Q2 2022 Knowbe4 Inc Earnings Call

August 4, 2022

Ladies and gentlemen, thank you for spending by NOL country before second quarter 2022 results Conference call. Please be advised that today's conference call is being recorded.

Since I 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 press star one on your telephone keypad, if you'd like to withdraw your question Press Star. One again. Thank you now it is my pleasure to turn the call over to Ken Powell, Colin you know before senior Vice.

President of S. P 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 is furnished with our form 8-K today with the SEC and May also be found in the.

I'm entering financial information available on our Investor Relations website at investors 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.

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

During today's call you will hear prepared remarks from our founder CEO and President do Sharman and CFO , Bob Rich Lars Latin 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 Stuart.

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

Im excited to share our results with you this morning.

<unk> had another record quarter of strong execution with second quarter results exceeding our guidance.

This has resulted in over 36% year over year annual recurring revenue growth.

Strong 23, 7% free cash flow margin.

As many of you know I started now before to help organizations manage the ongoing problem of social engineering.

We're the only public company dedicated to securing the human layer.

Our layered it continues to prove itself exceedingly critical to organizations of all sizes.

<unk> or private.

The environment that we find ourselves in today.

[laughter] forms this even further.

We believe that securing the human layer is a matter of national security.

Now before I go through the highlights of our record performance I first wanted to take a moment to talk about what this economic environment means for no before.

I want to reiterate that while we are constantly monitoring all of our forward looking metrics, we have not seen any material indication of a change in our sales pipeline that could impact our proven go to market strategy.

Our investment philosophy remains on track as well.

Specially regarding international expansion.

To specifically address our SMB segment.

We continue to see strong logo and dollar retention.

Our average selling prices for this segment continue to move up which we view as an indicator that our platform is being prioritized in SMB budgets.

Our lead quote and referral trends all remain healthy leading to a predictable close rates. This year. We also have a record number of active SMB quota bearing reps onboard or collectively producing excellent results.

Historically I have viewed these economic cycles as an opportunity to invest.

Which is a benefit that comes from running a streamlined organization, but the kind of free cash flow that we have historically generated every quarter.

While these economic conditions can bring challenges to most businesses I think that no before is positioned for continued expansion with a balance of growth and profitability.

There are a few reasons why I can confidently say this.

The first reason for my confidence comes from the industry that we're operating in.

Cyber security budgets are resilient.

It is well known that the cyber security posture of an organization is crucial.

However, the critical role that the human being plays in cyber security.

As only become clear within the past few years and is becoming more evident all the time.

For instance, the 2022 Verizon data breach investigations report or the D var, which came out this last quarter.

Round to that 82% of data breaches involve the human element organizations across the globe are experiencing increasingly frequent and debilitating data breaches ransomware infections and intellectual property theft. The vast majority of which are accomplished through social engine.

Hearing attacks, we believe that our secure human layer is absolutely mission critical to reducing these risks.

Phishing attacks, which the D var calls one of the four key paths to your state.

Our continuing to rise as well.

The anti phishing working group published their latest report showing that phishing attacks have once again reached an all time high in Q1 of 2020 to over 1 billion attacks were detected during the period more than tripling that of early 2020.

This equates to over one attack every eight seconds.

And these bad actors only needs to be right once.

Nobody forced platform is proven to reduce the risk of phishing attacks.

The cost is a small fraction of the overall cyber security spend for many organizations.

Some of you may have seen that IBM security released its annual cost of a data breach report last week.

Which found that the average cost of a data breach in 2022 was four point $35 million.

And reason for my confidence is our market position in spite of the success that we've seen so far we still have a relatively low penetration and a global landscape that is predominantly greenfield. We're pioneering a category that is very much in the early days all at a time when did GOP.

Political environment only continues to validate the need for our platform.

The ongoing conflict between Russia and Ukraine.

Showing the world what modern cyber warfare it looks like.

Tom Bert the head of Microsoft's customer security and trust.

Just gave an interview last month.

<unk> a glimpse of this destruction.

According to Bert.

10 hours before the first missiles were launched and the tanks rolled over the border. There was a huge wacker attack across 300 different systems and government and private sector companies in Ukraine.

For context, our Viper attack is designed to wipe out as much data as possible and caused maximum network destruction. While the conflict itself is tragic seems like these are helping the international community realized that the cyber security posture.

Of every organization is a matter of national security.

The final reason that I'm confident in our ability to execute during a potential economic cycle is that our customer base itself is a resilient our logo retention rate for both SMB and enterprise continues to remain above 90%. This quarter. This is a feat that we accomplished with AUM.

There are 52 with thousands of customers in Q2 of 2022.

Over 46000 of which we classify as SMB.

