In the IPOs of New Relic and Hortonworks, it’s the grownup vs. the startup

Brenon Daly

Contact: Brenon Daly

Although both New Relic and Hortonworks revealed their IPO paperwork on the same day, that’s pretty much all the similarities we could find between the two enterprise technology companies. The two candidates have wildly different delivery models, operating margins, customer counts and even maturity of business models. That’s not to say they both can’t find a home on Wall Street, but only one of them is likely to dwell in a ritzy neighborhood. (451 Research subscribers: look for our full reports on both the New Relic and Hortonworks offerings later today.)

Of the two offerings, New Relic looks to be the standout. The application performance management vendor is growing quickly, but maybe more importantly, it is starting to show some leverage in its business model. This stands in sharp contrast to some of the other unprofitable IPO candidates that talk distantly about the company hitting some magical ‘inflection point’ when the red ink turns black.

New Relic is already demonstrating greater efficiency in its model, which will undoubtedly appeal to Wall Street. Consider this: In the first six months of the company’s current fiscal year, its operating loss basically stayed the same even as revenue soared 84%. More specifically, New Relic actually lost less money in its most recent quarter, which wrapped in September, than it did in the same quarter a year earlier. It trimmed its quarterly loss even as the company added more than $10m, or 78%, to its top line.

In contrast, Hortonworks is still forming its business, without much – if any – regard to optimizing it. The three-year-old Hadoop distributor is a classic startup, with many of the concerns that come with early-stage businesses: customer concentration, heavy upfront spending and precariously thin margins. (Hortonworks’ professional services business, which actually runs at a negative gross margin, has been a serious drag on the company’s overall gross margin. Through the first three quarters of the year, Hortonworks has been running at just a 34% gross margin, less than half the 81% gross margin posted by New Relic.)

When we net out all the differences between New Relic and Hortonworks, we see a vast gulf between the two IPO candidates at the bottom line. Sure, both still run in the red, but New Relic is only a light red, while Hortonworks is hemorrhaging a blood red. To put some specific numbers on that metaphor: At its current rate, New Relic loses about 40 cents for every $1 it brings in as revenue. In contrast, Hortonworks loses a staggering $2.60 for every $1 it brings in as revenue.

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

Wall Street has favorable interpretation of Lionbridge deal

Scott Denne

Contact: Scott Denne

Lionbridge Technologies angles for diversity with the $77m acquisition of fellow language translation technology firm CLS Communication. The target doesn’t add much growth to Lionbridge – both companies have seen single-digit revenue gains over the past couple of years. But it does help it diversify into additional verticals and customers just as its overreliance on Microsoft as a customer is hurting it.

Revenue at Lionbridge dropped 4% year over year last quarter as Microsoft, the company’s largest customer, cut back on spending as part of its restructuring. Adding CLS, which is strong in the financial services and life sciences segments, decreases Lionbridge’s reliance on the tech and manufacturing industry and lowers the risk of another Microsoft-induced down quarter.

The deal values the target at 0.9x trailing revenue, about twice what Lionbridge commands. Despite that, Wall Street is reacting well to the purchase – Lionbridge’s stock is up 20% today, even after giving Q4 revenue guidance below analysts’ expectations.

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

Vonage rings up Telesphere acquisition for $114m

Scott Denne

Contact: Mark Fontecchio Kenji Yonemoto

Vonage goes back to the business telephony market for another acquisition as its previous play there helped the hobbled consumer VoIP vendor return to growth. Its purchase of Telesphere Networks for $114m in cash and stock values the target at about 3x trailing revenue, compared with the 2.1x it granted to Vocalocity a year ago. Telesphere has 1,200 business customers, as well as a deeper service offering with other elements of unified communications, going beyond the pure VoIP for small businesses that was Vocalocity’s bread and butter. That likely accounts for some of the higher multiple in this deal, but doubtless some of it also comes from Vonage’s confidence that its new tack is working.

The broad abandonment of landlines for mobile phones hit Vonage hard. The company’s revenue ticked down a few percentage points for several consecutive years. In the year since buying Vocalocity, the target’s revenue growth has accelerated, contributing $24m to Vonage’s top line and growing 52% year over year in the last quarter, compared with 38% growth a year ago. That’s playing a role in Vonage’s return to growth. Before the acquisition of Telesphere, the company was projecting $886m in 2014 revenue, which would be its biggest year since 2009.

