Q2 2022 ForgeRock Inc Earnings Call
Yeah.
Welcome to the Fortune walked second quarter earnings conference call.
As a reminder, this call is being recorded.
I will like to turn the call over to <unk>.
Mr. Mark <unk> head of Investor Relations.
Please go ahead Sir.
Hello, everyone. Welcome to <unk> Q2, 2022 earnings conference call on the call with me today are for Ed Ross CEO for John and John Fernandez, Our Chief Financial Officer, and EVP of global operation.
Before we begin I'd like to remind you that our discussion today includes forward looking statements within the meaning of the federal Securities laws forward. Looking statements include statements related to our expected results for Q3, and full year 2022, our future offerings and enhancements to our current offerings the market for our offerings customer demand for our offerings and other members.
Actual results could differ materially from those indicated by these forward looking statements. We encourage you to review the risk factors that we've included in our SEC filings, including our quarterly report on Form 10-Q filed with the SEC on May 12, 2022 for some of the factors that could cause actual results to differ from those indicated by the forward looking.
Statements all non-GAAP numbers referenced in today's call are reconciled in our press release and slides are available on our Investor Relations website with that I'll hand, the call over to Brian .
Thanks, Mark and thanks to everyone for joining us to discuss our second quarter 2022 results.
<unk> grew 30% year over year in Q2, marking the sixth consecutive quarter of AOR growth of 30% or greater.
While we experienced record growth of 35% in Q4 2021 in Q1 of 2022 <unk> in Q2 was below the low end of our guidance by $1.4 million.
Primary reason that our results were below our expectation.
Was that we did not close the larger deals in our pipeline as expected.
Latter part of June we began to experience lengthening sales cycles.
Especially for our larger enterprise deals.
It is important to note that.
Some of these deals have already closed in the first part of July which has resulted in a strong start to Q3.
Other deals are still in our pipeline, we are engaged with our customers on these opportunities.
We believe the changing macro and business climate materially contributed to these lengthening sales cycles, we have.
So saw more FX impact that we anticipated for Q2, primarily due to the dollar strengthening against the British pound and the euro.
By and large our <unk> results were impacted primarily by the unexpected lengthening of sales cycles for our larger enterprise deals.
Given that the challenging economic environment will likely continue to drive companies to take a harder look at spending.
We're already taking action within four drug to address the challenges.
We are focused on the following.
Efficient pipeline growth.
Continue to focus on increasing the size and improving the quality of our pipeline.
Keeping the focus on generating opportunities from our named accounts and our enterprise and large enterprise target market.
We generated a record amount of high quality pipeline in Q2.
On track to create the necessary pipeline to achieve our growth targets, which John will discuss in a bit.
Optimizing sales capacity, we continue to focus on cost effectively scaling our go to market organization to ensure that we have the capacity and courage to support our growing business.
Customer centric business model the investments we made in our customer success organization and culture as a resulted in another record quarter of customer retention.
This provides us with a strong foundation to increase expansion opportunities within our install base.
Driving platform innovation, where you drive.
More product releases and partnerships on our last call we announced the release of autonomous access we have quickly built a significant pipeline for this offering.
Even factoring in a challenging macro and business climate. We are confident we can deliver on our <unk> growth targets discussed on this call.
<unk> is a growth company with a huge opportunity and we remain focused on making measured investments.
<unk> robust and durable long term growth in the range of 30% as we march towards achieving our non-GAAP operating margin profitability sometime in the back half of 2023.
A key driver of our growth continues to be our market, leading technology and our continued innovation.
In the past you may have heard us mention the triple Crown a poor drug continues to be the only identity provider recognized as a leader by Gartner for access management enforcer and covers your coal for science.
Also in Q4 of last year Gartner published a report called critical capabilities for access management.
Deep technical review of 12 identity companies.
You combine our scores across all three categories in the report, which our scion workforce and application development.
It is the highest ranked platform.
I'm excited to provide the following product updates.
First we released a series of major enhancements to our market, leading identity orchestration capability called intelligent access trees.
And make it easier than ever for enterprises to deliver and measure world class customer and employee experience, while accelerating time to develop user journeys.
Key enhancements include new out of the box journey themes.
Custom UI CEB.
Localized language for end user UI in terms of conditions.
Improved accessibility compliance.
Key enhancements for administrators, including new analytics dashboard that measures of success and failure rates of user journeys and new organization features to enable tagging and searching journeys.
All of these improvements make our already market leading trees seem even further apart from the competition.
And enable our customers to deliver outstanding digital experiences.
Again, these the onramp to digital customer journey and done well as a force multiplier for businesses.
Next we released our $7 two version of self managed for Jack identity platform.
Leveraging our single code base. This release provides our self managed customers with all the new innovation that has already been delivered to port Arthur Downey cloud.
All of the advancements to our trees that I just covered a moment ago.
Key additional features include significant updates to our access token capabilities, including token exchange and enrichment and new OLED <unk> features which allow customers to tailor the user experience and increased security.
Several new tree nodes that accelerate time to value and improvements to scalability and resiliency of our directory services and data synchronization and elastically scale environments.
These new areas of innovation provide additional differentiation between <unk> and our competitors.
