K. Liu's Week in Review
Just when we thought the summer doldrums were upon us, VMware (VMW) made waves with the announcement of two public company take-outs. The first, an acquisition of long-time partner and fellow Dell Technologies (DELL) controlled company Pivotal Software (PVTL), came as no surprise given last week’s 13D/A by Dell Technologies disclosing merger discussions. Public shareholders of Pivotal’s Class A common stock will indeed receive the $15.00 per share in cash referenced in the filing, representing a nearly 81% premium to PVTL’s close price prior to the disclosure. Pivotal’s Class B shares held by Dell will be exchanged for VMware’s Class B shares at an exchange ratio of 0.055 VMware Class B shares per Pivotal Class B share. The blended purchase price of $11.71 per share represents an enterprise value of approximately $2.7 billion and values Pivotal at TTM and FY ’21 EV/Sales multiples of 4.0x and 3.1x, respectively. More surprising was VMware’s agreement to acquire Carbon Black (CBLK) for $26.00 per share in cash, representing an enterprise value of approximately $2.1 billion. The purchase price represents a 39% premium to CBLK’s close price on August 8, 2019, the day prior to reports by CTFN that Carbon Black had hired Morgan Stanley to explore a sale, and equates to TTM and FY ’20 EV/Sales multiples of 9.1x and 7.3x, respectively. The deal-making reflects management’s views that Kubernetes is the most significant shift in enterprise architecture since Java, virtualization and cloud, and that the cybersecurity industry is ripe for disruption given a hodgepodge of tools and agents spread across disparate groups emphasizing detection and response over protection. With the addition of Pivotal’s cloud-native platform, developer tools and services enabling modern app development, VMware is all-in on Kubernetes and plans to offer a complete stack enabling customers to build, run, and manage multi-cloud applications. Carbon Black brings a cloud-native platform for endpoint detection and response, which VMware intends to deeply integrate across its offerings, making security intrinsic to any application or workload running on its platform. Together, the acquisitions are expected to boost revenue growth by two points and generate positive operating income in year one. Subsequently, total revenue and hybrid cloud subscription and SaaS should increase meaningfully to over $3 billion in year two while delivering positive cash flow and earnings accretion. In addition to the deals, VMware also reported upside Q2 ’20 results this week and raised its FY ’20 non-GAAP EPS expectations on an unchanged revenue outlook.
Other M&A activity this week included Splunk’s (SPLK) $1.05 billion cash and stock acquisition of SignalFX, a provider of real-time monitoring solutions for cloud infrastructure, microservices, and applications. Approximately 60% of the purchase price will be paid in cash with the remainder paid in stock at a fixed value of $126.73 per share. The acquisition moves Splunk into the application performance management space and is expected to close in the company’s fiscal 2H ’20. Splunk also reported fiscal Q2 ’20 results ahead of expectations this week and raised its top and bottom-line expectations for the year. However, a reduction in the company’s upfront cash invoicing on multi-year deals and the elimination of perpetual license sales are expected to weigh heavily on operating cash flow for the year, prompting management to lower its expectations from $250 million to $(300) million. Shares traded lower as a result. Upland Software (UPLD) bought Cimpl, which provides a platform for telecom expense management, for $25.7 million in cash. Cimpl is expected to contribute approximately $8.0 million in revenue on an annual basis and generate adjusted EBITDA of at least $3.6 million post-integration. Upland Software raised its Q3 and FY ’19 guidance ranges in accordance. Descartes Systems Group (DSGX) also completed another tuck-in deal, acquiring BestTransport.com, which provides a cloud-based transportation management system focused on flatbed-intensive manufacturers and distributors, for $11.2 million in cash. Lastly, Elastic (ESTC) acquired a security consulting and training company, Perched, to help users leverage the Elastic stack to build cybersecurity applications. In other capital markets activity, Proofpoint (PFPT) closed an offering of $920.0 million in aggregate principal amount of 0.25% convertible senior notes due 2024 with an initial conversion price of $153.99 per share, representing a 37.5% premium to the close price prior to the announced offering. Net proceeds from offering will be approximately $899.8 million, of which $83.7 million will be put towards capped call transactions and the remainder will be used for general corporate purposes.
