Greetings, welcome to the SailPoint Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Josh Harding, Vice President of Financial and Investor Relations. Mr. Harding, you may begin.

Good afternoon and thank you for joining us today to discuss SailPoint's fourth quarter and full year 2018 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 exclude special items, please reference this afternoon's press release in the Investor section of 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.

Thanks, Josh, and good afternoon everyone. Thank you for joining the call today. I'm pleased to share our strong results for both the fourth quarter and full year 2018, which were driven by continued strong demand for identity governance and solid execution by the SailPoint team. For the full year 2018, total GAAP revenue under ASC 606 was $248.9 million and we continue to deliver both profitability and positive cash flow for the year. We added 240 net new customers in 2018 bringing us to nearly 1,200 customers across organizations of all sizes and verticals. Our international revenue grew by more than 50% year-over-year and we believe that we have only scratched the surface on this opportunity. And we continue to gain traction with our channel partners, complimenting the investments we are making in our direct sales teams to drive adoption of our solution. Our fourth quarter GAAP revenue under ASC 606 was $80.6 million. We saw growth across all of our product offerings and strong support from our channel, including systems integrator and technology partners as they continue to help us close many new customer deals and create awareness for our best-in-class identity governance platform. As we look back on the year, we believe our 2018 growth was fueled by several factors. The first factor driving our growth was the continued appeal for our innovative best-in-class identity solutions that help customers govern and secure their digital identities. As organizations of all sizes are pressing ahead on their digital transformation efforts, CIOs and CISOs have the task of securing the foundation of that transformation and are increasingly turning to SailPoint for their identity governance program. Their main concerns remain being able to properly and efficiently answer who has access to what and to gain and retain visibility into what that…

Thanks, Mark and thank you to everyone on the line today for joining us. We are very pleased with SailPoint's fourth quarter 2018 financial performance, which exceeded the high end of our revenue and non-GAAP operating income guidance. Before I walk through the details of the fourth quarter and the full year, I want to remind you that we were required to report our fiscal year 2018 GAAP financial results and issue our upcoming 10-K on an ASC 606 basis. However, in addition to the ASC 606 figures, the press release we issued earlier today includes 2018 quarterly and annual figures on both our 605 and 606 basis for comparability to our previously issued guidance and reported results. It is important to note that going forward, we will only report and guide on a 606 basis. In addition, because we elected the modified retrospective transition method for adoption of ASC 606, we are not required to have directly comparable results on an ASC 606 basis for 2017. Our growth rates, I'll reference have been calculated solely using ASC 605 results. I'd also like to take a moment to highlight some of the key differences and revenue recognition between ASC 605 and ASC 606, before walking through the income statement. I'd also like to note that we provided a supplemental ASC 606 summary on our investor website that we encourage you to review today. To begin the impact of our standalone SaaS and professional services arrangements is generally insignificant under ASC 606. Most of the changes to revenue are driven by how we account for perpetual license and term license agreements and the related maintenance and support obligations. For perpetual license agreements, our contracts include the first year of maintenance. Under ASC 605, a typical perpetual license transaction sold on a…

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Nowinski from Piper Jaffray. Please proceed with your question.

Great, thank you very much and I apologize for the background noise. Great quarter, great results. I just had a question on the subscription lines. If I'm not mistaken that includes maintenance revenue versus some of your perpetual licenses. So I was wondering if you could give us any color maybe on the growth rate of your subscription license revenues or whether that's just inline with the overall subscription segment?

Yeah. So Andy, first of all it’s Cam McMartin. Welcome to call. Thanks very much for joining. The answer is, just to remind you, the way we report and this is true both on a 605 and now on a 606 basis, we report license revenue as a separate component and with 606 now basically anything that’s term is in the license line. In addition, subscription is made up of both maintenance derived from the license transactions as well as SaaS. And so in that sense, that's the way the reporting has been and that's the way the reporting will continue to be. The slight difference between 605 and 606, as we are now splitting the term license transactions under 606 between a license component and a maintenance component. As we think about it, looking forward, our expectation, which has been true for the last couple of years is that the subscription component of our revenue will be the fastest growing component, and that's again made up of the strength of continued license growth and contribution therefore from the maintenance as well as very strong maintenance renewal rates. In addition, we continue to see very good performance overall from the SaaS business and that middle-market enterprise segment that we're focusing on which is largely greenfield has been – also a solid contributor to overall performance.

