SailPoint, Inc. (SAIL) Q1 2020 Earnings Report, Transcript and Summary

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

Good afternoon, and thank you for joining us today to discuss SailPoint's first quarter financial results. Joining me today are SailPoint's CEO and Co-Founder, Mark McClain; and our Chief Financial Officer, Jason Ream. Please note, today's call will include forward-looking statements. And because these statements are based on the Company's current intent, expectations and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially.

Thanks, Josh, and good afternoon, everyone. Thank you for joining the call today. Before we go into Q1 performance, I'd like to acknowledge that we are collectively facing unprecedented time not just among our own customers, but across the country and the world at large. I'd like to highlight how we've reacted to the COVID-19 pandemic as I'm both grateful and humbled by our team and our response. SailPoint pivoted quickly to a virtual workforce, while continuing to execute across the board from engineering to marketing and sales and as I'll point out in a moment, especially around customer services and support. Over the course of Q1, customer success remained our core focus, and we quickly mobilized to support our customers worldwide, especially those requiring additional help during these unprecedented times. We've added the concept of virtual office hours to give customers the professional service and support they need and have worked hard to maintain an open line of communication with all customers to ensure their continued success. As our customers have shifted to a virtual workforce, the value and scalability of our identity platform has become more evident. For example, a longtime SailPoint customer in the investment advisory business needed to ensure workforce continuity amid their rapid shift to a virtual workforce. Their identity and security technical lead shared that, "We tripled our user account and provisioning over the past few weeks, and SailPoint worked beautifully. During this time, we had to respond quickly to the unusually high systems integration and SailPoint handled 3x our normal workload. We're are grateful to less thing we have to worry about during the pandemic." In another instance, we helped a large retail organization and long-time customer to shift all of their retail location meetings to virtual meetings in six days, thanks to the automation they had built into their SailPoint identity program. This enabled them to swiftly and securely deploy videoconferencing across the business for 10,000 users. As a third example, a large insurance company quickly pivoted from a 20% virtual workforce to nearly 100% virtual workforce. With the help of SailPoint's identity platform, they offloaded a significant amount of work around access request needs during their shift to virtual. In their words, This was 1 less headache to worry about during COVID, the speed of now granting access is a . While these are just a few examples among many, we believe our identity platform will continue to prove out its valor during these challenging times.

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

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

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

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

Matt, this is Mark McClain. Matt, if I could interject you. As you said when demand comes back, I didn't want you to leave with the impression that demand has gone away. We still are seeing tremendous demand out there in the market for conversations and even including moving business through pipelines. We're just highlighting a level of uncertainty to close. That's all we wanted to highlight in the call. Let's continue. I would like to clarify that.

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

Yes. Matt, to build on your point, I think it is highlighted for some customers, which we commented before that we think some of the legacy solutions are fairly brittle, the term you heard or seen in some of these calls in the past. I think that's maybe what got highlighted in some of this sudden need for change and accelerated movement of working from home remote, virtual and all that as the customers, who have those older legacy solutions found they really were not very nimble. And customers who had solutions like ours were able to pivot fairly quickly to adjust some of their processes or even just the volume, as you heard in my example of 3, 4x normal volumes. And that's just going to be, I think, something that as the dust settled, so to speak, and some of these customers, they're going to want to revisit whether their current solutions are really going to be nimble enough to help them as they in many cases continue to accelerate in their digital transformation and will make some permanent shift in their whole working approach with more virtual work.

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

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

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

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

Mark, do you want to take that one?

Yeah. Guys, apologies, on the phone -- we've never done one of these in separate places before, so we can't look at each other and say, you take that one. Yes. Let me start, and I'll pass it to Jason after opening thoughts there. I think in general, we're seeing increased call in the market for IdentityNow and really all of our SaaS products. One of the things we highlighted is that IdentityNow is kind of our core SaaS platform, and then some of the newer offerings, which work both with IdentityNow and IdentityIQ are SaaS based. And in general, we are still feeling very good demand for IdentityNow in the traditional kind of mid to smaller end of the enterprise market, but increasingly into the mid to larger part of the enterprise market, and then, still good demand for IdentityIQ in mostly the very large end of the market, and as we heard from some of the positive customer reactions we get with our installed base, continued good demand for installed base up-sell in both platforms. So honestly, we're not really feeling any weakness in any part of the product line and are just obviously not at a point where we're kind of seeing a lot of sales because it's so early in the cycle from some of the newly introduced products, but a lot of excitement both in our field and our customer base about some of the newly introduced products. So no, really nothing to comment on from a concerning area. I don't know, Jason, if you have anything to add to that.

