Sumo Logic, Inc.
Q3 2021 Earnings Call Transcript

Published: 9 Dec 2020

[Operator:]

Greetings, and welcome to Sumo Logic's third quarter fiscal '21 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Paul Thomas, Vice President of Investor Relations. Please go ahead, sir.

[Paul Thomas:]

Thank you. Good afternoon, and welcome to Sumo Logic's third quarter fiscal '21 earnings conference call. I'm Paul Thomas, Sumo Logic's Vice President of Investor Relations. Joining me on the call today are Ramin Sayar, President and CEO; and Sydney Carey, Chief Financial Officer. Our format today will include prepared remarks by Ramin and Sydney, followed by a question-and-answer session.

[Ramin Sayar:]

Thanks, Paul, and thanks, everyone, for joining us today on our first earnings call as a public company. This is something we've been looking forward to for quite some time. We are excited to have completed our IPO in September and I want to take a moment to express our sincere gratitude to our employees, customers, partners and investors for helping Sumo Logic achieve that important milestone during these unprecedented times. It was an exciting event at the culmination of over a decade of hard work, building and enhancing Sumo Logic's cloud-native multi-tenant Software-as-a-Service offering. I'm especially proud because, together, with our strong community, we pioneered a new category of software called Continuous Intelligence, which automates the collection, ingestion and analysis of application, infrastructure, security and IoT data to derive actionable insights for DevSecOps. And we believe we are still in the early innings of a $50 billion market opportunity, whereby Sumo Logic can help enable organizations of all sizes and maturity accelerate their shift to the cloud and modern application architectures.

[Sydney Carey:]

Thanks, Ramin. I would also like to thank everyone for joining the call today. I'm personally very excited and proud of our performance in our first quarter as a public company. I'd like to start with a brief summary of our financial highlights for the quarter. First, we delivered compelling customer metrics both with new logo and expansion wins in our customer base while continuing to operate in a COVID-impacted environment. We have strong operational execution with compelling top line revenue growth, and we demonstrated efficiency with continued improvement in our margins.

[Paul Thomas:]

Before we move on to questions -- this is Paul. I just want to comment on the timing of the earnings release today. While we mistakenly released the results early, we hope this does not distract from the strength of the execution of our business in our first quarter as a public company. Going forward, you should expect the releases to come after market on the day of earnings. I'll turn the call back to the operator now to start Q&A.

[Operator:]

Our first question comes from the line of Derrick Wood with Cowen & Company.

[Derrick Wood:]

Great, and congrats on a strong quarter out of the gate. I guess, Ramin, can you talk about how you're seeing sales productivity trend versus what you saw in the first half of the year? And if you look at enterprise versus commercial business, just any comments on how that mix trended and how you're feeling about the demand going into Q4?

[Ramin Sayar:]

Great. Derrick, great to hear your voice. I think generally, we saw momentum in the quarter be very strong on the enterprise segment, as we've noted before. We saw North America enterprise both with new logo lands as well as cross-sell and upsell drive a significant portion or a good portion of our business. Similarly, productivity was higher in North America enterprise as well that led that, obviously. Naturally, some of the transactional business and the SMB, some of the international business and mid-market was down, just longer sales cycles, decision-making process. But overall, we're really happy with the strong execution and our growth in the quarter.

[Derrick Wood:]

Great. And then I guess, maybe one for Sydney. I mean, really nice gross margin performance, but it does sound like there were some onetime credit gain. So if you could give us a sense for kind of what the revenue -- what the margin run rate looks like going into Q4. And then perhaps just speak to the sales hiring, and it sounds like you hit certain goals but are looking to kind of catch up more on other parts of the fence. Can you talk about plans for Q4 hiring?

