SAILPOINT TECHNOLOGIES HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Unaudited Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report") and our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 24, 2020 (the "Annual Report"), including the consolidated financial statements and related notes included therein. SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements included in this Quarterly Report, other than statements of historical fact, are forward-looking statements. This includes statements regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions. You should not rely upon forward-looking statements as predictions of future events or place undue reliance thereon. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections, in light of currently available information, about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors. Important factors, some of which are beyond our control, that could cause actual results to differ materially from our historical results or those expressed or implied by these forward-looking statements include the following: the effect of the novel coronavirus disease ("COVID-19") global pandemic and its aftermath, as well as governmental, business and other actions in response, on the global economy and on our business; the scope, duration and severity of the COVID-19 pandemic, including any recurrence, as well as the timing of the economic recovery following the pandemic; our ability to achieve and sustain profitability; our ability to sustain historical growth rates; our ability to attract and retain customers and to deepen our relationships with existing customers; an increased focus in our business from selling licenses to selling subscriptions; breaches in our security, cyber-attacks or other cyber-risks; interruptions with the delivery of our SaaS solutions or third-party cloud-based systems that we use in our operations; our ability to compete successfully against current and future competitors; the length and unpredictable nature of our sales cycle; delayed effects on our operating results from ratably recognizing some of our revenue; fluctuations in our quarterly results; our ability to maintain successful relationships with our channel partners; the increasing complexity of our operations; real or perceived errors, failures or disruptions in our platform or solutions; our ability to adapt and respond to rapidly changing technology, industry standards, regulations or customer needs, requirements or preferences; our ability to achieve and maintain an effective system of disclosure controls and internal control over financial reporting; our ability to comply with our privacy policy or related legal or regulatory requirements; our ability to accurately forecast our estimated annual effective tax rate for financial accounting purposes; our ability to successfully identify, acquire and integrate companies and assets; our ability to maintain high-quality customer satisfaction; and our ability to maintain and enhance our brand or reputation as an industry leader. More information on these risks and other potential factors that could affect our financial results is included in our other filings with theSEC , including in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the Annual Report and "Risk Factors" in Part II, Item 1A in subsequent quarterly reports. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date hereof. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. 25 -------------------------------------------------------------------------------- Table of Contents Business OverviewSailPoint Technologies Holdings, Inc. ("we," "our," "the Company" or "SailPoint") is the leading provider of enterprise identity governance solutions. Our team of visionary industry veterans launchedSailPoint to empower our customers to efficiently and securely govern the digital identities of employees, contractors, business partners, software bots and other human and non-human users, and manage their constantly changing access rights to enterprise applications and data. Our SailPoint Predictive Identity platform provides organizations with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used. We offer both software and software as a service ("SaaS") solutions, which provide organizations with the intelligence required to empower users and govern their access to systems, applications and data across hybrid IT environments, spanning on-premises, cloud and mobile applications and file storage platforms. We help customers enable their businesses with more agile and innovative IT, streamline delivery of access to their businesses, enhance their security posture and better meet compliance and regulatory requirements. Our customers include many of the world's largest and most complex organizations, including commercial enterprises, financial institutions and governments. Organizations globally are investing in technologies such as cloud computing and mobility to improve employee productivity, business agility and competitiveness. Today, enterprise environments are more open and interconnected with their business partners, contractors, vendors and customers. Business users have driven a dramatic increase in the number of applications and amount of data that organizations need to manage, much of which sits beyond the traditional network perimeter. Because of these trends, the attack surface is expanding while well-funded cyber attackers have significantly increased the frequency and sophistication of their attacks. As a result, IT professionals need to manage and secure increasingly complex hybrid IT environments within these extended enterprises. Attackers frequently target the identity vector as it allows them to leverage user identities to gain access to high-value systems and data while concealing their activity and movements within an organization's IT infrastructure. The consequences of a data breach can be extremely damaging, with organizations facing significant costs to remediate the breach and repair brand and reputational damage. In addition, governments and regulatory bodies have increased efforts to protect users and their data with a new wave of regulatory and compliance measures that are further burdening