KnowBe4 Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the KnowBe4 Third Quarter 2021 Results Conference Call. Please be advised that today's conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

Now it is my pleasure to turn the call to Thakan Talanian, KnowBe4 Vice President of Investor Reporting.

Speaker 1

As a reminder, our commentary today will include non GAAP financial measures. Information regarding our non GAAP financial results, The limitations and reconciliations of our GAAP and non GAAP results can be found in our earnings release, which was furnished with our Form 8 ks today with the SEC may also be found in the supplemental financial information available on our Investor Relations website at investors. Knowbefore.com. In addition, some of the comments today, including those related to our guidance, may contain forward looking statements that are subject to risks, uncertainties and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, Actual company results could differ materially from those projected or implied during this call.

Speaker 1

These risks are described in our Form 10 Q that will be filed following this call.

Speaker 2

These documents can be found on the SEC's website,

Speaker 1

sec.gov, and on our Investor Relations website. During today's call, you will hear prepared remarks from our Founder and CEO, Stu Scharman and CFO and Co President, Krish Venkatraman. Lars Latanoff, our Chief Revenue Officer and Co President will join our question and answer session. And with that, I will turn the call over to Stu.

Speaker 3

Thank you, Ken, and thank you all for joining us today. We're excited to share our results with you this morning. Building on last quarter's Strong performance. We exceeded our guidance. We had a record quarter with over 40% year over year annual recurring revenue growth.

Speaker 3

As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of Social engineering, we are the only public company dedicated to securing the human layer. The emphasis in cybersecurity As traditionally been on legacy controls, however, the exponential growth in cyber attacks and their relative success proves That we cannot solely rely on security software infrastructure. According to the newest Verizon 2021 Patent Breach Investigations report 85 percent breaches involved a human element. Ignoring the human element of this equation Leaves organizations of all sizes vulnerable, which is why we are dedicated to helping our customers transform their employees Just last week, in fact, The Wall Street Journal reported that the group behind the SolarWinds attack Is actively targeting the global supply chain by exploiting the human layer with social engineering attacks. The regulatory environment continues to evolve in response to the growing threat landscape as well.

Speaker 3

In fact, a director at the NSA recently stated that the U. S. Will have to contend with ransomware attacks every single day For the next 5 years, we believe these actions help validate our market opportunity and provide a catalyst for new business growth. I will start by summarizing key results and activities for the quarter. 3rd quarter results exceeded our expectations across the board with Continued growth and strong free cash flow generation.

Speaker 3

Our inside sales motion continues to win both new enterprise and SMB customers across all industry verticals. This resulted in $262,000,000 in ARR ahead of our expectations and up 44% year over year. We have established a market leading position in the human centric Cybersecurity space and remain focused on continuing to innovate to meet the needs of our customers. Our vision for the security awareness market Our recently announced acquisition of Security Advisor is yet another example of our commitment to our vision of the market. With the acquisition of Security Advisor and future integration into the KnowBe4 platform, we are making a big bet to transform alerts With this, we believe we are creating a new category in cybersecurity called human detection and response or HDR.

Speaker 3

How this works is we connect to these other security layers through their cloud interface and pull in their alerts So we can analyze them and then take real time action. We believe the newest queue we plan to create with this acquisition Should give us an incredible upsell and cross sell opportunity given the estimated $5,000,000,000 TAM associated with this new category. The next several months will be spent integrating the product into the core Niobe4 platform, building in automation capabilities and extending the ecosystem. We anticipate solid traction with this product over the next few years. The Security Advisor team's Maximum earn out payment is based on sales of the new products reaching $40,000,000 in ARR by the end of 2024.

Speaker 3

Our organic product development remains strong as well. During our inaugural KBFORCON EMEA Conference, Which had in excess of 5,000 registrations, we announced the beta release of a product code named Password IQ. This is another exciting product that we expect to be of interest to customers of all sizes and all industries. To be clear, this is not a password manager. Password IQ is used to mitigate the risk around password hygiene issues, Such as weak or breached passwords, the product continuously monitors your organization for any issues detected With users' passwords, it organizes this data on an easy to read dashboard and allows for automatic employee training based on Detection of any password risk.

Speaker 3

As with our prior product launches, we expect this product to further expand our cross sell capabilities. We will provide an update on our expectations for this product during our Q4 earnings call. Given the backdrop of state sponsored Threat actors who continue to take advantage of bad password hygiene, we believe this product will be a welcome addition to our customers' defenses and an additional cross sell opportunity. Our technology leadership is a key factor in the strong momentum in our new business wins Represented by further penetration in the enterprise market, we also continue to see strength and best in Total number of customers now reaching over 44,000. Our current customers are investing in our KMSAT As of the end of Q3, 19% of customers now have subscriptions to multiple products That is up from 12% at the end of Q3 2020.

