Q2 2020 Earnings Call
Sure currently on hold for today's October 2nd quarter fiscal 20 earnings call. At this time, we still had many additional participants and plan to be underway. Shortly please remain on the line. We appreciate your patience.
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Good day and welcome to the October 2nd quarter fiscal 20 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Dave Generali. Please go ahead.
Good afternoon, and thank you for joining us for today's conference call to discuss the financial results a block that second quarter fiscal 2020.
With me on today's call are Tom Mackinnon, Arcturus co founder and Chief Executive Officer, Bill Wash, the company's Chief Financial Officer, and Fred or cares the Companys co founder and Chief operating Officer. Today's call will include forward looking statements pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Including but not limited to statements regarding our financial outlook and market position.
Forward looking statements involve known and unknown risks and uncertainties that may cause our actual results performance or achievements to be materially different from those expressed or implied by the forward looking statements. We're looking statements represent our management's beliefs and assumptions only as of the date night.
Information on factors that could affect the Companys financial results is included in its filings with the FCC from time to time, including the section entitled Risk factors and its previously filed Form 10-Q .
In addition, during today's call, we will discuss non-GAAP financial measures.
These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP reconciliation between GAAP and non-GAAP financial measures and discussions of the limitations of using non-GAAP measures versus our closest GAAP equivalent is available on our earnings release.
You can also find more detailed information in our supplemental financial materials, which includes trended financial statements and key metrics posted on our Investor Relations website.
On today's call, we will quote a number of numeric or growth changes as we discuss our financial performance and unless otherwise noted each such reference represents a year on year comparison.
And now I'd like to turn the call over to Tom Mackinnon, Doug Thanks, Dave and thanks, everyone for joining us today, our results Mark another exceptional quarter of execution and financial performance total revenue grew 49% subscription revenue grew 51% calculated billings grew 42% and remaining performance obligations or RPL grew 68%.
We added 450, new customers in the quarter, bringing our total customer count to 7000.
Once again, we made broad additions across our enterprise customer base with 46% growth in customers with annual contract value greater than $100000 and once again over half of these additions were from new customers. We now have over 1200 of these $100000 plus customers, which demonstrates our enterprise momentum and the increasingly strategic role that octa plays in our customers' environments.
Our momentum is powered by the massive and inevitable shifts that are enveloping company today, the rapid growth of cloud and hybrid I T.
Digital transformation and security identity plays a critical role in each of these mega trends and organizations are turning to octa, because we are uniquely able to address the broadest set of use cases across even the most complex technology environments.
Now I'll share a few customer wins from the quarter. The first is a fortune 50 company that wanted to replace its existing identity system with a cloud based identity solution that would support its hybrid environment well also deploying to zero Trust security strategy.
It was one of our largest contracts ever and covers octa workforce products were over 400000 global employees and contractors with secure access to hundreds of cloud and on Prem applications.
As well as after customer identity to improve access to its partner portal.
The point Dr will also provide visibility of application usage and reduce I T friction by automating the provisioning it's caught applications.
Next American century investments, a leading global asset manager was a new customer identity. One the company chose octa to replace its legacy customer identity system with a cloud based I did any platform that will provide both authentication and step up authentication for its retail website and mobile application.
The company selected octopus customer identity products to provide a seamless and secure registration and log in experience for its over 600000 customers.
A great upsell was with the French company Energy <unk> Global 500 multinational electric utility. This upsell is a fantastic illustration of how customers are expanding their relationship with OCC that to help solve both their workforce identity and customer identity needs energy first adopted Oct is workforce identity products to support its cloud first strategy and quickly deliver a scalable reliable infrastructure that facilitated collaboration among its employees.
This quarter and GE purchased at a ray of arc does customer identity products to accelerate its digital transformation for the users of its large b to b customers going forward after will be the identity standard across all LNG business units.
And finally, what we just launched advanced server access a few short months ago. We've already had some notable wins, including an upset with discovery a fortune 500 Entertainment company with a global portfolio that includes discovery channel HGTV food network, T.L.C. Eurosport and Gulf TV.
It's a great example of how our new products to help expand our use cases with existing customers discovery first adopted octet to serve its diverse mobile workforce and supported cloud first initiatives. This quarter discovery purchased advanced server access to help protect its infrastructure and extend the seamless authentication workflows to Linux and Windows machines.
We believe that great customer wins like these are just the tip of iceberg and that's why we are making a concerted effort to focus our energy on winning the world's largest organizations.
Companies are recognizing that their success depends on their ability to quickly and securely adopt the best technologies for their Workforces and customers every company needs to become a technology company and we've built the OCD identity cloud to enable that transition with the speed scale security and flexibility that our customers require.
A good indicator of our progress with winning the world's largest organizations is the overall strength and 68% growth in total our PEO. This is evidence that our deal sizes are getting larger and the contract term links are getting longer.
In fact, when looking at the top 25 contracts booked in Q2 by total contract value. The average contract size doubled when compared to Q2 last year well that's great progress, we still have a significant opportunity to further expand our business with these large organizations.
