KnowBe4, Inc. (KNBE) Q1 2022 Earnings Call Transcript

KnowBe4, Inc. (KNBE)
Q1 2022 Earnings Call
May 10, 2022, 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 first quarter 2022 results conference call. Please be advised that today's conference call is being recorded. [Operator instructions]. Now it's my pleasure to turn the call over to Ken Talanian, KnowBe4's senior vice president of FP&A and investor relations.

Please go ahead. 

Ken Talanian -- Vice 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 and may also be found in the supplementary financial information available on our investor relations website at investors.knowbe4.com. In addition, some of our 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 in accordance with the filing deadlines established by the SEC. 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, CEO and president, Stu Sjouwerman; and CFO, Bob Reich. 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 Sjouwerman -- Founder 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. We started another year of strong execution with first quarter results exceeding our guidance. We had a record quarter with about 38% year over year annual recurring revenue growth and a seasonally strong 31% free cash flow margin.

As many of you know, I started KnowBe4 to help organizations manage the ongoing problem of social engineering. We're the only public company dedicated to securing the human layer. We continue to innovate in this layer and our announcement of a brand-new category called HDR, Human Detection and Response, is a prime example of this. I'll come back to that later in my remarks.

The emphasis in cybersecurity has traditionally been on legacy controls. However, the exponential growth in cyber attacks and their relative success proves that organizations cannot solely rely on security software infrastructure. Recent examples of this are the cyber attacks seen during the tragic ongoing conflict between Russia and Ukraine. For example, near the end of March, the Ukrainian government reported severe cyber attacks that crippled UKR Telecom, one of their largest communications providers, collapsing the nation's network connectivity to 13% of pre-war levels.

Another more recent example came about a month ago. In mid-April, the Department of Energy, CISA, the NSA, and the FBI all released a joint advisory report about a new malware tool set called Pipe Dream. This highly sophisticated malware tool kit was designed specifically to target the kinds of industrial controls that are used in power grids factories, water utilities, and oil refineries. For context, on the potential devastation that an attack like this could achieve, we only have to look back less than a year ago to the incident with the colonial pipeline.

It's now being reported that the bad actors were able to gain access due to a single compromised password that was later found in a batch of breached credentials on the dark web. Poor password hygiene, which originates from human error, crippled oil production across the Eastern seaboard. Now we saw the headlines at the time, but what many don't realize is how close the situation came to shutting down entire subsets of the economy. A later declassified assessment by the department of energy reported that the country could only afford another three to five days of disruption before mass transit, chemical factories, and other refineries would have had to shut down from a lack of diesel fuel, crippling distribution.

Unfortunately, attacks like these are only part of an ongoing trend that started years ago and continues to accelerate so much so that Gartner predicts 30% of `critical infrastructure organizations will experience a security breach by 2025 that will result in the halting of an operations or mission-critical cyber physical system. When you combine this with Verizon's widely reported statistic that 85% of data breaches involve a human element, it becomes abundantly clear that securing the human layer is a matter of national security. This sentiment has already been echoed by the Biden administration on multiple occasions. It is clear that this problem is escalating in the private sector as well.

Just last February, the Anti Phishing Working Group reported that phishing attacks hit an all-time high in 2021, tripling that of early 2020. December of 2021 saw the highest number of attacks ever recorded. They're becoming more effective as well. With the number of organizations falling victim to ransomware in Q4 2021, hitting the highest numbers seen in the past two  years, while alarming, I'm sure that these statistics come as no surprise to anyone.

The unfortunate reality is that in a lot of these cases, bad actors are manipulating the human element in organizations without any regard to their size or industry. Untrained or poorly trained employees are walking liabilities and potentially devastating consequences to the operations of any organization. With that being said, employees who are properly trained using an effective platform and our frequently sent realistic phishing simulations have the potential to become one of the most powerful security assets of those same organizations. That is why we are dedicated to helping our customers transform their employees into a successful last line of defense against cyber attacks, and our efforts have not gone unnoticed.

