SailPoint Inc (SAIL) 2017 Q4 法說會逐字稿

Thank you for joining us today to discuss the results of SailPoint's Q4 2017 and full-year 2017. (Operator Instructions). Following this conference call, a replay will be available until midnight on March 7, 2018. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Harding, SailPoint's Vice President of Financial Planning, Analyst and Investor Relations. Mr. Harding, please go ahead.

Good afternoon and thank you for joining us to discuss SailPoint's fourth-quarter and full-year 2017 financial results. Joining me today are SailPoint's CEO and Cofounder, Mark McClain, and SailPoint's Chief Financial Officer, Cam McMartin.

Please note 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 investors section of SailPoint.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. And now I'd like to turn the call over to Mark McClain.

Thanks, Josh, and thank you to everyone on the line for joining our first ever earnings call. I'm pleased to share our strong results across all key financial measures for both the fourth quarter and full year 2017.

Our fourth-quarter revenue grew 53% year-over-year to $67.8 million. For the full year, our total revenue grew 41% to $186.1 million. And we delivered both profitability and positive cash flow.

Since this is our first call as a public company, I'm going to spend a few minutes on the SailPoint story so that new investors and analysts can better understand the key drivers for SailPoint's growth and strong financial results. Then I'll turn things over to Cam who will review our financial results in much more detail.

SailPoint is the leading provider of enterprise identity governance solutions. Our fundamental belief is that in today's enterprise, identity is power. Our growth is rooted in our ability to help our customers efficiently and securely govern and manage the digital identities of their employees, contractors and business partners.

To do so, we created our open identity platform, which helps organizations efficiently manage the life cycles of their identities while providing critical visibility into who currently has access to which resources, who should have access to those resources and how that access is being used across complex hybrid IT environments, whether comprised of on premises, cloud or mobile applications.

In the midst of their digital transformation, enterprises have seen their attack surface expand, allowing well-funded cyber attackers to significantly increase the frequency and sophistication of their attacks. Hackers frequently target users or the identity vector because they can exploit those identities to gain access to high-value systems and data all while concealing their activity within an organization's IT infrastructure.

Considering the number of identities an enterprise may have, each of which may be accessing a myriad of applications with various levels of permissions, an enterprise could have millions of points of access into their systems. These points of access are each an exposure point and it only takes one abuse of identity to compromise the entire organization.

At the same time, governments and regulatory bodies have increased efforts to protect users and their data with a new wave of regulatory and compliance measures that bring severe penalties for noncompliance. One of the most significant of these is the EU's General Data Protection Regulation, or GDPR.

These market dynamics around risk and compliance are contributing significantly to SailPoint's growth because enterprises around the globe are struggling to efficiently manage and secure their digital identities. Our open identity platform helps enterprises see everything, govern everything and empower everyone. That is why Gartner, Forrester and Kuppinger Cole have all named SailPoint a leader in their identity governance market reports.

As organizational complexity continues to increase, our identity platform has become a critical foundational layer of a modern cyber security strategy for our customers. In combination with our technology partners, we help create identity awareness across our customers' IT environments by integrating with a broad range of enterprise software and security solutions such as access management, security information and event management, privileged access management, IT service management and others to provide and share valuable identity-related insights.

I'm pleased to note that our most recent technology partner is Okta, a leading access management vendor, joining CyberArk, Microsoft, Splunk and VMware, among many others in our partner network. SailPoint and Okta will provide a platform-agnostic, integrated, end-to-end identity solution that delivers both the convenience of secure user access and the control of identity governance required by organizations with heterogeneous IT environments.

At SailPoint, both our product offerings and our go-to-market model are enabling us to address a large and growing opportunity. For large enterprises, which we define as those with more than 7,500 employees, we go to market with a direct salesforce while gaining further leverage from our strategic partnerships with global systems integrators like Accenture, Deloitte, KPMG and PwC. We believe this large enterprise market is ripe for disruption as organizations look for modern, flexible solutions to address their increasingly complex hybrid application infrastructure.

For midmarket enterprises, which we define as those with 1,000 to 7,500 employees, we go to market with a combination of territory managers, inside sales teams, resellers and boutique systems integrators. This is largely a greenfield opportunity where either no solution exists or we are replacing homegrown applications or highly manual processes.

We ended 2017 with 933 customers, up from 695 at the end of 2016. Our customers come from a broad set of industry verticals and we are growing our presence internationally. During the quarter, the demand trends driving our business were strong and sustainable. We closed many large transactions with new customers and had healthy upsell and cross-sell activity from our existing customers.

Many of our customers continue to expand their usage of SailPoint's solutions, managing more identities and applications while also expanding the number of modules and products. This is true for both of our two identity governance solutions -- IdentityIQ, which is deployed in a data center or a public cloud, and our SaaS offering, IdentityNow.

In addition, we are gaining traction by extending the value proposition of both IdentityNow and IdentityIQ with SecurityIQ, which provides identity governance for data stored in files and folders, such as those in SharePoint or Dropbox.

While we have a large, growing customer base, we believe there's an even larger opportunity in front of SailPoint. Globally, we believe our addressable market consists of more than 80,000 companies having at least 1,000 employees. Of these companies, approximately 65,000 are located in countries where we have customers today. As a result, we believe we have penetrated about 1% of potential customers in our existing markets. In other words, we've barely scratched the surface in terms of our market opportunity.

