Category: IPO

High water in the channel

Brenon Daly

Contact: Brenon Daly

In an unexpectedly strong debut, ChannelAdvisor created nearly $400m in market value in its IPO earlier this week. The 12-year-old company, which trades on the NYSE under the ticker ECOM, priced at the high end of its range and then shot up some 30% in its first session.

At the risk of bearishly mauling this bullish debut, ChannelAdvisor appears richly priced. With some 20.5 million (undiluted) shares outstanding, investors are saying the e-commerce channel advisory vendor is worth about $380m. That’s a steep valuation for a relatively small company (2012 revenue of just $54m) that’s only growing in the low-20% range and still has a negative ‘adjusted’ EBITDA figure, not to mention a net loss.

The roughly 7x valuation that ChannelAdvisor got in its IPO also looks pricey when compared with the value that a smaller rival got in its exit earlier this year. Back in February, channel intelligence sold to Google for $125m, which we understand worked out to about 4.5x trailing sales. Channel intelligence was roughly the same vintage as ChannelAdvisor, but only about half the size of the now-public company.

Still, it’s unusual for an IPO to trade at such a sharp premium to an M&A valuation, which should, theoretically, be higher because it reflects the full life value of a company. The gulf could indicate that either Google got a steal in its deal or that Wall Street may be paying too much for ChannelAdvisor.

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A big ‘DATA’ debut for Tableau

Brenon Daly

Contact: Brenon Daly

Big ‘DATA’, indeed. Tableau Software, which debuted Friday on the NYSE under the ticker DATA, created nearly $3bn of market value in its hotly anticipated IPO. The data discovery and analytics vendor becomes the latest enterprise-focused software company to command a platinum valuation on Wall Street.

Tableau priced its 8.2 million shares at $31 each, raising some $254m in the offering. Not that the company particularly needed the outside cash: It has been running in the black since 2010 and has an accumulated deficit of just $5.8m. And Tableau has been printing black numbers while doubling revenue, a rare combination that clearly resonated with investors.

After pricing at $31, shares changed hands at about $48 each in the early aftermarket. Based on the (non-diluted) share count of 58 million shares from the prospectus, the market is valuing Tableau at $2.8bn.

That’s 14x a loose projection of roughly $200m in sales for 2013. We penciled out that number based on the (probably conservative) assumption of nearly 60% growth in revenue from the $128m recorded in 2012. Whatever the exact numbers, it’s safe to say that Tableau has secured a double-digit multiple of this year’s sales.

The rarified valuation is all the more noteworthy because of Tableau’s throwback business model: It sells on-premises licenses, rather than subscriptions, which typically command higher multiples. Of course, when license sales are doubling – as they have at Tableau in each of the past two years – Wall Street can get comfortable with the model.

As a final thought, we would note that the license model certainly hasn’t hurt Splunk, which went public a year ago. While that company doesn’t compete with Tableau, the fellow self-described ‘big data’ play lines up rather closely with Tableau.

As mentioned, both fast-growing companies sell their software through licenses rather than subscriptions, and both get about 30% of total sales through maintenance and services on that software. Further, the similarities extend to what the market says the companies are worth: Splunk is valued at $4.6bn, or 23x last year’s revenue, compared with Tableau debuting at $2.8bn, or 22x last year’s sales.

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An infrequent shopper, Box buys Crocodoc to spiff up documents

Brenon Daly

Contact: Alan Pelz-Sharpe, Brenon Daly

Though likely a small deal, Box’s acquisition of Crocodoc is nonetheless significant in that it underscores the heavily funded startup’s ambition to serve as an enterprise platform rather than just product. Crocodoc provides HTML5 (originally it was an Adobe Flash service) rendering, annotation and viewing functionality for the cloud. It’s a very commonly used OEM service boasting more than 100 customers to date, including Facebook, SAP, Yammer, LinkedIn and, intriguingly, Dropbox.

Originally the firm provided free stand-alone tools, but in the past few months began to offer an Enterprise API option that allows developers to embed Crocodoc into Web applications. Traditional rendering tools have been designed with small numbers of on-premises power users in mind. On the other hand, Crocodoc began with ambitions to be a commodity cloud service, making its technology – in theory, at least – a good fit for Box.

Box is one of the hottest startups around at the moment, with huge expectations attached to the eight-year-old company. (In a round of funding late last year, for instance, investors valued Box at $1.2bn, according to our understanding.) The expectations have been fueled in part due to the roughly $280m in funding the company has received to date.

For its part, Box is using the money to pivot from the rapidly commoditizing market of file sync/share to a broader enterprise collaboration platform. To date, Box has done most of that repositioning organically. The company hasn’t announced an acquisition since October 2009. For comparison, in that same three-and-a-half-year period, rival Dropbox has inked seven acquisitions. We’ll have a full report on the transaction in our next Daily 451.