I am proud to say that we were once again recognized as a Forrester Wave leader in their security [Inaudible] training category, ranking the highest across all of their scoring criteria. In their onwards, KnowBe4 brings size, an established product, and a strong vision as one of the largest and most established vendors in this space before has an enviable growth trajectory. We believe that this is a kind of recognition that confirms the great work that we're doing. I will now walk you through our key results which highlight our execution during Q1 2022.

First quarter results exceeded our expectations across the board with continued balanced growth in both top line and profitability as well as seasonally strong free cash flow generation. The productivity of our direct sales and channel teams continues to deliver wins for both our SMB and enterprise customers across all industry verticals. This resulted in nearly $306 million in ARR, which is up about 38% year over year. We believe this performance demonstrates our market-leading position in the human-centric cybersecurity space, and we continue to remain focused on innovation in order to meet the needs of our customers.

Our vision for the security awareness market defines KnowBe4's product roadmap. This includes both exciting new features and new products. A great example of this is Security Coach, the product that we're planning to release in the second half of this year following the integration of our SecurityAdvisor acquisition. With Security Coach, we believe we are creating a new category in cybersecurity called Human Detection and Response, or HDR.

How this works is we connect through their cloud interface to existing layers in our customers' security software stack and pull in security alerts so we can analyze them and take real-time action. As discussed previously, we believe this new SKU will add an estimated $5 billion TAM as well. I'm pleased to announce that the integration is still on track for a full release in the second half of this year. Our R&D team is laser focused on making sure this new SKU, which is highly technical in nature, will be an easy upsell, cross-sell into our existing customer base in the simplest way possible.

This is the kind of automation that supports our high velocity sales motion as well as reinforces our proven go-to-market engine. For an update on the timeline, in early Q3, we'll begin a closed beta of Security Coach. An open beta will follow later in Q3 with the product poised for general release in Q4. Looking at no features for the KMSAT platform, there is one we are particularly excited about.

We have expanded the AI capabilities even further with AIDA recommended optional learning. AIDA stands for Artificial Intelligence Driven Agent, and it's been a core feature of our platform for years. One of its functions is to look at failed phishing security tests. The attack vectors of those failures, the training results, and how often that user reports suspicious emails.

We then apply ML to recommend and deliver an informed personalized phishing campaign. This latest feature now adds on to this by recommending additional content for an end user based on their specific interests. With these new features, we continue our path toward individual risk reduction at scale, which, in turn, reduces risk across the organization. New products and features are a key driving factor in the strong momentum of our new business wins.

As a reminder, this is one of the few areas in cybersecurity, if not the only one, that isn't a purely replacement market. We believe we're still operating within a space that is overwhelmingly greenfield with a global penetration that we believe to be in the low single digits. While most of our new business wins are greenfield, we also continue to see a number of competitive displacements. The greenfield wins continue to show that the value of security awareness is resonating with customers, and we believe that our competitive wins are further proof that our platform and customer support rank well above our competition.

Here are a few examples of our global wins that we've had this last quarter. We had 130,000 seat deal with one of the largest technology companies in the world. This opportunity was a perfect example of a competitive displacement. The customer cited frustrations with their current products that our platform capabilities could immediately account for.

Some of the reasons that our platform was chosen were our smart group's functionality, our robust active directory synchronization capabilities and the customer's ability to run global phishing campaigns with an arsenal of multi-language truly localized templates. We displaced a competitor in a 45,000 seat deal with one of the largest clinical labs in the world. They cited stale content as the primary reason for the switch. Finally, we've won a 40,000-seat deal with one of the largest school districts in the nation.

This opportunity went through an RFP process where we were chosen due to our wide array of training content and automation capabilities. The strong momentum we have been seeing in the international markets has continued as well. In Japan, we closed a 50,000 seat deal with a top printing company. We also closed a 66,000 seat deal with a French multinational specializing in gas technology.

In Australia, we had a 42,000 seat deal with the top university. We closed a 30,000 seat deal with a British multinational food processing company. And finally, we had a 30,000-seat deal with the German multinational, one of the largest building material companies in the world. These are just a few examples of the types of wins that have become a monthly occurrence for us.

We believe that they demonstrate how our customers continue to embrace not only the considerable risk reduction our platform brings, but also the thousands of hours we save IT departments in triaging security events. Given the current shortage of skilled IT workers, our strategy of building time-saving features into our platform has paid off. This also remains a critical focus for our product roadmap. With that being said, I would like to thank our employees and partners for their dedication, commitment, and customer focus that has brought KnowBe4 to its market-leading position today.

