For tech IPO market, it’s variety not volume

Contact: Brenon Daly 

This time last year, the only sound coming from the tech IPO market was crickets chirping. Not a single company made it public in Q1 2016, the first quarterly shutout since the end of the recent recession. So far this year, there’s a lot more going on, even if the recent activity lags what we might have expected after a prolonged listless period for new listings.

What the current IPO market lacks in depth, however, it more than makes up for in variety. Just since 2017 opened, we’ve seen a number of ‘outlier’ events, including a multibillion-dollar dual-track exit, a unicorn rewarded on Wall Street, the largest consumer Internet offering in three years, and even a company use the circuitous route of a blank-check deal to go public. You know it’s a strange time for IPOs when a company that had been planning to go public on the Nasdaq but opted for a sale instead goes ahead and rings Nasdaq’s opening bell when that deal closes, as AppDynamics did.

There are other indicators of just how hard the tech IPO market is to read right now, including:
-AppDynamics scrapping its planned offering after Cisco swept in with a too-rich-to-pass-up $3.7bn offer in January, days before the software vendor was set to debut on Wall Street. As rich as AppDynamics’ sale was, however, the deal looked like a discount when fellow infrastructure software provider MuleSoft did hit the market almost two months later. MuleSoft’s trading valuation nearly matches AppDynamics’ terminal value, which included a premium.
-Both of the enterprise-focused tech firms that have gone public so far this year (MuleSoft and Alteryx) raised more money from private market investors than they did from Wall Street.
-And what to say about the IPO of Snap, which lost more money in 2016 than it took in as revenue? A five-year-old company that starts its prospectus by talking about ‘eyeballs,’ and then doesn’t give investors any say about how the business should be run in any case? A media company that went public just as it was experiencing its slowest audience growth? Despite all of those questionable metrics, Snap created more than twice the market value of all enterprise tech IPOs last year.

With Okta set to debut next week and several Hadoop vendors reportedly close to revealing their paperwork, the tech IPO market has enough to keep it going for the next few weeks. However, that doesn’t necessarily mean that Wall Street will be as welcoming as it has been. The US equity indexes are about 25% higher than they were during the bear market that mauled investors in the opening months of 2016. Yet all of the indexes have recently reversed, and are in the red for the past month. Meanwhile, 451 Research surveys of investors have shown a steady erosion of confidence in the stock market, which could give them pause before buying shares in any of the unknown and unproven tech startups looking to go public.

Alteryx makes it two software IPOs in two weeks

Contact: Brenon Daly 

Data analytics vendor Alteryx has made its way to Wall Street, the second enterprise software provider to go public in as many weeks. The IPO, which raised $126m for the company, comes on the heels of a more-ebullient offering from MuleSoft. Together, the two oversubscribed IPOs indicate that the market for new offerings has rebounded from this time last year, when not a single a tech company made it public until late April.

Alteryx priced its shares at $14 each, and then edged higher to $15.50 on the NYSE during afternoon trading. With roughly 58 million (non-diluted) shares outstanding, the company is valued at about $900m. While MuleSoft more than doubled its private market valuation when it hit Wall Street, Alteryx’s IPO pricing is only slightly above the level it last sold shares to private investors in September 2015.

Although Alteryx debuted at a more modest valuation compared with MuleSoft, it did secure a double-digit multiple, albeit barely. Wall Street is valuing Alteryx, which recorded $86m in revenue last year, at 10 times trailing sales. That compares with about 16x for MuleSoft in its debut. The reason for the discrepancy? MuleSoft is more than twice as big and growing faster, increasing 2016 revenue by 71% compared with the 59% year-over-year growth for Alteryx. (Whether the comparison between the two vendors is fair or not, it is perhaps inevitable given the timing of their IPOs.)

In terms of future growth, Alteryx does face some challenges, as we have noted. Currently, the company focuses primarily on transforming and cleansing data and analyzing it using a combination of internally developed algorithms and functions based on the R open source computing statistical computing environment. Its own visualization and discovery capabilities are rather limited. Alteryx partners with Tableau, Qlik and Microsoft (Power BI) for this technology.