We went in the market because we empower our customers to create better than the experiences without compromising on security.
For a full suite and unified identity platform.
Our enterprise grade performance and scalability.
<unk> ability of our platform.
AI and innovation leadership, and our proprietary SaaS architecture.
Our SaaS offering has been a key accelerator of our growth since its inception.
Now represents 17% of our IRR and we're tracking well towards their goal of finishing this year with 22% to 27%.
<unk> from SaaS.
It's still in the early innings of migrating our existing customer base to SaaS with 83% of our air are still self managed.
Our existing customers to migrate to SaaS represent larger average <unk> and more importantly, we've seen a two to three times expansion of a R. After they begin their migration to SaaS.
We had some fantastic customer wins during Q2 across both our SaaS and self managed offerings that I'd like to share.
Our first customer. One example is a health insurer, serving more than 7 million people nationwide.
Our legacy Oracle solution was nearing end of life.
Was complex costly and limited in its capabilities.
Customers selected for drug identity cloud to help rebuild its portal for providers and customers.
The new solution aims to reduce cost, while providing a more secure and enhanced user experience.
Next is European based IW G. The world's largest provider of hybrid work solutions with over 3500 locations and more than 120 countries.
83% of Fortune 500 companies are <unk> customers.
Furthermore, <unk> is a leading provider when it comes to the safety and security of its customer.
And today's security spans both the physical and digital domains.
<unk> refers to building an office access visitor logs and convenient vending using one mobile key.
Digital refers to providing companies with the ability to manage their own security related to bookings.
Managing services, such as the collaboration of hybrid teams.
<unk> needed to automate the synchronization of new starters, and leavers add multifactor authentication and introduced password list login always seamless integrations with third party systems as such WG has selected <unk> as their platform to meet these requirements to support their complex use cases of its business.
Alright enterprise grade security and scalability.
A third example is a north American mall retailer with several hundred locations in the United States and Canada.
This retailer recently pursuits boardwalk identity cloud to replace a legacy system that could not keep pace with modern demands.
They will use for drive to improve the speed and security of employee onboarding featuring capabilities, including SSL multi path logging for associates.
Thats, a custom Urls self registration of service password reset.
Employee validation and provisioning of users.
Our fourth example is a state wide system that we use for drugs to help makes access easier and safer for millions of citizens applying for assistance programs.
As part of this win Boardwalk is also providing secure access to hundreds of thousands of state employees.
They were previously handling audits manually, which was resource and time intensive with.
With four drop they're able to automate and streamline their quarterly audits with Florida, Iga module saving significant time and cost.
Our last example is a global designer and manufacturer of household appliances.
This customer purchased our self managed offerings six years ago for assigning them use case.
They are in the process of transitioning to our SaaS offering for greater simplicity ease of use and cost reduction for tens of millions of consumer identities.
The shift now make some one of our top five SaaS customers.
Right.
Even in a challenging macro environment, we believe <unk> is well positioned for growth because we are at the intersection of three powerful value drivers for our customers.
First as cyber security.
Identity is critical to securing the enterprise, an increasing threat landscape and boardwalk enables greater security without sacrificing and user experience.
We recently released our 2022 consumer identity breach report.
Viewing that unauthorized access is a leading cause of bridges for the fourth consecutive year steadily increasing to account for 50% of all records compromised during 2021.
Breaches involving user names and passwords increased by 35% during 2021 accounting for more than 2 billion Records compromise.
Second is driving revenue growth every company with a digital presence is a frictionless personalized user friendly identi experience to drive digital product adoption and in turn revenue.
Our platform is mission critical and enabling enterprises to achieve superior customer experience security and privacy.
For new lines of business, such as a digital bank our market leading identity orchestration capabilities are a key enabler of this.
Third is cost reduction.
Customers are able to achieve significant cost reductions in two primary ways first by migrating off legacy homegrown solutions to our enterprise grade platform and second by leveraging AI to automate governance processes, such as managing entitlements detecting over provisioned to access the post secured.
<unk> and compliance risks.
In July we announced that Forrester consulting performed a total economic impact study that examined the ROI enterprises could realize.
By deploying <unk> science platform.
Forrester interviewed seven representatives at five organizations with experience using for drug and aggregated the results into a single composite organization.
These results show that the composite organization, so 186% ROI is less than nine months and.
And a net present value of $28 5 million over three years.
According to the study the composite organization realized significant cost savings over three years.
Over $8 million in savings from transforming their legacy environments for truck.
One $3 million in savings from avoiding it developed.
Development costs.
Almost 6 million savings for more efficient rollout and deployment of new functionality.
Reduced instances of fraud, resulting in $4 7 million savings.
40% reduction security related calls to the call center, resulting in a benefit of $24 million.
These value drivers that I just discussed are reasons why identity remains a top priority for every modern organization and why we continue to see strong customer demand for our enterprise grade identity platform.
We've built an incredible business support drop with world class customer base.
A market leading identity platform.
At over 860, <unk> worldwide, who are passionate about modernizing identity for enterprises. We are confident that we can drive robust and durable long term growth in the range of 30% as we capitalize on our 71 billion dollar addressable market.
