Category: IPO

Big or small, Wall Street likes them all

Mark Fontecchio

by Brenon Daly

On the same day the NYSE gave a warm welcome to a pair of enterprise tech vendors that are both running right around a level that, historically, would be the absolute minimum for a company to go public, investors also got their first official glimpse at the financials of a consumer tech behemoth that’s 10 times the size of the debutants. When the tech IPO market can cover that broad a spread, it truly is open for business.

Start with those companies that have already seen through their offering. The relatively slight build of both PagerDuty and Tufin Software Technologies didn’t really hurt them as they stepped onto the NYSE on Thursday. That’s particularly true for PagerDuty, a subscription-based IT incident-response software provider that put up just $118m in sales last year. Tufin, which recorded just $85m in sales in 2018, is about a year behind PagerDuty, assuming it holds its roughly 30% growth rate.

Nonetheless, PagerDuty priced its offering above the expected range and soared more than 50% on its debut. As we noted in our report on the offering, investors are valuing the company at some $2.8bn, or more than 20 times last year’s sales. Having already secured its standing as a unicorn in the private market, PagerDuty is now approaching ‘tricorn’ status in the public market.

Tufin debuted at a far more muted valuation, but still created more than $600m of market value. With 34.2 million shares outstanding (on a non-diluted basis), Tufin is trading at more than 7x 2018 revenue. As we outlined in our preview of the offering, Tufin’s valuation probably has less to do with how much revenue it generates than how it generates that revenue: back-end-loaded sales in a license/maintenance model.

But both those realized offerings on Thursday were very quickly and unceremoniously overshadowed by the anticipated debut of Uber. The ride-hailing company’s planned IPO, which will be brought to market by a herd of 29 underwriters, makes the offerings of Tufin and PagerDuty seem like a series B funding. Across the board, Uber’s financials – funding, revenue, losses – are orders of magnitude larger than either of the enterprise-focused IPOs. And yet, for all the variety of the companies and their offerings, each of them can find investors ready to throw more capital their way. The bulls are running right now.

Figure 1
Figure

PagerDuty calls on an exuberant IPO market

Mark Fontecchio

by Scott Denne

Following a nearly six-month lull, the market for enterprise IPOs has picked up where it left off – handing out gushing valuations to high-growth SaaS companies. PagerDuty became the newest beneficiary, pricing above its range and moving well beyond that as the stock began trading. The multiple commanded by the IT operations software vendor sets the stage for another notable year for enterprise IPOs.

In its public debut today, PagerDuty’s share price jumped to $38, about 60% from where it priced its offering ($24). That surge leaves the company with a $2.8bn market cap, valuing it at 23.5x trailing revenue. It also gives PagerDuty a more favorable multiple than many of its peers. For example, the debutant trades within a turn of Elastic, a 2017 vintage IPO that’s double the size of PagerDuty – it posted $241m trailing revenue to PagerDuty’s $118m – and growing at a faster pace (70% vs. 50% year over year last quarter).

PagerDuty isn’t the only enterprise company feeling Wall Street’s good graces. Video-conferencing provider Zoom set a price range earlier this week implying a valuation of $7.7bn (about 28x revenue) on its forthcoming IPO. And infosec vendor Tufin saw a 30% bump in its debut today (we’ll cover that company in this space tomorrow). There’s little doubt that after a dip in equity prices last year Wall Street has, once again, become a welcoming place for enterprise startups – several of last year’s other IPOs trade at multiples in the 20x neighborhood.

The S&P 500 has risen 15% since the start of the year and the latest consumer confidence survey from 451 Research’s VoCUL shows faith in the US stock market coming back to the same levels as last autumn. Should new offerings continue to garner healthy valuations, this year’s IPO pipeline could fill up to compete with last year’s record of 15 enterprise technology debuts, despite the first quarter passing without one.