Speaker 3

Organizations across all verticals and sizes Continue to see value in our free tools and thought leadership webinars, which we utilize to generate leads for our inside sales team. As in previous quarters, we also saw customers by both KAM SAT and Fisiar together to leverage the immediate risk reduction Fisior brings to their organization. Though we do not report the growth for Fisior Compliance Plus and ACMGRC separately, The combined local growth and revenue growth was close to triple digits year over year for the quarter, a continuation of the cross sell success Seen the last quarter. In terms of new business, most of our wins continue to be greenfield, but we also saw a number of competitive displacements. The greenfield wins continue to show that the value of security awareness is resonating with customers and our platform stands out from the competition.

Speaker 3

We believe our competitive wins are further proof that our platform and customer support Rank well above our competition. We continue to see success in our enterprise segment, which had several big wins. And to give you some examples of mega enterprise wins, we had an 80,000 seat win with a global bank based in Europe. Also in Europe, We closed a 60,000 seat deal with a multinational consumer electronics store chain. We closed a 45,000 seat deal With a large U.

Speaker 3

S. Retailer, it was an existing MediaPro customer and we closed a 40,000 seat deal With a global transportation services company, this was a great example of a deal we won by having an internal champion. Our key contact at Discounts brought us to the RFP at her previous company and we were one of the first calls she made upon arrival at her new job. In Europe, we closed a 19,000 seat deal with a multinational chemical company. This is customer who churned away from us, used a competitor and saw the value in coming back to our platform.

Speaker 3

In Japan, we closed a 16,000 seat deal with a multinational electronics company. In the Middle East, we closed a 15,000 seat deal with a national oil company in a competitive bake off against 2 competitors. We believe these wins and others demonstrates that our customers continue to embrace not only the considerable risk reduction Given the current shortage in skilled IT workers, our strategy of building time saving features into our platform has paid off. This also remains a critical focus for our product roadmap. Outside of the commercial space, the government segment Continues to be a strong vertical for us.

Speaker 3

In the U. S, the cyber division of 1 of the largest cities in the world purchased 150,000 seats in a deal where we displaced multiple vendors. In the same city, a large public healthcare organization purchased 65,000 seats. We also sold an 80,000 seat deal to a federal government agency in a competitive displacement where they favored our automation capabilities. We continue to see traction in the education sector as well.

Speaker 3

In a greenfield opportunity, a public university system in the U. S. Purchased 76,000 seats across the globe, we closed a 12,000 seat deal with an Australian university. Before I turn the call over to Krish, I would like to thank our employees and partners for the dedication, commitment and customer focus It has brought Novi Ford to its market leading position today. I'm incredibly proud not only of our financial results, But the great group of people driving this company and are contributing to our communities, we are as focused as ever on bringing high quality And diverse talent in the door, and this has not gone unnoticed.

Speaker 3

We were recently included in Fortune's Best Places to Work for Millennials and Moggill's List the Top 100 Workplaces with the Best Diversity and Inclusion Programs. And even more recently, we received the Readers Choice Award from Security Insider Magazine in Germany. Novi 4 was selected as the winner in the category security awareness, which we believe clearly shows our position as a Top rated security awareness provider in EMEA. And those are just a few examples of the great work we're doing behind the scenes. And I look forward to giving you an update in the quarters to come.

Speaker 3

And with that, I would like Krish to discuss our financial trends.

Speaker 2

Thank you, Stu, And good morning to everyone. As a quick reminder, unless otherwise noted, all numbers except revenue Mentioned during my remarks are non GAAP. As you heard from Stu, we continue to see strong performance across The business with AR for Q3 accelerating organically versus the 1st and second quarter of this year to 44% year over year growth. This is in the heels of over 40% growth in Q1 and Q2 of this year. Q3 growth was driven by another strong quarter of new logo additions in enterprise and SMB, global expansion and continued cross sell to existing global.

Speaker 2

Our platform continues to perform well across all geographies to customers of all sizes And industry, I want to remind everyone that a key pillar of our model is the ability to efficiently scale to customers of all sizes From organizations with less than 100 seats addressed by channel partners to customers with 100 and 1000 of employees Served by our hybrid insight sales model, we have continued to focus on 4 pillars of growth: new logo expansion, cross selling to existing customers, International expansion and channel expansion. We saw success in each of these areas throughout Q3, And it is a continuation of the growth we experienced in Q1 and Q2 of 2021. Our first pillar of growth is new logo expansion. Today, 88% of our logos are in the are in the enterprise space, which we define as organizations with greater than 1,000 employees. There, we have seen significant growth Over the past few years, we are very pleased with the sales execution this year given that the customer cohort for 2021 Has already surpassed what we built for the full year 2020.

Speaker 2

Our enterprise traction is a proof of not only Our ability to move up market with our current go to market model, but the strategic importance some of the largest organizations in the world Now place on our platform. This continues our trend of penetrating the enterprise market over the last couple of We have made very strong progress in selling into Fortune 500 U. S. Companies and are continuing to make inroads into the Global 2,000. This is evidenced by the number of examples we have shared with you in the global enterprise win.

Speaker 2

In Q3, we saw robust AR growth That was balanced between enterprise and SMB customers. Although we saw strong growth across all segments, SMB performed particularly well this quarter. To remind everyone, we are always trying to drive towards an evenly balanced AR mix Between SMB and Enterprise, our second pillar of growth is cross selling to existing customers. We continue to see Strong interest across both new and existing customers in the power of our global platform. As of Q3, about 19% Our customers have subscribed to multiple products and we continue to see strong interest among new customers in purchasing Multiple products within the first purchase.