Looking ahead to the second half of the year, we remain encouraged by the underlying drivers of our momentum.
Remained strong despite macroeconomic challenges.
Our integrated platform across identity access and governance for cyan workforce and Iot use cases that supports all identity types continues to be a differentiator for us.
And our ability to empower our customers to choose how they want to deploy our software.
Whether it be self managed or SaaS maximizes the market opportunity for us.
With that I'll turn the call over to Jon to walk through our financial results in more detail.
John .
Thank you Fran.
Pleased to deliver revenue non-GAAP operating loss and non-GAAP EPS results above our guided ranges in the second quarter as Fran mentioned, our Q2 <unk> results were impacted primarily by the unexpected lengthening of sales cycles for our larger enterprise deals and significant FX headwinds.
Before I dive into specifics on our financials I wanted to highlight three themes that give us confidence in the durability of our growth and our March towards profitability first before drug identity platform is a market leading product that is sold into large enterprises and serves a mission critical purpose. This is why we have world class retention.
Rates and high customer lifetime values.
Our gross margins remained strong and stable as we scale, our SaaS business and lastly, we are marching towards reaching non-GAAP operating margin profitability sometime in the back half of 2023 through measured investments to support the growth of our business for the long term and achieving operating leverage as our revenue growth began.
To more closely align with our <unk> growth, which has been impacted by our SaaS transition in the most recent periods.
As we look back over the past six quarters, we have experienced AOR growth of 30% or greater.
Ended Q2, <unk> $201 6 million up 30% year over year.
Adjusting for approximately $1 million of FX impact in 2022 year to date, our <unk> growth was 31% year over year. Some of our contracts are denominated in local international currencies and impacted by fluctuating FX rates.
<unk> represented 17% of our ending <unk> as of June 30th adoption of our SaaS offering among new and existing customers continues to be strong SaaS as a percentage of air are from new customers was 53% in Q2, and 23% of our new customers in Q2.
Purchased SaaS, we are seeing strong SaaS growth from both new and existing customers.
Of our SaaS customers that initially purchased our self managed offering after purchasing our SaaS offering they have expanded their <unk> with us by two to three times on average and they are not done yet.
Average SaaS air are from new customers, who purchased SaaS in Q2 exceeded 350000, we continued to see robust adoption of our SaaS offering in Q2, and we are tracking well towards our goal of finishing the year with 22% to 27% of ending RR from SaaS.
Yeah.
Moving onto customers, we continue to experience very high retention and are seeing great results from our investments in customer success. We ended Q2 with 414 large customers defined as customers with 100000 of IRR or greater our large customer base grew 17% year over year.
They represented over 91% of our <unk> as of the end of Q2, the average IRR for a large customer has steadily increased since the end of 2019 and is now 445000 of IRR.
Our net retention rate for Q2 was 112% up sequentially from 111% in Q1.
The expansion of air are from our existing customers is being driven by customers, adding more identities more use cases and more product modules. We also have a big opportunity to convert our existing self managed customers two of the four drug identity cloud. We continue to expect our net retention rate to stay in the 110 to 112.
Our range for the remainder of this year.
Moving to revenue revenue recognition for self managed deals is significantly different than ratable revenue recognition for SaaS deals under ASC 606.
They are our best reflects our growth while GAAP revenue is impacted by our SaaS, increasing as a percentage of <unk> <unk>.
Total revenue for Q2 was $47 7 million, which was above the high end of our guidance.
Subscription SaaS support and maintenance revenue grew 46% year over year in Q2 up sequentially from 43% year over year growth in Q1.
As it relates to the increasing level of predictability in our revenue. We are pleased to announce that our ratable revenue now represents 62% of our total revenue up from 46% of revenue in Q2 of last year.
Professional services revenue grew from $1 1 million in Q2 of 2021 to $2 6 million in Q2 of this year. The primary driver of this growth was due to services related to the delivery of our SaaS deals before turning to profitability and expense items I would like to point out that I will only be discussing non-GAAP .
Results going forward non-GAAP results exclude stock based compensation for all periods discussed our press release contains our GAAP results and reconciliations to our non-GAAP results.
Q2, gross profit was $39 million in gross margin was 82% as we continue to scale, our SaaS offering we expect to see increasing investment in cloud infrastructure and incur higher hosting costs, which was partially offset by a large SaaS asps.
Our professional services margins significantly improved year over year, primarily driven by higher utilization and higher professional services revenue.
Turning now to operating expenses, we remain focused on investing strategically for growth, while achieving our operating margin goals and our path to profitability. The percentages of revenue for our operating expenses are currently heavily impacted by revenue recognition under ASC 606.
Also please keep in mind that we were not a public company in Q2 of last year.
Sales and marketing expense for Q2 was $27 2 million compared to $21 5 million in Q2 last year. This represents 57% of total revenue for Q2 compared to 49% in Q2 of last year.
R&D expense for Q2 was $14 million compared to $9 7 million in Q2 last year. This represents 29% of total revenue for Q2 versus 22% in Q2 of last year.
G&A expense for Q2 was $12 million compared to $7 8 million in Q2 last year G&A was 25% of revenue versus 18% of revenue last year.