Aside from Splunk and VMware, this week also saw off-calendar earnings announcements from Intuit (INTU), QAD (QADA), and Salesforce (CRM). Intuit delivered a strong finish to its FY ’19 driven by robust growth in Online Ecosystem revenue of 35% Y/Y as the QuickBooks Online subscriber base continued to exhibit robust growth domestically and abroad. Management remains committed to the company’s goals of organic double-digit revenue growth, increasing operating income dollars at a faster clip than revenue, and investing cash to generate an expected return on investment in excess of 15%. Guidance for FY ’20 was consistent with consensus expectations. Manufacturing ERP software provider QAD (QADA) fared less well, reporting Q2 ’20 results below expectations. However, much of the shortfall stemmed from a decline in lower margin services, which management attributed to customers foregoing version upgrades prior to converting to the cloud. Cloud bookings were a bright spot, outpacing internal expectations as QAD closed 24 cloud deals and saw a nice rebound in Europe. Management further noted that the cloud funnel remains strong and is up 37% Y/Y. Reflecting lower anticipated services revenue for the balance of the year, the impact of a slowdown in the manufacturing economy on license sales, and an inability to recover from the slow start in Q1, management reduced guidance for FY ’20. However, we believe this was largely anticipated given commentary during last quarter’s earnings call and a fairly muted reaction in the stock price post-earnings. Rounding out the earnings reports this week was Salesforce, which posted Q2 ’20 results above expectations and raised its guidance for the year. Organic growth was +20% Y/Y and management cited strength in international markets. The higher guidance for the year now includes anticipated contribution from Tableau of $550-$600 million and $25 million from ClickSoftware. The following table depicts each company’s share price performance for the week, results versus expectations, and subsequent consensus estimate revisions for the current fiscal quarter and year.
In another active week for executive and board changes, 2U (TWOU) announced that Chief Financial Officer Catherine Graham plans to retire, effective April 1, 2020 or earlier upon the appointment of her successor. Citrix (CTXS) named Arlen Shenkman, who most recently served as Executive Vice President and Global Head of Business Development and Ecosystems at SAP, as its Chief Financial Officer. Eric Verniaut joined Blue Prism (PRSM-GB) as its Chief Operating Officer after previously serving as SAP’s Chief Business Officer for EMEA, MEE, and Greater China. Tenable (TENB) hired Matthew Olton as Senior Vice President of Corporate Development and Strategy. He joins the company from Symantec (SYMC) where he was Senior Vice President, Corporate Development and Ventures. Zuora (ZUO) appointed Chris Battles as Chief Product Officer and promoted Tom Krackeler to Chief Customer Officer. Mr. Battles joins the company from LogMeIn (LOGM) where he was Senior Vice President and General Manager of the Communications and Collaboration business unit, while Mr. Krackeler has served as Zuora’s Senior Vice President of Product for the past four years. As for board appointments, Asure Software (ASUR) welcomed Charlie Lathrop to its Board of Directors. Mr. Lathrop brings significant experience in the payroll processing space, having previously served as Chairman, President and Chief Executive Officer of both CompuPay and Advantage Payroll Services. Veeva Systems (VEEV) appointed Mary Lynne Hedley to its Board of Directors. Dr. Hedley currently serves as President and Chief Operating Officer of TESARO, which she co-founded in 2010 and was acquired by GSK in 2019. Finally, Qualys (QLYS) appointed Nutanix’s (NTNX) CIO, Wendy Pfeiffer, to its Board of Directors.
Mergers and Acquisitions
Descartes Acquires BestTransport
Descartes Systems Group (DSGX) has acquired BestTransport.com, which provides a cloud-based transportation management system focused on flatbed-intensive manufacturers and distributors, for $11.2 million in cash.
BestTransport’s solutions range from contract rate management to load building, shipment execution and freight payment.
Descartes intends to combine BestTransport with its Global Logistics Network to offer additional solutions, such as Descartes MacroPoint Visibility and Capacity Matching, to the acquired customer base.
Elastic Acquires Perched, a Security Training and Consulting Company
Elastic (ESTC) has acquired Perched, a training and consulting company focused on security analytics, threat hunting, and security operations.
Perched has been a long-time user of the Elastic stack and will provide training and consulting services to help other users leverage the Elastic stack to build cybersecurity solutions.
