K. Liu's Week in Review
As we near the end of another earnings season, our focus has been on those companies that benefited from the peak of COVID disruption a year ago, and the impact to their businesses as the world returns to some semblance of pre-pandemic normalcy. Although our base assumption was that difficult comparisons for those that saw outsized growth from the shift to digital last year would all but ensure decelerating growth rates over the course of 2021, the magnitude of the deceleration appears to have caught investors and perhaps some management teams off guard. The reality, of course, is more nuanced than tough comparisons. Among those reporting this past week, ON24 (ONTF) was the clearest example of this dynamic as shares fell precipitously following a reduced outlook for Q3 and FY ’21. A year ago, the rush to adopt digital experience solutions to counteract the lack of in-person events prompted massive growth in customer adoption. With that initial cohort now up for renewal, management noted that churn and downsell among small and medium-sized businesses was greater than anticipated. Moreover, while gross retention remained high among the company’s traditional enterprise customer base, there was also a degree of downsizing in those accounts. Following the reset in ON24’s expectations and valuation, we think the shares warrant a closer look, particularly for those that believe both digital and hybrid events will remain the norm.
In a similar vein, shares of Wix (WIX) were also under pressure following a lower outlook for Q3 and FY ‘21. Like ON24, the rush to establish an online presence in the prior year prompted an unprecedented surge in subscriber growth and revenue. In contrast, however, the dampened expectations going forward were attributed more so to challenges in refilling the top of the funnel, which combined with a greater pull forward of spend from existing cohorts than anticipated led to the reset in expectations. Worth noting, a newly announced partnership with Vistaprint may well address the question of where subscriber growth will come from as management indicated the alliance has the potential to bring hundreds of thousands of new subscribers to the platform. Also within the online presence and e-commerce space, Squarespace (SQSP) was hit by a seemingly conservative outlook for Q3 despite an uptick in its guidance for the year. The sell-off was unwarranted from our perspective given a sequential increase in net unique subscriptions as well as continued strong growth in GMV processed, which decelerated from Q1 but still represented strong growth against what should be the most difficult comparison this year.
Amid its proxy fight with Starboard, Box (BOX) pre-announced fiscal Q2 ’22 results above expectations and raised its guidance for the year. Billings growth in the low-teens exceeded guidance for mid-single digit growth, and the company saw sequential improvement in both its net retention rate and the attach rate of Suites in deals over $100,000. Box has exhibited steady improvement in its fundamentals over the past two years, and we remain optimistic that the company is on the cusp of accelerating growth after making significant strides in margin expansion. For those new to the story, we note that both Box and Starboard have recently published detailed presentations regarding their views on the company and its prospects.
Closing the loop on EXFO( EXFO), Founder Germain Lamonde increased the purchase price for his proposed go-private transaction from $6.00 to $6.25 per share. Subsequently, EXFO’s sale was approved by shareholders. During its earnings call, VIAVI’s (VIAV) management indicated that its higher offer for EXFO, which was rejected by Mr. Lamonde, was a “no-brainer” given the implied valuation, the similarity in the companies’ businesses and its bullish view on the environment. In this regard, VIAVI’s NSE segment again exhibited robust growth driven by demand for fiber, wireless and cable products. The recovery in its service assurance business continues to lag but is expected to improve in calendar 2022 as enterprise IT and 5G opportunities arise. RADCOM (RDCM) also highlighted a ramp in 5G activity during its earnings while noting that any opportunities closed would contribute more so to next year. With this in mind, we still expect NetScout’s (NTCT) growth to accelerate exiting its FY ‘22.
Mergers and Acquisitions
EXFO’s (EXFO) Founder Germain Lamonde has increased the purchase price for his proposed go-private acquisition from $6.00 to $6.25 per share.
Mr. Lamonde and the company have also entered into support and voting agreements with Westerly Capital Management, Chris Galvin and EHP Funds, who beneficially own over 3,161,487 shares, or 14.75% of the voting shares not held by Germain Lamonde and Philippe Morin.
