Ping Identity Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ping Identity Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the conference over to David Banks, Vice President of Investor Relations, please go ahead.

Speaker 1

Thanks everyone for joining And update our outlook for the full year 2021. Shortly after the market closed today, we issued a press release announcing our 3rd Quarter 2021 financial results. In addition to the financial results, we'll be presenting a live supplemental set of slides through the webcast portal. These will be published to our website following the call. You may access the press release and presentation on the Investor Relations section of Pingidentity.com.

Speaker 1

With me today is our CEO, Andre Durand and our CFO, Raj Dhani. Today's discussion may include forward looking statements. Please refer to our annual report on Form 10 ks for 2020 and our quarterly report on Form 10 Q for the quarter ended September 30, 2021, filed with the Securities and Exchange Commission. There, you will see a discussion of factors that could cause the company's actual results to differ materially from these statements. I would also like to remind you that during the call, we will discuss certain non GAAP measures related to Ping Identity's performance.

Speaker 1

You can find the reconciliation of those measures to the most closely comparable GAAP measures in our Q3 press release and the slides we're posting to our website. To assure we can address as many analyst questions as possible during the call, we ask that you please limit your questions to 1 plus a follow-up. We will end the call after 60 minutes. With that, I'll turn the call over to Andre. Thank you, David.

Speaker 1

Q3 was another strong quarter of solid growth against all our key performance metrics. Annual recurring revenue again grew by 19%. Revenue of $76,200,000 grew 27% year over year, once again reflecting solid sales results and contract durations. SaaS revenue of $15,300,000 grew 56% compared with Q3 of 2020. And our dollar based net retention rate again increased up a percentage point from last quarter to 112% and also up year over year for the first time in several quarters.

Speaker 1

Raj will cover the financials in more detail and update our guidance in a moment. I wanted to focus today on the first of 4 core themes we focus on each quarter, Delivering our entire platform in the cloud to help companies secure their hybrid IT environments. For starters, I'd like to thank and congratulate our PingOne Advanced Services team as we continue to exceed all expectations with this new offering. In just the past year, we brought 25 of the most sophisticated and complex Global Enterprises to PingOne Advanced Services, 5 of which were in our top 10 largest deals so far in 2021. Nearly 70% of these 25 customers are leveraging Ping for their customer use case, a trend not dissimilar Speaking of the PingOne cloud platform, much of our investment over the past 2 years has been behind the scenes, but these investments are now becoming a major driver of future growth.

Speaker 1

During our 12th Annual Users Conference, which took place last month. We announced several new PingOne cloud platform enhancements and services related to recent acquisitions. This includes the immediate availability of PingOne Verify to validate the real identity of users, PingOne API Intelligence to bring security to all API transactions PingOne Fraud to detect malicious behavior in our customer solutions And Penguin authorized to centralize authorization of any transaction coming in Q1 of next year. Together with our existing Penguin offerings, these new services enable a comprehensive platform from which to secure Customer and workforce identities, ensuring access to any resource or application by verifying, Authenticating, authorizing and monitoring any identity from a single intelligent cloud delivered Ping's technologies without the need for custom coding, but we can integrate and orchestrate identity technology into an extraordinary end user experience that spans the entire lifecycle of identity use cases. And we can do all of this without the need for an army of developers.

Speaker 1

As our cloud offering matures, so too have the request to operate in different regions around the world with mission critical resiliency. To meet these growing demands, we've invested to expand our geographic coverage while improving resiliency through investments aimed at providing active, active redundancy across multiple regions around the globe. Lastly, with regards to our cloud platform, I'm pleased to announce that we have officially received our FedRAMP sponsorship from the Department of Energy And as such, expect to make PingOne for government broadly available in 2022. Focusing on another one of our core themes, embracing Partners, we continue to make significant investments in our channel ecosystem. Our investments in channel marketing and enablement resources supporting our partners Through and with our partners, our investment enabled increased sales, technical and implementation training, including the sales certification of 125 partner representatives.

Speaker 1

This training, along with an important shift In our professional services team to support partner led implementations has helped to grow our delivery approved program, Now with more than 20 such delivery partners, we continue to refine our framework for working with the global system integrators or GSIs. These partners are eager to lead with Ping in their key business portfolios, especially as we have increased the pace of our acquisition activity. And now I'd like to highlight a few of our recent customer stories. Internationally, we landed a new logo with Cascia Economica Federal or Cascia. This government owned company is one of Brazil's largest banks And the largest publicly held bank in Latin America, serving more than 30,000,000 customers.

