Q1 2022 Knowbe4 Inc Earnings Call

May 10, 2022

Ladies and gentlemen, thank you for standing by and welcome to the no before first quarter 2022 results conference call.

Please be advised that today's conference call is being recorded.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

To withdraw your question. Please press star one again.

Now, it's my pleasure to turn the call over to Ken to Linnean, No before as senior Vice President of SG&A and Investor Relations. 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 supplementary.

Angela information available on our Investor Relations website at investors that 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 in accordance with the filing deadlines established by the IDP. These documents can be found on the SEC's website at SEC Gov and on our Investor Relations website.

During today's call you will hear prepared remarks from our founder CEO and President, Steve Sharman and CFO , Bob Rich <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 Sue.

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

We're excited to share our results with you this morning.

We started another year of strong execution with first quarter results exceeding our guidance.

We had a record quarter with about 38% year over year annual recurring revenue growth and a seasonally strong 31% free cash flow margin.

As many of you know I started and I will be forward to help organizations manage the ongoing problem of social engineering.

We're the only public company dedicated to securing the human layer, we continue to innovate in this layer and our announcement of a brand new category called HDR human detection and response is a Prime example of this.

I'll come back to that later in my remarks.

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

Recent examples of this are to cyber attacks seen during the tragic ongoing conflict between Russia and Ukraine.

For example, near the end of March.

Cranium government reported severe cyber attacks that crippled UK, our telecom one of their largest communications providers collapsing the nation's network connectivity to 13% of prewar levels.

Another more recent example came about a month ago in mid April the department of energy CSR. The NSA Andy FBI, All released a joined advisory report about a no malware toolset called pipe Dream.

This highly sophisticated malware toolkit was designed specifically to target to the kinds of industrial controls that are used in power grids factories water utilities and oil refineries.

For context on the potential devastation that an attack like this could achieve with.

Only have to look back less than a year ago to the incident with the colonial pipeline. It's now being reported that the bad actors were able to gain access due to a single compromised password that was later found in a batch of breached credentials on the dark web.

Poor password hygiene, which originates from human error critical oil production across the eastern seaboard.

Now we saw the headlines at the time, but many don't realize is how close to the situation came to shutting down the entire subsets of the economy.

Ah later declassify the assessment by the Department of Energy reported that the country could only afford another three to five days of disruption before mass transit chemical factories and other refineries would have had to shut down from a lack of diesel fuel crippling distribution.

<unk>.

Unfortunately attacks like these are all the part of an ongoing trend that started years ago and continues to accelerate.

So much so that Gartner predicts 30% of critical infrastructure organizations will experience a security breach by 2025 debt.

Will result in the whole thing of in operations or mission critical cyber physical system.

When you combine this with Verizon as widely reported statistic that 85% of data breaches involve a human element.

It becomes abundantly clear that securing the human layer is a matter of national security.

This sentiment has already been echoed by the binding administration on multiple occasions.

It is clear that this problem is escalating in the private sector as well.

Just last February the anti phishing working group reported that phishing attacks hit an all time high in 2021 tripling that of early 2020.

December of 2021 saw the highest number of attacks ever recorded.

They are becoming more effective as well with a number of organizations falling victim to ransomware in Q4 2021, hitting the highest number seen in the past two years.

Well alarming I'm sure that these statistics come as no surprise to anyone.

The unfortunate reality is that in a lot of these cases bad actors are manipulating the human element in 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 operations 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 of those same organizations.

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

And our efforts have not gone unnoticed.

I am proud to say that we were once again.

Recognized as a Forrester wave leader in their security awareness training category ranking the highest across all of their scoring criteria.

In their own words.

Now before <unk> size and established product and a strong vision.

I was one of the largest and most established vendors in this space now before has an enviable growth trajectory.

We believe that this is the kind of recognition that confirms the great work that we're doing.

I will now walk you through our key results, which highlight our execution during Q1 2022.

First quarter results exceeded our expectations across the board with continued balanced growth in both topline and profitability.

As well as seasonally strong free cash flow generation.

The productivity of our direct sales and channel teams continues to deliver wins for both our SMB and enterprise customers across all industry verticals.

This resulted in nearly $306 million in IRR, which is up about 38% 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 market defines Dolby forest product roadmap.

This includes both exciting new features and new products.

A great example of this is a security coach the.

The product that we're planning to release in the second half of this year following the integration of our security adviser acquisition.

We have security coach we believe we are creating a new category in cyber security called human detection and response or HDR.

How this works.

We connect through their cloud interface to existing layers anr.

In our customers' security software stack and pull in security alerts. So we can analyze them and take real time action.

As discussed previously we believe this new SKU will add an estimated $5 billion Tam as well.

I am pleased to announce that the integration is still on track for a full release in the second half of this year.

Our R&D team is laser focused on making sure. These new SKU, which is highly technical in nature will be an easy upsell cross sell into our existing customer base and 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.

For an update on the timeline in early Q3, we will begin our closed beta of security coach and open beta will follow later in Q3 with the product poised for general release in Q4.