Operating loss for Q2 was $14 3 million compared to a loss of $2 9 million in Q2 last year, representing an operating margin of negative 30% versus negative 7% a year ago. It is important to note that the biggest impact our operating margin year over year as our rapidly growing SaaS business and the resulting impact of.
Our revenue under ASC 606.
Our balance sheet is very strong and we ended the quarter with $347 million in cash cash equivalents and marketable securities.
In Q2 free cash flow was negative $20 7 million or negative 44% of total revenue compared to negative $22 4 million or negative <unk>, 51% of total revenue in the second quarter of last year.
In 2020 in 2021 free cash flow in Q2 was the lowest seasonal quarter within each fiscal year.
Before I turn to guidance I'd like to provide some comments that should give additional context for the remainder of this year, while we remain optimistic on our growth for the remainder of this year. We are revising our annual <unk> guidance to factor in greater impact from longer sales cycles, especially for large enterprise deals and incremental FX.
Ends.
The FX impact of <unk>, we estimate the impact to Q3 and Q4 is approximately one percentage point of growth for both periods, which has been built into our guidance for revenue. We expect Q2 to be the trough in terms of revenue growth in 2022, we expect revenue growth to begin meaningful.
The sequential Reacceleration in Q3, with Q4 being our strongest seasonal quarter for growth.
Four of our annual operating loss and operating margin guidance, we are managing our business to achieve the margin range over the dollar range. We remain confident in our ability to reach non-GAAP operating margin profitability sometime in the back half of 2023, though our progress between now and then may not be linear primarily due to <unk>.
Seasonal variability.
Now turning to guidance for the third quarter of 2022 Ford Rock expects total <unk> of $208 million to $211 million, representing 28% year over year growth at the midpoint, our Q3 and annual guidance is inclusive of estimated FX impact.
Total revenue of 49 million to $52 million, representing 14% year over year growth at the midpoint.
non-GAAP operating loss of 12 million to $10 million, representing an operating margin range of negative 24%.
Negative, 19% and non-GAAP net loss per share of 17 cents to <unk> 13, assuming weighted average shares outstanding of approximately $84 7 million.
For the full year 2022, four drug now expects total ore of 225 million to 232 million, representing 25% year over year growth at the midpoint.
Total revenue of $206 million to $212 million, representing 18% year over year growth at the midpoint.
non-GAAP operating loss of 35 million to 33 million, representing an operating margin range of negative 17% to negative 16%.
non-GAAP net loss per share of 49 to 44 cents, assuming weighted average shares outstanding of approximately $84 5 million.
I'll now turn the call back to Fran for closing remarks Fran.
Thank you John .
Before we open for questions I'd like to close with a quick summary of the actions that we're taking as a company to achieve our targets and to drive robust and durable long term growth in the range of 30%.
We continue to focus on increasing the size and improving the quality of our pipeline.
We are cost effectively scaling our go to market organization to ensure that we have the capacity and coverage to support our growing business.
We continued to focus on customer success to maintain our strong gross retention rates, while creating additional opportunities to expand our business within our existing customer base.
We're driving more product releases and partnerships.
As CEO I continue to be very excited about the incredible business, we built and the opportunity ahead for for drug.
Operator, you May now open the call for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please state now by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off.
To reach our equipment. Please ask one question at one time and you may have one follow up question well pause for just a moment to allow everyone an opportunity to see no fall question.
We'll now take our first question from Gregg Moskowitz from Mizuho. Your line is open. Please go ahead.
Okay. Thank you very much for taking the questions and good afternoon gentlemen.
I guess first question for Fred regarding that the macro or the longer sales cycles that you're seeing or began to see in the latter part of June or are they more pronounced in any particular region or is that broad based and then also are you seeing any changes in average deal sizes in any of your territories.
Yeah. Thanks, Craig, Yes, we did not see any concentration.
All of those kind of challenges in any particular G. O and then particular industry or really any particular product line is really kind of reflective of our business. As we came into Q2, while we had a strong pipeline of a lot of great. A large enterprise deals and you know as we work those we saw those challenges at the end of the <unk>.
Quarter, but it was kind of reflective of the business.
Okay understood and then I guess a question for John I think a lot of investors are just wondering how conservative your assumptions may be as it relates to your Q3 and full year guide in other words are you assuming a continuation of these trends that surfaced in June or or a worsening of them any color there.
It would be it would be terrific.
Yeah, Let me I'll touch on that and then maybe John can add some color if he thinks it's a it's beneficial when we looked at.
The Q2 guidance and the rest of the year guidance. We recognize we are really building off a very strong foundation. We've now had 10 quarters of this growth in that 30% range and including a couple of years at 35 over the past couple of quarters. The market continues to be really strong for digital identity with these great customers our technology can.
Can you just to be really well recognize so we really have a strong foundation as we went into the second half.
But given that lengthens the sales cycles that we saw at the end of Q2, we spent a lot of time.
Working with our sales team and looking at our pipeline for the second half of the year and we feel we have a strong both quantity and quality of pipeline because you recognize not all of it is created equal whether its new customers or existing customers cod or SaaS.
Our self managed we applied our conversion rates.
To that pipeline, but we also did apply some additional impact for those longer sales cycles as well as some FX that we saw earlier in the year.
