SAILPOINT TECHNOLOGIES HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report") and our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 28, 2022 (the "Annual Report"), including the consolidated financial statements and related notes included therein. SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements included in this Quarterly Report, other than statements of historical fact, are forward-looking statements. This includes statements regarding our pending acquisition byThoma Bravo , our expectations regarding the timing of the Merger, our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions. You should not rely upon forward-looking statements as predictions of future events or place undue reliance thereon. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections, in light of currently available information, about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors. Important factors, some of which are beyond our control, that could cause actual results to differ materially from our historical results or those expressed or implied by these forward-looking statements include the following: the completion of the Merger (as defined below) on anticipated terms and timing, regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth ofSailPoint's business and other conditions to the completion of the Merger; significant transaction costs associated with the proposed Merger; potential litigation relating to the proposed Merger; the risk that disruptions from the proposed Merger will harmSailPoint's business, including current plans and operations; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger; restrictions during the pendency of the proposed Merger that may impactSailPoint's ability to pursue certain business opportunities or strategic transactions; the scope, duration and severity of the COVID-19 pandemic, including any recurrence, as well as the timing of the economic recovery following the pandemic and its effect on the global economy and on our business; our ability to achieve and sustain profitability; our ability to sustain historical growth rates; our ability to attract and retain customers and to deepen our relationships with existing customers; an increased focus in our business from selling licenses to selling subscriptions; breaches in our security, cyber-attacks or other cyber-risks; interruptions with the delivery of our software as a service ("SaaS") solutions or third-party cloud-based systems that we use in our operations; our ability to compete successfully against current and future competitors; the length and unpredictable nature of our sales cycle; delayed effects on our operating results from ratably recognizing some of our revenue; fluctuations in our quarterly results; our ability to maintain successful relationships with our channel partners; the increasing complexity of our operations; real or perceived errors, failures or disruptions in our platform or solutions; our ability to adapt and respond to rapidly changing technology, industry standards, regulations or customer needs, requirements or preferences; our ability to comply with our privacy policy or related legal or regulatory requirements; the impact of various tax laws and regulations, including our failure to comply therewith; our ability to successfully identify, acquire and integrate companies and assets; our ability to maintain and enhance our brand or reputation as an industry leader; and the ability of our platform and solutions to effectively interoperate with our customers' existing or future information technology ("IT") infrastructures. More information on these risks and other potential factors that could affect our financial results is included in our other filings with theSEC , including in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the Annual Report and "Risk Factors" in Part II, Item 1A in this Quarterly Report and subsequent quarterly reports. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. 23
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The forward-looking statements made in this Quarterly Report relate only to events as of the date hereof. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Pending Transaction OnApril 10, 2022 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company,SailPoint Intermediate Holdings III, LP ("Parent," f/k/aProject Hotel California Holdings, LP ) andProject Hotel California Merger Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates ofThoma Bravo Fund XV, L.P. (the "Thoma Bravo Fund "), managed byThoma Bravo, L.P. ("Thoma Bravo"). As a result of the Merger, each share of the Company's common stock outstanding immediately prior to the Effective Time of the Merger (the "Effective Time") (subject to certain exceptions, including shares of common stock owned by stockholders of the Company who have not voted in favor of the adoption of the Merger Agreement and have properly exercised appraisal rights in accordance with Section 262 of the General Corporation Law of theState of Delaware ) will, at the Effective Time, automatically be converted into the right to receive the Merger Consideration of$65.25 in cash, subject to applicable withholding taxes. The transaction is expected to close in the second half of 2022, subject to customary closing conditions, including receipt of regulatory approvals. Upon closing of the transaction,SailPoint's common stock will no longer be listed on any public market. See Note 1 "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for information regarding the Merger. Business OverviewSailPoint Technologies Holdings, Inc. ("we," "our," the "Company" or "SailPoint") is the leading provider of enterprise identity security solutions. Our identity security solutions provide organizations with critical visibility into who currently has access to which resources, who should have access to those resources and how that access is being used. We offer both SaaS and software platforms, which provide organizations visibility and the intelligence required to both seamlessly empower users and securely manage their access to systems, applications and data across hybrid IT environments, spanning on-premises, cloud and mobile applications and file storage platforms. We help customers enable their businesses with more agile and frictionless IT, streamline and accelerate the delivery of access to their businesses, enhance their security posture and better meet compliance and regulatory requirements. Our customers include many of the world's largest and most complex organizations, including commercial enterprises, financial institutions and governments.
