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.

Thanks, Stu, and good morning, everyone. Thanks again for joining us on the call today. We're pleased to be able to share our Q2 results with you this morning. This is my first full quarter here at NOVA4, and it was very exciting to see the strong execution across the business, delivering another solid quarter of results. I'll be sharing more details on revenue, costs, and cash flow for the second quarter. 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 revenue performance across our various go-to-market groups. In the second quarter, total annual recurring revenue, or ARR, reached $328.3 million compared to $240.6 million a year ago, up 36.5% year-over-year. Similarly, our reported gap revenue for the second quarter totaled $80.8 million versus $59.4 million during the same period a year ago, an increase of $21.4 million or up 36.1% year-over-year. Our Q2 growth was driven by another strong quarter across each of our key growth initiatives, new logo expansion, cross-selling to new and existing customers, and international expansion. we continued to see strong execution in each of these areas during the second quarter. Let's start with our first pillar of growth, which is new logo execution. During the second quarter, we sequentially added nearly 2,600 logos net of churn, bringing our total customer count to 52,216 as of June 30th. That's a 25.5% increase year over year. or over 10,600 new logos added, net of churn. Our total customer distribution remains relatively consistent, with about 88% of our customers in the SMB space, which we define as organizations of less than a thousand employees, and about 12% in the enterprise space, which we define as organizations with greater than a thousand employees, where we've seen significant growth over the past few years. As a reminder, we remain focused on driving a balanced ARR mix between SMB and Enterprise, and we again ended the quarter with ARR generally balanced between these two. In terms of logo retention, both SMB and Enterprise retention again remained greater than 90% during the second quarter. We're particularly pleased with this continued strong retention rate in excess of 90%. especially when considering that our SMB customer base is over 46,000 customers. As Stu mentioned earlier, we're keeping a very close eye on all our leading indicators related to the health of this segment of the market, and all indicators remain positive. Our second pillar of growth is cross-selling to new and existing customers. During the second quarter, we continued to see strong multi-product adoption resulting in the percentage of customers subscribing to multiple products growing to 26.3% from 24.5% previously. This brings the total number of customers with multiple products to over 13,700, a number that has grown by 94% from Q2 of last year. While we're proud that over one-quarter of our 52,000 customers have multiple products, we also view this as a strong opportunity for continued expansion. These are all users who understand the value of our KMSAT platform and continue to act as a rich source of leads to cross-sell into. We're seeing record levels of customers with three and even four products, and all were closed without having to bundle products. And although we don't report growth of our individual products separately, our combined revenue growth for PhishER, Compliance Plus, and KCMGRC again reached over triple digits year over year for the quarter. Our cross-sell success is relevant not only to help expand our ARR base, but also to increase customer retention. Our retention statistics support that customers who purchase both KMSAT and PhishER get more value from our platform, and as a result, end up being much stickier customers. Our third pillar of growth is expanding internationally. Penetrating international markets remains one of our key pillars of growth. Our international revenue grew 56.1% year-over-year and grew sequentially by 1.4 million from Q1, representing our strongest quarter of sequential growth from international in the last three quarters. This complements our consistent domestic momentum, which delivered 32.5% year-over-year revenue growth during the second quarter. The geographic distribution of our revenue continues to evolve, with revenue derived from international markets now representing 17.4% of our total reported gap revenue, up from 16.8% last quarter. Although the majority of our revenue continues to come from North America, we believe there's a sizable greenfield market for Know Before internationally, represented by a total addressable market which is significantly higher than that of domestic, with key international regions at a similar inflection point previously seen in the domestic market. In order to capitalize on this compelling international opportunity, we continue to invest in both EMEA and APAC by focusing on hiring key go-to-market talent and expanding brand awareness. And this international execution strategy is also closely tied to us building on our growing partner network outside of the US, which is our fourth pillar of growth. We continue to make meaningful progress on hiring key resources in our channel team and building marketing and distribution capabilities for our channel partners. For an example of the meaningful contribution that our channel partners continue to make, the largest deal in Know Before history that Stu mentioned earlier came through our domestic channel business, and this will continue to be an important international execution initiative for us. The other global wins mentioned during Stu's remarks also serve as examples of international investment strategy producing results. While we're still early on in our expansion within these markets, we're adding marquee global brands to our client base on a monthly basis. As part of our philosophy of managing the business, we remain focused on sustaining our high growth rate with strong profitability, and we delivered margin expansion again in Q2. Our second quarter non-GAAP gross margins improved to 87.9% from 85.9% a year ago as we continued to deliver an efficient performance on our direct cost structure. Our total non-GAAP operating margin also showed healthy improvement during the quarter, up to 13.5% from 7.6% in the second quarter of 2021, a demonstration of our ability to leverage our overall cost structure as we continue to scale. As a reminder, our non-GAAP measures exclude stock compensation expenses, amortization of acquired intangibles, and acquisition and integration-related costs. Our total non-GAAP operating expenses for the quarter totaled $60 million, up from $46.5 million in the prior year, an increase of roughly 29%. We continue to invest in headcount across the business with total headcount increasing by about 33% versus the end of Q2 2021. This drove the vast majority of our operating expense increases. Year over year increases in non-GAAP sales and marketing expenses for the quarter were primarily attributable to higher headcount related costs, including headcount related subscriptions and overhead allocations. as well as higher marketing, PR, and demand generation costs contributing to our revenue growth. It's also worth noting that our marketing spend on industry events also increased year over year as we shift back towards in-person events versus primarily virtual arrangements in the prior year, including an incredibly successful K Before Con customer event that we hosted in April. 