Speaker 1

They signed a contract to start the Brazilian open banking journey with Ping using our authentication and authorization capabilities. Their plan is to extend the Ping footprint in 2022 and this new sale was a great example of how we are going to market with partners internationally, In this case, NetBR. Also in the quarter, one of the leading East Coast warehouse club operators became a new paying customer. The company, which operates 215 warehouses in 16 states, serving more than 600,000 members, sought to protect their digital assets tied to their website and mobile applications. They look to Ping to enhance their existing authentication capabilities by layering risk and evoking step up authentication to identify suspicious and fraudulent

Speaker 2

activity. In a

Speaker 1

third story, We both expanded and extended our relationship with a Canadian based multinational media conglomerate to secure 25,000 employees leveraging PingOne Advanced Services. We are currently nearing completion of agreement to extend the relationship to the customer use case. In another expansion story, the State of Colorado, which leverages Ping for both their state employees and for Colorado citizens has expanded the relationship based upon the success of their Ping deployment. More than 350,000 Coloradans now leverage Ping for their digital driver's licenses, proofs of vaccination and other state issue IDs. With regard to successful deployments, we went live with Flink's To provide open banking to Canada, based in Montreal, Flink's provides financial institutions a complete open banking ready environment to empower those organizations to drive new business.

Speaker 1

Joining us in this implementation was Fimeo, a longtime partner who is managing the Ping solution for Flinx in Canada to adhere to Canada's strict residency standards. We were also pleased to celebrate a go live with SEL Health, a non profit healthcare organization serving several Western states. Our solutions streamline authentication and workflows for hospital staff and physicians, while adhering to strict patient data confidentiality. SCL Health was also recognized as our 2021 Identity Innovation Champion, along with other award winners Eurofins, TIAA, Old Mutual and Banco Itau. We also recognize notable partners, including Altron Security, Proof ID and NetVR and other significant finalists Schneider Electric, TransUnion and Acor Hotels, thank you to all of our customers and partners for another great quarter expanding the boundaries of identity security.

Speaker 1

In closing, Q3 was a solid quarter for growth across all key metrics, and we're pleased to see a healthy return on larger deals. We're also excited to see years of hard work and our recent acquisitions start to reach a critical mass on our PingOne Cloud platform. We believe the Singular Key acquisition is a game changer and that no code orchestration will drastically simplify identity integration and the developer experience. I'd like to take this opportunity to thank the Ping team for their dedication and hard work, helping our customers succeed in identity And welcome Jason Keyes as our new Chief Information Security Officer. Jason has a long track record of enhancing cyber security strategies for large enterprises and managing security teams, most recently as CISO at Groupon, but also with McAfee, Siebel, Oracle and CBS Interactive.

Speaker 1

Finally, I'd like to invite you all to our upcoming Virtual Investor Day on December 1. We will go into greater depth on our strategy and vision, our product roadmap and provide key metrics while hearing from a number of our senior leaders. Please look for an official invite from our Investor Relations team. And with that, I'll now turn the call over to Raj to walk through the Q3 results in more detail and provide an outlook for Q4 and the full year.

Speaker 3

Raj? Thanks, Andre. We're pleased to have delivered above our guided ranges for all key metrics. We ended Q3 with ARR of $289,600,000 up 19% year over year. Q3 net ARR of $10,000,000 was up 36% compared with the $7,400,000 of net ARR added in Q3 of 2020.

Speaker 3

This quarter's performance reflects a continued return to a more normalized activity with some solid large deals and average durations that are more consistent with historic averages. 3rd quarter total revenue grew by 27% to $76,200,000 of which 94% was subscription based. Growth was driven by SaaS and multi year term license revenue. SaaS revenue grew 56% in the quarter, an acceleration from Q2 As we generated $15,300,000 in SaaS revenue, primarily from increased adoption of our PingOne cloud platform. We now have more than 780 customers using at least one SaaS solution, up more than 20% year over year.

Speaker 3

Subscription term based license revenue grew by 25% year over year in Q3. Given the impact deployment mix and contract duration have on GAAP revenue, we continue to believe that ARR is the key growth metric of a subscription business. Our Q3 dollar based net retention rate was 112%, calculated on a trailing 12 month basis and again consistently with accelerating ARR growth. We ended the quarter with 288 customers with more than $250,000 in ARR, up 14% year over year. Unless otherwise stated, for the remainder of the P and L, I will refer to non GAAP metrics.

Speaker 3

You can find a reconciliation of non GAAP to GAAP numbers in the accompanying press release. Gross profit margin for the 3rd quarter was 78% And comparatively, our GAAP subscription gross margin was 84%. Total operating expenses in the 3rd quarter were $55,100,000 Year to date operating cash flow is $38,100,000 due to the usage of $6,000,000 of cash in Q3, reversing last quarter's Strong cash generation as expected due to the timing of collections. This led to unlevered free cash flow of negative $11,100,000 for the quarter with $23,400,000 of positive unlevered free cash flow year to date. We ended Q3 with $51,000,000 of cash on hand.

