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SailPoint Technologies Holdings, Inc. (SAIL) Q1 2019 Earnings Call Transcript

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SailPoint Technologies Holdings, Inc. (NYSE: SAIL)
Q1 2019 Earnings Call
May. 8, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and Welcome to the SailPoint Technologies Holdings Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I will now turn the conference over to Josh Harding, Vice President of financial Planning Analysis and Investor Relations.

Thank you, please begin.

Josh Harding -- Vice President of Financial Planning, Analysis, and Investor Relations

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

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 www.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.

Mark McClain -- Chief Executive Officer & Co-founder

Thanks, Josh, and good afternoon everyone. Thank you for joining the call today. I'd like to share our results for the first quarter of 2019. Total revenue was $60.6 million, an increase of 24% over Q1 of 2018, and non-GAAP operating income was $518,000 in line with our guidance. We added 46 net new customers in the first quarter. Our Q1 results were consistent with our guidance. We shared in our press release that we have lowered our outlook for the full year, due to the fact that our sales pipeline has not matured at the rate we initially expected, nor has it matured at the rate we experienced in prior years.

Importantly, our competitive position remains as strong as ever and we have best-in-class solutions for both large enterprise and mid-market enterprise buyers. The challenges that our go-to-market execution is following short our standards. As we've spent significant time analyzing the root cause in recent weeks, we identified two factors impacting the quality and volume of opportunities in our sales pipeline.

First, we increased our focus on targeting mid-market enterprise buyers and our go-to-market teams didn't maintain the same level of focus on our large enterprise audience. This impacted the volume and the pace at which deals were moving to the large enterprise portion of our pipeline. Second, as we expanded our focus and emphasis on the mid-market enterprise, we didn't effectively adjust our go-to-market approach on these buyers. And we are not experiencing the higher levels of growth; we know we can while this is obviously disappointing in the short term.

Let me talk about the things we've been doing in the business that we think will help correct this going forward. First, we are renewing our focus on the current and emerging needs of the large enterprise segment of our business. This includes sharpening our focus on where the large enterprise market is going, more vertical industry messaging, emphasizing the importance of governing cloud infrastructure and cloud applications, and our multiple deployment options for hybrid environment. Second, we are improving our messaging and targeting aimed at the mid-market enterprise. While the large enterprise buyer understands the important role that identity governance plays in their overall cyber security strategy; the mid-market enterprise buyer is still learning about the role of identity governance in their organization and within their identity stack.

As we move past the early adopters, we are taking a more needs-driven simplified messaging approach to identity governance, as we target the next segment of mid-market enterprise customers. We are starting to see this targeted refined approach work well. Third, with Cam transitioning to his new role as COO, as announced prior to this call. This will allow us to increase leadership attention related to our go-to-market initiatives. We are confident that we have identified the challenges and started down a path that sets us up well for the future. We know that we are addressing a big market and we have best-in-class solution.

Large enterprises continue to tell us that they need to move beyond first generation provisioning tools and into a true integrated identity governance solution. And then the historically underserved mid-market enterprise, buyers want a SAAS solution to address the increasingly complex challenge of managing identities within their organization. In addition, we believe that the competitive landscape continues to be in our favor and our competitive win rates continue to be strong. We've seen some recent market shifts, particularly in the large enterprise portion of the market, that we believe present new opportunities for us.

For example, there is an increasing de-emphasis by legacy players of their identity governance businesses. We believe this shift will cause many more enterprises to revisit their current solution and recognize their need for a next generation identity governance platform, which the legacy players are unable to provide. This replacement motion which we've executed hundreds of times, is one sell point knows well and it is something we've continued to see bear fruit in the first quarter.

As an example, one of the largest telecommunications providers in the world purchased Identity IQ in the first quarter to help them govern over 70,000 identities and to better comply with SECs regulation, while driving better operational efficiencies and enhanced security and risk mitigation. The legacy vendor we replaced failed in all three of these areas. In addition, our relationships with the global systems integrators continue to be very strong. In Q1, we experienced significant year-over-year growth among the top global systems integrators. With the addition of E&Y last quarter, we now count all 5 of the global SI as partners. As we pass the 18-month mark as a public company, we began to look forward to the next stage Company evolution and growth. In that regard, we are making several changes to the leadership team.

First, as previously announced, Howard Greenfield will be departing SailPoint this summer. Howard has been a key contributor to our market leading success over the past 5 years. We began a search for a new CRO that will lead our go-to-market growth initiatives, including global expansion of the field organization and partner community, extending our leadership in large enterprises, while capitalizing on the largely untapped mid-market enterprise opportunities.

Next, as we just announced in today's press release, Cam will formally transition to the role of COO. To the context, Cam is largely operated as our COO for many years during his tenure with the organization. He has been instrumental in growing the company and leading us to our successful IPO, and building a world-class finance and operations team, while also owning our internal corporate functions.

As we move forward, Cam will continue to focus his efforts to enable and scale our operational activities and to influence our commercial endeavors. In the near-term, Cam will focus on supporting the transition of our new CRO and the refocus to go-to market efforts, I noted earlier. With this change, I'm excited to announce that Jason Ream will be joining the team as our new CFO, effective June 10th. Jason has a proven track record at a public company, CFO, at SolarWinds. He also has meaningful experience in high-growth SAAS and software, extensive corporate and business development experience, and success in driving profitability at scale.

Now, let me hand it over to Cam.

Cam McMartin -- Chief Financial Officer

Thanks, Mark, and thank you to everyone on the line for joining us today. Our financial results for the first quarter came within our guidance on both, the top and bottom lines, with total revenue growth 24%, positive non-GAAP operating income, and meaningful cash flow from operations. Total revenue was $60.6 million, an increase of 24%, over Q1 of 2018.