Looking at no features for the <unk> platform. There is one we are particularly excited about.

We have expanded the AI capabilities, even further with Ada recommended optional learning.

Ada stands for artificial intelligence driven agent and it's been a core feature of our platform for years.

One of its functions is to look at failed fishing security tests the attack vectors off of those failures training results and how often that user report suspicious E mails.

We then apply ml to recommend and deliver an informed personalized phishing campaign.

This latest feature now adds on to this by recommending additional content for an end user based on their specific interests.

With these new features we continue our path towards individual risk reduction at scale, which in turn reduces risk across the organization.

New products and features are a key driving factor in the strong momentum of our new business wins.

As a reminder, this is one of the few areas in cyber security if not the only one that isn't a purely replacement market. We believe we are still operating within our space that is overwhelmingly greenfield.

With a global penetration that we believe to be in the low single digits.

Well most of our new business wins are Greenfield. We also continued to see a number of competitive displacements.

The Greenfield wins continue to show that the value of security awareness is resonating with customers and we believe that our competitive wins are further proof that our platform and customer support rank well above our competition.

Here are a few examples of our global wins that we've had this last quarter.

We had 130000 seat deal with one of the largest technology companies in the World. This opportunity was a perfect example of a competitive displacement.

The customer side of the frustrations with their current product at our platform capabilities could immediately account for it.

Some of the reasons that our platform was chosen where our smart groups functionality, our robust active directory synchronization capabilities and the customer's ability to run global phishing campaigns with an arsenal of multi language truly localized templates.

We displaced the competitor in a 45000 seat deal with one of the largest clinical labs in the world.

<unk> cited still content as the primary reason for the switch.

Finally, we've won a 40000 seat deal with one of the largest school districts in the nation. This.

This opportunity went through an RFP process, where we were chosen due to our wide array of training content and automation capabilities.

Strong momentum we've been seeing in the international markets has continued as well.

In Japan, we closed a 50000 seat deal with a top printing company. We also closed a 66000 seat deal with a French multinational specializing in gas technology.

In Australia, we had a 42000 seat deal with a top university.

We close to a 30000 seat deal with a British multinational food processing company and finally, we had a 30000 seat deal with a German multinational one of the largest building materials companies in the world.

These are just a few examples of the types of wins that have become a monthly occurrence for us.

We believe that they demonstrate our customers continued to embrace not only the considerable risk reduction our platform brings but also the thousands of hours, we save it 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 brought 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 in Q1, we earned the number one spot for the <unk> 2022 top workplaces USA awards in the thousands to 2500 employee category.

We were also named a top workplace in Tampa Bay, Florida, Tampa Bay times for the seventh consecutive year.

While we believe that our financial results speak for themselves. The unique award winning company culture that we've developed here is one of the driving forces behind this continued execution.

And with that I would like.

Bob to discuss our financial trends.

Thanks, Stu and good morning, everyone.

Again for joining us today.

First let me start by saying how much I've enjoyed transitioning into this new role over the last 60 days or so and having the opportunity to get to know Stu and partner with the rest of the no before executive leadership team.

This is a very high performing alliance group and I believe my transition has been relatively seamless.

I'm quite excited to be part of the story.

So let's move on to our first quarter results.

As a quick reminder, unless otherwise noted all numbers, except revenue mentioned during my remarks are non-GAAP .

As you just heard from stool, we continue to see strong revenue performance across the business.

In the first quarter total annual recurring revenue or <unk>.

<unk> reached $305 9 million compared to $222 3 million a year ago up 37, 6% year over year.

Similarly, our reported revenue for the first quarter totaled $75 million versus $53 $6 million. During the same period, a year ago, an increase of $21 5 million or up 41% year over year.

Our Q1 growth was driven by another strong quarter across each of our key growth initiatives, new logo expansion cross selling to new and existing customers and international expansion.

We saw success in each of these areas during the first quarter.

Our first pillar of growth is new logo expansion.

During the first quarter, we sequentially added nearly 2500 logo is net of churn, bringing our total customer count to 49646 as of March 31.

That's a 27, 4% increase year over year or nearly 10700, new logos added net of churn.

We're also very excited to announce that as of today. We are now in excess of 50000 customers.

Our total customer distribution remains relatively consistent with about 88% of our customers in the SMB space, which we define as organizations of less than 1000 employees and about 12% in the enterprise space, which we define as organizations with greater than 1000 employees, where we've seen.

Significant growth over the past few years.

As a reminder, we continue to focus on driving a balanced mix between SMB and enterprise and we again ended the quarter with IRR generally balanced between these two.

In terms of logo retention, both SMB and enterprise retention continues to remain greater than 90%.

We believe that this retention rate in excess of 90% is difficult to find and software, especially when considering that our SMB customer base is nearly 44000 customers.

We also believe this is one of the primary reasons were consistently a recognized leader in our space such as the latest Forrester wave report that Stu mentioned earlier.

