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KnowBe4 Announces Third Quarter 2021 Financial Results

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KnowBe4 (NASDAQ: KNBE) reported a 42.6% year-over-year increase in GAAP revenue, reaching $64.1 million for Q3 2021. Annual recurring revenue rose 44.1% to $262.2 million, with more than 44,000 customers. The company generated $19.9 million in cash flow from operations and had a free cash flow margin of 28.1%. The acquisition of SecurityAdvisor on November 1 is expected to enhance cybersecurity capabilities. Looking ahead, KnowBe4 anticipates Q4 revenue between $66.8 - $67.2 million, representing 35-36% growth.

Positive
  • 42.6% year-over-year GAAP revenue growth to $64.1 million.
  • Annual recurring revenue increased 44.1% to $262.2 million.
  • Free cash flow of $18.0 million with a margin of 28.1%.
  • Strong international revenue growth at 99% year-over-year.
  • Successful acquisition of SecurityAdvisor expected to enhance product offerings.
Negative
  • GAAP operating margin remains negative at (1.1%).
  • Free cash flow margin guidance for Q4 expected to drop to 20%+.

•  Total GAAP revenue increased 42.6% year-over-year to $64.1 million

•  Annual recurring revenue increased 44.1% year-over-year to $262.2 million

•  Total number of customers reached more than 44,000

•  Cash flow from operations was $19.9 million

•  Free cash flow was $18.0 million and free cash flow margin was 28.1%

TAMPA BAY, Fla., Nov. 03, 2021 (GLOBE NEWSWIRE) --  KnowBe4, Inc. (NASDAQ: KNBE), provider of the leading security awareness training and simulated phishing platform, today reported results for the third quarter ended September 30, 2021.

“Our third quarter results exceeded our expectations with record annual recurring revenue (ARR) of $262.2 million and total customers of more than 44,000. We continue to scale the business with more than 40% revenue and ARR growth while generating strong free cash flow margins of 28%.” said Stu Sjouwerman, founder and chief executive officer of KnowBe4. “We are extremely excited about the positive response to the recent announcement of our acquisition of SecurityAdvisor, which closed on November 1, 2021. Through this acquisition, we believe we are creating a new category of cybersecurity that we are calling Human Detection and Response, or HDR. We are also seeing remarkable traction with our own internal product development initiatives, including Password IQ, which is currently in a beta release stage. With such positive momentum, we are looking forward to a strong finish to the year."

Krish Venkataraman, KnowBe4’s co-president and chief financial officer, added, “Our successful third quarter financial results show that we continue to execute on our key growth initiatives. GAAP revenue grew by 42.6% year-over-year, driven by substantial growth across both enterprise and SMB customers, increasing multi-product attachment rates to 19% and year-over-year growth in international revenues of 99%. We are also very pleased to report continued strong gross margins in excess of 80% and strong free cash flow generation of $18.0 million for the quarter.”

Third Quarter 2021 Financial Highlights

 Q3-2021 Q3-2020 Change
 (in thousands, except percentage and per share amounts)
Revenue$64,091   $44,932   + 42.6%
Annual recurring revenue1$262,172   $181,924   + 44.1%
GAAP gross margin85.0%   84.6%   + 0.4%
Non-GAAP gross margin185.4%   84.9%   + 0.5%
GAAP operating margin(1.1)%   (2.2)%   + 1.1%
Non-GAAP operating margin14.6%   0.7%   + 3.9%
Cash flow provided by operating activities$19,949   $12,661   + 57.6%
Free cash flow1$18,006   $11,017   + 63.4%

1 A reconciliation of GAAP to non-GAAP financial measures and definitions for our key business metrics, including annualized recurring revenue and free cash flow, is provided under the heading "Explanation of Non-GAAP Financial Measures."

