Greetings, and welcome to SailPoint Technologies Holdings, Incorporated Second Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Josh Harding, Vice President of Finance and Investor Relations. Thank you, Josh. You may begin.

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

Thanks, Josh and good afternoon. Thank you for joining the call today. I'd like to share our results for the second quarter of 2019. Total revenue for the quarter was $63.1 million, an increase of 18% over Q2 of 2018. And our non-GAAP operating loss was $1.6. We also added 59 net new customers. We executed well on multiple fronts in Q2, including the introduction of our vision for the future of identity governance, SailPoint Predictive Identity, continued execution across our partner ecosystem with notable strengths among our Global SI partners, and several operational improvements to drive greater effectiveness in our go to market initiatives. Taken together, this focus and improved execution helps us to exceed our revenue and operating margin guidance for Q2. Now, let me spend a few minutes providing additional color around some of the major highlights from the quarter. As mentioned at the close of 2018, our focus for 2019 continues to center on driving the identity governance market forward in three distinct ways; governing all, governing indeed and governing smart. While we continue to execute across all three areas, in Q2, we took important steps forward in reshaping identity governance from reactive to proactive with the unveiling of our vision for the future of identity governance, SailPoint's Predictive Identity. This new approach to identity leverages artificial intelligence and machine learning technologies to infuse identity programs with the critical intelligence enterprises need to govern smarter. As organizations continue to pursue their ever expanding digital transformation efforts, they need to get and stay ahead of the security curve, focusing on the most critical areas of risk. At the same time, their identity programs have grown increasingly more complex, particularly as they evolve the scope of their programs to encompass cloud applications and infrastructure.

Thanks, Mark, and good afternoon. I want to spend a few minutes today updating you on several operational improvements we have made to address the challenges we face in our go to market execution last quarter. Our focus has been to adjust our approach to improve both the quality and quantity of opportunities in our pipeline in order to better address the growth, the scale and global complexity of our business. We've made a number of adjustments. First, we improved our account qualification program with better market segment targeting. This includes further refinement in our target account definition across all selling teams in each geography. We have also implemented new tools to better identify purchase intent for these targeted accounts. These tools are now used by both our sales and marketing teams to drive improved effectiveness and opportunity generation. We've made changes to our Web and digital assets to further clarify the different solutions and positioning we are taking to the mid and large enterprise markets. Using these assets, we've increased the cadence and relevance of our account based marketing programs to targeted accounts. Finally, given the scale and complexity of our pipeline, we've implemented new instrumentation for the demand generation in the field teams to drive clear visibility in the earlier stages of the sales cycle. These tools allow sales management to better manage pipeline, health and maturation. Throughout the quarter, we saw strength in several key areas of our go to market strategy. In addition, our closing efficiency for late stage pipeline remains strong. Taken together, we believe the adjustments I just outline, coupled with solid sales execution is moving our go to market motion in the right direction. Now, let me hand it back to Mark.

Thanks, Cam. Before we turn to financial details, I'd like to take a moment to officially welcome Jason Ream, as our CFO. He brings a proven track record of success, and aligning financial execution with strategic vision. And we're thrilled to have him with us. As he focuses on his new role with SailPoint, Cam's transition to the dedicated COO role is going smoothly.

Thanks, Mark. And thank you to everyone on the line for joining us today. I'm excited to be on-board at SailPoint, and look forward to working with all of you and the team here at SailPoint to achieve our operational, financial and strategic objectives. As Mark noted earlier, we're pleased with our improved performance in the second quarter as we exceeded our guidance on both the top and bottom line. Total revenue for the second quarter was $63.1 million, an increase of 18% over Q2 of 2018. Subscription revenue increased 40% year-over-year to $33.7 million and represented 53% of total revenue for the quarter. License revenue of $19.3 million was essentially flat year-over-year, but up 4% sequentially and ahead of the expectations built into our previous guidance, largely driven by the improved execution Mark and Cam noted earlier. Services revenue was $10 million solid close to flat with last quarter in the prior year, although a little behind where we expected to be for Q2. On a geographic basis, the United States contributed 70% of Q2 revenue with international at 30%. This compares to 63% through the United States and 37% from international in Q2 of 2018. The lower year-on-year growth for international was largely due to two large perpetual license deals we closed in the second quarter of last year that created tough compare year-over-year. Gross margins were essentially flat from last quarter in the prior year, while operating expenses for the quarter were $50.7 million. This is up 8% sequentially from $47 million in Q1. Some of that increase is hiring but a significant portion is due to Navigate, our Annual User Conference, which was held in June and where we saw record attendance this year. On a year-over-year basis, operating expense is up 37% from $37 million, primarily reflecting hiring done in the second half of 2018 where we're now seeing the full expense impact in the compares. This increase reflects the long term investments we are making in sales, marketing and R&D to better address our market opportunity and to deliver our products visions. Also included in the growth is the expansion of our offices worldwide, including a new corporate headquarters in Austin, which increases our facilities expenses and depreciation costs compared to last year. Our operating loss was $1.6 million in Q2 or 3% of revenue. This compares to Q2 2018 operating income of $5 million and the 9% operating margin.