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Checking the pulse of health IT

Ben Kolada

Contact: Ben Kolada

Healthcare IT is alive and well, as evidenced by the emergence of new consumer technologies, exceptionally high valuations and investments by some of the largest old-line technology vendors. New regulations, advances in sensor technologies and ‘big data’ analytics are driving many aspects of this market for both consumers and enterprises.

New devices that track fitness, sleep and other personal health metrics are driving adoption of healthcare IT by consumers. Nearly every new wearable technology product being introduced offers some health-monitoring component. The consumer healthcare IT market is already moving from hopeful hype to valuable reality, with Jawbone recently reportedly paying more than $100m for BodyMedia. BodyMedia is Jawbone’s third acquisition; all were announced this year and all focused on healthcare.

For enterprises, Cerner’s $50m acquisition (excluding $19m earnout potential) of bootstrapped employee healthcare management software vendor PureWellness shows the variety of businesses that can make money in enterprise healthcare IT. And consolidation in the health information exchange (HIE) sector continues to go off for about 10x sales. Meanwhile, ad-supported electronic health record (EHR) startup Practice Fusion is widely expected to be considering an IPO soon. The company’s growth is attributed in large part by government initiatives incentivizing medical practices to adopt EHRs.

As for investments, Oracle recently participated in the $45m second tranche of Proteus Digital Health’s series F financing (which brought the round’s total to $62.5m). Proteus offers an ingestible sensor, used by patients to monitor internal health and by clinicians to monitor clinical trialists’ drug dosing. The plummeting cost of genome sequencing has led to a rise of big-data bioinformatics startups hoping to help make sense of the mountains of genetic data. Startups such as Bina and Spiral Genetics have recently raised capital from traditional VC firms.

FireEye eyes an IPO

Brenon Daly

Contact: Brenon Daly

Many tech IPO underwriters are spending this week trying to catch the eye of FireEye. The advanced anti-malware vendor is currently baking off for an offering later this year that will likely create the next publicly traded information security company valued at more than $1bn.

FireEye has been tracking to the public market for some time, making moves earlier this year – such as adding several executive heavyweights and raising a ‘top-off’ $50m round of funding – that indicated an IPO may be close at hand. Further, it has the financial profile that will undoubtedly find buyers on Wall Street. According to our understanding, FireEye generated some $130m in bookings in 2012, about double its bookings from the previous year.

The company, which has more than 1,000 customers, has made huge strides since it emerged from stealth in mid-2006. It has pivoted from its initial focus on the network access control market to botnets to a broader advanced anti-malware platform. Along the way it has raised some $95m in backing from investors including DAG Ventures, Goldman Sachs, Jafco Ventures, Juniper Networks, Norwest Venture Partners and Sequoia Capital, which incubated FireEye.

However fitful FireEye’s evolution has been, the company has drawn fans in the information security market. According to a late-2012 survey by TheInfoPro, a service of 451 Research, FireEye was ranked as the second ‘most exciting’ infosec company. It trailed only Palo Alto Networks, which went public last summer and currently commands a $3.5bn market capitalization.

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A big market for small IPOs

Brenon Daly

Contact: Brenon Daly

The IPO market is getting bigger by going smaller. Investors have shown they are ready to step in and buy shares of unprofitable companies that are still only generating revenue in the tens of millions of dollars. That has drawn a number of companies onto the IPO path that might have been termed ‘sub-scale’ in the recent past.

Consider the offerings – both planned and actual – from Rally Software Development, Marketo and ChannelAdvisor. All three companies finished 2012 with less than $60m in sales. Further, all three companies continue to run in the red – deeply in the red. (For instance, Marketo lost $34m in 2012 on sales of $58m. Rally doesn’t even turn an operating profit and ChannelAdvisor still runs at a negative ‘adjusted’ EBITDA.)

Not that the diminutive size or red ink hurt Rally on its Friday debut. The agile software development shop not only bumped up the size and price of its offering, but then shares, well, ‘rallied’ in the aftermarket. The stock changed hands at about $18 in mid-session trading, after pricing at $14 each.

When Rally set its range last week, we noted that the small-cap company wouldn’t necessarily be trading at the discount that typically gets assigned to that class of stocks. On a back-of-the-envelope (not fully diluted) basis, Rally has secured a valuation of roughly 6x trailing sales and 4x forward sales. With a healthy multiple like that, it’s small wonder that other small companies are lining up to hit Wall Street.

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Going mobile

Ben Kolada

Contact: Ben Kolada

In the past few years, mobile marketing M&A and IPO activity has been dominated by firms that pushed out ad impressions to consumers. The purchases of Quattro Wireless and AdMob more than three years ago were the most notable examples, with the two deals combining to create more than $1bn of M&A value. Turning to the other exit, the IPO last year of Millennial Media briefly created nearly $2bn of market value for that company. With these transactions, mobile ad publishing became an accepted form of mobile marketing.

But mobile advertising isn’t only about pushing ads out to consumers. In fact, this model may not even be the most effective. (That may be underscored by the performance of Millennial Media on the NYSE. Shares have lost about three-quarters of their value since the debut, and are now valued at just $500m.)