Terms of the transaction were not provided and the acquisition, which was completed in Q2 ’20, is not expected to have a material impact on the company’s operating results.
Splunk (SPLK) to Acquire Cloud Monitoring Leader SignalFX
Splunk has agreed to acquire SignalFX, which provides solutions for real-time monitoring of cloud infrastructure, microservices and applications, for $1.05 billion in cash and stock.
Approximately 60% of the purchase price will be paid in cash and the remaining 40% will be paid in stock (at a fixed value of $126.73 per share).
The acquisition expands the company’s presence into the application performance management market and is expected to close in 2H ’20.
Upland Software Announces Acquisition, Raises Guidance
Upland Software (UPLD) announced the acquisition of cloud-based telecom expense management platform provider Cimpl for $25.7 million in cash, of which $23.1 million was paid at closing and the remainder will be payable in 12 months.
Cimpl is expected to generate approximately $8.0 million in revenue annually, of which $7.4 million is recurring, and at least $3.6 million in adjusted EBITDA once fully integrated.
The combination of Cimpl with Upland’s Project & Financial Management Solution Suite is being touted as the first IT Financial Management (ITFM) Cloud, enabling enterprises to better manage over $3 trillion in IT spending, of which telecom spending accounts for 18% of the total.
Reflecting anticipated contribution from Cimpl, guidance for Q2 now calls for revenue of $54.1-$56.1 million and adjusted EBITDA of $20.1-$21.1 million, up from $53.5-$55.5 million in revenue and $19.8-$20.8 million previously.
For FY ’19, the company raised its revenue guidance from $209.9-$213.9 million to $212.3-$216.3 million and increased its adjusted EBITDA guidance from $77.2-$79.2 million to $78.2-$80.2 million.
VMware Enters Definitive Agreement to Acquire Carbon Black
VMware (VMW) has entered into an agreement to acquire Carbon Black (CBLK) for $26.00 per share in cash, representing an enterprise value of $2.1 billion.
Carbon Black provides a cloud-native endpoint protection platform to over 5,600 customers around the globe.
The purchase price represents a 39% premium to the close price on August 8, 2019, which was the day prior to CTFN reporting that Carbon Black had hired Morgan Stanley to explore a sale of the company, and reflects TTM and FY ’20 EV/Sales multiples of 9.1x and 7.3x, respectively.
The transaction is expected to close in VMware’s fiscal 2H ’20.
VMware Signs Definitive Agreement to Acquire Pivotal Software
VMware (VMW) has entered into an agreement to acquire Pivotal Software (PVTL) at a blended price per share of $11.71, representing an enterprise value of $2.7 billion.
Pivotal provides a cloud-native platform, developer tools and services enabling modern app development to over 350 customers and has a long-standing partnership with VMware centered around VMware’s PKS offering.
Under the agreement, Class A stockholders will receive $15.00 per share in cash and Dell Technologies, which owns the company’s Class B shares, will exchange its shares for approximately 7.2 million shares of VMware Class B stock, representing an exchange ratio of 0.055 shares of VMware Class B stock for each share of Pivotal Class B stock.
The $15.00 per share in cash to be paid to Class A stockholders matches the previously disclosed potential acquisition price and represents a nearly 81% premium to the unaffected close price prior to Dell’s filing revealing the negotiations.
The blended purchase price represents a TTM EV/Sales multiple of 4.0x and a FY ’21 EV/Sales multiple of 3.1x, and results in a net cash payout for VMware of $0.8 billion.
The acquisition is expected to close in VMware’s fiscal 2H ’20.
Earnings Releases
Intuit Fourth Quarter Revenue Up 15 Percent, Full Year Up 13 Percent
Intuit (INTU) reported Q4 ’19 results above expectations and guided FY ’20 consistent with consensus expectations.
Revenue of $994.0 million (+15.0% Y/Y) exceeded management’s guidance of 10%-12% revenue growth and consensus of $961.8 million. Non-GAAP operating income was $(47.0) million (-4.7% margin), above consensus of $(61.3) million. Non-GAAP EPS of $(0.09) beat guidance of $(0.16)-$(0.14) and consensus of $(0.15).