Speaker 3

The $53,000,000 quarter over quarter cash reduction was driven partially by working capital changes, but chiefly by the acquisition of Singular Key. The $73,200,000 price tag for Singular Key ad acquisition included $40,300,000 of cash consideration and 1,260,000 stock valued at $32,900,000 Even with our continued investments to drive innovation and growth, we remain in a strong Cash position as we enter the 4th quarter. Moving now to guidance for the full year, we are raising our ARR projection to $306,000,000 to $308,000,000 growth of 18.5 percent at the midpoint compared with 2020. We expect Q4 revenue growth 11% at the midpoint of a $67,000,000 to $73,000,000 range with full year revenue expectation of 291 to $297,000,000 or 21% growth at the midpoint. We expect to end the year with Unlevered free cash flow of $10,000,000 to $12,000,000 slightly lower than prior levels with negative 13.4 to negative $11,400,000 expected for Q4.

Speaker 3

This includes the impact of both SecureTouch and Singular Key acquisitions.

Speaker 1

In closing, we feel great about

Speaker 3

our year to date performance and are optimistic about the continued growth trajectory for the balance of this year and longer term. We're looking forward to sharing more with you at our December 1 Investor Day. With that, I'll turn it over to the operator for your questions.

Operator

Thank you. We have your first question from Andrew Nowinski with Wells Fargo. Your line is open.

Speaker 4

Great. Thank you. Congrats on a great quarter.

Speaker 5

Just want to start off

Speaker 4

with, you're clearly seeing an inflection in subscription growth. This is the 2nd consecutive quarter you've had Over 30% growth on

Speaker 1

a year over year basis. So can

Speaker 4

you just talk about how your products have evolved and what might be driving on that inflection in growth?

Speaker 1

Andy, this is Andre. Thanks for the question. Our product platform, the PingOne cloud platform

Speaker 6

is reaching a level of

Speaker 1

maturity now. It's a It's a combination of our advanced services coming online Q4 of last year, combined with Several new services, some acquired, some built organically, like risk, fraud, verification So the story here really is the maturation of the Ping Cloud Platform Being offered to existing customers as well as new customers.

Speaker 4

Okay, great. And then I wanted to ask about some of the recent acquisitions, including SecureTouch in June and then now Singular Key here in September. How do you think Those acquisitions fit into this product evolution, where your platform is headed in. How should we think about the inorganic contribution from those

Speaker 1

We've always had a vision that identity needs to be intelligent, Informed by risk and fraud signals to make better authentication and authorization decisions. So SecureTouch is consistent with that. We had introduced PingOne Risk, which was a risk service for our workforce use case Earlier in the year, SecureTouch completes that by offering risk and fraud signals now for the customer and consumer use case. So the entire notion that we're building a virtuous cycle where risk and fraud signals inform the identity control plane how to behave, It's also instrumental towards our passwordless vision. There's no way to achieve a passwordless experience without leveraging the implicit signals That are available to us such that if risk is low and trust is high, we just let the user in, so to speak.

Speaker 1

So that acquisition was part of our strategy around an intelligent identity control plane. The Singular or this yes, the Singular Key acquisition is a little bit different. If you step back, Identity is an integration game. We're trying to connect everyone to the more advanced identity technologies is critical to all of these large enterprises. Singular Key allows us to achieve a 10x On the time to value and the speed to integration.

Speaker 1

And it does so because much of the historical coding, As we say, the point to point hard coding has all been done in now Singular Key. So it allows the business to design user experiences without coding. So identity is an integration game. Time to value, speed to integrate really matters. Singular Key allows us to orchestrate All of these identity experiences without coding.

Speaker 4

That's great. Any color on how we should think about their contribution in 2022 or is it still too early?

Speaker 3

Yes. Hey, Andy, this is Raj. It is a little early. We're just a couple of weeks and a couple of months into these integrations. So our first Order of business right now is to integrate them with our own SaaS platform and continue to build pipe.

Speaker 3

What I will tell you is that there's

Operator

We have your next question from Adam Tindle with Raymond James. Your line is open.

Speaker 2

Okay, thanks. Good afternoon. I wanted to start on ARR. Last year, you had just over $250,000,000 and based on guidance this year, it's going to be just over $300,000,000 So if I look at the new ARR that you're Adding about $50,000,000 which I think would mark the highest level ever. Just wondering if you could maybe break down some of the composition of new ARR.

Speaker 2

And as we think on a forward basis, the puts and takes to adding this sort of level of ARR on a go forward basis? Thanks.

Speaker 3

Sure. Hey, Adam. So no surprise, right, based on what we've been talking about, SaaS ARR has been growing And multiples of the overall rate of growth of the business. We've introduced several new SaaS services over the past 3 or 4 quarters, including PingOne Advanced Services, which has a tremendous amount of pipe building and and interest and adoption, frankly, within our customer base. So when I think about sort of this year, It's really kind of that inflection point in our SaaS delivery.

Speaker 3

As Andre mentioned, that feature function parity along with these independent services on our Form really sort of changing the game for us in terms of SaaS competitiveness. So and we're seeing that translate into wins in the market. So that's driving a lot of our success there and overall growth. In fact, in Q3, we actually So the majority of our overall bookings for the quarter come from SaaS services. So we're really excited to see that.

