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Edited Transcript of PING.N earnings conference call or presentation 13-Nov-19 10:00pm GMT

Q3 2019 Ping Identity Holding Corp Earnings Call

Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Ping Identity Holding Corp earnings conference call or presentation Wednesday, November 13, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andre Wong Durand

Ping Identity Holding Corp. - CEO & Director

* Hugo Doetsch

Ping Identity Holding Corp. - VP of Finance, Strategy & Corporate Development

* Raj M. Dani

Ping Identity Holding Corp. - CFO

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Conference Call Participants

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* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Gregg Steven Moskowitz

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Gur Yehudah Talpaz

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Heather Anne Bellini

Goldman Sachs Group Inc., Research Division - MD & Analyst

* Jonathan Frank Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Matthew George Hedberg

RBC Capital Markets, Research Division - Analyst

* Michael Turits

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Saket Kalia

Barclays Bank PLC, Research Division - Senior Analyst

* Shaul Eyal

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Tal Liani

BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector

* Walter H Pritchard

Citigroup Inc, Research Division - MD and U.S. Software Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Ping Identity Third Quarter 2019 Earnings Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Hugo Doetsch, VP of Finance and Corporate Development. Please go ahead.

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Hugo Doetsch, Ping Identity Holding Corp. - VP of Finance, Strategy & Corporate Development [2]

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Thanks, everyone, for dialing in and joining us today, and welcome to the Ping Identity conference call, where we will discuss our results for the third quarter of fiscal year 2019. I am Hugo Doetsch, Vice President of Finance and Corporate Development, and with me today is Andre Durand, our CEO; and Raj Dani, our CFO.

Before we begin, I would like to remind you that today's discussion may include forward-looking statements. Please refer to our final initial public offering prospectus dated September 18, 2019, and filed with the Securities and Exchange Commission, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements.

I would also like to remind you that during the call, we will discuss some non-GAAP measures in talking about Ping Identity's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in our 2019 quarterly financial statement and in our final prospectus. (Operator Instructions)

And with that, I'll turn the call over to Andre Durand, Founder and Chief Executive Officer of Ping Identity. Andre, please go ahead.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [3]

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Thanks, Hugo. Good afternoon, everyone, and thank you for joining the first earnings call as a publicly traded company. I'd like to start by thanking my colleagues at Ping Identity for their dedication to the growth and success of Ping and to our customers for their trust, loyalty and partnership as they manage their critically important identity and security programs. We're honored to serve them and are inspired to define the future of identity and security with them.

With that, I'm pleased to share our third quarter results. We experienced strong top line performance in the quarter with ARR growth of 23% year-over-year culminating in a $206.7 million ARR and with total revenue of $61.8 million. Given the impacts of ASC 606, which Raj will detail later, we believe that ARR is the best representation and measure of our top line growth and is the key metric we use to evaluate the business.

Since this is our first earnings call, I'd like to take a few moments and explain why we exist and why the solutions we provide matter as well as share some of the reasons why I founded Ping and the identity industry conference, Identiverse. For starters, the question of authenticity and identity are not new. The need to verify identity precedes every transaction of value, and the assurance of identity has never been more critical to our future where the sheer volume of digital transactions requiring authentication is unprecedented.

With the advent of the cloud and mobility, we've seen an exponential increase in both the speed and volume of digital interactions between people, businesses and things. Fundamental to the integrity of these interactions lies 2 simple questions: who are you, and what are you authorized to do. These are the questions that now precede all digital interactions, giving rise for the need for identity and access management and creating the exciting opportunity that exists for Ping.

While the challenge of identity exists in both the physical and digital world, nowhere has the need to secure identity become more acute than within the enterprise IT, where companies are experiencing a dissolving perimeter and must now change how they secure applications and users that reside outside their firewalls, networks and perimeters. Despite being simple in concept, the technology required to identify, authenticate and authorize every transaction across our digital world in realtime and make it both seamless and secure requires significant investment, a thorough understanding of past, present and future IT infrastructures and relentless innovation.

Ping was created to help solve the challenge of identity-based access security for large enterprises, one where the desire for a frictionless user experience does not compromise the need for security. Given the massive opportunity, we've chosen to direct our solutions at the enterprise market, where the need for control, security, performance, scale, integration and advanced capabilities match our hybrid cloud, Intelligent Identity platform strengths and our DNA as a company for solving the hard problems. These enterprises require solutions that cannot only secure hybrid infrastructures. They require a solution that can be deployed wherever the enterprise requires: cloud, private cloud, hybrid and on-premise based upon granular security control and customization requirements. Only Ping offers this hybrid cloud deployment flexibility and the ability to secure the enterprise end to end.

We deployed our solutions at more than 1,300 companies, solving some of the most challenging identity problems. As a result, Ping has become the identity standard for large enterprises globally. To underscore this point, many of the world's leading enterprises, including over 50% of the Fortune 100, all 12 of the largest U.S. banks, 8 of 10 of the largest biopharmaceuticals, 4 of 5 of the largest health care plans and 5 of 7 of the largest U.S. retailers have chosen Ping for our advanced hybrid cloud solutions, ease of integration, deployment flexibility and proven ability to scale with security.

The approximately $25 billion market we serve can be broken down into 2 large opportunities. The first is a replacement of legacy identity solutions that were not architected for the modern world of hybrid cloud or open standards and as a result, are unable to meet today's enterprise requirements. Ping's modern single sign-on, access security, directory and data governance solutions are well positioned to take advantage of this market share shift away from the legacy incumbent providers.