It taught us that the spending habits of our customers are resilient as well.

With the only measurable impact to our existing customers being a reduction in their seat counts.

Some of our customers furloughed employees for the first few months.

We believe this is because they're aware of the value of the platform, which comes at a cost that some of our smaller smbs than just charge to a credit card.

Keep in mind. During this time, we continue to grow the number of customers with multiple products.

We remain committed to long term execution and continue to see an environment that only favors this.

A few highlights from our Q2 results are evidence of this.

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

As well as strong free cash flow generation is.

This resulted in over $328 million in a R, which is up over 36% year over year as of the end of Q2.

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.

I am pleased to announce that this now includes no before ventures fund dedicated entirely to supporting innovation in the human layer.

We are enriching this critical ecosystem.

Focusing on supporting organizations that build integrations with our platform and utilize our unique data for.

For years, we've discussed the mismatch between cyber security spend on the human layer and the risk that it actually represents.

The overwhelming majority of data breaches involve a human element.

Less than 3% of cyber security budgets have historically been dedicated to reducing this risk by focusing on early stage investments for organizations innovating within this space, we're helping to support and expand the human layer for years to come.

This is all part of our vision for the security awareness market.

Our vision that defines our own product roadmap as well.

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, resulting from the integration of our security adviser acquisition.

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

This works is we connect through a cloud interface to existing layers in our customers' security software stack and pull in security alerts to analyze and take real time action.

I am pleased to announce that security coach is currently in a closed beta.

Initial feedback being overwhelmingly positive.

And the open beta is soon to follow with general release still planned for Q4.

We showcased a number of our new features to the public advocate before cod in 2022.

Following the COVID-19 environment of virtual conferences.

Refreshing to hold this one in person and it was a great success.

The number of attendees far exceeded our expectations and a general feedback was overwhelmingly positive with surveys showing 96% of 2022 attendees planning to attend in 2023 as well.

One feature that came before Khan visitors, we're particularly excited about is it know before mobile app.

It is currently in a closed beta with plans for general release in Q3 2022. This has been a common request from our customers who want their users to be able to complete their new school security language training directly from their phone.

We believe that expanding our platform to mobile is the next step in boosting engagement and ultimately adds to the value that our customer base has grown to expect.

As a reminder.

We're operating in one of the few areas in cyber security if not the only area that isn't purely a replacement market.

While most of our new business wins are greenfield.

We also continue 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 are superior.

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

We closed the largest deal in our history at 243000 seat opportunity with a state department of education.

Scientists the quality of our content and ease of deploying our platform across all districts. That's the primary reason for their choice.

Above all they understood that they are in house training was inadequate given the current threat environment.

We displaced a competitor in 100000 seat deal with a top multinational conglomerate.

They had been unable to create a security culture with their current offering and also found our Fisher our platform to be superior.

Finally, we won 100000 seat deal with a multinational transportation enterprise.

This was another great example of a large organization realizing that the threat landscape, we're finding ourselves in today far exceeded their internal training capabilities.

And utilizing our platform was a no brainer decision.

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

In Germany, we closed a 50000 seat deal with one of the largest media conglomerates in the world.

We also closed a 50000 seat deal with the Swiss multinational building materials manufacturer.

In Africa with close to 10000 seat deal with a largest state oil and gas organization and we displaced a competitor or 10000 seat deal with a top multinational beverage company.

Finally, we displaced a competitor in a 16000 seat deal with any Italian medical device manufacturer.

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

We believe that they demonstrate how our customers continue to embrace not only to considerable risk reduction our platform brings but also the thousands of hours, we can save the it department in Triaging security events.

Given the current shortage of skilled idea workers our strategy of building time saving features into our platform is paying 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 no before it to its market leading position today.

I am Super proud of the Great group of people driving this company and contributing to our communities.

And with that I would like Bob to discuss our financial trends.

Thanks, Sue and good morning, everyone.

Thanks, again for joining us on the call today.

We're pleased to be able to share our Q2 results with you. This morning.

This is my first full quarter here at know before it was very exciting to see the strong execution across the business delivering another solid quarter of results.

I'll be sharing more details on revenue costs and cash flow for the second quarter.

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

As you just heard from Stu, we continued to see strong revenue performance across our various go to market groups and.

In the second quarter total annual recurring revenue or <unk> reached $328 3 million compared to $240 6 million a year ago up 36, 5% year over year.

Similarly, our reported GAAP revenue for the second quarter totaled $80 8 million versus $59 4 million. During the same period a year ago, an increase of 21 4 million are up 36, 1% year over year.

Our Q2 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 continued to see strong execution in each of these areas during the second quarter.

Let's start with our first pillar of growth, which is new logo execution.