[Sydney Carey:]

Sure. So our gross margins were strong in the period. We have been working to optimize our platform to expand those gross margins this fiscal year. And what we saw is that of the strength of the gross margins, about 2 percentage points were due to onetime AWS credit. So we're expecting in Q4 to have gross margins in around that 75% range. Moving on to your second question on the sales hiring goals, we did meet our quota rep capacity goal for the quarter. We are on track for the year to hit our annual goal. What we did see is we restarted the recruiting engine, just a bit more effort to do that in Q3. And so we had some other functions such as R&D and sales supporting roles where we did not hit those hiring goals.

[Operator:]

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

[Matt Hedberg:]

Congrats on the IPO. Maybe I'll start with Ramin. You guys obviously got your start in logging, and you've moved now into Cloud SIEM. Maybe just can you start with -- and just sort of remind us about why starting in logging is the right place to start? And really, how that positions you to extend into other areas of durability and, just broadly, security monitoring?

[Ramin Sayar:]

Yes. Great, Matt. Thank you, and great to hear your voice again. So in short, I think as you look at the operational use case, and you look at the security use case, and you look at also the other use cases around customer insights and business intelligence, they have one thing in common, and that is the need to have all types of data real time and both structured and unstructured. And that's the power of Sumo, and that's where we started. And so this has been our vision and our strategy for well over a decade to bring all that together to address these variances in use cases and variable data sets. So I think the importance here is the fact that we're able to, without having to take shortcuts, like other tools that are very focused on a point solution in terms of aggregating or sampling, all those other means you use to kind of get around the scalability and ingestion of all data. We pride ourselves on allowing customers to throw all the data at us, and then through algorithms and other means, to get meaningful insights without having to be experts in a query language and the like. So that in itself and the ease of use lends itself to more users, more data, more use case, and therefore, driving cross-sells and upsell after we land the deal.

[Matt Hedberg:]

Got it. That makes a lot of sense. And then, Sydney, strong large deal metrics in the quarter, a nice uptick from last quarter. And I think you said you added 100 customers. Was that a gross number? I'm curious if you have the net -- if it is gross, what the net was -- net add?

[Sydney Carey:]

Yes, we did have strong customer metrics. We added 100 customers growth. On a net basis, we were just up slightly in the period, but we feel good about our 100,000 adds as well where we added 19 customers sequentially, which was significantly up from the prior two quarters.

[Operator:]

Our next question comes from the line of Sanjit Singh with Morgan Stanley.

[Sanjit Singh:]

My congrats, Ramin and Sydney, on the -- both the IPO and the first quarter as a public company. Great to see the results this quarter. Ramin, to maybe start off with you, I was wondering if you can sort of draw the trend lines for us between sort of peak COVID in the summer and coming into this quarter on 2 dimensions

[Ramin Sayar:]

Well, first of all, good to hear your voice again. Thanks for participating and supporting us. Now for the first part of your question, I think the trend lines around net new logos, I would say that overall, our average deal size for net new logos was up year-over-year. In fact, our new logo average deal size was also up significantly quarter-over-quarter and within quarter. And so while we may talk about new logo ads being north of 100, it's also important to look at the average deal size there being larger. And obviously, a lot of that was given -- contribution from our enterprise strength in the business. As the next part of your question in terms of cross-sell and upsell, we saw a pretty similar pattern to what we've seen pre-COVID in terms of the land and expand. We gave 1 example earlier that was in the same quarter, an enterprise customer -- actually, a mid-market customer, we landed, and within the same quarter, expanded. And then similarly, we see the opportunity to expand after we land usually within the quarter -- after the first quarter of land within 2 or 3 quarters thereafter. I think some of that we've seen in certain geographies in certain segments slowdown naturally because decision-making processes. But as it pertains to the POCs or the trials and getting new data in, we're seeing strong demand and interest there leading to indication that you'll see further down the road, the cross-sells and upgrades as we normally do.

[Sanjit Singh:]

Understood.

