KnowBe4, Inc.

Ladies and gentlemen, thank you for your standby and welcome to the Know Before Fourth Quarter 2021 Results Conference Call. Please be advised that today's conference call is being recorded. At this time, all participants are in listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Now, it's my pleasure to turn the call to Ken Talanian, known before Senior Vice President of Investor Reporting. Please go ahead.

As a reminder, our commentary today will include non-GAAP financial measures. Information regarding our non-GAAP financial results, their limitations, and reconciliations of our GAAP and non-GAAP results can be found in our earnings release, which was furnished with our Form 8K today with the SEC. It may also be found in the supplemental financial information available on our Investor Relations website, at investors.knowbefore.com. In addition, some of the comments today, including those related to our guidance, may contain forward-looking statements that are subject to risks, uncertainties, and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results can differ materially from those projected or implied during this call. These risks are described in our Form 10-K that will be filed in accordance with the filing deadlines established by the SEC. These documents can be found on the SEC's website, sec.gov, and on our investor relations website. During today's call, you will hear prepared remarks from our founder and CEO, Stu Showerman, and CFO and co-president, Krish Venkataraman. Lars Lettenhoff, our chief revenue officer and co-president, will join our question and answer session. And with that, I will turn the call over to Stu.

Thank you, Ken, and thank you all for joining us today. We're excited to share our results with you this afternoon. We ended a year of strong execution with fourth quarter results exceeding our guidance. We have a record quarter with 44% year-over-year annual recurring revenue growth and a 28% free cash flow margin. Now, before I begin, I am sure you've seen the press releases regarding the organizational developments in our executive structure. We'll provide more detail about these changes later on, but I first wanted to go over our quarterly and annual highlights. As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of social engineering. We are the only public company dedicated to securing the human layer. We're excited to expand our platform even further as we plan to introduce the HDR category or human detection and response. Following the integration of Security Advisor in the second half of this year. The emphasis in cybersecurity has traditionally been on legacy controls. However, the exponential growth in cyber attacks and their relative success proves that we cannot solely rely on security software infrastructure. Just last month, the 2021 Annual Data Breach Report was published by the Identity Theft Resource Center, a nonprofit organization with over 20 years of experience and a recommended resource of the Department of Justice. In their report, they explained that 2021 had more data compromises in the US than any other year, up 68% over 2020. Phishing, smishing, and business email compromise were collectively the number one attack vector, just as they were in the years prior. I would like to think this is an alarming statistic for some, but sadly, it's a trend that we're all too familiar with at this point. It is clear that this problem is escalating as well. In fact, in December of 2021 alone, data from an organization responsible for somewhere between 15 to 30 percent of the world's Internet traffic, Akamai Technologies, reported over 722 million cyber attacks worldwide. That amounts to nearly 17,000 cyberattacks every second across the globe. And remember, bad actors only need to be right once. The unfortunate reality is that in a lot of these cases, bad actors are manipulating the human element of organizations without any regard to their size or industry. untrained or poorly trained employees are walking liabilities that could bring potentially devastating consequences to the security posture of any organization. With that being said, employees who are properly trained using an effective platform and are frequently sent realistic phishing simulations have the potential to become one of the most powerful security assets of those same organizations. That is why we are dedicated to helping our customers transform their employees into a successful last line of defense against cyber attacks. Both private and government organizations increasingly recognize the need to defend against this growing threat landscape. On the government side, the regulatory environment continues to evolve and address this. The U.S. Department of the Treasury, for example, released new guidance last quarter specifically identifying cybersecurity training as one of the meaningful steps to reduce the risk of ransomware extortion. This kind of guidance is on the heels of CISA, the cybersecurity infrastructure brands of the U.S. Department of Homeland Security. who stated that user awareness training programs are a key way of mitigating the risk of phishing email attacks. We believe that these actions help validate our market opportunity and provide a catalyst for new business growth. Another example came from Octus 2022 Businesses at Work report. I am proud to say that we're now within the top 10 of their top 15 most popular apps by number of customers. Quoting the report in their own words directly, this is up a jaw-dropping five notches and 56% the largest year-over-year growth from our top 15 most popular apps. KnowBe4 was consistently a fastest-growing app between 2017 and 2019 for those keeping track at home. End quote. This progress... places us next to titans of the software industry such as Salesforce, Zoom, Atlassian, Slack, and DocuSign. Even more recently, G2's Winter 2022 grid report named PhishER as their top-ranked SOAR software with the highest customer satisfaction among a dozen contenders in the space. Our G2 score was 93 out of 100, placing us well ahead of the competition. For context, the second place contender had a G2 score of 73. We believe that this is the kind of recognition that really sheds light on the great work we are doing. I will now walk you through our key results, which highlight our execution during 2021. Fourth quarter results exceeded our expectations across the board with continued growth as well as strong free cash flow generation. our inside sales motion continues to win both new enterprise and SMB customers across all industry verticals. This resulted in $285 million in ARR ahead of our expectations and up about 44% year over year. We believe this performance demonstrates our market-leading position in the human-centric cybersecurity space, and we continue to remain focused on innovation in order to meet the needs of our customers. Our vision for the security awareness markets defines KnowBe4's product roadmap. This includes both exciting new features and new products. A great example of this is the two products that we are planning to launch in the second half of this year. One code named PasswordIQ and the other representing our integration of the Security Advisor acquisition. As a reminder, These will be two entirely separate SKUs, each expanding our TAM as well as fueling our existing effective cross-cell momentum. With the Security Advisor product, we believe we are creating a new category in cybersecurity called Human Detection and Response, or HDR. How this works is we connect to other security layers through their cloud interface and pull in security alerts so we can analyze them and take real-time action. We believe this new SKU will add an estimated $5 billion TAM as well. I am pleased to announce that the integration of this product is on track for release in the second half of 2022. Our R&D team is laser-focused on making sure that this new product, which is highly technical in nature, can be implemented into our existing customer base in the simplest way possible. This is the kind of automation that supports our high-velocity sales motion as well