Speaker 2

Okay. Yes, sounds sustainable. Okay. I did want to ask maybe a follow-up on cloud. Andre, you talked about the active active coverage I'm wondering kind of a 2 parter, the benefits from this, any way to kind of comment on the size and Scale of incremental opportunity with maybe the U.

Speaker 2

S. As a potential precedent. And then secondly, the cost. I wanted to clarify, are investments already in place for this or are there going to be incremental investments needed as you do this and maybe Raj can help with sizing any of that? Thank you.

Speaker 1

All of our customers, well, many of them, most of them treat authentication as a Tier 0 or mission critical service. If Their own users or customers cannot authenticate. Transactions basically don't occur. People don't access the network. They can't work.

Speaker 1

So resiliency is a very big part of what we need to do when we deliver identity services. This is more than application, it really is Mission critical infrastructure. Active active in the cloud is one of the ways in which we achieve our 4 nines of availability in our SLAs. And so the investments there obviously are critical to the credibility and really acceptance of our cloud offering to our large enterprises. A lot of the investments now are behind us.

Speaker 1

To be clear, we do run our services in AWS. So these are not large Capital outlays, but really just bringing a new region within AWS online. There is work that we have to do obviously to bring a second region in a Territory online. There is data residency as we know that's driving a lot of decisions about where companies are able to put customer data Or even their employee data in the cloud. So in order to offer 4 nines of availability And the level of resiliency customers are demanding, you really want to get to an active, active state in country or in territory as best you can.

Speaker 1

Most of the investments in our geographic expansion or let me just say, many of them now are behind us. So I don't expect There will be continued investment going forward, but all the major regions that Ping now operates in, the U. S, PEMEA, Australia And now Canada are now covered under our under really our cloud active active program.

Speaker 2

Very helpful. Thanks and congrats on the results. Thank you.

Operator

We have your Question from Gray Powell with BTIG. Your line is open.

Speaker 6

Great. Thanks for taking the questions and congratulations on the good numbers.

Speaker 1

Thank you, Greg.

Speaker 6

So, yes, I just want to follow-up on Nam's question. I was just kind of doing some back of the envelope Roughly speaking, it looks like your SaaS product drove about 2 thirds of the net new ARR in Q3, versus more like 50% or 55 percent in the first half of the year. Does that seem about right to you? And then do you see a point where more like, I don't know, 90% plus of new business is coming from SaaS? Or is there sort of like a natural point where the on prem The SaaS mix stabilizes.

Speaker 1

As Raj noted, this was an important quarter in the inflection of our business And really the validation, if you will, of the investments we've made over several years in our cloud platform, in our SaaS platform PingOne. This was the Q1 where SaaS outstripped the bookings, outstripped the software bookings. We do expect that, that to continue Now that the product is reaching a level of maturity, obviously, we continue to invest in it. We are a Cloud Your Way company to be clear. Many of our largest customers continue to maintain or run Ping either on premise Or some of the newer deployments in the public cloud, but leveraging our DevOps program.

Speaker 1

So they're running our software in our DevOps program, but they are managing it in their public cloud, 1 or more of their public clouds. We don't do anything to, So you tip the table one direction or another. It is advantageous for us that we give these customers the choice Of how they want to consume identity, whether it's on prem in their public cloud or as SaaS from Ping. So and I would expect that, that would continue. You made a statement about 90% at some future point.

Speaker 1

I do think that there is a resting point in the future Where there is a healthy balance, SaaS dominated ARR, it is a faster growing part of our business. We expect that to continue into the future. I don't know if the balance point ends up at ninetyten, eightytwenty, 2,575, for example, but I think you are directionally correct in assuming that the transition to SaaS 4ping is now well underway.

Speaker 6

Okay. That's really helpful. And then just my follow-up business would be that so I mean the SaaS is How should we think about the product set and its potential to drive better headline customer growth metrics? Is that something we should be looking for over the next 6 to 12 months?

Speaker 1

It hasn't been the primary focus. We've been very focused on Bringing our entire platform to the cloud, number 1, introducing the new services that are building into the future. These are the risk and fraud services, the API security, focus on the customer use case. So product differentiation has been very important. And now focusing on how companies will integrate our platform into everything through no code orchestration.

Speaker 1

That's been the primary focus. And a lot of the ARR growth has been customers expanding into Ping as a strategic platform for both the workforce and the customer use case. I do believe that going forward, as the platform can be consumed all from the cloud, and as orchestration Reaches some level of maturity over the course of the next year. I do think that more focus and attention will come back To the customer count, but much of the focus has been on making sure we have the right platform that is differentiated, that is focused in the right places, And that we acquire through these technology tuck ins the acquisitions which complete our story.

Speaker 6

That makes sense. Okay, thank you very much.

Speaker 1

Thanks, Greg.

Operator

We have your next question from Adam Berg with Stifel. Your line is open.