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

We continue to see strong interest in the power of our global platform across both new and existing customers.

During the first quarter, we continued to see strong multi product adoption, resulting in the percentage of customers subscribing to the multiple products growing to 24, 5%.

Part of this growth is driven by new customers, who continue to show strong interest in purchasing multiple products within their first purchase.

To give you some perspective at the end of the first quarter of 2021, we had roughly 5800 customers or 14, 9% of our nearly 39000 customers at the time with multiple products.

As of the end of Q1 over 12000 customers are now subscribing to multiple products.

We've made tremendous growth here more than doubling our multiple product customer count year over year.

As a result, we are now seeing record levels of customers with three products and even some that have all four.

These deals were all closed without having the bundle these products and although we don't report the growth of our individual products separately or combined revenue growth for fishy, our compliance plus and Kcmg ERC reached triple digits year over year for the quarter. The result of this continued cross sell.

Success.

Our cross sell success is relevant not only to help expand our IRR base, but also to increase customer retention.

Number of support that customers, who purchase both <unk> and fishy or get more value from our platform and as a result end up being much stickier customers.

Our third pillar of growth is expanding internationally.

Penetrating international markets remains one of our key pillars of growth our international revenue grew approximately 69% year over year for the quarter, a continuation of our strong previous momentum and complementing our consistent domestic momentum, which delivered 35, 5% year over year revenue growth for the quarter.

<unk>.

The geographic distribution of our revenue continues to evolve with roughly 17% of our reported GAAP revenue now derives from our international markets.

Though the majority of our revenue.

Continuous to come from North America, we believe there's a sizable greenfield market for no before internationally, which is represented by a total addressable market, which is significantly higher than that of domestic.

We're seeing a number of key regions at a similar inflection point previously seen in the domestic market.

In order to capitalize on this compelling international opportunity, we continue to invest in both EMEA and APAC by focusing on hiring key go to market talent and expanding brand awareness.

And this international execution strategy is also closely tied to US building on our growing partner network outside the U S, which is our fourth pillar of growth.

We continue to make meaningful progress hiring key resources, and our channel team and building marketing and distribution capabilities for our channel partners and this will continue to be an important international execution initiative for us.

While we're still early on in our international expansion our strategy of investment in these markets is producing results and we are adding marquee global brands to our client base, which was evidenced by just a few of the global wind Stu mentioned earlier in his remarks.

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

First quarter non-GAAP gross margins improved to 87, 6% from 86, 6% a year ago as we continued to deliver an efficient performance on our direct cost structure.

Total non-GAAP operating margin also improved for the quarter up to 12% from 11% in the first quarter of 2021.

As a reminder, our non-GAAP measures exclude stock compensation expenses amortization of acquired intangibles and acquisition and integration related costs.

Our non-GAAP operating expenses for the quarter totaled $56 7 million up from $40 4 million in the prior year.

We continue to invest in head count across the business with total head count increasing by about 35% versus the end of Q1, 2021, which drove the vast majority of our operating expense increases.

Year over year increases in non-GAAP sales and marketing expenses for the quarter were primarily attributable to higher head count related costs as well as higher marketing PR and demand generation all contributing to our substantial revenue growth.

We continue to invest in sales capacity in our core markets and while we're still early stages of international expansion, we expect to continue to deploy additional resources to support growth in these markets.

Technology and development costs of increase year over year, primarily due to head count increases in tech support courseware and our product team to support our growth.

As we continue to expand our product offerings, you will see additional investments in key technical talent across the globe.

These have been critical investments to support the development efforts in connection with our new product offerings planned for later this year as Steve referenced earlier.

We have truly moved from a single product to a multi product platform in a short period of time.

The increases in general and administrative costs to year over year are also attributable to investments in headcount and headcount related costs, primarily to establish necessary administrative resources to support our international expansion and to support life as a public company.

These included head count investments across legal finance, HR and our own internal it teams.

These investments are necessary to first build the foundational capabilities to ensure we continue to execute efficiently and that scale.

Turning to cash flow and liquidity, we finished the quarter with cash and cash equivalents of $298 3 million up from $273 7 million at yearend illustrating our continued focus on maintaining a high level of capital efficiency and utilization of our liquidity.

Our free cash flow for the first quarter was $23 4 million, resulting in a free cash flow margin of 31, 1%.

This compares to free cash flow of $21 million and free cash flow margin of 39, 1% during the same period a year ago.

The free cash flow results for the first quarter.

Order were driven primarily by continued strong cash collections related to our favorable sales performance and some timing related cost efficiencies realized during the quarter.

Note there is seasonality in our quarterly free cash flow margins, which has ranged anywhere from 8% to 39% over the last six quarters.

This is generally related to the timing of disbursements for expenses and investments during the year as well as the profiling of sales contracts in billings throughout a given quarter.

We're very pleased with our first quarter performance, which is indicative of our resilient cash generating SaaS model and strong balance sheet, which is supporting a balance of top line growth and healthy profitability.

