Q4 2021 Knowbe4 Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby for your patients.
[music].
Ladies and gentlemen, thank you for standby and welcome to the <unk> fourth quarter 'twenty 'twenty. One results conference call. Please be advised that today's conference call is being recorded at this time all participants are in listen only mode. After the Speakers' remarks, there will be a question and answer session to ask a question during.
The session you will need to press star one on your telephone if you require any further assistance. Please press star zero and now it's my pleasure to turn the call to Ken Kilian, <unk> Senior Vice President of Investor with Li. Please go ahead.
As a reminder, our commentary today will include non-GAAP financial measures information regarding our non-GAAP financial result, there are limitations and reconciliations of our GAAP and non-GAAP results can be found in our earnings release, which was furnished with our form 8-K today with the SEC and May also be found in the supplemental financial information available on our Investor Relations website.
At investors Dot <unk> 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-K that will be filed in accordance with the filing deadlines established by the SEC. These documents can be found on the SEC website, SEC Gov and on our Investor Relations website.
During today's call you will hear prepared remarks from our founder and CEO , Stu Sherman and CFO and co President Chris Bank of drama.
Now our Chief revenue Officer, and co President will join our question and answer session and with that I will turn the call over to Sue.
Thank you Ken.
And thank you all for joining US today, we're excited to share our results with you. This afternoon. We ended a year of strong execution with fourth quarter results exceeded our guidance, we had a record quarter with 44% year over year annual recurring revenue growth and a 28% free cash flow margin now before I begin.
I'm sure you've seen the press release regarding the organizational developments in our executive structure, who will provide more detail about these changes later on but I first wanted to go over our quarterly and annual highlights 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, we're excited to expand our platform even further.
Plan to introduce the HDR category or human detection and response following the integration of security adviser in the second half of this year the emphasis in cyber security has traditionally been on the legacy controls. However, the exponential growth in cyber attacks and their relative success proves that we cannot so levered.
<unk> on security software infrastructure, just last month. The 2021 annual data breach report was published by the identity theft Resource Center, a nonprofit organization with over 20 years of experience and a recommended resource of the department of Justice in their report they explained that 2021 had more datacom.
<unk> in the U S than any other year up 68% over 2020, fishing, smashing and business email compromise where collectively the number one attack vector just as they were in the years. Prior I would like to think this is an alarming statistics for some but sadly it's a trend.
All too familiar with at this point it is clear that this problem is escalating as well in fact in December of 2021 alone data from an organization responsible for somewhere between 15% to 30% of the world's Internet traffic Akamai technologies reported over 722.
Million cyber attacks that amounts to nearly 17000 cyber attacks every second across the globe and remember bad actors only needs to be right. Once the unfortunate reality is that in a lot of these cases bad actors are manipulating the human element of organizations without any regard to their size or industry.
Untrained or poorly trained employees are walking liabilities that could bring potentially devastating consequences to the security posture of any organization with that being said employees, who are properly trained using an effective platform and are frequently sent realistic phishing simulations have the potential to become.
One of the most powerful security assets are those same organizations that is why we are dedicated to helping our customers transform their employees into a successful the last line of defense against cyber attacks, both private and government organizations increasingly recognize the need to defend against this.
Growing threat landscape on the government side, the regulatory environment continues to evolve and address this the U S Department of the Treasury for example, or at least new guidance last quarter, specifically identifying cyber security training as one of the meaningful steps to reduce the risk of ransomware extortion this kind of guidance.
It was on the heels of CSR, the cyber security infrastructure brands of the U S Department of Homeland Security, who stated that user awareness training programs are a key way of mitigating the risk of phishing email attacks. We believe that these actions help validate our market opportunity and provide a catalyst for new <unk>.
Business growth. Another example came from August 2022 businesses at work report I am proud to say that we're now within the top 10 of their top 15, most popular apps by number of customers quoting the report in their own words directly they say is up a jaw dropping five <unk>.
<unk> and 56% the largest year over year growth from our top 15, most popular apps no before was consistently a fastest growing app between 2017 and 2019 for those keeping track at home and quote this progress places US next to Titans of this.
Software industry, such as Salesforce zoom, Atlassian slack and Doctor sign even more recently G. Two's Winter 2022 grid report named <unk> as their top ranked SOR software with the highest customer satisfaction among a dozen contenders in this space our <unk>.
Or was <unk> 93 out of 100, placing us well ahead of the competition for context. The second place can tender had a <unk> score of 73. We believe that this is the kind of recognition that really sheds light on the great work. We are doing I will now walk you through our key results, which highlight our execution during 2021.
Fourth quarter results exceeded our expectations across the board with continued growth as well as 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 $285 million in <unk> ahead of our expectation.
<unk> and up about 44% year over year. We believe this performance demonstrates our market leading position in the human centric cyber security space and we continue to remain focused on innovation in order to meet the needs of our customers our vision for the security awareness markets defines note before product roadmap. This.
<unk>, both exciting new features and new products a great example of this is the.
Two products that we are planning to launch in the second half of this year, one code named password IQ and the other representing our integration of the security adviser acquisition. As a reminder, these will be two entirely separate skus, each expanding our tam as well as fueling our existing effective crew.
Ross cell momentum with the security advisory product. We believe we are creating a new category in cyber security called human detection and response or ACR.
Works.
We connect to other security layers through their cloud interface and pull in security alerts. So we can analyze them and take real time action. We believe this new SKU will add an estimated $5 billion Tam as well I am pleased to announce that the integration of this product is on track for release in the second half of 2022.