Online Ecosystem revenue increased 35% Y/Y, reaching a $1.8 billion annualized run rate, and management anticipates continued growth in excess of 30% going forward.
Key metrics: QuickBooks Online subscriber base over 3.2 million (+25% Y/Y) in the U.S. and over 1.3 million (+58% Y/Y) outside the U.S.; QuickBooks Self-Employed subscribers over 1 million.
Management remains committed to organic double-digit revenue growth, increasing operating income dollars faster than revenue, and investing cash to generate an expected return on investment in excess of 15%.
Guidance for Q1 calls for revenue of $1.105-$1.125 billion, non-GAAP operating income of $65.0-$75.0 million, and non-GAAP EPS of $0.23-$0.25, which was mixed relative to consensus expectations for $1.123 billion in revenue, $111.0 million in non-GAAP operating income, and $0.33 in non-GAAP EPS.
Management’s FY ’20 guidance of $7.440-$7.540 billion in revenue, $2.515-$2.565 billion in non-GAAP operating income, and $7.50-$7.60 in non-GAAP EPS compared favorably with consensus of $7.433 billion in revenue, $2.547 billion in non-GAAP operating income, and $7.53 in non-GAAP EPS.
QAD Reports Fiscal 2020 Second Quarter and Year-To-Date Financial Results
QAD (QADA) reported Q2 ’20 results below expectations and reduced its outlook for FY ’20.
Total revenue was $76.4 million (-9.7% Y/Y), falling short of management’s $77.0-$79.0 million guidance and consensus of $77.9 million. Adjusted EBITDA was $0.9 million (1.2% margin), slightly below consensus of $1.1 million. Non-GAAP EPS of $(0.05) missed consensus by a penny.
Lower results in the quarter were attributed to more customers foregoing upgrades prior to converting to the cloud, resulting in lower services revenue than anticipated.
Per management, cloud bookings outpaced internal expectations and resulted in record bookings ever for a 1H; the cloud funnel also remains strong and reflects an increase of 37% Y/Y.
Key metrics: closed 24 cloud deals, including 13 from new customers and 11 conversions; received 22 orders in excess of $500,000 in combined license, subscription, maintenance, and professional services billings, including 7 over $1 million.
QAD signed an agreement with Alibaba during the quarter to service the China market via a public cloud solution and plans to take additional steps in the future to become a platform agnostic provider.
Headcount additions will continue in 2H albeit at roughly half the level in 1H and QAD is accelerating its strategy of shifting more services work to its partner ecosystem.
Reflecting an inability to make up for lower subscription revenues in Q1, lower services revenue expectations for 2H, and the impact of the manufacturing slowdown on license revenue, management revised its outlook for the year.
Guidance for Q3 includes revenue of $78.0-$79.0 million and non-GAAP pre-tax income of $2.2-$3.4 million, implying non-GAAP EPS of $0.07-$0.12; consensus was higher at $84.6 million in revenue and $0.18 in non-GAAP EPS.
For FY ’20, management reduced its prior guidance for $330.0-$335.0 million and $10.0-$13.0 million in revenue and non-GAAP pre-tax income, respectively, to $313.0-$318.0 million and $6.7-$8.7 million.
Salesforce Announces Record Second Quarter Fiscal 2020 Results
Salesforce (CRM) reported Q2 ’20 results above expectations and raised its FY ’20 guidance.
Revenue of $4.00 billion (+21.8% Y/Y) exceeded management’s guidance of $3.94-$3.95 billion and consensus of $3.95 billion. Non-GAAP operating income was $573.0 million (14.3% margin). Non-GAAP EPS were $0.66, well above guidance of $0.46-$0.47 and consensus of $0.47.
Excluding Salesforce.org, which contributed $54 million in revenue, organic revenue growth was +20% Y/Y.
International growth was strong in the quarter as EMEA increased 30% Y/Y and APAC rose 27% Y/Y in constant currency.
By cloud, Sales Cloud grew 13% Y/Y, Service Cloud grew 22% Y/Y, Marketing and Commerce Cloud grew 36% Y/Y, and Platform and Other grew 28% Y/Y.
Key metrics: remaining performance obligation of $25.3 billion (+20% Y/Y), including $350 million from Salesforce.org.
