K. Liu's Week in Review
As the holiday season approaches, we want to wish everyone a safe and Happy Thanksgiving. Despite a myriad of challenges in 2020, there is still much to be thankful for and the potential to end the year on a high note. In this regard, we would be remiss if we failed to acknowledge CTG Inc.’s (CTG) strong stock performance of late. The shares of our Sponsored Research client have performed well since the company’s Q3 print and have been lifted further following insider buys in each of the past two weeks. Coincidentally, Assurance Global Services and Wax Asset Management, which had recently recommended a number of actions to increase shareholder value and had pursued an acquisition of CTG prior to the pandemic, terminated their agreement to act as a group earlier this week.
An improving trend has certainly been the theme throughout the calendar Q3 earnings season and apparently applies to the initial slate of off-calendar reporting companies as well. American Software (AMSWA), a K. Liu & Company investor relations client, is a case in point as net new Cloud Services Annual Contract Value (ACV) added in its fiscal Q2 ’21 outpaced Street expectations. The rebound from the depressed levels seen in the past two quarters was driven by new customer acquisition and a return to the nominal levels of churn seen pre-COVID. Moreover, management expressed confidence in sustaining an upward trajectory in the latter half of its fiscal year due to a robust pipeline of large, later stage opportunities.
Of the other reporting companies this week, Nuance (NUAN) offered the most food for thought. In conjunction with its fiscal Q4 ’20 results, which exceeded expectations on continued adoption of its cloud solutions in healthcare settings, the company announced the sale of its non-core Health Information Management Transcription business and its Electronic Health Record Go-Live Services business to DeliverHealth Solutions, a new company formed by Assured Healthcare Partners and Aeries Technology Group. Nuance will be a minority shareholder of the newly formed company but the transaction leaves Nuance with a faster growing healthcare business and higher margins to boot. As such, management raised its midterm CAGR for revenue from 3%-6% to 6%-11% and increased its FY ’23 non-GAAP operating margin target from 27% to 28%. For reference, guidance for FY ‘21 includes organic growth of 3%-7% and a non-GAAP operating margin of 25%-26%. The most interesting data point to us, however, was an underlying expectation for Nuance’s Dragon Ambient eXperience (DAX) offering to grow from $10-$20 million in ARR this year to $100-$250 million by the end of FY ’23. Not to be outdone, Cerence (CRNC), which was spun out of Nuance last year, beat expectations handily and saw its shares finish the week up 27%. A recovery in the auto sector and an increasing share of vehicles shipped with Cerence’s Connected Services technology fueled the strong results.
M&A activity also continued at a healthy clip with acquirers generally seeking data-oriented solutions to increase efficiencies. Autodesk (ADSK) agreed to acquire Spacemaker, which offers an AI-powered platform enabling designers to quickly create and test urban design ideas, for an enterprise value of $240 million. Aspen Technology (AZPN) acquired Camo Analytics, whose Unscrambler suite is used to analyze large industrial data sets with the end goal of driving greater consistency in quality and more efficient output. FireEye (FEYE) took a $400 million investment from Blackstone and ClearSky, a portion of which will be put towards the $186 million cash and stock acquisition of Respond Software, whose eXtended Detection and Response (XDR) engine automates the correlation of data used in cyber investigations. FireEye plans to integrate Respond’s XDR capabilities into its Mandiant Advantage platform, thereby enhancing its customers’ ability to sift through an ocean of security alerts and positively identify attacks. Of course, FireEye’s frontline experts will also leverage the technology to serve Mandiant Managed Defense customers. Lastly, Paylocity (PCTY) acquired collaboration tools provider Samepage in a bid to provide its customers with solutions that increase productivity among distributed workforces.
Mergers and Acquisitions
Aspen Technology Announces the Acquisition of Camo Analytics AS
Aspen Technology (AZPN) has acquired Camo Analytics, whose Unscrambler suite is used by over 25,000 scientists, researchers and engineers to analyze large industrial data sets to drive greater consistency in quality and more efficient output.
The acquisition bolsters Aspen’s portfolio of Process Analytical Technology and Overall Equipment Effectiveness solutions and expands its ability to serve the pharmaceuticals and biotechnology industries.
Autodesk (ADSK) has agreed to acquire Spacemaker for an enterprise value of $240 million.
Spacemaker offers an AI-powered platform enabling designers to create and test urban design ideas while considering a range of design criteria and data to optimize and maximize the potential of a building site.
