Cenzic finds second act at Trustwave

Scott Denne

Contact: Wendy Nather Scott Denne

Trustwave continues to add compliance offerings to its managed security service with the acquisition of Cenzic. The deal brings application security testing to Trustwave, which added database monitoring to its portfolio in a transaction late last year.

Cenzic fits the profile of a typical Trustwave purchase. It’s a company whose sales have plateaued with a niche product that will play better as part of a larger suite of services. We estimate that Cenzic clocked several years of $5-10m in annual revenue and $10m in trailing revenue, while competitors including Veracode and WhiteHat Security have grown faster. Cenzic is as well-known for its security testing as its patent litigation – it reached cross-licensing agreements with HP (WebInspect) and IBM (Watchfire), and forged settlements with NT OBJECTives and WhiteHat.

Terms of the deal weren’t disclosed, but most of Trustwave’s transactions have been valued at 1-2x trailing revenue. We’d expect this one was too, given that Cenzic was a motivated seller that had been in the market for some time.

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Vodafone continues consolidation in Europe with Ono acquisition

Scott Denne

Contact: Scott Denne

Vodafone picks up its second cable company in a year, spending $10bn on a cash- and debt-free basis on Spain’s Grupo Corporativo Ono amid an uptick of telecom consolidation in Western Europe. The deal has similarities to Vodafone’s $10.2bn purchase in June of Germany’s Kabel Deutschland.

Both transactions get Vodafone deeper into markets where it already offers some services, such as mobile and Internet access. However, the rationale for the two deals is different. While both add to the top line, the chance to grow revenue seems to be front and center in the Ono buy, where Vodafone sees an opportunity to market wireless services to the target’s customers and take share from Telefonica, which powers Ono’s existing mobile service, by transitioning those customers to Vodafone’s network. With the Kabel purchase, much of the logic for the deal came in the opportunity to lower costs by migrating Vodafone DSL customers in Germany onto Kabel’s coaxial network.

Vodafone’s move comes during a period of extraordinary consolidation of large telcos in Western Europe. So far this year, three telcos in that region have sold for more than $500m (including today’s announcement), for a total of $19.2bn of M&A. In all of last year there were four such transactions, combining for $32.2bn. In the preceding five years combined, such deals totaled only $22.2bn, according to The 451 M&A KnowledgeBase.

The hunt for additional revenue growth and cost savings comes as prices for wireless services in Europe are declining, and will continue to decline. The pricing pressure will amplify the need for further consolidation. In its most recent quarter, Vodafone’s own revenue fell 3.6% from a year earlier to $15.1bn, a drop that its management attributed to stiffer price competition. In Spain in particular, Vodafone’s revenue declined 14% due to increased competition from services offering combined wireless and wireline packages. Yankee Group, a unit of The 451 Group, anticipates that price squeeze in Europe will continue.

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Renaissance teaches lesson in the value of SaaS

Scott Denne

Contact: Scott Denne

A bet on Renaissance Learning’s transition to SaaS has paid off for Permira Funds. The private equity firm bought the educational software company for $455m in late 2011. Today, Hellman & Friedman announced that it is buying the business for $1.1bn.

When the sale to Permira closed, Renaissance Learning was in the early stages of transitioning its business to a SaaS model, moving away from the hardware and installed software sales that dominated its early years (the company was founded in 1986). In its last quarter before that, its SaaS sales rose 22% from a year earlier to $14.8m, accounting for 41% of its total revenue – and growing.

The Permira buyout was done at 3.3x trailing revenue ($133.5m at the time), well below the 5.1x median multiple that SaaS vendors fetched over the past 12 months, according to The 451 M&A KnowledgeBase. While it is unclear how Renaissance Learning’s SaaS revenue has grown since its sale to Permira, it is clear that its SaaS business helped it get a higher valuation this time around.

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A10 counting down to IPO, sets price range

Scott Denne

Contact: Scott Denne

A10 Networks sets a price range of $13-15 per share, which would give it a market cap of $767-885m. At the midpoint of that range, A10 would be valued at 5.9x trailing revenue, a bit higher than the 5.5x granted to F5 Networks, its main competitor and leader in the application delivery controller market. A10’s revenue growth rate, most notably that of its product sales, has outpaced F5’s. While A10’s product sales grew 18% year over year in the most recent quarter, F5 expanded by 7%, the first quarter it has topped the 5% mark in more than a year.