We have identified a few key areas that influenced our success in Q4 and will drive our growth in 2018 and beyond. The first growth opportunity for SailPoint is to further penetrate our existing markets. We are investing to expand our sales teams and provide additional vertical solutions to address more use cases for our customers. We are already seeing the impact of these investments. In Q4 2017 alone, we signed five of the largest 15 US federal agencies as new customers. One of these agencies was struggling to provision different types of accounts, specifically to contractors who are moving into and around the organization. The agency purchased IdentityIQ, IdentityNow and SecurityIQ to establish a single view into user access privileges to securely provision access to both full-time employees and contractors and to govern access to sensitive data stored in a variety of file systems.

We continue to have success replacing legacy identity applications, which we've done at more than 250 of our current customers. A recent example is a Fortune 500 manufacturing company with 70,000 identities that was frustrated with its failed legacy identity deployment. The organization chose IdentityIQ as its identity governance solution moving forward in part because of its ability to integrate with its existing systems, including CyberArk for privileged access management and SAP for applications.

Regarding selling IdentityNow to midmarket enterprises, our recent example from Q4 is an e-commerce organization that was spending an entire month each quarter preparing for Sarbanes-Oxley audits using a homegrown solution. This cloud first company wanted a true multitenant SaaS option that still provided comprehensive identity governance capabilities. They'll be using IdentityNow to streamline their quarterly audits as well as automate their identity processes related to users' lifecycle events.

Second, we will extend our global presence. We are focused on expanding our presence around the world through both direct selling and partners to increase our footprint internationally, including entering new countries in both Europe and Latin America.

Third, we will expand within our existing customer base. Many of our customers started with a single use case or project and have the potential for significant expansion over time as we deliver value and help them identify new use cases. An example is one of the largest banks in Australia, which has been a long time SailPoint customer. Using IdentityIQ, the bank was able to reduce risk related to application access. This success led the back to expand its identity program last quarter with the addition of SecurityIQ to govern its large volume of data stored in files and folders.

Fourth, we will leverage and expand our partner network. We believe that by working with our network of systems integrators, resellers and technology vendors, we can increase our reach and effectiveness. In the fourth quarter, over 80% of our new customer transactions involved a partner, illustrating the effectiveness and impact of our partner ecosystem.

Fifth and finally, we will further invest in our platform and products. We believe we have established a reputation as a technology leader and innovator in identity governance and we intend to strive for continued leadership in this area. IdentityAI, our recently delivered identity analytics solution, which leverages artificial intelligence and machine learning, is a great example of this.

As we work to capitalize on these growth opportunities we believe SailPoint's success is grounded in our culture and our people. We have built a team that we believe is unmatched in our industry, with very high retention rates and deep identity expertise. I'm happy to report that our employees voted SailPoint a Best Place to Work for each of the past eight years while Glassdoor named us both the fourth Best Place to Work in the US for small businesses in 2017 and an Employee's Choice Award winner for 2018.

In summary, 2017 was an exciting year for SailPoint. We delivered a combination of strong top-line growth, profitability and cash flow, extended our platform through the introduction of new product families and expanded functionality, invested in our direct sales teams, go-to-market and technology partners, and completed a very successful IPO. We are optimistic about our future and confident in the foundation we have built to support our growth in the years to come. Now, let me hand it over to Cam.

Thanks, Mark. I would also like to welcome all of you to our first earnings call as a public company. We are very pleased with SailPoint's financial performance for the fourth quarter and full year 2017. Before discussing our results, I'm going to provide some background on SailPoint's financial model given this is our first call as a public company.

We generate revenue through a combination of perpetually licensed software and associated maintenance for on-premises deployment and on a subscription basis for our SaaS offering. Professional services are delivered across all of our product offerings and billed primarily on a time and materials basis.

From a product perspective, IdentityIQ and SecurityIQ are typically sold as perpetual software license, which includes one year of standard or premium maintenance. IdentityNow and our just-released Identity AI are delivered as a subscription service with a typical contract length of three years and cash collected annually up front. Our subscription revenue line includes both maintenance and SaaS revenue.

With that background, let me turn to our Fourth-quarter performance, which was marked by meaningful revenue growth and profitability. The fourth quarter is typically seasonally strong for SailPoint is it is for most enterprise software companies. We also benefited from a combination of strong cross-sell and upsell activity, some larger deal sizes and higher than normal transaction close rates. This drove roughly half of the strong outperformance for the quarter, with the other half related to atypical events that I'll describe in a moment.

The net result was an acceleration in total revenue growth for the fourth quarter particularly in the license revenue.

Total revenue was $67.8 million, an increase of 53% over Q4 of 2016. Looking at the individual revenue lines, license revenue was $36.7 million, an increase of 65% year-over-year. In addition to the strong deal activity I just referenced, we were able to recognize approximately $4 million in license revenue from contracts signed in prior periods where we had product delivery requirements that were satisfied in the fourth quarter.

While most of our perpetual deals are recognized in the quarter in which they are assigned, delivery milestones and other contractual requirements require us to defer revenue recognition from time to time.

Subscription revenue was also strong in the fourth quarter at $21.2 million, up 51% year-over-year. This is approximately 10 percentage points higher than our full-year subscription revenue growth rate due to nearly $1 million of maintenance catch-up in the quarter, which is nonrecurring in nature.

In addition, subscription revenue benefited from IdentityIQ's renewal rate remaining above 95% in 2017 and increasing SaaS revenue contribution throughout the year. Services and other revenue was $9.9 million, up 23%. Our services business was strong as certain customers moved projects to full completion before year-end, which was sooner than we had expected.

Our services team is focused on the upfront services elements of implementation projects, which lead to more successful deployments and ultimately stronger retention rates and expansion opportunities. Overall, we expect to continue to push more of the implementation work to our partners, who are an important part of our ecosystem and would expect services to grow at a slower rate than the overall business.

