Author: Scott Denne

Spotify could hear ad revenue with The Echo Nest

Scott Denne

Contact: Scott Denne

Spotify’s acquisition of The Echo Nest deals a blow to competitors and brings with it technology to help the company expand beyond its subscription-focused business model. The Echo Nest’s algorithms integrate user preferences, digital analysis of songs and context from around the Web to build playlists for online and mobile music apps.

Spotify was an early customer and now it’s going to own the service that powers personalized radio for its competitors, including iHeartRadio, MOG and Rdio. In addition to a potential poke in the eye of its rivals, the deal takes Spotify’s ad capabilities from rudimentary (homepage takeovers and banner ads) to targeted. The Echo Nest recently launched a service that enables advertisers to target audiences based on how and what they listen to.

Advertising is an increasingly viable method of supporting digital radio as mobile marketing takes off, and this deal gives Spotify the tools to expand those capabilities. For example, last quarter Pandora Media saw a 42% year-over-year jump in its mobile ad revenue per listening hour. As the mobile ad market grows and Pandora tunes its product offerings, it now gets more than half of its revenue from mobile ads – an area where Spotify doesn’t (yet) have a product.

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Mitel migrates to call-center software with OAISYS acquisition

Scott Denne

Contact: Scott Denne

Communications hardware and software vendor Mitel Networks has extended its call-center software portfolio by acquiring call-recording software provider OAISYS. This is Mitel’s second call-center-related acquisition in the past year, and follows a wave of consolidation in the sector.

Last summer, Mitel spent $20m on its OEM partner prairieFyre Software to get directly into the call-center software business. Before that purchase, its only call-center offering was automated call routing. OAISYS, with 50 employees, provides call-recording and quality assurance software and, like prairieFyre, has a long-standing OEM partnership with Mitel. OAISYS was founded in 1996 and is based in Tempe, Arizona.

Historically, Mitel has struggled to sell its products, with revenue ebbing and flowing for several years. The company is trying to change that by selling applications that complement its PBX software and hardware products, which are experiencing pricing pressure from competitors. (Mitel is also spending to increase its traditional business, picking up Aastra Technologies, its European counterpart, in a $375m deal last year). The OAISYS buy is an attempt to move deeper into call-center software, which is seeing increasing interest lately.

Mitel’s competitors have been active acquirers in the call-center market lately. In just the past two years, Verint purchased four call-center software vendors, including the $514m pickup of KANA in January. Enghouse Systems has done eight deals in that time, including one announced this week, and Genesys Telecommunications has bought seven companies since Permira carved the company out of Alcatel-Lucent in 2012.

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Please hold for Five9 IPO

Scott Denne

Contact: Scott Denne

Call-center software maker Five9 made its IPO filing public Monday, with financials that fit the pattern of other SaaS companies: strong revenue growth, steep losses. Five9 posted $84m in 2013 revenue, up 32% from 2012.

There was a cost to that growth. The firm ended the year with $17m in cash, after raising $45m in debt and equity financing in 2013. Its sales and marketing expenses jumped 67%, double the rate that its revenue grew, and pushed operational expenses up to the highest level in the three years disclosed in its prospectus. Five9 recorded a $28m net loss last year, up from $17m in 2012 and $7m in 2011.

None of that makes Five9 an outlier, however. Many other SaaS vendors, including RingCentral, ServiceNow and Workday, spend a larger portion of their revenue on sales and marketing. None are trending toward profitability.

Losses haven’t hurt valuations for those companies, and they likely won’t impede Five9. Because of its pure cloud portfolio, we expect Five9’s enterprise valuation to be a few ticks higher than competitors Interactive Intelligence (4.8x trailing revenue) and inContact (3.5x), both of which still sell legacy on-premises software in addition to cloud offerings.

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GrubHub deal leads to Seamless IPO

Scott Denne

Contact: Scott Denne

Online food delivery services company Seamless North America had the size and the growth for a solid public offering of its own, and by acquiring (and taking the name and CEO of) its closest competitor, GrubHub, the company improved both of those attributes. The new GrubHub wasted no time pushing itself out to public markets. It filed for a public offering just four months after closing the merger and made its filing public last week.

