ForgeRock Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2021

There are 12 speakers on the call.

Operator

Welcome to ForgeRock's Third Quarter Earnings Conference Call. As a reminder, this call is being recorded. I would like to turn the call over to Mark King, ForgeRock's Head of Investor Relations. Please go ahead.

Speaker 1

Hello, everyone. Welcome to ForgeRock's Q3 2021 Conference Call. On the call with me today are Fran Roche, CEO of ForgeRock and John Fernandez, our Chief Financial Officer and EVP of Global Operations. Before we begin, I'd like to remind you that our discussion today includes forward looking statements within the meaning of the federal securities laws. Forward looking statements include statements related to our expected results for Q4 and full year 2021 results, our future offerings and enhancements to our current offerings, The market for our offerings, customer demand for our offerings and other matters, actual results could differ materially from those indicated by these forward looking statements.

Speaker 1

We encourage you to review the risk factors that we have included in our SEC filings, including our final IPO prospectus filed with the SEC on September 17, 2021, for some of the factors that could cause actual results to differ from those indicated by the forward looking statements. All non GAAP numbers referenced in today's call are reconciled in our press release slides available on our Investor Relations website. With that, I'll hand the call over to Fran.

Speaker 2

Thanks, Mark, And thanks to everyone for joining our first earnings call as a public company. Before I get started, I would like to thank our employees, customers, We are looking forward to this next stage of our growth. We're pleased with the results we achieved in our Q1 as a public company. Revenue in the Q3 grew 38% year over year to $44,000,000 while ARR grew 30% to $164,000,000 We continue to see traction with the 4th rack Identity Cloud, our SaaS offering, which is seeing growing Adoption with both new and existing customers. Identity continues to be critical to digital transformation as more companies recognize the need to deliver both safe and seamless experiences to engage their customers and keep employees productive.

Speaker 2

We see these trends continuing into our fiscal Q4, bolstering our confidence that we are well positioned to capitalize on a large and growing market for enterprise grade identity. Before I elaborate On our highlights of the Q3, given this is our first earnings call, I'd like to tell you more about ForgeRock, our opportunity And why I'm so excited about the future ahead. If you take a moment to look around, it's easy to spot how the world is changing. Activities that we used to conduct in person are now happening digitally, banking, healthcare and retail to name a few. We're using facial recognition on our phones to get access to applications and foreshock is helping to power This new digital economy and drive this massive digital transformation.

Speaker 2

ForgeRock is a global leader in consumer, workforce And IoT Identity and our unique technology breaks the forced compromise that has been the status quo for far too long. We help people access the connected world with intuitive digital experiences that provide enhanced security in a Zero Trust environment. Our mission is to create identity experiences for people at work, at home or on the go that are so simple and secure Two things happened. Identity recedes into the background completely and users never have to log in again. We purpose built our enterprise grade, unified and full suite platform to serve the modern digital identity needs of enterprise, who are under ever increasing competitive pressure to deliver personalized and seamless omnichannel experiences.

Speaker 2

This competitive pressure is driving enterprises to focus on identity as a key strategic initiative to provide differentiated experiences, to increase loyalty with consumers and enhance productivity for employees. However, enterprises are saddled with complex, heterogeneous IT environments, driven by the accumulation Of a myriad of applications and infrastructures resulting from decentralization of IT, Mergers and acquisitions and decades of homegrown or legacy systems, increasing and evolving regulatory and compliance mandates Add additional pressure as enterprises operate globally. These challenges faced by our enterprise customers Present a massive opportunity for ForgeRock. Based on our bottoms up analysis, using our current product suite, We estimate our market opportunity to be $71,000,000,000 across consumer, workforce, IoT and services. We estimate the consumer opportunity, often referred to as Consumer Identity and Access Management or SIAM to be $41,000,000,000 which we believe to be the fastest growing part of the identity market.

Speaker 2

Also, we are focused on enterprises We make up the majority of business information and communications technology spend. And a big reason why we win It's because we give our customers the power of choice. Our customers choose how they want to deploy our software in their heterogeneous environments, including self managed environments such as public and private cloud environments and through our SaaS offering, the ForgeRock Identity Cloud or a combination of both. ForgeRock has always had a differentiated approach to solving the identity challenge. We launched in 2010 with the intention of building the most comprehensive digital identity platform in the market, a full suite identity solution, Purpose built for all kinds of identities that can easily integrate into complex hybrid enterprise environments and provide blazingly fast Performance.

Speaker 2

When we ask our customers why they selected Fortrock, here are the key reasons that they give us. We provide our customers with the power to build simple, flexible identity experiences that are embedded with security by leveraging our identity tree capabilities. Their developers love this drag and drop capability that allows them to quickly create customer identity journeys in minutes. Our unified platform is purpose built for all kinds of identities, consumers, workforce, IoT and services, and across the identity lifecycle, including identity management, access management, including MFA and single sign on And governance administration. Our customers want to avoid the complexity and expense related to cobbling together and operating Multiple point solutions.

Speaker 2

What they want is a more comprehensive platform like ForgeRock. Our customers choose foredock because of our unique approach to the cloud. Foredock offers the choice between private, public and SaaS And our modern architecture provides our customers with more control over their data and performance. This differentiated cloud architecture is so important to global companies who face requirements to keep their identity data in their respective countries to ensure data sovereignty. The 4 drug platform enables our customers to create sophisticated identity experiences and to integrate into complex hybrid environments and performance scale with high reliability.

