The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, Feb 10 (Reuters Breakingviews) - SailPoint Technologies’ encore will struggle to match its original performance. The cybersecurity software developer is preparing a second initial public offering, seven years after its first market debut under the same private equity owner, Thoma Bravo. There’s much to like, but it’s worth thinking twice about the mooted $11.5 billion valuation.

Last time, SailPoint capitalized on corporate customers scrambling to bolster computer network defenses following a wave of high-profile hacks. The 20-year-old company, which helps businesses track employee access to internal systems, sold shares for $12 apiece in 2017. Thoma Bravo offloaded its entire stake within a year, before returning in 2022 to buy it again for $65.25 a share, or $6.9 billion.

The deal coincided with the U.S. Federal Reserve’s interest-rate hikes, which led to investors prioritizing profitability over breakneck growth. Orlando Bravo, the co-founder of Thoma Bravo, declared that operating cash flow, before factoring in interest payments on debt, was the new benchmark. After a profit-sapping transition to deliver its services from remote cloud servers, spiced up with artificial intelligence, SailPoint is nearly there.

From the financial year ending in January 2022 until the latest 12-month stretch through October 2024, revenue jumped nearly 85%. Though unprofitable, SailPoint’s operating margin, after adjusting for stock-based compensation and the amortization of intangible assets like customer relationships, rose to 14% for the nine months through October. It was just 3% the year before it went private. Money set to be raised from its listing is also earmarked to pay down buyout-related debt, which will slash interest expenses and help get the cash flowing.

The company wants a lot of credit for this progress, though. At the top of its $19 to $21 price range, SailPoint would be worth roughly 14 times revenue, about the same as Thoma Bravo paid for it. Rival Okta OKTA.O, which generates triple the sales but is recovering from its own security breaches, trades at less than 6 times, per Visible Alpha, around the median for cloud-based software vendors, according to boutique investment bank SEG Capital Advisors.

Seeking such a hefty premium, akin to the one peer CyberArk Software CYBG.F commands, is bold. Returns for new stock issues tumbled when borrowing costs increased, judging by the Renaissance IPO ETF’s IPO.P relative performance. There have been few sizeable tech listings since, and the buyout firm’s sprawling $50 billion cybersecurity portfolio no doubt incentivizes it to try and notch a solid yardstick. This is a tougher market than in 2017, however, and will make SailPoint’s first IPO act a hard one to follow.

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CONTEXT NEWS

Cybersecurity software developer SailPoint Technologies said on February 4 that it was seeking a valuation of as much as $11.5 billion in its planned return to public markets, over two years after private equity firm Thoma Bravo acquired it for $6.9 billion.

SailPoint set a price range of $19 to $21 for its offering of 47.5 million shares. Thoma Bravo is selling 2.5 million shares. Morgan Stanley, Goldman Sachs, JPMorgan, Evercore and 15 other advisers are helping with the initial public offering.

(Editing by Jonathan Guilford and Streisand Neto)

((For previous columns by the author, Reuters customers can click on GOLDFARB/jeffrey.goldfarb@thomsonreuters.com))