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Sailpoint Technologies Holdings, Inc. (NYSE:SAIL)
Q4 2018 Earnings Conference Call
March 5, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator 

Greetings. Welcome to the SailPoint fourth-quarter and full-year 2018 earnings conference call. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Josh Harding, vice president of finance and investor relations.

Mr. Harding, you may begin.

Josh Harding -- Vice President of Finance and Investor Relations

Good afternoon, and thank you for joining us today to discuss SailPoint's fourth-quarter and full-year 2018 financial results. Joining me today are SailPoint's CEO and Co-Founder Mark McClain; and SailPoint's Chief Financial Officer Cam McMartin. Please note today's call will include forward-looking statements, and because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. Since this call will include references to non-GAAP results, which excludes special items, please reference this afternoon's press release in the Investors section of sailpoint.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now, I'd like to turn the call over to Mark McClain.

Mark McClain -- Chief Executive Officer and Co-Founder

Thanks, Josh, and good afternoon, everyone. Thank you for joining the call today. I'm pleased to share our strong results for both the fourth-quarter and full-year 2018, which were driven by continued strong demand for identity governance and solid execution by the SailPoint team. For the full-year 2018, total GAAP revenue under ASC 606 was $248.9 million, and we continue to deliver both profitability and positive cash flow for the year.

We added 240 net new customers in 2018, bringing us to nearly 1,200 customers across organizations of all sizes and verticals. Our international revenue grew by more than 50% year over year, and we believe that we have only scratched the surface on this opportunity. And we continue to gain traction with our channel partners, complementing the investments we are making in our direct sales teams to drive adoption of our solutions. Our fourth-quarter GAAP revenue under ASC 606 was $80.6 million.

We saw growth across all of our product offerings and strong support from our channel, including systems integrator and technology partners, as they continue to help us close many new customer deals and create awareness for our best-in-class identity governance platform. As we look back on the year, we believe our 2018 growth was fueled by several factors: The first factor driving our growth was the continued appeal for our innovative best-in-class identity solutions that help customers govern and secure their digital identities. As organizations of all sizes are pressing ahead on their digital transformation efforts, CIOs and CISOs have the task of securing the foundation of that transformation and are increasingly turning to SailPoint for their identity governance program. Their main concerns remain being able to properly and efficiently answer who has access to what, and to gain and retain visibility into what that access is being used for.

SailPoint helps them address both of these challenges. For example, our platform-driven approach to comprehensive identity governance helped disclose an important deal in Q4 working with the CISO of a large U.S.-based multinational financial services corporation. The company purchased IdentityIQ and SecurityIQ to govern access to applications and data for their 300,000-plus users. Our platform replaces the company's antiquated approach to IAM, which was made up of multiple legacy solutions, none of which could keep pace with the size and scale of the company's identity program nor extend to governing access to data.

The second factor driving our growth is that the awareness for identity governance continues to rise across all segments of the enterprise. While large enterprises continue to be the predominant buyer of identity governance solutions, we now consistently see companies with 1,000 to 7,500 employees looking for identity governance programs to help them address security compliance challenges . For example, a global mid-market enterprise technology company recently purchased the full IdentityNow platform, including our newly released separation-of-duty's policy management. The company had a small identity team that was struggling to support manual provisioning and access requests.

They will now use IdentityNow to govern 6,000 digital identities while providing a uniform login password experience for those users. This company now has an identity governance solution that fits their organizational needs while helping them to move their businesses forward securely and confidently. The third factor driving our 2018 results was the growing contribution of our international business. As an example of how we're growing on a global scale, one of the largest banks headquartered in Italy recently purchased IdentityIQ to help them govern access to all of the sensitive business applications the company's 100,000 users need to do their jobs.

Of note, the company chose SailPoint due to our deep role management capabilities, best-of-breed technology and proof-of-concept execution during the evaluation process. And finally, the fourth factor driving our 2018 results was our customers who were strong evangelists for SailPoint. This has helped us maintain a 95-plus percentage renewal rate, in large part, due to our fierce commitment to their success. To help us extend our commitment to customer success around the globe, we recently hired a Chief Customer Officer Andrew Cole, who will help us scale our program to maintain that success rate with the next 1,000 customers.

As we look ahead to 2019, we believe we have the fundamentals in place to continue to drive strong growth across the business. And importantly, as a leading market innovator, we will continue to set the tone for what organizations of all sizes should expect from their identity governance solution. For 2019, the SailPoint team is focused on driving our market forward in three distinct ways: Helping our customers to govern all, to govern deep and to govern smart. First, let me expand on what I mean by govern all.

Companies must consider how to govern all areas of their business with identity, governing all digital identities, including both human and nonhuman users and their access to all applications and all data, including data stored in systems and data stored in files. To better align our portfolio with SailPoint's vision of identity, we have renamed our SecurityIQ product to File Access Manager, a module that we now offer as a core capability of our identity platform. We believe this will help accelerate broader adoption of governance of data and files as a part of our customers' existing entity programs. As an example, a U.S.-based integrated health system recently purchased IdentityIQ and File Access Manager to help govern their 20,000 digital identities across business applications and data.