Seamless itself posted $111m in 2013 revenue, up 35% from a year earlier and coming off a year of 36% revenue growth. Wall Street would likely have rewarded that high, consistent growth rate. Instead, Seamless added to that, handing over about 43% of its stock in August to pick up GrubHub, which, independent of Seamless, grew revenue 62% to $59m last year.

Pairing up didn’t hurt profits. Despite a $24m loss in 2012 from the original GrubHub, the combined company (Seamless alone through August 8, 2013, and combined results afterward) made a profit in each of the past three years and every quarter during the past two years, including $3.6m in combined net income on $84m in revenue during the two recent quarters, which mixes results between the two businesses.

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Poor ExactTarget results may extend salesforce.com’s M&A holiday

Scott Denne

Contact: Scott Denne

Two quarters in, salesforce.com’s ExactTarget acquisition is already losing some steam. The email marketing company continues to grow, though far from the pace it had as an independent business. On salesforce.com’s earnings call Thursday night, the CRM vendor announced that ExactTarget contributed $96m in revenue, up roughly 14% from the last quarter of 2012 (‘roughly’ because salesforce.com and ExactTarget’s fiscal quarters are misaligned by a month).

In its last two independent quarters, ExactTarget averaged 40.5% year-over-year growth. In its first two quarters as a salesforce.com subsidiary, it averaged revenue growth of just 12.5%. Even salesforce.com itself, with $1.15bn in revenue last quarter, gained 25%, after backing out ExactTarget’s contribution, and 26% the previous quarter.

On a call last year announcing the acquisition, salesforce.com CEO Marc Benioff said the company would take a 12- to 18-month M&A vacation to focus on ExactTarget. For the most part, it’s lived up to that promise. It announced a $133.7m deal for EdgeSpring a few days after the ExactTarget announcement but has been mostly quiet since then – salesforce.com spent just $2.5m on acquisitions last quarter. Since integrating ExactTarget hasn’t been a day at the beach, salesforce.com’s M&A holiday may not end early.

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Identified’s team and tech clock in at Workday

Scott Denne

Contact: Scott Denne

In announcing its fiscal first-quarter earnings yesterday, Workday also announced the purchase of recruiting startup Identified Inc. The tech and talent acquisition is Workday’s first since 2008.

Terms of the deal weren’t disclosed, but an equity analyst on Workday’s earnings call called out the price at $15m, which company executives did not refute. Though we haven’t confirmed that number, a price tag in the $10-20m range is feasible. Identified raised $22.5m in venture funding from VantagePoint Capital Partners and others.

The target built a service that enables recruiters to find prospective job candidates through analysis of social media files. Workday will scrap that offering, opting instead to use Identified’s employees and technology to embed machine learning and predictive analytics across product lines. Workday’s only other deal was the acquisition in 2008 of Cape Clear Software, an Irish middleware company with less than $15m in revenue. Following a recent secondary offering, Workday has amassed $1.9bn in cash and sports an enterprise value that’s 41x trailing revenue.

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Oracle’s new deal looks the same, but feels different

Scott Denne

Contact: Scott Denne

Oracle’s reach for BlueKai looks the same as some of its recent marketing software deals, in some ways. The transaction brings Oracle a cloud-based software service that companies use to manage data for Web and mobile marketing, an offering that complements the company’s other marketing products. But BlueKai’s advertising data marketplace service also moves Oracle into the world of ad tech, a very different sector with a set of customers and a sales model the company isn’t accustomed to.

Adding BlueKai’s data management and third-party data sources to its existing offerings enables Oracle to create a rich set of customer profiles and help it sell its earlier acquisitions, such as Eloqua and Responsys, into the CMO’s office. This type of vendor and feature is familiar to Oracle as the company got its start in managing and integrating data.

