Q3 2021 Mandiant Inc Earnings Call

Best ever quarter for mandated security validation and our largest validation deal ever.

Revenue from <unk> grew 22% year over year to $122 million in annual recurring revenue for managed grew 26% year over year to $264 million.

And management deals greater than $1 million grew 79% year over year from 14 deals a year ago to 25 deals this past quarter.

Total value of these deals greater than $1 million almost doubled growing from 24 million to $47 million year over year as.

As an example of these larger deals we added a new fortune 50 customer who in addition to our incident response expertise.

<unk> to help transform their security program through our powered by <unk> approach that Leverages, our full suite of intelligence validation and a mandate advantaged platform.

We are pleased with these financial results, but we are even more excited by the operational highlights and go to market changes, we are making to accelerate our growth.

I would now like to discuss some of the mandates innovation.

We continue to make great progress on our mandate advantaged platform, mainly the advantages are multi vendor xdr platform delivered as a SaaS offering and it contains modules such as threat intelligence security validation automated defense and now added in the third quarter attack surface management and.

We are innovating on the platform at great speed I'm going to highlight four examples for you.

First we now offer multi vendor managed defense <unk>.

Customers have asked for Mandy and expertise and threat intelligence to back their security teams for years with the divestiture of the Fireeye products business Mandy will be supporting more technologies as a multi vendor xdr capability.

I'm ready and competitively priced offering to reach new markets for mandaean.

And fourth we also innovated inorganically in the third quarter by acquiring intrigue intrigue allows mandaean to deliver attack surface management or ASM as another module in the mandaean advantage platform.

Sam identifies how organizations could be compromised by identifying applications that are visible.

Vulnerable and exploitable and we point that out in minutes, we have already derive significant value in our services business from this capability and we plan to integrate attack service management into the Mannion advantage platform in the first quarter of 2022.

In addition to these for innovations. We also added new functionality to our automated defense module mandaean advantage that codifies are human expertise into machine learning and analytics. Specifically in addition to numerous improvements to our machine learning decision models to automate scalar expertise to more confidently either.

<unk> security events that matter, we added new functionality to our Edr focused models. These new models allow us to more robustly assess metadata of various attacks and improve our ability to find the proverbial needle in the haystack at machine speed with each data science improvement and we made to mandaean automated defense.

We are measurably, improving our automated detection in response capabilities and improving our journey to automating our expertise.

Now I would like to provide some services highlights meaning professional services continue to be in high demand. We had a record third quarter for Mandan consulting revenue at $61.7 million, representing 20% year over year growth, while growing deferred revenue to third $113 $1 million.

We now have over 600 professional consultants worldwide and we continue to have great success recruiting talent as we believe our mission of being trusted advisers to some of the most important organizations in the world attracts great talent.

While we continue to respond to very prominent and well publicized security breaches globally. We also continue to maintain a healthy balanced across our services portfolio scheduling proactive and strategic services well into 2022.

There's an MSS piece, we plan to enable integrators and MSP to use the mandaean advantage platform to deliver security transformation and modernization programs for their customers.

And third we created an industry aligned expert team to help us navigate and deliver tailored strategic services to various industry sectors, such as finance healthcare defense utilities among others.

Addressing their specific requirements based on mission regulations and the risk profile.

Fourth we hired a new leader to create our strategic Alliance program targeting partnerships with global governments, we are leveraging her knowledge expertise in network connections to focus and expand managed relationship with important government agencies and fifth we hired a new channel league to create and manage a channel program that addresses the middle market.

Fourth we hired a new leader to create our strategic Alliance program targeting partnerships with global governments, we are leveraging her knowledge expertise in network connections to focus and expand managed relationship with important government agencies and fifth we hired a new channel league to create and manage a channel program that addresses the middle market.

In an efficient way and this was purposely timed with the new solutions announced that our cyber defense summit in October we are combining our technology and talent that deliver relevant solutions to our advantage platform and these offerings were created specifically to fuel our middle market growth provide channel leverage and any.

Double a high velocity sales model.

And on October eight is expected to impact our Q4 results.

