K. Liu's Week in Review
Among several M&A transactions this week, Asure Software’s (ASUR) divestiture of its Workspace Management business to FM:Systems for $120 million in cash, representing a TTM EV/Sales multiple of 4.3x was most notable given the market’s positive reaction. The sale frees the company to focus on its Human Capital Management (HCM) solutions, which span payroll, time and attendance, and consulting services and generated revenues of $71.6 million over the past 12 months. Proceeds from the tax-free transaction will be put towards the pay down of debt, and the elimination of approximately $11 million in annual interest expense is expected to offset a portion of the lost revenue and adjusted EBITDA anticipated in 2020. For the second time in as many weeks, Upland Software (UPLD) completed an acquisition and raised its FY ’19 guidance. The company has acquired Altify, a customer retention optimization solution sold to sales and extended revenue teams, for $84.0 million in cash, representing EV/Sales and EV/EBITDA multiples of 3.5x and 7.8x. Altair (ALTR) expanded its push into the Electronic Design Automation (EDA) market, acquiring Polliwog Co., LTD., a Seoul-based provider of PCB design and analysis products for $27.1 million in cash and stock. Other deals this week included Akamai Technologies’ (AKAM) acquisition of ChameleonX, which protects websites from credit card skimming and user credential thefts, and Medallia’s (MDLA) purchase of Crowdicity, a platform used to crowdsource and elevate employee and customer ideas to drive improvements and innovation.
With earnings season around the corner, we saw several pre-announcements this week. SAP (SAP) pre-announced Q3 ’19 results ahead of expectations and reaffirmed prior guidance for FY ’19. Additionally, the company announced that Chief Executive Officer Bill McDermott had opted not to renew his contract and is transitioning his responsibilities to newly named Co-Chief Executive Officers Jennifer Morgan and Christian Klein, both of whom are already on the Executive Board and most recently served as SAP’s President of the Cloud Business Group and Chief Operating Officer, respectively. Ahead of the company’s Financial Analyst Day, FireEye (FEYE) provided preliminary Q3 ’19 revenue and bookings results, indicating revenue would be at or above the high-end of management’s guidance and bookings would fall within the guidance range. Finally, IZEA Worldwide reported Q3 bookings of $7.7 million, an 18% decrease versus the prior year period as churn in the TapInfluence customer base weighed on SaaS Licensing and Marketplace bookings.
EXFO’s (EXFO) Q4 ’19 results were at the higher-end of management’s guidance and above Street expectations. Strength in the quarter was fueled by the company’s Test & Measurement (T&M) business, which continues to benefit from high speed fiber build-outs by both communication service providers and cable companies as well as webscale operators deploying data centers closer to the edge. Both revenues and bookings in the Service Assurance, Systems, and Services segment were down Y/Y, but management believes the segment will reach an inflection point in 2H ’20 driven by traction for RAN optimization and monitoring solutions as commercial 5G deployments become mainstream. In this regard, we believe EXFO’s commentary on 5G mirrors NetScout’s (NTCT) and suggests the latter’s organic growth will not return to positive levels for a couple more quarters, consistent with our current expectations. Turning back to EXFO, strong book-to-bill for the T&M segment coincided with a solid guide for Q1 and FY ’20, both of which compared favorably with consensus. The table below depicts EXFO’s share price performance for the week, results versus expectations, and subsequent consensus estimate revisions for the current fiscal quarter and year.
Also noteworthy, Shippo has partnered with UPS to offer heavily discounted rates to over 35,000 small and medium-sized businesses (SMBs) leveraging Shippo’s platform. The marketplace shipping rates now available to Shippo’s customers appear to match the rates Shopify (SHOP) offers its merchants, so we are unsure whether the partnership reflects any reseller economics. Regardless, we believe the collaboration validates our view that the large domestics carriers will look to leverage established technology vendors to drive volume growth in the SMB market. With nearly 750,000 paid customers and upwards of $11 billion in shipping-related postage and fees processed on behalf of these customers, we think Stamps.com is well positioned to secure one or more strategic partnerships.