[Ramin Sayar:]

Now in terms of the other part of your use case -- apologies, you asked about security versus observability. I think we see two distinct trends there. One, there's still a lot of greenfield opportunity, particularly with respect to monitoring, troubleshooting and observability. And despite what you may hear from vendors in the space around their portfolio, customers are still predominantly going through this transition -- large enterprise customers to the cloud and still looking at best-of-breed technologies to support that migration. And that's where we can provide a single platform or a part of that platform need as they migrate over. And so while that's important, we also strengthen our own observability capabilities this past quarter with massive improvements in distributed tracing, AWS Observability, Software Development Optimization and much more. So thereby strengthening our portfolio of offerings to allow customers to leverage our licensing model to extend the trial of existing service to new features. Now in terms of security, we saw strong demand in enterprise again this quarter, similar to previous quarter because in a lot of cases, as enterprise customers are accelerating their digital and cloud, they're, guess what, starting with their security needs. They want to make sure they protect the threat vectors because it's growing vastly daily as they span this bimodal on-prem to the cloud world. And so that sets us up uniquely to land in security with the CECL and the SecOps team and then expand into the observability, the DevOps lines of business and the like. And we saw that play out exactly in Q3.

[Sanjit Singh:]

Understood. And if I could just have one quick follow-up, which is really sort of given the size of the opportunity, Ramin, what is the best go-to-market motion for Sumo Logic to attack this opportunity? Because you're seeing a couple of different playbooks in the market, sort of that high velocity online sales motion. You have your kind of traditional top-down enterprise sales with some of your competitors. For your customer base and kind of the target customer that's typically going to gravitate towards a Sumo Logic solution, what does that go-to-market sales motion look like a year from now, 2 years from now?

[Ramin Sayar:]

Well, I mean, I think we've been pretty clear on that all along with you and others that we have a very direct selling motion. And that is something that we do across multiple verticals, segments, theaters and the like. It's heavily supported, however, with our ecosystem of partners, most notably, obviously, VARs and MSSPs that we just continued to increase the presence and reach to thereby reduce also cost of sale but also with ISVs as we co-sell. So our strategy hasn't changed. It's very much a direct selling model. I think the thing that we're also making sure that we work on and improve going forward is because the platform is so easy to use, and more importantly, we want more users, more data, more cross-sell and like, we're constantly making investments to drive that self-service aspect of our business as well. But by and large, make no mistake, our business is consistent around a direct selling enterprise and commercial segment-led, followed with partners like MSSPs, VARs and distributors globally.

[Operator:]

Our next question comes from the line of Anmit Suri with William Blair.

[Anmit Suri:]

Let me add my congrats. Really solid quarter coming out of the gate there. Maybe my first question is a little more strategic here. But as you talk to customers, and you sort of bring the whole platform and all the data, whether it's structured or unstructured JSON, et cetera, and you provide the AI that can read across that, which is pretty unique, is that part of the conversations you're having today? Or is that -- and maybe, is that probably the conversation you're having with new customers today? Or is new customers very much still about sort of log management security, et cetera, and it's the existing base of starting to understand the value of the platform? How should we think about that? And the initial conversations you're having with both new and existing customers, given the value of the multi-tenancy across that with your embedded AI, of course?

[Ramin Sayar:]

Right. Bhavan, great to hear your voice, and thank you for the support, as usual. I think you're not going to like this initial response, but it depends. And it simply depends on, a, the customers' maturity, right; b, the organizational model; and c, their pain point, right, and where they're starting. And so we can't walk in, leading to the third point around the pain point, and sell everything at once and nor do we lead with that. So oftentimes, it's around an acute problem because they're struggling with the cost, the complexity as they're going through this migration with gen 1 tools or gen 2 tools not keeping up and not being able to deliver on the promises. And so it's really more about helping to understand what they can get and achieve from Sumo without throwing all the resources and costs at it. And that is evidence with some of the wins in the security space that we saw this past quarter, right? I think the other part of your question around the organizational model maturity, if we're talking to platform engineering, the DevOps folks that are well entrenched in a lot of the capabilities required to build a micro services-based multi-tenant kind of service or application, then we go into the details that you're referring to around we're more than just monitoring. The analytics and intelligence derive a lot of these actionable insights that you don't need to necessarily set static thresholds and do everything else. We've surfaced up those things for you. Similarly, we do the same on the security side because they've been so brain trained, the right manual rules in correlation and others with legacy SIEM tools. And once they see the power of what we can surface up, we show them that through the intuitive interface, but then we talk about how we achieve that. Does that make sense?

