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Edited Transcript of SAIL.N earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 SailPoint Technologies Holdings Inc Earnings Call

Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of SailPoint Technologies Holdings Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Cameron McMartin

SailPoint Technologies Holdings, Inc. - COO

* Jason Ream

SailPoint Technologies Holdings, Inc. - CFO

* Joshua Harding

SailPoint Technologies Holdings, Inc. - VP of Financial Planning, Analysis and IR

* Mark D. McClain

SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director

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Conference Call Participants

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* Alexander Henderson

Needham & Company, LLC, Research Division - Senior Analyst

* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* Matthew George Hedberg

RBC Capital Markets, LLC, Research Division - Analyst

* Robbie David Owens

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Yi Fu Lee

Oppenheimer & Co. Inc., Research Division - Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the SailPoint Technologies Holdings, Inc. Second Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Josh Harding, Vice President, Finance and Investor Relations. Thank you, Josh. You may begin.

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Joshua Harding, SailPoint Technologies Holdings, Inc. - VP of Financial Planning, Analysis and IR [2]

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Good afternoon, and thank you for joining us today to discuss SailPoint's second quarter financial results. Joining me today are SailPoint's CEO and Co-Founder, Mark McClain; our Chief Operating Officer, Cam McMartin; and our Chief Financial Officer, Jason Ream.

Please note, today's call will include forward-looking statements, and because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially.

Since this call will include references to non-GAAP results, which excludes special items, please reference this afternoon's press release in the Investors section of SailPoint.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I'd like to turn the call over to Mark McClain.

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [3]

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Thanks, Josh, and good afternoon. Thank you for joining the call today. I'd like to share our results for the second quarter of 2019. Total revenue for the quarter was $63.1 million, an increase of 18% over Q2 of 2018, and our non-GAAP operating loss was $1.6 million. We also added 59 net new customers. We executed well on multiple fronts in Q2, including the introduction of our vision for the future of identity governance, SailPoint's Predictive Identity, continued execution across our partner ecosystem with notable strength among our global SI partners and several operational improvements to drive greater effectiveness in our go-to-market initiatives. Taken together, this focus and improved execution helped us to exceed our revenue and operating margin guidance for Q2.

Now let me spend a few minutes providing additional color around some of the major highlights from the quarter. As mentioned at the close of 2018, our focus for 2019 continues to center on driving the identity governance market forward in 3 distinct ways: governing all, governing deep and governing smart. While we continue to execute across all 3 areas, in Q2, we took important steps forward in reshaping identity governance from reactive to proactive, with the unveiling of our vision for the future of identity governance, SailPoint's Predictive Identity. This new approach to identity leverages artificial intelligence and machine learning technologies to infuse identity programs with the critical intelligence enterprises need to govern smarter. As organizations continue to pursue their ever-expanding digital transformation efforts, they need to get and stay ahead of the security curve, focusing on the most critical areas of risk. At the same time, their identity programs have grown increasingly more complex, particularly as they evolve the scope of their programs to encompass cloud applications and infrastructure. As a result, companies today are looking for a more dynamic, effective and accessible identity governance program. We believe SailPoint Predictive Identity is the differentiated approach that will set the direction for the future of identity.

SailPoint Predictive Identity was met with a positive response during our annual Navigate conference in June, our highest attended conference to date, and we've begun to execute on making this identity vision a reality for our customers in a number of ways.

IdentityAI is now generally available as an additional module for our IdentityNow and IdentityIQ customers. It includes a new recommendations engine and a patented approach to AI-enabled peer group analysis. These new capabilities not only speed important identity decisions but also improve the application of identity controls. This approach leads to better security and a stronger compliance posture and enables customers to begin to evolve their identity programs to be more dynamic, adaptive and predictive.

We are excited about IdentityAI, and we're beginning to see promising interest from our customers. As one example, we just expanded our relationship with a large commercial bank that had previously deployed IdentityIQ. They are our first customer to take advantage of our AI-enabled recommendation capabilities to address concerns fueled by the need for advanced reporting related to Sarbanes-Oxley compliance.

This quarter, we also saw increased interest for some of our larger enterprise customers to have IdentityIQ delivered from the cloud. For some time, we have provided customers with the ability to deploy IdentityIQ in their own AWS or Azure environment. In addition, a number of our partners deliver a managed identity service, leveraging IdentityIQ in the cloud. And we have been exploring potential options to respond to customer interest for IdentityIQ in the cloud delivered by SailPoint. We believe that we have the widest range of deployment options in the market, further separating SailPoint from our peers as we continue to meet the needs of any large enterprise.