During the second quarter, we sequentially added nearly 2600 logos net of churn, bringing our total customer count to 52216 as of June 30.

That's a 25, 5% increase year over year or over 10600, new logos added net of churn.

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 defined as organizations with greater than 1000 employees, where we've seen significant growth over the <unk>.

A few years.

As a reminder, we remain focused on driving a balanced mix between SMB and enterprise and we again ended the quarter with a generally balanced between these two.

In terms of logo retention, both SMB and enterprise retention again remained greater than 90% during the second quarter.

We're particularly pleased with this continued strong retention rate in excess of 90%, especially when considering that our SMB customer basis over 46000 customers.

As Stu mentioned earlier, we're keeping a very close eye on all our leading indicators related to the health of this segment of the market and all indicators remain positive.

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

During the second quarter, we continued to see strong multi product adoption, resulting in the percentage of customers subscribing to multiple products growing to 26, 3% from 24, 5% previously.

This brings the total number of customers with multiple products to over 13700 <unk>.

That has grown by 94% from Q2 of last year.

While we're proud that over one quarter of our 52000 customers have multiple products. We also view this as a strong opportunity for continued expansion.

These are all users who understand the value of our <unk> platform and continue to act as a rich source of leads to cross sell into.

We're seeing record levels of customers with three and even four products and all were closed without having to bundled product.

And although we don't report growth of our individual products separately or combined revenue growth for fishy, our appliance plus <unk> again reached over triple digits year over year for the quarter.

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

Our retention statistics 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 56, 1% year over year and grew sequentially by one 4 million from Q1, representing our strongest quarter of sequential growth from international in the last three quarters.

This complements our consistent domestic momentum, which delivered 32, 5% year over year revenue growth during the second quarter.

The geographic distribution of our revenue continues to evolve with revenue derived from international markets now representing 17, 4% of our total reported GAAP revenue up from 16, 8% last quarter.

Although the majority of our revenue continues to come from North America, We believe there's a sizable greenfield market for no before internationally represented by a total addressable market, which is significantly higher than that of domestic with key international 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 of the U S, which is our fourth pillar of growth.

We continue to make meaningful progress on hiring key resources, and our channel team and building marketing and distribution capabilities for our channel partners.

For an example of the meaningful contribution that our channel partners continue to make the largest deal in no before history that Stu mentioned earlier came through our domestic channel business and this will continue to be an important international execution initiative for us.

The other global wins mentioned during Stuarts remarks also serve as examples of international investment strategy producing results.

While we're still early on in our expansion within these markets, we're adding marquee global brands to our client base on a monthly basis.

As part of our philosophy of managing the business, we remain focused on sustaining our high growth rate with strong profitability and we delivered margin expansion again in Q2.

Our second quarter non-GAAP gross margins improved to 87, 9% from 85, 9% a year ago as we continued to deliver an efficient performance on our direct cost structure.

Our total non-GAAP operating margin also showed healthy improvement during the quarter up to 13, 5% from seven 6% in the second quarter of 2021.

A demonstration of our ability to leverage our overall cost structure as.

As we continue to scale.

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

Our total non-GAAP operating expenses for the quarter totaled $60 million up from $46 5 million in the prior year, an increase of roughly 29%.

We continue to invest in head count across the business with total head count increasing by about 33% versus the end of Q2 2021.

This 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, including head count related subscriptions and overhead allocations as well as higher marketing PR and demand generation costs contributing to our revenue growth.

It's also worth noting that our marketing spend on the industry events also increased year over year as we shift back towards in person events versus primarily virtual arrangements in the prior year, including an incredibly successful K before cod customer event that we hosted in April we continue to invest in sales capacity.

In our core markets and while we are still in the early stages of international expansion, we expect to continue to deploy additional resources to support growth in these markets.

non-GAAP technology and development costs have increased year over year, primarily due to head count increases across our product and content development teams.

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

They have been critical investments to support the development of the new products and features Thats due referenced earlier.

The increases in non-GAAP general and administrative cost 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 the ongoing life as a public company.

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

We also saw an increase in non head count related expenses related to professional services as we work to optimize and globalize our administrative systems.

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

We consistently try to highlight our balanced approach to both growth and profitability and this is evidenced by our non-GAAP operating income more than doubling year over year growing in Q2 by over 143% from $4 5 million in the second quarter of 2000 $21 million to $11 million in the second quarter of 2022.

<unk>.

Let's now turn to cash flow and liquidity, we finished the quarter with cash and cash equivalents of $315 5 million up from $273 7 million at 2021 year and illustrating our continued focus on maintaining a high level of capital efficiency and utilization of our liquidity.

