we have seen that before.

Excellent excellent progress on that site.

The second part of it is the cross sell motion because just to remind everybody. Our key insect motion from a sales perspective is all of these for land large so we get 100% of the employees at any client upfront.

So cross sell is 1 of the key drivers of growing our net dollar retention and in that case as you see the trend quarter after quarter. It has nothing but being an amazing sales execution right.

Right now 17% of all for.

1000 global customers have got cross sell capabilities. So you are seeing that momentum and given that as I said net dollar retention is a component of these 2 ingredients both of them are trending.

Positive direction.

Great. Thank you very much.

Your next question comes from the line of D J Hynes with Canaccord.

Hey, Thanks, guys and congrats on the strong results.

I wanted to ask about <unk> and what Youre seeing in terms of attach at.

Land and maybe it's part of that you could touch on trends in initial asp's.

Okay.

A question for sales.

I can go on on this 1 straight to Lars.

So I can't speak on specific attachment rates, but.

Our attachment rate has been.

In ever increasing each month.

Since we since we initially.

Put the product out and we also we drive a lot of games and drive a lot of incentives for our sales team.

To increase the attachment rates and we've had a lot of success with that.

Maybe Chris can talk about a little more specific on the numbers.

Yes, I think just to add some more color on in terms of the attachment rates.

Now I think of attachment rates across.

For the cross sell motion as well.

On the <unk> uplift motion now if you look at fishy are.

And you compare what we are seeing we are seeing very very strong.

Our attachment rates when customers actually buy both can stack from tissue together and that ranges anywhere between say 35.

<unk> plus.

Depending on whether you on SMB or enterprise and of course, SME is actually much larger than the enterprise side, given the size of the Collins and the seats. We are talking about so overall I think the attachment rates have been strong and growing given the cross sell motion and the aorta attachment rate also that it has been.

Very very encouraging and trading up.

Perfect. That's helpful. Thanks, and then as.

As we think about compliance vis vis the go to market model is is the playbook always going to be to lead with security and then work to cross sell compliance or is there an effort on would there be an effort to kind of sell compliance standalone as well.

Let me grab that 1.

For the moment essentially we have this huge customer base that we can mine.

It is most efficient for simply go back to existing customers and say check this out.

And save some money because your existing for Andrew is twice as expensive.

Ultimately, we would probably also starch and we are doing the initial testing and marketing to just go this is a shepherd.

Campaign, if you will and dry elites, specifically to the <unk>.

Clients management, Slash HR and drive.

Separate go to market strategy for the moment.

We have enough work for it in the existing customer base to keep us busy.

Perfect. Thank you guys.

Hey, Brad P J.

Your next question comes from the line of Hamzah <unk> with Morgan Stanley.

Hey, guys. Thank you for taking my question first question maybe for Stu.

Just curious I know, it's hard to kind of break down exactly but to what extent would you say that this more recent acceleration, particularly in the area of growth is coming from.

Perhaps a stronger spending environment that we're seeing from these recent cyber attacks or.

Moving to natural acceleration.

Coming off of some of the maybe some of the modest weakness you might have seen in the middle of last year due to the Covid shutdown.

Generally speaking.

What we're looking at is the market, becoming aware of the fact.

Bad actors essentially grab for humans as their first attack vector and simply send phishing e-mails highly scaled these days and very sophisticated.

Try to get in.

That's 1 of the successful.

It's really more than 50% of them are caused by fishing. So.

Congress remind me for the bad guys too.

If we're looking at here is.

Organizations start to understand it they absolutely need a strong last line of defense.

Which is employees being on their toes with security top of mind.

And then the media.

Debt currently have been giving.

Enormous airplane for.

For things like colonial pipeline and ranch on where dose strength that is significant tailwind for us just there.

Got it that's helpful. And then maybe my follow up for Chris Chris You mentioned.

13% of your customer base is now enterprise.

And then that accounts for a little over 50% of our.

You do the math, that's about a little over $20000.

<unk> for customer among that large enterprise cohorts about 4 to 5 times. The overall how is that.

Over 20000, there on a per customer grown in the past couple of years and where do you think that can go do you think that can go to 30000 or 50000 kind of what is for the potential there.

