K. Liu's Week in Review
M&A moved to the fore this week with a couple of high value transactions and several smaller tuck-in deals. Ahead of its Investor Day this week, simulation software provider ANSYS (ANSS) agreed to acquire Livermore Software Technology Corporation (“LSTC”) for $775 million in cash and stock, representing an EV/Sales multiple of 12.4x based on the midpoint of expected contribution in 2020. LSTC’s LS-DYNA solution has been broadly adopted by the automotive industry to predict vehicle behavior and the effects on occupants in the event of a collision. Beyond the automotive industry, Management expects LSTC’s technology for explicit dynamics and other advanced finite element analysis to enable its customers to solve new engineering challenges in areas such as aerospace, civil engineering, defense, manufacturing, and the biomedical industries. ANSYS plans to finance the cash component of the acquisition, which amounts to 60% of the purchase price, through new debt financing. E-commerce platform provider Shopify (SHOP) also announced a sizeable deal, entering into an agreement to acquire 6 River Systems for $450 million in cash and stock, equating to a 2020 EV/Billings multiple of 15.0x. The provider of cloud-based warehouse management software and collaborative robots called “Chuck” is expected to accelerate the growth of the Shopify Fulfillment Network by increasing the speed and reliability of associated warehouse operations. While 6 River Systems will continue to build and sell software to warehouses, the acquisition also brings critical expertise to the company amidst plans for a $1 billion investment to build out the Shopify Fulfillment Network. Elsewhere in e-commerce, Endurance International Group Holdings (EIGI) announced the acquisition of Ecomdash, a provider of inventory management, distribution, and multichannel marketplace listings software, for $9.6 million in cash. Additional details will be provided during the company’s Q3 ’19 earnings call. Other tuck-ins included Akamai Technologies’ (AKAM) purchase of Exceda, its largest channel partner in Latin America, to scale its business in the region faster, and SS&C Technologies Holdings (SSNC) acquisition of the Investrack business from long-time partner Globacom Technologies to bolster its offerings for digital investor engagement.
With off-cycle earnings largely complete, all eyes were on Oracle (ORCL) and Zscaler (ZS) this week. The former reported a day early as news also broke that Chief Executive Mark Hurd is taking a leave of absence for health reasons. Oracle’s fiscal Q1 ’20 earnings met expectations despite a modest revenue shortfall. Management attributed sequentially softer license growth to the splitting of the North American sales force into a cloud selling group and a license selling group, but was adamant that productivity would more than recover over the course of the year. Highlights in the quarter included robust growth in both Fusion ERP and NetSuite ERP as well as strong uptake of the company’s Autonomous Database. While Q2 guidance was short of consensus, management reaffirmed prior expectations for double-digit earnings growth on a constant currency basis. As for Zscaler, a big Q4 ’19 beat and solid revenue and billings outlook for FY ‘20 were overshadowed by management’s commentary during the earnings call that sales cycles for larger deals are elongating. Dali Rajic, who joins the company after previously serving as Chief Customer and Revenue Officer at AppDynamics, has been named President Go-To-Market and Chief Revenue Officer with a mandate to drive sales execution and evolve Zscaler’s customer success initiatives. With his hiring, the company also plans to step up spending in sales and marketing as well as continue to invest in its technology platform and cloud infrastructure. As such, guidance for the current quarter and year was mixed with anticipated profitability short of Street expectations despite a higher revenue outlook. Shares plummeted following the print. The table below depicts the weekly stock price performance for the two reporting companies this week, their actual results versus expectations, and subsequent estimate revisions for the current fiscal quarter and year.
While not reporting results this week, Viavi Solutions (VIAV) hosted an analyst day in which management raised its Q1 guidance, issued FY ’20 expectations that were mixed relative to consensus, and provided fresh three-year targets calling for a 2%-5% CAGR in revenue to $1.2-$1.3 billion by FY ’22, a non-GAAP operating margin of 19%-21% and non-GAAP EPS of $0.80-$0.90. The company also authorized a new $200 million share repurchase authorization, replacing the prior plan that was set to expire at the end of this month. In other news, Workiva (WK) hired Julie Iskow as Chief Operating Officer, a role in which she will help scale the company. Ms. Iskow joins from Medidata Solutions (MDSO) where she served as Executive Vice President and Chief Technology Officer. Nutanix (NTNX) named Christian Alvarez as Vice President, Americas Channel. He was previously Worldwide Head of Channels and Distribution at Juniper Networks (JNPR). Finally, Majesco (MJCO) appointed Carolyn Johnson, who previously served as Chief Transformation Officer at AIG, to its Board of Directors.