Speaker 2

To give you some perspective, at Q3 2019, We had about 1600 customers or about 6% of our 28,000 customers with multiple products. Today, approximately 8,500 customers or about 19% of our over 44,000 customers now have multiple products. As you can see, with 130% CAGR, We have made tremendous progress here. Our success is in part due to our large base of SMB, Many of which are quick to see the value of purchasing multiple products and enterprise customers seeing the value of our global platform capability. As a reminder, we don't bundle our products.

Speaker 2

We prefer to cross sell the products as this results in premium pricing for add on products versus discounting. As an example, year to date, fish ER represent approximately a 46% increase In AR for SMB and 36% on enterprise was a standalone KMSAT sale. Our multiproducts strategy is seeing considerable traction with the combination of fishy art, ACMGRC And now with the addition of Compliance Plus. We are also seeing record levels of customers with 3 products and even a few that have all 4 products. These deals are closed without having to bundle products.

Speaker 2

Year over year, Fish ER Compliance Plus and KCM GRC combined Span AR base, but also increased retention. We have found that customers who bought both KSAT and FISH ER Get more value from our platform and as a result, a much stickier customer. We remain committed to bring innovative products to our customers and ultimately driving shareholder value. The launch of Compliance Plus in early June is yet another example of our ability to innovate on the human layer and add complementary products to our platform. Though it's still early in the launch, Compliance Plus has seen similar results to what we saw from Fish ER in its initial launch.

Speaker 2

The total AR from Compliance Plus In the 1st 4 months, 4th launch was similar to the trend we saw with fish ER in its 1st 4 months. This It's a very positive indication to the power of our cross sell motion. As Stu mentioned, by the second half of next year, We expect to have 6 products to sell to new and cross sell to existing customers, further enhancing our platform capability. What we are noticing is that some of our customers, particularly large enterprise, have trended towards signing multi year deals with us. We believe this reflects the recognition we have received from 3rd party research organizations as well as the clarity Domestic and international customers have in our business as a result of know before going public.

Speaker 2

Our 3rd pillar of growth is expanding internationally. Penetrating international markets remains one of the key pillars of growth strategy. Our international revenue grew close to triple digits year over year To yet another record breaking quarter, domestically, we continue to see strong momentum with about 35% Year over year revenue growth in international markets, we do see more enterprise first go to market motion versus The SMB's first motion that we started with the U. S. On the international expansion, we continue to focus our investments on hiring key talent In marketing, sales, content and customer support, we have made several key hires in the UK, Germany, Australia and Japan and are laying the foundation of talent to scale across the globe.

Speaker 2

We're also pleased that we will add a Strong R and D team base in India when security advisor team is onboarded. Lastly, our 4th pillar of growth is channel expansion. We continue to focus on expanding our channel presence to accelerate growth both internationally as well as domestically. We have invested in hiring a number of key resources in our channel team and building marketing and distribution capabilities for our channel partners. Throughout the quarter, we have made great progress in growing both our number of channel partners and Deal volume generated through that.

Speaker 2

Now to give you some details on the quarter. Both new and existing customers have witnessed the ongoing problem of social engineering Over the last year, we continue to support our customers with our platform reach, which includes integrated capabilities around security awareness, Security Orchestration and Automation and Compliance. In the Q3, total annual recurring revenue reached 262,000,000 up 44% year over year. Our AR growth was driven by another strong quarter for new logo additions and Continued expansion of cross sell to existing logos as well as strong retention. Just to remind you, we have seen over 40% growth in ARR in each of our quarters this year.

Speaker 2

Our total customer count For the quarter grew to over 44,000, up from about 35,000 in Q3 2020. That's a 26% increase in customer count in just a year. And as I mentioned, we now have added more customers and marketing teams and drive the value proposition of the platform. Global churn What's comparable to historical levels, gross dollar retention, which in our case has been very strong considering our mix of SMB and enterprise, Reached the highest levels we have seen. This even beat out our strong levels in Q1 2021 and Q2 of 2021.

Speaker 2

We believe our increased retention is in part due to the success we have demonstrated through our cross sell efforts and multi product capabilities on the platform. Furthermore, our lower retention and cross sell percentage are at 1 of the Highest levels ever. Hence, the effect on retention rates has been very positive and increased every quarter this year. In Q3, total GAAP revenue grew 42% year over year, reaching 64,000,000 which was well ahead of our expectations. We continue to execute at a high level and remain focused Across all our 4 pillars of growth.

Speaker 2

Logistically, the vast majority of our revenue was derived from North America. At the same time, we believe there is a sizable addressable market for NovoPro internationally, and we continue to invest across Both EMEA and EPAC in both NovoCore personnel and expanding our channel relationship. 15% of our revenue now is derived from international markets, representing approximately a triple digit increase in international revenues year over year. While we are still early in our international expansion, our strategy of investing in these markets is producing results And we are adding marquee global brands to our client base. Since Q3 of 2020, We have added approximately 59 new heads to the NovoPro International team.