Previously, this company had audit issues related to both files and applications that needed to be addressed. With the implementation of SailPoint's end-to-end platform, they were able to resolve a wide range of audit concerns and gain a comprehensive view across all their digital identities and user access. Secondly, when I say we're going to help our customers to govern deep, that means to not only govern all systems, applications and data, but to govern them in depth to address the complex environment that is typical of midsized and large enterprises. Examples of SailPoint's strength in this area include our connectivity to the Epic, enterprise risk management system, often referred to as ERM, for healthcare, as well as our AWS and SAP advanced integration modules.

Identity is much more critical today, and our customers are coming to us to help them take their governance capabilities even deeper. Our technology, supported by our tech partner ecosystem, is helping to drive connectivity into the systems, applications and data and organization needs to properly govern today. And thirdly, when I say SailPoint will help our customers govern smarter, I'm specifically talking about customers adding IdentityAI, which delivers the visibility needed to understand the risks associated with user access and the ability to detect anomalous behavior which may be indicative of a breach. IdentityAI, which will enable a recommendation-based identity governance approach that enterprises of all sizes want to evolve toward, runs on top of both IdentityIQ and IdentityNow.

It was available through a controlled, early access release program in North America in 2018, and will be more broadly available in Q2 of 2019. In addition to these three areas of focus, in 2019, SailPoint is expanding our geographical coverage, including adding our first direct resources in Japan and additional go-to-market resources in South America. We also recently added Ernst & Young as a global systems integration partner. EY will help us to further extend our global reach into more organizations in need of a modern identity governance platform.

In summary, for 2019, we plan to continue building on the strong momentum we demonstrated in 2018. At the same time, we're equally focused on extending our leadership in driving innovation across our identity platforms to ensure global enterprises of all sizes can successfully address the security, compliance and efficiency challenges stemming from their digital transformation. Now let me hand it over to Cam.

Cam McMartin -- Chief Financial Officer

Thanks, Mark, and thank you to everyone on the line today for joining us. We are very pleased with SailPoint's fourth-quarter 2018 financial performance, which exceeded the high end of our revenue and non-GAAP operating income guidance. Before I walk through the details of the fourth quarter and full year, I want to remind you that we were required to report our fiscal year 2018 GAAP financial results and issue our upcoming 10-K on an ASC 606 basis. However, in addition to the ASC 606 figures, the press release we issued earlier today includes 2018 quarterly and annual figures on both the 605 and 606 basis for comparability to our previously issued guidance and reported results.

It is important to note that going forward, we will only report and guide on a 606 basis. In addition, because we elected the modified retrospective transition method for adoption of ASC 606, we are not required to have directly comparable results on an ASC 606 basis for 2017. All growth rates or reference have been inculcated solely using ASC 605 results. I'd also like to take a moment to highlight some of the key differences in revenue recognition between ASC 605 and ASC 606 before walking through the income statement.

I'd also like to note that we provided a supplemental ASC 606 summary on our investor website that we encourage you to review today. To begin, the impact of our stand-alone SaaS and professional services arrangements is generally insignificant under ASC 606. Most of the changes to revenue are driven by how we account for perpetual license and term license agreements and the related maintenance and support obligations. For perpetual license agreements, our contracts include the first year of maintenance.

Under ASC 605, a typical perpetual license transaction sold on a stand-alone basis would result in 75 to 80% of the total contract value recognized as license revenue upfront upon software delivery. The remaining 20 to 25% of the transaction value, depending on the customer's choice of standard versus premium maintenance, is recognized ratably as subscription revenue over the life of the annual maintenance obligation. On an ASC 606 basis, the overarching mechanics of a perpetual license transaction are unchanged. However, the amount recognized as license revenue will typically increase to a range of 80% to 84% of the total contract value, with the remaining 16% to 20%, again, dependent on the customer's choice of standard versus premium maintenance recognized as subscription revenue over the life of the annual maintenance obligation.

The shift between revenue categories is a function of weighting the values of each performance obligation within the contract under ASC 606 versus applying a residual value to the license as prescribed under ASC 605. For term license agreements, the majority of our new contracts have a three-year term. Under ASC 605, we typically recognize the entire contract value revenue ratably as license revenue across the three-year term. Under ASC 606, the term license is divided into without parts: A license element that is recognized upon the delivery of the software; and a maintenance and support obligation that is recognized ratably over the life of the implied maintenance and support obligation at subscription revenue.

As we've shared previously, term licenses make up a small part of our overall business so the financial impact of this change is not significant. On the expense side of the income statement, please note that the only change under ASC 606 relates to accounting for commissions paid to our sales team and partners. Under ASC 605, we recognize the entire associated commission expense upfront for perpetual license transactions and recognize commission expense ratably over the term of the contract for SaaS and term license transactions. Under ASC 606, for perpetual license transactions, we now recognize the commission expense allocated to the perpetual license element at the time of the transaction, with the remainder capitalized and recognized ratably over an estimated customer life of five years.

For SaaS and term license transactions, we continue to recognize commission expense ratably, but over an assumed customer life of five years versus the term of the underlying contract, which was the requirement under 605. In terms of deferred revenue, the impact of ASC 606 aligns with the changes to revenue outlined earlier. Overall, deferred revenue decreased under ASC 606, largely due to the change in revenue recognition practices related to term licenses and the reallocation of license and maintenance elements embedded in perpetual license contracts. For perpetual license transactions, the upfront license portion is increased while the maintenance portion that makes up the largest portion of our deferred revenue on the balance sheet decrease.