Yes, So I think there are 2 parts for that question 1.

And it would be helpful to understand that if you look at the enterprise Tony on Enterprise story is not a.

Q2, 2021 storey only we slotted initially moving from of course F&B to I would say the small to mid size enterprise customers and over the last year and half 2 years, we have really tried to migrate up to the.

On the Mega size still given that we already have as you said in excess of 5000 plus.

Enterprise customers.

Average is a mix between the smaller enterprise customers and now the Mega size enterprise customers for.

On a trend perspective of course that trend has been growing.

And the trend has been positive.

On the trend has been positive because of 2 reasons, 1 as I said not only be the motion moving towards the upper end of day on the enterprise.

But also is also the addition of the international logos.

We are more enterprise for us than SMB for us that'd be where in the U S. The second part of your question is.

<unk> seen a lot more cross sell motion on the in the enterprise space.

And that of course adds.

To your overall average.

For enterprise, but we are still early in that motion, but that motion has been growing.

Every quarter for the last year on year and half and we do see definitely an upside ability to the average are on.

On enterprise as we get knocked on the additional mega size or midsize enterprise customers domestically and internationally, but also cross sell now 3 additional products to that base.

Got it thank you.

Your next question comes from the line of Ethan Lee with Cowen.

Congrats on a strong set of results and thank you for taking my question.

2 quick questions, maybe start with you first.

So in light of the recent large GDP related sign on Amazon in Europe I was wondering if there's any flow through benefits you are seeing or hearing from the channel.

And then related to regulatory compliance front.

Not necessarily directly from the channel however.

You do need to remember that internationally, we are 100% channel.

And.

The focus on data privacy, especially in Europe with the debt.

For the G D P R.

Instead of you in compliance sample check the box requirement at this point in time organizations.

Literally be for should view it as a component of their day to day operations and that.

Is where we come in with the training for employees to begin with.

And then with the cash CMG, our sheet product to actually track compliance and reported on it.

It gives you a bit more efficient ability.

That makes sense and then my follow up question is maybe for Crystal alive for leaving yourself jump ball.

On the proof point, David reported last week was wondering if you are seeing any like change of control noise that I guess no before taking <unk>.

Opportunity up lately.

This was for a question for correct correct, yes.

It could be crash alive. This helps too.

The other hedged.

It's a proof point to related.

I can start with just a general comment.

We are cash.

Before.

Still heavily investing in the platform the international multi lingual.

They were on the opposite spectrum.

Roof point is currently moving too.

<unk> is generally focused on cost cutting.

No.

Okay.

We don't we see them now and then but I think Lars can.

And a little bit more on exactly where and how we see proof point today.

Yes. Thank you.

I really can't speak on any specific competitor, but I'll I'll answer this way first.

We rarely see cash.

On petition in SMB, it's mostly greenfield on the enterprise side.

When we are involved in new business in a bake off type scenario.

Net case, we rarely lose 2 competitors, we win those hands down.

Yeah.

On the other part of our go to market and in enterprise as I mentioned before is that we're actively going after our competitors existing customers.

Sometimes in those cases, when we're going after that business, we'll see them bundling the product kind of a scramble just to keep just to keep the business in house.

And Thats, where we will occasionally lose the sale, but we're we're winning a lot more of those than we're losing.

And not only do we view the competition is competition, but with our go to market. We also view the competition as opportunity.

Yes. Thank you. Thank you license deal again for the market color.

Yes.

Your next question comes from the line of Jonathan <unk> with Baird.

Yes, good morning, and congrats on the strong performance.

A product question when you when you look at.

Product development I'm wondering if you could just talk about the emphasis you are placing on improving existing products versus building out new skus, obviously, something like fish flip is a nice improvement to fishy are but maybe not as directly monetize about so just kind of curious how you how you look at that dynamic and that trade off.

Absolutely.

We have a really strong feedback loop with our existing customer base Jonathan.

On the.

That data stream. If you will gives us great insight into the features that day and would like to see.

And.

Thanks Philip.

Great example from custom.

Customers coming up with Hey, it would be great if.

We also have on product team that is.

Super focused on cash.

Moving our customers.

Fantastic platform.

