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Edited Transcript of SAIL.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·41 min read

Q3 2020 SailPoint Technologies Holdings Inc Earnings Call Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of SailPoint Technologies Holdings Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Andrew James Nowinski D.A. Davidson & Co., Research Division - MD & Senior Research Analyst * Brian Lee Essex Goldman Sachs Group, Inc., Research Division - Equity Analyst * Daniel J.W. Park Canaccord Genuity Corp., Research Division - Associate * Drew Timothy Foster Citigroup Inc., Research Division - Research Analyst * Hamza Fodderwala Morgan Stanley, Research Division - Research Associate * Joseph Anthony Gallo Jefferies LLC, Research Division - Equity Associate * Joshua Alexander Tilton Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst * Matthew John Swanson RBC Capital Markets, Research Division - Associate VP * Yi Fu Lee Oppenheimer & Co. Inc., Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by. This is the conference operator. Welcome to the SailPoint Third Quarter 2020 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Josh Harding, Senior Vice President of Finance. Please go ahead. -------------------------------------------------------------------------------- Joshua Harding, SailPoint Technologies Holdings, Inc. - VP of Financial Planning, Analysis and IR [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us today to discuss SailPoint's third quarter financial results. Joining me today are SailPoint's CEO, Mark McClain; and our Chief Financial Officer, Jason Ream. Please note that 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 GAAP to non-GAAP results. And now I'd like to turn the call over to Mark McClain. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Josh, and thanks to each of you for joining the call today. I hope you and your families are staying healthy and safe. I'm very pleased to share our impressive third quarter results with you this afternoon, which were underpinned by solid execution and a continued prioritization of identity as a core IT investment area for today's digital enterprise. Total revenue for the third quarter was approximately $94 million, representing 24% growth year-on-year. Our Q3 results were driven by continued broad interest and demand for a comprehensive identity platform that fully protects and securely enables today's digital workforce and their access to the tools and technologies that fuel the cloud enterprise. We experienced broad-based strength across our business throughout the quarter with strong momentum in our SaaS business, continued resilience in our license business, a good mix of large and midsized customer wins and strong performance in all geographies. In particular, we saw good contribution outside of the Americas, notably in Europe, as interest in our SaaS identity platform continues to rise. For example, one of the world's top stock exchanges chose SailPoint's SaaS identity platform to replace an on-prem legacy identity platform that could no longer keep up with the organization's identity and access management needs. The CISO, a repeat SailPoint customer, one of the SaaS identity solution that would help them solve for both the current as well as the future state of the business Already, this company has successfully onboarded 100-plus applications and solved some of their most pressing access modeling needs, thanks to the AI and ML-driven capabilities embedded in our platform. We believe our performance this quarter is indicative of the large market opportunity ahead of us as more organizations recognize how foundational identity security is to the business today. In fact, we attracted more than triple the number of attendees to our virtual Navigate conference this year. Identity management is increasingly being recognized as a foundational element of modern security stack and is a key investment priority for many companies. The aftermath of COVID-19 and the quick shift to virtual has seen many organizations realize that good-enough identity management is not good enough. In other words, it is not enough to simply grant workforce access, which many companies were quick to do as their business went remote, but that access needs to be properly secured and managed. This has resulted in more enterprises turning to SailPoint to provide the right identity security and governance controls needed to properly protect all business assets and securely enable today's workforce. As noted earlier, we continued to be very pleased with the adoption of our SaaS platform globally. In fact, close to half of the larger deals in the quarter were SaaS deals as more enterprises at the upper end increasingly adopt a SaaS-first approach to identity. For example, a large luxury department retailer turned to SailPoint when their legacy on-prem identity solution failed during their shift to remote work as the pandemic took hold. The pain they experienced in trying to securely grant access to their workforce became evident across the business, heightening the critical need for identity security all the way up to the Board level. Despite the substantial impact the pandemic had on their business, they chose to invest in our SaaS identity platform as identity became a top business imperative and IT investment priority for them. From a competitive perspective, we believe one of the big reasons we continue to draw broad interest from global enterprises is because of the breadth and depth of our enterprise-class SaaS identity platform. SailPoint brings a rich history of innovation in identity, which is evidenced most notably by the continued investments we make to embed AI and ML technologies into the core of our identity platform. Our goal is to make identity more approachable, streamlined and autonomous while adding new features that today's virtual workforce requires. We are committed to the long game, helping our customers navigate today's business challenges while anticipating the emerging challenges to come. Our customers recognize that in us and continually turn to us for this reason. As just one example, an aerospace manufacturer chose to make SailPoint SaaS identity platform foundational to their cybersecurity program. They selected