For term license transactions, the impact is even more pronounced given that a large portion of the contract value is now recognized upfront as license revenue instead of going to the balance sheet initially as deferred revenue when billed. The net effect of ASC 606 to our opening deferred revenue balance as of January first 2018, was a decrease of approximately $9 million. As we said before, while deferred revenue can be a useful indicator of performance over an extended period of time, the underlying complexity of our various revenue models and the adoption of ASC 606 makes it an imperfect indicator on a quarterly basis and hard to forecast. I'll now shift to summarizing our Q4 '18 results on an ASC 606 basis.

Total GAAP revenue was $80.6 million; license revenue was 40.5 million; subscription revenue, 29.5 million, and services was 10.5 million. On a geographic basis, United States contributed 74% of Q4 2018 revenue and 69% of 2018 revenue, while the rest of world making up the remaining 26 and 31%, respectively, all of which is on a 606 basis. This compares to 72% for the United States and 28% for rest of world in Q4 and the full year of 2017, which is on a 605 basis. As I transition to the remainder of the income statement, I want to note upfront, unless otherwise stated, all references to expenses and operating results exclude amortization of acquired intangibles and stock-based compensation.

Q4 license gross margins were 99%. Subscription gross margins were 81%. Services gross margins were 33%. The result is total gross margin for the quarter of 84%.

Total operating expenses for the quarter were $49.5 million. Our operating income was $18.4 million in Q4, representing an operating margin of 22.8%. To finish out the income statement, net income under ASC 606 was $16.9 million or $0.19 per share in Q4 of 2018. This is based on 90.2 million fully diluted weighted average shares outstanding.

Adjusted EBITDA under ASC 606 was $18.6 million in Q4 of 2018. During the fourth quarter of 2018, we generated positive cash flow from operation of $7.2 million compared with 16.1 million in Q4 of 2017. Now I'll briefly recap our full-year 2018 results on an ASC 606 basis. Total revenue was $248.9 million; license revenue was 105 million; subscription was 104 million; and services was 39.9 million.

On a non-GAAP basis, operating income was $38.9 million, which equates to an operating margin of 15.6%. Non-GAAP net income was $33.6 million, or $0.37 per share, based on 90 million fully diluted weighted average shares outstanding. Adjusted EBITDA under ASC 606 for full-year 2018 was $39.5 million. We exited 2018 with 77.2 million in cash and cash equivalents, compared with 116.1 million on December 31st 2017.

During 2018, we paid down 70 million in long-term debt and currently have no debt on the balance sheet. For the year 2018, we generated 37.5 million in cash from operations compared with 21.9 million in 2017. From a profitability and cash flow standpoint, we remain focused on balancing the right amount of incremental investment in the business to drive growth while also delivering profit and positive cash flow. We believe, in 2018, we were successful on all fronts.

We ended the quarter with 1,003 employees, a 24% increase from 806 at the end of the fourth quarter of 2017. We continue to increase our headcount to grow our business and realize productivity improvements as we scale. I'll now take a moment to summarize our results on a 605 basis given that our 605-based financial results are directly comparable to the prior year and our prior guidance as noted earlier. Total revenue for the fourth quarter of 2018 was $77.8 million, an increase of 15% year over year.

License revenue was 37.4 million, an increase of 2% year over year and ahead of our expectations. When looking at the year-over-year change in Q4, please remember that we previously shared that fourth-quarter 2017 included approximately $4 million of a license revenue that came from contracts signed prior to that period. We also previously noted that in 2017, our federal government business was more evenly split between Q3 and Q4, while in 2018, the majority of the federal spend was in Q3. Subscription revenue increased 41% year over year to $30 million.

This continues to be driven by a combination of healthy growth in new SaaS and software maintenance customers, upsells, and strong renewal rates. Services and other revenue was $10.3 million, up 4% compared to Q4 of 2017 and slightly ahead of our expectations. Again, as I transition to the remainder of our income statement, I want to note upfront that, unless otherwise stated, all references to expenses and operating results exclude amortization of acquired intangibles and stock-based compensation. Fourth quarter of 2018 license gross margins remain very high at 99%.

Subscription gross margins were 82%, an increase from 78% in Q4 2017 due to the increased scale of our SaaS offerings and improved maintenance support efficiency. Services gross margins for the fourth quarter of 2018 were 31%. The results in total gross margin for the fourth quarter of 2018 was 84% compared with 84% in the fourth quarter of last year. Total operating expenses for the quarter were $50.7 million compared with 40 million in Q4 of 2017.

Overall, our operating income was 14.4 million in Q4, representing an operating margin of 18.5% compared with an operating margin of 25% in the fourth quarter of 2017. For the full-year 2018, on an ASC 605 basis, total revenue was $248.5 million, increasing 34% year over year. License revenue increased 28%, and subscription revenue increased 50%. With the continued growth in subscription, we are pleased to exit fiscal year 2018 with the majority of our product revenue coming from recurring sources.