During the quarter, we had broad distribution of deals across verticals and strength both across our direct salesforce and with our channel partners. On a geographic basis, the United States contributed 73% of Q4 revenue and 72% of 2017 revenue, with the rest of world making up the remaining 27% and 28%, respectively. This compares to 66% in Q4 of 2016 and 70% for full-year 2016 for the United States and 34% and 30%, respectively, for the rest of the world.

As I transition to the remainder of our income statement, I want to note up front that unless otherwise stated all references to expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted just before this call.

In Q4, license gross margins remained very high at 99%. Subscription gross margins were 78%, an increase from 76% in Q4 2016 due to increased scale of our SaaS offerings and improved maintenance support efficiency. We also received some benefit from the nonrecurring maintenance catch-up that I referenced earlier.

Services gross margins were uniquely strong at 38% due to an accelerated volume of business in the quarter. The result is total gross margin for the quarter of 84% compared to 80% in the same period last year. It is worth noting that Q4 gross margins are seasonally strongest due to an increased contribution from license revenue.

Turning to our operating expenses, sales and marketing expense was $25.8 million for the fourth quarter or 38% of our total revenue. This compares to 35% of total revenue in the year-ago period. We continue to make investments in support of our direct sales initiatives, channel partner relationships and international opportunities in order to drive long-term growth.

During the quarter, we also had higher sales commission expense, reflective of the strength of our sales performance in the quarter and over the course of the year. Research and development expense was $9.4 million in the quarter or 14% of total revenue. This compares to 15% of total revenue in the year-ago period.

Our investments in R&D are focused on expanding our innovation, strengthening our open identity platform, extending our leadership in identity governance and driving greater adoption across our product portfolio.

G&A was $4.8 million for Q4 or 7% of total revenue. This compares to 5% in the fourth quarter of 2016 and includes costs associated with building out the infrastructure to operate SailPoint as a public company.

Overall, our operating income was $16.7 million in Q4, representing an operating margin of 25%, which is consistent with the year-ago period. It is worth noting that our fourth quarter typically has a much higher operating margin than the other quarters of the year primarily due to the seasonality of our license revenue line.

Net income was $13.1 million for the fourth quarter of 2017 or $0.17 per diluted common share compared to net income of $7.9 million or $0.11 per diluted share for the fourth quarter of 2016. Adjusted EBITDA was $17.1 million in Q4 of 2017 compared to $11.5 million in Q4 of 2016.

Total deferred revenue for the fourth quarter was $83.1 million, up 51% year-over-year. Although our deferred revenue is comprised predominantly of maintenance from perpetual software and contributions from SaaS billings, at times, there can also be more meaningful contribution from licenses and service arrangements.

For instance, I noted earlier that our fourth-quarter license revenue benefited from approximately $4 million related to contracts that were closed in prior periods. A portion of that $4 million was in our deferred revenue when the contracts were initially signed.

Over the long term, we believe that deferred revenue will reflect the long-term growth opportunity of our subscription business. However, we fully expect there will be quarterly fluctuations based upon the mix of our business, as well as the timing of moving parts within this balance sheet account. Therefore, it is important to stress that we do not believe that calculated billings is a meaningful indicator of the health of our business.

During the fourth quarter of 2017, we generated positive cash flow from operations of $16.1 million compared to $2.4 million in Q4 of 2016. We ended the quarter with 806 employees, a 24% increase from 649 at the end of the fourth quarter of 2016. We have continued to increase our headcount to grow our business and realize productivity improvements as we scale.

Now I will briefly recap our full-year results. In 2017, total revenue was $186.1 million, increasing 41% year-over-year. License revenue increased 46%, subscription revenue increased 44% and services and other increased 25% all compared to 2016.

Non-GAAP operating income was $23.3 million, an improvement compared to an operating income of $12.4 million in 2016. Non-GAAP earnings per diluted share was $0.13 in 2017 compared with earnings of $0.07 in 2016. In 2017, adjusted EBITDA was $25.5 million compared to $15.1 million in 2016.

We exited 2017 with $116 million in cash and cash equivalents, up from $18.2 million on December 31, 2016. The increase was primarily driven by $172 million in net proceeds from our initial public offering offset by the paydown of approximately $90 million of debt. During the full year 2017, we generated $21.9 million in cash from operations compared to $6.5 million in 2016.

Now I'm going to turn to review our guidance for the quarter and the year. It is worth noting that our top priority from a near-term perspective is investing for growth to support our go-to-market initiatives, including growing our direct salesforce, expanding internationally and strengthening our partner network.

In addition, we will continue to invest in innovation. We expect our expenses to ramp coming out of Q1. We believe we have an opportunity to drive strong top-line growth for many years while continuing to deliver non-GAAP operating income and positive free cash flow. This balanced approach has served us well historically and we believe it is the best way to drive shareholder value.

For the first quarter of 2018, we expect total revenue of $44 million to $45 million. We expect our non-GAAP operating loss to range between $0.5 million and $1.5 million and non-GAAP net loss per basic and diluted share of $0.03 to $0.04. This assumes cash taxes of $400,000 and 86.5 million basic and diluted shares outstanding.

For the full year 2018, we expect total revenue in the range of $220 million to $224 million. We expect our non-GAAP operating income to be in the range of $12 million to $14 million and non-GAAP net income per diluted share of $0.04 to $0.06. This assumes cash taxes of $1.8 million and 93 million diluted shares outstanding.