And finally, we saw a good leverage in joint-selling opportunities with our technology and global SI partners. As an example, a large international health care group purchased IdentityNow in Q2, taking the advantage of both of these types of relationships. They'd had a security breach in 2017 and needed an identity governance solution to help them align with the missed security framework. SailPoint was endorsed by Okta and CyberArk, both of which are encumbered vendors there. The deal was also heavily influenced by EY, a relationship we formalized in Q1 of this year.

In summary, our results in Q2 showed that we improved our execution and our market position is strong. As a market leader, we once again laid the foundation for the next generation of identity governance, introducing new identity innovations that will help our customers take their identity programs to the next level. We remain laser-focused on addressing our customers' current and future identity needs, both among the mid and large enterprise segments of the business.

Now let me turn the call over to Cam, who will briefly talk about some specific operational improvements made in the last quarter, which we believe will continue to improve our ability to execute.

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [4]

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Thanks, Mark, and good afternoon. I want to spend a few minutes today updating you on several operational improvements we have made to address the challenges we faced in our go-to-market execution last quarter. Our focus has been to adjust our approach to improve both the quality and quantity of opportunities in our pipeline in order to better address the growth and the scale and global complexity of our business. We've made a number of adjustments.

First, we improved our account qualification program with better market segment targeting. This includes further refinement in our target account definition across all selling teams in each geography. We've also implemented new tools to better identify purchase intent for these targeted accounts. These tools are now used by both our sales and marketing teams to drive improved effectiveness and opportunity generation. We've made changes to our web and digital assets to further clarify the different solutions and positioning we are taking to the mid and large enterprise markets. Using these assets, we have increased the cadence and relevance of our account-based marketing programs to targeted accounts.

Finally, given the scale and complexity of our pipeline, we've implemented new instrumentation for the demand generation and field teams to drive clear visibility in the earlier stages of the sales cycle. These tools allow sales management to better manage pipeline, health and maturation.

Throughout the quarter, we saw strength in several key areas of our go-to-market strategy. In addition, our closing efficiency for late-stage pipeline remains strong. Taken together, we believe the adjustments I just outlined, coupled with solid sales execution, is moving our go-to-market motion in the right direction.

Now let me hand it back to Mark.

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [5]

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Thanks, Cam. Before we turn to financial details, I'd like to take a moment to officially welcome Jason Ream as our CFO. He brings a proven track record of success in aligning financial execution with strategic vision, and we're thrilled to have him with us. As he focuses on his new role with SailPoint, Cam's transition to the dedicated COO role is going smoothly.

Now I will hand the call over to Jason to discuss the financial details from the quarter.

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [6]

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Thanks, Mark. Thank you to everyone on the line for joining us today. I'm excited to be on board at SailPoint and look forward to working with all of you and the team here at SailPoint to achieve our operational, financial and strategic objectives.

As Mark noted earlier, we're pleased with our improved performance in the second quarter as we exceeded our guidance on both the top and bottom line. Total revenue for the second quarter was $63.1 million, an increase of 18% over Q2 of 2018. Subscription revenue increased 40% year-over-year to $33.7 million and represented 53% of total revenue for the quarter. License revenue of $19.3 million was essentially flat year-over-year, but up 4% sequentially and ahead of the expectations built into our previous guidance, largely driven by the improved execution Mark and Cam noted earlier. Services revenue was $10 million, close to flat with last quarter and the prior year, although a little behind where we expected it to be for Q2.

On a geographic basis, The United States contributed 70% of Q2 revenue with international at 30%. This compares to 63% for The United States and 37% for international in Q2 of 2018. The lower year-on-year growth for international was largely due to 2 large perpetual license deals we closed in the second quarter of last year that created a tough compare year-over-year.

Gross margins were essentially flat from last quarter and the prior year, while operating expenses for the quarter were $50.7 million. This is up 8% sequentially from $47 million in Q1. Some of that increase is hiring, but a significant portion is due to Navigate, our annual user conference, which was held in June and where we saw a record attendance this year. On a year-over-year basis, operating expense is up 37% from $37 million primarily reflecting hiring done in the second half of 2018 where we're now seeing the full expense impact in the compare. This increase reflects the long-term investments we are making in sales, marketing and R&D to better address our market opportunity and to deliver our product division. Also included in the growth is the expansion of our offices worldwide, including a new corporate headquarters in Austin, which increased our facilities expense and depreciation costs compared to last year.

