SailPoint, Inc. Q1 FY2020 Earnings Call

Greetings, and welcome to the SailPoint Technologies Holdings, Inc. First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Josh Harding, Vice President of Financial Planning, Analysis and Investor Relations. Please go ahead, sir.

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

Thanks, Josh, and good afternoon, everyone. Thank you for joining the call today. Before we go into Q1 performance, I'd like to acknowledge that we are collectively facing unprecedented times, not just among our own customers, but across the country and the world at large. I'd like to highlight how we've reacted to the COVID-19 pandemic, as I'm both grateful and humbled by our team and our response. SailPoint pivoted quickly to a virtual workforce while continuing to execute across the board from engineering to marketing and sales, and especially around customer services and support. Over the course of Q1, customer success remained our core focus, and we quickly mobilized to support our customers worldwide, especially those requiring additional help during these unprecedented times. We've added the concept of virtual office hours to give customers the professional service and support they need and have worked hard to maintain an open line of communication with all customers to ensure their continued success. As our customers have shifted to a virtual workforce, the value and scalability of our identity platform has become more evident. For example, a longtime SailPoint customer in the investment advisory business needed to ensure workforce continuity amid their rapid shift to a virtual workforce. Their identity and security technical lead shared that, 'We tripled our user account and provisioning over the past few weeks, and SailPoint worked beautifully. During this time, we had to respond quickly to the unusually high systems integration and SailPoint handled 3x our normal workload. We're grateful for one less thing we have to worry about during the pandemic.' In another instance, we helped a large retail organization and longtime customer shift all of their retail location meetings to virtual meetings in six days, thanks to the automation they had built into their SailPoint identity program. This enabled them to swiftly and securely deploy videoconferencing across the business for 10,000 users. As a third example, a large insurance company quickly pivoted from a 20% virtual workforce to nearly 100% virtual workforce. With the help of SailPoint's identity platform, they offloaded a significant amount of work around access request needs during their shift to virtual. In their words, this was one less headache to worry about during COVID. The speed at which we are now granting access is a significant benefit. While these are just a few examples among many, we believe our identity platform will continue to demonstrate its value during these challenging times.

Thank you, Mark, and thank you to everyone on the line for joining us today. On the call, I'll review our first quarter results and then update you on our expectations for the rest of the year. Before I get to the quarter, I'll share some thoughts about SailPoint that I would ask you to keep in mind as we all face this unprecedented time of uncertainty.

Your first question comes from the line of Matt Hedberg with RBC Capital Markets.

This is actually Matt Swanson for Matt. Jason, you talked about the idea of controlling costs while still remaining well positioned to capture demand when it comes back. Could you just get a little bit more granular on how you're striking that balance?

Yes. Thanks, Matt. I think the best way to phrase it is that we're making sure that we know the priority of our investments and are putting our efforts and focus on the hires, the programs, and overall spend, where it has the most direct connection to our long-term investment plan and will benefit us regardless of the environment. And so naturally, that gives us sort of an automatic bias towards nimbleness, so to speak, in an environment like this. Generally, we're looking at what sort of constraints particular programs might have, making sure force majeure language is in our contracts, and not putting ourselves in a position where we would reduce our flexibility if we needed it. But to date, we're in a position where we have the ability to make investments and continue to fund the plan we set out for this year. We're just making sure we have the flexibility and the capability if we need it.

Matt, this is Mark McClain. If I could interject, regarding your point about when demand comes back, I didn't want you to leave with the impression that demand has gone away. We still are seeing tremendous demand out there in the market for conversations and even moving business through pipelines. We're just highlighting a level of uncertainty in closing. That's all we wanted to clarify.

Yes. That's a helpful clarification. And then, Mark, what was also really helpful is some of your examples about how you help enable your customers to make the transition to remote work. This might not be the easiest time for displacing legacy tools, but you have to think that some customers who aren't using SailPoint weren't able to make these transitions smoothly. I mean, do you see this as an opportunity, maybe if it is 6 months or a year when people are ready to make some of those larger displacements for that to accelerate from the lessons learned from going through this process?