Services and other revenue increased 12%. Non-GAAP operating income was $33.6 million, a non-GAAP operating margin of 13.5%. This was an improvement compared to operating income of $23.3 million in 2017, or a 12.5% margin. Moving to guidance, which, as a reminder, is based on ASC 606.

For the full-year 2019, we expect total revenue in the range of 293 to $299 million. On a net basis, we expect a relatively neutral impact to total revenue in 2019 due to the adoption of ASC 606. However, at the detail level, we expect our license revenue to be positively impacted by approximately $4 million to $6 million, while subscription revenue will be negatively impacted by roughly the same amount. However, as you can see from ASC 606 2018 quarterly detail we provided, this impact can vary on a quarterly basis since many of our transactions include multiple products.

The allocation of revenue to various elements of a multiproduct transaction will often deviate from a simple transaction consisting of only one product. When looking at the elements of our total revenue, we expect subscription revenue to be the fastest growing part of our business and to increase approximately 30% year over year. We expect license revenue to grow approximately 10% year over year, and we expect services revenue to grow in the low to mid-teens. Moving to expenses and profitability.

We expect our non-GAAP operating income to be in the range of 28 to $31 million. Non-GAAP net income per diluted share is expected to be $0.25 to $0.29, assuming cash taxes of $2 million and 93 million diluted shares outstanding. We continue to be focused on running a business that balances strong growth with continued profit and cash flow. At the midpoint of our guidance, our non-GAAP operating margin is approximately 10%.

As we've been saying for the last few quarters, our profitability in 2018 was running higher than our expectations. We were successful in hiring in Q4 and year-to-date and are pleased with our ability to add the right people across the organization. We will continue to make investments throughout the year in sales, marketing and R&D to support our long-term growth, in addition to the planned expansion of our offices worldwide, including a new corporate headquarters in Austin. This will increase our facilities expense and depreciation costs in 2019.

Moving to the first quarter. We expect total revenue of 59 million to $61 million. We expect subscription to increase approximately 40% year over year. We expect license revenue to grow in the mid-teens range, and for services to increase slightly year over year.

All of these growth rates are based off our Q1 2018 ASC 606-based results. We expect a range of a non-GAAP operating loss of $500,000 to a non-GAAP operating income of $1 million and a non-GAAP net loss per basic and diluted share of negative $0.02 to breakeven. This assumes cash taxes of $400,000 and 88.5 million basic shares outstanding. I want to finish by providing some extra color on the seasonality of our revenue over the course of 2019 for analysts to take into consideration as they update their models.

Now that we are a few years into selling SaaS, we have a better sense of license-versus-SaaS buying patterns and the quarterly composition of our revenue mix. As we look at 2019, we expect the first half of the year to make up approximately 42% of 2019 total revenue and for the remaining 58% to come in the second half, with license revenue weighted more toward the second half of the year to account for both Fed and enterprise year-end spending in Q3 and Q4. In closing, the fourth quarter was another very strong quarter and closed out an exceptional first full year as a public company. As we look ahead, we are well-positioned for a strong 2019 and look forward to building on the momentum in our business.

We'll now open up the call for Q&A. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Andrew Nowinski from Piper Jaffray. Please proceed with your question.

Andrew Nowinski -- Piper Jaffray -- Analyst

Great. Thank you very much, and I apologize for the background noise. Great quarter, great results. I just had a question on the subscription line.

If I'm not mistaken, that includes maintenance revenue versus some of your perpetual licenses. So I was wondering if you could give us any color maybe on the growth rate of your subscription license revenue or whether that's just in line with the overall subscription segment.

Cam McMartin -- Chief Financial Officer

Yes, so Andy, first of all, it's Cam McMartin. Welcome to the call. Thanks so much for joining. The answer is, just to remind you, the way we report, and this is through both 605, and now, on a 606 basis, we report license revenue as a separate component, and with 606 now, basically, anything that's term is in the license line.

In addition, subscription is made up of both maintenance derived from the license transactions, as well as SaaS. And so in that sense, that's the way the reporting has been, and that's the way the reporting will continue to be. The slight difference between 605 and 606 is we are now splitting the term license transactions under 606 between a license component and a maintenance component. We -- as we think about it, looking forward, our expectation, which has been true for the last couple of years, is that the subscription component of our revenue will be the fastest-growing component, and that's, again, made up of the strength of continued license growth and contribution, therefore, from the maintenance, as well as very strong maintenance renewal rates.

In addition, we continue to see very good performance overall from the SaaS business. And that middle-market enterprise segment that we're focusing on, which is largely greenfield, has been also a solid contributor to overall performance.

Andrew Nowinski -- Piper Jaffray -- Analyst

OK. And then like I said, you had a really strong quarter, but the new customer adds were a little lower than they have been over the last few quarters. So was this quarter just a little heavier on the cross-sell opportunities with existing customers?

Cam McMartin -- Chief Financial Officer

Yes, Andy, the answer to that is yes. It was a quarter where we had -- we were very pleased, first of all, with the continued strength in the overall contribution from both new customers and existing customers. The split in the quarter was roughly that typical 65-35 mix that we've seen for many, many quarters in the business. And that was true, again, in the fourth quarter, if you look at kind of the count, if you will, of transactions.

