Tufin Software Shares Jump, Should You Get On Board? - Tufin Software Technologies Ltd. (NYSE:TUFN)

The company has carved out a valuable niche in the security market with central management and automation of organizational security policy.

Giving the escalating connections and network complexity, the demand for this is growing firmly.

While the company still has considerable losses and the shares, after a recent jump are fairly fully valued, they can keep on growing for the foreseeable future.

The shares of cyber security provider Tufin Software (TUFN) have suddenly taken off to $28, which is double their IPO price which occurred as recently as last April.

This just happened in two days, and there is considerable volume behind this rally but it's unclear what caused this sudden enthusiasm for the shares. Most likely it's a belated reaction to their first quarterly earnings report which was published just a week ago on June 13.

The company has about 15% of the Global 2000 as a customer and it certainly enjoyed a good quarter, beating both revenue and earnings growth by quite a bit.

The company is still significantly in the red with EPS at -$0.41, even if that was 12 cents better than what analyst expected. There isn't yet much track record:

But trends are quite clear, in order to grow revenue the company keeps investing in S&M and R&D.

The company offers products that enable enterprises to visualize, define, and enforce their security policy across heterogeneous networks, on premise and in the cloud like:

The latter two provide cloud-based security automation solutions in response to the growth of containers and cloud-native environments. There is a good recent overview and short description of these products (and the company) at eWeek and here is William Blair analyst Jonathan Ho:

“We believe centralized security policy management for firewalls, cloud containers, and other devices will become mission critical as organizations modernize their infrastructure for digital transformation and increasingly operate in hybrid cloud environments,” Ho said. “Tufin’s solutions provide visibility for customers of their network topology and firewall rulesets to allow them to understand the potential impact of rule and policy changes. They also help organizations understand which rules create risk, particularly those that are not in use. Concurrently, new development methodologies, such as agile and continuous integration/continuous deployment, require the ability to deploy applications with increasing frequency, automation, and agility. Tufin’s policy-driven automation allows changes to network and cloud access rules and policies in minutes instead of days, leading to faster deployment times and responsiveness for network changes needed to support application releases.

The demand for these is increasing as a result of the increasing complexity of organizational networks and the proliferation of connections.

While we're not qualified to assess the quality of their products, they seem to have at least two competitive strengths:

Policy-centric security is core to our approach. Every organization needs a unified security policy for foundational controls, who can talk to whom and what can talk to what on the network. These are the core tenants of any network security architecture. With Tufin’s policy-driven automation, each network change can be implemented in minutes instead of days, removing the chance of human error. This can significantly accelerate the development and deployment of revenue generating applications, providing tangible business value in the near-term. We are a pioneer and a leader in our markets, and are in the early stages of capitalizing on significant, untapped market opportunity.

For what it's worth, there are some user reviews on the Gartner website that paint a positive picture. Gartner also wrote about the usefulness of their orchestrated security policy approach (here) which does make a lot of sense and gives the reader a good idea of the types of complexities that the company purports to solve.

Management argues that the competition doesn't have anything like Orca and Iris.

The company reminds us quite a bit about Yext (YEXT), which automates an organization's proliferating surface with social media (one could call that an orchestrated social media policy solution) just like Tufin does with security policies.

However, we are a little surprised to find that they sell their flagship Orchestration Suite as a perpetual license, and not as a subscription ("SaaS") service, which they do for some of their newer products like Orca and Iris.

But roughly half their revenue comes from maintenance and support so it's not that the company cashes the perpetual license fee and that's it (Q1CC our emphasis):

The ASPs themselves are also rising due to the fact that they're getting bigger deals, companies with more firewalls as they license based on the number of firewalls, which also nicely shows their TAM (Q1CC):

Also, the fact that they sell perpetual licenses doesn't mean there are no land and expand opportunities, both expanding usage in the company of product already bought as well as buying new products. Over half of new revenue in Q1 came from existing customers.

They also partner with multiple different adjacent providers like SOAR vendors (threat detection, incident response) and Cisco's (CSCO) ACI (application centric infrastructure) and Palo Alto (PANW). During Q1 they expanded cooperation with five new partners in their TAP or technology alliance program (earnings PR):

One should think there is plenty of room for geographical expansion with most (53% coming from the Americas and just 4% coming from Asia Pacific, with EMEA making up the rest.

Beating both on revenue and earnings, but the losses are increasing due to investments in sales and research. No reason to panic, that's what the IPO was for (the IPO funds aren't included in Q1 results as this happened after the quarter closed).

That 2019 revenue guidance boils down to a growth rate between 23.5%-29.4% while revenues grew by 31.7% in 2018. It's not hyper-growth, but still very good.

While the company enjoys very healthy gross margins (82% GAAP and 83% non-GAAP in Q1), operating margins are clearly suffering from investments in growth and are actually getting more negative as operating expense grew by 52% to $22.7M, a much faster growth rate compared to revenue growth.

S&M alone rose to 61% of revenue with R&D also increasing its share to 29% and even G&A rose to 12% of revenue (up from 6% a year ago).

Can the company afford these investments? Well, they have of course all that IPO money (over $120M) and even before that they had another $28.6M on the balance sheet and no debt.

But the company even generated a surprising $11.9M in cash from operations as they had a record number of 7 figure deals in the quarter, much of this came from deferred revenue ($12.3M).

With the doubling of the share price valuation has also increased by quite a bit. On mid-point ($107.5M) of sales, the company is trading at 8.7x sales (or rather EV).

The company has a solid market position and a fairly unique approach which seems pretty difficult to emulate, hence it looks like they've created a pretty attractive niche for themselves which is still in the early innings of development.

While the company is loss making, it has plenty of cash to keep on going for quite some time and they aren't unlikely to run out of cash as the one advantage of having a perpetual license model is that they get lots of cash up-front (deferred revenue).

For a loss making company growing sales at roughly 25%, trading at 8x sales is fairly fully valued. With tailwinds of positive market sentiment that multiple could stretch out some more, but not a whole lot.

Still, we think that for investors with a longer-time horizon the shares are still quite attractive as we see the growth continuing for the foreseeable future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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