Our operating loss was $1.6 million in Q2 or 3% of revenue. This compares the Q2 2018 operating income of $5 million and a 9% operating margin. To finish out the income statement, net loss for the quarter was $1.3 million or $0.01 per share loss. This is based on 88.8 million basic and diluted weighted average shares outstanding. This compares to net income of $4.5 million or $0.05 per share based on 89.9 million fully diluted weighted average shares outstanding in Q2 of 2018.

Lastly, we ended the quarter with 1,104 employees, a 4% increase during the quarter itself and 27% up from 868 employees at the end of the second quarter of 2018.

Before I move to guidance, I would like to make one note about the presentation of our non-GAAP taxes in the press release for this quarter. Historically, the non-GAAP tax referenced in our reconciliation of non-GAAP net income was based on the cash tax paid in the period reported. We have reevaluated the tax guidance set forth in compliance and disclosure interpretation 102.11 and have determined that our non-GAAP tax rate should be calculated using an estimated effective income tax rate that is commensurate with our non-GAAP pretax income. The result of this new approach is reflected in our Q2 reconciliation of non-GAAP net income and is accounted for in the guidance I'll provide shortly. In addition, please note that we have adjusted the previously reported non-GAAP tax amounts in comparative periods to align with the new approach. You can find a reconciliation of our EPS under the new and old methods in our press release and in the investor deck on the IR section of our website.

Moving on to guidance, which, as a reminder, is based on ASC 606. We currently expect total revenue for the year to be in the range of $278.5 million to $281.5 million, which at the midpoint represents a slight increase over the guidance we provided last quarter. Within this, we now expect subscription revenue to represent between $137 million and $138 million of total revenue in 2019, an increase from our prior guidance. We expect license revenue to remain approximately in line with our prior expectations, and we expect to continue to push more services to our partners with services contributing roughly 15% of total revenue for the year.

For the full year of 2019, we now expect our non-GAAP operating income to be in the range of $18 million to $19 million and non-GAAP net income per diluted share of $0.12 to $0.13. This assumes 93 million diluted weighted average shares outstanding and a non-GAAP tax provision of $5.1 million, up from our prior assumption of approximately $2 million, which was on a cash-tax basis.

For the third quarter, we expect total revenue in the range of $69.5 million to $71 million. We believe that license revenue in Q3 2019 will be up by approximately 24% to 25% sequentially with typical seasonal large deal activity in the third quarter. We expect our non-GAAP operating income to be in the range of $3 million to $3.5 million and non-GAAP net income per share of $0.02. This assumes 93 million diluted weighted average shares outstanding and a non-GAAP tax provision of $600,000.

With that, we will now open up the call for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matt Hedberg with RBC Capital Markets.

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Matthew George Hedberg, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Congrats on the much improved results, really good to see. Mark, I wanted to start with you. You talked in your prepared remarks about IdentityIQ delivered from the cloud. Historically, I know you've offered a lot of flexibility around that, delivered as a managed service, I know you mentioned. But it seems like there's even more interest today from customers for that particular offering. I'm wondering if you could maybe give us a little bit more about what this might look like? And then I know at the time of the IPO, I believe your subscription line item was about 10%. How should we think about that sort of trending over time, especially as you may start to sell more IdentityIQ to the cloud?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [3]

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I'll take the first part of that question. I'll probably flip the second over to Jason, and Cam may dive in. As you guys know, we're still handing up a few things here and there. On the first part, Matt, I'd comment that, in many ways, this feels mostly to us as a continuation of what we've been seeing, which is increasing interest over time from enterprise customers on doing more from the cloud. And as you know, we've already had out in the market now the ability to run the product in the cloud, AWS, Azure, et cetera, which customers were doing themselves, we found quite often. And then some number of our partners, particularly some of our larger partners have been offering a full managed service of IdentityIQ in the cloud as well. And we just found that a handful, who were interested in us, not necessarily running that full managed service doing all the compliance work and all of those kind of functional things, but the ability to just get it out of their data center and hosted it by. So we're responding to that interest in dialogues with customers pretty regularly, and we'll see how it goes. We're not -- it's so early, we don't have a lot of sense of where it will go from a volume standpoint. I'll let Jason comment on that. It's pretty early.