as reinforces our proven go-to-market engine. Our organic product development remains strong as well. with the product codenamed PasswordIQ also on track for release in the second half of this year. This is another exciting product that we expect to be of interest to customers of all sizes and industries and as part of our organic product development pipeline. As a reminder, this product is not a password manager. PasswordIQ will be used to mitigate risk related to password hygiene issues such as weak or breached passwords. The product will continuously monitor your organization for any issues detected with users' passwords. It organizes this data on an easy-to-read dashboard and facilitates automatic employee training based on detection of any password risk. Among the new features we have released, there is one we are particularly excited about. Nobiforce industry benchmarking has been expanded. To now include comparison data for Nobi4's security culture survey. You may have heard us talk about the ABCs of security. This stands for awareness, behavior, and culture. The goal of Nobi4's platform is to enable a culture of security awareness that produces real results. It creates a sense of collective responsibility that results in strong security behaviors. With the new security culture survey, we give our customers the ability to track their progress and also compare their security culture to that of their peers. As a potential area to explore, we believe that cyber insurance companies in particular could find this feature useful as a method to more accurately measure risk. These new products and features are a key driving factor in the strong momentum of our new business wins, represented by further penetration in the enterprise markets. Customer growth remains strong across both SMB and enterprise with our total customers reaching over 47,000. In just 2021, we added over 10,000 customers to the platform. We believe that this scale is hard to match in cybersecurity. Our current customers are investing in our KMSAT platform and adopting our additional KCR, KCMGRC and Compliance Plus products at record levels. At the end of Q4, Over 22% of customers now have subscriptions to multiple products. That is up from about 14% at the end of Q4 2020. As in previous quarters, we also saw customers buy both KMSAT and VCR together to leverage the immediate risk reduction that VCR brings to their organizations. Though we do not report the growth for FisherYard Compliance Plus and KCMGRC separately, the combined logo growth and revenue growth were about triple digits year over year for 2021, a continuation of our cross-sell momentum. In terms of new business, most of our wins continue to be Greenfield, but we also saw a number of competitive displacements. The Greenfield wins continue to show that the value of security awareness is resonating with customers, And we believe our competitive wins are further proof that our platform and customer support rank well above our competition. I am proud to announce that we've penetrated roughly 20% of the Fortune 500 list by now and have made strong progress into the global 2000s. On top of this, our upmarket penetration has continued in general. Here are a few examples of our global wins that we've had this last quarter. We've had a 175,000-seat deal with one of the largest technology companies in the world. We also won a 130,000-seat deal with one of the largest mega healthcare system providers in the U.S., We closed a 25,000-seat deal with a global technology supplier as well. This opportunity was a perfect example of a competitive displacement. With the product they were using, they noticed that their phishing templates were stale and that the platform in general lacked the automation and reporting capabilities needed to run their global enterprise. It became a no-brainer decision for them after seeing how an effective platform One with AI, ML, and automation woven throughout could provide them with the tools necessary to achieve true risk reduction, as well as save the IT department valuable time. The strong momentum we've been seeing in the international markets has only continued as well. In Europe, we closed a 23,000-seat deal with a multinational manufacturer. Also in Europe, we had a 10,500-seat deal with a multinational financing firm. This is an example of an organization that had already been successfully using our platform in Australia and Germany. and wanted to deploy us throughout the rest of their subsidiaries. We also displaced a competitor in a 20,000-seat deal with a top European medical university. In Australia, we closed deals with two top universities, one being 14,000 seats with the other being 30,000 seats. The latter opportunity closed through an RFP process where we came out as the preferred platform. We also had a 15,000-seat deal with one of the largest utility companies in Brazil, who chose us. due to the wide variety of Portuguese content we provide. And finally, we had a 26,500-sheet deal with one of the largest banks in Southeast Asia. Outside of the commercial space, the government segment continues to be a strong vertical for us. In the US, we displaced a competitor in a 65,000-seat deal at one of the largest law enforcement agencies in the country. We also displaced a competitor in an 81,000-seat deal at a large US public university who favored the automation of our platform. Finally, we closed a 102,500-seat deal with the Department of Education in a Midwestern state. This opportunity was also a great example of what's driving our cross-sell momentum, as they were already a know-before customer who decided to add FishER after seeing all of the time-saving features that we've added throughout the year. These kinds of wins have become a monthly occurrence for us. And we believe that they demonstrate how our customers continue to embrace not only the considerable risk reduction our platform brings, but also the thousands of hours we save IT departments in triaging security events. Given the current shortage of skilled IT workers, our strategy of building time-saving features into our platform has paid off. This also remains a critical focus for our product roadmap. With that being said, I would like to thank our employees and partners for the dedication, commitment and customer focus that has brought KnowBe4 to its market leading position today. I'm super proud of not only our financial results, but the great group of people driving this company and contributing to our communities. And this has not gone unnoticed. We were named as a 2021 customer's choice by Gartner Peer Insights, putting us in the upper right quadrant ahead of other companies who we are often compared with. We believe that our retention rates speak for themselves in regards to customer satisfaction, but awards like this certainly help reinforce the fact. Lastly, before I turn the call over to Krish, I wanted to give you the organizational update that I mentioned at the beginning of the call. Our current CFO and co-president Krish Venkataraman will be nominated to join our board of directors as a director. Krish, over the last four years, has built an incredibly strong finance organization, helped us refine and mature our strategy, and led us through a successful IPO. We value his leadership and know he will continue to help us from the board level as we expand. As part of this promotion, we are bringing on a new CFO to lead the finance organization. Following the filing of our Form 10-K, Bob Rich, a three-time CFO, will assume the position of Chief Financial Officer at KnowBe4. Local to Tampa Bay, Bob most recently served as CFO for Catalina, a marketing firm. He brings over 25 years of financial experience in both private and and public companies, including organizations of significant scale. I would like to thank Krish for his incredible contributions to KnowBe4 and welcome Bob as one of our newest Knowsters. Krish will continue to help drive the business strategically from the board of directors, as well as supporting Bob during this transition. And with that, I would like Krish to discuss our financial trends.

