ForgeRock (NYSE:FORG) Beats Q2 Sales Targets But Full Year Guidance Underwhelms

Full Report / September 21, 2022

Cybersecurity software provider ForgeRock (NYSE: FORG) reported Q2 FY2022 results topping analyst expectations, with revenue up 8.47% year on year to $47.6 million. However, guidance for the next quarter was less impressive, coming in at $50.5 million at the midpoint, being 9.82% below analyst estimates. ForgeRock made a GAAP loss of $22.3 million, down on its loss of $10 million, in the same quarter last year.

ForgeRock (FORG) Q2 FY2022 Highlights:

  • Revenue: $47.6 million vs analyst estimates of $47.1 million (1.05% beat)
  • EPS (non-GAAP): -$0.17 vs analyst estimates of -$0.22
  • Revenue guidance for Q3 2022 is $50.5 million at the midpoint, below analyst estimates of $56 million
  • The company dropped revenue guidance for the full year, from $213.5 million to $209 million at the midpoint, a 2.1% decrease
  • Free cash flow was negative $20.7 million, compared to negative free cash flow of $4.95 million in previous quarter
  • Gross Margin (GAAP): 80.4%, down from 81.9% same quarter last year

Founded in Norway by former Sun Microsystems engineers, ForgeRock (NYSE:FORG) offers software as a service that helps companies secure and manage the identity of their customers and employees.

More companies are digitizing their processes, leading to employees needing access to a growing number of applications, systems and data. As a result, enterprises are challenged with the rapid proliferation of Identities to manage along with increasing and evolving regulatory requirements and growing cyber security threats. On top of that, Enterprise IT environments have become increasingly complex as an increasingly distributed workforce has created more challenges for enterprises to effectively secure employee access to applications and data. Finally, most IT security platforms are built for customers, employees, or devices, but not all three.

ForgeRock’s Identity Management Platform enables enterprises to secure, manage, and govern the identities of everything—consumers, employees and partners, APIs, microservices, devices, and IoT. ForgeRock's platform specializes in addressing complex needs of large enterprises operating in hybrid IT environments, both Cloud and On-Premise.

As software penetrates corporate life, employees are using more apps every day, on more devices, in more locations. This drives the need for identity and access management software that help companies efficiently manage who has access to what, and ensure that access privileges are secure from cyber criminals.

ForgeRock’s competitors can be grouped into (1) legacy providers such as CA Technologies (NASDAQ: AVGO), IBM (NYSE:IBM), and Oracle (NYSE: ORCL), (2) cloud-only providers such as OKTA (NASDAQ: OKTA), and (3) companies that provide a singular functionality across identity, access, and governance such as CyberArk (NASDAQ: CYBR), Ping Identity (NYSE: PING), and SailPoint (NASDAQ: SAIL).

Sales Growth

As you can see below, ForgeRock's revenue growth has been solid over the last year, growing from quarterly revenue of $43.9 million, to $47.6 million.

ForgeRock Total Revenue

ForgeRock's quarterly revenue was only up 8.47% year on year, which might disappoint some shareholders. And the revenue actually decreased by $416 thousand in Q2, compared to $189 thousand increase in Q1 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.

Guidance for the next quarter indicates ForgeRock is expecting revenue to grow 14.1% year on year to $50.5 million, slowing down from the 37.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 27.9% over the next twelve months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. ForgeRock's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 80.4% in Q2.

ForgeRock Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop that is still a great gross margin, that allows companies like ForgeRock to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from ForgeRock's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on ForgeRock’s balance sheet, but we note that with a market capitalization of $1.96 billion and more than $347.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

ForgeRock topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that ForgeRock's revenue guidance for the full year missed analyst's expectations. Overall, this quarter's results could have been better. The company currently trades at $15.3 per share.

Is Now The Time?

ForgeRock may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although ForgeRock is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower, but at least that growth rate is expected to increase in the short term. And while its impressive gross margins are indicative of excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies and its growth is coming at a cost of significant cash burn.

ForgeRock's price to sales ratio based on the next twelve months is 7.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that ForgeRock doesn't trade at a completely unreasonable price point.

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