Speaker 2

Over the past 2 years, we have opened offices in Australia, Japan, Norway and Dubai, we've also completed building our shared service center in the Netherlands to help drive long term support for our clients And our sales team. With the addition of Security Advisor, we are adding another center of excellence, this one in India. We remain committed to ensuring we have the right resources in place to execute on our international expansion. Investments in R and D and product will continue to be a key part of our investment strategy. As part of our philosophy of running the business, We remain focused on sustaining a high growth with strong margin.

Speaker 2

3rd quarter non GAAP gross margins improved to 85.4% From 85% a year ago as we gain efficiency with scale. As we continue to scale our international business, We expect non GAAP gross margins in the low to mid-eighty percent long term. Total non GAAP operating expense for the quarter was about $51,800,000 versus about $37,800,000 for the same quarter last year. We continue to invest in the headcount across the business, which drove the vast majority of the expense increase this quarter. We have seen and expect to continue to see wage inflation in the U.

Speaker 2

S. Due to both current labor market conditions and the dynamics that is developed due to remote working. As we continue to invest globally by building centers of excellence around the world, We assume we will diversify some of these tight labor market conditions. Non GAAP sales and marketing expenses as a Percentage of revenue were lower year over year as we scaled the business. We continue to invest in sales capacity in our core markets And while we are still early stages of international expansion, we expect to deploy additional resources to support growth in these markets.

Speaker 2

As an example, we hosted our 1st RoboForm Conference in EMEA in September. We expect to invest in both sales and marketing internationally over the upcoming quarters. G and A cost increase reflects Our continued effort to support Life as a public company and assist our international expansion. We are investing across legal, finance, internal audit and HR teams. This is the Noble 4 way Of building foundation capabilities first to ensure we run an efficient business, 2nd debt costs have remained stable As a percentage of revenue, but increase in absolute dollar term, as we continue to expand our product breadth, We will continue to invest in key technical talent across the globe.

Speaker 2

Our launch of Compliance Plus, upcoming launch of Password IQ and future investments in developing a new SKU with security advisor technology are all examples of our evolving product roadmap. Non GAAP operating income in the 3rd quarter was about $2,900,000 and non GAAP Operating margin was approximately 4.6%. Quarterly non GAAP net income was about 2,000,000 Our non GAAP net income excludes stock compensation expense, amortization of acquired intangibles and acquisitions and integrated related costs. Turning to cash flow and balance sheet items. We finished September with cash and cash equivalents of approximately $272,000,000 representing our continued focus on maintaining a high level of capital efficiency and use of cash.

Speaker 2

Free cash flow for the quarter was approximately $18,000,000 driven by strong cash collection as well as sales performance ahead of plan and an efficient go to market. From our results, you can see We have a resilient and cash generating SaaS model and strong balance sheet supporting a balance of top line growth We are continuing to expand our resource pool, invest in new products and capabilities, both organically and inorganically, while Maintaining suitable profitable growth as we lead this new category in cybersecurity. And on to guidance. We entered the 4th quarter with strong customer and business momentum. This momentum It's being seen in all our segments and international markets and across all our four key pillars of growth.

Speaker 2

For the Q4 of 2021, we expect total revenue in the range of $66,800,000 to $67,200,000 or approximately 35% to 36% year over year growth. For the full year 2021, we are raising our total revenue guidance to 243.8 $1,200,000 to $244,200,000 or approximately 39% to 40% year over year growth. This revenue guidance is up from our guidance of $237,500,000 to $239,500,000 issued last quarter. We continue to expect free cash flow margins to be greater than 20% for the full year. As a reminder, There is seasonality in our free cash flow, which can cause results to vary quarter to quarter.

Speaker 2

4th quarter tends to see lower levels of free cash flow Generation driven, we typically pay out our annual company wide performance bonus during the quarter. For modeling purposes, you can assume a non GAAP Diluted weighted average share count of between 174,000,000 and 176,000,000 shares for Q4 and 167,000,000 to 169,000,000 shares for the full year 2021. As we look forward to Q4, we remain confident that we'll finish 2021 strong. We see continued growth and momentum in the business and we are laser focused on maintaining our market leadership in the most important layer in security, dedicated to the human endpoint and driving innovation around HDR. With that, we'll open the line to questions.

Operator

Your first question comes from Brian Essex with Goldman Sachs.

Speaker 4

Great. Good morning and thank you for taking the question. Yes, Maybe, Krish, question on ARR, as you expand both kind of increased penetration up market as well as Expanding internationally, great progress there in the quarter. It looks like a lot of that incremental new ARR is coming From new logos as opposed to existing. So maybe could you talk a little bit about improvement in net retention rates?

Speaker 4

And as you expand Feature functionality on your platform, how is reception from your existing customers with regard to some of the new products That you're expanding into and what do you think is the potential for increasing your penetration rate within your existing installed base?

