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.

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Emerging healthcare tech acquisitions are on the rise

Mark Fontecchio

by Michael Hill

Acquirers are reaching for healthcare companies built around emerging IT categories at an unprecedented rate in 2019. Our data suggests that widespread adoption of the Internet of Things (IoT) and machine learning among healthcare providers could make these technologies an increasingly prominent feature of healthcare IT M&A.

Just three months in, 2019 has already seen nine emerging healthcare tech deals, matching the total from all of last year, according to 451 Research’s M&A KnowledgeBase. Targets include both early-stage startups with roots in machine learning or IoT (e.g., KiviHealth and SOMA Analytics) and more mature vendors that have refined their offerings around emerging technologies (e.g., MedecinDirect, Temptime and Lightning Bolt Solutions).

Healthcare providers have been adopting IoT and machine learning throughout their networks for some time now. Indeed, our Voice of the Enterprise: IoT, Workloads and Key Projects 2018 survey found that 73% of healthcare providers report having at least one IoT project in either production or proof-of-concept stage. That level of IoT adoption puts healthcare at the top of industry verticals, right alongside manufacturing.

We expect healthcare’s adoption of these technologies to continue to build off of that head start. In 451 Research’s report on The Medical Internet of Things, we anticipate the deployment of connected medical devices to expand to 600 million by 2025 from about 300 million in 2015. And although most IoT and machine learning acquisitions in healthcare IT have been modestly sized, that level of deployment implies a prognosis of increasing size and frequency of such transactions.

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Software valuations soar in sponsor deals

Mark Fontecchio

by Scott Denne

The coordinated efforts of strategic and financial acquirers took purchases of application software vendors to a new height last year. Now, it’s the efforts of the latter alone that are pushing software deals back toward a record as sponsors place hefty valuations on such companies.

According to 451 Research’s M&A KnowledgeBase, $23bn of software assets have traded hands through the first quarter of the year, putting 2019 on pace to match 2018’s record haul ($93bn). As we discussed in 451 Research’s Tech M&A Outlook 2019, the reentry of strategic buyers played an equal role in driving last year’s total. This year, private equity (PE) buyers have contributed the lion’s share of investment through the first quarter, having spent more than $17bn on such transactions, our data shows.

PE shops are acquiring application software providers at a slightly higher clip, having bought 117 of them in the first quarter, compared with 108 in the same period of 2018. More importantly, those firms are paying an unprecedented premium through the start of the year. According to the M&A KnowledgeBase, software vendors selling to buyout shops are trading hands at a median 5.5x trailing revenue, a full turn higher than last year and extending a streak of soaring prices for software companies in sponsor-led deals.

That rise in software valuations largely follows the rise in public stocks (which usually corresponds with an increase in tech M&A valuations, as my colleague Brenon Daly pointed out last week). Looking at the three largest sponsor acquisitions of application software providers this year, two of the targets – Ultimate Software and Solium – sold above their all-time-high share price. The third, Ellie Mae, was a few percentage points below its peak, but still sold at roughly 50% higher than where it finished 2018. With the S&P 500 up 15% this year, prices for software deals don’t look ready to settle.

The ‘wealth effect’ in effect

Mark Fontecchio

by Brenon Daly

If you’re looking for direction on pricing in the tech M&A market, you might just want to cast a glance at your stock portfolio. When there’s a lot of green there, acquisition valuations tend to be ticking higher, as well. As the equity markets go, so goes the M&A market.

We saw that clearly in the just-completed first quarter, when previously beaten-down stocks surged to their strongest start to a year since 1988. Likewise, according to 451 Research’s M&A KnowledgeBase, acquirers in Q1 paid the second-highest multiples in any quarter since the end of the recession a decade ago. The valuations in the just-closed quarter only trail Q2 2018, when the US equity market was at a similarly lofty level as it is now.

First-quarter deals valued at more than $200m went off at 4.6x trailing sales, according to the M&A KnowledgeBase. That multiple is more than a full turn higher than the quarterly median since 2010, when the equity market was just one-quarter the level it is now. Even looking at the market on a relative basis, stocks are much more expensive now: The price-to-earnings ratio for the S&P 500 Index, for instance, was in the mid-teens at the start of the decade, compared with the low-20s now.

Of course, there’s long been a correlation between M&A valuations and the stock market. In some cases, there’s a direct link. For instance, when acquirers – whether fellow corporate buyers or, increasingly, financial firms – have to pay a premium on already historically high prices to pick up a publicly traded target. During Q1, First Data, Ultimate Software Group and Mellanox Technologies all got acquired at their highest-ever stock price. The M&A KnowledgeBase shows the average valuation for that trio was about 7x trailing sales.

Even beyond that, there’s a softer influence of the ‘wealth effect.’ Without going too deeply into behavioral economics, the wealth effect implies that when people – or companies, which are just collections of people, after all – feel flush, they tend to behave accordingly. Whether picking up a shiny new car or a shiny new startup, buyers that feel well-off tend to shop more – and pay up when they do.

M&A Valuations, 2016-2019
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Adobe’s M&A experience

Mark Fontecchio

by Scott Denne

As Adobe opens Adobe Summit – its annual digital marketing event starting today – the odds are against it using the main stage to announce a major acquisition. After all, 2018 was a record year for the marketing and media software vendor, which printed two $1bn-plus purchases, the first time it’s ever done so in a single year, our data shows. Still, Adobe may have deals left to do as competition intensifies around an expanding market.

