K. Liu's Week in Review
We began the week in Orlando, FL, where we attended American Software’s (AMSWA) Velocity Conference, the company’s first customer conference encompassing each of its four owned brands – Logility, Demand Solutions, NGC and Halo. Full disclosure, K. Liu & Company LLC provides external investor relations services to American Software. President Allan Dow’s message to attendees was to embrace digital transformation and begin the journey to improving the speed and agility of their supply chains by a factor of 10. An improvement of this magnitude requires substantial efficiency gains, which may be best realized through automation paired with artificial intelligence (AI). To this end, Mr. Dow outlined a master data management strategy in which AI and machine learning (ML) algorithms may be applied to a variety of data streams to fuel a continuous process for improving forecast accuracy, increasing customer service and optimizing inventory levels across the supply chain. Of course, American Software aspires to provide the platform enabling these automated supply chains of the future. During the Analyst & Investor Day session hosted in conjunction with the conference, the executive team expanded further on the company’s ability to serve enterprises from product concept to customer delight by leveraging the deep domain expertise found across its portfolio of solutions and the advanced reporting and analytics capabilities acquired via Halo. Given the ability to go to market with a platform and the recent hiring of Mac McGary to lead the sales organization, the foundation is in place to pursue higher value strategic sales, which should not only increase average deal sizes but ultimately reaccelerate top line growth. Although American Software’s transition to a SaaS model has weighed on growth and margins in recent years, management anticipates recurring revenues will reach 60% of total revenues in fairly short order, at which point subscription gross margin should also reflect levels more commensurate with other SaaS companies. Over the long-term, management believes this should translate into a more consistent growth profile with adjusted EBITDA margin in the 20%-25% range.
On the M&A front, Progress (PRGS) announced that the company has agreed to acquire secure file transfer and network management software provider Ipswitch for $225MM in cash, which represents EV/Sales and EV/Recurring Revenue multiples of approximately 3x and 4x, respectively. Management has identified approximately $15MM in annualized cost savings, which should result in a contribution margin of 40% post-synergies. Shares of PRGS soared following the news, which was further bolstered by better than expected Q1 ’19 results and a subsequent hike in management’s FY ’19 guidance to reflect the anticipated contribution from Ipswitch.
Aside from Progress, we tracked results from four other companies in a relatively slow week for earnings releases. Customer experience and cybersecurity vendor Verint (VRNT) also posted quarterly results above expectations and raised guidance for the full year. Most notably, management reported that Verint’s Cloud ARR increased nearly 45% in FY ’19, leaving the company on track to deliver Cloud revenue growth in excess of 40% for FY ’20 and a CAGR in Cloud revenue of 30%-40% over the next three years. Also in the cybersecurity realm, SecureWorks (SCWX) reported mixed results and guidance. Shares sold-off initially on a disappointing Q1 ’20 outlook and plans to invest an incremental $15MM-$18MM in research and development, which contributed to FY ’20 profitability expectations below consensus even as management reaffirmed its prior revenue outlook. SCWX bounced back at week’s end, however, finishing the week down just 3.5%. Digital content accessibility provider AudioEye’s (AEYE) results held few surprises given its January pre-announcement. Management noted that bookings in Q1 have benefited thus far from interest in PDF remediation services, but several indirect channel programs have ramped at a slower than anticipated pace. Additionally, the company’s pipeline is now double the levels of a year ago, and incremental investments have been made in marketing and public relations. Considering all of these factors, management reaffirmed its prior FY ’19 revenue and bookings guidance. Hardest hit this week was IZEA Worldwide (IZEA), which reported mixed results. Revenue remains under pressure amidst a transition from a managed services model executing marketing campaigns on behalf of brands and agencies to a SaaS model in which the company’s influencer marketing platform is sold to and utilized by its marketing customers. On a positive note, adjusted EBITDA turned positive two quarters ahead of expectations although management indicated the company has yet to reach the point where that can be sustained. All that said, we suspect the sell-off in shares likely has more to do with management’s commentary during the earnings call stating that IZEA is likely to undertake an equity offering to fund an upcoming payment due in July 2019 for its acquisition of TapInfluence. The following table depicts the actual results for each company relative to Street expectations as well as subsequent estimate revisions for the current fiscal quarter and year.
