Category: IPO

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

The Trade Desk trades up

Scott Denne

Contact: Scott Denne

The first successful ad-tech IPO in two years made a strong debut on Wall Street today. But don’t expect the floodgates to open for ad-tech offerings anytime soon. The Trade Desk priced at $18 per share and began trading at $28 for a market cap north of $1bn, or 7.2x trailing revenue. Within ad-tech, there aren’t many companies that offer investors the scale, growth and potential sustainability to draw such interest.

Trade Desk deployed a different sales strategy than most of its media-buying software peers. Vendors in that space were forced to choose between scaling up quickly through short-term, low-margin deals with ad agencies or fighting those agencies for direct business with marketers. Trade Desk positioned itself as a software provider to agencies only, and therefore not a threat to its own customers. Its positioning and product led revenue to grow 2.5x last year to $114m. Through the first half of this year, it’s running at $149m trailing revenue. It’s not the largest of its peers, but does have the highest growth at that scale.

Trade Desk’s debut is good news for AppNexus, which has been working toward an IPO of its own for the past year or so. However, most ad-tech vendors with the kind of growth that Trade Desk generates are simply too small to consider a public offering. And those that have the size don’t have the growth.

Today’s offering is reminiscent of Rocket Fuel’s 2013 IPO. That company also went public on the strength of scorching growth derived from sales to the agencies. Rocket Fuel currently trades down 95% from its debut. One of its problems was that it was winning high-margin sales from agencies. Once it went public and those margins became known, its customers began to demand that it take lower margins, which hindered its growth. While that’s a risk for Trade Desk, it’s far less pronounced.

Rocket Fuel was keeping about 55% of the media spending running through its platform, while Trade Desk keeps 21%. Trade Desk targets a different part of the agency business. As its name suggests, Trade Desk sells to agency trading desks – sophisticated digital media buying operations – many of which have a contractual relationship with the company. At the time of its IPO, Rocket Fuel was catering to agency buyers on a one-time basis and before most agencies’ holding companies sought to consolidate digital spending via their trade desks.

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

Coupa is latest SaaS firm to seek IPO following Apptio, The Trade Desk

Scott Denne

Contact: Scott Denne

Wall Street’s recent generosity toward software IPOs hasn’t gone unnoticed as a slew of such companies are looking to debut. Apptio and The Trade Desk recently set a range for their offerings and now Coupa has moved toward an IPO by unveiling its prospectus. The spend management vendor’s accelerating growth replicates a story that has played well lately and could enable it to top the valuation from its venture rounds.

Coupa offers cloud-based spend management software and an integrated (and free) portal for suppliers. The company believes that integrating supplier capabilities into the portal will help create a network effect to draw more buyers onto the software and vice versa. It still has massive sales and marketing costs, although there are signs that this strategy is beginning to work. Revenue rose 65% in 2015 to $83m and, more importantly, accelerated to 75% growth in the first half of this year. Coupa’s sales and marketing expense was 70% of its total revenue for the first half of last year, but dropped to 58% this year. Its net loss was $46m for the year.

Accelerating revenue has been a theme among SaaS IPOs. Talend, with 20% growth last year, fetches 8.5x trailing revenue on the strength of 34% and 38% year-over-year growth in the two most recent quarters. Twilio, which increased revenue 88% in 2015 from 78% the previous year, commands a 20x multiple. Coupa will be challenged to hit the heights of Twilio when it prices, although moving past Talend seems possible. Coupa and Talend have similar costs and the former’s higher growth should be enough to take it to 9x or beyond, giving it a valuation of approximately $1bn.

Consumer sentiment favors continued liberal multiples. According to 451 Research’s VoCUL survey in August, 17% of people are more confident in the US stock market than they were 90 days ago. That’s up from 14% in the same survey the previous month and just 5% from a year ago.

In its IPO, will Apptio suffer the curse of the crossover?

Brenon Daly

Contact: Brenon Daly

In what’s shaping up to be a bit of a test case for late-stage financings, a rather richly valued Apptio plans to go public. The company, which sells software that helps clients manage their IT spending, has revealed paperwork for an IPO with a placeholder amount of $75m. However, as Apptio makes its way to Wall Street, one of its existing backers on Wall Street has already trimmed the value of the company.

Institutional investor T. Rowe Price led Apptio’s $50m series D round in March 2012. At the end of 2015, the mutual fund had reduced the value of its investment by 24% compared with the previous year, according to the prospectus of the fund that holds Apptio equity. T. Rowe also marked down by a similar amount its holding of Apptio shares from a financing a year later. Fellow mutual fund Janus led the $45 series E in May 2013, Apptio’s last private round. According to Apptio’s prospectus, the company sold shares to Janus and other investors in that round at $22.69 per share.

Of course, valuations rise and fall every day on Wall Street. And startups that have drawn big money from mutual funds only to see their shares get marked down after the purchase often say the downgrades are mere ‘accounting’ moves made by people who don’t really understand Silicon Valley finance. However, in the case of Apptio, some of the discount may be warranted because it is currently growing only half as fast as it was when it raised its big slugs of capital from the so-called crossover investors.