We're continuing to expand our resource pool invest in new products and capabilities, while maintaining sustainable profitable growth as we lead this new category and cyber security.

With respect to guidance on future results. Let me first just state that we don't expect any change in the overall development philosophy as a result of the CFO transition.

This is an established process involving inputs across many layers of the organization as well as close partnership with both <unk> and Lars <unk>.

As for the updated guidance numbers of themselves for the second quarter of 2022, we expect total revenue in the range of 78, 5% to $79 5 million.

And for the full year 2022, we now expect revenue in the range of 331% to $333 million.

This revenue guidance is based on our current product mix expectations for 2022.

As a reminder, our <unk> product has a small portion of revenue that is recognized upfront and as a result variability in product mix can have an impact on our reported revenue.

We also now expect free cash flow margin to be greater than or equal to 19% for the full year and as I mentioned, there is seasonality in our free cash flow, which can result in variations from quarter to quarter.

For modeling purposes, you can assume diluted weighted average share count of between 182, and 185 million shares for both Q2 and the full year 2022.

As we look forward to the rest of 2022, we continue to be very energized by the continued growth and momentum in the business.

We are laser focused on maintaining our market leadership dedicated to the human defense layer and driving innovation around the new category of HDR, which we are excited to introduce to the cyber security ecosystem later this year.

And with that we'd like to open it up to any questions.

As a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.

First question is from Shaul Eyal with Cowen Your line is open.

Thank you.

Good morning, guys congrats on the results.

Thanks for mentioning and discussing security coach My question is actually on passport IQ the second plant products in the second half.

Relief, maybe just an update what you've seen over the course of the path.

Give or take things we've lost the Mets and talk then maybe feedback thus far from customers and maybe partners and I have a follow up.

Yeah.

Thanks, Sean.

<unk>.

The first feedback we got from customers that came before Khan was positive.

No.

We are mainly focused on security coach.

Getting that out first.

And we will provide you with some more information on password IQ in in following cause.

And your follow up there.

Understood understood.

And the other question is about the annual guidance and maybe also as we think about it from a quarterly perspective again when matching the annual guidance.

The current consensus without a doubt it has been asked a little bit but.

Second quarter.

It's fairly intact so.

Are you guys anticipating a backend loaded second half and any anything we should be.

Worrying about and focused on.

Let me throw that one over to Bob to begin with.

And maybe Lars can comp.

Comment a bit on just current trends.

Good evening.

Hey, Sal.

How are you.

I think we have.

There is I don't think Theres anything.

Regarding the profiling of the year that sort of unusual or different than has been previously messaged. I mean, there is sort of seasonality in the business and Q1 and Q3.

Okay.

From a.

Like sales just activity standpoint tend to be lower than Q2, and Q4 from a sales activity standpoint.

And so that sort of ultimately ends up.

Reflecting it was showing up in the actual recorded revenues in Q2 in <unk>.

Certainly in Q2, so there isn't anything.

In the in the guidance that would really suggest that there is a sort of change in the trends of the seasonality of the business.

Lars absolutely can speak to sort of what he's seeing in terms of pipeline activity and so on.

<unk> Lars.

Yes.

We really haven't seen any changes in trends with regard to our lead gen with our pipeline or opportunity creation.

But with that said there is there has been some pretty significant macro economic developments recently, so we are carefully considering.

Considering that.

The war in Ukraine.

Kind of the inflationary pressures that are coming up but again, we really haven't seen any any changes to our to our trends internally for for building the business.

Got it.

You guys I appreciate it.

The next question is from Rob Owens with Piper Sandler Your line is open.

Great. Thanks for taking my question just a couple around margins here number one was the gross margin line remains very strong should that change our outlook going forward or with the new products in the second half could you see some compression and alternatively, the free cash flow margin, what's giving you the confidence to.

Lift that expectation by four points here Kevin.

<unk>, probably gone up by a couple of million dollars and the revenue outlook goes up by only a couple of million dollars.

Alright.

Hey, Rob it's Bob.

On the gross margin question.

Do think that.

There is a reasonable expectation that gross margin as we move through the year can see some compression as the <unk>.

Total customer count continues to grow and the CSM population needs to continue to grow in order to basically service all of those new customers in that.

That new customer universe.

That all ended up most of that cost in terms of customer management.

Ends up in the in the direct cost line.

We did have a very efficient quarter in the first quarter.

The CSM universe really didn't change materially in the first quarter, but we are obviously, we have some pretty aggressive hiring plans for CSM is in order to make sure we're properly.

Servicing our customers so I do think that it.

It's reasonable to assume some level of gross margin compression and I think we've sort of always message of that.

We sort of expect gross margin sort of long term to be between 80% and 85%. So an 87, 6% non-GAAP performance was really exceptional in the first quarter.

On the free cash flow side honestly.

We had a very very strong quarter in terms of collections some of that really relates to the timing of when transactions sales transactions actually cross the goal line in the fourth quarter.

