SailPoint Inc (SAIL) 2021 Q2 法說會逐字稿

Greetings, and welcome to the SailPoint Technologies Holdings Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to our host, Josh Harding, Senior Vice President of Finance and Operations. Thank you. You may begin.

Good afternoon, and thank you for joining us today to discuss SailPoint's Second Quarter 2021 Financial Results. Joining me today are SailPoint's CEO and Co-Founder, Mark McClain; and our Chief Financial Officer, Jason Ream.

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 excludes 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 GAAP to non-GAAP results.

And now I'd like to turn the call over to Mark McClain.

Thanks, Josh, and thanks to each of you for joining the call today. I'm very pleased to share our strong second quarter fiscal year 2021 results with you. For the second quarter, we exceeded the high end of both our revenue and our ARR guidance, driven by strong growth from our SaaS and subscription-based offerings.

We reported subscription revenue of $64 million, up 40% year-over-year and ended the quarter with ARR of over $291 million, up 43% year-over-year. The outperformance in revenue and ARR was driven by our sales team's continued focus on demonstrating the value of our subscription-based identity security offerings and a relentless focus on customer satisfaction that continues to support our strong renewal rates. Taken together, our results this quarter point to solid execution across geographies and strong interest from global enterprises and the critical value we provide to their business.

Our well-executed Q2 helped us to close the first half of 2021 in a position of strength. As we noted last quarter, enterprises are increasingly aware of the foundational role identity plays in securing their business, and that continues to bode well for us in the market. This has proven to be particularly true at the upper end of the market as more and more large enterprises are embracing the next generation of identity and adopting our SaaS identity platform to address their complex identity security needs at scale.

On that point, I'd like to share a couple of highlights from Fortune 500 companies that selected our SaaS platform this quarter. First, a large financial services company selected our SaaS identity platform, paired with our AI-enabled services, to replace a legacy solution that had been in place for years and required significant maintenance, ongoing customization and the large team to keep the program up and running. As a result, the company constantly struggled to maintain IT controls required to secure access to critical business applications and to satisfy complex regulatory demands. With their move to SailPoint, they're moving from a cumbersome and static identity stack to a flexible and agile approach to identity that can scale with their business.

Second, a global pharmaceutical company opted for our SaaS identity platform given their desire for a solution that would be simple to deploy and yet sophisticated enough to meet their evolving multinational business needs. This customer has implemented a SaaS-first strategy and required an identity platform that delivered flexibility, agility and quick return on investment. SailPoint's platform checks all of these boxes, giving the company a strong foundation for securing and enabling their workforce while matching both the pace and scale of the business over time.

In addition to the growing adoption of our SaaS identity security platform at the upper end of the market, we are seeing a greater number of existing SailPoint customers expand their investment in SailPoint. In the first half of the year, we saw an accelerating interest in our AI-enabled services from our existing customer base as they look to embrace the future of identity. These services help companies simplify the administration of their identity programs while infusing a high level of intelligence, automation and extensibility. We simplify and automate key identity decisions critical to maintaining a compliant and secure environment without sacrificing the intelligent, sophisticated and scalable approach that large enterprises require.

In Q2, we saw a good momentum among customers, deepening their investment with us to help them evolve their program towards this autonomous state of identity. For example, in Q2, a longtime SailPoint customer in the property and casualty insurance space added our AI-enabled SaaS services to help them further streamline and modernize their approach to identity. With SailPoint, they will automate and simplify access requests and certifications, freeing up their teams to focus on the most critical identity decisions. This will add tangible value to their business by reducing the chances of human error and enforcing consistent application of access policies across the business. Now the company can take the strong identity security foundation already in place to SailPoint and evolve their program towards their desired state of autonomous identity.

As we continue to position SailPoint to capitalize on the opportunity in front of us, we made some important appointments both at the leadership and Board level this quarter. We recently hired a new CMO, Wendy Wu, who brings a deep understanding of SaaS, having led teams at Box, Google and Microsoft through their enterprise expansion journeys. And we expanded our Board of Directors with the addition of Sudhakar Ramakrishna, who is named CEO of SolarWinds earlier this year; and Ron Green, Executive Vice President and Chief Security Officer to Mastercard. Both bring deep SaaS and cybersecurity expertise to our Board. These additions serve us well as we look to grow scale and evolve the business over time.

