Greetings and welcome to the SailPoint Technologies Holdings' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Josh Harding, Senior Vice President of Finance and Operations. Thank you. You may begin.

Good afternoon and thank you for joining us today to discuss SailPoint's second quarter 2021 financial results. Joining me today are SailPoint's CEO and Co-Founder, Mark McClain; and our Chief Financial Officer, Jason Ream. Please note that today's call will include forward-looking statements and because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. Since this call will include references to non-GAAP results, which excludes special items, please reference this afternoon's press release in the Investors section of sailpoint.com for further information regarding forward-looking statements and reconciliations of GAAP to non-GAAP results. And now, I'd like to turn the call over to Mark McClain.

Thanks, Josh, and thanks to each of you for joining the call today. I'm very pleased to share our strong second quarter fiscal year 2021 results with you. For the second quarter, we exceeded the high end of both our revenue and our ARR guidance, driven by strong growth from our staff and subscription-based offerings. We reported subscription revenue of $64 million, up 40% year-over-year, and ended the quarter with ARR of over $291 million, up 43% year-over-year. The outperformance in revenue and ARR was driven by our sales team's continued focus on demonstrating the value of our subscription-based identity security offerings and a relentless focus on customer satisfaction that continues to support our strong renewal rates. Taken together, our results this quarter point to solid execution across geographies and strong interest from global enterprises in the critical value we provide for their business. Our well-executed Q2 helped us to close the first half of 2021 in a position of strength. As we noted last quarter, enterprises are increasingly aware of the foundational role identity plays in securing their business, and that continues to bode well for us in the market. This has proven to be particularly true at the upper end of the market as more and more large enterprises are embracing the next generation of identity and adopting our SaaS Identity Platform to address their complex identity security needs at scale. On that point, I'd like to share a couple of highlights from Fortune 500 companies that selected our SaaS platform this quarter. First, a large financial services company selected our SaaS Identity Platform, paired with our AI-enabled services to replace a legacy solution that had been in place for years, required significant maintenance, ongoing customization, and a large team to keep the program up and running. As a result, the company constantly struggled to maintain IT controls required to secure access to critical business applications and to satisfy complex regulatory demands. With their move to SailPoint, they're moving from a cumbersome and static identity stack to a flexible and agile approach to identity that can scale with their business. Second, a global pharmaceutical company opted for our SaaS Identity Platform, given their desire for a solution that would be simple to deploy and yet sophisticated enough to meet their evolving multinational business needs. This customer has implemented a SaaS-first strategy and required an identity platform that delivers flexibility, agility, and quick return on investment. SailPoint's platform checks all of these boxes, giving the company a strong foundation for securing and enabling their workforce while matching both the pace and scale of the business over time. In addition to the growing adoption of our SaaS Identity Security platform at the upper end of the market, we are seeing a greater number of existing SailPoint customers expand their investment in SailPoint. In the first half of the year, we saw accelerating interest in our AI-enabled services from our existing customer base as they looked to embrace the future of identity. These services help companies simplify the administration of their identity programs while infusing a high level of intelligence, automation, and extensibility. We simplify and automate key identity decisions critical to maintaining compliance and a secure environment without sacrificing the intelligent, sophisticated, and scalable approach that large enterprises require. In Q2, we saw good momentum among customers deepening their investment with us to help them evolve their program