What is your rating of the company Sailpoint

Background to the crash of the SailPoint share

We had a nasty surprise as shareholders of SailPoint Technologies this week.

After the presentation of good figures for the first quarter of 2019 and a simultaneous sales and profit warning for the rest of the year, the price fell by 30 percent.

In March 2019, we presented the Sailpoint share as a cyber security company from the DLF portfolio.

The stock has now fallen to a 12-month low and is back below $ 20 after trading at nearly $ 30 a few days ago.

Is this now a buying opportunity or the end of the growth story?

SailPoint Crash - The Numbers for Q1

First of all, a brief overview of the figures presented for the first quarter of 2019:

  • Revenue grew 24 percent to $ 60.6 million
  • Subscription revenue grew much faster, 41 percent to $ 31.8 million
  • Operating cash flow grew 12 percent to $ 17.2 million
  • Earnings per share were $ -0.10, down from $ -0.03 in the previous year

Guidance for 2019

The drop in the share price was not triggered by these decent figures for Q1, but by the significant reduction in sales and profit expectations for the full year 2019:

  • Revenue is now expected to be $ 279 million, up from $ 296 million previously.
  • Operating profit (non-GAAP) is expected to be $ 18 million instead of the previously targeted $ 30 million.

As a reminder, in 2018 SailPoint's revenue grew 34 percent to $ 249 million.

While the previous guidance for 2019 provided growth of 19 percent, management is now only assuming 12 percent.

That got me on the wrong foot too.

So far I had assumed that SailPoint would act rather too conservatively in its officially communicated business expectations, as in the past.

Together with other market observers, I had expected growth of more than 20 percent. I was probably wrong.

According to the company, the problem lies primarily in the current development in the distribution of enterprise software licenses to major customers.

In this customer segment, SailPoint sells licenses and maintenance contracts in the classic way and not SaaS solutions.

While license sales of $ 115 million were previously planned for 2019, they are now only forecasting $ 100 million.

Instead of a growth of 10 percent compared to the previous year, that would be a decrease of around 5 percent compared to 2018.

The much more predictable subscription revenue is much less affected by the current distribution problem.

This flow of sales will continue to grow strongly in the coming quarters and will already account for around 50 percent of sales in 2019.

However, classic software maintenance sales for the IdentityIQ software are also hidden behind these "subscriptions".

And not just SaaS subscriptions from the IdentityNow products.

The background to the sales problems

It is of course difficult to judge from the outside whether there is more to these problems than just the specified "Sales Execution Issues".

Management errors in sales control and the go-to-market strategy are reported.

Specifically, the business with major customers in sales, which has been going very well so far, has been neglected somewhat. In favor of a new focus on medium-sized customers.

In this segment, however, they were apparently less successful than hoped, at least in the short term.

In response to these developments, there are now changes in sales management:

  • CRO (Chief Revenue Officer) Howard Greenfield is leaving SailPoint. A new CRO is being sought.
  • Long-time CFO (Chief Financial Officer) Cam McMartin is promoted to COO (Chief Operating Officer).
  • The CFO role will be taken over by Jason Ream, who will be newly hired.

For the long-term company development, it is particularly important whether the competitive position of SailPoint as a recognized market leader in its segment of "Identity Governance" is threatened by a competitor.

Equally negative would be if this niche market turns out to be less attractive overall than previously expected.

So far there are no signs of this.

This week, the management once again expressly confirmed that the "win rate" in direct competition remains high and that the demand for migration projects away from legacy security solutions in the enterprise environment is still strong.

SailPoint Crash - My View of Things

For the first time since going public, the cyber security company has found itself in difficult waters.

This is a new experience for the growth spoiled management team around founder and CEO Mark McClain.

It is particularly problematic that the separation from the CRO had to be announced at short notice without being able to announce a corresponding replacement for this important role.

That creates uncertainty, and the stock market hates nothing more than uncertainty.

The management must of course be asked very critically why its own guidance for 2019 had to be revised significantly only 9 weeks after publication.

That actually speaks in favor of too lax pipeline management.

The CRO must primarily take responsibility for this - the appropriate consequences have already been drawn.

The valuation of the share

After falling below $ 20, SailPoint is now valued at an enterprise value of $ 1.7 billion.

This corresponds to an EV / sales ratio of 6.

If the growth in the current year actually falls from 34 percent to only 12 percent, that would be a big disappointment for me.

This shows once again why the software industry is rapidly converting its business models to SaaS wherever possible.

Because the visibility of business development in classic license sales is and remains very limited, especially in the enterprise environment with major customers.

I can well imagine that SailPoint was extremely cautious in its guidance so as not to risk another disappointment and not to put a new CRO under too much pressure from the very beginning.

Because a further failure to plan would destroy the credibility of the management once and for all.

However, in such a negative scenario, SailPoint would then become an attractive takeover target sooner than expected.

Due to the high gross margin of more than 75 percent, I am convinced that the price for taking over this 300 million dollar cyber security software would be above the current enterprise value.

And SailPoint would fit very well into the portfolio of various legacy competitors.

So I'm optimistic that SailPoint shares now have a very good risk-reward profile at prices below $ 20.

But is SailPoint really a digital leader as we previously suspected?

Is this a dent in growth or is there a structural problem?

We will continue to monitor the currently confusing situation around SailPoint in the coming weeks and decide in due course how to deal with our manageable position in the DLF portfolio.

Because we want the fund to continue to invest exclusively in digital leaders and not specifically in turn-around stories or takeover candidates.

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