SAIL - NASDAQ

Greetings. Welcome to SailPoint Technologies Holdings Fourth Quarter 2020 Earnings Conference Call. I would now to turn the conference over to Mr. Josh Harding, Senior Vice President of Financial Planning, Analysis and Investor Relations. Josh, you may now begin.

Good afternoon, and thank you for joining us today to discuss SailPoint's fourth quarter and full year 2020 financial results. Joining me today are SailPoint's CEO and Co-Founder, Mark McClain; and our Chief Financial Officer, Jason Ream.

Thanks, Josh, and thanks to each of you for joining the call today. I hope you and your families remain safe and healthy. I'm very pleased to share both our fourth quarter and fiscal year end 2020 results with you today. Our results in both periods were driven by solid execution across the business and strong demand for SailPoint's identity platform. For the full year 2020, total revenue was approximately $365 million representing 27% growth year-on-year. Total revenue for the fourth quarter was approximately $103 million, the largest quarter in our history, and the first time we've exceeded $100 million in quarterly revenue. Our team and our partners executed extremely well around the globe throughout the year. And I'd like to thank each one for their contribution to our ongoing success, especially during such a tumultuous time. Now I'd like to spend a few minutes talking through some key business highlights from 2020 before shifting to our focus and strategy for 2021. SailPoint's business performed at a high level throughout 2020 despite the economic disruptions related to the pandemic, we experienced significant demand and subsequent growth throughout the year as the relevancy and criticality of identity security became even more apparent. The SailPoint team responded well to this increased demand, delivering a high level of tight execution across all geographies. The events of 2020 reinforced many of the positive trends in our business which we expect to continue going forward. For example, this past year, the rapid shift to working from anywhere drew significant attention to an issue that many companies simply hadn't fully seen before. We helped numerous companies understand the extent of risk exposure in their business due to loosely managed and largely ungoverned access. Providing access for remote workers proved to be a light bulb moment, as more organizations realized they were operating under a false sense of security that they were only focused on connecting their people to technology without properly securing their access.

Thanks, Mark, and thank you to everyone joining us on the call today. As Mark mentioned at the beginning of the call, we're pleased with our performance in Q4 and throughout 2020. Here are some of the financial highlights that I'd like to call out with respect to Q4. First total revenue of $103 million representing 16% growth year-over-year and more than $8 million above the high-end of our previous guidance range. Second, subscription revenue of $56 million representing 38% growth year-over-year and $3 million above our previous guidance. This out performance was driven by strong sales performance and by better than expected retention of our SaaS and maintenance customers. Third, non GAAP operating income of $13 million well above our expectations. This out performance was driven by revenue, while we have our plan and by expenses slightly under planned. While we are aggressively investing in the business, our team is disciplined and tends to find efficiencies as we execute through our plans. And lastly, we have two new metrics; we'll be disclosing goals going forward. And we'll go into more detail on those tomorrow in our Analysts Day. But to give you a quick preview, we closed the year with ARR of $251 million, representing 40% year-over-year growth. And SaaS revenue for the year was $67 million, an increase of 58% from 2020. In terms of execution throughout the quarter, we had a very balanced performance with all of our geographies contributing nicely to growth. Additionally, we saw a nice balance of deals in the quarter with a healthy number of good side transactions, but without any reliance on the mega deals. In Q4, we continued to see our business transition towards SaaS, with SaaS representing the highest percentage of new bookings in our history. At the same time, just as we did in Q2 and Q3, we saw our software customers continue to move towards subscriptions, opting for term license. In Q4 subscription arrangements, either SaaS or term license made up more than two thirds of our new bookings in the quarter. As we move on to the rest of this call, 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. Combined gross margins in the quarter were 81%, the same as last quarter. Underneath the covers, SaaS gross margins improved quarter-over-quarter and year-over-year reaching record levels. SaaS gross margins benefited from both increase in scale, as well as continued focus by our DevOps and engineering teams on efficiently delivering our SaaS platform.

Thank you. We'll now be conducting a question-and-answer session. Thank you. And our first question is from the line of Matt Hedberg with RBC.

Congrats on the strong close to the year. I guess and thanks for the disclosures, too. Obviously, I think we're all looking forward to tomorrow's Analysts Day. When we look at the SaaS mix, I think it exited the year at about a 19% mix. I think you're guiding for the full year '21 about 24% of total revenue being SaaS. I am curious, as you progress here, are you going to start to incent reps and maybe even customers to sort of lean into SaaS a bit more? Just sort of wondering on the go-to-market side there.

