K. Liu's Week in Review
Earnings releases began to flow freely across the software industry this week. Our first covered company for this reporting season, NetScout Systems (NTCT), delivered its second consecutive quarterly beat, while also returning to positive organic growth. Shares traded higher subsequent to the print, but much of that was given back amidst a broader market sell-off to end the week. We think the stock is worth buying here and refer readers to our recap on the results, “Upside Q3 ’20 Results Punctuated by Renewed Growth.”
Of the other dozen software companies that we tracked, only Aspen Technology (AZPN) missed outright while SAP (SAP) turned in a mixed performance. All of the others beat expectations for the quarter, although guidance was more of a mixed bag. Despite facing a setback from the slippage of several deals out of its fiscal Q2, Aspen’s management team expressed confidence that the closure of the delayed deals, an increasingly mature pipeline, larger transaction sizes, and a more favorable backdrop across key end markets for its Asset Performance Management business would enable the company to meet its full year targets. In this regard, the shortfall in Q2 did not dissuade the company from reaffirming its prior guidance for annual spend growth, revenue and operating income in FY ’20. That said, the market was less enthused with the prospect of a back-end loaded year, and shares came under pressure.
As for SAP (SAP), those interested in a summary of the results and guidance may peruse the Earnings Release section below. More interesting to us, however, was the company’s plans to link bonus metrics directly to customer solution consumption rather than focusing solely on deal signatures. While SAP’s new co-CEOs indicated the change reflects an increased emphasis on customer engagement and success, we believe the move also portends a potential shift in how the company and the software industry at large may need to approach pricing as adoption of artificial intelligence/machine learning and other automation technologies creates growth headwinds for those that sell on a per seat or per site basis. How SAP measures customer consumption e.g. the number of database records created, specific user actions, etc. may provide a glimpse into its future pricing strategy.
Regarding the rest of this week’s reporters, investors drawn to growth should focus their attention on Agilysys (AGYS), Dynatrace (DT), Microsoft (MSFT), Mitek (MITK) and ServiceNow (NOW), all of whom continued to post strong results and provided positive guidance. Both Commvault (CVLT) and MicroStrategy (MSTR) turned in strong quarterly performances as well and may appeal to those searching for transition stories as each continues to make progress in garnering a higher mix of predictable revenue. F5 Networks (FFIV), OpenText (OTEX) and Proofpoint (PFPT) also delivered solid results, but their outlooks were all a bit mixed as each company is absorbing an acquisition that will pressure margins in the near-term.
Rounding out the news this week, Majesco (MJCO) agreed to acquire InsPro Technologies (ITCC) for approximately $12 million in cash, representing a TTM EV/Sales multiple of approximately 0.7x. The purchase bolsters Majesco’s presence in the life and annuity insurance market and expands its domain depth in voluntary, group, voluntary benefits, and worksite markets. We surmise the relatively depressed valuation garnered by InsPro reflects its year-to-date revenue decline of approximately 36%, which has also led to adjusted EBITDA losses. GoDaddy (GDDY) agreed to acquire the company behind the Over app, which boasts over one million monthly active users that utilize the app to create content for social media platforms, email marketing campaigns, and websites. ServiceNow plans to acquire Passage AI, a conversational AI platform company whose capabilities will be integrated into the Now platform to expand chatbot support for non-English languages. Citrix Systems (CTXS) announced a $1 billion accelerated share repurchase program, leaving another $750 million remaining under its existing authorization once the associated transactions are completed. Finally, PTC (PTC) raised $1 billion in debt, which will be used to retire its existing 6.0% Senior Notes due 2024 and pay down $457 million of outstanding loans against its senior revolving credit facility.
Mergers and Acquisitions
GoDaddy Acquires Over to Help Everyday Entrepreneurs Easily Create Engaging Visual Content Online
GoDaddy (GDDY) has agreed to acquire Over, the company behind the Over app.
The Over app boasts over one million monthly active users that utilize the app to create content for popular social media platforms, email marketing campaigns and websites.
Majesco to Acquire InsPro Technologies
Majesco (MJCO) has agreed to acquire InsPro Technologies (ITCC) for approximately $12 million in cash.
InsPro Technologies’ Enterprise platform caters to the life and annuity insurance market, processing over 15 million policies for leading insurance carriers and third-party administrators in the U.S.
