This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Greetings and welcome to the SailPoint Technologies Holdings Inc. first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Harding, Senior Vice President of Financial Planning, Analysis, and Investor Relations. Please go ahead.
spk07: Good afternoon, and thank you for joining us today to discuss SailPoint's first quarter 2021 financial results. Joining me today are SailPoint's CEO and co-founder, Mark McLean, and our Chief Financial Officer, Jason Rehm. Please note that today's call will include forward-looking statements, and because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. Since this call will include references to non-GAAP results, which exclude special items, please reference this afternoon's press release in the Investor section of SailPoint.com for further information regarding forward-looking statements, and reconciliations of GAAP to non-GAAP results. And now, I'd like to turn the call over to Mark McClain.
spk05: Thanks, Josh, and thanks to each of you for joining the call today. I'm very pleased to share our first quarter fiscal year 2021 results with you. In a very strong first quarter, we comfortably exceeded our internal sales goals, and at the same time, our mix shifted towards SaaS faster than we had been expecting. resulting in $270.2 million of total ARR at quarter end and a year-over-year growth of 43%. We reported quarterly total revenue of $90.8 million, including SAS revenue of $21.2 million, up 20% and 55% year-over-year, respectively. Our excellent results this quarter were driven by a high level of execution across the business and continued demand for SailPoint's identity platform. We established strong momentum in 2020 and continue to build on that this year, seeing both our average deal size and number of new logos increase notably as compared to Q1 2020. We believe the results this quarter are a testament to increased appreciation of identity security as organizations strive to balance the fine line between enabling and securing their largely remote or hybrid workforce today. As we indicated during our Financial Analyst Day in February, identity security has become a critical area of focus among enterprises. This is driving growing interest and commitment from the upper end of the enterprise market in our SaaS identity platform. We believe this trend will continue throughout 2021 and beyond as more and more enterprises recognize that their legacy on-prem identity solutions are not capable of providing the level of visibility and protection they require. Importantly, enterprises of all sizes are recognizing that taking a SaaS-first approach will give them the simplified yet sophisticated identity security program that only we provide to fully address the complexity of their enterprise needs and at scale. I'd like to spend a few moments sharing some examples from the quarter of large, marquee enterprise customers who selected SailPoint's SAS Identity Platform to fuel their identity security program. First, a large US-based American multinational technology and services company selected SailPoint's SAS Identity Platform to help them transform their identity program from legacy to next gen. With more than 200,000 human identities plus 200,000 machine identities to manage, they required a platform that could expertly scale, keeping pace with the complexities of their business. They added SailPoint's AI services, including cloud access management, as the company requires both the autonomous intelligence needed to identify access trends that need remediation and very clear visibility into access to cloud infrastructure environments on which a large portion of their business is built. With SailPoint, they can securely and at scale embrace the company's aggressive digital transformation efforts without introducing unnecessary access risk. Second, a large tire manufacturer chose SailPoint's SaaS identity platform to help them securely enable their nearly 50,000 identities. As they make the pivot towards SaaS first as part of the company's accelerated digital transformation efforts, they needed an identity solution that was time-tested, flexible, and scalable. They required a better way to manage and secure their workers' access needs, including granting and certifying access to business-critical information housed in their SAP systems. SailPoint delivered across the board as their trusted identity partner, providing them with an identity security platform that will help reduce risk, improve and streamline compliance efforts, and support their transformation to the cloud. And finally, a large APAC public health system and hospitals network, chose SailPoint's SaaS platform to help them quickly bring under governance their more than 100,000 identities. The decision was driven by the CIO, who did not want to spend time and money on constant upgrade cycles, a huge pain point with their existing on-prem approach to identity. With SailPoint, They have an identity solution that has already delivered quick value to them and will resolve a major pain point and security concern of overprivileged access. As these customer anecdotes indicate, larger enterprises are embracing our SaaS-delivered identity platform, which not only meets the current complexity of their business, but can scale with them over time. With years of investment in our SaaS platform and an ongoing commitment to driving continued innovation, we're confident that we're in the best position to meet the identity security and governance needs of today's enterprise. In addition, we're continuing to expand the scope of our identity platform to encompass new enterprise use cases, including addressing deeper enterprise security needs or adjacent market needs. We're addressing this in three ways. First, I'd like to talk for a moment about extensibility of our SaaS platform. We introduced several of these new extensibility innovations in Q1, which are all about helping customers embed SailPoint into the fabric of their business. These new capabilities include a refreshed