Greetings. Welcome to SailPoint Technologies Holdings, Inc. Third Quarter 2019 Earnings Conference Call. . Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Josh Harding, Vice President of Financial Planning, Analysis and Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today to discuss SailPoint's third quarter financial results. Joining me today are SailPoint 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 third quarter of 2019. Total revenue for the quarter was $75.9 million, an increase of 15% over Q3 of 2018, and our non-GAAP operating income was $9 million. Our company performance was indicative of our extended leadership in identity governance, as evidenced by our continued focus on driving innovation across our identity platform and our ability to execute. I'd like to spend a few moments providing color to each of these areas. A key aspect of our extended leadership this quarter was driven by our consistent focus on pushing the pace of innovation. We've demonstrated that this quarter from both a build and a buy standpoint. From a build standpoint, Gartner recognized SailPoint as a leader for the sixth consecutive time in the latest Gartner Magic Quadrant for Identity Governance & Administration. In the 2019 report, Gartner credits SailPoint for being the most innovative vendor in IGA. Gartner applauded our AI-driven identity analytics capabilities and our comprehensive approach to governing all users, including software bots, and their access to all applications and all data, including data stored in files. SailPoint is positioned well ahead of all competitors across both execution and vision in this year's report providing the latest validation of our superior technology and fierce commitment to the market. We also demonstrated continued leadership by further redefining identity governance, driving innovation from a buy standpoint. With the acquisitions of Orkus and OverWatchID, we're extending our ability to more deeply and dynamically govern access across all cloud resources, including cloud infrastructure like AWS and Azure. This is particularly important given that these cloud resources now underpin so many digital transformation efforts underway. Once these technologies are integrated into our identity platform, organizations of all sizes will have access to a new approach to governing these cloud environments, one that takes advantage of AI and machine learning and integrates seamlessly into their existing identity governance program.

Thank you, Mark, and thank you to everyone on the line for joining us today. As Mark noted earlier, we saw a number of positive trends in the third quarter and are pleased to be able to exceed our guidance on both the top and bottom line. Total revenue for the third quarter was $76 million, an increase of 15% over Q3 of 2018. Subscription revenue increased 34% year-over-year to $37 million and was 49% of total revenue for the quarter. Renewal rates remain consistent with historical trends, which we believe to be attractive relative to industry norms. Maintenance continues to represent a majority of the dollar growth in subscription revenue, but is bolstered by a growing contribution from faster-growing SaaS subscriptions. License revenue of $27 million was down 4% year-over-year, but up 39% sequentially and ahead of the expectations built into our previous guidance. The better-than-expected license performance was driven by improved execution, particularly in the United States, including a few deals that we had originally expected to close in the fourth quarter. On a geographic basis, the United States contributed 74% of Q3 revenue with international at 26%. This compares to 70% for the United States and 30% for international in Q3 of 2018. The mix change was driven by strong performance in the Americas, as Mark referenced earlier, and by several deals that slipped out of the quarter in EMEA and APAC.

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

Congrats on the results. The continued success is really good to see. You noted strong subscription growth. I believe you said 34%, and obviously, you increased your subscription expectations for the year, and we've talked about this in the past. You guys offer a lot of flexibility on how customers purchase, but it certainly seems like your SaaS business, in particular, continues to do well. I wonder if you could help us get a sense for how big that is as a percentage of revenue, because it seems like it continues to do quite well for you guys.

Yes. Thanks, Matt. This is Jason. We don't break out the SaaS piece, in particular, out of subscription. We talked about potentially doing that at some point. And I think, given that, that is the fastest-growing component of revenue, we will at the right time. Overall, the subscription piece is -- it still continues to be driven by maintenance, which -- on which we have a very high retention rate. And we do continue to add new maintenance to the pool every quarter. But the SaaS subscription piece is growing faster and becoming a larger piece of the mix. And again, at the right time, we'll split that out as -- at least, a separate disclosure. I don't know if it'll be a separate line on the income statement, but we'll disclose it at the right time.

