Category: IPO

A highly remunerative Workday

Brenon Daly

Contact: Brenon Daly

Apparently, the third time is the charm for second-chancers. Workday became the third significant tech IPO in 2012 headed by executives who previously ran similar companies in the Internet 1.0 era. And while each of the other ‘redo’ companies (ServiceNow and Palo Alto Networks) have created more than $4bn of market value since their IPOs last summer, Workday soared past that level. In fact, on a fully diluted basis, the human capital management vendor is valued at more than the two other earlier IPOs combined.

In its offering, Workday priced its 22.8 million shares at $28 each, raising an eye-popping $638m. That’s a mountain of money, roughly three times more than most other ‘big’ tech IPOs raise. But that was just the start for the company, which was founded in 2005 by executives from PeopleSoft after that ERP veteran was acquired by Oracle.

Once trading began on Friday, the stock continued to move higher, changing hands at $47 late in the session. With about 160 million shares outstanding (on a non-diluted basis), Workday is being valued at $7.5bn. That works out to 30 times this year’s expected sales of about $250m. For an indication of just how rich that is, consider that PeopleSoft garnered just 4x sales when it was snapped up in 2005. Or another way to look at the price: Workday is commanding three-quarters of the valuation of PeopleSoft while only putting up one-tenth the sales of the first-generation version.

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

LifeLock takes its lumps in IPO

Brenon Daly

Contact: Brenon Daly

The post-IPO slide of LifeLock highlights yet another case of overinflated private market valuations. The identity theft prevention vendor has had a tough run since its debut on the NYSE on Wednesday. LifeLock priced at $9 per share, which was below its expected range, and has never traded above that level in the aftermarket. In mid-Thursday afternoon trading, shares were changing hands at about $8.10.

That decline has brought LifeLock shares to nearly the same level they were when the company sold equity more than two years ago. In May 2010, Industry Ventures paid $7.88 per preferred share of LifeLock in a series E round. That’s only a 3% discount to LifeLock’s current market price.

Obviously, both valuations are just ‘moment in time’ prices. And in this particular moment, consumer names in nearly all markets are out of favor on Wall Street. Recall that consumer Internet security provider AVAST Software pulled its IPO paperwork in late July after not being able to get a valuation it wanted.

As we look back on recent IPOs in the security market, we are reminded that where a company starts out isn’t necessarily where it ends up. For instance, enterprise security vendors Sourcefire and ArcSight both had underwhelming IPOs, trading underwater before going on a tear on Wall Street. In the end, ArcSight got taken off the board in September 2010 at four times its offering price. Meanwhile, Sourcefire is currently trading at three times the level at which it first sold shares to the public in early 2007, compared with a 30% return over that period for the Nasdaq.

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

A double-dip for tech M&A

Brenon Daly

Contact: Brenon Daly

Three-quarters of the way through 2012, tech M&A activity is looking a lot like recession-plagued 2009. Spending on deals around the globe so far this year has slid to just $115bn, a decline of more than one-third compared with the same period last year and 20% lower than Q1-Q3 2010. The dealmaking slump comes amid a solid bull market for equities, with the Nasdaq up some 20% so far this year.

Looking ahead, the rate for the first three quarters puts the full-year 2012 on track for about $150bn in total M&A spending. Assuming that pace holds, that would roughly match the level of 2009 and would represent less than half the amount spent on tech acquisitions in each year from 2005-08. (We’ll have a full report on Q3 M&A activity in tomorrow’s Daily 451.)

The disconnect between the M&A and stock markets, which historically have been tightly correlated, suggests that activity in one of the markets doesn’t necessarily reflect fundamentals. If we had to guess which one is less rooted in reality, we would probably start with the Nasdaq, which has been trading above 3,000 since early August. The tech-heavy index hasn’t been at that rarified level in 12 years.

And yet, the run has come even as corporate earnings rates have slowed, the European debt picture remains unresolved and the US economy faces huge uncertainty around both elections and the potential expiration of measures that have stimulated the economy in recent years (the so-called ‘fiscal cliff’).