FireEye Announces Acquisition of Respond Software
FireEye (FEYE) has acquired Respond Software, a provider of eXtended Detection and Response (XDR) capabilities that automate the correlation of data used in cyber investigations, for $186 million in cash and stock.
FireEye plans to leverage Respond Software’s XDR engine in its delivery of Mandiant Managed Defense, which should accelerate its frontline experts’ ability to identify and respond to attacks.
Respond Software currently generates less than $10 million in annual revenues but has been growing rapidly.
The acquisition is not expected to have a material impact on results this year but should be accretive to billings, revenue and ARR in 2021 with no impact to operating margin.
Nuance Communications (NUAN) has agreed to sell its Health Information Management (HIM) Transcription business and its Electronic Health Record (EHR) Go-Live Services business to DeliverHealth Solutions, a new company formed by Assured Healthcare Partners and Aeries Technology Group.
Michael Clark, Nuance’s Senior Vice President and General Manager of Provider Solutions, will become CEO of DeliverHealth when the transaction closes, which is expected to occur early next year.
Nuance will be a minority shareholder of DeliverHealth and will continue to provide technology to the company.
Paylocity Announces Acquisition of Samepage
Paylocity (PCTY) has acquired Samepage, a provider of digital collaboration tools including task management, file sharing and real-time document collaboration.
The acquisition enables Paylocity to address more of its clients’ needs by providing solutions that increase productivity and efficiency among distributed workforces.
Earnings Releases
American Software Reports Second Quarter of Fiscal Year 2021 Results
American Software (AMSWA) reported Q2 ’21 results generally in line with Street expectations.
Revenues of $27.9 million (-4.0% Y/Y) were in line with consensus. Adjusted EBITDA of $2.8 million (10.0% margin) was just shy of the Street’s $3.0 million. Non-GAAP EPS of $0.05 beat consensus by a penny.
Key metrics: Cloud Services Annual Contract Value (ACV) of $29.6 million (+32% Y/Y).
The company generated solid net new ACV growth driven by the acquisition of six new customers and a return to the nominal churn levels seen pre-COVID.
The pipeline continues to grow both in the number and size of opportunities, leaving management confident in an upward trend in the number of projects to be initiated during the second half of the fiscal year.
Although professional services activity tends to dip in Q3, the virtual work conditions in effect this year are likely to result in a less pronounced holiday slowdown, resulting in flattish services revenues on a sequential basis.
Cerence Announces Record Fourth Quarter and Fiscal Year 2020 Results
Cerence (CRNC) reported Q4 ’20 results above expectations and guided FY ’21 ahead of consensus.
Revenue of $90.9 million (+9.6% Y/Y) exceeded guidance for $76.0-$80.0 million and consensus of $79.3 million. Adjusted EBITDA was $40.3 million (44.4% margin), well above guidance for $23.0-$26.0 million and consensus of $24.3 million. Non-GAAP EPS of $0.61 beat consensus of $0.34.
Key metrics: backlog of $1.8 billion; 53% of worldwide auto production with Cerence technology; Cerence connected cars shipped -16% Y/Y; billings per car +14% Y/Y.
Fiscal Q4 was the best quarter in Cerence’s history due to great adoption of the company’s products and services by auto OEMs, the strong recovery in the auto market and financial controls implemented in recent quarters.
While COVID has impacted connected car shipments and vehicle shipments as a whole, the number of cars shipped with Cerence technology has outpaced overall car production and the expansion of Connected Services into more cars has increased billings per car.
Heading into the new fiscal year, Cerence’s pipeline is over 2x bigger than it was at the start of FY ’20.
Q1 guidance for revenue of $85.0-$90.0 million and adjusted EBITDA of $31.0-$35.0 million exceeded Street expectations for $82.1 million in revenue and $25.7 million in adjusted EBITDA.
Management’s FY ’21 guidance for $360.0-$380.0 million in revenue and $122.0-$135.0 million in adjusted EBITDA was above consensus of $356.6 million in revenue and $114.6 million in adjusted EBITDA.
Intuit First Quarter Revenue Grew 14 Percent; Company Provides Guidance for Fiscal 2021
Intuit (INTU) reported Q1 ’21 results above expectations and guided FY ’21 favorably relative to Street expectations.
