K. Liu's Week in Review
Messaging was again en vogue as evidenced by Zendesk’s (ZEN) acquisition of Smooch, a customer engagement platform connecting businesses with consumers across multiple messaging channels, including WhatsApp, Facebook Messenger, LINE, WeChat, SMS text, RCS, and a host of other applications. The acquisition of Smooch follows Pegasystems’ (PEGA) purchase of In The Chat and NICE’s (NICE) acquisition of Brand Embassy, both of which were announced last week. Also topical as it relates to customer engagement, Verint (VRNT) held an Analyst Day in conjunction with its annual customer conference earlier this week. At the Analyst Day, management provided three-year targets for revenue growth and adjusted EBITDA margin within its Customer Engagement segment as well as several anticipated milestones for cloud and recurring revenues. Specifically, Verint is targeting a 10% CAGR in Customer Engagement revenue through 2022, at which point adjusted EBITDA margin should reach approximately 30% on a revenue base of nearly $1.1 billion. The top line growth and margin expansion is predicated upon cloud revenue increasing at a CAGR of 30%-40% and comprising over 40% of Customer Engagement revenue in three years. This in turn suggests recurring revenue, which includes cloud and maintenance, will account for approximately 70% of sales by 2022. Per management, incremental SaaS revenues contribute gross margin of approximately 80% and with 85% of cloud deals expected to be SaaS as opposed to managed services, gross margin expansion should be a key driver of operating leverage. Similarly, recurring revenues command a higher gross margin in aggregate than non-recurring revenue, so as the mix tilts towards the former, gross margin should expand. Management noted that its confidence in achieving these targets stems from its broad portfolio of solutions, ability to support hybrid cloud and on-premise strategies, efficient and scalable cloud operations, and strategic focus on automation. In addition, the company maintains a $300 million maintenance base that could covert to the cloud at an uplift of at least 2x. Days later, Spruce Point Capital released a short report on Verint, alleging that the company utilizes M&A and aggressive accounting measures to present a rosier picture of organic growth and profitability and calling for 60%-70% downside to a target of $17.00 to $25.00 per share. All this while shareholder Neuberger Berman has launched a proxy fight. Popcorn anyone?
In another quiet week for earnings, Autodesk (ADSK), Intuit (INTU), and Splunk (SPLK) reported their respective results after the close yesterday. Autodesk, which provides digital design, engineering, and production software, had previously reaffirmed its Q1 and FY ’20 guidance at its Investor Day in March. While Q1 results were indeed within management’s guidance, the headline numbers were slightly below Street expectations due to deals closing later in the quarter. Leading indicators like billings and free cash flow performed well from management’s standpoint, and the company again reaffirmed guidance for the year. Intuit, which provides financial management and compliance software to small businesses and consumers, reported Q3 ’19 results above expectations and also guided Q4 ahead of consensus. Management highlighted a strong tax season and robust growth in the company’s Online Ecosystem revenues as drivers of the performance. Turning to Splunk, which provides a platform enabling customers to investigate, monitor, analyze, and act on data, the company reported Q1 ’20 results well above expectations and raised its outlook for the year. Splunk added over 400 new customers in the quarter and also benefited from existing clients expanding their deployments in the cloud and on-premise. Despite the beat and raise, shares declined 12.6% for the week as lower billings and reduced cash flow expectations weighed on sentiment. While not an earnings release, Instructure (INST) also filed an 8-K this week disclosing additional details regarding its acquisitions of Portfolium and MasteryConnect. The filing indicates that organic growth for the acquired assets was in excess of 23% in Q1 ’19 and on a consolidated pro forma basis, the company would have increased revenues by 21% Y/Y during the first quarter. Management also reaffirmed prior revenue expectations for the year of $257.0-$260.0 million, including an anticipated contribution of $11.0 million from the acquisitions. The following table depicts the performance of this week’s reporting companies versus Street expectations, their weekly share price performance, and subsequent consensus estimate revisions for the current quarter and year.
Other activity this week included secondary offerings by selling stockholders of Ceridian (CDAY) and SolarWinds (SWI). Cannae Holdings and affiliates of Thomas H. Lee Partners sold 8 million shares of CDAY at a public offering price of $50.50 per share, representing just a modest discount to the close price prior to the announced offering. Affiliates and co-investors of Silver Lake and Thoma Bravo sold 15 million shares of SWI at a public offering price of $18.00 per share, representing a 6.1% discount to the close price prior to the announcement of the planned offering. Finally, AI-focused Veritone (VERI) announced the appointment of Richard Taketa, who previously served as President and CEO of York Risk Services, to its Board of Directors, replacing Rhone Apparel CEO Nate Checketts, who is transitioning to a Board advisory role.
