I was intrigued with SailPoint (SAIL) a couple of weeks back and pursued a bit further.
I read latest transcript (SeekingAlpha) and also listened through CEO talk at RBC Capital Market event (https://www.veracast.com/webcasts/rbc/technology2018/2311329…)
Below my summary - I am not expert in this technology or stocks but it is interesting enough for me to take a small position last week.
Why should you care?
Its a software company growing at 40% + CAGR while delivering cash and still have a long runway… and trading at low enough valuation to be highly attractive.
$238M revenue (TTM) - Three revenue sources: License ($100M) + subscription ($97M) + services ($41M): All of them are growing with subscription growing consistently and faster than the rest.
Gross margin 79%, operating cash flow (TTM) at $46M
Trading at a PS of ~11 which makes it
It claims to be a leader in Identity Governance for enterprises. Trying to understand this better, SAIL provides software that allows enterprise to decide and control access to various applications and document etc.
This seems to be the other side of the coin to what OKTA does. To clarify, Okta is focused on users identity and ensuring thats up to date and integrated with many many apps / software.
My simple brain says OKTA and SAIL need to go together to make a complete solution and turns out that they both show case partnership with each other prominently on their website.
Few more interesting tidbits:
- Company was established in 2004… taken over by private equity firm Thoma Bravo in 2014 (these guys specialize in application software business… recently bought MacAfee from Intel)
- IPO in Nov 2017… unlike old school PE firms spinning off IPO, this one doesnt seem to be laden with debt… although it does carry sizable goodwill on the balance sheet, it looks clean… and yes the PE form kept 34% of equity per S1. (not sure how much they sold since then)
- S1 claims revenue CAGR at 36% between 2012 and 2017
- Growth seems to be accelerating to average of 47% in last 4 quarters (see table below)
- CEO claims private equity roots trained them to seek profitable growth
Business model: Company is primarily focused on large enterprises (1000+ employees) including government markets.
CEO takes pride in being able to offer modern governance solutions and integrate that with legacy, on-prem infrastructure… claiming they are still hiring COBOL experts.
They are solving a real painful problem… most of their customers have been using legacy SW from CA and Oracle an SAP… they claim that the customers can not continue with those solutions for governance as security threat is becoming more clear and thats why they are chipping away at old stalwarts
And yes, they also have cloud and subscription business which seems to have grown rapidly to almost equal size of the on prem license business.
Here are some numbers to look at.
Quarter ending 2016-12 2017-03 2017-06 2017-09 TTM Revenue $M 44.3 35.4 39.2 43.5 162.4 Growth Y/Y % Growth Q/Q % -20.1% 10.7% 11.0% GM % 78% 71% 73% 75% 74% Share count (M) 46.3 47.2 47.9 48.2 Operating cash flow $M 6.5 6.8 -0.8 -0.2 12.3 Quarter ending 2017-12 2018-03 2018-06 2018-09 TTM Revenue $M 67.8 49.7 54.5 66.4 238.4 Growth Y/Y % 53% 40% 39% 53% 47% Growth Q/Q % 55.9% -26.7% 9.7% 21.8% GM % 81% 74% 76% 79% 78% Share count (M) 69.2 85.7 86.2 90.3 Operating cash flow $M 16 15.3 11.3 3.7 46.3
Since IPO, its gone up and down from $13 to $33… and trades at around $30 currently.
Last quarter they show un-expected strong growth in licensing as they found federal government contracts closing faster… at the earnings call CEO and CFO were explaining at length on why they didnt anticipate this and why this may be a forward pull-in and not to expect again this quarter (before shutdown was known). Understandably, license revenue will remain lumpy going forward and there may be bigger downside this quarter with the shutdown effect. To me this is one explanation why the stock is trading cheaper than a typical SAAS / cloud stock… the other may be that its license revenue component has been more dominant in the past.
Going forward, i would think both these will change. by end of this year, the federal government revenue should be accelerating due to digital act and such… and more importantly, the subscription revenue should be dominant and start driving the multiples.
If the story does pan out the I see it, valuation should grow at fast pace between mid this year and end of 2020. I would think a double or triple from here is quite reasonable expectation.
Although near term, specially through June quarter, it may be quite bumpy. So I plan to buy my position in steps through next two quarters.
Comment welcome… specially if you see holes in the story, please share.