[Anmit Suri:]

That makes a ton of sense, and all that makes sense. I guess one other quick question here. You touched on partners. You touched on VARs and resellers, and you touched on sort of the ISVs. Where does the guide like -- where do the SIs fit in, in the longer-term strategy here? Because obviously, they are partners for some of the, let's call it, competitors or the Web 1.0, 2.0 guys. So where does that have been in terms of strategy?

[Ramin Sayar:]

Yes. So I mean, I think what's interesting here is as you look at the overall service provider space, whether it's a GSI, the SI, the SPs, the GSSP, I mean, so they're all starting to converge and do more than one thing, right? You have a lot of the GSIs or global system integrators providing their own managed service offerings. In a lot of cases, historically, they're trying to build and integrate a bunch of disparate tools into a service architecture. What's happening more and more is if you look at the MSSPs, their expertise is not sticking together integrating spare tools. It's leveraging cloud-native architectures and tools and services from the likes Sumo and be able to provide their value-add on top of that in terms of consulting versus implementation, in terms of best practices and accelerate that journey for those customers. So I personally believe that where we're focusing as a result is those transformational partners that are looking at new ways and new technologies to help accelerate their best practices and their vertical practices to accelerate digital and cloud as well as modernized security. So you saw some of the announcements we've made with distributors like Westcon globally. You've seen some things around MSSPs, and we'll continue to work with some of the other GSIs to get into their practices as we also address some of the FedRAMP and other needs of our customers.

[Operator:]

Our next question comes from the line of Mark Murphy with JPMorgan.

[Mark Murphy:]

I'll add my congrats. So Ramin, are you encountering more prospects who are over time kind of growing tired of the limitations of some of your peers that -- the ones that rely on sampling and aggregating of data, where -- are they finding that they can't handle the diagnosing and troubleshooting part of the equation? And I'm just wondering if any of that sentiment is creeping in with some of these larger lands that you saw.

[Ramin Sayar:]

Mark, good to hear your voice. I think generally, it goes back to a little bit of Bhavan's question in terms of maturity and experience with some of the prospects and customers. They may start with a homegrown or point tool for monitoring. And as their architecture and application needs start to increase, because of the volume of data, they start seeing the inefficiencies of the commercial products or maybe the homegrown initiatives and the need to analyze all types of data, and it actually makes it a much easier qualified opportunity for Sumo, believe it or not, to supplement or replace. So I think the point we try to emphasize all along is time to value, ease of use. And we don't really necessarily try to rip and replace because there's so much greenfield there and there's so many opportunities as customers are still early in their journey. And they see naturally the power and the value that Sumo delivers as a result of our architecture, as a result of our ways that we use ML and analytics and other means and a single platform for multiple use cases. They have the flexibility to choose to expand their usage if they need or they choose to.

[Mark Murphy:]

Okay. And Ramin, when you drill into that 10% of ARR -- hope you can hear me. There's some noise on the line. When you drill into the COVID impacted industries, I'm curious how the airlines and some of the others are behaving. Right now, today, are they cautious to spend because we have this COVID wave 2 building over the winter? Or do you see some of them who want to look through it with a little more optimism because the vaccines are right around the corner?

