Sailpoint: Overview

Investment Analysis Clubs Saul’s Investing Discussions
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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

Company:
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.

Summary:
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.

nilvest

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Nilvest,

Thank you for posting this update of SailPoint. I am high on its long term potential, and have been a shareholder since December 2017. It’s currently my 4th largest position at 10.3% of my portfolio, partly because of some shares I added last month.

Aside from the stats that you shared, another reason that I am intrigued by its potential is because they don’t have to build the need for identity governance. It already exists. As SAIL notes on their website: “Identity governance originally emerged as a new category of identity management, driven by the requirements of new regulatory mandates such as the Sarbanes-Oxley Act (SOX) and the Health Insurance Portability and Accountability Act (HIPAA). Designed to improve transparency and manageability, identity governance gave organizations better visibility to identities and access privileges and better controls to detect and prevent inappropriate access.”

So, there’s a built-in need for their solution among many companies across the nation. As an investor I believe SAIL provides a first-class solution. Their partnership with Okta, announced last year, helps give confidence to that notion.

SAIL reports earnings on the 21st. Here’s to hoping for another strong quarter and continued momentum.

-ElonFeeNix

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You had me at “COBOL”

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Hi ElonFeeNix,

thanks for comments. I see you posted on SAIL before, hoping you can help understand it a little better.

They have subscription revenue which is faster growing and just overtaking old license model revenue. The point I am not clear on is if this subscription revenue is entirely cloud based or also has on-prem source.

I guess at a higher level, the question is - does SAIL see substantial success in newer generation infrastructure as well? Not just helping legacy infrastructure.

I know the CEO claims so… but knowing magnitude of success in modern infrastructure would help decide what to expect from this company.

thanks
nilvest

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Hi MoneySlob,

You had me at “COBOL”

I hear you… but lets clarify… COBOL piece is only so that they can plug into COBOL based legacy structure today and sell license at 95%+ gross margin… to few of their largest customers… i read it as a way to enter and grow… their SW is not in COBOL (at-least I don’t think)… nor their world is COBOL dependent…

And this essentially drives another point to me… this CEO is lot less “promotional”… and lot more trying to convey insight and reality.

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BTW - it so happens that Brittlerock has an excellent post on describing why COBOL is still relevant… this precisely why SAIL is willing to support a customer like this and upsell from there… result - absolutely no competition.

https://discussion.fool.com/tamhas-when-you-were-selling-erp-sw-…

On the Raymond James interview, CEO also talks about how if there is any major corp looking to upgrade (and there are way too many who still needs to do it), SAIL always invited on the table… price is almost never an issue… and in rare case they lose, they get back in a few months because the competitor just couldnt deliver…

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why COBOL is still relevant

Not very many years ago I read that there were not only more lines of COBOL in production than any other language, but that there were still more NEW lines of COBOL written each year than any other language, simply based on modifications to that installed base. Unfortunately, attempts to build translators for COBOL to anything else have not been very successful.

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I should have added my SAIL comments that i just posted to your thread.

I am long this stock also. Nice find and good post.

Dreamer

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Also…here is an older 2018 post on SAIL discussed here, to add to context on where stock has been and where it may be going:

https://discussion.fool.com/update-on-sailpoint-technologies-sai…

Dreamer

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Hi Dreamer,
I am glad you like SAIL… it seems the one with opportunity to expand multiple while continue to drive strong growth…
their federal / large customer biz is a bit lumpy, but over a year or so, this one should be a winner.

I agree, they could manage this reporting scheduling better. everything they said in the PR today was already known… however, things happen… fingers crossed

nilvest
(have 1/2 position size in SAIL and intend to build further through this year as long as results move in right direction)

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Just something that I don’t think anyone has brought up that I think is very relevant is that SAIL’s glassdoor reviews are outstanding. 100% CEO Approval and 95% would recommend to a friend. It doesn’t get much better than that.

https://www.glassdoor.com/Reviews/SailPoint-Technologies-Rev…

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I’d like to know if there’s been any new thoughts on Sailpoint. It seems like when conversation started here (Feb 2018), Sailpoint and Okta were both growing at a pretty good rate and their stocks were running up at about the same rate.
https://discussion.fool.com/why-i-bought-sailpoint-technologies-…

It also appears that both bear and mauser may have purchased some before or after the May 2018 lockup expiration.
https://discussion.fool.com/update-on-sailpoint-technologies-sai…

It’s interesting to see that both Sailpoint and Okta were on a very similar run from the day of Sailpoint’s IPO until November 12th of last year, but since then Okta has more than doubled in value while Sailpoint is relatively flat.
https://tinyurl.com/yxn9ecov
Note: Click on the 2y link above the chart to see how strikingly similar their runs were until November of last year.