In the first iteration of digital marketing, Adobe jumped out to an early lead, largely through its acquisition of website analytics specialist Omniture almost a decade ago. But now the fight has shifted to include new categories such as e-commerce, ad-tech and customer data platforms. That shift is reflected in the tag line for this year’s event – ‘The Digital Experience Conference,’ a change from past billings of the event as ‘The Digital Marketing Event.’ For Adobe, the change has been more than an exercise in corporate branding.

Last year, it paid $1.7bn for Magento, moving beyond marketing and into e-commerce software, and inking its first 10-figure purchase since Omniture ($1.8bn), according to 451 Research’s M&A KnowledgeBase. That transaction was largely a reaction to Salesforce’s earlier pickup of Demandware, which along with the acquisition of Krux in 2016, helped turn the buyer into a major power in customer experience software. Adobe’s other major purchase of 2018, the $4.8bn acquisition of Marketo, a B2B marketing automation provider, was clearly a foray into Salesforce’s turf. Adobe remains the larger of the two in experience software – it posted $2.4bn in sales of such software last year vs. Salesforce’s $1.9bn, although the latter business accelerated at a faster pace (37% annual growth compared with Adobe’s 27%).

Demand from marketers and other line-of-business executives underlies those deals. According to 451 Research’s VoCUL: Corporate Software report, 15% of all businesses are using or about to be using customer experience management (CEM) software. The adoption rates are even higher among organizations investing in a digital transformation project, where 100% of such respondents use CEM software.

With a newfound willingness to spend and a mandate that extends beyond marketing, we see multiple sectors where Adobe could expand its portfolio. It could look to counter SAP’s $8bn reach for customer feedback analytics vendor Qualtrics by purchasing that company’s competitor, Medallia. Such a move would align with Adobe’s ambition to be the system of record for customer data, although it would likely carry a price tag similar to Marketo. Or it could buy an ad server, which would give it additional customer data and a link between Adobe’s creative design software and its ad-tech products by providing creative management and optimization capabilities. Video specialist Innovid and Flashtalking, a rival with a broader portfolio, are the most compelling targets in this market.

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.

Gambling on the go

Mark Fontecchio

by Michael Hill

The market for online gambling acquisitions appears to be on another hot streak. After a record 2018 driven by an appetite for mobile gambling, buyers have continued to scoop up assets to bolster their mobile properties just as our data shows that mobile commerce is beginning to overtake other forms of digital commerce.

Paddy Power Betfair and 888 Holdings, both frequent shoppers in the space, have kept the party going into 2019, spending more than $175m so far on purchases of mobile gambling destinations such as Adjarabet, Jackpotjoy and BetBright. These early bets have put 2019 spending for online gambling targets on pace with 2018.

In all, investors put $6.1bn into online gambling properties in 2018, the highest-ever spending total for the sector, according to 451 Research’s M&A KnowledgeBase. The Stars Group’s $4.7bn play for Sky Betting & Gaming accounted for the bulk of last year’s total, while aligning with the trend that’s driven much of the M&A spending in this category – the push toward mobile gaming. In the case of Sky, mobile betting generated 80% of its revenue.

Of the 13 acquisitions of online gambling properties that took place in 2018, at least 11 featured targets that offer mobile applications for Android and iOS devices. According to 451 Research’s Global Digital Commerce Forecast 2018-2022, mobile app-enabled transactions are expected to surpass e-commerce transactions (i.e., transactions initiated on a laptop or desktop computer within a web browser) this year and will grow to 55% of all digital commerce transactions in 2022.

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

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.

I.D. Systems keeps on trucking with telematics IoT pickup

Mark Fontecchio

by Mark Fontecchio

A series of tentative steps into telematics turns into a plunge as I.D. Systems prints its largest deal to date, continuing to move its business beyond trucking asset management. The $140m purchase of Pointer Telocation gets the buyer telematics systems and software for freight, automotive and insurance industries, and marks its third telematics acquisition. Still, the scale of today’s bet outweighs any previous wagers, as the addition of Pointer more than doubles I.D.’s annual revenue.

According to 451 Research’s M&A KnowledgeBase, the pickup of Pointer eclipses I.D.’s combined spending for all other tech targets by 5x. And it’s paying a premium as well. The median enterprise value multiple for fleet management and telematics transactions has been 1x trailing revenue, according to the M&A KnowledgeBase. I.D. is valuing Pointer nearly a full turn above that – continuing a rise in valuations among telematics targets.

To illustrate that, in the past three months Bridgestone bought TomTom’s telematics business for $1bn at a 6.5x multiple on trailing revenue, while Volkswagen inked a telematics deal of its own with the $121m purchase of WirelessCar from Volvo, which went off at a 2.9x multiple. According to a 451 Research Voice of the Enterprise: Internet of Things survey from last year, three-quarters of respondents in the transportation sector cited fleet tracking and telematics as an existing or future IoT use case, more than any other.

Today’s move also increases I.D. Systems’ international reach: Most of its sales are in North America, while Pointer Telocation’s revenue is concentrated in its home country of Israel as well as South America. In addition, nearly two-thirds of Pointer’s revenue is recurring, compared with less than 40% for I.D. And finally, not only does I.D. more than double its revenue with the acquisition, it also adds a profitable company compared with its own balance sheet awash in red ink. Canaccord Genuity advised I.D., while ROTH Capital Partners banked Pointer.