MuleSoft gets a thoroughbred valuation in its IPO

Brenon Daly

Contact: Brenon Daly 

After a four-month shutout, the enterprise tech IPO market is back open for business. Infrastructure software vendor MuleSoft surged onto the NYSE, more than doubling its private market valuation. It sold 13 million shares at an above-range $17 each, and the stock promptly soared to $24.50 in late-Friday-afternoon trading. That puts the fast-growing company’s market valuation at slightly more than $3bn, twice the $1.5bn value that venture investors put on it.

MuleSoft’s debut valuation puts it in rarified air. Based on an initial market cap of $3.1bn, investors are valuing the company at a stunning 16.5x its trailing sales of $190m. That multiple is twice the level of fellow data-integration specialist Talend, which went public last July. Talend currently trades at a market cap of about $875m, or 8.3x its trailing sales of $106m. The valuation discrepancy indicates that investors are once again putting a premium on growth: MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing nearly twice as fast. (See our full report on the offering as well as MuleSoft’s ‘hybrid integration’ strategy – what it is and where it might take the company in the future.)

The IPO netted MuleSoft $221m, or $206m after fees. That’s undoubtedly a handy amount, but we would note that it is still less than the $260m it raised, collectively, from private market investors. (Somewhat unusually, there are three corporate investors on the company’s cap table.) All of those MuleSoft backers are substantially above water on their investment following the IPO. That bullish debut is likely to draw more high-flying startups to Wall Street after a discouraging 2016, when only two enterprise tech unicorns went public. This year will likely match that number next month, when Okta debuts. The identity management startup revealed its IPO paperwork earlier this week, putting it on track for a mid-April debut.

 

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.

M&A drives Intel’s future 

Scott Denne

Contact:  Scott Denne 

Intel missed the last big shift in computing. Now it’s spending aggressively to make sure that it doesn’t miss the next one. The storied chip company is using $15.3bn of its $20bn in cash to acquire Mobileye, a maker of semiconductors for assisted and autonomous driving applications. The price puts an unheard of valuation on its latest target – a valuation that suggests that Intel is still smarting from missing out on the mobile phone market. Mobileye is the latest in a line of acquisitions that show that Intel is no longer willing to bet on R&D alone to carve out its place in emerging markets like artificial intelligence (AI) and the Internet of Things (IoT).
The multiple that Intel is paying for Mobileye smashes the previous record for an acquisition of a similarly sized tech company. The purchase values the target at 41x trailing sales ($14.7bn in enterprise value on $358m in 2016 sales). According to 451 Research’s M&A Knowledgebase, that’s the highest multiple ever paid for a tech business with more than $100m in annual sales. Prior to this deal, Sirius Satellite Radio held the record from the 21.5x it paid for XM Satellite Radio 10 years ago.

Despite the valuation, Mobileye isn’t Intel’s largest acquisition. That was Altera, which it picked up in 2015 for $16.7bn to help it secure its spot in cloud datacenters and push into industrial IoT. Intel isn’t relying on a few big strategic transactions to enter emerging tech markets. In the 21 months that separate its Altera and Mobileye acquisitions, Intel purchased 11 other companies, mostly startups, including a maker of aerial drones, a pair of computer-vision vendors, and Nervana, a pre-revenue developer of AI chips (click here to see 451 Research’s estimate for that deal).

Compare that activity with 2005-2009, when Intel was plodding its way into mobile phones and never inked more than three acquisitions per year. That doesn’t mean that its attempt at the mobile phone market wasn’t costly. Between 2012 and 2014 (the last time it broke out its mobile business), Intel’s mobile unit put up a combined operating loss of $9bn and made a negligible boost to the overall topline. Intel abandoned that market as part of a restructuring midway through 2016.

Raymond James & Associates advised Mobileye on its sale, while Citigroup Global Markets and Rothschild Group banked the buyer.

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Spotify looks to machine learning as competitors raise the volume

Scott Denne

Contact: Scott Denne 

Spotify hopes that machine learning will be its encore. Two years ago, the company seemed to be pulling away from its pint-sized competitors with its then-novel on-demand music-streaming service. Now Apple and Amazon have gotten into this space, where they can leverage their large audiences and deep pockets.
Spotify has neither of those advantages. Instead, the company hopes that better data will enable it to compete with the internet’s largest vendors. On the one hand, trying to beat the likes of Amazon and Google through better data seems laughable. But music is a different beast. The data that’s easy to collect doesn’t tell you much. The data that’s hard to get provides more value.

