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Ping: A Potential Alternative Investment To Okta

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About: Ping Identity Holding Corp. (PING), Includes: OKTA
by: Bert Hochfeld
Bert Hochfeld
Long/short equity, Growth, event-driven, research analyst
Summary

Ping, a recent IPO, reported a strong quarter recently far exceeding expectations for profitability, cash flow, revenues, and ACV increase.

The company offers customers alternative solutions in the Identity Management space to Okta and the other stack vendors.

The company has specialized in providing identity management solutions for users/customers as opposed to employees and partners.

The company has a definite enterprise focus and that has been a factor in the escalation of revenue growth percentages.

The company, as opposed to Okta, offers solutions for those users with hybrid-cloud architecture and that has resulted in some large competitive wins in recent quarters.

The article was also shared with PRO+ Tech subscribers - find out more about PRO+ here.

Reviewing some of the financials of this new IPO

Okta (OKTA) is one of the poster children in the high growth/high valuation space. These days, identity management is considered to be a necessity and not an option. Okta has grown revenues at rates of more than 50% since it has been public. The results last quarter were far above prior guidance in terms of both revenues and operating margins. Last quarter, the company achieved a 1300 basis point improvement in non-GAAP operating margins. Free cash flow was marginally negative, but RPO (remaining performance obligation) grew by 68% year on year. Needless to say, the upshot of such fantastic performance has been a fantastic valuation which has made it difficult for me to recommend the shares. I find it more or less impossible to recommend the shares at an EV/S of more than 24X - and that is where they now sell. But optimism and hope spring eternal as the saying goes.

But this is not an article about how good Okta is or about how overvalued it might be, but about an alternative investment to Okta that has a strong offering in the identity management space called Ping (PING). Before I go any further - buying PING shares is not a strategy of finding an equivalent to OKTA for less. I will discuss the differences between the two companies and they are significant. And regardless of anything else - I have no expectation that Ping will overhaul Okta in the near future. It did report 45% revenue growth in its first quarter as a public company, although its ARR growth was around 23% - but I would suggest that forecasting a longer-term revenue growth rate of between 25-30% is a more realistic expectation.

The company's strong revenue performance last quarter was partially a function of ASC 606 in which subscription-based term license revenue is recognized up front. Last quarter, the company had a rather significant number of larger wins, relative to its size, that got recognized up front and led to 45% reported revenue growth. The larger customers that it closed had apparently signed 2-year agreements, and that effectively doubles the impact of these deals on reported revenue. The company is forecasting a decent Q4, but nothing at all on the order of the Q4's it has seen the last 2 years. The impact of the large deals signed for longer terms was that revenue from multi-year deals doubled year on year and was about 45% of total revenues. My expectation is that the company's forecasts typically are not adjusted for duration, as that cannot be foretold, and thus are designed to be beaten.

At this point in the company's evolution, it is hard to tell just how much seasonality the company will experience. The company is forecasting 8% sequential growth in reported revenues to almost $67 million for Q4. The current consensus revenue forecast as shown on First Call for 2020 is apparently unrelated to company guidance. It would be well-nigh impossible for the company to have ARR growing at substantial rates and to have a $67 million year ending quarterly revenue and not wind up with something like $300 million + in revenue for the year. In projecting an EV/S valuation, I am using a 12-month forward revenue estimate of $305 million. That puts the current EV/S ratio at less than 5X, quite a bit below average for what I think is the company's growth cohort in the mid-20% range. In fact, the company's EV/S would be average for growth in the mid-teens at this point.

Last year (2018) the company saw sequential growth in the December quarter of no less than 45% and the year earlier, sequential growth in the December quarter was an other-worldly 85%. Historically, the September quarter has been down sequentially compared to the June quarter, so the fact that revenues rose was a significant accomplishment. In a given quarter, reported revenues can be heavily influenced by contract duration and large deal closure and that indeed was the case in one quarter in which year on year revenue growth was not positive. These kinds of quarterly results make trying to project a smooth revenue growth rate a bit difficult. That said, however, the percentage growth trend in much of 2019 has been significantly above the rates of the recent past and the company has had success in its strategy of replacing legacy identity management solutions that have been sold by companies such as Oracle (ORCL), IBM (IBM) and Computer Associates. These tend to be very large transactions with thousands of seats and are thus difficult to forecast - but this company has no material customer concentration.