Thanks, Tim, and good afternoon, everyone. First, I would like to say that it's been a pleasure to work with everyone at Nobifor over the past four years, and I'm proud to see the growth the company has experienced over this time. Nobifor's finance organization has a strong bench of talent, and I believe the addition of Bob's experience and leadership skills will help the organization's continued growth. As you heard from Stu, Bob is a three-time CFO, including roles at organizations many times the scale of Nobifor. and I'm confident that he will be a strong partner to Stu and the management team as we scale the company to the next milestone of a billion dollars of ARR. I'm also looking forward to continuing to support the organization's future growth as a board member. Now, moving on to fourth quarter results. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks are non-GAAP. As you just heard from Stu, we continue to see strong performance across the business, with Q4 ARR growing 44% year-over-year. This is in the heels of over 40% growth in Q1, Q2, and Q3. Q4 growth was driven by another strong quarter of new logo additions in enterprise and SMB, global expansion, and continued cross-sell to new and existing logos. Our platform continued to perform well across all geographies to customers of all sizes and industries. I want to remind everyone that a key pillar of a model is is the ability to efficiently scale to customers of all sizes, from organizations with less than 100 seats addressed by our channel partners, to customers with hundreds of thousands of employees served by a hybrid inside sales motion. Our strong execution this year is the result of our focus on four pillars of growth. New logo expansion, cross-sell to existing customers, international expansion, and channel expansion. We saw success in each of these areas every quarter during 2021. Our first pillar of growth is new logo expansion. This year, we added in excess of 10,000 new logos. Today, about 88% of our logos are in the SMB space, which we define as organizations with less than 1,000 employees, and about 12% are in the enterprise space, which we define as organizations with greater than 1,000 employees, which we have seen significant growth over the past few years. Now, enterprise traction is a proof of not only our ability to move up market, but also the strategic importance some of the largest organizations in the world now place on our platform. This continues our trend of penetrating the enterprise market over the last couple of years. We have made strong progress selling into Fortune 500 U.S. companies and are continuing to make inroads into the global 2000s. In fact, we now count about 20% of the Fortune 500 as customers. This fact, along with a strong growing market share in the mega enterprise account, shows how some of the world's largest brands trust our platform as the true way to reduce the ongoing risk posed by the human layer. We ended 2021 with an AR balance between enterprise, and SMB customers. During Q4, we saw strong growth across all segments, with particularly strength in the SMB, which even outpaced the strong growth we saw in the enterprise this quarter. As a reminder, we continue to focus on driving balanced AR mix between SMB and enterprise. Our second pillar of growth is cross-selling to existing customers. We continue to see strong interest across both newer and existing customers in the power of our global platforms. As of Q4, we saw an acceleration of multi-product adaptation with about 22% of customers subscribing to multiple products. Part of this growth is driven by new customers who continue to show strong interest in purchasing multiple products within the first purchase. To give you some perspective, in Q4 2020, we had about 5,000 customers or almost 14% of our almost 37,000 customers at that time with multiple products. Today, About 10,300 customers, or about 22% of our over 47,000 customers, now have multiple products. As you can see, we have made tremendous progress here, more than doubling our multi-product customer count year over year. Our success is partly due to our large base of SMBs, many of which are being quick to see the value of purchasing multiple products. Enterprise customers also continue to see the value of our global platform capabilities with strong traction in multi-product sales in both the Fortune 500 and Global 2000. As a reminder, we do not bundle our products. We prefer to cross-sell them as this results in premium pricing rather than discounting. As an example, year-to-date, Phish ER represents approximately a 46% increase in AR for SMB and 36% on enterprise versus a standalone KM-style sale. Our multi-product strategy is seeing considerable traction with a combination of Fish ER and KCM GRC and the addition of Compliance Plus during 2021. We now see record levels of customers with three products and even a few that have all four. These deals are all closed without having to bundle products. Year over year, Fish ER continues CompliancePlus, and KCMGRC combined to have nearly triple-digit revenue and triple-digit logo growth. Our cross-sell motion continues not only to help expand our AR base, but also increases retention. We have found that customers who bought both KMSAT and PhishER get more value from our platform and, as a result, are much stickier customers. We remain committed to bringing innovative products to our customers and ultimately driving shareholder value. The launch of Compliance Plus in early June is yet another example of our ability to innovate in the human layer of security and add complementary products to our platform. Though it's still early, Compliance Plus has surpassed what we saw from Phish ER in its initial launch. That is to say that the total AR from Compliance Plus in the first six months post-launch ended higher than what we saw with Phish ER at the end of its first six months. This is a very positive indication to the power of our cross-sell motion. As Stu mentioned, by the second half of this year, we expect to have six products to sell to new and cross-sell to existing customers, further enhancing our platform capabilities. We are now noticing is that some of our customers, particularly the large enterprise, have trended towards signing multi-year deals with us. We believe this reflects the recognition we have received from third-party research organizations, world-class customer support, ever-expanding product profile, and building the next evolution in security by pioneering the HTM realm. Our third pillar of growth is expanding internationally. Penetrating international market remains one of the key pillars of growth. Our international revenue grew 88% year-over-year to yet another record-breaking quarter. Domestically, we currently see strong momentum with about 35% year-over-year revenue growth. In international markets, we initially see more enterprise-centric go-to-market motion versus SMB-first motion that we started with the U.S. On the international expansion, we continue to focus our investment on hiring key talent in marketing, sales, content, and customer support. We are also pleased to have added a strong R&D base in India following the Security Advisor acquisition. Finally, As many of you know, we launched Compliance Plus product last year as a domestic-only cross-sell. Based on the strong traction we have seen, and after expanding the content for global audience, I'm excited to announce we will begin selling it internationally this year as well. This type of international expansion, as well as new product introductions, are the cornerstone of our investment thesis for 2022. Lastly, our fourth pillar of growth is channel expansion. We continue to focus on expanding our channel presence to accelerate growth both internationally as well as domestically. We have invested in hiring a number of key resources in our channel team and building marketing and decision capabilities for our channel partners. Throughout this quarter, we have made great progress in growing both the number of channel partners as well as the deal volume generated through them. Now to give you Some more details on the quarter. Both new and existing customers have witnessed the ongoing problem of social engineering worsen over the last year. We continue to support our customers with our platform reach, which includes integration capabilities around security awareness, security orchestration and automation, and compliance. In the fourth quarter, total annual recurring revenue, or ARR, reached 285 million, up about 44% year-over-year. Our ER growth was driven by another strong quarter of new logo additions, continued expansion of cross-sell to existing logos, as well as strong retention. In fact, every pillar of growth saw extremely strong execution. This has been a trend for every quarter in 2021. Our total customer count for the quarter grew to over 47,000 customers, up from about 37,000 customers in Q4 2020. This is a 28% increase in customer count