Figure 1
Figure

Unusual beasts from the land of unicorns

Mark Fontecchio

by Scott Denne

Typically, venture capitalists offer public investors fast-growing companies that remain far from profitability. Occasionally they come out with an IPO candidate with massive growth and a trail of red ink to match (see our report on Lyft’s upcoming offering). Rarely do they bring to market a startup with massive growth and actual profits (or even a compelling case that it could shortly become profitable). On Friday, they took the wraps off two such unusual startups – Zoom and Pinterest.

Of the two, Zoom finished its most recent fiscal year in the black. While the video communications vendor’s topline more than doubled to $330m, it generated an $8m profit. That wasn’t an anomaly, as the company, with a $4m loss, was nearly profitable a year earlier. Pinterest, while not yet profitable, cut its net loss in half to $63m last year while sales jumped 60% to $756m. Mind you, that’s a decline in net loss, not a decline relative to its sales growth, which is typically the most a venture-backed IPO candidate can boast.

Public offerings from a pair of companies with compelling financials could generate investor interest in tech IPOs more broadly. And a welcoming IPO market could provide relief to any VCs and entrepreneurs seeking large exits in the next few months, as 10-figure outcomes via M&A have dwindled in the first quarter. According to 451 Research’s M&A KnowledgeBase, 2019 has yet to see a $1bn-plus acquisition of a VC-backed portfolio company, following a record 13 of them last year.

Playing small ball in the big leagues

Mark Fontecchio

by Brenon Daly

Over the past two years, no single IT sector has put forward more highly valued IPOs than information security (infosec). Spurred by ever-increasing spending by CISOs, startups across the cybersecurity landscape are either big or getting big fast. As they graduate up to Wall Street, growth-hungry investors have lavished rich, double-digit valuations on infosec startups.

So what, then, to make of the recent IPO filing by Tufin Software Technologies? The security policy management vendor is heading to the NYSE on the back of a year where it did less than $100m in sales. And its growth rate, while a solid 30% in 2018, barely matches the pace of some of the recent infosec debutants, even as they put up more than three times more sales.

And then, there’s the crucial consideration of how – and when – Tufin generates those sales. In the current era of cloud-delivered software, Tufin sells its product in the conventional model of software licenses, plus maintenance and professional services. Further, those sales are heavily back-end-loaded, with a make-or-break Q4 providing about 34% of total revenue for the company.

It’s worth noting that all five of the other infosec providers to come public since the start of 2017 derive at least a portion of their sales from subscriptions, with the two richest valuations being given to the full cloud-based vendors. (Zscaler trades at an astronomical 34x trailing sales, while Okta garners 23x trailing sales.) Subscription revenue tends to be more predictable than lumpy sales of licenses, particularly when the average price tag of just the software – as it is in some cases at Tufin – climbs above $200,000.

That’s not to say that Tufin doesn’t have the opportunity for growth in front of it. In its prospectus, the company cites a 451 Research Voice of the Enterprise survey of 550 IT buyers and users in 2018 that shows that 83% of the respondents do not currently run any security automation and orchestration technologies at their company. Yet, encouragingly for Tufin and other vendors, more than half of the respondents (54%) plan to have it in place by 2020.

In addition to Tufin, we suspect that at least one other company will likely be paying very close attention to the upcoming IPO. Rival Skybox Security, which we understand is roughly the same size as Tufin, is thought to be tracking to an offering of its own. The difference being, as we heard it, that Skybox is targeting a debut in 2020, when it will be north of $100m in sales.

Dialing up the next round of IPOs

Mark Fontecchio

by Scott Denne

With its recent IPO filing, IT management software vendor PagerDuty lines up to become the first enterprise software company to come to the public markets after an extended drought. A hiccup in the equity markets last autumn followed by the government shutdown effectively closed the door for new tech offerings, but now the pipeline is beginning to fill up after a record 2018.

Last year witnessed 15 enterprise tech offerings (to be clear, the count includes only business technology offerings, not those from consumer tech startups), mostly in the front half of the year (three deals priced in the first quarter and seven in the second). And while this year’s first half isn’t likely to match that, the pace of filings is picking up. To be the first enterprise tech provider to go public this year, PagerDuty will race security vendor Tufin, which filed a week earlier, while Slack announced in early February that it had confidentially filed for a direct listing.