What in the world's largest organizations continues to be an important part of our overall strategy and we remain focused on expanding our platform to better serve them to refresh what I've talked about before we are focused on building products and features that can leverage more integrations doing so unlocks more use cases attracts more customers and generates more data insights that can be harnessed to build better products that make our customers more successful, it's a virtuous cycle, where more customer success translates to more customer wins, which translates into more customer success and so on.
So we're winning more customers now, let's talk about the products that are increasing the use cases with our customers last quarter I talked about a number of new products and features that we introduced deducting we are transitioning our offering from products to a componentized platform and the investments that we've made in this area are really starting to bear fruit Weve opened up the platform into customize the blocks that enable unlimited use cases with the octa identity engine, we've introduced new functionality to our customer base like extensibility with October looks we've also added new products like Octa advanced server access to secure access to critical infrastructure and octa access gateway to extend the octa identity cloud in the on premise.
These are all great. Examples of how we are creating the pre eminent platform to help customers successfully adopt any technology. We are still in early days with each of these but we're very encouraged by the level of interest we're seeing in these new enhancements and products, especially with our large enterprise customers like discovery that I mentioned earlier.
We look forward to sharing more of this new product momentum as well as some additional enhancements, we're making to the AHCA platform at a new customer event called Octa showcase on October 10th in San Francisco. Please stay tuned for more details on that event.
The last thing I'd like to say before I hand, it over to Bill is that we're very pleased to be recognized as a leader by the analyst community for our vision strategy and ability to execute earlier. This month October was once again named a leader in Gartners Magic quadrant for access management.
Talk to define this category and we've been the leader since this quarter was created you really have to see the graphic where were placed in this year's magic quadrant, because it's absolutely striking and serves as Validations that were pulling further ahead from the competition.
This recognition of our sustained leadership comes on the heels of Forrester research recognizing octa as a leader in their identity as a service for enterprise support we value. This recognition by the industry analyst because what it really means is that our customers are having great success with doctor.
And have the confidence to reference us with the analysts with that I'll summarize by saying it was a very strong quarter for us driven by continued execution and market momentum. We are seeing great traction on all fronts and remain focused on capturing the massive opportunity in front of US. Thanks again for your time and now I would like to turn the call over to Bill to walk through our financial results Bill.
Thanks, Todd and thanks again to everyone for joining us I'll go through our results for the second quarter, and then discuss our business outlook for Q3 and the full year.
As Todd mentioned, we maintained strong momentum we had exiting Q1 experienced strength across the board with better than expected growth in many areas, including revenue calculated billings and RPL.
Total revenue was $140 million, an increase of 49% driven by 51% growth in subscription revenue.
Subscription revenue now represents 94% of our total revenue up from 93% in Q2 last year.
Revenue from outside of the U.S. grew 45% and represented 16% of revenue, which is consistent with Q2 last year.
We continue to view, our international business as a long term opportunity and are investing strategically to expand our international footprint.
Total calculated billings grew 42% and current calculated billings increased 44%.
The strength in billings continues to be driven by both new and existing customers across enterprise and commercial billings also benefited from stronger than expected bookings within the quarter.
Total RPL or backlog, which for US is contracted subscription revenue both billed and Unbilled that has not yet been recognized was $914 million, representing a growth of 68% as Todd mentioned, the exceptional growth and total RPL reflects the success, we have been experiencing with large enterprise customers for the contracts tend to be much larger in total contract value and longer in length up to five years in some cases.
As we continue to see success with winning the world's largest organizations, we expect the average contract size and terminaling to trend upwards overtime.
Earn RPL, which represent subscription revenue, we expect to recognize over the next 12 months also experienced strong growth of 52% to $461 million.
As I mentioned last quarter, our PEO should be viewed as an additional metric to gauge our performance in the quarter year over year growth in current Rps is the more meaningful metric when viewed along with subscription revenue and billings growth.
Bill gates can sustain variability caused by changes in invoice duration and invoice timing RPL can reduce some of the variability seen in buildings because it eliminates variances. These invoice dynamics. However, RPL can be influenced by factors such as contract duration and renewal cycles.
Turning to retention our dollar based net retention rate for the trailing 12 month period remained strong at 118% and represents a one point sequential decrease the slight decrease is as expected and is impacted by the large initial deal sizes were achieving with large enterprise customers as I mentioned last quarter. The net retention rate may fluctuate a bit from quarter to quarter. We expect it to remain very healthy as we continue to experience growth in initial deal sizes.
Before turning to expense items and profitability I would like to point out that I will be discussing non-GAAP results going forward.
Turning to gross margin subscription gross margin was 82.6% up 230 basis points and total gross margin was 77.2% up 390 basis points gross profit grew 56%.
Now looking at operating expenses total operating expenses for Q2 grew 34% consistent with prior quarters. The increase is primarily driven by sales and marketing investments as we look to capture more of our large addressable market with more of the world's largest organizations and expand geographically.
