K. Liu's Week in Review
In a week where advising against the ingestion or injection of disinfectants became a necessary PSA, there was some semblance of normalcy given a smattering of M&A and other capital markets activity, as well as the start of another earnings season in the software space. Due to recent market conditions, Cornerstone OnDemand (CSOD) closed its previously announced acquisition of Saba Software on improved terms as the final transaction value was lowered from $1.395 billion to $1.295 billion, reflecting reductions of $68.0 million in the cash portion of the purchase price and the value of the 1.1 million shares issued. Medallia (MDLA) agreed to shell out $59 million in cash for Voci Technologies, which offers a real-time speech to text platform. The transcription of calls in contact center settings and the insights derived from those interactions are expected to add another powerful set of signals to the Medallia Experience Cloud. 2U (TWOU) raised $330 million via an upsized offering of 2.25% convertible senior notes due 2025 with an initial conversion price of $28.27 per share, a 17.9% premium to the close price prior to the company’s initial disclosure of the planned offering and accompanying pre-announcement of its Q1 ’20 results. 2U plans to allocate $253.8 million of the anticipated proceeds to the full repayment of its senior secured term loan facility. As for its Q1 performance, the company delivered adjusted EBITDA ahead of expectations on revenues in line with management’s guidance. Like many others, however, management withdrew its FY ’20 guidance pending further clarity on the duration and impact of COVID-19.
The software earnings season kicked-off with a few reports this week. Both Manhattan Associates (MANH) and SAP (SAP) had previously provided business updates after quarter-end, so their Q1 results were not particularly surprising. Manhattan posted Q1 results slightly ahead of Street expectations but has begun to see delays in projects as customers respond to the COVID-19 crisis. As such, services revenues are now expected to decline 17% for the year, contributing to a sizeable cut to management’s revenue guidance for the year. Manhattan has taken a number of actions to reduce expenses by approximately $45 million, however, resulting in a lesser reduction in its earnings outlook. On a positive note, management stated that unlike other economic downturns in recent memory, the pipeline remains healthy and has not dissipated. That said, the timing of expected deal closures has shifted out with opportunities previously anticipated in Q2 moving into the latter half of FY ’20. SAP had previously pre-announced Q1 results below expectations and reduced its outlook for the year, so the new news was really around the company’s move from a co-CEO structure to a sole CEO. Christian Klein will continue to lead the company as Jennifer Morgan departs just six months after the two were named co-CEOs. The transition was attributed to the need for unambiguous leadership amidst the current uncertainty.
In contrast to many others, Citrix Systems (CTXS) appears to be a prime beneficiary of the coronavirus pandemic as businesses turned to the company to ensure continuity as workforces were transitioned to work-from-home settings. The surge in demand for limited-term burst licenses in March contributed to results far exceeding both management’s guidance and Street expectations, and that demand has continued to an extent in April. While it remains to be seen whether Citrix can ultimately convert these short duration licenses into recurring revenue beyond FY ’20, the near-term outlook remains positive and management raised its guidance for the year. On a separate note, Tyler Technologies (TYL) highlighted strong adoption of its recently launched Virtual Court product, which was released early in response to COVID-19. With the company offering a 90-day free trial, Tyler will not see an immediate uplift but the offering should further solidify its dominant market share in the courts and justice arena. Finally, SharpSpring (SHSP) and Tufin (TUFN) were the latest to provide updates on the impact of COVID-19. SharpSpring has reduced salaries by 10% across the board and implemented other measures to lower costs, resulting in savings of approximately $6 million for the remainder of the year. As management had baked in some conservatism in its initial outlook for the year, however, the company continues to anticipate revenue of $30.0-$31.0 million this year with cash usage of less than $4.5 million. As for Tufin, the company saw deals slip in the final weeks of the quarter, resulting in results falling short of expectations and management’s withdrawal of its prior FY ’20 guidance.
Mergers & Acquisitions
Cornerstone Completes Acquisition of Saba Software
Cornerstone OnDemand (CSOD) has closed its previously announced acquisition of Saba Software.
Due to current market conditions, the total transaction value was reduced from $1.395 billion to $1.295 billion at closing, reflecting a reduction in the cash portion of the purchase price from $1.330 billion to $1.262 billion.
The stock portion of the purchase price remained unchanged at 1,110,352 shares.
Medallia (MDLA) has agreed to acquire Voci Technologies, which provides a real-time speech to text platform, for approximately $59 million in cash.
Voci leverages artificial intelligence and deep learning capabilities to accurately transcribe calls and derive insights such as emotion, gender, sentiment and voice biometric identity.