The second opportunity is a greenfield expansion driven by the adoption of new technologies and use cases such as customer identity, multi-factor authentication, the identity of things and API security. We continue to see robust demand for our entire suite of solutions and believe that our investments across the business will create opportunities for us in the future and will allow us to capitalize on the large and underpenetrated market we serve.

Ping's Intelligent Identity platform is comprised of 6 solutions: single sign-on, multi-factor authentication, access security, directory, data governance and API intelligence, securing all primary use cases for customer, employee, partner and increasingly, IoT. Each solution is built upon open standards and can be deployed stand-alone or in concert with other Ping solutions in the customer's cloud, our cloud or in their data center. Our single sign-on solution allows users to sign on once and gain access to all of their applications across their hybrid IT landscape. Our multi-factor authentication solution provides adaptive authentication with a superior passwordless user experience. Our access security solution provides access control to both web and APIs and was designed as a modern replacement to legacy web access management solutions such as SiteMinder and Oracle Access Manager.

Our directory solution provides a secure data store for identities and is deployed in some of the largest customer, employee and IoT use cases in the world. For example, one of our customers leverages our directory to manage over 160 million users. Our recently released identity data governance solution provides advanced protection of sensitive or regulated identity data that is often exposed to third parties. This product is being driven by new privacy regulations such as GDPR and CCPA.

Lastly, our new API intelligence solution provides advanced security to protect APIs from hackers. The solution leverages artificial intelligence and machine learning to monitor all API traffic, detect anomalies and block cyber attacks. In Q3, we expanded a Fortune 100 financial services customer who is already spending more than $1 million in ARR with Ping by adding PingIntelligence to better secure their APIs. This deal totaled greater than $500,000 in new ARR and was deployed in 5 weeks.

Taken as a whole, these 6 solutions comprise the Ping Intelligent Identity platform and when leveraged together, provide a powerful foundation for the digital transformation of customer engagement and workforce security. We continue to invest in simplifying their deployment into the hybrid cloud and improving their integration with the enterprise. For example, this quarter, we launched a new capability that simplifies the integration of the Ping platform with application teams, providing self-service for app owners to speed integration and reduce IT costs at the same time. These solutions are differentiated through intelligence, unmatched deployment flexibility, turnkey integration with hundreds of hybrid cloud environments and an ability to address all primary identity use cases with one platform.

As a result, enterprises are able to provide an enhanced user experience and increased security to their customers, employees and partners. Many of our larger and more complex enterprise customers with significant on-premise environments choose to deploy Ping solutions within their data center for maximum security, customization and control. Customers undergoing a cloud transformation but requiring the same level of security and control they had within their data center choose to deploy Ping in their cloud. Others choose to leverage our identity as a service for rapid deployment when the needs for customization and control are a secondary requirement. Irrespective of where our customers deploy Ping, all of our customers leverage our prebuilt integrations to connect to on-premise applications and leverage open standards to connect to cloud applications.

Taken as a whole, Ping's flexibility and advanced hybrid cloud solutions are unmatched, and our ability to deploy wherever the enterprise chooses is unique. As an example, a large global entertainment and ticketing company recently purchased Ping to replace a homegrown solution that was part of their digital transformation initiative to establish a stronger and more personalized relationship with customers while improving the digital security around tickets and event access. The company was also pursuing a cloud mandate and chose the Ping platform deployed in AWS. The solution is unique in its scale, performing tens of thousands of transactions per second in a hybrid cloud deployment that also leverages our strong authentication as a service. The multimillion-dollar project is expected to go live in early Q4.

While we've always been strong in the customer use case, we are also trusted by the largest enterprises to secure their employees and partners, and we excel at both given our unique combination of performance and capabilities. For example, the state of Colorado was recently one of the first to issue a digital driver's license powered and secured by the Ping platform. The mobile experience provides better convenience and security for citizens and lower cost for government. For the year ended December 31, 2018, 44% of our subscription revenue was derived from the customer use case, which continues to be a strong growth driver and a competitive differentiator in the market.

In 2019, we're investing in our channel and partners and are making further enhancements to our unmatched hybrid cloud offerings, developer tools and intelligence offerings. All of these are multi-year investments that will begin to deliver value in 2020 and beyond.

In closing, we're proud of our year-to-date results. The success of our customers is validated by a 92% Gartner Peer Insight rating on willingness to recommend and the recognition we've received from research firms such as Gartner, KuppingerCole, Infosec and CRN, who have recognized Ping as a leader in the enterprise access management market. Recent conversations with customers and our CISO advisory have reconfirmed the growing importance of identity, Zero Trust and the fact that enterprises need hybrid cloud solutions more than ever. This has been further validated by many recent third-party research reports that cite identity as a top priority for security spend.

I would now like to turn the call over to Raj Dani, CFO of Ping Identity, to walk through the quarter results in more detail. Raj?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [4]

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Thanks, Andre, and everyone, for joining today's call. To begin, I'd like to provide an overview of our business and financial model so that everyone understands the fundamentals of Ping. Then I'll discuss our third quarter financial results in detail. And finally, I'll provide our guidance for the fourth quarter and full fiscal year 2019.

As Andre alluded to, Ping's Intelligent Identity platform is offered on a subscription basis primarily under multi-year contracts with an average contract term of 2 years. Regardless of the subscription contract term, almost all of our customers are billed annually in advance. Our subscription pricing model is based on the number of identities licensed by solution and by use case, customer, employee, partner and IoT.

Ping's modern hybrid cloud architecture allows customers to choose to deploy our solutions in the cloud, on-premise or some combination of the 2. Large and global enterprises quickly gravitate to Ping given the flexibility of our platform and our ability to address their multi-generational IT reality.