I am super proud of not only our financial results, but the great group of people driving this company and contributing to our communities. And this has not gone unnoticed. In Q1, we earned the No. 1 spot for the Energage 2022 Top Workplaces USA Awards in the 1,000 to 2,500 employee category.

We were also named a top workplace in Tampa Bay by the Tampa Bay Times for the seventh consecutive year. While we believe that our financial results speak for themselves, the unique award-winning company culture that we've developed here is one of the driving forces behind this continued execution. And with that, I'd like Bob to discuss our financial trends. 

Bob Reich -- Chief Financial Officer

Thanks, Stu, and good morning, everyone. Thanks again for joining us today. First, let me start by saying how much I've enjoyed transitioning into this new role over the last 60 days or so and having the opportunity to get to know Stu and partner with the rest of the KnowBe4's executive leadership team. This is a very high-performing aligned group, and I believe my transition has been relatively seamless, and I'm quite excited to be part of the story.

So let's move on to our first quarter results. As a quick reminder, unless otherwise noted, all numbers, except revenue mentioned during my remarks, are non-GAAP. As you just heard from Stu, we continue to see strong revenue performance across the business. In the first quarter, total annual recurring revenue, or ARR, reached 305.9 million, compared to 222.3 million a year ago, up 37.6% year over year.

Similarly, our reported revenue for the first quarter totaled 75 million versus 53.6 million during the same period a year ago, an increase of $21.5 million or up 40.1% year over year. Our Q1 growth was driven by another strong quarter across each of our key growth initiatives, new logo expansion, cross-selling to new and existing customers, and international expansion. We saw success in each of these areas during the first quarter. Our first pillar of growth is new logo expansion.

During the first quarter, we sequentially added nearly 2,500 logos net of churn, bringing our total customer count to 49,646 as of March 31st. That's a 27.4% increase year over year or nearly 10,700 new logos added net of churn. We're also very excited to announce that as of today, we are now in excess of 50,000 customers. Our total customer distribution remains relatively consistent with about 88% of our customers in the SMB space, which we define as organizations of less than 1,000 employees and about 12% in the enterprise space, which we define as organizations with greater than 1,000 employees, where we've seen significant growth over the past few years.

As a reminder, we continue to focus on driving a balanced ARR mix between SMB and enterprise, and we again ended the quarter with ARR generally balanced between these two. In terms of logo retention, both SMB and enterprise retention continues to remain greater than 90%. We believe that this retention rate in excess of 90% is difficult to find in software, especially when considering that our SMB customer base is nearly 44,000 customers. We also believe this is one of the primary reasons we're consistently a recognized leader in our space, such as the latest Forrester Wave Report that Stu mentioned earlier.

Our second pillar of growth is cross-selling to new and existing customers. We continue to see strong interest in the power of our global platform across both new and existing customers. During the first quarter, we continued to see strong multiproduct adoption, resulting in the percentage of customers subscribing to multiple products growing to 24.5%. Part of this growth is driven by new customers who continue to show strong interest in purchasing multiple products within their first purchase.

To give you some perspective, at the end of the first quarter of 2021, we had roughly 5,800 customers or 14.9% of our nearly 39,000 customers at the time with multiple products. As of the end of Q1, over 12,000 customers are now subscribing to multiple products. We've made tremendous growth here, more than doubling our multiple product customer count year over year. As a result, we are now seeing record levels of customers with three products and even some that have all four.

These deals were all closed without having to bundle these products. And although we don't report the growth of our individual products separately, our combined revenue growth for PhishER, Compliance Plus, and KCMGRC reached triple digits year over year for the quarter, the result of this continued cross-sell success. Our cross-sell success is relevant not only to help expand our ARR base, but also to increase customer retention. Numbers support that customers who purchased both KMSAT and PhishER get more value from our platform, and as a result, end up being much stickier customers.