Mergers and Acquisitions
Akamai Technologies to Expand Presence in Latin America by Acquiring Exceda
Akamai Technologies (AKAM) has entered into an agreement to acquire Exceda, its largest channel partner in Latin America.
Exceda has been a channel partner since 2002 and the combination will enable Akamai to scale faster in Latin America.
Exceda is expected to add approximately $2 million in revenue this year and $15 million in FY ‘20, while being dilutive to non-GAAP EPS by $0.01 in FY ’19 and accretive by $0.01-$0.02 in FY ’20.
ANSYS (ANSS) has entered into a definitive agreement to acquire Livermore Software Technology Corporation for $775 million, of which 60% will be paid in cash and the remainder in stock.
Livermore provides technology for explicit dynamics and other advanced finite element analysis applicable to the aerospace, automotive, civil engineering, defense, manufacturing, and biomedical industries.
The acquisition is expected to close in Q4 ’19 and will contribute $60.0-$65.0 million in non-GAAP revenue in FY ’20 along with neutral to modest accretion in both non-GAAP operating margin and EPS.
ANSYS anticipates obtaining new debt financing to fund most, if not all, of the cash component of the purchase price.
Endurance International Group Signs Definitive Agreement to Acquire Ecomdash
Endurance International Group Holdings (EIGI) has agreed to acquire Ecomdash for $9.6 million in cash.
Ecomdash provides ecommerce merchants with inventory management, distribution, and multichannel listings software.
The acquisition is expected to close on or before October 1, 2019.
Shopify to Acquire 6 River Systems
Shopify (SHOP) has entered into an agreement to acquire 6 River Systems, a provider of collaborative warehouse fulfillment solutions, for approximately $450 million, comprised of 60% cash and 40% stock.
The acquisition is expected to accelerate the growth of the Shopify Fulfillment Network as 6 River Systems’ cloud-based software and collaborative mobile robots known as “Chuck” increase the speed and reliability of warehouse operations.
The transaction will contribute nominally to revenue in 2019 but will increase expenses by approximately $25 million for the year, including $10 million in operating expenses with the remainder associated with non-cash items.
For FY ’20, 6 River Systems is expected to generate billings of approximately $30 million.
SS&C to Acquire Investrack Business
SS&C Technologies Holdings (SSNC) has agreed to acquire the Investrack business from Globacom Technologies.
Investrack offers a 360-degree client engagement solution designed for private bank, wealth and investment management firms that is already integrated with SS&C’s solutions.
The acquisition is expected to close this month at which point Investrack will operate as a business unit under SS&C Advent.
Earnings Releases
Q1 FY20 GAAP EPS Up 11% To $0.63 and Non-GAAP EPS Up 14% to $0.81
Oracle (ORCL) reported Q1 ’20 non-GAAP EPS in line with expectations on a modest revenue shortfall.
Revenues were $9.218 billion (+0.3% Y/Y), within guidance of $9.193-$9.377 billion and just shy of the Street’s $9.276 billion. Non-GAAP operating income was $3.842 billion (41.7% margin), slightly above consensus of $3.813 billion. Non-GAAP EPS of $0.81 were in line with guidance of $0.80-$0.82 and consensus of $0.81.
Management attributed softer growth in licenses to a slow start in North America as the sales force was split into a cloud selling group and a license selling group, but noted productivity should more than recover over the course of the year.
Fusion ERP was up mid-40s Y/Y and now has over 6,500 customers, and NetSuite ERP grew mid-20s Y/Y in Q1 and now boast over 18,000 customers.
In Q1, Oracle added more than 3,700 new Autonomous Database trials and had over 500 wins, resulting in over 2,000 customers at quarter-end; Oracle expects the number of new cloud customers to more than double in Q2.
Guidance for Q2 of 0%-2% revenue growth, which implies $9.562-$9.753 billion in revenue, and $0.87-$0.89 in non-GAAP EPS fell short of Street expectations for $9.782 billion in revenue and $0.91 in non-GAAP EPS.
For FY ’20, management reaffirmed guidance for a double-digit increase in non-GAAP EPS on a constant currency basis.
Zscaler Reports Fourth Quarter and Fiscal 2019 Financial Results
Zscaler (ZS) reported Q4 ’19 results ahead of expectations and issued mixed guidance for FY ’20.