As far as executive moves this week, Autodesk (ADSK) appointed former GoDaddy CEO Blake Irving to its Board of Directors and announced that Paul Wilson would lead the company’s sales efforts in all ASEAN markets. Mr. Wilson most recently led the ASEAN Public Sector business at Amazon Web Services. Autodesk also reaffirmed its prior Q1 and FY ’20 guidance ranges ahead of its Investor Day. Splunk (SPLK) announced changes to its Board of Directors as well, appointing current Director Graham Smith as Chairman and adding Atlassian’s (TEAM) CTO Sri Viswanath to the Board. The moves follow the planned retirements of former Splunk President and CEO Godfrey Sullivan and early investor Thomas Neustaetter from its Board of Directors. Zendesk (ZEN) promoted Amy Foo, Vice President Finance and Operations APAC, to Managing Director of Zendesk ANZ. Ms. Foo will retain her prior role as well as lead the company’s expansion plans across Australia and New Zealand, which represents Zendesk’s largest market in the APAC region. Lastly, MongoDB (MDB) announced the hiring of its first Chief Information Security Officer, Lena Smart, who joins the company from Tradeweb.
Mergers and Acquisitions
PRGS: Progress to Acquire Ipswitch, Inc.
Progress announced that the company has entered into an agreement to acquire Ipswitch for $225MM in cash, representing an EV/Sales multiple of approximately 3x.
Ipswitch was founded in 1991 and provides software solutions that enable secure file sharing and network management.
Ipswitch has approximately $75MM in revenue, of which 75% is recurring, and serves approximately 24,000 customers worldwide.
During Progress’ earnings call, management indicated that Ipswitch has a similar growth profile and annualized cost synergies of $15MM are expected to be realized within 12 months, resulting in a contribution margin of 40% post-synergies.
The acquisition is expected to close in late April and $185MM of the purchase price will be funded with debt.
Notable News
ADSK: Autodesk Appoints Blake Irving to Board of Directors
Autodesk announced the appointment of Blake Irving to its Board of Directors, effective March 22, 2019.
Mr. Irving most recently served as CEO of GoDaddy and prior to that served as EVP and Chief Product Officer at Yahoo!.
ADSK: Autodesk Appoints New Business Leader to Accelerate Growth in ASEAN
Autodesk announced the appointment of Paul Wilson as Regional Director of Sales for the ASEAN region.
Mr. Wilson will be responsible for the strategic direction and overall profitability of the company’s business across all ASEAN markets.
Mr. Wilson most recently led the ASEAN Public Sector business at Amazon Web Services.
MDB: MongoDB Hires Lena Smart as Chief Information Security Officer
MongoDB announced that Lena Smart is joining the company as its first Chief Information Security Officer.
Ms. Smart will be responsible for the company’s ongoing product security efforts, growing its global security team and evolving its approach to counter threat vectors across all database environments.
She most recently served as Global Chief Information Security Officer at Tradeweb, and prior to that served as CIO and Chief Security Officer for the New York Power Authority.
Splunk announced that Graham Smith has been appointed as its Chairman of the Board of Directors and Sri Viswanath has joined the Board of Directors.
Godfrey Sullivan, former President & CEO of Splunk, and Thomas Neustaetter, an early investor in Splunk, are both retiring from the Board of Directors following its June meeting.
Mr. Smith has served on the company’s board since 2011 and is the former CFO of Salesforce.
Mr. Viswanath, current CTO of Atlassian, has also served as CTO and SVP of Engineering at Groupon.
ZEN: Zendesk Poised for Next Phase of Growth in ANZ with New Leadership
Zendesk announced the promotion of Amy Foo to Managing Director of Zendesk ANZ.