organizations and levying severe penalties for non-compliance. As a result of these trends, enterprises are struggling to efficiently manage and secure their digital identities. We believe that our SailPoint Predictive Identity platform is a critical, foundational layer of a modern cyber security strategy. Its open architecture allows it to complement and build upon traditional perimeter- and endpoint-centric security solutions, which on their own are increasingly insufficient to secure organizations, and their applications and data. We deliver a user-centric security platform that combines identity and data governance solutions to form a holistic view of the enterprise. In combination with our technology partners, we create identity awareness throughout our customers' environments by providing valuable insights into, and incorporating information from, a broad range of enterprise software and security solutions. Our governance platform provides a system of record for digital identities across our customers' IT environments while allowing them to remain agile and competitive. Our adaptable solutions integrate seamlessly into existing technology stacks, allowing organizations to maximize the value of their technology investments. Our professionals work closely with customers throughout the implementation lifecycle, from documentation to development to integration. The SailPoint Predictive Identity platform currently consists of: •SailPoint Identity Services: delivered as multi-tenant SaaS subscription services and currently consisting of: •IdentityNow: provides customers with a set of fully integrated services for compliance, provisioning and password management for applications and data hosted on-premises or in the cloud; •Access Insights: turns identity data collected into actionable insights; •Recommendation Engine: uses artificial intelligence ("AI"), machine learning ("ML"), peer group analysis, identity attributes and access activity to help you decide whether access should be granted or removed; •Access Modeling: uses AI and ML to suggest roles based on similar access between users and gives you insights to confirm the correct access for each role; •Cloud Access Management: uses AI and ML to automatically learn, monitor and secure access to cloud infrastructure; and 26 -------------------------------------------------------------------------------- Table of Contents •Workload Privilege Management: automates the creation and rotation of credentials, keys and passwords and records and logs activity whenever privileged tasks are performed for security and audit purposes, and •IdentityIQ: our identity governance solution that can be delivered from the cloud or on-premises. IdentityIQ provides large, complex enterprise customers a unified and highly configurable identity governance solution that consistently applies business and security policies as well as role and risk models across applications and data. It can be used in conjunction with our SailPoint Identity Services, including Access Insights, Recommendation Engine, Access Modeling, Cloud Access Management and Workload Privilege Management. Our solutions address the complex needs of global enterprises and mid-market organizations. As ofSeptember 30, 2020 , 1,660 customers across a wide variety of industries were using our products to enable and secure digital identities across the globe. Our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers. Delivering these solutions is challenging because our customers have large, complex IT environments, often rely on both legacy and innovative technologies, and deploy different business models, including on-premises and cloud models. Rising security threats and evolving regulations and compliance standards for cyber security, data protection, privacy and internal IT controls create new opportunities for our industry and require us to adapt our solutions to be successful. Maintaining our historical growth rates is also challenging because our growth strategy depends in part on our ability to expand our global presence, increase the number of companies we can address with our current solutions, and invest in new vertical markets, while competing against much larger companies with more recognizable brands and financial resources. Although we seek to grow rapidly, we also focus on managing our net cash from operations while continuing to invest in our platform and to deliver innovative solutions to our customers. We believe enterprises are increasingly embracing the cloud to house their critical security infrastructure. As a result, a growing number of enterprises are changing their approach to identity governance and now prefer to use a SaaS solution rather than purchase software outright and install it in their own infrastructure. This industry shift aligns well with our current product strategy. Our product strategy is to (1) accelerate innovation within our core identity governance SaaS offerings, (2) deliver continued innovation as we execute against our vision for SailPoint Predictive Identity, and (3) ensure that as we deliver these new innovations, they work in concert with our on-premises offerings in addition to our SaaS offerings. We believe that continued growth of subscription revenue, which includes revenue from our SaaS offerings, as a percentage of total revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues. Nevertheless, our revenue and our gross margins vary depending on the type of solution we sell. As a result, a shift in the sales mix of our solutions could affect our performance relative to historical results. See "Key Factors Affecting Our Performance" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Annual Report for information regarding the key factors affecting our performance. Recent Developments and Outlook In light of the ongoing spread of COVID-19 inthe United States and abroad, government and public health authorities have continued to recommend social distancing and imposed various quarantine and isolation measures on large portions of the population, including measures directed at businesses. While intended to protect human life, these restrictions have had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain duration. In response