Our third pillar of growth is expanding internationally. Penetrating international markets remains one of our key pillars of growth. Our international revenue grew approximately 69% year over year for the quarter, a continuation of our strong previous momentum and complementing our consistent domestic momentum, which delivered 35.5% year-over-year revenue growth for the quarter. The geographic distribution of our revenue continues to evolve with roughly 17% of our reported GAAP revenue now derives from our international markets.

Although the majority of our revenues continues to come from North America, we believe there is a sizable greenfield market for KnowBe4 internationally, which is represented by a total addressable market, which is significantly higher than that of domestic. We're seeing a number of key regions at a similar inflection point previously seen in the domestic market. In order to capitalize on this compelling international opportunity, we continue to invest in both EMEA and APAC by focusing on hiring key go-to-market talent and expanding brand awareness. And this international execution strategy is also closely tied to us building on our growing partner network outside the U.S., which is our fourth pillar of growth.

We continue to make meaningful progress, hiring key resources in our channel team, and building marketing and distribution capabilities for our channel partners, and this will continue to be an important international execution initiative for us. While we're still early on in our international expansion, our strategy of investment in these markets is producing results, and we're adding marquee global brands to our client base, which was evidenced by just a few of the global wins Stu mentioned earlier in his remarks. As part of our philosophy of running the business, we remain focused on sustaining our high growth rate with strong margins. First quarter non-GAAP gross margins improved to 87.6% from 86.6% a year ago as we continued to deliver an efficient performance on our direct cost structure.

Total non-GAAP operating margin also improved for the quarter, up to 12% from 11% in the first quarter of 2021. As a reminder, our non-GAAP measures exclude stock compensation expenses, amortization of acquired intangibles, and acquisition and integration-related costs. Our non-GAAP operating expenses for the quarter totaled 56.7 million, up from 40.4 million in the prior year. We continue to invest in headcount across the business with total headcount increasing by about 35% versus the end of Q1 2021, which drove the vast majority of our operating expense increases.

Year-over-year increases in non-GAAP sales and marketing expenses for the quarter were primarily attributable to higher headcount-related costs as well as higher marketing, PR, and demand generation all contributing to our substantial revenue growth. We continue to invest in sales capacity in our core markets, and while we're still in the early stages of international expansion, we expect to continue to deploy additional resources to support growth in these markets. Technology and development costs have increased year over year, primarily due to headcount increases in tech support, courseware, and our product team to support our growth. As we continue to expand our product offerings, you will see additional investments in key technical talent across the globe.

These have been critical investments to support the development efforts in connection with our new product offerings planned for later this year, as Stu referenced earlier. We have truly moved from a single product to a multiproduct platform in a short period of time. The increases in general and administrative costs year over year are also attributable to investments in headcount and headcount-related costs, primarily to establish necessary administrative resources to support our international expansion and to support life as a public company. These included headcount investments across legal, finance, HR and our own internal IT teams.

These investments are necessary to first build the foundational capabilities to ensure we continue to execute efficiently and at scale. Turning to cash flow and liquidity. We finished the quarter with cash and cash equivalents of 298.3 million, up from 273.7 million at year-end, illustrating our continued focus on maintaining a high level of capital efficiency and utilization of our liquidity. Our free cash flow for the first quarter was 23.4 million, resulting in a free cash flow margin of 31.1%.

This compares to free cash flow of 21 million and free cash flow margin of 39.1% during the same period a year ago. The free cash flow results for the first quarter were driven primarily by continued strong cash collections related to our favorable sales performance and some timing-related cost efficiencies realized during the quarter. Note, there is seasonality in our quarterly free cash flow margins, which has ranged anywhere from 8% to 39% over the last six quarters. This is generally related to the timing of disbursements for expenses and investments during the year as well as the profiling of sales contracts and billings throughout a given quarter.

We're very pleased with our first quarter performance, which is indicative of our resilient cash-generating SaaS model and strong balance sheet, which is supporting a balance of topline growth and healthy profitability. We're continuing to expand our resource pool, invest in new products and capabilities while maintaining sustainable profitable growth as we lead this new category in cybersecurity. With respect to guidance on future results, let me first just state that we don't expect any change in the overall development philosophy as a result of the CFO transition. This is an established process involving inputs across many layers of the organization as well as close partnership with both Stu and Lars.

