K. Liu's Week in Review
We spent the week digesting the first major wave of Q1 ’20 software earnings, although much of what we observed was consistent with commentary from those that have already pre-announced. Business momentum was strong for most through January and February, but March brought a spate of challenges as organizations prioritized the transition of their employees to work-from-home amid the COVID-19 pandemic. Given that a majority of software deals tend to be secured in the final weeks of the quarter, deal slippage was rampant with new customer acquisition impacted most. Of course, several companies benefited from the rapid shift to remote work and distance learning. 2U (TWOU) highlighted the urgency among universities to move courses online as both a near- and long-term driver of demand for its offerings, and management expects to announce its next undergraduate program in short order. Akamai (AKAM) and Bandwidth (BAND) saw traffic and usage of their respective networks surge, and both anticipate those trends to persist at least into Q2, prompting favorable near-term outlooks. Check Point (CHKP) was another beneficiary as customers scaled up network infrastructure and implemented remote access VPN solutions, and F5 Networks (FFIV) experienced a similar uptick in demand for its access and control solutions. Microsoft (MSFT) benefited on several fronts as the rush to establish home offices and conduct business virtually drove adoption of Surface hardware, Windows, Office 365 and Teams.
Although several companies indicated that business activity has held up relatively well thus far, none were willing to suggest that the outlook for FY ’20 remains positive. In fact, of the 28 companies we tracked this week, 16 withdrew or suspended guidance for the year citing the uncertain impact of coronavirus on the economy. Moreover, of the 18 that were still willing to put forth expectations for the current quarter, only two guided above consensus while the rest provided outlooks that were mixed or lower relative to the Street. The cautious views primarily stemmed from project delays and lack of visibility into the timing of deal closures. Pressure on small- and medium-sized businesses was also called out as a near-term consideration for Atlassian (TEAM) and Zendesk (ZEN), while others like HealthStream (HSTM) and SPS Commerce (SPSC) pointed to industry-specific headwinds. Potential changes to existing agreements were also discussed in numerous calls but concessions have largely manifested as extended payment terms as opposed to more significant discounts at this juncture. That said, Paycom (PAYC) noted that with its revenue largely tied to its customers’ payrolls, headwinds to the company’s recurring revenue growth are directly correlated with unemployment rates in the U.S. On a more positive note, the restrictions on travel and other discretionary expenses have generated meaningful improvements in margin for many companies, which should negate the impact of lower revenue to an extent. Interestingly, OpenText (OTEX) has decided not to reopen 50% of its offices as productivity has remained high with employees working from home and has initiated a restructuring plan expected to generate annualized cost savings of $65-$75 million. We surmise others may follow the company’s lead.
In non-earnings news, Sonic Foundry (SOFO) accepted Chairman Mark Burish’s offer to acquire all outstanding shares of the company not currently owned by him for $5.00 per share. The offer represents a 192% premium to the close price prior to Sonic Foundry’s formation of a special committee to evaluate strategic alternatives and equates to a TTM EV/Sales multiple of 1x. MobileIron (MOBL) paid $6 million for incapttic Connect, which provides software to streamline the process associated with developing, approving and distributing purpose-built corporate apps. Customers that publish an app using incapttic Connect can then utilize MobileIron’s unified endpoint management platform to distribute the app to managed devices and automate any updates. Finally, Rapid7 (RPD) agreed to acquire DivvyCloud, which provides a compliance, risk management and governance platform for multi-cloud and container environments, for approximately $145 million. In conjunction with the announcement, Rapid7 pre-announced Q1 ’20 results ahead of expectations, although guidance for FY ’20 was lowered across the board. Incorporated into the revised outlook is approximately $10 million in incremental ARR from DivvyCloud, and management noted that the acquired asset has been in hyper-growth mode. While the acquisition is expected to be financed with cash on hand, Rapid7 also entered into a revolving credit facility with Keybank and priced a $200 million convertible senior notes offering.
Mergers & Acquisitions
MobileIron Acquires incapptic Connect to Accelerate App Release Journey for Enterprise Customers
MobileIron (MOBL) has acquired incapptic Connect, which provides software to streamline the processes associated with the development, approval and distribution of purpose-built corporate apps, for $6 million.
Once an app is published with incapptic Connect, customers can utilize MobileIron’s unified endpoint management platform to automatically distribute the app to managed devices and automate updates.
Rapid7 (RPD) has agreed to acquire DivvyCloud, a leader in Cloud Security Posture Management (CSPM) for approximately $145.0 million, comprised of $128.3 million in cash due at closing, $9.3 million in stock and $7.4 million in deferred payments.
DivvyCloud provides a compliance, risk management and governance platform for multi-cloud and container environments, enabling customers to prevent and remediate risks arising from misconfigurations, policy violations, external and internal threats, and identity and access management challenges.
Rapid7 also pre-announced Q1 ’20 revenue and non-GAAP operating income of $93.8-$94.0 million and $(4.4)-$(4.2) million, respectively, ahead of guidance for $91.6-$93.2 million in revenue and $(6.3)-$(5.3) million in non-GAAP operating income.
Key metrics: over 9,000 customers (+14% Y/Y) at quarter-end; average ARR per customer of $38,900 (+15% Y/Y); net revenue retention rate of 106%.
Q2 guidance for $94.6-$96.2 million in revenue and $1.0-$2.0 million in non-GAAP operating income was generally consistent with Street expectations for $94.4 million in revenue and $1.9 million in non-GAAP operating income.
Guidance for FY ’20 was reduced across the board and now calls for ARR of $387.0-$487.0 million, revenue of $388.0-$395.0 million and $(3.0)-$(1.0) million in non-GAAP operating income.
The revised outlook includes the impact of the DivvyCloud, which has been executing at a hyper-growth rate in excess of 50% and is expected to contribute incremental ARR of $10 million from the time of closing.
Rapid7 has entered into a new three-year revolving credit facility with Keybank that provides for up to $30 million in borrowing capacity with an accordion feature to expand that capacity up to $70 million.
Sonic Foundry Special Committee Announces Acceptance of Burish Stock Purchase Offer
Sonic Foundry (SOFO) has accepted Chairman Mark Burish’s offer to acquire all outstanding shares of the company that he does not currently own for $5.00 per share in cash.
The offer represents a 192% premium to the closing price prior to Sonic Foundry’s announced plans to evaluate strategic alternatives and values the company at approximately 1.0x TTM revenue and 71.7x TTM adjusted EBITDA.
The transaction, which does not contain a financing contingency and is expected to close in Q3 ’20, remains subject to customary terms and conditions, agreement on final definitive documents, and approval of the Special Committee and the holders of a majority of shares not held by Mr. Burish or his affiliates.
Earnings Releases
2U, Inc. Reports Results for First Quarter 2020
2U (TWOU) reported Q1 ’20 results in line with the preliminary results released on April 20, 2020.
Revenue was $175.5 million (+43.6% Y/Y), consistent with 2U’s pre-announcement. Adjusted EBITDA of $(4.3) million (-2.5% margin) was also consistent with the pre-announced results. Non-GAAP EPS of $(0.33) beat consensus of $(0.47).
Key metrics: Graduate Program full course equivalent enrollments of 45,734 (+16% Y/Y); Graduate Program average revenue per enrollment of $2,590 (-2% Y/Y); Alternative Credential full course equivalent enrollments of 15,141 (+66% Y/Y); Alternative Credential average revenue per enrollment of $3,766 (+90% Y/Y).
Revenue from the Graduate segment exceeded expectations, while adjusted EBITDA was significantly better due to cost controls implemented last year and teams working remotely.
COVID-19 created an urgent need for universities to move their programs online, and demand from universities for 2U’s core product offerings and new solutions should increase substantially.
Management anticipates the announcement of its next undergraduate program in short order.
Advertising costs are decreasing amidst the pandemic, enabling 2U to drive positive enrollments for clients.
Guidance for FY ’20 had previously been withdrawn at the time of the pre-announcement.
Akamai Reports First Quarter 2020 Financial Results
Akamai (AKAM) reported Q1 ’20 results above expectations and guided Q2 ahead of consensus.
Revenue of $764.3 million (+8.2% Y/Y) exceeded guidance for $741.0-$755.0 million and consensus of $749.8 million. Adjusted EBITDA was $326.7 million (42.7% margin), above consensus of $317.0 million and guidance for a 42.0% margin. Non-GAAP EPS of $1.20 beat guidance for $1.13-$1.18 and consensus of $1.16.
The outperformance was driven by continued strong performance of Akamai’s security solutions, greater-than-expected traffic levels and an ongoing focus on operational efficiency.
Robust growth in the cloud-based security portfolio was led by the company’s flagship services for DDoS prevention, application layer firewall and bot management, as well as a surge in bookings for next-generation zero trust security solutions.
Traffic on the company’s platform increased dramatically in March as enterprises moved their operations online.
Q1 was negatively impacted by $5 million from contract restructurings and elevated bad debt reserves, and with approximately 4% of revenue from travel and hospitality and 16% from commerce and retail, there may be more to come.
Q2 guidance for revenue of $752.0-$778.0 million, an adjusted EBITDA margin of 43.0% and non-GAAP EPS of $1.18-$1.24 compared favorably with Street expectations for $754.4 million in revenue, $322.0 million in adjusted EBITDA and $1.17 in non-GAAP EPS.
Due to the uncertainty associated with COVID-19, management withdrew its prior FY ’20 outlook.
Atlassian Announces Third Quarter Fiscal Year 2020 Results
Atlassian (TEAM) reported Q3 ’20 results above expectations but guided Q4 below consensus.
Revenue of $411.6 million (+33.1% Y/Y) exceeded guidance for $395.0-$399.0 million and consensus of $396.3 million. Non-IFRS operating income was $77.2 million (18.8% margin), also exceeding guidance for a 16.0% non-IFRS operating margin and consensus of $66.7 million. Non-IFRS EPS of $0.25 beat guidance for $0.20 and consensus of $0.21.
Key metrics: added 6,261 net new customers for a total of 171,051 (+19% Y/Y) at quarter-end.
The accelerated rollout of free cloud editions of Atlassian’s core products in March has been well received with new sign-ups increasing 125% in recent weeks.
Cameron Deatsch, who joined the company in 2012 and most recently served as Head of Server & Data Center product teams, has been named Chief Revenue Officer.
Early Q4 data suggests the impact of COVID-19 on Atlassian is likely to increase from the negligible levels seen in Q3 as the small-business economy may be adversely affected.
Q4 guidance for revenue of $400.0-$415.0 million, a non-IFRS operating margin of 14.0%-17.0% and non-IFRS EPS of $0.17-$0.22 fell short of Street expectations for $423.0 million in revenue, $75.5 million in non-IFRS operating income and $0.23 in non-IFRS EPS.
Bandwidth Announces First Quarter 2020 Financial Results
Bandwidth (BAND) reported Q1 ’20 results ahead of expectations and raised its outlook for FY ’20.
Revenue of $68.5 million (+28.5% Y/Y) exceeded guidance for $63.2-$63.7 million and consensus of $63.3 million. Adjusted EBITDA was $3.1 million (4.5% margin), well above consensus of $(1.2) million. Non-GAAP EPS of $0.04 beat guidance for $(0.12)-$(0.10) and consensus of $(0.11).
Key metrics: CPaaS revenue of $59.1 million (+31% Y/Y) exceeded guidance for $55.2-$55.7 million; active CPaaS customers of 1,808 (+34% Y/Y); dollar-based net retention rate of 126%.
Upside in the quarter was driven by ongoing momentum with communication service providers, increased usage driven by COVID-19 remote work requirements, and newly implemented carrier A2P messaging surcharges.
Usage from UCaaS and Meeting Solutions customers should continue to contribute meaningfully given current circumstances, partially offset by contraction in usage among adversely impacted small and medium-sized businesses.
Q2 guidance for $70.2-$70.7 million in revenue and $(0.01)-$0.01 in non-GAAP EPS exceeded consensus of $65.8 million in revenue and $(0.07) in non-GAAP EPS.
Management raised its FY ’20 outlook for revenue and non-GAAP EPS from $272.7-$274.7 million and $(0.27)-$(0.17), respectively, to $281.6-$283.1 million and $(0.03)-$0.03.
BlackLine Announces First Quarter Financial Results
BlackLine (BL) reported Q1 ’20 results above expectations and provided mixed guidance for Q2.
Revenues of $82.6 million (+28.8% Y/Y) were above guidance for $80.0-$81.0 million and consensus of $79.5 million. Non-GAAP operating income of $3.8 million (4.6% margin) was ahead of the Street’s $0.9 million. Non-GAAP EPS of $0.10 beat guidance for $0.04-$0.06 and consensus of $0.05.
Key metrics: added 32 net new customers for a total of 3,056 at quarter-end; expanded user base to 271,957; dollar-based net revenue retention rate of 110%.
BlackLine was operating above plan through January and February but began to see purchasing decisions deferred in early March due to COVID-19, although installed base business remained resilient throughout the quarter.
Management expects new logo acquisition to be more challenged as a result of COVID-19 and anticipates further push-outs in large strategic deals due to customer budget constraints.
Q2 guidance for $80.0-$82.0 million in revenue and $0.08-$0.13 in non-GAAP EPS was mixed versus Street expectations for $82.8 million in revenue and $0.09 in non-GAAP EPS.
Due to the uncertainty associated with COVID-19, guidance for FY ’20 was withdrawn.
Brightcove Announces Financial Results for First Quarter Fiscal Year 2020
Brightcove (BCOV) reported mixed Q1 ’20 results and guided Q2 below consensus.
Revenue was $46.7 million (+11.5% Y/Y), a hair below guidance for $46.8-$47.8 million and consensus of $47.2 million. Adjusted EBITDA was $3.7 million (7.9% margin), near the high-end of guidance for $2.8-$3.8 million and above consensus of $3.2 million. Non-GAAP EPS of $0.04 were in line with guidance for $0.03-$0.05 and consensus of $0.04.
Key metrics: recurring dollar retention rate was 88%; 3,498 customers at quarter-end, of which 2,293 were premium customers; annualized revenue per premium customer was $84,600 (+9% Y/Y).
The liquidation of HOOQ, Brightcove’s largest customer, caused the shortfall in revenue, and management noted that sales performance and retention were in line with internal targets when adjusted for the liquidation.
Brightcove Beacon, the company’s new OTT offering, built on its initial success in Q4 and has seen significant interest from content providers and regional broadcasters.
Q2 guidance for $44.5-$46.0 million in revenue, $(0.5)-$1.0 million in adjusted EBITDA and $(0.05)-$(0.01) in non-GAAP EPS fell short of Street expectations for $48.7 million in revenue, $2.4 million in adjusted EBITDA and $0.01 in non-GAAP EPS.
Due to the COVID-19 crisis, management withdrew its prior FY ’20 guidance.
Check Point Software Technologies Reports 2020 First Quarter Financial Results
Check Point Software Technologies (CHKP) reported Q1 ’20 results above expectations but withdrew its FY ’20 guidance.
Revenues of $486.5 million (+3.1% Y/Y) were within guidance for $475.0-$495.0 million and above consensus of $480.4 million. Non-GAAP operating income of $231.2 million (47.5% margin) was also above the Street’s $226.4 million. Non-GAAP EPS of $1.42 were near the high-end of guidance for $1.37-$1.43 and beat consensus of $1.38.
During the quarter, Check Point sustained elevated business activity levels driven by customers scaling up their network infrastructure and implementing remote access VPN solutions.
Both cloud and Infinity solutions exhibited growth in excess of 100% during the quarter.
Despite lockdowns in many parts of the world, the company continues to see an active business environment, and results in April are trending well thus far.
Given the evolving COVID-19 crisis, no formal outlook was provided for Q2 and guidance for FY ’20 was withdrawn.
Endurance International Group Reports 2020 First Quarter Results
Endurance International Group (EIGI) reported Q1 ’20 results slightly below expectations and suspended its FY ’20 guidance.
Revenue of $272.2 million (-0.5% Y/Y adjusted for the sale of SinglePlatform) was approximately in line with consensus of $272.8 million. Adjusted EBITDA was $72.5 million (26.6% margin), slightly below consensus of $73.7 million. EPS of $(0.02) were in line with Street expectations.
Key metrics: total subscribers of 4.780 million (-0.1% Y/Y), including 4.309 million Web Presence subscribers (+0.5% Y/Y) and 471,000 Digital Marketing subscribers (-4.8% Y/Y); average revenue per subscriber (ARPS) was $19.01 (-2.6% Y/Y).
In the Digital Marketing segment, progress was made in enhancing the core email platform, integrating the acquired Ecomdash business and enhancing Endurance’s website builder, logo and e-commerce capabilities under the Constant Contact brand.
In Web Presence, revenues continued to stabilize with the third consecutive quarter of positive unit growth.
Through April, the company’s execution has remained consistent with its 2020 growth plan, but the extent of the pandemic’s effect on the business remains to be seen.
Due to the uncertainty arising from COVID-19 and related economic impact, management suspended its FY ’20 guidance.
F5 Delivers 7% Revenue Growth in Second Quarter Fiscal Year 2020
F5 Networks (FFIV) reported strong Q2 ’20 results and provided Q3 guidance that left consensus near the high-end.
Non-GAAP revenue was $585.6 million (+7.5% Y/Y), within guidance for $580.0-$590.0 million and above consensus of $572.6 million. Non-GAAP operating income was $170.4 million (29.1% margin), exceeding consensus of $158.1 million. Non-GAAP EPS of $2.23 beat guidance for $2.14-$2.17 and consensus of $2.05.
COVID-19 had a net neutral impact on the company’s Q2 results as strong demand for access and control solutions from customers increasing their number of remote workers was offset by some project push-outs.
Software represented approximately 35% of product revenue versus 19% a year ago and software revenue increased 96% Y/Y, of which the acquisition of Shape accounted for 31% of the increase.
Customer engagement remains high despite the macro environment, and F5 has pledged to its employees that no layoffs will be made in FY ‘20.
Given the current environment and with interest rates declining, the company has reprioritized building its cash position ahead of paying down the $400 million term loan associated with its Shape acquisition.
Guidance for Q3 includes non-GAAP revenue of $555.0-$585.0 million and non-GAAP EPS of $1.91-$2.13, leaving consensus of $583.8 million in revenue and $2.12 in non-GAAP EPS near the high-end.
FireEye Reports Financial Results for First Quarter 2020
FireEye (FEYE) reported Q1 ’20 results above expectations but reduced its outlook for FY ’20.
Revenue of $224.7 million (+6.7% Y/Y) was within guidance for $222.0-$226.0 million and above consensus of $222.9 million. Non-GAAP operating income was $(2.8) million (-1.3% margin), ahead of guidance for a (5.0)%-(3.0)% margin and consensus of $(8.3) million. Non-GAAP EPS of $(0.02) beat guidance for $(0.05)-$(0.03) and the Street’s $(0.04).
Key metrics: billings of $170.0 million (-6.5% Y/Y) were at the midpoint of guidance for $165.0-$175.0 million; billings from emerging growth areas were $52.5 million (+21.7% Y/Y); annual recurring revenue of $590 million (+7% Y/Y) at quarter-end.
Management estimates that COVID-19 reduced Q1 billings by about $10.0-$15.0 million and revenue by less than $2.0 million.
The Board has approved a restructuring plan in which the workforce will be reduced by approximately 6% and total non-GAAP operating expenses will decline by at least $25 million in 2020 compared to 2019.
While not immune to the impact of the pandemic, Mandiant Services are expected to remain an important growth driver both during and after the pandemic as the attack surface expands due to work from home mandates.
Q2 guidance for revenue of $213.0-$217.0 million, a non-GAAP operating margin of (2.0)%-(1.0)% and non-GAAP EPS of $(0.03)-$(0.01) fell short of the Street’s $227.4 million in revenue, $6.7 million in non-GAAP operating income and $0.03 in non-GAAP EPS.
Management lowered its FY ’20 outlook from $935.0-$945.0 million in revenue, a 5.0%-6.0% non-GAAP operating margin and $0.20-$0.24 in non-GAAP EPS to $880.0-$900.0 million in revenue, a 1.0%-3.0% non-GAAP operating margin and $0.03-$0.07 in non-GAAP EPS.
HealthStream Announces First Quarter 2020 Results
HealthStream (HSTM) reported mixed Q1 ’20 results and withdrew its guidance for FY 20.
Revenues of $61.6 million (-5.5% Y/Y) were shy of the Street’s $63.1 million. Income from continuing operations was $7.1 million (11.5% margin), exceeding consensus of $6.2 million. EPS from continuing operations of $0.22 beat consensus of $0.14.
Key metrics: added approximately 240,000 hStream subscriptions to reach 3.40 million contracted hStream subscriptions; added over 20 new customer accounts to the VerityStream platform for a total of over 220 customers.
COVID-19 had no significant impact on Q1 results but is expected to have a negative impact beginning in Q2 given the adverse impact on health organizations as elective surgeries have ground to a halt and the cost of emergency care has increased sharply.
Sales representatives and account managers remain in active dialogue with customers, but the company has seen purchasing decisions put on hold temporarily or deferred to later in the year.
HealthStream has implemented expense management measures including postponing and potentially forgoing increases to base salaries, limiting hiring to critical positions, limiting the 401(k) match and negotiating with vendors for extended payment terms without penalty.
Management withdrew its guidance for FY ’20 due to the uncertain impact of COVID-19 on its business.
Microsoft Cloud Strength Drives Third Quarter Results
Microsoft (MSFT) reported Q3 ’20 results ahead of expectations and guided Q4 slightly below consensus.
Revenue was $35.0 billion (+14.6% Y/Y), exceeding management’s original guidance for $34.1-$34.9 billion and consensus of $34.1 billion. Operating income was $13.0 billion (37.0% margin), also surpassing guidance for $11.9-$12.4 billion and consensus of $11.9 billion. EPS of $1.40 beat guidance for $1.28-$1.33 and consensus of $1.29.
Revenue from the More Personal Computing segment was $11.0 billion, within management’s original guidance for $10.75-$11.15 billion as increased demand to support remote work and learn scenarios more than offset supply chain constraints in China that had prompted the company to announce an anticipated shortfall in the segment during the quarter.
COVID-19 has driven an immediate surge in demand and systemic structural changes across all solution areas as customers shift to remote work across all areas of their business.
Microsoft Teams now has over 75 million daily active users, Office 365 now has 258 million paid seats and the Power platform boasts over 3.4 million users.
Areas that have been negatively impacted by the pandemic include Search and LinkedIn, reflecting significant reductions in advertising spend, and transactional business in the small and medium business segment.
Management’s Q4 guidance implies revenue of $35.85-$36.80 billion, operating income of $12.50-$13.15 billion and EPS of $1.32-$1.39, slightly below consensus expectations for $37.04 billion, $13.05 billion and $1.41, respectively.
Mitek Systems (MITK) reported Q2 ’20 non-GAAP EPS ahead of expectations and withdrew guidance for FY ’20.
Revenue of $23.2 million (+16.1% Y/Y) was within guidance for $23.0-$23.5 million and in line with consensus. Non-GAAP operating income of $5.4 million (23.3% margin) was above guidance for $5.0 million and consensus of $4.6 million. Non-GAAP EPS of $0.13 beat the Street’s $0.10.
In Q2, Mitek continued to see ongoing momentum in the identity verification market and experienced growth in its highly profitable deposits product line.
Transactional SaaS revenue increased 38% Y/Y to $7.4 million.
Although the company is currently benefiting from existing identity customers experiencing significantly more traffic, it is impossible to predict what impact COVID-19 will have on both current and potential customers going forward.
Due to the uncertainty of the impact of COVID-19 on the economy, management withdrew its prior FY ’20 guidance.
MobileIron Announces First Quarter 2020 Results
MobileIron (MOBL) reported Q1 ’20 results above expectations and withdrew its ARR guidance for FY ’20.
Revenue was $49.7 million (+3.4% Y/Y), above guidance for $46.0-$49.0 million and consensus of $47.8 million. Non-GAAP operating income was $(4.0) million (-8.0% margin), above guidance for $(9.1)-$(7.8) million and consensus of $(4.3) million. Non-GAAP EPS of $(0.04) beat consensus of $(0.06).
Key metrics: ARR was $180.8 million (+8% Y/Y), comprised of $115.3 million in subscription ARR (+15% Y/Y) and $65.5 million in maintenance ARR (-2% Y/Y); dollar-based net retention was 103%.
The coronavirus pandemic has confirmed the relevance, urgency and value of MobileIron’s offering as virtual work requires end-to-end security, whether on more corporate-issued devices or to enable BYOD programs for employees.
In Q1, MobileIron saw promising signs from its initiative to transition on-premise maintenance customers to the cloud, but customer priorities began to shift in March, thereby creating a headwind to some of the company’s ARR growth drivers.
Q2 guidance for revenue of $49.0-$52.0 million and non-GAAP operating income of $(4.3)-$(1.9) million was in line with Street expectations for $50.7 million in revenue and $(2.5) million in non-GAAP operating income.
Management withdrew its prior FY ’20 ARR guidance but reaffirmed prior expectations for $195.0-$205.0 million in revenue and a non-GAAP operating margin of (10.0)%-(5.0)%.
OpenText Reports Third Quarter Fiscal Year 2020 Financial Results
OpenText (OTEX) reported Q3 ’20 results slightly below Street expectations.
Revenues of $814.7 million (+13.3% Y/Y) were just shy of the Street’s $815.7 million. Adjusted EBITDA of $259.5 million (31.8% margin) was below consensus of $265.1 million. Non-GAAP EPS of $0.61 missed consensus by a penny.
Key metrics: annual recurring revenues of $662.3 million (+20.6% Y/Y); cloud renewal rate in the mid-90s and customer support renewal rate remains in the low-90s.
The acquisition of Carbonite contributed $110 million in revenue during Q3 and was immediately accretive to non-GAAP earnings and cash flows.
The pandemic is massively accelerating discussions related to digitalization, cloud, and the edge but also impacting overall demand, especially in hard hit industries like auto, airlines, hospitality, oil, travel and retail.
OpenText is undertaking a restructuring plan to reduce its workforce and consolidate certain real estate facilities, which is expected to cost $80.0-$100.0 million and generate annualized cost savings of $65.0-$75.0 million.
For Q4, management anticipates revenues flat to down slightly on a sequential basis and adjusted EBITDA flat to up in absolute dollars, falling short of Street expectations for $861.9 million in revenue and $315.0 million in adjusted EBITDA.
Management expects FY ’20 revenue growth in the mid- to high-single digits and an adjusted EBITDA margin of 35.0%-36.0%.
Paycom Software, Inc. Reports First Quarter 2020 Results
Paycom Software (PAYC) reported Q1 ’20 results above expectations but withdrew its guidance for FY ’20.
Revenues of $242.4 million (+21.2% Y/Y) were ahead of guidance for $240.0-$242.0 million and consensus of $239.8 million. Adjusted EBITDA of $117.9 million (48.7% margin) was above guidance for $113.0-$115.0 million and consensus of $114.7 million. Non-GAAP EPS of $1.33 beat consensus of $1.28.
While the month of March was impacted by declining revenues from the existing base due to COVID-19, strength in new business adds enabled Paycom to post strong results.
Because Paycom charges clients on a per-employee basis for certain services, fluctuations in headcount at its clients will impact operating results in future periods, which combined with significantly lower average interest rates in 2020 and slower growth in the average funds held for clients will negatively affect recurring revenue growth.
The impact on current client revenue from the spike in unemployment is similar to the percentage increase in unemployment across the country, and the impact of the rate cuts in March is estimated at approximately $4.5 million per quarter for the remainder of the year.
The company plans to spend more on advertising in Q2 than in Q1 given the positive results from recent ad campaigns.
Due to uncertainties arising from the COVID-19 crisis, management withdrew its prior FY ’20 guidance.
Pluralsight Announces First Quarter 2020 Results
Pluralsight (PS) reported Q1 ’20 results above expectations and raised its FY ’20 non-GAAP EPS guidance on lower revenue.
Revenue was $92.6 million (+33.1% Y/Y), above guidance for $88.0-$89.0 million and consensus of $88.4 million. Non-GAAP operating income was $(13.9) million, exceeding consensus of $(19.3) million. Non-GAAP EPS of $(0.09) beat guidance for $(0.14)-$(0.13) and consensus of $(0.13).
Key metrics: billings of $90.3 million (+15.8 Y/Y), including $80.5 million (+19.8% Y/Y) from business customers; TTM net revenue retention was 120%.
Performance was trending at the higher end of expectations during the first two months of the quarter, but COVID-19 created a great deal of uncertainty in March.
In the six weeks since COVID-19 began impacting the company, Pluralsight has seen the average time spent on the platform and the number of skills assessments taken approach 3x the norm, which bodes well for improved retention over time.
Between a temporary hiring freeze and other restrictions on travel and nonessential operating costs, over $100 million in annualized costs have been removed from the company’s 2020 plan.
COVID-19 is expected to have a $6.0-$7.0 million impact on Q2 revenue and a $15.0-$25.0 million impact for the full year, reflecting lower than expected billings in the first half of 2020.
Q2 guidance for $87.5-$89.0 million in revenue and non-GAAP EPS of $(0.13)-$(0.11) was mixed versus Street expectations for $93.0 million in revenue and $(0.13) in non-GAAP EPS.
Management lowered its FY ’20 revenue guidance from $390.0-$400.0 million to $365.0-$390.0 million but raised its non-GAAP EPS expectations from $(0.50)-$(0.45) to $(0.44)-$(0.31).
PTC Announces Fiscal Second Quarter 2020 Results
PTC (PTC) reported Q2 ’20 results above expectations but lowered its outlook for FY ’20 due to the COVID-19 crisis.
Revenue was $359.6 million (+23.8% Y/Y), exceeding consensus of $340.8 million. Non-GAAP operating income was $103.2 million (28.7% margin), well above consensus of $78.0 million. Non-GAAP EPS of $0.59 beat consensus of $0.44.
Key metrics: ARR was $1.18 billion (+10% Y/Y); free cash flow was $82.3 million (22.9% margin).
New bookings deteriorated during the last few weeks of the quarter, but factors like backlog and the timing of start dates still enabled PTC to achieve strong new ACV growth.
In Q2, growth rates were 10% for the core business, 30% for growth areas and low single-digits for the focused solutions group, all of which were modestly below expected levels absent the COVID-19 crisis.
Recently acquired OnShape, PTC’s native SaaS product development platform, had the best performance relative to plan in Q2 out of all the company’s product lines.
Despite factoring in the potential for severe demand challenges and modest renewal headwinds, PTC continues to anticipate double-digit organic growth in ARR this year.
Management reduced its FY ’20 guidance to reflect a severe disruption in new bookings growth, a 100 basis point deterioration in churn to 8% and lower operating expense growth, the combination of which results in ARR of $1.220-$1.255 billion, revenue of $1.400-$1.430 billion, a non-GAAP operating margin of 27.0%-28.0% and non-GAAP EPS of $2.20-$2.35.
Even with continued economic softness, PTC anticipates further ARR growth in FY ’21.
Q1 2020 Revenue up 25% Driven by 57% Increase in Pega Cloud Revenue
Pegasystems (PEGA) reported Q1 ’20 results ahead of expectations.
Revenue of $265.6 million (+25.0% Y/Y) was ahead of consensus of $259.6 million. Non-GAAP operating income was $5.1 million (1.9% margin), above consensus of $1.2 million. Non-GAAP EPS of $0.05 beat consensus of $0.02.
Key metrics: total ACV of $711 million (+21% Y/Y), including Pega Cloud ACV of $182 million (+43% Y/Y); remaining performance obligation of $753.8 million (+19% Y/Y).
The company saw minimal disruption to financial results in Q1, and the sales team remains active in engaging with and acquiring customers.
95% of new client commitments in Q1 were either Pega or client cloud and approximately 5% were for perpetual license.
Pega continues to position its core architecture for the future with Project FNX, which will enable clients to create a new generation of platforms.
The company does not update its annual guidance, which currently stands at $1.1 billion in revenue and $0.20 in non-GAAP EPS, on a quarterly basis; however, management acknowledged that projects could be delayed or canceled and buying decisions could be deferred.
ServiceNow Reports First Quarter 2020 Financial Results
ServiceNow (NOW) reported Q1 ’20 results above expectations but lowered guidance for FY ’20.
Non-GAAP revenues were $1.059 billion (+34.2% Y/Y), above consensus of $1.025 billion. Non-GAAP operating income was $250.8 million (23.7% margin), exceeding consensus of $223.9 million. Non-GAAP EPS of $1.05 beat consensus of $0.96.
Key metrics: closed 37 transactions (+48% Y/Y) with over $1 million in net new annual contract value (ACV) for 933 total customers (+30% Y/Y) with over $1 million in ACV; adjusted billings totaled $1.114 billion (+30% Y/Y), which included adjusted subscription billings of $1.065 billion (+32% Y/Y) versus guidance for $1.042-$1.047 billion; renewal rate was 97%.
Most deals closed in the final weeks of March, consistent with normal linearity, with strength seen in the Americas and APJ.
The power of the Now platform has become self-evident to customers during the COVID-19 pandemic as they leverage the platform to quickly deploy workflow apps enabling better crisis management and business outcomes.
The pipeline continues to grow, and ServiceNow has successfully closed business with new and existing customers in the first few weeks of April; however, management anticipates potential delays in digital transformation initiatives, particularly in industries highly affected by COVID-19 that comprise 20% of the company’s business.
Q2 guidance calls for non-GAAP subscription revenues and billings of $1.008-$1.013 billion and $976.0-$996.0 million, respectively, as well as a non-GAAP operating margin of 23.0%.
Management lowered its FY ’20 subscription revenue and billings guidance from $4.210-$4.230 billion and $4.807-$4.827 billion, respectively, to $4.167-$4.187 billion and $4.664-$4.724 billion, but increased its non-GAAP operating margin guidance from 22.0% to 23.0%.
Shutterstock Reports First Quarter 2020 Financial Results
Shutterstock (SSTK) reported mixed Q1 ’20 results and withdrew its guidance for FY ’20.
Revenue of $161.3 million (-1.3% margin) fell short of Street expectations for $166.8 million. Adjusted EBITDA of $22.1 million (13.7% margin) was above consensus of $20.6 million. Non-GAAP EPS of $0.26 beat consensus of $0.22.
Key metrics: paid downloads of 46.8 million (-1% Y/Y); revenue per download of $3.42 (flat Y/Y); image collection of approximately 330 million images (+27% Y/Y); video collection of approximately 18 million clips (+29% Y/Y).
Market demand has varied across regions during the pandemic with Asia Pacific suffering declines in January and February but now showing signs of recovery, European sales exhibiting a more meaningful decline in March, and North America improving in April after declining in March.
The enterprise channel has been more affected than the e-commerce channel with customer engagement and paid downloads increasing in the latter.
No shares were repurchased in Q1 but management indicated the company may be in market over the next several quarters.
Due to the uncertainty regarding the COVID-19 pandemic, guidance for FY ’20 was withdrawn although management noted that if the late March and April revenue trends persist throughout Q2, revenue would decline high single-digits this quarter.
SolarWinds Announces First Quarter 2020 Results
SolarWinds (SWI) reported Q1 ’20 revenue ahead of Street expectations and guided Q2 slightly below consensus.
Non-GAAP revenue of $248.5 million (+15.1% Y/Y) was at the high-end of guidance for $243.5-$248.5 million and above consensus of $241.7 million. Adjusted EBITDA of $110.9 million (44.6% margin) was within guidance for $108.0-$112.0 million but shy of the Street’s $111.8 million. Non-GAAP EPS of $0.20 were in line with guidance and consensus of $0.21.
Key metrics: ARR of $862 million (+15% Y/Y); 926 customers (+22% Y/Y) with over $100,000 in TTM spend; subscription net retention rate was 106% on a TTM basis and maintenance renewal rate was 92% on a TTM basis.
Q1 began with a lot of positive market momentum, which disappeared by the end of the quarter as companies began to send their workforces home.
Growth was driven by improved performance from the MSP business, consistent contribution from cloud infrastructure and application management products, strong revenue from IT service management products and better than anticipated bookings for the acquired cloud database management product.
Thus far in Q2, key operational metrics such as pipeline creation and conversion rates have generally been flat to down a few percentage points versus the prior year with some signs of stabilization and improvement in recent weeks.
SolarWinds has reduced pricing for new subscription plans by 50% in some newer areas of IT infrastructure management such as public cloud infrastructure and application management.
Q2 guidance for non-GAAP revenue of $240.0-$248.0 million, adjusted EBITDA of $108.0-$112.0 million and non-GAAP EPS of $0.20-$0.21 was below Street expectations for $250.7 million, $117.5 million and $0.21, respectively.
SPS Commerce Reports First Quarter 2020 Financial Results
SPS Commerce (SPSC) reported Q1 ’20 results above expectations and guided Q2 slightly below consensus.
Revenue was $74.2 million (+10.8% Y/Y), at the high-end of guidance for $73.6-$74.2 million and above consensus of $73.8 million. Adjusted EBITDA was $20.4 million (27.4% margin), ahead of guidance for $19.2-$19.8 million and consensus of $19.5 million. Non-GAAP EPS of $0.38 beat guidance for $0.31-$0.32 and the Street’s $0.32.
Key metrics: 31,000 recurring revenue customers (+5% Y/Y); wallet share was approximately $9,100 (+6% Y/Y).
Carrier Service, a recently launched solution that helps suppliers manage drop ship orders, is already being used by customers to fulfill orders for Amazon, Costco, Home Depot, Bed Bath & Beyond and Target.
SPS Commerce has seen a steady volume of transactions since March with roughly half of its networks seeing increased volume and others experiencing a decline.
Looking forward, the onboarding of new suppliers for retailers, foodservice and grocery distributors drives direct demand for SPS Commerce’s solutions but continued pressure on retailers, lower demand for solutions like Analytics and a push-out of ERP implementations could all negatively affect the business.
Q2 guidance for $73.8-$74.8 million in revenue, $19.0-$20.0 million in adjusted EBITDA and $0.29-$0.31 in non-GAAP EPS was slightly below Street expectations for $75.2 million, $19.9 million and $0.32, respectively.
Due to uncertainty regarding the impact of the COVID-19 pandemic on the economy, guidance for FY ’20 was withdrawn.
Tenable Announces First Quarter 2020 Financial Results
Tenable (TENB) reported Q1 ’20 results above expectations and provided a mixed outlook for Q2.
Revenue was $102.6 million (+27.8% Y/Y), above guidance for $100.0-$101.0 million and consensus of $100.1 million. Non-GAAP operating income was $(7.7) million (-7.5% margin), exceeding guidance for $(18.0)-$(17.0) million and consensus of $(17.3) million. Non-GAAP EPS of $(0.09) beat guidance for $(0.19)-$(0.18) and consensus of $(0.19).
Key metrics: current billings of $99.2 million (+22.2% Y/Y); added 319 new enterprise platform customers and 24 net new six-figure customers; 655 customers with over $100,000 in annual spend at quarter-end.
Strength in the quarter was driven by strong execution in the EMEA region and some large deals in APAC.
Customer engagement has remained high as the rapid shift to work from home has forced enterprises to manage a more distributed network and a broader attack surface, requiring them to understand the risks of operating in a new paradigm.
Both the size and maturity of the pipeline continue to improve but the timing of new business and renewal transactions is difficult to gauge in the current environment and growth is likely to be impacted by the uncertainty.
Q2 guidance for $101.0-$103.0 million in revenue, $(5.5)-$(3.5) million in non-GAAP operating income and $(0.06)-$(0.04) in non-GAAP EPS was mixed versus consensus expectations for $104.8 million in revenue, $(10.4) million in non-GAAP operating income and $(0.11) in non-GAAP EPS.
Due to uncertainty around the duration of COVID-19 and resulting impact, management withdrew its prior FY ’20 guidance.
Tyler Technologies Reports Earnings for First Quarter 2020
Tyler Technologies (TYL) reported Q1 ’20 results below expectations and suspended guidance for FY ’20.
Non-GAAP revenues were $276.8 million (+11.3% Y/Y), below consensus of $281.6 million. Adjusted EBITDA was $73.2 million (26.4% margin), just shy of the Street’s $75.9 million. Non-GAAP EPS of $1.25 missed consensus of $1.28.
Key metrics: organic revenue growth was 5.7%; added 131 new subscription arrangements and converted 19 on-premise clients; software subscription arrangements comprised 73% of new software contract value; total bookings of $319 million (+39.8% Y/Y); total backlog of $1.50 billion (+19.2% Y/Y), including software-related backlog of $1.46 billion (+20.1% Y/Y).
Tyler Technologies had a great deal of momentum heading into the second half of March but began to see the effects of the COVID-19 pandemic as procurement processes were delayed and finalizing existing awards became more difficult logistically.
Management estimates that Q1 revenues were reduced by approximately $6 million as a result of COVID-19, which pushed out a few sales and negatively impacted professional services revenues.
The company anticipates lower services revenues, transaction-based e-filing revenues and other revenues associated with the cancellation of its Connect conference in the near-term but believes revenues can still grow mid-single digits this year with operating margins remaining relatively flat versus last year.
Due to the uncertainties around the evolving COVID-19 pandemic, management has suspended guidance until more clarity around the ultimate impact is available.
Workiva Announces First Quarter 2020 Financial Results
Workiva (WK) reported Q1 ’20 results above expectations and provided a mixed outlook for Q2.
Revenue of $85.8 million (+22.6% Y/Y) was above guidance for $82.8-$83.3 million and consensus of $82.3 million. Non-GAAP operating income was $0.8 million (0.9% margin), exceeding guidance for $(7.5)-$(7.0) million and consensus of $(8.0) million. Non-GAAP EPS of $0.03 beat guidance for $(0.13)-$(0.12) and consensus of $(0.15).
Key metrics: 3,507 customers (+4% Y/Y) at quarter-end; revenue retention rate was 94.5% excluding add-on sales and 110.9% including add-ons; 670 customers (+36% Y/Y) with annual contract value (ACV) over $100,000.
Growth was driven by new solutions, new logos and conversions to solution-based licensing.
While results outpaced expectations, management acknowledged that a number of customers and prospects delayed purchases in March.
Q2 guidance for $80.3-$80.8 million in revenue, non-GAAP operating income of $(7.3)-$(6.8) million and non-GAAP EPS of $(0.15)-$(0.14) was mixed versus consensus of $82.8 million in revenue, $(9.4) million in non-GAAP operating income and $(0.17) in non-GAAP EPS.
Guidance for FY ’20 was suspended given the current uncertainty, although management indicated revenue for the year is expected to grow at a slower pace than previously guided while operating margin should improve.
Zendesk Announces First Quarter 2020 Results
Zendesk (ZEN) reported mixed Q1 ’20 results and provided a mixed outlook for Q2.
Revenue of $237.5 million (+30.9% Y/Y) was near the low-end of guidance for $237.0-$242.0 million and just shy of the Street’s $238.2 million. Non-GAAP operating income of $9.2 million (3.9% margin) was above guidance for $5.0-$9.0 million and consensus of $5.9 million. Non-GAAP EPS of $0.10 beat consensus of $0.07.
Key metrics: 43% of Support ARR from paid customers with over 100 agents; 160,600 paid customer accounts (+10% Y/Y); dollar-based net expansion rate of 115%; remaining performance obligations of $673 million (+53% Y/Y).
Beginning at the end of Q1, Zendesk began to see a higher trend of contraction among its smaller customers, a trend that has continued into Q2.
Near- and intermediate-term performance is expected to be impacted by the global pandemic with some customers facing financial distress and seeing customer interactions decline, resulting in adjustments to invoicing or other subscription terms.
Zendesk as already implemented substantial expense-saving measures, including a reduction in its hiring plan.
Q2 guidance for revenue of $237.0-$243.0 million and non-GAAP operating income of $8.0-$12.0 million was mixed relative to Street expectations for $249.8 million in revenue and $7.6 million in non-GAAP operating income.
Guidance for FY ’20 was withdrawn given uncertainties related to the COVID-19 pandemic.
Notable News
Rapid7 Announces Pricing of $200 Million Convertible Senior Notes Offering
Rapid7 (RPD) priced an offering of $200.0 million aggregate principal amount of 2.25% convertible senior notes due 2025 with an initial conversion price of $61.02 per share, representing a 30% premium to the last closing price.
The company has also granted the initial purchasers of the notes an option to purchase up to an additional $30.0 million aggregate principal amount of notes.
Net proceeds from the offering are expected to be $194.0 million (or $223.2 million if the initial purchasers exercise their option to purchase additional notes in full), of which $23.7 million will be put towards the cost of capped call transactions and the remainder used for working capital and other general corporate purposes.
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 Brightcove (BCOV).