Speaker 2

More than 1300 organizations around the world leverage our platform to manage in aggregate over 3,000,000,000 identities. Our platform is capable of managing over 60,000 user based access transactions per second per customer. This is particularly important for customers who have tens of millions or 100 of millions of identities Like the BBC, HSBC and Telecom Cell, the largest wireless carrier in Indonesia. Our trust network allows our customers to quickly integrate with our network of over 120 technology partners across biometrics, Identity Proofing and Risk Analysis. These integrations are part of the ForgeRock Identity platform and are prebuilt, tested and always up to date.

Speaker 2

Lastly, our customers appreciate our track record of innovation Across important areas such as passwordless authentication, governance, AI and our SaaS offering, We expect our rapid pace of innovation to drive our future growth. We've taken a modern approach to the 4 Drake Identity Cloud. Our multi tenant SaaS architecture with complete tenant isolation provides our enterprise customers with more control over how their data is stored and where it resides. While all companies value this increased data control, This is particularly important to foredrop as around 50% of our revenue is generated from customers located outside of the U. S.

Speaker 2

And these customers face many requirements to maintain data sovereignty and information privacy. Our modern architecture also helps our customers to maximize performance and service reliability By not throttling or rate limiting individual customer environments, which can be critical for enterprises, especially during large Usage spikes such as Cyber Monday or media events like the World Cup or Royal Wedding. We also protect against noisy neighbor issues so that traffic from one customer will not affect another customer's performance. The holiday season is expected to be more digital than ever. With retail trends like click and collect at curbside growing, Companies cannot afford the front door of their businesses to be shut down due to large usage spikes, something our unique architecture prevents.

Speaker 2

As I mentioned previously, we provide our customers with if I were to choose how they want to consume our software, Whether it be self managed or SaaS. For our new customers in Q3, 75% chose our self managed offering And 25% chose the ForgeRock Identity Cloud. Demand for our self managed offering is strong because many global enterprises The combination of on premise and cloud deployments for their hybrid IT environment. Our SaaS offering continues To experience rapid growth since its launch with 50% of ARR from new customers in Q3 coming from SaaS. Now let's discuss some of the recent highlights on the product front.

Speaker 2

We have continued to invest in our platform to drive innovation And the biggest areas of focus for us recently have been in the 4DRAC Identity Cloud as well as AI. We released enhanced sign capabilities to the 4 Drake Identity Cloud to ensure every customer touch point along a buyer's journey want to deliver personalized experiences across a variety of channels like web and mobile and have a single view of all their identities. Called UI theming, it offers out of the box design options for developers So they can quickly and easily configure identity journeys that recognize the consumer across brands and digital channels for a personalized Experience. Our customers are telling us that they want to go passwordless as part of their digital transformation journey. For many hybrid IT organizations, maintaining sensitive passwords on prem, while moving other operations to the cloud Creates a significant challenge.

Speaker 2

Teams must evaluate the best authentication approach that will maximize security while preserving a greater user experience. But a move to the cloud often means adding more passwords or forced password resets, which is a bad experience for users. To help these customers, we released 2 new features, pass through authentication and just in time migration. Now, ForgeRock Identity Cloud empowers enterprises to move to the cloud without the headaches of managing even more passwords and causing customer inconveniences that can erode brand loyalty. We continue to provide more benefits to customers Healthcare records are prime targets for attackers.

Speaker 2

During the quarter, we achieved HIPAA compliance to give healthcare customers A safe and secure way to protect electronic health information. We also completed the SOC 2 Type 2 Certification. This additional third party industry validation confirms ForgeRock provides enterprise grade security, availability, confidentiality and privacy for customer data managed by the ForgeRock Identity Cloud. Our investments in AI and ML continue to benefit our customers who rely on us to better govern their identities for the workforce. We released a market first capability to our AI driven autonomous identity product that we believe is superior Traditional role based access control, commonly known as RBAC, used by many companies for provisioning access.

Speaker 2

RBAC can be costly to administer and often can't keep up in agile environments. That changes With our new roles workshop capability, which uses AI to quickly analyze and recommend the optimal role structure to manage access Customers are the crown jewel of ForgeRock, and I'm excited to share several notable wins from the quarter. DIRECTV is a new SIAM customer. The company chose our SaaS offering, the ForgeRock Identity Cloud To establish a single unified identity platform for their millions of users, this will give their subscribers the ability to seamlessly log in Ultimately, this will lead to a superior customer experience while helping DIRECTV retain subscribers and reduce costs. Our next customer example is a top 25 U.

Speaker 2

S. Retailer that has been using foreshock Over the past 5 years, for both consumer and workforce use cases, this customer significantly expanded their relationship They were looking to unify identity for employees, customers, partners and vendors and chose foredoc as their sole enterprise authentication An Identity and Access Management platform. On the consumer side, they leveraged the ForceRock identity platform To improve their omni channel capabilities as their customers were seeking the same purchase experience across in store, Online, curbside pickup and same day delivery. Through ForgeRock, they were able to provide a better user experience We're also boosting security for the consumer and workforce use cases. In Australia, We're helping the Australian Department of Home Affairs reopen the country's borders.