Take the problem of music recommendation and discovery. Analyzing the relationships among simple data – artist, track and category – leads to results that are obvious and uninteresting. Telling a fan of Led Zeppelin that they might also like Aerosmith, while likely true, is of no value as such a person is likely familiar with both bands. Using that same data to make ‘long-tail’ recommendations scales up the chances of inaccurate results as it forces recommendations of less-popular music.

Although the music itself is becoming a commodity, Spotify is looking to draw non-commodity data from it. Take this week’s acquisition of Sonalytic. The London-based startup is developing tech that identifies songs from short clips and musical stems, even when masked by changes in pitch, tempo and so on. Similarly, its 2014 purchase of The Echo Nest brought it technology that combined digital processing of music with natural-language-processing algorithms. By understanding the music, not the metadata, Spotify is positioned to make better recommendations, beyond identifying what’s already popular.

Similarly, a more nuanced picture of audiences could help Spotify attract artists to its platform – not just as a place to host their catalogue, but also for the analytics tools it provides. Those tools could entice artists to encourage sharing and listening of their music on Spotify and open avenues to grow its business beyond a simple subscription app into other parts of the music industry, such as promotion.

Spotify needs these efforts to bear fruit soon as its competitors are gaining ground fast. According to 451 Research’s VoCUL surveys, the company’s paid app is making only modest subscriber gains – 7% of people surveyed in December said they intended to use the paid service over the next 90 days, up from 5% a year earlier (its free service hovered at about 17% in recent surveys). Meanwhile, Apple Music went to 12% from 7% in a year and Amazon Prime Music is consistently above 20% in those surveys.

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A shift in strategies clips tech M&A valuations

Brenon Daly

Contact: Brenon Daly 

The speculative fever that helped spike tech M&A valuations at the start of 2017 has quickly been doused. After a mini-boom in high-multiple deals in January, last month came up virtually empty on richly valued exits as buyers stopped rolling the dice on acquiring startups and, instead, fell back on more old-school acquisition strategies. As a result, the broad-market price-to-sales multiple dropped a full turn from January to February, according to 451 Research’s M&A KnowledgeBase.

In the opening month of the year, tech acquirers appeared ready to write big checks for the startups they wanted. Cisco, Atlassian and Castlight Health all paid double-digit multiples for VC-backed companies in January, compared with just one buyer in February. Last month, Palo Alto Networks paid $105m for LightCyber, which works out to, barely, a 10x multiple of trailing sales, according to reports. Meanwhile, Cisco and Castlight both paid valuations closer to 20x sales and Atlassian – in its largest-ever purchase – spent $425m for Trello, a collaboration app that had only been available for a little more than two years and generated scant revenue.

Partly boosted by those handsomely valued startup exits, the average tech vendor sold for 5x trailing sales in January, according to the M&A KnowledgeBase. But in February, that broad-market valuation dropped to just 4x trailing sales. Last month’s multiple was dragged down by more conservative deal structures, such as divestitures (ARRIS Group buying the castoff Ruckus Wireless business for just 1.3x sales) and consolidation (private equity-backed Saba Software gobbling up publicly traded Halogen Software for just 2.4x sales).

If nothing else, the mixed picture for valuations so far in 2017 matches the expectation of senior bankers we surveyed last December about the coming year. In the 451 Research Tech Banking Outlook Survey, respondents were basically as likely to anticipate M&A pricing ticking up (32%) as sliding down (30%) in 2017. That’s the most-balanced forecast response ever recorded. In virtually all of our previous 11 surveys, one view – either squarely bullish or decidedly bearish – has dominated.

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CA’s two M&A strategies come together in Veracode

Brenon Daly

Contact: Brenon Daly 

CA Technologies plucks Veracode out of the IPO pipeline, paying $614m for the application security scanning startup. The acquisition bridges the two areas where CA has been shopping recently: security and DevOps. According to 451 Research’s M&A KnowledgeBase, all 10 of CA’s transactions in the four years leading up to the Veracode purchase have either brought additional technology for software development or security, primarily related to identity and access management. Including Veracode, CA’s recent shopping spree has cost the company slightly more than $2bn.

Originally a spinoff of Symantec, Veracode raised $122m from investors over the past 11 years, including a late-stage round in September 2014 that was expected to bridge the company to the public market. Shortly afterward, it tapped J.P. Morgan Securities to lead the planned offering. (J.P. Morgan gets the print for advising Veracode on its sale.) The IPO paperwork was filed with the SEC but never publicly revealed.