Thank you. We will now be conducting a question-and-answer session . Your first question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Congrats on the much improved results really good to see. Mark, I wanted to start with you. You talked in your prepared remarks about IdentifyIQ delivered from the cloud. Historically, I know you've offered a lot of flexibility around that delivered as managed service, I know you mentioned. But it seems like there is even more interest today from customers for that particular offering. I'm wondering if you could maybe give us a little bit more about what this might look like? And then I know at the time of the IPO, I believe your subscription line items about 10%. How should we think about that trending over time, especially as you may start to sell more IdentityIQ to the cloud?

I'll take the first part of that question. I'll probably flip the second over to Jason, and Cam may dive in. As you guys know, we're still handing off a few things here and there. On the first part, Matt, I'd comment that in many ways, this feels mostly to us as a continuation of what we've been seeing, which is increasing interest overtime from enterprise customers on doing more from the cloud. And as you know, we've already had out in market now the ability to run the products in the cloud, AWS, Azure, et cetera, which customers were doing for themselves we found quite often. And then some number of our partners, particularly some of our larger partners, have been offering a full managed service of IdentityIQ in the cloud, as well. And we just found that a handful were interested in us, not necessarily running that full managed service, doing all of the compliance work and all of those functional things, but the ability to just get it out of their datacenter and hosted it by. So we're responding to that interest in dialogs with customers pretty regularly. And we'll see how it goes or not, but it's still early we don't have a lot of sense of where we go from a volume standpoint. I'll let Jason comment on that, it's pretty early.

Matt, on the subscription revenue, the impact to our financial statement so far from that offering is negligible. And it's much too early to say what it might look like going forward. So it's something we'll keep our eye on here on out.

And then maybe as a follow-up, last Q3, obviously, you had a really strong federal quarter. I believe you pulled in I think about $6 million of deals, I think. I guess, I'm just wondering how should we think about the federal pipeline this quarter, or what is -- especially out that difficult compare -- and what -- if you could talk about the pipeline, maybe the expectation on the federal side?

Yes, what's our pipeline across both the federal markets and the commercial markets globally is strong. What we expect at this point is a balanced quarter, typically with what we've seen overtime historically. So really looking for balancing that and that's what's built into our expectations.

Thank you. Your next question comes from John DiFucci from Jefferies. Please go ahead.

So it's good to hear, Cam, that's -- it sounds like there's some evidence that some of the new tools you're putting in place are working, and things are going in the right direction. But guidance implies that second half license deteriorates even further, and in a meaningful way. And I just want to make sure we understand that. Is that due to prudence and getting guidance here? Or are you seeing any demand weakness at all out there? You didn't mention anything like that, but just in case? Or is this just more of last quarter, where it's going to take some time to build that pipeline? And we know that the sales cycle is like three quarters for IdentityIQ anyway.

So John, Cam here and then, Jason, will jump in as well, and talk a little bit about guidance. Firstly, as it relates to Q3, I'd remind you this is for us seasonally one of our softer quarters of the year, that is typically Q2 and Q4 the stronger quarters, Q1 and Q3 relatively speaking, because as the summer quarter tends to be when we work hard as we go through the summer to build demand. So that that's has been for a number of quarters. As it relates to the comments you indicated in terms of my prepared remarks. As we diagnostically came through Q2, we began to look at a deeper level what we've seen in terms of the drivers of the shift in demand outlook. I think as you would indicate, what we found was there are some actions that we could take almost immediately, and we've done that. And I'll walk you through those pretty quickly again. The market segment targeting has really been one we focused a lot of attention on. We believe fundamentally looking at how it, from a geographic perspective, from a size of entity perspective, from vertical, as well as app use, that that market segment targeting is, on a refined basis with the tools we put in place is getting us better purchase intent data, as well as actionability from an account based marketing perspective. So all those things have been stepped up to a new level, the amount of information we're driving into our process at the top of the final. And then as well, importantly, and I references this in the last quarter's commentary. One of the things we wanted to do is to improve the instrumentation of the teams we're using and looking at top of the funnel activity and then migration it through the funnel throughout time. All of that work has been advanced pretty significantly in last 90 days. We're not completely finished in all of this. This quarter, really in my mind, reflects a first half. But what we have done with the instrument is put in place some greater visibility across the organization, both sales and marketing all the ways down to the first line sales teams. So they can track and look at a much more visible and indicated way, where the pipeline is growing, how it's moving. And importantly, we said this last quarter, I'm going to repeat it again. The pipeline has been growing. The challenge we ran into in the last quarter as we look at it wasn't growing at the rate we wanted to, and that's been where do we can put our attention in the last 90 days. So we've put a lot into it. We're making progress. This will be a multi-quarter activity to get us to where we want it to be. But the first step along the path has been a good one.