set of APIs, which enable customers to integrate our platform functionality within their systems. We also launched new no-code integrations with Zapier and Workato, which makes it easier for our customers using these workflow automation platforms to build SailPoint into their workflow. We also introduced our new apps for Slack and Microsoft Teams, which lets end users access SailPoint capabilities in plain English from within these systems. And finally, within this category of extensibility, we introduced a new developer relations hub and team, which helps our customers and partners learn how to build on top of SailPoint. You'll see that the common thread among these initiatives is meeting our customers where they are, whether they are experts who want to code to our APIs, or they want to use existing enterprise workflow platforms, or they just want to use SailPoint from within Slack or Teams with no coding effort. Customer response to all of these initiatives has been very positive. Second, we expanded the scope by addressing deeper enterprise security and governance needs with the acquisition of ERP Maestro. With the new separation of duties access control capabilities that ERP Maestro brings, we're helping companies better address the need for deep visibility of access to critical business systems like SAP, eliminating conflicts in access that could result in fraud or compliance concerns. Once fully integrated into the SailPoint Identity Platform, customers will soon have a unified view and real-time business-focused intelligence needed to analyze logical access to critical business systems and then to identify potential areas of access conflict before access is ever granted. And the third expansion to highlight is that we are addressing an emerging adjacent market need with the acquisition of Intello. With the SaaS management technology and expertise that Intello brings, we're addressing the massive explosion in SaaS apps across the enterprise today, many of which live outside of IT's purview. Combined with our existing identity platform, Intello's capabilities will help companies discover where all of their SaaS apps exist across the business and then quickly put the right identity security controls in place to protect access to these apps and the sensitive data within. With each of these added capabilities, we're delivering increased value to our customers around the world and are already seeing strong interest from both new and existing customers in broadening and deepening their identity program with us. In closing, as we come off of a very strong start to 2021, I'd like to thank the entire SailPoint team for their contributions. We are well positioned this year and will continue to execute and to innovate to the benefit of our customers around the world. With that, I'd like to hand it off to Jason, who will cover our financial performance in greater detail.
spk09: Thank you, Mark, and thanks to everyone joining us on the call today. On the call, I will review our first quarter results and then update you on our expectations for the rest of the year. Let me start off by saying that we had a very strong quarter and we meaningfully outperformed our new bookings expectations. Furthermore, our mix accelerated its shift in the direction that we would like to see it go. In other words, towards SaaS and subscription. In fact, subscription represented over 70% of new software bookings in the quarter and SaaS as a percentage of the mix was almost 10 points higher than our plan going into the quarter. As Mark mentioned earlier, we're seeing appetite for SaaS across the enterprise customer spectrum, and our internal team is more comfortable than ever pitching and delivering our SaaS products. We believe that the acceleration towards SaaS that we saw in Q1 is an indicator of where this business is going in the near future. Driven by strong new bookings, faster than expected mix shift, and retention that was better than planned, total ARR grew by $19 million in the quarter to $270 million, representing 43% year-over-year growth. We finished the quarter with $90.8 million of total revenue within the guidance range that we laid out several months ago, but obviously, given the accelerated mix shift, less than what we would otherwise have expected. Had our actual bookings results been of the mix that was in our plan going into the quarter, we would have reported revenue well above the top end of our guidance range. Net-net, we're very happy with what is clearly the best result for long-term value. Strong bookings performance and a richer mix of recurring subscription business that accelerates our growth in ARR. As I talk about expenses and operating profit, please note that unless otherwise stated, All references to expenses and operating results are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today's press release. First quarter operating income was $.7 million within our guidance range, despite the revenue headwind from the accelerated mix shift. As we've said before, we continue to invest aggressively in the business, rounding out our product portfolio and building for scale, but we do so with as much discipline and efficiency as possible. Now let's shift to look at our approach to the rest of the year. Based on our Q1 performance and by what we see in the pipeline going forward, we feel even more bullish about 2021 than we did a few months ago. As a result, we are raising our full year outlook for total ARR to $340 to $345 million, up from $333 to $339 million previously. Our new outlook represents 35% to 37% year-over-year growth. Based on what we have seen over the last few months, we now expect the mixed shift towards SAS and subscription to be more rapid than previously forecast. As such, we are also raising our full-year outlook for SAS revenue by $5 to $6 million to a range of $102 to $105 million, or 52 to 57% growth year over year. With this recurring revenue increase and the overall strength in our business, we are able to maintain our full year outlook for total revenue at $404 to $412 