K. Liu's Week in Review

Happy Easter! Amid signs that shelter-in-place orders may be flattening the curve of coronavirus infections, stocks rebounded this past week with the software space up double-digits in percentage terms on average. While we continue to hope for a return to normalcy and a v-shaped recovery in the economy, it is increasingly clear that few companies will emerge unscathed and visibility remains limited. Agilysys (AGYS), which develops software for the travel and hospitality verticals, indicated its fiscal Q4 ’20 results would fall short of expectations and performance would be similarly challenged in FY ’21. In response, President and CEO Ramesh Srinivasan will forgo his salary for the next six months and other senior executives and members of the Board will have their salaries reduced. Unfortunately, staffing levels will also be cut and additional cost reduction measures are being enacted. Blackbaud (BLKB), which focuses on the non-profit and other social good verticals, also announced that President and CEO Mike Gianoni would forgo his salary for the foreseeable future. To preserve liquidity, the company has eliminated its quarterly dividend, implemented restrictions on non-essential travel and other cost reduction measures, temporarily ceased hiring, eliminated its 401(k) match program, and replaced merit increases and cash bonus plans for 2020 with one-time equity awards. Worth noting, Blackbaud will grant a $1,000 bonus to all employees with a base salary of $75,000 or less.

Both SAP (SAP) and Varonis Systems (VRNS) pre-announced Q1 ’20 results below expectations. Both also indicated that the first two months reflected a strong start to the year but purchasing decisions were deferred at quarter-end as customers and prospects turned their attention to COVID-19. SAP’s results were further impacted on the bottom line by the cancellation of its SAPPHIRE NOW conference and other customer events slated for later in the year as the associated costs were pulled into the quarter as opposed to being recognized during their scheduled timeframe. We suspect many software companies that planned to hold their annual customer conferences in Q2 will also report similar expense timing issues on their Q1 performance. SAP reduced its guidance for FY ’20, while Varonis withdrew its outlook entirely given the current uncertainty. EXFO (EXFO), which had previously pre-announced a shortfall in its quarterly results due to the impact of coronavirus on its manufacturing operations in China, also withheld guidance in its formal earnings release this week. On a positive note, the company indicated that its manufacturing capacity has returned to normal, and the explosion of work-from-home traffic on service provider networks has prompted an increase in its Service Assurance, Systems and Services (SASS) pipeline.

In other news, Paylocity (PCTY) acquired VidGrid, a leading video platform provider enabling peer-to-peer video learning courses. The two companies have partnered for several years already, and the acquisition should bolster Paylocity’s learning management system. Zscaler (ZS) has agreed to acquire Cloudneeti, a Cloud Security Posture Management (CSPM) company enabling customers to prevent and remediate application misconfigurations. The addition of Cloudneeti extends Zscaler’s data protection capabilities to public cloud workloads and addresses a leading cause of data breaches and compliance violations. Sonic Foundry (SOFO), which previously formed a Special Committee to evaluate strategic alternatives, announced that its Chairman, Mark Burish, has offered to acquire all outstanding shares of the company that he does not own for $5.00 per share. The offer is being considered by the Board and does not contain a financing contingency. Elsewhere, Commvault (CVLT) confirmed the receipt of six director nominations from Starboard Value, which now owns 9.9% of outstanding shares. Asure Software (ASUR) added three new Board members and announced that Eyal Goldstein, Chief Revenue Officer, would assume responsibilities for all field operations as Rhonda Parouty, Chief Operating Officer, has left the company. Conversely, Workiva’s (WK) Chief Revenue Officer, Scott Ryan, resigned to pursue other opportunities, and the company has implemented other personnel changes resulting in the sales, service and customer support organizations reporting to Chief Operating Officer Julie Iskow. Finally, Slack Technologies (WORK) priced an upsized offering of $750 million 0.50% Convertible Senior Notes due 2025.

Mergers and Acquisitions

Paylocity Announces Acquisition of VidGrid

  • Paylocity (PCTY) has acquired VidGrid, a leading video platform provider enabling peer-to-peer video learning courses.

  • Paylocity has partnered with VidGrid for several years to deliver a video-enabled learning management system to its clients.