The overall expense growth aligns with the commitment we've made to invest in our strategic priorities, which include driving business with the world's largest organizations strengthening the network effects of our platform expanding our presence with customer identity and investing in security with the ARCT identity clout.
As usual the biggest component to the spend increase is related to scaling head count to support these strategic initiatives, we have been successful in attracting and retaining great talent and total head count grew 40%.
We continue to invest in our business as we scale for durable growth operating loss in the second quarter narrowed to $10 million for a margin of negative 7% compared to negative 20% in the same period last year.
This is better than expected and primarily driven by our revenue outperformance.
The timing of octane, which was held in Q1 this year versus Q2 of last year also benefited the year over year compare and operating margin. This Q2.
Net loss per share was five cents for the 115 million basic shares outstanding as compared to a net loss per share of 15 cents with 107 million basic shares outstanding in Q2 last year.
Turning to cash flow operating cash flow was negative as expected due to typical seasonality.
Operating cash flow was negative $1.1 million or a margin of negative 1% compared to negative 6% in Q2 last year.
Free cash flow was negative $4.3 million free cash flow margin improved to negative 3% compared to negative 12% for Q2 last year.
We continue to expect to end the year with positive free cash flow and also expect to see continued variability in cash flow margins due to ongoing fluctuations in working capital the growth in enterprise business and seasonal factors.
We ended the second quarter with $557 million in cash cash equivalents and short term investments.
Moving onto our business outlook, we remain optimistic about the current demand environment based on our strong second quarter results, we are raising our full year outlook.
Consistent with our approach throughout this year, we're using this opportunity to reinvest the upside we're experiencing in investments to innovate our platform fuel growth and further enhance our competitive positioning as a result, while we increased our profitability outlook for the full year, we've adjusted our Q3 outlook to invest some of our better than expected Q2 profitability.
For the third quarter, we expect total revenue of $143 million to $144 million, representing a growth rate of 35% to 36%.
non-GAAP operating loss of $17.5 million to $16.5 million.
non-GAAP net loss per share of 13 cents to 12 cents assuming shares outstanding of approximately $117 million.
For the full year fiscal 20, we are raising our guidance and now expect total revenue of $560 million to $563 million, representing a growth rate of 40% to 41%.
non-GAAP operating loss of $64 million to $62 million.
non-GAAP net loss per share of 44 cents to 42 cents assuming shares outstanding of approximately $116 million.
In summary, we had another strong quarter and we're looking forward to building on this momentum in the second half of the year.
We are uniquely positioned to capitalize on the tailwinds and extend our leadership in the market.
We've achieved great progress over the past several years and we believe we are just getting started.
The investments, we're making today will help propel our future growth and solidify our disposition as the standard for both workforce and customer identity.
We are encouraged by the progress we've achieved and look forward to capitalizing on the tremendous market opportunity in front of us.
With that Todd Fredrik, and I will take your questions operator.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will go first to Heather Bellini with Goldman Sachs.
Mike for taking the question I wanted to ask if you could talk about a little bit about just to the competitive environment and maybe share a little bit given that the cloud native heritage Bob to if you could share a little bit about how customers are starting to react to your your product that also can be deployed on premise and kind of how you see that how you see that playing out and how you see if that changes any of the competitive dynamics that are out there today. Thank you.
And then I have a follow the.
Oh yeah.
This is a good question and it's really important part of how we think about the world. The major competitive dynamic really for the last several years has been there's a company moving to the cloud or are they not and when a company is moving to the cloud we do very very well and the good news for US is that every organization every industry is moving to the cloud and we're very differentiated between were very very very differentiated between most solutions because they weren't built in the cloud they weren't pre integrated to thousands of services. They can't be upgraded that can't be continuously connected to everything in the company's environment. So that's that's something we've benefited tremendously from.
We added product that you're referring to I think Heather called the AUC to access Gateway, we announced that at our conference back in octane and really what that does is it's it's a bridge to help those customers move a little bit faster over to the cloud. So it connects octa back into their on premise environment gets more of their on premise environment and connected dr. more easily and really accelerates that journey into the cloud and it's it's you know it's still early for that product, but it's off to a very.
Strong start and were seeing early success with it and we're expecting big things from over the next months and years.
Great. Thank you and then just a follow up for Bill Bill. If you would share with that said you know I mean, you had very strong ARPU growth. This quarter I'm just wondering from a demand perspective, there's there's been some concern of late just kind of slow down and in the overall macro environment and obviously you guys are still in hyper growth mode, but have you guys noticed any change in.
Sales cycles or anything that might make you think that the environment, a little bit more challenging than it was say three months ago.
Yeah. There is we're not seeing any of those type of things, we're seeing very strong macro demand for our product we're feeling like because.
But these tailwinds that we have been enjoying for a while now moving to the cloud companies digitally transforming themselves focusing on security. These tailwinds. We will we think are going to continue to remain sea level priorities and as a result of that we're feeling you know that from a demand standpoint demand is very strong for us.