Speaker 2

Our identity platform is enabling Digital passenger declaration cards to replace physical travel documentation. Travelers to Australia ForgeRock, in partnership with Accenture, will be used for this initiative due to the flexibility, scale And unified and extensive identity platform that we provide, an industry leading global transportation company Experiencing massive growth, particularly with its B2B business, selected foredrop in the quarter. This customer saw immense potential for growth through its end users and is embarking on a new digital strategy based on identity. The company chose ForgeRock to get a 3 60 degree view of its customers to enable personalized digital experiences, Offer new products, streamline compliance and reduce costs. Moving to our market leadership.

Speaker 2

Foredrop continues to be recognized by multiple third party industry analysts. In fact, foredrop has once again been named a leader In the 2021 Gartner Magic Quadrant for Access Management, we're pleased to receive leadership recognition in back to back years. We continue to be the only identity provider recognized as a leader by Gartner for Access Management and Forrester and Covenger Coal For cyan, during the quarter, we added impressive new talent to the team. Shudi Smith joined Foerdrok as our new Chief People Officer. She joins us from Cisco, where she served as Senior Vice President of People and Communities, overseeing talent, Rewards, recruiting and leadership development strategies.

Speaker 2

We also appointed 2 new members to our Board of Directors, Rinki Sethi and Johanna Flower. Rinki is currently the Chief Information Security Officer at Twitter And built her career leading and developing innovative online security infrastructures for Fortune 500 Companies. Johan has served as CrowdStrike's 1st CMO and was instrumental in helping the company grow from $12,000,000 to nearly $800,000,000 in ARR. We're pleased to welcome Shruti, Rinke and Johanna to the ForgeRock team that now exceeds 750 people worldwide. Overall, I'm very pleased with the momentum we're seeing across our business.

Speaker 2

Identity continues to be critical to digital transformation as more companies recognize the need to deliver both safe and seamless experiences to engage their customers and keep employees productive. We see these trends Continuing into our Q4, bolstering our confidence that we are well positioned to capitalize on a large and growing market opportunity for Enterprise Grade Identity. With that, I'll turn the call over to John to walk through our financial results in more detail.

Speaker 3

John? Thank you, Fran, and thank you to everyone for joining us. Before I get into the results from the quarter, I want to provide a quick overview of our business And the key metrics that we look at to measure our business. Customers license our software platform primarily through subscription licenses For our self managed or SaaS offerings, our subscription revenue includes recurring revenue from term licenses, SaaS, maintenance and support. We run our business and focus its growth on ARR.

Speaker 3

We believe it's the best metric to measure our business Performance. Due to ASC 606, our revenue growth is impacted by the amount of revenue recognized upfront Versus that which is recognized ratably, we believe our ARR numbers normalize for this. As of the end of Q3, ARR was $164,000,000 up 30% year over year. Our ARR growth was driven by new customer wins An expansion within our existing customer base through more identities, more use cases, more product modules and more deployments. Based on our process of continuous improvement in targeted lead generation, qualification of leads and pipeline and conversion rates, We have confidence in the sustainability of our growth.

Speaker 3

We have a very strong customer base that includes many of the world's leading brands. We ended Q3 With over 1300 customers globally who leverage our software to manage over 3,000,000,000 identities. We ended Q3 with 369 large customers defined as customers with 100 ks of ARR or greater. Our large customer base grew 18% year over year and our large customers represented 89% of our total ARR as of the end of Q3. Our net retention rate for Q3 was 112%.

Speaker 3

Our average ARR from new customers in Q3 again exceeded 200 ks of ARR demonstrating that we tend to land larger with new customers. Also due to an increase in new logo acquisition over the past few quarters, the mix of new ARR from existing customers Was slightly lower on a relative basis. Total revenue was $44,200,000 an increase of 38% year over year. We have transitioned to a nearly 100% subscription model over the past 2.5 years and 96% of our Q3 revenue Was subscription revenue? Our revenue growth was primarily driven by the growth in our customer base, expansion within existing customers, Multi year subscription licenses and SaaS revenue.

Speaker 3

Before turning to profitability and expense items, I would like to point out that I will only be discussing non GAAP results going forward. Non GAAP results exclude stock based compensation and restructuring and impairment charges. Our press release contains our GAAP results and reconciliations to our non GAAP results. Q3 gross profit was $36,000,000 and gross margin was 81%. As we continue to scale our SaaS offering, We will see increasing investment in cloud infrastructure and incur higher hosting costs.

Speaker 3

Our strong subscription gross margin Is offset by our professional services gross margin as we continue to invest in supporting our customers through further build out of our customer success and support organizations. Turning now to operating expenses. We remain focused on investing for growth To capture additional share in the large market opportunity that Fran discussed earlier, sales and marketing expense for Q3 Was $21,400,000 compared to $17,500,000 in Q3 last year. This represents 48% of total revenue for Q3 compared to 55% in Q3 of last year. The percent of revenue improvement was primarily driven by an increase in sales productivity.