Sonic Foundry Special Committee Announces Receipt of Stock Purchase Offer

  • Sonic Foundry (SOFO) has received an offer from Mark Burish, Chairman of the Board of Directors, to acquire all outstanding shares not held by him for $5.00 per share.

  • The company previously formed a Special Committee to evaluate strategic alternatives and will consider the offer.

  • The offer has no financing contingency but is subject to customary terms and conditions, agreement on final definitive documents and approval of both the Special Committee and holders of a majority of shares not held by Mr. Burish.

Zscaler Announces Intent to Acquire Cloudneeti

  • Zscaler (ZS) has agreed to acquire Cloudneeti, a Cloud Security Posture Management (CSPM) company enabling customers to prevent and remediate application misconfigurations in SaaS, IaaS and PaaS.

  • The acquisition extends Zscaler’s data protection capabilities to public cloud workloads and addresses a leading cause of data breaches and compliance violations in cloud workloads.

Earnings Releases

EXFO reports second quarter results for fiscal 2020

  • EXFO (EXFO) reported Q2 ’20 results in line with its pre-announcement and did not provide quarterly or annual guidance.

  • Sales of $55.3 million (-25.2% Y/Y) were consistent with the preliminary results announced on February 24 and below the initial outlook for $66.0-$71.0 million. Adjusted EBITDA of $(4.9) million (-8.9% margin) was below the $2.7 million consensus forecast, which was not fully adjusted following the pre-announcement. Non-IFRS EPS of $(0.12) missed consensus of $(0.01).

  • Key metrics: bookings of $72.9 million; book-to-bill ratio of 1.32.

  • Bookings were solid despite a temporary shutdown of EXFO’s manufacturing operations in China due to the coronavirus outbreak and reflected a double-digit increase in test and measurement orders offset by a large decline in SASS products.

  • The company has returned to full manufacturing capacity in China and an IT issue that surfaced in February has been resolved.

  • EXFO continues to book orders, albeit at a slower pace than a year ago, and management indicated that several network operators and webscale companies have increased capital spending to meet the global trend of telecommuting from home.

  • The launch of EXFO’s Nova Adaptive Service Assurance platform has been trialed with three lead customers with feedback thus far extremely positive.

  • Due to the uncertainty surrounding the breadth and duration of the coronavirus pandemic, EXFO did not provide quarterly or annual guidance.

SAP Pre-Announces First Quarter Results, Updates 2020 Outlook

  • SAP (SAP) pre-announced Q1 ’20 revenue of €6.52 billion (+7% Y/Y) and non-IFRS operating income of €1.48 billion (22.7% margin), falling short of Street expectations for €6.56 billion in revenue and €1.67 billion in non-IFRS operating income.

  • After experiencing healthy activity in the first two months of the quarter, a significant amount of new business was postponed towards the end of Q1 as the COVID-19 crisis intensified.

  • Operating expenses were inflated by approximately €36 million due to the cancellation of SAP’s annual SAPPHIRE NOW and other customer events, which typically would result in the associated expenses being recognized in later quarters.

  • Management lowered its FY ’20 outlook, which now calls for €27.8-€28.5 billion in revenue and €8.1-€8.7 billion in non-IFRS operating income versus €29.2-€29.7 billion and €8.9-€9.3 billion, previously.

  • The company reaffirmed its prior 2023 ambition.

Varonis Announces Preliminary First Quarter 2020 Financial Results

  • Varonis Systems (VRNS) reported preliminary Q1 ’20 results below expectations and withdrew its guidance for FY ’20.

  • The company anticipates Q1 ’20 revenues of $53.9-$54.3 million and non-GAAP operating income of $(17.6)-$(17.3) million, below guidance for $59.0-$60.0 million in revenue and $(17.3)-$(16.5) million in non-GAAP operating income.

  • Annual recurring revenues (ARR) are expected to be $220.2-$220.6 million, representing an increase of approximately 60% Y/Y, and cash and investments totaled approximately $126.0 million at quarter-end.

  • Varonis had a strong start to the quarter but saw customers defers purchasing decisions at the end of the quarter as their focus turned to employee safety amid the spread of COVID-19.