million. Our revenue outlook is, of course, based on the information we currently have, and the best assumptions we can make right now. But ultimately, near-term revenue is highly dependent on the mix of business we experience throughout the remainder of the year. As I mentioned earlier and at our recent analyst day, we're focused on transitioning to a 100% subscription-based model as quickly as possible. So we'll happily trade near-term license revenue for subscription bookings that deliver incremental ARR and superior long-term economics. In terms of profitability for the full year, we now expect an operating loss of $5 to $15 million, compared to our prior guidance of break-even to a loss of approximately $10 million. The change in profitability outlook is primarily driven by the addition of ERP Maestro to our business, the acquisition of which we closed in March after our last earnings release. As we look at the second quarter, I want to remind you that we had a huge second quarter in 2020. in part closing some business that didn't happen in Q1 as the pandemic first hit. So this year we have a pretty tough compare. With that said, we are initiating total ARR guidance for the quarter in the range of $288 to $290 million, representing 42 to 43% growth year over year. In terms of total revenue, our current expectations for the second quarter are in the range of $98 to $100 million. representing 6% to 8% year-over-year growth. As you look at those growth rates, I'd like you to remember that our second quarter 2020 results were driven in part by some particularly large deals, primarily perpetual and term license-based, which drove significant upfront revenue. So the mixed shift has a pretty significant impact on our expectations for GAAP revenue in Q2. Net-net, we expect the mixed shift from Q2 20 to Q2 21 to have approximately 17 points of headwind to GAAP revenue. And for the second quarter, we expect our operating loss to be in the range of $6 to $8 million. As I close, I'll say again that we're very pleased with our start to 2021. We continue to see market demand and appetite for identity security, and we are the clear leader in the market. The faster than expected transition to SaaS reinforces that we are making the right strategic moves to increase the value we deliver for customers and ultimately to shareholders. With that, we'd now like to take your questions. Operator, you can start the Q&A.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you please limit yourself to one question and one brief follow-up question per caller so that others have the chance to participate. For those using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. The first question is from Matt Hedberg from RBC. Please go ahead.
spk03: Oh, hey, guys. Thanks for taking my questions. Jason, for you, I guess, you know, ARR was obviously really strong in the primary metric, but I think all of us are going to be looking into judging the health of the business. It was good to see you raising the full year. License was a little bit light, though. Can you remind us again maybe sort of the thought on license revenue this year? I know you don't guide to that specifically, but how should license revenue just optically trend throughout this year given this faster mix shift towards subscription and SaaS?
spk09: Yeah, Matt, Thanks for that question. You know, we went into the year thinking that license revenue was going to trend down for the year, in other words, be a year-over-year decline. You know, obviously, as the mix shifts even faster towards SAS and subscription, that's going to be even more pronounced. And so, you know, continue to think about that being a decline. You know, also, when you think about the progression through both last year and this year, you know, we're not only shifting year over year towards SaaS and subscription, but also within the year, right? This is not, of course, perfectly linear, but it is an ongoing transition, right? And so every quarter we're getting more towards that subscription, you know, model. And so, you know, as the year goes along, you potentially see even bigger declines.
spk03: Got it. That's helpful. And then, Mark, You know, you guys have been a long-established leader in IGA. You know, during the quarter, Okta announced their plans of entering the market sort of in earnest, I guess, in calendar 22. Can you talk about just sort of, you know, what that means to the market, sort of your position, and just kind of, you know, what have you heard from customers on that thus far, given that, you know, Okta is a good partner as well?
spk05: Yeah, thanks, Matt. You know, in general, it hasn't really felt like it's made much fundamental change in our market to date. I think a lot of folks react to their announcement as if that puts them right squarely on top of us. But today in the market, we focus on the enterprise class customer. We don't see them as often as people might think. And thus far, it hasn't really changed much of our selling dynamic. I think, as you point out, we've been at this a long time and pretty strong leadership position. And we find that when we're talking to the The enterprise customers that we think are the right kind of customers for us to be talking to, they're very much resonant with our solution. Quite often, those customers already have Okta for their SSO or multi-factor authentication, and they quite often choose us for the governance and administration side. So it hasn't felt like it's fundamentally shifted much yet, and we're certainly going to keep paying attention. as we continue to pursue what we think is the solutions that those customers need. So, so far, not much Delta. Matt, last quick point I'll make is, you know, we've seen them in our space with their LCM offering for over a year now, and really that hasn't had much impact in our market to date. So they announced an intent for some other products next year. We'll have to wait and see what happens when those actually show up, I guess. Got it. Thanks a lot. And congrats on the quarter, guys. Thanks, Matt.