The company reported Remaining Performance Obligations - in essence, unbilled contractual commitments - of $110 million with 87% of that amount committed as revenue that will be billed over the next 24 months. At this point, the company did not provide an RPO metric for the prior year or the prior quarter. The company's DBE is respectable at 115%, although certainly not outstanding. Ping grows revenues from its installed base as a result of seat expansion and the purchase of additional functionality. It currently offers 6 products, but many users only have installed one or two solutions. Indeed, to a certain extent, Ping is known for providing its customers with the software that manages end-user identities - 44% of its revenues are coming from that single solution, while the balance of its revenues come from securing identities for employees, partners and the IoT. The application detects anomalies, i.e. when users do not enter the right credentials and set up remediation for those instances using two-factor authentication.

Unlike many other recent IT IPO's Ping has been non-GAAP profitable for some time now, and that was the case both for this just reported quarter, and for the first 9 months of the fiscal year. Last quarter the company had a GAAP operating margin of about 5% compared to a loss in the prior period. Its adjusted EBITDA margin was 22%, well above the range that the company has targeted. Stock-based comp was minimal in the latest period but it will almost inevitably increase as time goes on. Excluding amortization, the company reported a gross margin of 84% last quarter which compares to 81% in the year-earlier period. Given the large deal contribution to revenue last quarter, I think the level of gross margin, particularly as it relates to product, is indicative of a very healthy sales environment.

During the course of the conference call, the Ping CFO talked about accelerated investments in opex. The locus of the increased investment is going to be in the sales and marketing expense category. Management said that it expects that the benefits from investment will not be seen until 2021 and beyond. I would find it surprising if new sales hires did not have some influence on growth by the latter half of 2020 - it simply doesn't take that long to train people on Identity Management solutions and sales cycles - even those involving competitive displacements - simply do not take a year.

From time to time investors have been concerned about macro trends and their influence on the growth rate of a specific company. In the last 10 days or so, Cisco (CSCO) maintained that its weak performance and outlook were functions of various macro headwinds - although it is hard to read that statement with a straight face given the 22% growth in security software revenues. In any event, this company went out of its way to suggest that it was not having any demand headwinds from macro issues and it seems relatively apparent that regardless of the macro environment, users. I think it self-evident at this point, that companies with the right products in the right spaces are simply not seeing any growth slowdown because of weaker global growth.

Last quarter, the company's GAAP sales expense ratio was 29%. That is quite atypically low for a company with this kind of growth potential. Indeed, the absolute dollars of sales and marketing spend declined in Q3 from Q2 despite the sharp sequential increase in reported sales and ARR. (the company apparently pays commissions based on ARR and not revenue). The company grew research and development by 18% year over year, although unlike sales and marketing, sequential growth was positive albeit at just 3%. The research and development expense ratio is running at 19% for the year to date, and as management did not talk about the need to accelerate that investment, I expect that it will continue to creep upward. The company reported a rather substantial increase in general and administrative costs as part of the expense of the IPO.

Ping's Story - Does it have raison d'etre

Ping went public in late September at a price of $15/share. It got to ring the bell on the NYSE and traded to $21 on the day of its IPO, but that was about the only cheer to be found for the shares over the last couple of months. It was a tech IPO, and that was enough to drag down the valuation to quite lowly levels. Eventually, the shares reached a nadir of about $15.54 before responding noticeably to a very strong earnings report. That said, this company still retains a rather modest valuation - although again, I urge readers not to compare it to OKTA and that less than comfortable EV/S ratio of 24X. Currently, as mentioned earlier, the EV/S for Ping is less than 5X and to an extent, this company represents both a dusty corner of the IT stock world and suffers from what is apparently growth estimates that have not been updated in the wake of earnings.

I want to start this section by making clear that the identity management space, which has a TAM of $26 billion with a CAGR of 15%, is going to have more than a single winner. One may fairly suggest that Okta is the leader in Cloud IAM (Identity Access Management) which alone is going to have a TAM of $5 billion by 2022. Expecting that Ping will be successful in the space doesn't mean anything negative for Okta - they have coexisted for some time now.