We tend to utilize a land-and-expand model to grow ARR and revenues. We can expand within our customer base in 3 primary ways: selling additional solutions, expanding into new use cases and simply increasing identities under license. Core to our land-and-expand strategy, we saw one of our Fortune 100 retailers expand with Ping in the quarter across use cases and solutions. The retailer was undergoing a digital transformation and vendor consolidation initiative and chose Ping's hybrid platform to act as a central authentication authority replacing ADFS, homegrown solutions and CA SiteMinder. The expansion brings this customer's ARR to over $500,000.

We are also seeing a growing phenomenon of customers buying multiple solutions and use cases at initial purchase. In Q3, one of the largest banks in Australia chose Ping's SSO, MFA, access security and directory solutions deployed in a hybrid manner for their employee and partner use cases. In total, we are helping to secure tens of thousands of employee and partner identities. This new customer represents approximately $900,000 in total ARR with significant expansion opportunities across multiple use cases.

We early adopted ASC 606 with a full retrospective application. Thus, all figures in our historical SEC filings and in our financial reporting going forward will have ASC 606 uniformly applied. Under ASC 606, subscription term-based license revenue is recognized upfront with the associated maintenance and support recognized ratably over the subscription term. SaaS-based revenue continues to be recognized ratably over the subscription term. This is an important dynamic to remember given the nature of our revenues, which can be impacted by our hybrid cloud deployment model and contract duration. As a result, under ASC 606, our quarterly revenue may exhibit a high degree of variability from period to period. To help normalize for this, we believe that focusing on ARR or the annualized value of our subscription contracts and unlevered free cash flow, which are both unaffected by ASC 606, are more relevant in assessing Ping's growth and operational performance.

Now I'll turn to our third quarter results. We ended the quarter with ARR of $206.7 million, which represents strong year-over-year ARR growth of 23%. This growth was driven by increased deal volume and a healthy mix across solutions and use cases. Third quarter total revenue was $61.8 million, representing 45% year-over-year growth. Subscription revenue was $57.5 million or 93% of total revenue, continuing a trend of greater than 90% subscription-based revenue over the past 8 quarters.

In the third quarter, our dollar-based net retention rate was 115%, calculated on a trailing 12-month basis. While this rate can vary from period to period, we have consistently achieved very strong dollar-based net retention rates of at least 115% over the past 8 fiscal quarters.

For the remainder of the P&L, I will refer to non-GAAP metrics. You can find the reconciliation of non-GAAP to GAAP numbers in the accompanying press release.

Gross margin for the third quarter was 84%, and our subscription gross margin was 90%. We believe these metrics further reflect the strength of our enterprise customer base and the mission-critical nature of our hybrid cloud solutions for our customers. Our strong gross margins enable us to continue to invest in innovation and growth of the business without sacrificing profitability and cash flow. Our business model is established and well proven in terms of our ability to drive significant operating leverage with revenue growth.

We have consciously leaned into investments in 2019 to capitalize on our large market opportunity. Total operating expenses in Q3 '19 were $38.6 million driven primarily by year-over-year growth in both sales and marketing as well as research and development as we make incremental investments focused on innovation, especially in our growing hybrid cloud offerings and in our go-to-market activities. We also built out our global infrastructure, teams and footprint to further support our growth and in anticipation of operating as a public company. Part of this investment includes the initiation of an RSU program for our employees. After the third quarter ended 9/30, we granted 1.3 million shares with a vesting period of approximately 4 years.

Unlevered free cash flow was negative $0.8 million during the third quarter, better than we expected primarily due to strong cash collections and timing of CapEx that we now expect to realize in the fourth quarter. Adjusted EBITDA in the third quarter was $13.8 million, representing a margin of 22% despite increased investments in the business. As mentioned earlier, despite our continued commitment to invest in growth and innovation, our business model and operating efficiencies allow us to maintain profitability.

Our balance sheet remains strong with $81.9 million of cash on hand at the end of the third quarter. Our term loan balance at September 30, 2019, was $77 million with a maturity date of January 2025. As a result of our strong financial profile, in October, Moody's upgraded our corporate credit rating from B2 to B1 and S&P upgraded our corporate credit rating from B- to B+. Also, in October, the underwriters exercised their overallotment option of 1.875 million shares of common stock, and subsequent proceeds were immediately used to pay down debt. Pro forma for the exercise of the overallotment option, our basic and diluted share count was 68,144,000. We are confident that our existing capitalization structure will allow us to be a successful growth software company, and we are taking this opportunity to use profits to reinvest in the business.

Turning to guidance. It is important to reiterate that our quarterly revenue and adjusted EBITDA tend to exhibit a high degree of variability from period to period due to the overall impact of ASC 606 on our hybrid cloud deployment model. Additionally, given the nature of enterprise purchasing cycles, we do experience seasonality with the fourth quarter contributing the largest proportion of annual revenue. For this reason, Ping relies heavily on ARR as a much more precise KPI for assessing top line performance over time. At December 31, 2019, we project ARR to be between $222.1 million and $223.1 million. We further anticipate Q4 revenue to be between $64.7 million and $66.7 million with unlevered free cash flow to be between negative $11.9 million and negative $10.8 million.

Speaking to our unlevered free cash flow expectations specifically, we believe that the market opportunity is such that it's advantageous to continue to invest and lean into our tremendous growth opportunity within identity and security. So from that perspective, we have been investing across the board everything from support to professional services, customer success, new salespeople, training and enablement, channel investments, R&D innovation and new solution development. These investments are starting to demonstrate success as we see positive signs from the market and our customers.

For the full year 2019, we anticipate revenue between $239.3 million and $241.3 million with unlevered free cash flow between negative $3.8 million and negative $2.7 million, inclusive of contingent deal consideration in the amount of $4.9 million.