spk01: The next question is from Rob Owens from Piper Sandler. Please go ahead. Rob, your line is open.
spk08: Sorry about that. Thanks for taking my question. Sorry for the mute button. Wanted to drill down into the success you saw in ARR. And more specifically, I think as you guided this year, you talked about some legacy pipeline that effectively you thought would convert in more of a perpetual sense. And so when we see the ARR strength this quarter, is that coming from some of that pipe converting in a different way than you had previously thought? Or are some of the sales cycles that you thought were moving to SaaS actually compressing and happening faster?
spk09: Yeah, Rob. Yeah, thank you. So I think, look, there's a little bit of both of those phenomena plus a third one, which is our performance, right? Outperforming our own expectations and what we set for guidance. So yes, there are some deals that are in the pipeline that have switched, particularly more from PERP to term. There have been some deals where The customer is looking at identity IQ and they now have purchased identity now. So shifting all the way to SaaS, that has happened as well. I think there's also, you know, as we look at new deals that were created, particularly within this year, but certainly even in the latter part of last year, more and more of those were either going in the SaaS or subscription direction. but then fundamentally also our ARR performance is reflective of the fact that we really outperformed our plan.
spk08: And then with regard to the acquisitions, I guess, number one, Jason, while you have the floor, was there anything inorganic then relative to the ARR performance during the quarter? And then Mark, maybe you can elaborate just a little bit more on the customer response. Was this something they were asking for, something you just found to be opportunistic relative to these additions? Thanks.
spk09: Yeah, I'll just quickly hit the ARR. It added about $1 million worth of ARR between the two acquisitions, so pretty immaterial from that perspective.
spk05: And then, Rob, I could talk to you on the other side of it. I'd say two thoughts. One is a little different between the two acquisitions, Rob, on the ERP Maestro, which is really kind of an ERP management, you know, particularly deep in SAP acquisition. That's definitely something our customers have been kind of seeing as part of the overall value prop. At times we had partnered with them and others in the field, and definitely something that we saw as kind of filling out a set of capabilities. We had sort of, I'd call it somewhat shallow capabilities in SAP ERP. We had some capability, but this really gives us a very deep and broad offering there, and that's been very well received. On the other side, with what we did with Intello, that's a little more forward-leaning, so I wouldn't have characterized that as something customers were asking for, per se, for us to approach directly. I would tell you that what we've heard from many of our customers is that's a growing area of concern in general, and so when we announced what we were doing with that technology and how we saw it extending our value prop, it's been very well received, and there's actually some really nice momentum we see building in the field on that. Great, thanks. Thanks, Rob.
spk01: The next question is from Hamza Fadarwala from Morgan Stanley. Please go ahead.
spk10: Hey, guys. Thank you for taking my question. Just to follow up on Rob's question around the inorganic impact, was that $1 million in ARR for Q1 specifically or just your expectations for the full year as it relates to the recent acquisitions?
spk09: When you think about the full year, think about it adding a little bit more than a point to our growth rate year over year. So within our guidance, a little bit more than a point comes from the two acquisitions. The way we calculate ARR, we're taking the write-down into account. And so right now, just having closed the acquisitions, there isn't a ton of ARR in Q1 from those. There's a little more by the time you get to the anniversary, but pretty minimal either way you look at it.
spk10: Got it. Thanks for the clarification. And then, Mark, just my second question for you. I was wondering if you could dig into a little bit around the demand that you saw between existing customers versus new customer business this quarter and kind of if you could speak to the pipeline that you're seeing in Q2 and sort of the back half.
spk05: Yeah, I think in general, I guess some of the short answers, both are very strong. You know, we have a very strong set of motions for both new acquisition of customers, and we're pleased with the number that we added this quarter and kind of where they are, kind of some very large, impressive brands, unfortunately most of whom still don't allow us to use their name publicly. But there's good momentum in large and midsize enterprise accounts that we're very happy with. But I think partly back to Rob's question on the acquisitions and just some of the additional products we brought to market organically in the last year, we're seeing a very strong kind of upsell, cross-sell motion in a lot of our accounts. So both the performance in Q1 and the pipeline looking forward are quite strong in both kind of new account capture as well as additional expansion over time. So both motions are very good. All right. Thank you. Thanks, Tom. Thanks.
spk01: The next question is from Brian Essex from Goldman Sachs. Please go ahead.
spk04: Hi, good afternoon, and thank you for taking the question. I was wondering if maybe you could dig in a little bit to how things are progressing through the channel, channel expansion, expansion in Europe, particularly relative to your initial expectations in the beginning of the year.