However, this partnership strategy could inhibit the company’s future expansion because visualization and data discovery are useful for attracting less-technical end users, which it will need to do to increase the number of users of its technology. Right now, Alteryx’s users are largely data analysts even though the company markets itself as a self-service data analytics vendor for technical and nontechnical end users.

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

MuleSoft gets a thoroughbred valuation in its IPO

Contact: Brenon Daly 

After a four-month shutout, the enterprise tech IPO market is back open for business. Infrastructure software vendor MuleSoft surged onto the NYSE, more than doubling its private market valuation. It sold 13 million shares at an above-range $17 each, and the stock promptly soared to $24.50 in late-Friday-afternoon trading. That puts the fast-growing company’s market valuation at slightly more than $3bn, twice the $1.5bn value that venture investors put on it.

MuleSoft’s debut valuation puts it in rarified air. Based on an initial market cap of $3.1bn, investors are valuing the company at a stunning 16.5x its trailing sales of $190m. That multiple is twice the level of fellow data-integration specialist Talend, which went public last July. Talend currently trades at a market cap of about $875m, or 8.3x its trailing sales of $106m. The valuation discrepancy indicates that investors are once again putting a premium on growth: MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing nearly twice as fast. (See our full report on the offering as well as MuleSoft’s ‘hybrid integration’ strategy – what it is and where it might take the company in the future.)

The IPO netted MuleSoft $221m, or $206m after fees. That’s undoubtedly a handy amount, but we would note that it is still less than the $260m it raised, collectively, from private market investors. (Somewhat unusually, there are three corporate investors on the company’s cap table.) All of those MuleSoft backers are substantially above water on their investment following the IPO. That bullish debut is likely to draw more high-flying startups to Wall Street after a discouraging 2016, when only two enterprise tech unicorns went public. This year will likely match that number next month, when Okta debuts. The identity management startup revealed its IPO paperwork earlier this week, putting it on track for a mid-April debut.

 

With Okta, infosec no longer conspicuously absent from the IPO market

Contact: Brenon Daly 

Even as several other fast-growing enterprise IT sectors have all seen unicorns gallop onto Wall Street, richly valued information security (infosec) startups have stayed off the IPO track. The sector hasn’t seen a $1bn company created on a US exchange in more than two-and-a-half years. Infosec has been conspicuous by its absence from the tech IPO market, especially considering that no other single segment of the IT market has as many viable public company candidates. Fully one-quarter of the startups in the ‘shadow IPO’ pipeline maintained by 451 Research’s M&A KnowledgeBase Premium come from the infosec space. (See related report.)

At long last, one of the infosec unicorns is (finally) ready to step onto the public market: cloud-based identity management startup Okta has publicly revealed its paperwork for a $100m offering that should price next month. The company, which raised nearly $230m in venture backing, had already achieved a $1bn+ valuation in the private market – and will head north from there in the public market.

Wall Street will undoubtedly find a lot to like in Okta’s prospectus. The company is doubling revenue each year, with virtually all of its sales coming from subscriptions. (Professional services accounts for roughly 10% of total revenue, a lower percentage than most of the big-name SaaS vendors.) Subscription revenue gives a certain predictability to a company’s top line, especially when coupled with the ability to consistently expand those subscriptions. Okta notes in its prospectus that its customer retention rate, on a dollar basis, is slightly more than 120%, an enviable rate for any subscription-based startup. Put it altogether and revenue at Okta for the fiscal year that ended in January is likely to be in the neighborhood of $160m, up from $86 in the previous fiscal year and just $41m in the fiscal year before that.

Having quadrupled revenue in just two years, Okta’s red ink isn’t likely to worry many investors. Through its first three fiscal quarters (ended October 31, 2016), Okta lost $65m, up from $55m in the same period the previous fiscal year. As is often the case with SaaS providers, Okta’s losses stem primarily from heavy spending on sales and marketing. Early on, Okta was spending slightly more than $1 on sales and marketing to bring in $1 of subscription revenue. It has since slowed the spending, with the result that in its latest quarter it spent $32m on sales and marketing to bring in $38m in subscriptions. (For comparison, Box – one of the more egregious spenders – shelled out $47m on sales and marketing to generate exactly the same subscription revenue as Okta ($39m) in its most recent quarter when it originally filed to go public in 2014.)