And I'll just add to that. When you think about that context, the improvements we've made over the last 90 days feel good. It feels like we've made some progress. Pipeline is looking stronger than it was 90 days ago. I think the momentum is stronger. So overall, we feel much better about the business. The guidance is up a little bit at the midpoint. But as Cam said, first step in that process 90 days in, we've got certainly more work to do and more opportunity to improve the execution. It feels like the guidance is at the right place right now, leaving us room to achieve against the expectations.

That's great color guys. And welcome aboard, Jason. And look forward to hear you more. And I will move on to others. Thank you.

Thank you. Your next question comes from Rob Owens with KeyBanc. Please go ahead.

Great, and thanks for taking my questions guys. I was wondering if you can expand a little bit on your partner commentary and some of success you're seeing vis-à-vis that channel that you mentioned on the call.

Rob this is Cam. Welcome, and thanks for the question. As you all know, the partner channel and the partner relationships for us have been an important part of our go to market strategy, really almost from one day of the company. And we've been continuing to invest in how we enable the channel, the depth and breadth of the partner relationships that we have in place. I think as I walk you through the makeup of the Global SI partners that important five now, including E&Y since the beginning of this year, continue to be significant contributor for our overall forward progress. The role they play in helping large enterprise understand their security and identity strategy and direction is critically important in our minds to the development of the market. And then as well, they remain a valued partner on wholesale basis in terms of implementation of our sales transactions across the globe for the full product portfolio. We continue to work hard to develop in the middle market relationships with new partners that will help us in the IdentityNow realm. That work is ongoing. It's obviously less mature than what we see in the large enterprise space for IdentityIQ. But we're pleased with the progress we're making. We've added a number of partners around the world to help us there. And that contribution has been steady and solid. We have expectations to continue to grow the number of partners that support IdentityNow, both on a direct resale basis, a value added distribution basis, as well as lastly on fulfillment basis. So we're doing all of that. And that contribution remains strong and important to our ability to drive the business forward.

And then a follow-up to Mr. Hedberg's question from earlier regarding the year-ago in the federal success that you saw, and we're seeing, I guess, really nice CDM spending through DHS again this year. So relative to that program, in particular and the successes you saw a year ago. Was that pull-in, was that kind of one time? Or do you continue to be a critical part of that program? Thanks.

Yes. So I think if you recall the comments from last year third quarter, Rob, the way the results played out. We did see some pull in behavior from expected 4Q buying into Q3 of '18 last year. The reasons that that occurred are in some sense, I think, a bit speculative on our part, but we certainly saw that behavior. As we've indicated previously, CDM has been an important contributor to the success of our federal and state and local vertical over many quarters now. There is still room to sell underneath that program umbrella to the U.S. federal government, principally on the civilian agency and department side of the business. And so, we're continuing to work with our partners in the federal space to fulfill the demand need. And there is opportunity there and we expect we'll capitalize on that opportunity in the quarters to come.

Thank you. Your next question comes from Shaul Eyal with Oppenheimer. Please go ahead.

Congrats gentlemen on the nice recovery quarter. This is in for Shaul. My first question is we understand that there is a long term plan to invest in R&D, as well as sales and marketing investments. Cam or Mark explain on the -- of the investments made to-date?

