Greetings and welcome to the SailPoint Technologies' Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Josh Harding, Vice President of Finance and Investor Relations.

Good afternoon, and thank you for joining us today to discuss SailPoint's second quarter 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 Investor 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 welcome to everyone joining our Q2 2018 earnings call. I'm pleased to share our results from the second quarter of 2018. In Q2 2018, our total revenue grew 39% to $54.6 million, and we again, delivered profitability on a non-GAAP operating income basis. I'd like to share some company highlights from this past quarter, beginning with one of my favorites: SailPoint Navigate, our annual user conference. In May, we welcome to more than 1,000 of our customers, prospects, partners and SailPoint crew members to Austin for our first regional navigate event of the year. It was an energizing event for our growing community and we're looking forward to navigate Australia, later this month and navigate Europe, in Barcelona in October. Turning to our business highlights, Q2 was another strong quarter for SailPoint. We continue to execute successfully on our growth strategies, including driving awareness and adoption, both directly and through partners, and expanding our presence internationally and in the enterprise mid-market. As a result, we were excited to cross the milestone of having more than 1,000 enterprise organizations as customers, ending Q2 with 1,031. Last quarter, we saw balance demand across our identity solutions portfolio. We also saw a healthy mix of deals across the large enterprise and mid-market enterprise segments and notable contribution from our international team. I'd like to share two customer examples from the quarter that illustrate how we're driving success with both large and mid-market enterprises. At the high end of the market our global enterprises, with hundreds of thousands of employees and even more identities to manage. These enterprises turn to SailPoint because our identity platform delivers proven scalability and performance. One such organization is a Fortune 100 banking group, headquartered in Europe. This bank is an existing IdentityIQ customer, with more…

Thank you, Mark, and thanks to everyone on the line for joining us today. SailPoint’s financial results for the second quarter beat our guidance on both the top and bottom lines, with strong revenue growth, positive non-GAAP operating income and meaningful cash flow from operations. Total revenue was $54.6 million, an increase of 39% over Q2 of 2017. In Q2 of 2018, both license and subscription revenue were strong. License revenue increased 43% year-over-year to $19.1 million. Subscription revenue increased 53% year-over-year to $25.1 million. This was driven by a combination of healthy SaaS gross – growth and strong IdentityIQ maintenance renewal rates that remain above 95%. Services and other revenue was $10.4 million, up 8% compared to Q2 of 2017, and ahead of our expectations. Our services business experienced a higher-than-expected utilization rate in Q2 as our teams worked on services projects related to recent quarters’ bookings. As we’ve stated in the past, we continue to push implementation work to our partners who are an important part of our ecosystem. We now expect single digit services growth for full year 2018. On a geographic basis, the United States contributed 63% of revenue in Q2 and rest of world made up the remaining 37%. This compares to 69% in Q2 of 2017 and 31% for rest of world. We are pleased with our performance on a global basis. The quarter’s strong results highlights the investments we’ve made over recent years in several new markets. With that said, our international business in the quarter benefited from several large deals and is not yet at the scale of our U.S. business. Given this, we believe it is best to assess our geographic revenue growth on a multi-quarter basis. As I transition to the remainder of the income statement, I want to note…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] [Operator Instructions] Our first question comes from John DiFucci, Jefferies. Please proceed with your question.

Hi, Mark and Cam. This is Julian on for John. The first question I wanted to ask you guys as you talked about strong international deals and I’m just wondering, like do you still have an impact on that because I recall last quarter you mentioned that was primarily more conversations but didn’t really impact the number so much. Has that changed at all? Or how is that affecting it?

Yes. Julian, first of all thanks for joining the call today, we appreciate the interest. I think two comments, I’d make to start out. One is, as we’ve told you previously on a GDPR basis, it’s our belief that it will take a number of quarters for that to play out in terms of its fundamental opportunity impact to business. What we did see in the quarter is continued, I would say, heightened interaction with prospects and customers about where they’re taking their business from a GDPR reporting and compliance and therefore, IGA perspective. So I would say the activity and interest continues to be growing. I would also say, though, for the quarter itself, we couldn’t point you to a business lift in this quarter in Q2 from GDPR.