It’s fitting that PagerDuty could be the one to kick off a new round of enterprise IPOs because it’s almost the prototypical Silicon Valley IPO candidate. It’s growing fast and losing money, though not doing either at an unheard-of pace. In its most recently reported quarter, PagerDuty came up just shy of 50% year-over-year growth as it crossed the $100m TTM revenue mark. It posted a $43m loss, though that’s smaller as a share of its overall revenue than in earlier periods.

In the market for on-call management software for IT, PagerDuty is larger than its rivals VictorOps and OpsGenie, which were acquired by Splunk and Atlassian, respectively. (Subscribers to 451 Research’s M&A KnowledgeBase can view our revenue estimates for VictorOps and OpsGenie). But PagerDuty is banking on expanding into larger and more crowded markets, such as IT event intelligence and incident management, as we noted in a November report on the company. Almost all of its revenue today comes from on-call management.

Whether Wall Street ultimately decides to embrace PagerDuty for the potential of its new products or the financial results from its older offerings, the company should have little trouble pushing past the roughly $1.3bn valuation from its series D last summer. To get there, it will need to trade above 12x TTM revenue. That seems doable given Wall Street’s welcoming mood.

As we noted in our analysis of Lyft’s IPO filing , consumer confidence in the stock market sits at a 12-month high. And even though there hasn’t been an enterprise IPO to hit the public markets since SolarWinds issued shares in mid-October, those that went out last year are being generously priced. Smartsheet, for example, trades at nearly 30x revenue and sports a topline that’s about 50% larger than PagerDuty’s, with growth rates just a few percentage points higher.

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

Lyft gets IPO in gear

Mark Fontecchio

by Scott Denne

Heading toward an IPO, Lyft remains miles from profitability, and it may not be able to count on the burst of growth that drove its initial rise to get it there. In its first act, the ride-hailing service, along with its rival, Uber, disrupted an existing market (taxis). In its second act, it’s looking to build a new market by turning its network to bikes and scooters. Despite the long road to profitability, Lyft, which recently filed its S-1, could still see a warm welcome on the street.

The company finished 2018 with nearly $2.2bn in annual revenue, slightly more than double its year-earlier total and more than 5x 2016’s topline. Such growth, of course, came at a cost – it posted a $977m loss last year. Most of Lyft’s operational costs rose in tandem with revenue through 2018. While it became more disciplined with its sales and marketing spending – just a bit more than one-third of its revenue went toward sales and marketing expenses, down from more than half in 2017 – much of that goes toward incentives and refunds for drivers and riders. With Lyft still battling with Uber for both groups, it’s difficult to see that cost shrinking by much more.

Growth in its core business, while still immense, doesn’t appear to have the kind of momentum that could overcome its outstanding losses. Lyft’s expanding number of riders has decelerated. In the fourth quarter, the number of active riders using Lyft rose just 7% from the third quarter, marking the first time that sequential quarterly growth in riders dipped into the single digits. A portion of those riders (though likely a modest portion) rented bikes and scooters – a business that generated immaterial revenue for Lyft today but not immaterial costs, as the company owns those vehicles. It spent $68m on its burgeoning scooter fleet last year and another $251m to acquire bike-sharing vendor Motivate, according to 451 Research’s M&A KnowledgeBase.

Don’t expect those caution flags to keep Lyft from garnering a higher valuation in its IPO. The company last raised money over the summer with a $600m funding round that came with a $15.1bn post-money valuation. Just to match that would imply a valuation that’s 7.2x trailing revenue, a mark that should be easy to hit given Wall Street’s embrace of Silicon Valley’s most-lauded businesses. Snap, for example, still commands a 10x multiple even after losing two-thirds of its value since its debut.

Moreover, Lyft could be coming public in a welcoming environment. According to 451 Research’s VoCUL, 22% of survey respondents said they were more confident in the stock market in February than they were 90 days ago, marking the highest such reading in more than a year.