Mergers and Acquisitions
Akamai Technologies (AKAM) has agreed to acquire ChameleonX, which has developed a solution to protect websites from attacks in which malicious or compromised third-party scripts are used for credit card skimming and user credential theft.
Terms of the transaction were not provided, and Akamai does not anticipate any material impact to its 2019 or 2020 results.
Altair Acquires Polliwog Co. Ltd, Growing Software Toolset for Electronic Design Automation (EDA)
Altair (ALTR) has acquired 97% of Polliwog Co. Ltd., a Seoul-based vendor of EDA software to the electronics industry, and has entered into a separate stock purchase agreement to acquire the remaining 3% in October 2022.
The initial purchase includes $10.7 million in cash and 459,539 shares, of which 40% was issued at closing and the remainder will be issuable in equal installments on the anniversary of the closing date in each of the next three years.
The purchase of the remaining 3% stake in Polliwog includes $0.3 million in cash and 14,213 shares.
The acquisition expands the company’s presence into the PCB design and analysis market, adding products such as a PCB modeler, simulation solvers, and design verification tools that integrate with leading ECAD and PCB design solutions.
Asure Software to Sell Workspace Management Business to FM:Systems for $120 Million
Asure Software (ASUR) has entered into an agreement to divest its Workspace Management business to FM:Systems for $120 million in cash, representing a TTM EV/Sales multiple of 4.3x.
The sale of the Workspace Management business enables the company to focus on its core Human Capital Management solutions, which generated $71.6 million in revenue over the past 12 months.
Approximately 110 employees are affected and Asure will provide transition services to FM:Systems from the time the deal closes through the first half of 2020.
Both revenue and EBITDA will decline in 2020, but the impact to the bottom line should be mitigated somewhat by the elimination of interest expense as proceeds from the sale will be put towards the pay down of debt.
The transaction is expected to close within 45 to 60 days.
Experience Management Leader Medallia Acquires Idea and Innovation Platform Crowdicity
Medallia (MDLA) has acquired Crowdicity, a platform used to crowdsource and elevate the best employee and customer ideas in order to drive continuous innovation and improvement.
Neither terms of the transaction nor anticipated financial contribution were provided.
Upland Software Acquires Altify, Raises Guidance
Upland Software (UPLD) has acquired Altify, a cloud-based customer revenue optimization solution utilized by sales and extended revenue teams, for $84.0 million in cash.
Altify is expected to contribute approximately $24.0 million in revenue on an annual basis, including $22.0 million in recurring revenue, and generate at least $10.8 million in adjusted EBITDA once fully integrated.
Management raised its FY ’19 revenue and adjusted EBITDA guidance from $213.8-$217.8 million and $78.8-$80.8 million, respectively, to $217.3-$221.3 million and $80.5-$82.5 million.
The increase in guidance also reflects the impact of the company’s decision to divest or sunset certain small, non-strategic customer contracts and related assets, which reduces Upland’s annualized revenue run rate by $2.4 million and annualized adjusted EBITDA by $1.2 million.
Earnings Releases
EXFO Reports Fourth Quarter and Fiscal 2019 Results
EXFO (EXFO) reported Q4 ’19 results above expectations and guided Q1 and FY ’20 above consensus.
Total sales of $70.2 million (+1.4% Y/Y) were near the high-end of management’s $66.0-$71.0 million guidance and ahead of the Street’s $68.7 million estimate. Adjusted EBITDA of $6.2 million (8.9% margin) also beat consensus of $5.4 million. Non-IFRS EPS of $0.05 beat consensus of $0.04.
Service Assurance, Systems and Services (SASS) sales totaled $20.2 million (-6.7% Y/Y) with management anticipating an inflection in 2H ’20 driven by traction for RAN optimization and monitoring solutions as commercial rollouts of 5G become mainstream in the Americas and EMEA performance picks up upon the completion of 5G spectrum auctions.