year-over-year and over 10,000 new logos added. This is a phenomenal achievement by our global sales and marketing teams to help drive the value proposition of our platform. We continue to see strong logo retention across both SMB and enterprise customers. We believe our increased retention is in part due to the success we have demonstrated through our cross-sell efforts and the multi-product capabilities of the platform. As Stu and I have already mentioned, we have made excellent progress in the Fortune 500 and Global 2000. To remind everyone, we started in the SMB space and have successfully moved our market. Counting nearly 20% of the Fortune 500 as customers and strong penetration to the Global 2000 shows how critical the platform is for the world's greatest brands. We believe we are now the de facto leader of the human-centric securities. Our gross dollar retention has also been very strong, particularly considering our mix of SMB and enterprise customers, reaching the highest levels we have seen. The strong trends in both gross dollar retention and multi-product adaptation has resulted in positive trends for net dollar retention. As a reminder, our go-to market motion relies on selling to the entire organization, or in other words, to 100% of seats up front. As a result, Majority of our expansion dollars come from cross-sell execution. With that as the background, I'm proud to note that we reached 108% net dollar retention during 2021. and our logo retention for both SMB and enterprise was greater than 90%. We believe that a retention rate in excess of 90% is difficult to find in software, especially when we're considering that our SMB base is in greater of 41,000 logos. That is why we are recognized as a leader and are ranked among the titans of global software companies in the latest Okta report. Fourth quarter and full year, total gap revenue grew by almost 41% year over year. Quarterly revenue reached 69 million and annual revenue reached 246 million, which is well ahead of our expectations. Geographically, About 16% of our revenue is now derived from international markets. Although the vast majority of our revenue continues to come from North America, we believe there is a sizable, addressable market for NOBA IV internationally. And we continue to invest across both EMEA and APAS in both NOBA IV personnel and expanding our channel relationships. While we're still early in our international expansion, our strategy of investment in these markets is producing results. And we are adding marquee brands to our global client base. Since Q4 2020, we've added close to 100 new heads to our Nova 4 international team. We remain committed to ensuring we have the right resources in place to execute on our international expansion. Investment in R&D and product will continue to be a key part of our investment strategy, given the success of launching and cross-selling new products at scale. As part of our philosophy of running the business, we remain focused on sustaining a high growth rate with strong margins. Fourth quarter non-GAAP growth margins improved to 87% from 85% a year ago as we gained efficiency with scale. Non-GAAP growth margins was approximately 86% for the full year compared to 85% for the prior year. As we continue to scale our business, we expect non-GAAP growth margins in the low to mid-80s long term. Total non-GAAP operating expenses for the quarter was about $45.4 million versus $38.9 million for the same quarter last year. Non-GAAP operating expenses for the year were $184 million, up from approximately $145 million in the prior year. We continue to invest in headcount across the business, with total headcount increasing by about 35% during 2021, which drove the vast majority of our operating expense increases. Second dev grew the fastest, followed by sales and marketing, and lastly, G&A. As mentioned during our third quarter call, we have seen and expect to continue to see wage inflation in the U.S. due to both current labor market conditions and the dynamic that has developed due to remote working. As we continue to invest globally by building centers of excellence around the world, we believe that we can diversify some of these tight labor market conditions. Also, with the security advisor acquisitions, We have now opened operations in Cochin, India, and plan on significantly expanding our R&D presence and build a shared resource pool to take advantage of unit economics and large talent base. It's worth noting that we launched our stock compensation plan in October 2021, which contributed to the uptick in GAAP expenses. In typical know-before fashion, everyone from the mailroom to the executive seat was included in our stock compensation plan as inclusiveness ensued. is a cornerstone of our culture. We also launched our employee stock purchase plan program to further incentivize employee participation as long-term shareholders. Quarterly non-GAAP sales and marketing expenses increase year-over-year, contributing to our substantial revenue growth. These expenses decrease as a percentage of revenue when compared to prior quarters, as Q4 tends to have lower costs after scaling marketing efforts through earlier quarters. We continue to invest in sales capacity in our core markets, and while we are still in the early stages of international expansion, we expect to deploy additional resources to support growth in these markets. G&A costs increases reflect our continued effort to support life as a public company and to assist our international expansion, including significant headcount investment in legal, finance, internal audit, and HR teams. This is a know-before way of building foundational capabilities first to ensure we can run an efficient business. Tech and dev costs have remained stable as a percentage of revenue, but increased in absolute terms, again, primarily due to headcount increases. As we continue to expand our product offerings, you will see additional investments in key technical talent across the globe. We expect these investments to contribute to our product launches planned for later this year. As we still are on track to have six major products on our platform. We truly moved from a single product to a multi-product platform in a short period of time. Non-GAAP operating income was $15.1 million for the fourth quarter and $28.4 million for the full year. Non-GAAP operating margins were approximately 22% for the quarter and 12% for the full year. Non-GAAP net income for the quarter was $12.3 million and $23.2 million for the year. As a reminder, our non-GAAP measures exclude stock compensation expenses, amortization of acquired intangibles, and acquisition and integrated related costs. Turning to cash flow and balance sheet items. We finished the year with cash and cash equivalents of approximately $274 million, representing our continued focus on maintaining a high level of capital efficiency and use of cash. Free cash flow for the year was $71 million, and free cash flow margin was approximately 29%. This was driven by continued strong cash collections combined with sales performance ahead of plan and efficient go-to-market model. From our results, you can see we are resilient, cash-generating SaaS model with strong balance sheet supporting a balance of top-line growth and expanding profitability. We have continued to expand our resource pool, invest in new products and capabilities, both organically and inorganically, while maintaining sustainability. sustainable, profitable growth as we lead a new category in cybersecurity. And on to guidance. We entered a new year with strong customer and business momentum. This momentum has seen in all our segments and international markets and across all four key pillars of growth. For the first quarter of 2022, we expect total revenue in the range of $72 million to $73 million, or approximately 34% to 36% year-over-year growth. For the full year 2020, we expect 328 to 330 million or approximately 33 to 34% year-over-year growth. This revenue guidance is based on our current product mix expectations for 2022. As a reminder, our KM-STAT product has a small proportion of revenue that is recognized upfront. And as a result, variability in product mix can have impact on reported revenue. We continue to expect free cash flow margins to be greater or equal to 15% for the full year. As a reminder, there is seasonality in our free cash flow, which can result in variations quarter to quarter. We tend to have buildup of marketing and lead generation costs in the first half of the year. For modeling purposes, you can assume a non-GAAP diluted weighted average share count of between 173 and 175 million shares for Q1 and 174 to 178 million shares for the full year 2022. As we look forward to 2022, we are seeing continued growth and momentum in the business. We are laser focused on maintaining our market leadership, dedicated to the human defense layer, and driving innovation around the HDR category. With that, we are open to questions.