Yeah, one thing about the quarter to I'll, just add to that other one thing about the quarter. Two is very balanced in terms of like success across the board.
Whether it was geographically or segments of our business or the federal business. It was very balanced. So there wasn't a underperformance in one area that was covered by another area over performance is very balanced across the board success.
Helpful color. Thank you.
Well go next to Jonathan Ho with William Blair.
Hi, good afternoon, and congrats on the strong results I just wanted to start out on it was and maybe getting a little bit more color. When you talked about some of the outperformance on the larger deals can you give us a sense of what that's being driven by is this mainly cross sell or Upsells further penetration multiproduct deals I, just think it'd be helpful to just understand a little bit what what are maybe some of the stronger drivers were.
Hey, Jonathan This is Patrick thanks for the kind words as you mentioned, we're very excited about the traction that we're seeing with the world's largest organizations and that overall strength in the in the IPO indicates our progress there the deal sizes are getting larger and the contract lengths are getting longer in fact, we looked at to give you a piece of data the top 25 contracts booked in Q2 by TCV as Todd mentioned compared to last year and that average size of contract doubled and so what you're really starting to see is more and more larger organizations that are either adopting the cloud and thinking about how they're going to do that internally for workforce or for their customer identity management. Good example was that fortune 50, new customer of ours that was entirely a workforce deployment, they're thinking about you know trust and how they put that strategy and you see a lot of up sell so the example that we talked about with LNG, where they've been a strong workforce customer for a long time and are now seeing opportunities.
His customer today and access management, but what has really happened over the last couple of years is with so much innovation not only in the platform, but in the different products and the introduction of new products. You're also seeing that we can continue to land in new places across these larger organizations. So for example, a new fortune 500 win for the quarter was with Pacific life brand, new customer for us and that certain customer identity management, where they wanted to do some new portals for a new type of customer. So it was a new place where they're looking for innovation in a certain way and with the breadth and depth of the OCC integration network any idea any cloud we can really address a lot of those complex use cases that yeah, I'll just add to that the the largest organizations are have first of all they have a lot of things. We can help them with their there's lot of complex technology. It's a very there's a lot of friction and adopting technology, there and we can help smooth that and speed their time to value across the board, but it not only are.
The initial deals large, but theres a lot of white space to overtime because they have so much need. So we're not only just excited about the size of the deals initially but were excite so excited about the potential to grow in these accounts over time.
Got it and then just as a quick follow up on that you guys have talked a little bit about the server access product I'm just wondering.
Particularly as it pertains to the public cloud you have some of the recent breaches maybe led to more inbound interest or.
Is there any potential to benefit from some of the concerns out there.
There's a lot of interest in the product and its particularly strong and more modern development shops, where theyre doing a devops processes, and they're being really agile and how the iterate and get code out and that's where you've seen some of these breaches happened and the people people are moving so fast and trying to innovate that sometimes they don't walk down the servers are locked down the S. Three buckets like they should.
So advanced server axis is a great a great fit for that it fits into these modern software development processes and it can help close down some of this these security risks, whether it's shared administration credentials servers using us a weak passwords user accounts not created to maintain on the servers. We can help shore that up and it's a great fit in a in this modern software development World.
Thank you.
And we'll go next to Alex Henderson with Needham.
Great. Thank you very much.
Just one quick question on the deal links.
So when you sign a five year deal I assume that you're not providing any incentive for longer term deals that you're in fact.
Yeah.
Basically just extending it if they're just.
Their desire as opposed to something that is that correct.
Yes that is correct I mean, what we're finding is the larger enterprises, because they're looking to ARCC to to really be the secure and scalable identity standard for them across their complex hybrid environments are really looking for that long term partnership with us where we can address you know used cases now we can address use cases as they evolve for them. So they are really the ones driving the length of the contracts from the standpoint that it really from them is a deep partnership over overtime.
Great I just want to make sure that was accurate.
The final question I wanted to ask is there around the octane.
Pipeline.
[noise] continue to be incredibly impressed by how many people show up for that conference and my sense is that it's a deliberate a substantial pipeline of.
Leads that you are now running down can you give us some sense of what your lead book looks like at this point.
How long it takes to close the leads that were generated from that trade show.
I don't I don't have those numbers I do know that the octane is tremendously influential both for existing customers that are learning about the breadth of the platform and one of the big things, we try to do and keep in mind. It octane is that.
Our product at our platform, a very broad and we really need to make sure we spend a lot of effort there telling our customers about the breadth of its as I know the value we can provide.
So that's an important part of it and then there's a lot of new prospects. There too that are just wondering about the story for the first time and.
We try to we make sure that we.
We convey the message of the value the core product can provide in addition to explaining the breadth of the product. The we do you know we do see every year, we see a lot of impact on the marketing funnel and on the sales results from octane, which is one of the reasons why we we continue to grow and invest in that event. It is a very strategic event for us. So we're happy with that we're happy with how it went this year and we're happy with the.
We're confident that it's going to have a positive impact again.