spk05: I guess, Brian, just to clarify, kind of channel globally or particularly both kind of focused a little more on Europe, just so I'm clear?
spk04: Yeah, both. Both globally as well as specifically detail around Europe and expansion of Europe. Okay. Got it.
spk05: Thanks. On the channel thing, just kind of a reminder that we still spend a lot of energy on the systems integrator projects. quote-unquote channel, but as everyone knows, that doesn't necessarily imply always a resell of products. So we do a lot of business that's very heavily influenced and sometimes even uncovered by our good partners in that realm, but those are still sale point contracts. And those partnerships are very strong, really good momentum with the big SIs we've worked with for years, and frankly, some good momentum with some of the ones we've worked less with over the last 10 years. And that's true globally. And then particularly in Europe, as we all know, Europe tends to have a pretty strong channel motion. We have added a fair amount of capacity to our sale point sales force over there in the last few years. And we're seeing really good production in some of the core markets we care the most about, particularly strong in some of the northern and western European countries. So in general, we feel good about that. We feel good about the momentum we're seeing in Europe. You know, Asia continues to be a stronger contributor off a small base, obviously, that we're actively growing over time. But, yeah, all around the globe, pretty pleased with channel relationships, still looking to add more what we would call classic reselling capabilities. We always like to point to our friends at Optif who have been a very strong partner and continue to do a lot of business with us in classic resale fashion. But, yeah, good momentum there, nothing that we're concerned about for sure.
spk04: Got it. And maybe to follow up, I mean, we've heard a number of different vendors this earnings season talk about better visibility into budgets going into the year, particularly relative to last year where it seemed as though budget visibility was pretty minimal. But you've kind of, you know, grown at a pretty robust pace through last year in spite of this. But just in general, from a macro point of view, Any change that you're seeing on the budget side, and is that impacting your ability to, you know, accelerate, you know, integration, sales cycles, you know, accelerate business through the year? Just maybe any thoughts on that would be helpful.
spk05: Yeah, I think, you know, like you guys were watching all the news cycles week to week, month to month, and, you know, there's a lot of noise out there, as we all know. I think in general, Brian, we would still say that the tailwind of Once we got through that initial rattling in March, early April last year, the tailwind has been pretty consistent for us through that last five quarters now, I guess four or five quarters, meaning the confirmation we got from a lot of customers who were in a pipeline cycle back then and have been this year in those pipeline cycles is that this continues to be a high area of focus. Certainly don't know enough about whatever just happened in the pipeline breach, but all we know is that every time something significant like that happens, it does refocus people's attention on the importance of security. And again, good news for us is that identity is largely considered, if not the core, one of the core aspects of security these days, and that continues to put a lot of focus on our area of expertise and solutions providing to our customers. So with all that, we certainly haven't felt any negativity there. I mean, I think You know, budget cycles are always hard to predict ever in the world of enterprises. But generally in the U.S., at least, we get a little more opening up. That does seem to give people a little more confidence about where we're headed. But I don't know that we would say it's, you know, X percent easier than it was this time a year ago or anything like that. It's just, you know, we feel pretty confident in the demand profile because this is viewed as a pretty high priority issue to address.
spk04: Got it. That's pretty helpful. Thank you.
spk01: The next question is from Brent Phil from Jefferies. Please go ahead.
spk02: Thanks. Jason, on the billings number, you were about $6 million short of what the street was expecting. Is that all related to this quicker transition, or was there something else going on behind the scenes that related to the billing shortfall?
spk09: No, Brent, that's really the transition. Keep in mind, though, when you look at billings, it is somewhat different. you know, difficult to parse through that number, given that we've got term license in there as well, which sort of works opposite the way, you know, it used to under 605. But no, our billings and our collections were good. We obviously, you know, to cut to the related topic there, you know, from a cash flow perspective in Q1, we paid a pretty substantial bonus based on our performance last year. But no, billings were you know, simply reflective of the mix shift, really.
spk02: Okay, that's helpful. And Matt highlighted at the analyst day, you know, this transition to solution selling versus, you know, point selling or whatever else you want to call it. And in that move, it seems to be resonating and back to your growth in SaaS at, you know, close to 55% growth for the year and I think 55% for Q1. I mean, it seems like there's there's a lot of confidence that that's paying off when you're guiding to a full year number at that type of growth.