The acquisition expands Majesco’s domain depth in voluntary, group, voluntary benefits and worksite markets.
On a TTM basis, InsPro Technologies generated $15.6 million in revenue and $(0.7) million in adjusted EBITDA.
ServiceNow to Acquire Passage AI
ServiceNow (NOW) has agreed to acquire Passage AI, a conversational AI platform company.
The addition of conversational AI capabilities into the Now Platform expands ServiceNow’s chatbot support for non-English languages and will enable organizations to better understand work requests initiated in a customer’s native language.
The acquisition is expected to close in Q1 ’20.
Earnings Releases
Aspen Technology Announces Financial Results for the Second Quarter of Fiscal 2020
Aspen Technology’s (AZPN) Q2 ’20 results missed consensus, but management reaffirmed much of its prior FY ’20 guidance.
Revenue of $124.7 million (-11.2% Y/Y) was below consensus of $136.0 million. Non-GAAP operating income of $50.9 million (40.8% margin) was also short of the Street’s $62.2 million. Non-GAAP EPS of $0.66 missed consensus of $0.80.
Key metrics: annual spend was $564 million (+10% Y/Y); free cash flow totaled $48.1 million.
Refiners remained a source of strength in Q2, E&C customers produced the strongest growth quarter in four years, and chemical customers continue to be impacted by global trade conflict and deceleration in global growth.
Asset Performance Management (APM) growth is somewhat behind where management anticipated at this point in the year as several transactions expected to close in Q2 were pushed into the latter half of FY ’20.
Management remains confident in achieving its full year APM growth target, however, due to expectations for the slipped deals to close, a more mature pipeline following the conclusion of proof-of-concepts, larger sized transactions expected in 2H, and a growing GEI business for APM.
Management maintained prior FY ’20 expectations for 10%-12% annual spend growth, $600.0-$650.0 million in bookings, $575.0-$615.0 million in revenue and $272.0-$307.0 million in non-GAAP operating income; raised its free cash flow guidance from $250.0-$260.0 million to $260.0-$270.0 million; and lowered its non-GAAP EPS guidance from $3.43-$3.84.
Agilysys Fiscal 2020 Third Quarter Revenue Rises 16.6% to Record $42.0 Million
Agilysys (AGYS) reported solid Q3 ’20 results and raised its revenue growth expectations for FY ’20.
Net revenue of $42.0 million (+16.6% Y/Y) exceeded consensus of $40.6 million. Adjusted EBITDA was $3.2 million (7.7% margin), approximately in line with consensus of $3.1 million. EPS of $(0.11) were in line with Street expectations.
Key metrics: added 18 new customers; serviced approximately 274,000 (+1% Y/Y) rooms and 61,000 (+15% Y/Y) point-of-sale end points at quarter-end; subscription revenue increased 28% Y/Y; free cash flow was $3.0 million (7.1% margin).
Bookings remained strong in Q3, and management indicated that the past five quarters have been among the company’s six highest selling periods ever, reflecting demand for Agilysys’ point-of-sale solutions, InfoGenesis and rGuest Buy Kiosk.
Agilysys has also made breakthroughs in managed foodservice, higher education and healthcare, which are renewed areas of focus outside of the company’s core strength in the gaming, hotel, resorts and cruises verticals.
Given the increased business momentum at present, management plans to accelerate investments in R&D, professional services, and customer support.
Management raised its FY ’20 revenue growth target from 14% to 16% and reiterated prior guidance for adjusted EBITDA growth of 25%, implying Q4 revenue and adjusted EBITDA of $42.5 million and $3.0 million, respectively, versus consensus of $41.0 million and $3.5 million.
Commvault Announces Fiscal 2020 Third Quarter Financial Results
Commvault’s (CVLT) Q3 ’20 results beat, and management expressed confidence in achieving Street expectations for Q4.
Revenues of $176.4 million (-4.3% Y/Y) were above consensus of $172.7 million. Non-GAAP operating income was $28.9 million (16.4% margin), ahead of Street expectations for $24.2 million. Non-GAAP EPS of $0.47 beat consensus of $0.40.
