Poor ExactTarget results may extend salesforce.com’s M&A holiday

Scott Denne

Contact: Scott Denne

Two quarters in, salesforce.com’s ExactTarget acquisition is already losing some steam. The email marketing company continues to grow, though far from the pace it had as an independent business. On salesforce.com’s earnings call Thursday night, the CRM vendor announced that ExactTarget contributed $96m in revenue, up roughly 14% from the last quarter of 2012 (‘roughly’ because salesforce.com and ExactTarget’s fiscal quarters are misaligned by a month).

In its last two independent quarters, ExactTarget averaged 40.5% year-over-year growth. In its first two quarters as a salesforce.com subsidiary, it averaged revenue growth of just 12.5%. Even salesforce.com itself, with $1.15bn in revenue last quarter, gained 25%, after backing out ExactTarget’s contribution, and 26% the previous quarter.

On a call last year announcing the acquisition, salesforce.com CEO Marc Benioff said the company would take a 12- to 18-month M&A vacation to focus on ExactTarget. For the most part, it’s lived up to that promise. It announced a $133.7m deal for EdgeSpring a few days after the ExactTarget announcement but has been mostly quiet since then – salesforce.com spent just $2.5m on acquisitions last quarter. Since integrating ExactTarget hasn’t been a day at the beach, salesforce.com’s M&A holiday may not end early.

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Identified’s team and tech clock in at Workday

Scott Denne

Contact: Scott Denne

In announcing its fiscal first-quarter earnings yesterday, Workday also announced the purchase of recruiting startup Identified Inc. The tech and talent acquisition is Workday’s first since 2008.

Terms of the deal weren’t disclosed, but an equity analyst on Workday’s earnings call called out the price at $15m, which company executives did not refute. Though we haven’t confirmed that number, a price tag in the $10-20m range is feasible. Identified raised $22.5m in venture funding from VantagePoint Capital Partners and others.

The target built a service that enables recruiters to find prospective job candidates through analysis of social media files. Workday will scrap that offering, opting instead to use Identified’s employees and technology to embed machine learning and predictive analytics across product lines. Workday’s only other deal was the acquisition in 2008 of Cape Clear Software, an Irish middleware company with less than $15m in revenue. Following a recent secondary offering, Workday has amassed $1.9bn in cash and sports an enterprise value that’s 41x trailing revenue.

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Itty-bitty Bitcoin M&A

Ben Kolada

Contact: Ben Kolada, Scott Denne

Although the values of cryptocurrencies have skyrocketed, at least in the eyes of the beholders, the values of vendors in this sector so far haven’t followed suit. To date, we’ve recorded just a few acquisitions of cryptocurrency companies and assets, with nearly all having been done by tiny acquirers. The dealmaking so far suggests that the new-world currency medium has an odyssey in front of it before it becomes an established, liquid currency, and before its exchanges become worthy of big-ticket acquisitions.

Ripple Labs, with backing from Andreessen Horowitz, Lightspeed Venture Partners and others, ‘acq-hired’ simplehoney as it builds out a payment protocol to transact in Bitcoin and other currencies. CoinMyne, a maker of Bitcoin-mining software, added to its software products by purchasing the CGWatcher and CGRemote products and hiring their creator, Justin Milone. And yesterday, EffTec International, a penny stock, grabbed BitBank. (We’ve also noticed that Bitcoin is finding its way into M&A in other ways – Lemon, a mobile wallet startup acquired by LifeLock for $43m, had $1.2m worth of Bitcoin on its balance sheet.)

Acquisitions are likely to remain small for quite some time, given recent events. The ongoing implosion of Bitcoin exchange MtGox means that the road to high-profile liquidity for cryptocurrency vendors is going to take longer than initial hype suggested, if it materializes at all. However, if banks and retailers become comfortable with Bitcoin as either a currency or a secure medium for transacting, deals could swing upward, as we’ve seen with the rising volume of mobile payment acquisitions.

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Citrix takes a breather from M&A

Ben Kolada

Contact: Ben Kolada

After setting an M&A spending record in 2012, Citrix has stayed on the sidelines. The company announced six acquisitions that year, including two of its three largest deals, and spent more than $750m, the most in its history. It has been pretty quiet since then, announcing only two acquisitions in 2013 for a combined total of just $11m.

The cooldown contrasts the trend we’re seeing among the other large tech vendors, most of which have moved toward fewer and larger acquisitions. (Our recent Tech M&A Outlook webinar talks more about this trend.) Citrix participated in this activity in 2012, when it announced its all-cash acquisitions of Bytemobile for $435m and Zenprise for $327m. What’s especially noteworthy is that those two deals combined were worth more than the free cash flow Citrix generated in all of 2012 (though we note that the Zenprise buy closed in January 2013).