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 continue to deploy additional resources to support growth in these markets. Non-GAAP technology and development costs have increased year over year, primarily due to headcount increases across our product and content development teams. As we continue to expand our product offerings, you will see additional investments in key technical talent across the globe. These have been critical investments to support the development of the new products and features that Stu referenced earlier. The increases in non-GAAP general and administrative costs year over year are also attributable to investments in headcount and headcount-related costs, primarily to establish necessary administrative resources to support our international expansion and the ongoing life as a public company. These included headcount investments across legal, finance, HR, and our own internal IT teams. We also saw an increase in non-headcount related expenses related to professional services as we work to optimize and globalize our administrative systems. These investments are necessary to first build the foundational capabilities to ensure we continue to execute efficiently and at scale. We consistently try to highlight our balanced approach to both growth and profitability, and this is evidenced by our non-GAAP operating income more than doubling year over year, growing in Q2 by over 143% from $4.5 million in the second quarter of 2021 to $11 million in the second quarter of 2022. Let's now turn to cash flow and liquidity. We finished the quarter with cash and cash equivalents of $315.5 million up from $273.7 million at 2021 year end, illustrating our continued focus on maintaining a high level of capital efficiency and utilization of our liquidity. We're excited to highlight that this utilization will also now include no before ventures. As Stu mentioned earlier in his remarks, this is a program that is fully dedicated to supporting innovation in the human layer of cybersecurity. The purpose of this program is to provide early stage investments that support an ecosystem of organizations actively building integrations with Know Before's products. You'll note in our cash flow statement that we made 2.4 million of venture investments during the second quarter. Moving on to our free cash flow, we generated $19.1 million of free cash flow in the second quarter, resulting in a free cash flow margin of 23.7%. This compares to free cash flow of $12.8 million and free cash flow margin of 21.5% during the same period a year ago. The free cash flow results for the second quarter were driven primarily by continued upfront cash collections related to our favorable sales performance and some timing-related cost efficiencies realized during the quarter. As we've discussed in the past, there is seasonality in our quarterly free cash flow margins, which has ranged anywhere from 22% to 39% over the last six quarters. This is generally related to the timing of disbursements for expenses and investments during the year, as well as profiling of sales contracts and billings throughout a given quarter. We're very pleased with our second quarter performance, which is indicative of our resilient cash generating SAS model and strong balance sheet, which is supporting a balance of top line growth and healthy profitability. We're continuing to expand our resource pool, invest in new products and capabilities while maintaining sustainable, profitable growth as we lead this new category in cybersecurity. Before we go into guidance on future results, I just wanted to take a moment to dovetail onto Stu's remarks regarding the economic dynamics that continue to demand our attention. While we're constantly monitoring all of our forward-looking metrics, we haven't seen any material indication of a change in our pipeline, leads, quotes, referrals, or anything at this time significantly impacting our proven go-to-market strategy and our largely greenfield market opportunity. This is obviously a matter that we continue to monitor closely. For the third quarter of 2022, we expect total revenue in the range of 85 to 86 million. For the full year 2022, we now expect revenue in the range of 333 to 334 million, up from our prior guidance of 331 to 333 million. This revenue guidance is based on our current product mix expectations for 2022. As a reminder, our KM-set product has a small portion of revenue that is recognized up front, and as a result, variability in product mix can have an impact on our reported revenue. We believe our guidance reflects the current economic dynamics and an appropriate level of conservatism. We also now expect free cash flow margin to be greater than or equal to 24% for the full year. And as I mentioned, there is seasonality in our free cash flow, which can result in variations from quarter to quarter. We believe this guidance is indicative of the strength of our operating model and ability to maintain a high level of growth with a balance of profitability. For modeling purposes, you can assume a diluted weighted average share count of between 182 and 184 million shares for both Q3 and full year 2022. As we look forward to the remainder of 2022, we continue to be very energized by the growth and momentum we've seen in the business. We're laser-focused on maintaining our market leadership, dedicated to the human defense layer, and driving innovation around the new category of HDR, which we are excited to introduce to the cybersecurity ecosystem later this year. And with that, we'd like to open it up to any questions. Operator?

