Category: SaaS

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

Brenon Daly

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.

ServiceNow adds some smarts to the platform with DxContinuum

Brenon Daly

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

It’s win or go home for Oracle and its bid for NetSuite

Brenon Daly

Contact: Brenon Daly

Just like this year’s World Series, there’s a dramatic win-or-go-home contest playing out in the tech M&A market. The showdown pits the ever-acquisitive Oracle against one of Wall Street’s biggest investors. The stakes? The fate of the largest SaaS acquisition ever proposed.

At midnight tonight, Oracle’s massive $9.5bn bid for NetSuite will effectively expire. In the original offer three months ago, Oracle said it will pay $109 for each of the nearly 87 million (fully diluted) shares of NetSuite, valuing the subscription-based ERP vendor at $9.5bn. That wasn’t enough for NetSuite’s second-largest shareholder, T. Rowe Price. Instead, the institutional investor suggested that Oracle pay $133 for each NetSuite share, adding $2bn to the (hypothetical) price tag.

Oracle has declined to top its own bid. Nor will it adjust the other major variable in negotiations: time. (Oracle has already extended the deal’s deadline once, and says it won’t do it again.) In an unusually public display of brinkmanship in M&A, Oracle has said it will walk away from its $9.5bn bid if enough shareholders don’t sign off on its ‘best and final offer.’ As things stand, shareholder support is far below the required level, largely because of T. Rowe’s opposition.

Does T. Rowe have a case that Oracle is shortchanging NetSuite shareholders with a discount bid? Or is the investment firm greedily hoping to fatten its return on NetSuite by baiting Oracle to spend more money? If we look at the proposed valuation for NetSuite, it’s hardly a low-ball offer. On the basis of enterprise value, Oracle’s current bid values NetSuite at 11.1x trailing sales. That’s solidly ahead of the average M&A multiple of 10.3x trailing sales for other large-scale horizontal SaaS providers, according to 451 Research’s M&A KnowledgeBase. (For the record, T. Rowe’s proposed valuation of $11.6bn for NetSuite roughly equates to 13.7x trailing sales – a full turn higher than any other major SaaS transaction.)

With the two sides appearing unwilling to budge, NetSuite will likely return to its status as a stand-alone software firm. If that is indeed the case, NetSuite will probably have to get used to that status. The roughly 40% stake of NetSuite held by Oracle chairman Larry Ellison serves as a powerful deterrent to any other would-be bidder, which was one of the points T. Rowe raised in its rejection of the deal. Assuming 18-year-old NetSuite stands once again on its own, the first order of business will be to pick up growth again. (Although there’s still the small matter of a $300m termination fee in the transaction.) In its Q3, NetSuite reported that revenue increased just 26%, down from 30% in the first half of the year and 33% for the full-year 2015.

Select multibillion-dollar SaaS deals

Date announced Acquirer Target Deal value Price/trailing sales multiple
July 28, 2016 Oracle NetSuite $9.3bn 11.1x
September 18, 2014 SAP Concur $8.3bn 12.4x
May 22, 2012 SAP Ariba $4.5bn 8.6x
December 3, 2011 SAP SuccessFactors $3.6bn 11.7x
June 1, 2016 Salesforce Demandware $2.8bn 11x
June 4, 2013 Salesforce ExactTarget $2.5bn 7.6x

Source: 451 Research’s M&A KnowledgeBase

A public/private split in Apptio’s IPO

Brenon Daly

Contact: Brenon Daly

Apptio soared onto Wall Street in its debut, pricing its offering above the expected range and then jumping almost 50% in early Nasdaq trading. The IT spend management vendor raised $96m in its IPO, and nosed up toward the elevated status of a unicorn. However, in a clear sign of the frothiness of the late-stage funding market a few years ago, Apptio shares are currently trading only slightly above the price the institutional backers paid in the company’s last private-market round in May 2013.

That’s not to take anything away from Apptio, which created some $850m of market value in its offering. (Our math: Apptio has roughly 37 million shares outstanding, on an undiluted basis, and they were changing hands at about $23 each in midday trading under the ticker APTI.) That works out to a solid 5.4 times 2016 revenue, which we project at about $157m. (Last year and so far in the first half of 2016, Apptio has increased sales in the low-20% range. That growth rate, while still respectable, is about half the rate it had been growing. We suspect that deceleration, combined with uninterrupted red ink at the company, help explain why Wall Street didn’t receive Apptio more bullishly.)

In midday trading, Apptio’s share price was only slightly above the $22.69 per share that it sold shares to so-called ‘crossover investors’ Janus Capital Group and T. Rowe Price, among other investors, in its series E financing, according to the vendor’s prospectus. A relatively recent phenomenon, crossover investing has seen a number of deep-pocketed mutual funds shift some of their investment dollars to private companies in an effort to build an early position in a business they hope will come public and trade up from there.

However, given the glacial pace of tech IPOs in recent years as well as the overall deflation of the hype around unicorns, that strategy hasn’t proved particularly lucrative. In fact, many of the price adjustments that mutual funds have made on the private company holding have been markdowns.

But the institutional investors would counter that the short-term valuation of their portfolio matters less than the ultimate return. For the most part, we’ve seen conservative pricing of tech IPOs in 2016. (Twilio, for instance, has more than doubled since its IPO three months ago.) Apptio probably doesn’t have the growth rate to be as explosive in the aftermarket as Twilio, but it can still build value. That’s what investors – regardless of when they bought in – are banking on.

Recent enterprise tech IPOs*

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
Apptio September 23, 2016

*Includes Nasdaq and NYSE listings only

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.

Workday nabs Platfora for big-data analytics

Scott Denne

Contact: Matt Aslett

In keeping with the trend of SaaS application vendors snagging stand-alone analytic capabilities, human capital management specialist Workday has bought Platfora, a big-data discovery and visualization provider. Workday’s motivation for the purchase is to complement the analytic capabilities already built into Workday Financial Management and Workday Human Capital Management – without users having to export data outside Workday.

Workday is not disclosing how much it is paying for Platfora, and while we imagine it was more than the $26.3m and estimated $35m it previously spent for Identified and Cape Clear Software, respectively, we would be surprised if the target’s backers generated a significant return on the combined $95.2m they invested in its four funding rounds.

While it has been reticent to share exact numbers, Platfora has clearly built up a decent-sized list of customers. Over time, the company has shifted its focus beyond Hadoop visualization to also address data discovery and preparation, while adding support for open source SQL-on-Hadoop projects and the Apache Spark in-memory processing engine. Platfora also provides Workday with a data discovery and visualization offering that it can use to complement the analytic capabilities that it has already added to its own applications, as well as enable business users to access data from external sources and bring it into Workday for analysis.

Workday’s Platfora buy follows similar acquisitions of analytic specialists by other SaaS application providers – such as Salesforce’s reach for EdgeSpring and Zendesk’s pickup of BIME Analytics (formerly known as We Are Cloud), although Workday doesn’t compete directly with either of these. In fact, it could be said that all three are looking to add value to take on a common enemy – incumbent enterprise application vendors such as Oracle, SAP and Infor.

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.

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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