In with a bang, out with a whimper

Mark Fontecchio

by Brenon Daly

After a record pace throughout much of 2018, the enterprise tech IPO market has basically ground to a halt. And with the traditional extended holiday break for new offerings, it’s looking like the year will wrap with a two-month drought in IPOs. That’s quite a drop-off from the start of the year, when nearly two B2B tech startups were coming public each month.

Overall, our tally shows that twice as many enterprise-focused tech vendors came public in the first half of this year than the second half. (To be clear, we are counting only B2B companies that listed on the NYSE and Nasdaq. That excludes, for instance, this year’s surprisingly numerous biotech offerings as well as the handful of consumer tech startups that came to market in 2018.)

Of course, recent IPO activity has been hit hard by the fact that the broader US stock market has been hit hard. A survey by 451 Research’s Voice of the Connected User Landscape done during some of the volatile days in October showed that three times as many investors had lost confidence in the equity market since last summer as had gained confidence in it. When Wall Street feels like shaky ground, it’s hard for new offerings to find their footing.

None of that precludes new offerings next year. But to the extent that uncertainty continues to cast clouds over Wall Street in 2019, the overall climate could table IPOs for smaller, more speculative enterprise tech startups. Big names tend to be ‘bankable’ regardless of what’s happening in the broader market. (That development is also being driven by VCs, who are concentrating more money into fewer companies.)

That’s starting to play out in the related consumer technology sector. Lyft announced last week that it had put in its IPO paperwork, putting it on track for an offering in the opening months of next year. And not to be outdone, Uber is also reportedly putting its offering in place. Meanwhile, on the enterprise tech side, there’s been plenty of speculation that Palantir will exchange its long-held secrecy for a public listing in 2019.

As welcome as those new names would be, however, they won’t do much for the broader tech IPO market. No one holds out these so-called ‘decacorns’ as representative of the much bigger startup community. As anomalies, they are not going to lead other companies to market or help set a bullish tone for other tech IPOs. Instead, smaller tech vendors will be relegated to observers on Wall Street, watching on as large-cap private companies become large-cap public companies in a rather mechanical process.

Waving goodbye to Wall Street

Mark Fontecchio

by Brenon Daly

For software providers, Wall Street used to be a desirable location to set up shop. But now, an ever-increasing number of companies are waving goodbye to the neighborhood of public entities. Either the vendors bypass the fabled destination as they head to newer places with more privacy or, once public, they do a deal that’s the corporate equivalent of moving to the suburbs: consolidate with a larger software firm.

Already this year, the two major US stock exchanges have lost almost twice as many software companies as they have gained. According to 451 Research’s M&A KnowledgeBase, 15 publicly traded (or soon-to-be publicly traded) software providers have been acquired, compared with just eight new software listings.

Just today, the Nasdaq saw both medical software supplier athenahealth and cloud expense management specialist Apptio announce take-privates by buyout shops. And Qualtrics got picked off by SAP even before it had a chance to matriculate to the Nasdaq. (451 Research subscribers can look for our full report on SAP-Qualtrics on our site later today.)

The net reduction in publicly traded companies has erased tens of billions of dollars of market value from what had once been viewed as the place for software vendors to be, from both a marketing and financial point of view. For generations, software entrepreneurs founded and funded their businesses with a singular goal: IPO. Ringing the opening bell on the Nasdaq or NYSE was seen as a rite of passage for a company that aspired to grow out of its status as a ‘startup.’

Of course, tech vendors in general have been eschewing IPOs ever since the dot-com bust, in part due to regulatory changes on Wall Street. But the trend has accelerated in just the past half-decade as gigantic pools of private capital have, to some degree, replaced public market investors. For instance, Qualtrics managed to raise $400m from investors without an IPO. Domo raised almost twice that amount as a private company before its offering last spring.