As we think about the second half of the year, we are focused on 2 key areas to continue building upon our momentum. First, we will continue to deliver against our mission to help enterprises discover, secure and manage all their identities. We believe companies today have a stronger inclination than ever to adopt an enterprise security program that is grounded in identity security. To capitalize on this momentum, our product organization plans to deliver new functionality that further embeds and extends identity security into the workflow of the business. This will make identity security more accessible and approachable for the everyday user while infusing a high level of intelligence and automation needed to fuel and speed identity decisions across the business. Our entire company is united around delivering a best-in-class identity security experience so that our customers can ensure all parts of their business are properly enabled, resilient and protected.

Second, we'll continue to focus on consistent execution across the organization, driving broad global adoption of the SailPoint identity platform. We win in the market by delivering tangible value to our customers and by building solutions that achieve the right balance of speed and security across their businesses.

In closing, we believe we are well positioned for the second half of 2021 and beyond. We continue to see strong demand. We have the right teams in place to continue our shift to a SaaS and a subscription-based revenue model, and we enjoy a strong and committed partner ecosystem to support our customers' success over time. And most importantly, we have an advanced product offering that sits at the center of a modern enterprise security architecture.

Before I turn it over to Jason to review our financial results, I'd like to address the news we released earlier today that Jason will be departing SailPoint to pursue other opportunities. Jason has been an integral part of our management team for over 2 years and played an important role in our transition to a SaaS company. Jason will remain as CFO through August 31 and will serve as an adviser for a period of time after that to ensure a seamless transition. I've truly enjoyed working with Jason, and I'd like to thank him for his many contributions to SailPoint. On behalf of the Board and everybody at SailPoint, I wish him all the best in his future endeavors.

We will begin the search process for a new CFO immediately, which will focus on finding an executive that will complement our ongoing move to SaaS. As part of the transition process, Cam McMartin has agreed to serve as interim CFO starting September 1. Many of you know Cam, from the many years he served as SailPoint's COO and CFO prior to transitioning to our Board of Directors in 2019. We're incredibly fortunate to have somebody of Cam's experience able to serve as interim CFO and support our strong internal team through this transition period.

With that, I'd like to hand it off to Jason, who will share more details on the financial results for the quarter.

Thank you, Mark. Before we talk about Q2 and the rest of the year, I'd like to say thank you to Mark, to the SailPoint Board and most importantly, to the SailPoint team for a fantastic few years. It's been super exciting to be part of such a great company going after a huge market opportunity and to be part of setting the company firmly on the path to SaaS and subscription. I think SailPoint's best days are still ahead, and I'm looking forward to seeing what this team can do.

And now back to business. I will spend the rest of the time going through our second quarter results, and then we'll update you on our expectations for the rest of the year. In the second quarter, we saw continued strong execution by the team and continued interest in our SaaS solution from customers and prospects. SaaS momentum is very strong, and our subscription transition is progressing very well with more than 80% of our new bookings in Q2 coming in on a subscription basis, up from over 70% in the first quarter. Driven primarily by new SaaS bookings, but also in part by term license and some maintenance associated with perpetual licenses.

Total ARR grew to just over $291 million in Q2, representing 43% year-over-year growth. As a reminder, we're lapping a quarter that was early on in our subscription transition, so it's a relatively easy compare, but still very good performance.

Total revenue for the quarter came in at $102.5 million, a good result given the ongoing mix shift in our business. Revenue benefited from strong execution, including bookings earlier in the quarter than we had modeled. We also had some catch-up revenue in the quarter, and professional services revenue was a little bit higher than we were expecting. Again, while revenue is not the most important metric for us during this transition, we are, of course, pleased to have a good outcome this quarter.

To help give you a little perspective on the growth dynamics in the business underneath the impact of the model transition, as we look at this internally, we estimate that had our new bookings in Q2 of 2021 been of the same mix that they were in Q2 of 2020, our total revenue growth year-over-year would have been approximately 17 points higher this quarter.

