Category: application software

Coupa is latest SaaS firm to seek IPO following Apptio, The Trade Desk

Scott Denne

Contact: Scott Denne

Wall Street’s recent generosity toward software IPOs hasn’t gone unnoticed as a slew of such companies are looking to debut. Apptio and The Trade Desk recently set a range for their offerings and now Coupa has moved toward an IPO by unveiling its prospectus. The spend management vendor’s accelerating growth replicates a story that has played well lately and could enable it to top the valuation from its venture rounds.

Coupa offers cloud-based spend management software and an integrated (and free) portal for suppliers. The company believes that integrating supplier capabilities into the portal will help create a network effect to draw more buyers onto the software and vice versa. It still has massive sales and marketing costs, although there are signs that this strategy is beginning to work. Revenue rose 65% in 2015 to $83m and, more importantly, accelerated to 75% growth in the first half of this year. Coupa’s sales and marketing expense was 70% of its total revenue for the first half of last year, but dropped to 58% this year. Its net loss was $46m for the year.

Accelerating revenue has been a theme among SaaS IPOs. Talend, with 20% growth last year, fetches 8.5x trailing revenue on the strength of 34% and 38% year-over-year growth in the two most recent quarters. Twilio, which increased revenue 88% in 2015 from 78% the previous year, commands a 20x multiple. Coupa will be challenged to hit the heights of Twilio when it prices, although moving past Talend seems possible. Coupa and Talend have similar costs and the former’s higher growth should be enough to take it to 9x or beyond, giving it a valuation of approximately $1bn.

Consumer sentiment favors continued liberal multiples. According to 451 Research’s VoCUL survey in August, 17% of people are more confident in the US stock market than they were 90 days ago. That’s up from 14% in the same survey the previous month and just 5% from a year ago.

Dell-EMC closes, but there’s still dealing to be done

Brenon Daly

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

In its IPO, will Apptio suffer the curse of the crossover?

Brenon Daly

Contact: Brenon Daly

In what’s shaping up to be a bit of a test case for late-stage financings, a rather richly valued Apptio plans to go public. The company, which sells software that helps clients manage their IT spending, has revealed paperwork for an IPO with a placeholder amount of $75m. However, as Apptio makes its way to Wall Street, one of its existing backers on Wall Street has already trimmed the value of the company.

Institutional investor T. Rowe Price led Apptio’s $50m series D round in March 2012. At the end of 2015, the mutual fund had reduced the value of its investment by 24% compared with the previous year, according to the prospectus of the fund that holds Apptio equity. T. Rowe also marked down by a similar amount its holding of Apptio shares from a financing a year later. Fellow mutual fund Janus led the $45 series E in May 2013, Apptio’s last private round. According to Apptio’s prospectus, the company sold shares to Janus and other investors in that round at $22.69 per share.

Of course, valuations rise and fall every day on Wall Street. And startups that have drawn big money from mutual funds only to see their shares get marked down after the purchase often say the downgrades are mere ‘accounting’ moves made by people who don’t really understand Silicon Valley finance. However, in the case of Apptio, some of the discount may be warranted because it is currently growing only half as fast as it was when it raised its big slugs of capital from the so-called crossover investors.

In the first two quarters of 2016, Apptio has increased revenue a solid-but-not-spectacular 22%. That’s the same pace as its full-year 2015, but just half the rate of 2014. At the same time as Apptio’s growth has slowed, losses have mounted. It lost $41m in 2015, up from $33m in 2014. Although losses have eased so far this year, Apptio still very much runs in the red.

Part of the reason for the deep losses is that Apptio’s software is a rather heavy implementation, which can take several months to set up. For its software to be useful, clients need to have an IT budget that runs in the hundreds of millions of dollars, and some customization of the software is typically required. (Roughly 20% of the vendor’s revenue comes from professional services.)

Although Apptio has collected an enviable roster of clients, it counts just 325 total customers. As a point of reference, that’s roughly the same number of customers that Workday had when it went public in 2012. Further, the two companies were roughly the same size, recording about $130m in revenue in the fiscal year leading up to their mid-summer filings. However, at the time of their IPOs, they were on very different trajectories: Workday was doubling revenue, compared with 22% growth for Apptio. Obviously, for growth-focused Wall Street, that is almost certain to result in very different valuations for the companies. Workday hit the market at an astonishing 40x trailing sales, while Apptio would probably count itself fortunate to garner a double-digit valuation.

Enterprise tech IPOs* over the past 12 months

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016

*Includes Nasdaq and NYSE listings only

Is Apigee set to be an acquiree?

Brenon Daly

Contact: Brenon Daly

After a dual-track process ended in an IPO in April 2015, Apigee is understood to be trying once again to sell itself. Several market sources have indicated that the API management vendor has retained Morgan Stanley to run the process. According to our understanding, a handful of large software infrastructure vendors are considering a bid for Apigee, which would likely trade for roughly $500-600m.