Okta’s IPO would represent the first new $1bn valuation for an infosec vendor on the NYSE or Nasdaq since CyberArk’s offering in September 2014. Sophos went public (rather quietly) in 2015 on the London Stock Exchange, and the two domestic infosec IPOs since then (Rapid7 and SecureWorks) both currently trade underwater from their offering. In contrast to the recent infosec shutout, startups from several other IT sectors have all been able to enhance their $1bn private-market valuation on Wall Street, including Nutanix, Atlassian, Twilio and Pure Storage. That list will get a little longer as MuleSoft is set to debut at more than a $2bn market cap, up from $1.5bn in its final round as a private company.

CA’s two M&A strategies come together in Veracode

Contact: Brenon Daly 

CA Technologies plucks Veracode out of the IPO pipeline, paying $614m for the application security scanning startup. The acquisition bridges the two areas where CA has been shopping recently: security and DevOps. According to 451 Research’s M&A KnowledgeBase, all 10 of CA’s transactions in the four years leading up to the Veracode purchase have either brought additional technology for software development or security, primarily related to identity and access management. Including Veracode, CA’s recent shopping spree has cost the company slightly more than $2bn.

Originally a spinoff of Symantec, Veracode raised $122m from investors over the past 11 years, including a late-stage round in September 2014 that was expected to bridge the company to the public market. Shortly afterward, it tapped J.P. Morgan Securities to lead the planned offering. (J.P. Morgan gets the print for advising Veracode on its sale.) The IPO paperwork was filed with the SEC but never publicly revealed.

As it angled toward Wall Street, however, Veracode’s revenue growth slowed a bit, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimate of Veracode’s top line.) Also working against an IPO for Veracode has been the rather lackluster market for new tech offerings overall, compounded by a slump on Wall Street for the two previous information security vendors to come public on US exchanges, SecureWorks and Rapid7. In opting for a sale rather than an IPO, Veracode secured a valuation that essentially matches the multiple that CA paid in its similarly sized pickups of fellow infrastructure software providers Automic Software in December and Rally Software in May 2015.

Veracode has steadily expanded its customer base, more than doubling that count since 2014 to 1,400. And, based on 451 Research surveys of more than 200 information security buyers, the company still has room to move higher once it is acquired by CA, which is expected in Q2. In our Voice of the Enterprise: Information Security survey in late 2016, Veracode ranked only as the fourth-most-popular supplier of application scanning, trailing open source tools from Qualys and IBM.

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

‘Eyeballing’ the farcical Snap IPO

Contact: Brenon Daly 

It might seem a bit out of step to quote the father of communism when looking at the capital markets, but Karl Marx could well have been speaking about the recent IPOs by social networking companies when he said that history repeats itself, first as tragedy and then as farce. For the tragedy, we have only to look at Twitter, which went public in late 2013. The company arrived on Wall Street full of Facebook-inspired promise, only to dramatically bleed out three-quarters of its value since then.

Now, in the latest version of Facebook’s IPO, we have last week’s debut of Snap. And, true to Marx’s admonition, this offering is indeed farcical. The six-year-old company has convinced investors that every dollar it brings in revenue this year is somehow three times more valuable than a dollar that Facebook brings in. Following its frothy offering, Snap is valued at more than $30bn, or 30 times projected 2017 sales. For comparison, Facebook trades at closer to 10x projected sales. And never mind that Snap sometimes spends more than a dollar to take in that dollar in revenue, while Facebook mints money.

Snap’s absurd valuation stands out even more when we look at its basic business: the company was created on ephemera. Disappearing messages represent a moment-in-time form of communication that people will use until something else catches their eye. (Similarly, people will play Farmville on their phones until they get hooked on another game.) Some of that is already registering at the company, which has seen its growth of daily users slow to a Twitter-like low-single-digit percentage. Any slowing audience growth represents a huge problem for a business that’s based on ‘eyeballs.’