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

ReachLocal extends into booking software

Scott Denne

Contact: Scott Denne

ReachLocal makes another move beyond media sales and into subscription software with the purchase of Kickserv. The target adds online appointment booking and related management software to go with ReachLocal’s focused marketing and sales software – a stack it has been building out as its original business has decelerated and shrunk.

The company was built around providing software to manage and optimize the digital advertising efforts of small businesses, especially search engine marketing. ReachLocal has expanded further down the sales funnel with lead management and other software. This acquisition gets it a step closer to covering the full funnel, from lead generation to conversion. In particular, Kickserv is an attractive target because, like ReachLocal, it’s strongest in home services, a vertical that’s less competitive for booking software than other SMB segments like medical and legal.

Reach Local’s path to becoming a SaaS vendor has been bumpy. Revenue dropped 11% year over year this quarter to $118m, largely the fallout from a reorganization of its sales team to align with its strategy to reach beyond digital marketing. Last year it attempted to build its own online bookings capabilities, but the offering’s lack of functionality led to ReachLocal’s divestment of that product line.

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

Webinar: Tech M&A outlook

Brenon Daly

Contact: Brenon Daly

Last spring, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster accurately predicted a dramatic surge in tech M&A activity. So what do they see coming now?

We’ll take a lively and thought-provoking look at the results from our latest survey in a special webinar on Wednesday, November 5 at 1:00pm EST. To register for the webinar, simply click here.

Among the key findings we’ll be discussing:

  • Nearly half of the respondents expect overall tech acquisition activity, which has been running at a record rate in 2014, to accelerate through the next half-year.
  • The percentage of survey respondents who say the tech M&A market is likely to be busier from now through next spring is three times higher than the 16% forecasting a decline in acquisition activity.
  • The outlook for private company M&A valuations has never been more bearish. A record 34% of respondents project that sale prices for startups will head lower from now through next April, compared with 26% who anticipate prices ticking higher.

Again, the webinar will be held on Wednesday at 1:00pm EST. Registration is complimentary and can be found here.

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

Carpathia to play up fed angle

Scott Denne

Contact: Scott Denne Michael Levy

Carpathia Hosting will again test the market’s appetite by putting itself in play by the end of the year. The colocation and managed services provider has been a consistent target of deal rumors since Spire Capital Partners, its owner since 2008, set out to raise its third private equity fund around the start of last year.

We understand that Carpathia made earlier approaches to potential buyers a year or two ago but felt that the market wasn’t properly recognizing the value of some recently developed, underutilized datacenter space. The company’s 2014 revenue is likely to near $100m and it could fetch $200-250m in a sale, given that the median TTM revenue multiple for vendors in this space for the past two years is 2x, according to the 451 M&A KnowledgeBase.

Carpathia has 10 datacenters in three different US markets with a healthy utilization rate of 76%, according to the 451 Datacenter KnowledgeBase , which makes it an attractive target. The company’s most compelling value, however, is its footprint with the federal government. Though it’s too small to handle large physical deployments from the federal government on its own, Carpathia meets compliance needs and has the experience that would be valuable to larger players chasing federal business, such as CenturyLink, QTS Realty Trust and Verizon Terremark.

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

SiTime’s good timing

Scott Denne

Contact: Scott Denne

SiTime nabs a $200m exit in a sale to Japan’s MegaChips, navigating a market that’s crowded with failed competitors. Time, ironically, seems to be the element missing from earlier attempts by semiconductor companies to break into the timing market.

SiTime designs chips that take the place of the quartz crystals that for decades have provided the timing element in nearly all electronic devices – from high-end communications equipment to everyday consumer electronics. As silicon is smaller, cheaper and more energy efficient than quartz, it’s a large and promising market. You wouldn’t know it looking at SiTime’s peers, almost all of which ran low on capital while waiting for OEMs to get comfortable enough to replace quartz.

Earlier deals in this space have ranged from $6m-25m, typically at a loss to investors. While not the oldest of this group, SiTime had products in the market far longer, having generated revenue since 2008 (last year it posted $15.5m). It was also better capitalized: SiTime raised $79m from investors, including a $25m debt and equity round just last month.

Needham & Company advised SiTime on the transaction.