Ms. Foo will be tasked with driving growth for the company’s largest market in the APAC region.
Ms. Foo joined the company in 2013 as Finance Director for Asia Pacific and will retain her current role as Vice President Finance and Operations APAC.
Earnings Releases
ADSK: Autodesk Reaffirms First Quarter and Fiscal Year 2020 Outlook At Annual Investor Day
In conjunction with its Investor Day, Autodesk reaffirmed its previously issued guidance for Q1 and FY ’20.
Guidance for Q1 includes $735.0MM-$745.0MM in revenue, GAAP EPS of $0.06-$0.10 and non-GAAP EPS of $0.44-$0.48.
Guidance for FY ’20 includes total ARR of $3.50B-$3.55B, billings of $4.05B-$4.15B, revenue of $3.25B-$3.30B, GAAP EPS of $1.12-$1.31 and non-GAAP EPS of $2.71-$2.90. Free cash flow is expected to be approximately $1.35B.
AEYE: AudioEye Reports Fourth Quarter and Full Year 2018 Results
AudioEye reported Q4 ’18 results consistent with its January pre-announcement and reaffirmed prior FY ’19 guidance.
Revenues of $1.8MM (+103.3% Y/Y) were in line with the company’s pre-announcement and consensus of $1.7MM. Non-GAAP operating income was $(921)k (-51.7% margin). EPS of $(0.19) were below the Street’s $(0.11).
Key metrics: cash contract bookings of $3.5MM (+124% Y/Y); 16 established channel partners offering AudioEye as their exclusive digital accessibility solution to their customers; customer count over 1,000 as of February 28, 2019.
Management indicated that the pipeline today is double where it was a year ago. Bookings thus far in Q1 have been solid with strong performance in the direct channel offsetting some delays in program starts with indirect channel partners.
AudioEye sees emerging growth opportunities in the Federal sector following approval of the 21st Century Integrated Digital Experience Act and in the self-serve kiosk market.
Management reaffirmed its prior FY ’19 guidance calling for $11.0MM-$13.0MM in revenues and $20.0MM-$22.0MM in cash contract bookings.
IZEA: IZEA Reports Q4 and FY2018 Financial Results
IZEA reported mixed Q4 ’18 results as EPS beat by a penny despite a shortfall in revenue.
Revenue of $6.3MM (-7.3% Y/Y) was below consensus of $6.6MM, while adjusted EBITDA of $23k (0.4% margin) was above the Street’s $(0.2)MM forecast. EPS of $(0.06) beat consensus by a penny.
Gross billings increased 42.1% Y/Y to $11.1MM, while bookings increased 115% Y/Y to $11.2MM.
During the earnings call, management noted that the company’s cash on hand and line of credit is sufficient to cover IZEA’s operating needs for the next twelve months, but the company is likely to issue equity for a July 2019 payment due for the acquisition of TapInfluence.
Management anticipates SaaS services revenue to grow substantially Y/Y in each quarter, while managed services is likely to be down Y/Y in Q1 before returning to bookings growth in 2H ’19.
PRGS: Progress Reports 2019 Fiscal First Quarter Results
Progress reported Q1 ’19 results above expectations and raised its prior FY ’19 guidance to reflect the acquisition of Ipswitch.
Revenue of $89.5MM (-6.3% Y/Y) exceeded management’s $85.0MM-$88.0MM guidance and consensus of $87.6MM. Non-GAAP operating income of $30.3MM (33.8% margin) was also ahead of the Street’s $28.1MM projection. Non-GAAP EPS of $0.50 beat management’s $0.45-$0.47 guidance and the Street’s $0.47.
Management attributed the Q1 outperformance to better than expected license sales for OpenEdge in both the direct and ISV partner channels.