We did see a somewhat stronger contribution this quarter from existing customer revenue contribution, nothing off trend in the sense of any particular quarter will bounce up and down a bit. And so I think we continue to see that healthy balance of new customer acquisition and leveraging our installed base to drive revenue performance, and that was true again in the fourth quarter.

Andrew Nowinski -- Piper Jaffray -- Analyst

Great. Keep up the good work guys.

Mark McClain -- Chief Executive Officer and Co-Founder

Thank you, Andy.

Cam McMartin -- Chief Financial Officer

Thanks, Andy.

Operator

Our next question comes from the line of John DiFucci from Jefferies. Please proceed with your question.

Julian Serafini -- Jefferies -- Analyst

This is Julian Serafini on for John. So I had two questions. I mean, the first one, when I look at the 606 adjustment in 4Q, I mean, there's a big adjustment to the license plan, right, it's like over $3 million. I mean, are we to take that as really just like a large on-prem subscription deal that came through in the quarter?

Cam McMartin -- Chief Financial Officer

Yes. Really, it was actually, Julian, a couple of transactions in the quarter. There was one transaction that, in terms of its conversion between 605 and 606, it represent a fairly meaningful revenue recognition shift. I would say, if you look at the information that we've provided as part of the supplemental information in the press release, you'll see most of the quarters, the shift between the two categories of revenue recognition, by that, I mean, 605 and 606, the standards that are set, really was quite modest any particular quarter.

It just so happened, if you will, that in Q4, we had a couple of transactions where the effect was larger, and it was a combination in that quarter of both term license, as well as some perpetual license effect from a larger transaction that had a multiyear maintenance component.

Julian Serafini -- Jefferies -- Analyst

OK. And then the second question I had, too, is just on SecurityIQ, or I guess how you're bringing the product now, what's the genesis, I guess, of that decision to make really a module and not a stand-alone product anymore? Can you share some more in terms of like why do that right now going forward?

Mark McClain -- Chief Executive Officer and Co-Founder

Yes, Julian, this is Mark. I'll pick that one up. Good to talk to you. It's mostly about packaging.

We wanted to simplify the packaging to make sure the customers who kind of think of these two core platforms, kind of our SaaS platform, IdentityNow and our software platform, whether hosted in the cloud or run on-prem IdentityIQ, we wanted to signal that as we've expanded our vision of what identity governance encompasses, and now, we absolutely believe it should encompass both the access to applications and to data, generally, data kept in files and things like Dropbox and Box and SharePoint, all of that, we just felt like it was a better positioning to say the packaging of that should be viewed as sort of an add-on or a component of the broader two platforms, and we actually think it will help our field and our partners position it more as a component of the platform as opposed to a third product. It was sort of more and more being viewed as kind of a separate thing, both by our field, our partners, and even some of our customers. And so we think it will make it a more natural positioning and selling process. It'll make it a more natural consumption or purchasing process for the customer.

And we think it will actually help us increase the adoption of File Access Manager.

Cam McMartin -- Chief Financial Officer

Yes. And I think the second point I'd comment on is really based upon some of the early experiences we've had with the customers that have now fully deployed, they're thinking of it as a comprehensive governance solution. And in that sense, end to end, the wall-to-wall coverage of governance requirements, whether it's application or files, they want those interwoven in the way they manage certifications and life cycle and all the things we've talked about before, and so that comprehensiveness in this packaging, I think, lets the perspective customer know that this is, in fact, an end-to-end problem that has to be addressed. And so this packaging, I think, better aligns with our experience with our customers that are furthest along in the deployment of both solutions.

Julian Serafini -- Jefferies -- Analyst

OK, that makes sense. Thank you.

Cam McMartin -- Chief Financial Officer

Thanks.

Operator

Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Please proceed with your question.

Matt Swanson -- RBC Capital Markets -- Analyst

Thanks. This is actually Matt Swanson on for Matt. It was good to hear the update on IdentityAI, and we're excited to see more of that in Q2. Could you just talk a little bit about the customer response from the people who got to do the trials throughout 2018? And then if there's any expectations around contribution in 2019 from it?

Mark McClain -- Chief Executive Officer and Co-Founder

Hey, Matt. This is Mark, I'll take the first part of that, and let Cam pick up the second. As we think about kind of the focus of what we're trying to do with AI, it really is focused on how we help our customers on what we're calling kind of recommendation-based approach. In other words, one of the things we heard a lot from our existing customers is, they need to be both more efficient and more effective in their identity governance programs.

And one thing is we think we can do with that kind of intelligence is to help them make better initial decisions as to who should have access to what. They're obviously valiantly trying, in many cases, to get their policies and their roles to find in such a way that that can be pretty well-defined for standard roles, and which is true. So many of our customers, there's a lot kind of semi-nonstandard roles where part of the needs are defined by a clearly defined role in the organization, and then various other things are driven by unique needs. And so we think that the intelligence that IdentityAI will help customers with that initial approach to how should this person be configured as they join and as, frankly, as they move around and transition.