What’s new to Oracle is running a data marketplace, especially one like BlueKai’s that is sold to ad tech providers and ad agencies, rather than businesses. While Oracle has made multiple marketing deals, those offerings were aimed squarely at CMOs and other marketing professionals, not paid advertising executives. Though BlueKai sells its data management platform based on a recurring license fee, much of its data exchange business is based on how many people click on ads served using its data.

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No jumping for joy following Millennial’s Jumptap acquisition

Scott Denne

Contact: Scott Denne

Millennial Media promised benefits of scale and new technology last year when it bought fellow mobile ad network Jumptap in a $221m deal that cost the company about one-third of its stock. It’s a bit early to say whether that will play out or not, but on its earnings call this week, Millennial’s management gave a bleak forecast.

Its new CEO, Michael Barrett, who replaced Paul Palmieri last month, vaguely indicated that Millennial would grow about 20% annually, though he didn’t offer any official guidance for this year. That’s especially alarming since the larger audience that the combined company can now reach should attract higher ad prices and bigger advertising budgets.

Millennial is still growing, but at a slower rate than the broader mobile ad market. Revenue for the combined companies was up 42% in 2013 to $342m and up 44% year over year for the last quarter. That’s well below the numbers put up by other mobile ad vendors. Though not direct comparables, Pandora and Twitter show the rising revenue of in-app advertising. Pandora’s mobile ad revenue grew 73% year over year to $116m in its most recent quarter, and Twitter’s rose 55% to $165m.

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In seeking new channels, Facebook mobilizes the masses

Scott Denne

Contact: Scott Denne

Facebook has a challenge in mobile that it didn’t face with PCs: niche competition. When the company grew up in the PC era, it could fend off rivals through product design and virality. Its $19bn purchase of messaging app WhatsApp shows that mobile is a different game. It’s not the first time Facebook has paid an obscene amount – at least by traditional M&A measures like revenue or EBITDA multiples – and it won’t be the last time.

Think of Facebook as a network (in the television sense). In the days of broadcast (PC), it was OK for networks to have a single channel, but the emergence of cable TV (mobile) brought a slew of niche players that eroded broadcasters’ audiences. So networks added – and bought – other channels. The game was straightforward with the PC: whoever builds the most viral product wins. Mobile is more competitive, in part because of the low cost of launching an app, and because there’s a smaller screen, there’s more desire for straightforward, single-function apps.

Scale is everything in advertising, and Facebook will pay what it needs to pay to own anything that threatens its audience in mobile, especially as mobile now makes up more than half of its ad revenue. Even though it won’t be plastering ads on WhatsApp anytime soon, it keeps a massive audience intact. It’s the same logic that led to its $1bn purchase of Instagram when the photo-sharing app threatened one of Facebook’s core functions, and that same strategy is likely to lead to another eye-popping deal when a new category of mobile networking apps emerges.

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Application delivery controller vendor A10 delivers IPO docs

Scott Denne

Contact: Scott Denne

Over the three years on record in its IPO prospectus, application delivery controller vendor A10 Networks has grown its total revenue, but not without setbacks. The company has weathered – and continues to weather – multiple patent lawsuits, with one resulting in a $75m settlement with Brocade that included current and future patent licensing from A10 to Brocade until 2025.

Meanwhile, its own operations are showing signs of slowing. A10’s top line grew a respectable 18% to $141m in 2013, but its year-over-year growth rate on a quarterly basis was inconsistent, ranging from 7-27%.

Further, its costs have risen lately, indicating that the growth may not have met management’s expectations. A10’s operating costs (minus litigation expenses) grew to 84% of revenue in 2013, up from 73% in 2012 and 60% in 2011 and 2010. Last year A10 recorded a $27m loss, making 2013 the first year in the past four (the full period reported in its S-1) that it was unprofitable independent of its legal bills.

A10’s networking peers trade at 3-5x trailing revenue. Taking into account A10’s slightly higher – but lumpy – growth and the prospect of pending litigation, we expect it to trade on the low end of that range, with an enterprise valuation of 3-4x for a debut valuation of about $500m.

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