Key metrics: repeatable revenue of $123.4 million (+2% Y/Y); added approximately 200 subscription and utility customers in the quarter; subscription and utility annual contract value (ACV) of $140.0 million (+56% Y/Y); average enterprise deal size was $279,000, and revenue from enterprise deals comprised 66% of software and product sales.
Following rave reviews from customers, analysts and partners at Commvault GO, Metallic, the company’s SaaS solution, has garnered new customers and many initial trials.
Momentum continues to build for Commvault’s HyperScale solutions, which are consistently contributing to revenues and delivered growth in excess of 10% Y/Y during Q3.
Renewal rates average approximately 90% across the entire customer base and over 95% for larger customers.
Management indicated that the company expects to meet or exceed consensus estimates for Q4, which included revenue of $178.1 million, non-GAAP operating income of $26.8 million, and non-GAAP EPS of $0.44 prior to the print.
Dynatrace Reports Third Quarter of Fiscal Year 2020 Financial Results
Dynatrace (DT) reported Q3 ’20 results above expectations and guided Q4 ahead of consensus.
Total revenue of $143.3 million (+24.9% Y/Y) exceeded guidance of $137.0-$138.0 million and consensus of $137.6 million. Non-GAAP operating income was $37.5 million (26.2% margin), also exceeding guidance of $30.0-$31.0 million and consensus of $30.5 million. Non-GAAP EPS were $0.10, beating guidance of $0.06-$0.07 and consensus of $0.07.
Key metrics: added 380 customers for a total of 2,208 Dynatrace customers at quarter-end; Dynatrace net expansion rate exceeded 120%; total ARR of $534.5 million (+43.6% Y/Y), of which 87% represents Dynatrace ARR; Classic ARR declined to $69 million; remaining performance obligation (RPO) of $800 million, including current RPO of $456 million (+66% Y/Y).
Half of the customers added to the Dynatrace platform were new logos and conversion activity was strong with twice as many customers converting versus the prior year period.
Nearly all customers should be converted to the new platform over the next three quarters, paving the way for ARR expansion as customers adopt use cases not possible with Classic products.
Consistent with the company’s debt reduction initiatives, Dynatrace reduced debt by $30 million in Q3 and made another $30 million debt payment in January; management noted that the company will launch a repricing of its debt facility in Q4.
Management’s Q4 guidance includes revenue, non-GAAP operating income, and non-GAAP EPS of $147.0-$148.0 million, $33.5-$34.5 million, and $0.08, respectively, all exceeding Street expectations for $144.9 million, $33.2 million, and $0.07.
Guidance for FY ’20 was raised across the board with expectations for total ARR now expected to be $563.0-$566.0 million versus $550.0-$555.0 million previously.
F5 Networks (FFIV) reported Q1 ’20 results above expectations but provided a mixed outlook for Q2.
Revenue of $569.3 million (+4.7% Y/Y) was near the high-end of management’s $560.0-$570.0 million guidance and above consensus of $566.0 million. Non-GAAP operating income was $192.4 million (33.8% margin), ahead of the Street’s $182.5 million. Non-GAAP EPS of $2.55 beat guidance of $2.41-$2.44 and consensus of $2.42.
As customers increasingly deploy F5 in multi-cloud environments, the company’s revenue mix is shifting towards software, which comprised 28% of product sales and increased 50% Y/Y on strong demand for security use cases and ELAs in Q1.
Strong services growth of 8% Y/Y was attributed to improvements in identifying and securing renewals, healthy attach rates to software sold as a perpetual license or subscription, and a step-up in consulting services associated with software sales.
Near-term, management’s priority for cash is to pay down the $400 million term loan associated with the Shape acquisition.
The release of Controller 3.0 is expected to accelerate the NGINX business given an expanded addressable market that now includes adjacent app services in security and service mesh, increased deal sizes as large-scale NGINX deployments will be easier to orchestrate, and new commercial capabilities that should appeal to NGINX’s open source base.
In Q1, the North America sales organization was realigned to better focus on certain verticals and to address the evolution of the product portfolio, and F5 enters Q2 with a “very robust pipeline of software deals.”
Management’s Q2 guidance includes $580.0-$590.0 million in non-GAAP revenue and $2.14-$2.17 in non-GAAP EPS, which was mixed relative to Street expectations for $570.8 million in revenue and $2.44 in non-GAAP EPS.