So kind of the imprints of that is, that early on, we think AI will probably be most interesting to our existing installed customers who are, frankly, pretty mature in their rollout, and those are the customers we work with in our early access program to kind of vet it out with folks that really have a fairly deep, thorough understanding of governance and are well down the path there. So that's been our focus. As we kind of add more capabilities into the product going forward, we anticipate it will be more applicable to a newer customer who's less mature in their program. But our focus in '19 and headed into '20 will probably be more about the existing installed base customer.

Now I'll let Cam comment on the financial side of that.

Cam McMartin -- Chief Financial Officer

Yes, so Matt, thanks for joining the call. Appreciate it. Relative to the financial expectations for 2019, as a reminder, IdentityAI is a SaaS-based solution. It is, therefore, if you will price and package in that regard, there will be a bit of a consumption element in the pricing model as we go fully to market.

And so as we thought about it, what we see in '19 really about is a couple of things: One is obviously converting these early access program customers to long-term users and subscribers to the solution, and that's going along nicely in terms of where we're headed. In addition, as Mark said, this is a solution, and its first wave is about -- is focused around the existing well-deployed IdentityIQ, IdentityNow customers. And in that regard, that's where our team is focusing today, and we would expect to build a book of business in terms of new contracts and subscription agreements that will, if you will, layer cake upon each other as we go through the year, but really, the meaningful revenue contribution is out in front of us in 2020 and beyond.

Matt Swanson -- RBC Capital Markets -- Analyst

That's great. And if I could ask one more product question. Mark, last year at Navigate, was the first time I really heard you guys or anyone else talk about securing bots. Could you just talk about kind of the process that you've made throughout the year? To what extent customers kind of understand this as an issue? And I don't know if you have any customer examples so far that you could point to for kind of the size this opportunity represents.

Mark McClain -- Chief Executive Officer and Co-Founder

Yes, Matt, couple of points. One is, I think we have been somewhat surprised by the rapid pace at which our kind of larger, fairly sophisticated customers seem to be deploying bots, and their interest in managing those bots using these same types of approaches that they've managed people with. I think we've -- Cam will refer to an example here in a second, but in general, I think we're seeing a good take up there of customers who are saying, hey, I am deploying a lot of these software bots around my org. I do need to manage them kind of with the same approach, the same constructs as I do my people.

And so that's leading to some nice license upsells and cross-sells to get more revenue from those customers because they fully expect to manage those kinds of capabilities. So that's -- I think, honestly, I guess the short answer here is, it's not a massive needle mover to our financials, but we're seeing, frankly, a faster uptick there than we thought, and it's more driven by the rate at which our customers seem to be deploying these bots.

Cam McMartin -- Chief Financial Officer

Yes. So, Matt, I think to remind, and we've talked about this on our prior calls, but I'll just remind you this. The genesis of this is obviously what's going on in the market. But we had, earlier in '18, a customer come to us and say that they had deployed 20,000 software bots across their enterprise and recognize that they had a governance gap.

That while they could do certain things with it, with IdentityIQ, they couldn't address the full life cycle management requirements that they wanted to deploy. And so they came to us and asked us to look at some additions to IdentityIQ. We got it in the roadmap. We actually did that work during calendar year '18.

We released that new functionality that allowed for unique governance of bots and IdentityIQ 7.3. And so we moved quickly in response to the marketplace. Another example that came after the release of 7.3 in Q4 was a large global financial enterprise who was seeing a proliferation of bots across a number of different segments of their business. And in that case, the number of bots that they licensed was quite large, based not only on where they are right now, but what their own internal expectation was relative to additional bot rollout over the next couple of years.

So in that regard, we're seeing, I think, as Mark indicated, a more accelerated pace in the adoption of software bots as part of their identity programs. And so in that regard, I think we've positioned ourselves well to capitalize on it. And again, back to my earlier comment, it helps us be wall-to-wall in the way in which we can life cycle-manage all identity types for all uses for our customers.

Matt Swanson -- RBC Capital Markets -- Analyst

Great quarter, guys.

Cam McMartin -- Chief Financial Officer

Thank you.

Mark McClain -- Chief Executive Officer and Co-Founder

Thank you, Matt.

Operator

Our next question comes from the line of Walter Pritchard from Citi. Please proceed with your question.

Walter Pritchard -- Citi -- Analyst

Hi. I guess, first question for Mark. On the SaaS side, I'm wondering if you've seen any lines blurring between customers that are traditionally bought SecurityIQ versus IdentityNow? And if you anticipate any change in that, I mean, I guess it seems like your guidance doesn't necessarily assume that, but I'm wondering what you're seeing in terms of color on customers choosing each, and their size and so forth.

Mark McClain -- Chief Executive Officer and Co-Founder

Hey, Walter, it's a good question. What we've done, and we've tried to be a little bit more definitive with our field and guiding them how to approach customers. And what we typically say is rounded off, sub kind of 5,000 users, and this does vary somewhat by industry, that's a generally pretty clear IdentityNow customer; greater than 15,000, that's generally a pretty clear IdentityIQ customer, just because of the implications of the sophistication, the complexity that is implied in those kind of sizes. And then that middle ground is a bit gray.

