SailPoint Technologies Holdings (NYSE:SAIL), a software company focused on identity governance -- which lets organizations manage who has access to what in the digital world -- reported its third-quarter results on Wednesday. Revenue growth accelerated sequentially to 52% thanks to growth in its licensing business that was much better than expected. The strong top-line performance allowed the company to crank out a surprise profit and produce robust operating cash flow. But management also predicted that the torrid rate of growth was about to slow down significantly. 

SailPoint Q3 results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$66.4 million 

$43.6 million

52%

GAAP operating profit

$4.5 million

$0.4 million

1,025%

GAAP net income (loss)

$3.3 million

($6.4 million)

N/A

GAAP earnings (loss) per share

$0.04

($0.24)

N/A

Data source: SailPoint.

What happened with SailPoint this quarter?

  • License revenue grew 66% to $28.1 million. The gain was driven by better-than-expected uptake among its clients in the federal government.
  • Subscription revenue grew 54% to $28.5 million. Services and other revenue increased 22% to $9.8 million.
  • Total revenue of $66.4 million was more than $10 million above the top end of management's guidance range.
  • International sales were 31% of total revenue. This represents a sequential decline that is mostly attributable to the strong growth in its domestic license business. Management stated that it expects this number to bounce around from quarter to quarter.
  • Consolidated gross margin expanded by 500 basis points to 82%. Increased scale and strong contribution from the licensing business (which boasts a gross margin of 99%) helped drive the increase.
  • On a non-GAAP (adjusted) basis, operating margin came in at 18%. Non-GAAP net income and earnings per share (EPS) were $11.2 million and $0.12, respectively. These numbers far exceeded guidance.
A person holds a smartphone that contains a login screen.

Image source: Getty Images.

What management had to say

On the call with investors, CEO Mark McClain expounded on why his company continues to win in the marketplace: "We believe our results are due to a continuous demand for identity governance. Our market leadership and our commitment to delivering innovative best-in-class solutions to help customers secure digital identities for all users, all applications, and all data."

McClain also talked up new products that he says help the company serve its clients better. "With new releases to both IdentityIQ and IdentityNow, our approximately 1,100 customers are better prepared to govern digital identities for their users, whether human or nonhuman software bots; their applications, from legacy mainframe to cloud apps; and their data, regardless of where the files are stored," he said.

Looking forward

While SailPoint just reported blowout quarterly results, the guidance that CFO Cam McMartin shared with investors suggests that the company's hypergrowth is about to slow significantly:

Metric Q4 2018 Guidance Range
Q4 2017 Actual
Total revenue $70 million to $71.5 million $67.8 million
Non-GAAP operating income $8.5 million to $10 million $16.7 million
Non-GAAP EPS $0.08 to $0.09 $0.17

Data source: SailPoint.

But the upbeat third-quarter results did enable management to significantly boost its guidance for the full year 2018:

Metric New Guidance Range
Old Guidance Range
Total revenue $240.7 million to $242.2 million $233 million to $236 million
Non-GAAP operating income $27.8 million to $29.3 million $17 million to $19 million
Non-GAAP EPS $0.25 to $0.126 $0.12 to $0.14

Data source: SailPoint.

McMartin said he was quite pleased with the company's performance and reaffirmed his belief that SailPoint is well positioned for financial prosperity. "We continue to believe we have an opportunity to drive strong top-line growth for many years, while continuing to deliver non-GAAP operating income and positive free cash flow," he said.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends SailPoint Technologies. The Motley Fool has a disclosure policy.