Speaker 3

As we continue to expand our footprint and scale our business, We believe we will continue to see operating leverage. R and D expense in Q3 was $10,300,000 compared to $9,300,000 in Q3 last year. This represents 23% of total revenue For Q3 versus 29% in Q3 of last year, given the strong demand we are seeing for consumer and workforce identity use cases, We continue to invest in advancing our products and innovation in areas such as our enterprise SaaS offering, Our AI machine learning capabilities and our identity trees that empower our customers to create orchestration journeys focused on great customer Experience without compromising security. We believe the continued investment in our product differentiation will further cement our market leadership and identity. G and A expense was $9,700,000 for the quarter compared to $5,300,000 in the Q3 last year.

Speaker 3

G and A was 22% of revenue versus 16% of revenue last year. Our G and A expenses increased in absolute dollars and as a percentage of revenue due to new public company expenses in Q3 of this year. However, over time, We expect growth in G and A expense as a percentage of revenue to decrease as we optimize our back office costs as we scale. Operating loss was $5,700,000 versus a loss of $4,900,000 in Q3 a year ago. Operating margin was negative 13% versus negative 15% a year ago.

Speaker 3

Despite the increase in dollars year over year in our operating expenses, we continue to see operating leverage in our business with revenue growth outpacing the growth In our operating expenses, we view our strong top line growth as an indicator that our investments are paying off and we expect this trend to continue. Turning to the balance sheet, we ended the 2nd quarter with $378,100,000 in cash, cash equivalents and marketable securities. Turning now to guidance. For the Q4 of 2021, we expect total ARR $175,000,000 to $176,000,000 representing 29% year over year growth. Total revenue of $46,500,000 to $47,500,000 non GAAP operating loss of $9,000,000 to 8,000,000 And non GAAP net loss per share of $0.14 to $0.12 assuming weighted average shares outstanding of approximately 82,300,000.

Speaker 3

For the full year 2021, we expect total revenue of $175,500,000 to $176,500,000 Non GAAP operating loss of $20,500,000 to $19,500,000 and non GAAP net loss per share Of $0.96 to $0.94 assuming weighted average shares outstanding of approximately 41,800,000. That concludes my remarks for Q3. And now I'll turn the call back to Fran for closing remarks.

Speaker 2

Thank you, John. Thanks everyone for being with us on our call today. I am very pleased with the momentum that we are seeing across our business. The market for both consumer and workforce identity is massive and growing, and we believe ForgeRock is well positioned to capitalize on the opportunity. And this is just the beginning.

Speaker 2

Operator, you may now open the call for questions. Thank

Operator

And we'll take our first question today from Hamzah Fodderwala with Morgan Stanley.

Speaker 4

Hey, guys. Good afternoon. Thank you for taking my questions. Just first question for Fran. I was wondering if you could elaborate a little bit more on the ForgeRock Identity Cloud recently achieving HIPAA compliance.

Operator

What does

Speaker 4

that mean for you? And obviously, ForgeRock sort of differentiates itself and being able to handle more complexity over some of its competitors. So I'm curious How you see that opportunity within the healthcare vertical? How penetrated you think it is? And what the strategy there is going forward?

Speaker 2

Great. Hamzah, thanks so much and good to hear from you. Yes, I think the healthcare vertical continues to really grow and be important to us. I think with this digital transformation and a lot of driven through COVID, everyone's doing much more online. And That has led a lot of people to look for healthcare and telemedicine and move all of that online.

Speaker 2

And when I talk to our healthcare customers, they're looking to compete in their markets And to differentiate and a lot of that is how easy it is for patients to come in and enroll Get access and meet with doctors and that whole ease of use is identity is a key part of that. But there's also a lot of requirements around Data privacy and security. So it really is a vertical that really drives toward what Fort Drug does really well. And it's been growing. We expect it to continue to grow, which is why it made sense for us to get the HIPAA certification as that's really important to so many different healthcare companies.

Speaker 4

Maybe just a follow-up for John. You mentioned 25 Percent of new customers who bought the SaaS solution. I think if I remember correctly, I think You were getting to the point where close to half of new customers are buying the SaaS solution. So I'm curious why maybe That was a little bit lower in Q3. Does it have to do with summer seasonality?

Speaker 4

Do you expect to see a stronger Q4 when it comes to SaaS offering? Any color you can give us there would be helpful.

Speaker 3

Sure, Hamzah. Yes, so that's right. In Q2, we shared that 41% of our New customers had bought SaaS and that was now 25%. We also shared a new metric, Which was that, that 25% was actually 50% of the new ARR. And so we are seeing a little bit of that variability from period to period.

Speaker 3

And we think that's great because remember that in this period when 25% bought SaaS, 75% chose self managed, Which is really important in the enterprise because we could serve them quite uniquely with our offering and with choice. As we look at this and as we look forward to next year, We'll look to provide some additional detail around of our total ending ARR, what is SaaS? Then obviously, as we look forward into 'twenty three, we'll actually go

Speaker 4

Thank you.

Operator

Our next question Certainly, we'll hear from Sterling Auty with JPMorgan.

Speaker 5

Yes. Thanks. Hi, guys. Let's carry on with the SaaS Questions and just what I'm curious about is when you look at the customers that chose SaaS and you look at those use cases, Is there any common thread that you kind of can pull through in terms of either size of the deployment that they're looking at or use case That can give you a trend line for what you think the bigger adoption areas for SaaS will be?