Yes. Thanks, Matt and thanks for the comments about the quarter. We provided a slight incentive to reps last year and that worked very well a slight incentive for them to sell SaaS rather than to sell the on-prem product and that works very well. We're dialing that back a bit this year, there's still -- look, we're always incenting sales reps to do the things that we want them to do. And obviously, SaaS is our future direction. And so we're aligned there. But no, there's not -- it's not as if we have to do anything unnatural here. There's a very natural market pull in that direction, the product is a fit. And so there's sort of a synergy coming from both sides.

That's great. And then, I guess on the acquisition of Intello, I think, Mark, you touched on it briefly in your prepared remarks, but maybe just a little bit more on how you expect to integrate this into the platform. And because obviously, it's a little bit different than your historic focus on just pure identity with now SaaS app management, but maybe it's a little bit more detailed there, in terms of the integration plans and kind of the go-to-market there?

Yes, sure, Matt, and thanks for the comments as well. Yes, we've found them as we were looking for some ways to accelerate our ability to cover that kind of explosion in SaaS apps, in particular, we felt like they had some kind of slick technology that enables them to see some of the less aware unmanaged apps in the environment and now the shadow IT concept. The other thing, we like to add some activity data technology that allows us to kind of parse through activity data. So they had a couple of early technology wins that we thought were very attractive. And yet they themselves were getting pulled toward integration with identity tools, we found that they had started that kind of get into their market a little bit, very early stage with great young group of folks. And so yeah, we see it as a nice extension and kind of analogous to what we were focused on with a little more of an explicit focus on those areas.

Our next question is from the line of Rob Owens with Piper Sandler.

I’m going to hold it to just one question, because I have a lot of for tomorrow. So Mark at a high level relative to Sunburst, maybe you can talk about the role and covenants when we see an attack like that, and they go after identities. And where customer conversations have been since? Is this a potential boon for your space and you see an uplift from it, or is it just another security event that just raises awareness overall? Thanks.

I think it's more to the latter, Rob. While, nobody's happy about what happened there, at least of all the folks at SolarWinds and FireEye and others, it was not a particular spike that we think will fundamentally shift the demand curve. For us, we felt like a lot of customers are already well aware of these kinds of risks. This is obviously as we all know learned what we know of at least a very sophisticated, coordinated attack. And it just continues to keep the spotlight on the importance of -- as we like to say, knowing who has access to what. And so I think it will create a real stark shift or anything in the demand profile coming up. But like our guys haven't seen a sudden spike in interest, it just kind of more like head nodding like yeah, there's another ugly story, and this is why we got to keep our focus on getting our security even stronger in our business. That's the kind of reaction we hear in the field.

Our next question is from the line of Brent Thill with Jefferies.

This is Joe on for Brent. Thanks for the question. It's great to hear about the increased traction with SaaS from the large enterprises. What's reduced that friction? Is it more of a feature rich solution now? I know full parody might not be the way to think about it. But are you aware where you want it to be? Or is it more just the sales force is more confident leading with SaaS?

I'd say it's all three factors, I think you articulated too clearly and sort of implied a third it is a market pull from customers. It is an increasing strength of the product, the SaaS product to be kind of relatively equivalent from a use case coverage. And it's a comfort level in our field and our partners to bring that solution to the large scale enterprises. So it's really all three converging to create a very good environment for us to win there.

Okay. And then really appreciate the extra color as it relates to the model. I'm just curious of that. I think 100 to 104 in licensed what's the mix, are you continuing to sell perpetual going forward? I was a little unclear with that. We are like what's the expected mix with term there. And then, as we think about the SaaS line, you gave fantastic guidance for next year. How much of that is implied transitioning from maintenance customers today that you're trying to up sell?

Let me take that in reverse order. There's no transition in our model, we have installed base of identity IQ customers that represents our maintenance stream, that is a happy customer base. We're not going to try and move them. If they want to move at some point, if they're looking to move to SaaS, or if a customer with an older deployment that thinks the easiest way to upgrade is to move to the SaaS offering, then there will be there for them. And we'll make that happen. But we're -- there's no transition program, so nothing in our numbers from that perspective. The other part of your question was around license. And our license revenue does have both perpetual license and the upfront portion of term license that gets recognized at the beginning of a contract for 606 accounting rules. And we'll talk a little bit more about that tomorrow. We are definitely moving more towards subscription and more towards term license and more proactively than we did last year.

Thank you. Our next question is from the line of Brian Essex with Goldman Sachs.

I guess, I was wondering if I could, dive into licensed items, great to see ARR number and subscription revenue guidance? That's fantastic. On the license guide, what's your visibility into that trajectory? What do you see in the pipeline? Is that based on renewals? Or is it more new enterprise traction of pipeline, maybe just a little bit of color there?