As it angled toward Wall Street, however, Veracode’s revenue growth slowed a bit, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimate of Veracode’s top line.) Also working against an IPO for Veracode has been the rather lackluster market for new tech offerings overall, compounded by a slump on Wall Street for the two previous information security vendors to come public on US exchanges, SecureWorks and Rapid7. In opting for a sale rather than an IPO, Veracode secured a valuation that essentially matches the multiple that CA paid in its similarly sized pickups of fellow infrastructure software providers Automic Software in December and Rally Software in May 2015.

Veracode has steadily expanded its customer base, more than doubling that count since 2014 to 1,400. And, based on 451 Research surveys of more than 200 information security buyers, the company still has room to move higher once it is acquired by CA, which is expected in Q2. In our Voice of the Enterprise: Information Security survey in late 2016, Veracode ranked only as the fourth-most-popular supplier of application scanning, trailing open source tools from Qualys and IBM.

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‘Eyeballing’ the farcical Snap IPO

Brenon Daly

Contact: Brenon Daly 

It might seem a bit out of step to quote the father of communism when looking at the capital markets, but Karl Marx could well have been speaking about the recent IPOs by social networking companies when he said that history repeats itself, first as tragedy and then as farce. For the tragedy, we have only to look at Twitter, which went public in late 2013. The company arrived on Wall Street full of Facebook-inspired promise, only to dramatically bleed out three-quarters of its value since then.

Now, in the latest version of Facebook’s IPO, we have last week’s debut of Snap. And, true to Marx’s admonition, this offering is indeed farcical. The six-year-old company has convinced investors that every dollar it brings in revenue this year is somehow three times more valuable than a dollar that Facebook brings in. Following its frothy offering, Snap is valued at more than $30bn, or 30 times projected 2017 sales. For comparison, Facebook trades at closer to 10x projected sales. And never mind that Snap sometimes spends more than a dollar to take in that dollar in revenue, while Facebook mints money.

Snap’s absurd valuation stands out even more when we look at its basic business: the company was created on ephemera. Disappearing messages represent a moment-in-time form of communication that people will use until something else catches their eye. (Similarly, people will play Farmville on their phones until they get hooked on another game.) Some of that is already registering at the company, which has seen its growth of daily users slow to a Twitter-like low-single-digit percentage. Any slowing audience growth represents a huge problem for a business that’s based on ‘eyeballs.’

And, to be clear, the farcical metric of ‘eyeballs’ is a key measure at Snap. In its SEC filing, the company leads its pitch to investors with its mission statement followed immediately by a whimsical chart of the growth in users of its service. It places that graphic at the very front of the book, even ahead of the prospectus’ table of contents and far earlier than any mention of how costly that growth has been or even what growth might look like in the future at Snap. But so far, that hasn’t stopped the company from selling on Wall Street.

Snap’s debut through a TV lens

Scott Denne 
Contact:  SCOTT DENNE

Wall Street investors seem to think social media will be a winner-take-all game. Our view is that just as there were many TV shows vying for audiences in the last era of media, there will be many new-media ‘shows’ such as Twitter, Spotify and Tinder where audiences divide their time. Snap, the maker of the popular Snapchat app, priced its offering Wednesday night at $17 per share and jumped more than 50% by Thursday afternoon, giving it a market cap of $29bn, or 72x trailing revenue. Snap is a show that’s valued as a network.

The company builds social media apps focused on the smartphone camera. It was founded around the idea of sending photos to individuals that would vanish and has since built out other capabilities such as filters and lenses to augment the pictures and stories to share with larger groups. Those features have made it popular with 18-34 year olds in North America, a demographic that’s highly coveted by advertisers and increasingly hard to reach as they spend less time on TV than older audiences. That demographic, mixed with ad offerings such as sponsored lenses and other nontraditional, interactive products, has led to scorching revenue growth.

Snap only began to generate sales from its ad offerings in mid-2015 and annual revenue grew almost 7x to $404m in 2016 (its losses are even larger thanks to hefty IT infrastructure costs). Early signs suggest that revenue will continue to grow rapidly – at least in the short term. High-ranking advertising executives have publicly lauded the company and the results that it generates for their clients. And Snap had an ARPU of just $2 last quarter for its 68 million North American users. By comparison, Facebook generates about $20. Yet Facebook trades at just 12x revenue, meaning that Snap’s newest investors have priced the company as if it has already closed that gap. Facebook took more than four years to grow its North American ARPU by that amount.