Our set of identity security solutions currently consists of:
•IdentityNow: our cloud-based, multi-tenant identity security platform, which provides customers with a set of fully integrated services for compliance, provisioning and password management for applications and data hosted on-premises or in the cloud;
•IdentityIQ: our on-premises identity security solution, which can be hosted in
the public cloud or deployed in a customer's data center, that provides large,
complex enterprise customers a unified and highly configurable identity security
solution; and
•SailPoint Identity Services: our multi-tenant SaaS subscription services that
can be utilized in conjunction with IdentityNow and IdentityIQ and currently
consisting of:
•Access Insights: collects a wealth of identity information and turns that
information into actionable insights and provides business-oriented dashboards
and reports to track the effectiveness of customers' identity programs;
•Access Modeling: uses machine learning to suggest roles based on similar access
between users and gives customers insights to confirm the correct access for
each role;
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•Access Risk Management: our cloudbased access controls solution that enables our customers to manage their risk by automating access controls for business applications with complex security requirements;
•Cloud Access Management: uses machine learning to automatically learn, monitor and secure access to cloud infrastructure;
•Recommendation Engine: uses machine learning, peer group analysis, identity attributes and access activity to help customers decide whether access should be granted or removed; and
•SaaS Management: our cloudbased solution that helps customers discover, manage, and secure their SaaS applications.
Our solutions address the complex needs of global enterprises and mid-market organizations. Our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers. Rising security threats and evolving regulations and compliance standards for cyber security, data protection, privacy and internal IT controls create new opportunities for our industry and require us to adapt our solutions to be successful. Maintaining our historical growth rate is also challenging because our growth strategy depends in part on our ability to drive new customer growth within existing geographic markets, further penetrate our existing customer base, continue to invest in our platform, leverage and expand our network of partners, expand market and product investment across existing vertical markets, and continue to expand our global presence, while competing against much larger companies with more recognizable brands and financial resources. Although we seek to grow rapidly, we also focus on operating leverage and efficiency while continuing to invest in our platform to deliver innovative solutions to our customers. We believe enterprises are increasingly embracing the cloud to house their critical security infrastructure. As a result, a growing number of enterprises are changing their approach to identity security and now prefer to use a SaaS solution rather than purchase software outright and install it in their own infrastructure. This industry shift aligns well with our current product strategy. Our product strategy is to (1) accelerate innovation within our core identity security SaaS offerings, (2) deliver continued innovation as we execute against our vision forSailPoint identity security, and (3) ensure that as we deliver these new innovations, they work in concert with our SaaS offerings in addition to our on-premises offerings. IdentityNow and our SailPoint Identity Services are provided in exchange for a subscription fee and offer customers access to these solutions and infrastructure support for the duration of their subscription agreement. Our standard subscription agreement for our SaaS offerings has a duration of three years. For our IdentityIQ solutions, our customers either purchase a perpetual software license, which includes one year of maintenance and support, or a term license, sold as bundled arrangements that include the rights to a term license and maintenance and support typically for a three-year term. Accordingly, we allocate the transaction price to each performance obligation. Our maintenance and support offering provides software maintenance as well as access to our technical support services during the maintenance term. After the initial maintenance period, customers with perpetual licenses may renew their maintenance and support agreement for an additional fee. Pricing for each of our solutions is dependent on the number of digital identities of employees, contractors, business partners, software bots and other human and non-human users that the customer is entitled to govern with the solution. We also package and price our IdentityNow and IdentityIQ solutions into modules. Each module has unique functionalities, and our customers are able to purchase one or more modules, depending on their needs. We also offer advanced integration modules for key applications and systems which can be purchased in addition to our base solution modules. They are also priced based on the total number of identities, as are our SailPoint Identity Services. Thus, our revenue from each customer is generally determined by the number of identities that such customer is entitled to govern as well as the number of modules purchased by the customer for our IdentityIQ and IdentityNow solutions and which, if any, of the SailPoint Identity Services that the customer purchases.