Okay. And then -- that's helpful. And then, Jason, you also noted, it seems like you pulled some Q4 deals into Q3. I'm wondering if you can help quantify that. Q4, obviously, you raised the full year, which is great. Q4 revenue guidance was maybe a tad light of Street consensus, but maybe some of that is some of the Q4 deals that pulled in to Q3?

Yes. I mean, that's -- I think you've hit it on the head there, Matt. Obviously, with a number of large enterprise deals, some of those deals can move between quarters. And we did have some strong momentum. It was definitely not more than what you noted relative to Q4, but a little bit of pull-in from Q4 to Q3. But overall, just generally strong momentum, particularly in the Americas during Q3.

Your next question comes from Melissa Gorham Franchi with Morgan Stanley.

Mark, I just wanted to discuss the initiatives you have in place to target the mid-market. I know earlier in the year, you were sort of over-indexed on the mid-market. But do you feel like you've now kind of struck the appropriate balance between investing in the enterprise opportunity, your core opportunity, while also investing in the mid-market? And then the second question related to that is the strength in IdentityNow that it seems like you're seeing. To what extent is that coming really from enterprises adopting IdentityNow and extending their IdentityIQ deployments with that versus the mid-market coming in as a new customer?

Thanks, Melissa, and thanks for the call. A couple of points here. On the first one, I'd say we feel the best about the momentum we have in the mid-market in North America and the balance between the 2 markets, I'd say, and in general, kind of getting the tuning that we talked about coming out of Q1 and Q2, and kind of the mix of efforts -- marketing efforts, opportunity generation efforts to kind of make sure we are appropriately balanced to where we see the opportunity. I think we're farthest along in North America there and making good progress in the other geographies of the world. And then I think as you see that relative to IdentityNow, we do still see a higher correlation of IdentityNow in the mid-market and IdentityIQ in the largest of enterprise customers. But as we've said many times that we do see exceptions. We see some pretty large organizations. Comfortable with where IdentityNow is to meet their needs, and we have some fairly midsized companies who have very complex requirements that feel best suited to IdentityIQ. So we always want to be careful to not completely correlate IdentityNow to mid and IdentityIQ to large. But in general, that still brings true for many of the accounts we're working with today.

Your next question comes from Brent Thill with Jefferies. Howard M&A: This is Howard on for Brent. Could you give us some more color on how the acquisitions of Orkus and OverWatchID, how they improve the functionalities and the marketability of the Predictive Identity platform? And then on pricing for the Predictive Identity platform, is it going to be on a tiered basis? And then could you share any near-term targets for expected adoption among your existing installed base?

Okay. I think, Howard, that's about three questions. I'll do my best. I might ask Jason to help with the financial one there if I need it. On the first part of kind of the functionality, we were pretty careful to say that while we saw some great capabilities there, we're going to spend the remainder of this year kind of picking and choosing the things that we think are most helpful to extending our particular value prop. The common theme across those two companies and their relevance to us in identity is around kind of stronger governance of cloud. Both companies have some very strong capabilities about how best to help manage the cloud -- the rapidly adopted cloud environments in our enterprise-class customers, whether mid or large enterprises. And for now, that's where we're focused on. I think from a -- and just to be careful on the term Predictive Identity, we want to be careful not to correlate that to a single product. That is a kind of a vision that's going to cover a lot of our products. And so over time, things like IdentityAI, some of the capabilities that are coming in through these and continued enhancements we make to our core platform all are about delivering on that Predictive Identity vision. I will draw you back to IdentityAI itself, when we talked about that as a way to kind of drive forward on Predictive, we did highlight that, that's where we're beginning to leverage machine learning and artificial intelligence capabilities to streamline and make more efficient a lot of the governance processes our customers are doing. And both Orkus and OverWatch kind of build on that. They have built-in AI and machine learning capabilities, so they dovetail very nicely into that story and that strategy. From a penetration rate, volume of sales, we're just not commenting on how much we think that's going to affect next year yet. We're still building our plans. We commented in the press release that it wouldn't have any material impact on revenues in the remainder of '19. I think Jason highlighted a little bit of expense addition in Q4 for that. But we will kind of factor that into the guide we give for '20 when we're prepared to give that at that point.