Speaker 2

Hi. This is Austin Gaivakki on for Adam Borg. And thank you for taking the question. Maybe for Andre, just SaaS, obviously, your sweet spot has been in the upper end of the market. I was hoping you could talk more about, 1, the receptivity by your largest customers and prospects to adopt SaaS at Andy and 2, the opportunity for SaaS to help move down market more below the Global 3,000?

Speaker 2

Thanks.

Speaker 1

I think some of the success of advanced services among some of the larger enterprises speaks well to Some of the large enterprises' willingness to adopt cloud in the solution that we're giving them in PingOne Advanced Services, so I think that begins to speak for itself. We expect a lot I think down market, it is a the down market tends to focus on different things than the larger enterprise market. There's a lot of hybrid integration. There's a lot of legacy integration, not just cloud or SaaS app integration for large enterprises. It's an area where Ping tends to be very, very strong.

Speaker 1

So everything related to a large enterprise that wants to put identity in the Consume it as SaaS, but reach back into the hybrid enterprise for all of those legacy and on prem use cases. I think we're very differentiated there and foresee we will continue to be very differentiated there for some time. That use case or that level of sophistication, hybrid sophistication is not paralleled by the down market, the SMB market. So they do tend to focus on some different things. Our intention is not necessarily to go down market, say, below the Global 5,000.

Speaker 1

So I'll extend it a little bit beyond the 3,000 there. I will say, however, as the maturity of PingOne continues and as we introduce New services like orchestration that are new to the market and help, as I said, 10x The speed and simplification with which identity services, multiple identity services and platforms can be integrated That I would not preclude the opportunity that some of our new services have down market appeal. So Ori is open to it, but from a go to market point of view, it's not our primary focus.

Speaker 2

Great. Thank you.

Operator

We have your next question from Katarina Drupnik with Collier Securities. Your line is open.

Speaker 7

Thank you for taking my question. I'm not sure if you can quantify this, but in speaking with many of the CILs, the first piece that they're looking at when they're looking at a 0 Trust And can you explain to me or all of us how you fit in how soon you fit into that process when they start that architecture decision? And then how long it takes to really drive your use cases? Thank you.

Speaker 1

Good question, Catherine. So 0 Trust is an awfully big word. It's been commandeered by the marketers as of the last 6, 7 months to stretch To mean a lot of different things. But at its foundation, we're moving from essentially perimeter security where there was high trust, Meaning if you were inside the perimeter, you were very trusted to a world where we neither want to trust the user, The network they're on or the device they're on. So 0 Trust is an embodiment of what do we do when The network, the users and the applications don't reside within our control and we need to presume that we cannot Trust them.

Speaker 1

However, we need to somehow let them in. So the reason why Identity is foundational to 0 Trust Is or really the cornerstone of 0 Trust is we move from perimeter based security to identity being the perimeter. We only want to let the right users in who are appropriately authorized and on a device that we either trust or we are managing, think an endpoint, a laptop or A cell phone, for example, neither of which are necessarily in the building on the network. They could be anywhere So 0 Trust is fairly synonymous at its most foundational level with the notion of identity based security There are 2 major pieces of identity, both of which are central to our platform in 0 Trust. One is authentication, making sure you're talking to the right user.

Speaker 1

We need to strongly authenticate every user. And the second is authorization. Both authentication and authorization, which is why the second a company begins a 0 Trust journey, The focus and attention begins to move from firewalls and VPNs and all of the traditional layers of perimeter security and it begins to move towards How are we going to authenticate everybody? How are we going to do that frictionlessly, AKA passwordless if possible? And then what are we going to allow them into?

Speaker 1

So that connection tends to happen within the 1st day, As you said, and to support that, one of our well, our largest deal in the history of the company, the Advanced Services deal, I announced A quarter or 2 ago, the initiative that they are looking to achieve is both a cloud transformation, 1, and number 2, a 0 Trust transformation. Now for them, it's going to be a 5 year journey, I want to be clear. This is a very, very large global enterprise, tens of thousands Of users, hundreds of thousands of customers and they are moving from a perimeter based security to a 0 trust. This is a company that Makes significant weaponry and other big machinery that you would want to make sure that you need to maintain security on. So this move is happening.

Speaker 1

It's a secular shift. It's not going to happen overnight. Identity is central.

Speaker 7

All right. Thank you very much.

Operator

We have your next question from Matt Hedberg with RBC Capital Markets. Your line is open.

Speaker 1

Hi, great. Thanks guys.

Speaker 3

Andre, as we kind of maybe are

Speaker 6

in a period of a bit more reopening here from

Speaker 1

a COVID scenario, How do you think about the large

Speaker 3

or the opportunity to replace legacy solutions? I mean, do you think some of those things Could come up a bit more frequently now. And I guess to what extent can partners help with either the timing of

Speaker 1

I'll start with the last part. Partners are instrumental in helping us understand when these when the terms are essentially up on that infrastructure. So you're right in honing in on the importance of the channel and partners to identify that.