Combinations of our SaaS products are also offered in bundles through our Identity Security Cloud Business and Business Plus suites. These suites of products provide comprehensive sets of solutions for customers, meeting their needs at various stages of their identity security journey.
In addition to our solutions, we offer professional services to our customers
and partners to configure and optimize the use of our solutions as well as
training services related to the configuration and operation of our platform.
Most of our professional services activity is in support of our partners, who
perform a significant majority of all initial and follow-on implementation work
for our customers. Most of our consulting services are priced on a
time-and-materials basis, whereas our training services are provided through
multiple pricing models, including on a per-person basis for instructor led
courses and a flat-rate basis for our e-learning courses.
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Over the past several years, our revenue mix has changed as demand for our products and services has shifted from sales of perpetual licenses to sales of SaaS and term licenses, and in 2021, we largely completed our transition to a subscription model, with our principal focus on selling subscription-based arrangements, including SaaS and term licenses, and with revenue from perpetual licenses representing an increasingly smaller portion of our total revenue. Although we expect to occasionally see perpetual license transactions with new customers and ongoing expansion deals for current customers, our principal focus is on selling subscription-based arrangements. For customers that still wish to purchase and operate non-SaaS software, we are increasingly selling our software through subscription-based term licenses, rather than through perpetual licenses, and over time, we expect that sales to new customers will be exclusively comprised of SaaS, term licenses and other subscriptions. Our acceleration toward subscription-based offerings, which occurred more rapidly than anticipated, has resulted in and is likely to continue to result in short-term revenue headwind. In particular, our transition to a subscription model has impacted, and will continue to impact, the timing of our recognition of revenue as an increasing percentage of our sales become recognized ratably, as well as impact our operating margins as subscription revenue becomes a larger percentage of our sales. However, we believe that continued growth of SaaS, term-based license and maintenance and support revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues. Nevertheless, our revenue and gross margins vary depending on the type of solution we sell, and we expect that in a primarily subscription-based model, retention rates for our subscription customers could be slightly lower than the retention rates for support and maintenance for our perpetual customers. As a result, a shift in the sales mix of our solutions could affect our performance relative to historical results. Our shift to a subscription model has fluctuated between periods, and our ability to predict our revenue and margins in any particular period has been, and may continue to be, limited. As part of our growth strategy, in the first quarter of 2021 we acquiredIntello Inc. ("Intello"), an early-stage SaaS management company that helps organizations to discover, manage, and secure SaaS applications, andERP Maestro, Inc. ("ERP Maestro"), an early-stage SaaS governance, risk and compliance solution that provides separation-of-duty controls monitoring, enabling customers to manage their risk by automating access controls for business applications with complex security concepts. See Note 4 "Business Combinations" in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information. See "Key Factors Affecting Our Performance" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Annual Report for information regarding the key factors affecting our performance.
Impact of COVID-19
In light of the ongoing spread of COVID-19 inthe United States and abroad, including the emergence of new variants of the coronavirus, government and public health authorities continue to recommend and impose various regulations and restrictive measures on portions of the population, including measures directed at businesses. While intended to protect human life, these restrictions have had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain duration. We have made certain adjustments to our operations as we continue to provide our offerings to new and existing customers in response to these measures. For example, as a result of the COVID-19 pandemic, we shifted all customer events to virtual-only experiences beginning in early 2020. In 2021, we resumed certain in-person and hybrid events, but we expect that for the foreseeable future, some of our customer events will be virtual-only or hybrid events. While we believe that the pandemic has not had an immediate material adverse impact on our financial performance, our business may yet be negatively impacted by the COVID-19 pandemic as the duration of the pandemic and the long-term scope of its effects ultimately remain