Okay. Thank you. And then one follow-up question too. Just on capital allocation, I guess, you talked about repaying the debt of $60 million worth of the term loan. How do you think about capital allocation going forward, since you’re going to be free cash flow positive, you’re talking about investing for growth, which makes a lot of sense to us, so are you guys going to look to build cash to balance sheet, pay off the remaining of the debt? Like what are your thoughts about capital allocation big picture was?

Yes, so – again, Cam speaking. I think firstly we have been as you saw a strongly cash flow positive in the first half of the year. We’re very pleased with that performance. The inherent profitability of this business as we’ve driven very rapid and growth continues to be healthy. We’re very pleased with that performance. We’re also pleased with our ability to look at the balance sheet and find ways to drive some efficiency in terms of collection and other activity, so you saw a DSO come down a bit in the quarter. So overall, we’re pleased with what we are being able to generate with the performance of the business. We have been as you well know cash flow positive now for a number of quarters. We paid down a significant amount of debt at the time of the IPO. We took the opportunity in June to pay down the majority of the remaining outstanding balance on that data, $60 million, with $10 million remaining. And our expectation is as we go through the balance of the year, we’ll payoff of that remaining $10 million, don’t have any particular schedule to do that but we’ll do that so that we are, in that sense, debt free. But we then still expect to be able to build some cash through the remaining part of the year. And that’s the way we’ll think about it. And then on a go forward basis, obviously, will want to continue to drive the business on a growth with profitability basis that implies positive operating cash flow and therefore, building cash balances and that’s the way we think about it.

Okay. Thank you very much guys.

Thank you, Julian.

Our next question comes from Melissa Gorham Franchi, Morgan Stanley. Please proceed with your question.

Great. Thanks for taking my questions. Mark, you talked about some traction moving down to the mid-market and you did talk about good traction with IdentityNow. Can you talk about to what extent is that just the mid-market sort of coming to you as they are recognizing the need for identity governance solutions? Or are you guys making incremental investments in that opportunity? And if so, what exactly are you investing in from a go-to-market motion perspective?

Okay. Thanks, Melissa and good to talk to you. Yes, both is the short answer. I think we have definitely seen increased interest in the mid-market. Some of that is a heightened concern about the areas that we cover with identity governance. What I mean by that is as companies in that mid-market segment continue to have a lot of rapid adoption of applications, mostly SaaS, obviously, their ability to keep up with the operational side of identity, what we always refer to is the Joiner, Mover, Leaver challenge is just getting tougher, right. They have a lot of movement of applications. And of course depending on the nature of their industry, their business, maybe a lot of movement in churn in their employee base, and those two things, right, the movement in identities and the movement in applications targeted, it causes a lot of churn in identity governance from a provisioning or Joiner, Mover, Leaver standpoint. And, of course, I think the focus on GDPR and the concern that something like that could show up in the U.S. at some point just a continued ability to be sure, they know who has access to what, many of them have begun to grow concern we think about their ability to manage that manually which is the typical method in that mid-market that use spreadsheets and very simple things to try to keep track of who has access to what. So we’re definitely seeing some movement toward us as customers in that segment gain a deeper understanding and further wrestle with the risks of that. And then I’d say we’re definitely trying to create more demand there with our own efforts. That’s everything from marketing programs and webinars and various ways of getting people’s interest, it involves targeting partners, go-to-market partners, who are more oriented with the mid-market. As you know a lot of partners are tend toward either a very high enterprise segment or maybe middle or maybe an SMB. We know a lot of partners who are targeting that segment. We have done more work to recruit and enable those partners. And then lastly, we’ll certainly continue to increase our hiring in our own field selling force in that segment. What we call territory reps who’s focuses on kind of a geographic area, sometimes with a little bit of vertical intensity but generally geographic and they’re often the ones who are looking at the opportunity in that middle market segment. So kind of all three of those things, I’d say would be primary contributors.

Okay. That’s helpful. And one, sort of, related follow-up. So you mentioned the Rackspace deal. You also talked about being able to deploy SailPoint in a variety of different methods including managed security offerings. Can you just give us a little bit of an update on how big of a business managed-security partners are for you today? And is that an opportunity that you are investing in potentially could help you reach more of end-market customers.