Considering the significant outperformance in the fourth quarter, let me now provide more color on our revenue mix expectations that we might provide in the future in order to put our first-quarter and 2018 guidance into proper context.

Within our guidance for a strong first quarter, we expect subscription revenue to continue growing at a rapid pace on a year-over-year basis and for it to be approximately flat on a sequential basis, taking into consideration the nearly $1 million of one-time maintenance revenue catch-up that we recognized in the fourth quarter of 2017. We expect services revenue to grow year-over-year, but to decline sequentially by roughly $1 million given that some projects were completed earlier than expected and due to our ongoing effort to push implementation work to our partners.

We expect license revenue to generate healthy year-over-year growth, but decline sequentially due to the natural seasonality we experience in our business and our very strong fourth quarter. Our guidance for the full year 2018 assumes that subscription revenue remains the highest growth component of our revenue, increasing by approximately 400 to 500 basis points as a percentage of total revenue compared to 2017.

While showing solid year-over-year growth, we expect license revenue to decline 200 to 250 basis points as a percentage of total revenue and for services to do the same as we push more services to our partners.

In summary, we are very pleased with the results that I've just shared, the outlook for our business is very strong and we look forward to building a track record of success as we operate in the public market. And now with that, we'll open up the call for Q&A.

(Operator Instructions). Melissa Gorham Franchi, Morgan Stanley.

I'd like to just maybe parse through the drivers of the outperformance this quarter. It was helpful to hear about the revenue that was recognized sort of one-time, but you also noted a variety of different factors that drove the outperformance, like large deal transactions, healthy cross-sell.

So I'm just curious to what extent do you think this was indicative of a Q4 budget flush around large deals. Or is this inflection indicative of something that's happening from a demand perspective around identity governance?

Thanks, Melissa. This is Cam McMartin. Good to have you on the call. I think as we highlighted in the call script, two variables really drove the outperformance in the quarter. One is the unique one-time nature transactions that I highlighted. But I think as you highlight, there are I think some good signs in the quarter. I would say we felt like the performance of the business was really quite strong relative to large deal sizes or large deal transactions. We saw good cross-sell and upsell activity, especially as it relates to selling SecurityIQ along with IdentityIQ.

We saw an increased transaction close rate in the quarter relative to our historical experience. And I think that's indicative of a bit of budget flush behavior. We certainly felt like there was strong activity overall in the buyer market, if you will, relative to them wanting to get the dollars spent in the quarter.

So we saw that as a very strong and very sustained set of variables in the fourth quarter. I think overall relative to the opportunity, we continue to see, as we've seen for a number of quarters now, good demand behavior, good demand indicators for identity governance. It's a strong trend that we've been seeing. It's now another year in a row of north of 30% growth on a revenue basis. It's good performance across both our on-premise as well as our SaaS product, so we're quite pleased with the results of the quarter.

Okay, that's helpful. And then I just want to ask about IdentityNow. I know you're not breaking out the contribution relative to the overall mix, but I'm just wondering how it performed relative to your expectations. And then, Cam, as we're thinking about the guidance for FY18 and you're talking about license revenue growing slower than the overall total revenue, is that in part reflective of the fact that you think some of the license will be shifting into IdentityNow?

Yes, so two questions there, Melissa. First of all, we were quite pleased with the performance of IdentityNow from both a selling and if you will spinning up new customers from a revenue transaction perspective in the quarter. IdentityNow is I think beginning to find a good cadence of selling in the marketplace. I think as we've talked about previously, we are getting better at selling it.

The IdentityNow product service offering is focused on the middle market from an enterprise perspective and that for us is largely, as you know, a greenfield market. The customer and target set in that market space historically hasn't used identity governance; tended to be more manual in the way in which they solved the identity governance problem. And so we're pleased with the way in which that business is performing and growing.

As it relates to the second question, yes, I did highlight that, on a contribution mix basis, license (technical difficulty) expect to come down on a total mix basis 200 to 250 basis points over 2017. And that is, in fact, impacted or influenced by the fact that we think the IdentityNow product, because of its success in the middle enterprise market, will continue to grow at a healthy rate and begin to, over time throughout the year, begin to take more of the overall mix of our business.

Okay. Helpful. Thank you.

Walter Pritchard, Citi.

A question for Mark. On SecurityIQ, I know it's sort of first quarter really in the market fully for that product. Can you talk about how you are seeing that going? Is it I assume more installed base attach and what you're seeing competitively in that market? And then just had a follow-up for Cam.

Okay. Yes, Walter, just might be a little misunderstanding. SecurityIQ has actually been in the market for a little over a year with us. That's the one that's focused on -- we used to refer to it as data governance. We're now really using the phrase identity governance for files, basically (multiple speakers).

Sorry, I'm talking about analytics. I'm sorry, yes. The analytics product (multiple speakers).

I just wanted to verify. Okay, so you were really asking about Identity AI, correct, Walter?

Correct, yes.

Okay, thanks. Sorry for the confusion. Yes, no. We just brought that into a GA form for North America market at the end of the quarter and therefore, the end of the year, obviously. And we're just now working with the first customers on that product, and what we're finding is it is getting very, very solid response.

Because it's a machine learning and artificial intelligence product, there's a lot we are learning with those customers as we process their data in real-time. It's a very interesting learning process for us and them as we see what data we can gather both from within our products as well as some of the other data we can pull in from other sources and then use that data to make better decisions around governance.

We explicitly chose long-running, existing IdentityIQ and IdentityNow customers to use that product because they are very familiar with how we approach governance and we're seeing good, strong enhancement to their overall value proposition by using Identity AI. So it's very early, but we are very pleased with how that's going so far. And then you said you had a follow-up for Cam?