We had a really really strong end to the fourth quarter, which generated a lot of cash for us in the first quarter.

But we're we printed a 31% free cash flow margin in the first quarter last year, we printed over a 39% free cash flow margin in the first quarter and we ended the year at a little over 28% so.

Honestly that relationship we think that relationship in 2022 looks pretty consistent.

Again, if you just sort of do the math, we printed 39% in Q1 of 2021 ended the year in the 28% range.

Ended with a 31% free cash flow margin in the first quarter.

<unk>.

We're guiding now 19, plus which is a thermal similar relationships. So that's really why we're confident on that.

Thanks, Bob.

Okay.

Our next question is from Brian Essex with Goldman Sachs. Your line is open.

Great. Good morning, and thank you for taking the question Steve just one from me.

When we were at your recent user conference. The one thing that one observation I had was just the.

Lower awareness.

Those that I spoke with around the breadth of the platform that you have particularly <unk> and I guess the question is as you penetrate new markets, particularly Europe .

Which may have more mid market focus what are some of the key observations that you had from your work in the U S or domestic markets.

Really getting traction with with customer awareness of the platform and how do you anticipate spending on sales and marketing to improve initial attach rates I guess, the initial land rather than expand.

Mhm.

Yeah.

First of all Brian It was great having you at <unk>, we had 1500.

Andy So this.

<unk> success was fun to see everyone. There again.

The.

You kind of have to understand we lead with the <unk> platform into all accounts that is one thing that they need to immediately address this is the problem they need to manage.

And continue to manage.

And at that point in time, we were pretty successful today.

Our direct sales team.

Almost always able to attach 50% of new <unk>, new sales with <unk>.

So new customers that has an immediate cross sell the existing customer base, we are actually starting a dedicated.

Customer marketing campaign that our marketing team is focusing on to expand and sell into the existing base.

So there's huge potential there.

We're just starting to tap now.

Is that an answer to your question Brian .

Yes, that's very helpful. Thank you.

Very good.

The next question is from Joshua Tilton with Wolfe Research Your line is open.

Yeah, Hi, guys. Thanks for taking my question.

I wanted to come back to the free cash flow real quick is there any way that you guys could maybe quantify what the benefit from the timing of investment was in the quarter.

More broadly I just wanted to confirm that you said that free cash flow seasonality. This year should be similar to last year is that correct.

Yes so.

There is there is absolutely seasonality in free cash flow I mean, we have.

<unk>.

We have unique.

And all companies have this but we absolutely have unique cash outflows that happen isolated in the second quarter for example.

We are up we are a new public company, we have our insurance renewal that actually goes out the door at the same time that we anniversary of our IPO and thats not a trivial sort of cash disbursement, it's amortized straight line across the full year. So it doesn't affect our GAAP operating results, but it does affect our free cash flow.

Just referenced the customer conference in person customer conference that we did in April that's obviously isolated to the second quarter. So there are those type of seasonality dynamics.

Will be seen in 2022, and I think they are consistent with the dynamics that we've seen in the past.

Maybe even more acute honestly because we've.

Last year, our conference was virtual this year, our conference was face to face and so that's a that's a different that's a little bit of a different cost profile.

And I think.

On the on the margin and the timing.

As referenced in the prepared remarks, I mean, it really that really relates around pace of hiring to tell you that to tell you the truth Joshua.

We have ambitious hiring plans.

And we are sort of faced with the same overall macro dynamic that all other companies in the world are facing in terms of attracting talent. So.

We had.

That timing reference I think is really more around.

Or are the timing in terms of how we ramp head count in certain disciplines and in certain sectors inside of the organization.

Yes, let me add something to that we've actually increased our.

Our recruiters, both domestic and international and <unk>.

We have accelerated or accelerated our international ramp up in head count.

So we've pulled more into Q1 and are still pulling into Q2.

Simply to fuel our international growth and so that also influences those same numbers.

That was helpful. And then just a quick follow up on the international business are you guys seeing any impacts yet positive or negative as a result of the Russia, Ukraine crisis.

Are you guys expecting any.

The impacts later in the year.

We don't really.

<unk>.

We don't have any physical presence in eastern Europe , and obviously, we don't do business with Russia, China.

Given the nature of the conflict and if you look at our industry I believe that cyber security is the last thing that any saying the organization would cut.

Our platform, even more relevant today than it's ever been.

Which really speaks volumes because I believe it's already been super relevant for years.

And internationally speaking our platform.

Still purposely priced to be a no brainer decision.

And the result is that it does offer a tangible risk reduction in an environment like this where cyber attacks the gloves come off.

This is definitely an area.

That represents strong opportunity that is many times the domestic Tam.

Thank you.

Okay.

Okay George Thank you.

The next question is from Hamzah <unk> with Morgan Stanley . Your line is open.

Hey, Good morning, gentlemen, just one quick one from me for doing <unk>.

So you've had a lot of success.

Selling multiple products to your customers, particularly among new customers can you just.