SailPoint, not just for the current capabilities we offer today, but because they believe our predictive approach is best suited to helping them to properly manage the variety of identity use cases they expect to address both now and in the future. As we turn to the last quarter of 2020, we are energized by our significant momentum and leadership position in the market. We continue to be mindful of the economic environment and its potential impact on close rates, but the strength of our recent performance gives us confidence in our ability to execute despite a continued challenging macro environment. We are focused on 3 key priorities: driving broad adoption of SailPoint's identity platform across geographies as more organizations recognize the criticality of identity security to today's modern workforce; delivering innovative, differentiated SaaS identity solutions that protect and provision today's enterprise with confidence and at scale; and executing consistently while delivering a reliable identity security solution to the benefit of our customers around the world who depend on us to support their identity and security needs. In closing, we believe our performance this quarter further validates the high relevance and criticality identity has achieved as a global business priority. In today's digital world, you can no longer do business without technology and you can't securely use that technology without identity security. At SailPoint, we protect our customer's business, helping to manage the risk from this explosion and technology access happening across today's digital enterprise. As we head into Q4 and year-end, we look forward to continuing to provide the dual value of enabling secure access and protecting the entirety of our customer's business, helping them to provision with confidence, protect its scale and comply with certainty. With that, I'd like to hand it over to Jason, who will discuss the details of our financial performance and results in Q3. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Mark, and thank you to everyone on the line for joining us today. I'll review our third quarter results and then update you on our expectations for the remainder of 2020. As Mark mentioned earlier, we're very pleased with our performance in the third quarter and with the momentum in our business. Total revenue for the third quarter was $94 million, a 24% increase over Q3 of 2019 and 12% ahead of the high end of our guidance range. Our SaaS bookings were meaningfully ahead of our internal expectations. We're really seeing traction across our organization with the lean into SaaS that we signaled at the beginning of 2020 with more of our team learning motion and becoming comfortable winning with our SaaS products. As Mark mentioned earlier, we're seeing an increase in the number of sizable SaaS wins, reflecting strong interest from larger enterprise customers as well. Subscription revenue increased 36% year-over-year to $51 million or 54% of total revenue for the quarter. We continue to expect subscription revenue to be more than half of our total revenue going forward while there can be some quarter-to-quarter variation if we have a particularly strong license revenue quarter. I would note that we have seen SaaS, which is the fastest-growing part of our subscription revenue, accelerate over the course of the year. This has been offset by slower growth of maintenance revenue, which reflects our license performance in 2019 and our continued shift towards SaaS. License in Q3 was also meaningfully ahead of our internal expectations. But this quarter, we saw a pronounced shift in IdentityIQ bookings from perpetual license purchases to term license subscriptions. We have always done some amount of term license, and we indicated last quarter that some of our outperformance came in the form of several large term license deals. This quarter, however, is the largest quarter we've ever done in term license bookings, and those bookings were distributed over a much broader set of deals than they were last quarter. As a reminder, term license contracts are recurring just like a SaaS deal. But under ASC 606, we have to account for a term license, similarly to how we would if it were a perpetual license. As a result, we end up recognizing a meaningful portion of the term contract value upfront as license revenue and the remainder ratably as maintenance revenue over the life of the contract. Last, but definitely not least, our renewal rates remained very strong across both maintenance and SaaS this past quarter. As I transition to the remainder of our income statement, please note that, unless otherwise stated, all references to expenses and operating results are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today's press release. On a combined basis, total gross margin for the quarter was 81%, compared with 80% in Q3 of 2019. The increase in gross margin was largely driven by revenue mix, although gross margins across all revenue lines performed well. Operating expenses were $64.2 million, up 10% sequentially and 23% year-over-year. The increase in operating expenses was driven largely by proactive investments in sales and marketing and product growth initiatives as well as some increased corporate bonus accrual based on our outperformance so far this year. Operating income was $12 million, meaningfully higher than our expectations. Obviously, revenue's significantly ahead of our expectations played a big part in this result as the spending that came in below budget. As we invest to pursue this growth opportunity in line with our strategy, we try to closely evaluate spending decisions to make sure that we're pursuing initiatives that we can manage and from which we can drive return. Turning to our outlook for the fourth quarter of 2020, I'll lay out a few thoughts and then give you specific expectations for the quarter. First, we have performed well so far in 2020, and we believe that we can continue to drive strong growth in Q4 and over the coming years. Second, as I mentioned earlier, our SaaS momentum is ramping nicely. We lead with SaaS and sales opportunities and fully expect a large and growing portion of our new business will be driven by our SaaS solutions in the coming quarters and years. The strength of our licensed business year-to-date