to these measures, we have made certain adjustments to our operations as we continue to provide our offerings to new and existing customers, but it remains unclear how these changes or the broader effects of COVID-19 on global economies will affect our financial performance going forward. For example, as a result of the COVID-19 pandemic, we have shifted all customer events to virtual-only experiences for the remainder of 2020. It remains unclear what effect this trend may have on our sales cycle, conversion rate or the quantity and quality of our customer pipeline. The conditions caused by the COVID-19 pandemic may also materially adversely affect the rate of IT spending by our current and prospective customers, including our customers' ability or willingness to purchase our offerings, delay prospective customers' purchasing decisions, delay the provisioning of our offerings, or cause customers to fail to make timely payments. We have seen an immaterial number of customer requests, and may continue to see similar requests, to lengthen payment terms or reduce the value or duration of subscription contracts, but this has not resulted in a material adverse impact on our renewal rates. And while, due to local and regional restrictions, we have not been able to provide on-site consulting services to our 27 -------------------------------------------------------------------------------- Table of Contents customers during the pandemic, this has not resulted in any meaningful adverse impact on our ability to deliver such services because a significant portion of our consulting services have historically been provided remotely and most on-site projects transitioned to a remote delivery model. Notwithstanding the potential and actual adverse impacts described above, as the pandemic has caused more of our customers to shift to a virtual workforce, we believe the value and scalability of our identity platform has become even more evident. We believe that the pandemic has not had a material adverse impact on our financial performance, and indeed, our revenue and customer base have grown through the first three quarters of 2020. For the remainder of 2020, we foresee healthy demand for our solutions given the aforementioned virtual workforce shift, though we recognize that the uncertainty related to COVID-19 may result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. The challenges posed by COVID-19 on our business and our customers' businesses may evolve rapidly, and the speed, trajectory and strength of a recovery in general economic conditions remains highly uncertain and could be slowed or reversed by a number of factors, including the recent resurgence in COVID-19 infections in a number of locations around the world and the continued lack of generally effective therapeutics or a vaccine for the disease. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. See "Risk Factors" in Part II, Item 1A of the Quarterly Report for the quarter endedMarch 31, 2020 for information regarding the possible effects of COVID-19 on our business. Key Business Metrics In addition to our GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations: Three Months Ended Nine Months EndedSeptember 30, 2020
1,660 1,341 1,660 1,341
Subscription revenue as a percentage of total
revenue 54 % 49 % 54 % 52 %
•Number of Customers. We believe that the size of our customer base is an
indicator of our market penetration and that our net customer additions are an
indicator of the growth of our business and our future revenue opportunity. We
define a customer as a distinct entity, division or business unit of an
organization that receives support or has the right to use our cloud-based
solutions as of the specified measurement date. Revenue from any single customer
is determined by the number of identities the customer is entitled to govern as
well as the number of modules and solutions purchased. Our customer base
increased by 319, or 24%, from 1,341 customers at September 30, 2019 to 1,660
customers at September 30, 2020 . This increase includes 12 customers added in
the first quarter of 2020 as a result of the integration of our two acquisitions
in the fourth quarter of 2019.
•Subscription Revenue as a Percentage of Total Revenue. Subscription revenue is
a portion of our total revenue and is derived from (i) IdentityIQ maintenance
and support agreements and (ii) the SailPoint Identity Services where customers
enter into subscription agreements with us. As we generally sell our solutions
on a per-identity basis, our SaaS subscription revenue for any customer is
primarily determined by the number of identities that the customer is entitled
to govern, the number of applications that the customer has licensed from us,
and the ongoing price paid per-identity under a maintenance and support
agreement. Thus, we consider our subscription revenue to be the recurring
portion of our revenue base and believe that its continued growth as a
percentage of total revenue will lead to a more predictable revenue model and
increase our visibility to future period total revenues. Because we recognize
our subscription revenue ratably over the duration of those agreements, a
portion of the revenue we recognize each period is derived from agreements we
entered into in prior periods. In contrast, we typically recognize license
revenue upon entering into the applicable license, the timing of which is less
predictable and may cause significant fluctuations in our quarterly financial
results.
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Components of Results of Operations
See "Components of Results of Operations" within "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
the Annual Report for information regarding the components of our results of
operations.
Seasonality
We generally experience seasonal fluctuations in demand for our products and
services. Our quarterly sales are impacted by industry buying patterns. As a
result, our sales have generally been highest in the fourth quarter of a
calendar year and lowest in the first quarter. Although these seasonal factors
are common in the technology industry, historical patterns should not be
considered a reliable indicator of our future sales activity or performance.