Yes, it’s fairly small today. We do see that as kind of an emerging trend, because remember, we have this unique situation that not everyone has where we have our own SaaS offering, right? It’s a true, multitenant SaaS offering hosted for the customer. And then we also have found because of the depth of functionality of our IdentityIQ enterprise product, some customers, probably in that upper end of that middle market segment, tend to want that level of functionality and breadth and flexibility of the product but don’t want it in their data center and those are prime candidates for a managed offering. I’d say that’s early days from a level of demand there, but we’re engaging in more conversations with people that fit that orientation. And So I think, we’re going to keep watching that and seeing whether customers are – whether that’s kind of a small subset of customers that will move that way or whether the ones that really want to go towards cloud will primary move toward our SaaS offering. But we just wanted to ensure we have that flexibility for customers to look at our product offerings, consultatively work with our team and our partner to pick the best solution and then ensure they can deploy in whatever manner they think is best for their business.

Very, good. Thank you very much.

Thanks, Melissa.

Our next question comes from Rob Owens, KeyBanc Capital Markets. Please proceed with your question.

Thanks. And good afternoon, gentleman. You have pretty meaningful beats on the license line, each of the last three quarters here, and I’m wondering, if there’s anything that you can draw, kind of, commonality across the quarter’s whether it’s pipeline converting quicker, sales productivity as a result or sales cycles decreasing, or partner driven revenue. I’m just curious if there is kind of a common thread here across the last three quarters in the strong license growth that you’ve seen.

Yes. Thanks Rob. First of all for the question and for joining the call today. This is Cam, let me see if I can tackle that question in serious for you. Yes, we’re very pleased as I think you’ve noted the performance in the license line, both for IdentityIQ therefore, and SecurityIQ has now achieved our expectations in terms of continued strength, right? We’re pleased with that performance. And we didn’t – I wanted to highlight, we really didn’t have anything special or unique come up the balance sheet this quarter so it was a very much of performance within the quarter standpoint. The reality is we talk to you and everybody else, Rob, over time about the large enterprise market. This is a big problem, it is a problem that is getting more acute in the enterprise. And so our ability to provide people with solutions for both governance of applications and governance for files as powerful. And I think it’s achieving what we wanted to achieve. And we obviously, extended the portfolio with SecurityIQ’s 6.0 release in the quarter. And I think that as well is an extension of our leadership position in that market. In terms of the overall cadence of the quarter, I would say, overall, contribution from our enterprise selling force, our partners was very much on the line in terms of what we would expect from the business and the way we've been performing in prior quarters, we're simply seeing strong demand. I think we are pleased with both the performance of the business in terms of acquisition of new logos as well as selling, cross-selling and up selling into the installed base and release all healthy mix of both during Q2, which were pleased by, you've heard to say previously that we have been focusing a bit more on making sure we are capitalizing on install base and those programs are working and yielding and so we are pleased by that. I think the other reality is, it is continues to be a contribution model in terms of overall revenue across all of the vertical segments. We've had good health across all vertical segments and that's a continuation of prior quarter trends as well. So really good performance and good health on all of the dimension that you highlighted. And quite frankly, it's high quality sales execution as well across the team, across the globe, we saw what we believe to be solid sales performance and we're pleased by that as well.

Great. And then as you look at coming on mid-market, you mentioned displacing spreadsheet. One of that opportunity greenfield and when you run into competitive situations, typically who's it against?

Rob, it’s Mark again. I'd say, yes, the bulk of that mid-market opportunity would do consider Greenfield, I'd say that the vendor and there's a little bit by vertical that we probably run into the down market more often would have – but I – now I guess refer to as Micro Focus, formerly NetIQ, formerly Novell. I think Novell, in its day with its directories that kind of they extended into identity had a decent portion to that mid-market. But in general, that was only on what we would call a provision inside, right. The lifecycle management side, not on the complaint side so much. And so in general, if you run into much product they are at all, it's probably that amongst matters of others to be sure but probably that one although, we don't consider that call it competitive threat, quite often the customers have very old implementation of that and there's just often that using it very broadly. So it's pretty much a greenfield approach in general is how we think of it. If they do have that product, it's probably, fairly, lightly deployed.