[Ramin Sayar:]

Yes. I think we're pretty consistent here in the sense of COVID has both headwinds and tailwinds, right? Obviously, travel, transportation, hospitality, those verticals were ones that were impacted the most, and some of those are still impacted, right? And our approach there was simply to support them as a partner and allow them flexibility as they manage their business through this unprecedented time. And so we're giving more flexibility to them in terms of usage of features, some degree of some payment terms, but generally trying to support their data needs, through their user needs and value. I think outside of that, in terms of those segments, what's also important to understand is, generally, this pandemic in this macroeconomic circumstance has slowed down decision-making because we're all remote. And so that's not just in those verticals but probably more specifically in segments of the market more in the SMB and the kind of commercial space that we also attach or attribute to this pandemic. But those are the headwind side. On the tailwind side, if you look at what's happening, billings was a strong growth for us this quarter as new customers began larger, new and upfront deals with us. And I mentioned the ASP comment for -- the average sales price comment for net new logos this quarter. We also saw a strong contribution from multi-use case out of the gates from new logo lands with our customers. So I think all that tells us that we need to continue to invest in building out our routes to market, our IP and getting prepared for not when necessarily the vaccine is available but when businesses are returning to normal because just because the vaccine is available, it doesn't mean that our business can quickly within a quarter or so, return to normal.

[Mark Murphy:]

Yes. That's a fair point. And then since you mentioned Ramin, on the billings side, I guess, I did want to ask Sydney. We see this healthy sequential growth in billings. Is there anything worth mentioning in terms of underlying drivers? Anything unusual in terms of the annual invoicing mix or early renewals, lead renewals, is there anything like that, that you're able to comment on?

[Sydney Carey:]

Yes. We did see good momentum on our billings this quarter. I would characterize it that in Q3, we saw us go back to our historical mix where we had about 90% of our billings being annual and upfront. So that was a good indicator. As we discussed earlier, last quarter, that had actually shifted down, and it impacted our billing. We did have a large billing from one of those COVID impacted industries that slipped from Q2 to Q3. So it billed out in Q3, and that was about a 5 percentage point of growth in the Q3 quarter.

[Operator:]

Our next question comes from the line of Rob Owens with Piper Sandler.

[Rob Owens:]

Could you guys speak to linearity throughout the quarter given some of the challenges one of your adjacent competitors saw and also the fact that you're your DSO or DBO, however we calculate it, but the receivables ticked up pretty meaningfully quarter-over-quarter. So just curious what the trends in the quarter look like and anything unusual from a receivable perspective?

[Sydney Carey:]

Yes. So for linearity in the quarter, we actually had fairly good linearity on our bookings side. Where you see the DSO tick up was primarily due to providing some payment concessions, so a little bit longer payment terms for some of our larger deals. But as far as linearity on closing the business, it was pretty typical and standard in the quarter. We saw good momentum kind of throughout the quarter.

[Rob Owens:]

Will those payment concessions persist? So this is a level we should expect moving forward, Sydney?

[Sydney Carey:]

I think it's kind of a deal-by-deal and specific. I think we've actually done a really good job navigating COVID and executing through COVID with both payment terms and collections. And so I think it's a balance between what -- giving a bit of a concession on certain deals. But at this point in time, I don't expect them to continue.

[Rob Owens:]

Great. And Ramin, you talked about the larger lands you guys are seeing these days. What's underlying these? Are people just getting more comfortable around the platform? Is it newer projects that are just larger than they once were? Any color you can give?

[Ramin Sayar:]

We try to give a few examples during the call with respect to different types of customers, illustrating their maturity as well as their pain points with either migrating to the cloud or security transformation. And I think the simple answer is we're in the early innings. And a lot of customers are still shackled by legacy tools, processes and inefficient technologies that hold them in the data center. And as they move and migrate to the cloud, it fundamentally changes their operating model, and it fundamentally changes how and what types of tools and technologies they need to be able to compete in this new world. And so I think given our platform breadth of use cases and our ability to either solve a point problem for logging and monitoring or a broader problem for a full stack observability, a -- audit and compliance problem, a Cloud SIEM and analytics problem, a customer analytics problem, we have a lot of flexibility to have our sellers, both direct and partners, be able to provide value quickly to any of our prospects and then look to expand that as they get value and usage and budgets potentially come up for more adoption of Sumo. So I think that's a unique position that we're in. Now I'll tell you that this past quarter, some of the larger opportunities we saw was from the strong demand for our security and Cloud SIEM. And that underscores the investment we've made for several years and, more importantly, the heritage of our company, 10-plus years being security practitioners and experts. And so last year, this time, we acquired JASK, we fully integrated JASK on top of a Cloud SIEM platform we already had. And the combination, therefore, is very competitive and market leading. And so that's where we saw more understanding of the value because it's a couple of quarters under our belt of selling the combined solution, and we see an uptake from our channel partners that are also helping us on the security transformation side.