As for the updated guidance numbers themselves, for the second quarter of 2022, we expect total revenue in the range of 78.5 to 79.5 million, and for the full year 2022, we now expect revenue in the range of 331 to 333 million. This revenue guidance is based on our current product mix expectations for 2022. As a reminder, our KMSAT product has a small portion of revenue that is recognized upfront, and as a result, variability in product mix can have an impact on our reported revenue. We also now expect free cash flow margin to be greater than or equal to 19% for the full year.

And as I mentioned, there is seasonality in our free cash flow, which can result in variations from quarter to quarter. For modeling purposes, you can assume diluted weighted average share count of between 182 and 185 million shares for both Q2 and the full year 2022. As we look forward to the rest of 2022, we continue to be very energized by the continued growth and momentum in the business. We are laser-focused on maintaining our market leadership dedicated to the human defense layer and driving innovation around the new category of HDR, which we are excited to introduce to the cybersecurity ecosystem later this year.

And with that, we'd like to open it up to any questions.

Questions & Answers:

Operator

[Operator instructions]. Our first question is from Shaul Eyal with Cowen. Your line is open.

Shaul Eyal -- Cowen and Company -- Analyst

Thank you. Good morning, guys. Congrats on the results. Stu, thanks for mentioning and discussing Security Coach.

My question is actually on Password IQ, the second planned product for the second half release. Maybe just an update what you've seen over the course of the past weeks, give or take since we've last met and talked, and maybe feedback thus far from customers and maybe partners? And I have a follow-up.

Stu Sjouwerman -- Founder and Chief Executive Officer

Yes. Thanks, Shaul. The first feedback we got from customers at KB4-CON was positive. Know though that we are mainly focused on Security Coach, getting that out first, and we will provide you with some more information on Password IQ in following calls, and I'm interested in your follow-up there.

Shaul Eyal -- Cowen and Company -- Analyst

Understood. Understood. And the other question is about the annual guidance and maybe also as we think about it from a quarterly perspective. Again, when matching the annual guidance versus the current consensus, without a doubt, it has been up a little bit, but the second quarter is fairly intact.

So are you guys anticipating a back-end loaded second half? Or anything we should be worried about and focused on?

Stu Sjouwerman -- Founder and Chief Executive Officer

Let me throw that one over to Bob to begin with, and maybe Lars can comment a bit on just current trends. Bob, what do you think?

Bob Reich -- Chief Financial Officer

Shaul, how are you? I think we have -- there's -- I don't think there's anything regarding the profiling of the year that unusual or different than has been previously messaged. I mean there is sort of seasonality in the business. And Q1 and Q3 -- from like sales just activity standpoint, tend to be lower than Q2 and Q4 from a sales activity standpoint. And so that sort of ultimately ends up reflecting and showing up in the actual recorded revenues in Q2, and certainly, in Q2.

So there isn't anything in the guidance that would really suggest that there is a sort of change in the trends of the seasonality of the business. Lars absolutely can speak to sort of what he's seeing in terms of pipeline activity and so on.

Lars Letonoff -- Co-President and Chief Revenue Officer

Hey, Shaul, it's Lars. Yes, we really haven't seen any changes in trends with regard to our lead gen, with our pipeline or opportunity creation. But with that said, there's been some pretty significant macroeconomic developments recently. So we are carefully considering the war in Ukraine and kind of the inflationary pressures that are coming up, but again, we really haven't seen any changes to our trends internally for building the business.

Shaul Eyal -- Cowen and Company -- Analyst

Got it. Thank you, guys. Appreciate it.

Operator

The next question is from Rob Owens with Piper Sandler. Your line is open.

Rob Owens -- Piper Sandler -- Analyst

Great. Thanks for taking my question. Just a couple around margins here. Number one, with the gross margin line remains very strong.

Should that change our outlook going forward? Or with the new products in the second half, could you see some compression? And alternatively, the free cash flow margin. What's giving you the confidence to lift that expectation by four points here, given ARRs probably going up by a couple of million dollars and the revenue outlook goes up by only a couple of million? Thanks.

