K. Liu's Week in Review
QAD (QADA) has acquired Foreign-Trade Zone Corporation (FTZ), a provider of cloud-based software and services enabling manufacturers to establish and manage foreign-trade zone operations while ensuring compliance with regulations governing the Foreign-Trade Zones program. The purchase price includes $13 million in cash upfront, a sellers note of $2.4 million payable over the next four years and a potential earnout of $2.6 million based on FTZ’s cloud bookings growth over the next three years. QAD plans to integrate FTZ into its Precision division, which offers solutions for trade and transportation management. The acquisition is not expected to have an impact on the company’s near-term financial results but should provide another avenue for expansion within QAD’s existing customer base. In the United States, manufacturers and distributors leveraging the Foreign-Trade Zones program typically realize lower import costs, enhanced inventory control and improved supply chain velocity. With tariffs instituted under the prior administration likely to remain in place for the foreseeable future, we surmise interest in the program is rising. Worth noting, Descartes Systems Group (DSGX), which competes with QAD Precision, recently acquired QuestaWeb, also a provider of Foreign Trade Zone and customs compliance solutions, for $36 million.
There were just a couple of earnings releases to sift through, including EXFO’s fiscal Q2 ’21 results. The company’s sales, which were short of Street expectations, actually rose over 25% Y/Y as the year-ago period was affected by supply constraints arising from the onset of the COVID-19 pandemic. Bookings, which were not impacted by the pandemic in the prior year period, increased 9% Y/Y and yielded a book-to-bill ratio of 1.15. By segment, Test & Measurement bookings rose 3% Y/Y while Service Assurance, Systems and Services (SASS) bookings increased 21% Y/Y. This latter metric is of relevance to our coverage of NetScout Systems (NTCT) given its focus on service assurance and security and represents a positive data point with respect to a recovery in service provider spending. For its part, EXFO attributed the strong SASS bookings growth to early deployments of 5G, cloud-based networks and cited a growing number of RFPs for standalone 5G network monitoring systems. Recall that NetScout has previously suggested that its growth with service providers will be aligned with the deployment of standalone 5G networks. With more RFPs being issued, we continue to believe NetScout is poised for reaccelerating growth later this year. In the broader observability space, New Relic (NEWR) disclosed its fiscal Q4 ’21 results will slightly exceed its prior guidance, and the company has commenced a restructuring plan affecting nearly 160 employees. The plan coincides with an effort to re-orient its sales organization around customer success and to reduce friction in the adoption of its products. Separately, Splunk (SPLK) appointed Teresa Carlson as President and Chief Growth Officer, a newly created role in which she will lead the company’s sales, customer success and marketing initiatives. She joins the company from AWS, where she was Vice President, Worldwide Public Sector and Industries.
After rumors surfaced in recent weeks of a potential sale, Box (BOX) formally concluded its review of strategic options with an announcement that KKR will lead a $500 million investment in the company in the form of convertible preferred stock carrying a 3% dividend and a conversion price representing a 30% premium to the 10-day volume-weighted average price ending April 21, 2021, subject to a $24.00-$27.00 collar. Box plans to utilize the proceeds to fund a “Dutch auction” self-tender offer, although the specific amount and pricing of the self-tender will be determined after the company’s earnings release next month. Shares sold-off on the news. Although we understand the disappointment of those speculating on a sale, we think the company still has a long runway for growth and believe the current path forward provides investors with ample opportunity for upside should management successfully execute against its stated goals. That said, we wonder if Box could have accomplished the same outcome on more attractive terms considering Verint Systems (VRNT), which has a remarkably similar financial profile, priced an upsized offering of $275 million aggregate principal amount of 0.25% convertible senior notes with an initial conversion price representing a 35% premium this week. Progress (PRGS) also completed an upsized offering of $325 million albeit with interest of 1.0% and a conversion premium of 24%.