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Brian Essex from Goldman Sachs. Please go ahead.

I agree. Thank you. Good morning, and thank you for taking the question, and good to see the, you know, continued strong results. I guess maybe, Stu, one question for you with regard to, you know, your focus on SMB growth and adding SMB quota sales reps. Can you help us maybe understand what the unit economics look like there? How scalable is that, and what does this motion look look like to, I guess, maintain efficiency as you drive those efforts?

Yeah, good question. You have to understand that this is still like at least 90% greenfield, so the amount of scale we can achieve is only really limited by our own ability to execute. We are planning for the foreseeable future to continue to expand that team, and really only talking about U.S. domestic. If you look at international, that is even a larger green field and a TAM that is six to seven times larger than U.S. domestic. Now, international, we work with channel partners, and I'm sure that Lars, a little later down, can expand on that. So as was earlier mentioned, this is still an early stage in a brand-new category. Does that answer your question, Brian?

Yeah, I think that's helpful. And maybe just to follow up, any insight you can give us around attach rates? It looks like ARR per customer continues to grow really nicely. Is this primarily still – or you're starting to get more kind of compliance attached, and how might that differ domestically versus internationally?

When it gets to numbers, I generally defer to Bob. But generally speaking, yes, we have very healthy attach rates for FishER, and Compliance Plus starts to kick in nicely. But Bob can maybe give some additional color.

Hey, Brian, good morning. You know, honestly, it has been very consistent around sort of the distribution of the attach rate. Compliance Plus had a very, very strong quarter, but to be honest with you, Fish ER had a really, really strong quarter sequentially in the second quarter as well. There really hasn't been any sort of change in the dynamics or the distribution of the attach rate. Both of those products are still attaching very strongly, and both of those products are obviously contributing to the increase in average ARR. With respect to distribution domestically versus internationally, It's probably a little bit more biased towards domestically. Just the international deals are generally larger deals, and those larger deals are usually starting with KMSAT. But overall, the trends have been really, really consistent over the last several quarter. We really haven't seen anything unusual or changing in terms of the attach rates.

Got it. Really helpful. Thank you very much.

Your next question comes from Sol Eyal from Cohen. Please go ahead.

Thank you. Good morning, guys. Congrats on the consistent performance in a challenging environment. Maybe for Bob, gross margins remain absolutely healthy, coming better than expected. Customers are purchasing additional modules. As we think about the second half, should we be expecting some gross margin moderation, or pretty much we should be within the same level that we are at right now? And I have a follow-up.

Yeah, good morning, Shaul. It's interesting. It's the exact same question we had in the first quarter, and I had... Again, I had this little code word in my prepared remarks around an efficient performance on the direct cost structure. Honestly, we did see a better performance in the direct cost structure than was originally anticipated. Some of that is really around the fact that we are achieving more and more scale, and that is providing a little bit more efficiency in some of those people elements that reside in the direct cost structure, things like our customer relation manager population, our direct tech support. So we're seeing a little bit better efficiencies than we were originally expecting there. I do think, though, that there has been some delays in some of the hiring that we've been trying to do. We've normally biased, and I think we are biasing in terms of our own internal forecast, that those margins could compress a little bit, but it really won't be very significant as we continue to add resources into the customer support side and the CRM side.