toward this autonomous state of identity. For example, in Q2, a long-time SailPoint customer in the property and casualty insurance space added our AI-enabled SaaS services to help them further streamline and modernize their approach to identity. With SailPoint, they will automate and simplify access requests and certifications, freeing up their teams to focus on the most critical identity decisions. This will add tangible value to their business by reducing the chances of human error and enforcing consistent application of access policies across the business. Now, the company can take the strong identity security foundation already in place with SailPoint and evolve their program toward their desired state of autonomous identity. As we continue to position SailPoint to capitalize on the opportunity in front of us, we made some important appointments both at the leadership and board level this quarter. We recently hired a new CMO, Wendy Wu, who brings a deep understanding of SaaS, having led teams at Box, Google, and Microsoft through their enterprise expansion journeys. And we expanded our Board of Directors with the addition of Sudhakar Ramakrishna, who was named CEO of SolarWinds earlier this year, and Ron Green, Executive Vice President and Chief Security Officer for MasterCard. Both bring deep SaaS and cybersecurity expertise to our Board. These additions serve us well as we look to grow, scale, and evolve the business over time. As we think about the second half of the year, we are focused on two key areas to continue building upon our momentum. First, we will continue to deliver against our mission to help enterprises discover, secure, and manage all of their identities. We believe companies today have a stronger inclination than ever to adopt an enterprise security program that is grounded in identity security. To capitalize on this momentum, our product organization plans to deliver new functionality that further embeds and extends identity security into the workflow of the business. This will make identity security more accessible and approachable for the everyday user while infusing a high level of intelligence and automation needed to fuel and speed identity decisions across the business. Our entire company is united around delivering a best-in-class identity security experience so that our customers can ensure all parts of their business are properly enabled, resilient, and protected. Second, we'll continue to focus on consistent execution across the organization, driving broad global adoption of the SailPoint Identity Platform. We win in the market by delivering tangible value to our customers and by building solutions that achieve the right balance of speed and security across their businesses. In closing, we believe we are well positioned for the second half of 2021 and beyond. We continue to see strong demand. We have the right teams in place to continue our shift to a SaaS and subscription-based revenue model, and we enjoy a strong and committed partner ecosystem to support our customers' success over time. Most importantly, we have an advanced product offering that sits at the center of a modern enterprise security architecture. Before I turn it over to Jason to review our financial results, I'd like to address the news we released earlier today that Jason will be departing SailPoint to pursue other opportunities. Jason has been an integral part of our management team for over two years and played an important role in our transition to a SaaS company. Jason will remain as CFO through August 31st and will serve as an advisor for a period of time after that to ensure a seamless transition. I've truly enjoyed working with Jason, and I'd like to thank him for his many contributions to SailPoint. On behalf of the Board and everybody at SailPoint, I wish him all the best in his future endeavors. We'll begin the search process for a new CFO immediately, which will focus on finding an executive that will complement our ongoing move to SaaS. As part of the transition process, Cam McMartin has agreed to serve as Interim CFO starting September 1st. Many of you know Cam for the many years he served as SailPoint's COO and CFO before transitioning to our Board of Directors in 2019. We are incredibly fortunate to have somebody of Cam's experience able to serve as Interim CFO and support our strong internal team through this transition period. With that, I'd like to hand it off to Jason, who will share more details on the financial results from the quarter.