One last quick question, if I could the painting filing.
There are obviously setting to go public how often do you run into paying how do you see them competing can you give us any color around.
What they might say or how you might position against them. Thanks.
The its so I talked earlier about the world is really separate it into legacy in the cloud future and the best thing that happened to us over the last five or so years is that everyone. In the world now they know they want to they are either in the cloud or they want to get to the cloud that's the future strategic direction and I think that the competitors. We see are mostly in the legacy bucket, there's software companies, they're part of a.
Major suite of products like the I.B.M. identity products or the computer associates or maybe they're a standalone nish vendor like paying but they're all legacy on premise software and I think the market. As is is basically decided that the cloud is the future and that's why you see our results you know twice the size growing twice as fast as someone like Ping.
Perfect. Thank you very much great quarter.
Thank you.
Well go next to Sterling Auty with JP Morgan.
Yes, Thanks, Hi, guys. So Todd you mentioned kind of the change to the packaging and and of products in the home owner ties nature of it.
What does that do to pricing and how the procurement process actually works relative to how you how to structure previously.
The.
The.
Turning to the the products into a componentize double platform is really about addressing more use cases, so it's giving the customers the flexibility to use octa very seamlessly for use cases that may have been difficult before or maybe not possible before and so I really it's not it's not like a repricing, it's making sure that the platform and the products can be used for ever use case, the customer has whether it's maybe they just want to.
The use of a very small part of our multifactor authentication infrastructure to get started right or maybe they want to do a scenario, where we do the authentication, but they rely on third parties to do the address and identity verification improving right. It's all of those use cases that are addressed by what we what we call. The identity engine that make it really powerful so it's basically more flexibility more power to address more use cases, which means more users and more more product. So.
All right excellent and then one follow up I missed if you said it on the competitive landscape with that server access solution. What do you see in terms of head to head competition. If there is an RFP or what is the the other alternative that customers are considering before they actually purchase your solution.
Yeah, It's a great question that it's it really it's.
We are competing with with you know bad security. So we go into an environment and if they have shared admin credentials, they're not they're using one admin account across all their operators are all their engineers, we can go in their input.
Fine grain access control very easy very flexible it works and all of the Dev Ops works workflows that that company has so its really a that evolving modern development in devops environment is really greenfield. It's not we don't we're not competing with people like cyberark or some of the other Pam products those are more for the traditional I T.
Pam workloads and we partner on those we're really focused on is more of a modern development Devops type workflows.
And we'll go next to Melissa Frenchie with Morgan Stanley .
Hi, guys. This is hamza fodderwala in for Melissa Frankie Thank you for taking my questions.
I wanted to follow up on the on the macro question, obviously, that's top of mind for for for companies and investors.
I know I know, it's still early days outside the U.S., but did notice that the international revenue growth.
Decelerated quite a bit versus 60% year on year in Q1.
Anything to read into there you know, whether it's a currency or under investment yeah that I have a follow up.
Yes, I mean, the international growth remains strong.
One of the things you have to think about is you know the outperformance of the U.S. So you know as a percentage of the business. It remained consistent.
So it is still very strong I think the the the comments I made earlier on the macro environment, that's worldwide as far as demand for us.
We still believe that given you know the key things that we're benefiting from these these key tailwinds that we're having of companies moving to cloud.
Transforming themselves digitally and focused on security is true both here in the U.S. and outside the U.S. and they're going to be we believe high sea level priorities. In addition to that when we talk about the success, we're having in the world's largest organizations. We are talking about worlds largest organizations. So we are seeing success outside of the U.S. you know Todd mentioned one of those companies beyond GE in Europe . So you know, we're we're seeing very strong demand.
Across the board.
Got it and just a follow up.
The but could you help us square, maybe billings growth came in around 42%.
Current our PEO and subscription where we're above 50% year on year is that just.
Duration I know that there was some.
Early renewals in Q1 as well you know if you could help us sort of.
Just kind of puts and takes there.
Yeah sure. So you know, we do think that and we said this in the last couple of quarters that current Rps, though is a very meaningful metric when you view it with billings growth. Our current RPL did grow 52% and the reason we think it's a meaningful metric in conjunction with looking at billings is for really the reasons. You just said, which is our PEO current rps, though really eliminates some of that timing that you'll see with invoices invoice timing and invoice direction and actually is a good metric to look in conjunction with billings because it eliminates that type of timing that we did see.
Over the Q1 Q2 period.
Thank you.
And we'll go next to France, while you're she to our with Marin Bird capital markets.
Hi, I'm on for Josh I'm, just with Hilton.
I believe until now the large enterprise businesses have mostly been direct can you just comment on what contribution from partners and specifically system integrators was a driving enterprise business this quarter.