Recent Business Highlights

  • Revenue and ARR increased year-over-year by 42.6% and 44.1% respectively, driven primarily by overall business growth resulting from positive multi-product adoption trends, strong international growth and continued expansion of our customer base into both enterprise and SMB.
  • On September 23, 2021, we hosted our inaugural KB4-CON EMEA conference which engaged with cybersecurity professionals across the EMEA region to provide relevant industry updates and product overviews and roadmap reviews. The conference was well attended with over 5,000 registrations to the virtual event.
  • As announced during our KB4-CON EMEA conference, we have release a beta version of a new product code named "PasswordIQ." Password IQ will continuously monitor organizations' employees for password hygiene issues, such as weak or breached passwords, summarize data on an easy-to-read dashboard and allow for automatic training to mitigate password hygiene risk.
  • On October 21, 2021, we held a business update conference call announcing the acquisition of SecurityAdvisor Technologies, Inc. for an estimated aggregate purchase price of $80.0 million a portion of which is to be paid upfront through a combination of cash and our Class A common stock and a portion of which is to be paid through future incentives, including earnout provisions and restricted stock unit grants. This acquisition closed on November 1, 2021 and is subject to customary post-closing adjustments. We look forward to future innovations within the Human Detection and Response category that we expect to come through the integration of the SecurityAdvisor technology into our core platform.
  • We completed a follow-on offering on August 16, 2021 where certain selling stockholders offered and sold 11,995,546 shares of our Class A common stock at a price to the public of $20.75 per share, including the full exercise of the underwriters’ option to purchase 1,564,636 additional shares of our Class A common stock from the selling stockholders. We did not receive any proceeds from the sale of shares by the selling stockholders in the follow-on offering.

Financial Outlook

For the fourth quarter and full year 2021, the Company expects:

MetricFourth Quarter RangeGrowth
Total Revenue$66.8 - $67.2 million35 - 36%


MetricFull Year RangeGrowth
Total Revenue$243.8 - $244.2 million39 - 40%
Free Cash Flow Margin20%+N/A

Conference Call Information
KnowBe4 will host a conference call for analysts and investors to discuss its earnings results for the third quarter of 2021 and outlook for the fourth quarter and full year 2021 today at 8:30 AM EDT.

Conference Call: (833) 529-0227 (US/Canada Toll Free) or (239) 738-2273
Conference ID: 4828864
Webcast: https://investors.knowbe4.com/investor-relations

A recorded webcast of the event will also be available shortly after the call, and will be made available for one year on the KnowBe4 Investor Relations website (https://investors.knowbe4.com).

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally involve risks and uncertainties, including statements regarding our future financial and operating performance and our financial outlook and guidance for the year 2021. In some cases, you can identify forward looking statements because they contain words such as "may," "will," "should," "plans," "anticipates," "going to," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern KnowBe4's expectations, strategy, priorities, plans or intentions. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the impact of the COVID-19 pandemic on our and our customers’ business; our limited operating history; our ability to identify and effectively implement the necessary changes to address execution challenges; risks associated with managing our rapid growth; our limited experience with new product and subscription and support introductions and the risks associated with new products and subscription and support offerings, including the risk of defects, errors, or vulnerabilities; our ability to attract new and retain existing customers; the integration of SecurityAdvisor or companies we may acquire in the future; the failure to timely develop and achieve market acceptance of new products as well as existing products; rapidly evolving technological developments in the market; length of sales cycles; and general market, political, economic, and business conditions.

Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth from time to time in our filings and reports with the Securities and Exchange Commission (“SEC”), including in our most recent Quarterly Report on Form 10-Q and any subsequent filings with the SEC. Copies of these filings are available free of charge at the SEC’s website at www.sec.gov or upon request from our investor relations department. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those contemplated by these forward-looking statements, including, as a result of such risks and uncertainties. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Use of Non-GAAP Financial Information
We believe that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to our financial condition and results of operations. For further information regarding these non-GAAP measures, including the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, please refer to the financial tables below, as well as the “Explanation of Non-GAAP Financial Measures" section of this press release.

About KnowBe4
KnowBe4 is the leading provider of “new-school” security awareness training and simulated phishing platform. Our mission is to enable your employees to make smarter security decisions, every day. Through our subscription-based services, your organization will have access to the leading security awareness training platform.