Bob Reich -- Chief Financial Officer

Hey, Rob, it's Bob. On the gross margin question, I do think that there is a reasonable expectation that gross margin as we move through the year can see some compression as the total customer count continues to grow, and the CSM population needs to continue to grow in order to basically service all of those new customers and that new customer universe. That all ends up -- most of that cost in terms of customer management ends up in the direct cost line. We did have a very efficient quarter in the first quarter.

The CSM universe really didn't change materially in the first quarter, but we are -- obviously, we have some pretty aggressive hiring plans for our CSMs in order to make sure we're properly servicing our customers. So I do think that it's reasonable to assume some level of gross margin compression. And I think we've sort of always messaged that we sort of expect gross margin sort of long term to be in between 80 and 85%. So an 87.6% non-GAAP performance was really exceptional in the first quarter.

On the free cash flow side, honestly, we had a very, very strong in terms of collections. Some of that really relates to the timing of when transactions -- sales transactions actually cross the goal line in the fourth quarter. We had a really, really strong end to the fourth quarter, which generated a lot of cash for us in the first quarter. But we're -- we printed a 31% free cash flow margin in the first quarter.

Last year, we printed over a 39% free cash flow margin in the first quarter, and we ended the year at a little over 28%. So honestly, that relationship, we think that relationship in 2022 looks pretty consistent. Again, if you just sort of do the math, we printed 39% in Q1 of 2021, ended the year in the 28% range. We just ended with a 31% free cash flow margin in the first quarter, and we've -- we're guiding now 19 plus, which is a similar relationship.

So that's really why we're confident on that.

Rob Owens -- Piper Sandler -- Analyst

Thanks, Bob.

Operator

Our next question is from Brian Essex with Goldman Sachs. Your line is open.

Brian Essex -- Goldman Sachs -- Analyst

Great. Good morning. Thanks for taking the question. Stu, just one from me.

When we were at your recent user conference, the one thing that -- one observation I had was just the low awareness with those that I spoke with around the breadth of the platform that you have, particularly GRC. And I guess the question is, as you penetrate new markets, particularly Europe, which may have more mid-market focus, what are some of the key observations that you've had from your work in the U.S. or domestic markets of really getting traction with customer awareness of the platform? And how do you anticipate spending on sales and marketing to improve initial attach rates -- I guess initial land rather than expand?

Stu Sjouwerman -- Founder and Chief Executive Officer

First of all, Brian, it was great having you at KB4-CON. We had 1,500 attendees. It was a big success. It was fun to see everyone there again.

The -- you kind of have to understand, we lead with the KMSAT platform into all accounts. That is the one thing that they need to immediately address. This is the problem they need to manage and continue to manage. And at that point in time, we are pretty successful today.

Our direct sales team is almost always able to attach 50% of new sales with PhishER. So new customers that is an immediate cross-sell. The existing customer base, we are actually starting a dedicated customer marketing campaign that our marketing team is focusing on to expand and sell into the existing base. So there is huge potential there that we are just starting to tap now.

Is that an answer to your question, Brian?

Brian Essex -- Goldman Sachs -- Analyst

Yes, that's very helpful. Thank you.

Stu Sjouwerman -- Founder and Chief Executive Officer

Very good.

Operator

The next question is from Joshua Tilton with Wolfe Research. Your line is open.

Joshua Tilton -- Wolfe Research -- Analyst

Yes. Hi, guys. Thanks for taking my question. I wanted to come back to the free cash flow real quick.

Is there any way that you guys can maybe quantify what the benefit from the timing of investment was in the quarter? And more broadly, I just wanted to confirm, Bob, that you said that free cash flow seasonality this year should be similar to last year. Is that correct?

Bob Reich -- Chief Financial Officer

Yes. So there's absolutely seasonality in free cash flow. I mean we have unique -- and all companies have this, but we absolutely have unique cash outflows that happen isolated in the second quarter, for example. We are a new public company.

We have our insurance renewal that actually goes out the door at the same time that we anniversary our IPO, and that's not a trivial sort of cash disbursement. It's amortized straight line across the full year. So it doesn't affect our GAAP operating results, but it does affect our free cash flow. Stu just referenced the customer conference -- the in-person customer conference that we did in April, that's obviously isolated to the second quarter.