Great. Thanks.

Our next question comes from Matt Hedberg, RBC Capital. Please proceed with your question.

Hi, guys. Thanks for taking my questions. I want to start with IdentityIQ. I know it's relatively early, but I kind of wanted to talk about that cross-sell opportunity, it’s your based. And maybe I know you guys introduce the identity governance suite. Is that helped with adoption there?

Matt, you said IdentityIQ, you meant SecurityIQ, it’s kind of an add-on, right? Just to be clear, I think that's what you meant?

I'm sorry, I meant SecurityIQ. Yes.

Yes, just to be verify, I was pretty sure that's what you meant. Go ahead, Cam.

Yes, so I think Matt, this is Cam. Look, we're pleased with the performance of SecurityIQ. It is meeting our expectations across the globe. I think we're seeing good adoption in across the spectrum of enterprises to, which we sell. I think, again, as well we go some great implementations going across multiple vertical segments. Identity governance for files is a new and emerging problem. Some organizations are far down the – if you will, far down the path of identity governance replication. And so therefore, the beginning to move on from governance for files. I think to answer your question around this, yes, I think it helps. In the end, I think you can't underestimate, from a buying simplicity perspective, the fact that when you package solutions together and that packaging is consistent with the market positioning and messaging and what we think is the need profile business. I think it simplifies the decision in buying process for our buyers. And so we are pleased with the contribution that packaging, that identity governance suite has provided us in recent quarters. And we'll look to continue to capitalize on that as we go forward.

That's great. And maybe a follow-up. You guys have had a lot of success in the federal vertical earlier this year. Can you talk about the momentum into the federal year-end and sort of what's driving some of that strength?

Yes. So I mean – as you highlight, we had good strength over time in the federal vertical. We don't – in any particular quarter, we don't highlight specifically, what transactions occurred. What I'll tell you is about 13% of our customer installed base is in the government that is federal, state, local and education markets. So in that sense, as you heard we say before, we like balance across vertical in those low double-digit percentage share numbers or we think that show us strength. It is the case that as you go into Q3, you generally see a bit more demand from the federal government, that's seasonally typical in terms of the historic budget cycle but in recent years, I'd also highlight for you because of the fact that there is no official federal budget, we've seen a little bit of spreading, if you will, or division of the buying between Q3 and Q4 because in some cases, they working against continuing resolution money, some of the money runs through our partners in larger programs in terms of integration programs. So I think our history would suggest we'll see benefit both in Q3 and Q4. We'll obviously, as we go through third quarter will be looking to capitalize on our opportunity and so that matter for the full half of the year.

Well, thanks a lot. Well done, guys.

Our next question comes from Alex Henderson, Needham & Company. Please proceed with your question.

Hi. Just a quick one of that last question. Can you remind me where you have finished your fed ramp qualification?

We've started it, we have not finished it.

Okay. Question I wanted to ask is as you look into the adoption of IdentityIQ and for that matter SecurityIQ, how much are you seeing that implementation in AWS as your another cloud instances run as a – on-prem package but in the cloud, if you will. And to what extent if you put that together with IdentityNow, what percentage of the business is going in that format?