Now as we shift to 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. In Q2, operating income was $0.8 million, obviously, well ahead of our guidance range due to a combination of our revenue outperformance and expenses coming in below plan.

Given the confidence that we've had in the business and the large opportunity in front of us, we had a very aggressive spending plan for the quarter, which, in the end, we didn't quite manage to hit. That being said, we're seeing great success in building the team with a significant increase in our software engineering capacity and a sales team that is fully staffed to plan. While we'll bank the savings from delayed hiring, we are pushing some onetime expenditures into the back half of the year. More importantly, we're continuing to invest aggressively in the business as we support the growth trajectory that we see over the next few years.

Now shifting to the rest of the year. We are feeling very good about the momentum we are seeing in the business, specifically with regard to the appetite of large customers to buy SailPoint's SaaS platform. Based on our Q2 performance and based on the momentum we are seeing in our pipeline, we are raising our full year ARR outlook to $343 million to $347 million, an increase of $2.5 million at the midpoint, representing 37% to 38% annual ARR growth.

We are also raising the midpoint of our full year revenue guidance by $2 million to a total of $408 million to $412 million for the year.

This change is based on what we see at this time, but I want to remind you that as we make this transition, revenue is difficult to predict, given the timing difference in revenue recognition for SaaS versus license, and we will depend heavily on the actual bookings mix. This guidance range represents 12% to 13% total revenue growth year-over-year. Consistent with my comments on the second quarter, our current expectation is that the mix shift towards SaaS should result in a 12-point headwind to reported revenue growth for the full year.

We are also raising our full year SaaS revenue guidance to a range of $103 million to $106 million, representing 54% to 58% growth over 2020. In terms of profitability, we are tightening the range of our expectations for full year non-GAAP operating loss to $5 million to $10 million compared to our prior guidance of $5 million to $15 million. Of course, our profitability outperformance in Q2 raises our outlook for the year, but we are leaving ourselves room to continue to invest in the business in the back half of the year.

With respect to Q3, we are going to continue with the practice we began last quarter and guide the ARR for the quarter. Our current expectations for Q3 total ARR are to be in the range of $315 million to $317 million, representing 40% to 41% growth over Q3 of last year.

As you look at year-over-year ARR growth, I'd like to remind you that we officially leaned into SaaS at the beginning of 2020. But with our sales cycles, we really didn't see the mix shift kick in until the second half of the year. And so our year-over-year compares are a bit more difficult in Q3 than they were in Q1 or Q2.

As for the P&L in Q3, we currently expect total revenue to be in the range of $102 million to $104 million or 9% to 11% growth over Q3 of 2020. As we model it, we believe that the mix shift creates about a 10-point headwind to these growth rates. Lastly, we expect our non-GAAP operating loss for Q3 to be in the range of $7 million and $9 million.

With that, we'd now like to take your questions. Operator, you can start the Q&A.

(Operator Instructions) Our first question comes from Hamza Fodderwala with Morgan Stanley.

Jason, you will be missed. I look forward to seeing where you land.

Thanks, Hamza.

So just on the first question, so for ARR, obviously, came in strong, 43% growth, which was consistent with the prior quarter. But it was, I guess, maybe more modestly ahead of sort of the guidance that you guys had given out. So I'm just curious as to, was this kind of just, hey, this is the first time you started guiding to quarterly ARR? And kind of what is sort of the conservatism that's baked into the ARR estimates for the back half?

Yes, Hamza. So this was the first time that we have guided to quarterly ARR. And obviously, in a quarter, there's a little bit less room and flexibility than the year. I think we try to approach all of our guidance with as much transparency as we can and try to give you a best view of where we're going, but obviously put a little bit of conservatism in there as well. And I think that applies to any particular quarter we've had in the past, but also the back half of the year as well.

When you look at the back half of the year, remember, of course, that while there was conservatism in the guidance, it's also harder year-over-year compare from an ARR perspective. In the first half of the year, we're comparing against a couple of quarters last year where we weren't quite into the SaaS and subscription transition quite as much as we were by the back half of the year. We signaled it at the beginning of 2020 last year. But with our sales cycles at 6 to 9 to 12 months, it really was the back half of the year when we started to see the shift really happen.