So there are -- those type of seasonality dynamics will be seen in 2022, and I think they are consistent with the dynamics that we've seen in the past. Maybe even more acute, honestly, because we've -- last year, our conference was virtual. This year, our conference was face-to-face and so that's a different -- it's a little bit of a different cost profile. And I think on the margin and the timing that was referenced in the prepared remarks, I mean it really -- that really relates around pace of hiring to tell you the the truth, Joshua.

I mean we have ambitious hiring plans, and we're sort of faced with the same overall macro dynamic that all other companies in the world are facing in terms of attracting talent. So we had -- that timing reference, I think, is really more around the timing in terms of how we ramp headcount in certain disciplines and in certain sectors inside of the organization. 

Stu Sjouwerman -- Founder and Chief Executive Officer

Yes. Let me add something to that. We've actually increased our recruiters, both domestic and international, and we have accelerated our international ramp-up in headcount. So we have pulled more into Q1 and are still pulling into Q2, simply to fuel our international growth.

And so that also influences those same numbers.

Joshua Tilton -- Wolfe Research -- Analyst

That was helpful. And then just a quick follow-up. On the International business, are you guys seeing any impacts yet positive or negative as a result of the Russia-Ukraine crisis? And if you're not, are you guys expecting to maybe see any impact later in the year?

Stu Sjouwerman -- Founder and Chief Executive Officer

We don't really. We don't have any physical presence in Eastern Europe, and obviously, we don't do business with Russia or China. Given the nature of the conflict and if you look at our industry, I believe that cybersecurity is the last thing that any sane organization would cut. Our platform is more relevant today than it's ever been, which really speaks volumes because I believe it's already been super relevant for years.

And internationally speaking, our platform is still purposely priced to be a no-brainer decision. And the result is that it does offer a tangible risk reduction in an environment like this where cyber attacks, the gloves come off. This is definitely an area that represents strong opportunity that is many times the domestic TAM.

Joshua Tilton -- Wolfe Research -- Analyst

Thanks, guys.

Stu Sjouwerman -- Founder and Chief Executive Officer

OK, Josh. Thank you.

Operator

The next question is from Hamza Fodderwala with Morgan Stanley. Your line is open.

Hamza Fodderwala -- Morgan Stanley -- Analyst

Just one quick one for me for Stu and/or Lars. So you had a lot of success selling multiple products to your customers, particularly among new customers. Can you just remind us of what the difference in the sales cycle looks like when you're selling, let's say, stand-alone KMSAT versus like KMSAT plus PhishER or KMSAT plus Compliance Plus. Is there a difference in the sales cycle between the two?

Lars Letonoff -- Co-President and Chief Revenue Officer

Hamza, I think Stu alluded to it earlier. We really start with KMSAT. And then through our sales process, whether there's a cross-sell or not, we're focusing on the upsell as well, be that PhishER or CMP. KCM is a little bit different because KCM is sold to a different audience.

So that's typically a handoff outside of that initial sale, but we do get the KCM with the sale. But to answer your question, no, there's really no difference when we're upselling the products within -- especially with because CMP is pretty much just a flip of a switch. They're going to add those to the platform, we add them to the platform. The only area where it would get a little different is with enterprise because you have different stakeholders in the very large companies.

So -- whereas, in an SMB deal, we might have the sale with PhishER and CMP all at once. With the enterprise, if you were really getting into the megas now, you'll get a handoff to the different groups. So initially, the purchase will be, say, KMSAT, but while we're working the KMSAT, there's also the PhishER with one group and the CMP maybe with compliance at that company. And those POs might hit two or three months apart, but they are part of that initial sale.

Hamza Fodderwala -- Morgan Stanley -- Analyst

Got it. Super helpful. Thank you.

Operator

The next question is from Tal Liani with Bank of America. Your line is open.

Madeline Brooks -- Bank of America Merrill Lynch -- Analyst

It's Madeline Brooks on for Tal. Congrats on the quarter. Just two quick questions from me. The first one is, have you seen any customer implementation delays in the first quarter?

Stu Sjouwerman -- Founder and Chief Executive Officer

No, Madeline, that's pretty much all going on trend.