As a reminder, if you have a question at this time, please press star 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Once again, that's star 1 to ask a question. Your first question comes from the line of Brian Essex with Goldman Sachs. Please go ahead.

Yeah, good afternoon. Thank you for taking the question, and first, congratulations. Really well done, and nice set of results to move on off of. I guess the first question also, thank you for the incremental color on net retention rate. And maybe if you can peel back a few layers on that. Could you give us an idea? It sounds like the 108, you hit that level during the year, according to the prepared remarks. Was it that run rate at the N4Q? What was the level of improvement throughout the year? And then would love to get an idea of if you look at your customers on a cohort basis, how would you frame the improvement in net retention rate? Was that primarily new customers who then, or one- to two-year-old customers who then increased the attach? Were there pricing increases involved? Maybe if you could just give a little bit more color around that improvement, that would be fantastic.

Yeah, thanks very much, Brian. That is very much, of course, for Chris.

Excellent. Thanks, Brian, and appreciate the kind words from you. So I think I'm going to unpack that question in a couple of different pieces. If you look at our net dollar retention, that momentum has continued over the full last year pretty much every quarter. And there are a number of key reasons why our net dollar retention has improved and come to this stage. One, if you look at our cross-sell motion, we now have about 22% of our massive customer base has got cross-sell capabilities built into it. And in our case, given that we don't bundle products, we actually charge for our incremental additional products on the platform, that, of course, has been a positive momentum in terms of our net dollar retention. The other aspect of this business, which is so incredible, is that even if you look at SMB or enterprise, our logo retention has been growing. And that, of course, has positive momentum on net dollar retention too because we are maintaining and growing our existing base as we actually grow into this very large and addressable TAM associated with the human layer. So we are getting momentum across all the key aspects of net dollar retention across the business. The second part of the question is, How do we think about cohorts, especially historical cohorts, and what has been the effect of those cohorts on net dollar attention? I mean, if you look at our cohorts, our cohorts have all been growing incrementally in terms of net dollar attention. That's because we have been very, very successful in terms of going and mining our existing base with cross-sell motion. And what we are noticing now, and this is a trend that is continuing from Q3, is now we have customers who not only buy additional one product, but we have customers who are actually buying two products, three products, and all four products of the KnowBe4 platform. And as you heard from our prepared remarks, we are going to be adding additional two SKUs by the end of this year. So in terms of the cohort creation, you're seeing momentum across the board in pretty much historical customers as well as new customers coming to the KnowBe4 platform.