Yeah happy to do that so I mean, we're seeing that the investments we've been making in the partner channel continue to pay off and we are investing those both domestically and internationally, especially as we find more global reach and scale its going to be an important part of our strategy you talk specifically about the system integrators like Deloitte Accenture and Pwc as examples continues to be very strong partners of ours. The reality is when you talk about the world's largest organizations. They always have relationships with at least one if not all of those in different parts of the organization all of those large system integrators are thinking about how they can both enhance their identity practices and enhance the security posture of their customers, but they are also thinking about how they can help them build digital transformation practices to that's what accenture Deloitte Pwc think about conveniently the oxide and cloud becomes so strategic that we can help them with both of those things, but helping their cost.
Summers become more secure adopt the cloud more easily but also as they think about enhancing their relationships with customers and partners and vendors.
So those partnerships are going very well.
We've had strong continuing support from them at a at the conferences and events that we go to you as well as the number of employees in there that are getting trained and certified on the off the service continues to grow very fast we're very excited about those partnerships and I think they're very bright days ahead.
Thank you for that and just one more follow up as you move into the enterprise how do we think about the competitive positioning of the product suite with single sign on and multi factor authentication, we think that it's going to be highly disruptive, but in regards to lifecycle management. What is the demand like there and do enterprises view that product is enough from a functionality perspective.
The competitive positioning in a world class organization is very solid I mean, if you. If you see if you take a look at the new Gartner Magic quadrant, we're very happy with how that comes out and I, that's that feedback and our positioning there is largely influenced by Gartner tuck into the world's largest organizations some of which are customers already. So they are having success. They are willing to talk with them about Gartner and.
It's a really good testament to the value we're delivering specific on specific use cases large organizations have.
They have many many use cases, it makes sense right and they have single sign on use cases multifactor use cases lifecycle management use cases, and we're working across the board to make the products continue to enhance the products and make sure that they are more flexible more ability to address ever use case.
And you know and that goes across the board all the products whether single sign on Multifactor lifecycle management.
I talked earlier about the AUC to access gateway, which really is the way that it's it's a gateway to help help these large organizations move from on premise to where they all want to go which is the cloud it's like the bridge to the cloud and it's a way for them to connect octa back into that legacy infrastructure and keep it integrate it as they move it. So we're focused on making the product even though they are by far the leaders in the industry, we're focused on making them even better because.
There's a lot of value we can deliver across the board two things I would add to that our other first as we mentioned in the prepared remarks that fortune 50, new customer of ours I mean, one of the big things. They were looking for specifically was around reducing ikea friction by automating the provisioning of applications. So that speaks specifically to their lifecycle management interest and then in addition to that as we discuss our new workflows capabilities are going to continue to strengthen the end to end use cases, we can provide for large organizations for automating multi application multi step workflows HR is a master employee Onboarding and Offboarding. There's just a lot of opportunity there and we're very excited to provide that value for large organizations.
Well go next to and you know when this scheme with Piper Jaffray.
Great. Thank you and congrats on a great quarter.
You talked about getting into more large enterprise deals, which contributed to your ARPU growth can you just give us any color on the large enterprise customers and how they are using the product relative to internal workforce versus external customers and it really just wondering if that mix is different in those large deals versus your historical customer base.
Thanks, Andrew for further comments, yeah, absolutely happy to talk about that I think what you're seeing is that there are more and more opportunities for us to help large organizations think about again, the three macro trends that are addressing so whether it's trying to reduce cost and accelerate with the cloud whether it's enhancing security whether it's trying to accelerate their revenue streams and think about growing their business using customer today and access management.
You're really seeing them use more and more components of the platform in both of those use cases, both the workflow salaried workforce and customize any management. So there's nothing significantly different than what's happened in the past we have had large organizations as customers for some time I think what is exciting is all the new ways that they are able to find value quickly with specific parts of the organization and the application suite and then grow from there a good example, as we put out a commentary today about cengage large customer of ours, one of the largest providers of learning digital learning for University students I mean, they have been a customer of ours just for a couple of quarters and within six months, they were able to deploy their customer identity and access management to tens of millions of students for the new fall fall quarters in fall semester is in college that are just starting right now so I think that time to value in that speed to market is something that is very good.
Attractive and the fact that we can help them get started quickly.
Find success find value and then grow with US I think 10 portends well for for the times ahead.
That's great. Thank you and then maybe just one follow up like a new customer add for fortune 50 or were very strong again, but it is surprisingly consistent over the last five quarters, regardless of the seasonality of the quarter.
I'm just wondering as you.
Why is your new customer growth, perhaps not im not not increasing or accelerating roll considering you're getting into these more more of these large enterprise customers that are relatively new segment now.
Thanks.
Yeah, I mean, you're right. The 450 customers. It is a fairly consistent growth we have every quarter between four and 500.
And as has remained in line with that historical trend what I'd point to is really the larger enterprise.
The significant growth that we continue to have in the large enterprise yeah, we grew 46% year over year in the greater than 100000, but even more than that is the fact that were.
With these new customers.