Microsoft Commercial Strength Powers Second Quarter Results
Microsoft (MSFT) reported Q2 ’20 results above expectations and guided Q3 ahead of consensus.
Revenue was $36.9 billion (+13.7% Y/Y), exceeding management’s $35.2-$36.0 billion guidance and consensus of $35.7 billion. Operating income was $13.9 billion (37.6% margin), well ahead of guidance for $11.9-$12.4 billion and consensus of $12.2 billion. Non-GAAP EPS of $1.51 beat guidance for $1.29-$1.34 and consensus of $1.32.
Key metrics: Azure revenue +62% Y/Y; Office 365 Commercial revenue +27% Y/Y; Office 365 Consumer subscribers reached 37.2 million; Dynamics 365 revenue +42% Y/Y; LinkedIn revenue +24% Y/Y; Microsoft Teams now has over 20 million daily active users; commercial remaining performance obligation was $90 billion (+30% Y/Y).
An expanded portfolio of edge appliances, including Azure Stack Edge and Azure Arc, and rapid adoption of AI tools, infrastructures, and services are driving customer wins for Azure.
The Power platform is now used by 2.6 million citizen developers, and Microsoft is innovating in robotic process automation with Power Automate and Power Virtual Agents.
Management’s Q3 guidance for segment revenue, cost and expenses, and tax rate implies total revenue, operating income, and EPS of $34.1-$34.9 billion, $11.9-$12.4 billion, and $1.28-$1.33, respectively, all of which compared favorably versus consensus of $34.1 billion in revenue, $11.5 billion in operating income, and $1.25 in EPS.
For FY ’20, management continues to anticipate double-digit revenue and operating income growth with operating margin now expected to be roughly two points higher versus the prior year.
MicroStrategy Announces Fourth Quarter 2019 Results
MicroStrategy (MSTR) reported Q4 ’19 results ahead of expectations.
Total revenues were $133.5 million (+1.2% Y/Y), exceeding consensus of $129.4 million. Non-GAAP operating income was $12.0 million (8.9% margin), well above Street expectations for $6.9 million. EPS of $1.18 also beat consensus of $0.81.
The company added 71 HyperIntelligence customers for a total of 175 at quarter-end, and 740 customers have already upgraded to MicroStrategy 2019.
MicroStrategy now offers its platform on AWS and Azure, enabling customers to deploy and move across multiple platforms.
First year revenue for a cloud subscription typically amounts to one-third to one-half of a perpetual license transaction.
Key priorities for 2020 include an increasing focus on the MicroStrategy cloud platform in the company’s go-to-market strategy, migration of existing customers to the latest platform version, generating constant currency revenue growth and driving continued operating efficiency.
Mitek (MITK) reported Q1 ’20 results ahead of consensus and reiterated prior guidance for FY ’20.
Revenue of $22.1 million (+24.8% Y/Y) was above consensus of $21.5 million. Non-GAAP operating income was $4.7 million (21.2% margin), exceeding consensus of $3.1 million. Non-GAAP EPS of $0.12 beat consensus of $0.07.
Identity verification revenue rose 28% Y/Y to $7.4 million, while Deposits revenue increased 23% Y/Y to $14.7 million.
Momentum in the identity verification market is being driven in part by new customer adoption, particularly in the financial services, gig economy and marketplace segments, and is reflected in the 39% Y/Y increase in SaaS and transactions revenue.
The company remains the market leader in deposit solutions with over 6,500 financial institutions using its products.
Mitek continues to be involved in litigation with USAA, including a lawsuit in which its customer, Wells Fargo, was found to infringe on at least one patent and is likely to appeal and another in which Mitek is seeking a declaratory judgment that the company’s products do not infringe on USAA’s four patents.
Guidance for Q2 includes revenue of $23.0-$23.5 million, in line with consensus of $23.4 million, and non-GAAP operating income of approximately $5.0 million, above consensus of $4.4 million.
Management reaffirmed prior FY ’20 guidance for revenue of $98.0-$102.0 million and a non-GAAP operating margin of 20.0%-22.0%.
OpenText Reports Second Quarter Fiscal Year 2020 Financial Results
OpenText (OTEX) reported Q2 ’20 results above expectations.