We're pleased with our strong results through the first 3 quarters of the year, the momentum that identity and access management is gaining within security, and our company's leadership position in securing customer, employee, partner and increasingly, IoT identities across a large enterprise market. We view security as a key underpinning to enterprise digital transformation and believe we are in the early innings of an enormous market disruption opportunity. As such, we will continue to invest in our industry-leading Intelligent Identity platform and aggressively pursue our large and growing market opportunity.

Ping is uniquely positioned to be the premier security choice for large and global enterprises as they embark on their digital transformation journeys, and we look forward to reporting on our progress in achieving this vision along the way.

With that, I'll turn it over to the operator for your questions.

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Heather Bellini with Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [2]

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Great. Congrats on the IPO. Just had 2 quick ones. I was wondering if you could talk a little bit about the accelerated investments you're making in sales and marketing that, Raj, you were just talking about. And how should we be thinking about that increased spending translating into ARR and revenue growth as we look into 2020? Is there any color you can give us there? And then my second follow-up question was just going to be related to the competitive environment, if you could just walk us through what you're seeing if there's any changes.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [3]

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Raj, why don't you take the first part of that question? I'll take the second.

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Raj M. Dani, Ping Identity Holding Corp. - CFO [4]

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Yes, sure. So in terms of the increased investment, our -- basically, our model has a lot of operating efficiency already built into it, and we've demonstrated considerable operating leverage with revenue growth in the past. So that gave us a lot of confidence to go ahead and reinvest in the business, especially at a time when we saw a great opportunity to reinvest, right? Our land and expand is the key driver for us, and we -- our high-velocity sales will enable us to land quickly into new logos in the enterprise. So we just thought that given that we've invested in product in the past and we'll continue to do so, but now is the time to -- since we're in early innings from an enterprise adoption standpoint on our platform and the -- and just from a timing standpoint, it seemed to be the right time to invest. And we anticipate that we'll see the benefits of this when it all comes together probably in 2021 and beyond.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [5]

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Heather, this is Andre speaking here. I'll speak to the -- just kind of the macro environment, competitive environment. I mean, as you know, identity is a large and growing market. There are multiple market segments. There will be multiple winners. The market has proven historically too large and also too dynamic for a winner takes all. There are multiple swim lanes in this market. I think it's well understood that identity and access management is distinct from privileged access management and IGA, where we partner. That is our strategy to continue to do that. I think from a competitive point of view, the overarching competitive landscape has not changed significantly. I would say the competition varies by use case. For example, in the customer use case, we're often competing with status quo and homegrown solutions, believe it or not.

The most frequent situation for us, frankly, is an inertia of do nothing, especially in large modernization -- legacy modernization efforts. So we are riding -- we are competing against an incumbent to essentially modernize their entire infrastructure. I would say that when we see cloud-only vendors, it tends to be in the workforce use case, and it tends to -- where we run up against it a little bit more tends to be in what we would refer to as the smaller enterprise segment.

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Operator [6]

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Your next question comes from Tal Liani with Bank of America.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [7]

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I have a question about the sources for the unexpected positives. If I look at your EPS that was very strong, roughly half of it comes from strong revenues, and half of it comes from better margin. Where -- go over the -- if you don't mind, go over the sources for the unexpected positives given that we just met you a few weeks ago, and I want to understand what was just conservatism on your end. And where did you see real change, better change or positive change that you can carry into the next few quarters? I'm trying to understand the roots of it and how I model the next few quarters.

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Raj M. Dani, Ping Identity Holding Corp. - CFO [8]

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Sure, Tal. This is Raj. Thanks for the question. Certainly, from a primary source of the unexpected was revenue. And so if you think about the EPS impact, that is largely a flow down from the top line growth. And we had a really big quarter, and you'll see this in the disaggregated revenue footnote from software deals that were multiyear. So we're continuing to see a great shift from our clients. There's some -- with some impetus coming internally but largely our clients driving the shift to more multi-year contracts not just at the inception but also at renewal. So we're seeing a lot of 1-year renewals historically turning into 2 years. So that's adding to the revenue impact. And then certainly, we're seeing some timing impacts on the operating expense lines that has a much more minor impact, but it's largely the revenue beat that's flowing down.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [9]

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Got it.

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Raj M. Dani, Ping Identity Holding Corp. - CFO [10]

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The only thing I'll add, Tal, is that because of the variability that we talked about, I'd continue to focus on ARR as a key metric. That's what we do internally, and that's what drives a lot of the internal compensation plans, et cetera.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [11]

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Got it. Two additional short ones. I know you don't provide EPS guidance. But can you help us with OpEx? Or how do we have to think about profitability next quarter, so we can have EPS expectations?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [12]

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Well, we don't guide to necessarily OpEx, but let me -- because we don't guide to that, let me come back to you on that, Tal.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [13]

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Right. What are the puts and takes, meaning seasonality or any planning for investment for the following quarter? When I look at the OpEx sequentially, even without getting to the numbers, what are the puts and takes in the expenses?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [14]

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Well -- so you hit the nail on the head. I mean seasonality, Q4 is always our largest quarter, and we expect that to continue as you can see from some of the top line guidance. We are continuing to invest and have been in sales and marketing. So I think you'll continue to see that trend move in that direction. We've -- as we've been investing even through Q3, you'll see the full quarter run rate impact in Q4 with the -- largely in sales and marketing and probably a little less so in R&D and G&A as those sort of start to settle in.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [15]

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Got it. And maybe I'm wrong because I'm working. I have a problem with my computer, so I'm looking at a table rather than my Excel spreadsheet. If I understand correctly, on a sequential basis, sales and marketing was down. G&A was down. R&D was the only one that was up in OpEx. So again, if I look at the table correctly, if these are the trends, how does it connect to what you said about greater investment in sales and marketing?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [16]

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The -- well, I think part of it is timing of hiring, to be honest. I mean we've opened racks, and we'll continue to fill those. But Q2 is generally higher on sales and marketing, Tal, because of -- because it's usually a big commissions quarter. So the accrual for that is in there. Q3 is a little bit lighter seasonally. So that's impacting it. We also have our large industry conference, Identiverse, in Q2. So that drives some of that marketing spend in Q2. So that's the spike that you see. So it's -- so when you look at the trending, if you normalize for all of that, you would see a slight tick up sequentially. But I expect that Q4 will increase from Q3 just based on where our focus is internally.