At the ad:tech conference, which wrapped up Wednesday in San Francisco, we noticed the emergence of a handful of startups attempting new ways to enable businesses to advertise themselves on smaller, mobile screens.

Rather than pushing out ad impressions, DudaMobile, for example, helps businesses ‘mobilize’ their own websites. Its software requires no coding knowledge. The company apparently has proven itself enough to recently expand its series B financing from $6m to $10.3m. In a similar vein, we’ve heard that bootstrapped Bizness Apps, which provides a template for small businesses to easily build custom-made apps, is experiencing considerable growth.

To our subscribers: What do you think is the next big trend in mobile advertising? Which companies or mobile advertising markets do you think are most valuable? Let us know @451TechMnA or anonymously at kb@the451group.com.

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

Tableau’s IPO ‘book’ is tech’s next bestseller

Brenon Daly

Contact: Brenon Daly

The prospectus a company files with the SEC in order to go public is nothing more than a book. And like other books, some of them languish on the shelves, collecting dust. Most attract only a little interest, with a handful of curious readers cracking open the covers. But every once in a while, a book so compelling comes along that it literally flies off the shelves. Readers can’t wait to get their hands on it.

Tableau Software, which revealed its IPO paperwork on Tuesday afternoon, is the tech industry’s next bestseller.

The data-visualization vendor had been expected to put in its prospectus about now. If anything, however, the anticipation has increased for Tableau’s offering because of the financials in its filing. The company doubled revenue in 2012 to $127.7m. Last year’s growth rate is notably higher than the mid-80% range Tableau put up in the two previous years, even though it is operating on a much larger revenue base. Its sales in 2012 were nearly 10 times higher than in 2008.

And unlike other hyper-growth tech vendors, Tableau turns a profit. Even on a GAAP basis, the company has been in the black since 2010. It has an accumulated deficit of just $1.5m. That’s pocket change compared with most other IPO wannabes, some of which have burned through tens of millions of dollars – or even more than $100m – to make it to the public market.

When Tableau does hit the market in about a month, we figure it will command a valuation of roughly $2bn. That would put it, rightfully so, on the same shelf as the bestselling IPOs from 2012: Workday, Splunk, Palo Alto Networks and ServiceNow. On average, those companies trade at about 20x trailing sales.

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Rally Software prices itself out of ‘purgatory’

Brenon Daly

Contact: Brenon Daly

It appears that Wall Street is ready to play small ball in the IPO market. Rally Software Development has set the range for its upcoming offering, which will land it squarely in the realm of small-cap stocks. The agile software development shop put its expected pricing at $11-13. Assuming Rally does come to market at that level, it will debut at a valuation of less than $300m.

Typically, companies that garner valuations in the low hundreds of millions of dollars on the market get overlooked by most institutional investors. Without big-money buyers on Wall Street, small-cap companies often trade at a discount to their larger brethren. (Some executives of smaller companies, frustrated by the valuation disparity, jokingly describe their place on Wall Street as ‘purgatory.’)

However, it doesn’t appear that Rally will necessarily be starting life at a discount. The company generated some $57m of revenue in the year that ended in January, meaning it will likely be trading at about 5-6x trailing sales and maybe 4x this year’s sales. (Rally has increased sales roughly 39% in each of the past two years. Assuming that rate ticks down slightly this year, the company could still put up about $75m of sales.)

Clearly, Rally – along with its five underwriters, led by Deutsche Bank Securities and Piper Jaffray – has done a good job telling its story to investors. And it certainly doesn’t hurt that both the broader equity markets are at all-time highs and the tech IPO market has been rewarding new issues. Both of the two previous tech IPOs (Marin Software and Model N) priced above their expected ranges and have traded up in the aftermarket.

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Cashing in on CDW

Contact: Tejas Venkatesh, Ben Kolada

Although CDW was taken private at the height of the prerecession bubble, when valuations were on the rise, its private equity (PE) owners, led by Madison Dearborn Partners and including Providence Equity Partners, may still profit handsomely from their investment. Based on our assumptions, the PE pair could record a profit of nearly $4bn on their investment. CDW filed its IPO paperwork last week.

Madison Dearborn announced that it was taking CDW off the Nasdaq in May 2007, at a valuation of about 1x trailing sales. At that time, the company was debt-free and generated $7bn in revenue in the preceding 12 months.

At the time of the take-private, CDW indicated that it expected $4.6bn of debt to be outstanding after the $7.3bn deal. Assuming all of that debt was used to finance the deal would mean that Madison Dearborn and Providence Equity would have invested just $2.7bn in equity.

If CDW reenters the public arena at the same valuation it was taken off (1x sales), then Madison Dearborn and Providence Equity’s investment will more than double. If CDW goes public at an enterprise value of $10.1bn (1x sales), backing out its $3.7bn of net debt would mean that the PE shops’ equity would have grown from $2.7bn at the time of the take-private to $6.4bn today.

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