The company’s outlook for the year now includes approximately $550.0-$600.0 million in revenue from the acquisition of Tableau and another $25.0 million from the acquisition of ClickSoftware
Guidance for Q3 calls for revenue of $4.44-$4.45 billion (includes $300.0 million from the acquisition of Tableau), above consensus of $4.18 billion, and non-GAAP EPS of $0.65-$0.66, in line with consensus of $0.66.
Management raised its FY ’20 revenue and non-GAAP EPS guidance from $16.45-$16.65 billion and $2.68-$2.70, respectively, to $16.75-$16.90 billion and $2.82-$2.84.
Management also stated that Salesforce remains on track to achieve its long-term FY ’23 revenue target.
Splunk Inc. Announces Fiscal Second Quarter 2020 Financial Results
Splunk (SPLK) reported Q2 ’20 results above expectations and raised guidance for FY ’20.
Total revenues of $516.6 million (+33.0% Y/Y) exceeded management’s guidance of $485.0 million and consensus of $488.4 million. Non-GAAP operating income was $46.6 million (9.0% margin), well ahead of consensus of $16.9 million and management’s guidance for a non-GAAP operating margin of 3.0%. Non-GAAP EPS of $0.30 beat consensus of $0.12.
Key metrics: 93 orders in excess of $1 million; added nearly 500 new enterprise customers; Cloud ARR now exceeds $300 million; RPO of $1.235 billion (+47% Y/Y).
Cloud accounted for 25% of the business in Q2 and is expected to comprise 50% over the next few years.
95% of software bookings were term and cloud in Q2, and management expects the elimination of perpetual license sales to accelerate its renewal mix to 99% in Q4.
Splunk is also reducing its upfront cash invoicing for term and cloud deals from 58% paid upfront in 1H ’20 to an estimated 33% paid upfront in 2H ’20, which combined with the elimination of perpetual license sales, will negatively impact cash flow.
Pricing adjustments are also being made to allow for more flexibility on data volumes and infrastructure requirements.
Guidance for Q3 calls for revenues of approximately $600.0 million and a non-GAAP operating margin of approximately 16%, which implies non-GAAP operating income of $96.0 million, exceeding Street expectations for $590.9 million in revenue and $94.7 million in non-GAAP operating income.
For FY ’20, management raised its revenue outlook from approximately $2.25 billion to approximately $2.30 billion and maintained prior expectations for a non-GAAP operating margin of approximately 14%, but reduced its operating cash flow expectations from $250 million to $(300) million.
VMware Reports Fiscal Year 2020 Second Quarter Results
VMware (VMW) reported Q2 ’20 results above expectations and raised its non-GAAP EPS guidance for FY ’20.
Revenue was $2.439 billion (+12.2% Y/Y), above management’s guidance of $2.425 billion and consensus of $2.426 billion. Non-GAAP operating income was $802.0 million (32.9% margin), exceeding guidance for a 32.6% non-GAAP operating margin and consensus of $791.1 million. Non-GAAP EPS were $1.60, beating guidance and consensus of $1.55.
Core SDDC license bookings increased high-single digits Y/Y with total SDDC bookings up 11% Y/Y; Compute license bookings increased mid-single digits with total Compute bookings up 12% Y/Y; and Management license bookings increased mid-teens with total Management bookings up 10% Y/Y.
Key metrics: billings of $2.853 billion (+16.5% Y/Y); license backlog of $13 million and total backlog of $117 million; RPO of $8.05 billion at quarter-end.
VMware Cloud on AWS is now present in 16 regions globally and the company is seeing early traction for Azure VMware Solutions with 20 customers onboarded in the first two months; Google Cloud VMware Solution was announced in July.
Guidance for Q3 includes revenue of $2.4 billion, non-GAAP operating margin of 30.3%, and non-GAAP EPS of $1.42, below consensus of $2.45 billion in revenue, $802.4 million in non-GAAP operating income, and $1.57 in non-GAAP EPS.
Management reiterated its prior FY ’20 revenue and non-GAAP operating margin guidance of $10.030 billion and 33%, respectively, and raised its non-GAAP EPS guidance from $6.49 to $6.54.
