Ping Identity Holding Corp.

year cloud solutions continued to grow faster than the rate of the overall business and as a result we saw slightly lower subscription gross margins new customer acquisition with our growth team remains a strategic priority in generating pipeline and landing quickly in the global 3000 as at the end of the quarter we remained in a strong net cash position with 173 million dollars of cash on hand Moving now to guidance. For the fourth quarter, we project ARR to be between $255 million and $257 million. We project revenue to be between $67 million and $70 million with annual revenue of between $247.3 million and $250.3 million based on our Q4 expectation. This revenue range anticipates faster growth in our ratable revenue relative to the overall business, as well as some expected impact from shorter-term license subscriptions with our customers. Given the impact that deployment mix and contract duration has on GAAP revenue, management continues to believe that ARR is a key growth metric of our subscription business. Finally, we expect fourth quarter unlevered free cash flow to range between negative $5 million and negative $3 million with a full year unlevered free cash flow expectation of approximately $5 million to $7 million based on our Q4 expectation. Note that Symphonic will not have a material impact Q4 revenue or ARR. Our unlevered free cash flow guidance is inclusive of approximately $1 million of increased burden. Given our success navigating the COVID macro environment, we have fully resumed sales and marketing and R&D operating investments that were put on pause in Q2. These investments are heavily focused on building a world-class channel and partner organization and delivering on new and innovative Ping Cloud and Ping One SaaS services. We expect to accrue between $17.5 million and $19 million for the long-term incentive plan and approximately $6 million of additional stock-based compensation in the quarter in which these awards are first considered probable of meeting vesting requirements, which could be as early as Q4. This is predicated on the price appreciation of PING stocks since the IPO and VISTA's ongoing efforts to monetize their long-term investment in PING. We expect that these will be non-cash charges. In closing, we remain excited about our opportunity as we are still in the early innings of identity transforming both enterprise security and digital experiences. Ping is disrupting 20 years of enterprise legacy access management while leading innovation among customer identity solutions. Our strong balance sheet, subscription business model, and track record of balancing growth and profitability provide us with great confidence to continue to execute to our plan. With that, I'll turn it over to the operator for your questions.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, simply press the pound key. Your first question will come from the line of Phil Winslow with Wells Fargo. Please go ahead.

Hey, thanks guys for checking my question. I wonder if you'd give us some more color on, you know, the call it the employee slash partner side of your business and then the B2C side is sort of what trends you've been seeing year to date and sort of how your expectations for G4. And I guess if you think about this from a COVID economic recovery perspective, how would you think about those sort of in 21?

Phil, this is Andre speaking. Both of those use cases remain strong. We have, as I've said before, been investing and leaning into the customer use case, which is a smaller market but growing faster. That said, our platform has always been designed to serve both use cases. It's our belief that a single identity platform should be able to serve all identity use cases. That's been our design goal, our architecture, and our historical reality really since the inception of the company. So in the COVID environment, we certainly have seen, I would say in earnest, interest in adopting the zero trust identity security model. I think more of that has to do with the reality of the workforce use case, where all of a sudden now users are remote and no longer kind of on the corporate network, and they're looking for architectures that don't have to have the workforce VPN back into the corporate network. we do see zero trust, which has been incoming for some time, have kind of been increased focus on the workforce use case. But likewise, COVID has also impacted a desire to simplify digital experiences across the omni-channel for customers. And so we see companies looking to consolidate a lot of siloed or fragmented customer experiences and then rally around the ping platform to facilitate that consolidation. So COVID has actually had kind of, I would say, a positive influence on both sides of that equation. The customer use case is growing faster for us, and that is by design as we've leaned into it.

Great. Thanks, guys.

Our next question will come from the line of Adam Tindall of Raymond James. Please go ahead.