At a very competitive price so.

For people, who don't exactly know what fish flip is.

And administrator.

She is a malicious email come in.

A few clicks they can turn to that particular malicious E mail into a fishing template for everyone else.

So you can immediately see who avoid have fall on for this particular attack.

It's very handy.

Super popular feature.

Does that answer your question Jonathan.

Yes.

I have a follow up it is somewhat along the same lines.

You introduced artificial intelligence capabilities into the core <unk>.

On product recently I'm curious, how you see that differentiating and then maybe any color you can provide on product roadmap debt leverage.

In the future it would be.

It's Andy here.

Sure.

Absolutely.

For the last 5 years, we've been very focused on making the platform AI enabled and you will see more and more.

Driven machine learning driven features.

Things like suggested training modules for employees similar to what Youre seeing on Netflix, we think you'll like this.

Also suggested training modules that we present to the administrators. So they can roll it out to their users.

Apart from that we have now 60 patents and a lot of them are for.

Focused on AI.

Related to security awareness. So we are.

Very heavily investing in that particular direction.

And we'll provide more and more AI enabled.

Functionality and a core platform itself.

Okay. That's helpful. Thank.

Thank you.

You bet. Thank you.

Your next question comes from the line of Tyler Radke with Citi.

Hey, good morning, Thanks for taking my question I was curious just given the strength that you've seen in the business. The last couple of quarters as well as the strength you've seen in kind of cross sell and up sell.

Where are we at in terms of your head count growth plans this year, particularly in.

Quota carrying reps have you kind of accelerated those based on the strength that you've seen are you leaning more into the channel and just help us understand kind of the increased investments that you're making given the strength in the business.

I'll take a quick stab and then I'm on now give lars on.

Opportunity to give some more detail.

And now before we have a similar rural Ash sales force.

Half of our employees are in sales.

And we are definitely <unk>.

Even increasing our outreach in the recruiting area, where we're hiring more recruiters. So we can expand our outreach specialty international but large has for more detail on.

Actually we're in.

How much for it.

Different groups Lars yes.

Yes, so we've pretty much been on a very consistent.

Head count growth plan net debt matches our growth in <unk>.

I would say youre going to see a lot more acceleration in the international markets as we grow those.

And then.

With the introduction of.

Some of the Adjacencies.

That are coming along as well as the compliance plus.

Youre going to see us a lot more efficient with head count because for instance, like compliance plus we really don't need to add headcount to sell the product. It's really just in other SKU on the new sale and then CSM.

<unk> can easily just.

Add that up our cross sell that to our existing base and then as far as delivering it.

Delivering CMP is really just flipping.

Flipping a switch and turn it on in the console. So we're not going to need additional.

We're not going to need additional.

Customer success managers.

To deliver that.

Thank you.

Your next question comes from the line of Roger Blood with UBS.

Hey, Thank you very much for taking my question and congrats on the results I was wondering on free cash flow. If you could talk through the puts and takes on the upside there I think part of the Capex came in a little light again I'm wondering.

Maybe you could talk about your PP&E spending plans for the rest of the year and maybe if you're thinking about anything differently as it relates to office space in remote work long term.

Krish.

Surely.

So I can add a little bit color on on on a free cash flow I think 1 thing to understand is that since I think the beginning since 2 founded this company. He has always wanted to maintain a.

Strong balance between growth and Mcf and that that is basically ingrained into every employee's DNA of a day.

You are at the front desk or you are the CEO.

So that will continue going forward now if you look at seasonality in terms of FCS you do see some level of seasonality in Fcs.

Especially.

If you look into the later half of the year.

But at the same time, we had never been our base Capex intensive business right.

We are going to actually increase some capex in <unk> H, 1 as we actually build out some of our facilities in anticipation for our employees to come back into a hybrid moored in Q4, but none of this is going to be really large to create.

The significant imbalance in our PPE expense over the last couple of years.

Perfect. Thank you very much.

And at this time I will turn the call back over to Mr. Chairman and CEO for closing remarks.

Okay.

Thank you very much for attending.

We appreciate your interesting know before and we look forward to an exciting back half of the year.

Thank you that today's conference call you may now disconnect.