Understood. And maybe, you know, Stu mentioned that, you know, Lars is going to contribute his fair share. So my next question is on that international opportunity, is it more greenfield or is it more displacement driven?

So, yeah, international is absolutely more greenfield. If you look at the international markets, you have each of these primary markets are in a different level of maturity than we are here in the US. And we're kind of going after those in a different way. But when you talk about SMB, it's really 100% a greenfield opportunity for international. Little less so for enterprise, because with the bigger global-sized companies, they're well on the way to having something with regard to security awareness training.

Understood. Thank you.

Your next question comes from Fatima Bulani from Citi. Please go ahead.

Hey, good morning, guys. This is Mark Khan for Fatima. Thanks for taking our questions. So maybe just to start off, thanks for the high-level views on your sales pipeline and go-to-market. But in the current environment, we're really starting to, you know, frequently hear companies speak to, you know, sales cycle elongation. So to that matter, can you give a sense of, you know, what you're seeing in your deal negotiations, especially on the enterprise? And, you know, what type of impact is it having on, you know, pricing, discounting, elasticity, and how you're maybe adjusting go-to-market if there are any adjustments? Thanks.

You know, we... We definitely monitor every single part of our sales cycle, and we're really not seeing any material changes in anything, be it the number of opportunities coming in, our lead generation, our time for a sales cycle. I mean, everything... Up to this point, seems to be cranking along as normal. We don't really see any changes as far as deal elongation. Not really seeing the sales cycles extending either. Even with the, you know, like the war in Ukraine, we're actually seeing some of the sales cycles shorten, but I know that's more of just a temporary reaction to to a horrible event there globally.

Okay, got it. Thank you. That's very helpful. And then maybe just to follow on, you know, can you maybe dive a little, you know, delve a little deeper on the security coach side? Maybe give a sense of, you know, how you expect the, you know, revenue monetization efforts to ramp there. And in terms of timing, magnitude that we can expect going forward. Thanks. Sure.

We are currently in closed beta with very good results. We're going into open beta later in Q3. We still schedule to release this product in Q4. The expectations haven't changed. We are still very excited about this new category. The TAM that we mentioned earlier is holding up. We haven't yet finished our pricing surveys and setting the final price. We have shown the product at a few trade shows with uniformly very positive feedback. So you will see us release this product this year. I do not expect meaningful revenues in Q4. This is really a 2023 product. Great. Thank you guys very much.

Your next question comes from Rob Owens from Piper Sendlers. Please go ahead.

Great. Good morning, and thanks for taking my question. Sales-related questions, I'm guessing you'll ship it over to Lars. But wondering on customer acquisition and the $2,600 that you added, relatively flat year over year and still a strong result, but how should we think about that as we look at the back half of the year? Should that be relatively flat with what was a record customer acquisition year last year, or do you think we can see some growth on that front?

You know, Rob, we're just, you know, steady moving along at the same pace. So I would expect it to remain the way it is just kind of flat, but yeah, I wouldn't expect to see any big accelerations in that. We are making some investments in international, and we should next year, those investments in international should start picking up, but I don't see any real material acceleration in that.

No, let me add something there, Rob. Most cybersecurity companies would give away their right arm

adding 2,500 logos per quarter so it may be it may be flat on the other hand it is fantastic execution absolutely thanks for the color and I guess since it's a two question morning you mentioned the large deal with the State Department of Education can you remind us your sled fed opportunity especially as we enter the the third quarter here kind of where you guys are at overall thanks

So, SLED-FED has always been a huge part of our go-to-market. So, we are seeing, I would say, especially in the SLED market, and then also federal, what we're seeing now is previous, we would be involved in pieces of these very large organizations, and we've been kind of chipping away one piece at a time, and what we're seeing now is from that success that these huge mega organizations are now coming in and then saying, hey, you know, we're hearing good things about you. You're in seven of 15 of our departments. We want to come in and just buy for the entire organization at once. So we expect to see a lot more of that in the future, and that could accelerate as well in the federal space.

Great, thanks.

Your next question comes from DJ Hines from Canaccord. Please go ahead.