Hey, it’s Mark. I don't have a percentage of the top of my head for the first part there, meaning we are seeing as I said earlier, prior to the sounds a little funny I suppose, high end of the mid-market and the low end of these enterprise market kind of that 7,000 to 15,000 range. I think that's kind of the band where it's likely will return to a customer who says, hey, I think I need the sophistication and flexibility of IdentityIQ versus our IdentityNow SaaS offering, which is still very much primarily targeted at customers who want a simpler, faster deployment and can live with a little trade out there in configurability. And those customers in that segment were definitely seeing some pick up there. And as I answered in this earlier, Alex, there's kind of a division between, I'll run it myself at AWS, or Azure, or I'd like someone else to kind of run and operate it for me, which would be in MSP. And we’re definitely not seeing a huge pick up there to date in actual deals done that way I think we are engaging almost like the GDPR into earlier. We are engaging in a lot more dialogue, but people who just want to understand where that fits into their range of options. So in the old days, if maybe they were just default to, I'm going to put this in my data center, now they want to understand, if I want that product but I don't want to put it in my data center, talk to me about these options. Again, we're forced into have some good strong go-to-market partners for that MSP offering. We've done work to tune the product that was a lot of our recent as SIQ 6.0 release and a prior IIQ release, we've done a lot to tune the products to run and perform well in those cloud hosted environments primarily as you're in AWS. So it’s earlier days on the percentage number, it’s low percentage there. And as you know, we're still not releasing the percent of the business that is coming to SaaS but we'll continue to keep you guys surprised on the fact that it's growing very nicely as component of our product portfolio.

If I could follow. So you are now on IdentityAI about where we would have been this time last year on IdentityNow in terms of its ramp cycle. Are you seeing faster adoption, slower adoption, comparable adoption. If you were to plot the two curves against each other, are they similar in terms of where they had to be halfway into the first year of launch?

Yes, Alex, let me – we are a little off on the compare there. And that IdentityNow at this point last year it had been in market more like 3-ish years. And AI is still in an early release program. So I wouldn't make that up an apple-and-apple compare at all, just to be kind of clear there. What we are seeing with AI is a very, very high level of interest in it, in general, and with a number of customers we have in our early access program a lot of engagement. And I think, I said this on the call last quarter, Alex, but we do kind of consider the heck for a lack of better term, a run product, in the crawl-walk-run metaphor. Meaning, its value today is certainly highest for a customer who got pretty significant investment and understanding of identity governance. And there are looking for more efficient, effective ways to advance their program as oppose to a way to get started. Today the product is definitely oriented primarily and this will continue evolve to add more use cases that are brand-new users but its value today is much more to an existing fairly advanced customer, of which we have hundreds, that's the good news, but we're focused on making sure that their product is the algorithmic work is delivering value to customers expect their helping us understand the data they want to see in different formats and the ways we can give them insight that they can get today. It really is kind of a classic analytical Big Data product, it's helping them through a lot of information to find ways to be more efficient and effective in their governance program. And so we are pleased with how things are going but it's definitely early in its life cycle than IdentityNow was a year ago. it most like IdentityNow circa 2015, 2016, would probably be a better compare.

Great. Thank you very much.

Thanks, Alex.

Our next question comes from Walter Pritchard, Citi. Please proceed with your question.

Two questions. Just one, you want to sort of expensive detail the highlight of subscription moving higher. Is there anything new driving that? Or is kind of in terms of mid-market demand and so forth?

First of all, Walter, Cam here, thanks for joining the call, I appreciate the interest. The answer there is more of the same. The continued health of the business, the variables we've highlighted previously and the variables that are driving us today, basically, first the health of the maintenance business and that relates to the continued healthy growth rate for both IdentityIQ and SecurityIQ in the maintenance this following of that. We continue to see very healthy renewal rates, that's a trend we're highlighted for you previously and it continues today. We are continuing to see some uptick in the number of customers also employing premium maintenance, that is the, 7/24 offering that we provide. That's also an increasing activity. And then, we'll talk to you about this before on a subscription line. Inside of that line is SaaS. It is the fastest growing component of our business today. It is growing at a very healthy rate. And we're pleased by that. It's meeting our expectations across the board in terms of type types of customers, the adoption of breadth of services that we're offering. So both elements of that combine line are doing exactly what we hoped we'd be doing and are consistent with prior quarters.

And then it sounds like on the services side, our math maybe services revenue going up a bit, it sounds like you're trying to push that business to partners. Can you talk about just what seems like a little bit of a disconnect there and then any breakout in terms of what percentage of your business at this point is SI influenced and maybe where that was a year ago?

