KnowBe4, Inc. (KNBE) Q3 2021 Earnings Call Transcript | The Motley Fool

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KnowBe4, Inc. (NASDAQ:KNBE)
Q3 2021 Earnings Call
Nov 03, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the KnowBe4 third quarter 2021 results conference call. Please be advised that today’s conference call is being recorded. [Operator instructions] Now it is my pleasure to turn the call to Ken Talanian, KnowBe4 vice president of investor reporting.

Ken TalanianVice President of Investor Relations

As a reminder, our commentary today will include non-GAAP financial measures. Information regarding our non-GAAP financial results, their limitations, and reconciliations of our GAAP and non-GAAP results can be found in our earnings release, which was furnished with our Form 8-K today with the SEC may also be found in the supplemental financial information available on our Investor Relations website at investors.knowbe4.com. In addition, some of the comments today, including those related to our guidance, may contain forward-looking statements that are subject to risks, uncertainties, and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from those projected or implied during this call.

These risks are described in our Form 10-Q that will be filed following this call. These documents can be found on the SEC’s website, sec.gov, and on our Investor Relations website. During today’s call, you will hear prepared remarks from our founder and CEO, Stu Sjouwerman; and CFO and Co-President Krish Venkataraman. Lars Letonoff, our chief revenue officer and co-president, will join our question-and-answer session.

And with that, I will turn the call over to Stu.

Stu SjouwermanFounder and Chief Executive Officer

Thank you, Ken, and thank you all for joining us today. We’re excited to share our results with you this morning. Building on last quarter’s strong performance, we exceeded our guidance, had a record quarter with over 40% year-over-year annual recurring revenue growth. As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of social engineering.

We are the only public company dedicated to securing the human layer. The emphasis in cybersecurity has traditionally been on legacy controls. However, the exponential growth in cyberattacks and their relative success proves that we cannot solely rely on security software infrastructure. According to the newest Verizon 2021 Data Breach Investigations Report, 85% breaches involved a human element.

Ignoring the human element of this equation leaves organizations of all sizes vulnerable, which is why we are dedicated to helping our customers transform their employees into a successful last line of defense against cyberattacks. This problem is not going away. It is escalating. Just last week, in fact, Western Journal reported that the group behind the SolarWinds attack is actively targeting the global supply chain by exploiting the human layer with social engineering attacks.

The regulatory environment continues to evolve in response to the growing threat landscape as well. In fact, a director at the NSA recently stated that the US will have to contend with ransomware text every single day for the next five years. We believe these actions help validate our market opportunity and provide a catalyst for new business growth. I will start by summarizing key results and activities for the quarter.

Third quarter results exceeded our expectations across the board with continued growth and strong free cash flow generation. Our inside sales motion continues to win both new enterprise and SMB customers across all industry verticals. This resulted in $262 million in ARR ahead of our expectations and up 44% year over year. We have established a market-leading position in the human-centric cybersecurity space and remain focused on continuing to innovate to meet the needs of our customers.

Our vision for the security awareness market finds KnowBe4’s product roadmap, and this includes both exciting new features and new products. Our recently announced acquisition of SecurityAdvisor is yet another example of our commitment to our vision of the market. With the acquisition of SecurityAdvisor and the future integration into the KnowBe4 platform, we are making a big bet to transform alerts from other leading cybersecurity layers into real-time opportunities to change human behavior. With this, we believe, we are creating a new category in cybersecurity called Human Detection and Response, or HDR.

How this works as we connect to these other security layers through their cloud interface and pull in the alerts so we can analyze them and then take real-time action. We believe the new SKU we plan to create with this acquisition should give us an incredible upsell and cross-sell opportunity given the estimated $5 billion TAM associated with this new category. The next several months will be spent integrating the product into the core KnowBe4 building in automation capabilities and extending the ecosystem. We anticipate solid traction with this product over the next few years.

The SecurityAdvisor team’s maximum earnout payment is based on sales of the new products reaching $40 million in ARR by the end of 2024. Our organic product development remains strong as well. During our inaugural KB4-CON EMEA conference, which had in excess of 5,000 registrations, we announced the beta release of a product code named Password IQ. This is another exciting product that we expect to be of interest to customers of all sizes and all industries.

To be clear, this is not a password manager. Password IQ is used to mitigate the risk around password hygiene issues, such as weak or breached passwords. The product continuously monitors your organization for any issues detected with users’ passwords. It organizes this data on an easy-to-read dashboard and allows for automatic employee training based on detection of any password risk.

As with our prior product launches, we expect this product to further expand our cross-sell capabilities. We will provide an update on our expectations for this product during our Q4 earnings call. Given the backdrop of state-sponsored threat actors who continue to take advantage of bad password hygiene, we believe this product will be a welcome addition to our customers’ defenses and an additional cross-sell opportunity. Our technology leadership is a key factor in the strong momentum in our new business wins represented by further penetration in the enterprise market.

We also continue to see strength and best-in-class retention across our existing customer base. Customer growth remains strong across both SMB and enterprise with our total number of customers now reaching over 44,000. Our current customers are investing in our KMSAT platform and adopting our additional PhishER, ACM GRC, and now Compliance Plus products at record levels. As of the end of Q3, 19% of customers now have subscriptions to multiple products.

That is up from 12% at the end of Q3 ’20. Organizations across all verticals and sizes continue to see value in our free tools and thought leadership webinars, which we utilize to generate leads for our inside sales team. As in previous quarters, we also saw customers by both KMSAT and PhishER together to leverage the immediate risk reduction that PhishER brings to their organization. Though we do not report the growth for PhishER Compliance Plus and ACM GRC separately, the combined local growth and revenue growth was close to triple digits year over year for the quarter, a continuation of the cross-sell success seen in the last quarter.

In terms of new business, most of our wins continue to be greenfield but we also saw a number of competitive displacements. The greenfield wins continue to show that the value of security awareness is resonating with customers and our platform stands out from the competition. We believe our competitive wins are further proof that our platform and customer support rank well above our competition. We continue to see success in our enterprise segment, which had several big wins.

And to give you some examples of mega enterprise wins, we had an 80,000 seat win with a global bank based in Europe. Also in Europe, we closed a 60,000-seat deal with a…

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