License revenue increased 11% year-over-year to $18.7 million. Subscription revenue increased 41% year-over-year to $31.8 million. Services revenue was $10.1 million, up 5% compared to Q1 of 2018. On a geographic basis, the United States contributed 69% of Q1 revenue, with rest of world making up the remaining 31%. This compares to 66% for the United States and 34% for rest of world in Q1 of 2018.

As I transition to the remainder of our income statement. I want to note upfront, that unless otherwise stated, all references to expenses and operating results exclude amortization of acquired intangibles and stock-based compensation. In Q1 license gross margins were 100%, subscription gross margins were 83%, services gross margins were 24%. Together, the total gross margin for the quarter was 78%, up one percentage point year-over-year, driven by improvements in our subscription gross margins, as we benefit from increasing scale in our SAAS business.

Total operating expenses for the quarter were $47 million, compared with $34.1 million in the year ago period. This increase reflects the investments we're making in sales, marketing, and R&D, to support our long-term growth, additional professional services cost associated with the accelerated implementation of ASC 6O6 SOCs and 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 income was $518,000 in Q1, representing an operating margin of 1%. This compares to Q1 2018 operating income of $3.6 million for a 7% margin. To finish out the income statement, net loss was $88,000 or zero cents per share in Q1 of 2019. This is based on $88.3 million basic and diluted weighted average shares outstanding. This compares to net income of $2.3 million or $0.03 per share, based upon 88.9 million fully diluted weighted average shares outstanding in Q1 of 2018.

Adjusted EBITDA was $1.1 million in Q1 of 2019, compared to $3.9 million in the year ago period. During the first quarter of 2019, we generated positive cash flow from operations of $17.2 million, compared with $15.3 million in Q1 of 2018. We ended the quarter with 1,061 employees, a 27% increase from 835 at the end of the first quarter of 2018. We have continued to increase our headcount to grow our business and realized productivity improvements as we scale.

I'd also like to note that during the first quarter of 2019, we adopted ASC 842, the new lease accounting standard. This resulted in a meaningful change to the presentation of our balance sheet, as a result of recording right-of-use assets and lease liabilities for the present value of future cash flows for applicable leasing arrangements. As of March 31, 2019, we had total right-of-use assets of $32.2 million and total lease liabilities of $43.1 million.

Moving to guidance which as a reminder is based upon ASC 606; as Mark noted earlier, while our Q1 results were largely in line with our guidance, we've seen some recent changes in our pipeline that have impacted our outlook for the second quarter and the remainder of 2019. This is expected to have the greatest impact to our reported license revenue. Therefore, we now expect 2019 license revenue to be down 4% to 5% year-over-year. The reduction in our license outlook will have a commensurate effect on the maintenance portion of our subscription business. The remainder of the decrease in our subscription expectations is driven by a slightly lower than initially expected revenue from SAAS. As a result, we accept -- expect subscription to represent approximately 48% of total revenue in 2019.

It's worth noting that while our revised guidance implies a year-over-year decline in our license revenue for 2019, we continue to see year-over-year growth in our long-term pipeline. In addition to what Mark referenced earlier, this near-term decline in license revenue is also magnified by a challenging 2018 license comparable masking underlying growth trends. We are confident that we're on the right track to correct the challenges we noted and believe we need to continue making investments in our refocused go-to-market initiatives and product portfolio to address our large market opportunity and extend our competitive advantage. While this continued investment will have an impact on our prior operating income guidance for the year, we believe the level of investment contemplated is appropriate, given the long-term opportunity we see in the market.

For the full year 2019, we now expect total revenue in the range of $277 million to $281.5 million. We expect our non-GAAP operating income to be in the range of $17.1 million to $18.6 million, and non-GAAP net income per diluted share of $0.14 to $0.16. This assumes cash taxes of $2 million and 93 million diluted weighted average shares outstanding.

For the second quarter, we expect total revenue in the range of $59.7 million to $61.2 million. We now expect our non-GAAP operating loss to be in the range of a loss of $3.5 million to a loss of $3 million, and non-GAAP net loss per basic and diluted share of negative $0.05. This assumes cash taxes of $800,000 and $89 million basic and diluted weighted shares outstanding.

We believe that license revenue in Q2 of 2019 will be down by approximately $1.5 million, sequentially. In addition, we would also note that in Q2, we hold our Annual Customer Conference Navigate, which has an impact on our operating expenses.

In summary, we have some work to do, but are confident we are on the right path.

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

Questions and Answers

Operator -- Chief Financial Officer

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Dan Hedberg with RBC Capital. Please proceed.

Matt Hedberg -- Analyst

It's Matt Hedberg. Thanks for taking my questions. I'm kind of curious maybe dig in on the pipeline issues that you talked about. I'm sort of curious as you sort of done some due diligence, have you noticed anything from a pattern basis, was there any particular region in the US, within international? And then I guess secondarily, -- Mark, you always some things you're going to address. But I'm sort of curious if you could put a finer point on it, maybe the two or three things that you're thinking about, doing obviously a Chief Revenue Officer. But is it additional channel training, is it sort of more sales reps. Just maybe a finer point on the two or three things that you think are going to correct this.