But when we as we get in here to Q3, we've seen improved linearity, we had a record July at four drugs. So some of those deals that we experienced those longer sales cycles have already closed which is great. We have a strong pipeline. We have the right sales capacity. So when we look at these things we do have confidence that we did create the.
The right guidance for the second half of the year and I think to add to that Greg We really as you look at that FX.
Expense just material movements in Q2, just globally against the euro and the pound depreciated against the dollar we got almost 3 million.
<unk>, that's now incorporated into the reduction in the ALR Guy. So obviously very very meaningful and you would hope the worst is behind us in that sense. However, I would state is also incorporated a guy I think three additional levels of desktop and this is a level of discount that was integrated and then for macro in general.
For additional potential FX and also for the lengthening of the sales cycle, so really material in the way we've thought about this and again I think focused around what we saw in just a handful of large deals that we hope that is not the norm going forward, but obviously, we felt it was prudent and important to incorporate that conservatism this into our <unk>.
Hi.
That's helpful. Thank you both.
Thank you.
Next we have Eric <unk> from Keybanc capital markets. Your line is open. Please go ahead.
Hey friend had John and.
Good afternoon so.
So just on the on the margins I think it was clear that youre, taking a little bit more of a measurable approach to spend this year. So just curious kind of where you're kind of focusing of those dollars are.
You want to continue investing in and maybe where youre just pulling back a little bit.
Sure absolutely Yeah, I think first of all Florida aren't really a growth company and an amazing growth opportunity looking forward and we've had this.
You had a long string of 30% growth, we think that's going to continue as our long term durable growth target of the company. So we've got to invest invest and build into that.
Our targeting we are primarily a technology company, obviously in our companies choose us for that so we continue to invest in R&D to ensure that we can continue released really couldnt things to help our customers with better digital identity will continue to invest in our go to market and our sales efforts to scale that capacity. So we have what we need to deliver the number.
We continued to invest in customer success and customer support to ensure that our customers get that get that value. So we're kind of re prioritize some things within the company. Some things that we felt we could do less hub to ensure that we protect and investments in some of those key areas to continue to drive the strong growth that we've experienced.
For the past several years, yeah, and I would just add.
Leadership team took a really careful look at all of our expenses I think it's always prudent to do that again as Fran mentioned re prioritize and reduce some dollars where we could what we were able to do with that was the flow through from the reduction in revenue did not completely flow through as you'll note in the guidance around the operating in Boston. So we did there was maybe some of.
The strategic reductions, but also with an eye toward really importantly, always running our three year plan out looking at that looking at making sure we're seeing that growth in the future, obviously around R&D and customer success sales and marketing, but also really importantly to ensure that we could have reaffirmed that target we have around that profitability somewhere.
In that back half of 2023, and so all of that was done as a very coordinated with you on this side.
Nicole.
Got it that's helpful. And then finally I mean, I think about your business, it's still largely Siam, which does include both security organizations and marketing organizations in terms of making a decision on the buying cycles. So just.
I'm just curious I mean, I think we all think security budgets are pretty safe relatively speaking so is it maybe a function of kind of the marketing side that might have caused a little bit more kind of scrutiny of deals just curious your thoughts there.
Yeah. It's a great question and you know a four drug we do service both parts of the market. Our platform works you know definitely a lot of folks who sign where we tend to land most frequently and expand from there, but we also continue to land in the work force is well had some wins in governance. This past quarter that we feel really really great about.
But we do tend to land in science and when we looked at kind of some of those changing dynamics in those sales cycles in the latter half of June I think some of what you're talking about is kind of what we saw that we were in some of these opportunities where our champion said, we've chosen toward driving many of the right platform for US and then we're moving it through the purchasing process.
And when we got to that that champion might even behind the platform for maybe a single business unit or line of business within that organization and his identity is becoming more and more strategic and important companies.
Companies looked and said hey could we potentially use this technology. Other places. So that's led to further conversations or Poc's, which unfortunately has driven those longer sales cycles, but by and large we've not lost any of these opportunities to our competitors. We continue to engage with our customers some of them have closed already.
So you know we.
We feel good about that that momentum and I guess just said.
One other way to answer that question.
Consumer identity continues to be a top priority even in these environments.
Whether from a cyber security standpoint with account takeover, assuming a common attach.
Attack vector.
As all of these companies trying to compete in their market the identity experience becomes so important so that they can.
Deepen relationships and drive.
Loyalty with their own customer base, as well as reducing costs and making more self service to reduce kind of help that so we feel there's still a great market for both Simon and work for us and we continue to drive growth in both areas.
Alright, thanks for taking the questions.
Thank you.
Next up we have <unk> from Morgan Stanley . Your line is open. Please go ahead.
Hi, Thanks, so much for taking my question so.
So theres been some consolidation within the identity management space lately. So can you just talk on how you think this might impact the current.
Additive landscape. Thanks.
So much.
Yes, absolutely we have seen that consolidation over the past couple of quarters and I think that's really that really demonstrates how interesting. This market is and people really see when they talk to a CIO. Since he says you know again it always comes up in the top one two or three priority of an organization.