I believe that Ping does have some areas of specialization that differentiate it in whole or in part from other participants in this very competitive space. I mentioned earlier that Ping gets 44% of its revenues from customer use cases, i.e. cases where it is securing the identities of customers who want to buy things and log into their accounts to access information regarding balances. Ping maintains this is a differentiator and it has surely been a growth driver for the company. Presumably, this capability is why Ping is conspicuously overrepresented in large banks and large retailers. More and more individuals have multiple online accounts and the necessity for those accounts to be secured will be a significant mandate for most large enterprises.

In looking at the Gartner Magic Quadrant report about Access Management, which is linked here, Okta is considered to be the absolute leader followed by Microsoft and then Ping. But all 3, along with Oracle and IBM are rated in the leader's quadrant. It is not frequent that users will go to a stack vendor for a holistic Access Management solution for an enterprise, so the current competitive environment really is a 2 horse race. The Forrester Wave has a similar rating - with Okta in first place, although it ranks other companies in different parts of its wave. One thing to note is that market presence, i.e. growth, is an important metric in these evaluations so Okta is almost guaranteed a high spot in the evaluations.

The other - and the key difference to understand - is that while Okta is considered to be the leader in what is called IDaaS, Ping is considered a leader in SaaS Identity Management. The former are cloud solutions and the latter are hybrid cloud solutions. Ping is going to be overrepresented in terms of win rates in situations where users currently have an on-premise solution which will remain in part, but where their future growth will be in the cloud. Ping offers users multiple choices and lots of flexibility and that is why it can be successful, even though Okta gets the most notice in this space and probably will continue to do so.

It is worth noting, I believe that some of the installations that Ping has sold are enormous and provide a huge base for crosssells and upsells. One user has a Ping directory of 160 million users. The company has recently introduced governance products, heretofore one of the advantages of the Okta offering. The latest of Ping's product offerings relate to its ability to secure API's from hackers. This is an adjacency for Ping and one that expands it TAM and ability to leverage its larger customers. Like many modern security solutions, it utilizes AI to monitor traffic. This particular application has been sold to a large financial services which increased its ARR with Ping from $1 million to $1.5 million and was able to deploy the solution in just 5 weeks.

I have linked here to a discussion by an industry consultant that evaluates the differences between the solutions offered by Okta and Ping. I am not about to draw investment conclusions from this analysis. Just as a backdrop to the linked article, it should be noted that the author works for a system integrator who gets paid for consulting on the installation of new AM suites - the more complete the installation, the more his firm will be paid. For the most part, it seems likely that Ping's installation process is a bit simpler and quicker for cloud-based installations that require no customization when compared to what Okta offers.

According to the study, Okta has certain advantages; so too does Ping. One of Ping's advantage is apparently its tight integration with the Microsoft Azure. Okta is said to have significant advanced functionality when it comes to administering policies with regards to access - the evaluation was written before Ping introduced its governance product. Okta has a platform agnostic approach but then so too does Ping. Ping is commended for its tight integration with MSFT Azure but it is worth noting that one of its absolute largest wins this past quarter was with an entertainment/ticketing vendor who was moving their base of applications to AWS (AMZN). Here the differentiating factor was more about Ping's specialization in dealing with customers rather than particular policy enforcement that won the day.

This article is not about trying to figure out which identity management solution to select but to try to develop an investment thesis for a particular company. My view after reading this and other competitive evaluations is that Ping will be able to win often enough to support a growth rate in the mid-to-high 20% range for some years into the future.

Overall given the size of Ping, the size and growth of the market; and the fact that essentially all enterprises will need identity management for compliance and operational purposes, the issues for Ping are unlikely to be those of demand, although the company still has to prove itself when it comes to sales execution. I think the company's accelerating investment in sales and marketing ought to be something that will show positive results by the 2nd half of 2020. While I have absolutely no expectation that Ping is going to be able to catch the skyrocket that is Okta, I think it will win its fair share of competitive engagements and in a market continuing to grow as this one is, that is more than enough.