Medallia expects Voci to add a powerful set of signals to the Medallia Experience Cloud and enable customers to optimize their call center operations.
The acquisition is expected to close next month and will be funded with Medallia’s existing revolving credit facility.
Earnings Releases
2U (TWOU) pre-announced Q1 ’20 adjusted EBITDA ahead of expectations on revenue in line with management’s guidance.
The company anticipates Q1 revenue and adjusted EBITDA of $175.5 million and $(4.3) million, respectively, compared with guidance for $170.0-$180.0 million and $(18.0)-$(8.0) million.
By segment, Graduate Program revenue was $118.5 million (+14% Y/Y) and Alternative Credential revenue was $57.0 million (+216% Y/Y).
Cash and equivalents at quarter-end totaled $157.5 million and debt stood at $254.1 million.
2U withdrew its prior guidance for FY ’20 and will not provide new guidance until there is more clarity on the duration and magnitude of the COVID-19 pandemic.
Citrix Reports First Quarter 2020 Financial Results
Citrix Systems (CTXS) reported Q1 ’20 results above expectations and raised its outlook for FY ’20.
Revenue of $860.9 million (+19.7% Y/Y) exceeded guidance for $730.0-$740.0 million and consensus of $733.6 million. Non-GAAP operating income was $269.5 million (31.3% margin), well above consensus of $196.1 million. Non-GAAP EPS of $1.73 beat guidance for $1.15-$1.20 and consensus of $1.17.
Key metrics: subscription ARR was $837 million (+50% Y/Y); SaaS ARR was $555 million (+48% Y/Y); subscription bookings were 55% of total product bookings; 7.7 million paid subscribers (+60% Y/Y); future committed revenue was $2.5 billion million (+19% Y/Y).
Citrix experienced a surge in demand in March with some of that continuing in April as business continuity became a key focus for customers impacted by restrictions associated with coronavirus.
Short-term burst licenses to aid customers in shifting to remote work contributed $47 million to revenue in the quarter, and management hopes to convert a portion of those to full licenses over time.
Q2 guidance for $760.0-$770.0 million in revenue and $1.18-$1.23 in non-GAAP EPS was consistent with Street expectations for $762.8 million in revenue and $1.19 in non-GAAP EPS.
Management raised its FY ’20 guidance, which now calls for revenue of $3.10-$3.16 billion and non-GAAP EPS of $5.40-$5.60 versus prior guidance for $3.10-$3.13 billion in revenue and $5.35-$5.55 in non-GAAP EPS.
Manhattan Associates Reports Record First Quarter 2020 Revenue
Manhattan Associates (MANH) reported Q1 ’20 results above expectations but reduced its outlook for FY ’20.
Revenue of $153.9 million (+3.7% Y/Y) was above consensus of $152.5 million. Non-GAAP operating income was $31.9 million (20.7% margin), exceeding consensus of $27.6 million. Non-GAAP EPS of $0.40 beat consensus of $0.33.
Key metrics: signed three license deals over $1 million; customer retention remained over 95%; remaining performance obligations were $202.8 million (+102% Y/Y).
The company closed its largest Manhattan Active Omni order volume deal in Q1 and continues to see strong demand for WMS in the cloud.
Manhattan conducted approximately 100 go-lives in Q1, consistent with its typical run rate, but has seen project delays from customers consumed by high levels of business activities or those focused on managing through their own challenges.
The global pipeline remains healthy but opportunities have shifted from Q2 into the latter half of the year.
Actions taken to ensure the company manages through the current COVID-19 uncertainty include reduced fees and salaries for the Board of Directors, named executive officers, certain global leaders and all U.S. employees; suspension of the 401(k) match program and share repurchases; a hiring freeze on non-essential roles; and reductions in discretionary spend.
Adjustments to guidance include a 17% decline in services revenue and a reduction in operating expenses of $45 million.
Management reduced its prior FY ’20 guidance for revenue and non-GAAP EPS from $644.0-$656.0 million and $1.53-$1.60, respectively, to $541.0-$565.0 million and $1.50-$1.58, but increased its non-GAAP operating margin assumption from 20.0%-20.5% to 22.9%-23.1%.
SAP SE: Solid Start to 2020 Amidst COVID-19 Crisis
SAP (SAP) reported Q1 ’20 results in line with its pre-announcement and reaffirmed its updated FY ’20 outlook.
Non-IFRS revenue and operating income were €6.522 billion (+6.6% Y/Y) and €1.482 billion (22.7% margin), respectively, consistent with the company’s pre-announcement on April 8. Non-IFRS EPS were €0.85 versus consensus of €0.92.