unknown. For example, the conditions caused by the COVID-19 pandemic may materially adversely affect the rate of IT spending by our current and prospective customers, including our customers' ability or willingness to purchase our offerings, delay prospective customers' purchasing decisions, delay the provisioning of our offerings, or cause customers to fail to make timely payments. We have seen an immaterial number of customer requests, and may continue to see similar requests, to lengthen payment terms or reduce the value or duration of subscription contracts, but this has not resulted in a material adverse impact on our renewal rates. In addition, during 2020 and the first part of 2021, we generally were not able to provide on-site consulting services to our customers due to local and regional restrictions related to the pandemic, and such restrictions remain in place for some of our customers. However, this has not resulted in any meaningful adverse impact on our ability to deliver such services because a significant portion of our consulting services have historically been provided remotely and most on-site projects transitioned to a remote delivery model. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce, we believe the value and scalability of our identity platform has become even more 26
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evident. We believe that the pandemic has not had a material adverse impact on our financial performance, and indeed, our revenue grew throughout 2020 and 2021 and the first half of 2022 as compared to the prior year periods. We expect to continue to see healthy demand for our solutions; nevertheless, we recognize that the uncertainty related to COVID-19 may result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. The challenges posed by COVID-19 on our business and our customers' businesses may evolve rapidly, and the speed, trajectory and strength of a recovery in general economic conditions remains highly uncertain and could be slowed or reversed by a number of factors, including the emergence or spread of variants of the coronavirus and the effectiveness and acceptance of vaccines and therapeutics for the disease as they continue to be developed and distributed. Consequently, we will continue to evaluate our financial position and results of operations in light of future developments, particularly those relating to COVID-19, and we will continue to monitor the global impact of the pandemic on our customers and our business. See the section titled "Risk Factors" in Part I, Item 1A in the Annual Report for more information regarding the possible effects of COVID-19 on our business. Key Business Metric
In addition to our financial information prepared in accordance with
As of
June 30, 2022 June 30, 2021
(In thousands)
Total annual recurring revenue $ 429,505 $ 291,277
We use total annual recurring revenue ("Total ARR") to monitor the growth of our
recurring business as we continue to shift to a subscription model. Total ARR
represents the annualized value of the active portion of SaaS, term-based
license, maintenance and support contracts and other subscription services at
the end of the reporting period. We calculate Total ARR by dividing the active
contract value by the number of days in the active portion of the overall
contract term and then multiplying by 365. Total ARR should be viewed
independently of revenue and deferred revenue as Total ARR is an operating
metric and is not intended to be combined with or replace these items. Total ARR
is not a forecast of future revenue, which can be impacted by contract start and
end dates and renewal rates, and does not include revenue from perpetual
licenses, training, professional services or other sources of revenue that are
not deemed to be recurring in nature.-
Components of Results of Operations
See "Components of Results of Operations" within "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
the Annual Report for information regarding the components of our results of
operations.
Seasonality
We generally experience seasonal fluctuations in demand for our products and
services. Our quarterly sales are impacted by industry buying patterns. As a
result, our sales have generally been highest in the fourth quarter of a
calendar year and lowest in the first quarter. Although these seasonal factors
are common in the technology industry, historical patterns should not be
considered a reliable indicator of our future sales activity or performance.
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Results of Operations
The following table sets forth our unaudited condensed consolidated statements of operations for the periods presented:
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(In thousands)
Revenue
Licenses $ 25,743 $ 24,450 $ 41,014 $ 43,685
Subscription 92,289 64,355 177,880 123,597
Services and other 16,251 13,681 30,809 25,966
Total revenue 134,283 102,486 249,703 193,248
Cost of revenue
Licenses 1,290 1,355 2,668 2,602
Subscription (1) 22,680 13,716 42,646 25,020
Services and other (1) 15,723 12,519 29,560 24,318
Total cost of revenue 39,693 27,590 74,874 51,940
Gross profit 94,590 74,896 174,829 141,308
Operating expenses