  • The company plans to implement prudent cost control measures to better match investments to revenue.

  • Due to the uncertainty of the economic impact of COVID-19, management withdrew its prior guidance for FY ’20.

Notable News

Agilysys Announces Response to COVID-19

  • Agilysys (AGYS) expects revenue and profitability for its Q4 ’20 and FY ’21 to be negatively affected by market headwinds arising from COVID-19.

  • The company will miss its Q4 ’20 revenue guidance but remains well positioned financially with over $46 million in cash at quarter-end and no debt.

  • Ramesh Srinivasan, President and CEO, will not receive a salary for the next six months, and all senior employees, including the Board and the executive management team, will see significant salary reductions.

  • Staffing levels will also be reduced and other major cost reduction measures have been implemented.

Asure Announces Executive and Board Member Changes

  • Asure Software (ASUR) announced the additions of Bjorn Reynolds, founder and chief executive officer of Safeguard Global; Laureen DeBuono, partner emeritus at FLG Partners; and Carl Drew, chief financial officer at Harvard Maintenance to its Board of Directors.

  • Randy Waterfield has resigned from Asure’s board of directors, effective March 31, 2020.

  • Rhonda Parouty, Asure’s chief operating officer, has also left the company, effective March 31, 2020, and Eyal Goldstein, the company’s CRO, will be assuming the responsibilities of field operations.

Blackbaud Outlines Initial Actions to Strengthen Financial Position Amid COVID-19

  • Blackbaud’s (BLKB) customer base is being impacted in different ways by COVID-19 with some customers, such as those in the education vertical, leveraging its technology to adopt more digital and virtual experiences, and others, like arts and cultural organizations, facing challenges from temporary closures.

  • To provide additional near-term liquidity and financial flexibility, Blackbaud has eliminated its quarterly cash dividend, implemented restrictions on non-essential travel and other operating cost reductions, temporarily frozen hiring efforts, suspended its 401(k) match program for U.S.-based employees, replaced employee merit increases and 2020 cash bonus plans with one-time equity awards, and provided a one-time bonus of $1,000 to all employees with a base salary of $75,000 or less.

  • President and CEO Mike Gianoni will also forgo his base salary for the foreseeable future.

  • Blackbaud has also withdrawn its prior guidance for FY ’20.

Commvault Confirms Receipt of Director Nominations from Starboard Value

  • Commvault (CVLT) confirmed that Starboard Value has nominated six candidates to stand for election to the company’s Board of Directors at the 2020 Annual Meeting of Shareholders.

  • The company indicated that Starboard’s director candidates will be reviewed by the Board’s Nominations and Governance Committee, after which its recommendation regarding the candidates will be made in Commvault’s proxy materials.

  • Commvault also noted that five of the eleven directors on its Board have joined in the past two years, including its Chief Executive Officer, its independent Chairman, and three other independent directors, two of which were appointed under an agreement with Elliott Management.

Slack Technologies, Inc. Prices Upsized Offering of $750 Million 0.50% Convertible Senior Notes due 2025

  • Slack Technologies (WORK) priced an offering of $750.0 million aggregate principal amount of 0.50% convertible senior notes due 2025 at an initial conversion price of $31.00 per share, representing a 27.8% premium to the close price prior to the announcement of the planned offering.

  • The offering was upsized from initial plans to offer $600.0 million aggregate principal amount of convertible senior notes, and Slack has granted the initial purchasers an option to purchase up to an additional $112.5 million aggregate principal amount.

  • Slack anticipates net proceeds from the offering will be approximately $731.4 million (or $841.3 million if the initial purchasers exercise their option in full), of which $91.8 million will be used to pay the cost of capped call transactions with the remainder used for working capital and other general corporate purposes.

Workiva Chief Revenue Officer Resigns

  • Workiva (WK) announced that Scott Ryan, Executive Vice President and Chief Revenue Officer, has resigned to pursue other opportunities.

  • Due to his resignation, Workiva has made additional personnel changes and the sales, service and customer success organizations will now report directly to Julie Iskow, Chief Operating Officer.