Mind as to what the difference in the sales cycle look like when you're selling let's say standalone cancer versus like cans that plus the SCR. Okay on compliance buses there or is there a difference in the sales cycle.

Between the two.

Hi, Hamzah.

I think Stu alluded to it earlier, we really start with <unk>.

And then through our sales process, whether there is a cross sell or not we're focusing on on the up sell as well be that Vichy are or CMP <unk>, a little bit different because <unk> is sold to a different audience. So thats <unk>.

<unk> a handoff.

Outside of that initial sale, but we do get the case.

With the sale, but to answer your question no. There is really no difference.

When we're up selling the products within especially with CMP, because CMP is pretty much just a flip of a switch.

We're going to add those to the platform, we add them to the platform.

The only area, where it would get a little different is with enterprise because you have different stakeholders in the very large companies.

Whereas in an SMB deal we might.

Have the sale with fishy are in CMP all at once.

With.

The enterprise, if we really getting into the megas now youll get a hand off to the different groups. So initially the purchase will be say <unk>, but while we're working the km sat there is also the PCR with one group in the CMP, maybe with compliance at that.

And those might hit two or three months apart, but they are part of that initial sale.

Got it Super helpful. Thank you.

Yes.

The next question is from Tal Leone with Bank of America. Your line is open.

Thank you Madeleine brookbank recall.

Perhaps on the quarter I guess two quick questions for me first one is on.

Customer implementation delays.

First quarter.

I would now, Maryland, thats pretty much all going.

On trend.

Alright, Thanks, and then just one more question follow up so your revenue guidance. You mentioned is based on the current product mix expectations for the rest of 2000 Q should.

Should we include security code in that in that mix are now.

Not really because we're releasing in Q4 and so revenue really you should the vast majority accounts through 2023.

Perfect. Thanks, so much.

Excellent. Thank you.

More questions and then we have to sort of slowly ramp it up.

The next question is from David Hynes with Canaccord. Your line is open.

Hey, guys. This is Luke on for DJ Thanks for taking the question.

As you gain.

Recognition and traction with enterprise customers can you just remind us or help us think about what the typical catalyst.

Or you to replace an existing vendor.

I know you gave some nice examples in your prepared remarks, but is there a common theme or two that you had pointed out.

Yes.

This is lars I'm going to take that one.

Really it's just a testament to our products team.

We have best of breed product and when typically our sale into enterprise.

When when when it's a displacement sale it begins with a demo and I've said this in the past, it's typically an oh wow moment, when we demo the product too.

To the company.

They're blown away at the features and how easy it is to implement our product how easy it is to maintain all the automation and AI built into it so to answer your question, it's very specifically product driven.

Great.

Helpful and then as a follow up as you add.

Standalone products like compliance plus you see an opportunity to sort of get your foot in the door with something other than.

And that and then use that foothold to eventually expand into security awareness or the reverse.

Are you seeing that strategy play out today.

No not really.

The <unk> platform is really still the number one.

Entry into the account the.

The rest follows I would think in a couple of years that that might be the case.

We're still building up the CMP library itself, we're adding a number of modules that are opening up the international space for us, they're being released now and I'm happy to say that the the CMP total first nine months actually exceeded.

The first nine months of <unk>.

So we're executing well on CMP.

I hope that answers. Your question, we have time for one more question then we need to wrap it up because we have.

Very tight schedule with follow up call. So who's next.

Our final question is from Roger Boyd with UBS. Your line is open.

Hey, terrific and things on the quarter, just a quick follow up on the macro conversation.

Very strong, 90% plus retention rates on both SMB and enterprise just in light of the macro concerns around space and any color on what youre, assuming for what's baked in your guidance around retention and churn maybe for the rest of the year.

Yes, all three of us could answer that.

Sure.

Honestly with the macro conditions the way they are.

Looking at how.

State sponsored Packers are using fishing and spear phishing attacks.

On.

Essentially soft targets.

In.

Sure.

The U S.

But also Europe .

A platform like ours becomes essentially a must.

And from that angle.

This isn't headwind for us on a macro level does that answer your question Roger.

It does thanks I appreciate it thank you.

Thank you very much.

That's the end of our Q&A session.

Yes.

Mr. Johnson you May proceed with any closing remarks.

Very good thanks very much for attending.

We believe we've had a really strong quarter and we hope to see everyone again very soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the no before first quarter 2022 results conference call.

Please be advised that today's conference call is being recorded.

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

If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Withdraw your question. Please press star one again.

Now, it's my pleasure to turn the call over to Ken to Linnean.

Before as senior Vice President <unk> and Investor Relations. Please go ahead.

Information available on our Investor Relations website at investors that 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 guidance call. These risks are described in our Form 10-Q that will be filed in accordance with the filing deadlines established by the SEC. These documents can be found on the SEC's website, SEC Gov and on our Investor Relations website.

Today's call you will hear prepared remarks from our founder CEO and President, Steve Sharman and CFO , Bob Rich Lawrence flatten off 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 morning.

