Good morning and happy Monday! It’s Early Stage week here at TechCrunch, which means that I have some prep work to do. That in mind, we’re briefly going to dig into SailPoint’s huge private equity buyout to divine what the transaction says about the value of technology companies.
The SailPoint sale comes amid a changing exit market for technology companies more broadly. Per exit data collated by CB Insights, while global M&A activity is stable thus far in 2022 compared to last year’s pace, IPO and SPAC exits fell sharply in the first quarter. That means that M&A is more important than ever for tech exits, making the SailPoint deal worth spending time on.
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From a high level, SailPoint’s exit is not a mercy-killing. Before the deal was announced, the company’s stock price was effectively $50 per share, down only modestly from its 52-week high of a little more than $63 per share; compared to many public technology companies, that’s a very limited valuation haircut from peak levels.
Thoma Bravo will pay $65.25 per share in cash for SailPoint, which sells enterprise security products.
To understand why the company is selling, and why Thoma Bravo is buying, we’ll need to peek into the company’s results. That will bring us to the question of how the company is valued and what its price could mean for unicorns and other high-priced startups. This will be fun, and quick! Let’s go!
Is SailPoint a good business?
Yep.
In the fourth quarter, SailPoint generated revenues of $135.6 million, up 31% year over year. For the full year, SailPoint grew 20%. Inside that fourth-quarter revenue number was $78.8 million worth of subscription revenues, up 41% year over year, and SailPoint reported that it closed the calendar year with annual recurring revenue (ARR) of $370.4 million.
The company is also not losing oceans of money as it scales. We tend to expect growth-focused software companies to run deficits, and SailPoint is not an exception. But the company’s Q4 2021 net loss of $9.7 million is modest and manageable for a company of its scale. The company’s adjusted net profit of $9.98 million in the fourth quarter of 2021 further points to the company’s clean growth.
SailPoint has also completed a SaaS transformation, shifting its bookings from 61% perpetual in Q1 2020 to 87% subscription in Q4 2021.
Looking ahead, in the first quarter of 2022, SailPoint expects ARR of $393 million to $395 million and total revenues of around $111 million. However, because the company’s revenues are somewhat seasonal and it lists full-year expected revenues of $517 million at the midpoint of its expectations, we can do some math:
- Q1 2022 anticipated ARR (midpoint) multiple: 17.5x
- 2022 anticipated revenue multiple: 13.3x
There’s some nuance to SailPoint revenues, with the company including some “Perpetual Maintenance and Support” incomes inside its larger ARR figure. Those recurring incomes are an ever-smaller portion of the company’s ARR, however, so just how much of a discount they might have engendered is not clear.
What matters is that a middle-growth SaaS company that is profitable on an adjusted basis is selling for a number that sits around the 15x mark, if you stare between our two above numbers.
Is that good news? Yes and no. Yes, it is a piece of good news for unicorns worth less than $10 billion because they can benchmark against a recent sale — one that could help them defend double-digit multiples of their ARR. But also no, because companies sell for a premium when they exit to private equity; Thoma Bravo didn’t get to pay the market price for the company because it wanted to buy it all at once and thus had to overpay.
The above multiples are therefore likely a bit richer than yet-private tech companies should anticipate for themselves at numerical result parity. Most unicorns looking at the SailPoint deal, however, will have faster growth, but worse profitability. Which means they can’t argue too much that they should get a better multiple as they are in a plus-one, minus-one situation. And that means that the adjusted, unicorn-pertinent value of SailPoint is lower than our numbers above would indicate.
It is good that the deal was done. It is good that the PE shop in question is paying, per Q1 ARR expectations, a number that looks solid. But just how much sunlight from this deal will filter all the way down to unicorns still avoiding the public markets is less clear. So call it heavily adjusted good news, I suppose. The adjusted EBITDA of encouraging updates.
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