Research and development (1) 33,363 23,033 64,409 42,599
General and administrative (1) 13,047 10,461 27,034 21,728
Sales and marketing (1) 74,973 58,408 140,703 109,570
Total operating expenses 121,383 91,902 232,146 173,897
Loss from operations (26,793) (17,006) (57,317) (32,589)
Other expense, net
Interest income 140 212 164 412
Interest expense (615) (632) (1,514) (1,421)
Other expense, net (1,128) (219) (1,788) (220)
Total other expense, net (1,603) (639) (3,138) (1,229)
Loss before income taxes (28,396) (17,645) (60,455) (33,818)
Income tax (expense) benefit (975) 903 (2,000) 1,785
Net loss $ (29,371) $ (16,742) $ (62,455) $ (32,033) (1)Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(In thousands)
Cost of revenue - subscription $ 1,434 $
873
1,379 938 2,506 1,712
Research and development 4,757 3,186 9,192 5,406
General and administrative 2,895 2,534 5,444 4,596
Sales and marketing 7,635 5,341 14,069 9,696
Total stock-based compensation expense
12,872
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The following table sets forth the unaudited condensed consolidated statements
of operations data for each of the periods presented as a percentage of total
revenue:
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Revenue
Licenses 19 % 24 % 17 % 23 %
Subscription 69 63 71 64
Services and other 12 13 12 13
Total revenue 100 100 100 100
Cost of revenue
Licenses 1 1 1 1
Subscription 17 14 17 13
Services and other 12 12 12 13
Total cost of revenue 30 27 30 27
Gross profit 70 73 70 73
Operating expenses
Research and development 25 23 26 22
General and administrative 10 10 11 11
Sales and marketing 56 57 56 57
Total operating expenses 91 90 93 90
Loss from operations (21) (17) (23) (17)
Other expense, net
Interest income - - - -
Interest expense - - (1) -
Other expense, net (1) - (1) -
Total other expense, net (1) - (2) -
Loss before income taxes (22) (17) (25) (17)
Income tax (expense) benefit (1) 1 (1) 1
Net loss (23) % (16) % (26) % (16) %
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Comparison of the Three and Six Months Ended
Revenue
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 variance $ variance % June 30, 2022 June 30, 2021 variance $ variance %
(In thousands, except percentages)
Revenue
Licenses $ 25,743 $ 24,450 $ 1,293 5 % $ 41,014 $ 43,685 $ (2,671) (6) %
Subscription
SaaS 46,362 25,369 20,993 83 % 87,489 47,258 40,231 85 %
Maintenance and support 43,799 37,304 6,495 17 % 86,131 72,778 13,353 18 %
Other subscription services 2,128 1,682 446 26 % 4,260 3,561 699 20 %
Total subscription 92,289 64,355 27,934 43 % 177,880 123,597 54,283 44 %
Services and other 16,251 13,681 2,570 19 % 30,809 25,966 4,843 19 %
Total revenue $ 134,283 $ 102,486 $ 31,797 31 % $ 249,703 $ 193,248 $ 56,455 29 %
License Revenue. License revenue increased by $1.3 million , or 5%, for the three
months ended June 30, 2022 compared to the three months ended June 30, 2021
primarily due to significant new term license agreements entered into during the
quarter.
License revenue decreased by $2.7 million , or 6%, for the six months ended June
30, 2022 compared to the six months ended June 30, 2021 primarily due to SaaS
offerings becoming a larger portion of new sales.
Subscription Revenue. Subscription revenue increased by $27.9 million , or 43%,
for the three months ended June 30, 2022 compared to the three months ended June
30, 2021 primarily due to new sales of our SaaS offerings and an increase in
ongoing maintenance and support revenue from our installed base.
Subscription revenue increased by $54.3 million , or 44%, for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due
to new sales of our SaaS offerings and an increase in ongoing maintenance and
support revenue from our installed base.
Services and Other Revenue. Services and other revenue increased by $2.6
million , or 19%, for the three months ended June 30, 2022 compared to the three
months ended June 30, 2021 primarily as a result of an increase in the number of
customers using our consulting and training services.
Services and other revenue increased by $4.8 million , or 19%, for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 primarily a
result of an increase in the number of customers using our consulting and
training services.
Geographic Regions. Our customers in the United States contributed the largest
portion of our revenue in each reporting period ended June 30, 2022 and 2021
because we have more market momentum related to our larger and more established
sales force, sales pipeline and brand recognition and awareness in the United
States as compared to our other regions. Revenue is classified by the following
major geographic areas: (i) the United States , (ii) Europe , the Middle East and
Africa ("EMEA") and (iii) the rest of the world. We continue to invest in
increasing the size of our international sales force and strengthening
partnerships with global system integrators and resellers worldwide. For the
three and six months ended June 30, 2022 , the Company realized significant
revenue growth in the United States and EMEA. Revenue in the rest of the world
decreased 2% for the three months ended June 30, 2022 , but increased 24% during
the six months ended June 30, 2022 .