Yes, so I think, the headline and overall comment around services continues to be the principal strategic direction is for more and more of the services ecosystem to be delivered by our partner community. We believe that fundamentally is the right business strategy for us in terms of our ability to sustain high growth rates and ensure that customers can be implemented and get to value quickly that ecosystem is very productive and has a great track record, and we like that. So overall, we are pleased with where we are in terms of the performance, the services business. I think the reality for us is as we move through this strategy, I think we're going to see the opportunity for that number to bounce around a little bit on us. It certainly was strong in Q2. I think as we think about Q3, you saw my comments in the script and if you think about the second half of the year, if you think about 9, 9.5, if you will, over time for those couple of quarters, it's going to be in that range. Our objective is to deliver what services we need to deliver to keep that market and balance, to keep moving forward. We do have customers that want to initial and follow-on implementation with SailPoint. We are aggressively continuing to extend our expert services offering both in terms of things like health checks, architectural checks and then partnering with customers in our partner community, just to make sure implementation cycles are on track and yield value we are expecting. And then lastly, we talked about this before and maintenance our training business while small is driving nicely both in terms of on premise delivered training as well as e-learning offering. So all of that is performing well. You see that – again, we guided you to roughly $9 million, but there could be some bounce in that number upward a little bit as we go through the year. Again, just depending on how much of the capacity we have to absorb into the market.

And then on SI influence business, is that something you're willing to break out on anything that you're tracking internally at this point?

No, we haven’t broken it out and at this juncture. I won't, again, give you specific numbers. We continue to – I think starts we have given you is an overall partner basis, about 85% of the overall business is somehow influenced by the partner community that's the first point, the second point it continues to be roughly at about 15% of our overall business runs through resellers, one the 15% is a subset of the 85 that round number. We're pleased with the overall contribution of SIs. It's been steady overall. I think growing right along with the business, which again would suggest they're making the investments in capacity and resources for their business to grow right along with ours. And support the implementation needs of our customers. So we are very pleased with where it is. The international component of that is getting more mature. That's a good thing because we're obviously – you've seen the health of our international business in recent quarters and so the evolution and the maturation in the marketplace of our SI partners' ability to deliver there is, I think, gratifying to us because we think that means, again, we've got the chance to keep growing on the line we want.

[Operator Instructions] Our next question comes from Shaul Eyal from Oppenheimer. Please proceed with your question.

Thank you. Good afternoon gentlemen. Congrats on another set of strong results and outlook. Apologies in advance for some background noise. So without a doubt, it appears as if the [ITA] Market, the identity market as a whole continues to see nice acceleration. On the other hand it would also appear that the number of participants within this market is shrinking by the week, by the day, by the month. Just wishing to understand maybe from a near or a midterm perspective, specifically, given that one of the larger participants in the ITA market and on the legacy front is being removed from the environment. Could that close any interesting displacement opportunities?

Shaul, I’ll just at least verify that we’re all thinking the same thoughts since you haven’t used any names. But are you referring to the Broadcom deal, just to be clear?

Yes, indeed.

Okay. I think our view of that is a couple of things. One is, as we have highlighted for you all before, we have a very strong and growing book of business that is involved with replacing legacy products. At the top of that list is Oracle CA, IBM, occasionally Quest, Novell, as I’ve mentioned, and others. So we have a good track record of both competing with CA and actually replacing their products where they’re deployed already. I think past experience would indicate to us that in a scenario like this, it will be either neutral or positive for us with regard to what this would mean for our future in that type of environment. I think the market is waiting and watching to see exactly how, assuming the deal goes through, obviously, Broadcom would handle that and what they would do with that identity portfolio. But even in almost all cases, whether they spin it out or whether they keep it or anything in between, it’s going to create some level of uncertainty and uncertainty often drives people to look at all their options and that probably bodes well for us.

Understood. Thank you so much. Congrats again.

Thanks, Shaul.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Mark McClain for closing remarks.

Well, thank you. Again, thanks to all of you for joining us today. I’d be remiss if I didn’t take a moment to thank our employees and partners for all the work they’re doing to continue to contribute to our growth as a business and to the strong results we were able to report today. I’d also like to thank our customers, in case any of them are on. Even if they’re not, we continue to thank them for their trust and confidence in us as a vendor and a partner. And we look forward to speaking with many of you again soon. Thanks for joining us this afternoon. Take care.