Earnings Releases
Absolute Software Reports Fourth Quarter and Full-Year Fiscal 2021 Financial Results
Absolute Software (ABST) reported Q4 ’21 results above expectations.
Revenue of $31.8 million (+17.0% Y/Y) was above consensus of $30.7 million. Adjusted EBITDA was $8.0 million (25.2% margin), exceeding consensus of $6.7 million. Non-GAAP EPS of $0.17 beat the Street’s $0.03.
Key metrics: total ARR was $123.4 million (+14% Y/Y); new logo ARR was $2.7 million; net dollar retention was 106%.
Growth in Q4 was solid despite the global chip shortage that is directly affecting OEM partners in the PC industry.
Absolute has seen increased adoption and usage of its key capabilities across all business segments, particularly in regulated industries like healthcare and financial services, resulting in strong upsells and renewals with large enterprises.
Within Education, demand remains strong albeit at a slightly slower velocity due to supply chain constraints, some delays in COVID funding and a degree of post-pandemic normalization.
The past year was very successful for the partner ecosystem as Absolute instituted more programs, integrations and initiatives than ever before, which resulted in steady demand and continued growth.
Although NetMotion’s revenue growth rate approached 30% in 2020, that was boosted by the combination of accounting rules and customer migrations from on-prem perpetual licenses to on-prem subscriptions, so management expects a growth rate going forward more commensurate with the mid-teens growth rate reported for Absolute this past year.
Management’s FY ’22 guidance calls for revenue of $203.0-$207.0 million and an adjusted EBITDA margin of 18%-20%, implying adjusted EBITDA of $36.5-$41.4 million versus the $50.0 million pro forma run rate previously highlighted when the acquisition of NetMotion was announced.
AppFolio, Inc. Announces Second Quarter 2021 Financial Results
AppFolio (APPF) reported Q2 ’21 results below consensus but raised the midpoint of its FY ’21 revenue outlook.
Revenue of $89.0 million (+9.9% Y/Y) was in line with consensus of $89.2 million. Operating income of $1.1 million (1.3% margin) was below consensus of $4.1 million. EPS of $0.06 missed the Street’s $0.10.
Key metrics: 16,532 property manager customers (+10% Y/Y); 5.82 million units under management (+18% Y/Y).
Adjusting for the divestiture of MyCase, revenue increased 22% Y/Y driven by growth in property management customers.
Value+ services revenue benefited from increased demand for electronic payment services, while tenant screening and insurance services also saw growth commensurate with the increase in units under management.
Higher spending in the quarter arose from a 22% increase in headcount, higher third-party transactional costs related to the growth in Value+ services and an increase in expenses for advertising and virtual marketing events.
Management raised its FY ’21 revenue guidance from $348-$355 million to $350-$355 million.
Box Announces Preliminary Fiscal Second Quarter 2022 Financial Results
Box (BOX) pre-announced Q2 ’22 results above expectations and raised its guidance for FY ’22.
Revenue is expected to be $214.0 million (+11% Y/Y), above guidance for $211.0-$212.0 million and consensus of $211.5 million. Non-GAAP operating margin is expected to be 20.0%, ahead of guidance for 18.0%-18.5% and implying non-GAAP operating income of $42.8 million versus consensus of $38.8 million. Billings of $213 million (+13% Y/Y) was ahead of guidance for Y/Y growth in the mid-single digit range.
Other key metrics for the quarter included a net retention rate of 106%, which was up from 103% last quarter, and an attach rate of over 70% on Suites in deals over $100,000, which was up from 49% in the prior quarter.
Q3 guidance for revenue of $218.0-$219.0 million and a non-GAAP operating margin of 20% (implies non-GAAP operating income of $43.6-$43.8 million) was ahead of Street expectations for $215.5 million in revenue and $39.9 million in non-GAAP operating income.