Okay, thanks, Cam. And then as I said, you had a really strong quarter. But the new customer adds were a little lower than they have been over the last three quarters. So was this quarter, just a little heavier on the cross-sell opportunities with existing customers?

Yes, Andy. The answer to that is yes. It was a quarter where we had – we were very pleased first of all with the continued strength in the overall contribution from both new customers and existing customers. The split in the quarter was roughly that typical 65:35 mix that we've seen for many, many quarters in the business and that was true again in the fourth quarter if you look at kind of the count if you will, of transactions. We did see a somewhat stronger contribution this quarter from existing customer revenue contribution, nothing off trend in the sense of any particular quarter will bounce up and down a bit. And so I think we continue to see that healthy balance of new customer acquisition and leveraging our installed base to drive revenue performance and that was true again in the fourth quarter.

Great, keep up good work guys.

Thank you, Andy.

Thanks Andy.

Our next question comes from the line of John DiFucci from Jefferies. Please proceed with your question.

This is Julian Serafini on for John. So, I had two questions. I mean the first one, when I look at the 606 adjustment in 4Q, I mean there is a big adjustment to the license plan, right, it's like over $3 million. I mean, are we to take that as really just like a large on-premise subscription deal that came through in the quarter?

Yes, it really – it was Julian, a couple of transactions in the quarter. There was one transaction that in terms of its conversion between 605 and 606, did represent a fairly meaningful revenue recognition shift. I would say, if you look at the information that we provided as part of the supplemental information in the press release, you'll see most of the quarters, the shift between the two categories of revenue recognition, by that I mean 605 and 606, the standards that are said, really was quite modest in any particular quarter. It just so happened if you will, that in Q4, we had a couple of transactions where the effect was larger and it was a combination in that quarter of both term license as well as some perpetual license effect from a larger transaction that had a multi-year maintenance component.

Okay, thank you. And then the second question I had, too just on SecurityIQ or I guess how you're bringing the product now? What’s the genesis, I guess, that decision to make early module and not a standalone product anymore? Can you share some more in terms of like why do that right now going forward?

Yes. Julian, this is Mark. I'll pick that one up. Good to talk to you. It's mostly about packaging. We wanted to simplify the packaging to make sure that customers who kind of think of these two core platforms, kind of our SaaS platform IdentityNow and our software platform whether hosted in the cloud, or run on-prem IdentityIQ. We wanted to signal that that is we've expanded our vision of what identity governance encompasses, and now we absolutely believe it should encompass both the access to applications and to data, generally data kept in files and things like Dropbox and box in SharePoint all of that. We just felt like it was a better positioning to say the packaging of that should be viewed as sort of an add-on or a component of the broader two platforms and we actually think it'll help our field and our partners position it more as a component of the platform as opposed to a third product. It was sort of more and more being viewed as kind of a separate thing, both by our field, our partners and some of our customers. And so we think it'll make it a more natural positioning and selling process, it will make it a more natural consumption or purchasing process for the customer and we think it'll actually help us increase the adoption of File Access Manager.

Yes. And, I think the second thing I'd comment on is really based upon some of the early experiences we've had with customers that have now fully deployed. They're thinking of it as a comprehensive governance solution and in that sense end to end, it's the wall to wall coverage of governance requirements whether its application or files, they want those interwoven in the way they manage certifications and life cycle and all the things we've talked about before. And so that comprehensiveness in this packaging, I think, let's the prospective customer know that this is in fact an end-to-end problem that has to be addressed. And so this packaging, I think better aligns with our experience with our customers that are furthest along in the deployment of both solutions.

Okay, that makes sense. Thank you.

Thanks.

Our next question comes from line of Matt Hedberg from RBC Capital Markets. Please proceed with your question.

Thanks, this is actually Matt Swanson on for Matt. It was good to hear the update on IdentityAI and we're excited to see more of that in Q2. Could you just talk a little bit about the customer response from the people who got to try – do the trials throughout 2018? And then if there's any expectations around contribution in 2019 from it?