Of all the concerns that are keeping corporate buyers out of the market right now, we suspect that the lackluster earnings outlook is the main reason. We expect to hear more about that in two weeks or so, when the third-quarter earnings season kicks off in earnest.

But as one indication of how the reports might go, consider that a recent survey by ChangeWave Research, a service of 451 Research, of more than 2,600 corporate employees indicated that one of every three (33%) predicted that Q3 sales at their company would come in below plan, compared with just one in five (19%) who projected that their company would top expectations. The percentage seeing sales at their companies falling short has risen steadily throughout 2012. On the other side, the percentage seeing stronger-than-expected sales in Q3 is at its lowest level since the summer of 2009.

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

Qualys looks to transition from a product to a platform

Brenon Daly

Contact: Brenon Daly

As it gets set to hit the public market later this week, the question for Qualys is whether the on-demand security vendor can make the transition from a product to a platform. The 13-year-old company is known primarily for its vulnerability management offering, which will account for the vast majority of the $100m or so of bookings it will generate this year.

But Qualys is acutely aware of the fact that it won’t get a premium valuation if it doesn’t expand beyond that. The company has already helped its own cause with the early steps it has made in expanding its portfolio. It recently noted that revenue growth is outpacing customer growth. (In the first half of this year it bumped up its overall top line by 22%, about 5 percentage points higher than its growth rate in 2011.)

Qualys has a number of advantages as it attempts to pull off the transition. For starters, the company sells its service entirely on a subscription basis, which makes it easier – both commercially and in terms of technology architecture – to add additional security offerings. Besides its vulnerability management product, Qualys already offers five other products around compliance, Web application security and other areas.

That approach has drawn in nearly 6,000 customers for the company, providing a broad base to sell new products into. Yet, as Qualys highlighted during its roadshow, the company has only begun its cross-selling efforts. Currently, only one out of five customers uses more than one Qualys product.

The underwriters for Qualys, led by J.P. Morgan Securities and Credit Suisse Securities, are likely to be conservative in their initial pricing of what would be the fourth information security vendor to go public in the past year. As it stands, the range is set at $11-13 per share. We expect Qualys to actually price above that on Thursday and then likely move higher in the aftermarket, as the previous trio of enterprise security offerings have done. Even with the expected bump, Qualys will likely only create about $500m of market value. However, if the company can emerge as a true platform, that will be just the starting point.

A solid IPO for Trulia

Contact: Thejeswi Venkatesh

Amid the consumer tech IPO lull following the Facebook offering, real estate website Trulia enjoyed a solid opening on its first day as a public company. First, it priced a dollar above its indicated range, at $17 per share. Then, encouraged by its robust growth, investors bid up the stock further to $23 per share.

Trulia provides an online marketplace, delivered through the Web and mobile applications, that lets consumers and real estate professional connect with each other. Unlike traditional real estate websites like REALTOR.com, Trulia gives users detailed information on crime, commute and schools.

On the top line, the company has put up astonishing growth. In the 12 months ended in June, Trulia generated $51m in revenue, up from $38m in calendar year 2011. It makes money from a combination of advertising on its website and a freemium model for real estate professionals, with the latter accounting for more than two-thirds of its revenue.

The offering valued Trulia’s equity at $448m, or 8.8 times trailing sales, and the company currently garners a market cap of roughly $600m, or 12x trailing sales. That’s good value creation for Trulia, which has raised roughly $33m in venture capital from Accel Partners, Fayez Sarofim and Sequoia Capital. In addition to high growth, public investors were also surely encouraged by the broader housing recovery in recent months.

That’s not to say that Trulia couldn’t have done better. In recent weeks, its primary rival Zillow has traded close to 14x sales. In part, that can be explained by Zillow’s bigger size and outpaced growth. In the 12 months ended in June, Zillow doubled its sales, reaching $90m. But last week, Zillow filed a lawsuit against Trulia, alleging that the company infringed upon a home valuation patent. Trulia denies the allegations. While the eventual outcome is not yet known, investors likely factored that into the stock price.