Okay. Thanks. Good afternoon. I just wanted to start on the ARR question and around customers taking a phased approach or they have smaller initial purchases. Imagine that's going to be a catalyst to future quarters as they expand. But maybe, Raj, just to start, is there a way to help us size that cohort? I think we could make some assumptions around maybe normalized NRR and new customer growth. I think it could become a pretty material catalyst, but any way to corral or help us size that number? And as a follow-up, Andrej, How does that play out? It seems like that demand would not be perishable, but I'm just wondering what you're seeing and if, you know, there's anything like pricing that would compete that away. Because if not, you know, I'd imagine we'd see ARR growth acceleration in 2021. Yeah.

Hey, Adam. Thanks. This is Raj here. So certainly, you know, we started seeing the phasing in of these typically larger deals starting with COVID and back in Q1. We're starting to see the cycle now in terms of phase two and beyond in what we saw in Q3 and into Q4. So typically what I'd say is we're seeing the larger deals are being phased in over, call it four to six quarters. So like I said, we're seeing it now. Customer engagement's really strong. That pipeline is still intact. It's all part of a customer's roadmap and zero trust, and they've selected Ping for that journey. So it's just a matter of time in terms of the phasing in of those, but I would expect that to continue over the next few quarters. And Adam, this is Andre here. We don't have any expectations that this demand is perishable. We think this is a dynamic brought about by Um, budget budgeting in the COVID environment. And, uh, you know, it's fair to say we, we, we serve the largest enterprises. Um, every sector to varying degrees has been impacted, um, and budgets have been impacted and, and, uh, that's not new. We, we saw that in Q2, we saw that in Q3. Um, I think as Raj reports and as we've reported, we are now starting to see kind of phase two and or phase three, either be discussed or closed. And when companies do make commitments to ping on what would typically be a larger deal for us, that is typically a multiple use case and multiple product or multiple capability commitment. They've got a roadmap to a larger vision. They've strategically selected ping for that vision. They just have a reality of what they can deploy in any one quarter. Makes sense.

Thank you. Our next question will come from the line of Jonathan Ho of William Blair. Please go ahead.

Hi there. I just wanted to maybe start out with the show card opportunity. Can you maybe help us understand how that potentially can play out and maybe give a few examples of how you could build out the consumer identity market? And I'm assuming this is not going to be a direct-to-consumer type of offering, but maybe just help us understand the business case around it. Thank you.

Yeah, thanks, Jonathan. This is an entirely new paradigm, to be clear, and it hasn't been talked about by us. I guess if you're in the identity industry, deeply embedded in the identity industry, it is a conversation. But as I stated at Identify, we as individuals or consumers, as we engage with companies, we do have little control over what information is shared. Now, there's regulation that is enforcing companies have – better consent capture and then also consent enforcement, meaning once they capture a user's consent to share, they need to make sure that they apply that consent appropriately in sharing data. Ping actually sells and enables companies to ensure that they're not violating a lot of this privacy policy. The entire notion that an individual in the future can begin to collect data pieces of their identity information onto their phone and into an identity wallet and then present that information when requested or required in interactions with other businesses, it fundamentally changes the privacy model, makes the individual an active participant in the management and control of their identity and their privacy. Where this gets really interesting, especially, is in what we'll call the registration or identity verification side of the identity use cases. Companies spend a tremendous amount of money verifying your identity before they allow you to authenticate. And there's a lot of friction in new customer relationships as customers basically register to create an account with companies. the concept that a user could show up with a verified identity skip registration and establish a relationship with a company in a matter of seconds is a completely new paradigm and to do so in a privacy enabling way is going to lower the friction both for end users and for businesses it's going to simultaneously improve the privacy for the for the end user So this is a model that we think will have applicability in all identity use cases. When employees, new employees show up to a company, they also have to verify identity. It's not just a customer or consumer use case. But we also believe that it has significant value in the customer or consumer use case.

Got it. Thank you. That's very helpful. And just in terms of the contract duration, I think you said that it's move back to a normalized state. But I mean, just want to confirm that maybe we've already passed the bottom point here and whether that can sort of sustain at more normalized contract durations.