And so I think we're seeing all kinds of investors take a lot of interest in this market and we think we're really happy to be in such an exciting market I think for us.
And then my career I've been involved in a lot of M&A and M&A can be really challenging and potentially distracting and so as you know new owners command new priorities get set your budget's rolled out change of leadership that can be distracting for these companies. So I look forward to what we're really focused on using this time and using this opportunity as a standalone public.
Company to execute and grow in the market.
And the last element when we think of sort of how some of these orders might put some of these other pieces of technology together.
We recognized a long time ago talking to our customers that they don't want to have to cobble together multiple point solutions across that identity journey and unfortunate we've already have identity and identity management access management SSO MFA governance entitlement management all in a single platform all.
Anticly built.
By our development team all fully integrated into that single platform. So it's interesting everyone else's kind of noticed sort of great market. This is taken some actions, but we feel really good about our position and our ability to continue to win with our platform.
Great. Thank you and just one other follow up question have you guys been seeing any or have you guys been making any changes in terms of hiring plans versus six months ago.
Yep.
Yes.
As we mentioned, we're a growth company and we continue to hire we also talked about doing that prudently and where we couldnt pulling back. So we could focus our hiring in the areas that are really going to move the needle.
We're really focused on our sales capacity and we know that we look at our sales capacity in a pretty.
Fifth gated way to look at Rep productivity in the zero to six months six to 12 and greater than 12, and we know we've got a constantly build that pipeline to grow that go to market machine continue definitely to stay focused in that in that area.
We've got to continue to create great innovation, So we're continuing to invest in R&D and customer success and support it.
And look at other areas, where we might slow down hiring so we can focus.
Investing in those growth areas.
Yeah.
Thank you for the question I guess next one.
Okay.
All right next we have Jonathan Ho from William Blair. Your line is open. Please go ahead.
Hi, Good afternoon, I just wanted to see if we could get a sense of the magnitude of the deals that slipped out and how they all subsequently closed or are there still some that are open right now.
Yeah. So when we go into any quarter because at the beginning of the quarter. We spent a lot of time looking at our pipeline and looking at the deals that are in the pipeline and how some combination of those are going to close to result in us achieving our targets and of course, it's not all of those into presented those so for US. It was really just a hand.
Some of these larger deals that we that we were looking forward to closing and being part of that quarter.
Some of them have already closed we had at one of our large healthcare companies and has already closed here in Q2 and in Q3 excuse me. So we're off to a really good start several others as well.
As close as well, but we've got more to go.
As I mentioned, we haven't lost any of these to our competitors. We just continue to engage with our customers.
Helping them further put this whether it's an ROI more poc's to get these deals closed.
And Joe I'll, just add you know some of those deals that didn't close enough to them close such that we're actually off to a record linearity.
In July and August is looking incredibly strong. So I think it's testament to the fact that they they really did not come in just on the goal line with respect to Q2, but we've closed substantial amounts such that contributed to that record linearity.
Got it and then.
Tough for environment do you see maybe the contribution mix shifting from new any new customers two more existing customers or vice versa. Just wanted to get a sense for how youre thinking about relative net retention versus new customer growth. Thank you.
Yeah can I give my perspective, and then maybe John can add a little more around on our net retention.
Approach that we continue Jonathan I think both of these are really great opportunities.
We've got a great customer base with really strong gross retention and we believe that's a great opportunity to cross sell upsell and grow more air are through that through that channel whether it's your workforce to sign customers are assigned to workforce, while we just launched our autonomous access last quarter.
We now have several million dollars of pipeline in that.
With several.
Deals, we expect to close this quarter, our software to SaaS initiatives. So we think theres a lot of opportunity and we're going to continue to focus on that embrace the base as we call. It a poor drug, but we're going to continue to focus on.
New logos and new customers, it's still a really dynamic market theres still a lot of companies that we see that are running oracle or CA or other legacy platforms that need to modernize a lot of homegrown technology out there that's ready to be replaced we still see strong growth in rfps that are coming into the company.
So we're going to continue to focus on both our sales teams are compensated on new IRR, whether that comes in from.
Existing customers or new logos, our marketing team is focused on driving.
Leads from new logos, but we're selling to our installed base as well. So I guess the long way of saying, we think both opportunities continue to be really great for florsheim, yeah, and as it relates to that retention new loans are a huge opportunity all of the largest deals that slipped in Q2 really more a function of new logo acquisition as you might.
This is more of a contracting and POC kind of process that you go through what that meant was that the percentage of new business. We closed as you might expect presents skewed toward our installed base. However, if you look back over the prior four quarters. So I was just the percentage that was higher than the prior four quarters actually the absolute dollars were high.
So when you go a layer deeper into that expansion.
That really shows that those great results from having built out that customer success last year really moving toward getting that deeper upsell cross sell and add more identity. So that the base installed base is really strong showing really nice expansion, we're pleased to see that adding as well multiple software to SaaS deals.
So again continue to convert is that two to three extra RR.
So really really pleased with how that's flowed through and then overall in net retention just to note gross retention continues to be a record highs and ticked up even further in Q2.
Thank you.
Next up we have threat zelnick from Deutsche Bank. Your line is open. Please go ahead.
