If you headed to your local DeLorean dealer, set the controls for 1971, fully fifty years ago, arrived, and said to the guys with bad hair and worse trousers crowded around the IBM 3270 terminal, hey how’s it going, they would most likely say, “well, we’re having a heckuva time trying to log on to the university mainframe. Can’t remember the password, you see. It was something to do with fondue, but we can’t quite recall what it was, and we have only two attempts left before it times out for an hour”. Inspired by your futuristic appearance - insofar as your trousers actually fit - they would conclude that since computing by 2021 surely would be mostly conducted entirely in the wetware, in some kind of mind-machine-meld, they might say to you, how does logon work in the 2020s, friend?
And you would say, er, well, we still have passwords. We do have email so re-setting passwords is easier than for you guys, but then again, everybody has not less than 50 passwords and nobody can remember them all, unless you use “password” as your password and then you find that you have been buying sneakers on Amazon and having them Prime’d all the way to an address you have never heard of in a country that you once visited. So in short, nothing has changed. Except now you can import sneakers more easily.
And the group would just blink at you and say, no, really, we had a guy here from like 1999 once, same kind of car as you, it was all looking so promising. What happened? And you would say, well, the future is a long time coming. Oh and hey - that password - was it ‘Lactose_Intolerance_1971’ you were thinking of?
The thing with investing in technology is that the product cycles tend to be waaayyyy longer than you think. As you know we are old folks here at Cestrian Towers (this newsletter is penned in greenscreen in fact) and we think back to those futuristic days of the late 1990s, specifically when Google came out and we sat there thinking huh, what can this do that Metacrawler can’t? At around the same time some of our number we were heard to muse, “but I have a digital camera already, why do I need one in my cellphone?”
When you think a product category is done in tech? It’s not done. Think about it - really think about it - what’s done? Word processing maybe, but that’s a function of monopoly power and network effects, it’s not product nirvana. Spreadsheets? Same story. Absolutely everything else remains in play. One theme we’re turning over in our idle minds is, one of the reasons software is still growing so quickly is that it is still awful. We mean really basic. For instance in order to run our very simple business we use about 20-30 different code packages and they don’t talk to each other very well, the amount of manual work required is still mind boggling, and the absence of any form of meaningful machine intelligence in this apparent age of machine intelligence is also remarkable.
So, back to logon. Logon processes are supposed to keep systems secure but are in fact the bane of security professionals’ lives. No, wait. Users are the bane of their lives. Followed by anything that has any proximity to a user. Computers would be sooo much more secure if it wasn’t for those pesky users. We remain in the dark ages when it comes to solving for logon. Cellphones are a little further ahead than computers, what with built-in facial recognition, second factor authentication via app or text, etc, but they are still far from perfect. So a company that provides a little piece of the puzzle in solving for this yawning gap in security architecture? This, we like.
ForgeRock is expected to start trading on the NYSE soon, as $FORG. You can find the
company’s S-1 here. This identity management software vendor says its vision is “a world where you never login again”. The notion being that you trust your ID to someone like FORG and that everywhere you go, FORG - or $AAPL or $OKTA or someone like that - is sat on your shoulder doing the ID bit when you want to open an application, go through a door, whatever. Now this makes sense of course. Writing passwords down and keeping them in the top draw has long been a threat vector that drives cybersecurity professionals nuts. So if there was a way to abstract identity away from the user, every sysop out there would love it. As would every CFO because less manual systems means less sysops means …. more lovely stock buybacks!
There are other players already active and growing in the identity management sector of course. Okta ($OKTA) is probably the best know, SailPoint Technologies ($SAIL) also
plays in the space, and Ping Identity ($PING) is the grab-bag of choice if you want to know where legacy authentication companies go to when they become unable to look after themselves anymore. But back to our point about product cycles. If we had to guess we would say that it will still be decades before identity management is anything like solved. And that means there is very likely room for a number of new-to-the-public-market stocks yet, FORG amongst them.
FORG has solid financials - FY12/20 revenue of $128m, up 23% on FY12/19; H1 FY12/21 revenue of $85m, up 53% on the same period in 2020 - so growth just accelerated which is, of course, a good thing. Gross margins are good at 83% for FY12/20 and the same for the first half of FY12/21. EBITDA losses were $25m in FY12/20 and $5m in the first half of FY12/21, meaning narrowing losses and a path to accounting profitability - normal for new name software IPOs. Weaknesses? Cashflow is a little weak - negative $34m in H1 of FY12/21 which given a big cash raise at IPO time will be fine, but we want to see those cashflow margins improving and turning positive within say 18-24 months. The reason those margins are poor is that whilst the company does runs a deferred, prepaid revenue model, such prepayments sat at just $55m in June this year, representing around 35% of TTM revenue; in the best-run software companies you’ll find that deferred revenue is close to or above 100% of TTM revenue. So we’d like to see FORG improve on this front too. Doesn’t put us off buying the IPO but it is something we’ll monitor as the company progresses.
We think the market has plenty of appetite yet for new name listings in the identity management space, and we think that means that FORG will have time to work out its problems and challenges against a backdrop of generally rising sentiment in software. The lowish level of deferred revenue does mean an earnings surprise could hit within the first year or two, which is yet another reason not to bet the farm on day one here. We do expect some vertiginous dips to buy along the way.
But back to the happy stuff. High growth company, underserved segment, we think this will be a winner over the coming years, so we’re buying at IPO time and expect to buy more over time, particularly on any short-term earnings misses. Simples!
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