KnowBe4, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Know Before Second Quarter 2022 Results Conference Call. Please be advised that today's conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Thank you. Now, it is my pleasure to turn the call over to Kentel Talon Yan, known before as Senior Vice President of FP&A and Investor Relations, 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 is furnished with our Form 8-K today, with the SEC and may also be found in the supplementary financial information available on our investor relations website at investors.knowbefore.com. In addition, some of our 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 could differ materially from those projected or implied during this call. These risks are described in our Form 10-Q 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, CEO, and President, Sue Schauerman, and CFO, Bob Rich. Lars Lettenhoff, our Chief Revenue Officer and Co-President, will join our question and answer sessions. And with that, I will turn the call over to Stu.

Thank you, Ken, and thank you all for joining us today. We are excited to share our results with you this morning. We've had another record quarter of strong execution with second quarter results exceeding our guidance. This has resulted in over 36% year-over-year annual recurring revenue growth and a strong 23.7% free cash flow margin. As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of social engineering. We're the only public company dedicated to securing the human layer, a layer that continues to prove itself exceedingly critical to organizations of all sizes, public or private. The environment that we find ourselves in today has transformed this even further. We believe that securing the human layer is a matter of national security. Now, before I go through the highlights of our record performance, I first wanted to take a moment to talk about what this economic environment means for KnowBe4. I want to reiterate that while we are constantly monitoring all of our forward looking metrics, we have not seen any material indication of a change in our sales pipeline that could impact our proven go-to-market strategy. Our investment philosophy remains on track as well, especially regarding international expansion. To specifically address our SMB segment, we continue to see strong logo and dollar retention. Our average selling prices for the segment continue to move up, which we view as an indicator that our platform is being prioritized in SMB budgets. Our lead quote and referral trends all remain healthy, leading to predictable close rates. This year, we also have a record number of active SMB quota bearing reps on board who are collectively producing excellent results. Historically, I have viewed these economic cycles as an opportunity to invest, which is a benefit that comes from running a streamlined organization with the kind of free cash flow that we have historically generated every quarter. While these economic conditions can bring challenges to most businesses, I think that KnowBe4 is positioned for continued expansion with a balance of growth and profitability. There are a few reasons why I can confidently say this. The first reason for my confidence comes from the industry that we're operating in. Cybersecurity budgets are resilient. It is well known that the cybersecurity posture of an organization is crucial. However, the critical role that the human being plays in cybersecurity has only become clear within the past few years and is becoming more evident all the time. For instance, the 2022 Verizon Data Breach Investigations Report, or the DBIR, which came out this last quarter, found that 82% of data breaches involve the human element. Organizations across the globe are experiencing increasingly frequent and debilitating data breaches, ransomware infections, and intellectual property theft, the vast majority of which are accomplished through social engineering attacks. We believe that a secure human layer is absolutely mission critical to reducing these risks. Phishing attacks, which the DBIR calls one of the four key paths to your state, are continuing to rise as well. The Anti-Phishing Working Group published their latest report showing that phishing attacks have once again reached an all-time high in Q1 of 2022. Over 1 million attacks were detected during the period, more than tripling that of early 2020. This equates to over one attack every eight seconds. And these bad actors only need to be right once. Nobiforce platform is proven to reduce the risk of phishing attacks. The cost is a small fraction of the overall cybersecurity spend for many organizations. And some of you may have seen that IBM security released its annual cost of a data breach report last week, which found that the average cost of a data breach in 2022 was $4.35 million. The second reason for my confidence is our market position. In spite of the success that we've seen so far, we still have a relatively low penetration in a global landscape that is predominantly greenfield. We're pioneering a category that is very much in the early days, all at a time when the geopolitical environment only continues to validate the need for our platform. The ongoing conflict between Russia and Ukraine has shown the world what modern cyber warfare looks like. Tom Burt, the head of Microsoft's customer security and trust, just gave an interview last month offering a glimpse of this destruction. According to Burt, 10 hours before the first missiles were launched and the tanks rolled over the border, there was a huge wiper attack across 300 different systems in government and private sector companies in Ukraine. For context, a wiper attack is designed to wipe out as much data as possible and cause maximum network destruction. While the conflict itself is tragic, scenes like these are helping the international community realize that the cybersecurity posture of every organization is a matter of national security. The final reason that I'm confident in our ability to execute during a potential economic cycle is that our customer base itself is resilient. Our logo retention rate for both SMB and