Ping Identity: Not Addressing Fundamental Problems

Summary

• Ping Identity has been experiencing weakening key performance metrics throughout FY12/2020.
• In spite of the tailwinds from remote working and SaaS adoption, the company only managed to grow its customers by 4% YoY.
• With the gap widening further versus key peer Okta, we are sellers of the shares.

Investment thesis

Ping Identity (NYSE:PING) has been seeing weakening key performance indicators, and management does not appear to have a strategy to address them. The gap is widening versus key peer Okta (OKTA) and with a comparatively lower growth profile we are sellers of the shares.

Our objective

In this piece we want to assess the following:

• The company's level of competitiveness in terms of customer success.
• Outlook for the medium term.

We will take each one in turn.

Low client adds

Accelerated adoption of SaaS and hybrid cloud solutions has been a by-product of the pandemic as remote working became widespread. Consequently, demand for IDaaS (identity-as-a-service) has been a second derivative.

With the shift from license to subscription revenues impacting revenue recognition, Ping Identity's key performance indicator is ARR (annual recurring revenue) growth. With higher hurdles YoY, we see the growth rate reach 15% YoY in Q4 FY12/2020.

Quarterly ARR growth trend

Source: Company, created by author

ARR growth of 15% is not a bad metric in isolation. However, with growth falling YoY for every quarter during FY12/2020, one feels that the market opportunity during the year has not been capitalized.

Although this is not a like-for-like comparison, key competitor Okta discloses current remaining performance obligations (RPO). Current RPO illustrates amounts invoiced to clients for subscriptions for the next 12 months. This is different from ARR with respect to being a tighter number. Current RPO is mostly cash received upfront as deferred revenue, versus what you can expect as annual recurring revenue based on a snapshot (including upsells and churn at the time) which is annualized. When we compare the figures from Q4 FY12/2020, we see Ping Identity's growth is significantly lower than Okta at 42% growth YoY.

Q4 FY12/2020 Ping Identity ARR growth YoY versus Okta's current RPO

Source: Companies, created by author

We look at net retention ratio (NRR), a key indicator of customer success for existing customers. This takes into account revenues less churn (caused by departing or downgrading customers) and revenue expansion from upgrades, cross-sells or upsells. A figure for Q4 FY12/2020 of 108% is still a positive sign that existing customers on the whole are happy - but the trend has been of falling satisfaction overall, particularly during FY12/2020.

Ping Identity NRR trend

Source: Company, created by author

The NRR trend looks even more suspect when compared to Okta. It is quite telling how Okta is seeing growing customer success, particularly as both NRRs were comparatively similar in Q3 FY12/2020.

NRR trend - Ping Identity versus Okta

Source: Companies, created by author

New client wins are a simple indicator of how well the company is marketing and winning business. Perhaps this is the most negative indication for Ping Identity, with only 4% growth in customers YoY. There is something wrong with Ping Identity's go-to-market strategy.

Client numbers and growth YoY

Source: Companies, created by author

From the evidence gathered, we believe Ping Identity is having difficulty in new customer acquisitions, seeing falling existing customer success and is losing out to Okta.

Next we look at the outlook for the business.

Outlook

Ping Identity is guiding for 15% ARR growth at the midpoint for FY12/2021 - initially this looks rather high given the performance seen in FY12/2020. We find the outlook slightly confusing as Ping Identity has been spending on sales and marketing (36.5% of FY12/2020 sales versus Okta's 44%), and therefore has been making material investments here. The limited returns are difficult to explain.

Okta has a current outlook of 30%-35% revenue CAGR for FY2020-2024. When compared against Ping Identity's 15% midpoint ARR forecast, we surmise that Ping is expecting to continue losing market share in what should be a growth industry where competitive players should be seeing similar rates of revenue development.

It is not clear what the fundamental issue is. One slight hint in the analyst call was that existing software clients were not renewing to the SaaS offering as hoped which would explain the falling NRR.

The fact remains that key performance indicators at Ping Identity are low or weakening, particularly in comparison to Okta. As we cannot identify any major fundamental change to Ping Identity's strategy for FY12/2021, we are negative on the outlook.

Valuations

The shares are trading on consensus free cash flow yield of 0.5% for FY2/2021. Although it is positive to see free cash flow being generated, we would rather see cash burn but with NRR and ARR metrics accelerating. This is because it provides greater clarity for growth and eventual free cash flow generation at potentially very high levels in a steady-state business.

Risks

A sudden major pick-up in large enterprise customer wins could change the outlook significantly. Improving conversion of existing software customers to SaaS and lowering churn would also be a plus.

Conclusion

Ping Identity's performance during FY12/2020 has been disappointing, as the pandemic should have acted more as a tailwind to drive growth. Key performance indicators are weakening in our view, and with a lack of major strategic changes from management the outlook does not look very positive. We are sellers of the shares.

Analyst’s 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.