Revenues of $771.6 million (+4.9% Y/Y) exceeded consensus of $754.2 million. Adjusted EBITDA of $317.0 million (41.1% margin) was also above consensus of $306.5 million. Non-GAAP EPS of $0.84 beat consensus of $0.79.
Key metrics: annual recurring revenues of $563.8 million (+6.5% Y/Y); cloud revenues of $248.3 million (+13.3% Y/Y); off-cloud renewal rates in the low-90s and cloud renewal rates in the mid- to high-90s.
The acquisition of Carbonite brings a leading position in the cyber resilience market, increases the base of cloud subscription revenues, adds 16,000 new channel partners and enables OpenText to serve customers of all sizes.
Management announced a restructuring plan with an estimated cost of $26.0-$34.0 million that is expected to be completed by the end of FY ’21 and subsequently generate annualized cost savings of approximately $37.0-$41.0 million.
Guidance for Q3 calls for low double-digit revenue growth and for adjusted EBITDA to be flat to up slightly, implying at least $791.1 million in revenue and $261.8 million in adjusted EBITDA versus consensus of $727.7 million and $277.3 million.
For FY ’20, Carbonite adds $195.0-$200.0 million in revenue in 2H and will be accretive to non-GAAP EPS, but management’s target adjusted EBITDA margin falls from 38%-39% to 36%-37%.
Proofpoint Announces Fourth Quarter and Full Year 2019 Financial Results
Proofpoint (PFPT) delivered Q4 ’19 results above expectations but provided a mixed outlook for FY ’20.
Total revenue of $243.4 million (+22.6% Y/Y) was above guidance for $237.5-$239.5 million and consensus of $239.1 million. Non-GAAP operating income was $37.0 million (15.2% margin), ahead of consensus of $35.1 million. Non-GAAP EPS of $0.52 beat guidance for $0.47-$0.50 and the Street’s $0.48.
Key metrics: billings of $347.2 million (+28.6% Y/Y) were ahead of guidance for $339.0-$343.0 million; approximately 7,100 (+16% Y/Y) customers at quarter-end; emerging products represented over 25% of ARR at year-end; bundled solutions comprised over 20% of new ARR in Q4; renewal rate remains well above 90%.
Business momentum remained strong driven by ongoing demand for Proofpoint’s next-generation cloud security and compliance platform, continued migration to the cloud, and the company’s visibility into the evolving threat landscape.
The acquisition of ObserveIT enables Proofpoint to deliver a single, integrated platform with the ability to defend against insider threats, which combined with a unified DLP solution expands the company’s addressable market by $1 billion.
As management plans to immediately transition ObserveIT to a subscription selling model, revenue contribution will be limited initially to $3.7 million associated with legacy support and maintenance contracts versus an annual spend rate of approximately $40 million.
Guidance for Q1 includes revenue of $246.0-$248.0 million and non-GAAP EPS of $0.25-$0.29, which was mixed versus Street expectations for $244.3 million in revenue and $0.38 in non-GAAP EPS.
Management’s FY ’20 guidance calls for $1.060-$1.067 billion in revenue and $1.42-$1.48 in non-GAAP EPS, which was also mixed relative to consensus of $1.061 billion in revenue and $1.87 in non-GAAP EPS.
Longer-term, management intends to double the business to $2 billion in annualized revenues in the 2023-2024 timeframe and achieve a mid-40s rule of 40 score based on revenue growth and free cash flow margin.
SAP Cloud Growth, Margin Focus and S/4HANA Adoption Power 2019 Results
SAP’s (SAP) Q4 ’19 results and FY ’20 guidance were mixed relative to Street expectations.
Total non-IFRS revenue was €8.051 billion (+8.3% Y/Y), slightly below consensus of €8.077 billion. Non-IFRS operating profit was €2.843 billion (35.3% margin), in line with consensus. Non-IFRS EPS of €1.82 beat consensus of €1.71.
Key metrics: added 1,200 SAP S/4HANA customers to reach over 13,800 (+24% Y/Y) at quarter-end; new cloud bookings of €878 million (+19% Y/Y); non-IFRS cloud revenue of €1.908 billion (+35% Y/Y).