Revenue was $86.1 million (+53.3% Y/Y), exceeding management’s guidance of $81.0-$83.0 million and consensus of $82.8 million. Non-GAAP operating income was $7.9 million (9.2% margin), also exceeding guidance of $0-$2.0 million and consensus of $2.0 million. Non-GAAP EPS of $0.07 beat guidance of $0.01-$0.02 and consensus of $0.01.
Key metrics: billings of $125.8 million (+32% Y/Y) were above consensus of $115.8 million and would have increased 50% Y/Y if excluding upfront billings greater than one year; net dollar retention rate of 118%; over 3,900 customers at quarter end; remaining performance obligations of $554 million (+39% Y/Y).
Management indicated that some large deals are taking longer to close, possibly due to macroeconomic conditions.
More customers are buying the ZIA and ZPA platforms together and the newer ZPA platform already accounts for 14% of new business with approximately half of the business coming from existing ZIA customers.
With a new Chief Revenue Officer onboard, Zscaler plans to step up sales and marketing investments in the coming quarters as well as increase investments in its technology platform and cloud infrastructure.
Guidance for Q1 calls for revenue of $89.0-$90.0 million, above consensus of $87.6 million, and non-GAAP operating income and EPS of $(1.0) million to breakeven and $0.00-$0.01, respectively, below consensus of $1.9 million and $0.02.
Management’s FY ’20 guidance includes revenue, billings, non-GAAP operating income, and non-GAAP EPS of $395.0-$405.0 million, $490.0-$500.0 million, $13.0-$18.0 million, and $0.12-$0.15, respectively, which was mixed versus the Street’s $398.5 million, $490.1 million, $20.8 million, and $0.19.
Notable News
Christian Alvarez Joins Nutanix as Vice President, Americas Channel
Nutanix (NTNX) has appointed Christian Alvarez as Vice President, Americas Channel, a role in which he will lead the company’s Americas Channel team with an emphasis on extending the efforts of partnerships like Nutanix’s HPE partnership.
Mr. Alvarez previously served as Worldwide Head of Channels and Distribution at Juniper Networks (JNPR).
Julie Iskow Named Chief Operating Officer at Workiva
Workiva (WK) announced the hiring of Julie Iskow as Executive Vice President and Chief Operating Officer, a role in which she will help scale the company, effective October 1, 2019.
Ms. Iskow previously served as Executive Vice President and Chief Technology Officer at Medidata Solutions (MDSO).
Majesco Appoints Industry Trailblazer Carolyn Johnson to Its Board of Directors
Majesco appointed Carolyn Johnson, who previously served as Chief Transformation Officer at AIG, to its Board of Directors.
Prior to AIG, Ms. Johnson was Chief Executive Officer, Annuities and Individual Life at Voya Financial.
Oracle Chief Executive Officer Mark Hurd to Take a Leave of Absence for Health Related Reasons
Oracle (ORCL) announced that Mark Hurd, Chief Executive Officer, will take a leave of absence for health reasons.
Founder, Executive Chairman, and Chief Technology Officer Larry Ellison and Chief Executive Officer Safra Catz will assume his responsibilities in the interim.
Viavi Solutions (VIAV) announced that its Board of Directors has authorized a new $200 million stock repurchase program.
Management raised its Q1 ’20 revenue and non-GAAP EPS guidance from $273.0-$293.0 million and $0.14-$0.16, respectively, to $282.0-$294.0 million and $0.15-$0.17.
FY ’20 guidance includes $1.140-$1.170 billion in revenue, a 17.5%-18.5% non-GAAP operating margin, and $0.67-$0.73 in non-GAAP EPS, which was mixed versus consensus of $1.172 billion in revenue, $207.4 million in non-GAAP operating income (17.7% margin), and $0.68 in non-GAAP EPS.
Management also provided a three-year outlook calling for a CAGR of 2%-5% in revenue to $1.200-$1.300 billion by FY ’22, non-GAAP operating income of $230.0-$270.0 million (19%-21% margin) and non-GAAP EPS of $0.80-$0.90.
Zscaler Names Dali Rajic as President Go-To-Market and Chief Revenue Officer
Zscaler (ZS) announced the appointment of Dali Rajic, who most recently served as Chief Customer and Revenue Officer for AppDynamics, as President Go-To-Market and Chief Revenue Officer.
Mr. Rajic will be responsible for all aspects of the company’s revenue growth and go-to-market strategy as well as the continued evolution of Zscaler’s customer success initiatives.