SailPoint Needs A Bigger Mast – SailPoint Technologies Holdings, Inc. (NYSE:SAIL)

SailPoint Technologies Holdings, Inc. (SAIL) is the leader in Identity Governance, a technology that determines and monitors who has access and how the access is being used. SailPoint may be the leader but there is plenty of competition, including some of the big names such as International Business Machines (IBM), Oracle (ORCL), and Broadcom (AVGO) subsidiary CA Technologies that have tempered SailPoint’s revenue growth.

(Source: Portfolio123)

One year ago, SailPoint had revenue growth of more than 45% but is now struggling to reach 20% annual revenue growth.

In my previous article on SailPoint, I stated that: “I am not convinced that the company has enough SaaS experience at the executive management level to make it a success.” Indeed, SailPoint has now brought in a new CRO, Matt Mills, a person with experience in SaaS and leading sales teams with the objective of growth and scale. It has been my observation that it takes 6 to 12 months for new management to turn around sales execution. So investors shouldn’t expect too much for the rest of 2020.

In addition, it was noted during the 2019 Q3 earnings call that some revenue had been pulled in from Q4, meaning that Q4 revenue may be slightly depressed, although it isn’t clear how much revenue we are talking about.

Matthew Hedberg

And then, Jason, you also noted, it seems like you pulled some Q4 deals into Q3. I’m wondering if you can help quantify that. Q4, obviously, you raised the full year, which is great. Q4 revenue guidance was maybe a tad light of Street consensus, but maybe some of that is some of the Q4 deals that pulled in to Q3?

Jason Ream

Yes. I mean, that’s — I think you’ve hit it on the head there, Matt. Obviously, with a number of large enterprise deals, some of those deals can move between quarters. And we did have some strong momentum. It was definitely not more than what you noted relative to Q4, but a little bit of pull-in from Q4 to Q3.

Apart from the slowing revenue growth, new CRO and revenue being pulled forward, the company is in good shape. The company has a strong and consistent free cash flow margin of 13% and the stock price is fairly valued.

SailPoint historical free cash flow margin

(Source: Portfolio123)

While SailPoint is going through the motions to convert to a SaaS business model, it doesn’t really appear to be a priority. As stated in the Q3 2019 earnings call:

Subscription revenue increased 34% year-over-year to $37 million and was 49% of total revenue for the quarter. … Maintenance continues to represent a majority of the dollar growth in subscription revenue,

I would like to see higher revenue growth and faster conversion to SaaS. That will likely not happen in the next few months at least. For this reason, I am giving SailPoint a neutral rating.

Convertible Series Notes

In September, SailPoint issued $400 Million of Convertible Senior Notes due 2024. This is an action that has left me scratching my head as I don’t see a need for this unless they plan on an M&A spree. An explanation for issuing the notes was given by management in the Q3 2019 earnings call:

we did the offering to take advantage of an opportunity to strengthen our balance sheet at an incredibly attractive terms.

If raising a company’s debt level to 82% of equity is strengthening the balance sheet then so be it. But let’s keep in mind that the expense of issuing the $400 Million notes including the hedge was on the order of $46 Million.

(Source: Portfolio123)

Now, SailPoint has in excess of $400 Million in cash on the books, at a cost of $46 Million, but I guess that was a good deal. In all fairness, SailPoint has made a couple of small acquisitions including Orkus and Overwatch.ID that may contribute to the product, but I have to wonder what the game plan is.

Stock Valuation

The following scatter plot of enterprise value/forward sales versus estimated forward Y-o-Y sales growth illustrates SailPoint’s stock valuation relative to the 152 stocks in my digital transformation stock universe.

(Source: Portfolio123/private software)

A best-fit line is drawn in red on the scatter plot and represents a typical valuation based on next year’s sales growth. As can be seen from the chart, SailPoint is fairly valued relative to its peers based on its forward sales multiple.

Summary And Conclusions

SailPoint is a leader in Identity Governance but revenue growth is noticeably slowing presumably due to competition and “sales execution issues.” The company has brought in a new CRO who is experienced with the SaaS business model and has the capability to grow and scale the company. That being said, I expect it will take 6 too 12 months before any performance increase is realized.

In addition, some revenue has been pulled in from Q4 to Q3, which may result in lower revenue in the coming quarter.

SailPoint does not appear to be urgently pressing for the SaaS business model. Subscription revenue is about 50% of all revenue, and of that most is maintenance revenue. Perhaps the new CRO will have an impact in this area.

The company appears to be reasonably strong with 13% free cash flow margin and close to 20% revenue growth. I also believe that the company is fairly valued based on its forward sales multiple. But the slowing growth, new CRO and revenue pulled forward are enough for me to give this company a neutral rating.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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