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Can A New Product Freshen SailPoint’s Growth Rate?

Mark McClain, chief executive officer and co-founder of Sailpoint Technologies Holdings Inc., center, smiles during the company’s initial public offering (IPO) on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Nov. 17, 2017. Photographer: Michael Nagle/Bloomberg

© 2017 Bloomberg Finance LP

There’s a decent-sized business for services that protect companies against employees and others whose ties to the company are severed from inadvertently getting access to its computer systems and data.

The business — called Identity Governance — helps companies manage the specific access to a company’s systems by employees, contractors, suppliers, and others. And it’s expected to grow at a 15.2% compound annual rate from $3.8 billion in 2018 to $7.7 billion in 2023, according to MarketsandMarkets.

One of the players in this market is Austin-based SailPoint which went public in November 2017 and has since enjoyed a 41% increase in its share price — yielding a stock market capitalization of $1.6 billion.

Today SailPoint is launching a new product which looks to me as though it could boost the productivity of its customers. But based on my May 24 interview with cofounder and CEO Mark McClain, investors will need to wait for a more concrete estimate of how much the product will add to the company’s top line.

(I have no financial interest in the securities mentioned in this post).

SailPoint’s financial performance has been mixed. Between 2015 and 2018, its revenues grew at a 27% average annual rate to $249 million in 2018 — when it eked out a 1% net profit margin after losing money in the previous three years.

Sadly for investors, SailPoint’s stock peaked out last September at $34.60 a share and has since lost 47% of its value. A big chunk of that decline happened on May 9 after SailPoint supplied disappointing guidance to investors in its first quarter 2019 report.

The report was not all bad though. After all, according to the MotleyFool, its revenue grew 24% to $60.6 million. which was ahead of Wall Street expectations.

The bad news was that investors were expecting SailPoint to predict $65.3 million in revenue for the quarter ending June 2019 — whereas its guidance was far lower — in the range of $59.7 million and $61.2 million.

SailPoint also lowered its forecast for all of 2019 by about 6%. Whereas it had previously predicted revenues between $293 million and $299 million, on May 9 it said it expected revenues for the year in the range of $277 million to $281.5 million.

At the midpoint of the new forecast revenue range for 2019, SailPoint is predicting 12% growth for the year — about half its four year average revenue growth rate — and slower than the industry’s 15.2% growth.

So it does not come as a surprise that SailPoint shares lost 28% of their value the morning it shared these results with investors.

Can SailPoint grow faster? During SailPoint’s May 9 investor conference call, McClain stated that the company’s “sales pipeline has not matured at the rate we initially expected.”

He said that SailPoint’s investigation of the shortfall revealed that its “go-to-market teams” focused more on mid-market than enterprise customers. And to solve the problem, SailPoint will change its mid-market “messaging and targeting” while “sharpening it focus on where the large enterprise market is going.”

In the conference call, CFO Cam McMartin stated that SailPoint is “taking action to address the sales shortfall” — which includes “making investments in [its] product portfolio.”

Today it’s announcing a result of such investments — SailPoint Predictive Identity — which uses big data and machine learning to “autonomously anticipate user access needs, spot and respond to risky behavior, achieve continuous compliance and adapt security policies,” according to Paul Trulove, SailPoint Chief Product Officer.

SailPoint Predictive Identity should take all but the most difficult identity governance problems out of the hands of people. As McClain explained,

When it comes to identity governance — companies experience a lot of churn. SailPoint helps answer three questions: Who has access to what? Who should have access to what? Are they using systems and data as you’d expect — e.g., the Snowden problem? For example, an employee in a company’s tax group would be expected to have a low level of activity for much of the year but hit the database hard before tax season. SailPoint Predictive Identify will deal with more routine things and leave the tough exceptions to people.

SailPoint believes Predictive Identify will provide economic benefits to its customers. “While we are still trying to quantify the benefits, we expect Predictive Identity to boost efficiency and lower the cost of changing a user’s status or identity, raising the security bar for who should have access and who can do what; and running compliance processes,” he said.

Silicon Valley Bank, a SailPoint customer since March 2017, is using Predictive Identity. According to Shawn Lawson, Head of IT Engineering & Operations at Silicon Valley Bank,

We picked SailPoint over Dell, RSA, Oracle, and Okta for many reasons — including our shared vision of an ever-changing IT environment and focus on innovation. We initially used SailPoint’s IdentityIQ platform to govern access to all users, applications and data. We have been early adopters for SailPoint’s platform innovations — such as the Accelerator Pack which allows us to onboard and quickly oversee access to additional applications.

SailPoint is optimistic about customer adoption of Predictive Identity but is not yet ready to estimate how much revenue it will generate. “We promised this in our IPO and see considerable pent up demand. Companies are anxious to test it and see if it helps. We anticipate a high level of interest. We will start talking about the revenue impact in 2020 or much later this year,” concluded McClain.

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