Apigee has had a tough run as a public company. In its 16 months on the Nasdaq, it has never traded above its IPO price of $17 per share. (Morgan Stanley led Apigee’s IPO.) During the broad market meltdown in February, Apigee stock touched $5. Although shares have nearly tripled in value in the half-year since then, the company is still underwater from its debut.

One reason for Wall Street’s bearishness is that Apigee is viewed as a ‘sub-scale’ software provider. It likely finished its most recent fiscal year, which ended at the end of July, with less than $100m in revenue. (For comparison, that is less than privately held MuleSoft, which is a sometimes rival to Apigee with its broader integration portfolio.) Further, Apigee is running in the red, losing about $10m in each of the past four quarters on a GAAP basis.

Possible bidders for Apigee, which currently has a market cap of $435m, include big software firms such as existing partners SAP and Pivotal, as well as CA Technologies. According to our understanding, CA was a serious suitor for Apigee before the IPO. That would have been on top of the existing API management CA obtained with its purchase of Layer 7 in April 2013.

Further, CA bought agile software development tools supplier Rally Software last year in a $480m transaction that lines up fairly closely – both strategically and financially – with a possible pickup of Apigee. Both play a part in the broader software lifecycle management market, and both found Wall Street to be a fairly inhospitable neighborhood. Rally garnered 5.5x trailing revenue in its sale to CA. However, Apigee is growing faster (roughly 30%, compared with about 20% at Rally) so would likely get a bit of a premium. Apigee currently trades at about $435m, or 4.7x trailing sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA

Salesforce: Try before you buy

Brenon Daly

Contact: Brenon Daly

When it comes to M&A, Salesforce likes to go with what it already knows. More than virtually any other tech firm, the SaaS giant tends to acquire startups that it has already invested in. Overall, according to 451 Research’s M&A KnowledgeBase, Salesforce’s venture arm has handed almost one of every five deals to the company. Just this week, it snapped up collaboration vendor Quip – the eighth startup backed by Salesforce Ventures that Salesforce has purchased.

For perspective, that’s twice as many companies as SAP Ventures (or Sapphire Ventures, as it has been known for almost two years) has backed that have gone to SAP. (We would note that the parallel between SAP/Sapphire Ventures and Salesforce Ventures doesn’t exactly hold up because the venture group formally separated from the German behemoth in January 2011.) Still, to underscore SAP/Sapphire Ventures’ nondenominational approach to investments, we would note that archrival Oracle has acquired as many SAP/Sapphire Ventures portfolio companies as the group’s former parent, SAP, according to the M&A KnowledgeBase.

Salesforce’s continued combing through its 150-company venture portfolio comes at a time of uncertainty and a bit of anxiety about the broader corporate venture industry. It isn’t so much directed at the well-established, long-term corporate investors such as Salesforce Ventures, Intel Capital, Qualcomm Ventures or Google’s investment units. Instead, it’s the arrivistes, or businesses that have hurriedly set up investment wings of their own over the past two or three years as overall VC investment surged to its highest level since 2000. (They seem to have been infected with the very common Silicon Valley malady: Fear of Missing Out.) It’s hard not to see a bit a froth in the corporate VC market when Slurpee seller 7-Eleven launches its own investment division, 7-Ventures.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Massive SaaS: Oracle pays up for NetSuite

Brenon Daly

by Brenon Daly

Announcing the largest-ever SaaS transaction, Oracle says it will pay $9.3bn in cash for cloud ERP vendor NetSuite. The deal, which is expected to close before year-end, involves the ever-acquisitive Oracle snapping up the roughly 54% of NetSuite not already owned by Oracle founder and executive chairman Larry Ellison.

Terms call for Oracle to pay $109 for each share of NetSuite. Oracle’s bid represents a premium of nearly 60% over NetSuite’s closing price 30 days ago, before rumors swirled about this pairing. Although the premium is about twice as rich as typical enterprise software transactions, NetSuite is still valued just a smidge below its highest-ever stock price, which it hit in early 2014.

NetSuite is the latest SaaS firm that Oracle has gobbled up as the 29-year-old company increasingly stakes its future on cloud software. After initially ignoring – and even dismissing – the disruptive trend of subscription-based software, Oracle, which still sold more than $7bn worth of software licenses in its just-completed fiscal year, went on a SaaS shopping spree. In addition to NetSuite (ERP), Oracle’s other recent SaaS deals valued at $1bn or more include: Taleo (HR software), Responsys (marketing software), RightNow (CRM) and Datalogix (marketing data).

At an equity value of $9.3bn, NetSuite is valued at 11x its trailing 12-month revenue of $846m. That matches the average multiple paid by rival SAP in its multibillion-dollar SaaS acquisitions, as well as the valuation Salesforce put on e-commerce provider Demandware in June.

Further, to underscore the value that can accrue through the subscription model, it’s worth noting that NetSuite’s double-digit multiple is basically twice the multiple that Oracle has paid for the license-based software vendors it has acquired. (Of course, some of the discrepancy can be attributed to NetSuite’s enviable 30% growth rate, even as the 18-year-old company hits a $1bn run rate.)