Approximately 40% of S4/HANA customers are net new and competitive wins, S/4HANA Cloud now boasts over 2,300 customers with a revenue run rate over €500 million, and 70% of SAP’s ERP customers have yet to adopt its cloud solutions.
Qualtrics has expanded to over 11,450 customers with the number of deals in excess of €100 million up 40% Y/Y.
The broader SuccessFactors suite now has nearly 7,000 customers, while Employee Central has ramped to over 3,700 customers and the recently launched Employee Experience micro suite already has over 450 customers.
SAP plans to link bonus metrics directly to customer solution consumption rather than focusing solely on deal signatures, and the company’s external reporting will move away from new cloud bookings to disclosing the current cloud backlog.
Heading into 2020, SAP boasts a robust global pipeline and its predictable revenue is approaching 70% of the mix.
Management’s FY ’20 guidance includes non-IFRS revenue and operating profit of €29.2-€29.7 billion and €8.9-€9.3 billion, respectively, which was mixed versus Street expectations for €29.7 billion in revenue and €8.9 billion in operating profit.
Longer-term, SAP’s Ambition 2023 continues to call for non-IFRS cloud revenue to triple from €5.03 billion in 2018, non-IFRS total revenue in excess of €35.0 billion, and approximately 500 basis points of non-IFRS margin expansion versus 2018.
ServiceNow Reports Fourth Quarter and Full-Year 2019 Financial Results
ServiceNow (NOW) reported Q4 ‘19 results ahead of expectations.
Revenues of $951.8 million (+33.0% Y/Y) were above consensus of $941.1 million. Non-GAAP operating income was $209.6 million (22.0% margin), ahead of the Street’s $202.9 million and guidance for a 21.0% non-GAAP operating margin. Non-GAAP EPS of $0.96 beat consensus of $0.87.
Key metrics: subscription revenues of $899.2 million (+35.0% Y/Y) beat guidance for $884.0-$889.0 million; subscription billings of $1.298 billion (+36.3% Y/Y) beat guidance for $1.249-$1.254 billion; closed 76 (+49% Y/Y) transactions in excess of $1 million in net new annual contract value (ACV); 892 (+32% Y/Y) customers with over $1 million in ACV.
Highlights included 16 ITSM deals over $1 million, the largest ITAM deal ever with the U.S. Department of Veteran Affairs, 9 HR deals over $1 million, and CSM now boasting over 1,000 customers.
Priorities for 2020 include being a trusted innovator for the C-suite, engaging customers with a world class go-to-market machine, force multiply ServiceNow with a strong industry and partner ecosystem, creating product experiences beloved by people at work and teamwork.
Guidance for Q1 includes subscription revenues of $975.0-$980.0 million, subscription billings of $1.040-$1.045 billion, and a non-GAAP operating margin of 22.0%.
Management’s outlook for FY ’20 calls for subscription revenues of $4.220-$4.240 billion, subscription billings of $4.805-$4.825 billion, a non-GAAP operating margin of 22.0%, and a free cash flow margin of 29.0%.
Notable News
Citrix Announces $1 Billion Accelerated Share Repurchase
Citrix Systems (CTXS) has entered into accelerated share repurchase transactions to buyback $1 billion of its common stock.
Terms of the transactions dictate that the company will initially receive approximately 6.53 million shares with the remainder, if any, to be delivered upon the completion of the transactions.
The purchase price per share will be based on the volume-weighted average price of CTXS shares during the term of the accelerated share repurchase, less a discount, and the number of shares repurchased will be determined based on this price.
Following the accelerated share repurchase transactions, Citrix will have approximately $750 million remaining under its existing share repurchase authorization.
PTC Prices Offering of $1 Billion of Senior Notes
PTC (PTC) priced a private offering of $500 million aggregate principal amount of 3.625% Senior Notes due 2025 and $500 million aggregate principal amount of 4.000% Senior Notes due 2028.
The offering was upsized from initial plans to offer $750 million aggregate principal amount of Senior Notes.
Approximately $530 million of the net proceeds from the offering are expected to be put towards the redemption of all $500 million of PTC’s outstanding 6.000% Senior Notes due 2024.
The remaining net proceeds will be used to repay $457 million of the outstanding loans under its senior revolver.
Disclosure(s):
The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of NetScout Systems (NTCT).