Yes, then just to Cam, on the SaaS versus on-prem mix, anything you can tell us about what you're expecting for 2018? And anything changing there in terms of how you've looked at that likely mix play out over the next couple years as you've moved through another quarter here, especially Q4 where you sold a lot of product?

Yes, Walter. First of all, thanks for joining the call. In terms of the overall complement of business, no, I don't anticipate that the mix of business between IdentityIQ, which again is largely focused and serves the large enterprise market, and IdentityNow, which is largely focused on the middle enterprise customer. We don't see that mix changing based upon what we've discussed previously. We think both of those markets are healthy, growing markets. We've got good demand characteristics in that large enterprise market. We continue to have very good success in replacing existing legacy systems. That cadence has been steady and strong for many quarters now.

What I would also say is, and I highlighted this as part of Melissa's question, is the IdentityNow product is performing at a very good rate. It is gathering new customers at a healthy rate. We're implementing those projects on time. I think our field force largely in the territory seller segment of our salesforce as well as reselling partners are getting more mature in the way in which they identify mature and then close transactions.

So we're very pleased with both and believe the opportunity for both to continue to grow at healthy rates is strong for us and therefore, I think we believe that balanced growth story that we've told you previously is still the outlook we would expect.

Great. Thank you.

John DiFucci, Jefferies.

Guys, you put up accelerated license growth in both of the last two quarters. Even after, Cam, you take out the -- even if you adjust -- you shouldn't take it out, but adjust for that $4 million this quarter, the growth rate was -- the last and the second half was double that in the first half from last year.

And I guess from your guidance for next quarter sort of implies license growth declines prior rates or maybe even a little bit below that. I just wanted to make sure, is there anything in the pipeline driving that? Or is it just more being prudent about guidance given the potential budget flush that you mentioned earlier?

First of all, John, good to talk to you. Thanks for joining the call. A couple of things to say. I'll remind you and all the folks on the call that we do have a seasonal business. That is there is a natural cadence or progression, if you will, throughout the year. As you know and we've talked about previously, the first half of the year tends to be less than 50% of our overall selling activity. The second half of the year consistently nicely above 50%. And so there is that natural cadence in the business that we've now established for many years.

And yes, the growth rate in the first half of the year was in fact much stronger overall than -- in the second half of the year than the first half of the year. So we're pleased with that performance. I think it's the result of a combination of a variety of factors that we've talked about previously -- the increasing size of our salesforce, extending our global reach, learning to more I think successfully sell IdentityIQ and SecurityIQ together to solve the broad identity governance question.

I think that guidance is reflective of two factors. One, as we've highlighted previously, in that seasonality pattern, Q1 tends to be our seasonally softest quarter of the year. And secondly, yes, we saw a very strong budget flush activity in the quarter, very healthy, we were pleased with it.

As Mark highlighted, a variety of very good patterns in the overall performance. And so we have reflected in our thinking from a guidance perspective that budget flush and typical seasonality in the business in the way we've guided you for Q1.

Okay. Okay, great. And if I might, a quick follow-up, Cam. That $1 million of maintenance catch-up in this quarter, is that any way related to that $4 million that you were talking about? Or is it something else? Is it -- was there (multiple speakers) renewals?

No. No, John, the renew -- so first of all, the renewal activity continues to be strong, steady and healthy. We've highlighted that again this year we saw maintenance renewal rates above 95%. That's consistent with our historic success in renewing and retaining customers. The nearly $1 million of, if you will, nonrecurring maintenance catch-up is entirely related to that $4 million.

As we highlighted in the prepared remarks, we did have a few transactions where it was a combination of factors, but generally related to the fact that we had deliverables that were required to fulfill the obligations of the contracts that required time to pass, either developing products or acceptance, those types of things. I won't specifically highlight which, but what I'll tell you is is that that maintenance is fully related to that license revenue that I highlighted in the $4 million addition to the fourth quarter.

Got it, got it. Nice job, guys. Thank you.

Matt Hedberg, RBC Capital Markets.

I know it's still an emerging opportunity, but wondering if you can help us think about the percentage of your IdentityIQ base that also uses SecurityIQ. And maybe when you add that to an existing customer, what does that do typically to that customer's spend?

What was the second part of the question, Matt? I got the mix, kind of the penetration rate into the IQ base. What was the second question again?

Let's say an existing IdentityIQ customer adds SecurityIQ, what does that typically do to their spend rate with you?

Okay. I guess on the first part of the question, it's around 10% today penetration. Meaning if you look at the number of IIQ accounts we have today, about 10% of them also have SecurityIQ, which in our minds is a tremendous upsell/cross-sell opportunity for us to go into that base and extend their value proposition, as we said, from how they've traditionally thought of identity governance being focused on application and platform governance to the management and control of file information, especially Word documents, PowerPoint, etc. that are living in SharePoint or Dropbox or something like that.

And we're just finding a lot of customers that recently sort of saw the identity governance problem limited to those structured applications are now really seeing that problem much more broadly and needing to get good controls and governance around that data when it's living in that kind of a format. Often it's the same data. It's SAP financials getting exported to a spreadsheet; same data, just living in a different format. So I'd say about 10%.

In terms of the financials, I'll go to Cam for that one.

Yes, Matt, one additional comment just to follow on from Mark. I think the thing that's beginning to resonate in the market is the combination of selling IdentityIQ and SecurityIQ together. I think in combination, as we've talked about previously, it really does begin to address the full spectrum of identity governance question that large enterprises are facing. And really begins as they fully deploy to address the security needs of the organization, as well as the compliance needs.