Got it. That's super helpful. Maybe just to follow up for Stu, you know, I guess as you look at transition to a new CFO, maybe if you could frame the most important elements in your eyes as you pursued a search for a new chief financial officer and and how that decision evolved.

Sure. It's been a pleasure to work with Karish over the last four years. As for the timing, KnowBe4 has never been in a stronger position. We have a talented finance organization that is well positioned to help the incoming CFO lead us to the next major $1 billion ARR milestone. While there is never a good time for a CFO change, I couldn't be happier with where the company is positioned. Chris will be on the board and help us transition and provide guidance. Related to the CFO search, we went, of course, to an executive search company and ultimately found someone who was in our own backyard. who had worked in organizations quite larger than us. And he is a really good fit to guide us through the next phase to that billion dollars in ARR. And that's really quickly where we're at, Brian.

Got it. That's helpful, Carlos. Thank you very much.

Thank you. Your next question comes from the line of Joel Fishbein with Truis. Please go ahead.

Thank you. And, Krish, all the best to you as well on your transition. I guess I have one for Stu and a follow-up for Krish. Stu, I'm really excited about the new products you're going to be launching back half of the year. Krish said in the prepared remarks that, you know, fish AR uplift. Any idea what the AR uplift will be for PasswordIQ and Security Advisor? And how long do you think it will take to start to monetize those two products?

I can give you a 30,000-foot perspective. Chris will give you a little more in the sense of numbers. We are mostly using 2022 to do the platform integration, to invest in the sales teams, marketing, and to a large degree, invest in the R&B industry. side of things to make sure that the Security Advisor acquisition is just as easy and super easy to deploy as our other products. From an ARR perspective, you'll understand that since we launched this in the second half, we don't really expect all that much. That is mainly a 2023 number. Maybe Krish can shed some additional light there.

Yeah. Thanks, Joel, and I appreciate your kind words, too. Now, if you look at, of course, we are launching two products in the second half of this year, but I'll focus a little bit more on Security Advisor, given that it was part of your question. If you look at Security Advisor, the acquisition, the focus of the acquisition was really to pioneer a critical brand-new layer in security, which is the HDR level, of course. And when we actually did a lot of the TAM-based analysis associated with that critical new layer, we noticed that it's from a TAM potential, it's very similar to our core product KMSAT. So that's the reason why we were so excited about the acquisition. And of course, all the effort that the team has actually put in from a product launch perspective is that this could be a very strong addition to the Novo4 platform. And of course, give us the potential to almost have the same level of TAM potential as a core product, which is KM-SAC. Joel, was that helpful?

Yes, very. Thank you. And just as a follow-up, you know, Chris, you significantly outperformed on the operating margin line. How are you going to think about, you know, going forward the balance between continued investment and growth and, you know, margins, frankly?

Yep. So I'm going to take that question. Of course, Stu can add a little bit more color in terms of his investment thesis through the year. Now, Joel, we are in a very interesting part of the company, right? We have moved from this single product tenant to a multi-product tenant. And one of the key tenants that Stu has ingrained into pretty much every person in this company is how we actually think about balancing growth, investment, and free cash flow. Free cash flow would be maybe the mantra of today, but it's been Stu's mantra since he started this company. And that has been part of how we run the company and how we basically balance investment in the future before growth, as well as run a profitable organization. Now, we are very fortunate that we now have six Cree products this year that we could launch with. And you have seen that incredible cross-sell motion 22% in a very short period of time, aka 10,000 logos who have cross-sell motion. There are few companies in security who have 10,000 logos in totality, and we have been able to achieve that in a very, very short period of time just in a cross-sell motion. So in terms of balancing operating margins as well as free cash flow, this has been the way we run the business from day one under Stu's leadership, and that will continue as we refine our go-to-market with the launch of six products into next year.

Yeah. Actually, I do have a bit of a perspective here. Joel, as you saw, our free cash flow for 21 was extraordinary. The interesting thing is that the board over the last five years has continually asked me, Stu, can you spend more money and grow faster? And I have consistently said, I don't see any way. So no. However, for 2022 we decided to grab some of that FCF because in the prepared remarks you may have noticed that Chris said FCF will be 15% plus well we are heavily investing in international both in infrastructure headcount we're almost doubling our marketing in the international markets And so we are actually spending more in the international growth. And the interesting thing is every geography has its own maturity curve and their own inflection points. And so we are moving from one geography to another and see if we can create that same hockey stick that we created in the U.S. So that's a little bit more color on the FCF, Joel. Does that answer your question?

Yes, sir. Thank you very much.

You bet.

Thank you. Your next question comes from the line of Shoal Ale with Helen. Please go ahead.

Thank you. Good afternoon, guys. Congrats on the results, guidance. Krish, not saying hi here because you're going to stick around, but it was absolutely a pleasure. Quick question maybe on the operating margins and the kind of strong performance. Given you're still capturing some of the security advisor costs, is it fair to assume that margins could even be higher than what we had seen in the fourth quarter?