Speaker 2

Yes. I think what we're seeing is, as John mentioned, we're really glad to be able to have both options because there's good market out there opportunity for SaaS as well as self managed and we really kind of have it all covered. But when we look at SaaS, I think we're seeing a lot of traction in the science space. I think that companies, whether they be in digital retail or financial services and how they're expanding, they want to move fast And they don't want to run a lot of infrastructure. So we're really seeing that SIAM use case is the one that's driving most of the growth in our SaaS, especially from New customers, so we're going to continue to focus on that.

Speaker 2

And then of course, once we get that Si'AM business, we have the opportunity to cross sell and upsell Workforce as well. So I think the trend we're seeing is the same opportunity is bigger, more greenfield, a lot of homegrown And that's a key driver of our SaaS business. And to that point, we're seeing some big deals. DIRECTV was really important for them to have a Easy SciAM solution so that they can make it easy for their subscribers to enroll and get services and manage their accounts, and they were ready to go to the cloud, so they can move fast. That's kind of an example of the type of SIAM SaaS deals we're seeing.

Speaker 5

That makes sense. And then one follow-up. When you look at the new business that you brought on in the quarter, can you give us a sense of how much of that was actually displacement of Perhaps some of the legacy solutions like the old SiteMinder versus greenfield projects that were being put into place?

Speaker 2

So generally, because we tend to focus on enterprise and large enterprise, there's typically something in place today because these Customers already have employees and they already have customers, so we're typically displacing something. I think it is a mix, but we kind of put into 3 groups. There is a fair amount of homegrown, especially in the SIAM space, where people just try to build their own identity solutions And they're finding they're not giving them the flexibility if they need to be build great journeys or they can't scale on performance they need. So that's kind of one is homegrown. 2nd is definitely the legacy.

Speaker 2

We've done some additional Oracle and CA SiteMinder replacements this past quarter. We continue to see That is a big opportunity going forward. I was looking at our pipeline recently. There's definitely a fair amount of that still in the pipeline. And then the third is a lot of enterprises, large enterprises have kind of a group of point solutions They just put in place over the years, maybe one for mobile and one for med and one for call center.

Speaker 2

They're looking to kind of consolidate And looking for a comprehensive solution. So that's the kind of the way we look at what we're displacing. As I said, we're typically always displacing something.

Speaker 5

Understood. Thank you.

Speaker 2

Thank you.

Operator

Next, we'll hear from Patrick Colville with Deutsche Bank.

Speaker 6

Hey, thank you so much for taking my question and congrats guys on your Q1 as a public company. So My question is about, I guess, the market more broadly. This time, 12 months ago, we were in the kind of the mix of the pandemic. Now we're hopefully kind of exiting the pandemic. Can you just help us understand how the demand environment Has shifted throughout that process.

Speaker 6

And then I guess, probably the most interesting bit is, What do you guys see? What did you see over the last kind of 3 months?

Speaker 2

Yes. I would say that when John and I look at this, we almost see Different phases of COVID, what we call kind of COVID tailwinds. I think in the 1st 6 months or a year, companies were just trying to react very quickly to respond to The shift to digital, as it wasn't safe to go out and do, a lot of business in person. So most companies had something in place today, And they had to just scale it up and make it work. So for a lot of our customers, that went really successfully.

Speaker 2

We talked about one of our customers that saw A 300% increase in the digital banking traffic is really they just had to scale up and adopt. And then I think as people realize this digital transformation is not going back, people aren't going to go back to the old ways, they're going to stay with digital, They have to really say, okay, it's going to become our primary channel. What do we have in place today? Is it able to give us The experiences we need, the security, can it scale and perform? Because when identity is the front door to your business, it Has to be reliable and be there.

Speaker 2

So we're kind of seeing a second wave that people are saying, we've got to move to something. And we talked about one of our in the quarter is a U. S. Retailer. And as they see the holidays coming on board, they know they're going to have less people coming in person Shopping, especially with some of the labor shortages and more digital, so more opportunity for us to expand.

Speaker 2

So we've seen acceleration in the past 3 months, More FPs, bigger pipeline, particularly in cyan, but workforce as well.

Speaker 6

Great. That's helpful. And then I guess as I think about the ARR guidance fiscal 4th quarter, Pretty big number, 17,545. Can you just help us understand the kind of the puts and takes there? And the reason I ask is, doing kind of analysis around sequential dollar ARR ads And kind of quarter on quarter growth, I guess how much conservatism is in that number?

Speaker 3

Yes. So that represents 29% year over year growth and we have a lot of confidence in that number and in that range. And for us, Q4 does because of enterprise buying cycles, it does tend to be our largest quarter. So I think that's Important and historically fits the pattern very well. So again, a lot of confidence in the range and in those numbers and obviously the point we're at in the quarter as well.

Speaker 3

We have a lot of visibility into our pipeline. And just Patrick, when

Speaker 2

you talk about the puts and takes, we look at those puts and takes as brand new logos That are coming on and buying, contributing new ARR to 4 drop, our ability to cross sell and up sell into our base, which we have a lot of opportunities, Both Syme to Workforce, Workforce to Syme as well as software to SaaS, help our customers move to the cloud. And that third put and take is our gross retention of our customers. And we've invested more in customer success, more in our professional services and we're seeing our customers stick with us longer. So we are very Our focus as a company on those puts and takes and contributing to our confidence in that guidance.