So if you remember, last Q2, we had a very sort of on-prem perp-heavy quarter. And so the compares are a little harder in the back half of the year. So we think that the business is set to continue to grow very nicely, but the ARR growth has a little bit harder compare as you look at it in the back half of the year.

Got it. And just maybe a quick follow-up. You mentioned that the OpEx came in a little bit below sort of your spending plans. I'm curious, from a hiring perspective, where you're at for your full year plans? And has it been maybe a little bit more of a difficult hiring environment? Obviously, it's a very competitive market right now for talent. So just curious for any updated thoughts there.

Yes. Look, it is a competitive market. I think we're a pretty competitive employer, though. And so I would say those things kind of balance each other out. I mentioned that our sales team is fully staffed to plan, which I don't think I've ever actually been able to say that before it. Either a company I've been at or any company I've known, it's kind of unusual. So we've done a really good job in a lot of places. There are places where we're not quite where we wanted to be. But then again, we had -- as I mentioned in the script, we had very aggressive plans for hiring. And in some cases, look, our eyes were a little bit bigger than our stomachs.

So I would say, yes, it's a competitive market out there, but we also, I think, are well positioned to hire. We're well staffed to hire. Our recruiting team is very good and focused on the places that we want them to be focused, which is obviously primarily in go-to-market and in software engineering. So overall, I think it's going well. But look, we just had -- we had very aggressive plans, and we didn't quite hit them.

Our next question comes from Matt Hedberg with RBC Capital Markets.

This is Matt Swanson on to Matt. It was nice hearing, Mark, about some of those expansion deals driven by AI. Could you just talk a little bit more about how you're shifting your go-to-market strategy maybe around having more expansions, especially as SaaS keeps picking up, right? And maybe how you're going to segment your sales force to manage those renewal expansion opportunities?

Okay. Thanks, Matt. Yes, I guess on the first part of that, kind of what we're seeing, certainly, we made a lot of investment, as we've said for a little while now, around AI and some things. And then we've obviously brought in a couple of acquired pieces of technology. So in general, kind of setting ourselves up for more of that cross-sell, upsell motion with more things in the bag as it were. And then -- and partly, as you say, as you get into more and more of a SaaS selling motion, it's a little bit typically less upfront and more over time is kind of the way both I think forces are trained to sale and customers are generally now trained to buy now.

But from a sales force standpoint, we're not really segmenting along the upsell versus new sales. We're giving our reps in the field kind of ownership of accounts or territories and then asking them to own that over time. Whether that's a new opportunity or whether it's an existing customer where we see a chance to come in and bring in more over time. We're segmenting more by kind of strategic accounts and larger enterprise accounts and then in some cases, kind of midsize accounts and territories, then increasingly looking to add and layer in verticalization, right? So we get more concentrated expertise in our selling sales -- in our sales motion, excuse me, in the field from folks who are used to dealing with a particular industry and its issues.

So definitely been a motion for quite a while now toward more kind of I always hesitate to say land and expand because that kind of connote some things differently for different people. I would say it's a fairly large land but with still opportunity for expansion. And I think you're seeing us now fill in some of that expansion around what are typically pretty good-sized initial transactions.

Yes. That's super helpful. And then if I could just throw in 1 more. I mean, historically, we haven't never really needed to talk much about the competitive environment and governance. But as you're moving more in the SaaS, are you seeing any different dynamics? Or obviously, there's some announcements from competitors that seem maybe not going to be focused on your segment of the enterprise. But are you hearing anything change in conversations with your customers?

Not substantially or certainly relative to competition, I think we are feeling more pull, more demand from the mid- to high end of our traditional enterprise segment for SaaS. As we said for a long time, we just weren't really feeling that pull from those largest customers, and that's definitely shifted over the last 12 to 24 months.

But from a competitive standpoint, we still strongly believe we're kind of the only enterprise-class SaaS offering for our market. We have some folks, as you point out, who've recently chosen to talk about this market space, but really aren't kind of enterprise class for this offering today. Not sure how long it will take them to get there. And then we have some other competitors who have been in the market around the enterprise space but really aren't offering real SaaS offerings.