We do have tank shovels and, you know, Roy, thank you for your kind words, too. If you look at the operating margins of the business, we actually have a couple of things happening, especially in Q4, I would say. A, the most important thing about the operating margins is the performance of the sales team, right? It has been a story from Q1 to Q2 to Q3 to Q4 is the extraordinary effort the sales and marketing team have actually done in terms of executing and executing over plan. The second part is that, just like other companies in the U.S., we did get the benefit of the CARES Act associated with, which was in our Q4 numbers. And the third key part, I think I said that in our prepared remarks, Shaul, is that we tend to build up our sales and marketing costs as we start the year. because especially now, given we have a very balanced approach towards SMB and enterprise, we tend to actually build a lot of sales and marketing expense into Q1, into Q2, into Q3, which helps us, of course, achieve our growth, especially on the enterprise, which has a little bit longer lead time in terms of execution versus SMB population. So those are a couple of things that are happening from an operating margins around the company, but the most important reason why the operating margins were where it is is this amazing strength in our sales motion. Shaul, was that helpful?

Yeah, no, I'm absolutely understood. Thank you for that color, Krish. And Stu, it appears to be, without a doubt, one of the takeaways, at least in my end, nothing that we haven't seen in the past, but competitive displacements appear to be maybe even accelerating this quarter so have anything changed or is that you know some of the dynamics that we have seen in the marketplace with some consolidation over the course of the past you know pick up you know whether back in April or back or in December you know competitive displacement that's actually a great question for Lars

Hey, Shaul, how are you? So the competitive displacement, we've been consistently year over year really going after that enterprise market. And half of the focus is on that new business, those RFPs and that type of business. But the other half of our business is... us just going after incumbents and going after their business. And that's actually a testament to our product team because the product, it's so far ahead of the competition that really the sale just begins with a demo of the product. And when we're going into these displacement-type sales processes and we do the demo, again, it's typically an oh-wow moment for the for the prospect, and I'd say that's really what's been driving that.

Got it.

And Shaul, just to add one, for the very first time we actually mentioned that we have almost 20% of the Fortune 500. People have always thought of us as we are just getting into the enterprise world. I think hopefully that provided color that we're not just getting in, we are now the de facto leaders in this process from the enterprise perspective.

Got it. Understood. Thank you so much. Congrats, Krish. Thank you so much, Awul.

Thank you.

Thank you. And your next question comes from the line of Hamza Polarwala with Morgan Stanley. Please go ahead.

Hey, guys. Thanks for taking my question. And, Krish, I'll add my congrats. We're going to miss your presence and your energy on these earnings calls.

Thank you, Hamza.

Maybe just on that topic, Krish, obviously you've been front and center, you know, fairly messaging the note before story over the last four years, been really passionate about the business. I'm curious why now is a good time to step back in this new role on the board and, you know, how you came to that decision.

So you heard Stu from his perspective, from a timing perspective, but I'll also add a little bit more color. Now, the last four years, you know, and I'm putting my finance hat on, the finance team has done some incredible work, right? We have not only helped run a number of rounds for the company from series B, C, onwards, we also got the company ready to be a public company, and of course, the launch of the public offering of KnowBe4. The next key and most important milestone of this organization is what Stu mentioned, the next billion-dollar AR target. So that is the next critical step in the organization's growth trajectory, and it logically made sense from a timing perspective, given that now that's the next focus for the company, that we should think about who can lead the CFO organization in its next endeavor. Now, there are two personal reasons to. One, you know, I've been very fortunate and very lucky, honestly, that I had the opportunity to learn from Stu for the last four years. That is one of the key things that I came and I came to the know before is to learn how to be a great executive, how to be a great CEO, and who to learn better from than Stu, who is, as you know, ranked one of the best CEOs in this country. And that has been a great mentorship for me from a personal perspective. And finally, there's been some positive and happy developments in my personal life, which meant that, as you know, I've been traveling back and forth from New Jersey to Florida every week, or even prior to COVID. And I think finding somebody of talent, of Bob, who's not only a great CFO, who has done it in scale and size, but somebody who's also local, was something that, an opportunity we could not pass by.

Makes total sense. Thanks for the color question. Congrats again.

Thank you, Hamza. Thank you for your kind words. Thank you. Your next question comes from the line of Rob Owens with Piper Sandler. Please go ahead. Great.

Thank you guys for taking my question. Wondering about the relationship between operating margin and free cash flow, which typically has kind of a 20-point delta if I look at the last couple of years. So if that holds, the 15% plus would imply that margins could swing back into the negative here. And is that what is implied in your guidance as well as your share count as we look at not only Q1 but for the full year?

Chris can answer that one. And we actually did look at that. So we're prepared.

So that's a fair question, but I would focus more, given that we guide only on free cash flow revenue, of course, and that's two areas of focus. But I think if you look at the philosophy of this company, we've always been very, very prudent in terms of how we run the company, whether that's in an operating margin perspective, free cash flow margin perspective, or growth perspective. Now, if you look into the future, as I said, I don't guide to operating margins, but it's very fair to assume that that focus in terms of really maintaining profitability in a business with strong growth will continue in the future because that's Stu's DNA and that's how the future of this organization will be run.

So I appreciate the color there then, Chris. So if we're going to see kind of free cash flow margin compression relative to operating margin, what are the different areas of working capital we should be thinking about to get the model there to a 15% plus type of free cash flow margin?

Yep. So I think if you look at the key areas of investment that we are actually going to make from a modeling perspective, you would expect next year is further investments in three critical areas on the P&L. One is investments in sales and marketing. I think Stuart alluded to this, especially on international, given the strong momentum that we are actually seeing. And we'll continue to add good solid headcount in both sales and marketing to drive our international growth. The second key part from a P&L perspective, of course, is additional heads in R&D. Now as a company, we've got six key products that we actually developed and adding enhancements to our existing products. So that'll be another key area that we'll actually put investments in from an R&D perspective. The third key area that I would say that we are really focused on is how do we actually think about creating further efficiency on the G&A line item? As you see, our G&A headcount was the lowest percentage growth versus tech and dev and sales and marketing. So we will continue to find creative ways to create further efficiency on our G&A motion throughout next year and the following years.