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [4]

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Yes. Matt, on the subscription revenue, the impact to our financial statement so far from that offering is negligible, and it's much too early to say what it might look like going forward. So it's something we'll keep our eye on from here on out.

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Matthew George Hedberg, RBC Capital Markets, LLC, Research Division - Analyst [5]

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Okay. And then maybe as a follow-up, last Q3, obviously, you had a really strong federal quarter. I believe you pulled in, I think, about $6 million of deals, I think. I guess I'm just wondering how should we think about the federal pipeline this quarter, especially of that sort of difficult compare? Talk about the pipeline, maybe the expectation on the federal side?

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [6]

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Yes. With our pipeline across both the federal markets and the commercial markets, globally it's strong. What we expect at this point is a balanced quarter, typical of what we've seen over time, historically. So really looking for balance, and that's what's built into our expectations.

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Operator [7]

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Your next question comes from John DiFucci from Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [8]

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So it was good to hear, Cam, that it sounds like there's some evidence that some of the new tools you're putting in place are working and things are going in the right direction, but guidance implies that second half license deteriorates even further in a meaningful way. And I just want to make sure we understand that. Is that due to sort of prudence in getting guidance here? Or are you seeing any demand weakness at all out there? You didn't mention anything like that, but just in case. Or is this just more of last quarter where it's going to take some time to build that pipeline? We know that the sales cycle is like 3 quarters for IdentityIQ anyway.

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [9]

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Yes. So John, Cam here, and then Jason will jump in as well and talk a little bit about guidance. Firstly, as it relates to Q3, I'd remind you this is, for us, seasonally one of our softer quarters of the year, that is typically Q2, Q4; the stronger quarter is Q1 and Q3, relatively speaking of it, because it's a summer quarter tends to be when we work hard as we go through the summer to build demand. So that has been for a number of quarters. As it relates to the comments you indicated in terms of my prepared remarks, we -- as we diagnostically came through Q2 and began to look at a deeper level what we have seen in terms of the drivers of the shift in demand outlook, I think, as you would indicate, what we found was there were some actions that we could take almost immediately, and we've done that, and I'll walk you through those pretty quickly again. The market segment targeting is really been [on] when we focused a lot of attention on. We believe, fundamentally, looking at how it from a geographic perspective, from a size of entity perspective, from vertical as well as app use, that, that market segment targeting is on a refined basis with the tools we put in place is getting us better purchase-intent data as well as actionability from an account-based marketing perspective.

So all those things have been stepped up to a new level. The amount of information we're driving into our process at the top of the funnel, and then as well, importantly, and I referenced this in the last quarter's commentary, one of the things we wanted to do is to improve the instrumentation of the teams we're using and looking at top-of-the-funnel activity and then migration through the funnel throughout time. All of that work has been advanced pretty significantly in the last 90 days. We're not completely finished in all of this. This quarter, really, in my mind, reflects a first step. But what we have done with the instrumentation is put in place some greater visibility across the organization, both sales and marketing, all the way down to the first-line sales teams, so they can track and look at a much more visible and indicative way of where the pipeline is growing, how it's moving. And importantly, we said this last quarter, I'm going to repeat it again: "The pipeline has been growing. The challenge that we ran into in the last quarter, as we looked at it, wasn't growing at the rate we wanted to, and that's been where we do put our attention in the last 90 days." So we put a lot into it. We're making progress. This will be a multi-quarter activity to get it to where we want it to be, but the first step along the path has been a good one.

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [10]

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And I'll just add to that. When you think about that context, the improvements we've made over the last 90 days feel good. It feels like we've made some progress. The pipeline is looking stronger than it was 90 days ago. I think the momentum is stronger. So overall, we feel much better about the business. Guidance is up a little bit at midpoint, but as Cam said, the first step in that process, 90 days in and we've got certainly more work to do and more opportunity to improve the execution. It feels like the guidance is at the right place right now, leaving us room to achieve against the expectations.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [11]

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That's great. That's great color, guys. And welcome aboard, Jason, and look forward to hearing you more.

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [12]

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Thanks, John.

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Operator [13]

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Your next question comes from Rob Owens with KeyBanc.

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Robbie David Owens, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [14]

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I was wondering if you could expand a little bit on your partner commentary and some of the success you're seeing vis-à-vis that channel that you mentioned on the call?