Mergers and Acquisitions
Zendesk Unveils Next Generation of Conversational Messaging Experiences
Zendesk (ZEN) announced it has acquired Montreal-based Smooch Technologies Holdings ULC, a long-time partner providing a platform to connect businesses with consumers through messaging across multiple channels.
Smooch is one of the largest providers of WhatsApp Business integration, and also provides integrations with Facebook Messenger, LINE, WeChat, Telegram, Twitter DM, Viber, Kakao Talk, SMS text, RCS and other native iOS and Android apps.
Pricing for the Smooch platform is based on the number of conversations, channel integrations, and other technical features desired and ranges from $145 per month to $995 per month with additional conversations charged at $0.02 each.
Neither terms of the transaction nor Smooch’s financial profile were provided.
Notable News
Ceridian Announces Pricing of Secondary Public Offering
Ceridian HCM Holding (CDAY) announced the pricing of an underwritten secondary public offering of 8 million shares held by Cannae Holdings and affiliates of Thomas H. Lee Partners at a price of $50.50 per share, representing a modest 1.4% discount to the close price prior to the announced offering.
All proceeds from the offering will be received by the selling stockholders.
In an 8-K filing, Instructure (INST) disclosed that Portfolium and MasteryConnect together generated $2.8 million in revenue in Q1 ‘’18 and would have added an additional $3.5 million to revenue in Q1 ’19 if owned for the entire quarter.
A partial quarter of Portfolium’s results was included in the Q1 ’19 results, while MasteryConnect was acquired subsequent to quarter-end.
The disclosures reflect organic growth for the acquired companies in excess of 23.7% Y/Y for Q1 and represent growth of 21.0% on a consolidated basis.
From a profitability perspective, the acquired companies generated $3.4 million in losses in Q1 ’18 and would have presented an additional $2.5 million headwind to earnings in Q1 ’19 if owned for the whole quarter.
Instructure also reiterated its prior FY ’19 revenue guidance of $257.0-$260.0 million in the 8-K, noting the acquisitions are expected to contribute approximately $11.0 million this year.
SolarWinds Announces Pricing of Follow-On Offering by Selling Stockholders
SolarWinds (SWI) announced the pricing of an underwritten public offering of 15 million shares of its common stock held by funds and co-investors affiliated with Silver Lake and Thoma Bravo at a public offering price of $18.00 per share, a 6.1% discount to the close price prior to the announcement of the planned offering.
The underwriters have also been granted a 30-day option to purchase up to an additional 2.25 million shares of SWI.
SolarWinds will not receive any proceeds from the sale of the shares.
In conjunction with the Sell-Side Analyst Day held at its annual Customer Engagement user conference, Verint (VRNT) published presentations slides on its website discussing its cloud and automation strategy and providing three-year customer engagement financial targets.
Total Customer Engagement revenue is expected to increase at a 10% CAGR through 2022, reaching nearly $1.1 billion and allowing for an adjusted EBITDA margin of approximately 30% versus 28% today.
Revenue growth is expected to be driven by a 30%-40% CAGR in cloud revenue, resulting in over 40% of Customer Engagement revenue coming from the cloud and approximately 70% of Customer Engagement revenue being recurring.
Verint boasts $300 million in maintenance revenue that could be converted to the cloud at an uplift of at least 2x.
Margin expansion arises from an increasing mix of SaaS revenue relative to managed services as the former is expected to generate incremental gross margin of 80% while the latter generates gross margin in the 30% range; a higher mix of recurring revenues also results in gross margin expansion given a mid-to-high 70% margin for recurring revenue versus a mid-50% margin for non-recurring revenue.
Veritone Appoints Richard H. Taketa to Board of Directors
Veritone (VERI) announced the appointment of Richard Taketa to its Board of Directors, replacing Nate Checketts, who is transitioning to a Board advisory role.
Mr. Taketa most recently served as President and CEO of York Risk Services, Inc., an insurance services company.
Earnings Releases
Autodesk, Inc. Announces Fiscal 2020 First Quarter Results
Autodesk (ADSK) reported Q1 ’20 results short of Street expectations but reaffirmed prior expectations for the year.
Total net revenue of $735.5 million (+31.4% Y/Y) was at the low-end of management’s $735.0-$745.0 million guidance and below consensus of $740.5 million. Non-GAAP operating income of $131.9 million (17.9% margin) fell short of the Street’s $142.5 million. Non-GAAP EPS of $0.45 was within management’s $0.44-$0.48 guidance but below consensus of $0.47.