Revenue of $1.323 billion (+13.6% Y/Y) was above consensus of $1.207 billion. Non-GAAP operating income was $334.0 million (25.2% margin), exceeding consensus of $122.8 million. Non-GAAP EPS of $0.94 beat the Street’s $0.37.
The strong start to the year was driven by 13% growth in the Small Business and Self-Employed Group, while Consumer Group and ProConnect Group revenue was in line with expectations.
Within the Small Business and Self-Employed Group, Online Ecosystem revenue increased 24% Y/Y, and management continues to expect growth of 30% or more over the long-term.
Intuit continues to see recovering trends across its platform with many QuickBooks indicators back to pre-pandemic levels.
QuickBooks Commerce was launched in September to better serve the 1.0 million product-based businesses on the platform with inventory and order management tools, and the company has identified another 6.4 million businesses in the U.S., U.K., Canada and Australia that could also benefit from the solution.
The Credit Karma acquisition is still pending but management noted that after being negatively impacted over the last seven months as lenders tightened access to credit, monthly revenue was close to pre-COVID levels in October.
Q2 guidance for revenue growth of 8.0%-9.0% (implies revenue of $1.832-$1.849 billion) and non-GAAP EPS of $1.31-$1.34 exceeded Street expectations for revenue of $1.800 billion and non-GAAP EPS of $1.21.
Management’s FY ’21 guidance includes revenue of $8.265-$8.415 billion, non-GAAP operating income of $2.960-$3.010 billion and non-GAAP EPS of $8.40-$8.55, comparing favorably with Street expectations for $8.291 billion, $2.907 billion and $8.43, respectively.
Nuance Announces Fourth Quarter and Fiscal Year 2020 Results
Nuance (NUAN) reported Q4 ’20 results above Street expectations.
Revenue of $352.9 million (-9.0% Y/Y) was near the high-end of guidance for $334.0-$354.0 million and above consensus of $345.7 million. Non-GAAP operating income was $76.3 million (21.6% margin), above consensus of $73.8 million. Non-GAAP EPS of $0.18 was at the high-end of guidance for $0.13-$0.18 and beat the Street’s $0.16.
Key metrics: Healthcare Cloud ARR of $385.9 million (+29% Y/Y) was above guidance for $370.0-$380.0 million.
Q4 results reflected a favorable revenue mix shift as well as increasing demand for cloud solutions but were still impacted by disruption in elective procedures and delays in license purchases and project implementations.
Healthcare Cloud ARR outpaced expectations driven by the migration of the Dragon Medical One installed base to the cloud and Nuance’s expansion into ambulatory settings in the U.S. and internationally.
Dragon Ambient eXperience (DAX), which is being used in both hospital and telehealth settings, has been well received and is expected to grow from $10-$20 million in ARR this year to $100-$250 million in ARR by the end of FY ’23.
The Enterprise business saw success in the retail sector with several competitive wins across the company’s broad portfolio of solutions, ranging from security and biometrics to conversational AI.
The loss of a nonstrategic government term license contract in Nuance’s coding business creates a $40 million headwind in FY ’21, most of which will occur in Q1.
Q1 guidance for revenue of $325.0-$243.0 million and non-GAAP EPS of $0.15-$0.19 was not directly comparable to Street expectations for $395.6 million and $0.23, respectively, due to the pending sale of Nuance’s HIM Transcription and EHR Go-Live Services businesses to DeliverHealth Solutions.
Managements’ FY ’21 guidance, which excludes the businesses being divested, calls for revenue of $1.327-$1.367 billion (+3.0%-7.0% Y/Y on an organic basis), a non-GAAP operating of 25.0%-26.0% and non-GAAP EPS of $0.71-$0.77.
Given the sale of the HIM and EHR businesses, management raised its midterm CAGR for revenue from 3.0%-6.0% to 6.0%-11.0% and increased its FY ‘23 non-GAAP operating margin target from 27.0% to 28.0%.
Palo Alto Networks Reports Fiscal First Quarter 2021 Financial Results
Palo Alto Networks (PANW) reported Q1 ’21 results above expectations and raised its FY ’21 outlook.
Revenue of $946.0 million (+22.6% Y/Y) exceeded guidance for $915.0-$925.0 million and consensus of $921.6 million. Non-GAAP operating income of $205.4 million (21.7% margin) was well above consensus of $168.6 million. Non-GAAP EPS of $1.62 beat guidance for $1.32-$1.35 and the Street’s $1.33.
Key metrics: billings of $1.08 billion (+21% Y/Y) were above guidance for $1.03-$1.05 billion; added 2,200 new customers.