So in general, we're kind of still in a fairly unique position there. And increasingly, that seems to be helping us in our competitive dynamics. So yes, I think we're feeling really good about the competitive dynamics today, but haven't really noticed a shift relative directly to the SaaS focus.

Our next question comes from Rob Owens with Piper Sandler.

I wonder if you could help us a little bit with some of the puts and takes around the second half guide. And I don't know if you gave us a headwind for Q1, but you had 20% revenue growth. And Jason, you mentioned 17 points of a headwind in Q2. So I guess the implication is there is some organic slowing in the back half. Is that just difficult comps or pipeline or conservatism? Maybe you can kind of walk us through how we should think about the back half of the year. And I appreciate you just providing that growth delta to begin with. I know the SaaS transition is not necessarily an easy thing.

Yes. No. Thanks, Rob. Yes. I think the best way to think about it is more difficult comps in the back half of the year. Obviously, from a recognized revenue perspective, it's sort of neither here or there because of the SaaS transition that was kicking in, in the back half of last year. But we did have a very strong performance in the back half of the year. So those are difficult comps.

Now obviously, we are always aiming to continue to accelerate the business. But when you look at our guidance, we are looking at some high comps in the back half of last year.

And I guess -- this is a quick follow-up. Can you elaborate a little bit on some of the spending that actually got pushed out of Q2 into the second half? And some of those things, are they onetime in nature?

Yes. Look, part of our underspend in Q2 was hiring, and you can't exactly push the hiring spend out. It starts whenever you hire the person. There is some onetime, whether it's marketing programs or other third-party work, for example, that we do internally, whatever it might be that we are pushing to the back half of the year. But at the end of the day, really, the important takeaway, Rob, is that we're investing aggressively in the business. We feel very comfortable with the growth trajectory that we've got over the next several years and feel like we can invest now in the business and pay that off easily over this year or next year, but for years to come.

And so it's not so much that there was a lot of specific things that we didn't do in Q2 that we're then going to do in the back half of the year. But given that we underspent in Q2, we're just allowing ourselves a little bit more room in Q3 and Q4 to do some more spending and invest in the business to build for the long term.

Our next question comes from Brian Essex with Goldman Sachs.

And Jason, congratulations from me as well.

Thank you.

Mark, perhaps you made some commentary in your prepared remarks about success at the upper end of the market. Could you maybe highlight what you're seeing that's -- if there's anything thematic there that's driving a better success, whether it's digital transformation initiatives, finally getting over the hurdle, whether it's bringing conversations of an elevated threat environment up to the Board level? Kind of what do you attribute the success there to primarily?

Yes. I think Brian, I only struggle with the primarily part of your question. I think you hit on 2 or 3 of the biggest issues, right? I think there's a both a push and a pull, meaning I think we're continuing to enhance the depth and breadth of our product offering. Obviously, that's a factor as these very large enterprises look at what their needs are and they ask us to stack up our capabilities against that. I think we're hitting on the bulk of what they need. That's a big factor. Their acceptance and willingness to take a SaaS offering, again, has been a pretty significant shift for the last few years. I think we've said before that sometimes people, I think, confused the incredible acceptance of SaaS for other parts of the identity offering landscape, particularly access management, single sign and multifactor authentication, but it just really wasn't a preferred option in our minds and from our customers for quite some time, but that's really begun to shift.

And then I think the other 2 things you highlighted, Brian, are certainly factored, right, just the learnings of not just COVID and the pandemic, but just the general growing sense that in the realm of security, identity is an increasingly important control point to understand and manage and that the push for digital transformation and the kind of the exacerbating effect of working from anywhere has definitely caused these large enterprises to want to make sure they are well suited, well prepared to help their organizations move fast, but safe, right? I think that old brakes on race car thing again, right? They want to move quickly to take advantage of opportunities with technology, but they need to do so in a way that doesn't put the organization at risk. And increasingly, that means getting a much better handle on identity.