Key metrics: current cloud backlog exceeded €6.6 billion (+25% Y/Y).
While business activity in the first two months was healthy, a significant amount of new business was postponed as the COVID-19 crisis intensified towards the end of the quarter.
Approximately 300 SAP S/4HANA customers were added in Q1 for a total of approximately 14,100 (+23% Y/Y) customers at quarter-end; go-lives were around 500 in Q1, bringing total go-lives to 6,700.
Cloud gross margin was up 300 basis points versus the prior year due primarily to the migration of SuccessFactors to HANA.
SAP is slowing hiring and reducing discretionary spend in response to COVID-19 and anticipates natural savings from lower travel and events shifting to virtual formats.
No additional share repurchases are expected in 2020, and the company’s dividend proposal remains unchanged at €1.58 per share and will be put to a vote at the upcoming shareholders’ meeting.
Management reiterated its updated FY ’20 guidance provided at the time of the pre-announcement, which calls for non-IFRS revenue and operating income of €27.8-€28.5 billion and €8.1-€8.7 billion, respectively.
Notable News
2U, Inc. Announces Pricing of Upsized $330 Million of Convertible Senior Notes Offering
2U (TWOU) priced $330 million aggregate principal amount of 2.25% convertible senior notes due 2025 with an initial conversion price of $28.27 per share, a 17.9% premium to the close price prior to the announcement of the planned offering.
The offering was upsized from initial plans to offer $300 million aggregate principal amount of notes, and the company has granted the initial purchasers a 13-day option to purchase up to an additional $50 million aggregate principal amount of notes.
Net proceeds are expected to total $320.9 million, of which $253.8 million will be used to repay all outstanding amounts under 2U’s senior secured term loan facility and the remainder for working capital or other general corporate purposes.
SAP Co-Chief Executive Officer Christian Klein Continues as CEO, Jennifer Morgan Departs
SAP (SAP) announced that Chris Klein will continue as sole Chief Executive Officer as Jennifer Morgan, co-Chief Executive Officer, has agreed to depart the company on April 30, 2020.
The transition from a Co-CEO to sole CEO model was undertaken earlier than anticipated to ensure a clear leadership structure amid the current crisis.
Mr. Klein and Ms. Morgan were both appointed co-CEO in October 2019.
SharpSpring Provides Company Update and COVID-19 Response
SharpSpring (SHSP) issued a letter to investors providing an update on the company’s business and response to COVID-19.
SharpSpring has instituted a 10% salary reduction across the majority of the organization, reduced non-revenue roles, deferred new hiring, paused director cash compensation and company bonuses, removed certain benefits stipends, eliminated its events budget and lowered professional fees, resulting in a reduction of over 20% in the expense base that should save the company over $6 million during the remainder of the year.
Cash at the end of Q1 was $9.7 million and subsequent efforts to increase cash reserves through a $1.9 million line of credit, receipt of a $1.6 million accelerated tax refund and approval for a $3.4 million loan through the Paycheck Protection Program have bolstered the balance to approximately $16.6 million.
The company continues to bring in new leads and host demos commensurate with 2019 levels despite significantly lower marketing spend and has seen an uptick in its demo schedule and attendance rates through mid-April.
SharpSpring reaffirmed prior FY ’20 guidance for $30.0-$31.0 million in revenue and cash usage of less than $4.5 million.
Tufin Provides Business Update Related to COVID-19
Tufin (TUFN) pre-announced Q1 ’20 results below expectations.
The company expects to report revenue and non-GAAP operating income of $21.0-$21.3 million and $(13.8)-$(13.0) million, respectively, below guidance for $23.0-$26.0 million and $(13.0)-$(10.5) million.
Consensus called for $23.8 million in revenue and $(11.9) million in non-GAAP operating income.
As the majority of deals close towards the end of the quarter and global uncertainty related to COVID-19 was escalating in the final weeks of March, Tufin saw some customers delay purchases.
Cash at quarter-end totaled $120.5 million and the company had no debt outstanding.
Given the uncertainty around the impact of COVID-19 going forward, management withdrew its prior FY 20 guidance.
Tyler Technologies Announces Rapid Adoption of Virtual Court Offering
Tyler Technologies (TYL) announced that 60 courts have selected its recently launched Tyler Virtual Court product.
The company previously accelerated the product launch in March 2020 in response to COVID-19 and offered a 90-day free trial enabling courts to conduct court sessions online.
The courts may opt to continue with a subscription service once the free trial concludes.