Yes, that the license guidance is more based on new, they are under 606, if we renew a term license, we will get some license revenue, again, upfront in the renewal portion of the contract. But we just don't have that many, old term licensed contracts that are up for renewal. That wasn't something we were doing a lot in the business three years ago. In terms of visibility, look, no change necessarily there. Other than I would say directionally, as we've progressed in the business, particularly in the last year and a half with Matt Mills, but just generally maturing as a business, we've put more instrumentation, we put more focus and we put more resources around our sales pipeline, and around visibility into what's happening going forward. But at the end of the day, it's a pipeline and forecast. There's nothing structural necessarily there, that's that much different.

Got it. And then maybe just a follow up, is there any change in the way that you're incentivizing the sales force and the channel with regard to selling identity now versus identity IQ and any progress in terms of channel relationships that are notable?

Yes, I'll talk about the incentives and Mark, if you want to jump in about the channel and partner relationships. As I mentioned before look we have, obviously, always some incentive in terms of which direction we want people to go. But in terms of selling SaaS, or in terms of selling term, versus perpetual, that's not something we need to put incentives in any meaningful way to drive those results. We're really talking about pull from the market here, with customers actually, these days, really more interested in a subscription arrangement. It's really how they're buying software and technology these days. And so it just fits with their buying patterns.

And Brian to the channel part of that, I'd say in general, the great majority of our partners have been actively getting their people specked up on our SaaS product identity, now, they're more and more comfortable selling SaaS products themselves in the marketplace. They are balancing the need to keep a stable group of folks who can do the services work around our identity IQ, because they're getting those are large deployments and they stretch out over many years, in some cases, as customers expand and get into new divisions and such. So they have a lot of bench strength and identity IQ, and they're building bench strength identity now, but they're all seeing the momentum, we are in the market and they've kind of re-jiggered their teams to get ready for that sort of a momentum even increasing in '21. So yeah, in general, they're seeing the same thing and they're pipelines that we're seeing is that the bulk of the pipeline is beginning to shift to SaaS.

Our next question is from the line of Hamza Fodderwala with Morgan Stanley.

I hope you guys are all doing well down there in Texas. So just I wanted to ask a couple of questions. I'm sorry if this was touched upon earlier. But just on the license revenue declined this quarter, I appreciate the SaaS transition really accelerating, but any color you can give around sort of why that declined and perhaps more material pace than some of us might have been expecting, given the fact that three quarters year-to-date it's definitely been growing quite strong.

Down here in Texas we're warmer this week than we were so thanks. And it's brighter at night than it was last week. On the license side, look, that's something we've been signaling for a long time and we expect that to decline over time. Now, we don't expect it to go away. We think there is a segment of the market for whom IdentityIQ is the right product, but IdentityNow is capable of serving every segment of the market. We've talked before about while IdentityNow might not be able to serve the high-end or it might not be able to serve the largest et cetera. It's there. It is a product to conserve any part of the market. Now, there are certain customers who might want their data on-prem or who might need to have single tenancy for regulatory reasons or for their own security policy reasons, whatever it might be and IdentityIQ is there for them. But fundamentally, our growth is coming from IdentityNow and you should expect for IdentityIQ to be declining. We're going to go into more detail on that tomorrow and give you a picture of what that looks like in 2021 and versus 2020 and what that looks like over the next few years and our current expectations. But that's definitely the view that you should have is that, that is becoming a smaller piece of the business.

The next question is from the line of Andrew Nowinski with D.A. Davidson.

Congrats on another great quarter. So you've talked about the market shifting to SaaS, and I'd imagine that's loosening up some of the customers that are running legacy solutions from the likes of Oracle, CA and IBM. And I know you also talked about AI possibly being the feature that starts to convince those customers to move to a better platform like SailPoint. So I'm curious if you've seen any sort of change or increase in your competitive displacements relative to prior quarters?

Frankly no, really, it's still a good, solid, steady drumbeat. I think we would say we see good momentum in the field, customers engaging with our field that have those legacy platforms. So it's still a good steady drumbeat. We have never seen a sudden uptick from all the many things that might have created such COVID, SolarWinds any other things. But yes, the technology capabilities in our SaaS product including the AI capabilities, which I think really are a step function forward from the traditional capabilities of their legacy products. All that seems to create a lot of interest in dialog and some set of those customers are moving quarter-by-quarter-by-quarter but there hasn't been a notable uptick in the rate of that.

Okay. Yet to come, it sounds like. Maybe then also hearing from channel partners about how the remote work environment may have increased the need for an IGA solution, providing customers with better visibility to who has access to what application. So I'm wondering if you could just discuss kind of your -- how that has impacted growth if at all and maybe just rank order your key growth drivers that you're seeing right now.