Got it. And that's helpful. And then maybe to follow-up either for you or Jason. I think one of you commented on bookings earlier in the quarter than normal. Maybe just a confidence level in the pipeline that you're seeing? Are you seeing any acceleration in the pipeline is maybe some of the conservatism more marked around, which direction a customer might go, whether they might go with IdentityIQ or IdentityNow and they're still calling to that decision process? Or how do you frame out the level of confidence, tougher comps not withstanding in the back half of the year?

Yes. Like -- thanks, Brian. I was going to highlight that as I started, which was, just to remind you that Jason pointed out, it was a very good back half of the year for us. So we're going to have some fairly challenging comps, but we still feel very good, to basically answer your question, very good about the direction and growth of the pipeline, particularly kind of a continued very good steady shift towards SaaS in the pipeline. So we're seeing good overall top line numerical growth in the pipeline, but within that pipeline growth, a continued mix shift towards SaaS that we've been planning for and working towards for some time now.

So I think we're seeing good strong signs. Like Jason pointed out, that's part of the reason we're keeping -- not necessarily accelerating but keeping our foot on the gas on hiring sales capacity because we want the feet on the street to be able to capture that opportunity. And so that's why we want to make sure we have field capacity at the ready for that.

But -- so yes, pipeline growth, very good, increasingly focused more and more on SaaS for new business, particularly and then kind of ensuring we have the capacity, both ourselves and through our partner network, which is a huge part of our strategy to capture that.

And then, Brian, in terms of -- you asked about conservatism and is that just how it's going to come in? Look, we're obviously not going to put out in guidance all the possible achievement and growth that we could see in the pipeline and could see in our results. We're obviously going to be a little bit more prudent than that. But otherwise, look, yes, most of the conservatism on the revenue side is around the fact that we just don't know exactly how the mix is going to shake out.

It's not so much so we don't know how -- whether a deal is going to come in one way or another, it's just we have a mix of deals across the pipeline and some come in and some don't, right? And so what that mix is, will be -- have a huge effect on what the recognized revenue is, much more so than the overall level of bookings.

Our next question comes from Brent Thill with Jefferies.

Jason, just on the adoption of SaaS outside the U.S., can you speak to this? It looks like EMEA had a great year-over-year growth rate, which suggests maybe they're still taking perpetual a little harder than SaaS. Can you talk to what you're seeing there?

Yes. Look, I would say that the U.S. is a little bit ahead of EMEA and APAC and Rest of World. But no, it's not that we have a market difference between U.S. and international in terms of SaaS or that there's a -- anyone digging in their heels and saying they're not going to SaaS, anything like that.

I think what you see though, Brent, in the numbers this quarter, for example, is just simply that there little bit smaller sample sizes in international geographies. And so if we happen to get an on-prem deal that has upfront license or upfront revenue recognition, that could just throw things off a little bit for the quarter. We've always had a little bit of that issue. Timing of services revenue, for example, like those things don't affect the U.S. growth rate, but they do affect sometimes EMEA or APAC. And so that's all you're seeing there.

But no, I would say that, that SaaS transition is happening in EMEA. SaaS transition is happening in APAC, maybe not quite as -- it's a little bit a step behind the U.S. but not in any substantial way different.

And for Mark, I guess maybe if we look beyond the financials and we could see through your lens, the company, everything that's happening, what would you say has been the most surprising thing for you in terms of what you're seeing, whether it's deal size, sustainability, cross-sell? Is there -- there are a couple of things that come to mind that maybe we all can't see that you're seeing?

A credit for more intriguing question than normal on that one, Brett. I guess I feel like we're mostly trying to convey to you what we think we're seeing, which is good, strong demand profile, particularly from the high end of the market that we continue to feel like is a uniquely strong position for us. But quite strong in the mid-enterprise as well, continuing to see the importance of identity get elevated. I guess I'll call this something you might not see. I think that's maybe a point we've tried to highlight, but Matt would comment that the stature of the conversation is elevating, for lack of a better term, right?

In other words, in the customer environment, if you rolled back 10 years in this market space, it was kind of a back office productivity conversation around identity governance. Can we do provisioning faster and better? Can we do compliance operations faster and better? Nice to have -- save some money, great.