Thank you, Mark. Before we talk about Q2 and the rest of the year, I'd like to say thank you to Mark, to the SailPoint Board, and most importantly, to the SailPoint team for a fantastic few years. It's been super exciting to be part of such a great company going after a huge market opportunity and to be part of setting the company firmly on the path to SaaS and subscription. I think SailPoint's best days are still ahead, and I'm looking forward to seeing what this team can do. And now back to business, I will spend the rest of the time going through our second quarter results and then we’ll update you on our expectations for the rest of the year. In the second quarter, we saw continued strong execution by the team and continued interest in our SaaS solution from customers and prospects. SaaS momentum is very strong and our subscription transition is progressing very well, with more than 80% of our new bookings in Q2 coming in on a subscription basis, up from over 70% in the first quarter. Driven primarily by new SaaS bookings, but also in part by term license and some maintenance associated with perpetual licenses, total ARR grew to just over $291 million in Q2, representing 43% year-over-year growth. As a reminder, we're lapping a quarter that was early on in our subscription transition, so it's a relatively easy compare, but still very good performance. Total revenue for the quarter came in at $102.5 million, a good result given the ongoing mix shift in our business. Revenue benefited from strong execution, including bookings earlier in the quarter than we had modeled. We also had some catch-up revenue in the quarter, and professional services revenue was a little bit higher than we were expecting. Again, while revenue is not the most important metric for us during this transition, we are of course pleased to have a good outcome this quarter. To help give you a little perspective on the growth dynamics in the business, underneath the impact of the model transition, as we look at this internally, we estimate that had our new bookings in Q2 of 2021 been of the same mix that they were in Q2 of 2020. Our total revenue growth year-over-year would have been approximately 17 points higher this quarter. Now, as we shift to expenses and operating profit, 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. Q2 operating income was $0.8 million. Obviously, well ahead of our guidance range due to a combination of our revenue outperformance and expenses coming in below plan. Given the confidence that we’ve had in the business and the large opportunity in front of us, we had a very aggressive spending plan for the quarter, which, in the end, we didn’t quite manage to hit. That being said, we're seeing great success in building the team with the significant increase in our software engineering capacity and a sales team that is fully staffed to plan. While we'll bank the savings from some delayed hiring, we are pushing some one-time expenditures into the back half of the year. More importantly, we're continuing to invest aggressively in the business as we support the growth trajectory that we see over the next few years. Now, shifting to the rest of the year. We are feeling very good about the momentum we are seeing in the business, specifically with regard to the appetite of large customers to buy SailPoint's SaaS platform. Based on our Q2 performance and the momentum we are seeing in our pipeline, we are raising our full year ARR outlook to $343 million to $347 million, an increase of $2.5 million at the midpoint, representing 37% to 38% annual ARR growth. We are also raising the midpoint of our full year revenue guidance by $2 million to a total of $408 million to $412 million for the year. This change is based on what we see at this time, but I want to remind you that as we make this transition, revenue is difficult to predict given the timing difference in revenue recognition for SaaS versus license, and we will depend heavily on the actual bookings mix. This guidance range represents a 12% to 13% total revenue growth year-over-year. Consistent with my comments in the second quarter, our current expectation is that the mix shift toward SaaS should result in a 12 point headwind to reported revenue growth for the full year. We are also raising our full year SaaS revenue guidance to a range of $103 million to $106 million, representing 54% to 58% growth over 2020. In terms of profitability, we are tightening the range of our expectations for full year non-GAAP operating loss to $5 million to $10 million compared to our prior guidance of $5 million to $15 million. Of course, our profitability outperformance in Q2 raises our outlook for the year. But we are leaving ourselves room to continue to invest in the business in the back half of the year. With respect to Q3, we are going to continue with the practice we began last quarter and guide the ARR for the quarter. Our current expectations for Q3 total ARR are to be in the range of $315 million to $317 million, representing 40% to 41% growth over Q3 of last year. As you look at year-over-year ARR growth, I'd like to remind you that we officially leaned into SaaS at the beginning of 2020. But with our sales cycles, we really didn't see the mix shift kick in until the second half of the year, and so our year-over-year compares are a bit more difficult in Q3 than they were in Q1 or Q2. As for the P&L in Q3, we currently expect total revenue to be in the range of $102 million to $104 million, or 9% to 11% growth over Q3 of 2020. As we model it, we believe that the mix shift creates about a 10 point headwind to these growth rates. Lastly, we expect our non-GAAP operating loss for Q3 to be in the range of $7 million and $9 million. With that, we'd now like to take your questions. Operator, you can start the Q&A.

