Ping Identity: Patient Investors Will Be Rewarded (NYSE:PING)


Ping Identity (PING) reported strong F2Q20 results beating both on revenue and EPS. However, the company issued guidance that fell below consensus estimates. Revenue was $59.0 million versus the consensus estimate of $53.8 million. EPS was $0.08 versus the consensus of $0.02. Higher revenue and lower than expected Opex drove EPS upside. Ping issued lackluster guidance with the company guiding revenue in the range of $54-57 million with the midpoint $55.5 million, down 10% Y/Y versus prior consensus of $58.5 million. The following chart illustrates the F2Q20 financial highlights:

Source: Company Presentation

Since the results, the stock has been treading water and has been range-bound. While the pandemic has impacted the outlook for the company, we are confident in the longer-term growth prospects. Therefore, we would buy the shares opportunistically on weakness. Ping remains a compelling alternative to Okta (OKTA), with a reasonable valuation, marquee customer base, and compelling product portfolio that address on-prem, cloud, and hybrid cloud architectures. For a more detailed view of Ping’s core business, please refer to our prior work on SA.

What we did not like in the earnings report

Due to the macro environment, management noted that larger deals are taking longer to close since the transactions are more thoroughly scrutinized. Net Retention Rate (NRR) is down Y/Y and is 111% and is down from 114% from 1Q. Customers are adding more products cautiously and on an as-needed basis, and this has caused NRR to dip. Customers are purchasing products in phases and are buying products that are needed now, to conserve cash, lowering deal sizes. Therefore, the net effect of a lower level of upgrades and smaller initially purchases with smaller ASPs are likely to continue for the remainder of the year or until the pandemic effects subside.

While the near-term effects on revenue and EPS are real, we are confident in Ping’s longer-term position within the enterprise. We expect multiple winners in the emerging Identity and Access Management (IAM) space, and we believe Ping would be one of the winners. Ping is a reasonably priced asset that we would be buying.

What we liked in the earnings report

Ping’s management noted the resiliency and the market opportunity for the Identity and Access market. Enterprises are using the Zero Trust Network Access (ZTNA) framework to secure their enterprises, as firewalls are no longer sufficient. In ZTNA, Identity is used as the core pillar around which the security is built. According to Ping’s management, Cloud and Hybrid IT architectures, ZTNA, and Password-less access are driving demand for Ping’s Identity products.

The company noted that ARR is the best indicator of the strength of Ping’s business. ARR during the quarter was up 19% Y/Y and is slightly ahead of street estimates. The company noted that PingIntelligence for APIs has been seeing traction and is one of the emerging and most promising product categories. The company also stated that it continues to sign more deals than before, albeit a little smaller than usual. However, the company feels confident that it can upsell more into its existing install base as the economy recovers from the pandemic. Management also noted that a majority of the deals that slipped into 2Q from 1Q were closed during the quarter. In 1Q, the contract duration dipped from the historical levels, but, in 2Q, the duration began to normalize to near pre-COVID-19 levels faster than anticipated. Management also noted that 60% of newer deployments of Ping are in the cloud, either in public, private, or the Ping’s proprietary PingCloud. Given management’s confidence in its prospects, Ping is resuming its investments in opex for the remainder of this year. The following chart illustrates ARR versus revenue growth over the past nine quarters.

Source: Company Presentation

What keeps us excited about the name

Identity and Access Management is the secular growth story in enterprise security today. Identity is gaining importance due to the arrival of ZTNA, remote work environments, and digital transformation. Ping Identity CEO Andre Durand noted that enterprises continue to prioritize Identity and Access Management products, and securing Identity remains at the top of the IT spending priorities. Mr. Durand also noted that IAM is highly resilient, and even during stressful macroeconomic times, enterprises will continue to deploy best of breed end-to-end Identity solutions. We expect multiple Identity providers to benefit from the Identity spending trend. We expect Ping to get its fair share of the business and will likely garner the second highest market share behind Okta. In our view, Okta is a simpler platform with limited capabilities. Many SMBs find Okta’s solution attractive and will continue to drive its growth rate. While we cannot argue with Okta’s growth rate and stock performance, we believe Ping is a much more capable platform and is designed for enterprises.

Companies are building next-generation security using the Identity as the core pillar. Different use cases such as customer identity, workforce identity, partner, and supplier Identity are driving the Identity solutions growth in the market. Ping’s solutions for customer identity are considered the best in the industry. While we believe Ping Identity’s position within the enterprise is undisputed, given its customer Identity solutions are considered the best, we believe the gains in the shares will likely be over time. Ping gives its customers a choice to deploy its solutions anywhere of the customers choosing- on-prem, in the cloud, or the hybrid cloud. The company also sells you the product in various models – perpetual and subscription. It also gives customers how they choose to pay. Given the flexibility it provides, forecasting revenue is challenging. Despite this, we believe Identity is a secular growth vector, and Ping would be one of the beneficiaries of this growth. For a more detailed view of Ping and its products, please refer to our prior work on SA.

Valuation

When valuing Ping, we use EV/Sales as the primary valuation metric. Given that many of the companies in the peer group are currently in transition to SaaS/Subscription revenue model or not sufficiently profitable, EV/Sales makes the comparisons meaningful. Also, in a takeout scenario, one of the primary metrics used to evaluate takeout prices remains EV/Sales, as it is easier to compare with historical multiples. Ping is currently trading at 7.7x EV/C2022 sales, well below the peer group average of 8.8x, despite growing faster. Ping is forecasted to grow at 22%, versus the security peer group at around 19%. Okta, one of the Ping’s chief rivals, is forecasted to grow at 29%, slightly faster than Ping, yet, it is trading at 20x. Okta’s multiple is 260% higher. The following chart illustrates the valuation of the security peer group.

Source: Author from Reuters Data

Risks

The risks for owning this stock are many, as we had detailed in our previous article on SA. However, the main risks remain the macroeconomic weakness and the accompanying demand environment. If the pandemic persists for longer than many anticipate, the demand for Ping’s products and services will be negatively impacted, leading to a selloff of the stock.

What to do with the shares

Given the shares of Ping are reasonably valued but not overly cheap and due to near-term macroeconomic uncertainties, we would be accumulating shares opportunistically on weakness. We believe investors need to be patient for the shares to appreciate.

Disclosure: I am/we are long PING. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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