We're excited to highlight that this utilization will also now include no before ventures.

As Stu mentioned earlier in his remarks. This is a program that is fully dedicated to supporting innovation in the human layer of cyber security.

The purpose of this program is to provide early stage investments that support an ecosystem of organizations actively building integrations with no before its products.

You'll note in our cash flow statement that we made $2 4 million of venture investments during the second quarter.

Moving onto our free cash flow, we generated $19 1 million of free cash flow in the second quarter, resulting in a free cash flow margin of 23, 7%.

This compares to free cash flow of $12 8 million and free cash flow margin of 21, 5% during the same period a year ago.

The flip the free cash flow results for the second quarter were driven primarily by continued upfront cash collections related to our favorable sales performance and some timing related cost efficiencies realized during the quarter.

As we've discussed in the past there is seasonality in our quarterly free cash flow margins, which has ranged anywhere from 22% 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 profiling of sales contracts and billing throughout a given quarter.

We're very pleased with our second 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.

Before we go into guidance on future results I, just wanted to take a moment to dovetail onto steves remarks regarding the economic dynamics that continue to demand our attention.

While we're constantly monitoring all of our forward looking metrics, we haven't seen any material indication of the change in our pipeline leads quotes referrals or anything at this time significantly impacting our proven go to market strategy and are largely greenfield market opportunity.

This is obviously a matter that we continue to monitor closely.

For the third quarter of 2022, we expect total revenue in the range of $85 million to $86 million.

For the full year 2022, we now expect revenue in the range of $333 million to $334 million up from our prior guidance of $331 million 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 believe our guidance reflects the current economic dynamics and an appropriate level of conservatism.

We also now expect free cash flow margin to be greater than or equal to 24% 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.

We believe this guidance is indicative of the strength of our operating model and ability to maintain a high level of growth with a balance of profitability.

For modeling purposes, you can assume a diluted weighted average share count of between 182, and 184 million shares for both Q3 and full year 2022.

As we look forward to the remainder of 2022, we continue to be very energized by the growth and momentum we've seen in the business. We're 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 operator.

Thank you at this time I would like to remind everyone that in order to ask a question press star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Your first question comes from Brian Essex from Goldman Sachs. Please go ahead.

Great. Thank you good morning, and thank you for taking the question and good to see that.

Continued strong results.

I guess, maybe one question for you with regard to your focus on F&B growth and adding F&B quota sales reps.

Can you help us maybe understand what the unit economics look like there how scalable is that.

What is this motion looked like.

I guess maintain efficiency as you go out to those efforts.

Yes, good question.

You have to understand that this is still at least 90% Greenfield. So the amount of scale. We can achieve is only really a limited by our own ability to execute.

We are planning for.

The foreseeable future to continue to expand that team.

Really only talking about U S domestic.

If you look at international that is even a larger greenfield and a Tam that is 6% to seven times larger than U S domestic international.

International we work with channel partners.

And I'm sure that Lars a little later down can <unk>.

Expand on that.

So.

As was earlier mentioned.

This is still early stage in a brand new category does that answer your question Brian .

Yes, I think that's helpful and maybe just a follow up any insight you can give us around attach rates. It looks like Arab customer continues to grow really nicely is this primarily still.

And.

Or are you starting to get more kind of compliant attack and how might that differ domestically versus internationally.

Yeah.

When it gets to the numbers I generally defer to Bob.

But generally generally speaking, yes, we have very healthy attach rates per PCR and compliance plus starts to kick in nicely, but Bob can maybe give some additional color.

Brian Good morning.

Good morning honestly.

It has been very consistent around sort of the distribution of the attach rate.

Compliance plus at a very very strong quarter, but to be honest with you <unk> had a really really strong quarter sequentially in the second quarter as well so.

There really hasnt been any sort of change in the dynamics or the or the distribution of the attach rate both of those products are still attaching very strongly.

And both of those products are obviously contributing to the increase in average IRR.

And.

With respect to distribution domestically versus internationally.

It's probably a little bit more biased towards domestically.

Just the international deals are generally larger deals and those larger deals are usually starting with <unk>.

But overall the trends have been really really consistent over the last several quarter and we really haven't seen anything.

Unusual or changing in terms of the attach rates.

Really helpful. Thank you very much.

And your next question comes from Phil <unk> from Cowen. Please go ahead.

Thank you.

Good morning, guys congrats on the consistent performance.

The challenging environment.

Maybe for Bob.

Gross margin remained absolutely healthy coming better than expected.

Customers are.

Purchasing additional module as we think about the second half.

Should we be expecting some gross margin moderation will pretty much we should be within the same levels that we are right now and I have a follow up.

Yes, good morning, Cheryl it's interesting. It's the exact same question, we had in the first quarter and I had.