Our R&D team is laser focused on making sure that there is no product, which is highly technical in nature can be implemented into our existing customer base in the simplest way possible. This is the kind of automation that supports our high velocity sales motion as well as reinforces our proven go to market engine, our organic products.
Development remains as strong as well with the product code named password IQ also on track for release in the second half of this year. This is another exciting products that we expect to be of interest to customers of all sizes and industries and as part of our organic product development pipeline. As a reminder, this product is not a password manager password Iq.
<unk> will be used to mitigate risk related to password hygiene issues, such as weak or breached passwords. The product we will continuously monitor your organization for any issues detected with users password org.
Organisers this data on an easy to read dashboard and facilitates automatic employee training based on detection of any password of risk. Among the new features we have released there is one we are particularly excited about nobody force industry benchmarking has been expanding.
To now include comparison data for <unk> Security Culture Survey you may have heard us talk about the Abcs of security. This stands for awareness behavior and culture. The goal of <unk> platform.
Enable a culture of security awareness that produces real results. It creates a sense of collective responsibility that results in strong security behaviors with the new security culture Survey, we give our customers the ability to track their progress and also compare their security culture to that of their peers as a.
Larry to explorer, we believe that cyber insurance companies in particular could find this feature useful as a method to more accurately measure risk. These new products and features are a key driving factor in the strong momentum of our new business wins represented by further penetration in the enterprise market customer.
Growth remains strong across both SMB and enterprise with our total customers reaching over 47000 in just 2021, we added over 10000 customers to the platform. We believe that this scale is hard to match in cyber security. Our current customers are investing in our <unk> platform.
And adopting our additional TCR kcmg, RC and compliance plus product at record levels at the end of Q4 over 22% of customers now have subscriptions to multiple products that is up from about 14% at the end of Q4 2020.
As in previous quarters, we also saw customers by both <unk> and fishy are together to leverage the immediate risk reduction that <unk> brings to their organization, though we do not report the growth for fishing or compliance plus an ACM Jersey separately, the combined logo growth and revenue growth.
About triple digits year over year for 2021, a continuation of our cross sell momentum in terms of new business. Most of our wins continue to be Greenfield, but we also saw a number of competitive displacements. The greenfield wins continue to show that the value of security awareness is resonating with customers.
And we believe our competitive wins are further proof that our platform and customer support ranked well above our competition I am proud to announce that we've spent a trade at roughly 20% of the Fortune 500 list by now and have made strong progress into the global two thousands on top of this our upmarket.
<unk> has continued in general here are a few examples of our global wins that we've had this last quarter. We've had a 175000 seat deal with one of the largest technology companies in the World. We also won 130000 seat deal with one of the largest mega healthcare system providers into.
U S. We closed a 25000 seat deal with a global technology supplier as well. This opportunity was a perfect example of a competitive displacement with a product they were using they noticed that their fishing templates, where scale and at the platform in general laxity automation and reporting capabilities needed to run their global.
Enterprise they became a no brainer decision for them after seeing how an effective platform one with AI ml and automation woven throughout could provide them with the tools necessary to achieve true risk reduction as well as save the it department valuable time.
Momentum, we've been seeing Andy International markets has only continued as well in Europe . We closed a 23000 seat deal with a multinational manufacturer also in Europe . We had a 10500 seat deal with a multinational financing firm. This is an example of an organization that had already been successfully using.
Our platform in Australia, and Germany, and wanted to deploy us throughout the rest of their subsidiaries. We also displaced a competitor and at 20000 seat deal with a top European Medical University in Australia, we closed deals with two top universities, one being 14000 seats with the other being 30000 seats, the latter opportunity close through an RFP.
Process, where we came out as the preferred platform. We also had a 15000 seat deal with one of the largest utility companies in Brazil, who chose us due to the wide variety of Portuguese content, we provide and finally, we had a 26500 <unk> deal with one of the largest banks in southeast Asia outside of the.
Commercial space. The government segment continues to be a strong vertical for us in the U S. We displaced a competitor in a 65000 seat deal at one of the largest law enforcement agencies in the country. We also displaced a competitor and an 81000 seat deal at a large U S public University, who favored the automation of our platform.
Finally, we close to 102500 seat deal with the Department of Education and it made the Western State. This opportunity was also a great example of what's driving our cross sell momentum as they were already I know before customer who decided to add fishy arm. After seeing all of the time saving features that we've added.
Throughout the year these kinds of wins have become a monthly occurrence for us and we believe that they demonstrate our customers continue to embrace not only the considerable risk reduction our platform brings but also the thousands of hours. So we say IP departments in Triaging security events, given the current shortage of skilled.
Workers our strategy of building time saving features into our platform has paid off. This also remains a critical focus for our product roadmap with that being said I would like to thank our employees and partners for their dedication commitment and customer focus that has broad know before to its market leading position today I am.
Super proud of not only our financial results, but the great group of people driving this company and contributing to our communities.
And this has not gone unnoticed, we were named as a 2021 customers choice by Gartner peer insights putting us in the upper right quadrant ahead of other companies, who we are often compared with we believe that our retention rates speak for themselves in regards to customer satisfaction, but awards.
Like there's certainly help reinforce the fact lastly, before I turn the call over to Krish I wanted to give you the organizational update that I mentioned at the beginning of the call. Our current CFO and co President <unk> will be nominated to join our board of directors as a director Krish over the last four years has built an incredible.