Madeline Brooks -- Bank of America Merrill Lynch -- Analyst

Got it. And then just one more question to follow up. So your revenue guidance, you mentioned is based on the current product mix expectations for the rest of '22, should we include Security Coach in that mix or no?

Stu Sjouwerman -- Founder and Chief Executive Officer

Not really because we're releasing in Q4. And so revenue really, you should -- the vast majority accounts for 2023.

Madeline Brooks -- Bank of America Merrill Lynch -- Analyst

OK. Perfect. Thanks so much. That is it for me.

Stu Sjouwerman -- Founder and Chief Executive Officer

Excellent. Thank you. A couple more questions and we have to sort of slowly wrap it up.

Operator

The next question is from David Hynes with Canaccord. Your line is open.

Unknown speaker

Hey, guys. This is Luke on for DJ. Thanks for taking the question. So as you gain recognition and traction with enterprise customers, can you just remind us or help us think about what the typical catalyst is for you to replace an existing vendor? I know you gave some nice examples in your prepared remarks, but is there a common theme or two that you would point to?

Lars Letonoff -- Co-President and Chief Revenue Officer

Yes -- this is Lars. I'm going to take that one. Really, it's just a testament to our products team. We have best-of-breed product.

And when typically our sale enter enterprise, when it's a displacement sale, it begins with a demo. And I've said this in the past, it's typically an well moment when we demo the product to the company. And they're blown away at the features and how easy it is to implement our product, how easy it is to maintain all the automation and AI built into it. So to answer your question, it's very specifically product driven.

Unknown speaker

Great. That's helpful. And then as a follow-up, as you add stand-alone products like Compliance Plus, do you see an opportunity to sort of get your foot in the door with something other than KMSAT and then [Inaudible] foothold to eventually expand into security awareness or the reverse? And are you seeing that strategy play out today?

Stu Sjouwerman -- Founder and Chief Executive Officer

No, not really. The KMSAT platform is really still the No. 1 entry into the account, the rest follows. I would think, in a couple of years that, that might be the case.

We're still building up the CMP library itself. We're adding spend a number of modules that are opening up the international space for us. They are being released now. And I'm happy to say that the CMP total first nine months actually exceeded the first nine months of PhishER.

So we're executing well on CMP. I hope that answers your question. We have time for one more question, and then we need to wrap it up because we have a very tight schedule with follow-up calls. So who's next?

Operator

Our final question is from Roger Boyd with UBS. Your line is open.

Roger Boyd -- UBS -- Analyst

Terrific. Just a quick follow-up on the macro conversation. Very strong 90% plus retention rates on both SMB and enterprise. Just in light of the macro concerns around facing, any color on what you're assuming what's baked in your guidance around retention and churn maybe for the rest of the year? Thanks.

Stu Sjouwerman -- Founder and Chief Executive Officer

Yes. All three of us could answer that. Honestly, with the macro conditions to why they are looking at how state-sponsored packers are using phishing and phishing attacks on essentially soft targets in the U.S., but also Europe, a platform like ours becomes essentially a must. And from that angle, this isn't a headwind for us on a macro level.

Does that answer your question, Roger?

Roger Boyd -- UBS -- Analyst

It does. I appreciate it. Thank you.

Stu Sjouwerman -- Founder and Chief Executive Officer

Thank you very much. That's the end of our Q&A session.

Operator

Mr. Sjouwerman, you may proceed with any closing remarks.

Stu Sjouwerman -- Founder and Chief Executive Officer

Very good. Thanks very much for attending. We believe we've had a really strong quarter, and we hope to see everyone again very soon.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Ken Talanian -- Vice President of Investor Relations

Stu Sjouwerman -- Founder and Chief Executive Officer

Bob Reich -- Chief Financial Officer

Shaul Eyal -- Cowen and Company -- Analyst

Lars Letonoff -- Co-President and Chief Revenue Officer

Rob Owens -- Piper Sandler -- Analyst

Brian Essex -- Goldman Sachs -- Analyst

Joshua Tilton -- Wolfe Research -- Analyst

Hamza Fodderwala -- Morgan Stanley -- Analyst

Madeline Brooks -- Bank of America Merrill Lynch -- Analyst

Unknown speaker

Roger Boyd -- UBS -- Analyst

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