[Operator:]

Our next question comes from the line of Gray Powell with BTIG.

[Gray Powell:]

Okay. Great. Congratulations on the very good results. Yes. Maybe a couple on my side. I just want to clarify, did you say that total RPO was up 51% year-over-year? And if that's right, was there any meaningful change in contract duration or anything unusual that we should think about? I'm just trying to think how I should -- how we should reconcile that versus revenue growth in the high 20s.

[Sydney Carey:]

Yes. So we have a strong RPO quarter. It was up 51% year-over-year. And sequentially, it was up 30%. And I think, again, it's just -- our customers are making larger commitments and longer-term transactions with us, and that's reflected in the RPO.

[Gray Powell:]

Okay. Great. And I think you hit on this earlier, but I just kind of follow up on it. So did you see any change in behavior late in the quarter with any larger customers or any larger deals? From the looks of it, it doesn't seem like you did, but again, one of your peers mentioned that last week that executives at larger customers were more closely scrutinizing deals late in the quarter. So I just want to be really sure like what exactly did you see throughout the quarter.

[Ramin Sayar:]

No. We didn't necessarily see that late in the quarter, any change. I would say that generally and I would say across multiple segments and geographies or theaters, there's been more approval processes that we see in some deals, right? And in our case, our value selling model, which includes really TCO and BVAs, all upfront is really meant to make sure that you align cost and price with technology and value. And so that's been part of our inherent selling motion for quite some time. And so we didn't see necessarily a few deals or 2 in the late quarter that may have caused any differences. Instead, overall, we saw strong consistent demand through month 1, month 2, month 3 and heading into the back -- few days of the quarter as we closed out Q3.

[Operator:]

Our next question comes from the line of Kingsley Crane with Berenberg.

[Kingsley Crane:]

Just want to touch again on the security phase. Enthusiasm is really clear if you think back to the acquisition of JASK and recent integrations with AWS Network Firewall as well as the addition of Tracey Newell to the Board. Is it fair to say you're leaning in more aggressively to this market? Or would you just view this as a continuation of what's been a strength of Sumo for a long time?

[Ramin Sayar:]

Kingsley, this is something that we've been building, and our strategy is build it, and they will come. And so given our tenure in history and security, we've seen over the last few quarters, but more importantly the last couple of years because of our own organic capabilities, that customers wanted and needed something new with respect to security. And I think the reason why you're seeing more investment in that and not just organic effort in IT but also the inorganic effort of the JASK acquisition and even the Board reference you made is because we want a balanced business, and we've been building a strategy for addressing a multiple use case platform across DevSecOps. That's what uniquely positions us and continues to differentiate us. So this is not about us overreaching one way or another. This is about having a balanced strategy and predictable growth with durable growth that we want to deliver on to take advantage of this large market.

[Kingsley Crane:]

Right. That makes perfect sense. It's such a large market. And then one on the financials. Great to see 100 customer gross adds in the quarter. Still up -- like the total growth is being underrepresented due to some churn. Would we expect this dynamic to continue in the near term?

[Sydney Carey:]

Yes. I mean, we're focused on new customers. We're focused on driving our prospects onto our premium platform and doing that conversion even at that level. So very much, there's a focus on customers. Again, we were pleased with the 100K adds. We were pleased with the gross adds, and we are still seeing some churn with our lower ARR customers, which kind of reflected into our net customers just increasing slightly period to period. But we do believe that our focus is really on the enterprise and those enterprise customers that represent over 100K ARR.

[Operator:]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.