Yes. So this is Cam. And I think as we have indicated on a long-term basis. As we look at the overall market opportunity for SailPoint and identity governance, we see it as a market that we have real growth opportunity to address. Just a bit of a reminder, we segment on a size basis our customers above, if you will large enterprise about 10,000, middle enterprise from 2,500, up to 10,000. And we are moderately penetrated in each segment, sub 10% in the large enterprise and single digits in the middle market enterprise. So the opportunity to continue to deliver innovative and leadership solutions in that in both segments looks attractive to us. We're going to continue to invest in our ability to deliver from a channel and sales perspective globally, because it is a global market and we see global opportunity. So we're certainly investing in sales and marketing footprint on a global basis. In addition, both platforms, IdentityIQ and IdentityNow, represent real opportunities for additional investment within each, if you will, family of solutions and we're doing that. And you can see a continued healthy growth rate. Obviously, a bit of a bump earlier in the year in terms of the growth rate we think we can -- with progress, we can begin to rebalance the investment versus growth in the right way and we would expect to do that. And we're going to have an investment and growth bias orientation in our business planning and in our investment management.

And then just quick follow-up, Cam. You mentioned about the metrics of using a scorecard instrumentation to track better sales on the pipeline. Can you give a little bit more color on what type of metrics you look at? And during a weekly basis or monthly basis that drive the better sales and as well as an update maybe on the CRO search.

Yes. So great question. The instrumentation really relates to, from a demand generation, all of the variables that you would expect. I mean, there's a real-time system. We use a variety of tools that little long that early stage pipeline generation activity. But it reflects lead responses up, further up the channel, then the lease, then the opportunity creation and the linked points that should exist and will be optimized over time, between sales and marketing. Those are important innovations we're continuing to push. So we've got good visibility at the top of the funnel. We've got good visibility as we move into the early selling funnel, and we look at that real time. We provided tools with greater visibility and greater actionability to our sales team in the field organization, such that they've got effectively near real-time daily, if you will ability to look at pipeline migration, pipeline health and pipeline maturation and down to the individual rep level. So we really retooled a good deal of that. We've always had those tools but we've taken the opportunity with the bit of the bump we had earlier in the year to re-look at all those tools, to work with our teams, to make sure we're getting them the right information, by which they can manage their individual territories. And I think so far so good. We've seen positive response from what we've done to-date and we're going to continue to invest and innovate around manageability of the business from a sales and marketing perspective.

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

I've got two questions. The first one is on the middle market pitch. As I understood, the problem last quarter, to some extent, was that you went into broadly and weren't addressing the precise pain points of some of your middle market customers, and you were going to refine that. Can you talk little bit about to the degree to which you've narrowed that focus down to more accurately target what these issues were that these customers are trying to deal with?

I think the focus was really on, what we would call a solutions approach. Meaning the idea that many of those mid market customers, while they ultimately do understand that idea that they have a broad identity set of issues, quite often the initial presenting pain point is around something else, it could be a ServiceNow implementation, SAP, migration, maybe some new audit compliance finding. So a lot of what we focused on is to try to target the initial messaging. It's somewhat about solution focused but it's almost somewhat the initial messaging to get attention. We run different types of experimental campaigns, for instance, and found that when we targeted a set of users with a broad based identity message versus a more focused message around how identity technologies can help extend and expand your value of ServiceNow, that was much more effective and we've got much higher resonance with that. So I think it's generally, I put it into that category that in the mid-market as more solutions oriented approach seems to work much better for us.

Is there any metrics around that? I mean was it 20% or 30% more effective when you had that narrowed targeting around solutions, or some other data points that we can use to calibrate that?

No particular metrics were prepared here at this point. I think if you link what Mark said that what I've commented on earlier in terms of market segment refinement, it really is identifying in that middle enterprise space, if you will, that one -- cohort of customers from one, let's say, 2,500 up to 10,000 in size. What we really done has begun to refine our approach and marketing effort, account based marketing efforts really within, as Mark said, what app maybe driving the pain at this point that they engage with, or within a vertical a transition to a new ERP, or a new HCMIs -- HCNIs system, if its healthcare, all those things. So what we try to do is recognize that that mid-market enterprise went from in the earliest of stages buyers that were more familiar with identity governance and had a better understanding of the comprehensiveness benefit of our solution to recognition that as we came through the quarter and began to do some diagnostics that the buyers in recent quarters really much more focused on moving into an identity governance program but as Mark commented, addressing a specific need, or a specific driving question or problem at the time. That focus really allows us to get engaged, get into the selling campaign. And we've had a good success and starting with a narrower messaging and selling focus, and extending into a broader selling platform as we go through the selling cycle. So no specific metrics. But what I would tell you is we're pleased with the resonance or the refinements that we've made to-date. And we're going to continue to work, and engineer, and retool it so that we can continue to step-up the efficiency of what we're doing both on the marketing side of the organization, as well as the selling side.