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

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

This is Strecker on for Dan. Can you talk about what you guys are seeing spending wise throughout the different verticals in your customer base? And has anything surprised you there? And then 1 follow-up is, any color you can give us on conversations with customers thus far in the quarter would be great.

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

Okay, yes, go ahead, go ahead.

Okay. This will happen on every question. Hopefully not, some will be very clear. Yes, I think, the response, I think, in general, we would see at least some level of further discipline analysis around customers that are in what we call the heavily hit verticals. The travel and entertainment and somewhat retail, depends on the retail. Some of those folks have pivoted and actually seeing quite a positive circumstances. But in general, our field has been very, very thorough about kind of betting business in those verticals. And in many cases, as Jason said in his opening comments, we're seeing customers who are still very committed to moving forward. In some cases, they are having to "let the dust settle" a little more before they are able to proceed either with an upgrade or expansion project or a new project. That said, we still are doing business in some of those verticals, absolutely. And then in the other verticals that are not as heavily hit by what's happened really, if anything, neutral to accelerate from moving things forward and putting this kind of a program in their kind of Tier 1 priority. So I'd say in general nothing to report that would surprise anyone. Your question was continue surprises. No, I think in the verticals that have been most heavily hit, there's at least some pausing and reassuring us and themselves that they have the ability to move forward and in many cases . So Jason, if you want to add anything more to that?

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

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

I was wondering if you could drill in a little bit to some of the commentary around what those customer conversations have been like, particularly with regard to some of those customers that are maybe pausing a little bit, but still very committed. Are there any points of hesitation that they might have in terms of needing to get greater level of approvals or issues, not issues, but considerations that need to be made for the business process involved given the complexity of the deal?

Brian. It's Mark. I'll jump in on that and probably Jason will have a couple of thoughts, too. I'd say what we saw in that early March into mid-, late March time frame was definitely a set of folks where clearly either the Head of Procurement and/or the CFO gets a pause. We were just going through a fair amount of, I'll call it, chaos, in that time, right, people trying to sort out what are we really going to do here, and we definitely felt some of that. As Jason said, we're pleased with our Q1 results, and we kind of left you with the impression, they probably could have been a little stronger because there were definitely some things that were affected in the last part of March. That said, I think your question was sort of what have those conversations been like since to some degree. And I can tell you with a very high probability, most of those conversations right back to where they left off through kind of a pause model. So we haven't seen, in most cases, some different process that was instituted necessarily. We definitely, as I think Jason highlighted, we've had some customers call us and talk about, hey, is there anything you can do to help us through this, if they are in one of those industries. But not a significant amount, and nothing that we anticipate having much effect on our financial results anytime soon. So I say, in general, our suspicion is everybody hit the pause, which you would expect in that time of what the heck is happening here. And for the most part, they have reengaged and in some cases, as we're indicating, we really don't want anyone to misread the lack of a guide, if you too. They're very engaged. It's just, it's the uncertainty, hasn't exactly how that will play out in May and June. By the way, there's a lot of conversation about whether there might be a sudden resurge in certain areas. So I mean this we kept coming back to the level of uncertainty, not any sense that people aren't engaging, if anything, they've engaged even stronger.

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

I think there's a couple of different things there, Brian. One is quite often a lot of these companies are still, even some of those that are in the challenging industries, but particularly, those that are still doing lots of what we call joiner mover leaver processes. People joining the organization, that could be as an employee, could be a contractor or partner and moving around, making changes, getting promoted, transferred and then leave. And that's, not all of that kind of stuff totally stopped even in this crisis and certainly is back in some of those companies, while they're working remotely, all those processes are still happening. Well, what they're finding is their flexibility to handle those processes smoothly when the volume is higher and the interactions are potentially more challenging as well finding working over remote and Zoom, but it's a little challenging at times compared to normal. And I think they found that they couldn't adapt and flexibly deal with those ongoing processes. But then in some cases, there were brand-new things, where they send a bunch of people home and gave them access to new things to do their work remotely that they hadn't had before. So that's, in the techie speak of our space, that's called provisioning. You're giving people access to things they need to do their work. Well, they figure -- a lot of them told us they figured out that it was particularly hard to do something new and fast and at scale, in some cases. And so that's where they recognize, oh, the solution I've got just can't quickly adapt to onboarding either at much higher volume or a new set of applications or targeting a new set of users. That's the kind of things they run into.