Speaker 6

Great. Thank you. And nice job once again on the IPI.

Speaker 2

Thank you.

Operator

Greg Moskowitz with Mizuho has our next question.

Speaker 7

Okay. Thank you for taking the questions. Good afternoon, guys. Fran, wondering if you could speak to what the early feedback has been like for your 4DROC Autonomous Identity offering? And then maybe also tell us why It's important to IGA solutions out there.

Speaker 2

Yes. It's great, Greg. Thank you. So let me just kind of frame the problem we hear from customers. And what IGA and our autonomous identity product is all about is helping Our enterprise customers understand of their employees who has access to what and to be able to manage that access.

Speaker 2

And there are kind of 2 competing priorities Our customers have one is, of course, they want all their employees to be productive, right? They want everyone to get access to the applications and services they need to do their job. So That lends them to kind of say, well, let's open it all up and get people get access. But the flip side is they have to manage risk. And this whole idea of kind of least privilege where The goal is to have only people have access to what they need.

Speaker 2

So it just reduces risk because you don't have that inappropriate access from someone. So We really recognize that they have these competing priorities. And what our Auto ID does is brings the AI capability to be able to look at The groupings of users and exactly what they need to do their jobs and be able to kind of automatically ensure that Employees are only approved to get access to what they need their jobs and they don't get access to what they don't need. And that way, we can deliver both for our customers, Which is productivity of their workers while managing the risk. So that's kind of what we're all about with Auto ID and IGA.

Speaker 2

And we've seen some great growth this year, and we see great pipeline going forward, and it will continue to be a big focus and a big differentiation for us in 2022.

Speaker 7

All right. That's very helpful. Thanks, Fran. And then John, your subscription SaaS support and maintenance revenue line item saw some good acceleration this quarter on a year over year basis. I would expect that within that line item, SaaS was probably the predominant driver, if not the sole driver of that, but any more Color there would be helpful.

Speaker 3

Yes, sure. So we did see that nice 54% increase in that subscription SaaS support and maintenance. And yes, a part of that is the SaaS product that we have. And really, it's really that ongoing focus again just around the ratable And continuing to do that, but SaaS certainly contributed meaningfully for the first time.

Speaker 7

Perfect. Thanks very much.

Speaker 3

Thanks, Greg.

Operator

Our next question comes from Gray Powell with BTIG.

Speaker 8

Great. Thanks for taking the question and congratulation on the quarter.

Speaker 2

Thanks, Craig.

Speaker 8

Absolutely. Yes, I want to follow-up on an earlier question. So I mean, if I just kind of look at the building blocks, you're growing the customer base In the high teens, net retention is in the 12% to 13% range the last few quarters. You have a new SaaS product that's gaining momentum. Is there any reason why ARR growth would not further improve off of this current 30% pace over the next few quarters?

Speaker 3

Yes. I think we again forecasted 29% with respect to our guidance for Q4 and we feel very confident about that. I think we have a lot of upside levers in our growth that we focus on. I think our installed base is a big one. One of the things we talked about throughout the IPO process was the opportunity to unleash the multiple in moving some of our customer base over from self managed to SaaS and that statement remains true.

Speaker 3

We continue to be able to we're in the early innings of that, so to put it. So I think that remains a huge opportunity for upside and that's really focused on obviously not just ARR overall, But also net retention is a core metric. And so that's one of those I think SaaS on a standalone basis aside from the installed base Remains a huge opportunity. Again, we see that as an opportunity to sell into, not to migrate additional usage into our installed base So a variety of different vectors there that we believe provide strong upside for us in the future.

Speaker 8

Understood. That's really helpful. Thanks. And then just one other one. So yes, I mean, I know the SaaS business is relatively new.

Speaker 8

How should we think about the SaaS business as we exit 2021? Are you still expecting it to be in sort of that 10% of ARR range by the end of the year? Just kind of a ballpark number?

Speaker 3

So yes, our expectations have not changed from that Perspective and we do anticipate to disclose that number at the end of Q4. And as I mentioned then to provide that Into 2022 and then revenue segmentation in 2023. That is the intended plan and expectations remain the same, correct.

Speaker 2

And I'd just say, we as a company are really focused on that SaaS market. We think that more and more that's the way customers are going to want to consume identity We have a unique cloud architecture and that's really resonating in the market. So this ability to have The tenant isolation to ensure the reliability and the scalability of that service, it's really resonating. So I think that, As John said, we're not we feel comfortable in that guidance we've given in the past on that, but we as a company are really Focusing on the growth and success of that SaaS offering.

Speaker 8

Perfect. Okay. Thank you very much.

Operator

Next, we'll hear from Rob Owens with Piper Sandler.

Speaker 9

Maybe you could touch a little bit on partners and alliances and just I know it was in the slide deck relative to 2020, but The trends that you're seeing throughout this year and does that lend more towards the workforce side or the SIAM side?

Speaker 3

Rob, thanks. This is John. I'll take the first part of that. As it relates to the S-one, as a reminder for folks, what we talked about was 15%, 31% and 44% for 2018, 2019 and 2020 respectively There were the level of opportunities that we had closed that were sourced out of our partner network and that's a significant point of leverage for the company. As we are today sitting here at the end of Q3, we are now above those 2020 levels 44%.