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Tal Liani, BofA Merrill Lynch, Research Division - MD and Head of Technology Supersector [17]

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Got it. And just my last question and it's not even connected to your numbers. Great results. Great guidance. I want to ask you about the environment. Cisco, just once again, had a weak quarter, weak guidance. This is not the first company. We've seen many other companies, some of them in your area, whether it's FireEye or Forescout, that are reporting on longer sales cycles and difficulty to close deals. And I know you had great results and great guidance. But have you noticed any of these issues with your customers that it's more difficult now to get the contract? Or this is something you just don't see?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [18]

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I'll take the first piece of this, and Raj, if you have something to add, feel free to chime in. Look, I don't think anything is truly, call it, recession bulletproof. We have observed that security is resilient especially in the enterprise market. Our solutions are treated as mission critical, and they are very sticky as evidenced by how hard it is for us to take out incumbents at times. Our average contract duration is 2 years. We obviously have a strong balance sheet and great cash flow now. So I think as we project out, we have not seen anything in our business, which would indicate a slowdown.

Now when you compare us to companies the size of Cisco and other, obviously, they've got early warning indicators that extend far beyond our ability to see into the market. But we have not observed, I think, or even heard anecdotally of anything specific on a general market turndown. Maybe we've had a few commentary around what the Brexit might mean, in particular, to England. Raj, do you have something to add to that?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [19]

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No, I think that's it.

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Operator [20]

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Your next question comes from Matt Hedberg with RBC Capital.

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Matthew George Hedberg, RBC Capital Markets, Research Division - Analyst [21]

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Congrats on the quarter. In your S-1, I believe you noted 13% of customers have adopted 3 or more products. And I know in your prepared remarks, you talked a lot about MFA and API intelligence success there. I'm wondering if you could talk a little bit about the attach of some of these newer products, how that's been trending. In other words, are customers signing up for initial deals with multiple products more so today? Or are some of these multi-product customers more so on upselling existing contracts?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [22]

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We have absolutely experienced more of our new customers purchasing more than one capability at the start date. We do sell that way. We sell -- we do sell solutions that include multiple capabilities. I will say that the largest success but it's also been around the longest in terms of attach. We do see a high attach rate of our cloud MFA into a lot of deals. And so we have experienced, generally speaking, larger deals, multicapability from day 1.

In terms of the new product introduction, it is very much a strategy to pursue near adjacencies where we have a strong foothold, many of our large deals, both expansion deals as well as new deals. So for example, we announced a Fortune 100 retailer that just expanded into a replacement of SiteMinder for both workforce and partner. They chose us for our hybrid flexibility. That was a north of $500,000 ARR expansion. At the same time, Raj mentioned this. We signed the largest bank in Australia. That was a new customer, so over $900,000 in ARR. That was a workforce partner legacy modernization. And there, we landed with SSO, MFA, access and directory.

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Matthew George Hedberg, RBC Capital Markets, Research Division - Analyst [23]

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That's great. And then the customer use case, I know that's been a strong opportunity for you guys. I think it was about 44% of subscription revenue last year. How should we think about the size of that opportunity, I guess, relative to sort of the core enterprise identity opportunity?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [24]

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I'll take that, Raj. The -- so we believe the customer use case is a larger overall market opportunity. We think that most of the solutions in large enterprise have been a combination of homegrown and now a number of legacy systems. These, as you know, are revenue generating -- top line revenue-generating initiatives. Many times, they're driven by budget of a digital transformation where they're shooting for digital -- better digital and mobile experiences. Oftentimes, there's a cloud transformation going at the same time. And they are also looking to consolidate what has been a number of siloed, disparate almost line of business customer systems, and now they're trying to create one customer identity for all services, all solutions, all lines of business. And in that scenario, Ping is ideally suited to win that business. Many of our largest deals have been in that use case. As you know, our business has been largely comprised of the customer use case for some time. We just think our solution is so well suited now to the modernization of these legacy customer systems that we are leaning into it. So we also believe that the market is larger because the number of identities associated in the customer use case is not tied to employment. We have many more customer identities that have to be managed by these large enterprises than we do employment identities.

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Operator [25]

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Your next question comes from Walter Pritchard with Citi.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [26]

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Andre, question for you, I think, following up on that customer side. I know you recently -- last few quarters released your SaaS-based customer offering. I'm wondering, has that changed the game? I know your largest public competitor is a SaaS-only solution. I'm curious how that's improved your competitiveness or not in that market.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [27]

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So we're actually pursuing a slightly adjacent and new market opportunity for our IDaaS solution focusing towards the customer. We have now a solution that targets developers and line of business, whereas our traditional solution targets IT in their modernization and replacement of their existing systems. So you can kind of think of this as net new activity where companies are looking to deploy a customer-facing solution and speed and time to market and ease of use is the primary requirement. That tends to differ significantly from when we see a modernization of 20 years of legacy customer systems.