Our guidance for the third quarter focus on continuing operations and I'm pleased to say that we met our guidance ranges for all metrics and our revenue was at the top end of our guidance range.

In addition, we had very solid performance in our last full quarter of discontinued operations.

As always I'll be referring to non-GAAP metrics, except when discussing revenue and cash flow.

Our non-GAAP measures exclude stock based compensation amortization of intangibles noncash interest expense on our convertible debt and convertible preferred equity.

Restructuring charges accretion of series, a convertible preferred stock and other nonrecurring items.

Now, let's look at the reported results for continuing operations or the mandate solutions business.

Manny and billings increased 40% from Q3 of 'twenty with strong performance in platform cloud subscription and managed services and professional services.

We ended the quarter with record deferred revenue of $315 million.

The platform cloud subscription and managed services category grew billings by 58% year over year in the third quarter.

We achieved this with flight with a slight one month decline in average contract length, which was approximately 22 months for the quarter.

Growth in the platform cloud subscription and managed services billings was driven by solid demand for Mandeans, Intel managed defense and validation subscriptions.

Mandy and validation had its best quarter ever.

While we encourage you to look at revenue is the best metric to evaluate our professional services performance.

It is still worth noting that professional services billings were up 24% year over year in the quarter.

Last quarter I indicated that we expected to see annual recurring revenue accelerate during the second half of 2021 to the mid 20% levels.

I am pleased to report that <unk> solutions increased 26% from the end of Q3 of 'twenty to $264 million.

<unk> will be in a central metric for mandate solutions as we continue to transition to more of a SaaS business model.

For continuing operations, we added 212, new logo customers up 14% from Q3 of 'twenty.

And closed 25 transactions greater than $1 million compared.

Compared to <unk> 14 in Q3 of 'twenty.

Turning to the translation of our strong billings and our performance into revenue.

Many of revenue increased 22% from Q3 of 2020 with a strong performance in platform cloud subscription and managed services and professional services.

Our revenue of $122 million was at the top end of our guidance range. We provided in last quarter's earnings release.

The platform cloud subscription and managed services category grew revenue, 24% year over year in the third quarter.

Professional services revenue increased 20% year over year in the third quarter.

Given Q3 has significant seasonality due to summer vacations.

We saw a professional services sequentially flat compared to Q2 as we had anticipated.

Now, let's look at our gross margin and operating margin.

Our 60% gross margin for the third quarter slightly exceeded our guidance range and operating margin of negative 27% for the third quarter was at the top end of our guidance range.

The platform cloud subscription and managed services gross margin was 70% in the third quarter up from 66% last quarter and 62% from Q3 of 2020.

Driven by increased scale in our subscription business.

Professional services gross margin was 51% in the third quarter down slightly from 53% last quarter, primarily due to increased vacation during the summer months.

The transaction is closed most of the cost of shared resources encourages support the fiery products business will be reimbursed demanding under the transition services agreement.

Now, let's turn to our current outlook for Q4.

For Q4, we expect revenue to be in the range of 129 to 100 million.

On a year over year basis, the midpoint of our guidance range implies revenue growth of approximately 19%.

We expect in the mix between size and services to be approximately 50, 50 and year over year growth rates for both sides and services to be in the range of 18% to 20%.

Similar to Q2 and Q3, we expect an increasing percentage of new validation deals to be cloud vs. On premise in queue for relative to last year.

This is expected to reduce the Q4 year over year SaaS growth rate by approximately five percentage points.

As a reminder, today any cloud validation deals are 100% Rottable recognition and any on premise deals are recognized with a significant portion of the revenue recognize upfront.

This is expected to change in January of 2022, when even our on premise validation deals will be 100% rateable.

See some leverage in 2022, but not a significant amount given 2022 will include approximately a $30 million headwind for moving to rateable recognition for validation.

Additional branding cause for the mandaean relaunch and some stranded costs relating to it facilities and the expected wind down of the TSA operations.

For 2023, we currently expect to be non-GAAP operating margin positive.

I look forward to explaining our 2022 expectations and more details part of our queue for earnings call and.

And laying out the bridge to our long term model as part of the of the Analyst day, we plan to hold in the first quarter of 2022.