Really strong finance organization helped us refine and mature our strategy and lead us through a successful IPO we value. His leadership I know he will continue to help us run a board level as we expand as part of this promotion we are bringing on a new CFO to lead the finance organization following the <unk>.
<unk> of our Form 10-K , Baum rich a three time CFO will assume the position of Chief Financial Officer, Ed No before local to Tampa Bay, Bob. Most recently served as CFO for Catalina marketing firm. He brings solid for 25 years of financial experience in both private and public companies.
Including organizations of significant scale I would like to thank Chris for his incredible contributions to know before and welcome. Bob is one of our newest no stairs Caruso will continue to help drive the business strategically from the board of directors as well as supporting Bob during this transition and with that I would like.
Krish to discuss our financial trends.
Thank you and good afternoon, everyone first I would like to state that it's been a pleasure to work with everyone I know before over the past four years.
Good to see the growth the company has experienced over this time <unk> Finance organization has a strong bench of talent and I believe the addition of bulbs experience and leadership skills to help the organization continued growth as you look the SKU Bob is at three <unk> CFO , including roles at organization.
Many kinds of scale of note before and I'm confident that he will be a strong partner to skew.
<unk> team as we scale the company to the next milestone of $1 billion of AI.
I'm also looking forward to continuing to support the organizations future growth as a board member now moving onto fourth quarter results as a quick reminder, unless.
Otherwise noted all numbers, except revenue mentioned during my remarks are non-GAAP .
I saw some steel we continued a strong performance across the business.
Q4.
Growing 44%.
Yes.
Is the heels of <unk>.
40% growth in Q1, Q2, Q3, Q4 growth was driven by another strong quarter of new logo additions in enterprise and SMB Global expansion and continued cross sell to new and existing logos a platform continued to perform well across all geographies to customers of all sizes and industries.
To remind everyone that a key pillar of our model is the ability to efficiently scale to customers of all sizes from organizations with less than 100 seats addressed by channel partners to customers with hundreds of thousands of employees. So by hybrid inside sales motion our strong execution. This year is the result.
Of our focus on new logo expansion cross sell to existing customers International expansion and channel expansion. We saw success in each of these areas every quarter. During 2021, our first pillar of growth is new logo expansion.
This year, we added <unk>.
Excess of 10000, new logos.
About 88% for logos are in the SMB space, which we defined as organizations with less than 1000 employees.
About 12% in the enterprise space, which we defined as organizations with greater than 1000 employees, which we have seen significant growth over the past few years now I took my section is a proof of not only our ability to move upmarket, but also the strategic importance some of that.
The largest organizations in the world now place on our platform. This continues our trend of penetrating the enterprise market over the last couple of years, we have made.
Strong progress selling into fortune 500 U S companies and continue to make inroads into the global 2000. In fact, we now count about 20% of the Fortune 500 as customers. This fact, along with a strong growing market share in the Mega enterprise cone shows how some of the world's largest.
Brands Trust our platform.
The true way to reduce the ongoing risk posed by the human layer.
2021.
Our balance between enterprise and SMB customers. During Q4, we saw strong growth across all segments, particularly strength in the F&B, which even outpaced the strong growth we saw in the enterprise this quarter. As a reminder, we continue to focus on driving balanced mix.
Within SMB and enterprise, our second pillar of growth is cross selling to existing customers.
Can you see strong interest across both new and existing customers.
Power of our global platform as of Q4, we saw an acceleration of multi product about patients with about 22% of customers subscribing to multiple products part of this growth is driven by new customers, who continue to show strong interest in purchasing multiple products within the first approaches could give you some perspective.
In Q4, 2020, we had about 5000 customers or almost 14% of our.
Almost 37000 customers at that time with multiple products today about 10300 customers or about 22% of our 47000 customers.
Global product as you can see we have made tremendous progress here more than doubling.
LT product customer count year over year. Our success is partly due to our large base of SMB, many of which I'd be quick to see the value of purchasing multiple products enterprise customers also continue to see the value of our global platform capabilities with strong traction in multi product sales in both the fortune 500.
And global 2000, as a reminder, we do not bundle of products, we prepared to cross sell them.
This resulted in premium pricing rather than discounting as an example year to date fishy represent approximately a 46% increase.
For SMB and 36% on enterprise, what's the Standalone Tms that Phil our multi product strategy is seeing considerable traction with a combination of fishy and <unk> and the addition of compliance during 2021, we now see record levels of customers with three products.
And even a few that have all four of these deals are all closed without having to bundled products.
Fishy.
Compliance plus and <unk> combined to have nearly triple digit revenue and triple digit local growth.
Cross sell motion cut is not going to expand.
But also increases retention yes.
The customers, who bought both <unk> and fishy are good.
Value from our platform and as a result, a much stickier customers, we remain committed to bringing innovative products to our customers and ultimately driving shareholder value. The launch of compliance in early June is yet. Another example of our ability to innovate in the human layer of security and AD comp.
Limited products to our platform, though it's still early compliance has surpassed what we saw for fishy.
In its initial launch that is to say that it totally off on compliance plus in the first six months post launch ended higher than what we saw with fishy are.
It is six months.
Very positive indication.
Pollard of our cross sell motion as stew mentioned by the second half of this year. We expect it has six products to sell to new and cross sell to existing customers.
Enhancing our platform capabilities now.
Now noticing is that some of our customers, particularly the large enterprise have trended towards signing multiyear deals with US. We believe this reflects the recognition we have received.