Mergers and Acquisitions
Critical Event Management (CEM) Provider Everbridge to Acquire xMatters
Everbridge (EVBG) has agreed to acquire xMatters for $240 million, approximately two-thirds of which will be paid in cash and the remainder in stock.
Combining xMatters with Everbridge’s CEM for Digital offering is expected to produce an IT Alerting and Incident Management platform enabling security and IT professionals to identify potential issues, reduce mean time to restore services and remediate breaches.
The acquisition is expected to add $9-$11 million in revenue during the remainder of 2021, have no material impact on adjusted EBITDA this year and be accretive to adjusted EBITDA next year.
QAD Enhances Inventory and Supply Chain Agility with Acquisition of Foreign-Trade Zone Corporation
QAD (QADA) has acquired Foreign-Trade Zone Corporation (FTZ) for an upfront payment of $13.0 million in cash, a sellers note of $2.4 million payable over four years, and a potential earn-out of $2.6 million based on FTZ’s cloud bookings growth over the next three years.
FTZ provides cloud-based foreign-trade zone software and consulting services, enabling customers to establish and manage foreign-trade zones and bonded warehousing operations while ensuring compliance with applicable regulations.
QAD plans to integrate FTZ into its global trade and transportation division, QAD Precision, and does not anticipate any material impact to its financial results in the immediate future.
Tyler Technologies Acquires ReadySub School Scheduling Solution
Tyler Technologies (TYL) has acquired ReadySub, which provides school districts with a cloud-based solution for managing staff absences and substitute teacher assignments.
ReadySub has ten full-time employees and serves 1,000 school districts across the U.S., of which approximately 20 overlap with Tyler’s existing base of 2,000 school district clients.
Earnings Releases
Duck Creek Technologies Announces Second Quarter Fiscal 2021 Financial Results
Duck Creek Technologies (DCT) reported Q2 ’21 results above expectations and raised its outlook for FY ’21.
Revenue was $62.7 million (+18.6% Y/Y), above guidance for $58.5-$59.5 million and consensus of $59.2 million. Adjusted EBITDA was $3.0 million (4.7% margin), exceeding guidance for $(2.5)-$(1.5) million and consensus of $(1.7) million. Non-GAAP EPS of $0.01 beat the Street’s $(0.03).
Key metrics: SaaS ARR was $118.1 million (+75% Y/Y); SaaS net dollar retention was 121%.
Duck Creek experienced robust demand across all segments of the P&C market and signed a number of notable wins, including expansions with two Tier-1 customers, a new core system customer and two conversions.
Large sales within existing accounts contributed to the strength in SaaS net dollar retention, which was above the company’s quarterly range of 113%-118% over the past two years.
Management conveyed a sense of urgency amongst customers to develop a comprehensive long-term cloud strategy.
Q3 guidance for revenue of $62.5-$64.5 million and adjusted EBITDA of $(0.5)-$0.5 million was ahead of Street expectations for revenue of $61.8 million and adjusted EBITDA of $(1.2) million.
Management raised its FY ’21 revenue and adjusted EBITDA guidance from $246.0-$251.0 million and $3.5-$5.5 million, respectively, to $250.0-$254.5 million and $6.5-$8.0 million.
EXFO reports second quarter results for fiscal 2021
EXFO (EXFO) reported Q2 ’21 results below expectations.
Sales of $69.3 million (+25.2% Y/Y) fell short of Street expectations for $71.2 million. Adjusted EBITDA of $3.4 million (4.9% margin) missed consensus of $5.6 million. Non-GAAP EPS of $0.01 were below the Street’s $0.04.
Key metrics: bookings were $79.3 million (+9% Y/Y), including Test and Measurement (T&M) bookings of $53.7 million (+3% Y/Y) and Service Assurance, Systems and Services (SASS) bookings of $25.3 million (+21% Y/Y); book-to-bill was 1.15.
Strong bookings in the quarter reflected increased market demand driven by catch-up spending and early deployments of 5G, cloud-based networks.