Management raised its FY ’22 revenue and non-GAAP operating margin guidance from $845-$853 million and 18.0%-18.5%, respectively, to $856-$860 million and 19.5%.
Cerence Announces Strong Third Quarter 2021 Results
Cerence (CRNC) reported Q3 ’21 results above expectations and guided Q4 adjusted EBITDA ahead of consensus.
Revenue of $96.8 million (+28.7% Y/Y) was near the high-end of guidance for $94.0-$97.0 million and above consensus of $96.0 million. Adjusted EBITDA was $38.7 million (40.0% margin), exceeding guidance for $34.0-$37.0 million and consensus of $35.9 million. Non-GAAP EPS of $0.62 beat the Street’s $0.54.
Key metrics: 53% of TTM worldwide auto production with Cerence Technology; 12% increase in number of Cerence connected cars shipped on a TTM basis; 13% growth in billings per car on a TTM basis.
The strong performance was driven by the continuing recovery in auto production, which drove significant growth in variable license revenue despite some ongoing impacts from the semiconductor shortage.
In Q3, over 60 different car models from more than 15 OEMs reached start of production, which marks the point at which license and connected services begin to generate revenue for Cerence.
New applications and connected services drove momentum in bookings, providing management with the confidence to increase its mid-term revenue expectations.
Q4 guidance for revenue of $97.0-$101.0 million and adjusted EBITDA of $36.0-$39.0 million compared favorably with Street expectations for revenue of 498.7 million and adjusted EBITDA of $34.8 million.
Management’s new mid-term 2024 target model calls for revenue of $700 million and adjusted EBITDA of $260 million, both of which are higher than prior expectations for $600 million and $210 million, respectively.
Model N Announces Third Quarter Fiscal Year 2021 Financial Results
Model N (MODN) reported Q3 ’21 results above expectations and guided Q4 ahead of consensus.
Revenues were $51.0 million (+23.7% Y/Y), above guidance for $48.5-$49.0 million and consensus of $48.9 million. Adjusted EBITDA was $7.4 million (14.4% margin), exceeding guidance for $2.0-$2.5 million and consensus of $2.3 million. Non-GAAP EPS of $0.16 beat guidance for $0.01-$0.02 and the Street’s $0.02.
The revenue outperformance combined with improved gross margin and accelerated cost synergies from the acquired Deloitte Business Services group drove upside on the bottom line.
In Q3, Model N signed five new logos, four SaaS transitions, and numerous existing customer expansions.
Q4 guidance for revenues of $50.5-$51.0 million, adjusted EBITDA of $5.0-$5.5 million and non-GAAP EPS of $0.09-$0.11 was ahead of Street expectations for $49.9 million, $2.2 million and $0.02, respectively.
ON24 Announces Second Quarter 2021 Financial Results
ON24 (ONTF) reported Q2 ’21 results above expectations but lowered its guidance for FY ’21.
Revenue of $52.1 million (+43.5% Y/Y) was above guidance for $50.5-$51.5 million and consensus of $51.0 million. Non-GAAP operating income was $2.5 million (4.8% margin), exceeding guidance for $0-$1.0 million and consensus of $0.4 million. Non-GAAP EPS of $0.04 beat guidance for $(0.01) and the Street’s $0.00.
Key metrics: ARR was $164.1 million (+44% Y/Y); added 16 net new customers for a total of 2,078; 345 customers with ARR of $100,000 or more (+51% Y/Y).
Management characterized Q2 as a transition quarter, which went from the peak of COVID last year to the peak of vaccinations this year and created some uncertainty as businesses anticipated returning to some sort of normalcy.
Although new business bookings remained healthy, both churn and down-sell were higher than anticipated among customers signed during the peak of COVID, particularly in the SMB segment.