Key metrics: average annual subscription revenue per customer was $103k in Q4; closed 16 deals with a total contract value above $1MM; 89% revenue retention rate for FY ’19; ACV increased 15% sequentially and drove a $1MM sequential increase in MRR to $36.2MM.
Returned $32MM to shareholders through share buybacks and dividends during the quarter, but the company does not plan to purchase additional shares this year given the acquisition of Ipswitch.
Progress separately announced the acquisition of Ipswitch, which meets management’s acquisition criteria of being complementary to the business with similar products, audiences and growth profiles; bolstering recurring revenue; and being accretive with margins of at least 35% after cost synergies.
Guidance for Q2 calls for $96.0MM-$99.0MM in revenue and $0.55-$0.57 in non-GAAP EPS. Consensus called for $93.2MM in revenue and $0.57 in non-GAAP EPS.
Management raised its prior FY ’19 guidance and now anticipates revenue of $422.0MM-$428.0MM, up from $380.0MM-$386.0MM previously, and non-GAAP EPS of $2.46-$2.52, compared with $2.33-$2.39 previously. The increase in guidance was due solely to the acquisition of Ipswitch.
Secureworks reported mixed Q4 ’19 results and guided Q1 ’20 below expectations.
Revenue of $130.7MM (+8.0% Y/Y) fell short of management’s $132.0MM-$133.0MM guidance and consensus of $132.6MM. Adjusted EBITDA was $4.8MM (3.7% margin), in line with consensus of $4.7MM. Non-GAAP EPS of $0.02 beat management’s $0.00-$0.01 guidance and consensus of $0.01.
In conjunction with the earnings release, Secureworks also announced a $15.0MM increase in its existing stock repurchase program.
The company’s plans for FY ’20 include an incremental $15.0MM-$18.0MM investment in R&D versus the prior year to launch the first app on its new software application framework and to continue expanding the framework across its application portfolio.
Guidance for Q1 includes revenue of $131.0MM-$133.0MM and non-GAAP EPS of $(0.06)-$(0.05). Consensus was higher at $136.7MM in revenue and $(0.00) in non-GAAP EPS.
Management reaffirmed its prior FY ’20 revenue guidance of $565.0MM-$575.0MM, but issued adjusted EBITDA and non-GAAP EPS guidance of $2.0MM-$6.0MM and $(0.13)-$(0.09), respectively, both of which were below consensus of $19.9MM and $0.05.
In an 8-K filed earlier in the morning, Secureworks disclosed that CFO Wayne Jackson would be departing the company by the end of FY ’20, but will remain in his role until a successor is identified.
VRNT: Verint Announces Strong FY2019 Results and Raises Guidance for FY2020
Verint reported Q4 ’19 results ahead of expectations and raised guidance for FY ’20.
Non-GAAP total revenue was $336.7MM (+4.3% Y/Y), above consensus of $333.4MM. Non-GAAP operating income was $88.2MM (26.2% margin) and also exceeded consensus of $75.9MM. Non-GAAP EPS of $1.08 beat the Street’s $1.01.
Customer Engagement revenue increased 7.5% Y/Y and management anticipates acceleration to 10% in the current year.
Cyber Intelligence revenue increased 10% Y/Y and should sustain that growth rate for the year.
Cloud ARR of $199.8MM increased 44.8% Y/Y, which should translate into cloud revenue growth in excess of 40% this year to nearly $250.0MM; management is targeting a CAGR of 30%-40% in cloud revenue over next three years.
For Q1, management’s guidance of 8% growth in non-GAAP revenue and 14% growth in non-GAAP EPS implies $315.3MM and $0.60 in non-GAAP revenue and EPS, respectively, whereas consensus stood at $310.7MM and $0.62.
Management raised its prior FY ’20 non-GAAP revenue guidance from $1.325B +/- 2% to $1.370B +/- 2% and increased its outlook for non-GAAP EPS from $3.50 to $3.60.
Disclosure(s):
K. Liu & Company LLC has received compensation from American Software (AMSWA) for non-investment banking services within the past 12 months.