VMware expects the acquisitions of Carbon Black and Pivotal to generate positive operating income and add two points of revenue growth and over $1 billion in hybrid cloud subscription and SaaS revenue in year one, and to increase total revenue and hybrid cloud subscription and SaaS to over $3 billion in year two along with positive cash flow and EPS accretion.
Notable News
2U, Inc. Announces Chief Financial Officer Retirement
2U (TWOU) announced that Catherine Graham, Chief Financial Officer, has notified the company that she plans to retire, effective April 1, 2020 or earlier upon the appointment of her successor.
The company has retained an executive search firm to assist in the search for its next Chief Financial Officer and expects to retain Ms. Graham as a strategic advisor for a period of time following her retirement.
Asure Software Welcomes Charlie Lathrop to Board of Directors
Asure Software (ASUR) announced the appointment of Charlie Lathrop to the company’s Board of Directors.
Mr. Lathrop has ample experience in the payroll processing space, serving as Chairman, President, and Chief Executive Officer of CompuPay, which tripled in size under his watch, and prior to that, serving in that same capacity at Advantage Payroll Services, during which time the company grew from $12 million in revenue to over $75 million prior to being sold to Paychex.
Blue Prism (PRSM-GB) appointed Eric Verniaut as Chief Operating Officer.
Mr. Verniault will be responsible for the company’s sales, field marketing, partner management, globalization, customer service and support operations and will focus on the company’s expansion into North America, Europe, and Asia.
Mr. Verniault most recently served as SAP’s Chief Business Officer for EMEA, MEE and Greater China.
Citrix Announces Arlen Shenkman as Chief Financial Officer
Citrix Systems (CTXS) appointed Arlen Shenkman as Executive Vice President and Chief Financial Officer.
Mr. Shenkman will be responsible for the company’s financial and capital management strategies, budgeting and planning, financial accounting, tax and treasury, investor relations, strategic alliances, and mergers and acquisitions.
Mr. Shenkman most recently served as Executive Vice President and Global Head of Business Development and Ecosystems at SAP and prior to that had served as Chief Financial Officer of SAP North America.
Mary Lynne Hedley Joins Veeva Board of Directors
Veeva Systems (VEEV) announced the appointment of Mary Lynne Hedley to the company’s Board of Directors.
Dr. Hedley is president and chief operating officer of TESARO, which she co-founded in 2010 and was acquired by GSK in 2019, and a member of Millendo Therapeutics’ Board of Directors.
Proofpoint (PFPT) closed an offering of $920.0 million aggregate principal amount of 0.25% convertible senior notes due 2024, which includes the full exercise of the initial purchasers’ option to purchase up to an additional $120.0 million aggregate principal amount of the notes.
The initial conversion price of $153.99 per share represents a 37.5% premium to the close price prior to the announcement of the offering.
The offering was upsized from plans to offer $750.0 million aggregate principal amount of the notes with an option to purchase up to an additional $112.5 million principal amount.
Net proceeds from the offering will be approximately $899.8 million, of which $83.7 million has been put towards capped call transactions and the remainder will be used for general corporate purposes.
Qualys Appoints Wendy M. Pfeiffer, CIO of Nutanix, to its Board of Directors
Qualys (QLYS) announced the appointment of Wendy Pfeiffer to its Board of Directors, succeeding Patricia Hatter, who has resigned from the Board.
Ms. Pfeiffer currently serves as the CIO of Nutanix and has led technology teams at GoPro, Yahoo!, Cisco Systems, Exodus Communications, and Robert Half over the course of her 20+ years in the technology industry.
Tenable Appoints Matthew Olton as Senior Vice President of Corporate Development and Strategy
Tenable (TENB) appointed Matthew Olton as Senior Vice President of Corporate Development and Strategy, a role in which he will work closely with the broader security technology ecosystem to drive Tenable’s growth around the globe.
Mr. Olton joins the company from Symantec, where he was Senior Vice President, Corporate Development and Ventures.
Zuora Appoints New Chief Product Officer and Chief Customer Officer
Zuora (ZUO) appointed Chris Battles as Chief Product Officer and promoted Tom Krackeler to Chief Customer Officer.
Mr. Battles joins the company from LogMeIn (LOGM) where he was senior vice president and general manager of the Communications and Collaboration business unit.
Mr. Krackeler has served as Zuora’s senior vice president of product for the past four years.