And, to be clear, the farcical metric of ‘eyeballs’ is a key measure at Snap. In its SEC filing, the company leads its pitch to investors with its mission statement followed immediately by a whimsical chart of the growth in users of its service. It places that graphic at the very front of the book, even ahead of the prospectus’ table of contents and far earlier than any mention of how costly that growth has been or even what growth might look like in the future at Snap. But so far, that hasn’t stopped the company from selling on Wall Street.

Snap’s debut through a TV lens

Wall Street investors seem to think social media will be a winner-take-all game. Our view is that just as there were many TV shows vying for audiences in the last era of media, there will be many new-media ‘shows’ such as Twitter, Spotify and Tinder where audiences divide their time. Snap, the maker of the popular Snapchat app, priced its offering Wednesday night at $17 per share and jumped more than 50% by Thursday afternoon, giving it a market cap of $29bn, or 72x trailing revenue. Snap is a show that’s valued as a network.

The company builds social media apps focused on the smartphone camera. It was founded around the idea of sending photos to individuals that would vanish and has since built out other capabilities such as filters and lenses to augment the pictures and stories to share with larger groups. Those features have made it popular with 18-34 year olds in North America, a demographic that’s highly coveted by advertisers and increasingly hard to reach as they spend less time on TV than older audiences. That demographic, mixed with ad offerings such as sponsored lenses and other nontraditional, interactive products, has led to scorching revenue growth.

Snap only began to generate sales from its ad offerings in mid-2015 and annual revenue grew almost 7x to $404m in 2016 (its losses are even larger thanks to hefty IT infrastructure costs). Early signs suggest that revenue will continue to grow rapidly – at least in the short term. High-ranking advertising executives have publicly lauded the company and the results that it generates for their clients. And Snap had an ARPU of just $2 last quarter for its 68 million North American users. By comparison, Facebook generates about $20. Yet Facebook trades at just 12x revenue, meaning that Snap’s newest investors have priced the company as if it has already closed that gap. Facebook took more than four years to grow its North American ARPU by that amount.

The key nuance for us is that where Facebook offers a broad identity platform that touches most of the US Internet population, Snap is limited to a single (albeit valuable) demographic. Facebook has a platform that can (and does) bolt on other social networks (or shows, to stick with the analogy). And Facebook is protected by a network effect that Snap doesn’t benefit from.

Snap’s pitch that it could be an Internet powerhouse is built on the assumption of continued growth of revenue and audience through new product development (both new ad offerings and new consumer products). Its total daily average users grew just 3% over the fourth quarter to 158 million. Compare that with its quarterly growth rate of 14% a year ago and it looks like Snap is running out of steam. By contrast, Facebook put up 9% quarterly user growth leading up to its own IPO (off an audience that was then three times as large as Snap’s current count).

A broken promise to be the third leg of the Google-Facebook digital media stool led Twitter’s stock to shed two-thirds of its value since its 2013 IPO once it became obvious that its audience size had plateaued. Snap could be setting itself up for the same trap. Twitter currently trades at 3.5x trailing revenue. Snap’s coveted demographic and unique ad formats give it better growth potential than Twitter, even if audience expansion does indeed stall. Yet Snap’s current valuation forces it to chase an audience with Facebook-like scale and the window for it to be a solid but not dominant media company has now disappeared.

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

A mule that’s actually a unicorn

Contact: Brenon Daly 

Unlike a fair number of late-stage startups, MuleSoft is no donkey trying to pass itself off as a unicorn. The fast-growing data-integration specialist has tripled revenue over the past three years, and appears to be on track to put up about $250m in sales this year. More importantly, MuleSoft is not hemorrhaging money. That should play well on Wall Street, which has telegraphed that it will no longer reward the growth-at-any-cost strategy at startups that want to come public (ahem, Snap Inc).

Assuming MuleSoft does indeed make it to the NYSE, where it will trade under the ticker MULE, it would mark the first enterprise technology IPO since last October. Of course, Snap is currently on the road, telling potential investors that its business model, which consists of hardware and disappearing messages, is the next Facebook rather than the next Twitter. But we’ll leave aside the offering from that consumer technology vendor, which just might be able to convince investors that losing a half-billion dollars last year, which is about $100m more than it booked as revenue, is a sustainable or even desirable business model.