Available Information
KnowBe4 announces material information to the public about KnowBe4, its products and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, webcasts, its Investor Relations website, its Twitter accounts (@KnowBe4) and its blogs (including blog.knowbe4.com/) in order to achieve broad, non-exclusionary distribution of information to the public and for complying with its disclosure obligations under Regulation FD.

Investor Relations Contact:
Ken Talanian
ir@knowbe4.com

Press Contact:
Kathy Wattman
pr@knowbe4.com

Explanation of Non-GAAP Financial Measures

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we consider certain financial measures that are not prepared in accordance with GAAP, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income (loss), non-GAAP operating margin, free cash flow and free cash flow margin, as useful in evaluating our operating performance. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it assists investors in seeing our operating results through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our operating results over multiple periods with other companies in our industry. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit as GAAP gross profit excluding stock-based compensation expense, amortization of acquired intangible assets and acquisition and integration related costs. Costs associated with acquisitions and integration include legal, accounting and other professional fees, changes in the fair value of contingent consideration obligations and other costs related to the transition of the acquired business. We believe non-GAAP gross profit and non-GAAP gross margin provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our results of operations, as this metric generally eliminates the effects of certain variables unrelated to our overall operating performance.

Non-GAAP Operating Income (Loss) and Non-GAAP Operating Margin
We define non-GAAP operating income (loss) as GAAP operating income (loss) excluding stock-based compensation expense, amortization of acquired intangible assets and acquisition and integration related costs. Costs associated with acquisitions and integration include legal, accounting and other professional fees, changes in the fair value of contingent consideration obligations and other costs related to the transition of the acquired business. We believe non-GAAP operating income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric generally eliminates the effects of certain variables unrelated to our overall operating performance. Non-GAAP operating margin is calculated as non-GAAP operating income (loss) divided by revenue.

Free Cash Flow and Free Cash Flow Margin
We define free cash flow as net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, less purchases of property, equipment, amounts capitalized for internal-use software and principal payments on finance leases. We believe that free cash flow is a meaningful indicator of liquidity to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and capitalized internal-use software, can be used for strategic initiatives. Free cash flow margin is calculated by dividing free cash flow by revenues.

Explanation of Key Business Metrics

In addition to GAAP measures of performance, we regularly monitor certain financial and operating metrics, including Number of Customers and Annual Recurring Revenue (ARR), in order to measure our current performance and estimate our future performance. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.

Number of Customers
We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution or a distinct business unit of a large company that has an active contract with us to access our platform. We do not consider our channel partners as separate customers as our contracts are executed with the end user, and we treat MSPs, who may purchase our products on behalf of multiple companies, as a single customer. We believe that our ability to increase and retain the number of customers on our platform is an indicator of our market penetration, the growth of our business and potential future business opportunities.

Annual Recurring Revenue
We define ARR as the annualized value of all contractual subscription agreements as of the end of the period. We perform this calculation on an individual contract basis by dividing the total dollar amount of a contract by the total contract term stated in months and multiplying this amount by twelve to annualize. Calculated ARR for each individual contract is then aggregated to arrive at total ARR. We believe that ARR is a key metric to measure our business performance because it is driven by our ability to acquire new customers and to maintain and expand our relationship with existing customers.

KnowBe4, Inc.
Consolidated Balance Sheets
(in thousands)

 September 30, 2021 December 31, 2020
 (unaudited)  
Assets   
Current assets:   
Cash and cash equivalents$272,273   $85,582  
Accounts receivable, net44,814   38,664  
Deferred commissions17,043   13,177  
Prepaid expenses and other current assets12,462   6,124  
Total current assets346,592   143,547  
    
Deferred commissions, non-current29,370   24,022  
Capitalized software and content, net14,525   15,523  
Property and equipment, net9,117   10,284  
Operating lease right of use assets, net12,460   12,067  
Intangible assets, net8,168   2,985  
Goodwill42,607   8,605  
Other assets1,074   1,177  
Total assets$463,913   $218,210  
    
Liabilities and stockholders' (deficit) equity   
Current liabilities:   
Accounts payable and accrued expenses$36,040   $19,265  
Current portion of deferred revenue170,149   127,043  
Current portion of operating lease liabilities3,245   2,651  
Total current liabilities209,434   148,959  
    