Thank you. And ladies and gentlemen, at this time, we'll be conducting our question-and-answer session. Our first question comes from Hamza Fodderwala with Morgan Stanley. Please state your question. Hamza Fodderwala, your line is open. You may have yourself on mute.

Sorry about that. I was on mute. Hey guys, thanks for taking my question. And Jason, you will be missed; I look forward to seeing where you land?

Thanks, Hamza.

Regarding your first question on ARR, we saw a strong 43% growth, which aligns with the previous quarter, though it was slightly above the guidance you provided. I'm curious if this is the first time you guided to quarterly ARR and what prudence was considered in your ARR estimates for the latter half of the year.

Yes Hamza, so this was the first time that we have guided to quarterly ARR and obviously, in a quarter, there is a little bit less room and flexibility than a year. I think we try to approach all of our guidance with as much transparency as we can and try to give you a best view of where we're going, but obviously, put a little bit of conservatism in there as well. And I think that applies to any particular quarter we've had in the past, but also the back half of the year as well. When you look at the back half of the year, remember of course that while there was conservatism in the guidance, it's also a harder year-over-year compare from an ARR perspective. In the first half of the year, we're comparing against a couple of quarters last year where we weren't quite into the SaaS and subscription transition quite as much as we were by the back half of the year. We signaled it at the beginning of 2020 last year, but with our sales cycles at six to nine to 12 months, it really was the back half of the year when we started to see the shift really happen. So, if you remember last Q2, we had a very sort of on-prem perp-heavy quarter, and so the compares are a little harder in the back half of the year. So, we think that the business is set to continue to grow very nicely, but the ARR growth has a little bit harder compare as you look at it in the back half of the year.

Got it. And just maybe a quick follow-up, you mentioned that the OpEx came in a little bit below sort of your spending plans. I'm curious, from a hiring perspective, where you're at for your full-year plans, and has it been maybe a little bit more of a difficult hiring environment? Obviously, it's a very competitive market right now for talent. So, just curious for any updated thoughts there.

Yes, it's definitely a competitive market. However, I believe we are a strong employer, which helps balance the situation. I also mentioned that our sales team is fully staffed to plan, something I don't think I've been able to say at previous companies. That's quite unusual for us. We have made significant progress in many areas, although there are still some spots where we haven't quite reached our goals. We had very ambitious hiring plans, and in some cases, we may have overreached. So yes, the market is competitive, but I think we are well-positioned to hire. Our recruiting team is excellent and focused on critical areas, particularly in go-to-market and software engineering. Overall, things are going well, though we haven't completely met our aggressive hiring targets.

All right. Thank you very much.

Thanks.

Our next question comes from Matt Hedberg with RBC Capital Markets. Please state your question.

Yes, thanks. This is Matt Swanson on for Matt. It was nice hearing, Mark, about some of those expansion deals driven by AI. Could you just talk a little bit more about how you're shifting your go-to-market strategy, maybe around having more expansions, especially as SaaS keeps picking up, right? And maybe how you're going to segment your sales force to manage those renewal and expansion opportunities?

Thank you, Matt. Regarding your first question, we have made significant investments in AI and have also acquired new technologies. This positions us well for cross-selling and up-selling opportunities. As we transition to a SaaS selling model, it's typically less about upfront sales and more focused on ongoing revenue. Our sales team is not distinguishing between upselling and new sales; instead, they are given overall account and territory ownership, allowing them to manage both new opportunities and existing customers where expansion is possible. We're organizing our sales efforts more strategically, focusing on larger enterprise accounts while also addressing mid-sized accounts and territories. Additionally, we're aiming to deepen our expertise within specific industries to enhance our sales approach. While I’m cautious about using the term "land and expand," we are focused on securing significant initial transactions with clear opportunities for future expansion.

Yes, that's very helpful. If I could ask one more thing, we historically haven't discussed the competitive landscape in governance much. As you transition more into SaaS, are you experiencing any different dynamics? There have been announcements from competitors that may not target your segment of the enterprise. Are you noticing any changes in discussions with your customers?