Speaker 2

Charlie, good morning, Brian. So I actually want to talk about AR in 2 different ways. Firstly, We have seen AR growth significantly, especially as we grow our new logo addition, as you mentioned. But at the same time, The AR growth is also being driven by cross sell to existing logos, additional seats In our existing logo base and with new customers, we are also seeing High attachment rates associated with multiple products, which of course drives added ARR. So across Both existing as well as new customers, we are seeing strong growth from an AR perspective.

Speaker 2

Now If you look at we don't comment on net dollar retention, but at the same time, I can provide some color in terms of what we are seeing, Especially in Q1 of this year, Q2 of this year and continuing to Q3 of this year. Given for our sales motion, we always go first With our KMSAT sale, we have seen extremely strong, both retention rate from a logo perspective, Which is one of the highest we have ever seen and the cross sell percentage that you see has reached now 19.3% of our base, Right, which is a substantial increase just over a year. So if you put those two key points together, they are seeing we are seeing Very strong growth in net dollar retention and what we're seeing the momentum is growing from Q1 to Q2 and into Q3. In fact, we have seen growth in every quarter this year in terms of both all varieties of our retention Metrics, including both gross as well as net dollar.

Speaker 4

Got it. That's helpful. Maybe if I could just follow-up. In terms of international penetration, what does the mix tend to be? I know you noted some Nice large enterprise wins in your prepared remarks.

Speaker 4

But does that tend to be skewed, I guess, more towards SMB, particularly in Europe? How are you finding penetration? And where are you seeing the most initial traction as you expand internationally?

Speaker 5

This is Lars. I'll take that, Brian. So initially here in the U. S, we started Really strong in SMB and moved up market. We're finding that a little bit different in the international markets.

Speaker 5

It's we are selling SMB, but it's initially starting with enterprise and large enterprise. And then, as we're doing that, we're expanding into SMB.

Speaker 4

Got it. That's very helpful. Thank you very much.

Operator

Your next question comes from Rob Owens with Piper Sandler.

Speaker 6

Great. Thanks for taking my question and good morning. I wonder if you could expand on the strength you guys are seeing In public sector and the broader opportunity for both Fed and SLED, as you mentioned, multiple wins in those theaters. Thanks.

Speaker 3

Yes. That's a great question for Lars. Good morning, Rob.

Speaker 5

Yes. We're seeing one of the things we're seeing is We were penetrating those markets kind of on a 1 on 1 basis, especially federal government. You have these Huge three letter acronym names and we are hitting the different offices. What we're seeing now, which is Really growing fast with us is a consolidation of that where the entire organization comes in at once or in Particular states or university systems where we were initially going after the individual universities or the individual State departments were now seeing those organizations moving that up to the state level and now they're Coming in broad and we're signing deals for the entire state or the entire university system at once. And that's actually when we go into those, we're competing with our competitors and we're displacing them at local levels all at once.

Speaker 5

And then, Placing them at local levels, all at once and then, Novi IV goes in, from the top for the whole entire organization.

Speaker 6

Great. Thank you.

Operator

Your next question comes from Hamzah Badrawala with Morgan Stanley.

Speaker 7

Hey, gents. Good morning. Just one question from my end. Maybe for Krish, Given a lot when you talked about some of the cross sell momentum of multiple products, the larger enterprise I'm curious, are you starting to get near the point where you're starting to see The 7 figure type ARR customer deals or is that a milestone that hasn't quite been crossed yet?

Speaker 2

I think if you look at the deals that we are doing Hamzah, they are definitely becoming pretty large. In fact, I would say a couple of years back and I think Lars can add some more color also on this. We were seeing relatively we were penetrating the midsize And the smaller size enterprise. Now literally every quarter, we are seeing really, really large deals coming in, In the Enterprise segment and one thing we are also noticing is we are starting to penetrate at a decent clip The Fortune 500 in the U. S.

Speaker 2

And more importantly the Global 2000s at a relatively Strong pace. So yes, we are seeing really large deals and they are happening Pretty much every quarter. Lars, any other additional color on that?

Speaker 5

Yes. I think, Hamzah, I answered part of that Previously with Rob, we're also seeing on the government sector again the consolidation of Multiple different units all into one large sale. And again, we're seeing a lot of strength, a lot of interest With these big global companies, again, those deals take a little longer to move through the sales process, But we have a ton of that business in the pipeline right now and more coming at us each day.

Speaker 3

Yes. I can add one thing to that is we've been investing in making our platform truly global. And we have a huge amount of content now available in 34 languages, Including things like the user interface and training materials and a series of other, what we call, artifacts That global companies can roll out all over the world in the local language of their users there. And that gets us significant traction in Global 2,000 type organizations.

Speaker 8

Thank you.

Operator

Your next question comes from DJ Heinz with Canaccord.

Speaker 9

Hey, guys. Congrats on the strong results. So if I think about the portfolio of solutions, right, it's expanded pretty significantly. I think we're going to have SKUs, you're going to be selling here at some point next year. Krish, I know you hate the idea of bundles, so I'm going to avoid that word.

Speaker 9

But Look, in a self serve motion, when you have a bunch of SKUs, it can add complexity to the buying process. So how are you guys thinking about this? Should we expect some product Packaging over time that takes friction out of the multi product buying behavior, would love to just get some thoughts there.