Overall, Ping has a set of solutions that are well adapted for larger enterprises. The two poster deals that were discussed this past quarter related to very large ARR expansions that were fueled by multi-product wins. I hate to use the word digital transformation - but many of Ping's potential customers are looking to improve digital experiences for their employees and customer. Many of these users have multiple identities and need to access multiple silos of business systems and enterprise users want to create a single customer identity. Without trying to discuss the "how" component, Ping does best where there is a legacy system to replace, where there are legacy siloed business systems and where a user is moving some apps from on-prem to the cloud. It does very well with competition where there are multiple customer identities that have to be managed. I think it is fair to say that the more complex the identity management problem, the better chance Ping has to be successful in a competition.

The company in this initial conference call tried to suggest that Ping's focus had pivoted a bit and that they were now targeting developers and line of business solutions whereas heretofore they had looked at replacing legacy IM solutions. The advantages that Ping seeks to sell are speed in development, time to market in terms of getting a system adopted and working in the field and ease of use. I will probably settle for the latter in terms of my own interaction with Single User Sign-Ons, but that is a different tale entirely.

Finally, and I can't stress this point enough, what Ping can do, that is not really a focus of or a capability of Okta, is that it can integrate all apps across the board including on-premise and cloud. Many users, and that is particularly true in the larger enterprises, really want both. Hybrid is the current sweet spot in the IT world and if Ping is successful in its efforts to improve sales and marketing capability, it will almost surely find receptivity for its hybrid offering. That as much as any other single thing is the raison d'etre for this company in this highly competitive space.

Some thought on relative valuation and forward financial results

Although Ping shares have appreciated a bit since I started to write this article, they remain at exceptionally modest levels of valuation. Projected growth has not been at a level that has excited investors - and I am pretty sure that if the company doesn't exceed expectations, the shares are not likely to show relative alpha. In this environment, most investors are looking for sustained strong growth and frankly, the current estimate for 10% year on year growth in the current quarter is not a number that will be able to provide the shares with any significant positive alpha. The current First Call consensus forecast for 2020 is equally problematic in terms of providing IT investors the kind of growth that they might reasonably anticipate. The fact that all of the covering analysts rate the share a buy and also are forecasting 10% growth next year represents two alternative realities. I doubt that anyone actually believes that Ping will be growing at rates substantially less than the market, all the while hiring salespeople which will decrement profitability in the 2020.

Last quarter the company achieved rather significant operating leverage. I doubt that the model is going to regress next year, although I do imagine the company will accelerate its hiring of sales teams as part of its strategy. It is my guess that margins will wind up at noticeably better rates than implied in management commentary during 2020 - and, of course, in the final quarter of 2019 as well.

The company spoke about one-year renewals turning into two-year renewals. There are a variety of reasons to expect that this trend will continue. Essentially, as deals get larger and more strategic for customers, they tend to make lengthier commitments. There is no reason why this trend is not likely to continue, and under the ASC 606 rules, this is going to accelerate revenue growth. So, while I think the opportunity for headline revenue growth beats are significant, the better metric for investors to look at is ARR growth - 23% achieved last quarter and about the same forecast for this quarter… although the forecast does not seemingly reflect historical Q4 seasonality.

At this point, the company hasn't started to forecast either operating margins or specific EPS goals. The company is forecasting a cash burn of about $11 million, compared to positive free cash flow in Q3 of about $1 million - far better than had been projected at the time of the IPO. Cash flow in a given quarter is often more influenced by balance sheet items than by operating results. Obviously, it is impossible for outsiders to make any kind of realistic guess when it comes to balance sheet items - but I simply think that if Q4 has negative cash flow, it will because revenues and receivables are much higher than have been implied in the guide.

This is a newly minted public company, and as such it has rough edges in terms of presenting a set of expectations with regards to guidance that are consistent and complete. The company is simply not going to be able to move forward without providing guidance for the components of operating income and non-GAAP EPS.

I think in summing up, I will simply state that the company has compiled a reasonable record - although nothing like that of Okta - in terms of growth the last few years. That has left valuation quite modest at less than 5X my projection of forward revenues to enterprise value. The company has been profitable and cash flow positive during most of that period.

I believe that the company has positioned itself to be one of the leaders in the identity management space and that it has developed specialties in some of the more rapidly growing segments of that space. The space is large, it continues to grow rapidly, and at this point, compliance mandates complement digital transformations as demand drivers. I think the company should be able to compile a strong operational performance well above what appears to be the current consensus expectations. That should create a solid case for the shares to create plenty of positive alpha over the coming years.

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.