Your next question comes from Shaul Eyal with Oppenheimer.

Congrats on the improved performance. So you've got great execution in the U.S. But as we think about the international opportunity maybe EMEA, this quarter specifically, is it self-inflicted? Or is it driven by some of the macro uncertainty? Is it any country-specific within the EMEA region?

Yes, Shaul, Cam. Thanks for the question, and good to have you on the call. Look, I think there are 2 or 3 comments I'd make with that question. I think, firstly, as we highlighted over the last couple of quarters, we've been working hard to get demand gen and other activities back on the pace we want them to be. We're probably not quite as far along in EMEA as we are in North America. And in that regard, there's work still going on there to get all of what we've especially learned in North America up and running as appropriate in EMEA, and we're also obviously tailoring our actions to that local market. I think we did see some longer deal cycles in EMEA in the quarter. Nothing concerning. I think it's -- we always watch those things, just to see if there are macro uncertainty factors or it's something else. I think at this point, as we've looked at the quarter, I don't think I'd highlight for any particular factor. I think we do -- as Jason highlighted earlier, we had some pull-in in the business. We saw some slippage in other places. And so I don't know that there's anything particularly notable to highlight for you there. We continue to drive hard in Europe, and for that matter, in Asia as well to be bigger contributor to the business.

Got it. That's understandable. And as we think about the partnership, the expanding partnership landscape, anything to highlight this quarter? I recall last quarter that there was a couple of notable transactions that were pushed by, I think, it was EY one of them. So anything specifically this quarter? Or just steady as she goes?

Shaul, it's Mark. I think I'd categorize it more as steady as she goes. I mean, we're really pleased with the -- particularly, the momentum with all of those large global SI partners that we've named up before, KPMG and EY and PwC and Accenture and Deloitte, all performing really well with us. And we've continued to have good momentum with many of the reseller-type partners around the world as well. So I wouldn't say there's anything new to highlight, just very pleased with the momentum. All of them have good, strong growth in their identity practices. And we just feel great about the momentum there.

Your next question comes from Walter Pritchard with Citi.

A couple of questions. Just as we think about next year, I know you're not giving guidance, but with SaaS and given the expanded product portfolio in this area, is it the time that you think you'll push more aggressively on driving some of the larger customers to your SaaS offering? And I'll actually start there, and then I have a follow-up.

Yes. Walter, this is Jason. I'll take this, and Mark and Cam to help to add here. But we see some of that dynamic already that customers' own expectations are trending more towards SaaS in all sorts of products that they use that, that comes through in our business as well. We're not going to talk about 2020 plans yet. We'll obviously finalize those and then communicate them to you on our call early next year. But that's the trend that's happening already and happening over time. And it's one we constantly watch, and we'll respond to as appropriate based on what we're seeing in the market.

Great. And then just maybe as we look at Q4, and any comments on the third quarter here? Can you talk about sort of large deals? How much of a contribution you saw in the third quarter? And then on the fourth quarter side, from a year-over-year comp perspective, can you just remind us sort of the large deal impact from a year ago? And how that affects, as we're looking at growth on the large deal, especially?

Yes, I'll comment on Q3. And then I may turn to some of my colleagues for the year-over-year compare on Q4 since I know some of it, but I wasn't here to -- I can't comment quite as easily. Q3 was pretty typical for a Q3 for us. We did have some large deals. We did have that activity. We're always strong in the large enterprise, and so you expect that, particularly as we get to the second half of the year. But pretty typical, maybe a little bit less than last year. I think last year, we had some more -- even more large deal activity as a percentage of the mix, but otherwise pretty typical.