Specifically, consider Oracle’s purchase more than a decade ago of PeopleSoft, which would stand as a representative ERP transaction for the ‘Software 1.0’ era while NetSuite serves as a ‘Software 2.0’ deal. Although Oracle paid $1bn more for PeopleSoft than NetSuite, PeopleSoft generated three times more revenue than NetSuite. Put another way, if we applied PeopleSoft’s valuation of 4x trailing sales to NetSuite, Oracle would have had to pay only $3.4bn – rather than $9.3bn – to take it home.

SaaS multiples

LogMeIn goes to GoTo

Brenon Daly

by Brenon Daly

Eight months after Citrix announced plans to spin off its GoTo business, the company has significantly bulked up the unit with the consolidation of rival online communications and support provider LogMeIn. The deal, which is structured as a tax-advantaged merger that values LogMeIn at $1.8bn, would increase GoTo’s revenue by about 50% to $1bn. It is expected to close early next year.

Terms of the Reverse Morris Trust transaction call for Citrix to own slightly more than half of the combined entity, holding 50.1% of the company with LogMeIn retaining the remaining 49.9%. Ownership notwithstanding, LogMeIn will have an outsized role in charting the future course of the $1bn SaaS giant.

Both the current CEO and CFO at LogMeIn will hold those respective roles at the combined firm, which will take LogMeIn’s current headquarters as its own. Further, LogMeIn will have five directors on the company’s board, with four coming from Citrix. We would attribute that weighting to the fact that LogMeIn has significantly outgrown the larger GoTo unit. In the just-completed second quarter, for instance, LogMeIn increased revenue about 28%, roughly twice the rate at GoTo.

At $1.8bn, the deal values LogMeIn at its highest-ever level. Over the past year, LogMeIn has generated $309m in sales, meaning it is being valued at 6x trailing sales. That’s a bit shy of the average of 7.5x trailing revenue paid for SaaS vendors in transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. For instance, two months ago, Vista Equity Partners paid 8x trailing sales for Marketo, a smaller but slightly faster-growing marketing automation provider that, unlike LogMeIn, runs in the red.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Pricing out an alternate reality for Salesforce-LinkedIn

Brenon Daly

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

The software buyout boom

Brenon Daly

Contact: Brenon Daly

After playing small ball for the first few months of the year, buyout shops have begun taking bigger swings in the M&A market. That’s nowhere more evident than in the bustling enterprise software sector, where private equity (PE) firms have displaced their strategic rivals as the main buyers at the top end of the market.

According to 451 Research’s M&A KnowledgeBase, PE shops have been the acquirers in four of five enterprise software transactions announced so far this year valued at more than $1bn. (The big-ticket shopping list: the $3bn take-private of Qlik, the $1.8bn take-private of Marketo and the $1.7bn take-private of Cvent, as well as the $1.1bn purchase of Sitecore.) Set against this recent string of 10-digit deals by financial buyers, the only corporate acquirer to ink a similarly sized transaction is Salesforce with its $2.8bn reach for Demandware.

The fact that buyout barons are leading the current software shopping spree is a direct reversal of recent years. At this point last year, for instance, there were four software deals valued at more than $1bn, with corporate acquirers announcing three of them, according to the M&A KnowledgeBase. More broadly, PE firms typically account for only about 10-20% of overall M&A spending in any given year. So far this year in the software sector, however, PE shops have accounted for just less than half of announced spending.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Content and data form foundation of Adobe’s M&A strategy

Scott Denne

Contact: Scott Denne

At its annual marketing user conference, Adobe laid out a strategy to extend throughout and beyond marketing by touching on every part of the customer experience with content and data offerings. The company has accumulated the biggest and broadest suite of marketing software products among any of its enterprise software peers. However, it will take many years for marketing software to become a mature segment. For Adobe to maintain its position, it will need to continue to expand its offerings.

Despite the hyperbole about the level of technology spending among CMOs, marketing software remains in an early – though promising – stage. Spending continues to rise and the landscape is fragmented. It will likely remain so as new forms of media and mobile devices continue to sprout. And with them, new methods of customer engagement and increasingly fragmented audiences and data sets. The exits of enterprise software vendors such as Teradata, Hewlett Packard Enterprise and SDL provide Adobe and other remaining incumbents with an opportunity to gain market share and push into emerging corners of this category.

Adobe began its foray into digital marketing with acquisitions – first website analytics company Omniture (2009), and then website content management vendor Day Software (2010). Those two products currently sit at the core of Adobe’s marketing suite and much of the growth in its Marketing Cloud, which currently generates $1.4bn in trailing revenue, comes through the sale of them or cross-selling other offerings to customers that already use Adobe for analytics or content management.

As Adobe looks beyond marketing and toward becoming the data and content layer that powers the customer experience landscape, it could expand into areas such as e-commerce platforms, cross-channel attribution and customer data platforms. Subscribers to 451 Research’s Market Insight Service can access a full report on Adobe’s strategy, product portfolio, competitive positioning and potential targets in the marketing ecosystem.