Acquisitions of timing chip vendors

Date announced Target Acquirer Deal value
October 29, 2014 SiTime MegaChips $200m
August 30, 2013 Discera Micrel $6.1m
March 30, 2012 Multigig Analog Devices $24.2m
April 28, 2010 Silicon Clocks Silicon Labs $21m
January 14, 2010 Mobius Microsystems Integrated Device Technology $20.2m

Source: The 451 M&A KnowledgeBase

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

NetApp carves SteelStore out of Riverbed

Brenon Daly

Contact: Brenon Daly

NetApp’s first acquisition in more than a year and a half comes with a bit of a twist. The storage giant is only a few months removed from a period in which hedge fund Elliott Management was stirring for changes at the company. Having largely settled with the activist investor, NetApp has now picked up a division carved out from Riverbed Technology, which is currently being targeted by Elliott.

Terms call for NetApp to pay $80m for Riverbed’s SteelStore cloud storage gateway. The size of the business, which was formerly known as Whitewater, wasn’t disclosed. However, our understanding is that it was generating less than $10m in sales. Only 26 employees are going over to NetApp as part of the deal.

SteelStore was part of Riverbed’s broader portfolio expansion, an effort that hasn’t really paid off for the company. Some 70% of Riverbed’s revenue still comes from its core WAN optimization unit. The slowdown in that business is one of the main drags on Riverbed, which recently forecasted that sales in the current quarter may be flat.

However, according to our understanding of the transaction, it wasn’t driven by Riverbed, which is currently exploring ‘strategic alternatives,’ looking to jettison a non-core business. Instead, we gather that NetApp went after the division. Neither side used a financial adviser.

That dynamic may help explain the relatively rich valuation of the deal. (Though we would note that both EMC and Microsoft also paid princely multiples in their purchases of cloud storage gateways.) Also, price-to-sales multiples tend to get exaggerated by companies posting only tiny revenue.

And to be clear, virtually all of the cloud storage gateway startups are generating tiny sales. In a recent study of IT professionals at midsized and large enterprises conducted by TheInfoPro, a service of 451 Research service, only 4% of participating companies had deployed cloud storage gateways – a figure that was essentially unchanged from a similar TIP study in 2013. (See our full report .) With the cloud storage market still very much in its early stages, we would argue that a gateway startup is more at home in a storage vendor like NetApp than in a networking provider like Riverbed.

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

Microsoft’s mobile efforts are tabulating gains

Scott Denne

Contact: Scott Denne

Record tablet sales helped Microsoft beat revenue expectations by more than $1bn last quarter. Redmond reported $908m in sales from its Surface tablet devices in the quarter – twice the tally of the previous quarter and the same quarter a year ago. The momentum looks set to continue.

According to an August survey by ChangeWave Research, a service of 451 Research, 20% of consumers looking to buy a tablet in the next quarter planned to purchase one built by Microsoft. Among corporate IT departments, Microsoft commanded the same 20% of respondents, putting it in second place behind Apple in both surveys.

The results of Microsoft’s efforts in smartphones have been tepid, but it’s essentially the only vendor growing market share in the tablet business. The company gained the most ground in our consumer survey, nearly doubling the positive responses from 11% in the same survey a quarter earlier. Both Apple and Samsung lost ground in the consumer and corporate surveys.

Survey: no slowdown in record tech M&A pace

Brenon Daly

Contact: Brenon Daly

Even as tech M&A spending sprints along at a record clip in 2014, half of the respondents to the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster expect the pace to accelerate through the next six months. The 48% of survey respondents who say the tech M&A market is likely to be busier from now through next April is three times higher than the percentage forecasting a decline in activity. (451 Research subscribers: See our full report on the M&A Leaders’ Survey.)

Although the bullish forecast in our mid-October survey dropped from the high-water mark of 72% in our April 2014 survey, it essentially matches the level from surveys over the previous two years. For context, however, it’s also important to note that this outlook – with five out of six respondents indicating that dealmaking will either hold steady or pick up – is coming at a record time for tech M&A. Spending on tech transactions around the globe so far in 2014 is higher than the spending during the same period of 2012 and 2013 combined, according to The 451 M&A KnowledgeBase. (451 Research subscribers: See our full report on Q3 M&A and IPO activity.)

Survey respondents were less bullish in their outlook for private company M&A valuations. A record 34% of respondents predicted that sale prices for startups would head lower from now through next April, three times the percentage that said that in our survey just a half-year ago. We would attribute at least part of the deterioration to the fact that there were certainly bigger – and much higher-profile – sales of startups in the early part of 2014. Overall, according to the KnowledgeBase, the first half of 2014 has seen eight of the 10 largest deals announced so far this year, led by the largest-ever VC exit, WhatsApp’s sale to Facebook in February for $19bn.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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