Yes. And I guess I'll comment. I think fourth quarter, as we look at it is looking to be a pretty typical quarter mix-wise as well. And I'd comment that, Walter, as it relates to the mix of large and midsized deals is, at this point, it's obviously early in the quarter for us. But as we look at the pipe and think about the guide we've given you, we feel good about that mix, and it's healthy. It continues to be in the direction we've seen it go. And so at this juncture, I'd say nothing to highlight for you in terms of the -- that contribution.

. Your next question comes from Yun Kim with Rosenblatt Securities.

Congrats on a solid quarter. Just following up on earlier Howard's question. When you do release some set of the Predictive Identity product suites next year, do you expect that to -- the sales to focus more on the current installed base initially, especially those with IdentityAI? Or do you expect to target the Predictive Identity product suite to both new and existing customers?

It will definitely be a mix of both. There's definitely momentum in some of our largest, most advanced customers. I won't meaning to say largest, midsize and advanced customers that are pretty mature in their deployment of identity and how sophisticated they understand the problem. They see a lot of advantage of using AI to help them streamline and automate some of the more mundane aspects of what they're doing, so they can focus more time and energy on the challenging outliers, if you will. But also as it comes to new greenfield opportunity areas, some of the enhancements we're bringing to market in '20, we think will be very applicable to greenfield customers as well. Particularly, there's some very sophisticated things when we're doing around roles. And I think that will help us to be more articulate, I think, to a brand-new customer of advantages they can get from some of the advanced analytics and advanced machine learning capabilities in a brand-new deployment as well as what we already can articulate is that an existing customer can get a lot of value when they bring AI on top of their existing deployment. So next year, it will be even more blended. This year, frankly, it is been more of a motion with existing accounts, with the installed base accounts. But it will be more blended between installed and new in '20.

Just curious on the IdentityAI product today. Is that the traction with either the IQ customers or IdentityNow customers?

Frankly, a bit of both. Probably, I'd say, honestly, today, a little more with IdentityIQ customers because they're the more longer-term, more deeply deployed customers. Therefore, they -- they've sort of seen some of the challenges of the manual operations they still have to do around the product. And if we can help them with some of those things with intelligence, that is a lot of attraction at them. So it is definitely applicable in both. We're seeing interest from both sets of installed customers, probably a little stronger on the IQ side.

Okay. Just one last question. Can you just talk about the -- how much contribution the federal government made in the quarter? And where you are in terms of monetizing on the federal government opportunity, especially in regards to CDM?

Yes. I'll start that and maybe ask Cam for some help here as well. I mean it was a good Fed quarter for us, not out of the ordinary for Q3. Fed is obviously a strong vertical for us in general, and we continue to see a lot of opportunity there. But, Cam, anything else you want to add anything particular on CDM?

Yes. No, I think my comment with CDM as same as I've said previously, which is it's encouraging to us that quarter-by-quarter, we're continuing to capitalize on that opportunity, it's -- for us, on the civilian department and agency side of the world. It's been a good contributor to our business, and we were able to capitalize on that in the third quarter, particularly with the normal year-end federal budget process. And so our team continues to focus there. There is still business in front of us to go get, and we will work hard to go get that in succeeding quarters as we go forward.

Your next question comes from Tyler Wood with Northland Securities.

Just one for me. When we look at the beat on the quarter, was there any notable increase in competitive displacements? And is churn from legacy competitors about at the rate you were expecting? Or have we seen any increase there?

Yes, this is Cam. No, I think as it -- the high-level comment would be the normal mix of competitive displacements continued in Q3. That is -- we continue to do a nice job in the -- for those legacy players that we're -- we've been capitalizing on the reality that those are older and older solutions in the customer shops, we're able to capitalize on those nicely. That trend continued. And it's obviously, as you appreciate, based on our prior comments, an area of selling focus for us, and it will continue to be as we go forward. We see that as an opportunity to contribute to the business for many quarters to come.

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

Well, I'd like to thank everyone for joining us on the call today. We appreciate your interest in the company. We're pleased again with the results, and we're looking forward to talking to you guys again after the close of the year. Thank you very much.

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