Yeah, it's a good question, Jonathan. This is Raj. So, you know, as we talked about in Q1, when we had the COVID shock to the system, everyone sort of retracted back to you know, what's the minimum they could do, right? Realizing that identity is mission critical to everything and We saw that bounce back a bit in Q2. Q3, actually, we saw it normalize back to sort of pre-COVID levels. Now, I don't know if that's the bottom, but we certainly feel that in those conversations with customers that the feeling we get anecdotally in these discussions is that it's the same that we felt prior to COVID.

Great. Thank you. Our next question will come from the line of Saket Kalia of Barclays. Please go ahead. Okay, great. Hey, guys. Thanks for taking my questions here.

Andre, maybe for you, and I apologize if this has already been addressed. I joined the call late, but can you just talk about the legacy identity infrastructure out there from the likes of like a CA SiteMinder or like an Oracle Access Manager, for example? I guess, how are customers sort of approaching the prospect of ripping and replacing these, you know, heavy sort of, you know, kind of systems amidst the pandemic?

And maybe qualitatively, how does your pipeline of those types of displacements look like here in the coming quarters? That make sense?

Yeah, it does sack it. I would say that as we've discussed before, web access management, the legacy Oracle Access Manager, SiteMinder, and other products probably is one of the stickiest products in the identity suite because they do tend to touch every application. We had seen a trend and have been seeing a trend of a modernization of those products as they've become largely unsupported by the legacy vendors. In CA's case in particular, Broadcom, which is, you know, according to their playbook, has really turned the screws on some of the renewals of those products. So I would say that there has been a general desire and or acceleration to move off of those products, even though they are a heavy lift. At the same time, and so, you know, I would call the tailwinds have been increasing for that. At the same time in the COVID environment, large replacement projects in general come under budget scrutiny and companies ask, is this the highest priority of something that we need to do? And so we've seen both puts and takes on that front. That said, we estimate that there's a $3 to $5 billion legacy market still in existence in the large enterprise market at some point does need to be replaced. And we believe that the pressure to replace grows every day with these large enterprises. They will hold on as long as they can, but all of the trends are heading towards a moment in time where they just will not be able to hold on to that legacy any longer. As I've said before, it's become brittle. Got it. That's very helpful. Raj, maybe for you, just maybe to piggyback off that last question on contract duration, I just want to zoom in a little bit on renewal specifically.

And I guess what I mean there is, you know, for renewals that are maybe three years in length, are they continuing to sort of renew with their prior duration?

Or are you seeing some of those, you know, maybe contract perhaps or change given the pandemic? That's a good question, Saket, because we, you know, we tend to focus so much on duration of new ARR, right? But the renewal ARR has a very significant impact on revenue as well. You know, if you think back to three years ago in Q4 of 17, when we did have several subscription term licenses that were multi-year, you know, we had a fair amount of those that were three-year, but also four- and five-year, right? And so those were RevRec as as those terms unfold. But what we are seeing at the time of renewal, we're pretty much back to where we were before in terms of whether customers were renewing for single-year or multi-year, you know, according to their preference. That's pretty much back. Got it. Very helpful.

Thanks, guys. Sure. Your next question will come from the line of Gray Powell of BTIG. Please go ahead. Gray Powell of BTIG, please go ahead. Unfortunately, it seems to be muted. Next question will come from the line of Matt Hedberg of RBC. Please go ahead.