Cam McMartin -- Chief Financial Officer

Yes, so Matt, this is Cam. Thanks for joining the call. I'll answer the first part of your question; I'll let Mark pick up the second. So I think as we did our diagnostic coming into -- looking at the balance of the year, both Q2 and the rest of the year. And we did a fairly thorough going look at where the pipeline was, what the movements have been across time. And going back as you recall, we guided for the first time in the year back in early March. And at that point had gone through as you would expect our typical thorough going review. And had seen pipeline for Q2 and Q3 being solid relative to historic metrics. And Q4 obviously in good shape, still meeting some pipeline growth, but not a typical for a year on a historic basis. As we came into and through March and into Feb-- excuse me into April, what we really began to see was more movement than we would typically see in -- inside this quarter. And the net result of that was a less mature pipeline for Q2. So as we looked at our historic closing metrics, the result was to bring the quarter down. I will tell you, we've looked at it across all of the variables that is geography and vertical -- and really verticals and other metrics that we look at, and we really saw a bit of softness across the totality of the quarter's pipeline that is Americas, Europe and Asia.

And in addition, really no particular vertical stood out for us. And is -- were highlighted in the prepared remarks. I think we had a bit more softness on the license side of the equation than we saw on the subscription side of the equation. And so, our analysis as we laid out really reflected a bit of softening in Q2 especially across the Board. And as we look at the balance of the year, we saw that same pattern showing itself in terms of the maturity and health of the pipeline. And quite frankly again, a movement from what we had seen back in the late March timeframe before we guided.

Mark McClain -- Chief Executive Officer & Co-founder

Hey, Matt, it's Mark. On that going forward, kind of adjustments, I think a couple of thoughts that we highlighted on the call and I'll go little deeper. There was a sense in which as we were watching the development of the pipeline in the mid-market, and I think this is part of why we saw some movement in the pipeline within the quarter. That these early adopter buyers that we think now in retrospect, we probably been tapping to last couple of years in the mid-market. As we moved into a more mainstream adoption phase of that market for identity governance, granted those mid-market buyers have been buying other types of identity software for a while, right, like Access management and Privilege Access.

I think what we're finding is, the buyers we're getting to now need a more targeted specific delineation of the solution. For instance, how does this specifically help me with SAP governance, how does it help me manage AWS, how does it help me with compliance on new regulatory framework like GDPR. So we've tightened up and tuned the messaging. And we've already seen some pretty good early signals that, that's resonating, causing deals to move a little quicker in the pipeline, stay strong, et cetera.

And as we also highlighted, I think that focus we put on the mid-market took a little of our focus, not a lot, by the way, we want to be careful here that we don't over correct. A little of our focus off the enterprise buyer, and we're seeing some of that same kind of adjustment in the enterprise, meaning there are definitely customers that still want a broad-based identity solution in the enterprise. Some of them, they want to be very clear with us, how we are going to help them manage their transition to cloud and live in a hybrid computing environment.

So all of that said, I feel like we understand better, what got a little bit off track in both segments, both the enterprise segment and the mid-market, have already made some adjustments, and we are seeing some good movement in the pipeline early on, but not so aggressive that we're willing to kind of stay where we have been on the guidance.

Matt Hedberg -- Analyst

That's great. And then maybe just a quick follow up. Obviously, you guys have had a lot of success the last few years with growth 30% to 40% or better. It sounds like you don't think there is a competitive issue out here. So it seems like that you're not losing deals. And I think, Cam, you mentioned that your pipeline's in all-time high. Going from where we are now, kind of low double-digit growth this year. Could you remind us against sort of -- you know how fast do you think the underlying market that you guys are in is growing. And how soon until you think we can get back to some of these market growth rates are even better like you guys had been delivering?

Cam McMartin -- Chief Financial Officer

Yes, so Matt, a couple of comments there. I think that the answer in terms of looking back into Q1. That's obviously the place we look at what the competitive dynamic is. Q1 looked very difficult to us, I would say. As we -- we've now turned the corner on the quarter and look back that is competitive win rates progression and transactions through the pipeline within the quarter. So, if you will maturation the way in which we got deals closed. So our overarching conclusion that we want to make sure we communicate today is, this is more about the rate and pace of pipeline expansion and pipeline quality on a near-term basis versus a change in the market outlook, if you will, or a competitive change. We don't see any of those variables manifesting themselves in the underlying numeric that we track on a quarterly basis.

You asked a question about growth. I think our belief is -- it's important to remind you that we are growing. In the large enterprise space, while we are seeing a -- because of the -- some of the highlights that we gave you, we are seeing a revenue decline in our current outlook for the year. We are seeing good overall growth in the pipeline across the 12 month window in the enterprise space and we're continuing to see healthy growth in the SAAS side of the business. Just not the level of growth we wanted to achieve or would expect to achieve. And so, to your question on growth outlook, I would -- have you look back at where we guided for the year in terms of this 2019 originally.

Our belief is, with the investments that we are making in product, the investments we are making in the sales organization and marketing programs, with the renewed focus and tightness in the approaches Mark highlighted, that will begin to see the pipeline build more successfully in front of us through the balance of the year and we'll see the growth rates begin to pick back up. And we think -- we see nothing in our outlook over the intermediate term that would suggest we can't get back. Because the type of growth that we would have expected as we enter in 2019.

Matt Hedberg -- Analyst

Great. Thanks a lot guys.

Operator -- Analyst

Thank you. (Operator Instructions) Our next question comes from the line of John DiFucci with Jefferies. Please proceed.

John DiFucci -- Analyst

So sort of a follow-up to Matt's questions; so having license declined 45% and thinking about that as being primarily the enterprise, your traditional enterprise business versus plus 10% or so the previous guidance for the year. And I know that's not a pure thing, like some large enterprises could buy IdentityNOW or some smaller enterprises could buy IdentityIQ. But when -- I just wanted to sort of figure this out my head. So can you remind us about how long your sales cycle is. And it almost seems like to go from plus 10 to minus 4 to 5, it almost seems like, I don't know, did you almost abandoned efforts to build that pipeline or just sort of let it to sort of -- I'm not sure how that can -- that's such an dramatic change to have a decline in that. And I just want to understand how that could have happened.