Speaker 2

So I'll take the first part and I think either Lars and Stu will actually add a little bit color. You are absolutely right. I do hate the word bundle, but I think it's a sentiment that is shared by Stu and Lars equally or maybe even higher. So for us, The focus has always been building incremental value on the platform, which in turns helps drive additional AR. Now one point I think Stu and Lars can give you color in terms of how we train our salespeople and how Stu's philosophy of pricing Has been has evolved.

Speaker 2

Those things actually help drive that non bundling concept and more towards additional AR.

Speaker 3

Yes. If you look at what an IT professional would prefer is they like Strong single products and a combination of those that are integrated well, much better Then a suite, because in a suite of products or a bundle of products, you always have to compromise some product or another or more than one. Whereas we talk to the customer, we do discovery, we find out where the pain points are. And at that point in time, we are able to present the right way to manage that problem and upsell 2 other problems that they identify in that environment. And in that way, we feel we provide the maximum value.

Speaker 3

Maybe Lars can add something there.

Speaker 5

Yes. I'll just touch on something Krish mentioned. We train our sales team to an inch of their lives. They fully know everything about the product and they're actually very important In that they can create all the value they need to justify the pricing. And again, our pricing is pretty much We do know Brainer pricing.

Speaker 5

So there's not a lot of room there, where And then often what we're seeing in some cases, especially with CMP, We're finding that the budget for CMP is a completely different budget than the budget for KMSAT. So we're not having 2 products compete against each other for the exact same budget.

Speaker 9

Yes, Yes. Okay. Makes sense and

Speaker 10

very

Speaker 9

helpful color. Thank you, guys.

Speaker 2

You're welcome, D. J.

Operator

Your next question comes from Joel Fishman with Truist?

Speaker 11

Hey, good morning, everyone. I just have a quick one for you, Krish. Security Advisor Looks like an amazing acquisition. I just wanted to know what when do you think that you'll actually start to see revenue And start to penetrate that $5,000,000,000 TAM.

Speaker 2

Yes. So I'll take the first part. I think Stu would be the perfect person to talk about product evolution. Now I think the first thing we are really doing and I would say this is how we have built this company is We focus a lot on integrating the product with high level of automation upfront itself because it helps our Sales motion, which in our case is a high velocity sales motion. For the next part of this year and next year, we're going to be focusing that And I think Stu can provide a lot more color on that into the second half of next year.

Speaker 2

But this is a long term investment In terms of acquisition as well as product that we put into place, so we're going to spend our time really investing in the product and integration before we get to market. Yes.

Speaker 3

Let me amplify just a bit. This is a really strategic M and A transaction. This is brand new technology that we position as human detection and response. And we are going to take our time. We have said pretty much on purpose, we don't expect revenue until the second half next year and that might even be Q4.

Speaker 3

So that is it's a conservative start. We do see Huge up sell potential and also increased ASP is simply because the price point for Security Advisor is going to be somewhat similar to the KMSAT platform. And this is why we gave the existing team an earn out based on $40,000,000 in end of 2024.

Speaker 11

Great. Thank you.

Operator

Your next question comes from Mike Sicos with Needham and Company.

Speaker 8

Hey guys, thanks for taking the questions here. Just a lot to like as far as the Q3 results you just put out there with the upside to revenues versus guidance And I'm trying to factor all the different, I guess, details you guys are Bringing to light regarding the strong operations you have out there, can you help us think about the core upside drivers In Q3 versus where we were 3 months ago when we were just starting out the quarter?

Speaker 3

Any of us could take that, but I think Harish would be the best one to give it a kickoff.

Speaker 2

Yes. I think, Mike, you are perfectly right. We are absolutely firing in every cylinder possible. This If you look at the 4 key pillars of our growth and I think that's important to go back to those and look at the progress that we have made Across all of them, this includes cross sell, adding new logos in the product, adding multi product capability on the platform, Channel expansion, we have seen considerable progress in all of them. And this is overall A strategic vision that Stu can actually add a little bit more color in terms of adding additional SKUs, additional capabilities on the platform to create For the strength and provide our customers with a suite of capabilities around the human layer.

Speaker 3

Yes. If you look at this particular TAM, Mike, what you're looking at is still mostly greenfield And especially international, we see if it's 90%, I'm being conservative. So being able to provide a platform internationally and then upsell, cross sell gives us What we believe is a huge potential for the next 5 or 10 years. This is only really only the very early days. Does that answer your question to some degree?

Speaker 8

It does. It does. Thanks for the color there. And if I could just tack on one more. Coming back to some of the prepared remarks around Password IQ.

Speaker 8

Can you just give us a sense for how the Testing the pilots have gone so far, what has customer feedback been? And then what's the timeline for bringing this to market More broadly.

Speaker 3

Sure. This is an early beta. We just announced it like Krish said in our KB4, Con, in EMEA. We have very early users, but it is a bit too early to say How things are looking because guess what, we have just finished our Cybersecurity Awareness Month. So everyone was fully focused on the end users and training them.