Hey, guys. Thanks for taking my question. You know, I guess follow up on the prior question. You know, I have to imagine COVID is increasing your new business pipeline really at an accelerated rate. I guess I'm wondering if you could talk a bit more about the health of that pipeline. And is it just a function of macro stability that could ultimately reduce some of the phase in nature that you're seeing? Or are there actually things that perhaps you can control that could accelerate these deals a bit? Hi, Matt. This is Andre. The pipeline has largely returned to pre-COVID levels at this stage. When we look at our balance or mix between new and base business, the new side of that business has actually also been very, very strong actually recently. Now, we haven't had conversations yet internally about is that a COVID impact? And then all of a sudden, you know, we're seeing kind of strong demand on the new front. The second part of your, repeat the second part of your question. Well, it's just, is it a function of macro stability that ultimately sort of like breaks this, what I would imagine is a very healthy pipeline for you, or are there things that you guys can do to control that? And I guess, you know, a follow-up to that would be, you know, Raj, you mentioned that you're accelerating, you resume spending. You know, maybe it's a function of, you know, increased reps or even more tenured reps. Just sort of curious on that side of the house. I would say it is macro stability that we do believe is impacting the close rate and or the size of those initial deals and the experience that we've had with phased-in deals. With respect to the actions we can take to control aspects of closure rate, we, like many others, continue to focus on customers that are expanding, customers that we already have a relationship with, tends to be less friction associated with the sales cycle for an expansion. And so we, along with other companies, when we entered into COVID, made sure that we were paying attention to all of the expansion opportunities. That said, we did not make a wholesale jump to focus on simply base business. We experienced in Q2 and in Q3 a healthy amount of new business. We know that new lands equal future expands. And so focusing too heavily, while we probably could accelerate some closure with increased focus on base, if it comes at the expense of landing new customers, we also don't like that trade-off. And then, you know, maybe then, you know, then sort of to ask Raj a question about hiring. I mean, could you double-click on that a bit in terms of where you're focused? I imagine sales and marketing and R&D, but Maybe a bit more color there. And, you know, how do you kind of think about the rate of new rep additions as we prepare for next year? Yeah, absolutely. So we felt pretty good coming into this year with our hiring plan for reps. And this year has been a good, strong year in terms of getting those reps seasoned and enabled to be productive next year. So we feel good about the sales capacity. Now our growth team, which we've highlighted in the past, has been doing phenomenally well. And that team, as we've talked about, is focused on, say, the Fortune 1000 down to the Global 3000. We've also been investing. In our cloud products, Andre mentioned several innovations around the Ping One platform in terms of our services that we're offering there that are new, as well as our Ping Cloud platform. So the combination of all of those things is where we're investing, and certainly from a rep-specific standpoint, We are continuing to grow that investment in the growth team as well as putting a real fine focus on our channel investments and enabling our partner network there too. I'd say just in terms of in general the other areas of spending around R&D, around cloud hosting and infrastructure in advance of what is expected to be significant growth there as we enable our customers to go about their cloud journey and in our support teams. Thanks a lot, guys. Sure.

Our next question will come from the line of Brad Zelnick of Credit Suisse. Please go ahead.

Great. Thank you so much, guys. And my question actually, Raj, follows what Matt was just asking you. So you say that the growth team is doing phenomenally well, yet if I look at your Q4 ARR guidance, it implies further deceleration year on year, whether I just look at the absolute number or trends in net dollar ads in ARR actually revert back to where they were in the first half. And You know, at the same time, your sales and marketing productivity seems to be deteriorating relative to the new and expansion business that you're adding. So what might I be missing that gives you that confidence to resume investing in sales and marketing? And how should we think about productivity relative to the new ARR that you're adding going forward?

Yeah, I think it's a good question, Brad, right? I mean, basically we're seeing the headwinds and the tailwinds of COVID here. And, you know, we spent this year on enablement of our sales force, so we do feel like that productivity will improve going forward. We've also seen, you know, quicker time to productivity for our growth reps who are leading with our cloud products. So, investing there, we feel like will lead to a quicker time to productivity. When we think about the COVID world here that we've lived in this year and we look at the sequential increase in ARR, you know, what we're guiding to in Q4 is, you know, a healthy almost doubling of of the net ARR we generated in Q3. So those are all the signs I would point to in terms of what gives us confidence going into Q4 and beyond.