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The following table sets forth, for each of the periods presented, our
consolidated total revenue by geography and the respective percentages of total
revenue:
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
$ % of revenue $ % of revenue $ % of revenue $ % of revenue
(In thousands, except percentages)
United States $ 96,938 72 % $ 69,742 68 % $ 173,590 70 % $ 135,149 70 %
EMEA (1) 24,289 18 % 19,422 19 % 47,435 19 % 34,878 18 %
Rest of the World (1) 13,056 10 % 13,322 13 % 28,678 11 % 23,221 12 %
Total revenue $ 134,283 100 % $ 102,486 100 % $ 249,703 100 % $ 193,248 100 %
(1)No single country outside of the United States represented more than 10% of
our revenue.
Gross Profit and Gross Margin
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 variance $ variance % June 30, 2022 June 30, 2021 variance $ variance %
(In thousands, except percentages)
Gross profit
Licenses $ 24,453 $ 23,095 $ 1,358 6 % $ 38,346 $ 41,083 $ (2,737) (7) %
Subscription 69,609 50,639 18,970 37 % 135,234 98,577 36,657 37 %
Services and other 528 1,162 (634) (55) % 1,249 1,648 (399) (24) %
Total gross profit $ 94,590 $ 74,896 $ 19,694 26 % $ 174,829 $ 141,308 $ 33,521 24 %
Gross margin
Licenses 95 % 94 % 93 % 94 %
Subscription 75 % 79 % 76 % 80 %
Services and other 3 % 8 % 4 % 6 %
Total gross margin 70 % 73 % 70 % 73 %
Licenses. License gross profit increased by $1.4 million , or 6%, for the three
months ended June 30, 2022 compared to the three months ended June 30, 2021 . The
increase in gross profit was primarily the result of increased license revenues,
as described above. Gross margin remained materially consistent with the prior
period.
License gross profit decreased by $2.7 million , or 7%, for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 . The decrease in
gross profit was primarily the result of decreased license revenues, as
described above, in addition to increased royalty costs. Gross margin remained
materially consistent with the prior period.
Subscription. Subscription gross profit increased by $19.0 million , or 37%, for
the three months ended June 30, 2022 compared to the three months ended June 30,
2021 . The increase in gross profit was the result of growth in subscription
revenue, as described above, partially offset by a $9.0 million increase in cost
of revenue compared to the prior period. The increase in cost of revenue was
primarily driven by a $5.7 million increase in cloud-based hosting costs to
further support the scalability of our SaaS offerings and a $3.0 million
increase in employee-based costs to support the growth of our SaaS offerings and
ongoing maintenance and support to our expanding installed customer base. Gross
margin declined from the comparative prior period due to increased hosting costs
in support of SaaS offerings, and a greater increase in our SaaS revenues as
compared to our maintenance revenues which have higher relative gross margins.
Subscription gross profit increased by $36.7 million , or 37%, for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 . The increase
in gross profit was the result of growth in subscription revenue, as described
above, partially offset by a $17.6 million increase in cost of revenue compared
to the prior period. The increase in cost of
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revenue was primarily driven by a$10.1 million increase in cloud-based hosting costs to further support the scalability of our SaaS offerings, a$6.4 million increase in employee-based costs to support the growth of our SaaS offerings and ongoing maintenance and support our expanding installed customer base and a$0.7 million increase in amortization of intangibles, primarily from our acquired intangible assets during the first quarter of 2021. Gross margin declined from the comparative prior period due to increased hosting costs in support of SaaS offerings, and a greater increase in our SaaS revenues as compared to our maintenance revenues which have higher relative gross margins. Services and Other. Services and other gross profit decreased by$0.6 million , or 55%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . The decrease in gross profit is primarily attributable to a$3.2 million increase in cost of revenue compared to the prior period, partially offset by the increased revenues due to customer growth. The increase in cost of revenue was primarily driven by a$2.1 million increase in employee-based costs to support an increasing number of customers and a$0.8 million increase in partner costs due to higher partner utilization in our professional services and training organization. Services and other gross profit decreased by$0.4 million , or 24%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The decrease in gross profit is primarily attributable to a$5.2 million increase in cost of revenue compared to the prior period, partially offset by the increased revenues due to customer growth. The increase in cost of revenue was primarily driven by a$3.6 million increase in employee-based costs to support an increasing number of customers and a$1.1 million increase in partner costs due to higher partner utilization in our professional services and training organization. Operating Expenses Three Months Ended Six Months EndedJune 30, 2022 June 30, 2021 variance $ variance %June 30, 2022 June 30, 2021 variance $ variance % (In thousands, except percentages) Operating expenses Research and development$ 33,363 $ 23,033 $ 10,330 45 %$ 64,409 $ 42,599 $ 21,810 51 % General and administrative 13,047 10,461 2,586 25 % 27,034 21,728 5,306 24 % Sales and marketing 74,973 58,408 16,565 28 % 140,703 109,570 31,133 28 %