Instead of Snap’s planned IPO, MuleSoft’s offering lines up more closely with fellow infrastructure software provider AppDynamics. (At least up to the point where Cisco comes in with a too-good-to-be-ignored $3.7bn offer.) A glance at the prospectus from each vendor shows both growing at a rapid clip (AppDynamics posted a slightly higher rate, even off a bigger base) and posting GAAP numbers that were at least headed out of the red (MuleSoft lost less than AppDynamics, on both an absolute and relative basis). Also, both firms had annual customer retention rates, measured by dollars spent, of roughly 120%. Wall Street eats up that sort of metric.

MuleSoft raised roughly $250m in total funding, most recently announcing a $128m round in mid-2015. With investors clamoring for growth tech companies right now, MuleSoft could certainly start life as a public entity with a double-digit multiple. Maybe not the nearly 18x trailing sales that AppDynamics commanded in its sale to Cisco. (After all, that was terminal value, not trading value.) But MuleSoft could almost undoubtedly convince Wall Street that it’s worth a premium to Talend, a rival data-integration vendor that came public last summer and currently trades at about 7x trailing sales. MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing twice as fast. That profile will likely boost MuleSoft’s initial valuation on Wall Street to north of $2bn, or 10x its trailing sales of $190m.

2016 enterprise tech IPOs*
Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Coupa October 7, 2016
Everbridge October 11, 2016
BlackLine Systems October 27, 2016
Quantenna Communications October 27, 2016
Source: 451 Research *Includes Nasdaq and NYSE listings only

451 Research M&A Outlook webinar

Contact: Brenon Daly

After a slow start in January, what does the rest of the year hold for tech M&A? Will 2017 rebound like 2016, which had a similarly slow opening month only to surge later in the year to finish with the second-highest annual spending total since the internet bubble burst? Or will this year settle back down to more typical post-recession levels, which would mean a decline of about 50% in spending from 2016’s total?

Join 451 Research tomorrow for an hour-long webinar as we look at the recent activity and forecasts from both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Additionally, we’ll look at specific themes that are likely to play out in key sectors of the IT market, including software, security and mobility. The webinar starts at 10:00am PST on Tuesday, February 7, and you can register here.

Snap pictures a massive valuation in upcoming IPO

Contact: Scott Denne

Snap, the company behind the social networking app Snapchat, has taken the next step toward one of the most highly anticipated IPOs by disclosing its prospectus. The documents show astonishing revenue growth and a strong hold on a coveted demographic that will have some investors believing it could become the next major online media company. No less astonishing are Snap’s valuation expectations. Based on the price of its last private funding, the company carries a valuation of about $25bn, roughly 62 times trailing revenue. For comparison, Facebook trades at 12x, Alphabet (Google) at 5x and Twitter at 4x.

There’s no doubt that Snap has built an incredible media business. It has 158 million daily users, 68 million of them in North America. A majority of those users are 18-34 years old, a widely sought after demographic by advertisers and one that’s increasingly difficult to reach through television ads. That’s a big part of the reason why Snap’s revenue has grown sharply – it only began to post sales in 2015.

Snap generated about $2 per user in North America last quarter. Facebook generates about $24, so it’s not unprecedented for Snap to grow this number by 10x. And it will have to do so, as there’s not much space left for Snap within that demographic. There are about 110 million people in North America that fall into that age group and Snap’s daily users in North America grew by less than 5% last quarter. (Sales from international audiences at both social networks are a fraction of those from North America.)

To keep users and advertisers engaged, the company points to its history of generating new products and features. While it’s been successful in doing that to this point, it’s challenging to keep that momentum going on a platform that’s designed to entertain. The Snap team seems to have an eye for design and entertainment, but the offering documents cast doubt on its judgement in other parts of the business.

Nearly all of the company’s infrastructure runs on Google’s cloud and Snap signed a deal last month that commits it to spending $400m per year for the next five years on Google infrastructure. Snap’s ambition is to carve out a large share of the digital advertising market, and it’s hard to justify running its critical infrastructure with its largest rival.

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