Thank you in advance for any new insights you can provide on Sailpoint!

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The key to SailPoint is that their Subscription revenue is becoming a much larger portion of total revenue. As this continues, their revenue growth rate will become more steady at a rate probably north of 40%, which should cause the shares to appreciate since a higher PS ratio will be justified.

Here’s Subscription revenue as a % of Total revenue:

2017: 38%
2018: 42%
Mar 2019 Q: 51%

Here’s more from a fellow board member on the March quarter results: https://discussion.fool.com/sail-results-34150684.aspx

I think this one could double in the next year.

Bear

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Bear,
I was initially in based on Sub growth y/y.
They had done 4 straight Q’s of 50%+ growth in Subscription, prior to the last ER.

To your point, it was increasing as a % of total revenue, too.

However, the last ER showed the Sub % y/y for the Q dropped to 42%, breaking the 50% streak.

42% is still great, and not trying to quibble, but unclear if that is a downward trend or just the new normal as their Sub rev base gets bigger.

I initially bought prior to the ER and then sold prior figuring I could just buy in if the thesis was holding true. As the Sub % dipped, I decided to hold off for now.

Still on the radar though. I noticed CBLK just popped big after rebounding off a previous bad/down ER, so I actually thought of SAIL as a result, thinking maybe they are positioned under the radar a bit.

Dreamer

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However, the last ER showed the Sub % y/y for the Q dropped to 42%, breaking the 50% streak.

42% is still great, and not trying to quibble, but unclear if that is a downward trend or just the new normal as their Sub rev base gets bigger.

I initially bought prior to the ER and then sold prior figuring I could just buy in if the thesis was holding true. As the Sub % dipped, I decided to hold off for now.

Perfectly reasonable. They addressed this in the first couple questions in the Q&A on the Q4 and full year conference call (I said March Q before, but that was a mistake – that one hasn’t happened yet! That will be next week), so you might wanna check those out. Had to do with 606.

Bear

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I remember Dreamer bringing up SAIL just before last earnings. Then it came out and at least from this one report I don’t find them very attractive.

Financial Highlights for Fourth Quarter 2018:

Revenue: Total revenue was $80.6 million, a 19% increase over Q4 2017. License revenue was $40.6 million, an 11% increase over Q4 2017. Subscription revenue was $29.5 million, a 39% increase over Q4 2017. Services and other revenue was $10.5 million, a 7% increase over Q4 2017.

That was Q4 now compare to Q3.

Financial Highlights for Third Quarter 2018:

Revenue: Total revenue was $66.4 million, a 52% increase over Q3 2017. License revenue was $28.1 million, a 66% increase over Q3 2017. Subscription revenue was $28.5 million, a 54% increase over Q3 2017. Services and other revenue was $9.8 million, a 22% increase over Q3 2017.

Total from 52%-19%. License from 66%-11%. Subscription from 54%-39%. Services from 22%-7%.

Did they just phone that quarter in? I would be really concerned about that unless there’s something else to the story that caused them to hit the brakes like that. Not sure accounting can fully account for that.

Darth

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Thats correct Darth… I recall this was the reason for me to exit as well.

I figured license revenue was going to be lumpy and also had the variability of federal government buying cycle… and on a TTM basis, their subscription revenue is now about same as license revenue… which means if subscription revenue shows higher growth, that will pull the top line going forward.

But when I saw subscription revenue growth slowing substantially in Dec Q. I decided to step on the sidelines.

To be fair, I think they still have large TAM potential in license revenue growth as well. I currently model growth in 30s% this year and slowing to 20s% after that… which may be a bit too conservative but lets see how March Q turns out.

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