And again I have this little code word in my prepared remarks around an efficient performance on the direct cost structure and we did honestly we did see.

Sure.

We did see a better performance in the direct cost structure than was originally anticipated some of that is really around the fact that we were.

Achieving more and more scale and that is providing a little bit more efficiency in some of those.

Some of those.

People elements that reside in the direct cost structure things like.

Our.

Our customer relation manager.

Population are direct opex.

So we are seeing a little bit better efficiencies than we were originally expecting there I do think though that there has been some delay.

Delays in some of the hiring that we've been trying to do and so.

We've normally biased and I think we are biasing in terms of our in terms of our own internal forecast that those margins could compress a little bit, but it really won't be very significant as we continue to add resources.

Into the customer support side and the CRM side.

Understood.

Maybe you mentioned.

Lots going on.

Completed here.

My next question is on that international opportunity.

Is it more greenfield with more displacement driven.

Okay.

So.

Yes International is absolutely more greenfield.

If you look at the international markets you have each of these primary markets are at a different level of maturity than we are here in the U S.

We're kind of go and answer those in a different way but.

When you talk about SMB, it's really 100 per se in a greenfield opportunity for international.

Little less so for enterprise because with the bigger global sized companies.

They are well on the way to having something.

With regard to security awareness training.

Understood. Thank you.

Your next question comes from <unk> <unk> from Citi. Please go ahead.

Hey, Good morning, guys. This is mark on for <unk>, Thanks for taking our questions.

So maybe just to start off thanks for the high level views on your sales pipeline and go to market, but that kind of environment. We're really starting to frequently hear me speak too.

Cycle elongation so.

That matter can you give a sense of what you're seeing in your deal negotiations, especially on the enterprise and what.

Type of impact is that having on pricing discounting elasticity.

And how you're maybe adjusting our go to market. If there are any adjustments. Thanks.

Yes.

We definitely monitor every single part of our sales cycle and.

We're really not seeing any material changes in anything yet.

There are opportunities coming in R. R.

Lead generation.

Our.

Time for a sales cycle I mean, everything up to this point seems to be cranking, along as normal we don't really see any changes.

As far as deal elongation not.

Not really seeing the sales cycles extending either.

Even.

With.

Yes.

<unk> in Ukraine, we're actually seeing some of the sales cycles.

Shortened, but I know that's more of just a temporary reaction to two a horrible event there globally.

Okay got it thank you.

That's very helpful.

And then maybe just a follow on.

Can you maybe delve.

<unk> deeper on the security coach side, maybe give a sense of how you expect the.

Revenue monetization efforts to ramp there.

And then in terms of timing and magnitude that we can expect going forward.

Sure.

We are currently in closed beta.

With very good results.

Going into open beta later in Q3.

We still scheduled to release this product in Q4.

The expectations haven't changed.

Very excited about this new category.

The Tam that we mentioned earlier.

He is holding up we haven't yet finished our.

Pricing.

Surveys and setting the final price.

We have shown the product add few tradeshows with uniformly.

Very positive feedback.

So you will see us or at least this product this year I do not expect meaningful revenues.

In Q4, this is really a 2023 product.

Great. Thank you guys very much.

Your next question comes from Rob Owens from Piper Sandler. Please go ahead.

Great. Good morning, and thanks for taking my question sales related question, so im guessing youre shifted over to Lars but.

I was wondering on customer acquisition and the 2600 that you added relatively flat year over year and still a strong result, but how should we think about that as we look at the back half of the year. So that would be relatively flat with what was a record customer acquisition Youre last year or do you think we could see some growth on that front.

Yes, Rob we're just.

Steady moving along at the same pace.

So I would expect it to remain the way it is just kind of flat.

I wouldn't expect to see any big acceleration and that we are making.

Some investments in international and.

We should next year those investments into international should start picking up but I don't see any real.

Serial acceleration in that.

Let me add something there.

Most cyber security companies would give away their right arm for adding 2500 logos per quarter. So it may be it may be flat on the other hand these fantastic execution.

Absolutely. Thanks for the color and I guess since it's a two question morning, you mentioned the large deal with the state Department of Education can you remind us your sledz said the opportunity, especially as we enter the third quarter here kind of where you guys were at overall thanks.

So sled fed has always been a huge part of our go to market. So.

We are.

Seeing I would say, especially in the sled market and then also a federal.

What we're seeing now is previous we would be involved.

In pieces of these very large organizations.

And we've been kind of chipping away one one piece at a time and what we're seeing now is from that success that these huge mega organizations are now coming in and saying Hey, we're hearing good things about you year end seven to 15 of our departments, we want to come in and just buy for the entire.