T&M bookings increased as communication service providers increased fiber deployments to support broadband network expansion and some service providers released budgets earlier in the calendar year.
Management indicated there is a growing number of RFPs for 5G standalone network monitoring systems, and its Nova Adaptive Service Assurance platform has entered the lab evaluation stage for a potential large-scale 5G monitoring deal.
Notable News
Box Announces Strategic Partnership with KKR, Including $500 Million KKR-led Investment
Box (BOX) announced an agreement in which KKR will invest $500 million in the company via convertible preferred stock.
The preferred stock carries a 3% dividend, payable in kind or in cash at Box’s election, and will be convertible into BOX shares at a conversion price of $27.00.
Should the 10-day volume-weighted average price of BOX ending April 21, 2021 be less than $20.77 per share, the conversion price will be proportionately adjusted downward but remain subject to a minimum conversion price of $24.00.
Proceeds from the investment will be used to fund a “Dutch auction” self-tender of up to $500 million of BOX shares with the specific amount and pricing to be determined subsequent to the company’s release of its fiscal Q1 ’22 results in May.
John Watters Rejoins FireEye Executive Team as President and Chief Operating Officer
FireEye (FEYE) has appointed John Watters as President and Chief Operating Officer, a role in which he will focus on accelerating the company’s transition to a Security as a Service and a Solutions company.
Mr. Watters was most recently chairman of the FireEye Advisory Board, which he joined in April 2020 after stepping down as the company’s Executive Vice President and Chief Strategy Officer, and he initially joined FireEye after its acquisition of iSIGHT Partners, where he served as Chairman and CEO.
New Relic, Inc. Pre-Announces Q4 ’21 Results Above Expectations
In an 8-K filing, New Relic (NEWR) indicated that its fiscal Q4 ’21 revenue, annual recurring revenue, non-GAAP operating income and non-GAAP EPS are all expected to come in slightly ahead of management’s prior guidance.
New Relic also plans to undertake a restructuring plan in which its workforce will be reduced by nearly 120 employees in the U.S. and up to 40 internationally, resulting in aggregate charges of $13-$16 million.
As part of the restructuring plan, the sales organization will be re-oriented around customer success and some spending will be reallocated to research and development to enhance the overall product experience.
Progress Software Announces Proposed Convertible Senior Notes Offering
Progress Software (PRGS) priced an offering of $325 million aggregate principal amount of 1.00% Convertible Senior Notes due 2026 with an initial conversion price of $57.30, a 24% premium to the close price prior to disclosure of the offering.
The offering was upsized from initial plans to offer $300 million, and Progress has granted the initial purchasers an option to purchase up to an additional $50 million aggregate principal amount of notes.
Progress anticipates using approximately $20 million of the proceeds to repurchase 445,037 shares through one of the initial purchasers at a price of $44.94 per share and will use the remainder for acquisitions or general corporate purposes.
Splunk Welcomes Teresa Carlson as President and Chief Growth Officer
Splunk (SPLK) has appointed Teresa Carlson as President and Chief Growth Officer, a newly created role in which she will lead the company’s sales, customer success and marketing initiatives.
Ms. Carlson joins the company from Amazon Web Services, where she served as Vice President, Worldwide Public Sector and Industries.
Verint Announces Upsize and Pricing of Offering of Convertible Senior Notes
Verint (VRNT) priced an offering of $275 million aggregate principal amount of 0.25% convertible senior notes due 2026 with an initial conversion price of $62.08 per share, a 35% premium to the close price prior to disclosure of the offering.
The offering was upsized from initial plans to offer $250 million, and Verint has granted the initial purchasers an option to purchase up to an additional $40 million aggregate principal amount of notes.
Net proceeds from the offering are expected to be used to repay a portion of the debt outstanding on the company’s existing credit facility, to repay certain amounts owing under interest rate swap agreements and to repurchase approximately 1.06 million shares.
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, Inc. (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).