In the first two quarters of 2016, Apptio has increased revenue a solid-but-not-spectacular 22%. That’s the same pace as its full-year 2015, but just half the rate of 2014. At the same time as Apptio’s growth has slowed, losses have mounted. It lost $41m in 2015, up from $33m in 2014. Although losses have eased so far this year, Apptio still very much runs in the red.

Part of the reason for the deep losses is that Apptio’s software is a rather heavy implementation, which can take several months to set up. For its software to be useful, clients need to have an IT budget that runs in the hundreds of millions of dollars, and some customization of the software is typically required. (Roughly 20% of the vendor’s revenue comes from professional services.)

Although Apptio has collected an enviable roster of clients, it counts just 325 total customers. As a point of reference, that’s roughly the same number of customers that Workday had when it went public in 2012. Further, the two companies were roughly the same size, recording about $130m in revenue in the fiscal year leading up to their mid-summer filings. However, at the time of their IPOs, they were on very different trajectories: Workday was doubling revenue, compared with 22% growth for Apptio. Obviously, for growth-focused Wall Street, that is almost certain to result in very different valuations for the companies. Workday hit the market at an astonishing 40x trailing sales, while Apptio would probably count itself fortunate to garner a double-digit valuation.

Enterprise tech IPOs* over the past 12 months

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

*Includes Nasdaq and NYSE listings only

Trade Desk looks to trade publicly

Scott Denne

Contact: Scott Denne

The Trade Desk unveiled its prospectus Monday, showing that its agency-focused strategy may have enabled it to meet the challenge of scaling an ad-tech business. Most of Trade Desk’s peers have a complicated relationship with ad agencies and the holding companies that own them. Agencies control an outsized amount of ad spending, yet they treat most media buying platforms as a media rather than software purchase, and play ad-tech competitors off each other to see who will take the lowest margin for a campaign. This has led many media buying platform purveyors to seek to sell their wares to marketers directly, bypassing the agencies and hoping to exchange unpredictable, low-margin orders from agencies for long-term, software-like contracts.

Rather than fight ad agencies, Trade Desk embraced them by selling its software strictly to them and not to the agencies’ marketer customers. That bet has paid off. The company’s revenue increased to $114m in 2015 from $45m a year earlier. Its topline rose 83% year over year through the first six months of 2016. That growth hasn’t come at the expense of profits. The Ventura, California-based vendor eked out a tiny profit in 2014 and grew that to $15m last year. This year it’s on pace to bump that up a bit.

Selling to ad agencies is expensive. Profits remain elusive for many ad-tech firms because the sales process is never-ending, as many agencies choose to purchase media buying platforms as a one-off media expense, rather than an ongoing license or subscription. Trade Desk appears to have gained more traction in selling software contracts to agencies (389 of its agency customers have contracts in place with minimum spending levels), which has kept its marketing and sales costs down as the use among existing customers has risen.

Trade Desk allocated just 24% of its 2015 revenue toward selling its products. Other publicly traded ad-tech providers spend far greater portions of their net revenue on this activity. TubeMogul spent 41% of its revenue on sales and marketing last quarter. Rocket Fuel shelled out 55%, though far lower than the 88% it was spending at its IPO. Ad network specialists Tremor Video and YuMe were even higher at 65%.

Its ability to sell ad-tech as software, its high growth and its profitability should enable Trade Desk to fetch a superior multiple than its peers when it does begin to trade. And it will need to trade well up from those companies to get a valuation above the $600m it garnered in a private financing earlier this year. TubeMogul is the best available comp for Trade Desk. Both vendors offer a media buying platform, and both position themselves as software firms rather than services or media companies. At 57% last year, TubeMogul’s growth is less than half that of Trade Desk and the vendor has yet to turn a profit. Despite garnering one of the best multiples in ad-tech, TubeMogul trades at roughly 2x net revenue. To hit $600m, Trade Desk would need to get 4x trailing revenue.

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

The comeback kids of the tech IPO market

Brenon Daly

Contact: Brenon Daly

If there’s going to be a recovery in the tech IPO market, information security (infosec) looks like it will lead the way. According to 451 Research’s recently launched M&A KnowledgeBase Premium, one-quarter of the 72 startups that we think are of a size and mind to go public in the near future come from the infosec industry. The ‘shadow IPO’ pipeline is one of the key features of the new premium version of 451 Research’s industry-leading M&A KnowledgeBase.

The premium version of our M&A KnowledgeBase features a full financial profile of the candidates, as well as 451 Research’s qualitative assessment of each company’s technology and its competitive positioning in the market. For instance, the profile of Veracode includes our proprietary estimates of the application security startup’s bookings for both 2015 and 2016, plus our analysis of its expansion into the new growth market of mobile apps. Altogether, KnowledgeBase Premium has a shortlist of 18 infosec vendors that could be eyeing an upcoming IPO, including Carbon Black, LogRhythm and ForeScout.