So with that in mind, we are actually experiencing some nice interest right now from a new -- really a new buying center that we ourselves are beginning to understand. But suffice it to say, when you go after the customer use case, there are both existing systems that need to get modernized. There are new applications that we need to cater to a new segment of buyer. That's what we're targeting our new cloud customer solution towards.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [28]

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Great. And then, Raj, for you on just a couple of questions earlier on incremental sales and marketing investments. And we also noted there wasn't a huge uptick in spending. It sounds like there's some timing there. But as we think about it going forward, have you sort of deployed the additional sales and marketing firepower that you see deploying? Or do you think this ramp will continue as we go into 2020 and well into that year?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [29]

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Yes. And we'll -- Walter, we'll go ahead and update the guidance for next year on our next call, but just directionally, we expect to continue to ramp up that investment over the next couple of quarters. And that will also take some time as sales and marketing investments usually due to sort of gestate and drive results. And that's why we sort of signaled to the returns in '21 and beyond.

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Operator [30]

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Your next question comes from Saket Kalia with Barclays Capital.

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Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [31]

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Congrats on your first quarter as a public company. Maybe, Raj, just to start with you, can you just talk anecdotally about any trends that you're seeing in terms of customers opting for cloud deployments versus on-premise? And just perhaps remind us what sort of ARR and revenue impacts, one versus the other, could have?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [32]

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Sure. So great question. So all enterprises, we've sort of maintained our hybrid by default, right? So the beauty of the Ping solution is that we can integrate all apps across on-premise and cloud. And lately, what we're seeing, Saket, is a lot more customers, a lot of these enterprises who have cloud mandates but require the customization, the control and the security requirements, right, of having on-premise software but yet to have a cloud mandate, they will opt to deploy Ping software in a third-party cloud of their choice. And we've made that very easy.

So while we're agnostic as to how our customers deploy Ping software, basically, they could deploy us in the public cloud. They could deploy us in a private cloud. They could deploy us in their cloud or in their data center. And so what happens is when we sell software to a customer and they deploy that in a data center or in a third-party cloud of their choice like AWS, that is considered term license revenue to Ping, right? And so that is largely upfront rev rec. If we sell a SaaS solution, and typically, we're selling hybrid solutions where we're selling SaaS and software in the same deal for the most part given the hybrid nature of the customers, and the SaaS continues to be deployed -- or continues to be rev rec ratably over the contract term. So one thing that's really important to realize, and this is why we always come back to ARR being the go-to metric, is regardless of deployment type or duration of a contract, ARR normalizes for all of that.

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Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [33]

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Makes sense. That's helpful. Maybe for my follow-up for you, Andre. You mentioned SiteMinder a couple of times. There was a question earlier about the competitive landscape. I'd love to hear what you saw in terms of opportunities for displacement for tools like SiteMinder and any of the other legacy IAM vendors during the quarter.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [34]

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Well, we mentioned 2 of them. So that large retailer, that's a Fortune 100 retailer who expanded with us specifically on a CA SiteMinder -- or sorry, CA-Broadcom -- no, SiteMinder replacement, pretty substantial deal. Typically, these involve thousands of applications. Likewise, that largest bank in Australia, I'm not exactly sure -- well, I don't have it in front of me which legacy vendor we replaced there. But unquestionably, if we are SSO, MFA, access and directory, there are at least 2 or 3 legacy vendors that we are displacing. And by and large, we have seen by market share kind of in this order, CA, Oracle, IBM, and there's been a smattering of legacy vendors like Novell in there as well.

This large ticketing deal that we also just recently announced, this is a 7-figure multi-year deal. It's a hybrid cloud solution we were referred to as the solution by Amazon. This was all part of a cloud and digital transformation initiative. They had a homegrown solution, and they selected the Ping platform deployed in AWS. So we see a combination of these large homegrown systems typically in the deals that are, say, north of $0.5 million. There is some legacy that we are replacing as well in the order I mentioned.

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Operator [35]

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Your next question comes from Brad Zelnick with Crédit Suisse.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [36]

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Congrats on all the success, guys. I've got, first, a question for Andre and a follow-up for Raj. So Andre, you talked about the dissolving network perimeter as a demand driver for identity management solutions, which I think it's fair to say has been happening for some time. Can you talk about the trends you're seeing in enterprises embracing Zero Trust architecture? And maybe to the old baseball analogy, what inning would you say we're in as the world fundamentally shifts its approach to security?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [37]

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We're very much in early innings. As a matter of fact, the Zero Trust kind of moniker, if you will, is, I would say, actively being defined by the vendors and participants who have a piece of enabling a zero-perimeter enterprise if that makes sense. And so the entire notion of work from anywhere on any device, any place, gain secure access to corporate resources, independent of where the company defined its firewall, which is really what Zero Trust is about and what is how we describe the dissolving enterprise perimeter, what we do know about the definition is that identity is the underlying, I'll say, architecture if you will. We need to secure identities through the devices that they are accessing, whether they be corporate-issued devices or personal devices, into any corporate resource irrespective of where that corporate resource resides, in the public cloud, in the private cloud, in their data center. And it's connecting that anytime, anywhere mobility of a workforce not defined by these network perimeters.