Cam McMartin -- Chief Financial Officer

John, this is Cam. I'll start adding at it and let Mark add to the commentary. The answer to your first question around sales cycle duration. The typical sales cycle duration for the large enterprise is about 270 days and for the middle enterprise customer about 180 days. That's roughly speaking, so that's an average obviously. Deals close faster than that, deals take longer to close in that average. The reality of where the growth moved, but for us in the large enterprise space between where we guided originally in today is really movement in the underlying pipeline as we look at it. And I think candidly as Mark highlighted, I think we took a bit of the focus away in our business activity, that is the motion of demand generation, pipeline build and so forth in the recent months and the result of that was we saw some weakness in what has otherwise been the strong part of our business, that is the large enterprise part of the business. In response to Matt's question, I want to be clear again. Our competitive win rates on that market -- that large enterprise market were very healthy in Q1. The replacement cycles that you have seen us talk about in the past from a legacy competitor perspective, were very much intact. And so we do believe as we've gone diagnostically down the road to understand where we landed and how we landed here. It was an over-rotation a bit toward the mid-enterprise market, as we tried to keep extending our footprint in that market. And a drop in focus in the large enterprise. And one of the things that we have redoubled our efforts on, as we begun to understand what the disconnect has been is to go back and look at those things that we were doing well in the large enterprise and launch programs to do those things focused on replacements again in terms of specific targeted programs against the legacy competitors and other activities. We've I think importantly redoubled our efforts with the Global SIs. As you know, we added E&Y (ph) in the first quarter and we are working very hard to get them up to speed and productive for us in the marketplace, because that Global SI contribution in the large enterprise has been very important and we saw good contribution there in the first quarter and we've got to go back and make sure we're working closely with them as we build and grow pipeline at the rate we would expect to grow. So I think those are some highlights I would give you. I'll let Mark add on some additional spots.

Mark McClain -- Chief Executive Officer & Co-founder

Yes. I have much to add John on that. I honestly I think the truth is, we didn't drop our focus entirely. I think we saw that there was some shifting away from the demand and activity that we would typically have focused on the enterprise toward the mid-market and as a result, we saw a little bit of weakness developing in that enterprise segment that we just got uncomfortable holding the same guidance we've given you before and we -- at the time as we saw, we already began to shift some of our focus to some renewed programs for targeting legacy players, etcetera. So all that to say, but we do feel like we're already seeing some good lift in that pipeline development, as you know, a lot of that pipeline now that we're developing in the enterprise segment does start to look like it's out in 2020. One of the things we'll be working on is trying to improve some of that, to pull it in as Cam like to say, member and average is an average. Some of our enterprise deals absolutely close unless than nine months, but for now, I think we feel like this is the prudent guidance for the market and that we will be working hard to improve it.

John DiFucci -- Analyst

Okay. And if I might just follow-up, just sort of a general question here. It sounds like at least you guys think that this is somewhat self-inflicted just sort of what's happened here. But can you just tell us, you said you've seen some signs that in a way things are improving. What's implied in guidance, the current guidance? Is it imply that things are actually going to improve in this guidance or given that's so early as it is implied that -- OK, if things stay the way they are is this kind of what we would do?

Mark McClain -- Chief Executive Officer & Co-founder

Yes, John. I think -- listen, the answer your question is, from a guidance perspective, we have tried to be, I think very thoughtful about how we guided and given the early indications of progress against some of these variables, right. I want you to understand that as you've heard me say earlier and to give you the timeline again, we looked at our metrics in March and saw what we felt like it was a strong outlook relative to the guidance that we gave you in March and have an evolution of outlook from March through the middle of April that showed a less growth oriented outlook for 2019 and we began as you would expect us to, very aggressively day-by-day into all of the moving parts of what it is that we were doing and what we had stopped doing and we, I think as a team have tried to very deliberately develop a set of action-oriented activities to get back on-track.

As you highlighted in the early part of your questions, this is a longer sales cycle. Some of this because of the maturation and progression of deals in the pipeline, it's our belief that it will take a bit of time to get the growth back on-track as I link you back to Matt Hedberg's question. This is a guide that we believe reflects the improvement that we can achieve in the pipeline. But we have work to do, I don't -- I want to make sure you understand that we are going to be working hard to execute against the programs that we have laid out for ourselves. We see those programs as being in terms of places of improvement as being very opportunistic in that regard in terms of the contribution that can make and it's now a matter of execution.

You asked the question earlier, you posed the positive the notion that this was self-inflicted. I think the answer is, this was an execution blip bump in the road for us that quite frankly is unfamiliar to us. You're well familiar with the history of the operation of this business and the growth of this business. And we are completely unsatisfied with where we are at this point in terms of where we sit today and having to adjust the guide as we're doing. And we are as a team completely unified that we're going to go after getting growth back on-track and taking the necessary actions to do so.

John DiFucci -- Analyst

Okay. And I don't -- that was my second question so let it go with that. I'm just trying to get a sense of something happened here. And does -- the things have to get a lot better for you to hit the numbers you just gave? It sort of says they have to get better for you -- sort of what you just said Cam.

Cam McMartin -- Chief Financial Officer

John, I think they have to. Look, I think the way to think about it a lot better versus a bit better. What we have to do is sustain a good performance of maintaining the quality of the pipeline within the current quarter, which we work very hard to do on second quarter, so we have a quite frankly, a realistic and widely scrubbed view of the pipeline, where the deals are, what their stages are, what the health of them is. We've done the same for Q3 and Q4 as well, we've looked, I think very directly what the pipeline addition will be based upon our demanagement (ph) programs that we are running and the additions that we have made in order to give ourselves a very solid opportunity to achieve the out quarter guidance that's reflected in the full year guidance. And we understand what's required, it is about executing and not hitting a bump in the road as we have here. And I think we've -- the redoubling of the effort, the extra focus that we're giving now on the enterprise business around what is needed to get that back where we believe, it should be on a growth basis and get that replacement cycle to a place we think it should be. All of those activities the team understands what needs to be done in much like we've been doing for many quarters it's about execution in front of us and that's what we're going to be working very hard to do.