Although the IPO market has been mired in a slump recently, with just three enterprise-focused offerings so far this year, many private companies have matured to the point where their business models are comparable to their publicly traded brethren. Further, many are putting up growth rates that leave Nasdaq and NYSE firms in the dust. That’s particularly true in the infosec space, where a recent survey of 881 IT budget-holders by 451 Research’s Voice of the Enterprise found that 46% of respondents had more to spend on security in the coming quarter, compared with the start of the year. That was 10 times the percentage who indicated that their infosec budgets were shrinking.

Of course, merely having a business that’s ready to go public doesn’t necessarily mean that the company needs to file an S1. Most of the infosec companies have plenty of cash in their treasuries, with the 18 pre-IPO vendors having raised about $2bn in venture backing. (KnowledgeBase Premium not only tracks fundings, but in some cases it also notes the valuation of the funding.) Additionally, many of the publicly traded infosec names – including both of the sector’s most recent debutants, Rapid7 and SecureWorks – haven’t necessarily found bullish investors on Wall Street.

But as the Twilio offering and its subsequent aftermarket trading has shown, a company with a strong growth story can almost always find buyers, regardless of what’s happening in the overall market. With that in mind, we’ll watch for more of the 72 names on our M&A KnowledgeBase Premium IPO shortlist – particularly those in the bustling infosec arena – to move from the pipeline to Wall Street in the coming quarters.

IPO pipeline by sector

Source: 451 Research’s M&A KnowledgeBase Premium

Is Apigee set to be an acquiree?

Brenon Daly

Contact: Brenon Daly

After a dual-track process ended in an IPO in April 2015, Apigee is understood to be trying once again to sell itself. Several market sources have indicated that the API management vendor has retained Morgan Stanley to run the process. According to our understanding, a handful of large software infrastructure vendors are considering a bid for Apigee, which would likely trade for roughly $500-600m.

Apigee has had a tough run as a public company. In its 16 months on the Nasdaq, it has never traded above its IPO price of $17 per share. (Morgan Stanley led Apigee’s IPO.) During the broad market meltdown in February, Apigee stock touched $5. Although shares have nearly tripled in value in the half-year since then, the company is still underwater from its debut.

One reason for Wall Street’s bearishness is that Apigee is viewed as a ‘sub-scale’ software provider. It likely finished its most recent fiscal year, which ended at the end of July, with less than $100m in revenue. (For comparison, that is less than privately held MuleSoft, which is a sometimes rival to Apigee with its broader integration portfolio.) Further, Apigee is running in the red, losing about $10m in each of the past four quarters on a GAAP basis.

Possible bidders for Apigee, which currently has a market cap of $435m, include big software firms such as existing partners SAP and Pivotal, as well as CA Technologies. According to our understanding, CA was a serious suitor for Apigee before the IPO. That would have been on top of the existing API management CA obtained with its purchase of Layer 7 in April 2013.

Further, CA bought agile software development tools supplier Rally Software last year in a $480m transaction that lines up fairly closely – both strategically and financially – with a possible pickup of Apigee. Both play a part in the broader software lifecycle management market, and both found Wall Street to be a fairly inhospitable neighborhood. Rally garnered 5.5x trailing revenue in its sale to CA. However, Apigee is growing faster (roughly 30%, compared with about 20% at Rally) so would likely get a bit of a premium. Apigee currently trades at about $435m, or 4.7x trailing sales.

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

In latest infosec consolidation, Avast + AVG = AV(G)ast

Brenon Daly

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

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Talend to test the waters on Wall Street

Scott Denne

Contact: Scott Denne

European data-integration company Talend has set its sights on a US listing. Should Talend make it to the public markets, it would become the second venture-backed tech IPO of the year. Last week’s offering by Twilio showed that Wall Street still has an appetite for growth stocks – it currently trades at more than double its IPO price. Talend does little to satisfy that hunger. While Talend and Twilio both posted accelerating growth rates last year, Talend’s topline jumped just 21%, compared with Twilio’s 88%.

Talend’s unveiled IPO prospectus shows that it put up $76m in revenue last year, amid signs that growth is accelerating as subscription revenue increases and services fees hold steady. Subscription revenue rose 27% to $63m while services fees stayed flat at $13m. That pushed its growth rate up three percentage points from 2014’s figure and caused the topline to grow 34% year over year (YoY) in the first quarter. Losses have persisted. Talend has generated a net loss of $19-22m for each of the three years covered by the filing. Its first-quarter numbers show a similar trajectory for 2016.

A secondary sale of the company’s stock last summer valued the business at about $250m. At that level, the company would trade at 3x trailing revenue. We would expect it to price up from that level. Yet it’s hard to envision Talend trading at a multiple beyond that of its open source compatriot Red Hat. For comparison, the latter company garnered a 5.5x multiple on 18% growth YoY last quarter and trailing 12-month revenue of $2.1bn. Talend’s valuation could also be pulled down by fears over the ‘Brexit’ decision, as more than half of its revenue comes from the EMEA region.

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.

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