K. Liu's Week in Review
Zuora (ZUO) hosted a virtual Investor Day in which management presented its strategy for helping enterprises win in the subscription economy, a market opportunity estimated at $5 billion today and projected to grow at 25%-30% annually. For those less familiar with the company, Zuora was founded on the notion that every company would one day become part of the subscription economy. Zuora’s solutions enable customers to launch, manage and scale subscription businesses by automating processes associated with the subscriber lifecycle journey, including billing, collections and revenue recognition. The company first caught our attention some two years ago as challenges in integrating its flagship Billing and Revenue products drove a deceleration in its dollar-based net retention metric, which combined with sales execution issues prompted a sell-off in shares and a depressed valuation relative to SaaS peers. Although the COVID-19 pandemic created another headwind to growth over the past year, Zuora exited its FY ’21 with a revamped executive team, its product integration challenges in the rear-view mirror and a refined land, transform and expand go-to-market motion. The changes have already begun to show benefits with dollar-based retention returning to over 100% in Q4 ’21 and non-GAAP operating losses moderating. Moving forward, initiatives to simplify the deployment of Zuora’s Revenue, Billing, Collect and Platform products, to focus on established incumbents in industries rapidly adopting the subscription model and to expand the partner ecosystem are expected to drive a meaningful reacceleration in revenue growth along with a more favorable margin profile. Specifically, management unveiled FY ’25 targets calling for subscription revenue growth of 25% or more and a non-GAAP operating margin of at least 10%. Underpinning these targets are assumptions for annual recurring revenue growth to reach 25%-30%, dollar-based net retention of 112%-115% and achievement of the “Rule of 40” as defined by the sum of subscription revenue growth and free cash flow margin. Considering Zuora’s FY ’22 guidance reflects assumptions for just 12%-14% growth in subscription revenue and a non-GAAP operating loss of $8-$12 million, the long-term outlook suggests this year may serve as the inflection point in a successful turnaround.
Microsoft’s (MSFT) deal to acquire Nuance Communications (NUAN) for $56.00 per share in cash, representing a 23% premium to NUAN’s closing price and an enterprise value of $19.7 billion, headlined M&A activity for the week. The transaction values NUAN shares at TTM and FY ’21 EV/Sales multiples of 15.5x and 14.4x, respectively. The two companies have partnered since 2019, and Microsoft expects the acquisition to accelerate its strategy of providing industry-specific cloud offerings and to expand its healthcare TAM to nearly $500 billion. Other notable transactions included Autodesk’s (ADSK) agreement to acquire Upchain, a provider of cloud-based solutions for product lifecycle management and product data management, and Zscaler’s (ZS) plans to buy Trustdome, which offers a Cloud Infrastructure Entitlement Management platform enabling enterprises to maintain governance over access to data, applications and services in public cloud environments. Finally, Dell Technologies (DELL) announced plans to spin-off its 81% equity ownership in VMware (VMW), thereby simplifying and enhancing the latter’s corporate governance structure. Under the agreement, VMware will distribute a special cash dividend of $11.5-$12.0 billion, or $27.43-$28.62 per share, to all shareholders.
With earnings season around the corner, investors were treated to a trio of positive pre-announcements from Atlassian (TEAM), SAP (SAP) and SolarWinds (SWI). Atlassian attributed the upside in its results to strong demand for on-premise products ahead of a planned discontinuation in server license sales and price increases for on-premise products. SAP highlighted a sharp acceleration in new cloud business as well as a strong start for its RISE with SAP offering as the impetus for raising the low-end of its FY ’21 cloud and software revenue outlook. Most notable in SolarWinds’ announcement was the issuance of FY ‘21 guidance for its N-able MSP business ahead of a potential spin-off, which implies revenue growth of 12%-14% and an adjusted EBITDA margin of 31%-32%. Lastly, Verint (VRNT) raised its FY ’22 non-GAAP EPS guidance slightly to account for the impact of multiple capital structure transactions completed recently.
Mergers and Acquisitions
Autodesk to Acquire Upchain to Accelerate Product Development Data and Processes in the Cloud
Autodesk (ADSK) has agreed to acquire Upchain, which offers cloud-based product lifecycle management (PLM) and product data management (PDM) solutions.
The acquisition bolsters Autodesk’s value proposition to manufacturers by ensuring data can be moved easily between systems and leveraged throughout the product lifecycle from development through manufacturing.
The transaction is expected to close during Autodesk’s fiscal Q2 ’22.
Dell Technologies Announces Planned VMware Spin-Off
Dell Technologies (DELL) plans to spin-off its 81% equity interest in VMware (VMW), resulting in two standalone companies.
At closing, Dell Technologies shareholders would receive 0.44 shares of VMware for each Dell Technologies share owned.
Terms of the agreement call for VMware to distribute a special cash dividend of $11.5-$12.0 billion, or $27.43-$28.62 per share, to all shareholders, of which Dell Technologies would receive $9.3-$9.7 billion based on its current ownership stake.
Dell and VMware plan to enter into a commercial agreement to preserve the co-development of critical solutions and alignment on go-to-market activities.
The transaction is expected to close in calendar Q4 ’21 and to qualify as generally tax-free for Dell Technologies shareholders for U.S. federal income tax purposes.