I think we're in extremely early innings. I think we are still defining it. I think the primers for what companies have to deploy to enable Zero Trust is now being understood. We know that MFA and identity sit underneath every construct of Zero Trust.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [38]

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Excellent. Really, that makes a lot of sense. And just a follow-up for Raj. Raj, strong 115% dollar-based net retention in the quarter. How should we think about that metric in the context of nonregrettable churn? And what, if any, impact that might have on your renewal rate going forward?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [39]

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So the nonregrettable churn you referred to, just to kind of calibrate everybody, that's sort of low dollar ARR customers that haven't grown with us and aren't our ideal customer profiles, right? Just by their very nature, while you can accumulate them and count, you -- they typically don't have much ARR associated with them. So I don't see much, if any, impact of any continued attrition there to really impact the dollar-based net retention rate going forward or just the overall growth of the ARR snowball in general.

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Operator [40]

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Your next question comes from Phil Winslow with Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [41]

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Congrats on a great first quarter out of the box. I just want to focus in on PingIntelligence for APIs. One of the things you called out in the press release is that you signed the largest deal in the history over $500,000 in ARR. I guess 2 questions here. First, obviously, the new solution -- newer solution for you guys. Just wondering if you can give us a commentary and just sort of like how you're going to market with this, sort of who this is sold into and kind of how it fits into the broader portfolio. And then obviously, it is not just a new solution to Ping but also just a new market. So where are we in, call it, the CISO's understanding of the need for API security?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [42]

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This one, we are definitely pioneering the way on API security. I will step back and say that digital transformation has 3 main pillars: digital experiences kind of sits at the center of it, cloud transformation and API transformation, where companies now are really getting deliberate about the APIs of their underlying systems and services so that they can innovate faster. In light of that, I will tell you that for our users' conferences, the interest in our API security sessions are the highest attended and we have the most interest. So clearly, we are hitting a chord with our current buyers and our current users to want to understand what Ping is doing to help them secure their growingly important and growingly vast API infrastructure.

But in many respects, Ping is defining the market in much the way that we defined the single sign-on market and the early standards of identity. So we like that position. We like our thought leadership and investment. We have a lot of conviction about where we spend our money on innovation. We've been convicted that APIs sit underneath everything in the future, and we will have to do more to protect the APIs than simply provide what's called OWASP keys to gain access. And so this is a giant step forward in our ability to bring visibility to all the API traffic company-wide and then to apply machine learning and AI to detect anomalies and stop hackers.

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Operator [43]

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Your next question comes from Michael Turits with Raymond James.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [44]

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Congratulations, Andre, Raj, Hugo, and everybody, of course, on the deal and then a good first quarter out of the gate. I had 2 product questions for Andre and one question for Raj. So Andre, 2 new products that are up and coming: PingCentral, this should help with onboarding, especially in legacy; and then Ping private cloud, which plays on the tendency that you talked about for people who want to put the -- put Ping into the cloud but still keep control. Are each of those products starting to have an impact because they both seem like they could be really helpful?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [45]

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Those products are both very new, Michael, but I will say the interest for -- let me start with PingCentral. The interest from PingCentral was driven by a vast array of existing customers, who have deployed Ping centrally to -- they've deployed Ping to provide central identity services to the entire organization.

The number of application teams that are consuming identity services from Ping is vast, measured in thousands of application developers at many of these large enterprises. What they have needed to do and that many have done themselves prior to our development of PingCentral is put a portal so that application developers could consume identity through self-service. It drastically reduces the workload for IT, IT and IAM professionals, and it speeds the onboarding of new applications and the migration off of legacy. So we just followed their footprint, what many of our customers did. We collaborated with many. We rolled that product out, and we have a lot of customers now that are in early innings of testing PingCentral.

PingCloud is our solution for the large enterprises that have all of the requirements of our most advanced enterprise capabilities, have a cloud-first mandate, do not want to be in the business of hosting or running or managing the infrastructure. We can now stand up the Ping solution or the Ping platform for those customers, really, in a matter of minutes. And so that is really targeting the large customers with advanced requirements that can be met from the Ping platform, where they've got a cloud, where they also have a cloud-first mandate.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [46]

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Great. That's really helpful, Andre. And then, Raj, on the mixture of multi-year term, if we look at the footnote, it looks like it's about the same percentage of total revenue as it's been the last couple of quarters. Is that what we should expect? Or do you see an increase or decrease in that multi-year portion that, if it comes in higher, would benefit revenue?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [47]

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Yes. I think that it'll be gradual, Michael. I mean we -- this quarter, we tended to just have a more multi-year contract. So I think that is -- like I said earlier, it's the direction our customers are taking. I think for the most part, it'll stay pretty much in the range it has been historically.

Keep in mind also what I'd mentioned earlier is that more and more customers are deploying Ping software in a third-party cloud of their choice. And that looks like while that's a cloud transformation for the customer, for us, from a revenue recognition standpoint, it looks like software term license revenue. So given that, that may impact the mix a little bit towards software but for the most part, I don't see major changes from where we've been historically.

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Operator [48]

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Your next question comes from Gregg Moskowitz with Mizuho.

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Gregg Steven Moskowitz, Mizuho Securities USA LLC, Research Division - MD of Americas Research [49]

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Congratulations guys on a very good start as a public company. I'll just ask one question since I know we're getting short on time. More recently, Andre, we've been hearing about rising demand for passwordless or MFA-oriented solutions. And assuming that's consistent with what you're seeing, can you talk about how you're capitalizing on that, particularly as it relates to your installed base? And I ask the question just given that many of those customers, many of those enterprises had initially deployed Ping years ago.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [50]

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Yes. Our passwordless solution is a cloud-deployed solution. It is our MFA product, PingID. We demonstrated passwordless at our users conference, IDENTIFY, a month ago. There is a lot of interest in the market for a better security, but passwordless user experience, we enable it today. We're strengthening it through our intelligence and risk services. I expect that this is going to be large and much the same way I've said that we're at a time and place where MFA needs to be put on everything. Passwords alone are no longer enough to secure anything, much less critical infrastructure. So that is one of the drivers that we see.