Yes. The way we think about Andy is a use a metaphor a couple of times, hopefully it's helpful. In some ways the customers before the pandemic were somewhat aware of their lack of great visibility and control over true security of who had access. The whole digital transformation movement has been a lot about increasing new access to new systems because customers are buying and/or building all these new systems to drive their business forward. And so, there was a rapid enablement or rapid gaining or granting of access. And behind that was maybe a bit of concern as to how well controlled it was. So what we've sort of describe the effect of the pandemic, which again was drove people to be remote than working from home or working from anywhere, was it sort of like shining a spotlight on cobwebs in a corner. The cobwebs were there, the light just exposed them, but now that they are exposed, people feel an urgency to deal with it. And I think it's more that the pandemic and the working from home phenomenon sort of caused people to go, well, I do need to deal with the fact that I don't have great visibility and control. It didn't necessarily change dramatically just because of working from anywhere. One thing is, we don't want to feel the pressure of as you know people used to have five access points and now they have 50, that's not what happened. But they might have gone from five to eight and they did -- now they've access to those eight from a less secured fundamental environment at home and that caused people to be worried about exposure and risk. So it's been a general tailwind for the business, not a sudden surge like

Our next question is from the line of Joshua Tilton with Berenberg Capital.

The first one and apologies if I missed this, but in regards to the term contribution, was there any meaningful contribution this quarter to license revenue sometime?

Yes. We had a fair amount of term license in the quarter in our new bookings, consistent with what we saw in Q2 and Q3 of 2020, there was strong customer interest in term license and that's something we were comfortable with and capable of doing. And so, yes, we did have term license contribution as well.

And then just to follow up on that, I guess some of the feedback that we have received from the channel is basically the on-premise business would have done even better in 2020, if there wasn't COVID. So given that you guys kind of gave us a similar message around the on-premise business going into 2020 last year, and then it obviously meaningfully outperformed. I guess what gives you the confidence today that this is the year of SaaS and that IdentityIQ is going to start to decline?

So that's kind of two questions in there, Joshua. One is confidence around IdentityNow and the other one I guess is confidence in a different sense around IdentityIQ direction. And on IdentityNow, look, we get the confidence from all sorts of places, but particularly starting with the product and its capability and the success that we've had selling that to and deploying with very large complex customers and the feedback that we've gotten from them as they used the product. As Mark answered one of the questions earlier around SaaS, is that the market is the product, is at your confidence, it's all of those. And so I think all those together tell a story that makes us very confident that last year was the year of SaaS, like the acceleration that we saw in the SaaS business relative to historical trends were certainly there and I think this year will be another year of SaaS. Now, the question around IdentityIQ is a little bit different. And last year we had sort of the dynamic that the pipeline going into the year was built during a time when SaaS was not the lead product for us. And even during the early parts of 2020, we did not have the sort of level of confidence around SaaS that we do now, confidence on IdentityNow that we have currently. So what we closed even at the end of the year when our confidence level was really high in SaaS, what we closed was built during a time when that wasn't necessarily the case, right. So I wouldn't take last year's results as indicative of the direction that IdentityIQ is going. As you look at this year, we've given you the guidance of what we believe is going to happen that this is not hedging one direction or another on the mix of IdentityNow versus IdentityIQ. Look, our pipeline as you would imagine, going into the year and throughout the course of the year is larger than the bookings we need to meet our expectations, and within that pipeline, there is both SaaS and on-prem software. It can always happen that the mix end up shifting one direction or another based on that pipeline and based on the new pipeline that we built throughout the year, but our current expectation is for what we've guided to. And then long-term, as I think I said to Hamza's question, look, we believe that the IdentityIQ portion of our business will be declining. Now it will be there we think, as far as forward as we can see at this point. There will be some portion of our new bookings and some portion obviously of our installed base and recurring revenue base that's IdentityIQ related but not only is that a smaller piece going forward of the business every year, but what we believe it actually will be declining year-over-year as well.

Thank you. At this time, we've reached the end of the question-and-answer session. I'll now turn the call back to Mark McClain for closing remarks.

Well, again thank you to everyone. We anticipated that it might be a little trimmer because we've got a full day or half day I guess it is roughly, our plan with you all tomorrow and those that can join us. I appreciate those who could dial in tonight for sort of the quarter-end and year-end results, but we'll look forward to a much deeper longer conversation tomorrow. Thanks for taking the time to join us tonight and we will talk to you tomorrow, those who can join us. Thanks again. Bye now.