Quest Software – Extensive Product Portfolio, Growth Considerations & Corporate Governance Challenges – 12 January 2022

How would you describe Quest as a company, and how has it evolved? If you’d been with the company for 12, 13 years as you had been, clearly the world has changed and Quest to a large extent has changed as well. How would you describe that evolution?

As you indicated, we’re talking about hundreds of different products across what I understand to be dozens of different categories. You’ve highlighted 3-5 primary businesses at any given time. It seems to me there are three primary businesses. One is a data-intelligence business focusing on data, including data operations, data governance and data protection. Then, there’s a security-software business, which seems to be a growing emphasis and which has endpoint and identity offerings. I’m not sure if the endpoint and identity offerings should be considered separately or within a broad cybersecurity-software construct, especially given what you said. Then, there’s a business which is related to migration and consolidation, one that the company has historically been most well-known for and which it refers to as ITOps. Is that a good way to think about the different businesses that make up the company?

How would you characterise the revenue mix across Quest’s data intelligence, security-software and ITOps categories, acknowledging that the company has continued to be quite active with M&A since you left? It’s something that people think about. Obviously the company bought OneLogin in October 2021.

Over what range has the One Identity business been and will be growing?

What did you think when you heard that One Identity was buying OneLogin? Clearly it aligns with what you observed while at Quest, which is understandable given the higher-growth nature of the business segment, but that’s obviously an area the company identified as attractive, and where investment should go. What do you think it has in mind regarding a broader IAM [identity and access management play]?

It is noteworthy how separate it seems Quest has kept One Identity. If you’re researching the company, some people would not even know or overlook the fact that Quest actually owns One Identity. Do you have any insight as to why the company has been doing that? Is it because it is a very different business from what it has historically focused on? Is it because perhaps there are plans to monetise that business through an IPO or a divestiture in the future?

It seems to some extent the strategy related to One Identity might be different than the rest of the company, as we were just discussing. Something I’ve noted and which you referenced is the notion of One Identity buying OneLogin. It seems there are many opportunities to bring products together, to engage in cross-selling and other strategies, but doing that is different than how Quest has historically approached its products, where there’s not much integration across areas and products. Why do you think the company has taken that approach of seemingly keeping things separate in many ways? Do you think that’ll be consistent in terms of One Identity and OneLogin, given it does seem as if it has been carved out in a manner where the company could do things differently?

What is the benefit to Quest having all those different areas and products? Yes, over the years, the company has done some divestitures, but for the most part, it has accumulated more and more products, and even added areas. Do you think that’s more of a strength or weakness of the company, because it seems it would be difficult to manage the technology, operations and sales elements of all the products, especially when there’s not much cross-selling taking place as you would imagine, even though the company could do so but hasn’t for a variety of reasons? Alternatively, why couldn’t it begin to undertake more cross-selling opportunities where it says, “Hey, our software is in almost every major enterprise that actually has any kind of significant technology infrastructure, so clearly we should be able to get in there and talk about other products and services across our major categories of focus,” even if it’s identity, which is very separate from the other offerings?

Something you mentioned is how you’d have salespeople responsible in theory for selling hundreds of products, and my guess would be that they would sell the products that would actually sell in the marketplace, and then ones that would reward them for selling. To what extent do you think it would make sense to have a semblance of specialisation across the sales force, where you’d focus on a particular area? How is the sales force structured and oriented? It seems from your description that it could potentially be problematic, considering there are so many things to sell, and it can be difficult to be conversant, let alone an expert on all these areas. Additionally, there is the potential for many sales reps overlapping each other.

Does the Windows and Active Directory-migration business have any recurring-revenue nature? It seems you do an acquisition, you have to consolidate systems, you’ll bring in Quest and these solutions, but then the project is done. Then you move on from that business. How does that work? Is there any long tail to that business?

It would make sense to think about competition, based on Quest’s focus areas, but then on the other hand, you think, “Quest doesn’t really adhere to this approach, so I guess it wouldn’t necessarily make sense to think about competition in terms of who else can do what Quest does across these areas, it would seem to be pretty unique.” Which competitors would you highlight across the three primary areas – information management, Windows and Active Directory migration and identity and access management? Who is most significant and formidable? You already highlighted some of the IAM competitors such as SailPoint, Okta and Ping.

It would seem companies such as Oracle and Microsoft are quite relevant, not just regarding the importance of their platforms, but presumably because they want a piece of the business involved in working with ITOps, whether it’s with maintenance, endpoint and patches or migrations. How much of a growth impediment is it over the near-to-intermediate term that these companies are considering ways to increasingly disintermediate Quest in these contexts?

You referenced Microsoft focusing on the cloud in many ways and Quest, to some extent, is doing that. Is the cloud transition perhaps a risk to Quest? Its identity business seems to be more oriented in and around the cloud, but legacy businesses will be more on-prem and less cloud, which will present a challenge for operations and winning and keeping business. How much of the business do you think is cloud-based?

You gave us a sense of the growth by discussing the major businesses and how they’ve been growing. It would seem Quest is growing revenues in the mid-single-digit range. Is that reasonable and do you think it can sustain that for the next three years? Where do you expect the growth trajectory going? Does this become more of a high-growth business because of opportunities in identity, or does it become more of a no growth, or low-single-digit grower, because of the challenges in information management?

How international or global is Quest’s business? Obviously, many of the challenges the company helps customers address aren’t unique to the US and it has been around for more than three decades. What would you characterise the mix of domestic vs international business and is there an opportunity to invest and grow more overseas?

You point to partnerships, which seemingly are pretty critical at Quest in many ways. The company references 11,000-plus partners and 146 countries. What is the importance of these partnerships and close alignments that can help drive revenue?

We discussed investing in the partner network and whether Quest has the appetite to do that. Given the company has a lean organisation and its revenue is growing in the mid-to-high single digits, the focus has to be on keeping expenses under control, generating EBITDA and free cash flow. Can you discuss that? Are there opportunities to reduce cost and expenses further? It seems what you’re saying is, “No, this is already a pretty lean organisation,” and you don’t know to what extent there are more opportunities to make further changes.

One opportunity for Quest to consider for cost and expenses might be OneLogin. What do you think management’s approach will be there, given One Identity has been separate and the company is investing for growth into the future in this identity software area? How hands-off vs aggressive do you think it’ll be in changing things with OneLogin?

What do you think of Quest’s management? There have been a tremendous number of changes across the management team. It’s amazing to think that less than two years ago, the current CEO, Patrick Nichols, was appointed. There have been many changes since then, perhaps as he is building out his team. A month or two after his appointment there was a new CRO [Chief Revenue Officer], a new CMO [Chief Marketing Officer], a new COO, and then about a year ago, new heads of the information management and One Identity businesses.

It seems there have been many changes in terms of ownership and leadership. You referenced many strategy changes, which make sense, given all the other changes. How does that impact employee morale at Quest? It seems it would be more difficult to attract and retain talent in this environment.

What is your 1-3-year outlook for Quest and what is its biggest opportunity and risk?