And what we've learned is, a lot of those customers in that middle ground, and certainly, those below that, the lower end of the market, tend to start by saying, "Hey, I'm cloud-first, or frankly, sometimes cloud-only." And in response to that, our team was initially saying, "Well, therefore, I should be talking to you about IdentityNow because that's our SaaS offering." One thing we're clearly positioning for is that through partners, to help the customer themselves, hosted at, say, Azure or Amazon, we are seeing a pretty interesting uptick in people who absolutely qualify or position well to use IdentityIQ because of the nature of the use cases they have and the nature of their environment, but they don't want to run it in their data centers. So that line has gotten a little fuzzy, Walter, in that middle ground of, OK, so that customer wants a cloud-based solution, they may or may not be well-suited to IdentityNow versus IdentityIQ in the cloud, and we then have to kind of double click into the next level of detail as to what's happening there and which way we go. And honestly, there's some nuances here by geography, some countries are more SaaS-friendly than others today. There's just a lot of moving parts here for us.

But I don't think we've seen any substantial shift that's confusing the market between our two products today. We have to help our field get that right. Sometimes, it's more just that we had to train ourselves and our partners and others to just not immediately say SaaS when the customer said cloud, if that makes sense. Sometimes they say cloud, and we say, "Well, that may be a cloud-hosted version of IdentityIQ that's most appropriate for you." Does that make sense?

Walter Pritchard -- Citi -- Analyst

It does. Yes. Got it. And so safe to say, it sounds like you've seen a bit more of the hosted cloud SecurityIQ piece, but it doesn't really -- we don't see that in revenue or anything like that?

Cam McMartin -- Chief Financial Officer

Yes, well, practically -- Walter, Cam here, practically, it depends on the buying dynamic of the customer. To date, as Mark indicated, we have seen, I think, a steady uptick in the deployment of IdentityIQ in the public cloud environment. Generally speaking, those customers are still wanting to buy and own on a perpetual license basis IdentityIQ. They're simply play-shifting, if you will, from their existing location, if you will, behind the firewall in their data center to the public cloud.

But our large enterprise customers continue to have an overwhelming preference in the buying cycle to buy on a perpetual license basis.

Walter Pritchard -- Citi -- Analyst

Got it. And then, Cam, just on the guide, the 10% margin for 2019. Can you help us understand as we're comparing that to -- I think you're very clear on the revenue side. If we're comparing that to our estimates on a 605 basis that we had prepared before, what is the -- maybe what would the margin -- the operating margin have been for 2019 on 605?

Cam McMartin -- Chief Financial Officer

Yes, we really haven't pro forma-ed the 605 in a way in which -- if you're talking about including the CAC adjustment. Walter, I'll take it back to what we've said previously about the performance in 2018 through the year, because we were nicely ahead throughout the beginning part of the year and through the year on license contribution at the marginal level. It was a good contributor overall in terms of revenue, and therefore, profit performance. In addition, as you saw, and we updated you in the prepared remarks, around hiring, the first part of the year, we were a bit behind in hiring, and then late in the year, caught back up.

So in that sense, 2018's performance was really above what we wanted to manage to on a long-term trend basis in terms of growth focused at the top line. And in that regard, as we commented in the third-quarter call, we expected to moderate a bit our 2019 profitability to be more in line with our overall focus on growth in the long term. And so that's where it is. If you, at the end of the day, if you look at it, I think the difference between the two would have been a couple of points in terms of overall non-GAAP operating income.

Walter Pritchard -- Citi -- Analyst

I'm assuming a couple of points higher on 606 given the commission deferrals?

Cam McMartin -- Chief Financial Officer

Yes, correct. Just to be clear. Thank you.

Walter Pritchard -- Citi -- Analyst

OK, Thank you.

Cam McMartin -- Chief Financial Officer

Absolutely. Thanks, Walter.

Operator

Our next question comes from the line of Rob Owens from KeyBanc Capital Markets. Please proceed with your question.

Mike Casado -- KeyBank Capital Markets -- Analyst

This is Mike on for Rob. As you compare your 2018 pipeline at this time a year ago, to the 2019 pipeline you're seeing today, to what extent are you seeing shifts in the compliance versus security focus, or compliance versus security drive demand?

Cam McMartin -- Chief Financial Officer

Yes, Mike, this is Cam. I'll start, and I'll let Mark come in behind. I think the answer is the complexion of the demand drivers for our business remain the three that we've highlighted now for really, pre-public even, but certainly, since we've gone public. And the biggest driver really remains the IT operational efficiency and effectiveness portion of our value prop being the biggest driver.

Organizations, especially the larger organizations, but now, more and more of the middle market or middle enterprise organizations, with the proliferation of applications, with the fact they now have to manage these data stores, with the proliferation of identity types, life cycle governance and management is a tough challenge, and that tends to be the most frequent driver, whether we're displacing an existing solution at the customer, or in fact, simply going in for the first time. But in addition, the other two that we've talked about, security is important and remains important. People are managing breach risk as tightly as they can. They continue to view identity governance as an important pillar in their overall security framework.

And identity -- tight identity control gives them the understanding of who is accessing what. And ultimately, with the addition of IdentityAI, as time goes on, they'll have a more dynamic understanding of that. And then lastly, compliance remains important. In the U.S., HIPAA, for example, in the healthcare markets and other drivers, are critically important to organizations, especially as they go through their annual audit cycles.