<unk> from third party research organizations World class customer support even expanding product profile and building. The next evolution in security by pioneering the HTM route.
Growth is expanding internationally benefiting international market remains one of the key pillars of growth our international revenue grew 88% year over year to.
To yet another record breaking quarter domestically, because we see strong momentum with about 35% year over year revenue growth.
The actual markets be initially see more enterprise centric go to market motion.
F&B first motion, let me start with the U S. On the international expansion, we continue to focus our investment on hiring key talent in marketing sales content and customer support. We also pleased to have added a strong R&D based in India. Following the security advice acquisition finally, as many of you know.
We launched compliance plus product last year as a domestic only cross sell based on the strong traction we have seen an update expanding the content for global audiences and I'm excited to announce we will be begin selling it internationally. This year at about this type of insertion expansion as well as new product introductions are the cornerstone of.
Our investment thesis for 2022 lastly.
Fourth pillar of growth is channel expansion, we continue to focus expanding our channel presence to accelerate growth both internationally as well as domestically we have invested in hiring a number of key resources in our channel team and building marketing and Decisioning capabilities for our channel partners throughout this quarter, we have made great progress in growing both.
A number of channel partners.
As well as the deal volume generated through them now to give you some more details on the quarter, both new and existing customers have witnessed the ongoing problem of social engineering worsen over the last year, we continue to support our customers with our platform reach which includes integration capabilities around security event, it security orchestration and automation.
<unk> and compliance in the fourth quarter total annual recurring revenue.
<unk> reached $285 million up about 44% year over year.
Growth was driven by another strong quarter of new logo additions.
Continued expansion of cross sell to existing logos as well as strong retention in fact.
Retail are.
Extremely strong execution. This has been a trend for every quarter in 2021, our total customer count for the quarter grew to over 47000 customers up from about 37000 customers. In Q4 2020. This is a 28% increase in customer count year over year and 10.
<unk> thousand new logos added.
This is a phenomenal achievement by our global sales and marketing teams to help drive the value proposition of our platform.
Can you see strong logo retention across both SMB and enterprise customers. We believe our increased retention is in part due to the success. We have demonstrated through our cross sell efforts and in multi product capabilities of the backbone as you and I have already mentioned, we have made excellent progress in the fortune 500, and global 2000.
And everyone. We started in the SMB space and have successfully moved up a bucket.
Counting nearly 20% of the fortune 500, as customers and strong penetration into the global 2000 shows how critical the platform is with the world's greatest brands. We believe we are now the deep facto leader of the human centric security a gross dollar retention has also been very strong.
Particularly considering a mix of F&B and enterprise customers, reaching the highest levels. We have seen the strong trends in both gross dollar retention and multi product without patient has resulted in positive trend for net dollar retention as a reminder, our go to market bullshit relies on selling the entire organization or the other.
So 100% of seats upfront as a result majority of our expansion dollars come from cross sell execution with that as a background I am proud to note that we reached 108% net dollar retention during 2021, and our logo retention for both SMB and enterprise was greater than.
90%, we believe that our retention rates in excess of 90% is difficult to find and stop it.
Especially when considering that SMB base isn't greater all four.
1000 logos that is why we are recognized leader and are ranked among the tightened a global software company in the latest report fourth quarter and full year total GAAP revenue grew by almost 41% year over year quarterly revenue reached $69 million and annual revenue reached 200.
<unk> hundred $46 million, which is well ahead of our expectations geography.
About 16% of our revenue is now derived from international market.
The vast majority of our revenue continues to come from North America. We believe that is a sizable addressable market for <unk> internationally.
Continue to invest across both EMEA and APAC, both noble for personnel and expanding our channel relationships. While we are still early in our international expansion strategy of investment in these markets, it's producing results.
We are adding marquee plans to our global client base. Since Q4 2020, you've added close to 100, new heads no before international team.
<unk> committed to ensuring you have the right resources in place to execute on our international expansion investment in R&D and product will continue to be a key part of our investment strategy given the success of launching and cross selling new products at scale as part of our philosophy of running the business.
<unk> focused on sustaining a high growth rate with strong margin fourth quarter non-GAAP gross margin improved to 87% from 85% a year ago as we gain efficiency, but scale non-GAAP gross margins was approximately 86% for the full year compared to 85% for the prior year as we continue to scale our business we expect.
non-GAAP gross margins in the low to mid eighties locked up total non-GAAP operating expenses for the quarter was about 45 4 billion with $38 9 million for the same quarter last year non-GAAP operating expenses for the year was $184 million up from approximately 145 million.
In the prior year, we continue to invest in head count across the business.
Head count increasing by about 35% during 2021, which drove the vast majority of our operating expense increases second that grew the fastest followed by sales and marketing and lastly G&A.
During our third quarter call, we have seen and expect to cut EC <unk> patient in the U S. Due to both current labor market conditions and the dynamic that has stepped up due to remote working.
We continue to invest globally by building centers of excellence around the world. We believe that we can diversify some of these tight labor market condition also with the security advice acquisition. We have now opened operations in Cochin, India and plan on significantly expanding R&D presence and build a shared resource to take advantage.
Of unit economics, and large talent.
It's worth noting that we launched a stock compensation plan in October 2021, which contributed to the uptick in GAAP expenses.
Typical multiple fashion everyone from the main rule to the executive suite was included in our stock compensation plan.
Inclusive of this is the cornerstone of our culture. We also launched our employee stock purchase plan program to further.