Gross enterprise retention remains consistent with pre-COVID levels although there was some downsizing in these accounts to normalize for last year’s peak of COVID buying.
Investments continue to be made in growing sales capacity, expanding internationally and increasing contribution from the partner channel.
Q3 guidance for revenue of $47.5-$48.5 million, non-GAAP operating income of $(4.0)-$(3.0) million and non-GAAP EPS of $(0.09)-$(0.07) missed Street expectations for $51.2 million, $(2.2) million and $(0.05), respectively.
Management lowered its FY ’21 revenue, non-GAAP operating income and non-GAAP EPS guidance from $207.5-$210.5 million, $(2.0)-$1.0 million and $(0.08)-$(0.02) to $201.2-$204.2 million, $(4.3)-$(1.3) million and $(0.13)-$(0.06).
Qualys Announces Second Quarter 2021 Financial Results
Qualys (QLYS) reported Q2 ’21 results above expectations and raised its outlook for FY ’21.
Revenues of $99.7 million (+12.2% Y/Y) were ahead of guidance for $98.6-$99.2 million and consensus of $99.0 million. Adjusted EBITDA of $46.7 million (46.8% margin) was above consensus of $41.8 million. Non-GAAP EPS of $0.79 beat guidance for $0.67-$0.69 and the Street’s $0.68.
Key metrics: calculated current billings of $109.0 million (+26% Y/Y); 64 million cloud agent subscriptions (+51% Y/Y).
Qualys’ VMDR solution continues to gain traction in the market and is now 28% penetrated within the customer base; management expects to drive further adoption in the SMB segment with recently introduced packaging and pricing options.
The launch of CyberSecurity Asset Management is a very strategic initiative and has already garnered significant interest.
Q3 guidance for revenue of $103.8-$104.4 million and non-GAAP EPS of $0.78-$0.80 was ahead of Street expectations for revenue of $102.9 million and non-GAAP EPS of $0.66.
Management raised its FY ’21 revenue and non-GAAP EPS guidance from $402.5-$404.5 million and $2.67-$2.72, respectively, to $406.0-$407.5 million and $3.02-$3.07.
RADCOM Reports Second Quarter 2021 Results
RADCOM (RDCM) reported Q2 ’21 results above expectations and maintained its guidance for FY ’21.
Revenues of $9.8 million (+6.5% Y/Y) were slightly above consensus of $9.7 million. Non-GAAP operating income was $(0.6) million, ahead of consensus of $(0.8) million. Non-GAAP EPS of $(0.02) beat the Street’s $(0.04).
In Q2, the company secured several meaningful orders from its existing customers, which will increase visibility into 2H ’21.
RADCOM remains engaged in a significantly higher number of sales opportunities and continues to invest in its advanced 5G cloud technology.
Although still in the non-standalone phase of 5G, activity is ramping on several fronts and some early adopters of standalone 5G should begin their process of selecting their assurance solutions in 2021 and beyond.
Operators are including new 5G use cases like edge computing, network slicing and private networks in their tender process, which are addressable with RADCOM’s solutions.
Management reiterated its prior FY ’21 guidance for revenues of $39-$41 million.
Squarespace Announces Second Quarter 2021 Financial Results
Squarespace (SQSP) reported Q2 ’21 results above expectations and raised its outlook for FY ’21.
Revenue of $196.0 million (+31.0% Y/Y) was above guidance for $186.0-$189.0 million and consensus of $188.5 million. Adjusted EBITDA was $42.6 million (21.8% margin), exceeding consensus of $9.5 million. Non-GAAP EPS of $0.57 beat the Street’s $0.02.
Key metrics: annual run rate revenue of $777.9 million (+28% Y/Y); bookings of $206.6 million (+23% Y/Y); GMV of $1.4 billion (+40% Y/Y); 3.9 million unique subscriptions (+15% Y/Y); average revenue per subscription of $193 (+6% Y/Y).