Together, obviously, the CISO thinks that is a more comprehensive and powerful answer to the kinds of questions they are being asked to solve for the organization.

So we're pleased with the acceleration that we saw during calendar year 2017 around SecurityIQ. As Mark said, the if you will attach rate expanded into that just about 10% range. So we're pleased with that overall -- the overall acceleration and performance that we're seeing there.

As to the financial effect, the net simple answer is it increases the ASP. As you know, we don't guide or disclose around ASPs. But what I will tell you is that selling in combination, what we're experiencing is that people continue to see strong value in IdentityIQ related to both compliance and lifecycle management. In addition, they're seeing I think and beginning to attach attractive value to data governance for files, SecurityIQ.

We're pleased with if you will the appreciation of ASP when we're selling both together or in fact where we're going back into the installed base with long-time customers and adding SecurityIQ to their installation.

That's great, Cam. And then maybe just a quick one. Even backing out the $4 million of prior period license recognized this quarter, I think license growth was still strong. I think it was about 47%. Can you help quantify if there was any large deal impact in the quarter? Anything abnormal on that side?

We had strong large deal size performance overall, Matt, in the quarter. As you well know, each quarter we have a good complement of large deal sizes. That's been a hallmark of our business now for a number of quarters, a number of years. That spectrum of transactions that we've highlighted for you that we sell between $100,000 and north of seven figure continued in the quarter. I want to highlight that as well. It was a good balanced quarter in terms of the overall contribution of business, but it was a healthy large deal quarter.

I would say, and Mark highlighted that we got, what, five of 15 government enterprises or government organizations and biggest in the quarter. And so we are seeing -- we did see a somewhat higher than normal complement of large deals, but not off the curve. I don't want you to take away from my comment that it was a quarter dominated by large deal sizes.

In fact, if you look at the overall complement of business, it was nicely spread across that spectrum. That's what we focus on. The sales team really does a great job in driving large deals both in terms of new customer or new logo acquisition, as well as follow-on transactions with the existing customer base.

Great. Thanks a lot, guys. Well done.

Rob Owens, KeyBanc Capital Markets.

What was the ending customer count? I didn't know if we heard it correctly or not.

Rob, there was 933 customers (multiple speakers). Yes, up from 695 a year prior, so a little over (multiple speakers).

So I guess a couple questions from that then. If I look at your license success, whether I back out the $4 million or not, curious if that's changing relative to what's coming from new customers versus existing customers.

Rob, I think the shorter answer is no. We've historically had a 65/35 mix that is new logo contribution. If you look at it as a transaction count basis --

Count, yes (multiple speakers).

Count basis, 65% of the transactions in the quarter typically are new logos, 35% are existing customers. That trend really was sustained in Q4. It was plus or minus a few points, nothing off the curve, I would say. We like, as we've said before, we like that complement of new business because as we've established I think, over time, we can sell into an organization some portion of the product portfolio, some number of modules within a productline that get a customer started on their identity governance journey if you will. And then ultimately we can upsell them or cross-sell them over time.

And so we like the opportunity to do that land and expand type activity with the transaction mix. But the short answer is consistent performance this quarter relative to prior quarter trend.

Great. Then if I look at the metrics, it was a record new logo quarter. Maybe you can speak to customer acquisition on that front. Is it IdentityNow that's effectively driving that, but at a lower ASP than maybe what you'd see historically? Were they larger perpetual customers?

We saw really good performance across all product categories, Rob, for the quarter. We had good new customer logo capture across the on-premise product set, as well as the SaaS product set. We were pleased with that mix.

As I said earlier on the call, we really do have, if you will, a bit of a two-market story -- the large enterprise market, which is largely a legacy replacement market, and the mid-enterprise market, which is largely a greenfield market. We're seeing good performance, good traction, good capture in both and that's again consistent with prior quarter trend.

And last one if I could sneak one in. The AR balance, is that a function of the linearity in a perpetual model with a lot closing in the last couple weeks of the quarter? Just curious because it did spike considerably.

Two things to highlight there I think. One is on a dollar AR basis, it did bump up and, yes, we are a back-end-loaded business in terms of the quarter in terms of [month three]. We've been that way. Previously we had very good visibility as we went into the late in the quarter as the pipeline and the closed cadence of that pipeline. But yes, the answer is the AR bump was related to the timing of the AR.

On a DSO basis, we did see good DSO performance. We had a good solid collections quarter. We were pleased with that performance and worked very hard to drive the year-end cash balance and cash flow performance of the business, so pleased with both as it turns out.

Thanks, guys.

Richard Davis, Canaccord.

It's Mark on for Richard today. I had a question on IdentityNow. So from a product perspective, I was just wondering how you're allocating R&D dollars to that product. In other words, maybe what are some of the features that customers are asking for that might not be there currently, which can help drive additional sales in the future?

Yes, I guess a couple things, Mark. Thanks for joining the call, by the way. We have over time continued to fill out as it were the breadth of that productline and we feel very good about that. But most recently we introduced a capability we call access request, which is that business user interface that allows a manager/employee/person to request access directly. As opposed to something being automated based on a job change or a new hire, that kind of thing.

The one that's still coming this year from us is what's called SoD, or segregation of duties. Again, that's been in our traditional on-prem IIQ product for many years now. But again as we move into that middle-market enterprise, we're finding that there are some of those customers that really have that pain point, especially anybody who's public obviously has to deal with that.