Incentivize employee participation as long term shareholders quarterly non-GAAP sales and marketing expenses increased year over year contributing to a substantial revenue growth. These expenses decreased as a percentage of revenue when compared to prior quarters as Q4 tends to have lower cost after scaling marketing efforts through.
Earlier quarters, we continue to invest in sales capacity in our core market and while you're still in the early stages of international expansion, we expect to deploy additional resources to support growth in this market G&A cost increases reflect our continued effort to support life as a public company and to assist our interest expense.
<unk>, including significant head count investment in legal finance and.
And HR teams. This is adobe full way of building foundational capabilities to ensure we can run an efficient business.
That costs have remained stable as a percentage of revenue, but increase in absolute terms again, primarily due to head count increases as we continue to expand our product offerings, you will see additional investments and Keith I think is down across the globe. We expect these investments to contribute to our product launches planned for later this year as we still are.
Back to have six major products on our platform, we truly moved from a single product to a multi product backlog in a short period of time non-GAAP operating income was $15 1 million for the fourth quarter and $28 4 billion for the full year non-GAAP operating margins were approximately 22% for the quarter.
And 12% for the full year non-GAAP net income for the quarter was $12 3 million and $23 2 million for the year.
As a reminder, our non-GAAP measures exclude stock compensation expenses.
Amortization of acquired intangibles and acquisition and integrated related costs.
Going to cash flow and balance sheet items.
We finished the year with cash and cash equivalents of approximately $274 million, representing our continued focus on maintaining a high level of capital efficiency and use of cash.
Free cash flow for the year was $71 million in free cash flow margin was approximately 29%.
This was driven by continued strong cash collections combined with sales performance ahead of plan and efficient go to market model from our results you get CBL resilient cash generating SaaS model strong balance sheet supporting our balance of top line growth and expanding profitability.
Continued to expand our resource will invest in new products and capabilities.
<unk> added organically.
Maintaining sustainable profitable growth as we lead a new category in cyber security and onto guidance, we entered a new strong customer and business momentum.
This momentum has seen in all our segments and international markets and across all four key pillars of growth for the first quarter of 2022, we expect total revenue in the range of $72 million to $73 million or approximately 34% to 36% year over year growth for the full year 2020 you'd expect.
<unk> $28 million to $330 million or approximately 33% to 34% year over year growth.
This revenue guidance is based on our current product mix expectations for 2022.
A reminder, a cancer product as a small portion of revenue that is recognized upfront and as a result being able lithium product mix can have an impact on reported revenue. We continue to expect free cash flow margins to be greater or equal to 15% for the full year. As a reminder, there is seasonality in our <unk>.
Cash flow, which can result in variations quarter to quarter.
We tend to have a buildup of marketing and lead generation cost in the first half of the year for modeling purposes, you get a deal or non-GAAP diluted weighted average share count of between 173, and 175 million shares for Q1, and 174 to 178 million shares.
For the full year 2022.
As we look forward to 2032.
Continued growth and momentum in the business, we are laser focused on maintaining our market leadership dedicated to the human defense Leer and driving innovation around the HDR category.
We are open to questions.
As a reminder, if you have a question at this time. Please press star one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue press the pound key once again Thats star one to ask a question. Your first question comes from the line of Brian Essex with Goldman Sachs. Please go ahead.
Yes, good afternoon, and thank you for taking the question and Chris Congratulations really well done and a nice set of results to move on and off of.
I guess first question and also thank you for the incremental color on net retention rate and if maybe if you can peel back a few layers on that.
Could you give us an idea it sounds like the one you hit that level during the year. According to the prepared remarks.
Was it with at that run rate would be in <unk>.
What was the level of improvement throughout the year, and then would love to get an idea of.
If you look at your customers on a on a cohort basis.
How would you frame the improvement in net retention rate was that primarily new customers too then.
Or one to two year old customers, who then.
Increase the attach with our pricing increases involved maybe if you can just to get a little bit more color around that agreement that would be fantastic.
Yeah. Thanks, very much Brian that is very much a question for Krish.
Thanks, Brian and I appreciate the kind words from you.
So I think I'm going to unpack that question in a couple of different pieces.
If you look at it.
Net dollar retention.
That momentum has continued over the last year pretty much every quarter.
There are a number of key reasons why our net dollar retention has improved.
And come to the stage one if you look at our cross sell motion. We now have about 22% of our massive customer base has got cross sell capabilities built into it.
And in our case, given that we don't bundle products, we actually charge.
What our incremental additional products on the platform that of course has been a positive momentum in terms of our net dollar retention.
The other aspect of this business, which is so incredible is that even if you look at SMB or enterprise our logo retention has been growing.
And that of course has positive momentum on net dollar retention too because we are maintaining and growing our existing base as we actually grow into this very large and addressable Tam associated with the human layer. So we are getting momentum across all the key aspects.
Net dollar retention across the business.
The second part of your question as how do we think about cohorts, especially historical cohorts and what has been the effect of those cohorts are net dollar retention I mean, if you look at our cohorts cohorts have all been growing incrementally in terms of net dollar retention that's because.
Do you have anybody be successful in terms of growing and mining the existing base with cross sell motion and what we are noticing now and this is a trend that has continued from Q3 is that we have customers who not only by additional one product, but we have customers who are actually buying two products three products and all four products.
Also note before our platform.
And as you heard from our prepared remarks, we are going to be adding additional two skus at the end of this by the end of this year. So in terms of the cohort creation youre seeing momentum across the board.
Pretty much historical customers as well as new customers coming to the <unk> backbone.