We started another year of strong execution with first quarter results exceeding our guidance.

We had a record quarter with about 38% year over year annual recurring revenue growth and a seasonally strong 31% free cash flow margin.

As many of you know I started and I will be forward to help organizations manage the ongoing problem of social engineering.

We're the only public company dedicated to securing the human layer, we continue to innovate in this layer and our.

Announcement of a brand new category called HDR human detection and response is a Prime example of this.

I'll come back to that later in my remarks.

The emphasis in cyber security has traditionally been on legacy controls.

However, the exponential growth in cyber attacks and their relative success proves it organizations cannot solely rely on security software infrastructure.

Recent examples of this are to cyber attacks seen during the tragic.

Ongoing conflict between Russia and Ukraine.

For example, near the end of March.

Cranium government reported severe cyber attacks that crippled UK, our telecom one of their largest communications providers collapsing the nation's network connectivity to 13% of prewar levels.

Another more recent example came about a month ago in mid April the department of energy CSR. The NSA Andy FBI, All released a joined advisory report about a no malware toolset called pipe Dream.

This highly sophisticated malware toolkit was designed specifically to target to the kinds of industrial controls that are used in power grids factories water utilities and oil refineries.

For context on the potential devastation that an attack like this could achieve with.

Poor password hygiene, which originates from human error critical to oil production across the eastern seaboard.

Now we saw the headlines at the time, but what many don't realize is how close the situation came to shutting down entire subsets of the economy.

A later day classified assessment by the Department of Energy reported that the country could only afford another three to five days of disruption before mass transit chemical factories and other refineries would have had to shut down from a lack of diesel fuel crippling distribution.

<unk>.

Unfortunately attacks like these are all the part of an ongoing trend that started years ago and continues to accelerate.

So much so that Gartner predicts 30% of critical infrastructure organizations will experience a security breach by 2025.

Well results in the whole thing of in operations or mission critical cyber physical system.

When you combine this with horizons widely reported statistic that 85% of data breaches involve a human element.

It becomes abundantly clear that securing the human layer is a matter of national security.

This sentiment has already been echoed by the by the administration on multiple occasions.

It is clear that this problem is escalating in the private sector as well just last February the anti phishing working group reported that phishing attacks hit an all time high in 2021 tripling that of early 2020.

December of 2021 saw the highest number of attacks ever recorded.

They are becoming more effective as well with the number of organizations falling victim to ransomware in Q4 2021, hitting the highest number seen in the past two years.

Well alarming I am sure that these statistics come as no surprise to anyone.

The unfortunate reality is that in a lot of these cases bad actors are manipulating the human element and 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 operations 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 of those same organizations.

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

And our efforts have not gone unnoticed.

I am proud to say that we were once again.

Recognized as a Forrester wave leader in their security awareness training category.

<unk> the highest across all of their scoring criteria.

In their own words.

Now before brings its size and established product and a strong vision.

I was one of the largest and most established vendors in this space now before has an enviable growth trajectory.

We believe that this is a kind of recognition that confirms the great work that we're doing.

I will now walk you through our key results, which highlight our execution during Q1 2022.

First quarter results exceeded our expectations across the board with continued balanced growth in both topline and profitability as well as seasonally strong free cash flow generation.

Productivity of our direct sales and channel teams continues to deliver wins for both our SMB and enterprise customers across all industry verticals.

This resulted in nearly $306 million in IRR, which is up about 38% year over year.

Our vision for the security awareness market defined.

Forest product roadmap.

This includes both exciting new features and new products.

A great example of this is security coach.

The product that we're planning to release in the second half of this year following the integration of our security adviser acquisition.

We have security coach we believe we are creating a new category in cyber security called human detection and response or HDR.

How this works.

As we connect through their cloud interface to existing layers in our customers' security software stack and pull in security alerts. So we can analyze them and take real time action.

As discussed previously we believe this new SKU will add an estimated $5 billion Tam as well.

I am pleased to announce that the integration is still on track for a full release in the second half of this year.

Our R&D team is laser focused on making sure. These new SKU, which is highly technical in nature will be an easy upsell cross sell into our existing customer base and 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.

For an update on the timeline in early Q3, we will begin our closed beta of security coach and open beta will follow later in Q3 with the product poised for general release in Q4.

Looking at no features for the <unk> platform. There is one we are particularly excited about.

We have expanded the AI capabilities, even further with Ada recommended optional learning.

Ada stands for artificial intelligence driven agent and it's been a core feature of our platform for years.

One of its functions is to look at failed, finishing security tests the attack vectors off of those failures training results.

How often that user report suspicious E mails.

We then apply ml to recommend and deliver an informed personalized phishing campaign.

This latest feature now adds on to this by recommending additional content for an end user based on their specific interests.

With these new features we continue our path towards individual risk reduction at scale, which in turn reduces risk across the organization.

New products and features are a key driving factor in the strong momentum of our new business wins.

As a reminder, this is one of the few areas in cyber security if not the only one that is.