So those are the latest things we've rounded out so to speak the IdentityNow product with. But we feel very good about the breadth of that product for fairly sophisticated enterprises. While it's certainly focused on the middle market enterprise, there are customers north of 15,000 employees that use IdentityNow, so it can certainly handle the fairly aggressive robust needs of enterprise companies. But that's the most recent functionality we've added to it.

Okay, great. And just one more follow-up. What are you seeing from some of your early renewals for IdentityNow in terms of expansions, either anecdotally or even if you can wrap some numbers around it?

Richard, this is Cam.

Mark.

I'm sorry (multiple speakers). So the net answer is we're seeing good renewal and upsell activity. As you know, this is a product offering in IdentityNow where we have sold on a three-year contract basis. As we went into the market, we consistently sold that way. 2017, late in the year, was really the first quarter we saw or the first part of the year where we saw a cadence of renewal activity that was measurable.

And the answer is good renewal rates. It's still the law of small numbers, so I won't specifically address the renewal rate at this point. We'll watch that as we go through time, but we are seeing in those renewals customers coming back and adding one or two modules depending on where they started into their overall complement of services so that they're addressing that broad-spectrum IGA need.

I think that's been the good news about this solution set is people recognize, as Mark mentioned, that adding access request extends the value of the proposition, adds to the capability of the organization to more directly control their identity governance needs.

We have seen -- again, it's the law of small numbers so I don't want to guide you to the belief that we've got enough data here to have a strong trend, but the early indications have been good overall additions to the customer set in terms of new modules that have been added since they first subscribed.

Perfect. Thank you so much.

Shaul Eyal, Oppenheimer.

Congrats on a strong set of results and guidance. Mark, from a big picture perspective, I know it's a topic you might have discussed in the past, there's some debate about whether or how quickly the cloud will be taking over on-premise infrastructure, physical infrastructure.

Firstly, this thing -- it's (inaudible) for a good five, seven years where we will see some hybrid deployments or hybrid infrastructure will be characterizing the landscape. But what's your sense and what are you hearing from your clients in that respect?

Well, Shaul, thanks for joining, first of all. Good to talk to you. I will split this to make sure we're not confusing anyone on the call because we have learned to be very careful in answering questions about the cloud between the management of cloud for our customers, which then cloud can be a traditional application that's been migrated to the cloud, meaning AWS or Azure or something like that, or our delivery of our solutions on-prem or in the cloud. So let me address those separately real quick.

On the first, it is 99% probable that no matter which of our products we are deploying into a customer, we are managing some level of cloud application. In the mid-enterprise, it tends to be almost all cloud these days by lots of SaaS and some amount of cloud. As you move up into the large-scale enterprise environments, of course, they have got some cloud applications and/or SaaS applications. But frankly the bulk of their infrastructure is still not operating in the cloud. That's just typically what we see and over time we do see both sets of customers migrating more and more things to cloud. Again, not necessarily always SaaS, but cloud. We certainly feel pressure to manage things that are outside the data center, so that's the target systems as it were, right?

The other part of the question I assume you were driving at was how customers want to consume our solution. Then again, given that IIQ has traditionally been deployed in the data center, obviously IdentityNow is a SaaS offering, the simple division was that one up until recently.

One of the things -- a trend that we're seeing emerge is people, particularly mid to larger scale customers, that want the capabilities of IdentityIQ but would prefer not to deploy the solution in their data center. And so our answer to that is to do two things. One is to ensure that IdentityIQ -- and by the way, SecurityIQ as well -- run very well in a cloud environment, meaning an AWS or an Azure. So we have put a fair amount of engineering effort and are continuing to do that to ensure that when a large-scale customer says I want IdentityIQ or SecurityIQ but I want to deploy it at Amazon or Azure, it's going to perform flawlessly, have the ability to be managed and tracked and all of that good stuff.

The other thing we're doing and a number of our key partners are offering this now is a managed service provider option, where a strong SI, like an Accenture or a Deloitte or a PwC or a KPMG, will come to a large enterprise customer and offer to run that productline from SailPoint as a managed service for the end customer.

So we're finding a lot of movement, to your point, Shaul, out in the market around cloud. Again, just to summarize, we almost always are managing cloud applications, SaaS or cloud deployed applications, and we're still seeing mid-market customers tend towards SaaS, larger market customers tend toward IIQ. The new trend is that some of those large customers want to deploy IdentityIQ outside their own data center.

Got it. No, thank you for that elaborated answer. That was great. And as you think about 2018 unfolding, what's the hiring plan for the year? Mostly sales and marketing, more balanced with R&D? (inaudible) I don't know if you can even quantify (inaudible).

Shaul, this is Cam. Good to speak with you. The answer is really balanced hiring. We always start from a priority perspective. In terms of our business focus as I highlighted in my prepared remarks, we are focused on this company as being a growth-first company. That is we want to grow the top line. We see a very large opportunity to capture share in the market in both the large and middle enterprise market, and so that's what we're focused on.

As we plan for each fiscal period, we think about first making sure we're putting in place the resources and capacity across direct sellers, systems engineers and partner managers, the resources necessary to keep top-line growth healthy.

We then prioritize behind that on a -- to the engineering and development organizations to make sure the innovation engine is well-funded across each of our product families. That is something we obviously spend a great deal of time on.

And then the marketing organization in support of that and then G&A behind it as well all focused on really driving good overall capability in the enterprise. But also across all of these, as you've heard us say before, we are both a growth and a profit balance story and so we look for opportunities to improve productivity in the business on a year-over-year basis.

And so you saw that a bit if you look at the revenue growth versus the headcount growth for 2017. You saw some expansion of if you will revenue per employee. We will focus that way, but in general I think the way to think about growth of the employee base is tracking close to but probably just a bit behind revenue growth as we go through time.

