Seeking Alpha • Sep 02
ForgeRock Faces Revenue Growth And Foreign Exchange Headwinds
Summary
ForgeRock went public in September 2021, raising approximately $275 million in a U.S. IPO.
The firm provides IT identity access software and services to organizations worldwide.
FORG has produced tepid revenue growth and increasing operating losses; the company also faces slowing sales cycles and foreign exchange headwinds.
I'm on Hold for FORG in the near term.
A Quick Take On ForgeRock
ForgeRock (FORG) went public in September 2021, raising approximately $275 million in gross proceeds from an IPO that was priced at $25.00 per share.
The firm provides digital identity as a service software for organizations globally.
For the near term, I'm on Hold for FORG due to its ongoing transition to SaaS, slowing sales cycles, foreign exchange challenges and increasing operating losses.
ForgeRock Overview
San Francisco, California-based ForgeRock was founded to develop a digital identity management platform for various identity types and cloud deployments.
Management is headed by President and CEO, Francis Rosch, who has been with the firm since June 2018 and was previously EVP at Symantec.
The company's primary offerings by identity type include:
Consumer
Workforce
IoT & Services
The firm pursues client relationships with medium and large enterprises via its direct sales and marketing efforts.
FORG's platform can support over 200 million access transactions per hour, securing thousands of applications across types, operating environments and deployments, whether in public, private, hybrid cloud or on-premises infrastructures.
ForgeRock's Market & Competition
According to a 2020 market research report by Grand View Research, the global identity as a service (IDaaS) market was an estimated $3.34 billion in 2019 and is forecast to reach $16 billion by 2027.
This represents a forecasted very strong CAGR of 22.0% from 2020 to 2027.
The main drivers for this expected growth are an increasing number of regulatory mandates and growing complexity of environments with multiple stakeholders and user types using their own devices (BYOD).
Also, an increasing number of employees working remotely is putting further demand on services that safely and efficiently secure this type of access.
Below is a chart showing the historical and projected future U.S. IDaaS market size:
U.S. Identity As A Service Market (Grand View Research)
Major competitive or other industry participants include:
CA Technologies
Okta
SailPoint
IBM
Oracle
CyberArk
Ping Identity
OneLogin
Auth0
Centrify
Homegrown, in-house solutions
ForgeRock's Recent Financial Performance
Total revenue by quarter has grown slightly over the past 5 quarters:
5 Quarter Total Revenue (Seeking Alpha)
Gross profit by quarter has plateaued in recent quarters as well:
5 Quarter Gross Profit (Seeking Alpha)
Selling, G&A expenses as a percentage of total revenue by quarter have been trending higher in recent reporting periods:
5 Quarter Selling, G&A % Of Revenue (Seeking Alpha)
Operating losses by quarter have worsened markedly in recent quarters, as the chart shows below:
5 Quarter Operating Income (Seeking Alpha)
Earnings per share (Diluted) have remained negative over the past five quarters:
5 Quarter Earnings Per Share (Seeking Alpha)
(All data in above charts is GAAP)
In the past 12 months, FORG's stock price has fallen 60.4% vs. the U.S. S&P 500 Index's drop of around 11.5%, as the chart below indicates:
52 Week Stock Price (Seeking Alpha)
Valuation And Other Metrics For ForgeRock
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM]
Amount
Enterprise Value/Sales
6.21
Revenue Growth Rate
19.6%
Net Income Margin
-35.4%
GAAP EBITDA %
-29.8%
Market Capitalization
$1,460,000,000
Enterprise Value
$1,170,000,000
Operating Cash Flow
-$32,190,000
Earnings Per Share (Fully Diluted)
-$1.05
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Ping Identity (PING); shown below is a comparison of their primary valuation metrics:
Metric
Ping Identity
ForgeRock
Variance
Enterprise Value/Sales
8.17
6.21
-24.0%
Revenue Growth Rate
13.8%
19.6%
42.8%
Net Income Margin
-34.3%
-35.4%
3.3%
Operating Cash Flow
-$5,990,000
-$32,190,000
437.4%
(Source - Seeking Alpha)
A full comparison of the two companies' performance metrics may be viewed here.
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
FORG's most recent GAAP Rule of 40 calculation was negative (10.2%) as of Q2 2022, so the firm needs significant improvement in this regard, per the table below:
Rule of 40 - GAAP
Calculation
Recent Rev. Growth %
19.6%
GAAP EBITDA %
-29.8%
Total
-10.2%
(Source - Seeking Alpha)
Commentary On ForgeRock
In its last earnings call (Source - Seeking Alpha), covering Q2 2022's results, management highlighted the company's revenue growth but also noted the lengthening sales cycles for the larger deals in its pipeline.
This slowdown meant FORG produced ARR (Annual Recurring Revenue) of $1.4 million below the bottom end of its previous guidance.
Also, the company saw a greater foreign exchange impact as the US dollar rose against the British Pound and the Euro.
Management expects the macroeconomic environment to produce greater IT budget scrutiny, likely hampering the company's revenue growth trajectory.
Notably, 83% of the company's revenue is from customers managing their own systems, 17% from SaaS. However, management has a goal of increasing its SaaS mix from 17% to around 25% by the end of 2022.
