News that private equity group Thoma Bravo is buying Ping Identity for $2.8 billion in cash broke earlier today, marking the beginning of the end of Ping’s life as a public company (at least for now).
Thoma Bravo will pay $28.50 per share in an all-cash transaction, a price that TechCrunch noted is a roughly 63% premium over the company’s pre-announcement share price. News of the sale emerged after Ping reported earnings that missed both profit and revenue estimates in the second quarter.
Given that M&A activity has been muted compared to 2021’s torrid pace, the deal is attracting attention. To better understand the transaction, we’re going to dive into Ping’s numbers to see what its sale price can tell us about the value of software companies today, and then riff on the identity market itself, part of the technology space with several public players and a recent history of falling values.
What $2.8B buys you today
Given that Ping announced its earnings at the same time as its sale to Thoma Bravo, we can directly compare its recent results with its newly disclosed sale price.
In the second quarter, Ping generated revenues of $72.0 million, down from $78.9 million in the year-ago quarter. Seeing a technology company — especially a software firm — shrink is a bit surprising. So what’s going on?
Ping is moving away from its traditional subscription software model to a hosted SaaS service, a transition that tends to take time and can lead to near-term revenue growth issues.
But there was much to like in Ping’s report regardless: The company’s hosted service (PingOne) crossed the $100 million annual recurring revenue (ARR) threshold, up 69% on a year-over-year basis, while its total (SaaS and non-hosted) ARR expanded to $341 million, up 22%.
And Ping’s dollar-based net retention rate of 114% in Q2 was steady from Q1 results, implying that the company’s longer-term growth profile appears durable as we look to the future.
But not all is well at Ping, and a year-over-year revenue decline was just one of its issues. The company is losing more money today, both in Q2 2022 and the first half of this year, when compared to its year-ago comps. Even more, Ping’s operating cash flow has flipped from positivity in the year-ago quarter ($44.0 million) to a deficit in the second quarter (-$3.7 million).
The transition to a more SaaS-focused model of sales can delight investors in time, but for Ping, the ability to execute that particular evolution away from the public markets could yield some benefits. If it can finish its general transformation toward hosted software instead of mere subscriptions and then go public again, it could skip having to endure its ugly-duckling phase while also reporting quarterly results to increasingly conservative investors. And — provided that Ping can continue to expand its SaaS ARR faster than its aggregate ARR — Thoma Bravo can then lap up a win when it refloats Ping with a different, more attractive revenue base.
How likely is that? Ping’s Q1 2022 SaaS revenue was $20.2 million (up 68% year over year). In the second quarter, the company noted that its SaaS ARR was over the $100 million mark, or $25 million or more in the second quarter. Adding $5 million per quarter — more or less — it would take around eight or nine quarters for SaaS ARR to consume all of Ping’s second-quarter revenue base.
Naturally, that estimate is loose – some non-SaaS Ping customers will not move over to a hosted solution, and so we care more about the day when Ping’s ARR is mostly SaaS. That could occur in the back half of 2023, if our math is correct. For Thoma Bravo, that timeline is likely appealing.
So is $2.8 billion for ARR of $341.0 million a fair price? The company is selling for an ARR multiple — loosely, as we tend to use ARR only in a SaaS context — of around 8.2x. That’s near the average revenue multiple for cloud companies that Bessemer notes in its cloud index.
By dint of not yet being a majority-SaaS business, we might assume that Ping would actually sell at a noticeable discount to market averages. But in any takeover, a premium to its prior price must be paid. Thus, Thoma Bravo is perhaps overpaying modestly for the company based on its most recent financial results.
Why might that make sense? All the financial group has to presume is that Ping’s revenue transformation continues and that tech valuations recover even modestly in the future. Such a combination could turn the Ping deal into a sizable profit source in time.
So the premium paid for Ping may look steep, but there is some logic to it. Frankly, instead of wondering why the PE shop is paying $2.8 billion for the company, it’s almost more surprising that Ping Identity had seen so much of its value erode. Sure, SaaS transitions aren’t easy, but they are also not novel. We’ve seen this dance before.
How an early subscription bet helped Ping
Ping Identity dates back to 2002, when the notion of the cloud didn’t even really exist. AWS didn’t launch its first product until 2006, while the idea of securing the enterprise through identity has been around for a long time.
Ping started in an on-prem enterprise world. It raised over $128 million, and by 2016, when it was sold for the first time to Vista Equity Partners, it had made the successful transition from licensing to subscriptions, a good call that early on.
In a conversation with TechCrunch in October 2015, the company told us that it was already pushing $100 million in revenue. That’s a good benchmark today, never mind seven years ago. It seemed to be poised to IPO, looking at 2017 as a target at that point in time.
But something changed along the way, and the company decided to sell instead, giving founder and CEO Andre Durand a way to pay back longtime, loyal employees and his investors — and a path forward.
Vista helped grow the company with multiple acquisitions, including UnboundID and Elastic Beam, and eventually took it public in August 2019.
The question now is whether Durand stays on board. Does he have it in him after almost two decades at the helm to lead the company through another major change? His new PE overlord may want to keep him on to maintain the company’s path toward majority-SaaS revenues. Or it might ax him to give it more latitude to strip costs from the business. (TechCrunch reached out to Durand and will update this if we can get in touch.)
Ping’s journey has not been linear, and today’s news is just one more turn in its path. If and when the company does come back to the public market, and what it looks like when it does, will provide an interesting business case of a smaller player in a growing software category showing us how many winners a particular niche can hold, especially one that may see more competition over time from tech’s largest players.