However, poor financial results have derailed Citrix’s dealmaking machine since then. In the 15 months since announcing the Zenprise purchase, Citrix’s quarterly results have been rocky – it has lowered guidance or posted results below analysts’ expectations a half-dozen times.

Its recently released 10-K shows that Citrix paid $5.3m for Byte Squared in September and $5.5m for Skytide in December, its only two deals of 2013. At $28.2m, the lone purchase Citrix has announced so far this year, Framehawk, already surpasses its 2013 total M&A spending, but still falls below its three-year median acquisition size of $45m, according to The 451 M&A KnowledgeBase.

Citrix’s recent acquisitions

Year announced* Target Target abstract Deal value
2014 Framehawk Application mobilization software provider $28.2m
2013 Skytide CDN and streaming video analytics $5.5m
2013 Byte Squared Mobile file-editing software $5.3m
2012 Zenprise Mobile device management software $327m
2012 Beetil Service Management Helpdesk management SaaS Not disclosed
2012 Bytemobile Mobile traffic management software $435m
2012 Virtual Computer Desktop virtualization software provider Not disclosed
2012 Apere Single-sign-on security vendor $25.2m
2012 Podio Team collaboration SaaS provider $45.3m

Source: The 451 M&A KnowledgeBase *In 2012, Citrix also acquired two unnamed companies

 

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Oracle’s new deal looks the same, but feels different

Scott Denne

Contact: Scott Denne

Oracle’s reach for BlueKai looks the same as some of its recent marketing software deals, in some ways. The transaction brings Oracle a cloud-based software service that companies use to manage data for Web and mobile marketing, an offering that complements the company’s other marketing products. But BlueKai’s advertising data marketplace service also moves Oracle into the world of ad tech, a very different sector with a set of customers and a sales model the company isn’t accustomed to.

Adding BlueKai’s data management and third-party data sources to its existing offerings enables Oracle to create a rich set of customer profiles and help it sell its earlier acquisitions, such as Eloqua and Responsys, into the CMO’s office. This type of vendor and feature is familiar to Oracle as the company got its start in managing and integrating data.

What’s new to Oracle is running a data marketplace, especially one like BlueKai’s that is sold to ad tech providers and ad agencies, rather than businesses. While Oracle has made multiple marketing deals, those offerings were aimed squarely at CMOs and other marketing professionals, not paid advertising executives. Though BlueKai sells its data management platform based on a recurring license fee, much of its data exchange business is based on how many people click on ads served using its data.

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No jumping for joy following Millennial’s Jumptap acquisition

Scott Denne

Contact: Scott Denne

Millennial Media promised benefits of scale and new technology last year when it bought fellow mobile ad network Jumptap in a $221m deal that cost the company about one-third of its stock. It’s a bit early to say whether that will play out or not, but on its earnings call this week, Millennial’s management gave a bleak forecast.

Its new CEO, Michael Barrett, who replaced Paul Palmieri last month, vaguely indicated that Millennial would grow about 20% annually, though he didn’t offer any official guidance for this year. That’s especially alarming since the larger audience that the combined company can now reach should attract higher ad prices and bigger advertising budgets.

Millennial is still growing, but at a slower rate than the broader mobile ad market. Revenue for the combined companies was up 42% in 2013 to $342m and up 44% year over year for the last quarter. That’s well below the numbers put up by other mobile ad vendors. Though not direct comparables, Pandora and Twitter show the rising revenue of in-app advertising. Pandora’s mobile ad revenue grew 73% year over year to $116m in its most recent quarter, and Twitter’s rose 55% to $165m.

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In seeking new channels, Facebook mobilizes the masses

Scott Denne

Contact: Scott Denne

Facebook has a challenge in mobile that it didn’t face with PCs: niche competition. When the company grew up in the PC era, it could fend off rivals through product design and virality. Its $19bn purchase of messaging app WhatsApp shows that mobile is a different game. It’s not the first time Facebook has paid an obscene amount – at least by traditional M&A measures like revenue or EBITDA multiples – and it won’t be the last time.

Think of Facebook as a network (in the television sense). In the days of broadcast (PC), it was OK for networks to have a single channel, but the emergence of cable TV (mobile) brought a slew of niche players that eroded broadcasters’ audiences. So networks added – and bought – other channels. The game was straightforward with the PC: whoever builds the most viral product wins. Mobile is more competitive, in part because of the low cost of launching an app, and because there’s a smaller screen, there’s more desire for straightforward, single-function apps.

