K. Liu's Week in Review
We attended Box’s (BOX) annual user conference, BoxWorks 2019, as well as the Investor Breakout session held in conjunction with the event. A detailed recap is forthcoming, but suffice to say, we were impressed with the company’s platform and opportunity in the cloud content management space. Further due diligence is in order, but the combination of a large addressable market, highly differentiated technology, and an attractive valuation has the hallmarks of a compelling investment opportunity, in our opinion. Intuit (INTU) also hosted an Investor Day, prior to which the company reaffirmed prior guidance for its fiscal Q1 and FY ’20.
FreightWaves published an interesting article, “Loss of Parcel Select business could hit USPS hard, consultancy says,” in which shipping consultant ShipMatrix estimates that the United States Postal Service (USPS) may be faced with a 32% decline in total parcel volume and a corresponding 20% drop in parcel revenue should Amazon.com, FedEx and UPS opt to in-source last-mile deliveries currently shipped via the USPS’ Parcel Select service. Moreover, concerted efforts by FedEx and UPS to target small and mid-sized shippers serviced by the USPS’ Priority Mail service presents another challenge, which ShipMatrix estimates could cause a 10% shift in Priority Mail volume to the private carriers, resulting in total USPS parcel volume and revenue declines of 34% and 24%, respectively. In our view, the increasingly competitive landscape suggests the USPS ought to reconsider its efforts to reduce incentives available to its partner ecosystem, particularly its resellers and Stamps.com (STMP), which boasts some 742,000 paid customers in the SMB market and facilitates the purchase of postage for a significant share of Priority Mail volume.
Avaya Holdings (AVYA) and RingCentral (RNG) upended the Unified Communications as a Service (UCaaS) market, entering into an exclusive partnership in which the two companies will jointly develop and launch Avaya Cloud Office by RingCentral in Q1 2020. The partnership provides a pathway for over 1 million users across Avaya’s customer base of over 120,000 to migrate to RingCentral’s UCaaS solution. Terms of the agreement call for RingCentral to make an advanced payment to Avaya of $375 million, most of which will be in stock and covers future commissions with the remainder to secure certain licensing rights. In addition, RingCentral will also purchase $125 million aggregate principal amount of Avaya’s 3% convertible and redeemable preferred stock with a conversion price of $16.00, equating to a stake in Avaya of approximately 6% on an as-converted basis. Benefits to RingCentral include enhanced unit economics from lower customer acquisition costs and reduced friction for both Avaya’s customer and partner base to embrace its UCaaS offering. Avaya plans to pay down $250 million in debt and the company’s Board of Directors has authorized a $500 million share repurchase program. Shares of both companies appreciated meaningfully following the news.
Other deals this week included Alteryx’s (AYX) acquisition of Feature Labs, which has developed algorithms to optimize the process of building machine learning models. Alteryx anticipates the acquisition will enable customers to empower data workers and help fill talent gaps in data science and machine learning. Upland Software (UPLD) acquired InGenius, a provider of Computer Telephony Integration solutions, for $29.4 million in cash. The acquisition bolsters Upland’s contact center agent productivity solution with integrations to leading CRM and contact center solutions. Management anticipates annualized revenues of approximately $9.0 million and expects at least $4.0 million in adjusted EBITDA once InGenius is fully integrated, implying EV/Sales and EV/EBITDA multiples of 3.3x and 7.4x, respectively. Upland raised its FY ’19 guidance for revenue and adjusted EBITDA from $212.3-$216.3 million and $78.2-$80.2 million, respectively, to $213.8-$217.8 million and $78.8-$80.8 million. Lastly, we continue to track new developments in the rise of conversational commerce. Following its acquisition of Smooch earlier this year, Zendesk (ZEN) announced the availability of Sunshine Conversations, an API-based platform enabling businesses to engage with customers across a myriad of popular messaging apps, SMS text, and RCS. The new offering also supports the integration of bots and AI services, enables the building of interactive experiences and payments within the messaging interface, and allows conversational data to be shared across business lines.
Mergers and Acquisitions
Alteryx Acquires Feature Labs to Advance Machine Learning for the Enterprise
Alteryx (AYX) has acquired Feature Labs, a data science software company that automates feature engineering for machine learning and artificial intelligence applications.
Feature Labs has developed algorithms to optimize the building of machine learning models, including the ability to automate the model fitting and hyper-parameter tuning process as well as the feature engineering and data prep process.
Feature Labs’ open-source libraries have been downloaded over 350,000 times, and Alteryx plans to continue to support the open-source community.
The acquisition is expected to make it easier for customers to empower data workers and help fill the skills gap in data science and machine learning.