The larger enterprise customers were doing bigger deals and we're doing longer term lengths. That's reflected in the 68% growth rate on the RPL that we talked about it's also reflected in the metric we've been talking about where the 25 largest contracts. We booked this quarter were double what we booked last quarter and so as we think about the business. Obviously, we're focused on is adding new customers, but we're also focusing on adding those large enterprise customers as weve talked about winning the world's largest organizations and we're seeing a lot of success with that with larger deal sizes longer contract lengths.
And overall value.
Yeah.
And we'll go next to Gray Powell with Deutsche Bank.
Great. Thanks for thanks for taking the questions just a couple.
So I know there are a lot of metrics to focus on and maybe I'm oversimplifying things, but if I look at the absolute dollar growth in subscription revenue in Q2, it almost doubled off the pace of Q1. So so can you talk about the main driver there and how much of that is just normal seasonality versus improved sales productivity and execution in the quarter.
Yes, I mean I think that.
The what we're seeing really is all being you know not all being but primarily being driven by again the the business that we continue to traction we continue to see with the large enterprise and the fact that when you see the metrics that we've been talking about specific to Archeo, where the long term RPL. The total RPM. So that's you know from a growth that that actually accelerated the growth of the current rps accelerated quarter over quarter all of those things because of the larger contract lengths are longer contract lengths lot much larger value is really what's driving what you're saying.
Got it that's helpful. And then just on the product side really quickly how should we think about the opportunity with the advanced server access product and I know, it's early but for the customers that have signed up so far what kind of uplift are you seeing on the overall bill Doctor.
It's.
Great. The it's a good it's a good area to drill into it I understand it's up there we think about a lot. We the product was made generally available just a few months ago and octane and the early success is very positive it's both selling it to new customers. So a new way to land and also expansion in existing customers. It's we've had a lot of success with.
But as I mentioned before into a previous answer to the previous question to companies that are really doing modern agile development and most often with them using infrastructure as a service is where they deploy the software.
And I think long term that what we get very excited about is that is the future of software development and.
The early indications are strong but over time, we're hooked onto another major macro trend there and.
As we've seen in our other businesses.
Building a product that is in the right place at the right time on a big macro trends like cloud or digital transformation or security is a powerful place to be so we're very excited about that one.
And we'll go next to Gregg Moskowitz with Mizuho.
Okay. Thank you very much and congratulations on a good quarter. Most of my questions have been asked but still I was wondering if it were possible to provide a little more color on how much your average contract duration change this quarter on a year over year basis as well as what your expectations are around duration over the next two quarters or so.
Yes, Greg So we've we've our average contract duration has been in the two to three year range.
You know because of what I said earlier as far as.
These large enterprise customers and what was driving the RPM, though.
With longer contract lengths that you know is ticking up within that range I think we believe that as long as we continue which we do believe we will continue to win more and more worlds largest organizations that average contract length will tick up over time.
Okay. That's helpful. And then just as a follow up but if you look at our head count. It again grew about 40% year over year do you continue to expect hiring growth rate to accelerate in the back half.
Yes, so when when you as we talked about are as I said in my prepared remarks were we saw upside in Q2, primarily driven by revenue upside we're going to make you know take that upside and invest it later in the second half the year, primarily in Q3, those additional investments will primarily be in our customer facing headcount and innovation and head count related innovation. So our expectation is the growth in head count will accelerate in the second half of the year.
And we'll go next to Keith Bachman with bank of Montreal.
Hi, Thank you very much I was wondering if I could ask about.
The market segments in particular, if you think about employee versus customer.
Could you give us any dimensions on.
Growth rates between the two segments, how you really see this unfolding over the next couple of years in terms of which being a larger Tam.
And in terms of incremental opportunities.
And then how you see the pricing variances between the employee and the customer segment.
Thanks very much.
So the workforce market or what we call the <unk>.
Workforce identity is still and continues to be our largest piece of our business and continues to be very strong customer identity also contributes to incremental upside growth and is also growing well, we think that the addressable market on both those markets is very big.
Which is what's exciting for us in many ways, because we're one platform, which services those two markets and so theres a lot of synergies between those two that allows us to do a lot of upsell and cross sell with our existing customers and with potentially new customers. When it comes to workforce moving them then to customer identity and vice versa. So we feel really.
Really positive about that I think from the standpoint of pricing just from an overall pricing structure workforce is based on a named user.
Pricing structure and customer identity is based on an active user pricing structure, just because of the different nature of the users.
But like I said, we think those are both big opportunities for us and feel good about our ability to grab those opportunities.
Okay, and just as my follow up again.
So I'm just going to say we are quickly one thing that's missed in the competitive conversation a lot of times is that we're the only company that has scale and both of those businesses. So we're very differentiated if you like going back to the Gartner report one of the big things. They found is that customers really value of vendor that can provide both of those so we're very excited about both and really we're excited about the ability to offer both because it means we can land in a more variety of ways, we have more upto avenues, and that's an important part of our strategy.
Okay will that actually was my follow up in terms of the competitive dynamic because paying in the registration statement talks about a fairly meaningful size of revenues from the customer side and I just wanted to tease out a little bit I think you answered. The question do you see any different.
Different competitive landscape between the employee and the.