Speaker 3

So I think that remains a consistent strong leverage point for the company along those lines.

Speaker 2

Yes. And I would say that when we look at our partners, they're incredibly great accelerators for our business, right? They are Working with our customers on larger digital transformation initiatives, and they're bringing ForgeRock in. And We've got great connections in with the identity and the security team, which does lean itself a little bit more to the workforce, to your question, Rob. But we are forging new Security and identity practices.

Speaker 2

So we're bringing on new types of partners. So we're really looking at and These two segments, Simon and Workforce are both critically important and critically large, but also different. And that means we have to have different messaging And different types of partners to ensure that we're in as many of the opportunities as possible.

Speaker 9

Great. And I guess focusing a little bit On OpEx and where some of the efficiency was in the quarter, could you touch on R and D a little bit? I mean, it's up $1,000,000 year over year. And I'd think it Given the scale of the company, you might be leaning in a little bit more aggressively on product development. So how should we think about this line item going forward?

Speaker 3

Yes. I think we're seeing a lot of efficiencies, right? I think for a variety of reasons, our platform is all organic, single do it across self managed and SaaS and be able to do that in that single code base. I think that's really a core reason for that. And what you're still seeing is this incredible innovation that we're releasing out to the market period over period.

Speaker 3

So I think we will see that Go down over time to reasonable levels from a long term model perspective that we shared during the IPO roadshow, We believe without question that, that will hold and is what we trend to. I don't think we'll see any levels of variability in that in either the Short or mid term.

Speaker 5

But I

Speaker 2

would say, Rob, our Chief Product Officer, Peter Barker is going to love that you asked that question. So thanks for asking. And as John talks about it, That's as a percent of revenue. So obviously, on real dollars, it's continuing to go up year on year quite a bit. We're going to continue to Bring on new engineering talent to continue to invest in innovation.

Speaker 2

So it will be scaling. It will just be scaling slightly slower than our top line. So we'll see the improvement in productivity. But we are a technology company in our heart and we are hiring more engineers right now. So if you know anybody, send them over.

Speaker 9

Sounds good. Thanks, guys.

Speaker 2

Thanks, Rob.

Operator

Next, we'll hear from Joel Fishbein with Truist.

Speaker 3

Hey, good evening, guys. Fran, can you talk about the competitive dynamics around that DIRECTV deal and If it was a competitive bake off?

Speaker 2

Sure. Yes. It absolutely was a competitive bake And I think almost every opportunity we have is that. And companies are out there looking at their And they're choosing Portrock over the competition. And we feel really we've never felt better about our ability to win these deals.

Speaker 2

And I think it comes down to kind of 4 main reasons when we look at the competition. One is just the ability to have a full identity Experience is a single platform across identity management, authentication, MFA and governance, a single platform to cover all identities. And then we Especially in the cloud, people really appreciate the uniqueness of that architecture. The ability to have that type of tenant isolation Of our multi tenant SaaS that gives them confidence in the performance, the scalability and the data privacy is really huge. And I think that's why we see Our ability to win with great customers like DIRECTV and many others.

Speaker 3

And then just as a follow-up, Can you talk about the large deal pipeline? And have you seen an uptick since you've become a public company?

Speaker 2

So our pipeline is absolutely increasing, for sure. Sometimes it's hard to tag exactly What it's for? Is it because we went public? Is it because we the Gartner MQ came out recognized as a leader again, drawing our sales team and our go to market engine. We've definitely seen an uptick in the pipeline and feel confident that we've got the pipeline to deliver on the growth rate here for the company.

Speaker 3

Great. Thank you.

Speaker 2

Thank you.

Operator

We'll now hear from Jonathan Ho with William Blair.

Speaker 10

Hi, good afternoon and let me echo my congratulations. I just wanted to start out with a little bit more color on Some of the sales productivity gains that you referenced, I just want to understand maybe what's driving that productivity? What inning are we in, in terms of seeing that productivity expand? Any color would be helpful. Thanks.

Speaker 3

Sure. And we're really proud of

Speaker 2

the sales productivity improvements we're seeing. And I would say the inning we're in is maybe the 4th or 5th inning, lots of progress behind But more to go. And we see there are really a handful of things driving those sales productivity. One is just The advancement of our technology, right, our products are getting better. We've got more features, more things to sell.

Speaker 2

So that's opening up more opportunity for us. 2nd is I think the market awareness of ForgeRock is growing. We're just getting more at that here. And I think certainly To Joel's question, the IPO is going to help in that as well. So our marketing team has continued to execute on a digital first approach, Creating more leads, more opportunities, so that's great.

Speaker 2

That's leading to increased pipeline. And my goal is to have one of our sales reps to be able to wake up in the morning And have these leads and these opportunities coming to them that they can continue to work to be efficient. Now we got work to do. It's always a work in progress, But we are seeing improvements there. So that's resulting in sales acceleration, especially with SaaS.

Speaker 2

We're seeing shorter sales cycles for SaaS versus self managed, Which is helping with that. We talked a little bit about partner leverage, right? These GSIs as well as dozens of regional identity partners around the world Recognize that we're kind of uniquely positioned to help their customers be successful. So they're really bringing us into these opportunities. So Again, it's like a lot of things.