Excluding Tock, Commerce revenue increased 50% Y/Y and continues to increase as a percentage of revenue.
International expansion remains a key area of focus and growth, particularly in English-speaking countries such as Australia, U.K. and Canada.
Q3 guidance for revenue of $193.0-$198.0 million left consensus of $197.6 million at the high-end.
Management raised its FY ’21 revenue guidance from $764-$776 million to $772-$780 million and increased its unlevered free cash flow guidance from $100-$115 million to $102-$116 million.
Synchronoss (SNCR) reported Q2 ’21 results above expectations and reiterated its guidance for FY ’21.
Revenue was $71.5 million (-6.5% Y/Y), above consensus of $66.7 million. Adjusted EBITDA was $13.3 million (18.6% margin), exceeding consensus of $5.8 million. Non-GAAP EPS of $(0.27) missed the Street’s $(0.22).
The outperformance in Q2 reflected double-digit cloud subscriber growth, messaging subscriber growth, accelerated revenue from the dissolution of CCMI and a continued focus on driving efficiencies in cost management.
Cloud subscriber growth was favorably influenced by the Verizon Cloud Unlimited offering as well as increasing momentum for AT&T’s personal cloud offering, while messaging growth benefited from the migration of millions of British Telecom subscribers and continued strong adoption in Japan.
With the addition of Kitamura, Synchronoss has added three new cloud customers in the first half of FY ’21.
The recapitalization effort undertaken in Q2 reduces the company’s projected 2021 interest and dividend expense by over 50% and eliminates operating constraints placed on management.
Lou Ferraro, Executive Vice President of Financial Operations and Chief Human Resources Officer has been named Acting Chief Financial Officer.
Management reiterated its prior FY ’21 guidance for revenue of $275-$285 million and adjusted EBITDA of $32-$37 million.
Vertex Announces Second Quarter 2021 Financial Results
Vertex (VERX) reported Q2 ’21 results above expectations and raised its guidance for FY ’21.
Revenues of $104.9 million (+15.0% Y/Y) were above guidance for $99.0-$100.0 million and consensus of $99.6 million. Adjusted EBITDA of $19.2 million (18.3% margin) was ahead of guidance for $15.5-$16.5 million and consensus of $16.0 million. Non-GAAP EPS of $0.08 beat the Street’s $0.05.
Key metrics: ARR of $336.2 million (+14% Y/Y); over 4,175 customers at quarter-end; ARR per customer was $80,500; net revenue retention was 106%; gross revenue retention rate was 94.3%.
Growth accelerated in Q2 driven by the company’s strategy to connect business and government seamlessly across the fabric of global e-commerce with end-to-end tax automation, investments in new product development and acquisitions.
Subscription revenue benefited from an annual tier-based subscription amendment, which added $2.1 million in revenue.
An overwhelming majority of new logos continue to choose Vertex’s cloud products, while current customers continue to add cloud products as part of their hybrid strategy as well as migrate fully to the cloud.
New laws under the EU VAT e-commerce package impose additional compliance burdens with changes to rates, thresholds and remittance processes for B2C marketplaces, merchants conducting cross-border transactions and the supply chains that support them, which will have an impact on how businesses transaction in the EU much like Wayfair had in the U.S.
Q3 guidance for revenue of $104.0-$106.0 million and adjusted EBITDA of $15.0-$17.0 million was in line with Street expectations for $104.1 million and $16.3 million, respectively.
Management raised its FY ’21 revenue and adjusted EBITDA guidance from $410-$414 million and $66-$70 million, respectively, to $414-$417 million and $68-$72 million.
VIAVI Announces Fourth Quarter and Year End Fiscal 2021 Results
VIAVI (VIAV) reported Q4 ’21 results above expectations and guided Q1 in line with consensus.