Hey, Matt. This is Mark. I will take the first part of that and let Cam pick up the second. As we think about kind of the focus of what we're trying to do with AI, it really is focused on how do we help our customers on what we're calling kind of recommendation-based approach. In other words, one of things we've heard a lot from our existing customers is they need to be both more efficient and more effective in their identity governance programs and one thing as we think that we can do with that kind of intelligence is to help them make better initial decisions as to who should have access to what. They're obviously valiantly trying in many cases to get their policies and their roles defined in such a way that that could be pretty well defined for standard roles and – which is true. So many of our customers has a lot of kind of semi non-standard roles, who are – part of the needs are defined by – a clearly defined role in the organization and then various other things are driven by unique needs. And so, we think that the intelligence IdentityAI will help customers with that initial approach to how should this person be configured as they join and as frankly as they move around in transition. So kind of the inference of that is that early on, we think AI will probably be most interesting to our existing installed customers who are frankly pretty mature in their rollout. And those are the customers we worked with in our early access program to kind of vet it out with folks that really have a fairly deep thorough understanding of governance and are well down the path there. So, that's been our focus as we kind of add more capabilities into the product going forward, we anticipate it will be more applicable to a newer customer who's less mature in their program, but our focus in 2019 and headed into 2020, will probably be more about the existing installed base customer. Now, I’ll let Cam comment on the financial side of that.

Yes, so, Matt thanks for joining the call. Appreciate it. Relative to the financial expectations for 2019, as a reminder, IdentityAI is a SaaS-based solution. It is therefore, if you will price and packaged in that regard, there will be a bit of a consumption element in the pricing model as we go fully to market. And so, as we've thought about it, what we see 2019 really about is a couple of things; one is obviously converting these early access program customers to long-term users and subscribers to the solution and that's going along nicely, in terms of where we're headed. In addition, as Mark said, this is a solution and its first wave is about focused around the existing well-deployed IdentityIQ, IdentityNow customers in that regard that's where our team is focusing today. And we would expect to build a book of business in terms of new contracts and subscription agreements that will, if you will, layer cake upon each other as we go through the year, but really the meaningful revenue contribution is out in front of us in 2020 and beyond.

That's great. And if I can ask one more product question, Mark. Last year at Navigate was the first time I've really heard, do you guys or anyone else talk about securing bots. Could you just talk about kind of the process that you've made throughout the year? To what extent customers kind of understand this as an issue? And I don't know if you have any customer example so far that you could point to for kind of the size this opportunity represents?

See, yes, Matt, couple of points. One is I think we have been somewhat surprised by the rapid pace at which are kind of larger fairly sophisticated customers seem to be deploying bots and their interest in managing those bots using these same types of approaches that they've managed people with. I think we can refer to an example here in a second, but in general, I think we're seeing a good tick up there of customers who are saying, hey, I am deploying a lot of these software bots around my org, I do need to manage them kind of with the same approach, the same constructs as I do my people and so that's leading just a nice license, up sells and cross sells to get more revenue from those customers because they fully expect to pay to manage those kinds of capabilities. I think, honestly, I guess the short answer here is it's not a massive needle mover to our overall financials, but we're seeing frankly a faster uptick there than we thought. And it's more driven by the rate at which our customers seem to be deploying these bots.

Yes so Matt, I think just to remind you, and we've talked about this in our prior calls, but I'll just remind you this. The genesis of this is obviously what's going on in the market, but we had earlier in 2018 a customer come to us and say that they had deployed 20,000 software bots across their enterprise and recognized that they had a governance gap that that while they could do certain things with it, with IdentityIQ, they couldn't address the full lifecycle management requirements that they wanted to deploy. And so they came to us and asked us to look at some additions to IdentityIQ. We got it in the roadmap; we actually did that work during calendar year 2018. We released that new functionality that allowed for unique governance of bots in IdentityIQ 7.3. And so we've moved quickly in response to the marketplace. Another example that came after the release of IdentityIQ 7.3 in Q4 was a large global financial enterprise, who was seeing a proliferation of bots across a number of different segments of their business. And in that case, the number of bots that they license was quite large based not only on where they are right now, but what their own internal expectation was relative to additional bot roll out over the next couple of years. So in that regard we're seeing, I think as Mark indicated, a more accelerated pace in the adoption of software bots as part of their identity programs. And so in that regard, I think, we positioned ourselves well to capitalize on it. And again, back to my earlier comment, it helps us be wall-to-wall in the way in which we can lifecycle manage all identity types for all uses for our customers.

Alright, great quarter guys.

Thank you.

Thank you, Matt.

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

Hi, I guess first question is for Mark. On the SaaS side I'm wondering if you've seen any lines blurring between customers that have traditionally bought SecurityIQ versus IdentityNow and if you anticipate any change in that? I mean, I guess, it seems like your guidance doesn't necessarily assume that, but I'm wondering what you're seeing in terms of color on customers choosing each, and their size, and so forth?