Not substantially or certainly relative to competition. I think we are feeling more pull, more demand from the mid to high-end of our traditional enterprise segment for SaaS. As we've said for a long time, we just weren't really feeling that pull from those largest customers, and that's definitely shifted over the last 12 to 24 months. But from a competitive standpoint, we still strongly believe we're kind of the only enterprise-class SaaS offering for our market. We have some folks, as you point out, who recently chose to talk about this market space, but really aren't kind of enterprise-class for this offering today. I'm not sure how long it'll take them to get there. And then we have some other competitors who have been in the market around the enterprise space, but really aren't offering real SaaS offering. So, in general, we're kind of still in a fairly unique position there. And increasingly, that seems to be helping us in our competitive dynamics. So, yes, I think we're feeling really good about the competitive dynamics today, but haven't really noticed a shift relative directly to the SaaS focus.

All right. Thanks for your time.

Thanks, Matt.

Thank you. Our next question comes from Rob Owens with Piper Sandler. Please state your question.

Great and thank you for taking my question. I wonder if you could help us a little bit with some of the puts and takes around the second half guide. And I don't know if you gave us a headwind for Q1, but you had 20% revenue growth. And Jason, you mentioned 17 points of a headwind in Q2. So, I guess, the implication is, there is some organic slowing in the back half. Is that just difficult comps or pipeline or conservatism? Maybe you can kind of walk us through how we should think about the back half of the year. And appreciate you just providing that growth delta to begin with; I know the SaaS transition is not necessarily an easy thing.

Yes. No, thanks, Rob. Yes, I think the best way to think about it is more difficult comps in the back half of the year. Obviously, from a recognized revenue perspective, it's sort of neither here nor there because of the SaaS transition that was kicking in in the back half of last year. But we did have very strong performance in the back half of the year. So, those are difficult comps. Now, obviously, we are always aiming to continue to accelerate the business, but when you look at our guidance, we are looking at some high comps in the back half of last year.

And I guess this is a quick follow-up. Could you elaborate a little bit on some of the spending that actually got pushed out of Q2 into the second half and some other things really one-time in nature? Thanks.

Yes. Look, part of our underspend in Q2 was hiring, and you can't exactly push the hiring spend out. It starts whenever you hire the person. There is some one-time, whether it's marketing programs or other third-party work, for example, that we do internally. Whatever might be that we're pushing to the back half of the year, but at the end of the day, really the important takeaway, Rob, is that we're investing aggressively in the business. We feel very comfortable with the growth trajectory that we've got over the next several years and feel like we can invest now in the business and pay that off easily over this year, next year, but for years to come. And so it's not so much that there was a lot of specific things that we didn’t do in Q2 that we're then going to do in the back half of the year. But given that we underspent in Q2, we're just allowing ourselves a little bit more room in Q3 and Q4 to do some more spending and invest in the business to build for the long-term.

Great. Thank you very much.

Thanks.

Thanks.

Our next question comes from Brian Essex with Goldman Sachs. Please state your question.

Great. Thank you for taking the question, and Jason congratulations from me as well.

Thank you.

Mark, perhaps, you made some commentary in your prepared remarks about success at the upper end of the market. Could you maybe highlight what you're seeing that or if there is anything thematic there that's driving a better success, whether it's digital transformation initiatives finally getting over the hurdle, or whether it's bringing conversations of an elevated threat environment up to the Board level? Kind of what do you attribute the success there to primarily?

Yes, I think, Brian, I only struggle with the primarily part of your question. I think you hit on two or three of the biggest issues, right? I think there is both push and pull meaning, I think we're continuing to enhance the depth and breadth of our product offering. Obviously, that's a factor as these very large enterprises look at what their needs are and they ask us to stack up our capabilities against that, I think we're hitting on the bulk of what they need. Their acceptance and willingness to take a SaaS offering because again, there's been a pretty significant shift for the last few years. I think we've said before that sometimes people, I think, confuse the incredible acceptance of SaaS for other parts of the identity offering landscape, particularly access management, single sign-on, and multi-factor authentication, but it just really wasn't the preferred option in our minds and from our customers for quite some time, but that's really begun to shift. And then, I think the other two things you highlighted, Brian, are certainly factors, right? Just the learnings of not just COVID and the pandemic, but just the general growing sense that in the realm of security, identity is an increasingly important control point to understand and manage and that the push for digital transformation. The kind of the exacerbating effect of working from anywhere has definitely caused these large enterprises to want to make sure they are well-suited, well-prepared to help their organization's move fast but safe, right? I think that old brakes on race cars thing again, right. They want to move quickly to take advantage of opportunities with technology, but they need to do so in a way that doesn't put the organization at risk, and increasingly, that means getting a much better handle on identity.