is a positive indication of the overall demand for SailPoint but is more of a reflection of pipeline built before we leaned into the SaaS transition, and we don't believe this changes the underlying trend in our business towards SaaS. As a result, we are still expecting revenue growth to be dampened over the intermediate future as we see more of our business mix shift towards SaaS and its ratable revenue model. Third, as we have said throughout this year, we are committed to making the investments needed to capitalize on our attractive strategic opportunity. As we progress through the revenue transition I just discussed, it is likely that at some point, expenses will be growing faster than the top line. We strongly believe that investing in our growth will generate strong returns for shareholders. Now specifically in the fourth quarter, we are raising our total Q4 revenue expectations from what was implied in our prior full year guidance by $2 million due to the strong recent performance in our SaaS business. I would note that our internal expectations have changed, such that we expect a much larger portion of IdentityIQ bookings to be term licensed subscriptions rather than perpetual licenses. The shift in our pipeline from perpetual to term should result in less upfront revenue as we trade onetime perpetual licenses for recurring term license contracts, but the overall strength in our business allows us to feel confident raising our expectations. We now expect total revenue to be in the range of $93 million to $95 million. We expect subscription revenue to be between $53 million and $53.5 million and services revenue to come in at around $9 million to $9.5 million. We expect our non-GAAP operating income to be in the range of breakeven to a loss of $2 million. For the full year, we now expect total revenue to be between $355 million and $357 million with approximately $194 million driven by the subscription line, which represents 35% year-on-year subscription revenue growth. And for the year, we expect non-GAAP operating income to be in the range of $33 million to $35 million. In summary, SailPoint is performing well and generating significant growth at scale. We're excited about our strategy, about our market opportunity and about how we are executing as a team. We are looking forward to providing greater detail on our vision for the future of SailPoint and how the transition of our business model to SaaS and subscription will impact our financial results at our first-ever Analyst Day, which we are targeting for February 26, 2021. We will provide more details as we get closer to that date. With that, I'd now like to turn to the operator to begin the Q&A portion of the call. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Your first question is from Brian Essex. -------------------------------------------------------------------------------- Brian Lee Essex, Goldman Sachs Group, Inc., Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Great. And congrats on the results, nice, strong, quarter. I was wondering maybe if you could address the shift to term license from perpetual. What is the duration of some of those term contracts? And how might that pipeline be building with regard to the installed base of term license with respect to building expectations for future periods in renewals? -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [3] -------------------------------------------------------------------------------- Yes. Brian, thank you. This is Jason. As you know, we have done term license in the past, but it's not something we've pushed much. Last quarter, we saw a number of sort of customer demand-driven term license contracts but relatively concentrated in some big deals. This quarter, we saw just a lot more demand from the customer side for those term license arrangements. And typically, like any of our recurring contracts, they are 3 years, although we have done a number that are longer than 3 years. But we don't have a lot in our installed base currently that is coming up for renewal. There are a few here and there. But as I mentioned, we just haven't done a lot in the past. I think what we saw this quarter is probably not surprising to you and to others on the call that have seen lots of software companies go to a term license model. We had not done it previously sort of waiting for customer demand. But now that we're seeing it, we're certainly seeing a lot more interest from customers in that model. -------------------------------------------------------------------------------- Brian Lee Essex, Goldman Sachs Group, Inc., Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Got it. That's super helpful. And maybe for a follow-up, pretty substantial increase in sales and marketing. As you noted, you're investing in the growth for the company. Maybe if you could highlight some of the initiatives of where your focus is, whether it's growth in Europe or through the channel and where some of that spending may be focused? And how much of that is driven by more near-term activity that you're seeing in the pipeline? -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Brian, this is Mark... -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [6] -------------------------------------------------------------------------------- I think, Mark... -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [7] -------------------------------------------------------------------------------- Oh, you want to go ahead, Jason? Go ahead. Go ahead. Go ahead. Yes, the joys of not being in the same room anymore. Yes. Brian, I guess I'll start with that. Jason may add to it. I think, in general, what we're seeing is that the demand for capacity around the globe that Matt, as our CRO, is looking to create enough capacity for what we see in the pipeline. And that, of course, our pipeline, we see going out more than a year at a time, right? So we have some pretty good visibility to longer-term demand that's driving a lot of that. There's some needs to add to the group that supports the core sellers, right, SEs and channels and internal sales folks who create some of the early demand. But in general, it's mostly about delivering more capacity, and we are seeing continued strength in the U.S. We noticed some good strength in Europe, and so solid performance in APAC. So that's pretty global. No particular areas of focus over another. I guess that would be my short answer. I don't know if Jason would add anything to that. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [8] -------------------------------------------------------------------------------- Yes. No. I think that's perfect. I will note, Brian, and I mentioned this a little bit in the script that this applies to sales but it also applies to the overall business and our expense. And when you talk about sales and marketing expense going up, and we certainly are investing in the ways that Mark just talked about. But also remember, we are outperforming our plan, right? I mean you certainly see it in the revenue numbers year-to-date. But our SaaS bookings are well ahead, too, and you don't quite see that in the revenue number. So as you would expect, compensation is up a bit more as we continue to outperform, both in terms of sales commissions and in terms of bonus accrual. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Your next question comes from Hamza Fodderwala. -------------------------------------------------------------------------------- Hamza Fodderwala, Morgan Stanley, Research Division - Research Associate [10] -------------------------------------------------------------------------------- Mark, first question for you. I wanted to touch on something you mentioned in the prepared remarks, how you guys are sort of managing through an uncertain environment still. So I'm wondering, based on what you're seeing so far in Q4 with your pipeline, how has that been trending? And kind of what are your -- what's your guidance thought process on the ability to get deals done and close rates as we're seeing more flare-ups and all the uncertainty that's going on from a macro standpoint? -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [11] -------------------------------------------------------------------------------- Yes. Thanks, Hamza. Good question. Obviously, I'll just be blunt. We recorded this a day or 2 ago. And as you can imagine, it's been an uncertainty in the U.S. and still is somewhat around how that particular issue settles out, but we don't see that having much impact. If anything, the market seems to be settled a little about what appears to be a divided government in a good way. And regarding the COVID impact of uncertainty around the globe, we aren't seeing any significant change in behavior patterns from our customers that are well through the pipeline, moving deals. As you know, Q4 is seasonally always our strongest quarter. So I think we were just trying to reflect the fact that, yes, we are seeing some increase around the world. Everyone's kind of a little bit on their toes on that, but we haven't felt any particular pullback from our customers. And I think we are all watching for how this week might affect things here in the U.S. and ultimately around the globe. But again, aren't seeing any particular reaction in the short term. So I'd tell you that was just a note of caution that we're still living in some level of uncertain times, but we haven't seen any significant reason to believe that the quarter won't finish along our expectations. -------------------------------------------------------------------------------- Hamza Fodderwala, Morgan Stanley, Research Division - Research Associate [12] -------------------------------------------------------------------------------- Got it. And then maybe a follow-up question for Jason, if I may. Jason, on the term license front, any color you can give us to sort of help us quantify what the mix of that was in Q3? I know historically, there hasn't been a great percentage of the license mix. Any color you can give us there? And that's it for me. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [13] -------------------------------------------------------------------------------- Yes. I mean, I'll say that, as you said, historically, it has not been a big part of the mix amongst our IdentityIQ bookings, which is where all our user perpetual or term license comes from at this point. If you think about half this quarter, it's probably the right way to think about it. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from Matt Hedberg. -------------------------------------------------------------------------------- Matthew John Swanson, RBC Capital Markets, Research Division - Associate VP [15] -------------------------------------------------------------------------------- Yes. This is Matt Swanson on for Matt. Mark, could you dig a little deeper into what's really driving the SaaS growth right now, if you think it's kind of the maturity of the product, the investments that you guys have been making, go-to-market or changes in the demand environment? And then as that portfolio kind of builds, how are you thinking about managing renewals? -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [16] -------------------------------------------------------------------------------- Okay, Matt, let me pick up both -- actually may flip to Jason on the second part of the renewals there a little bit. On the first part, I used this silly analogy in a couple of settings lately of the trying to split out the ingredients of soup versus salad, where you feel like things are kind of mixed together, and you can't completely separate those ingredients. I think in some ways, it is pretty difficult for us to point specifically to the percentage impact or proportional impact of the 3 things you named, right? Is it an increasing breadth and depth of product use case coverage? That's certainly a factor. Is it a pull from the market in increasingly large customers who seem to be getting more comfortable than they were even in 12 to 18 months ago with SaaS as an operator for this particular part of their identity solution set, that's a factor. Is it our fields growing comfort level with their ability to win SaaS deals, not just in the mid-market, where we've been strong for quite some time, but also at the mid- to high end of the market, that's a factor. I can't tell you that those are perfectly 1/3 each, but I can tell you that they're all definitely contributing to the momentum. And we do see, as Jason said earlier in the year, a very strong indication that over half of our new deals will be through our SaaS product line. And there, as you guys know, we do a lot of our business at the high end of the market as well as kind of the mid-high end of the market. So I guess we're just seeing all those factors contribute to a lot of success. And then I'll flip it over to Jason, Matt, to talk about kind of how we think about renewals yes. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [17] -------------------------------------------------------------------------------- Yes. And Matt, can you give me a little more color on what you're looking for on renewals? -------------------------------------------------------------------------------- Matthew John Swanson, RBC Capital Markets, Research Division - Associate VP [18] -------------------------------------------------------------------------------- Yes. No, it's just what steps are you guys putting in place to make sure that you're managing and have visibility to this growing part of your business. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [19] -------------------------------------------------------------------------------- Well, look, we have a customer success organization. In addition, obviously, when you're talking about SaaS products, you have a lot more visibility into what the customer is doing with the product. And that's exactly what they're doing, obviously, but how they're using it. But we have, as we've told you before, very strong renewal rates for our maintenance. And we have strong retention with our SaaS product as well. And it's really kind of -- it's the same organization, which is a customer success focused organization to make sure that customers are enabled, that they're deployed, that they know what they've got and what they're using it and that we're solving any problems that they encounter so that we can hold on to those customers and make sure that they're successful, right? Ultimately, their success turns into our continued success, not only with them, but then as they become references for us throughout the market. So not any dramatic change from how we thought about it historically in the maintenance world. Obviously, given the fact that there is a subscription mindset, I think there are more opportunities to upsell to customers. And at a renewal event, that's potentially more of a -- there's more of a sales motion involved. But strictly from a renewal and retention standpoint, it's sort of sticking to the ABCs of making sure customers are successful and that we're engaged with them. -------------------------------------------------------------------------------- Matthew John Swanson, RBC Capital Markets, Research Division - Associate VP [20] -------------------------------------------------------------------------------- That's really helpful. And then, Jason, you mentioned a second ago that we haven't fully seen SaaS show up in the revenue line yet. Could you talk to us about impact? And maybe most of this is, "stay tuned for the Analyst Day," but the impact SaaS is having on the model for revenue or deferred revenue standpoint. And I'm guessing as this gets more material, we're going to get some additional disclosures to help us get a sense of that growth. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [21] -------------------------------------------------------------------------------- Yes. I think you're thinking about it the right way. I mean, I will give a little color and say that we started off this year talking about a shift towards SaaS in our business. We have done, as you know, and everyone knows, we've done a fair amount of license deals this year as well. And think about that, in part, as a factor of pipeline -- existing pipeline that was there before we sort of internally and externally leaned into the SaaS transition. But also -- it's also just part of the journey that we're on. As we mentioned, part of our transition to SaaS is bolstering the product, and that's well underway but that's certainly not complete. And so thinking about customers in Q2 who bought, in some cases, and Q3 as well. In some cases, the SaaS product just wasn't quite ready for them, and the on-prem product was the right one for them. So from an impact perspective, we talked at the beginning of the year of our transition potentially having a 7% headwind or a 7-point headwind to our growth rate. We -- as I mentioned, we've done a fair amount of license this year, and so I think not all of that has played out in year-to-date. But if you think about our Q4 guidance, I mentioned that we're seeing a lot of the IdentityIQ, the on-prem software bookings transition to term. And we're expecting that shift in Q4 from what we've seen in the pipeline, but we also are expecting SaaS to be ahead or better of what we expected at the beginning of the year. And so our growth rate in Q4, and this is not the full year comment we made at the beginning of the year, but the growth rate in Q4, if we were to do the same amount of bookings but at the mix we did last year, we have significantly more revenue, right? And I would put it more like a 15-point headwind to growth in Q4. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Your next question comes from Brent Thill. -------------------------------------------------------------------------------- Joseph Anthony Gallo, Jefferies LLC, Research Division - Equity Associate [23] -------------------------------------------------------------------------------- This is Joe on for Brent. So if term was half this quarter of the license line, is it fair to say in regards to the pipeline that it's 50, 25, 25 with SaaS perpetual and term. And then it sounds like you guys continue to lean into SaaS, so I would expect that to kind of go up. You increased the compensation, I believe, for salespeople and the typical deal cycle is 6 to 12 months. So are we now at the point now where almost every deal is being -- has been led with an incentivized salesperson trying to lead at SaaS? -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes. Let me start with that. And Mark, feel free to jump in as well. Joe, I'm not going to break out our pipeline, but I will tell you for sure that SaaS has been growing very nicely in the pipeline and growing more rapidly than on-prem in the pipeline. And on the term side, that has been growing much more rapidly than it ever has in the past, right? And so I think directionally, you've got the right idea there. Sorry. What was the next part of your question? -------------------------------------------------------------------------------- Joseph Anthony Gallo, Jefferies LLC, Research Division - Equity Associate [25] -------------------------------------------------------------------------------- Well, it was just more -- it sounds like it's going to continue to move towards SaaS given you guys are now kind of leaning into that and incentivizing the sales people. And given the sales cycle, 6 to 12 months, we're -- yes. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [26] -------------------------------------------------------------------------------- Yes. Look, no, I certainly don't want to say that every single deal in our pipeline started off during the incentivized period. Our average deal cycle is 6 to 9 months, but there are some big deals and even some not quite as big deals that take longer and are still good opportunities for us. So I wouldn't say that. I also would say, look, there are -- and we expect this to be the case for some period of time. There are customers for whom the SaaS product is not the right product yet, right, that they have particularly complex use cases, particular sensitivities, whatever it might be. And so they may have, as you said, have been started during that incentivized environment but still IdentityIQ might be the right product for them. -------------------------------------------------------------------------------- Joseph Anthony Gallo, Jefferies LLC, Research Division - Equity Associate [27] -------------------------------------------------------------------------------- Makes sense. And I'll keep this question a lot shorter. Can I just get an update on the federal vertical? -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [28] -------------------------------------------------------------------------------- Yes, Fed continues to be a good vertical for us. Obviously, the government is sensitive to identity security concerns and understands the benefits of what our solution can do. That continues to be a good opportunity for us. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from Andrew Nowinski. -------------------------------------------------------------------------------- Andrew James Nowinski, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30] -------------------------------------------------------------------------------- Great, and congrats on another great quarter in a very tough environment. So first, I want to ask about the license revenue. It continues to surprise on the upside. I think you saw -- you said you saw a meaningful shift determine this quarter, and you're obviously recognizing most of that revenue from those deals upfront as if they were perpetual, but I don't know if I would necessarily account for all the upside in the license line this quarter. So were there any large deals that contributed to license that maybe you weren't expecting to close in the quarter that drove some of that upside? -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [31] -------------------------------------------------------------------------------- No. Look, our performance was above our expectations, almost by definition. We closed some deals that we weren't expecting to close, but not as if they were blue birds that we didn't have on our radar, right? We just -- we closed more than -- and we expected we absolutely would. So in terms of was there extra outperformance on the perpetual license front, definitely not. The outperformance on revenue and even the license revenue came more from the term license side than it did from perpetual license. -------------------------------------------------------------------------------- Andrew James Nowinski, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [32] -------------------------------------------------------------------------------- Okay. Very good. And then I would imagine we're going to continue to see many more of these term deals, not only in Q4, which you said does create a headwind to your -- for your guidance. But we'll also see that going into 2021. So I'm wondering if you could just put a finer point on perhaps the headwind. How big is the headwind when you have a perpetual deal shift to a term license deal? How much less revenue are you getting typically on those deals as -- just to give us a sort of framework to think about 2021? -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [33] -------------------------------------------------------------------------------- Yes. The term license is a headwind. It's not nearly the headwind that SaaS is. I think the way to think about it is just, in very rough terms, when we sell perpetual license, we usually sell the license and the first year of maintenance bundled together, and we'll recognize somewhere around 80% of that in the first year -- well, sorry, 80% of it initially and the entire amount over the first year. When we sell a 3-year term deal, we'll probably recognize somewhere in the neighborhood of 60% of that upfront. And so there's a bit of a headwind there. It's not quite like SaaS, though, where we saw a SaaS deal in December, and we're not recognizing much of it at all during that year. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Joshua Tilton. -------------------------------------------------------------------------------- Joshua Alexander Tilton, Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst [35] -------------------------------------------------------------------------------- I was just hoping that you could dive a little deeper on why a customer would choose term over cloud. What exactly our customer citing is the reason for not being ready from a cloud perspective? And then could you just remind us for the plan on closing that functionality gap. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [36] -------------------------------------------------------------------------------- Yes. Let me pick that one up, Joshua, as a start, at least, because that's a little more about why customers go a certain way, not just the financial ramifications of that. In general, we've really got... -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [37] -------------------------------------------------------------------------------- Did we lose Mark? (technical difficulty) Okay. Well, Josh, let me talk to your question while Mark is rejoining. Look, the range of reasons why a customer might choose IdentityIQ instead of IdentityNow ranges in a very few cases where customers still have a preference for on-prem software. There are -- that obviously is decreasing as they're experiencing SaaS software in all sorts of other parts of the environment. And so there are a few holdouts, there aren't many. To customers that have particular use cases that they're trying to solve that we just haven't built out in IdentityNow, in some cases, those are use cases that we have on our road map. And we're -- I think you used the word closing the gap. We try not to use those words, but it's probably a fair way of talking about that many ways. But sometime early next year, we think we'll be at a point where product functionality really isn't much of a reason. But there are some use cases in IdentityIQ that we're not planning to build. They just aren't broad market use cases. But some particular customers happen to have those use cases on their radar, and IdentityIQ covers it. And so for some customers, that's a choice. And then lastly, there are the -- if you want to call them, those gaps where IdentityNow just isn't quite at the level of IdentityIQ yet. Again, we expect it to be there in the next couple of quarters. But for now, it's not quite there. And certainly, as some customers started their sale, their buying process with SailPoint, whether it was 6, 9, 12 or longer months ago, they had IdentityIQ in mind, and sometimes it's tough to change that mindset. On the flip side, we have some other customers who buy IdentityNow, knowing the direction we're going. Even if they're not entirely satisfied with where IdentityNow is today, they're sort of coming along the journey with us. So it varies a bit. But for the most part, I would say, it's customers who have particular use cases in mind or particular needs that just aren't solved yet by IdentityNow but should be in the near future. -------------------------------------------------------------------------------- Joshua Alexander Tilton, Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst [38] -------------------------------------------------------------------------------- That was helpful. And I guess I know you've been having a lot of questions on the term licenses. But if we think about it, how do we kind of reconcile your pipeline visibility with the outperformance that you're seeing in the license business? And then if we think about it, a lot of the term was supposed to be perpetual and find that the beat would have been even greater. So I guess the question is how do we reconcile your visibility and see outperformance? And how sustainable is the outperformance going forward? -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [39] -------------------------------------------------------------------------------- Yes. Look, the outperformance -- did we have visibility into it? Again, I want to be clear. We're tracking all of these deals that we did and expecting them to close at some point. And in all the cases this quarter, they were targeted for Q3. We just were successful in more than we bet on when we provided guidance at the beginning of the quarter. In terms of outperformance, I'll say like I did last quarter, that I don't want to say we can outperform like this every single quarter. But I would say that there is a fundamental market force that is, I think, leading to our outperformance as well as our own execution, which is leading to our performance. And we believe in both of those factors, both -- that identity governance, identity security is important, is being recognized as such by customers, and it's something that's a priority for customers. And that our team is in a good place, that our strategy is in a good place, and we're executing well. And so while I wouldn't promise outperformance like we had this quarter or last going forward, I do think that our business momentum is something that we believe that we can continue and sustain for -- as I mentioned actually in the script, not just in Q4 but for the coming years as well. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Your next question is from Yi Fu Lee. -------------------------------------------------------------------------------- Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [41] -------------------------------------------------------------------------------- I hope everybody's well and congrats on the strong set of results. First question is, I think Mark mentioned earlier about the SMB market earlier. I was wondering if you guys could give me an update, either Mark or Jason, about -- we understand SailPoint's a powerhouse on capturing enterprise front. What is the go-to-market motion? How's the pipeline looking on the SMB space? And then I have a quick follow-up, Jason. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [42] -------------------------------------------------------------------------------- Okay. I'll take that one, Yi Fu. Yes. Not to be too differentiated from your question, but we're not really focused on what most people consider SMB, and we typically draw that line at kind of 1,000 employees and below. We tend to be focused on what we refer to as kind of the mid-enterprise market and up, so think a few thousand users and up. Now there are exceptions. In financial services, we will go to smaller organizations that have a lot of complexity in their regulatory framework, their IT application environment, things like that. But in general, what we consider mid- to large enterprises kind of gets defined in a few thousand, 3,000 and up. And I know other organizations sometimes define enterprise quite a bit lower than that. But to us large enterprise is maybe 10,000 and up, and enterprise is 3,000 to 10,000, just round numbers. That's kind of how we think about it sometimes. -------------------------------------------------------------------------------- Yi Fu Lee, Oppenheimer & Co. Inc., Research Division - Associate [43] -------------------------------------------------------------------------------- Got it. And then my follow-up is more general. This one is, I guess, can you discuss like the pipeline going to the fourth quarter, how are we seeing this? I know you briefly commented earlier that we don't -- there's a lot of uncertainty, whether the secondary lockdown in EMEA. But then again, EMEA performed really strong this quarter. Wanted to take -- get your take on like maybe the APAC region as well as the EMEA region versus the U.S. region, how they performing heading into 4Q, and that's it for me. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [44] -------------------------------------------------------------------------------- Yes. Yi, good question. I think we saw good strength internationally in Q3. The teams there are in a good position and executing well but great performance in the U.S., too, or in the Americas, I guess, I should say. And in terms of pipeline going into Q4, pipeline looks great. It gives us all the confidence to provide the guidance we provided, and we feel very good about it. In terms of the uncertainty, I think Mark addressed this a little bit at the beginning. But there is a ton of uncertainty. But for that matter, there's been a lot of uncertainty for the last couple of quarters. And I think we saw -- if you remember, back in March, we saw the uncertainty have an effect on the business, and that sort of mitigated how well we did in Q1. I think what we've seen since then and for the most part expect to continue is that we and customers and prospects are able to operate through the uncertainty, right? Now look, uncertainty is uncertainty. And at some point, there's presumably a limit of what people will operate through. But from what we have seen, people are continuing to operate, and that's what we expect to see going forward. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Your next question comes from Drew Foster. -------------------------------------------------------------------------------- Drew Timothy Foster, Citigroup Inc., Research Division - Research Analyst [46] -------------------------------------------------------------------------------- Just a quick one for me. Wondering how close you are to being able to steer people toward ARR or some other metric or set of metrics to help wash out some of the noise that we're seeing on a quarter-to-quarter basis? -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [47] -------------------------------------------------------------------------------- Yes. I mentioned, Drew -- thanks for the question. I mentioned it in the script that we're planning to hold our Analyst Day on February 26, which is in the early part of next year. That's the sort of opportunity, as you might imagine, where we can take the time to look at the model in detail and potentially look at new metrics that would shed light on the situation. And -- but give us the ability to take more than 20 minutes and run through them but actually walk through them and explain them in detail. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Your next question comes from Mike Walkley. -------------------------------------------------------------------------------- Daniel J.W. Park, Canaccord Genuity Corp., Research Division - Associate [49] -------------------------------------------------------------------------------- This is Daniel on for Mike. So it seems like it was a strong quarter in terms of net adds. I think you guys added 70 new customers sequentially. Could you just provide some color for us on what drove the strength in new customers? And are you still seeing the majority of this as competitive displacements? Just wondering if you could provide some more detail. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [50] -------------------------------------------------------------------------------- I guess, Jason, I'll start on that one, and you can certainly jump on as well. Yes, Daniel, I don't think we're seeing any significant shift there, meaning we still are getting a lot of net new business. It tends to be spread across the mid-, large enterprise and the very large enterprise. And as we've said, the higher up in that segment you go, the more likely there's at least some partial displacement, that they've got some remaining legacy technology. It tends to be more from the life cycle/provisioning side of the portfolio than the compliance or auditor. Certainly, if we're coming in with more of our kind of predictive identity intelligence solutions, that's really not displacing. That's coming in with some things they've never had before. So I get -- that you're still a long -- excuse me, a strong focus on net new business, net new logos from that and the team, coupled with a continued goal of continuing to expand our footprint in a lot of the existing accounts we're in. I think, Jason, you could kind of, here -- we've had a roughly 2/3, 1/3 split by transaction count each quarter for quite a few quarters. I think this quarter was about the same. I've got to verify that, so Jason can jump in on that one, perhaps. -------------------------------------------------------------------------------- Jason Ream, SailPoint Technologies Holdings, Inc. - CFO [51] -------------------------------------------------------------------------------- Yes. Yes. That's true. That's true. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [52] -------------------------------------------------------------------------------- Yes. But 2/3 of the transactions by count, Daniel, would be net new logos, net new customers to us. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mark McClain for any closing remarks. -------------------------------------------------------------------------------- Mark D. McClain, SailPoint Technologies Holdings, Inc. - Co-Founder, CEO & Director [54] -------------------------------------------------------------------------------- Well, just again, thank you to everyone who joined us. It's been a particularly interesting week here in the U.S. for I know most of us are. So things are making the time for the call. Appreciate the continued interest in SailPoint. And again, we will certainly wish all of you a safe and healthy remainder of the year, and look forward to talking to some of you individually in the coming hours and days. Thanks again. Appreciate it. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.