Yes. Matt, to build on your point, I think it has highlighted for some customers, as we commented before, that we believe some of the legacy solutions are rather brittle. This may have gotten highlighted in the sudden need for change and accelerated movement to remote work, as customers with those older legacy solutions found they were not very nimble. Customers with solutions like ours were able to pivot fairly quickly to adjust their processes or volume, as you heard in my example of 3-4x normal volumes. That's just going to be something that, as the dust settles, some of these customers will want to revisit whether their current solutions are nimble enough to help them as they continue to accelerate their digital transformation and make permanent shifts in their whole working approach with more virtual work.

Your next question comes from the line of Melissa Franchi with Morgan Stanley. Please proceed with your questions.

This is Hamza Fodderwala in for Melissa Franchi. Thank you for taking my question. I was hoping for a little bit more color on the lack of the Q2 guide. It seems like from your commentary that April was a strong start. So I'm just wondering, where are you seeing the most risk as you progress through Q2? Is it renewal rate, longer sales cycles, closing new deals? If you can just give a little bit more color on each of those factors?

Yeah, sure. This is Jason. As I mentioned in the script, our renewal rates have been good. We didn't see really any deviance in Q1 from what we've seen historically, which I think, as you know, are very good. I also wouldn't say close times are necessarily different nor, as Mark just mentioned in the last question, are we seeing any change in demand. If anything, maybe a better demand environment than even before. I think really it's just a question of uncertainty and not knowing what might happen. Many of our customers are in that situation. And so there's some uncertainty about whether deals will close. But we're not seeing a particular slowing, we're not seeing a falloff of demand; it's just given the uncertainty right now. And frankly, given that there still is a license component to our model, although we're increasingly more SaaS and more recurring, there's a license component in the model. This introduces some uncertainty for Q2.

Got it. And maybe just a follow-up question, if I may. As you look through your product portfolio, which parts are holding up really well in this environment and which parts maybe are you seeing a bit more of a drag, specifically regarding IdentityNow and some of the other products that you have?

Mark, do you want to take that one?

Yes, I apologize for the situation with the phone setup, as this is our first time doing this in separate locations, making it challenging for us to communicate directly. I'll begin, and then I'll turn it over to Jason for his thoughts. Overall, we've noticed an uptick in demand for IdentityNow and all of our SaaS offerings. IdentityNow remains our primary SaaS platform, alongside our newer products that integrate with both IdentityNow and IdentityIQ. We continue to see strong demand for IdentityNow particularly among the traditional mid to smaller enterprises, and it is also gaining traction in mid to larger enterprises. There is good demand for IdentityIQ primarily from the very large market segment. Positive feedback from our existing customers indicates a solid demand for upselling within both platforms. We are not identifying any weaknesses in our product line and although we are not yet seeing a lot of sales from some newly launched products, there is significant enthusiasm among our team and customers about these innovations. So, there’s really nothing concerning to report. Jason, do you have anything to add?

Yeah. No, I agree. I think, part of your question is, is there concern around IdentityIQ's on-prem? Look, most of our customers are deploying it in the cloud. Professional services work done around our products is, for the most part, done remotely anyways. I don't think we've seen any extra concern there. The overall backdrop, as Mark was talking about, is that there is a shift towards IdentityNow and the newer SaaS products that we've launched recently, and there's a ton of momentum in our own sales force, in our product side, but also on the customer side and among our partners as well.

Your next question comes from the line of Dan Ives with Wedbush Securities.

This is Strecker on for Dan. Can you talk about what you guys are seeing spending wise throughout the different verticals in your customer base? Has anything surprised you there? Additionally, any color you can give us on conversations with customers thus far in the quarter would be great.

Jason, let me take the first question, or go ahead, Jason.

Okay, yes, go ahead, go ahead.