Great. Thanks, so much for taking the questions guys maybe.
Maybe I'll start with your friend, we all know the environment's tough out there and I know you're a pro you've lived through prior cycles. What gives you confidence. This is all environment that youre seeing in that your team is executing the best that they possibly can and just given what's going on out there can you double click I know you spoke to some of this in your prepared remarks, but just wondering.
Adjustments that you're making.
In your go to market to adapt to the environment does it make more sense to.
Put more effort behind the expansion versus new logos. An example, thanks.
Thank you you're right I've been I've been around a while and and and it gives me a great Foundation to Ted.
I do feel really confident in the future of the company and the opportunity we have in the back half of the year and I would say there are two things that really give them that confidence first is really looking at the pipeline. You know we've spent a lot more time understanding not only the quantity, but the quality of that pipeline that we have we had a record pipeline development in Q.
Two we're on track for strong pipeline development here in Q3 from a quantity standpoint, but we've also spent a lot of time continuing to dig into the quality and by that not every opportunity is created equal some opportunities convert at higher rates than others. So whether we look at pipeline from our new logos or existing customers or self managed.
Versus size, our Siam versus workforce are opportunities that are generating our target account list. We know those convert at a higher at a higher level. So that really drives that confidence is looking in that pipeline and seeing the quantity and quality there to deliver the numbers, but I would also say, it's the conversations that I have with our customers.
And our prospects and I was on the phone with one of our larger financial services customers over the past couple of days who are.
We are looking at opportunities to further use for dragon other business lines.
They continue to grow as an organization.
Alright tuck in brand new prospects technology company here in Silicon Valley.
As you know done and they take off any selected and they're now in our pipeline here to close this quarter. So a lot of confidence there both by the numbers and the data I've seen the pipeline as well as the conversations that I'm, having with customers and prospects.
Thanks for that friend and maybe just a follow up for John John It seems the dsos have been creeping up pretty meaningfully, especially in Q2, which is a little counterintuitive.
If the story of Q2 was larger deals pushing out at the very end. So is there anything else that's happening in terms of payment terms and explain what we're seeing in receivables and what should we expect as it relates to collections going forward.
Yeah, I mean, that's really hadn't seen if you if you go through prior filings you look at the actual bad debt.
I would challenge anyone in our business to show a better level of collections.
We have I think our bad debt is absolutely record for the industry and so that is really where we're everything that comes out in the wash so to speak.
It's just a function of great product really durable great customers enterprise that PE. So I think DSO can be just a function of period over period changes not anything that we've had a challenge with add on payment terms has been very very consistent just review the analysis over the last week looking at how much 30 day, how much 45.
I actually approve anything over 45 days in the company and I've seen no uptick in those payment terms year over over the prior periods. So things appear to be very very strong there could we see more of those requests going forward potentially but have not seen them yet.
Great. Thank you so much for taking the questions guys.
Thank you.
Next up we have Shaul Eyal from Cowen. Your line is open. Please go ahead.
Thank you good afternoon guys.
Front I want to go back to that point about the quality of your pipeline.
Sure.
And maybe on the heels of <unk>.
And you know go to market question as you think about your relations with your partners.
Any changes any fine tuning that are also needed on that specific front.
Yeah sure Yeah, let me answer that in.
Got it you know when we look at our pipeline our pipeline comes from three primary sources and one great source is our partners and they continue to be.
Really important to us we have great relationships some of the big partners like Accenture, Deloitte Pwc, but we also partner with dozens of different identity providers and around the world and they are absolutely bringing us into these accounts as they are working with customers as part of kind of larger initiatives around digital transformation and clarification.
A good part of our pipeline comes from that from those partners and we love that because it typically comes in more qualified a larger faster cycles, because the partners already and they're developing with us.
Mentioned in the past, we do co sell once that opportunity gets generated but our organization to really focus with working on our partners to identify new opportunities close those opportunities and then deliver them.
Work with our partners around customer satisfaction. So that's an important part of our pipeline generation and what's important in the first half of the year, we expect it to be important in the second half our second big part of the pipeline is what we generate ourselves.
Primarily our marketing organization is focused on new logo pipeline generation, where we create it.
<unk> in the market.
<unk> also had flowed through to our sales development team, who then set of meetings and opportunities with our in these are our account reps and then our enemies or contracts are also focused on our existing customers, creating new pipeline. So when we look at the quality of that pipeline. We do look at its source across those three but then we also look at other factors.
As I mentioned on whether it's Siam, our workforce and we tend to land more and Siam. Our platform is really recognized as much more market, leading Simon anywhere else. So we tend to close those at a higher rate or right now our SaaS business is closing at a faster rate slightly shorter sales cycles. So we look at quality a lot of different.
When we look at that pipeline that give us confidence here and what we've provided for the second half of the year.
Understood understood.
Be tricky.
Tricky question.
We will read about the recent cyber attack on Cisco.
Took place in late May.
It does mention.
Do or that we bought back in 2018, and you know obviously I think no one understands.
He gave you they provided it in a very very thorough manner.
It was really mostly in the density driven.
Type of attack.
What's your thought on that front and maybe.
Have you been seeing.
And anything emanating from.