Non-current liabilities:   
Deferred revenue70,425   58,653  
Operating lease liabilities, net of current portion9,765   9,766  
Other non-current liabilities2,184   3,991  
Total liabilities291,808   221,369  
    
Stockholders' equity (deficit)   
Preferred stock, Series A, A-1, B, C, C-1     
Common stock     
Common stock, Class A     
Common stock, Class B2     
Additional paid-in capital350,693   158,483  
Accumulated deficit(177,546)  (161,303) 
Accumulated other comprehensive loss(1,044)  (339) 
Total stockholders' equity (deficit)172,105   (3,159) 
Total liabilities and stockholders' equity (deficit)$463,913   $218,210  

KnowBe4, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

 Three Months Ended September 30, Nine Months Ended September 30,
 2021 2020 2021 2020
Revenues, net$64,091   $44,932   $176,991   $125,599  
Cost of revenues9,609   6,918   25,543   19,264  
Gross profit54,482   38,014   151,448   106,335  
Operating expenses:       
Sales and marketing27,731   20,752   82,312   60,254  
Technology and development7,579   4,822   20,081   14,119  
General and administrative19,852   13,440   62,765   34,536  
Total operating expenses55,162   39,014   165,158   108,909  
Operating loss(680)  (1,000)  (13,710)  (2,574) 
Other income (expense):       
Interest income16   20   41   159  
Interest expense(67)  (16)  (329)  (45) 
Other income (loss)114   29   (445)  142  
Loss before income tax (expense) benefit(617)  (967)  (14,443)  (2,318) 
Income tax expense(963)  (735)  (1,800)  (316) 
Net loss$(1,580)  $(1,702)  $(16,243)  $(2,634) 
Net loss per share, basic and diluted(1)$(0.01)  $(0.04)  $(0.17)  $(0.06) 
Weighted-average shares used in calculating basic and diluted net loss per share170,359,220   42,169,160   98,076,290   42,116,480  

(1) At September 30, 2021, basic and diluted (loss) income per share for Class A and Class B common stock are the same.

KnowBe4, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 Three Months Ended September 30, Nine Months Ended September 30,
 2021 2020 2021 2020
Cash flows from operating activities:       
Net loss$(1,580)  $(1,702)  $(16,243)  $(2,634) 
Adjustments to reconcile net (loss) income to net cash from operating activities:       
Additions to capitalized content(1,885)  (1,642)  (4,504)  (4,063) 
Depreciation and amortization expense3,399   3,041   9,999   8,660  
Deferred commissions amortization5,071   3,597   13,806   10,402  
Equity-based compensation expense2,670   1,248   23,151   3,285  
Other, net(73)  (1)  327   (92) 
Changes in operating assets and liabilities, net of business combinations:       
Accounts receivable(2,202)  (2,317)  (4,943)  828  
Deferred commissions(8,726)  (5,469)  (23,112)  (15,427) 
Prepaid and other assets623   1,732   (7,656)  782  
Accounts payable and other liabilities3,750   3,956   13,675   7,096  
Deferred revenue18,902   10,218   51,299   30,787  
Net cash provided by operating activities19,949   12,661   55,799   39,624  
Cash flows from investing activities:       
Business combinations, net of cash acquired      (11,227)    
Purchases of property and equipment(1,159)  (837)  (2,214)  (4,692) 
Capitalized internal-use software costs(774)  (798)  (1,895)  (2,304) 
Net cash used in investing activities(1,933)  (1,635)  (15,336)  (6,996) 
Cash flows from financing activities:       
Proceeds from the exercise of stock options2,483   22   3,435   157  
Repurchase of common stock and options      (1,171)  (497) 
Proceeds from the issuance of common stock      155,958     
Acquisition-related contingent liability payments      (375)  (252) 
Proceeds from finance lease obligations         214  
Payments for finance lease obligations(10)  (9)  (30)  (24) 
Taxes paid for the net share settlement of restricted stock units(5,110)     (11,892)    
Net cash provided by (used in) financing activities(2,637)  13   145,925   (402) 
Effect of exchange rate changes on cash and cash equivalents(162)  184   303   (100) 
Net change in cash and cash equivalents15,217   11,223   186,691   32,126  
Cash and cash equivalents, beginning of period257,056   69,767   85,582   48,864  
Cash and cash equivalents, end of period$272,273   $80,990   $272,273   $80,990  