Got it that's super helpful and maybe just a follow up for Stu.
I guess.
As you look to transition to a new CFO , maybe if you could frame the most important elements in your eyes as you pursued a search for a new chief financial Officer.
And kind of how that transition how that decision.
Sure.
It's been a pleasure to work with Chris over the last four years.
As for the timing.
Before has never been in a stronger position.
We have a talented finance organization is well positioned to help the incoming CFO lead us to the next major $1 billion of IRR milestone.
And while there is never a good time for staying at home change I couldnt be happier.
The company is positioned.
<unk> will be on the board and help us.
Transition and provide guidance.
Related to the CFO search we've learned of course to an executive search company.
And ultimately <unk> found some on who was in our own backyard.
Who had worked in organizations.
But larger than us.
Okay.
Really good fit to guide us through the next phase to that $1 billion.
<unk>.
And that's.
Really quickly.
However at Bryan.
Got it that's helpful color. Thank you very much.
Sure.
Thank you. Your next question comes from the line of until teach me. They truly please go ahead.
Thank you and Chris all the best to you as well on your transition.
Yes, I have one for <unk> and a follow up for Chris.
Really excited about the new products are going to be launched in the back half of the year.
Chris said in the prepared remarks that officially our uplift.
Deal with the AAR uplift will be for password IQ and security advisor and how long do you think it will take to start to monetize those two products.
I can give you.
30000 foot perspective.
She will give you a little more in the sense of numbers.
We are mostly using 2022 to the platform integration.
To invest in the sales teams marketing and.
To a large degree interested in the R&D side of things to make sure that the <unk>.
<unk> advisor acquisition.
Is easy.
Sure for easy to deploy as our other products.
IRR perspective.
Youll understand that essentially launch this in the second half, we don't really expect all that much.
That is mainly a 2023 number maybe krish can.
Some additional light there.
Yeah. Thanks, Joe I appreciate your kind words too.
Now if you look at of course, we are launching two products in the <unk>.
Second half of this year, but I'll focus a little bit more on security advisor given that part of your question. If you look at security advisor the acquisition. The focus of the acquisition was really to pioneer a critical brand new layer of security, which is the HDR level of course.
And when we actually did a lot of the time based analysis associated with that critical new layer, we noticed that it's from a Pam potential is very similar to our core product can stack. So that's the reason why we're so excited about the acquisition.
Of course, all the effort that the team has actually put in from a product launch perspective is that this could be a very strong addition to the <unk> platform and of course give us a potential to almost have the same level of Tam potential as a core product which is <unk>.
Joel was that helpful.
Yes, Barry Thank you and just as a follow up Chris.
Chris you significantly outperformed on the operating margin line.
<unk>.
How are you going to think about.
Going forward the balance between continued investment in growth and.
And.
Margins frankly.
Yep.
So I'm going to take that question of course, Stu can add a little bit more color in terms of his investment pieces through the year.
Now towards the end of a very interesting part of the company right. We have moved from this single product and into a multi product tenant.
And one of the key tenants that still has ingrained into pretty much every person in this company is how we actually think about balancing growth investment and free cash flow free cash flow would be maybe the the mantra today, but it's been <unk> mantra since he started this company.
That has been part of how we run the company and how we basically balance investment in the future before growth as well as run a profitable organization.
Now we are very fortunate that we now have six creek products. This year that we could launch with and you have seen that incredible cross sell motion, 22% in a very short period of time.
10000 logos, who have cross sell motion there are few companies in security, who have 10000 logos in totality and we have been able to achieve that in a very very short period of time just in our cross sell motion. So in terms of balancing operating margins as well as free cash flow. This has been the way we run the <unk>.
Is this from day, one under <unk> leadership and that will continue as we refine our go to market with the launch of six products into next year.
Yeah.
Actually I do have a benefit.
Im.
<unk> here.
Joe.
Okay.
As you saw our free cash flow.
For 'twenty one was extraordinary.
The interesting thing is that the board over the last five years has continually asking me Stu can you spend more money.
And grow faster.
And I have consistently said I don't see any way.
No.
However.
For 2022.
We decided to grab some of that Fcs.
Because in the prepared remarks, you may have noticed that creation FGF will be 15% plus.
Well.
We are heavily investing in international both in infrastructure head count.
We are almost doubling our marketing in the international markets and so we are actually spending more.
In.
The international growth.
And the interesting thing is if every geography has its own maturity curve.
And their own inflection points and so we are moving from one geography to another and see if we can create the same hockey stick.
We created in the U S.
So that's a little bit more color on the on the Scf sure does that answer your question yes.
Yes, Sir thank you very much you bet.
Yeah.
Thank you. Your next question comes from the line of so <unk> with Cowen. Please go ahead.
Thank you good afternoon, guys. Congrats on the results guidance Chris.
Nothing high here, because you are going to stick around but it was absolutely a pleasure.
Quick quick question, maybe on the operating margin.
And that's kind of a strong performer.
Given you still capturing some of the security advisor Com.
Is it fair to assume that marking.
Higher than what we have seen.
In the fourth quarter.
We do have banks shallow.
Great. Thank you for your kind words do it.
If you look at the operating margins of the business.
I actually have a couple of things happening, especially in Q4, what I would say.
A.
Most important thing about the operating margins is the performance of the sales team right. It has been.
It's been a story from Q1 to Q2 to Q3 to Q4 is the extraordinary effort the sales and marketing team have actually done in terms of executing executing our plan.