And if they -- if there seems to be a deficiency in the control framework around IT resources, and we'll see people come to us as that is their primary driver. Again, I'll remind you throughout, we are selling all three value propositions because we fundamentally believe that organizations need to comprehensively address their governance requirements, and so they should think about how they deploy to address all three.

Mark McClain -- Chief Executive Officer and Co-Founder

Yes, the only nuance I'd add, Mike, is a little bit of industry vertical. What I mean by that -- and/or scale. What I mean by that is, if a company is public and/or regulated, obviously, compliance tends to weigh in a little heavier than it does when that's not true, right? A smaller or a nonregulated industry company, security and operational issues tend to be more at the forefront. And just to echo what Cam said, I think in the world of IT products of any sort, even security, if there is a value proposition to be discussed, relative to cost management or cost reduction, it's always a great way to get the dialogue going.

And that's an even better dialogue if they're replacing, displacing older legacy technology that they know has become somewhat costly to maintain and inefficient to use. So I think we quite often get people's attention on compliance and/or security. But a lot of times, when you get into the sales cycle and are helping them do an ROI, what we call a business value assessment, and justify this up their chain of command up to the financial organization, quite often, the operational issues are pretty significant.

Mike Casado -- KeyBank Capital Markets -- Analyst

That makes sense. And I'm sorry if I missed it, but last quarter, you guys spoke positively on the Accelerator Pack driving faster implementations among already committed customers. And I know it's still early, but could you speak to what extent, if any, the promise of faster implementations maybe driving a faster expansion cadence?

Mark McClain -- Chief Executive Officer and Co-Founder

I don't know if I could quantify that.

Cam McMartin -- Chief Financial Officer

Yes, I would say I think on a quantifiable basis, Mike, I think it's still early, practically speaking. I think the good and positive indicator is that we're seeing a number of our customers both upgrade to include Accelerator Pack and follow on procurements as they come back and buy additional identity cubes. And then additionally, new customers are adding into the mix in terms of their initial procurement. I think what our partners are able to articulate is that with the use of the Accelerator Pack, they can move customers along more quickly to on-ramp applications, on-ramp identities, i.e.

people, or nonhuman identities, in a way that gives them an accelerated time to value. And that, I think, will prove to be, over time, the important variable. It will take time to collect all the data around that. As you well know, these are multi-month, generally, deployment cycles, and so we're still early in this life cycle of that contribution.

But the feedback that we're getting from customers and from partners is positive. And I think that's the most, I think, we can comment in terms of early results at this point for you.

Mike Casado -- KeyBank Capital Markets -- Analyst

Great. Thanks, guys.

Operator

[Operator instructions] Our next question comes from the line of Tim Klasell from Northland Securities. Please proceed with your question.

Tyler Wood -- Northland Securities -- Analyst

Yeah, this is Tyler Wood on for Tim. So as you kind of break apart the deferred revenue build, could you talk a little bit about did bookings on a perpetual -- how the bookings on a perpetual side compare to bookings on the security now and subscription side of the business.

Cam McMartin -- Chief Financial Officer

Can you reask the back end of that question one more time. Sorry, I was losing you at the end there.

Tyler Wood -- Northland Securities -- Analyst

Sorry. Just how did bookings on the perpetual side of the business compare with bookings on the SecurityNow and subscription side for the quarter?

Cam McMartin -- Chief Financial Officer

Yes. I would tell you that the performance of bookings in Q4, we were pleased with. In terms of, if you will, the makeup of the contribution, we saw, on a historic basis, continued contribution from IdentityIQ and good both cross-sell and upsell and new attach for SecurityIQ, we've now started calling it File Access Manager going forward, but we saw good contribution there. And we were pleased with the overall progression through the year with IdentityNow.

I think we're pleased with what we've learned in the marketplace around IdentityNow, and some of the positioning and selling shifts that we accomplished through the year, I think, are bearing fruit for us, and that's what we're looking for. So overall, the contribution across all of the product categories was positive in terms of Q4 overall results.

Tyler Wood -- Northland Securities -- Analyst

Thank you.

Operator

We have reached the end of the question-and-answer session, and I will now turn the call back over to management for closing remarks.

Mark McClain -- Chief Executive Officer and Co-Founder

Well, I think we'd just like to thank everyone for their interest and the thoughtful questions. Again, we apologize for the delay in getting this earnings out to you all, but we're happy to have everyone join us today on what was an adjusted schedule. And we look forward to conversing with all of you in the short term here as soon as we can. Thanks for joining us today.

Operator

[Operator signoff]

Duration: 56 minutes

Call Participants:

Josh Harding -- Vice President of Finance and Investor Relations

Mark McClain -- Chief Executive Officer and Co-Founder

Cam McMartin -- Chief Financial Officer

Andrew Nowinski -- Piper Jaffray -- Analyst

Julian Serafini -- Jefferies -- Analyst

Matt Swanson -- RBC Capital Markets -- Analyst

Walter Pritchard -- Citi -- Analyst

Mike Casado -- KeyBank Capital Markets -- Analyst

Tyler Wood -- Northland Securities -- Analyst

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