spk05: Yeah, Brent, agreed. And if anything, one of the things we're trying to highlight a little more this quarter is the growing acceptance of SaaS at the higher end of the enterprise market. I think for a long time now we've been saying that the mid to mid-large enterprise class customers have been leaning towards SaaS for quite some time now, and that's fairly typically been our motion for a couple of years. At the higher end of the enterprise market, I'd say even in the early part of last year, we were not feeling quite the same level of shift there. And I think that began to change a little bit more in the second half. And I think we're now seeing some very large, very strategic customers and brands select identity now as their choice. Again, we still find customers who do believe identity IQ for business. REGULATORY OR DATA RESIDENCY REASONS IS THE RIGHT ANSWER, AND WE'RE STILL 100% SUPPORTIVE OF THOSE CUSTOMERS MAKING THAT CHOICE. BUT WE ARE FINDING THAT IN GENERAL THE HIGH END OF THE ENTERPRISE MARKET, AS THEY'VE GROWN MORE COMFORTABLE WITH SAS FOR THIS PARTICULAR ASPECT OF THE IDENTITY LANDSCAPE, WE'RE SEEING SOME GOOD MOMENTUM AT THE HIGH END AS WELL AS THE MID TO LARGE THAT WE'VE SEEN ALREADY. THANKS, MARK. THANKS, BRETT.
spk01: question is from Daniel Ives from Wedbush Securities. Please go ahead.
spk11: Yeah, thanks. In terms of just what you're seeing in the subscription, are you seeing from the sales side just a number of deals that were even more pull rather than push and one that just actually just want to get accelerated on the subscription side? Is that something you're seeing as well?
spk05: Yeah. That's a little of the last bit of the question. Did you get that, Jason?
spk09: Yeah, I think it broke up a little bit on the description model enabling, you know, more of a whole self-service. Oh, look, you know, I think I think it it is the way that that customers prefer to buy today. So I think it removes some friction. You know, I think I don't know that it's changed the sales dynamic necessarily to the extent that we would call it flipping from push to pull. I think, look, broadly speaking, there is there is a pull in our market right now, right? There's a growing awareness that customers need identity security and that they may try to get it from someone else, but mostly they view us as the leader as we are. And so there's a clear pull there from that perspective. But net-net, I would say that the subscription model is helpful, but maybe not game-changing from a deal perspective.
spk05: I agree. Yeah, I think it takes friction out of the cycle less than it creates new demand.
spk11: Great. And just kind of like a little follow-up, like when you used to have the success that you're finding here, has it basically just made sure the team determined just rip the band-aid off, just go through this quick? I mean, we've seen others, you know, obviously security, then there's be real successful in this. Can you just talk about that instead of the The slow transition maniacal focus on quarters and then two years later still going through it.
spk05: Well, yeah, I think as we've said in a couple settings, I feel like it is difficult to separate some of these factors. We feel like the three biggies we like to point to are that the market demand for both, you know, our core offering identity security, you know, we're kind of the way we're referring to governance and admin now. The demand has increased over time. The capabilities of our product have increased over time, giving more of those mid- and large-size enterprises comfort that the SaaS offering can meet their needs. And then lastly, yeah, I think in the year and a half coming up on two years that Matt has been here to help kind of guide the go-to-market organization, we're getting even better and more predictable execution and predictability of our sales cycle. So it's a bit of all three things. that we're seeing. It's hard to kind of separate, you know, the percentage of each factor, but all three are very real. Demand, capabilities, and execution. Great. Thanks. Thank you.
spk01: The next question is from Alex Henderson from Needham. Please go ahead.
spk12: Great. Thanks. I was hoping you could talk a little bit about the sequential increase in costs associated with the acquisitions. Just to give us some sense of how much we should be putting into R&D, sales and marketing, G&A, the OPEX lines due to the two acquisitions.
spk09: Yeah. So, Alex, this is Jason. We specifically changed our profitability outlook this quarter for the full year to reflect ERP Maestro. And there's about a $5 million impact for the year. Again, Brett KenCairn, Keep in mind that, from a revenue perspective, you know there's an acquisition write down so we're getting less revenue than we might otherwise out of that but. Brett KenCairn, You know that gives you a pretty good sense in tello was done before our last guidance, and so we didn't call that out separately, but think about it in the same ballpark from a size perspective. Brett KenCairn, And for both of them really most of the. most of the expenses going into the R&D line. We don't have separate sales forces for either of those. They're sold by our one and only sales force. And there'll be some marketing work that goes on for both of those products. And obviously, there's some G&A in the background. But really all the resources that we added and are adding are really focused on the product side of things.
