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Sailpoint's (NYSE:SAIL) Q2 Sales Top Estimates But Stock Drops


Full Report / August 09, 2021
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Identity governance software company SailPoint (NYSE:SAIL) reported strong growth in the Q2 FY2021 earnings announcement, with revenue up 10.8% year on year to $102.4 million. Sailpoint made a GAAP loss of $16.7 million, down on its profit of $3.04 million, in the same quarter last year.

Sailpoint (SAIL) Q2 FY2021 Highlights:

  • Revenue: $102.4 million vs analyst estimates of $99.2 million (3.22% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.06 ($0.06 beat)
  • Revenue guidance for Q3 2021 is $103 million at the midpoint, below analyst estimates of $103.9 million
  • The company reconfirmed revenue guidance for the full year, at $410 million at the midpoint
  • Free cash flow was negative -$13.62 million, compared to negative free cash flow of -$12.99 million in previous quarter
  • Gross Margin (GAAP): 73%, in line with previous quarter
  • Company’s Chief Financial Officer tendered his resignation

Founded in 2005 by Kevin Cunningham and Mark McClain, SailPoint (NYSE:SAIL) provides software for organizations to manage the digital identity of employees, customers, and partners.

More companies are digitizing their processes, leading to employees needing access to a growing number of applications, systems and data. Manually tracking who has access to what takes a lot of time, work and is prone to errors, resulting in new hires having to wait prolonged time to get access to the tools they need and employees who quit the company or changed roles being left with access to sensitive data. This can lead to productivity loss, risk of cyber security incidents, information theft and compliance problems.

To solve these problems, SailPoint provides a modern software platform to manage user profiles, passwords, and also grant and monitor access to business apps. SailPoint provides companies with a central dashboard where they have instant visibility into user permissions across the organization and can easily adjust access to applications as users change roles, take on new projects or leave the organization. The software also automatically manages approval processes and compliance enforcement, making sure that only employees passing required criteria, whether it is training or management permission are granted access. Using artificial intelligence based technology SailPoint also helps IT detect suspicious and risky activities, such as fake user accounts, irregular authentication, and weak security policies.

For example, whenever a company recruits a new employee, SailPoint ensures the individual is given all the necessary access on the minute they start, but only to the applications and data they need, nothing more. As the employee moves to a new department, SailPoint monitors and updates the apps and devices that can be accessed. This means a sales representative isn’t able to access apps and data in the legal department. Similarly, when an employee leaves an organization, SailPoint automatically revokes access to any asset owned by their former employer without the need to send IT helpdesk requests. This ensures that adequate security measures are maintained at all times.

As companies move more data and applications into the cloud and more users are granted access to these resources, it brings more business efficiencies but also opens them to more vulnerabilities. Managing user access through a centralized cloud-based solution is a way to reduce the risks and the demand for identity security platforms has been growing.

Competitors in the identity management space include Okta (NASDAQ:OKTA), Ping Identity (NYSE:PING) and Computer Associates (owned by Broadcom (NASDAQ:AVGO)).

Sales Growth

As you can see below, Sailpoint's revenue growth has been decent over the last year, growing from quarterly revenue of $92.4 million, to $102.4 million.

Sailpoint Total Revenue

This quarter, Sailpoint's quarterly revenue was once again up 10.8% year on year. We can see that the company increased revenue by $11.7 million quarter on quarter. That's a solid improvement on the $12.58 million decrease in Q1 2021, so shareholders should appreciate the acceleration of growth.

Analysts covering the company are expecting the revenues to grow 12.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Profitability

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. Sailpoint's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 73% in Q2.

Sailpoint Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Key Takeaways from Sailpoint's Q2 Results

With market capitalisation of $4.56 billion Sailpoint is among smaller companies, but its more than $407.6 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

It was good to see Sailpoint outperform Wall St’s revenue expectations this quarter. That feature of these results stood out as a positive. On the other hand, revenue growth is overall a bit slower these days and the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was a mixed quarter, but the company is still staying more or less on target. The company is down 5.11% on the results and currently trades at $47 per share.

Is Now The Time?

When considering Sailpoint, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Sailpoint we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its strong gross margins suggest it can operate profitably and sustainably, unfortunately its customer acquisition costs are higher than we like to see.

Sailpoint's price to sales ratio based on the next twelve months is 10.4, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.