Q1 results reflected strong growth across the board and was highlighted by Next-Generation Security (NGS) billings increasing 53% Y/Y and NGS ARR reaching $719 million.
Firewall-as-a-Platform billings increased 16% Y/Y as Palo Alto added ~2,000 customers for a total of 71,000 at quarter-end.
The upcoming launch of a new 5G-native security offering will feature 5G network slice security, 5G context-driven security and other capabilities within a containerized solution.
The acquisition of Expanse will add $73 million in ARR, 100 basis points to billings growth and 50 basis points to revenue growth in FY ’21, and acquisitions completed since 2019 are expected to contribute ~15% of forecasted billings for FY ’21.
Q2 guidance for revenue of $975.0-$990.0 million and non-GAAP EPS of $1.42-$1.44 was above Street expectations for revenue of $971.0 million and non-GAAP EPS of $1.35.
Management raised its FY ’21 guidance across the board and now anticipates billings of $5.08-$5.13 billion, revenue of $4.09-$4.14 billion, non-GAAP EPS of $5.70-$5.80 and an adjusted free cash flow margin of 29%.
Workday Announces Fiscal 2021 Third Quarter Financial Results
Workday (WDAY) reported Q3 ’21 results above expectations and provided a mixed outlook for Q4.
Revenues of $1.106 billion (+17.9% Y/Y) were above guidance for $1.083-$1.085 billion and consensus of $1.086 billion. Non-GAAP operating income was $268.1 million (24.2% margin), exceeding guidance for a 19.0% margin and consensus of $207.4 million. Non-GAAP EPS of $0.86 beat the Street’s $0.67.
Key metrics: subscription revenue backlog of $8.87 billion (+23% Y/Y); over 190 virtual go-lives; gross retention over 95% and net retention over 100%.
Workday delivered a solid Q3 as conversion rates exceeded expectations and the medium enterprise had a strong quarter.
The company has now reached 1,000 customers using Workday Financial Management for core finance and demand for its expanding suite of solutions supporting finance and procurement requirements has remained solid.
Sales into the installed base generated over 50% growth in new ACV bookings, although that rate is not expected to be sustained as comparisons become tougher starting in Q4.
Q4 guidance for revenue of $1.112-$1.114 billion and a non-GAAP operating margin of 15% (implies $166.8-$167.1 million in non-GAAP operating income) was mixed relative to Street expectations for revenue of $1.101 billion and non-GAAP operating income of $177.8 million.
Notable News
FireEye Announces $400 Million Strategic Investment Led by Blackstone
FireEye (FEYE) sold $400 million in shares of its 4.5% Series A Convertible Preferred Stock to Blackstone and ClearSky at a purchase price of $1,000 per share.
The preferred shares are convertible into shares of FireEye’s common stock at a price of $18.00 per share.
Proceeds from the investment by Blackstone and ClearSky will be put towards the acquisition of Respond Software and to support other strategic growth initiatives.
Viral Patel, Senior Managing Director at Blackstone, will be appointed to FireEye’s Board upon closing of the transaction.
Jamf Announces Upsize and Pricing of Follow-on Offering of Common Stock by Selling Shareholders
Jamf (JAMF) priced a secondary offering of 11.0 million shares of its common stock by certain selling shareholders at $32.00 per share, a 7.7% discount to the close price prior to announcement of the planned offering.
The offering was upsized from initial plans to sell 10.0 million shares and the selling shareholders have granted the underwriters an option to purchase up to an additional 1.65 million shares.
Jamf did not issue any shares in the offering and will not receive any proceeds from the offering.
SharpSpring Provides Long-Term Business Outlook
SharpSpring (SHSP) updated its long-term business outlook in a letter and an accompanying presentation to shareholders.
Management believes that the company’s model supports gross margin of 80%+ and an operating margin of 20%+ at scale.
Detailed customer cohort data reveals that new cohorts are substantially outperforming older ones, a gap that is expected to widen over time and drive meaningful expansion in monthly recurring revenue.
Other highlights include a deep dive into SharpSpring’s LTV to CAC ratio, which checks in at 8.0x by one measure and at an even higher 9.2x when focusing on the high-value agencies driving the business.
Disclosure(s):
K. Liu & Company LLC has received compensation from American Software (AMSWA) for non-investment banking services within the past 12 months.
K. Liu & Company LLC has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.