Speaker 2

It is a bit of

Speaker 1

a waiting game, right? This is critical infrastructure. They don't necessarily rush to replace it until the term is up and then they look to modernize. We are seeing a return of legacy modernization. Some of many of those projects were put on hold for the 1st year of COVID.

Speaker 1

Now we are seeing those projects begin to return. We do anticipate we've been asked for years whether or not there is a Accelerated tipping point where everyone just rushes to get rid of that legacy. We have not seen that. We see this as a large, Almost steady state replacement of legacy. Now the truth is every year it becomes a little bit more brittle.

Speaker 1

We are really the go to company that has migrated hundreds of large, very large, very complex enterprises, Wholesale from legacy to a modern identity stack or modern identity platform. So we're in a very, very good position to sit and Essentially, wait until these modernizations occur. We are working with partners to identify them as they happen. Got it. That's helpful.

Speaker 1

Super helpful. And then I know you guys have you have had

Speaker 6

a little bit of hybrid work Corporate Officer or Sales and Marketing folks out

Speaker 2

in the field. But as

Speaker 3

we think forward to 2022, I guess it's somewhat related question, but do you anticipate salespeople getting out and seeing clients more face to face meetings next year? And If that's the case, do you think

Speaker 1

that could have a positive impact on pipeline generation as well? We do. I'm pleased with the Pipeline generation, we've been able to create through COVID without traveling. But the truth is in large enterprises, relationships do matter, seeing people Eye to eye does matter. So while we've been able to operate effectively through it, I think the team and our customers are looking forward To getting back together, whether it's white boarding sessions, whether it's kickoff of implementations where the 1st 2 or 3 days you want to get the team together.

Speaker 1

So I do anticipate that there is going to be more face to face. I do believe it will have a positive impact on pipeline.

Speaker 6

Great. Thanks a lot. Congrats on the results guys.

Speaker 5

Thank you, Matt.

Operator

We have your next question from Brian Cooley with Stephens. Your line is open.

Speaker 8

Hey, guys. Thanks for taking the questions. So I'm curious, can you just talk about the competitive environment and kind of how it trended during 3Q? And also, are you seeing Any change in win rates against kind of some pure play SaaS vendors like Okta and Okta?

Speaker 1

We are seeing improved win rates as a result of really the Maturity and differentiation of some of our cloud capabilities as of recent. We have not noticed an overall there's no There's been no rapid necessarily change in the competitive environment. We watched whether or not the Okta or Auth0 Would have any material impact on where they showed up or how they showed up. I would say that our own cloud maturity has Made us more aware, if you will, of those deals. I think we're included where we might not have been included before.

Speaker 1

But generally speaking, Where we were historically strong, we continue to be historically strong. This is in large enterprise, hybrid deployments, Cloud Your Way, And in the areas where we might not have been considered in prior years because of the maturity of our own SaaS platform PingOne, That has that is absolutely improving in our world.

Speaker 8

Got it. So I mean just thinking about the channel And the investments you've made there, I'm curious if you're seeing channel partners start to have more meaningful impact on the It's been a year or 2 since you've been investing there.

Speaker 3

Yes, Brian, this is Raj. I can take that. So we are deeply committed to our channel partners and are working with channel partners now in almost all our deals or at least really pushing to do that. And that's just a manifestation of just going all in with the channel and I think they're feeling that. We've always been A good channel partner to folks, but I think we've this year we've really sort of Amped up that commitment as we've talked about in previous quarters.

Speaker 3

And it's not engaging in the channel is not something that It's a flip, you just sort of switch and now you're 100% channel company overnight. But we're seeing the kind of Steady improvements that we expected to see at the beginning of the year, and it's all starting to come together. So we're really pleased with our team and how they're doing and how channel partners are reacting to those investments. We have over 125 channel partners out there. We're investing in them in terms around sales and enablement and all sorts of other training and marketing activities.

Speaker 3

So we would expect that trend to continue.

Speaker 8

Great. I appreciate the time.

Speaker 1

Thanks, Brian.

Operator

We have your next question from Michael Romanelli with Mizuho

Speaker 1

Just one from me actually. Touched on this But was there any shift this quarter in the customer identity business visavis workforce identity? Customer has been trending at an accelerated pace relative to workforce for several quarters now. This quarter was no different. So the majority of our new ARR now is being generated from customer use case.

Speaker 1

That is by design. We're We've been leaning heavily into the customer use case. Many of our acquisitions have been focused on our platform solution capabilities around the customer use case. So we're very committed to be clear. Our vision of the platform is 1 platform, both use cases.

Speaker 1

25% of our customers use us for both use cases. That is increasing. I've signaled that before. We do see a desire From large enterprises to consolidate where they can, to gain leverage from both the partner that they have for identity, but as well as platform that they're using for both customer and workforce identity. All of that said, the customer use case we believe to be Ultimately, a larger it is today and we expect in the future a faster growing use case.