Thank you for that information. I would like to follow up on a comment made earlier regarding bookings being earlier than usual this quarter. Can you share your confidence level regarding the pipeline? Are you noticing any acceleration in it? Is there a sense of caution regarding how customers are deciding between IdentityIQ and IdentityNow, or how do you assess your confidence level, especially considering the tougher comparisons in the latter half of the year?

No, I think thanks, Brian, I was going to highlight that as I started, which was just to remind you that Jason pointed out it was a very good second half of the year for us. So, we're going to have some challenging comparisons, but we still feel very good about the direction and growth of the pipeline, particularly with a steady shift toward SaaS in the pipeline. We're experiencing overall top-line growth, but within that growth, there's a continued shift toward SaaS that we've been planning for and working toward. We're seeing strong indications, and that's part of the reason we're maintaining, not necessarily accelerating, but keeping our focus on hiring sales capacity because we want to have the necessary resources to capture that opportunity. So, yes, pipeline growth is very good, increasingly focused on SaaS for new business, and we're ensuring we have the capacity, both within our team and through our partner network, which is a crucial part of our strategy to capture that.

And then, Brian. Regarding your question about conservatism and how it might affect our guidance, we will not include every potential achievement and growth from our pipeline in our forecasts. We intend to be cautious in our projections. The majority of our conservative approach to revenue is due to uncertainty about how the mix of deals will ultimately unfold. It’s not primarily about whether individual deals will close; rather, it’s about the variety of deals we have in the pipeline, with some materializing while others do not. The combination of these deals will significantly impact the recognized revenue, more so than the total amount of bookings.

Great. That's fair. Okay. Thank you.

Our next question comes from Brent Thill with Jefferies. Please state your question.

Jason, just on the adoption of SaaS outside the U.S., can you speak to this? It looks like EMEA had a great year-over-year growth rate which suggests maybe they're still taking perpetual a little harder than SaaS. Can you talk to what you're seeing there?

I would say that the U.S. is slightly ahead of EMEA, APAC, and the rest of the world. However, it's not a situation where there's a significant market difference between the U.S. and international regarding SaaS, nor is anyone unwilling to adopt SaaS. What you see in the numbers this quarter, for instance, is largely due to smaller sample sizes in international markets. If we happen to secure an on-prem deal with upfront revenue recognition, it could skew the quarterly results. We've often had timing issues with service revenue that don't impact the U.S. growth rate but can affect EMEA or APAC. That’s what you’re observing, but the SaaS transition is occurring in EMEA and APAC as well. APAC may be slightly behind the U.S., but not significantly.

And for Mark, I guess, maybe if we look beyond the financials and we could see through your lens the company, everything that's happening, what would you say is then the most surprising thing for you in terms of what you're seeing, whether it's deal size sustainability, cross-sell? Is there a couple of things that come to mind that maybe we all can see that you're seeing?

I'll give credit for a more intriguing question than usual, Brent. I feel like we're mostly trying to share what we believe we are observing, which is a strong demand profile, especially from the high end of the market where we continue to find ourselves in a uniquely strong position, but it's also quite robust in the mid-enterprise sector. We're still seeing the importance of identity gaining more attention. I think that's something you might not notice immediately. It's a point we aim to highlight, but Matt would say that the nature of the conversation is becoming more significant. If you think back ten years in this market, discussions centered on back office productivity concerning identity governance, like can we improve provisioning efficiency and compliance operations? It was more of a nice-to-have to save some money. Now, there's a growing awareness about the control point of identity not being well managed in most large enterprises today, with Boards and senior management becoming more cognizant of that, which elevates the conversation. This awareness could provide tailwinds for aspects like ASPs and growth rates over time. We feel very positive about how these conversations continue to emphasize the importance of this to customers. That's probably the main thing that stood out to me when you asked your question.