<unk>.

The entire organization at once.

So.

We expect to see a lot more of that in the future and that could accelerate as well in the federal space.

Great. Thanks.

Your next question comes from DJ Hynes from Canaccord. Please go ahead.

Hey, good morning, guys.

I remember a couple of quarters back you said you felt like this was the year, where it made sense to take some margin and to try and grow a little bit faster just based on guidance.

Like the thinking has changed a bit there.

It doesn't sound demand driven right. So curious if the initial plan was just too aggressive or what's happening there.

It's a good question because a couple of quarters ago, we were thinking well, we are going to invest as much as we can in the international and <unk>.

I said listen it's going to be a little lower.

The reality is that we.

Moving internationally as fast as we possibly can but it is going a little slower like Bob indicated earlier. So we're just not spending the money that I was thinking I was going to spend so.

That's really.

That explains this higher margin percentage.

Keeping it simple for demand.

Hey, Bob wants to hop in but.

No.

Hey, DJ I honestly.

Steve is absolutely correct I mean this is a this is a sequence.

Our international expansion and things happen in a sequential manner.

And so it doesn't make any sense for us to get one step ahead of ahead of a different step and spend money internationally thats not ultimately going to bear fruit and provide us with a return. So we're just working through that sequence and it's just taking a little longer than the original profiling suggested.

That makes sense and no one's going to push back on higher margins in this environment.

Lars maybe one for you just.

I'm curious do you find customers are more ROI focused in this environment or is this something that buyers just know that they need to have it and the reason I asked and it seems to me like this.

Spending upfront to potentially save money in the future isn't the easiest pitch in a tight spot environment. So curious how you manage those conversations.

Gosh.

I don't really see a lot of change.

I am here.

A lot here here and there on PV and what have you about.

Mix, but.

We're our sales cycles aren't changing.

The.

The kind of the on.

On the purchase side.

Offering terms are not offering terms are asking for that we're not seeing that changing where they're trying to do like multiple year payments.

It's just pretty much for us what I'm seeing now is business as usual.

Yes, that's great to hear.

Yes.

One small addition, there.

This is a critical layer in in an organizations.

Cyber security stack.

The price is still a no brainer.

And the ROI question isn't necessarily front.

<unk> front of mind this.

This is more we have to have this.

We can expose ourselves to employees clicking on phishing links.

So we honestly do not see that come up much.

Okay got it yet.

We're we're kind of a no brainer price. This is not a relative to other technology spend this is not an expensive item and it has it's a huge bang for the Buck.

Yes, yes.

Super helpful color guys. Thank you congrats.

Your next question comes from Tal <unk> from Bank of America. Please go ahead.

Hi, Steve its Madeline <unk> Italiana. Thanks for taking our question just one question from US the hiring plans can you talk a little bit how you're thinking about hiring Patrick Wang into the slowdown I know you said earlier Q you had some delayed hiring so just.

Should we think about that in the second half of the year. Thank you.

Yes Marilyn.

Generally see the business cycle as a great opportunity to expand I've lived through two of these.

We do not plan to slow down at all especially our international hiring is ramping up because that is a huge opportunity still lives that we want to capitalize on.

And so these.

We're really.

Hind our hiring targets frankly, and Thats also the reason why the margin percentages were up I Hope. This is a short answer about LNG illustrates wherever and.

Okay.

Got it thanks, so much.

Your next question comes from Brendan Mark I'm curious Securities. Please go ahead.

Hi, Joel Fishbein actually true.

I wanted to follow up SKU on.

Your remarks with regard to your recent pipeline product pipeline I know you have the <unk>.

It's coming out in Q4 can you talk about the remaining products.

No the pipeline is robust and I'd love to hear some of the new add ons that you are bringing to market soon.

Joe are focused mostly asos unsecured coach that is our main.

Thrust in the sense of companywide there are many different sectors column divisions that are ramping up for this.

That's R&D, but it's also the sales team the marketing team is internal training et cetera et cetera.

There are a few other products that sit in the pipeline that we are working on but we decided to focus this year on the security coach release, because that is a major.

<unk> that we find our customers are also looking forward to.

Great. Thank you.

Thank you Joe.

Your next question comes from Alex Henderson from Needham. Please go ahead.

Great actually I have two questions I'd like to ask the first one is.

<unk> cast and proof point, having now.

Going into the private markets.

Has that changed.

The competitive environment changed pricing with larger accounts.

Any implications for the business and how are they behaving in the private market.

Okay.

I think Lars is the best.

Best position to give some color there yes Alex.

I think.

I would think the main thing that we're seeing with mine cast and proof point is.

The customers are coming to us.

I don't think they are getting the same level of service and quality that they had prior.