The key nuance for us is that where Facebook offers a broad identity platform that touches most of the US Internet population, Snap is limited to a single (albeit valuable) demographic. Facebook has a platform that can (and does) bolt on other social networks (or shows, to stick with the analogy). And Facebook is protected by a network effect that Snap doesn’t benefit from.

Snap’s pitch that it could be an Internet powerhouse is built on the assumption of continued growth of revenue and audience through new product development (both new ad offerings and new consumer products). Its total daily average users grew just 3% over the fourth quarter to 158 million. Compare that with its quarterly growth rate of 14% a year ago and it looks like Snap is running out of steam. By contrast, Facebook put up 9% quarterly user growth leading up to its own IPO (off an audience that was then three times as large as Snap’s current count).

A broken promise to be the third leg of the Google-Facebook digital media stool led Twitter’s stock to shed two-thirds of its value since its 2013 IPO once it became obvious that its audience size had plateaued. Snap could be setting itself up for the same trap. Twitter currently trades at 3.5x trailing revenue. Snap’s coveted demographic and unique ad formats give it better growth potential than Twitter, even if audience expansion does indeed stall. Yet Snap’s current valuation forces it to chase an audience with Facebook-like scale and the window for it to be a solid but not dominant media company has now disappeared.

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After a two-year surge, a two-month slump in tech M&A

Brenon Daly

Contact: Brenon Daly 

The tech M&A market is still struggling to get going in 2017. For the second straight month, spending on tech acquisitions around the globe totaled just half the average monthly level from last year. According to 451 Research’s M&A KnowledgeBase, tech acquirers announced just $19bn worth of transactions in the just-completed month of February, almost exactly matching the low spending level of January. Put together, the opening months of this year represent the weakest back-to-back monthly spending totals since 2013.

Similarly, the number of announced deals in February slumped to its lowest monthly level in more than three years. The 238 transactions tallied for February in the M&A KnowledgeBase represents a 30% slide from January deal volume and a 25% year-over-year decline from the average activity levels in February 2016 and February 2015.

The decline is due primarily to several of the well-known corporate acquirers either slowing their M&A machines or unplugging them altogether so far this year. For instance, neither SAP nor Intel have put up a 2017 print. Meanwhile, IBM has announced just one small transaction this year, down from a head-spinning pace of seven acquisitions in the first two months of 2016.

On the other hand, private equity (PE) firms have continued their record-setting pace. Buyout shops, which represent the sole ‘growth market’ in tech M&A right now, announced 23 deals in February – almost as many as they did in February 2015 and February 2016 combined. Three separate PE firms (Blackstone Group, H.I.G. Capital and The Riverside Company) announced at least two transactions last month.

The lackluster start to 2017 comes after tech M&A hit its two strongest years of the past decade and a half. (Tech acquirers dropped more than $1.1 trillion on deals over the 2015-16 spree, according to the M&A KnowledgeBase.) That recent record activity appears to have siphoned off some of the acquisitions in 2017. Senior tech investment bankers surveyed by 451 Research last December gave their weakest forecast for M&A spending in 2017 for any year since the recent recession.

Singtel’s Amobee takes a Turn toward a broader ad-tech platform 

Scott Denne

Contact: Scott Denne 

Singtel doubles the size of its ad-tech business with the $310m acquisition of Turn Inc, one of the earliest vendors serving the programmatic advertising market. Together, the two companies manage about $1bn in media spending. Today’s combination could help bring economies of scale to both businesses, an important and rare element of the low-margin ad-tech sector. For Amobee, Singtel’s ad-tech unit, the deal brings it a broader platform – Amobee is mostly a mobile ad player – and a footprint in the North American market.

The $310m price tag assigns Turn a multiple, according to our understanding of the target’s revenue, that’s roughly in line with the 2.5x trailing revenue that Adobe paid for video media platform TubeMogul. Turn is getting a market multiple in its sale, although one that comes in at less than half the post-money valuation of its last venture round in early 2014.

That earlier valuation came during a period of hyper-growth for Turn and the programmatic ad market. Its peers have similar private valuations and Turn won’t be the only one in the space to exit below its previous private funding. There’s an emerging cohort of buyers for these technologies (as we predicted earlier) as growth for many of the vendors has tapered off. TubeMogul, although public at the time of its sale, also exited below the high-water mark of its stock price that it reached in 2014.

LUMA Partners advised Turn on its sale. We’ll have a more detailed report on this transaction it tomorrow’s 451 Market Insight.

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