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [15]

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Yes. So Rob, this is Cam. Welcome. Thanks for the question. As you well know, the partner channel and the partner relationships for us have been an important part of our go-to-market strategy, really, almost from day 1 of the company. And we've been continuing to invest in how we enable the channel, the depth and breadth of the partner relationships that we have in place. I think as I walk you through the mix of the global SI partners, that important 5 now including EY since the beginning of this year, continue to be significant contributors to our overall forward progress. The role they play in helping large enterprise understand their security and identity strategy and direction is critically important in our minds to the development of the market. And then as well, they remain a valued partner on a wholesale basis in terms of the implementation of our sales transactions across the globe for the full product portfolio. We continue to work hard to develop in the middle-market relationships with new partners that will help us in the IdentityNow realm. That work is ongoing. It's obviously less mature than what we see in the large enterprise space for IdentityIQ, but we're pleased with the progress we're making. We've added a number of partners around the world to help us there, and that contribution has been steady and solid. We have expectations to continue to grow the number of partners that support IdentityNow, both on a direct resale basis, a value-added distribution basis as well as, lastly, a fulfillment basis. So we're doing all of that and that contribution remains strong and important to our ability to drive the business forward.

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Robbie David Owens, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [16]

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Great. And then a follow-up to Mr. Hedberg's question from earlier. Regarding a year ago and the federal success that you saw, and we're seeing, I guess, really nice CDM spending through DHS again this year. So relative to that program, in particular, and the success that you saw a year ago, was that pull-in? Was that kind of onetime? Or do you continue to be a critical part of that program?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [17]

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Yes. So I think if you recall the comments last -- from last year's third quarter, Rob, the way the results played out, we did see some pull-in behavior from expected 4Q buying into Q3 of '18 last year. The reasons -- but that occurred in some sense, I think, a bit speculative on our part, but we certainly saw that behavior. As we've indicated previously, CDM has been an important contributor to the success of our federal and state and local vertical over many quarters now. There is still room to sell underneath that program umbrella to the U.S. federal government, principally on the civilian, agency and department side of the business. And so we're continuing to work with our partners in the federal space to fulfill the demand need. And there is opportunity there, and we expect we'll capitalize on that opportunity in the quarters to come.

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Operator [18]

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Your next question comes from Shaul Eyal with Oppenheimer.

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Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [19]

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Congrats gentlemen on the nice recovery quarter. This is Yi in for Shaul. My first question is, we understand that there is a long-term plan to invest in R&D as well as sales and marketing investments. Can Cam or Mark explain all the investment made to-date?

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [20]

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Yes. So this is Cam. I think as we have indicated on a long-term basis, we -- as we look at the overall market opportunity for SailPoint and identity governance, we see it as a market that we have real growth opportunity to address. Just a bit of a reminder, we segment on a size basis our customers above -- if you will, large enterprise, above 10,000, middle enterprise from 2,500 up to 10,000. And we are moderately penetrated in each segment, sub-10% in the large enterprise and single digits in the middle-market enterprise. So the opportunity to continue to deliver innovative and leadership solutions in that -- in both segments looks attractive to us. We're going to continue to invest in our ability to deliver from a channel and sales perspective globally because it is a global market, and we see global opportunity. So we're certainly investing in sales and marketing footprint on a global basis.

In addition, both platforms, IdentityIQ and IdentityNow, represent real opportunities for additional investment within each, if you will, family of solutions, and we're doing that, and you can see continued healthy growth rate. Obviously, a bit of a bump earlier in the year in terms of the growth rate. We think we can -- with progress, we can begin to rebalance the investment versus growth in the right way, and we would expect to do that. And we're going to continue to have an investment and growth bias orientation in our business planning and our investment management.

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Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [21]

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And then just a quick follow-up, Cam. You mentioned about the metrics of using a scorecard instrumentation to track better sales on the pipeline. Can you give a little bit of more color on what type of metrics you look at -- doing a weekly basis or a monthly basis that drives the better sales and -- as well as an update maybe on the CRO search?