Now I think this recognition of, I use that term a lot, the control point of identity being sort of not well managed in most large enterprises today and the Board and senior management being more aware of that, it's sort of elevating the conversation. I think that does provide tailwinds for things like ASPs over time and growth rates over time. But I think that's -- we feel very good about the way the conversations continue to highlight the importance of this to the customer. That's probably the main thing that occurred to me when you asked your question.

Okay. And this is coming from a client. So we'll say this is not a third question, it's coming from a client. You talked about the increasing interest in existing customers from AI. What's the typical uplift when they add penetration thank you from the client?

Brian, it depends...

Is that a client winning pricing, Brent?

Yes. It really depends, right? We talk about AI, but there are several products there. They can be applied in different ways to the existing employment. I mean think about it as a -- it's a meaningful uplift. It's not doubling the opportunity that we have in that range, typically, but it is still meaningful.

Our next question comes from Mike Walkley with Canaccord Genuity.

This is Daniel on for Mike. Congrats on the strong quarter. So it seems like your total deferred balance in billings was up pretty substantially this quarter. Could you just provide us with some color on what drove the strong results? And have you seen any meaningful changes to billing duration as a result of the transition?

No, Daniel, we haven't seen much of a change, and we typically do 3-year deals. There are some customers that will want to lock in 4- or 5-year deals as they're making a very big commitment to this platform and this technology. But typically, we're doing 3-year deals.

I would otherwise not look too closely at deferred because we have a mix of both SaaS and term license, which work very differently with deferred. The best thing to really look at is ARR, that gives you a real sense of where the subscription business is and what run rate we're driving.

Great. And just as a follow-up, can you just provide us with an update on how the integration of the 2 acquisitions are coming along?

Yes. Sure. I'll take that one, Daniel. It's Mark again. Well, as a short burden, we're pleased with both of those. Again, kind of serving different purposes. ERP Maestro is mostly about kind of making sure we had a good strong offering for so many of our enterprise customers that care a lot about ERP and folding that into identity governance and identity security. And they had a good strong offering there, and it's getting a lot of good interest in the market and kind of helping us in our competitive posture as well.

I think on what we called Intello and we now call ARM, acronym escapes me at the moment, but just basically finding that, that whole SaaS management -- sorry, it's SaaS management ARM. My mistake, we call that SaaS management. We are finding that, that is, in fact, a high area of interest for a lot of customers and an easy thing to add to the discussion that we're kind of wrestling with the explosion of SaaS applications, particularly sometimes the shadow IT kind of phenomenon that that's just a great adder to our conversations as well. And pretty interesting to both new customers that are kind of in the shoot already as well as existing customers who have some interest in adding it to their existing situation. So both very positive.

Our next question comes from Alex Henderson with Needham.

I was hoping you could talk a little bit about the dynamics around the recent hacks, the presidential executive orders? And whether those changed activity rates or intensity as identity was so center stage relative to all of those events?

Alex, this is Mark. I'll start on that one. I guess, yes, kind of separate the 2. From a hack standpoint, I think we're always hesitant to draw a very straight line from hack happens and our business goes up x percent. But I think what we do find is there's a -- it just kind of continues to reinforce with our enterprise class customers that the their security situation is far from fully solved and they need to continue to look to invest to improve their security posture. And as you point out, identity seems to be increasingly in either the center of or near the center of those conversations.

I think when you look at kind of the executive order, a little more indirect as well, but we think positive for us for sure in the long run in terms of just increasing the awareness and need for both the federal government and the folks that work with the federal government but also that government's influence on the overall market conditions that these are things that are probably getting less attention than they should and that they will get more attention going forward.

So again, all just in the category of positive tailwinds for us, I guess, I'd say, Alex, but nothing, I would say tied to x percent increase in pipeline or business in the next period or something.

And can you talk a little bit about your opportunities in the federal arena?