Results of Operations
The following table sets forth our unaudited condensed consolidated statements
of operations for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
(In thousands)
Revenue
Licenses $ 30,864 $ 26,825 $ 86,748 $ 64,827
Subscription 51,004 37,383 140,807 102,929
Services and other 12,145 11,671 34,358 31,760
Total revenue 94,013 75,879 261,913 199,516
Cost of revenue
Licenses 1,083 1,083 3,269 3,157
Subscription (1) 9,794 6,862 26,927 18,990
Services and other (1) 9,922 8,985 27,597 25,361
Total cost of revenue 20,799 16,930 57,793 47,508
Gross profit 73,214 58,949 204,120 152,008
Operating expenses
Research and development (1) 19,314 14,148 52,775 40,318
General and administrative (1) 8,846 10,192 27,731 27,819
Sales and marketing (1) 44,092 33,274 119,886 99,298
Total operating expenses 72,252 57,614 200,392 167,435
Income (loss) from operations 962 1,335 3,728 (15,427)
Other expense, net:
Interest income 349 418 1,790 843
Interest expense (4,639) (408) (13,757) (561)
Other income (expense), net 214 (295) (222) (1,018)
Total other expense, net (4,076) (285) (12,189) (736)
Income (loss) before income taxes (3,114) 1,050 (8,461) (16,163)
Income tax benefit 2,438 2,618 2,410 2,244
Net income (loss) $ (676) $ 3,668 $ (6,051) $ (13,919)
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(1)Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30,
September 30, 2020 2019 2020 2019
(In thousands)
Cost of revenue - subscription $ 485 $
286
550 337 1,368 1,066
Research and development 1,712 820 4,700 2,653
General and administrative 1,944 1,710 4,896 4,725
Sales and marketing 3,147 1,336 8,945 4,824
Total stock-based compensation expense $ 7,838 $
4,489
The following table sets forth the unaudited condensed consolidated statements
of operations data for each of the periods presented as a percentage of total
revenue:
Three Months Ended Nine Months Ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Revenue
Licenses 33 % 35 % 33 % 32 %
Subscription 54 49 54 52
Services and other 13 16 13 16
Total revenue 100 100 100 100
Cost of revenue
Licenses 1 1 1 2
Subscription 10 9 10 9
Services and other 11 12 11 13
Total cost of revenue 22 22 22 24
Gross profit 78 78 78 76
Operating expenses
Research and development 21 19 20 20
General and administrative 9 13 11 14
Sales and marketing 47 44 46 50
Total operating expenses 77 76 77 84
Income (loss) from operations 1 2 1 (8)
Other expense, net:
Interest income - 1 1 -
Interest expense (5) (1) (5) -
Other income (expense), net - - - -
Total other expense, net (5) - (4) -
Income (loss) before income taxes (4) 2 (3) (8)
Income tax benefit 3 3 1 1
Net income (loss) (1) % 5 % (2) % (7) %
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Table of Contents Comparison of the Three and Nine Months EndedSeptember 30, 2020 and 2019 Revenue Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 variance $ variance % 2020 2019 variance $ variance % (In thousands, except percentages) Revenue Licenses$ 30,864 $ 26,825 $ 4,039 15 %$ 86,748 $ 64,827 $ 21,921 34 % Subscription 51,004 37,383 13,621 36 % 140,807 102,929 37,878 37 % Services and other 12,145 11,671 474 4 % 34,358 31,760 2,598 8 % Total revenue$ 94,013 $ 75,879 $ 18,134 24 %$ 261,913 $ 199,516 $ 62,397 31 % License Revenue. License revenue increased by$4.0 million , or 15%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . During the three months endedSeptember 30, 2020 and 2019, license revenue from new customers was$22.4 million and$15.4 million , and license revenue from existing customers was$8.5 million and$11.4 million for the respective periods. License revenue increased by$21.9 million , or 34%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 and 2019, license revenue from new customers was$55.9 million and$41.7 million , and license revenue from existing customers was$30.9 million and$23.1 million for the respective periods. Subscription Revenue. Subscription revenue increased by$13.6 million , or 36%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to an increase in ongoing maintenance revenue from our increased installed base and new sales of our SaaS offerings as we continue to see strong momentum in our SaaS business. During the three months endedSeptember 30, 2020 and 2019, subscription revenue from new customers was$6.5 million and$5.7 million , and subscription revenue from existing customers was$44.5 million and$31.7 million for the respective periods. Subscription revenue increased by$37.9 million , or 37%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily a result of an increase in ongoing maintenance revenue from our increased installed base and new sales of our SaaS offerings as we continue to see strong momentum in our SaaS business. During the nine months endedSeptember 30, 2020 and 2019, subscription revenue from new customers was$10.9 million and$10.1 million , and subscription revenue from existing customers was$129.9 million and$92.8 million for the respective periods. Services and Other Revenue. Services and other revenue increased by$0.5 million , or 4% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The increase is primarily a result of an increase in the number of customers using our consulting and training services. Services and other revenue increased by$2.6 million , or 8%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase is primarily a