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

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

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

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

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

I'll start on that one. This is Mark. No, we have not seen any material impact. I think that they've definitely started to comment more about some capabilities in the -- in one part of the governance space. I think we should make that clear. It's one part of the governance space, called life cycle management or -- the last question from Brian about provisioning is the old term for that. And what we're finding is, at the very low end of the market, which I think is where office strength initially lied, it's certainly moved upmarket, I think, credibly with their single sign-on and multifactor authentication solutions. But in that segment of the market, which is historically our strength, we really haven't seen them much there because I think that sophisticated customers in that segment understand the complexity of the processes there. And I think they understand what it takes to really solve those problems. So no, we really haven't felt that too much at all yet.

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

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

Yes. Let me give you an anecdote, this is Mark, again, to start on that one. I was talking to a CSO of a, think, Fortune 20, I don't know exactly where they lie, but they're certainly comfortably in that top 20, very, very, very large global organization. And then CSO told me, he said, look, obviously, when this thing hits, in many cases, our top priority, as Jason referred to, we called bucket one. In this case, I think it was bucket 1a, which was get people effectively working from home. So if they didn't already have it, give them a laptop, make sure they're on a VPN. And in some cases, make sure they had single sign-on or particularly multifactor authentication. So kind of get people working remotely and reasonably securely to logging in, hopefully, to get their work done. But he said, look, my second concern right behind that is, "Are they, in fact, accessing the right stuff? Are they correctly provisioned, over provisioned?" Generally, there is similar problem with under provisioning because that means someone doesn't have something they need to do their job. So they typically have what they need. It's much more common, they have way more than what they need as a result of either bad processes or just keeping access to things they no longer need. And so that was a great anecdote for me of a very large organization with a security officer concerned that the lack of visibility to understanding who has access to what just got worse in a remote virtual working from home environment because the risk goes up. And so I think in terms of a short-term demand acceleration, again, we're not going to sit here and tell you our demand spiked or something. I wouldn't use that term. We're not Zoom, went up 15 times in a month or whatever the crazy numbers are. But we certainly had heard from a lot of customers that same kind of sentiment that as I'm moving very rapidly into this new world. And to your point, they're going to stay somewhat in that world. I think everybody is assuming we're going to see more virtual, more working from home as part of our normal business mode, that in that environment, the sophisticated customers we deal with understand that this just accelerated the concern they already had about how accurately they can determine who has access to what and are they correctly set up. So the security risk there, I think, is a factor. And as the other question, there's an operational aspect to this. How rapidly can you bring people up to get them productive? So kind of the front end of the process and the back end, taking people out when they need to be removed from systems and the security that ensures that we, in fact, understand that the right people have access to the right stuff. All those questions are kind of getting brought to the forefront in this context. And I think I'll just use that to segue to your second question, which is, so what does that mean for identity in the long run? I think we're increasingly hearing some of the same buzzword across the landscape, right, particularly in the security landscape. Zero Trust is kind of the next game and the next way people are going to be thinking about this, which has this sort of secondary effect of identity is the new perimeter. That's another term you'll hear. I'm not cordoning people off based on a network segment or inside or outside my firewall or all those things I used to do, I'm now trying to use identity as kind of the fundamental determination of whether this person is a valid actor and are able to do the things we're asking to do in our systems. And I think all of that is just a good secular tailwind for identity increasing in importance over time. And people are really pretty clear that there are different dimensions of identity now. And that one of the big dimensions is good governance, which includes life cycle management and compliance and operational efficiency. And I think we're very well positioned to help people with those problems.

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

Well, thank you, and thank you to everyone. I know it's a busy day of earnings. And I know in some cases, we have folks who are covering multiple companies today. So thank you to those that made time for the call and for the Q&A. We certainly wish all of you and your families and loved ones, colleagues safety in this difficult time. And again, we're super grateful for our own team and our partners in the way they handled this, and we're hopeful that you're in the same position of feeling like you're getting through this difficult time. So thanks for all the questions. I'm sure we'll be talking to many of you soon, but we won't be seeing you soon, only talk to you soon. So thanks for the time today. Appreciate it.

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