The top line at the application delivery controller upstart grew a respectable 18% to $141m in 2013. Its net loss was $27m as it invested a larger portion of its revenue back into sales and marketing. The net loss was lower than the $90m it chalked up in 2012, but that year’s expenses were driven by a legal settlement, without which it would have had three straight profitable years starting with 2010.

At the current price range, the IPO will generate a solid return for Summit Partners. The private equity firm invested $80m in A10 last summer for stock that will be worth $132m at the midpoint of the proposed range.

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Serena’s sinking software revenue

Scott Denne

Contact: Ben Kolada Scott Denne

HGGC’s purchase of Serena Software ends a challenging holding period for Silver Lake Partners, the buyout shop that took the application lifecycle management vendor private eight years ago today. Initially hampered by the 2008 financial crisis, the company’s inability to evolve its portfolio to today’s Web, mobile and cloud environments contributed to its decline. Toward the end of its time under Silver Lake, Serena was basically a maintenance shop.

Serena’s sales have shrunk from $251m in trailing revenue ahead of its take-private in 2006, to $184m in trailing sales today (the now-private company still files financials with the SEC). The largest decline came on the heels of the financial crisis, when its annual revenue dropped to $224m in the year ending January 31, 2010, from $260m a year earlier. When that crisis abated, Serena still faced declining use of mainframes (a significant revenue generator for the company), increasing use of open source software and developer-led purchases of application management products.

The company’s most recent filing period, the nine months ended October 31, shows it was becoming increasingly reliant on merely maintaining the use of its software for its customers, instead of selling new software licenses. For that period, license sales as a percent of revenue declined six percentage points, to 15% of total revenue, while its maintenance revenue increased eight percentage points, to 75% of total sales. Also under Silver Lake’s stewardship, Serena’s total debt load had nearly doubled to $410m.

Terms of the company’s sale to HGGC weren’t disclosed. Public reports peg the deal at $450m, about two-thirds less than it was taken private for. When looking at the company’s finances, that price is understandable.

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Pre-IPO stock: an ‘earnout’ that can actually pay out

Scott Denne

Contact: Scott Denne

Investors in Coupons.com aren’t the only ones who stand to benefit from the 100% rise in its IPO today. The company’s M&A targets are set up for a big gain as well. Investors in Yub, a digital loyalty card vendor, have seen the value of their exit to Coupons.com triple in the span of two months.

Yub sold to Coupons.com in January for $10.1m in common stock (valued at $10.05 per share). As of this afternoon, Coupons.com trades at $32 per share, valuing the Yub stake at $32m. In fact, Yub’s backers, including Battery Ventures, Greylock Partners and QuestMark Partners, are seeing a bigger pop than investors that funded Coupons.com’s last round of private funding – a June 2011 series B at $13.73 per share.

There’s a downside to relying on the jump in a pre-IPO acquisition. In addition to being at the mercy of the public markets, shareholders have to sweat out a six-month lockup period before cashing out. The 11 companies acquired by Twitter in the year leading up to its IPO saw the value of their exits jump 2-4x since. MoPub, for example, sold for $350m in Twitter stock that’s now valued at $797m, which will make for some happy VCs (MoPub raised just $18m) if the price holds up for the next two months.

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Spotify could hear ad revenue with The Echo Nest

Scott Denne

Contact: Scott Denne

Spotify’s acquisition of The Echo Nest deals a blow to competitors and brings with it technology to help the company expand beyond its subscription-focused business model. The Echo Nest’s algorithms integrate user preferences, digital analysis of songs and context from around the Web to build playlists for online and mobile music apps.

Spotify was an early customer and now it’s going to own the service that powers personalized radio for its competitors, including iHeartRadio, MOG and Rdio. In addition to a potential poke in the eye of its rivals, the deal takes Spotify’s ad capabilities from rudimentary (homepage takeovers and banner ads) to targeted. The Echo Nest recently launched a service that enables advertisers to target audiences based on how and what they listen to.