In closing I'd like to reiterate that the sale of the thyroid products business, which was completed in October 8th will enable us to concentrate our efforts on growing the mandaean business.

We remain more confident than ever that this will focus will result in financial and go to market changes that we believe will make mandaean stronger and drive value for our customers and investors.

I will now turn the call over the operating for questions.

Operator.

The payment actually won't drive, whether it's recognized ratably or upfront they will really be.

<unk>.

Being through the Mandaean advantaged platform and getting real time access to the intelligence and it should be a huge win for the customers. So our expectation is that upon renewal the vast majority of customers will move over and Thats, how we model that assuming that they are all kind of moved over commanding advantage there may be one or two.

Government customers that for whatever reason.

Cannot.

Have ongoing access to real time, Intel so but.

But the vast majority in from a modeling perspective, I think we feel very comfortable that the head headwind won't be more than the $30 million that we have projected.

Yes.

Okay. That's helpful and then I guess with regard to the support costs for <unk>.

For the product side of the business.

Let's skip that.

Regard to the relaunch costs, how persistent are they and at what point might we kind of hit a regular stride, where we'll have a very I guess predictable migration with better scale of the platform, where we can envision a pathway to better profitability.

Having a sales team going from selling nine things down to really won the mandate advantage platform. So with that focus will automatically come better efficiency with the sales force less to train them on and way more alignment as to how the deliver the message you can get that done second thing you're going to get is we're building towards technology.

<unk> services, as well, where you get more leverage from the consultants what that means is as our consultants use the platform more and more to deliver things like ransomware assessments or as we learn to scale manage defense with other products through our own platform you get to see the margins increase gross margin will get better and at the same time.

Time frame.

You just see more leverage there and more scalability, we can deliver things quicker and faster which leads to growth and then that's why I talked about five go to market changes Jonathan during the earnings call.

We were surrounded his fire.

We were E Mail security network Security, we had assumed we had endpoint we had services managed services Intel we were in every single business and it made it very hard to have frictionless partners. So.

We have a very aligned strategic operations group to get leverage from partnerships that historically, we haven't had any so that's a big advantage for mandaean, when it's vendor agnostic I can't emphasize how important mandan been vendor agnostic is it literally allows us we're getting in.

Inbound calls the partner for the first time since about 2015.

So now we've got leverage from partners that's possible, we get leverage from technology enabled services, which is possible and we are only talking about going from 26% to 30% and our whole go to market was aligned about appliances three months ago six.

Months ago, So I'm very confident in that top line.

Fantastic and just depends on your point around the partnerships.

Now that you are a vendor agnostic when can we expect to maybe see some of these new partnerships are opportunities emerge and how much can accelerate yep.

First and foremost efficiency a sale starts with maniacal focus and that's what we have now so for the first time ever instead of going to the Salesforce with here's the nine products you got in years and by the way selling endpoint versus selling network pretty darn different factor talking to a different fire you talking to your network ops on one side.

Or the desktop folks from the other or maybe the security professionals. So there's it's you.

You are talking about something that I will take a couple of quarters to see the efficiencies grow so I'm starting with looking at our Pms looking at our training looking at her enablement in recognizing the company is 100% a line. This is what we're building. This is who we are this is how we're resource and for the first.

Time in our history, we can actually invest in everything we're doing because when we had nine products. We were funding three at the expense of the other six some times and tradeoffs with Resourcing. So it's too soon to tell and measure the efficiency and again until the end of the year the sales folks that went with.

<unk> products are still inserted to sell Mandean and vice versa. Mandaean sales folks are still unscented and we're holding the comp plan together till the end of the year. So that will also skew a little bit of a performance, but we have an aggressive plan for our January kickoff sales kickoff with trained.

I mean, when you <unk> yeah, we catch up later you can walk through that then okay. Thank you I appreciate it.

Two.

They're a nice further questions I'll have that for the management team for any closing remarks.

Thank you Sam I want to thank everybody for joining us on this call today man. It's just getting started folks we are very excited about the.

Tap in front of us and I look forward to speaking to all of you over the next few days and 90 days from now with the new update until then thank you very much.

This concludes today's cool. Thank you for joining you may now disconnect your lines.