The second part is that just like other companies.
The U S. We did get the benefit of the cares Act.
Associated which was in our Q4 numbers.
And the third key part I think I said that in a key in our prepared remarks, Charles is that we tend to build up.
Our sales and marketing costs as we start the year.
Because especially now given we have a very balanced approach towards SMB and enterprise, we tend to actually build a lot of sales and marketing expense into Q1 into Q2, and Q3, which helps us of course achieve.
Growth, especially on the enterprise, which has a little bit longer lead time in terms of execution versus SMB population. So those are couple of things that are happening from an operating margins around the company, but the most important reason why the operating margins will abate is is this amazing strength in our sales motion.
<unk> was that helpful.
Yes no.
Okay understood. Thank you for that Chris.
And Stu.
It appears to be.
Without a doubt one of the takeaways that leads to my end.
Nothing that we haven't seen in the past that.
Competitive displacement.
Maybe even accelerating this quarter. So has anything changed or is that some of the dynamics that we have in the marketplace with some consolidation over the course of the path.
I'll pick up where they were back in April or <unk>.
Remember in our.
Competitive displacement Thats actually a great question for Lars.
Hey, shell how are you so.
The competitive displacement.
We've been consistently.
Year over year really going after that enterprise market.
Half of the half of the focus is on that new business, those rfps and that type of business, but the other half of our business is.
US juice going after incumbents.
And.
Going after their business and Thats actually a testament to our product team because the products. So it's.
It's so far ahead of the competition that really the sale just begins with a demo of the product and when we're going into these displacement type sales processes and we do the demo.
Again, it's typically well moment for the for the prospect and.
I'd say, that's really what's been driving that.
Got it.
For the 31st then be actually you mentioned that you have almost 20% of the fortune 500 people have always thought of us as we are just getting into the enterprise World I think hopefully that provides the color that we're not just getting in we're now but the fact of leaders in this process from the enterprise perspective.
Got it understood. Thank you so much congrats Chris.
Thank you so much.
Thank you.
Thank you and your next question comes from the line of Hamzah <unk>.
<unk> with Morgan Stanley . Please go ahead.
Hey, guys. Thanks for taking my question.
Chris I'll add my congrats we're going to Miss your presence and your energy on these on these earnings calls.
Thank you Hamzah maybe.
Maybe just on that on that topic crush.
Obviously, you've been front and center.
Fairly messaging the note before story over a <unk>.
Last four years has been really passionate about about the business I'm curious.
Why now.
Is a good time to step back in this new role on the board and what how you came to that decision.
Okay.
Surely.
So you heard Stuart from his perspective from a timing perspective, but I'll also add a little bit more color.
The last four years.
And I would talk I'm, putting my finance had on the finance team has done some incredible work right. We have not only helped run number of.
Number of rounds for the company from Cds B C onwards, we also got the company ready to be a public company and of course, the launch of the public offering of <unk> before the next key and most important milestone all of this organization is still mentioned the next billing.
Our target so that is the next critical step in the organization's growth trajectory and it logically make sense from a timing perspective, given that now that's the next focus for the company that we should think about who can lead the CFO organization in his next endeavor.
Now to personal reasons to one I've been very fortunate and very lucky honestly that I had the opportunity to learn from <unk> for the last four years that was one of the key things that I came in I came to the knoll before is to learn how to be a great executive how would it be a great CEO and who to learn better from them.
<unk> was as you know ranked one of the best Ceos in this country and that has been a great Mentorship for me from a personal perspective.
And finally, there's been some positive and happy to developments in my personal life.
Which meant that as you know I've been traveling back and forth from New Jersey to Florida every week.
Even prior to Covid and I think finding somebody of talent of bulb, who is not only a great CFO was done it in scale and size, but somebody who is also a local was something that an opportunity we could not pass by.
Thanks, Phil and thanks for the color guys and congrats again.
Thank you Hamzah. Thank you for your kind words.
Thank you. Your next question comes from the lineup.
Lynch the Piper Sandler. Please go ahead.
Great. Thank you guys for taking my question.
Wondering about the relationship between operating margin operating margin excuse me in free cash flow, which typically has kind of a.
Two point Delta if I look at the last couple of years so.
If that holds the 15% plus would imply that margins could swing back into the negative here and as that is what is that what is implied.
In your guidance as well as your share count as we look at not only Q1, but for the full year.
Krish can answer that one and we actually did look at that so we're prepared.
So that's a fair question, but I would focus more given the big guide only on free cash flow of revenue of course, and that's the two areas of focus but I.
I think if you look at the philosophy of this company, we have always been very very prudent in terms of how we run the company, whether that's an operating margin perspective free cash flow margin perspective or growth perspective, now if you look into the future as I said I don't guide to operating margins, but it's very fair to assume that that focus.
In terms of really maintaining profitability in the business with strong growth will continue in the future because that stool DNA and that's how the future of this organization we run.
So I appreciate the color. There then Chris so if we're going to see kind of free cash flow margin compression relative to operating margin what are the different areas of working capital we should be thinking about to get the model there to <unk>.
<unk>, 15% plus type of free cash flow margin.
Yes, So I think if you look at the key areas of investments that we are actually going to make from a modeling perspective.
You would expect next year is further investments in three critical areas on the P&L one.
Is is investments in sales and marketing I think as Stuart alluded to this especially on international given the strong momentum that <unk> seen and will continue to add good solid head count in both sales and marketing to drive our international growth.
Second key part from a P&L perspective of course.