Hey, good morning, guys. Stu, I remember a couple quarters back you said you felt like this was the year where it made sense to take some margin and to try and grow a little bit faster. Just based on guidance, it seems like the thinking has changed a bit there. It doesn't sound demand-driven, right? So curious if the initial plan was just too aggressive or what's happening there?

It's a good question because a couple of quarters ago we were thinking, well, we are going to invest as much as we can in international. And I said, listen, it's going to be a little lower. The reality is that we are moving internationally as fast as we possibly can, but it is going a little slower, like Bob indicated earlier. So we're just not spending the money that I was thinking I was going to spend. So that really... explains this higher margin percentage. Keeping it simple for the moment. Maybe Bob wants to hop in, but...

No, hey, DJ, honestly, Stu's absolutely correct. I mean, this is a sequence in our international expansion, and things happen in a sequential manner. And so it doesn't make any sense for us to get one step ahead of a different step and spend money internationally that's not ultimately going to bear fruit and provide us with a return. So we're just working through that sequence, and it's just taking a little longer than the original profiling suggested.

Yeah, that makes sense. And no one's going to push back on higher margins in this environment. Lars, maybe one for you. Just I'm curious, do you find customers are more ROI focused in this environment or is just something that, you know, buyers just know that they need to have it? And the reason I ask, and it seems to me like spending upfront to potentially save money in the future, isn't the easiest pitch in a tight spend environment. So curious how you manage those conversations.

Gosh, I don't really see a lot of change. I'm hearing a lot here and there on TV and what have you about economics, but our sales cycles aren't changing. On the purchase side, offering terms or not offering terms or asking for that, we're not seeing that changing. We're They're trying to do like multiple year payments. It's just pretty much for us, what I'm seeing now is business as usual.

Yeah, one small addition there. This is a critical layer in an organization's cybersecurity stack. The price is still a no-brainer. And the ROI question isn't necessarily front of mind. This is more we have to have this. We can't expose ourselves to employees clicking on phishing links. And so we honestly do not see that come up much.

We're kind of a no-brainer price. This is not relative to other technology spends. This is not an expensive item, and it's a huge bang for the buck.

Yeah, yeah. Super helpful caller, guys. Thank you. Congrats.

Your next question comes from Tal Liani from Bank of America. Please go ahead.

Hi, Stu. It's Madeline Brooks on for Tal Liani. Thanks for taking our question. Just one question from us. The hiring plans, can you talk a little bit how you're thinking about hiring people As we're going into the slowdown, I know you said earlier, too, you've had some delayed hiring. So just how should we think about that in the second half of the year? Thank you.

Yeah, Madeline, I generally see the business cycle as a great opportunity to expand. I've lived through two of these. We do not plan to slow down at all, especially our international hiring is ramping up. because that is where a huge opportunity still lives that we want to capitalize on. And so we're really behind our hiring targets, frankly, and that's also the reason why the margin percentages were up. I hope this is a short answer, but I hope it illustrates where we're at.

Got it. Thanks so much.

Your next question comes from from Truist Securities. Please go ahead.

Hi, it's Joel Fishbein actually from Truist. I wanted to follow up, Stu, on your remarks with regard to your recent pipeline, product pipeline. I know you have the products coming out in Q4. Can you talk about the remaining products? You know, I know the pipeline is robust, and I'd love to hear some of the new add-ons that you're bringing to market soon.

Joel, our focus mostly is on Security Coach. That is a main thrust in the sense of, you know, company-wide, there are many different sectors, call them divisions, that are ramping up. for this, that's R&D, but it's also the sales team, the marketing team, internal training, et cetera, et cetera. There are a few other products that sit in the pipeline that we are working on, but we decided to focus this year on the Security Coach release because that is a major product that we find our customers are also looking forward to. Great. Thank you. Thank you, Joel.

Your next question comes from Alex Anderson from Needham. Please go ahead.

Great. I actually have two questions I'd like to ask. The first one is, with Mimecast and Proofpoint having now gone to the private markets, has that changed the competitive environment? Has it changed pricing with larger accounts? any implications for the business and how are they behaving in the private market?

I think Lars is the best position to give some color there.