Hey Walter it’s a good question. What we've done and we've tried to be a little more definitive with our field and guiding them how to approach customers. And what we typically say is rounded off, sub kind of 5,000 users and this does vary somewhat by industry. That's a generally pretty clear IdentityNow customer greater than 15,000 that's generally a pretty clear IdentityIQ customer just because of the implications of the sophistication, the complexity that is implied in those kinds of sizes. And then that middle ground is a bit gray. And what we've learned is a lot of those customers in that middle ground and certainly those below that, the lower end of the market tend to start by saying, “Hey, I'm cloud-first or frankly sometimes cloud only. And in response to that, our team was initially saying, well therefore I should be talking to you about IdentityNow because that's our SaaS offering. One things we’re clearly positioning for is that through partners, to help the customer themselves hosted let’s say Azure or Amazon, we are seeing a pretty interesting uptick in people who absolutely qualify or positioned well to use IdentityIQ because of the nature of the used cases they have and the nature of their environment. But they don't want to run it in their data center. So that line has gotten a little fuzzy, Walter, in that middle ground of okay, so if that customer wants a cloud-based solution, they may or may not be well suited IdentityNow versus IdentityIQ in the cloud, and we then have to kind of double click into the next level of detail as to what's happening there and which way we go. And honestly, there are some nuances here by geography. Some countries are more SaaS-friendly than others today, but there's just a lot of moving parts here for us. But I don't think we've seen any substantial shift that's confusing the market between our two products today. We have to help our field get that right. Sometimes it's more just that we had to train ourselves, and our partners and others to just not immediately say SaaS when the customer said cloud if that makes sense. Sometimes they say cloud then we say, well that made me a cloud hosted version of IdentityIQ that's most appropriate for you. Does that make sense?

It does, yes. Got it. And so safe to say, it sounds like you've seen a bit more of the hosted cloud SecurityIQ piece, but it doesn't really – we don't see that revenue or anything like that.

Yes, well practically and Walter Cam here. Practically it depends on the buying dynamic of the customer. To date, as Mark indicated, we have seen, I think, a steady uptick in the deployment of IdentityIQ in the public cloud environment. Generally speaking, those customers are still wanting to buy and own on a perpetual license basis IdentityIQ. They're simply play-shifting, if you will, from their existing location, if you will, behind the firewall in their data center to the public cloud. But our large enterprise customers continue to have an overwhelming preference in the buying cycle to buy on a perpetual license basis.

Got it. And then, Cam, just on the guide, the 10% margin for 2019, can you help us understand as we're comparing that to – I think you're very clear on the revenue side. If we're comparing that to our estimates on a 605 basis that we had prepared before, what is the – maybe what would the margin – the operating margin have been for 2019 on 605?

We really haven't pro forma-ed the 605 in the way in which if you're talking about including the CAC adjustment. Walter, I'll take it back to what we've said previously about the performance in 2018 through the year, because we were nicely ahead throughout the beginning part of the year and through the year on license contribution at the marginal level. It was a good contributor overall in terms of revenue, and therefore, profit performance. In addition, as you saw, and we updated you in the prepared remarks, around hiring, the first part of the year, we were a bit behind in hiring, and then late in the year, caught back up. So in that sense, 2018's performance was really above what we wanted to manage to on a long-term trend basis in terms of growth focused at the top line. And in that regard, as we commented in the third quarter call, we expected to moderate a bit our 2019 profitability to be more in line with our overall focus on growth in the long term. And so that's where it is. If you, at the end of the day, if you look at it, I think the difference between the two would have been a couple of points in terms of overall non-GAAP operating income.

I'm assuming a couple of points higher on 606 given the commission deferrals?

Yes correct.

Yes just to be clear. Thank you.

Okay, thank you.

Thanks.

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

Hey guys, this is Mike on for Rob.

Hey Mike.

Hey. As you compare the 2018 pipeline at this time a year ago, to the 2019 pipeline you're seeing today, to what extent you've seen shifts in the compliance for security focus, or compliance versus security drive demand?