Yes, I think, the response, in general, we would see at least some level of further discipline analysis around customers that are in what we call the heavily hit verticals. The travel and entertainment and somewhat retail, this depends on the retail segment. Some of those folks have pivoted and are actually seeing quite positive circumstances. In general, our field has been very thorough about kind of vetting business in those verticals. As Jason said in his opening comments, we're seeing customers who are still very committed to moving forward. They may be having to let the dust settle a little more before they can proceed, either with an upgrade, expansion project, or a new project. That said, we are still doing business in some of those verticals, absolutely. In the other verticals that are not as heavily hit by the events, there may be neutrality or even acceleration in moving forward. Putting this kind of program as their Tier 1 priority. So I'd say in general nothing to report that would surprise anyone. Your question was about continuing surprises. No, I think in the verticals that have been most heavily hit, there's at least some pausing and reassurance on their part to ensure they can move forward.

Yes. I was actually going to say just about the same thing. We have actually signed some new deals with customers that we would think would be the hardest hit. Part of that is because people talk about us as a bucket one priority for them, part of the enablement of this digital transformation and making a remote workforce possible, but secure at the same time. We also have a customer base of over 1,500 customers in every industry and vertical around the world. Some of them are in very hard-hit industries, but we've had great conversations with them, and in some cases, they have been really committed to us. We didn't see any impact to renewals in Q1, including with some customers that were in tough positions. I think we're mission-critical for their environment, especially at a time like this.

Your next question comes from the line of Brian Essex with Goldman Sachs.

I was wondering if you could drill into some of the commentary around what those customer conversations have been like, particularly with regard to customers that may be pausing a bit but still very committed. Are there any points of hesitation that they might have in needing to get greater levels of approvals or other considerations that need to be made for the business process involved, given the complexity of the deal?

Brian, it's Mark. I'll jump in on that, and probably Jason will have a few thoughts too. I'd say what we saw in that early March to mid- and late-March time frame was definitely a set of folks where either the Head of Procurement and/or the CFO paused. We experienced a fair amount of chaos in that time, as people were trying to sort out what actions to take. We definitely felt some of that. As Jason said, we're pleased with our Q1 results, and we would note that they probably could have been a little stronger because there were definitely some things affected in the last part of March. That said, I think your question pertains to what have those conversations been like since? Most of those conversations, with a very high probability, went right back to where they left off, moving through a pause model. We haven't seen, in most cases, any different processes instituted, necessarily. We definitely had some customers call us to discuss if we could help them through this if they are in one of those industries. But not a significant amount, and nothing that we anticipate having much effect on our financial results anytime soon. So, generally speaking, our suspicion is everybody hit the pause, as expected during the time of uncertainty. For the most part, they have reengaged, and in some cases, as indicated by our comments on engagement, we really don't want anyone to misread the lack of a guide at this time. They are very engaged.

Got it. And then I think you noted on some of the legacy issues that prospective customers might be having and how brittle they might be. Could you expand on that a bit? Where are the most significant pain points where they might actually push forward at a more aggressive pace?

I think there are a couple of different things there, Brian. One is that many of these companies are still executing joiner mover leaver processes; people joining the organization, which could include employees, contractors, or partners, moving around, making changes, getting promoted, transferred, and then leaving. Not all of that has stopped during this crisis; it has certainly resumed in many companies, even while they are working remotely. What they are finding is that their flexibility to handle those processes smoothly when the volume is higher and interactions are potentially more challenging while working with remote tools such as Zoom has become a challenge. Many have expressed that it's particularly tough to adapt and flexibly deal with ongoing processes. Additionally, in some cases, they have sent a certain number of people home and given them access to new tools for remote working that they had not used before. In technical terms, that is called provisioning. Granting people access to the tools they need to perform their work. They have figured out that it was particularly hard to accomplish new tasks quickly, at scale, in some cases. That is where they recognize that the solution they currently have cannot quickly adapt to onboarding at higher volumes or new sets of applications or targeting new users. These are the challenges they encounter.

Got it. That's super helpful. Thank you.