Management noted that while leading indicators like billings and free cash flow performed well, revenue reflected the lower-end of expectations due to deals closing later in the quarter than anticipated.
End market demand was robust in Q1 with broad-based strength across all regions.
Key metrics: Total ARR of $2.83 billion (+33% Y/Y); Billings were $798 million (+40% Y/Y adjusted for the impact of ASC 606); net revenue retention was within the 110%-120% range realized in FY ‘19.
The maintenance-to-subscription (M2S) program exhibited further progress with the conversion of approximately one-third of maintenance renewals to product subscriptions, consistent with prior quarters and within the 25%-35% historical range.
Approximately 700,000 maintenance payers remain to be converted from over 2 million at the start of the M2S program.
Guidance for Q2 includes $782.0-$792.0 million in revenue and $0.59-$0.63 in non-GAAP EPS, which was generally in line with Street expectations for $788.8 million in revenue and $0.62 in non-GAAP EPS.
Management reaffirmed its prior FY ’20 guidance, which includes $3.50-$3.55 billion in total ARR, $4.05-$4.15 billion in billings, $3.25-$3.30 billion in revenue, $2.71-$2.90 in non-GAAP EPS, and approximately $1.35 billion in free cash flow.
Intuit Grows Revenue 12 Percent in Third Quarter; Raises Full Year Guidance
Intuit (INTU) reported Q3 ’19 results above expectations and raised guidance for FY ’19.
Revenue was $3.272 billion (+12.4% Y/Y), above management’s guidance for 10%-12% growth and consensus of $3.231 billion. Non-GAAP operating income was $1.888 billion (57.7% margin), also above consensus of $1.837 billion. Non-GAAP EPS were $5.55, exceeding management’s $5.35-$5.40 guidance and consensus of $5.40.
Consumer Group revenue increased 10% Y/Y on a strong tax season and Small Business and Self-Employed revenue increased 19% driven by Online Ecosystem revenue growth of 38%, above management’s target of 30%.
Key metrics: QuickBooks Online subscribers reached 4.2 million (+32% Y/Y) at quarter-end; over 14 million registered users on the Turbo platform, up from 5 million last year; $360 million in cumulative loans funded by QuickBooks Capital over the past 18 months.
Repurchased $135 million worth of shares in Q3 and approved a quarterly dividend of $0.47 (+21% Y/Y).
Management’s Q4 guidance includes revenue growth of 10%-12%, implying revenue of $948.0-$968.0 million, and non-GAAP EPS of $(0.16)-$(0.14). Consensus called for $904.9 million and $(0.16) in revenue and non-GAAP EPS, respectively.
Guidance for FY ’19 was increased from $6.530-$6.330 billion, $2.165-$2.215 billion, and $6.40-$6.50 in revenue, non-GAAP operating income, and non-GAAP EPS, respectively, to $6.738-$6.758 billion, $2.258-$2.268 billion, and $6.67-$6.69, respectively.
Splunk Inc. Announces Fiscal First Quarter 2020 Financial Results
Splunk (SPLK) reported Q1 ’20 results above expectations and raised its outlook for FY ’20.
Total revenues of $424.9 million (+36.3% Y/Y) were above management’s $395.0 million guidance and consensus of $395.8 million. Non-GAAP operating income was $(7.8) million (-1.8% margin), ahead of management’s guidance and the Street’s $(30.1) million. Non-GAAP EPS of $0.02 were above consensus of $(0.14).
Growth was driven by the addition of new customers and existing ones extending deployments in the cloud and on-premise.
Key metrics: signed over 400 new enterprise customers to reach over 18,000 customers overall; closed 46 seven-figure orders; ended the quarter with total RPO of $1.2 billion (+57% Y/Y).
Splunk recently formed a vertical solutions field team focused on financial services, telecom and media, healthcare, and IoT.
During the earnings call, management noted that the faster than anticipated shift to renewable billings and higher un-invoiced contract value negatively affects operating cash flow in the near-term before normalizing once the mix reaches steady state.
Management’s Q2 guidance includes revenues of approximately $485.0 million and a non-GAAP operating margin of approximately 3%, implying non-GAAP operating income of approximately $14.6 million. Consensus called for Q2 revenues and non-GAAP operating income of $480.3 million and $13.3 million, respectively.
Management raised its prior FY ’20 revenue guidance from approximately $2.20 billion to $2.25 billion, while leaving its prior non-GAAP operating margin target of 14% unchanged.