Yeah, Alex, I think I would think the main thing that we're seeing with Mimecast and Proofpoint is, you know, the customers are coming to us and I don't think they're getting the same level of service and quality that they had prior. So we're getting a lot more interest coming in the door on our product. As with most acquisitions, that's typically the case, at least immediately. I don't see any Any pressure on pricing. We've been competing with these guys for many years. We really know exactly where we need to be on pricing, and I don't see them really pulling those in. The one area that I would see pricing changing on their side is when we're actively poaching their business, that's when you're going to see these guys do aggressive bundling or even, in some cases, give away the product for free in a bundle. But again, we're best of breed product. We sell our product really based on the quality of the product. So it hasn't been a big threat to us.

The second question I wanted to ask, but before I do it, I just want to compliment you guys. You guys really did a great job of laying out the fundamentals. It was almost like it was written by a sell-side analyst. It was exactly what people would want to hear. So compliments there. But I wanted to go to the international side of it. I mean, obviously, it's a primary driver of growth. And I have two questions related to it. The first is, you know, what portion of the international is just simply multinational domestic companies here that are buying it into the international market. But more importantly, as we look at the international customers, the economy in Europe in particular is under enormous duress. We've seen the U.S. exporting inflation to them with the 20% swing in the value of the exchange rate versus the euro and the pound. Pricing of a lot of products have gone up on top of that. So they're looking at 20, 30% cost increases for a lot of products in the tech field. The question I have for you is, A, how much of your business is U.S. dollar denominated internationally? And second, more to the point, how are you handling that enormous increase in cost that they're absorbing, given their budgets are probably flat, Are you giving them better discounts? Is there price pressure there? I assume that there isn't because your pricing is so low, but can you address that conceptual issue of how you're handling that?

I think that Bob is probably best positioned to give you some insights there, but I did want to quickly answer the first part of your question. The way we count our revenues, Where the headquarters is, is where the sale lands. And so if we talk international, those sales are actually logos that are in other countries. And Bob will take it from here.

Yeah. Hey, Alex. Good morning. You know, with respect to FX, the vast majority of all of our international revenue transactions are actually denominated in USD. you know we do most of our international business through channel partners and our you know our channel partners ultimately end up sort of navigating the effects with the end users with the you know at the end customers so we are you know we're generally billing almost all of our international revenue in USD there are some exceptions but most of Europe is USD all of UK Ireland is USD there's a Germany is actually denominated in euros, but it's not super, it's not very significant. Overall, roughly 3% of our total revenues is denominated in currencies other than USD. So it's a really, really small number. That said, we do know, and Lars can confirm this, we do know that the sales reps in their negotiations with the channel partners you know, obviously are taking into consideration the exchange rate impacts from a discounting standpoint. So I think there is sort of a natural FX impact, even though we're being denominated. These transactions are being denominated in USD.

So how are you handling it?

Well, yeah, I mean, I think it ultimately ends up resulting in slightly higher discounts that are a proxy for the FX impact, even though it's being denominated in USD, which is sort of what you're predicting, right?

Right. Thank you very much. That's helpful.

Your next question comes from Amza Fodorwala from Morgan Stanley. Please go ahead.

Hey, guys. Good morning. Thanks for squeezing me in. Just one quick one for me, and appreciate all the really great color earlier in the call. Bob, this is for you. I think you said pretty healthy pipeline. It seems like demand overall remains strong. Just as you look into the back half, you've got this healthy pipeline. Are you assuming a lower close rate on that pipeline, just given some of the macro uncertainty? Any color you can give us around just the conservatism embedded in the back half?

No, Hamza, I actually, I think when it comes to the guides that, you know, honestly, we've used the exact same sort of philosophy with respect to the guides of Q3 and full year. You know, we guided roughly, you know, somewhere between 33% and 35% year-over-year growth in Q1 and Q2. We're doing the same thing in Q3. You know, full year now reflects an estimated... you know, a little bit north of 35% year-over-year growth. So I don't think that there is any sort of change in assumptions in growth rates or anything that's that granular in terms of our calculus here. I think Q3, the level of precision is obviously pretty high, and we're guiding very consistent with the way we guided Q2. I do think that there is just sort of a natural bias to be a little bit more conservative in terms of the full year, just given the fact that there are uncertainties, and even though we're not seeing anything

Any sort of early indicators here as we sit here on August 4th, you know, we still have five months of the year to go Thank you There are no further question at this time I will turn the call back over to the presenters for closing remarks Thank you very much for attending and that really is all hope to see you in three months This concludes today's conference call you may now disconnect