K. Liu's Week in Review

Amidst an exponential rise in coronavirus cases and a surge in unemployment claims, market sentiment was still more positive than in recent weeks as Congress passed a landmark $2 trillion stimulus package. Across the software sector, much of the news for the week still pertained to COVID-19 in some fashion, although we begin with a couple of unrelated items. First, Everbridge (EVBG) acquired one2many, a leading provider of cell broadcast solutions for safety applications, in a cash and stock deal valued at approximately €11 million. The acquisition positions Everbridge as the only provider of a population warning system combining cell broadcast with location-based mobile messaging capabilities, leaving the company well positioned to capture opportunities arising from a mandate that all EU countries should have a population alerting system in place by June of 2022. At Box (BOX), shareholder Starboard Value entered into an agreement with the company, which will result in the addition of three new directors to the board as well as the formation of an Operating Committee of the Board tasked with assisting the executive team to identify additional opportunities for growth and margin expansion.

Given the market volatility of late and the uncertainty wrought by COVID-19, we surmise the next few weeks may see more earnings pre-announcements than usual. In this regard, A10 Networks (ATEN) provided a business update this week, reaffirming its prior Q1 outlook and stating that the company has not seen any meaningful impact from coronavirus on its business and supply chain. Management further noted that A10 remains well positioned with service providers that must continue to invest to keep up with network demand and increasing data usage. We believe A10’s pre-announcement provides a positive read-through for NetScout Systems (NTCT), which we highlighted a few weeks back as a stock to buy amidst the sell-off. In a similar vein, ChannelAdvisor (ECOM) issued a letter to shareholders indicating that e-commerce transaction volumes have been solid thus far in Q1. Although the company acknowledged the uncertain impact of COVID-19 going forward, management also emphasized that recurring revenues have hovered around 80% of the mix in recent years, ChannelAdvisor has been solidly profitable and the balance sheet remains flush with cash. Shares of ECOM subsequently jumped higher but still trade at just 1.0x revenue and 6.6x adjusted EBITDA. On the other side of the coin, VMware (VMW) filed an 8-K withdrawing its previously issued Q1 and FY ’21 guidance due to the increased uncertainty arising from the global COVID-19 pandemic.

As for those that actually reported earnings this week, AudioEye (AEYE), Progress Software (PRGS) and Secureworks (SCWX) all posted strong results for their respective quarters. At AudioEye, improved contribution from the partner channel as well as strong enterprise customer acquisition and renewal activity drove a substantial increase in bookings and customers. However, management opted not to provide its usual revenue and bookings guidance for the year and instead indicated that analysts and investors should expect healthy growth in its monthly recurring revenue (MRR) metric in 2020 and positive cash flow in 2021. The lack of more explicit guidance was attributed to increasing contribution anticipated from AudioEye’s marketplace and new platform partners, which will limit the amount of upfront bookings relative to historical norms. Management also indicated that the company has no immediate needs for additional capital, but AudioEye intends to file a shelf registration statement with the SEC to ensure flexibility in the future. Turning to Progress, the company outperformed expectations in its fiscal Q1 due to higher than anticipated revenue from its DCI, MOVEit and Sitefinity products. While management indicated that customer and partner conversations thus far support cautious optimism with respect to Q2 and beyond, guidance for the quarter and year was lowered to account for potential softness arising from COVID-19 and headwinds from foreign currency fluctuations. Finally, Secureworks closed out its FY ’20 with the strongest annual contract value performance in its history as the company closed 72 managed detection and response deals on its new SaaS platform and secured 21 deals with a total contract value in excess of $1 million. Reflecting the macro uncertainty at present, management refrained from providing guidance for FY ’21 but did issue a mixed outlook for Q1.

Mergers and Acquisitions

Everbridge Acquires Cell Broadcast Technology Leader one2many; Launches Industry’s First Unified Public Warning Platform to Combat COVID-19 Pandemic Globally

  • Everbridge (EVBG) has acquired one2many, a leading provider of cell broadcast solutions for safety applications, for approximately €11 million in cash and stock.

  • The acquisition creates the largest population warning system combining cell broadcast and location-based mobile messaging capabilities and adds countrywide support in the Middle East and Asia Pacific to Everbridge’s CEM platform.

  • Revenues from the acquisition are expected to be de minimis.

Earnings Releases

AudioEye Reports Record Fourth Quarter and Full Year 2019 Results, Nearly Doubles Customer Count Sequentially

  • AudioEye (AEYE) reported Q4 ’19 results ahead of expectations and guided for positive operating cash flow in 2021.

  • Revenue was $3.6 million (+100.2% Y/Y), within guidance for $2.8-$3.8 million and above consensus of $3.1 million. Operating income was $(1.5) million (-42.1% margin), above consensus of $(2.5) million. EPS of $(0.16) beat consensus of $(0.27).

  • Key metrics: bookings of $6.6 million (+90% Y/Y); over 6,800 customers at quarter-end (+95% Q/Q); monthly recurring revenue was $1.2 million (+20% Q/Q); vertical partner count remained at 20.

  • Growth was driven by better penetration within the vertical partner channel as well as new customer acquisition and solid retention in the enterprise channel.

  • AudioEye has launched a campaign through its marketplace and via selected partners to offer AudioEye Pro for free to new clients for 90 days.

  • While the impact of COVID-19 is difficult to predict, e-commerce could benefit and access to digital content could become more important; AudioEye continues to plan for hypergrowth and remains confident in its ability to gain and retain customers.

  • In lieu of providing its usual annual revenue and bookings guidance, AudioEye put forth expectations for MRR to grow at a healthy rate in 2020 and for the company to be cash flow positive in 2021.

  • The company intends to file a shelf registration statement with the SEC to ensure capital raising flexibility in the future but does not currently plan to draw upon it.

Progress 2020 First Quarter Results Exceed Guidance

  • Progress (PRGS) reported Q1 ’20 results above expectations but lowered its outlook for FY ’20.

  • Non-GAAP revenue was $113.8 million (+27.0% Y/Y), above guidance for $110.0-$113.0 million and consensus of $112.1 million. Non-GAAP operating income was $48.0 million (42.2% margin), exceeding consensus of $41.8 million. Non-GAAP EPS of $0.76 beat guidance for $0.69-$0.71 and consensus of $0.70.

  • Outperformance in the quarter was driven by higher than anticipated revenue from the company’s DCI, MOVEit and Sitefinity products with the performance of Ipswitch products also slightly ahead of expectations.

  • The launch of Progress Accelerate, a global program to provide channel partners with the tools necessary to accelerate growth and customer success, centralizes and expands the company’s channel initiatives into one offering.

  • Management has been reviewing approximately 50 potential M&A deals per quarter, many of which are in the $40-$80 million revenue range.

  • Although Progress did not see any impact on its business from COVID-19 during Q1, and customer and partner feedback leaves management cautiously optimistic for Q2 and beyond, guidance was reduced to reflect heightened uncertainty.

  • Q2 guidance calls for $95.0-$101.0 million in revenue, which includes reductions of $3.0 million and $2.5 million for COVID-19 and foreign currency, respectively, and $0.60-$0.64 in non-GAAP EPS; consensus called for $108.6 million in revenue and $0.69 in non-GAAP EPS.

  • Management reduced its prior FY ’20 guidance from $448.0-$455.0 million in non-GAAP revenue and $2.87-$2.92 in non-GAAP EPS to $428.0-$438.0 million and $2.73-$2.80, respectively, which reflects a $10.0-$13.0 million reduction for COVID-19 and a $7.0 million reduction due to foreign exchange.

Secureworks Reports Fourth Quarter and Full Year Fiscal 2020 Results

  • Secureworks (SCWX) reported mixed Q4 ’20 results and provided a mixed outlook for Q1.

  • Revenue was $142.0 million (+8.6% Y/Y), above guidance for $138.0-$140.0 million and consensus of $139.2 million. Adjusted EBITDA was $2.3 million (1.6% margin), below consensus of $3.1 million. Non-GAAP EPS of $0.02 beat guidance for $(0.01)-$0.00 and consensus of $(0.01).

  • Key metrics: closed 72 Managed Detection and Response (MDR) deals on the new SaaS-based Red Cloak Platform; closed 21 deals with a total contract value over $1 million; annual recurring revenue was $437.5 million.

  • Annual contract value during Q4 was the highest in Secureworks’ two-decade history.

  • Severance charges of $6.3 million drove adjusted EBITDA below the company’s guidance.

  • Q1 guidance includes revenue of $133.5-$137.5 million, below consensus of $139.6 million, and non-GAAP EPS of $(0.06)-$(0.02), in line with the Street’s $(0.03).

  • Due to macro uncertainty arising from COVID-19, management refrained from providing guidance for FY ’21.

Notable News

A10 Networks Provides Business Update Amidst the Rapidly Evolving COVID-19 Situation; Reaffirms First Quarter 2020 Outlook and Guidance

  • A10 Networks (ATEN) reaffirmed its prior Q1 ’20 guidance for revenue of $51.0-$53.0 million, adjusted EBITDA of $3.7-$5.0 million and non-GAAP EPS of $0.01-$0.03.

  • Per management, the company has not experienced any meaningful negative impact to its business or supply chain due to COVID-19 and remains well positioned with service providers, who must invest to keep up with network demand and increasing data usage.

Box Announces Agreement with Starboard

  • Box (BOX) has entered into an agreement with Starboard Value LP, which owns approximately 7.7% of outstanding shares, to add three new independent directors.

  • Jack Lazar, former Chief Financial Officer of GoPro and Atheros Communications, will join the board immediately.

  • A second new director will be selected from a list of candidates provided by Starboard, and a third new director will be selected by the board prior to the 2020 Annual Meeting.

  • Two existing board members, Rory O’Driscoll and Dylan Smith, will not stand for re-election as directors at the 2020 Annual Meeting, and Josh Stein will retire from the board at the time of the 2020 Annual Meeting.

  • Box has also formed an Operating Committee of the Board, which will work with the executive team to identify and recommend opportunities for further improvement in growth and margin performance.

ChannelAdvisor Issues Letter to Shareholders

  • ChannelAdvisor (ECOM) has seen solid e-commerce transaction volumes thus far in Q1, including month-to-date in March.

  • The impact of the novel coronavirus on the industry and the company remains difficult to predict as social distancing initiatives may well boost e-commerce, but widespread lockdowns and an ensuing economic slowdown could also reduce consumer demand or cause brands and retailers to cut back on digital investments.

  • Approximately 80% of revenues have been recurring in recent years, profitability and liquidity have remained strong, and cash climbed to over $55 million in February, leaving the company in a strong financial position.

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 Box (BOX).

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).