Great. Maybe just a follow-up for you. How would you characterize the size of your renewal opportunity in Q4 and into next year? I mean, if customers are signing shorter-duration deals, Is it fair to assume then that that renewal portfolio actually grows in size and gives you more shots on goal, so to speak, for upsells and expansions?

Well, we're continually talking to our customers. We've been investing in our customer success group for several years now and have great coverage over our ARR Snowball in that regard. So everything from making sure that new customers are getting value for money and getting time to value is super important for that group. And we stay in constant contact with them to make sure that if there are upsell and cross-sell opportunities that we're identifying them early on in order to add value to the customer. So, you know, it just doesn't happen at a renewal point. And, you know, traditionally renewals were, regardless of the initial term of the deal, historically renewals were typically one year. We just started to see, you know, over the last couple of years where certain renewals were longer durations too. And like I said earlier, we're actually seeing now that the pattern of renewal duration is sort of reverting back to, you know, on a weighted average basis what we were seeing pre-COVID. So I don't see any sort of specific renewal duration issue or opportunity there that's different from anything else we've had in terms of upsells and cross-sells.

Awesome. Thanks so much for the very full explanation, Raj. Sure, Brad.

Our next question will come from the line of Gray Powell of BTIG. Please go ahead.

Okay, great. Thanks.

Can you hear me this time?

Yeah, we can. Thanks, Gray.

All right. All right. That's great. You know, phones tend to work better when they're not on mute. Okay, so yeah, can you talk about the linearity that you saw in Q3? And then with the recent macro volatility and potential for lockdowns, at least in Europe, could you give us any color on what you saw in October and just sort of like overall visibility on your pipeline today?

So Greg, the first part of your question was around linearity. Can you just expound on that, please? Yeah, just like monthly trends, what you saw in terms of your pace of bookings between July, August, and September. You know, we had a – what is fairly typical for us where, you know, we get off to a pretty reasonable start in the quarter, and then just given what Q3 is typically for us, especially with our international business, there tends to be a lull in the middle of the quarter. And then, you know, we finish very strong at the end of the quarter. So I wouldn't say that there was anything – out of the ordinary. You know, we have a monthly focus, just like we have a quarterly focus, and we're executing well to that. With regards to your second question around Q4, we continue to have a strong pipeline, as Andre mentioned, and we executed well in the month. So let's see what happens with some of these macro trends that you mentioned and some of the shutdowns internationally. But certainly, you know, from a beginning of quarter, we're on track.

Got it. Okay, that's really helpful. Thank you very much.

Sure thing, Greg. Our next question will come from the line of Walter Pritchard of Citi. Please go ahead.

Hi, thanks. Question on the SAF side. Any update there on revenue from SAF as presented to Total?

And to the extent you're seeing any change there, Anything in particular driving that, and how are you thinking about as you go into 2021?

Yeah, sure, Walter. This is Raj. I'll take that. So as you know, we disclose our Rattable revenue every quarter in Footnote 2, and, you know, we continue to see a gradual shift towards Rattable. That's, you know, one, because we've been investing that way, and we're certainly really excited about all the new innovations we've We've unveiled here over the last couple of quarters being our Ping One services and Ping Cloud. So we continue to see good adoption and good pipeline build behind that. And so, you know, and also with our customers, right, in terms of their desire to embark on their cloud journeys, and all of them are different and, you know, it's – It's to our advantage to help them navigate through that complex hybrid cloud world to get them to their desired state. And we feel like we are in an architecturally differentiated way to help them get there. So, you know, we did see a fair amount of ratable revenue growth. Our ratable revenue grew 24% year over year in Q3. In Q2, that growth was 22%. And overall, Rattable revenue was 34% of total revenue for Q3. So we continue to see that trend, as we talked about before, when that's an expectation we continue to believe will occur in the future as enterprises go through a gradual transition to more cloud. Okay, and I guess just the implication, is there the implication there that you are seeing stats uptick as a percentage within that ratable? Yes, absolutely. Okay. Absolutely. Just to be clear, yes, our SaaS businesses are growing at a significantly faster rate than the overall business, and that's been the case for several quarters now.