Isn't a purely replacement market. We believe we are still operating within the space that is overwhelmingly greenfield.

With a global penetration that we believe to be in the low single digits.

Well most of our new business wins are Greenfield. We also continued to see a number of competitive displacements.

The Greenfield wins continued to show that the value of security awareness is resonating with customers and we believe that our competitive wins are further proof that our platform and customer support rank well above our competition.

Here are a few examples of our global wins that we've had this last quarter.

We had 130000 seat deal with one of the largest technology companies in the World. This opportunity was a perfect example of a competitive displacement the.

The customer side of the frustration with their current product at our platform capabilities could immediately account for.

We displaced the competitor and a 45000 seat deal with one of the largest clinical labs in the world.

Cited still content as the primary reasons for the switch.

Finally, we've won a 40000 seat deal with one of the largest school districts in the nation. This.

This opportunity went through an RFP process, where we were chosen due to our wide array of training content and automation capabilities.

The strong momentum we've been seeing in the international markets has continued as well.

In Japan, we closed a 50000 seat deal with a top printing company.

Also close to a 66000 seat deal with a French multinational specializing in gas technology.

In Australia, we had a 42000 seat deal for the top University.

These are just a few examples of the types of wins.

That have become a monthly occurrence for us.

We believe that they demonstrate our customers continued to embrace not only the considerable risk reduction our platform brings.

But also the thousands of hours we save.

<unk> 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 brought before to its market leading position today I.

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 in Q1, we earned the number one spot for the <unk> 2022 top workplaces USA awards in the <unk>.

<unk> to 'twenty 500 employee category.

We were also named a top workplace in Tampa Bay.

Tampa Bay times for the seventh consecutive year.

While we believe that our financial results speak for themselves. The unique award winning company culture that we've developed here is one of the driving forces behind this continued execution.

And with that.

Bob to discuss our financial trends.

Thanks, Stuart and good morning, everyone.

Thanks again for joining us today.

This is a very high performing aligned group and I believe my transition has been relatively seamless.

I'm quite excited to be part of the story.

So let's move on to our first quarter results.

As a quick reminder, unless otherwise noted all numbers, except revenue mentioned during my remarks are non-GAAP .

As you just heard from stool, we continue to see strong revenue performance across the business.

In the first quarter total annual recurring revenue or <unk>.

<unk> reached $305 9 million compared to $222 3 million a year ago up 37, 6% year over year.

Similarly, our reported revenue for the first quarter totaled $75 million versus $53 $6 million. During the same period, a year ago, an increase of $21 5 million or up 41% year over year.

Our Q1 growth was driven by another strong quarter across each of our key growth initiatives, new logo expansion cross selling to new and existing customers and international expansion.

We saw success in each of these areas during the first quarter.

Our first pillar of growth is new logo expansion.

During the first quarter, we sequentially added nearly 2500 logo is net of churn, bringing our total customer count to 49646 as of March 31.

That's a 27, 4% increase year over year or nearly 10700, new logos added net of churn.

We're also very excited to announce that as of today. We are now in excess of 50000 customers.

Significant growth over the past few years.

As a reminder, we continue to focus on driving a balanced mix between SMB and enterprise and we again ended the quarter with IRR generally balanced between these two.

In terms of logo retention, both SMB and enterprise retention continues to remain greater than 90%.

We believe that this retention rate in excess of 90% is difficult to find and software, especially when considering that our SMB customer base is nearly 44000 customers.

We also believe this is one of the primary reasons were consistently a recognized leader in our space such as the latest Forrester wave report that Stu mentioned earlier.

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

We continue to see strong interest in the power of our global platform across both new and existing customers.

During the first quarter, we continued to see strong multi product adoption, resulting in the percentage of customers subscribing to multiple products growing to 24, 5%.

Part of this growth is driven by new customers, who continue to show strong interest in purchasing multiple products within their first purchase.

To give you some perspective at the end of the first quarter of 2021, we had roughly 5800 customers or 14, 9% of our nearly 39000 customers at the time with multiple products.

As of the end of Q1 over 12000 customers are now subscribing to multiple products.

We've made tremendous growth here more than doubling our multiple product customer count year over year.

As a result, we are now seeing record levels of customers with three products and even some that have all four.

These deals were all closed without having the bundle these products and although we don't report the growth of our individual products separately or combined revenue growth for <unk> compliance plus and Kcmg ERC reached triple digits year over year for the quarter. The result of this continued cross sell.

Success.

Our cross sell success is relevant not only to help expand our IRR base, but also to increase customer retention.

Number of support that customers, who purchase both <unk> and fishy or get more value from our platform and as a result end up being much stickier customers.

Our third pillar of growth is expanding internationally.

<unk>.

The geographic distribution of our revenue continues to evolve with roughly 17% of our reported GAAP revenue now derived from our international markets.

The majority of our revenue continues to come from North America, We believe there's a sizable greenfield market for no before internationally, which is represented by a total addressable market, which is significantly higher than that of domestic.