Upland Software Announces Acquisition, Raises Guidance
Upland Software (UPLD) has acquired InGenius, a Computer Telephony Integration (CTI) solution for enterprise contact centers, for $29.4 million in cash, of which $26.4 million was paid at closing and $3.0 million will be payable in 12 months.
The addition of InGenius’ CTI platform enables Upland to go-to-market with a contact center agent productivity solution integrated with leading CRM and contact center solutions, enhancing both the agent and customer experience.
The acquisition adds approximately $9.0 million in annualized revenues and is expected to generate at least $4.0 million in annual adjusted EBITDA once fully integrated.
Upland raised its FY ’19 revenue and adjusted EBITDA guidance from $212.3-$216.3 million and $78.2-$80.2 million, respectively, to $213.8-$217.8 million and $78.8-$80.8 million.
Notable News
Avaya Announces Strategic Partnership with RingCentral to Accelerate Transformation to the Cloud
Avaya Holdings (AVYA) announced a strategic partnership with RingCentral (RNG) in which Avaya will launch Avaya Cloud Office by RingCentral in Q1 2020.
The new offering combines RingCentral’s UCaaS platform with Avaya technology, services, and migration capabilities, and expands Avaya’s product portfolio to include UCaaS and CCaaS solutions in addition to its traditional on-premise unified communications and contact center solutions.
Avaya’s customer base includes over 100 million users spread over 120,000 customers in more than 180 countries.
Terms of the agreement call for RingCentral to contribute $500 million, comprised of a $375 million payment that will largely be made in stock to secure certain licensing rights and to fund future payments and a $125 million investment in 3% redeemable preferred equity convertible at $16.00 per share, representing an approximately 6% stake in Avaya if converted.
Avaya’s Board of Directors has authorized a $500 million share repurchase plan, and the company also plans to pay down $250 million in debt.
Intuit Hosts Investor Day: Reaffirms First-quarter and Fiscal 2020 Guidance
Ahead of its Investor Day session at the company’s headquarters, Intuit (INTU) reaffirmed its Q1 and FY ’20 guidance.
Q1 guidance includes revenue of $1.105-$1.125 billion (+9%-11% Y/Y), non-GAAP operating income of $65.0-$75.0 million, and non-GAAP EPS of $0.23-$0.25.
FY ’20 guidance includes revenue of $7.440-$7.540 billion (+10%-11% Y/Y), non-GAAP operating income of $2.515-$2.565 billion, and non-GAAP EPS of $7.50-$7.60.
Loss of Parcel Select business could hit USPS hard, consultancy says
ShipMatrix, a consulting firm focused on assisting shippers with reducing costs, estimates that the U.S. Postal Service (USPS) could face declines of 32% and 20%, respectively, in total parcel volume and parcel revenue should Amazon, FedEx and UPS in-source parcel volumes for which the USPS provides last-mile delivery through its Parcel Select service.
Also noted, the USPS faces challenges in the SMB market as FedEx and UPS aggressively target shippers that have previously leveraged Priority Mail, and ShipMatrix estimates approximately 10% of that volume could be at risk.
FedEx has already announced plans to in-source all of its Parcel Select volumes by the end of 2020, UPS has in-sourced an estimated 35% of its volumes, and Amazon has begun providing last-mile delivery via its own service in high-density areas.
RingCentral to Become Exclusive Provider of UCaaS Solutions to Avaya in Strategic Partnership
RingCentral (RNG) has entered into a commercial agreement with Avaya Holdings (AVYA), making it the exclusive provider of UCaaS solutions to Avaya.
The two companies will introduce a new solution, Avaya Cloud Office by RingCentral, and will jointly develop programs leveraging Avaya’s sales and partner network as well as technologies to automate the migration of Avaya’s customers to RingCentral’s UCaaS solution.
RingCentral will pay Avaya an advance of $375 million, comprised primarily of stock, of which the majority of the amount is for future commissions with the remainder for certain licensing rights.
RingCentral will also purchase $125 million aggregate principal amount of 3% convertible and redeemable preferred stock, representing a 6% stake in Avaya on an as-converted basis.
Sales of Avaya Cloud Office should have better unit economics as RingCentral plans to leverage Avaya’s global sales and partner network.
Zendesk Delivers the Future of Conversational Business with Sunshine Conversations
Zendesk (ZEN) announced the availability of Sunshine Conversations, an API-based platform enabling businesses to leverage messaging to interact and transact with customers.
Sunshine Conversations was built on the Smooch platform acquired earlier this year and is part of the company’s CRM platform, Zendesk Sunshine.
In addition to engaging customers via popular messaging apps like Facebook Messenger, WhatsApp, Line, WeChat, Viber, SMS text, and RCS, Sunshine Conversations also supports the integration of bots and AI services, building interactive experiences and enabling payments within the messaging interface, and sharing conversational data across lines of business.
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 Stamps.com (STMP).