Microsoft accelerates industry cloud strategy for healthcare with the acquisition of Nuance
Microsoft (MSFT) has agreed to acquire Nuance Communications (NUAN) for $56.00 per share in cash, a 23% premium to the close price prior to announcement of the acquisition.
The purchase price equates to an enterprise value of $19.7 billion, representing TTM and FY ’21 EV/Sales multiples of 15.5x and 14.4x, respectively.
The two companies have partnered since 2019, and the acquisition is expected to accelerate Microsoft’s strategy to provide industry-specific cloud offerings and expand its healthcare TAM to nearly $500 billion.
Microsoft was drawn to Nuance’s momentum in cloud and AI-first solutions in three key areas: ambient clinical intelligence, health care costs and cross-industry enterprise AI, specifically for customer experience and biometric security.
Once closed, Nuance’s results will be included within Microsoft’s Intelligent Cloud segment and are expected to be less than 1% dilutive to non-GAAP EPS in FY ’22 and to be accretive in FY ’23.
Zscaler Addresses Entitlement Gap for Cloud Workloads with Acquisition of Trustdome
Zscaler (ZS) has agreed to acquire Trustdome, a Cloud Infrastructure Entitlement Management (CIEM) platform provider.
Trustdome’s CIEM platform enables enterprises to maintain governance over access to data, applications and services in public cloud environments and will be combined with Zscaler’s Cloud Security Posture Management platform.
Terms of the transaction, which is expected to close during Zscaler’s fiscal Q3, were not disclosed.
Earnings Releases
Atlassian (TEAM) pre-announced Q3 ’21 results above expectations, reflecting accelerated demand for on-premises products ahead of the planned discontinuation of new server license sales and price increases.
The company expects revenue of $566.0-$572.0 million, ahead of prior guidance for $475.0-$490.0 million and consensus of $487.5 million; cloud revenue grew in line with the company’s mid-30% target for FY ’21.
Non-IFRS operating income is expected to come in ahead of prior guidance for $76.0-$78.4 million, although Atlassian does not anticipate maintaining this level of profitability in the coming quarters.
The company’s full Q3 ’21 results will be released on Thursday, April 29, 2021.
SAP Announces Preliminary First Quarter 2021 Results, Raises Full-Year Outlook
SAP (SAP) pre-announced Q1 results above expectations and raised the low-end of its cloud revenue outlook for FY ’21.
The company anticipates non-IFRS revenue, operating income and EPS of €6.35 billion (-2.6% Y/Y), €1.74 billion (27.4% margin) and €1.40, respectively, ahead of consensus of €6.34 billion, €1.51 billion and €0.92.
Key metrics: current cloud backlog of €7.63 billion (+15% Y/Y); non-IFRS cloud revenue of €2.15 billion (+7% Y/Y).
The performance was highlighted by a sharp acceleration in new cloud business as well as a strong start for RISE with SAP.
Management raised its FY ’21 non-IFRS cloud revenue and cloud and software revenue guidance from €9.1-€9.5 billion and €23.3-€23.8 billion, respectively, to €9.2-€9.5 billion and €23.4-€23.8 billion; guidance for non-IFRS operating profit of €7.8-€8.2 billion was unchanged.
SolarWinds Announces First Quarter 2021 Preliminary Financial Results
SolarWinds (SWI) pre-announced Q1 ’21 results above expectations.
The company anticipates non-GAAP revenue and adjusted EBITDA of $255.9-$256.9 million and $103.0-$106.0 million, respectively, exceeding its prior guidance for $247.0-$252.0 million and $98.0-$101.0 million.
Ahead of a potential spin-off of its N-able MSP business, SolarWinds provided guidance for N-able, which includes Q2 revenue of $83.5-$84.0 million (+12%-14% Y/Y) and FY ’21 expectations for $340.0-$344.0 million (+12%-14% Y/Y) in revenue and $105.0-$110.0 million in adjusted EBITDA (31%-32% margin).
SolarWinds will report its full Q1 ’21 results and provide its Q2 outlook on April 29, 2021.
Notable News
Radware Announces CFO Departure
Radware (RDWR) announced that CFO Doron Abramovich is leaving the company to pursue other opportunities.
The company has commenced a search for his successor.
Verint Announces Successful Completion of Multiple Capital Structure Transactions
Verint (VRNT) has completed the second tranche of its two-tranche investment agreement with Apax Partners, a $315 million convertible notes offering, the repurchase of approximately 1.06 million shares and the repayment of $260 million of its term loan facility.
Reflecting the effect of these transactions, the company updated its FY ’22 non-GAAP EPS guidance to $2.20-$2.23 (from $2.20 previously) and noted that after accounting for the repayment of its existing convertible notes due in June, Verint will have $400 million of cash, $315 million of convertible notes and $150 million of borrowings under its term loan facility.
Zuora Issues Financial Targets for Fiscal Year 2025
In conjunction with its Investor Day, Zuora (ZUO) issued financial targets for FY ’25, including subscription revenue growth of 25% or more, professional services revenue comprising less than 15% of total revenue, non-GAAP subscription gross margin of 82% or more, non-GAAP operating margin of 10% or more, and free cash flow margin of 10%-15%.
Zuora also introduced three new KPI targets for FY ‘25: annual recurring revenue (ARR) growth of 25%-30%, net dollar retention of 112%-115%, and achieving the “Rule of 40” based on the sum of subscription revenue growth and free cash flow margin.