Okay. And this is coming from a client. So, we'll say this is not a third question, it's coming from a client. You talked about the increasing interest in existing customers from AI. What's the typical uplift when they add penetration? Thank you from the client.

Brent, I think we feel very good about the way the conversations continue to highlight the importance of this to the customer. That's probably the main thing that occurred to me when you asked your question. You talked about the increasing interest in existing customers from AI. What's the typical uplift when they add penetration? Thank you from the client.

It really depends, right? We talk about AI, but there are several products there; they can be applied in different ways for the existing deployment. I mean, think about it as a meaningful uplift. It's not doubling the opportunity that we have in that range typically, but it is still meaningful.

Thank you.

Our next question comes from Mike Walkley with Canaccord Genuity. Please state your question.

Hi, good afternoon. This is Daniel on for Mike. Congrats on the strong quarter and thanks for taking my questions. So, it seems like your total deferred balance in billings was up pretty substantially this quarter. Could you just provide us with some color on what drove the strong result and have you seen any meaningful changes to billings duration as a result of the transition?

No, Daniel, we haven't seen much of a change. We typically do three-year deals. There are some customers that will want to lock in four or five-year deals as they're making a very big commitment to this platform and this technology. But typically, we're doing three-year deals. I would otherwise not look too closely at deferred. Because we have a mix of both SaaS and term license which work very differently with deferred, the best thing to really look at is ARR. That gives you a real sense of where the subscription business is and what run rate we're driving.

Great. Thanks for the details. And just as a follow-up, can you just provide us with an update on how the integrations of the two acquisitions are coming along?

Yes, I'm happy to address that, Daniel. It's Mark here again. In short, we're very satisfied with both acquisitions, as they serve different purposes. ERP Maestro is primarily aimed at enhancing our strong offering for many enterprise customers who prioritize ERP, integrating it into identity governance and security. This has generated significant interest in the market and has strengthened our competitive position. Regarding what we previously referred to as Intello, we now call it ARM. My apologies for forgetting the acronym briefly. Essentially, it's focused on SaaS management, and we're seeing that this area is a major point of interest for many customers. It's an easy addition to discussions, especially as clients navigate the rapid growth of SaaS applications and the related challenges of shadow IT. This topic resonates well with both potential new customers and current clients looking to expand their existing setups. Overall, we view both developments very positively.

Right. Thank you very much.

Thanks.

Our next question comes from Alex Henderson with Needham. Please go ahead.

Great. Thank you very much. I was hoping you could talk a little bit about the dynamics around the recent acts, the Presidential Executive orders and whether those changed activity rates or intensity as identity was so center stage related to all of those events?

Yes, Alex, it's Mark. I'll begin by addressing that. It's important to clarify that while we hesitate to directly link a hack to a specific percentage increase in our business, we do observe that such incidents reinforce for our enterprise-class customers that their security challenges are far from resolved. This compels them to invest further in enhancing their security measures. As you noted, identity is increasingly at the forefront of these discussions. In terms of the executive order, while it's somewhat indirect, we believe it positively impacts us in the long run by raising awareness and emphasizing the need for both the federal government and its partners, as well as affecting overall market conditions. These issues are likely receiving less attention than they should, but we anticipate that will change moving forward. Overall, we see these developments as positive tailwinds for us. However, I would caution against linking this to a specific increase in pipeline or business in the next period.

And can you talk a little bit about your opportunities in the federal arena? Thanks.