result of an increase in the number of customers using our consulting and training services. Geographic Regions. Our customers inthe United States contributed the largest portion of our revenue in each reporting period endedSeptember 30, 2020 and 2019 because we have more market momentum related to our larger and more established sales force, sales pipeline and brand recognition and awareness inthe United States as compared to our other regions. Revenue is classified by the following major geographic areas: (i)United States , (ii)Europe , theMiddle East andAfrica ("EMEA") and (iii) rest of the world. We continue to invest in increasing the size of our international sales force and strengthening partnerships with global system integrators and resellers worldwide. For the three and nine months endedSeptember 30, 2020 , revenue inthe United States , EMEA and the rest of the world increased year-over-year. 31 -------------------------------------------------------------------------------- Table of Contents The following table sets forth, for each of the periods presented, our consolidated total revenue by geography and the respective percentages of total revenue: Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 $ % of revenue $ % of revenue $ % of revenue $ % of revenue (In thousands, except percentages)United States $ 67,917 72 %$ 56,071 74 %$ 191,613 73 %$ 142,030 71 % EMEA (1) 16,329 17 % 12,499 16 % 43,104 17 % 38,768 19 % Rest of the World (1) 9,767 11 % 7,309 10 % 27,196 10 % 18,718 10 % Total revenue$ 94,013 100 %$ 75,879 100 %$ 261,913 100 %$ 199,516 100 % (1)No single country outside ofthe United States represented more than 10% of our revenue. Gross Profit and Gross Margin Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 variance $ variance % 2020 2019 variance $ variance % (In thousands, except percentages) Gross profit Licenses$ 29,781 $ 25,742 $ 4,039 16 %$ 83,479 $ 61,670 $ 21,809 35 % Subscription 41,210 30,521 10,689 35 % 113,880 83,939 29,941 36 % Services and other 2,223 2,686 (463) (17) % 6,761 6,399 362 6 % Total gross profit$ 73,214 $ 58,949 $ 14,265 24 %$ 204,120 $ 152,008 $ 52,112 34 % Gross margin Licenses 96 % 96 % 96 % 95 % Subscription 81 % 82 % 81 % 82 % Services and other 18 % 23 % 20 % 20 % Total gross margin 78 % 78 % 78 % 76 % Licenses. License gross profit increased by$4.0 million , or 16%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The increase in gross profit was the result of increased license revenues with only minor increases in third party royalties. License gross profit increased by$21.8 million , or 35%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase in gross profit was the result of increased license revenues with only minor increases in third party royalties. Subscription. Subscription gross profit increased by$10.7 million , or 35%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The increase in gross profit was the result of growth in subscription revenue, as described above, while gross margin remained materially consistent with prior period. Subscription gross profit increased by$29.9 million , or 36%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase in gross profit was the result of growth in subscription revenue, as described above, while gross margin remained materially consistent with prior period. Services and Other. Services and other gross profit decreased by$0.5 million , or 17%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The decrease in gross profit is primarily attributable to the higher partner utilization in our professional services and training organization to support an increasing number of customers, partially offset by increased revenues due to customer growth. 32 -------------------------------------------------------------------------------- Table of Contents Services and other gross profit increased by$0.4 million , or 6%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase in gross profit is primarily a result of an increase in the number of customers using our consulting and training services, partially offset by higher partner utilization in our professional services and training organization. Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 variance $ variance % 2020 2019 variance $ variance % (In thousands, except percentages) Operating expenses Research and development$ 19,314 $ 14,148 $ 5,166 37 %$ 52,775 $ 40,318 $ 12,457 31 % General and administrative 8,846 10,192 (1,346) (13) % 27,731 27,819 (88) - % Sales and marketing 44,092 33,274 10,818 33 % 119,886 99,298 20,588 21 % Total operating expenses$ 72,252 $ 57,614 $ 14,638 25 %$ 200,392 $ 167,435 $ 32,957 20 % Research and Development Expenses. Research and development expenses increased by$5.2 million , or 37%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This increase was primarily driven by a$5.0 million increase in employee-based costs primarily consisting of salary related expenses, bonus accrual and stock-based compensation. Research and development expenses increased by$12.5 million , or 31%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was primarily driven by a$11.1 million increase in employee-based costs primarily consisting of salary related expenses, bonus accrual and stock-based compensation,$0.7 million increase in professional services expense and a$0.7 million increase in software and hosting