Great. Thank you so much. Good luck, good job.

Alex Henderson, Needham & Company.

Just a couple of clarifications. The number you gave on the mix, the new versus existing, was that customers or was that revenue mix?

Alex, good to talk to you. That's logo mix, so think of that as count or customers.

Accounts versus logo. If you were to display that on revenues, I assume it's quite different?

I wouldn't say it's quite different. It probably skews a little bit more towards new, not surprisingly, in the sense that average transaction sizes for our existing customer base typically tend to be cross-sell, upsell or expansion. So those are smaller transactions. But the gap between count and dollars is not that great.

The second question I had was -- again this is almost all follow-ups on questions that were just asked -- but the 10% penetration rate of SecurityIQ, I assume that when you talk about resonating selling together, you're talking about selling to new accounts. Can you talk a little bit about the mix between selling into new accounts as opposed to using that as an upsell? Because I would think that upsell would be a pretty rich opportunity as well.

Yes, actually both are very true I guess, Alex, to address your question. There's definitely a motion we have now with our salesforce to include the complete the value proposition as it were. To come into a new opportunity and say this is about governing identities and the access to the information that matters to the organization, and that information and data lives both inside applications and in unstructured file formats.

The new selling motion is certainly typically that way. But we've seen a lot of interest as we've gone back into our existing accounts, partly because we feel a bit of an industry shift happening there. The responsibility for understanding who accesses that critical data out in these file formats of SharePoint and Dropbox, etc. has not always been under the purview of the folks responsible for identity and access management in enterprises. And we felt a shift there, that the same customers that bought our traditional productlines over time used to tell us that wasn't exactly part of their core domain.

More and more they are telling us that is part of their domain, and so the existing accounts that have been with us two, three, five, seven years are very interested in understanding how that integrated value proposition extends their governance. Whereas in new deals, because that trend has been happening, it's very natural for us to include that overall value proposition into the initial transaction.

Do you think you'll double that penetration number from 10% up towards 20% over the course of 2018?

Yes, I don't know that we would guide to a particular number there, but we are certainly seeing good acceptance of that in our installed base.

Can you just talk about how often you are running into Varonis in the marketplace?

Well, because of the selling motion, Alex, less than you might expect. In other words, we believe historically Varonis, which is a fine company, has sold to a different buyer. They've sold to the data and storage buyer, and as we see people who have responsibility for identity -- identity management, identity governance, etc. -- incorporating this into their overall domain, that is not typically where Varonis has been present in the organization.

And conversely, we don't go over to the storage buyer very often and just pitch some sort of data management. While there is some overlap I guess is the appropriate term for our productline and theirs in this arena, the selling motion we have actually causes us not to run into Varonis that often, that directly. We do see each other in the market, but I would say it's far less than we see our core identity governance competitors.

Just a clarification on your prior question, when you talk about moving IdentityIQ and SecurityIQ to AWS and Azure over to a large MSP, I assume you're still selling that on an on-prem type sale as opposed to a SaaS sale. Is there some opportunity to take advantage of that move so that you might start to shift it to a SaaS sale over time?

Alex, this is Cam. I think the answer is what we've offered and packaged into the market is the opportunity for those customers, especially our systems integration partners and MSP partners if you will to -- as they sell to their end customer to sell that solution set in a way the customer wants to buy, whether that's as a capital expense and then as a service offering or as a recurring charge type offering, we are working with our partners to make sure we've got the kind of transaction structure that they're looking to transact. And so in that regard, we are seeing both types of transactions occur where the partner or the end customer wants perpetual license type transaction or a recurring charge.

The answer to your question is certainly this opens the opportunity to the possibility I guess I would say that some of these IdentityIQ could become more recurring revenue in nature. We'll have to watch that trend because, as Mark said, this is a new development and it's early days so I think it's hard to draw too many conclusions from the limited number of customer situations that we've addressed.

Does that require you to bring the performance of ID Now up to a comparable feature set with IQ so that you're selling at least a comparable product in that? Or will you tend to have a differential performance and feature set there? (multiple speakers)

Yes, I think for the next year or two at least, there will be some differential in the depth of the features in IdentityIQ. But more importantly, the configurability. Because what we often find is that customers who want IdentityIQ are these large enterprises who want a lot of adaptation of the product to their policies. And we've built the product to be able to do that without causing it to be customized into a non-upgradable product, which has a bad history in the enterprise software market. We built the product so that it could be flexibly adapted to a very complex enterprise environment with lots of very complex policies.

The customers that tend to gravitate today toward IdentityNow are more comfortable taking our best practices that are in fact embedded into the architecture and use cases of that product and just adapting to those. And so as you move up the enterprise scale line that's where you get into some grey area. There's a large midmarket enterprise, want them to have a lot of flexibility, they'll probably go to IdentityIQ. And if they want it out of their data center, we will encourage them to talk to an MSP or run it at Amazon. If they are a small or midmarket customer for now we assume the great majority of them will in fact go with IdentityNow.

Super. Thanks for taking my call.

Ladies and gentlemen, our question-and-answer session has concluded. I would now like to turn the call back over to Mark McClain for closing remarks.

Thank you. We just wanted to say a quick thank you at the end. We appreciate everyone's attention and interest and we'd particularly like to thank our customers, partners and employees who got us here to this first ever earnings call. With that, we'll say we look forward to speaking with you again in the future and thank you for your attendance on our call.

Ladies and gentlemen, our conference has concluded. You may now disconnect your lines at this time. Thank you for your participation.