So we're getting a lot more interest coming in the door on our product.

As with most acquisitions Thats typically the case at least immediately I don't see any.

Any pressure on pricing.

We've been competing with these guys for many years, we really know exactly where we need to be on pricing and I don't see them really pulling those in the one area that I would see pricing change it on on their side is when we're actively poaching.

Their business.

That's when you're going to see these guys too aggressive bundling or even in some cases to give away the product for free in a bundle.

But again.

We're best of breed product, we sell our product really based on that on how the quality of the product so it hasn't been.

A big threat to us.

The second question I wanted to ask.

But before I do it I just want to compliment you guys you guys really did a great job of laying out the fundamentals.

It was almost like it was written by a sell side analyst. It was exactly what people would want to hear.

So complements there, but I wanted to go to the international side of it.

Honestly its a primary driver of growth.

I have two questions related to the purchase.

What portion of the international is just simply multinational.

Domestic companies here that are buying it into the international market, but more importantly, as we look at the international customers.

The economy in Europe in particular is under enormous stress, we've seen the U S exporting inflation to them with the 20% swing in the value of the exchange rate versus the euro and the pound.

Pricing of a lot of products have gone up on top of that so they are looking at 20% 30% cost increases.

For a lot of products in the Tech field day.

Question I have for you is how much of your businesses.

[music].

Ladies and gentlemen, thank you for spending by animal country before second 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 press star one on your telephone keypad, if you'd like to which I. A question press Star. One again. Thank you now it is my pleasure to turn the call over to Ken tell how long you know before senior.

Rice President of F E N E 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 furnished with our form 8-K today with the SEC and May also be found in the <unk>.

Elementary financial information available on our Investor Relations website at investors know before dotcom.

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 any.

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 SEC. These documents can be found on the SEC's website SDC.

<unk> died Gov and <unk>.

On our Investor Relations website.

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

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

Im excited to share our results with you. This morning, we've.

<unk> had another record quarter of strong execution with second quarter results exceeding our guidance.

This has resulted in over 36% year over year annual recurring revenue growth.

Strong 23, 7% free cash flow margin.

As many of you know I started now before to help organizations manage the ongoing problem of social engineering.

We're the only public company dedicated to securing the human layer.

Our layered it continues to prove itself exceedingly critical to organizations of all sizes.

<unk> or private.

The environment that we find ourselves in today is transformed this even further.

We believe that securing the human layer is a matter of national security.

Now before I go through the highlights of our record performance I first wanted to take a moment to talk about what this economic environment means for no before.

Our investment philosophy remains on track as well, especially regarding international expansion.

To specifically address our SMB segment.

We continue to see strong logo and dollar retention.

Our average selling prices for this segment continue to move up which we view as an indicator that our platform is being prioritized in SMB budgets, our lead quote and referral trends all remain healthy leading to a predictable close rates. This year. We also.

A record number of active SMB quota bearing reps onboard or collectively producing excellent results.

Historically I have viewed these economic cycles as an opportunity to invest.

Which is a benefit that comes from running a streamlined organization with the kind of free cash flow that we have historically generated every quarter.

While these economic conditions can bring challenges to most businesses I think that no before is positioned for continued expansion with a balance of growth and profitability.

There are a few reasons why I can confidently say this.

The first reason for my confidence comes from the industry that we're operating in.

Cyber security budgets are resilient.

It is well known that the cyber security posture of an organization is crucial.

However, the critical role that the human being plays in cyber security.

As only become clear within the past few years and is becoming more evident all the time.

For instance, the 2022 Verizon data breach investigations report or the D var, which came out this last quarter.

And of that 82% of data breaches involve the human element organizations across the globe are experiencing increasingly frequent and debilitating data breaches ransomware infections and intellectual property theft. The vast majority of which are accomplished through social engine.

Hearing attacks, we believe that our secure human layer is absolutely mission critical to reducing these risks.

Phishing attacks, which is D. Var calls one of the four key paths to your state.

Our continuing to rise as well.

This equates to over one attack every eight seconds.

And these bad actors only needs to be right once.

Nobody forced platform is proven to reduce the risk of phishing attacks.

The cost is a small fraction of the overall cyber security spend for many organizations.

And some of you may have seen that IBM security released its annual cost of a data breach report last week.

Which found that the average cost of a data breach in 2022 was for $35 million. The second reason for my confidence is our market position in spite of the success that we've seen so far we still have a relatively low penetration and a global landscape that is predominantly.

A greenfield.

Pioneering a category that is very much in the early days.

All at a time when the geopolitical environment only continues to validate the need for our platform.

The ongoing conflict between Russia and Ukraine.