That oh.
That attack that could come in your direction.
And I know that maybe.
Maybe compete compete on a different front, a little bit, but there's I think without a doubt plenty of angle that you could address.
Yeah, I'll answer that two ways Shaw.
Youre right identity continues to be one of the most attack vectors.
Of cyber criminals trying to break it to any enterprise, whether it's on the consumer side, where people will buy or sale use names and passwords and show up and appear to be legitimate when they're not.
Within the enterprise compromised credentials are leading to these type of breaches. So we released our breach report just a couple of weeks ago that demonstrate identity related breaches continue to grow so.
It's a real problem for companies out there and for drugs helps them solve that problem with better and smarter identity. So we see that.
As part of our value proposition and we're focused on helping companies improve security around identity.
We also obviously ever own infrastructure, our own products. So we have to invest in our own security here at <unk>, we have a great sea. So Argos Kirby we continue to invest in security a board level conversation to ensure whether it's with people and technology and better processes, we stay protected because our companies.
We are counting on us.
Around her and Danny services, so for US, it's kind of both our market opportunity and continued investment here for drug around cyber security.
Thank you for that.
Thank you. Thanks, Scott we have gray Powell from <unk>. Your line is open. Please go ahead.
Okay, great. Thanks for taking the questions.
So, yes, maybe just sort of a couple of related ones on my side.
Roughly speaking it looks like the SaaS product drove about two thirds of your net new additions.
First half of the year and then if I look at the guidance that I think the guidance implies that fast is going to account for just over 80% of the.
The net adds in the second half.
Does that seem about right to you am I doing the math correctly. There and then is that factoring in any sort of conservatism on the on Prem side in the second half or am I reading too much into that mix.
Yeah, I'll touch on kind of our approach to SaaS is it and then maybe John can.
Provide a little bit more color on that math, but.
Part of what we do is we offer our customers choice on whether they want to consume for dry in identity SaaS.
We're in a self managed because we think there is continues to be a market for both and we want to capture all of that market.
We've seen really rapid adoption of our SaaS.
As you mentioned this is only our second full year of having SaaS in the market and it's a big driver of our growth.
In Q2 was no different with over 50% of our new air coming from new logos coming on that SaaS platform and we've always talked about some potential kind of cool.
The quarter fluctuations, but overall, we're going to continue to sell both SaaS and self managed and see good strength in both that's right Yeah, and I think there's a couple of things.
Talking about revenue first there is a lot of revenue coming from our self managed business that will continue to renew will continue as we look out toward our pipe, but I think this is right to the core of your question right.
It looks very good healthy mix of both SaaS and self managed and so we do have a beat and raise model in place. Obviously, we have provided a level of conservatism to that I'd tell you. The 80% is probably on the high range there.
And so I think as you look at those factors. We believe it will continue to grow but it will fluctuate quite a bit from quarter to quarter that SaaS dollar mix as we move out towards the end of the year.
Okay.
Okay, that's really helpful.
Thank you very much.
Thank you.
Next we have Rob Owens from Piper Sandler Your line is open. Please go ahead.
Great. Thank you for taking my question I guess.
Following on that could you then impact for us.
The percentage of new customers, who are purchasing SaaS versus self damage because it was at a low this quarter and just customer patterns right now and how they are buying because it seems with other infrastructure stories.
They are migrating more towards SaaS and they are the self managed so curious why yours went the other way.
You know what I would say, it's generally we do see that.
Growth in SaaS.
As I mentioned, we offer our customers choice and redundancy some fluctuations.
To the next and again from an IRR perspective in Q2 still it was over 50%, we're coming off of that task. So.
We think that we really appreciate the opportunity to give our customers choice a lot of our customers still want to run identity in the public cloud of their choice like AWS or George ECP, along with the rest of their application stack and we were to support that.
We continue to see great growth in our SaaS in including what's in our pipeline going forward.
But what.
So as we think about those large deals that I mentioned earlier that were oriented towards the new mix. When you talked about again correlated that as SaaS has been a great new logo driver for us so that new beam SaaS, obviously impacting that 23%, yeah, I think interestingly still 53% on the dollar.
So youre reaffirming there that when we close these SaaS deals they're high Asps and that's been really I think very very consistent for us and very strong in Q2, but yes to your point.
The new number and the the new logo was the slightly lower part in Q2, and we did finish the quarter with 17% of our <unk> SaaS and we continue to reaffirm that at the end of this year, which is only the second year. We've had in the market, we'll be between that 22 and 27%. So we continue.
Feel really great about that size opportunity.
Alright, thanks, guys.
It looks like there are no more question at this time I would like to turn the call back over to Mr. Brian Welsch CEO for any additional all closing remarks.
Great well, thanks, everyone for joining our call. Thanks to all the great questions.
On behalf of the entire team at <unk>, we feel great Q4, great about our growth opportunity.
Were really incredibly exciting market to be in digital identity today.
We feel very confident with our you know our full scale comprehensive platform our approach to cloud and the pipeline that we continue to build that's really going to support our growth in.
In the second half and going forward for the next many years. So thanks again to everyone who joined the call.
This concludes today's call. Thank you for your participation you may now disconnect.
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