Total operating expenses
$ 29,481 32 %$ 232,146 $ 173,897 $ 58,249 33 % Research and Development. Research and development expenses increased by$10.3 million , or 45%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily driven by a$9.0 million increase in employee-based costs due to an increase in headcount, as well as selected salary increases to address competitive market pressures as our headcount increases, as we continue investing in additional products and capabilities and a$1.1 million increase in software and hosting arrangement expenses. Research and development expenses increased by$21.8 million , or 51%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily driven by a$19.6 million increase in employee-based costs due to an increase in headcount, as well as selected salary increases to address competitive market pressures as our headcount increases, as we continue investing in additional products and capabilities and a$1.6 million increase in software and hosting arrangement expenses. General and Administrative. General and administrative expenses increased by$2.6 million , or 25%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily driven by employee-related costs related to increased headcount and stock-based compensation and the use of contract labor related to the transition of certain key management positions. As part of the Merger, the Company expects to incur material non-recurring expenses contingent on the consummation of the Merger, including banker fees, legal fees and other third-party professional fees. 32
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General and administrative expenses increased by$5.3 million , or 24%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily driven by employee-related costs related to increased headcount and stock-based compensation and the use of contract labor related to the transition of certain key management positions. As part of the Merger, the Company expects to incur material non-recurring expenses contingent on the consummation of the Merger, including banker fees, legal fees and other third-party professional fees. Sales and Marketing. Sales and marketing expenses increased by$16.6 million , or 28%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily driven by a$13.3 million increase in employee-based costs, a$1.1 million increase in advertising and promotion expense to support increased penetration into our existing customer base and expansion into new industry verticals and geographic markets and a$1.5 million increase in travel expenses as COVID-19 related restrictions were eased. Sales and marketing expenses increased by$31.1 million , or 28%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily driven by a$26.8 million increase in employee-based costs, a$1.8 million increase in advertising and promotion expense to support increased penetration into our existing customer base and expansion into new industry verticals and geographic markets and a$2.4 million increase in travel expenses as COVID-19 related restrictions were eased.
Other Expense, net
Interest Income
Interest income for the three months ended
Interest income for the six months endedJune 30, 2022 decreased by$0.2 million compared to the six months endedJune 30, 2021 primarily due to a significant decrease in interest rates earned on our money market accounts and a decrease in our cash balance. Interest Expense
Interest expense for the three and six months ended
Other Expense, net
Other expense, net increased by
Other expense, net increased by$1.6 million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily driven by changes in foreign exchange rates.
Income Tax (Expense) Benefit
The Company recorded an income tax expense of$2.0 million and income tax benefit of$1.8 million for the six months endedJune 30, 2022 and 2021, respectively, leading to a decrease in net benefit of$3.8 million year-over-year. Provision for income taxes consists ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. The Company is in an overall deferred tax asset position and maintains its valuation allowance for certain federal and state tax purposes as existing deferred tax liabilities do not provide sufficient future taxable income to realize the full benefit of its deferred tax assets. The effective tax rate for the three and six months endedJune 30, 2022 was (3.4)% and (3.3)%, respectively, compared to 5.1% and 5.3% for the three and six months endedJune 30, 2021 , respectively. The main drivers of the differences in the rates from the prior period to the current period are related to differences in pre-tax book loss and the discrete tax benefit recognized for the change in valuation allowance in the prior-year period.