Advertising is an increasingly viable method of supporting digital radio as mobile marketing takes off, and this deal gives Spotify the tools to expand those capabilities. For example, last quarter Pandora Media saw a 42% year-over-year jump in its mobile ad revenue per listening hour. As the mobile ad market grows and Pandora tunes its product offerings, it now gets more than half of its revenue from mobile ads – an area where Spotify doesn’t (yet) have a product.

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Mitel migrates to call-center software with OAISYS acquisition

Scott Denne

Contact: Scott Denne

Communications hardware and software vendor Mitel Networks has extended its call-center software portfolio by acquiring call-recording software provider OAISYS. This is Mitel’s second call-center-related acquisition in the past year, and follows a wave of consolidation in the sector.

Last summer, Mitel spent $20m on its OEM partner prairieFyre Software to get directly into the call-center software business. Before that purchase, its only call-center offering was automated call routing. OAISYS, with 50 employees, provides call-recording and quality assurance software and, like prairieFyre, has a long-standing OEM partnership with Mitel. OAISYS was founded in 1996 and is based in Tempe, Arizona.

Historically, Mitel has struggled to sell its products, with revenue ebbing and flowing for several years. The company is trying to change that by selling applications that complement its PBX software and hardware products, which are experiencing pricing pressure from competitors. (Mitel is also spending to increase its traditional business, picking up Aastra Technologies, its European counterpart, in a $375m deal last year). The OAISYS buy is an attempt to move deeper into call-center software, which is seeing increasing interest lately.

Mitel’s competitors have been active acquirers in the call-center market lately. In just the past two years, Verint purchased four call-center software vendors, including the $514m pickup of KANA in January. Enghouse Systems has done eight deals in that time, including one announced this week, and Genesys Telecommunications has bought seven companies since Permira carved the company out of Alcatel-Lucent in 2012.

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Please hold for Five9 IPO

Scott Denne

Contact: Scott Denne

Call-center software maker Five9 made its IPO filing public Monday, with financials that fit the pattern of other SaaS companies: strong revenue growth, steep losses. Five9 posted $84m in 2013 revenue, up 32% from 2012.

There was a cost to that growth. The firm ended the year with $17m in cash, after raising $45m in debt and equity financing in 2013. Its sales and marketing expenses jumped 67%, double the rate that its revenue grew, and pushed operational expenses up to the highest level in the three years disclosed in its prospectus. Five9 recorded a $28m net loss last year, up from $17m in 2012 and $7m in 2011.

None of that makes Five9 an outlier, however. Many other SaaS vendors, including RingCentral, ServiceNow and Workday, spend a larger portion of their revenue on sales and marketing. None are trending toward profitability.

Losses haven’t hurt valuations for those companies, and they likely won’t impede Five9. Because of its pure cloud portfolio, we expect Five9’s enterprise valuation to be a few ticks higher than competitors Interactive Intelligence (4.8x trailing revenue) and inContact (3.5x), both of which still sell legacy on-premises software in addition to cloud offerings.

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GrubHub deal leads to Seamless IPO

Scott Denne

Contact: Scott Denne

Online food delivery services company Seamless North America had the size and the growth for a solid public offering of its own, and by acquiring (and taking the name and CEO of) its closest competitor, GrubHub, the company improved both of those attributes. The new GrubHub wasted no time pushing itself out to public markets. It filed for a public offering just four months after closing the merger and made its filing public last week.

Seamless itself posted $111m in 2013 revenue, up 35% from a year earlier and coming off a year of 36% revenue growth. Wall Street would likely have rewarded that high, consistent growth rate. Instead, Seamless added to that, handing over about 43% of its stock in August to pick up GrubHub, which, independent of Seamless, grew revenue 62% to $59m last year.

Pairing up didn’t hurt profits. Despite a $24m loss in 2012 from the original GrubHub, the combined company (Seamless alone through August 8, 2013, and combined results afterward) made a profit in each of the past three years and every quarter during the past two years, including $3.6m in combined net income on $84m in revenue during the two recent quarters, which mixes results between the two businesses.

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