John DiFucci -- Analyst

Okay. Thanks a lot, Cam. Thanks, Mark.

Operator -- Analyst

Thank you. Our next question comes from the line of Andrew Nowinski with Piper Jaffray. Please proceed.

Andrew Nowinski -- Analyst

Thanks for taking the questions. So maybe based on your customer, discussions are you certain that the issues impacting your pipeline are specific to your own execution, considering the volatility in the market? I may have created some caution with regard to spending?

Mark McClain -- Chief Executive Officer & Co-founder

It's good question, Andy. I think we believe that we see things that we are not happy with in our execution and we know we can improve on those and that's what we're focused on. Can we delineate that part of the softness, could be market. We don't think we see a lot of general market softness that contributed to this but we're certainly watching that, it's been an interesting week this week as these things often are in markets but I think in our case, we believe the bulk of this, the great bulk of this is we have ample opportunity in front of us that we didn't target quite as well from an opportunity standpoint that we can improve and therefore, we will improve it and believe we'll see our results get back in line with those camps at the kind of guidance -- growth guidance we had on the table in the first quarter call.

Andrew Nowinski -- Chief Executive Officer & Co-founder

Okay, got it. And then I know you have go-to-market partnership setup with Okta and CyberArk. And I was wondering if you could give us any color on that. How the pipeline of deals from those partnerships have contributed so far and going forward?

Cam McMartin -- Chief Financial Officer

Yes, Andy. This is Cam. You're correct. We do have relationships both with CyberArk and Okta. I would tell you those were strong contributions in Q1. In each case, what we would have expected, in fact a little bit ahead of expectations in terms of the contribution. We continue to work closely both teams in terms of the way we message, in terms of how we can work together in the field, in terms of the integrations that we have between our two product set. So there is a broad spectrum of activity that is ongoing to deepen those and broaden those relationships so that we can each capitalize on the opportunity in the marketplace that comes from collaborating working together as we go to customers and we go to market.

Andrew Nowinski -- Chief Financial Officer

Okay, thank you.

Operator -- Chief Financial Officer

Thank you. Our next question comes from the line of Rob Owens with KeyBanc Capital Markets. Please proceed.

Mike Casado -- Chief Financial Officer

This is Mike Casado on for Rob Owens. On the 4Q call you discussed 2018 running ahead on profitability targets, but in light of the updated pipeline outlook and the profitability guidance, can you provide us a bit more color on how your investment priorities have shifted from last quarter's outlook?

Cam McMartin -- Chief Financial Officer

Yes, Mike. This is Cam. The answer is, that we have -- if you look at the inherent structure of the guide, we continue to focus our investment prioritization in the same ways. What do I mean by that? We continue to believe that investing in the scale and global positioning of the sales force is important. We have moderated somewhat the growth expectations in that spend, just based upon what we believe the trajectory of growth will be. So we are -- if you will be watching a wider wins of time and making sure we're investing in a way that now reflects where we're starting from this guide and going forward to reestablish the growth rate that was reflected in the beginning of the year guidance and the implied growth there.

And so that's important and we continue to be focused on that. We have in this process of relooking at the outlook for the year, we have gone back through and reprioritized where we think the most valuable additions to the field sales force will be. We have looked at what we're doing from a partner standpoint to make sure we're investing in the most profitable segments of the partner program. And in addition, we have looked at all of the productivity of our marketing programs to make sure, as we go forward, the spend that we have and the growth that we anticipate will be in areas that we have found to be most productive for us or those places where we think there is an opportunity to accelerate or reaccelerate performance based upon some of the focus miss that we had in -- how we talk about the enterprise space.

I think as it relates to product development, again, we've moderated some of the hiring expectations and that's trying to balance a bit, our historic desire to have growth with profitability. And we believe that there are still good investment opportunities in the business from an R&D perspective in terms of extending the portfolio, maintaining our lead that's reflected in the way Gartner looks at it, Forbes looks at our position in the marketplace. So really what happened here is, we are not changing our investment philosophy in the business. What we have done in light of the moderated guide for the business for full-year 2019 is moderated what we see to be the expansion in aggregate spending across Q2 through Q4.

Mike Casado -- Chief Financial Officer

That's really helpful detail. Thank you. And then, last quarter you talked about repackaging SecurityIQ. Presenting file access manager as more of a core add-on versus the third product. How did you see that repackaging impact consumption trends in the quarter, both in the channel and direct?

Mark McClain -- Chief Executive Officer & Co-founder

Hi, this is Mark. Mike, I'd say we didn't see any noticeable movement yet because I think that messaging, obviously had -- you know, we retrained our sales force at our sales kickoff in late January of Q1. They've now begin to carry that message out. We're seeing about the same, maybe a slightly increased attach rate, what we call the attach rate of that family to our pipeline, but we do still believe that we are at the early stages of that as a market shift and maybe it's helpful -- I think I made this point in another call, that if you roll back the clock a decade, there was a time when people saw what are now considered the two halves of governance, meaning kind of compliance and lifecycle management of provisioning is distinct markets. We strongly believe those are converging, we made that case. Ultimately Gartner and all the other analysts agree with that, rig package (ph) those as a single offering in the market. We think we're at the early stages of a similar evolution here where file access governance -- file access management, i.e., who can access what in the file systems Box, Dropbox, etcetera, SharePoint which is today generally viewed in the customers as a separate and distinct things to be managed from the core identity governance disciplines that we've historically focused on. We think the market will see those as more converged over time. That's certainly the message we're carrying. We think that the leading thinking customers that we talked to agree with that and are implementing that way so we just think it's at the beginning innings of a multiyear in game here on the convergence of file access management with the rest of identity governance.