Speaker 3

What this product We'll do for the our customer is monitor bad password hygiene. So we're looking at weak passwords, but moreover also passwords that sit in a data breach. And we will be able to get back to the enterprise, essentially credentials that already have been broken that users Are currently using, meaning an immediate and high risk of being penetrated And being infected by, for instance, ransomware. So we expect this product to be a good addiction And a good upsell, but we're still in the process of testing, surveying the customers. And we'll be able to get you a little more color in our Q4 earnings call next year.

Speaker 8

Thanks for the detail guys. Appreciate it.

Operator

Your next question comes from Joshua Tilton with Wolfe Research.

Speaker 12

Yes. Hi. Thanks for taking my questions and congrats on the results. I think it's pretty clear that you guys did very well in the enterprise segment this quarter. I'm just curious, was there a noticeable Change in the mix of customer additions between SMB and enterprise and how does the mix trend maybe versus prior quarters?

Speaker 2

Yes. So, hey, Joshua, I'll take the first part and if additionally color required from Stu or Lars. Now, I think this trend on SMB and enterprise has been going for some time. What you're definitely noticing Is the expansion of our enterprise business at scale internationally. The international market, as Stu mentioned, In terms of all the product capabilities now which are on the platform is a good strong driver of the international enterprise expansion that we are seeing.

Speaker 2

And what we are extremely encouraged by is markets that we just started or more recently entered, we are seeing Very, very strong global brands coming on the platform, which shows the power of the platform and the capabilities that are already built into it For global enterprise customers, the second thing that you see in terms of enterprise expansion is What you're seeing in terms of the research community coming out in terms of the strength of the platform and its capabilities. And finally, the third thing is, Especially in international, it's important to understand, it's companies especially which now have public level financial information. That actually also helps Because when you're a private company in the U. S, your financial strength are not available for everybody to see. Once you become public, it's available.

Speaker 2

And of course, that drives the reduction in length In terms of a sales motion, because those questions don't have to be answered. Lars, do you see anything else?

Speaker 5

I don't see a whole lot more to add to that.

Speaker 3

No, that's it.

Speaker 12

Yes. Just maybe as a follow-up, I kind of wanted to ask the net revenue retention question a little differently. I understand you guys don't disclose it, but in the S-one, you did kind of give us enough breadcrumbs Could you possibly just talk directionally as to where the rate is today relative to that pre pandemic level rate?

Speaker 2

Yes. So I'll answer it similar to I think a question maybe Brian asked upfront. Now It's important for people to understand in terms of our sales motion. Our sales motion tends to be getting 100% of the seats upfront for core Kilometers ZAC. Now, especially in the last, I would say, couple of years and you can see the trend in terms of the cross product penetration, we have added multiple layers of products on the core KMSACK platform that are available for our customers to sell.

Speaker 2

And the one other thing which we are Honestly, extremely impressed with is our continued growth in terms of core logo retention. When you add this extremely strong motion in terms of cross sell, which is now at 19.3% of our total customer base and you add Maybe one of the best we have ever seen in terms of logo retention, you can see the positive momentum that you see in net dollar retention. So the net dollar retention is definitely in Q3 higher than Q1 and is definitely higher than Q2 and Q2 was greater than Q1. So Every quarter we are seeing strong momentum in every key metric associated with retention.

Speaker 8

That was helpful. Thanks.

Operator

Your next question comes from Jonathan Ruchaeuber with Baird.

Speaker 10

Yes. Hey, guys. Congrats on the strong ARR performance once again. I'm curious if you could Talk a little bit about the I guess it's relatively new at this point that the Compliance Plus module, just how that sale has progressed? And also maybe some color on just how you're capturing that buying center relative to S.

Speaker 10

A. T. Maybe some of the challenges You've seen or is that not the case?

Speaker 3

I'll take a stab at the first half and Lars will grab the second half. Compliance Plus is performing quite well. We have an internal contest to beat The initial product rollout of fish ER and to our Great. Surprise, actually, early on, Compliance Plus beat fishy are in the sense of monthly sales. So It's ramping up relatively quick.

Speaker 3

We are very encouraged by the direction. It's literally hockey stick. Note that compliance plus content, which is about 100 modules at the moment, is still U. S. Domestic, and we are next year expanding that to international.

Speaker 3

So We're preparing the road like we did with CAMSAT, 1st domestic U. S. And international expansion will be next year. So This is a very encouraging 1st couple of months and maybe Lars can provide some color on who we're exactly selling to.

Speaker 5

Yes. So, well, 1st, Compliance Plus, we've entered the market with disruptive pricing. So that immediately opens the door to conversations for us, which is great when for a sales guy. What we're seeing in the SMB space, It's a pretty simple sale, and the person we're talking to is very involved in the sale. As we move up Stream, it becomes a little more complicated to sell because we're having other stakeholders that we have to pull into the sale And then other budgets as well.

Speaker 5

So but again, with the disruptive pricing, Our tech people that we're talking to quickly just open that door, make the referrals and pull those people into the deal.