Yes Mike, this is Cam. I'll start and I'll let Mark come in behind. I think the answer is that the complexion of the demand drivers for our business remain the three that we've highlighted now for really pretty public even, but certainly since we've gone public and the biggest driver really remains the IT operational efficiency and effectiveness portion of our value prop being the biggest driver. Organizations, especially the larger organizations, but now, more and more of the middle market or middle enterprise organizations with the proliferation of applications with the fact that now have to manage these data stores, with the proliferation of identity types, life cycle governance and management is a tough challenge. And that tends to be the most frequent driver, whether we're displacing an existing solution at the customer, or in fact, simply going in for the first time. But in addition, the other two that we've talked about security is important and remains important, people are managing breach risk as tightly as they can. They continue to view identity governance as an important pillar in their overall security framework. And tight identity control gives them the understanding of who is accessing what. And ultimately, with the addition of IdentityAI, as time goes on, they will have a more dynamic understanding of that. And then lastly compliance remains important. In the U.S. HIPAA, for example, in the healthcare markets and other drivers are critically important to organizations, especially as they go through their annual audit cycles and if there seems to be a deficiency in the control framework around IT resources, and we'll see people come to us as that is their primary driver. Again, I'll remind you throughout, we are selling all three value propositions because we fundamentally believe that organizations need to comprehensively address their governance requirements. And so, they should think about how they deploy to address all three.

Yes, the only nuance I'd add, Mike, is a little bit of industry vertical. What I mean by that – and/or scale. What I mean by that is if a company is public and/or regulated, obviously compliance tends to weigh in a little heavier than it does when that's not true, right? A smaller or a non-regulated industry company security and operational issues tend to be more at the forefront. And just to echo what Cam said, I think in the world of IT products of any sort, even security, if there is a value proposition to be discussed, relative to cost management or cost reduction, it's always a great way to get the dialog going. And that's an even better dialog if they were replacing, displacing older legacy technology that they know has become somewhat costly to maintain and inefficient to use. So, I think we quite often get people's attention on compliance and/or security, but a lot of times when you get into the sales cycle and are helping them do an ROI, what we call a business value assessment and justify this up their chain of command and up through the financial organization, quite often the operational issues are pretty significant.

That makes sense. And I'm sorry if I missed it, but last quarter you guys spoke positively on the accelerator pack, driving faster implementations among already committed customers, and I know it's still early, but could you speak to what extent, if any the promise of faster implementations may be driving a faster expansion cadence?

I don't if I quantify that in anyway.

Yes I would say I think it's on a quantifiable basis Mike, I think, it's still early, practically speaking. I think the good and positive indicator is that we're seeing a number of our customers both upgrade to include Accelerator Pack and follow on procurements as they come back and buy additional Identity Cubes. And then additionally, new customers are adding it to the mix in terms of their initial procurement. I think what our partners are able to articulate is that with the use of the accelerator pack, they can move customers along more quickly to on-ramp applications, on-ramp identities, i.e. people or non-human identities in a way that gives them an accelerated time to value and that, I think, will prove to be over time the important variable. It will take time to collect all the data around that, as you well know, these are multi-month generally deployment cycles. And so, we're still early in the lifecycle of that contribution. But the feedback that we're getting from customers and from partners is positive and I think that's, that's the most, I think, we could comment in terms of early results at this point for you.

Great. Thanks guys.

Thank you.

[Operator Instructions] Our next question comes from line of Tim Klasell from Northland Securities. Please proceed with your question.

Yes, this is Tyler Wood on for Tim. Thanks for taking our question. So as you kind of break apart the deferred revenue build, could you talk a little bit about did bookings on a perpetual – how the bookings on a perpetual side compare to bookings on the SecurityNow and subscription side of the business? Thanks.

Can you re-ask the back end of that question one more time, sorry, I was losing you at the end there?

Sorry, just how the bookings on the perpetual side of the business compare with bookings on the SecurityNow and subscription side for the quarter?

Yes, I would tell you that the performance of bookings in Q4, we were pleased with. In terms of, if you will, the makeup of the contribution, we saw on a historic basis, continued contribution from IdentityIQ and good both cross sell, up-sell and new attach for SecurityIQ, we've now started calling it File Access Manager going forward, but we saw good contribution there. And we were pleased with the overall progression through the year with IdentityNow. I think we're pleased with what we've learned in the marketplace around IdentityNow. And some of the positioning and selling shifts that we accomplished through the year, I think, are bearing fruit for us. And that's what we're looking for. So overall, the contribution across all of the product categories was positive in terms of Q4 overall results.

Thank you.

We have reached the end of the question-and-answer session. And I will now turn the call back over to management for closing remarks.

Well, I think we just like to thank everyone for their interest and the thoughtful questions. Again, we apologize for the delay in getting this earnings out to you all. But we're happy to have everyone join us today on what was an adjusted schedule. And we look forward to conversing with all of you in the short term here as soon as we can. Thanks for joining us today.

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