enterprise continues to remain above 90% this quarter. This is a feat that we accomplished with over 52,000 customers in Q2 of 2022, over 46,000 of which we classify as SMB. COVID taught us that the spending habits of our customers are resilient as well, with the only measurable impact to our existing customers being a reduction in their seat counts as some of our customers furloughed employees for the first few months. We believe this is because they're aware of the value of the platform, which comes at a cost that some of our smaller SMBs can just charge through a credit card. Keep in mind, during this time, we continued to grow the number of customers with multiple products. We remain committed to long-term execution and continue to see an environment that only favors this. A few highlights from our Q2 results are evidence of this. Second quarter results exceeded our expectations across the board with continued balanced growth in both top line and profitability. as well as strong free cash flow generation. This resulted in over $328 million in ARR, which is up over 36% year over year as of the end of Q2. 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. I am pleased to announce that this now includes Know Before Ventures, a fund dedicated entirely to supporting innovation in the human layer. We're enriching this critical ecosystem by focusing on supporting organizations that build integrations with our platform and utilize our unique data. For years, we've discussed the mismatch between cybersecurity spend on the human layer and the risk that it actually represents. The overwhelming majority of data breaches involve a human element, yet less than 3% of cybersecurity budgets have historically been dedicated to reducing this risk by focusing on early stage investments for organizations innovating within this space we're hoping to support and expand the human layer for years to come. This is all part of our vision for the security awareness market, a vision that defines our own product roadmap as well. This includes both exciting new features and new products. A great example of this is Security Coach, the product we're planning to release in the second half of this year, resulting from the integration of our security advisor acquisition. With Security Coach, we believe we are creating a new category in cybersecurity called Human Detection and Response, or HDR. How this works is we connect through a cloud interface to existing layers in our customer's security software stack and pull in security alerts to analyze and take real-time action. I am pleased to announce that Security Coach is currently in a closed beta with initial feedback being overwhelmingly positive. An open beta is soon to follow with general release still planned for Q4. We showcased a number of our new features to the public at KB4Con 2022. Following the COVID environment of virtual conferences, it was refreshing to hold this one in person, and it was a great success. The number of attendees far exceeded our expectations, and the general feedback was overwhelmingly positive, with surveys showing 96% of 2022 attendees planning to attend in 2023 as well. One feature that KB4Con visitors were particularly excited about is the KnowBe4 mobile app. It is currently in a closed beta with plans for a general release in Q3 2022. This has been a common request from our customers who want their users to be able to complete their new school security awareness training directly from their phone. We believe that expanding our platform to mobile is the next step in boosting engagement and ultimately adds to the value that our customer base has grown to expect. As a reminder, we're operating in one of the few areas in cybersecurity, if not the only area, that isn't purely a replacement market. While most of our new business wins are greenfield, we also continue to see a number of competitive displacements. The greenfield wins continue to show that the value of security awareness is resonating with customers, and we believe that our competitive wins are further proof that our platform and customer support are superior. Here are a few examples of our global wins that we've had this last quarter. We closed the largest deal in our history, a 243,000-seat opportunity, with a State Department of Education. They cited the quality of our content and ease of deploying our platform across all districts as the primary reason for their choice. Above all, they understood that their in-house training was inadequate given the current threat environment. We displaced a competitor in a 100,000-seat deal with a top multinational conglomerate. They had been unable to create a security culture with their current offering and also found our fish ER platform to be superior. Finally, we won a 100,000-seat deal with a multinational transportation enterprise. This was another great example of a large organization realizing that the threat landscape we're finding ourselves in today far exceeded their internal training capabilities and utilizing our platform was a no-brainer decision. The strong momentum we've been seeing in the international markets has continued as well. In Germany, we closed a 50,000-seat deal with one of the largest media conglomerates in the world. We also closed a 50,000-seat deal with a Swiss multinational building materials manufacturer. In Africa, we closed a 10,000-seat deal with a large state oil and gas organization, and we displaced a competitor for a 10,000-seat deal with a top multinational beverage company. Finally, we displaced a competitor in a 16,000-seat deal with an Italian medical device manufacturer. These are just a few examples of the types of wins that have become a common occurrence for us. 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 can save the IT department in triaging security events. Given the current shortage of skilled IT workers, our strategy of building time-saving features into our platform is paying 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 am super proud of the great group of people driving this company and contributing to our communities. And with that, I would like Bob to discuss our financial trends.