Speaker 10

Yes, that sounds fantastic. Yes, it does. Thank you. And then just a quick follow on and correct me if I'm Off base here, but it seems like KCM has maybe been a little bit less successful historically relative to fishy art. I'm just wondering How do you see Compliance Plus maybe influencing that cross sell for KCM?

Speaker 10

Could it help facilitate a better sales motion?

Speaker 3

Yes. That's actually a very good observation. Obviously, anyone who is Picking up Compliance Plus as an additional SKU would be a lead for KCM. And we have a strong internal referral system, which will Feed those leads into the KCM team.

Speaker 10

Okay, perfect. That's all I have. Thank you.

Speaker 3

Thank you, Jonathan.

Operator

Your next question comes from Tyler Radke with Citi.

Speaker 13

Hey, good morning, everyone. Thanks for taking my question. I wanted to ask you about the record new logo ads that you saw in the quarter. Maybe just unpack what was the biggest driver of the upside, whether it was kind of international channel or Just kind of what surprised you the most?

Speaker 5

Tyler, great question, by the way, and it's across the board. But I will tell you, we have a very strong partner program. Our channel is very much ramping up. And what you see with that with a direct sales team, they start from 0 every month. But our channel sales team, once they build that partner, they get them trained, they get them selling, it actually creates an annuity Where they're just bringing us deals every month.

Speaker 5

And I think, one of the drivers of that is just seeing that Continuing channel business starting to ramp up, which is less effort for us, as well as Adding some of our additional products, that's really driving that as well.

Speaker 13

Great. And a follow-up for Krish. You talked a little bit about some of the trends in hiring, and And how maybe a little bit more detail how you're thinking through that in terms of geos that you're investing in And I guess how are you managing through that from the standpoint of continuing to deliver Upside on the margin front?

Speaker 2

Yes. So I think it's important to understand That we have built now a strong geographical base in multiple places. You heard me speak about centers of excellence that we've built. Now we've got centers of excellence in multiple locations. And now with the addition of the Security Advisor team, We are now building a footprint now in India, especially for our R and D teams.

Speaker 2

I think by diversifying our workforce, And that makes sense given the strength of our and our growth of our international business. We have actually started to really put a lot of emphasis On international hiring, now especially in the support teams, we built a shared service center just outside Amsterdam and Amsterdam has got A very, very strong attraction because multi language capabilities, great strength in terms of G and A talent. And we are using bases like that to help cushion some of the price increases from a comp perspective That every company in the U. S. Is facing.

Speaker 2

So I think that's been our core strategy. And the great thing is we have actually Coming into this year, those centers are up and running and at full steam, which helps really From a margin perspective, but at the same time, I can tell you we are all of us in software or any industry are going to feel some of the wage inflation pressures. Thank you.

Operator

Your next question comes from Roger Boyd with UBS.

Speaker 6

Hey, thanks for taking my question and congrats on the results. I'm wondering on the competitive front, you noted Some good traction with brownfield opportunities. Wondering what you're seeing out of the public email gateway vendors that bundle

Speaker 5

Yes. So we first, in the SMB market, We really don't compete with anyone. That's still very much a greenfield without much competition coming into the deals. If you go into the enterprise side, we kind of approach that from 2 different angles. One would be that new business coming in Where there's a bake off situation, where companies looking at us and multiple vendors, in that case, we pretty much Win the majority of those deals, where we're actually seeing the bundling and that kind of stuff Is the other half of our strategy for the large enterprise and that's us actively going out and poaching Our competitors' customers.

Speaker 5

And in that case, it's typically a last ditch effort where They'll go into the bundling and discounting, and they're really just struggling to keep that customer there. But again, on just competitive product against product, we typically win those almost every time.

Speaker 3

Yes. The additional color there really is that for them that's just a me too product And they don't necessarily spend the time and effort to increase the platform capabilities, Whereas we have done practically nothing but and in bake offs and in comparisons, Especially like Gartner and Forrester, we all Literally all of those we wind up as on the number one slot because we are so much further advanced in the CAMSAT platform than any competitor. Does that answer your question, Roger?

Speaker 6

It does. Thank you, both. Maybe as a quick follow-up, the general demand for Frescadius awareness seems Pretty strong. And you've talked in prior quarters about the regulatory environment and growing emphasis on security awareness there. How much is that showing up with new customer conversations and how are you thinking about that tailwind over the next year or so?

Speaker 3

Well, if you look at new customers, they are really worried about ransomware And are really getting geared up to lock down their whole infrastructure And a very large percentage of ransomware infections are caused by phishing and social engineering. So That is a particular strong driver, which is not stopping. As I said in my comments earlier, The NSA expects for the next 5 years that we have to deal with ransomware attacks literally every day. And so getting a really strong last line of defense, having that human firewall there, Any organization has by now understood that that is critical and then they do their research and they usually wind up with us.

Operator

At this time, there are no further questions. I will turn the call over to Stu for any closing remarks.

Speaker 3

Thank you very much for attending. We appreciate your interest in Novi 4 and we do look forward to speaking with you again soon.

Operator

Thank you for participating. You may disconnect at this time.

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Earnings Conference Call
KnowBe4 Q3 2021
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