spk12: So just to be clear, if it wasn't for the Intel acquisition, your profitability would have been unchanged? Or should we assume that your profitability would have changed one way or the other, exclusive of the deal, and the deal is plus what the change was in that pie, because it's not clear what the addition is or what the baseline would have done excluding it. Can you just parse between those two a little bit? Because that's the crux of the question.
spk09: Yeah, so we maintained our revenue outlook, and I can tell you that there's very minimal revenue contribution from ERP Maestro. And we changed our profitability outlook by $5 million. essentially 5 million more of operating loss, which essentially telling you that there's around 5 million of net expense from that deal. It's not exact. We gave a guidance range that has round numbers in it, and it wasn't exactly that round number, but that's the vast majority of that change.
spk12: Okay. Thank you. If I could ask a second question, then going back to the integration and the shift to subscription and cloud orientation. Can you talk a little bit about to what extent you're seeing any improvement in the selling cycle? Is the less friction and the more comfort with the large enterprises and the subscription business and SaaS business resulting in any shortening of your cycle time with deals or any change in deal sizes? Thanks.
spk09: So a few questions there. Net-net, I think the short answer is not really. The longer answer is actually our deal sizes have been getting a little bit bigger. Our sales cycles have been getting a little bit shorter. I would put most of that, though, to execution, right? That As Matt is tuning up the Salesforce and as the entire team is learning how to do what we do at scale and how to do it repeatedly, we're focusing on execution process, and that leads to shorter deal times. Not all of it is on our side, of course, but the things that we can control, we're controlling better than we have before, and so that's improving things. I think that the SaaS and cloud effect – Kind of like we talked before about what that does to the deal momentum, I think it's a removal of friction, right? That removes a couple of things that the customer might otherwise have to do. But I would attribute more of our improvement in deal size and our improvement in deal cycles to intentful changes that we've made to try and drive drive those outcomes.
spk12: Great. That's a very, very clear answer. Thank you very much.
spk09: Thanks, Alex.
spk01: The next question is from Andy Nowinski from DA Davidson. Please go ahead.
spk00: Hey, thanks for taking the question. This is Hanon for Andy. You mentioned back at the analyst day that SAS gross margins have been improving. And how are they this quarter? And do you expect to break out SAS margins in the future? Yeah.
spk09: They continue to be strong. We're not planning to break those out. I don't think it at this point would really add to the picture. You know, we're also keep in mind that, you know, we're still rapidly growing that business and adding to the number of products that we have that are SaaS-based. And despite that, continue to see good margins there. I think it's We're already in a good place, but there continues to be good momentum on our side based on the scale that we're growing and the changes we're making to our own operations.
spk00: Great, thanks. And just one follow-up on an update on how the new hires and added capacity to the sales force have been ramping. At the analyst day, you mentioned that the solution-oriented prescriptive selling process should help them ramp a lot faster. Just wanted to check in on that.
spk05: Yeah, good question, Hannah. They're definitely coming along well. We've done a lot of investment in our wholesales enablement infrastructure from people to tools to ways we help folks get onboarded quickly. We've found that as we've hired a lot of folks who came from a very strong SaaS background, their motion and comfort level in selling a SaaS enterprise solution is quite helpful and enables them to hit the ground running pretty quickly. So, yeah, generally, like Jason said, kind of seeing overall good improvement in sales cycles and average selling and, I guess, notably in what Matt refers to as participation, right, the kind of proportion of our team that's bringing in at least a deal every quarter. That's something we're also tracking, and it's trending well.
spk00: Great. Thank you.
spk05: Thank you.
spk01: The next question is from Joshua Tilton from Barenburg Capital Markets. Go ahead.
spk13: guys thanks for taking my questions my first one uh has to do with the arr guidance i believe that it implies that uh h1 net new arr accounts for a much larger portion of the annual net new arr relative to the last two years so how should we think about this is this just because you're you're doing more sass or that sass is becoming a larger portion of the business uh any color there would be helpful i think joshua you should probably think about it as that is the guidance that we've got
spk09: Right now, we obviously are very pleased with what we've done in the first half and feel incredibly positive. Well, first half, sorry. We haven't done the first half yet. Very pleased about what we did in the first quarter and feel very good about the rest of the year and think that we can keep delivering strong ARR growth.
spk13: All right. I appreciate the preview for next quarter. And then my follow-up. Would it be possible to maybe get a sense of the revenue mix between term and perpetual in the on-premise business? Or maybe just, you know, what was recurring revenue as a percentage of total revenue in the quarter?