Test and Measurement (T&M) sales reached $50.2 million (+5.6% Y/Y) with growth driven by fiber build-outs by both communication service providers and cable companies as well as data center deployments by webscale providers.
Key metrics: bookings of $70.1 million (+12.3% Y/Y), including SASS bookings of $20.7 million (-3.9% Y/Y) and T&M bookings of $50.4 million (+21.4% Y/Y); book-to-bill ratio of 1.01.
Guidance for Q1 includes sales of $70.0-$75.0 million and non-IFRS EPS of $0.05-$0.09, comparing favorably with consensus expectations for $71.9 million in revenue and $0.06 in non-IFRS EPS.
For FY ’20, management guided to adjusted EBITDA of $33.0 million, which includes a $4.0 million benefit from the adoption of IFRS 16 for leases, above consensus of $30.1 million.
FireEye Discloses Preliminary Results for Q3 ‘19
Ahead of its 2019 Financial Analyst Day, FireEye (FEYE) filed an 8-K disclosing preliminary Q3 ’19 revenue and billings results.
Management anticipates Q3 ’19 revenue to be at or above the high-end of its prior guidance of $217.0-$221.0 million and billings to be within prior guidance of $245.0-$255.0 million.
During the Financial Analyst Day session, management also indicated that annual recurring revenue saw a nice uptick to $570.0-$588.0 million after being flattish for a couple quarters and 276 new customers were added (+14% Y/Y).
The company’s target model for 2024 reflects a 12%-16% CAGR in billings, a 12%-15% CAGR in revenue, a non-GAAP operating margin of 18%-22%, and an operating cash flow margin of 20%-25%.
IZEA Reports Q3 Bookings of $7.7 Million
IZEA Worldwide (IZEA) reported Q3 bookings of $7.7 million (-18% Y/Y).
SaaS Licensing bookings of $332,000 (-79% Y/Y) and SaaS Marketplace bookings of $1.6 million (-43% Y/Y) were negatively affected by churn of prior TapInfluence customers.
Managed Servicing bookings of $4.9 million (+12% Y/Y) increased despite 26% less personnel on a Y/Y basis, and Legacy Workflow bookings totaled $619,000 (-7% Y/Y).
SAP Pre-Announces Outstanding Third Quarter Results
SAP (SAP) pre-announced Q3 revenue of €6.81 billion (+13% Y/Y) and EPS of €1.30 on a non-IFRS basis, ahead of consensus revenue and EPS expectations for €6.73 billion and €1.20, respectively.
Non-IFRS cloud revenue increased 37% Y/Y to €1.81 billion, while new cloud bookings increased 38% Y/Y to €0.57 billion.
The addition of over 500 SAP S/4HANA customers brings the total to over 12,000 (+25% Y/Y).
Management reiterated its prior outlook for FY ’19, which includes €8.6-€9.1 billion in non-IFRS cloud revenue, €28.6-€29.2 billion in non-IFRS revenue, and €8.8-€9.1 billion in non-IFRS operating profit.
Notable News
UPS Collaborates with Shippo To Simplify Shipping For Small and Medium-Sized Businesses
UPS has partnered with Shippo to offer UPS marketplace shipping rates to over 35,000 small and medium-sized businesses that utilize Shippo’s platform.
The collaboration enables Shippo to offer its customers discounts of up to 55%, including waived surcharges, for services such as UPS 2nd Day Air and UPS Ground.
SAP Sets Course for the Future with Next Generation Leadership Team
SAP (SAP) announced that CEO Bill McDermott will not renew his contract and is stepping down from his position.
Jennifer Morgan and Christian Klein have been appointed Co-Chief Executive Officers, effective immediately.
Ms. Morgan joined SAP in 2004 and most recently served as President of SAP’s Cloud Business Group.
Mr. Klein joined the company two decades ago and most recently served as the company’s Chief Operating Officer.
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 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 Stamps.com (STMP).