Your next question comes from the line of Andrew Nowinski with D.A. Davidson. Please proceed with your question.

Hi, this is Hannah Baade on for Andy. Last quarter, you said you expect the majority of new customer bookings to be SaaS by the second half of 2020. To what extent have you seen customer demand shift to the cloud-based products? Has this accelerated due to the outbreak?

Yeah. This is Jason. I'll start there. We expect by the second half of this year that the majority of our new customer bookings will be SaaS. Q1 came out about as expected in the course of our plan from a mix perspective. It's not the best quarter to judge by. It typically gives us a little more existing customers than we do, say, in the fourth quarter. But I think the transition that we expected over the course of this year is basically on pace from a results perspective. What I would say is the excitement level among our field team, partners, and feedback from customers or potential customers is maybe more than we expected. There is a lot of excitement around SaaS and what we're planning to do with our SaaS product and what we have already done with it. We're standing behind it. I would say, if anything, we’re basically on pace for what we expected, but there’s certainly lots of confidence that the market feels this is the right direction.

Thank you. And just one follow-up. From a competitive standpoint, have you seen any material impact from Okta beginning to edge into the government space with their lifecycle management product?

I'll start on that one. This is Mark. No, we have not seen any material impact. We have heard them comment more about capabilities in a portion of the governance space called lifecycle management. What we're finding is, at the very low end of the market, which Okta's strength initially lied, it has certainly moved upmarket with their single sign-on and multifactor authentication solutions. But in that segment, which represents our historical strength, we really haven't felt much presence there because the sophisticated customers in that segment understand the complexity it necessitates to address those challenges effectively. So no, we really haven't felt any impact from that yet.

Your next question comes from the line of Rob Owens with Piper Sandler.

This is Ben Schmidt on for Rob. Wondering if you could add a bit of color to the changes you're seeing in the prioritization of identity, the pros and cons there in the short term. More broadly, if you could just share how you're thinking about the prioritization of identity in the long term? Are there any changes given factors like work-from-home that could persist beyond the short term?

Yes. Let me give you an anecdote; this is Mark again to start on that one. I was talking to a CSO of a firm that is a Fortune 20, I don't know exactly where they rank, but they are certainly in that top 20, very large global organization. The CSO told me, he said, look, our top priority, as Jason referred to, we called bucket one. In this case, I think it was bucket 1a, which is to get people effectively working from home. So, if they didn't already have it, provide them a laptop, ensure they are on a VPN, and in some instances, implement single sign-on or multifactor authentication to get people working remotely and reasonably securely. He said, my second concern right behind that is, 'Are they actually accessing the right stuff? Are they correctly provisioned? In general, we see excessive provision resulting from obsolete processes or access being retained by those who no longer need it. What we've found is that in a remote working environment, the lack of visibility to understanding who has access to what just got worse because the risk has increased. Thus, I think that in terms of short-term demand acceleration, I wouldn't state that our demand spiked; I wouldn’t use that term. We are more in line with a trend of solid engagement from customer activity. I think everybody assumes increased virtual work will become part of our normal business model in the future, and that in this situation, the sophisticated customers we deal with understand that this just accelerated the concerns they had about how they determine who has access to what and whether they are correctly provisioned. Therefore, both the security risk and the operational aspect of onboarding people rapidly remains at the forefront of demand. I think that will create positive secular shifts for identity solutions leveraging the increased importance of identity over time and the various dimensions of identity, including governance, lifecycle management, compliance, and operational efficiency.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Mark McClain for closing remarks.

Well, thank you, and thank you to everyone. I know it's a busy day of earnings, and in some cases, we have folks covering multiple companies today. So thank you to those who made time for the call and the Q&A. We certainly wish all of you, your families, friends, and colleagues safety during this difficult time. We are grateful for our team and partners in handling this, and we are hopeful that you're navigating through this difficult time as well. Thank you for the questions. We look forward to talking to many of you soon, but we won't be seeing you soon; only talking to you soon. Thank you for your time today; we appreciate it.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.