Our financial service segment remains a strong part of our overall business, leading in healthcare and other sectors. The federal government, along with state, local, and non-U.S. national governments, is a significant source of opportunities for us. In particular, our team focused on the U.S. federal government has been robust. We have made notable additions to that team in recent years to capitalize on various opportunities across all major areas, including civilian, DoD, and intelligence. We maintain strong positions in all government sectors and see considerable potential for growth, both in attracting new customers and expanding our relationships with existing ones as we return to some of those clients.

And if I could, does the government vertical have any differences in its approach to SaaS adoption and subscription adoptions?

Well, I mean as you well know and a lot of folks know, FedRAMP is a high focused topic, right, to make sure we have something that addresses the FedRAMP requirements. But in general, I think for the most part we see government kind of matching the general market on that, like the general trend toward SaaS is there, it's strong. It doesn't necessarily become the only thing people consider, but increasingly by far the majority of what people prefer. But that said, we still have a very strong presence with IdentityIQ in that market and we'll continue to expand that presence over time. But I think as we look forward, we certainly want to be well-positioned for increasingly large slots of the federal government to go with the SaaS offering.

Great. Thanks. Clear answers.

Thanks, Alex.

Thank you. Our next question comes from Joshua Tilton with Wolfe Research. Please go ahead.

Yes, hi guys. Thanks for taking my question. For the first one, I was just curious, did you see any change in the pace of legacy replacements in the quarter relative to previous quarters? And does the replacement opportunity accelerate now that the large enterprise is ready to buy the SaaS offering?

Jason, I'll begin addressing that question. Both of us will respond to it, Joshua. I wouldn’t say we noticed a significant change in the pace. I believe it was more about how your question was framed. In other words, we weren’t experiencing a sudden increase in momentum last quarter. As we’ve mentioned consistently, we typically see a substantial portion of our business each quarter in large enterprises as either partial or full replacements. This makes sense since our focus is on high-end markets where customers usually have some form of legacy implementation when we engage. It’s quite uncommon to find a Fortune 5000 account that has not invested at all in these types of technologies. Therefore, there is generally some form of replacement happening. We have prepared for an increase, and I would suggest that we’re likely seeing a slight uptick in our pipeline through our partners. Particularly, some of our significant large system integrator partners are gearing up for more displacement and replacement opportunities, especially among customers they’ve had for many years who are still using older technologies. We observe a positive momentum building, and as larger enterprises recognize SaaS as a more appealing option compared to their past legacy on-premise deployments, this likely encourages them to take action sooner than they might have otherwise. So, yes, considering all these factors, we anticipate potentially a stronger uplift in such movements in 2022, following the latter part of this year and into next year, but I wouldn’t say we would attribute an enhanced outlook to it. Jason, do you have anything to add?

No, that makes sense. I mean look that's always a part of our business. And as Mark said, it's tough to isolate that and say this is exactly how much of the business that is or isn't, but it is a real phenomenon.

That was clear. And I just wanted to follow-up on the question on the AI service adoption; I believe it's still early innings, but what percentage of the customer base have adopted the AI services?

Yes, it's still early innings. We haven't disclosed what that percentage is, but it's still pretty early innings.

Interest is very high, I guess, that's one thing I'd add. We find that the great majority of those customers do want to understand what we're doing there. I think they do see it as an enhancement to their traditional approach. But yes, I think we're pretty early in the selling cycle of getting that broadly into the whole install base, but a good amount of business every quarter I think coming through that now.

Thanks guys. Appreciate it.

Thanks.

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

Thank you all for your interest and questions. I want to express my gratitude to Jason for his valuable contributions and service here. We're looking forward to what lies ahead for him. We'll keep everyone updated on developments at SailPoint. In the meantime, Jason will be with us to assist during the transition. Thank you for your attention today, and we look forward to staying connected in the coming weeks.

Thank you. This concludes today's call. All parties may disconnect. Have a great day.