Mike Casado -- Chief Executive Officer & Co-founder

That's helpful, thanks guys.

Operator -- Chief Executive Officer & Co-founder

Thank you. Our next question comes from the line of Walter Pritchard with Citi. Please proceed.

Walter Pritchard -- Chief Executive Officer & Co-founder

I'm wondering on the fed side, what you're seeing in terms of pipeline there, and I know that was a strong contributor to you in the second-- to your business in the second half of the year. And there's obviously some been some moving pieces there, but what's your confidence and then what are you embedding around Fed and then had a follow-up?

Cam McMartin -- Chief Financial Officer

Yes, sure. This is Cam. I think the basic message is that will be a solid contributor for us as we look at the outlook, we went back for our pipeline scrub for the balance of the year, we don't see it having the same level of contribution in 2019 as we saw in 2018. There are programs and activities we see in Q3 and Q4 that were working very hard to mature and in a way that they will be contributors to each of those quarters. As it currently stands, I would tell you we see a more historically typical pattern to 2019 that is more business coming in Q3 than Q4. But there is pipeline maturation that we see happening in both Q3 and Q4 for Fed. So a somewhat more moderated outlook for 2019 than we saw in 2018, there is contribution coming from CDM, there is contribution coming from other departments and agencies on the civilian side. In addition, we are working very hard on a number of programs on the defense and intelligence side of the business. So there's good activity there and we're pleased with the activity and our continued success in building our position in the U.S. Federal market. The other thing that I would highlight for you is, is it state and local. Is a business that we are newer in, compared to U.S. Fed and the growth this year in that looks to be a bright spot in what, if you will, has been a moderated outlook on some of the other activity we talked about. So we've got obviously work to do, as you always do to mature that pipeline to a place of closing for Q3 and Q4 but I think that's the work we understand that needs to be done, and that's what the team is focused on at this point, in the Fed side of the business.

Walter Pritchard -- Chief Financial Officer

And then as it relates to cloud. How are you evolving if at all the go-to market to try to capture customers who might feel a paint point that your product can solve when they start looking at public cloud? And specifically around Microsoft. I didn't hear you mention them as a partner in that context but it seemed like their customers to be the ones that would most understand the value.

Mark McClain -- Chief Executive Officer & Co-founder

Yes, Walter. It's Mark. Good point in that. I think we're finding in both our core segments, right. The enterprise segment and the mid-market segment that the identity governance, applications data, etcetera, in the cloud is very important in both segments. And increasingly right, there is certainly the dominant franchises of AWS and Azure. So the management of those cloud infrastructures in the apps living in those infrastructures is really key to both segments for us. Obviously, Google, IBM, others play in the cloud game, but those two are surely dominant. And we have invested a lot in both the IdentityIQ and IdentityNOW platforms and the management there. The tricky part with Microsoft is that from an identity governance standpoint, they shifted to a bit more competitive posture with us, we thought that would happen there. Obviously, already very competitive with Okta. And they've made noise now that they may become more competitive in the governance landscape. I will tell you that that is not something we have a lot of heartburn over because we've now seen Microsoft attempt to enter this space in multiple times, in our 20-year history in this market and have very limited success in the government segment of Identity, as opposed to the access segment of Identity.

So we will watch that but frankly we talked to a lot of customers that are very dependent on Microsoft both their OnPrem solutions and their emerging cloud Office 360 Azure solutions and they are very, very pleased with our offerings there and are using us to manage those environments all the time.

Walter Pritchard -- Chief Executive Officer & Co-founder

Thank you.

Operator -- Chief Executive Officer & Co-founder

Thank you. Our next question comes from the line of Alex Henderson with Needham & Company. Please proceed.

Analyst -- Chief Executive Officer & Co-founder

Hi, it's Denpark (ph) on for Alex. Thanks for taking my questions. So just provide some color on what solutions are resonating well with mid-market customers and have they been more open to consuming SaaS versus Perpetual?

Mark McClain -- Chief Executive Officer & Co-founder

Yes. This part, I think, for sure, they are much more staff in perpetual what we generally will say is in the below 10,000 user line, it tends toward SaaS and the above 10,000 it tends toward Perpetual. In both cases, that is not pure. We have some reasonably smaller companies, particularly in financial services, it's still tend to want our identity IQ offering because of the complexity of the environment. Conversely, we are some much greater than 10,000 and 20,000 user environment that are using it now because of their environments needs, so to speak. Particularly, we noticed that for instance in retail, that a lot of very large retail organizations are perfectly content with our SaaS offering because so much of their users and identities are in relatively simple store applications with one or two access points. So that said, we typically still find SaaS being the predominant offering to the mid-market enterprise. And within that mid-market, we do see a bit more how is this a little bit on the call and a little bit of the first couple of follow-ups. More targeted solutions. What I mean by that? When we got the enterprise those buyers are very sophisticated and their thinking about governance, identity governance, tend to win a comprehensive solution over everything.