As shown the world what modern cyber warfare it looks like.

Tom Bert the head of Microsoft's customer security and trust.

Just gave an interview last month.

<unk> a glimpse of this destruction.

According to Bert.

Of every organization is a matter of national security.

The final reason that I'm confident in our ability to execute during a potential economic cycle is that our customer base itself is resilient.

<unk> retention rate for both SMB and enterprise continues to remain above 90%. This quarter. This is a feat that we accomplished with over 52000 customers in Q2 of 2022.

Over 46000 of which we classify as SMB.

Covid taught us that the spending habits of our customers are resilient as well.

But the only measurable impact to our existing customers being a reduction in their seat counts.

Some of our customers furloughed employees for the first few months.

We believe this is because they're aware of the value of the platform, which comes at a cost that some of our smaller smbs than just charge to a credit card.

Keep in mind. During this time, we continue to grow the number of customers with multiple products.

We remain committed to long term execution and continue to see an environment that only favors this.

A few highlights from our Q2 results are evidence of this.

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

As well as strong free cash flow generation.

This resulted in over $328 million in a R, which is up over 36% year over year as of the end of Q2.

I am pleased to announce that this now includes no before ventures fund dedicated entirely to supporting innovation in the human layer.

We're enriching this critical ecosystem.

Focusing on supporting organizations that build integrations with our platform and utilize our unique data for.

For years, we've discussed the mismatch between cyber security spend on the human layer and the risk that it actually represents.

The overwhelming majority of data breaches involve a human element.

It's less than 3% of cyber security budgets have historically been dedicated to reducing this risk by focusing on early stage investments for organizations innovating within this space, we're helping to support and expand the human layer for years to come.

This is all part of our vision for the security awareness market.

The vision that defines our all in product road map as well.

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, resulting from the integration of our security adviser acquisition.

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

This works is we connect through a cloud interface to existing layers in our customers' security software stack and pull in security alerts to analyze and take real time action.

I am pleased to announce that security coach is currently in a closed beta.

Initial feedback being overwhelmingly positive.

And the open beta is soon to follow with general release still planned for Q4.

We showcased a number of our new features to the public advocate before cod in 2022.

Following the COVID-19 environment of virtual conferences.

Refreshing to hold this one in person and it was a great success.

The number of attendees far exceeded our expectations and a general feedback was overwhelmingly positive with surveys showing 96% of 2022 attendees planning to attend in 2023 as well.

One feature that came before Khan visitors, we're particularly excited about is it know before mobile app.

It is currently in a closed beta with plans for general release in Q3 2022. This has been a common request from our customers, but want their users to be able to complete their new school security awareness training directly from their phone.

We believe that expanding our platform to mobile is the next step in boosting engagement and ultimately adds to the value that our customer base has grown to expect.

As a reminder.

We're operating in one of the few areas in cyber security if not the only area that isn't purely a replacement market.

While most of our new business wins are greenfield.

We also continue 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 are superior.

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

We closed the largest deal in our history at.

243000 seat opportunity with a state department of education.

They cited the quality of our content and ease of deploying our platform across all districts. That's the primary reason for their choice.

Above all they understood that their in house training was inadequate given the current threat environment.

We displaced a competitor in 100000 seat deal with a top multinational conglomerate.

They had been unable to create a security culture with their current offering.

And also found our Fisher E our platform to be superior.

Finally, we won 100000 seat deal with a multinational transportation enterprise.

This was another great example of a large organization realizing that the threat landscape, we're finding ourselves in today far exceeded their internal training capabilities and.

And utilizing our platform was a no brainer decision.

The strong momentum we've been seeing in the international markets.

And you would as well.

In Germany, we closed a 50000 seat deal with one of the largest media conglomerates in the world.

We also closed a 50000 seat deal with the Swiss multinational building materials manufacturer.

In Africa with close to 10000 seat deal with a largest state oil and gas organization and we displaced a competitor or 10000 seat deal with a top multinational beverage company.

Finally, we displaced a competitor in a 16000 seat deal with any Italian medical device manufacturer.

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

We believe that they demonstrate how our customers continue to embrace not only to considerable risk or duction. Our platform brings but also the thousands of hours, we can save the I T Department in Triaging security events.

Given the current shortage of skilled idea workers our strategy of building time saving features into our platform is paying 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 no before it to its market leading position today.

I am Super proud of the Great group of people driving this company and contributing to our communities.

And with that I would like Bob to discuss our financial trends.

Thanks, Sue and good morning, everyone.

Thanks, again for joining us on the call today.

We're pleased to be able to share our Q2 results with you. This morning.

This is my first full quarter here at Knoll before and it was very exciting to see the strong execution across the business delivering another solid quarter of results.