And the customer side. It sounds like you don't really see a difference from your competitive landscape. You know if you looked at Ford's rock or paying or yourselves or some of the legacy players.
I do you think that there's there's like you see for drop more on the customer side. So there is a slight difference in the competitive set of competitors you see the bigger difference I think our customer identity, it's more of a build versus buy the we're educating people on the fact that there is a scalable proven solution that can solve this problem for them. They don't have to build themselves were for work on the workforce I'd know and build it themselves and you know there's there's.
Leading vendors like Dr that can do it for them that is pretty well understood.
Well go next to Rishi Jaluria with D.A. Davidson.
Hi, guys. This is Hannah on for Ricky. Thank you for taking my questions first just following up on an earlier question I was wondering if you could talk about how long it takes to ramp new hires to full productivity and if you're facing any challenges with the tightening labor market.
Yeah happy to talk about that in terms of.
Ramping new customer facing employees, we continue to see very strong learning and development internally in the organization, obviously with the success that we're having in the market.
You know customer facing or account executives talk to each other and so we're getting.
Better and better quality of talent every day.
So thats. The first thing is just when you think about who's coming to octa and their interest level. We are certainly attracting the quality of sales person that we were not able to do 24 months ago. Secondly in terms of the tightening labor market. When you think about what we're trying to do we're trying to hire the best people across the entire organization, whether it's customer facing R&D engineering or otherwise.
Those people are always well employed and so we're always looking for the best folks we haven't seen any significant change in our approach or in the results you see the very strong 40% head count growth.
In the first half and we expect that to continue a strong throughout the rest of the year.
And we're very excited about that.
Great that's helpful.
And then the second question I noticed there was a slight diesel and the dollar based net retention rate that was impacted by larger initial deal sizes.
If you could talk about how we should think about that going forward, especially as you continue to learn land to larger and larger customers.
Yes, I mean, I think as we've talked about.
You're right. The this was impacted by larger initial deal sizes, I think as we talked with RPL growing 68% and were learning not only out longer term deals but bigger deals.
Referring back to the metric we talked about earlier, where the top 25 contracts, we booked in Q2, but the average contract size doubled when compared to Q2 of last year.
A significant portion of those contracts were net new business and therefore net new business, meaning large initial land. So those larger initial deals are going to have an impact and we think that.
The net retention rate will continue to remain healthy like it did this past quarter to 118%, but it may fluctuate a bit further remaining at this helped very healthy level fluctuating in a range of up or down a few points.
And we will take our last question from Shaul Eyal.
With Oppenheimer.
Thank you for taking my question Jan San Congrats on the quarter, just as you push out.
Just two quick questions. The first one is in terms of the larger size deals.
What is the duration in terms of the sales cycle between the large ones as as compared to a small SMB ones.
Yeah. That's a good question as we've talked about the overall strength that we're seeing with larger organizations those deal sizes, obviously getting larger and the contract lengths are getting longer. If you think about how strategic identity is becoming in large organizations. When they make these kinds of decisions. They are obviously, making it for three to five years.
And so thats what were starting to see and when it comes to small and medium business. These are still very important decisions. We see we do at least annual contracts billed upfront, but we see more and more multiyear contracts across all the different segments of the business.
In terms of like sales cycle.
Do you have an estimate of like the duration of how long it takes to sales team to close the SMB deal versus a I guess larger enterprise deals I guess.
Yeah, I mean, obviously larger enterprise deals do take longer typically there are more folks involved it's more strategic you have to touch more parts of the organization.
Whereas in smaller organizations frankly, there is just less folks that are involved in that decision. So it's pretty typical what you'd see in enterprise software and service companies like ours.
Okay Fair enough and the last question is really you mentioned about the displacement opportunity on.
Legacy on premise vendors like idea, that's well see a or do you have an estimate of how many customers. This opportunity can be and the magnitude of it that I guess I could take advantage of.
I think when I think about our opportunity I think of every company and that's the problem with some of the legacy technologies. It wasn't sold very broadly it was only some of the largest organizations in the world that could could spend tens of millions of dollars on a on a I didnt implementation. So I wouldn't I think our opportunity is much much broader than just the largest organizations in the world those are strategically important for us, but it's much broader than that.
And I think that in terms of view the desire to move away from that legacy technology in the world's largest organization. The desire is is really high and now it's up for its up for its up to us to keep executing and keep delivering a robust industry leading platform that can help those customers get there and that's what we're focused on doing.
At this time I would like to hand, the call back over to Dave Gennarelli for any additional or closing remarks.
Thanks, operator, as Todd mentioned in his opening commentary, we're going to be hosting a customer event called showcase at our headquarters in San Francisco on October 10th and you can look for more information on that next week will also be hosting a number of bus tours and we will be marketing in Boston, New York and Los Angeles This quarter.
As well as attending the Berenberg Your stock Picker Conference in New York on October Threerd. So we hope to see you at one of those events. Thanks.
That does conclude today's conference we thank you for your participation.