Speaker 2

There's many things that are driving it. We've made great progress and we're going to continue to focus on that in the months years ahead.

Speaker 10

Got it. Got it. And then in terms of the role based capabilities that you talked about, replacing the traditional RBAC capabilities, Can you talk a little bit about sort of the customer reception for that? And maybe just a little bit more detail on understanding why This is important. Why this is a differentiator and potentially a game changer?

Speaker 10

Thank you.

Speaker 2

Sure. I think that Identity Governance Administration is critically important to companies for the reasons that we talked about, right? This ability to understand who has access to what, Have great workflow to keep people productive, but also manage risk for the business. And but companies have challenges because Organizations are very dynamic. People are always coming and going, changing jobs.

Speaker 2

And to be able to really have a fluid system, it can be really difficult. So we have this role based structure. We can leverage our algorithms to kind of develop a role based structure, Not based on an organizational chart, which is always going to change and not necessary a reflection of what you do, but really by understanding and looking at the of what these groups of people get access to. So it really helps us, very accurately and automatically Do the true access needs for a particular employee base, so they can do their jobs without over provisioning access and driving up risk for the company. So I think this is kind of a Holy Grail of challenges that companies have been dealing with for years.

Speaker 2

They've dealt with some of maybe rules based or manual approvals, and we're just bringing kind of a new way of doing it. So we think that We're getting a lot of positive reception and that really opens up opportunity for us to really have that full Workforce identity platform across identity management, access, governance powered by this AI platform. So It's a big deal, and we're going to continue to make investments on that and continue to see as a driver of growth into 2022.

Speaker 10

Great. Thank you.

Speaker 2

Thank you.

Operator

Our last question will come from Shaul Eyal with Cowen and Company.

Speaker 2

Hello, Shah. Thank

Speaker 11

you. Hey, guys. How's everybody? Congrats on the Q1 as a public company. I was a little late to The call, so apologies if anything was already addressed.

Speaker 11

But maybe, Fran and John, how the hiring plans coming along versus Your internal plans so far?

Speaker 2

Yes. What I would say, Shaul, it's never been a better time to recruit for talent at ForgeRock. We're doing a great job attracting great new talent across engineering, sales, marketing, support, our professional services, Really, the whole group, we announced our new Chief People Officer and did great by bringing Judy Smith on board. We're on track to meet our hiring plans that we need to continue to power our business. And there's clearly a war for talent out there and we hear about that.

Speaker 2

But we're doing a great job bringing in that new talent and it's important to stay focused on and we kind of look at talent as attracting great talent, but it Can't stop there. It's all about development and our investing and developing our teams so that we can retain because we know there's a big cost of attrition. At the same time, managing out some people who might we might have outgrown. So we're really looking at an end to end talent management approach as a company.

Speaker 11

Understood. And certainly, the company

Speaker 2

helps that the visibility that we got. I'd also say just identity. I mean, everybody kind of recognize The importance of identity and digital transformation, so it's a great time to attract new talent at ForgeRock.

Speaker 11

Got it. Got it.

Speaker 7

Thank you for that. And maybe

Speaker 11

my follow-up question, Fran or John, on pricing. So We have seen a number of companies taking pricing up to account for either supply chains, looming issues or just overall healthy The demand trend, have you increased pricing as of late or plan to do so near term?

Speaker 3

Yes. I think there's 2 different elements going on. One is we continue to be able to effectuate annual price increases with our Customers and I think that's been reasonable and not met with resistance. But I think there's more strategic things to do than just to raise the prices as they are. And we've really looked at how we bundle.

Speaker 3

As they are, and we've really looked at how we bundle. And I think there are mechanisms there that we've looked at. We've been able to Find significant value through some of the re bundling techniques that we've done and some that are still to come that are giving us some real uptick And really, I think helping to lift that pricing and improve margins. So we're going to continue to put additional focus on that with some of the things that we'll do in 2022.

Speaker 11

Understood. Thank you so much. Jul, I'm sorry. Thanks, Shal.

Speaker 2

No, it's okay. I just want to say thank you, Shal, and Got it.

Speaker 11

Thank you, everybody.

Speaker 2

Thank you. And really thanks to all of you for attending our earnings call today and for the great questions. We really look forward to engaging with all of you in the days and weeks ahead, continue to talk about Fort Rock, which we love to do. Before we conclude the call, I'd just like to make a few final remarks. Our ForgeRock team is focusing on 4 key business dynamics that are bolstering our confidence that we're well positioned to capitalize on the large and growing market opportunity for Enterprise Grid Identity And that will target a durable and sustainable ARR growth rate for our company.

Speaker 2

And those four dynamics are really this enterprise demand For a unified full suite identity platform across SCIAM, Workforce and IoT, our unique position really is a leader in SCIAM, We're seeing the fastest growth in the company. The fact that we have choice, we can either have self managed or SaaS Makes that full market available to ForgeRock and then our unique approach to SaaS that architecture that gives our customers confidence in performance and security. So we're very excited about the future. So thanks again for your time today and we look forward to further dialogue in the days months ahead. So back to you, operator.

Operator

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.

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ForgeRock Q3 2021
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