Got it. Okay. Thank you.

Our next question will come from the line of Catherine Trepnick of Collier's Securities. Please go ahead.

Oh, thank you very much for taking my question. Mine has more to do with macro environment. In many of the conversations I've had with, you know, procurement officers at large financial banks and healthcare and retail, they're saying that they're really not going to spend much more money in 2021. And they already have so many tools on site that they just can't imagine adding any more tools. So can you rationalize how you view your growth opportunity with that type of feedback that I'm getting? And this is with almost 25 different very senior procurement officers. So I'm just trying to rationalize your growth and how you fit in what they're saying. Thank you.

Thanks, Catherine. This is Andre. So we are absolutely hearing and seeing the same thing. What we are seeing is a desire for vendor consolidation and replacement or modernization of several legacy vendors and movement to Ping. So while we should consider this a wallet share shift from legacy spend to a modern partner in the case of Ping, I've personally been involved in several conversations that played out pretty much exactly what you were describing. Budgets might be flat year over year. We're being asked to find ways in which we can reduce cost where possible. We also have a desire to reduce the complexity of our vendor landscape. But the business demands have not slowed down. At the same time, we're being pressed to onboard new applications. accommodate new use cases for the business units that are not supported by our legacy environment. And so we see those companies in dialogue to essentially consolidate several legacy vendors and replace them with Ping. So we look at our growth as not necessarily bound by flat budgets, but by a transition from legacy to Ping.

All right. Thank you very much.

The next question will come from the line of Gore Telpaz of Stifel. Please go ahead.

Chris Spiro is on for Gore. Andre, can you talk about the level of demand for the API security use case that you saw during the quarter and how we should think about that opportunity evolving going forward into 2021?

Yeah, thank you. I would say the interest level in all things API security have been high since we introduced that product and have not changed. As I reported in Q2, and it was also consistent in Q3, while API security tends to be one of the top three conversational topics that CISOs understand is incoming, an important I would say vector of future attacks. It also suffered from not being a top three priority in the COVID environment. So we have experienced that new deals around API security have been postponed in many cases through Q2 and Q3. We took the opportunity in Q2 and Q3 to fully deploy enterprise wide several extremely large API security deployments, protecting, in some cases, hundreds, in other cases, thousands of APIs, and fully validate and prove the scalability of that solution with our early customers that signed in Q4 and Q1 as we introduced that product. It is our expectation that that is an emerging market. We do not see it going away. All of my customer interactions are validating that increasing awareness of the exposure of APIs and the lack of visibility into the traffic of APIs is a growing concern to the security groups of many of these large enterprises. But this is an emerging technology, an emerging space, and in tight budgets and COVID time, it did not make the top three, at least in the last couple of quarters. my expectation is that in 2021 like all new technologies that are incoming as things return and companies uh get the high priority projects under their belt um that they will get to the api security and you know we've introduced ping several new products in new categories over the course of you know our history i've seen this trend before when you have this level of interest in a new product It's not a matter of if, it is a matter of when.

That's great. Thanks, guys.

Next question will come from the line of Michael Romanelli of Mizuho Securities. Please go ahead.

Yes, thanks. Hi, guys. So maybe just one quick one for me. Most of my questions have been already addressed. I'm just sort of wondering if you saw any change at all with respect to just customer return in the quarter. Thanks.

We really didn't. You know, identity continues to be mission critical for these enterprises. And if anything, you know, as Andre mentioned, you see more and more wallet share going from traditional security budgets towards identity. So we really have continued to see strong retention as we always have in our history.

All right. That concludes our questions for today. We'll now turn the call back over to the presenters for closing remarks.

Thank you. I want to thank everyone for joining today's earnings call. I wish you guys all the best of health. We look forward to continuing to carry out our mission, providing updates on the business as the year progresses. Thank you.

That concludes today's conference call. Thank you for participating. You may now disconnect.

Thanks for watching!