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [22]

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Yes. So great question. The instrumentation really relates to -- from a demand generation, all of the variables that you would expect. It is a real-time system. We use a variety of tools the -- little long that early-stage pipeline generation activity, but it reflects lead responses further up the channel, then the leads, then to opportunity creation and the link points that should exist and will be optimized over time between sales and marketing. Those are important innovations we're continuing to push. So we've got good visibility at the top of the funnel. We've got good visibility as we move into the early selling funnel, and we look at that real time. We provided tools with greater visibility and greater actionability to our sales teams in the field organization such that they got effectively near real time daily, if you will, ability to look at pipeline migration, pipeline health and pipeline maturation down to the individual rep level. So we've really retooled a good deal of that. We've always had those tools, but we've taken the opportunity with a bit of the bump we had earlier in the year to relook at all those tools to work with our teams to make sure we're getting them the right information by which they can manage their individual territories. And I think so far, so good. We've seen a positive response from what we've done to date, and we're going to continue to invest and innovate around manageability of the business from a sales and marketing perspective.

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Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [23]

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And welcome to the team, Jason. Congrats, again.

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Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [24]

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Thanks.

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Operator [25]

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(Operator Instructions) Your next question comes from Alex Henderson with Needham.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [26]

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I have got 2 questions. The first one is on the middle-market pitch. As I understood that the problem from last quarter, to some extent, was that you went in too broadly and weren't addressing the precise pain points of some of your middle-market customers and you were going to refine that. Can you talk a little bit about to the degree to which you've narrowed that focus down to more accurately target what these issues were that these customers are trying to deal with?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [27]

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Sure. This is Mark. I think the focus was really on what we would call a solutions approach, meaning the idea that many of those mid-market customers, while they ultimately do understand that, that idea that they have a broad identity set of issues, quite often the initial presenting pain point, is around something else. It could be a ServiceNow implementation, SAP migration, maybe some new audit compliance findings. So a lot of what we've focused on is to try to target the initial messaging. It's somewhat about solution-focused, but it's almost some of the initial messaging to get attention. So we run different types of experimental campaigns, for instance, and found that when we targeted a set of users with a broad-based identity message versus a more focused messaging on how identity technologies can help extend and expand your value of ServiceNow for that was much more attractive, and we got much higher resonance with that. So I think it's -- generally, I put it into that category that's in the mid-market as a more solution-oriented approach seems to work much better for us.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [28]

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Is there any metrics around that? I mean, was it 20% or 30% more effective when you had that narrow targeting around solutions or some other data points that we can use to calibrate that?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [29]

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Yes, go ahead, Cam.

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [30]

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Alex, this is Cam. No particular metrics were prepared to share at this point. I think if you link what Mark said to what I commented on earlier, in terms of market segment refinement, it really is identifying in that middle-enterprise space, if you will, that one cadre of core customers from one, let's say, 2,500 up to 10,000 in size. What we've really done is begun to refine our approach and marketing effort -- our company's marketing efforts really within, as Mark said, what app may be driving the pain at this point that they engage with or within a vertical transition to a new ERP or a new HCMIS systems, if it's health care, all those things. So what we've tried to do is recognize that, that mid-market enterprise went from, in the earliest of stages, buyers that were more familiar with identity governance and had a better understand of the comprehensiveness benefit of our solution to a recognition that as we came through the quarter and began to do some diagnostics that the buyers in recent quarters were really much more focused on moving into an identity governance program. But as Mark commented, addressing a specific need or a specific driving question or problem at the time, that focus really allows us to get engaged, get into the selling campaign. And we've had a good success in starting with a narrower messaging and selling focus and extending it to a broader selling platform as we go through the selling cycle. So no specific metric, but what I would tell you is we're pleased with the resonance of the refinements that we've made to-date. And we're going to continue to work and engineer and retool it so that we can continue to step up the efficiency of what we're doing, both on the marketing side of the organization as well as the selling side.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [31]

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If I could just ask one question on the technology side to get the go-to-market question and taste out of my month because I hate asking those kind of questions. Your move to management in the cloud, I assume that, that's a single-tenant architecture as opposed to multi-tenant architecture. And if that's the case, could you get efficiency scaling in that format?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [32]

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Yes, that's exactly right. And just to differentiate it. So this is a response to higher-end customers who understand their need for kind of the robust kind of completeness of IdentityIQ and all of its integration points, and that would be a single-tenant hosted option for those kinds of customers. And then just to contrast, right, we're relatively unique, I think, in the market having both that offering and a true multi-tenant SaaS offering in IdentityNow. And so that is part of the breadth of offering that we're fortunate to be able to offer to the market. And oftentimes in these midsized customers, the higher end of that midsize, in particular, we have to get into a pretty healthy dialogue about the best fit solution for those customers, right? At the low end, it tends to be pretty clearly IdentityNow; at the very high end, pretty clearly, IdentityIQ, sometimes hosted. And now we're finding that in the middle, we'll find the kind of a cloud-first mindset but then it double-clicked into understanding what's really the best solution for that client, based on all those firmographics, technographics that we were talking about a second ago.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [33]

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And about the scaling -- the scalability?