I think the market recognizes that our customers are putting our MFA solution on everything, and they're coupling it with our single sign-on solution. So users authenticate once. And then to the Ping platform, Ping provides single sign-on to all the applications. We are making our MFA more intelligent, and we are improving the user experience all the time. Passwordless is going to be a long-lived theme. There are many ways to accomplish passwordless, by the way, which is why I say this is a long-lived theme. There isn't just one way to do it. We will support all the ways that enterprises want to support passwordless.

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Operator [51]

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Your next question comes from Jonathan Ho with William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [52]

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Let me echo my congratulations as well, and I'll limit myself to one question. You gave a few examples of where you're being used inside of AWS. I just wanted to get a little bit more color about how you're maybe enabling some of that lift-and-shift opportunity and how customers that are looking to go to that digital transformation and shifting to dev ops are looking at your solution?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [53]

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Yes. We've invested heavily in this last year, and we'll accelerate the, essentially, the containerization efforts and the efforts to allow our platform to deploy on any cloud in a matter of minutes. Our customers have been doing this for the better part over the last couple of years. Many of our largest deployments are deployed in Amazon. We are now hearing Azure more often, but it is being deployed in the public cloud in the customer's tenant. And automating the way in which they both deploy and upgrade that infrastructure and simplifying it around technologies like Docker and Kubernetes and generally speaking, the containerization of our platform, that is a significant effort underway here, and we see a lot of demand for it. In many cases, our customers are now collaborating with us being that they've actually already deployed at significant scale.

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Operator [54]

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Your next question comes from Gur Talpaz with Stifel.

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Gur Yehudah Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [55]

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Okay. I'll also echo my congratulations on the results and the successful IPO. I'll keep it to one question here as well. Andre, you talked a lot about hybrid as a differentiator, and I was hoping you could elaborate a bit on that. Are you seeing that play a factor in competitive bake-offs? And I think, more broadly, how do you think about your flexibility in terms of deployments as a differentiator as you go forward?

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [56]

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Yes. Thank you, Gur. I'd say there's 2 dimensions to hybrid. There's a notion of hybrid IT, which is IT is managing infrastructure both in the cloud, in the data center, in multiple clouds probably. And so we want -- enterprises want to deploy identity to create a consistent security experience for all users irrespective of where they're going or where the applications that they're accessing resides. So to be wall to wall or end to end for a large enterprise to encompass all applications for single sign-on, access security, you have to accommodate the large portion of on-prem apps. You have to accommodate the apps deployed in the public cloud, and you need to protect the apps consumed to SaaS or just in the cloud.

Ping has been doing that for years. We have all the integrations to all of the legacy on-prem. Those are hard because, many times, they're proprietary. We develop the standards that allow us to connect to the cloud. So we've been connecting cloud and on-prem across hybrid IT really for the better part of our entire existence. What has now emerged, which is a little bit different, so when we talk about hybrid cloud versus hybrid IT, is this notion that companies are deploying identity in their cloud. And the level of customization, the level of control that they are looking for, the five nines in some cases that they are looking for architecting for the Tier 0 infrastructure, data residency now matters in many of these customer use cases with privacy regulation popping up where all of a sudden now, where they deploy their identity controls matters. We are seeing companies deploy Ping into their cloud.

So hybrid cloud really speaks to the notion that Ping can span all of the applications across the enterprise, cloud and on-prem, first point. Second point is they can deploy identity where they want, how they want, their level of customization control security. And that is growing in our customer base, and it is especially growing in that customer use case.

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Operator [57]

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Your next question comes from Shaul Eyal with Oppenheimer.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [58]

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Congrats on a strong debut quarter. Raj or Andre, I know customer count is not a metric to closely watch. But can you tell us, maybe even just from a color perspective, how many customers, give or take, were added during the recent quarter and maybe, Andre, just international versus domestic business during the third quarter?

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Raj M. Dani, Ping Identity Holding Corp. - CFO [59]

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Yes. Shaul, this is Raj here. So customer -- the customer data, we will pretty much give you a comprehensive look annually, and that'll be in our next call. But directionally, what I can tell you is, in the past few years, we've been focusing on expanding the base. We've invested a lot in product. We've really developed our platform, and we've had great success, as you can see from our net dollar expansion rate, retention rates that we've been able to sell into our base. Now with this lean in, so to speak, of sales and marketing, we are targeting new customers, and we're seeing a lot of positive momentum this year in terms of new logo generation. So stay tuned for that, and we'll get you a more comprehensive look next quarter.

From an international standpoint, we continue to see a lot of momentum there as well. As you know, in EMEA and in APAC, there's a lot of focus on data security and data privacy. That's really been a tailwind to our customers engaging with us and purchasing Ping solutions. We did -- for Q3, as you'll see in the Q, our international revenues were about 25% of the total, so we're really pleased with our international exposure there.

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Operator [60]

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There are no further questions at this time. I'll turn the call back to management for closing remarks.

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Andre Wong Durand, Ping Identity Holding Corp. - CEO & Director [61]

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So I want to thank everyone for joining today's earnings call. We appreciate the time, thoughtful questions, and we're grateful for the support of our investors. We strongly believe that the pervasive need for enterprise-grade security, our innovative solutions, market tailwinds and the commitment to supporting our customers will continue to propel Ping forward. I just want to reiterate how excited we are to continue Ping's mission of securing the digital world through intelligent identity, and we're looking forward to the journey ahead. Thank you.

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Operator [62]

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This concludes today's conference call. Thank you for joining, and you may now disconnect.