In the mid-market, they may start from a position of I'm a healthcare company focused on Epic, I'm a manufacturer focused on SAP, I'm whatever kind of business who is moving everything to Amazon web services; what's your answer for me in that environment? So they will start with a more targeted solution, they generally still want to get us to cover their enterprise, their smaller enterprise, these mid-market companies but it often starts in that single point of focus. So we find that by tuning up some of our marketing efforts, our go-to-market messaging, webinars, seminars things we do toward that kind of a buy, meaning a kind of a focused targeted initial buy. We've seem to be getting better residents with this segment of the mid-market and as we said earlier on the call, we think we sort of move beyond some of the earliest adopters in the mid-market segment of identity governance toward those that are going to be looking for a little simpler way to buy. So long answer there, but that's how we see it emerging in the market.

Analyst -- Chief Executive Officer & Co-founder

Thanks for the info. And as a follow-up, were the pipeline challenges that you're seeing are primarily focused within your domestic business or was pretty evenly distributed across goes and as a follow-up, does this impact particular vertical more so than others?

Cam McMartin -- Chief Financial Officer

Yes. So this is Cam. The answer to that, those question as I think they're a sequence. The change in pipeline outlook that we saw both in Q2 and for the balance of the year in terms of the rate of demand generation, in the latter part of the year from a 3Q and 4Q perspective, really was across the globe. Now that is, we saw similar patterns, not exactly the same, but similar patterns in the U.S. or the Americas, in EMEA, and in Asia-Pac. And so, as we then dug deeper and looked at vertical, I would say the lack of progress and the lack of matured pipeline in Q2, touched all the verticals in a pretty balanced way. There are relative puts and takes on any particular vertical but what I would say is, I wouldn't call out any particular vertical as being noticeably a contributor to the change in outlook by any stretch of the imagination. This is that's why, as we diagnostically come back to the answer we come back to, is this is a focus and execution question, not a market question.

Analyst -- Chief Financial Officer

Great, thanks for the color. That's really helpful.

Operator -- Chief Financial Officer

Thank you. Our next question comes from the line of Melissa Gorham Franchi with Morgan Stanley. Please proceed.

Melissa Franchi -- Analyst

Great, thanks for taking my question. In the enterprise space, are you primarily still just seeing IdentityIQ as the primary product of choice? Are you starting to see any shift between IdentityIQ and IdentityNOW as enterprises are increasingly willing to adopt SaaS-based solutions. And is that factor into your outlook at all?

Cam McMartin -- Chief Financial Officer

Melissa, I'm Cam. I'll start and I'll let Mark follow on. I think the answer is, we are not seeing any fundamental new directional shifts in the ways in which the large enterprise customers want to consume, beyond what we told you in the past. And what do I mean by that? I think importantly the large enterprise across all the verticals segments we address, continue to have a preference for the ability to deploy IIQ such that they can address their complex governance requirements from a use case perspective, as well as the different service offering elements within the IIQ family, including FAM, as Mark talked about earlier.

So I think, largely what we're seeing is a continued preference there. As we've told you in the past, as Mark highlighted in prior response, there are flips and flops between the large enterprise and mid enterprise, based upon a particular vertical drivers that as the margin might push somebody, for instance, in the large enterprise to be an IDNOW customer. What I would tell you is, we have seen a greater focus in the large enterprise around, evaluating, moving, that is play shifting, if you will, IdentityIQ deployments out of the data center, behind the firewall of the large enterprise into the public cloud. In that like, if you recall back in the third quarter of last year, we announced with the release of IdentityIQ that we did in that timeframe we had added some additional capabilities around serviceability, manageability and deploy ability of that product family into those environments. That has gone well, I think the reception in that domain has been good. I think we have identified additional investments that we can make, that will make that an even stronger value proposition for our customers. We're prioritizing those investments in terms of new engineering and development programmatic efforts we're making there. So I think the shift that we're seeing is really play shifting for deployments of the IQ family rather than the large enterprise making up platform, if you will shift from our IIQ acute family to the ITNow family.

Melissa Franchi -- Analyst

Okay, that makes sense. And then just a quick follow-up for you, Cam. What are you seeing in terms of the attrition rate within your salesforce this quarter and what should we expect in terms of investments in sales headcount for the year?

Cam McMartin -- Chief Financial Officer

Yes. So the attrition rate within the sales force has been consistent this year with prior years. We've always said, I think a somewhat better than average retention rate of our sales folks, on a long-term basis and I wouldn't highlight for you any overall change in the outlook, if you want to look-back basis in terms of what we're experiencing better said around attrition. I think that is one variable we watch very closely and it's obviously something we work hard to do, is to retain our very experienced and capable in our enterprise sales force. The growth rate in our enterprise selling team and by that I mean, reps and all of the supporting cast of players around the individual reps in the field that is systems engineers, partner managers, marketing professionals, all of the team that we believe is necessary to have a successful selling program in the marketplace. We are investing to grow there, we haven't given you any numbers in prior guide and I won't give you any additional information, day-out specifics, but what I would say is what you -- as you look at the guide in OpEx for Q3 and Q4, you're going to -- you will see continued expense expansion and that really reflects on an underlying basis, our intent to grow the field sales force across the entirety of the globe, so that we can capitalize again. As we get some of these execution problems underneath us, we can capitalize again on what we see to be attractive growth opportunity in this market.

Melissa Franchi -- Analyst

Thank you very much.

Operator -- Analyst

Thank you. Our next question comes from line of Shaul Eyal with Oppenheimer. Please proceed.

Shaul Eyal -- Analyst

Thank you. Good afternoon, guys. Wanted go back to the question on the mid-market growing focus. So on the one hand, I think we clearly see the opportunity but on the other hand, there always could be some challenges. I'm certain that in one of the names that comes to everyone's minds on the call is Veronese (ph) which is primarily focused on the mid-market. My question is first of all, how long do you think -- do you anticipate that the ongoing education paid to take with the mid-market accounts? You've already addressed kind of the subscription so I think that you'll take care of that, but also as you know, down market toward the mid-market, are you running into any new competitive global?