Scale is everything in advertising, and Facebook will pay what it needs to pay to own anything that threatens its audience in mobile, especially as mobile now makes up more than half of its ad revenue. Even though it won’t be plastering ads on WhatsApp anytime soon, it keeps a massive audience intact. It’s the same logic that led to its $1bn purchase of Instagram when the photo-sharing app threatened one of Facebook’s core functions, and that same strategy is likely to lead to another eye-popping deal when a new category of mobile networking apps emerges.

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Application delivery controller vendor A10 delivers IPO docs

Scott Denne

Contact: Scott Denne

Over the three years on record in its IPO prospectus, application delivery controller vendor A10 Networks has grown its total revenue, but not without setbacks. The company has weathered – and continues to weather – multiple patent lawsuits, with one resulting in a $75m settlement with Brocade that included current and future patent licensing from A10 to Brocade until 2025.

Meanwhile, its own operations are showing signs of slowing. A10’s top line grew a respectable 18% to $141m in 2013, but its year-over-year growth rate on a quarterly basis was inconsistent, ranging from 7-27%.

Further, its costs have risen lately, indicating that the growth may not have met management’s expectations. A10’s operating costs (minus litigation expenses) grew to 84% of revenue in 2013, up from 73% in 2012 and 60% in 2011 and 2010. Last year A10 recorded a $27m loss, making 2013 the first year in the past four (the full period reported in its S-1) that it was unprofitable independent of its legal bills.

A10’s networking peers trade at 3-5x trailing revenue. Taking into account A10’s slightly higher – but lumpy – growth and the prospect of pending litigation, we expect it to trade on the low end of that range, with an enterprise valuation of 3-4x for a debut valuation of about $500m.

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iPass roams away from managed Wi-Fi services business

Scott Denne

Contact: Peter Christy Scott Denne

As its core business of Wi-Fi roaming services grows, iPass plans to shed its managed network services division, which chalked up $33.2m in sales last year, down slightly from $33.4m the year before. We understand the company has already passed on an unsolicited offer from a private equity firm to buy its managed network services business, prompting it to hire Blackstone Group to run a broader effort to sell the division.

After a long sequence of revenue decline and profitless operation, iPass has been inching back toward growth. Since its beginnings as a dial-up access roaming service, the company has transitioned to include Wi-Fi , survived the brief over-exuberance around metro Wi-Fi, and then reengineered its roaming platform as Wi-Fi-only beginning around 2012. Revenue has declined as iPass phased out its legacy connectivity businesses, and the growth of its Wi-Fi services isn’t enough to offset the difference. Last year, the company posted $111.1m in revenue, down from $126.1m in 2012.

Its legacy connectivity business fell by $35.8m to $29.8 in 2013; however, the worst declines are likely behind it. The legacy business shrank sequentially by just $1m to $5m in the fourth quarter, while its Wi-Fi roaming business grew to $13m in the quarter, up from $9.1m a year earlier. Today, iPass has about $24m in cash and a sale of its managed network services business could double that amount.

We plan to cover the resurrection of public Wi-Fi access in a forthcoming 451 Spotlight.

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Aerohive buzzing toward IPO

Scott Denne

Contact: Scott Denne

Aerohive Networks, a maker of Wi-Fi equipment and software, has made its IPO filing public, setting it up to be the fastest-growing publicly traded Wi-Fi vendor. The company posted $89.6m in trailing revenue and while it has yet to declare its full 2013 performance, we estimate Aerohive’s revenue was roughly $100m for the year, giving it 50% year-over-year growth.

Its revenue is tilting toward SaaS sales, rather than equipment revenue alone, as it grows sales of its network management software. SaaS makes up less than 10% of Aerohive’s overall revenue; however, sales of its software are causing a spike in its deferred revenue, indicating that future revenue will be less lumpy than a typical networking equipment provider – something that should play well on Wall Street.

Aerohive’s growth comes as enterprises are moving wireless networking projects to the top of the queue. In surveys of enterprise IT buyers by TheInfoPro, a service of 451 Research, 25% of respondents said a wireless rollout or expansion was their top networking project during the second half of 2013 and first half of this year.

The best comparables for Aerohive are two of the publicly traded Wi-Fi vendors, Ruckus Wireless and Aruba Networks. Both are bigger companies with slower growth (Ruckus posted 17% year over year in its most recent quarter, while Aruba posted 11%) and enterprise valuations of 3x trailing revenue for Aruba and 3.6x for Ruckus. Aerohive’s superior growth rate and increasing SaaS revenue should give it a significant valuation boost, and we expect the company to be valued at 6-8x trailing revenue, or about $700m, when it comes to market.

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