Qualys: a quality offering at a tough time

Brenon Daly

Contact: Brenon Daly

Continuing a run of enterprise-focused IT security IPOs, Qualys has set an initial range of $11-13 per share for its upcoming offering. The range would value the on-demand vulnerability management vendor a bit above $400m, a rather conservative valuation for a company that will record bookings of more than $100m this year. We understand that Qualys will price its offering in two weeks, and we wouldn’t at all be surprised to see it debut at a price in the mid-teens. J.P. Morgan Securities and Credit Suisse Securities are co-leading the offering.

The IPO of Qualys would mark the fourth enterprise IT security provider to hit the market in the past year, following Imperva, Proofpoint and Palo Alto Networks. That makes this particular slice of the tech landscape the most active – and most lucrative – area for IPOs. Collectively, the quartet – including the roughly half-billion-dollar initial market cap we project for Qualys at its debut – will have created about $6bn in market value.

Two-thirds of that amount comes from the wildly successful IPO of Palo Alto Networks. But we would note that Imperva and Proofpoint have been fairly well received on Wall Street, with both offerings trading above water. That stands in contrast to the loosely related consumer security companies and, even more broadly, the overall IPO market, which is highly skeptical of new offerings as a number of recent high-profile IPOs have turned out to be big money losers for investors.

For instance, shares of consumer Internet security provider AVG Technologies have broken issue and are currently changing hands at nearly their lowest level since the company debuted in February. AVG’s woeful performance contributed to the decision by AVAST Software, a similar consumer Internet security provider, to pull its IPO in late July.

Undoubtedly, the bearishness around the consumer security market is weighing on the offering from Qualys. However, we suspect that pressure will be relatively short-lived for Qualys, and the company will enjoy the same strong aftermarket performance of other recent enterprise security IPOs.

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

Co-founders set Workday IPO as ‘PeopleSoft 2.0’

Brenon Daly

Contact: Brenon Daly

Despite the initially abrupt and ultimately acrimonious end of PeopleSoft in the mid-2000s, many of the executives are back with another run at the public market. Workday put in its IPO paperwork late Thursday in what’s shaping up to be the most anticipated post-Facebook offering.

As a sign of that anticipation, Workday plans to raise $400m, nearly twice the amount of most ‘big’ tech IPOs and about four times more than the typical tech offering. To move all that paper, the human capital management (HCM) startup has enlisted no fewer than nine underwriters, led by Morgan Stanley and Goldman Sachs & Co.

Workday was founded in 2005 by Dave Duffield and Aneel Bhusri after Oracle pushed through its contentious $10.5bn deal for the first-generation ERP vendor. Perhaps conscious of how ‘their’ company got rolled into Oracle against their wishes, Workday’s two cofounders have concentrated ownership in their hands (collectively owning almost three-quarters of the company) and created two classes of stock. The structure effectively gives Duffield and Bhusri absolute control of all matters that go to a shareholder vote.

The rivalry with Oracle – and to a degree, SAP as well – also carries over into how Workday does its business. During pre-roadshow presentations, Workday executives noted that they typically pitched their on-demand product when enterprises were considering an upgrade of their current license-based ERP or HCM offering, such as Oracle’s PeopleSoft product. Workday has 325 enterprise customers.

So far, that approach has paid off in stunning growth for the company. It doubled revenue to $134m in the year ended January 31, and has more than doubled revenue in the two quarters since then: Workday recorded $120m, up from $55m in the year-earlier period. (It also has a mountain of nearly $250m in deferred revenue that it has piled up from its contracts that range from three to five years.)

The revenue growth so far in 2012 puts Workday loosely on track for revenue of about $250m. For comparison, that would make the fast-growing ‘redo’ about one-tenth the size of PeopleSoft when it was erased from the market.

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

LifeLock plans life as public company

Brenon Daly

Contact: Brenon Daly

Despite consumer technology names falling largely out of favor on Wall Street, LifeLock has announced plans for a $175m IPO. The identity theft prevention vendor, which has 2.3 million customers, ran at basically breakeven on sales of $125m in the first half of 2012. The offering is being led by Goldman Sachs & Co, which owns 11% of LifeLock, along with Bank of America Merrill Lynch and Deutsche Bank Securities.

