Earlier this morning, cybersecurity software developer SailPoint (SAIL) priced its 20.0 million share IPO at $12, above the $9-$11 expected price range, raising $240.0 million in proceeds in the process. The company plans to use the capital from its IPO to fund working capital, operating expenses, capital expenditures, and to repay approximately $90.0 million in debt.
The lead underwriters on the IPO were Morgan Stanley, Citigroup, Jefferies, and RBC Capital Markets. Shares are set to open for trading later this morning on the NYSE.
SailPoint is a provider of enterprise identity governance software. The goal is to empower customers to securely govern the digital identities of employees, contractors, business partners and other users, and manage their constantly changing access rights to enterprise applications and data. Its open identity platform provides companies with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used.
The company offers both on-premises and cloud-based software. Its customers include many of the world's largest companies, including commercial enterprises, educational institutions and governments.
Its current set of offerings consists of (i) IdentityIQ, its on-premises identity governance platform, (ii) IdentityNow, its cloud-based, multi-tenant governance suite, which is delivered as a subscription and (iii) SecurityIQ, its on-premises data access governance platform that secures access to data stored in file servers, collaboration portals, mailboxes and cloud storage systems.
Today, enterprise environments are more open and interconnected with their business partners, contractors, vendors and customers. Well-funded cyber attackers have significantly increased the frequency and sophistication of their attacks. As a result, IT professionals need to manage and secure increasingly complex hybrid IT environments. Attackers frequently target the identity vector as it allows them to leverage user identities to gain access to high-value systems and data while concealing their activity and movements within an organization's IT infrastructure.
More than 80% of hacking-related breaches involve the misuse of identity credentials, leveraging stolen and/or weak passwords. The consequences of a data breach can be extremely damaging, with companies facing significant costs to remediate the breach and repair brand and reputational damage. In addition, governments and regulatory bodies have increased efforts to protect users and their data with a new wave of regulatory and compliance measures. As a result of these trends, enterprises are struggling to efficiently manage and secure their digital identities.
SailPoint believes that its open identity platform is a critical, foundational layer of a modern cyber security strategy that complements traditional perimeter- and endpoint-centric security systems, which on their own are increasingly insufficient to secure companies.
SailPoint generates revenue from licenses, subscriptions and services. License revenue comes from the sale of its on premise software license agreements. Subscription revenue comes from (i) IdentityNow and (ii) IdentityIQ and SecurityIQ maintenance and support agreements, but not licenses. As SAIL generally sells its platform on a per-identity basis, its subscription revenue is determined by the number of identities that the customer is entitled to govern.
In terms of the actual numbers, the first thing we see is that SAIL is not yet profitable. In fact, in its SEC filing, SAIL says it expects its operating expenses will increase significantly as it builds up its sales and marketing efforts, its R&D activities and as it expands its operations generally. So it could be a little while before they are profitable. On the positive side, SAIL is reporting positive adjusted EBITDA, which came in at 7.1% of sales for the first nine months of 2017, up from 4.1% in the prior year period.
Revenue growth is quite strong as 2016 revenue grew 39% to $132.4 million and for the first nine months of 2017, it grew 34% YoY to $118.3 million. And subscription revenue as a percentage of total revenue has been growing nicely from 32% in 2015 to 37% in 2016 to 42% for the first nine months of 2017. This will be a metric investors and analysts will be monitoring.
In terms of margins, gross margin has consistently stayed in the high 60 to low 70% range. You might think that's low for a software company but they do have a chunk of services revenue in there, which likely brings down the overall margin results. Operating margin is in negative territory but it getting close to break even.
Another negative is the high debt level. This is not that unusual as private equity companies have a tendency to load up acquisitions with a decent amount of debt and that seems to be the case here. Currently, LT debt is at $156.4 million vs a negative shareholders equity of $26.6 million. So that is highly levered. Perhaps some of the IPO proceeds will be used to pay that down, but as of now it's really high.