SailPoint: The Price Of Innovation (NYSE:SAIL)

Source: Datastore

SailPoint’s (SAIL) transition to a subscription-based business model has made it tough to calibrate its growth factor. SailPoint is one of the few software companies that innovated fast enough before COVID-19 hit. As a result, it will enjoy a robust sales pipeline, which will eventually be accretive to its growth factor. SailPoint has also expanded the breadth of its capabilities beyond delivering compliance solutions. It now addresses more business efficiency and analytics related issues. This will help improve its average revenue per customer and its profitability factor. Adding its attractive balance sheet, SailPoint is a tough player to overlook.

Demand (Bullish)

SaaS-Cloud-Legacy Displacement-Analytics-Compliance

Based on data from S&P Global Market Intelligence, we believe we have penetrated approximately 2% of over 65,000 companies in the countries where we have customers today.

SailPoint is a leading provider of identity governance and administration (NYSE:IGA) software solutions. Its products are geared to address the need for enterprises to stay compliant with growing data regulations. Its offerings also extend to access security and the optimization of security operations (SecOps). Legacy vendors have been slow to innovate as enterprises demand IGA solutions to solve more business problems. As a result, SailPoint’s growth opportunity remains valid and sustainable in an IGA market, which is regarded as mature and competitive.

These favorable growth tailwinds drove 25% revenue growth last quarter. A mix of sales execution issues and the mix shift to a SaaS business model has impacted revenue growth in the past. Going forward, SailPoint didn’t provide forward guidance as the peak of the COVID-19 worries impacted optimism during the last earnings season. With the broad market rotation to cloud stocks, SailPoint’s growth factor will continue to enjoy favorable momentum. Near term, growth metrics might be impacted by a weak close rate from weak economies. Regardless, the sales pipeline remains strong as identity governance solutions are increasingly important in securing the future of work.

Business/Financials (Neutral)

Platform-Land & Expand-Margins-FCF-Liquidity

SailPoint made two strategic acquisitions before COVID-19 disrupted the global economy. These acquisitions will ensure it benefits from long term growth trends in the cloud space.

Orkus was acquired to improve its access security capabilities on cloud platforms like GCP, Azure, and AWS. The acquisition of OverwatchID adds to Orkus’ access control capabilities in cloud-based environments. These acquisitions come with AI and ML capabilities to accelerate decision making when applying security policies in cloud environments. The integration of these solutions was fast-tracked when COVID-19 happened. This resulted in the release of SailPoint cloud access and workload privilege management services.

The demand for these cloud security solutions will impact gross margin due to cloud hosting costs. This is due to SailPoint’s focus on growing its SaaS offerings. Regardless, SailPoint’s gross margin is attractive at 79%. SailPoint’s operating margin benefitted from less travel and marketing spend last quarter. Like most software companies, stock-based compensation masks the true cash expense in the current operating period. Though adding stock-based compensation to operating cash flow makes the use of GAAP metrics acceptable on the income statement. In an environment of favorable multiple expansion in which products have been validated by the market to drive growth for enterprises, the focus on GAAP metrics might mask the true margins of a SaaS software business. SailPoint’s balance sheet is also attractive. Its cash position and positive working capital depict its ability to meet its near term obligations. Its focus on research and innovation might impact liquidity in the near term. Though this helps its income statement as it can utilize NOLs and tax credits.

Macro/Competitors (Bullish)

Integrations-Acquisitions-Partnerships-International Expansion

The slow pace of innovation by legacy vendors opened up a window of opportunity for SailPoint to keep acquiring market share. SailPoint took advantage of this opportunity and acted fast. It partnered with all the right IAM, privileged access, and cloud vendors to improve the reach of its solutions. It also doubled down on developing its predictive identity technology to improve its security operations capabilities. This helps it drive down the total cost of ownership of its solutions while justifying its premium pricing. If we back out the sales execution issues in the past, SailPoint’s leadership in the IGA space is justified. The sale execution issues have been addressed with changes at the management level. This includes the strategic focus around repositioning the way the brand is perceived. Now, SailPoint’s solutions are well detailed on its website, and account-level sales strategies have been optimized.

Companies facing heavier pressure both short- and long-term are SailPoint, Fortinet (NASDAQ:FTNT) and Palo Alto Networks (NYSE:PANW)… Gartner notes a cloud shift comes alongside the convergence of Identity Management, Identity Governance and Privilege Access Management, moves Needham believes favors companies like Okta and poses a challenge to CyberArk (NASDAQ:CYBR) and SailPoint.

Investors/Valuation (Neutral)

Economies Of Scale-Switching Cost-Growth-FCF-Momentum-Analysts

SailPoint’s valuation is a function of the growth prospect of its market positioning strategy. The breadth of its solutions and pace of innovation will ensure its leadership position is sustained. Cash flow growth might be a concern if revenue collection becomes a challenge due to the level of competition in the IGA space. IAM players are developing capabilities in identity governance to grow the breadth of their offerings. Okta’s (OKTA) lifecycle management solution is a perfect case study. SailPoint is ready to defend its niche strategy, and it recently improved its lifecycle management offerings to extend to non-employees. The improvements are part of its workforce continuity updates that emphasizes its adaptability to the future of work. It also added new connectors for Slack (WORK) and Zoom (ZM). To further improve on the value creation capabilities of its solutions, SailPoint will benefit from the patents it was granted for its predictive identity platform. These patents add to the earlier patent granted for its graph-based approach to peer group analysis

The most efficient way of using analytics for identity risk mitigation is by leveraging peer-group analysis, anomaly detection or even simple account monitoring to identify the typical blind spots of IGA environments: orphan, dormant accounts, or accounts with excessive and unused entitlements. By using cleanup capabilities in the initial stage of deployment (and not later), IAM leaders will show identity and access risk mitigation benefits earlier in the IGA deployment, demonstrating more rapid ROI.

This will ensure SailPoint’s strategy of rapid innovation delivers more growth opportunities. This will also benefit its cash flow trajectory because existing customers will buy more modules.

Given the recent multiple expansion due to favorable macro momentum, SailPoint is now fairly valued relative to its competitors. It is currently trading above analysts’ average price target. Near term growth metrics are not as important as the potential capabilities of its evolving innovation pace in the cloud space. Therefore, SailPoint is expected to continue to enjoy the benefit of doubt heading into the back half of the year.

Risks

Demand-side risk factors should be monitored. SailPoint is innovating to grow its near term monetizable market. Its extended capabilities in file analysis and its growing SaaS business are ways to convince enterprises to adopt more IGA solutions. Its financials are inline, and the path to profitability will benefit from its improving operating margins and positive operating cash flow. SailPoint’s balance sheet is also attractive in light of the recent debt issued to shore up its liquidity.

Macro risk factors have been tempered by stimulus checks, and the rotation to tech stocks from underperforming sectors means SailPoint will continue to enjoy strong valuation momentum in the near term. This means the focus will be on how near term revenue collection and the transition to a subscription business model impact valuation and volatility.

Conclusion (NYSEARCA:HOLD)

The lack of revenue growth guidance doesn’t help sentiments heading into earnings. The long term growth story is compelling. The short term momentum is susceptible to cash collection weaknesses in light of the soft guidance about deal close rates in April. Regardless, SailPoint’s innovation story is compelling to preserve its momentum in the long term.

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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