Revenue of $310.9 million (+16.6% Y/Y) was above guidance for $290.0-$310.0 million and consensus of $300.8 million. Non-GAAP operating income was $64.7 million (20.8% margin), above consensus of $60.1 million. Non-GAAP EPS of $0.22 beat guidance for $0.18-$0.22 and the Street’s $0.19.
The results were a record for Q4 and like last quarter were driven by an ongoing recovery from the pandemic, strength in wireless and fiber, and demand for VIAVI’s anti-counterfeiting products.
In the NSE segment, revenues exceeded expectations as strength in fiber, wireless and cable products drove a high-teens increase in NE revenue and more than offset a mid-teens decline in SE revenue, which reflected a lag in recovery of assurance and data center products that is expected to improve in calendar 2022.
OSP revenue was at the high-end of guidance as robust anti-counterfeiting demand offset a modest seasonal decline in 3D sensing products.
NSE bookings were at record levels but the business is being impacted by the shortage in advanced semiconductor devices, dampening VIAVI’s impact to meet otherwise strong customer demand.
Q1 guidance for revenue of $303.0-$317.0 million and non-GAAP EPS of $0.20-$0.22 was in line with Street expectations for $309.0 million and $0.20, respectively.
Wix Reports Second Quarter 2021 Results
Wix (WIX) reported Q2 ’21 results above expectations but lowered its guidance for FY ’21.
Revenue of $316.4 million (+34.0% Y/Y) was above guidance for $308.0-$312.0 million and consensus of $311.7 million. Non-GAAP operating income was $(17.5) million, above consensus of $(24.1) million. Non-GAAP EPS of $(0.28) beat the Street’s $(0.38).
Key metrics: collections of $343 million (+29% Y/Y) were near the low-end of guidance for $342-$352 million; Creative Subscriptions ARR was $967.3 million (+22% Y/Y).
The revenue outperformance was driven by a higher mix of monthly packages than expected and the outperformance of Business Solutions, partially offset by lower growth in new users and subscriptions than predicted.
Retention rates remain strong, the conversion of new users to subscriptions remained consistent with the last four quarters and growth in both GPV and Wix Payment was in line with management’s expectations.
The lack of clarity regarding new COVID variants and potential government responses created significant uncertainty, and beginning in mid-May, Wix experienced a reduction in new user traffic at the top of the funnel and a greater pull forward effect from existing cohorts than predicted, resulting in subscriptions ending up near the low-end of guidance.
Wix has entered into a marquee technology alliance with Vistaprint, which has the potential to deliver hundreds of thousands of new subscribers to Wix.
Q3 guidance for revenue of $311.0-$317.0 million fell short of Street expectations for $325.3 million.
Management reduced its prior FY ’21 guidance for revenue, collections and free cash flow from $1.280-$1.290 billion, $1.440-$1.460 billion and $62-$72 million, respectively, to $1.255-$1.270 billion, $1.400-$1.435 billion and $35-$40 million.
Notable News
Avalara Price Offering of $850 Million of Convertible Senior Notes due 2026
Avalara (AVLR) priced an offering of $850 million aggregate principal amount of 0.25% convertible senior notes due 2026 with an initial conversion price of $238.44, a 38% premium to the closing price prior to disclosure of the planned offering.
The company has also granted the initial purchasers an option to purchase up to an additional $127.5 million aggregate principal amount of the notes.
Net proceeds are expected to total $834.7 million (or $959.9 million if the initial purchasers exercise their option in full), of which $65.5 million will be used to pay the cost of capped call transactions and the remainder for general corporate purposes.
GoDaddy Announces $250 Million Accelerated Share Repurchase Plan
GoDaddy (GDDY) has entered into an accelerated share repurchase agreement with Goldman Sachs to repurchase $250 million of GoDaddy’s common stock.
Upon completion of the accelerated share repurchase, the company will have repurchased 6.9 million shares this year, representing 4% of outstanding shares, and will have a remaining share repurchase authorization of $750 million.
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 (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).
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 Squarespace (SQSP).