arrangement expenses. General and Administrative Expenses. General and administrative expenses decreased by$1.3 million , or 13%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This decrease was primarily driven by a$1.4 million decrease in professional services expense relating primarily to legal fees and consulting fees associated with the issuance and sale of the Notes and Capped Call Transactions (each as defined below) and acquisition related costs in the prior year and a$0.4 million decrease in provision of credit losses, partially offset by a$0.7 million increase in software maintenance and subscription expenses. General and administrative expenses decreased by$0.1 million , or 0%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This decrease was primarily driven by a$2.9 million decrease in professional services expense relating primarily to legal fees and consulting fees associated with the issuance and sale of the Notes and Capped Call Transactions and acquisition related costs in the prior year, offset by a$2.3 million increase in software maintenance and subscription expenses and a$0.7 million increase in general and administrative headcount and related allocated overhead expenses. Sales and Marketing Expenses. Sales and marketing expenses increased by$10.8 million , or 33%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This increase was primarily driven by a$10.9 million increase in employee-based costs primarily consists of salary related expenses, commissions, bonus accrual and stock-based compensation, a$1.6 million increase in professional services expense relating primarily to staff augmentation and advisory services and a$0.5 million increase in software and hosting arrangement expenses, partially offset by a$2.1 million decrease in travel expense due to COVID-19 related limitations. Sales and Marketing Expenses. Sales and marketing expenses increased by$20.6 million , or 21%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was primarily driven by a$23.6 million increase in employee-based costs primarily consists of salary related expenses, commissions, bonus accrual and stock-based compensation, a$1.2 million increase in professional services expense relating primarily to staff augmentation and advisory services and a$1.0 million increase in software and hosting arrangement expenses, partially offset by a$4.4 million decrease in travel expense and a$0.7 million decrease in events expense, both due to COVID-19 related limitations. 33 -------------------------------------------------------------------------------- Table of Contents Interest Income and Interest Expense Interest Income Interest income decreased by$0.1 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This decrease was primarily due to a significant decrease in interest rates earned on our money market accounts, offset by the increase in our cash balance. Interest income increased by$0.9 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was due to interest income earned on our money market accounts, primarily during the first quarter of 2020, in which we have invested a significant portion of the net proceeds from the Notes issuance in the third quarter of 2019. Interest Expense Interest expense increased by$4.2 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This increase was primarily due to$4.1 million of amortization of debt discount and$0.3 million of debt issuance costs related to the Notes for the three months endedSeptember 30, 2020 . Interest expense increased by$13.2 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was primarily due to$12.1 million of amortization of debt discount and$1.0 million of debt issuance costs related to the Notes for the nine months endedSeptember 30, 2020 . Income Tax Benefit The Company recorded an income tax benefit of approximately$2.4 million and$2.2 million for the nine months endedSeptember 30, 2020 and 2019, respectively, leading to a net benefit of$0.2 million year-over-year. The Company maintains a full valuation allowance for ourIsrael tax position due the lack of taxable earnings for the foreseeable future. Our income tax rate varies from the federal statutory rate due to the valuation allowances on certain foreign deferred tax assets, regulations and interpretations in multiple jurisdictions in which we operate; unanticipated changes in tax rates; and differences in accounting and tax treatment of our stock-based compensation, foreign withholding taxes and research and development credits. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue. We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject toU.S. income tax if such earnings are distributed to theU.S. With the exception of 2018 and 2019, we have incurred net operating losses for federal income tax purposes each year since our inception. We have since begun to utilize some of our net operating losses for federal income tax purposes. Thus, our tax expense to date relates primarily to state as well as foreign income taxes. The effective tax rate for the three and nine months endedSeptember 30, 2020 is 78.3% and 28.5%, respectively, compared to (249.3)% and 13.9% for the three and nine months endedSeptember 30, 2019 . The main drivers for the differences in the rates from the prior period to the current period are related to differences in forecasted pre-tax book income, the impact of stock compensation, an increase in foreign tax liabilities and the impact of the research and development ("R&D") credits. We do not consider the earnings of our foreign subsidiaries, with the exception ofIndia , to be permanently reinvested in foreign jurisdictions. The global intangible low-taxed income ("GILTI") provisions require the Company to include in itsU.