Great. Thanks for the color.

Thank you so much. Thank you. Your next question comes from the line of Joshua Tilton with Wolf Research. Please go ahead.

Hey, guys. Thanks for taking my questions. And I echo Hamza's kind words. Chris, your energy is definitely going to be missed. My first one is, you know, look, I just kind of want to follow up on the free cash flow guide, but just a little bit more direct. 15% margin is obviously down from what you did this year, and I know you guys are stepping up investments, but this guide is kind of similar to the initial guide at the beginning of last year, and you guys came in well ahead of that. So just help us understand a little bit better your ability to kind of outperform this initial guide, and maybe just, you know, in other words, would you say there's any different level of prudence built into this guide relative to previous guidance you have provided us?

Let me start, and then Chris can take over. We have... for the year 2022 done a very robust. It's really a process that has now been embedded, I should say. We had a very robust look at, okay, where do we want to be by the end of the year? And especially in the sales side of things, we have worked back the specific amounts of leads required in separately SMB enterprise, but also international through our offices in the channel. And kind of worked back this whole thing with a data lake based set of metrics and ratios, which really tell us how much we need to spend in marketing. In the past, we have chronically underspent in marketing. We simply didn't have sufficient resources, couldn't get to the right vendors. But with Michael Williams coming on board a year ago, we have significantly upgraded our whole marketing team. And we are actually spending and will spend that budget this year. So from that angle, there's much better prediction and visibility on what we will spend. There's more to it, and I'm sure that Karish can add some color here.

Yeah. I think one of the key things, Joshua, to think about is, you know, if we are now firing in all couple of cylinders, right, A, not only what Stu mentioned, international, but also in our existing domestic side, now we are seeing lots of positive momentum in both SMB and enterprises. So even though we are thinking about a lot of investment in international, the domestic story has been amazing, right? Given we now have 20% of the Fortune 500 as customers, and these are great drivers of what we invested in and the results of that investment coming in in actual sales to the organization. Now, in Novo4Fashion, this is not a company that we're going to blow money for no reason. That's not how the philosophy, the culture of this organization is. We are going to see every month, and we have lots of in-depth metrics of the business that is shared with the management team and Stu, that we make good quality decisions in terms of where to invest, seeing results, and then further increasing those investments as we see the results of those investments bear fruit. So going back to your 15% plus point, you know, This is going to be one of those key things that we'll keep measuring. And as we see results, we'll make the right decisions for the overall growth of the business and the right mix of growth as well as FCF.

That was helpful. And just kind of a quick follow-up. I do appreciate the commentary on the NRR. But just like helping us think into 2022, given, you know, you have new products coming out, you continue to fire on the cross-sell, is there any reason that NRR shouldn't continue to tick up this year? and maybe, you know, just help us understand what level of NNR is kind of baked into the current guidance.

Yeah, so we don't, of course, guide on NNR. We'll provide NNR on a yearly basis because looking at every month or quarter is not, we don't think is the right prudent approach. You have to look at a year-on-year basis. Now, it's fair, Joshua, to think about NNR as a strong part of our overall growth metric of the business because, of course, we are going to add new products on the platform. But Stu mentioned something that both Security Advisor and PasswordIQ, which will come later half of this year, will really drive a lot more growth in the following year. But at the same time, there are lots of good products that were launched last year that will help us from a cross-sell motion and continue throughout the year.

Thanks, guys. That was very helpful.

Thank you. So just a quick, a quick heads up. Um, we have four minutes left and then we have to go away because the next call is quarter two. So who's next? We got time for one more question.

Thank you, sir. Your next question comes from the line of DJ Heinz with Canaccord. Please go ahead.

Hey, thanks for fitting me in guys. I'll keep it quick. And, uh, uh, Chris, good luck to you and congrats on the next steps. I think my question is probably going to be for Lars, and it's around Compliance Plus and the cross-sell there. I assume you're selling into a different buyer, right? I don't know if it's HR or if it's compliance, but I don't think it's the security IT budget. So just talk a little bit about the playbook that you're running there to tap into these different budgets. And obviously it's going well, but I'd love to just get some color.

Yeah, so you're absolutely correct on the different budgets, which – It's kind of nice, actually. That's a positive for us because as we're selling our core product CAMSAT on the initial sale, we're not competing with one budget to get the Compliance Plus into the sale. Actually, what we're finding out is it's kind of split between SMB and enterprise. In SMB, it's Typically, it is the same person that we're selling to. And in times, you know, they'll pull in maybe HR or legal in some way to check out the product. But we're typically dealing with the same person to get that sale together on that initial sale. But as we move into enterprise, obviously, there's whole other teams that would handle CMP. You know, we're talking to typically very happy customers on the cross-sell. And then along with the pricing of CMP, it's kind of a no-brainer price. So that typically opens the door for us and gets us those introductions to the correct people in the larger organization. So it's actually been a pretty smooth process on both sides.

That's helpful, Collin. Thanks. I'll leave it there.

Thanks so much. I am sorry to say that we have run out of time, but thank you all very much for attending. We appreciate your interest in KnowBe4, and we look forward to speaking with you again soon. Thank you.

And this concludes today's conference call. Thank you all for participating. You may now disconnect.