His additional heads in R&D.
Now as a company we've got six key products that we actually de blocked and adding enhancements to existing products. So that would be another key ABF that will actually put investments in.
From an R&D perspective, the third key area that I would say that we are really focused on is.
How do we actually think about creating further efficiency on the G&A line item as you see our G&A head count was a lowest percentage growth versus second half and sales and marketing. So we will continue to find creative ways to create further efficiency.
G&A motion throughout next year and the following years.
Great. Thanks for the color.
Thank you so much.
Thank you. Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking my questions.
I'm just fine words, Chris your energy definitely be missed.
My first one.
Okay.
I just kind of want to follow up on the free cash flow guide, but just a little bit more direct.
15% margins, obviously down from what you did this year and I know you guys are stepping up investments, but this guide is probably similar to the initial guide at the beginning of last year and you guys came in well ahead of that.
Just help us understand a little bit better your ability to kind of outperform this initial guide and maybe just.
In other words would you say there is any different level of prudence.
This guide relative to previous guidance provided.
Let me start and then Chris can take over.
We have.
For the year.
2022.
Very robust.
It's really a process that has now been embedded.
I'd say, we had a very robust look at okay, where do you where do we want to be by the end of the here and especially in the sales side of things. We have worked back the specific amounts of leads required.
Separately SMB enterprise.
But also internationally through our offices in the channel.
And.
Kind of worked back this whole thing.
With a data lake based.
Set of metrics and ratios.
Which really tell us how much we need to spend in marketing.
In the past, we have chronically under spent and marketing.
We simply didn't have sufficient resources.
Get to the right.
Vendors.
With Michael Williams coming on board a year ago.
Indefinitely upgraded their whole marketing team and we are actually spending and we'll spend that budget. This year so from that angle.
There is much better prediction and visibility on what we will spend.
There's more to it and I'm sure. It is krish can add some color here.
Yeah, I think one of the key thing Joshua.
Think about is it up.
If we are now firing in all couple of cylinders right not only what Stu mentioned international but also in our existing domestic side. We are seeing lots of positive momentum in both SMB and enterprise. So even though we are seeing.
Thinking about a lot of investment in international and the domestic story has been amazing right given given we now have 20% of the fortune 500 as customers and this is these are great drivers of what we invested in and the results of that investment is coming in in actual sales for the organization.
<unk>.
Now in order for fashion. This is not a company that we're going to like blow money for no reason, that's not how the philosophy. The culture of this organization is we're going to see every month and we have lots of in depth. The metrics of the business that is shared with the management team at <unk> that we made good quality decisions in terms of beta.
<unk> seen results and then further increasing those investments as we see the results of those investments bear fruit, so going back to a 15% plus.
Point.
This is going to be one of those key things that will keep measuring and as we see results, we'll make the right decisions for the overall growth of the business and the right mix of growth as well as Fcs.
That was helpful. And then just kind of a quick follow up I do appreciate the commentary on the IRR, but just like helping I think into 2022, given you have new products coming out would you continue to fire on the cross sell is there any reason that MLR should it continue to tick up this year and maybe just help us understand what level of <unk>.
It's kind of baked into the current guidance.
Yes, so we don't have caused guide on NR.
We will provide in and out on a yearly basis because looking at every month or quarter is is not we don't think is the right prudent approach you have to look at it year on year basis now its fair Joshua to think about NR as a strong.
Strong part of our overall growth metric of the business because of course, we will continue to add new products on the platform, but still mentioned something that board security advisor and password IQ, which will come later half of this year will really drive a lot more growth in the following year, but at the same time.
Lots of good products that were launched last year that will help us from a cross sell motion and continue throughout the year.
Thanks, guys are available.
Thank you. So just a quick a quick heads up we have four minutes left and then <unk>.
Half two.
Go away because the next call as quarter two so.
Next we've got time for one more question.
Thank you Sir your next question comes from the line of DJ Hynes with Canaccord. Please go ahead.
Hey, Thanks for fitting me in guys I'll keep it quick.
Chris Good luck to you and congrats on the next steps.
I think my question is probably going to be for Lars and it's around compliance plus and the cross sell there.
Assume youre selling into a different buyer right I don't know if its HR or if its compliance, but I don't think it's the security budget. So.
Just talk a little bit about the playbook that you are running there to tap into these different budgets and obviously, it's going well, but I'd love to just get some color.
Yes so.
You're absolutely correct on the different budgets, which it's kind of nice actually that's a positive for us because as were <unk>.
Selling our core product Cam side on the initial sale, we're not competing with one budget to get the.
Complaints plus into the sale.
Actually what we're finding out is it's kind of split between.
SMB and enterprise and SMB, it's typically.
Is the same person that we're selling to.
In times, they'll pull in maybe HR or legal in some way to check out the product, but we're.
We're typically dealing with the same person and to get that sale.
Together on that initial sale.
But as we move into enterprise, obviously theres whole other teams that would handle CMP.
But.
We're talking to typically very happy customers on the cross sell.
And then along with the pricing of CMP.
It's kind of a no brainer price so that typically opens the door for us and gets us to those introductions to the correct people in the larger organization. So it's actually been pretty smooth.
Process on both sides.
That's helpful color. Thanks, I'll leave it there.
Thanks, so much.
I am sorry to say that we have run out of time, but thank you all very much for attending.
Appreciate your interest in now before and we look forward to speaking with you again soon thank you.
And this concludes today's conference call. Thank you all for participating you may now disconnect.
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