Speaker 1

And our platform Has been differentiated for some time now on scale and performance. Some of the largest systems in the world run off of Ping. But in the future, we believe we'll be differentiated in the speed with which we can generate incredible user experiences without coding, Visavis singular key acquisition that is focused on the user journey, enabling a user journey through identity that's both frictionless And do so with the minimal amount of coding.

Speaker 3

Perfect. Thanks.

Speaker 1

Thank you, Mike.

Operator

We have your next question from Mike Sicos with Needham and Company. Your line is open.

Speaker 9

Hi, thanks for taking the question guys. Just a real quick one for Raj to kick things off. But can you talk to

Speaker 6

the return of these large deals that you're seeing?

Speaker 9

And maybe if we're Turn of these large deals that you're seeing and maybe if we're trying to quantify what that impact was to Q3? And in addition to that, anything you can talk to regarding the decline in gross margins we saw this year? There was a slight decline in subscriptions, But I'm more looking at the compression we saw on the professional services side as we're looking at the future of the business.

Speaker 3

Yes, let me take that one at a time. So in terms of deal activity, we are seeing A return to what I would call more normalized buying behavior, which is in contrast The COVID quarters, I'll call them, where we saw deals not go away, budgets not go away, but really get Sort of phased and chunked up into smaller deals that sort of culminated into The original deal size over a period of time, that's largely now behind us. We're seeing that on a onesie twosie basis, but For the most part, that has largely sort of Come back to more normal levels where what we were seeing pre COVID, which is a bunch of transactional run rate activity coupled with a couple of large sort of high 6 figure or 7 figure deals. And we're starting to see that Come back, we saw that in Q2 as we talked about last quarter. That was probably an anomaly the other way, If I'm recalling correctly, but in Q3, we saw a more normalized quarter similar to what we saw In pre COVID quarters.

Speaker 3

From a margin standpoint, we have We're investing in our cloud, right? And we've been talking about that for several quarters now. We've introduced several new services, including PingOne Advanced Services, and we're seeing a lot of traction there. But we are building Our kind of entire infrastructure in advance of that, so we'll see operating leverage on that once we hit more scale. But we're certainly sort of building out the our support Sure and hosting infrastructure in advance of that.

Speaker 3

On the ProServe side, it's largely a function Of timing of hiring, it's also a function of enablement For our channel partners versus us directly maybe billing, we think that's healthier in the long run for our business. I'd say those are probably some of the factors that come to mind.

Speaker 9

Thanks for that. And then just one real quick one for Andre. I'm curious because we did talk to Global 3,000 or maybe I'm answering my own question here with the commentary that you had earlier about the Global 5,000. But My sense is that with this maturing and growing number of SaaS services that you have, it is in a sense And what I mean by that is, do you see these services as making Ping more consumable As we think about potential to expand down market,

Speaker 1

is that a fair characterization and can you extrapolate on that? That's 100% accurate. The skills to maintain infrastructure down market are not present. Those companies essentially are required To consume identity capabilities, however they can get them, but they don't have the skill sets to deploy and maintain Mission critical infrastructure, the same way that the large enterprises do. So as our capabilities now are consumable as SaaS, Companies to run are now available as a SaaS or cloud offering.

Speaker 1

In addition to all of the new things that we've either built and or acquired, which are very SaaS focused, That is going to inherently increase the acceptance and the opportunity for companies without the same level of sophistication to

Speaker 5

consume them.

Speaker 1

Now many of the services that we provide probably do cater to a down market, meaning The down market has those problems like single sign on, for example, and MFA. Almost every company has those needs. But some of the more advanced capabilities that we offer like data governance and authorization and API security, It might be that those services, are address problems or issues that only large enterprises have. So we're cognizant that our product portfolio has been optimized, the complete portfolio, let's just say that, Is optimized to tackle the source of challenges that large enterprises tend to have. But you are right that Offering it all in the cloud is going to improve our ability to move down market, should we choose.

Speaker 9

Thanks again, guys. Appreciate the color.

Operator

We have your next question from Patrick Colville with Deutsche Bank. Your line is open.

Speaker 5

Hey, thank you so much Can I ask about the guidance? Does the fiscal 'twenty one ARR guidance includes the inorganic contribution from Singular Key. And I guess, If so, is there any framework that you can kind of give us to help quantify it or any kind of metrics you can share in terms of how big Singular Key was Like as a kind of private company, was it have employees or anything to kind of help us

Speaker 3

Yes. Patrick, this is Raj. I can take that. So we Singularity is a relatively small company, probably just over a dozen folks between Employees and between employees and contractors. And They didn't have much in the way of ARR acquired.

Speaker 3

So it's really insignificant. And we're spending the time now rather than just simply rush to roll it out there. We're taking our time to integrate it into our PingOne cloud platform. And so the fiscal 2021 guidance really doesn't have much of anything on coming from that.