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company is currently in a tested loss and does not incur a GILTI tax. InIndia , we continue to invest and grow our research and development activities and have no plans to repatriate undistributed earning held inIndia back to theU.S. parent company, and therefore consider earnings inIndia to be permanently reinvested. Liquidity and Capital Resources As ofSeptember 30, 2020 , we had$483.7 million of cash and cash equivalents (of which$4.7 million is held in our foreign subsidiaries),$75.0 million of availability under the Credit Agreement (as defined below) and$6.0 million in our irrevocable, cash collateralized, unconditional standby letter of credit, issued primarily in connection with our corporate headquarters lease. As ofSeptember 30, 2020 , we had$253.9 million in net working capital, which we define as current assets less current liabilities, excluding deferred revenue. 34 -------------------------------------------------------------------------------- Table of Contents We believe that existing cash and cash equivalents, any positive cash flows from operations and available borrowings under our Credit Agreement will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new solutions and product enhancements and the continuing market acceptance of our offerings and services. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we may borrow under our Credit Agreement or seek to raise additional funds through equity, equity-linked or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity financing, incur indebtedness or use cash resources. As ofSeptember 30, 2020 , we had no material commitments for capital expenditures. Since inception, we have financed operations primarily through license fees, maintenance fees, SaaS subscription fees, consulting and training fees, borrowings under our prior credit agreement and, to a lesser degree, the sale of equity securities. Our principal uses of cash are funding operations and capital expenditures. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in key initiatives to drive the Company's long-term growth. Credit Agreement InMarch 2019 ,SailPoint Technologies, Inc. , as borrower, and certain of our other wholly owned subsidiaries entered into a credit agreement (as amended, restated, amended and restated, supplemented or otherwise modified from time to time through the date hereof, the "Credit Agreement"). InSeptember 2019 , the Company amended the Credit Agreement in connection with the issuance and sale of the Notes. Such amendment included a decrease in the commitments for revolving credit loans from an initial$150.0 million to$75.0 million , with a$15.0 million letter of credit sublimit, which amount can be increased or decreased under specified circumstances and is subject to certain financial covenants. Borrowings pursuant to the Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the Credit Agreement. Borrowings under the Credit Agreement are scheduled to mature inMarch 11, 2024 . We had no outstanding revolving credit loan balance as ofSeptember 30, 2020 andDecember 31, 2019 . We were in compliance with all applicable covenants as ofSeptember 30, 2020 . See Note 8 "Credit Agreement" in our notes to unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding terms and conditions of the Credit Agreement. Convertible Senior Notes InSeptember 2019 , we issued$400.0 million aggregate principal amount of 0.125% convertible senior notes due 2024 (the "Notes"), in a private offering to qualified institutional buyers. In connection with the issuance of the Notes and exercise in full of the initial purchasers' option, the Company used$37.1 million of the net proceeds to pay the cost of the privately negotiated capped call transactions (the "Capped Call Transactions"). As ofSeptember 30, 2020 , the Notes are convertible at the option of the holders. We have the ability to settle the Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our own election. It is our current intent to settle conversions of the Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. In conjunction with the issuance of the Notes, we entered into the Capped Call Transactions to reduce our exposure to additional cash payments above principal balances in the event of a cash conversion of the Notes. We may owe additional cash to the holders of the Notes upon early conversion if our stock price exceeds$41.34 per share, which is subject to certain adjustments. Although our incremental exposure to the additional cash payment above the principal amount of the Notes is reduced by the capped calls, conversion of the Notes by the holders may cause dilution to the ownership interests of existing stockholders. See Note 9 "Convertible Senior Notes and Capped Call Transactions" in our notes to unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding terms and conditions of the Notes and Capped Call Transactions. 35
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