Well, still a very good piece of our overall business, good segment for us as probably financial services is the overall largest segment, strong in health care and other verticals. But government, particularly federal, but also, frankly, state and local and non-U. S. national governments continue to be a pretty good source of opportunity for us. But the U.S. federal government, in particular, that's been a strong team. We've added quite a bit to that team over the last few years to take advantage of various opportunities there in all major areas, civilian, DoD, intelligence, and we have really, really strong positions in all aspects of the government. But there's still lots of upside ahead, both in terms of additional customers we don't have yet or continuing, as the questions earlier pointed out, we still have more to sell than we had in some cases a few years ago. And we're coming back to some of those customers and expanding our position.

And if I could, is the government vertical have any differences in its approach to SaaS adoption and subscription adoptions?

Well, I mean, as you well know, and a lot of folks know, FedRAMP is a high focused topic, right, to make sure we have something that addresses the FedRAMP requirements. But in general, I think for the most part, we see government kind of matching the general market on that. Like the general trend towards SaaS is there. It's strong. It doesn't necessarily become the only thing people consider, but increasingly by far the majority of what people prefer. But that said, we still have a very strong presence with IdentityIQ in that market, and we'll continue to expand that presence over time.

But I think as we look forward, we certainly want to be well positioned for increasingly large swathes of the federal government to go with a SaaS offering.

(Operator Instructions) Our next question comes from Joshua Tilton with Wolfe Research.

So the first one, I was just curious, did you see any change in the pace of legacy replacements in the quarter relative to previous quarters? And does replacement opportunity accelerate now that the large enterprise is ready to buy the SaaS offering?

I guess, Jason, I'll start on that one. We can both kind of tackle that one, Joshua. I don't think we would say we saw a distinct change in the pace, I think it was the phrasing of your question. In other words, we weren't on some trajectory that suddenly ticked up in last quarter. We can -- as we said for a long time, we see just a decent chunk of our business every quarter in large enterprises is at least partial, if not full displacement because it sort of stands to reason that because our focus is in these high-end markets that these customers almost always had some level of legacy implementation already when we got there.

So as we like to say, it's pretty rare to hit a Fortune 5000 account that has 0 investment in these kinds of technologies. So there's generally some kind of displacement going on. I think we have geared up for more. And I would say there's probably a little bit of increase in some of the pipe there through our partners. We've seen particularly some of our key large SI partners gear up for more of that displacement replacement opportunity, frankly, in some of the customers they've had for a decade or 2 that are on those older technologies. So I think we see some good momentum building.

And as you point out, as those large enterprises see SaaS as more of a differentiated offering to move to from their past legacy on-prem deployment. I think that probably spurs them on to take an action a little more than it might have otherwise. So yes, all those things together, I think we will see, we believe, potentially a little stronger uplift in that kind of movement in '22 as last half of this year and as we move into '22. But I wouldn't tell you that we would tag some increased outlook to it.

I don't know, Jason, anything you'd add to that or...

No. It makes sense. I mean, look, that's always a part of our business. And it's -- as Mark said, it's tough to isolate that and say this is exactly how much of the business that is or isn't. But it is a real phenomenon.

That was clear. And I just wanted to follow-up on the question on the AI service adoption. I believe it's still in early innings, but what percentage of the customer base have adopted the AI services?

It's -- yes, it's still early innings. We haven't disclosed what that percentage is, but it's still pretty early innings.

Yes. Interest is very high. I guess, Josh, that's the one thing I'd add. We find that the great majority of those customers do want to understand what we're doing there. I think they do see it as an enhancement to their traditional approach. But yes, I think we're pretty early in the selling cycle of getting that broadly into the whole installed base. But a good amount of business every quarter, I think, coming through that now.

There are no further questions at this time. I'll turn it back to management for closing remarks.

Okay. Well, again, thank you to everyone again for your interest and your questions. Again, I'll go ahead and add to what I said on the earlier comments, really a big thank you to Jason for all his great contribution service here. We're excited for what's next for him. And obviously, we'll keep everyone posted on things with us at SailPoint. And -- but in the meantime, we'll have Jason here to help for quite a bit as we transition.

And thanks for your attention today, and we'll look forward to staying in touch over the next few weeks.

Thank you. This concludes today's call. All parties may disconnect. Have a great day.