Speaker 5

That's very clear. It's very helpful. Can you just get over to margins? When you look at the model now, I'd say that one of the kind of most impressive things of fiscal 2021 has been increasing On the free cash flow line, if I'm calculating this correctly, 10% free cash flow margin year to date, up from 5% last year, Maybe 2 years ago. Just help me understand, I guess, that dynamic, where that's coming from?

Speaker 5

And clearly, you can't guide for next year, but just

Speaker 1

give us a framework

Speaker 5

as to how we should, I guess, think about the margin profile from here? Thank you.

Speaker 3

Absolutely, Patrick. I'll take that too. So we're as you know, we're our Financial ethos is to be a profitable growth company. As you mentioned, we were close to breakeven a couple of years ago and cash flow positive Last year and again expect to be this year. So that's not by accident.

Speaker 3

We We're very efficient and very disciplined in everything that we undertake. And the business model has a lot of operating leverage in it. I'd say that we've been in investment mode last year and this year. Again, not Sort of looking too far ahead, but we'll continue to lean into investments where they're paying off. But we're not we don't sort of peanut butter spread Our investments around and hope for the best were pretty surgical in what we invest in, how we invest And in measuring those things and pivoting quickly from initiatives that maybe aren't Delivering the highest ROI to doubling down in those that are.

Speaker 3

That's very clear. Thank you so much.

Operator

We have your next question from Jonathan Ho with William Blair. Your line is open.

Speaker 10

Hi, good afternoon. I just wanted to maybe start out with, I guess, the improvement in terms of the Ping Cloud capabilities. You've had this for a little bit of time now. And I'm just wondering, has this affected at all your relationship with Microsoft, which has oftentimes been a large partner on that side.

Speaker 1

There's been no change in relationship as a result of the maturation of our cloud Platformer capabilities, Jonathan. We've enjoyed a good relationship with Microsoft. As you'd imagine, nearly every, If not all of our large enterprises have strong Microsoft relationships, they're looking to provide identity services that integrate not just with their own Microsoft consumed technologies, but they're on prem, they're legacy and their other Cloud capabilities or other cloud deployments. So Ping is pretty instrumental in providing a neutral Identity set of services that allow those large enterprises to integrate identity across all of their clouds, Their legacy and their on prem. That's always been the case.

Speaker 1

I do believe that there will be an emerging set of opportunities Between Ping and Microsoft, relative to some of our new orchestration capabilities of Singular Key, we haven't explored those yet. We do anticipate exploring those in the years to come.

Speaker 10

Got it. And then just in terms of, I guess, The U. S. Government opportunity, can you talk a little bit about how big of an opportunity PingOne for government could be in 2022 and maybe some of the rationale for why now to try to push into that vertical? Thank you.

Speaker 1

We've had a number of government customers for some time that have run us on prem. We've had growing demand from those and new customers for FedRAMP certified offering. But I would suggest that the FedRAMP certified offering isn't limited to simply federal government New or existing opportunities. There's a good swath of our private sector enterprises that do business with the government and it is a requirement that their solutions That interface with the government also be FedRAMP certified. So the FedRAMP opportunity, FedRAMP certification is larger than simply an opportunity to sell the federal government.

Speaker 1

It's to allow the large private enterprises who are running Ping to also interface with the federal government. So We're very bullish on where this goes. We have been wanting a FedRAMP solution for some time. Getting a sponsor for FedRAMP certification is non trivial. We've got a very, very strong sponsor in the Department of has been a Ping customer for some time and they have agreed to sponsor us for multiple levels of FedRAMP certification, some of the higher levels of which will allow us to move into some highly secure environments with our existing customers who do business with the federal government.

Speaker 1

Great. Thank you.

Operator

We have your next question from Andrew Nowinski with Wells Fargo. Your line is open.

Speaker 10

Great. Thank you for squeezing me in

Speaker 4

for one more. I know you talked about PingOne and the maturity of your cloud Bringing you into more deals. But I was wondering if the recent cyber attacks like the one that Microsoft detected are creating new demand? Or do you think the impact From those attacks will be felt more in 2022 when companies reset their priorities and their budgets?

Speaker 1

I think all of these cyber attacks are putting essentially more focus on what is already a secular shift from traditional Security methods and paradigms to an identity based security paradigm. So I don't see that there is Any one attack necessarily pointing to you must do this, so to speak. But what I am seeing is the nature and the persistence of the And the nature of the attacks themselves are essentially exposing identity weaknesses and or identity immaturity. And all of that combined with the notions of 0 trust, which is basically moving from the notion of perimeter based security, Firewalls and VPNs and trusted users on company issued computers in the building to a world where Everybody is distributed, yet we still need to secure it, and we're going to need to secure it through the identity capabilities. So I don't see it as An immediate and impending change from any one cyber attack, but every one of these attacks adds to the argument that they need to invest in identity.

Speaker 1

Great. Thank you. So that concludes today's earnings call. I want to thank everyone for joining We look forward to providing you with additional updates at our December 1 Investor Day. Thank you, and good evening.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Ping Identity Q3 2021
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