LifeLock’s filing comes as other consumer-focused technology IPOs have had a rough go of it. That’s true across a number of markets, from social networking (Facebook) to gaming (Zynga) to online backup (Carbonite has been nearly cut in half during its first year on the public market) to information security (AVAST Software pulled its IPO paperwork last month). Fairly or not, LifeLock – a company that spends about half its revenue on sales and marketing – will have to work its way through that bearish sentiment in the market.

Still, the company has been steadily increasing its subscriber base (at about a 20% rate) as well as bumping up its average revenue per subscriber (currently $9 per month). That has helped LifeLock get to a point where it generated $21m of free cash flow in the first half of 2012, which is only slightly less than it generated in all of last year. Also, we recently noted that LifeLock used some of that cash to take its first step into the enterprise market, acquiring ID Analytics. Although that business is still less than 10% of total revenue, it’s a welcome hedge for LifeLock, both in terms of technology and end markets.

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

InronPlanet throws its IPO paperwork on the scrap heap

Brenon Daly

Contact: Brenon Daly

The road to the public market is turning into a dead end for an increasing number of companies. IronPlanet has pulled its IPO paperwork, just days after AVAST Software also scrapped its planned offering. The two companies operate in wildly different markets, with IronPlanet serving as an online marketplace for industrial machinery and AVAST selling security software to consumers. While both cited ‘market conditions’ as the reason for their withdrawals, it’s a bit of a stretch to see it applied to both.

In the case of AVAST, the company almost certainly could have gotten public, if it were willing to take a bit of a discount on its pricing. (AVAST, which was growing at about 40% annually and richly profitable, was nonetheless dinged by concerns over its focus on the consumer, rather than enterprise, market as well as a less-than-robust IPO by fellow European security software provider AVG Technologies.) But rather than cut its value to convince investors to buy into the offering, AVAST will stay private until ‘market conditions’ change.

On the other hand, IronPlanet won’t make it to the Nasdaq anytime soon. Although the company filed its prospectus in March 2010, it hadn’t updated its financials in more than a year. And the numbers it revealed then would have gotten it roughed up on Wall Street. In 2010 (the latest full-year results available), IronPlanet grew just 7%, down from 56% in 2009. (The paltry growth rate continued in the first half of 2011, too.) Meanwhile, IronPlanet has swung to a loss after posting black numbers in the past. That’s clearly not the profile of a company that will appeal to investors, particularly ones that have been burned on their investments in recent IPOs that have posted slowing growth and declining margins.

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

Eloqua hits right message at right time

Brenon Daly

Contact: Brenon Daly

The key to marketing is the right message at the right time. And in that regard, marketing automation vendor Eloqua hit both points squarely as it came public on Thursday. The company priced its shares at the high end of its expected range ($11.50 each) and then registered a mid-teen percentage gain in the aftermarket. The IPO created some $420m in market value.

Eloqua’s pitch is fairly simple: Its subscription-based platform makes the sales process for its roughly 1,100 customers more efficient. As corporate budgets continue to flow to marketing, Eloqua has actually been able to accelerate its growth rate as its revenue has increased.

The company was putting up revenue growth in the 30% range in late 2010, but has bumped that up to the 40% range over the past year. (It finished 2011 with sales of $71m, putting it on track for about $100m in sales this year. Assuming it does hit that level, it would represent a doubling of revenue since 2010.)

Wall Street, of course, pays for growth, so Eloqua is delivering the right message on the top line. Further, the revenue is coming in a relatively predictable manner: Eloqua sells only through subscriptions, which is a lot smoother than the traditional big-or-bust license model. Subscriptions account for roughly 90% of total revenue at Eloqua, with another coming 10% from professional services.

The timing of the offering, which has been on file for almost a year, also fits fairly well in the broader market right now. While consumer Internet offerings continue to get roughed up, investors have been supportive of enterprise-focused companies. Eloqua sells primarily to the B2B market, with enterprise customers accounting for about 60% of total revenue, and the remaining 40% coming from SMB customers. Add all that together, and it’s a solid start for Eloqua in its debut.

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