If I could just ask one question on the technology side to get the go to market question and phased out of my month, because I hate asking those kind of questions. Your move to a management in the cloud. I assume that that's single tenant architecture as opposed to multi-tenant architecture. And if that's the case, can you get efficiencies scaling in that format?

Yes, that's exactly right and it's just differentiated. So this is a responsive higher end customers who understand their need for the robust completeness of IdentityIQ, and all of its integration points, and that would be a single tenant hosted option for those kinds of customers. And then just to contrast, we're relatively unique, I think in the market having both that offering and a true multitenant SaaS offering in IdentityNow. And so that is part of the breadth of offering that we're fortunate to be able to offer to market. And often times in the midsized customers, the higher end of that midsize, in particular, we have to get in a pretty healthy dialogue about the best fit solution for those customers, right. The low end it tends to be pretty clearly IdentityNow. At the very high end, pretty clearly IdentityIQ and sometimes hosted. And now we're finding that in the middle, we will find the cloud-first mindset but then a double click into understanding what's really the best solution for that client based on all those firmographics, technograhics that we were talking about a second ago.

And about the scalability?

Well, for that cloud hosted virtual IdentityIQ, as scalable as IdentityIQ in the other setting that it's a single tenant hosted. So it will scale. And again, as you know, we have some large Fortune 10 accounts on IdentityIQ today. So we're comfortable with its scalability for any size enterprise out there.

Thank you. Your next question comes from Andrew Nowinski with Piper Jaffray. Please go ahead.

Great, thank you. And congrats on the nice quarter. You hosted a track at user conference focused on how customers are moving from Oracle to Sailpoint. Can you just provide any color on how much Oracle wins contributed in Q2, and how we should think about it as it relates to the pipeline?

Andrew, this is Cam. We did host, as you indicate, a track around Oracle. We continue to believe that the Oracle replacement opportunity and that legacy software provider space is quite attractive. We've had very good success, as you know in the long-term. And in terms of our ability to successfully replace them, either in a direct way or in a phased way, that is we add compliance management and opening a life cycle, or any other configuration that's driving the particular need for the large enterprise. What I would tell you is as it relate to the Q2 results, we saw a solid contribution from Oracle replacements overall. As you know, we highlighted this last conference call we up-leveled our energy around, both sales and marketing programs to replace Oracle. It's early. You know, selling to a global 2000 size enterprise to replace an OIM implementation takes a bit of time to develop. But the results today of those campaigns have been very good. And in terms of early indications, it's all top of funnel but the response has been positive. Our work with our partners across the globe has been, I think very good, as well in terms of what we wanted to accomplish. But we've got to now continue to move those through the pipeline and mature them to a contribution. But first results, I think we're pleased with.

And I'd only add one super short in there, which is if there is subtle shift that the partners are little more willing to initiate those kind of go to market programs as opposed to being responsive to us when we wanted to pursue something they would say, sure, I will come along that kind of the program. Now, some of them are actually saying, we'd like to initiate an Oracle replacement campaign within their installed base accounts, which we view as a good sign.

I'd just like to follow up to that with regard to the rest of the landscape. So as CA was acquired, which we believe created some disruption in the market. I guess, what are you seeing in terms of wins at the expense of CA? And are you putting any sales incentives in place similar to what you have for Oracle to take advantage of that disruption?

Yes, you're exactly right. The Broadcom -- acquisition CA has really begun to mature and play out. We've seen inside of the organization based on what we hear from prospects and clients, a de-emphasis around the security portfolio that certainly the message we've heard. And so we are targeting them. As you well know, we've always targeted all of the legacy software providers for replacement because we believe their innovation and investment around supporting the increasing the complexity of hybrid computing environments just wasn't keeping up. And therefore, we had a solid opportunity to replace them. So we have continued to, as part of our overall targeting mix, targeted the CA account base very aggressively and all geographies. We have refined, as I talked about earlier, their account based marketing programs, refined our messaging and the targeting that we're doing. So both the quality of the message, as well as the account identification and targeting, have both been refined based upon some of the learnings and tools we put in place. And so, the contribution in terms of CA install base replacement cycle is stayed an important part of our mix and we expect it will for a number of quarters to come.

Thank you. There are no further questions at this time. I'd like to turn the conference back over to Mr. Mark McClain for closing comments.

Well, with that, I guess, I'll say thank you to everyone for joining us today. We're pleased again with the overall results and continue to appreciate everyone's interest. Thanks to many of you who are able to join us at Navigate in Austin a few months back. We appreciate you taking the time to do that. And we will keep you posted on our future progress. Thanks, and have a great afternoon.