IPO Update: Ping Identity Readies $187 Million IPO

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About: Ping Identity (PING)
by: Donovan Jones
Summary

Ping Identity has proposed terms for its U.S. IPO.

The firm provides network identity and security tools for enterprises.

PING is growing smartly, is almost at net breakeven, is producing positive cash flow from operations and the IPO appears reasonably valued.

Quick Take

Ping Identity (PING) has filed to raise to raise $187.5 million in an IPO of its common stock, per an S-1/A registration statement.

The company provides a range of online network security tools for enterprises.

PING is nearing breakeven on a net basis, is producing positive cash flow from operations, will have a very solid balance sheet post-IPO, and management’s expectations on IPO valuation appear reasonable.

Company & Technology

Denver, Colorado-based Ping was founded in 2002 and has developed an Intelligent Identity Platform that analyzes device, network, application and user behavior data to make real-time authentication and security control decisions.

Management is headed by Founder, CEO and Director Andre Durand, who previously founded Jabber (CSCO).

The firm's Intelligent Identity Platform is designed to detect anomalies and automatically apply additional security measures only when necessary, such as two-factor authentication, and can secure all primary use cases, including customer, employee, partner and IoT, while supporting operations across cloud, hybrid and on-premise infrastructures.

Below is a brief overview video of the company:

Source: Ping Identity

The platform’s features comprise of six solutions, namely secure single sign-on [SSO], adaptive multi-factor authentication [MFA], security control for applications and APIs [Access Security], personalized and unified profile directories [Directory], data governance to control access to identity data [Data Governance], as well as AI and machine learning-powered API security [API Intelligence].

Ping's primary products include:

  • PingID

  • PingOne for Enterprise

  • PingOne for Customers

  • PingCloud Private Tenant

  • PingFederate

  • PingAccess

Source: Company website

In 2018, 44% of the company’s subscription revenue from its Intelligent Identity Platform accounted for the customer use case.

The company’s major customers include Accenture (ACN), Allegiant (ALGT), Applied Materials (AMAT), Burberry (OTCPK:BURBY), Chevron (CVX), Cisco (CSCO), eHealth (EHTH), GlaxoSmithKline (GSK), and Hewlett-Packard (HPE), among others.

Investors in Ping Identity have included DFJ, Appian Ventures, W Capital Partners, General Catalyst, Sapphire Ventures, Volition Capital, Triangle Peak Partners, TenEleven Ventures, and Kohlberg Kravis Roberts, among others. Source: Crunchbase

Ping was acquired in June 2016 by private equity firm Vista Equity Partners for a reported $600 million.

Customer Acquisition

Ping markets its solutions through a subscription model via a direct sales force with increasing influence from its channel partners.

The firm’s growth "land and expand" strategy is based around targeting enterprises with a specific solution and use case and then further seeking to expand its footprint with additional solutions, use cases and identities.

Sales and marketing expenses as a percentage of revenue have been increasing, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

To June 30, 2019

33.1%

2018

29.8%

2017

28.7%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend in the prior period, was 0.5x in the most recent six-month period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

To June 30, 2019

0.5

2018

0.6

Source: Company registration statement

Ping’s dollar-based net retention rates were ‘123%, 116%, and 115% at December 31, 2017, 2018, and June 30, 2019, respectively.’

For subscription-based businesses like Ping’s, the dollar-based net retention rate is an important metric. Any figure over 100% shows that the firm has a net ‘negative’ churn, i.e., it is adding revenue for each customer cohort over time and is an indicator of both efficient marketing strategy/spend and customer acceptance of the firm’s service.

Market & Competition

According to a 2019 market research report by Grand View Research, the global cybersecurity market was valued at $116.5 billion in 2018 and is projected to reach $241.1 billion by 2025, growing at a CAGR of 11% between 2019 and 2025.

The main factor driving forecasted market growth is the increasing in number and complexity cybersecurity threats as well as the storage and transmission of confidential information by governments and corporations that has made it increasingly necessary and vital to protect networks, programs, computers, and data from unauthorized access.

The cybersecurity market in the US accounted for $44.6 billion of the total industry in 2018 and is anticipated to grow at a ‘healthy’ CAGR during the period.

Major competitors that provide or are developing identity solutions include:

Source: Sentieo

Financial Performance

Ping’s recent financial results can be summarized as follows:

  • Increasing topline revenue

  • Increasing gross profit but slightly lowered gross margin

  • Reduced operating profit and operating margin

  • Variable cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To June 30, 2019

$112,898,000

13.5%

2018

$201,562,000

16.8%

2017

$172,539,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

To June 30, 2019

$87,327,000

11.5%

2018

$156,951,000

14.8%

2017

$136,704,000

Gross Margin

Period

Gross Margin

To June 30, 2019

77.35%

2018

77.87%

2017

79.23%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To June 30, 2019

$3,660,000

3.2%

2018

$15,886,000

7.9%

2017

$24,280,000

14.1%

Net Income (Loss)

Period

Net Income (Loss)

To June 30, 2019

$(3,123,000)

2018

$(13,446,000)

2017

$18,961,000

Cash Flow From Operations

Period

Cash Flow From Operations

To June 30, 2019

$8,064,000

2018

$22,886,000

2017

$3,423,000

Source: Company registration statement

As of June 30, 2019, the company had $83 million in cash and $340.1 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was $5.5 million.

IPO Details

PING intends to sell 12.5 million shares of common stock at a midpoint price of $15.00 per share for gross proceeds of approximately $187.5 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.3 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.1%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

We expect to use approximately $169.9 million of the net proceeds of this offering (or $196.1 million of the net proceeds of this offering if the underwriters exercise their option to purchase additional shares in full) to repay outstanding borrowings under our Term Loan Facility...

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, BofA Merrill Lynch, RBC Capital Markets, Citigroup, Barclays, Credit Suisse, Deutsche Bank Securities, Wells Fargo Securities, Raymond James, Stifel, William Blair, Mizuho Securities, and Oppenheimer & Co.

Commentary

With the IPO proceeds, Ping will cut its relatively small debt in half, resulting in a very solid balance sheet post-IPO.

However, the company will also continue to be 82% controlled by Vista Equity Partners, a private equity firm.

PE firms are known to load up their portfolio companies with debt, pay themselves a dividend and leave the company in a slow growth mode. So, I’m pleasantly surprised by the lack of that type of situation in this case.

The firm’s financials show a company that has passed through the $200 million annual revenue run rate, but appears to be producing decelerating growth.

The company is operating almost at breakeven and producing positive cash flow from operations, so from that standpoint, the current business trajectory is sustainable.

The market opportunity is quite strong, with online security and identity solutions being markets that are large and expected to grow at impressive growth rates over the foreseeable future, so PING has a very positive industry backdrop to its expansion efforts.

As to valuation, management is asking IPO investors to pay an EV/Revenue of 6.16x, a reasonable price for the shares. While the firm isn’t growing at the rate of a company such as Okta, PING’s valuation expectations are much lower and the firm is closer to breakeven EPS.

Although I tend to shy away from private equity-owned IPOs, the PING IPO appears to be different from the usual heavy debt private equity playbook, so the IPO looks enticing.

Expected IPO Pricing Date: September 18, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.