spk09: So I think I mentioned in the script that over 70% of our new sales were subscription-based. In terms of, it's a little hard to answer in terms of revenue. I mean, revenue, we have subscription revenue on the face of the income statement, right? So that sort of is the answer. I think If the question you're getting to is how much of our sales are subscription-based, well, that's the answer. More than 70% this quarter. And if you remember from the analyst day, we're expecting to effectively be almost all subscription-based next year, holding out, you know, potentially a small bit of room for stragglers, so to speak, right? But effectively 100% subscription, you know, by Q1 of next year.
spk13: Thanks, that was helpful.
spk01: The next question is from Yoon Kim from Loop Capital. Please go ahead.
spk06: Thank you. First, congrats on a solid bookings quarter. Mark, you mentioned one large deal in your prepared remarks that included machine identities. Can you talk about how common is that to include those machine accounts in deals today? What is a typical pricing lift or ARR uplift when you include those machine accounts in your deals? And are you able to charge the same pricing as the actual human user or is it much lower? Just kind of some questions around the pricing around that. And then is this something that represents potentially a meaningful add-on sales opportunity to your existing customers?
spk05: Okay. Hey, Yoon. Okay, it's not a four-part question. I'm going to do my best to unpack all four parts. I think in some ways, yes, we are seeing it more common that our enterprise class customers have, I'll say this, some flavor of non-human identities, right? We're not sure what the right term is in today's market, but there is robotic processes that are non-human identities, right, where there's a software bot that's sort of emulating the behavior of a human. There are true historical machine identities, things like systems and service accounts that actually represent an actual physical machine. There are new IoT types of devices, some of which are sophisticated enough that they also kind of mimic the behavior of an identity. And so there's a collection of different types of, quote, machine identities out there, and some flavor of that is fairly commonly being discussed in a lot of our deals now. It doesn't necessarily mean it's going to happen at the initial sale time, It might be something the customer looks to come back and bring along in a subsequent additional sale, but it's certainly a topic that comes up a lot. So I think that was kind of question part A. I think, you know, part B is do we charge the same for that as for human identities? Generally, no, but it does vary by what exactly is happening in that customer's environment and the volume of those and how the volume of those compare against the human identities. You know, we have a We have a fairly flexible approach for customers sort of getting into this realm and don't always know exactly how they're thinking about these new flavors of identity that are not people and how they think about that. So it definitely does represent, we believe, certainly over the long haul, I think the third part of your question, over the long haul, does this represent an expansion of the opportunity landscape? We think it does. You know, we've said for a long time that the identities we manage for a given enterprise, A, aren't limited to their employees because there's a lot of non-employee humans, contractors, partners, et cetera, that we can often, you know, receive licenses and compensation for. And now there are non-human identities that will also be part of their view of their identity landscape. So, yeah, we think it just continues to add to the size of the potential market.
spk06: Just want to make sure, is this – product, a SaaS product, or is it both SaaS and on-prem product?
spk05: This particular example we talked about was, I think, for SaaS, but in general, yes, we are handling various flavors of machine identities with both identity IQ and identity now.
spk06: Okay, great. And Jason, very easy question for you. I think you're getting some tougher questions tonight, you know, obviously the model shift going on, but What are the dynamics you're seeing on the contract length for the SAS deals, and are you able to maintain that three-year duration? And also, if you can remind us the billing frequency of the SAS deals.
spk09: Yes, Yoon. So the term lengths for SAS deals have been pretty standard. New deals are typically three years. We actually see some customers who want to do longer deals. give an incentive to do that, but customers sometimes want to sort of lock in the deal. And so sometimes we'll do a four or five year deal. We don't do new deals that are shorter. There are occasional times when an existing customer is co-terming with their existing deal. And so an upsell might be shorter than three years, but new deals are three years or longer. Billing for SAS is almost always annual. You know, no, they're always annual. Trying to think if we've done any that are, you know, quarterly, but I'm really aware.
spk05: If they prepaid up front, which is very, I guess we wouldn't bill, right? We don't really take that with any. Yeah, not a standard thing.
spk06: All right, great. Thank you so much, guys. Thank you.
spk01: This concludes the question and answer session. I would like to turn the floor back over to Mark McLean for closing comments.
spk05: Thank you very much, Operator, and thank you to everyone who joined the call today. Again, a shout-out to our teams who continue to persevere and deliver really, really strong results through still somewhat challenging times. And, again, we have a team in India. As so many tech companies do, our hearts go out to the folks there. It's been a pretty rough road for those folks, so we're continuing to think about them and wish them well. And thanks for everyone's attention. We appreciate your interest. Thanks for joining the call.
spk01: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer