K. Liu's Week in Review
Despite this being a short week coming off Labor Day, it was quite eventful on our end, especially with one of many fires raging up and down the West Coast igniting uncomfortably close to our home base in Monrovia. We are thankful for all the first responders fighting to keep our collective communities out of harm’s way. We were also on the road, virtually of course, with management of CTG, Inc. (CTG). In short, we believe the company continues to execute well amid a challenging environment and expect further acceleration in management’s efforts to shift away from lower margin staffing engagements to higher margin solutions services. Our Sponsored Research report, “Highlights from Virtual Non-Deal Roadshow with CTG,” provides a more detailed recap of the day along with a summary of the letter to the Board sent by 13-D filers Assurance Global Services and Wax Asset Management.
Since its successful acquisition of Ipswitch roughly 18 months ago, Progress (PRGS) has been on the hunt for additional targets in the infrastructure software space with high levels of recurring revenue, strong retention rates and a post-synergies margin profile consistent with its own operating margin. DevOps pioneer Chef appears to fit the bill as Progress has agreed to acquire the company for $220 million in cash, representing a TTM EV/Sales multiple of 3.1x. Chef offers compliance and application automation products that enable customers to build, deploy, manage and secure applications in multi-cloud, on-premise and hybrid environments. Post-integration, Chef is expected to add over $70 million in annual recurring revenue with a growth and margin profile in the low single-digit and 35%+ ranges, respectively. In conjunction with the deal announcement, Progress pre-announced fiscal Q3 ’20 results ahead of Street expectations and updated its guidance for the year. Secureworks (SCWX) also reported upside results this week and announced a tuck-in acquisition as well. The company plans to acquire vulnerability management platform provider Delve and integrate the acquired technology into its Red Cloak platform and Threat Detection and Response application. Also worth noting, AppFolio (APPF) agreed to sell its MyCase subsidiary to Apax Partners for $193 million in cash. With MyCase comprising approximately 10% of AppFolio’s revenue, the sale price implies an EV/Sales multiple in the neighborhood of 6.0x-7.0x.
All ten of the software companies that we tracked this week reported quarterly results ahead of expectations and generally guided in line or better than Street expectations. However, only Oracle (ORCL) and Verint (VRNT) managed to hold onto any gains for the week. The two companies had been more impacted at the outset of the pandemic, due in part to more significant exposure to on-premise license revenue, but saw some recovery this past quarter and guided for further improvement in the near-term. Despite upside results and guidance, BigCommerce (BIGC), a recent IPO and e-commerce play, saw the biggest decline in shares amongst the reporting companies. We see this as more a function of a full valuation as opposed to any surprising trends in its business. Similarly, both Coupa Software (COUP) and Slack (WORK) experienced double-digit sell-offs on strong headline results and guidance. For the former, commentary that sales cycles have extended relative to last year as well as an outlook for further deceleration in the TTM billings growth metric in the current quarter shook investors. At Slack, billings growth was impacted by COVID-related concessions and slightly higher churn in the cohort of customers spending $1,000 to $100,000 annually, which overshadowed an acceleration in paid subscriber growth and management’s expectations for the positive trend in subscriber growth to be sustained.
Both PROS Holdings (PRO) and RingCentral (RNG) launched convertible notes offerings this week. PROS priced an offering of $150 million aggregate principal amount of 2.250% convertible senior notes due 2027 with an initial conversion price of $41.82 per share, while RingCentral priced an upsized offering of $650 million aggregate principal amount of 0% Convertible Senior Notes due 2026 with an initial conversion price of $424.03 per share. Finally, the preliminary results of MicroStrategy’s “modified Dutch Auction” tender offer to purchase up to $250.0 million in shares at a price between $122.00 per share and $140.00 per share have been tallied, and MicroStrategy expects to purchase 443,482 shares at a price of $140.00 per share for a total cost of $62.1 million.
Mergers and Acquisitions
AppFolio Announces Sale of MyCase to Funds Advised by Apax Partners
AppFolio (APPF) has agreed to sell its wholly-owned subsidiary, MyCase, Inc., to Funds advised by Apax Partners for approximately $193 million in cash.
MyCase provides cloud-based legal practice and case management software.
The transaction is expected to close before the end of Q3.
Progress Announces Acquisition of Chef
Progress (PRGS) has agreed to acquire Chef for $220 million in cash, representing a TTM EV/Sales multiple of 3.1x.
Chef has over $70 million in annual recurring revenue derived from sales of compliance and application automation products that enable customers to build, deploy, manage and secure applications in multi-cloud, on-premise and hybrid environments.
Chef has over 250 employees and boasts over 700 paying customers.
Progress plans to continue supporting Chef’s open source community, which has driven over 40 million downloads of Chef’s products across hundreds of thousands of organizations.
The acquisition, which is expected to close next month and to be accretive to both non-GAAP EPS and cash flow in Q1 ’21, complements Progress’ core offerings supporting the development, deployment and management of business applications.
Integration activities are expected to wrap up within 12 months of closing at which point Chef should achieve an operating margin in excess of 35% on a low single-digit growth trajectory.
Secureworks to Acquire Delve Laboratories, Inc.
Secureworks (SCWX) has agreed to acquire Delve, which provides a vulnerability management platform that automates asset discovery and classification, vulnerability scanning, risk prioritization and remediation planning.
Delve will be integrated into Securework’s Red Cloak platform and its Threat Detection and Response application.
The acquisition is expected to close during the company’s fiscal Q3 ’21.
Earnings Releases
BigCommerce Announces Second Quarter Financial Results
BigCommerce (BIGC) reported Q2 ’20 results above Street expectations and guided FY ’20 ahead of consensus.
Revenue of $36.3 million (+33.3% Y/Y) was ahead of consensus of $35.6 million. Non-GAAP operating income of $(6.2) million (-17.2% margin) was also above consensus of $(6.9) million. Non-GAAP EPS of $(0.38) beat consensus of $(0.45).
Key metrics: annual revenue run-rate (ARR) of $151.8 million (+32% Y/Y); Enterprise account ARR of $79.8 million (+44% Y/Y); number of accounts with annual contract value over $2,000 was 9,378 (+7% Y/Y) with an associated average revenue per account (ARPA) of $12,936 (+29% Y/Y).
BigCommerce provides a platform enabling businesses to create, manage and grow an online store, an addressable market opportunity that IDC estimates will increase from $4.7 billion in 2019 to $7.8 billion in 2024.
Subscription revenue growth decelerated slightly from Q1 due to an essentials plan promotion run during Q2 to help merchants during the initial months of the COVID-19 pandemic.
Partner and service revenue grew meaningfully due to higher e-commerce activity driven by the pandemic and improved monetization of partner revenue share.
Q3 guidance for revenue of $35.9-$36.3 million and non-GAAP operating income of $(10.4)-$(10.1) million was ahead of Street expectations for revenue of $34.4 million and non-GAAP operating income of $(11.7) million.
Management’s FY ’20 guidance for revenue of $142.5-$143.3 million and non-GAAP operating income of $(33.5)-$(32.9) million was above consensus of $139.5 million and $(35.6) million, respectively.
Coupa Software Reports Second Quarter Fiscal 2021 Financial Results
Coupa Software (COUP) reported Q2 ’21 results ahead of expectations and raised its guidance for FY ’21.
Revenues of $125.9 million (+32.4% Y/Y) were above guidance for $118.0-$119.0 million and consensus of $118.8 million. Non-GAAP operating income was $12.3 million (9.8% margin), exceeding guidance for $5.0-$6.8 million and consensus of $6.0 million. Non-GAAP EPS of $0.21 beat guidance for $0.06-$0.08.
Billings of $130.5 million (+21% Y/Y) faced a difficult compare as some new customer billings in Q2 last year were billed during Q1 this year, and the acquisition of Exari contributed to a spike in billings in the prior year period.
Sales cycles have extended relative to last year but many prospects that paused in March and April reengaged and became customers; pipeline build has been strong and RFP activity has risen.
All go-lives were completed remotely during the quarter and implementation times have been reduced by roughly a month.
Coupa booked a general reserve of $2 million to reflect the uncertainty in today’s macroeconomic environment.
The acquisitions of BELLIN and ConnXus will take time to ramp but should contribute revenue of $20-$25 million in FY ’22.
Q3 guidance for revenues and non-GAAP operating income of $123.0-$124.0 million and $4.5-$5.0 million, respectively, was above the Street’s $122.2 million and $4.1 million, but non-GAAP EPS guidance of $0.02-$0.03 was shy of the Street’s $0.05.
Management raised its FY ’21 revenue, non-GAAP operating income and non-GAAP EPS guidance from $489.0-$491.0 million, $28.0-$30.0 million and $0.36-$0.38, respectively, to $496.5-$498.5 million, $33.5-$35.5 million and $0.43-$0.45.
Descartes Announces Fiscal 2021 Second Quarter Financial Results
Descartes (DSGX) reported Q2 ’21 results ahead of Street expectations.
Revenues of $84.0 million (+4.4% Y/Y) were above consensus of $81.4 million. Adjusted EBITDA of $34.0 million (40.5% margin) was ahead of consensus of $32.5 million. EPS of $0.12 were in line with Street expectations.
After a 5% decline in April, revenues were up a little bit in May before recovering more so in June and July as businesses returned to work, particularly in the U.S.
Descartes has seen good traction with businesses levered to e-commerce or small packaged goods; businesses moving food, medicine and other essential goods; and businesses focused on real-time tracking of the location of goods.
Business with air cargo providers, brick-and-mortar retailers, and shippers of commodities and automotive supply chain goods has recovered more slowly.
Baseline revenues for Q2 are estimated at $80.5 million with a corresponding baseline adjusted EBITDA of $27.5 million.
nCino Reports Record Second Quarter Fiscal 2021 Financial Results
nCino (NCNO) reported Q2 ’21 results above Street expectations and guided FY ’21 ahead of consensus.
Revenue was $48.8 million (+52.5% Y/Y), above consensus of $45.1 million. Non-GAAP operating income was $(1.6) million (-3.3% margin), exceeding consensus of $(4.5) million. Non-GAAP EPS of $(0.01) beat the Street’s $(0.05).
nCino offers an end-to-end digital bank operating system that improves employee efficiency and productivity; enhances transparency across client onboarding, loan origination and deposit account opening; and ensures regulatory compliance.
There are over 28,000 financial institutions worldwide that spent over $63 billion on software in 2018, and management believes $10 billion of that spend is serviceable by nCino.
32 financial institutions that were not PPP customers purchased seats for Forgiveness in Q2, of which 10 were new customers, bringing the total to 87 financial institutions using nCino for PPP and Forgiveness.
The immediate activation of PPP and Forgiveness deals contributed $3 million to subscription revenue that would typically be recognized later under the company’s phased activation approach.
Sales and marketing expenses were lower than anticipated due to reductions in travel and expenses related to nSight, the company’s annual user conference that moved to a virtual format this year.
With bank executives refocusing more on business as usual and revisiting some long-term projects in the pipeline, management expects more normal sales and activation cycles in 2H.
Q3 guidance for revenue of $49.0-$50.0 million, non-GAAP operating income of $(9.0)-$(8.0) million and non-GAAP EPS of $(0.10)-$(0.09) was ahead of Street expectations for $46.5 million, $(9.5) million and $(0.11), respectively.
Management’s FY ’21 guidance includes revenue, non-GAAP operating income and non-GAAP EPS of $193.0-$194.0 million, $(23.0)-$(22.0) million and $(0.26)-$(0.25), respectively, above consensus of $183.1 million, $(26.5) million and $(0.31).
Oracle Announces Fiscal 2021 First Quarter Financial Results
Oracle (ORCL) reported Q1 ’21 results above expectations and guided Q2 ahead of consensus.
Revenue of $9.367 billion (+1.6% Y/Y) was ahead of guidance for $9.126-$9.310 billion and consensus of $9.190 billion. Non-GAAP operating income was $4.178 billion (44.6% margin), above consensus of $3.930 billion. Non-GAAP EPS of $0.93 beat guidance for $0.84-$0.88 and the Street’s $0.86.
Key metrics: 7,300 Fusion ERP customers and 23,000 NetSuite ERP customers.
Currency helped but the upside was mostly attributed to solid sales execution and disciplined management of operations.
Per management, Fusion SaaS momentum is very strong and Autonomous Database is seeing success and should garner further traction with Autonomous Database now available on Cloud@Customer.
Q2 guidance for revenue growth of 1%-3%, which implies revenue of $9.711-$9.903 billion, and non-GAAP EPS of $0.98-$1.02 exceeded Street expectations for revenue and non-GAAP EPS of $9.594 billion and $0.94, respectively.
Progress (PRGS) pre-announced Q3 ’20 results ahead of expectations and raised its guidance for FY ’20.
The company expects to report non-GAAP revenue of $109.0-$111.0 million and non-GAAP EPS of $0.75-$0.78, exceeding management’s prior guidance for non-GAAP revenue and EPS of $104.0-$109.0 million and $0.69-$0.71, respectively, and Street expectations for $107.8 million and $0.71.
Management raised its FY ’20 non-GAAP revenue and EPS guidance ranges from $433.0-$443.0 million and $2.82-$2.86, respectively, to $452.0-$456.0 million and $2.94-$2.97.
The revised outlook includes an incremental $10.0-$12.0 million in non-GAAP revenue and a reduction of $0.00-$0.04 in non-GAAP EPS from the acquisition of Chef.
Excluding the impact of the Chef acquisition, guidance implies Q4 revenue and non-GAAP EPS of $116.7 million and $0.79-$0.83, respectively, compared with consensus of $117.6 million and $0.75.
Secureworks Reports Second Quarter Fiscal 2021 Results
Secureworks (SCWX) reported Q2 ’21 results above expectations but provided mixed guidance for Q3 and FY ‘21.
Non-GAAP revenue of $138.5 million (+1.4% Y/Y) was above guidance for $135.0-$137.0 million and consensus of $136.1 million. Adjusted EBITDA of $13.1 million (9.5% margin) exceeded Street expectations for $3.7 million. Non-GAAP EPS of $0.10 beat guidance for $0.01-$0.03 and consensus of $0.02.
Key metrics: ARR of $441 million; over 200 customers on Secureworks’ new cloud-based security analytics platform.
Secureworks’ revenue continues to reflect a mix shift from custom consulting and staffing-type MSS work to more software-driven threat detection and response services.
Since the launch of its global partner program in May, over 100 partners have selected Secureworks for its collaborative network approach to cybersecurity, and several deals have been secured via these partnerships.
The new cloud-based SaaS security analytics platform represents 5% of customers, 17% of Q2 ACV sold and 36% of the pipeline exiting Q2.
Management plans to continue investing prudently, balancing investments in the new software platform and expansion of its partner program while leveraging G&A to grow cash flow and scale profitably.
Q3 guidance for revenue of $137.0-$139.0 million and non-GAAP EPS of $0.04-$0.06 was mixed relative to Street expectations for revenue of $140.1 million and non-GAAP EPS of $0.01.
For FY ’21, management anticipates revenue of $554.0-$558.0 million, adjusted EBITDA of $29.0-$33.0 million and non-GAAP EPS of $0.19-$0.23, which was mixed relative to consensus of $561.7 million, $15.0 million and $0.07, respectively.
Slack Announces Second Quarter Fiscal Year 2021 Results
Slack (WORK) reported Q2 ’21 results above expectations and raised its guidance for FY ’21.
Revenue of $215.9 million (+48.9% Y/Y) was above guidance for $206.0-$209.0 million and consensus of $209.1 million. Non-GAAP operating income was $(6.7) million (-3.1% margin), exceeding guidance for $(22.0)-$(18.0) million and consensus of $(20.9) million. Non-GAAP EPS of $(0.00) beat guidance for $(0.04)-$(0.03) and the Street’s $(0.03).
Key metrics: billings of $218.2 million (+25% Y/Y); added 8,000 net new Paid Customers for a total of over 130,000 (+30% Y/Y); 985 Paid Customers with over $100,000 in ARR (+37% Y/Y); 87 Paid Customers with over $1 million in ARR (+49% Y/Y); over 52,000 Paid Customers using Slack Connect (+27% Y/Y); net dollar retention rate of 125%.
Growth in net new paid customer additions accelerated in June and July compared to April and May, and that trend has continued in August even after the typical vacation-related slowdown for the month.
Management attributes the strength in customer growth to work-from-home tailwinds, improvements to the self-serve experience, better conversion due to new trial offers and the emergence of intercompany collaboration via Slack Connect.
Slack Connect’s contribution to paid customer growth is expected to increase substantially in 2H as trial starts are increasing in conjunction with network growth.
Billings were impacted by approximately $4.0 million of COVID-related concessions, for which requests have slowed over the past couple of months, and contract duration headwinds.
Retention of customers spending over $100,000 annually remains in the mid- to high-90s and moved down slightly from the low-90s for customers spending $1,000 to $100,000.
Q3 guidance for revenue of $222.0-$225.0 million, non-GAAP operating income of $(27.0)-$(23.0) million and non-GAAP EPS of $(0.06)-$(0.05) was largely in line with Street expectations for $223.7 million, $(28.8) million and $(0.05), respectively.
Management raised its FY ’21 guidance across the board and now anticipates revenue of $870.0-$876.0 million, non-GAAP operating income of $(75.0)-$(70.0) million and non-GAAP EPS of $(0.14)-$(0.13).
Verint Announces Q2 FY2021 Results
Verint (VRNT) reported Q2 ’21 results ahead of expectations and guided 2H ’21 generally in line with consensus.
Non-GAAP revenue of $313.4 million (-5.4% Y/Y) exceeded consensus of $299.2 million. Non-GAAP operating income of $85.2 million (27.2% margin) also exceeded consensus of $60.1 million. Non-GAAP EPS of $1.06 beat consensus of $0.69.
Key metrics: new Customer Engagement SaaS ACV +65% Y/Y; perpetual license equivalent bookings +3% Y/Y.
Demand for analytics, workforce productivity and compliance solutions drove significant cloud momentum in the Customer Engagement segment during Q2.
Certain customers moved forward with on-premises deployments that were previously slowed due to the pandemic, so management believes on-premises deals will come back gradually over the remainder of the year, resulting in mid to high single-digit growth in new perpetual license equivalent bookings.
Verint’s Cyber Intelligence business secured multiple large orders in Q2 that will come into revenue over time, and the company remains on track to separate into two independent companies early next year.
Management’s outlook calls for sequential revenue growth in each of the next two quarters with adjusted EBITDA similar to prior year levels.
Vertex Announces Second Quarter 2020 Financial Results
Vertex (VERX) reported Q2 ’20 results above expectations and provided mixed guidance for FY ’20.
Revenue of $91.3 million (+16.5% Y/Y) was above consensus of $89.3 million. Adjusted EBITDA was $21.5 million (23.6% margin), ahead of consensus of $18.9 million. Non-GAAP EPS of $0.16 beat the Street’s $0.08.
Key metrics: ARR of $294.6 million (+16% Y/Y); net revenue retention of 108%; gross revenue retention was 91%.
Vertex’s software enables tax determination, compliance and reporting, tax data management and document management.
Management estimates the total addressable market among enterprises with over $1 million in annual sales for solutions enabling global commerce and compliance at over $7 billion in the U.S. alone.
ARR growth in the quarter came from new customer acquisition and solid expansion of existing customer revenues.
Q3 guidance for revenue of $89.0-$91.0 million and adjusted EBITDA of $17.5-$18.5 million was consistent with Street expectations for revenue of $89.4 million and adjusted EBITDA of $18.1 million.
Management’s FY ’20 guidance calls for revenue and adjusted EBITDA of $362.0-$365.0 million and $73.0-$75.0 million, respectively, which was mixed relative to Street expectations for $359.2 million and $75.3 million.
Zscaler Reports Fourth Quarter and Fiscal 2020 Financial Results
Zscaler (ZS) reported Q4 ’20 results ahead of expectations and guided FY ’21 above consensus.
Revenue of $125.9 million (+46.2% Y/Y) was above guidance for $117.0-$119.0 million and consensus of $118.5 million. Non-GAAP operating income of $7.8 million (6.2% margin) exceeded guidance for $2.0-$4.0 million and consensus of $3.2 million. Non-GAAP EPS of $0.05 beat guidance for $0.02-$0.03 and the Street’s $0.03.
Key metrics: billings of $194.9 million (+55% Y/Y); dollar-based net retention rate was 120%; remaining performance obligations of $783 million (+41% Y/Y).
The ZIA business is accelerating due to customers’ focus on work-from-anywhere, and adoption of the high-end Transformation Bundle is increasing as evidenced by that bundle now comprising 49% of ZIA ARR versus 43% last year.
Adoption of ZPA has also been strong, contributing 29% of new and upsell business versus 14% last year.
Zscaler has largely completed the buildout of its field sales leadership and exceeded its fiscal year-end target of a 60% Y/Y increase in quota-carrying field reps.
Q1 guidance for revenue of $131.0-$133.0 million, non-GAAP operating income of $8.0-$10.0 million and non-GAAP EPS of $0.05-$0.06 outpaced Street expectations for $126.7 million, $3.7 million and $0.04, respectively.
Management’s FY ’21 guidance calls for revenue of $580.0-$590.0 million, non-GAAP operating income of $44.0-$46.0 million and non-GAAP EPS of $0.28-$0.30, comparing favorably with consensus of $557.8 million, $37.5 million and $0.29.
Due to accelerated investments to support growth this year and incremental expenses from the acquisitions of Cloudneeti and Edgewise Networks, management revised its long-term target operating margin to 20%-22% in FY ’24.
Notable News
MicroStrategy Announces Preliminary Results of Modified Dutch Auction Tender Offer
MicroStrategy (MSTR) expects to purchase 443,482 shares of its class A common stock at a price of $140.00 per share for an aggregate cost of $62.1 million, representing all of the shares properly tendered at a price at or below $140.00 per share.
The company previously commenced a “modified Dutch Auction” tender offer to purchase up to $250.0 million in shares at a price between $122.00 per share and $140.00 per share on August 11, 2020.
PROS Holdings (PRO) priced an offering of $150.0 million aggregate principal amount of 2.250% convertible senior notes due 2027 with an initial conversion price of $41.82 per share, an 18.4% premium to the close price prior to announcement of the planned offering.
Approximately $25.3 million of the net proceeds will be used to pay the cost of capped call transactions with the remainder used for general corporate purposes.
RingCentral (RNG) priced an upsized offering of $650.0 million aggregate principal amount of 0% Convertible Senior Notes due 2026 with an initial conversion price of $424.03 per share, a 63.6% premium to the close price prior to announcement of the planned offering.
The offering was upsized from initial plans to offer $600.0 million aggregate principal amount, and the company has granted the initial purchasers of the notes a 13-day option to purchase up to an additional $100.0 million aggregate principal amount.
Approximately $41.8 million of the net proceeds will be used to pay the cost of capped call transactions, $452.5 million will be used to repurchase $132.6 million of the aggregate principal amount of RingCentral’s outstanding 2023 Notes and the remainder will be used for general corporate purposes.
Disclosure(s):
K. Liu & Company LLC has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.