Liquidity and Capital Resources
As of
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cash collateralized, unconditional standby letter of credit issued in connection with our corporate headquarters lease. As ofJune 30, 2022 , we had$179.3 million in net working capital, which we define as current assets less current liabilities, excluding deferred revenue. OnMarch 11, 2019 ,SailPoint Technologies, Inc. , as borrower, and certain of our other wholly owned subsidiaries entered into a credit agreement (as amended, the "Credit Agreement"), which includes commitments for revolving credit loans of$75.0 million , with a$15.0 million letter of credit sublimit, which amount can be increased or decreased under specified circumstances and is subject to certain financial covenants. We had no outstanding revolving credit loan balance, and we were in compliance with all applicable covenants as ofJune 30, 2022 . See Note 8 "Credit Agreement" in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding the terms and conditions of the Credit Agreement. InSeptember 2019 , we issued$400.0 million aggregate principal amount of 0.125% convertible senior notes due 2024 (the "Notes") in a private offering (the "Offering") to qualified institutional buyers. The net proceeds from the Offering were approximately$391.2 million , after deducting discounts and commissions and other fees and expenses payable by the Company in connection with the Offering. In conjunction with the issuance of the Notes, and exercise in full of the initial purchasers' option, the Company used approximately$37.1 million of the net proceeds to pay the cost of privately negotiated capped call transactions (the "Capped Call Transactions") to reduce our exposure to additional cash payments above principal balances in the event of a cash conversion of the Notes. The Notes will mature onSeptember 15, 2024 , unless earlier redeemed, repurchased or converted. The Notes bear interest at a fixed rate of 0.125% per year payable semiannually in arrears onMarch 15 andSeptember 15 of each year. As ofJune 30, 2022 , we had in aggregate$1.1 million in contractual interest payments, of which$0.5 million are due within the next 12 months. As ofJune 30, 2022 , the Notes are convertible at the option of the holders. We have the ability to settle the Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. The impact of the Notes on our liquidity will depend on whether we elect to settle any conversion in shares of our common stock or a combination of cash and shares. During the three months endedMarch 31, 2021 , the Company settled conversion requests in the aggregate principal amount of$10.2 million of the Notes and terminated corresponding Capped Call Transactions. In connection with these transactions, we paid$10.2 million in cash to the converting holders for the principal amount, issued to the converting holders 181,629 shares of the Company's common stock with a fair value of approximately$10.1 million , and received 37,301 shares of the Company's common stock bearing a fair value of$1.9 million . As of the date of this filing, no other holders of the Notes have submitted requests for conversion. See Note 9 "Convertible Senior Notes and Capped Call Transactions" in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding the terms and conditions of the Notes and Capped Call Transactions. There have been no material changes outside the ordinary course of business to the cash requirements from our contractual and other obligations, as disclosed in the Annual Report. We believe that existing cash and cash equivalents, any positive cash flows from operations and available borrowings under our Credit Agreement will be sufficient to support working capital, capital expenditures and other cash requirements for at least the next 12 months and, based on our current expectations, for the foreseeable future thereafter. Our future capital requirements, both near-term and long-term, will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new solutions and product enhancements, the continuing market acceptance of our offerings and services, the costs of any future acquisitions in complementary businesses and technologies and the impact of the COVID-19 pandemic to our and our customers', vendors' and partners' businesses. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we may borrow under our Credit Agreement or seek to raise additional funds through equity, equity-linked or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity financing, incur indebtedness or use cash resources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected. Since inception, we have financed operations primarily through license fees, SaaS subscription fees, maintenance and support fees, consulting and training fees, borrowings under our prior credit agreement and, to a lesser degree, the sale of equity securities. Our principal uses of cash are funding operations and capital expenditures. Over the past several years, revenue has 34
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increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in key initiatives to drive the Company's long-term growth.
OnApril 10, 2022 , we entered into the Merger Agreement, pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of theThoma Bravo Fund , managed by Thoma Bravo. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the Effective Time. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Parent's consent, including:
•acquiring businesses and disposing of significant assets;
•incurring expenditures above specified thresholds;
•issuing additional debt facilities; and
•repurchasing shares of our outstanding common stock.
We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements.
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