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [34]

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Well, for that cloud-hosted version of IdentityIQ is, sort of, as scalable as IdentityIQ in the other setting because it's a single-tenant hosted. So it will scale. And again, as you know, we have some incredibly large Fortune 10 accounts on IdentityIQ today. So we're comfortable with its scalability for any sized enterprise out there.

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Operator [35]

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Your next question comes from Andrew Nowinski with Piper Jaffray.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [36]

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Congrats on the nice quarter. You hosted a track at your user conference focused on how customers are moving from Oracle to SailPoint. Can you just provide any color on how much Oracle win is contributed in Q2? And how we should think about it as it relates to the pipeline?

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [37]

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Yes, Alex, this is -- I'm sorry, Andrew, this is Cam. We did host, as you indicate, a track around Oracle. We continue to believe that the Oracle replacement opportunity in that legacy software-provider space is quite attractive. We've had very good success, as you know, over the long term. And in terms of our ability to successfully replace them, either in a direct way or in a phased way, that is do we add compliance managers and ultimately a life cycle or any other configuration that's driving the particular need for the large enterprise. What I would tell you is, as it relates to the Q2 results, we saw a solid contribution from Oracle replacements overall. As you know, we highlighted this in the last conference call. We've up-leveled our energy around both sales and marketing programs to replace Oracle. It's early, as you know, selling to a global 2,000 size enterprise to replace an OIM implementation. It takes a bit of time to develop, but the results to-date of those campaigns have been very good. And in terms of early indications, it's all top of funnel, but the response has been positive. Our work with our partners across the globe has been, I think, very good as well in terms of what we wanted to accomplish, but we've got to now continue to move those through the pipeline and mature them to a contribution. But first results, I think we're pleased with.

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [38]

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I only had one sort of super-short addendum there, which is -- if there's a subtle shift, that the partners are a little more willing to initiate those kind of go-to-market programs as opposed to being responsive to us when we wanted to pursue something they would say, "Sure, I'll come along that kind of a program." But now some of them are actually saying, "We'd like to initiate kind of an Oracle replacement campaign within their installed base of accounts," which we view as a good sign.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [39]

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That's great. I just like to follow up that with regard to the rest of the landscape. So as you know, CA was acquired, which we believe creates some disruption in the market. I guess, what are you seeing in terms of wins at the expense of CA? And are you putting any sales incentives in place, similar to what you got for Oracle to take advantage of that disruption?

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J. Cameron McMartin, SailPoint Technologies Holdings, Inc. - COO [40]

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Yes, Andrew, this is Cam. Yes, you're exactly right. The Broadcom of our acquisition of CA has really begun to mature and play out. We've seen inside of the organization based upon what we hear from prospects and clients, a de-emphasis around the security portfolio. That's certainly the message we've heard, and so we are targeting them. As you well know, we've always targeted all of the legacy software providers for replacement because we believe their innovation and investment around supporting the increasing complexity of hybrid computing environments just wasn't keeping up, and therefore, we have solid opportunity to replace them. So we have continued to -- as part of our overall targeting mix, targeted the CA account base very aggressively in all geographies. We have refined, as I talked about earlier, via our account-based marketing programs, refined our messaging and the targeting that we're doing. So both the quality of the message as well as the account identification and targeting have both been refined based upon some of the learnings and tools we put in place. And so the contribution from the CA installed base replacement cycle has stayed an important part of our mix, and we expect it will for a number of quarters to come.

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Operator [41]

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Thank you. There are no further questions at this time. I'd like to turn the conference back over to Mr. Mark McClain for closing comments.

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Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [42]

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Well, with that, I guess, I'll say thank you to everyone for joining us today. We're pleased again with the overall results and continue to appreciate everyone's interest. Thanks to many of you who are able to join us at Navigate in Austin a few months back. We appreciate you taking the time to do that. And we will keep you posted on our future progress. Thanks, and have a great afternoon.