Mark McClain -- Chief Executive Officer & Co-founder

Hi Shaul, it's Mark. Let me try to take both of those. On the first about kind of mid-market, especially in the element of files and therefore that Veronese (ph) environment. I do feel like we run into the most need for clarity in that. We do find that when we get to the companies that are trying to get a comprehensive sense as we've simply like to say, who has access to what. That is pretty straightforward to them to understand that they would prefer to answer that question across their entire IT infrastructure, meaning both applications and files, file systems, etcetera. I'd say that the residents with that is definitely better in the higher-end of the mid-market market. What I mean by that? We sometimes sub divide the mid-market into kind of the greater than 5,000 and less than 5,000 because above that line in a lot of industries, those companies are more similar to the large enterprises in terms of the complexity, regulatory environment, often you're dealing with more public companies in that range, etcetera. And that in those environments they are definitely starting to click more with the value proposition of these things being integrated whereas I think at the lower end of the market there's a little bit more. Whoever got that responsibility is probably still pretty distinct -- the group managing SharePoint is distinct from whoever is managing Core IT and Identity. So I think we do find that we have more work. I certainly couldn't help you with how long it takes to get the whole market educated. I think we are building good reference accounts here that can talk about the value of managing those things in that integrated way. And obviously, we start hopefully going to create a flywheel there of those that are already doing that and happy with it, can talk to the next set of prospects, that kind of thing. But I think we have more work to do there, but we are starting to feel like that message is resonating, probably more at the high-end of that mid-market that if at the mid to lower end of it.

Shaul Eyal -- Chief Executive Officer & Co-founder

Understood. And my follow-up, I know that -- Cam also mentioned, I think you mentioned the 18-month mark as a publicly astute (ph) company. I know also you mentioned in the Q&A session, the term sort of a steering bump; do you think we can also characterize this bump as representing growth space, which is pretty much natural stage in the evolution of almost every relatively new publicly traded entity. Is that fair?

Cam McMartin -- Chief Financial Officer

Yes, Shaul. I'm Cam. I think it is a reasonable observation in the sense that, you can look across the longer-span spans of time and see a number of younger public companies have some challenges in the early part of their time as being public companies. We've obviously had a busy 18 months as a public company. You know the history, I don't need to highlight it for you. That said, that's not the standard by which we measure ourselves. We measure ourselves by the standard we guided in the month of March. And we believe that guide and we've aligned our resources and our team to achieve that business objective and we have surprisingly based upon all the work we've done, quite frankly falling short. And we would not have guided as we've seen this back in March. And so our job at this point is to recognize that it's a bump in the road. It is not by any assessment that we can make either a competitive position of our product portfolio in the marketplace nor is a change in the outlook for the identity governance marketplace. It is rather an execution problem and execution problems as we all know, have a history of taking time to develop and so they will take time to clean up. We are all aligned as a team to clean them up quickly. That's the simple story, simple message I would deliver to you. And Mark and I are spending a great deal of time working on these questions and will increase the allocation of that time as we go forward, so that we can ensure that what we know to be the right corrective actions are getting implemented and executed against.

Shaul Eyal -- Chief Financial Officer

Fair enough. Thank you.

Operator -- Chief Financial Officer

Thank you. Our next question comes from the line of Tim Klasell with Northland Securities. Please proceed.

Tyler Wood -- Analyst

This is Tyler Wood on for Tim. Just one question from us. You mentioned the changes in mid-market messaging and renewing a focus in the large enterprise but is there anything else specific you are looking to change under the new sales leadership? Maybe anything new compensation or coverage wise that we should be looking for going forward? Thank you.

Mark McClain -- Chief Executive Officer & Co-founder

Good question, Tyler. No, I would say not substantially, right. I mean every year, coming up on midway through this year and as we head into the late year, it's our planning for 2020. We always look at everything from the sales force structure to the compensation programs and all that. So we'll certainly be looking at that. I'd say in general, no, this really was more about kind of a collection of messaging, frankly that comes out of our product teams to our marketing engine and then the execution of the combined field force both our channel and our direct seller. So with all that said, I think in general, we are looking comprehensively at that entire go-to-market machine and making sure we are tuning it up again for the differences that we now think we understand more clearly between those segments.

And then, one other thing I could mention is, we've definitely increased our focus on what we call target account. Marketing, right. Really being very clear on the types of accounts that seem to resonate best, the profiles of existing accounts, how does that map to prospects in our pipeline and even some newer technology that allows us to get a sense of their activity level related to this area of investment and governance, identity governance. So I think not a lot beyond what we talked about there, kind of the refocusing in the enterprise, the tuning of the messages for the mid-market. We always look at tweaking in tuning our go-to-market mix of the investment in cut campaigns, going to events, all those kind of marketing mix questions everybody wrestles with, but I think in general, those two big ideas are still the two big ideas.

Operator -- Chief Executive Officer & Co-founder

Thank you. We have reached the end of our question-and-answer session. This will conclude today's conference call. You may disconnect your lines at this time and thank you for your participation.

Questions and Answers:

Duration: 63 minutes

Call participants:

Josh Harding -- Vice President of Financial Planning, Analysis, and Investor Relations

Mark McClain -- Chief Executive Officer & Co-founder

Cam McMartin -- Chief Financial Officer

Matt Hedberg -- RBC Capital Markets -- Analyst

John DiFucci -- Jefferies -- Analyst

Andrew Nowinski -- Piper Jaffray

Mike Casado -- KeyBanc Capital Markets

Walter Pritchard -- Citi

Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Shaul Eyal -- Oppenheimer

Tyler Wood -- Northland Securities -- Analyst


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