Non-GAAP Gross Profit and Non-GAAP Gross Margin

 Three Months Ended September 30,
 2021 2020
 (in thousands, except percentages)
Gross profit$54,482  $38,014 
Add: Stock-based compensation expense124  70 
Add: Amortization of acquired intangible assets142  60 
Non-GAAP gross profit$54,748  $38,144 
    
GAAP gross margin85.0% 84.6%
Non-GAAP gross margin85.4% 84.9%

Non-GAAP Operating Income (Loss) and Non-GAAP Operating Margin

 Three Months Ended September 30,
 2021 2020
 (in thousands, except percentages)
Operating loss$(680)  $(1,000) 
Add: Stock-based compensation expense2,744   1,234  
Add: Amortization of acquired intangible assets302   83  
Add: Acquisition and integration related costs588     
Non-GAAP operating income$2,954   $317  
    
GAAP operating margin(1.1)%   (2.2)%  
Non-GAAP operating margin4.6%   0.7%  

Non-GAAP Net Income (Loss) Per Share

 Three Months Ended September 30,
 2021 2020
GAAP net loss per share, diluted$(0.01)  $(0.04) 
Add: Stock-based compensation expense0.02   0.03  
Add: Amortization of acquired intangible assets     
Add: Acquisition and integration related costs     
Non-GAAP net income (loss) per share, diluted$0.01   $(0.01) 
    
Weighted-average shares used in the calculation of GAAP net loss per share170,359,220   42,169,160  
Weighted-average shares used in the calculation of Non-GAAP net income (loss) per share(1)175,651,818   42,169,160  

(1) At September 30, 2021, non-GAAP weighted average shares used assumes that all historical preferred stock and all common stock outstanding prior to the Company’s IPO were reclassified into Class B common stock as of January 1, 2021 and that all vested and exercisable stock options were exercised as of the earlier of January 1, 2021 or the beginning of the quarter in which they became vested and exercisable. There were no adjustments to weighted-average shares outstanding at September 30, 2020.

Free Cash Flow

 Three Months Ended September 30,
 2021 2020
 (in thousands)
Net cash provided by operating activities$19,949   $12,661  
Less: Purchases of property and equipment(1,159)  (837) 
Less: Capitalized internal-use software(774)  (798) 
Less: Principal payments on finance leases(10)  (9) 
Free Cash Flow$18,006   $11,017  
Free Cash Flow Margin(1)28.1%  24.5% 

(1) Free Cash Flow Margin is calculated as Free Cash Flow divided by Revenues, net for each period.

Key Business Metrics

 September 30,
 2021 2020
 (annual recurring revenue in thousands)
Number of customers41,601  34,604 
Annual recurring revenue$262,172  $181,924 

Stock-based Compensation Expense

 Three Months Ended September 30,
 2021 2020
 (in thousands)
Cost of revenues$124  $70 
Sales and marketing726  423 
Technology and development242  153 
General and administrative1,652  588 
Total stock-based compensation expense$2,744  $1,234 

 


FAQ

What were KnowBe4's Q3 2021 earnings results?

KnowBe4 reported $64.1 million in GAAP revenue, a 42.6% increase year-over-year, and $262.2 million in annual recurring revenue, up 44.1%.

What is KnowBe4's revenue forecast for Q4 2021?

KnowBe4 expects Q4 2021 revenue to be between $66.8 million and $67.2 million, indicating growth of 35-36%.

What was the impact of the acquisition of SecurityAdvisor on KnowBe4?

The acquisition of SecurityAdvisor is anticipated to strengthen KnowBe4's product offerings in cybersecurity, creating a new category known as Human Detection and Response.

How did KnowBe4 perform in free cash flow in Q3 2021?

KnowBe4 generated $18.0 million in free cash flow, achieving a margin of 28.1%.

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