All of that private-market capital has allowed software providers the luxury of operating behind closed doors for much longer, perhaps indefinitely. Institutional investors have accepted that new reality. Several deep-pocketed firms started putting money into the private market, which is a bit of a stretch for investors accustomed to the liquidity and transparency that comes with a public listing. But if software vendors won’t come to Wall Street, then Wall Street investors have to go to them.

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

Elastic adds spring to the fall IPO market

Mark Fontecchio

by Scott Denne

Investors clamored for shares of Elastic in the search software vendor’s public debut on Friday as the market for tech IPOs appears ready to bounce back after a slow summer. After pricing at $36 per share, the company’s valuation nearly doubled when trading opened at $70, giving it a market cap that’s just shy of $5bn and the kind of multiple that shows an unflagging faith in growth on Wall Street.

The developer of open source search software for IT log analysis, security analytics and other applications nearly doubled its top line in its fiscal year (ending April 30) to $160m, up from $88m a year earlier, while increasing the share of subscription revenue in its mix. That trajectory propelled the company to a 26.5x trailing revenue multiple – well beyond the $1bn valuation on its last private round, a $58m series D in mid-2016.

Few other unicorns have galloped onto the street with quite as much glamor. This year has now seen 11 enterprise tech companies enter the public markets with valuations north of $1bn, often at heated multiples, although not quite as high as Elastic’s. Zscaler came to market with a similar 26x multiple (it trades just shy of 24x now) and Smartsheet currently commands north of 20x. Longer is the list of 2018 IPOs that trade above 10x, including DocuSign, Zuora and Tenable.

The latter firm was one of just two enterprise tech providers to go public in the third quarter – a dry spell that followed an unusual burst of activity as 10 such companies debuted in the first two quarters (almost the same number that did so in all of 2017). Judging by Elastic’s offering, the dry spell had little impact on investor appetites, setting up a favorable environment for Anaplan and SolarWinds as both look to price this month.

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

Two different companies, two different exits

Mark Fontecchio

by Brenon Daly

Maybe Anaplan can pull off what its rival Adaptive Insights failed to do: make it to Wall Street. The two corporate performance management (CPM) vendors put in their IPO paperwork just four months apart, but the outcomes for the two companies are looking very different. While Adaptive Insights is probably more at home inside the portfolio of an existing enterprise software provider, Anaplan’s stronger financial profile makes it far more likely to go public and continue this year’s bullish run of enterprise software offerings.

By any number of measures at these two vendors, Anaplan’s financials are more in line with what public market investors want to see. (We would note that measuring financials is essentially what the software from each of these companies actually does.) Anaplan is half again as big as Adaptive Insights, and it’s increasing sales at a more rapid clip (40% growth for Anaplan, compared with 30% at Adaptive Insights.) Anaplan’s scale and trajectory put it more in line with other recent enterprise software debutants such as Pluralsight and Zuora.

The fact that Anaplan has lost roughly twice as much as Adaptive Insights in recent quarters due to comparatively rich sales and marketing spending probably won’t trouble public market investors, who have been focused on the top line of this year’s IPOs rather than the bottom line. Lingering concerns around Anaplan’s red ink will likely be eased if Wall Street looks at the company’s customer retention rate of roughly 120%, which puts it in the top segment for SaaS vendors. For comparison, Adaptive Insights renewed customer contracts each year at only about 100% of their value.

All of that points to Anaplan enjoying at least some premium valuation to its CPM rival. In its dual-track process, Adaptive Insights ended up selling to SaaS stalwart Workday for $1.6bn, or 13.6x trailing sales. That’s also roughly the current trading valuation for recent software debutant Zuora.

Although Zuora and Anaplan serve vastly different markets, they are identically sized ($109m in 1H 2018 revenue, with each putting up a majority of subscription sales combined with a bit of professional services) and share a similar growth trajectory. Putting the mid-teens price-to-sales valuation on Anaplan’s trailing sales of $168m puts the CPM provider in the neighborhood of $2.5bn market value, which would work out to roughly 10x forward sales, based on our estimates. Assuming that’s the case, Anaplan’s IPO exit could well be worth $1bn more than Adaptive Insights’ M&A exit.

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