K. Liu's Week in Review
As the fate of the United States Postal Service’s (USPS) customized postage program hangs in the balance, Stamps.com (STMP), Minted.com and the Alliance of Nonprofit Mailers all filed comments with the Postal Regulatory Commission in favor of leaving the program intact with perhaps a few minor modifications to resolve an outstanding USPS legal issue pertaining to a customer’s desire to order PhotoStamps with “some pleasant, innocuous Christian images.” As noted in Stamps.com’s filing, the USPS has prohibited religious images since modifying its regulations pertaining to customized postage in December 2017. From our perspective, the arguments in favor of retaining the program appear compelling. Specifically, the commenters highlighted the branding benefits and response rates realized by small businesses and nonprofit organizations, the provision of a high margin revenue stream to the USPS, and the impact on those employed by the USPS’ partners to support the program. While we had assumed termination of the program was a foregone conclusion, the public representative for the docket commented on the lack of supporting information provided to justify termination of the program, and a Chairman’s Information Request was subsequently filed to gather data relevant to the evaluation of the USPS’ request to remove the product. Ultimately, the outcome of the customized postage program has little bearing on our view of Stamps.com (STMP) but considering that both management’s guidance and our estimates already exclude any contribution beyond the current quarter, a positive resolution would provide a modest uplift to expectations.
Turning to earnings, results and commentary from the four reporting companies was generally consistent with their industry exposure and updates from other companies that have reported post-pandemic. Agilysys (AGYS) had previously indicated results would fall short of management’s guidance as the hospitality-focused solutions provider saw its customers essentially shutdown in March. Still, Agilysys delivered profitability above expectations and noted customer inquiries and demos have skyrocketed of late as those in the industry grapple with aligning the guest experience with a new normal. That said, sales levels through the first two months of the current quarter are trending at approximately 60% of the levels seen on average over the past four quarters, and management’s fiscal Q1 guidance calls for a 35% decline in revenue. Intuit (INTU) had also pre-announced a shortfall as the extended IRS tax filing deadline and impact of COVID-19 on small businesses weighed on revenue growth and new customer acquisition. On a positive note, management has seen signs of stabilization on a number of fronts in May and noted the company remains on plan with its tax season objectives. Palo Alto Networks (PANW) posted strong results and near-term guidance, reflecting a return to above-industry growth in its firewall business and heightened demand for next-generation solutions. Still, management believes recovering from the pandemic shock may take as long as 12-18 months, which could make for a bumpy ride over the next three to nine months (their words, not ours but we don’t disagree). Lastly, Splunk’s headline results were mixed relative to expectations as the company experienced an accelerated transition to the cloud. Reported ARR growth exceeded 50% Y/Y, however, which combined with management’s confidence in achieving its prior target of mid-40% ARR growth for the year sent shares soaring.
With the economic outlook in 2H ’20 remaining highly uncertain, several companies took advantage of still functioning capital markets to bolster their balance sheets. We would be remiss, however, if we neglected to first acknowledge a company actually buying shares in the current environment. A10 Networks (ATEN) repurchased 2.2 million shares from its founder and former President and CEO, Lee Chen, at a price of $6.00 per share, representing an 8% discount to the close price prior to the transaction. A10 Networks also canceled Mr. Chen’s outstanding option to purchase 282,500 shares at a price of $5.52 per share in exchange for a cash payment of $135,600, which was also calculated using a share price of $6.00. Fastly (FSLY), which has been a beneficiary of the COVID-19 disruption thus far, priced an offering of 6.0 million shares of its Class A common stock at $41.50 per share, a 6% premium to the close price prior to the announced offering. RealPage (RP) priced both a common stock offering of approximately 5.1 million shares at $59.00 per share and an offering of $300.0 million aggregate principal amount of 1.50% convertible senior notes due 2025 with an initial conversion price of $76.70. Model N (MODN) priced an offering of $150.0 million aggregate principal amount of 2.625% convertible senior notes due 2025 with an initial conversion price of $33.33 per share. Both RealPage and Model N plan to repay outstanding debt on their credit facilities with a portion of the proceeds. Finally, Five9 (FIVN) priced an offering of $650.0 million aggregate principal amount of 0.50% convertible senior notes due 2025 with an initial conversion price of $134.34. The company plans to utilize $181.0 million of the proceeds, as well as the issuance of approximately 2.7 million shares, to repurchase or exchange $181.0 million aggregate principal amount of its outstanding 0.125% convertible senior notes due 2023.
Earnings Releases
Agilysys Fiscal 2020 Fourth Quarter Revenue Rises 8% Despite Impact from COVID-19
Agilysys (AGYS) reported Q4 ’20 profitability ahead of expectations but guided Q1 below consensus.
Net revenue was $39.7 million (+8.3% Y/Y), approximately in line with consensus of $39.8 million. Adjusted EBITDA was $3.6 million (9.0% margin), exceeding consensus of $1.5 million. Non-GAAP EPS of $0.05 beat consensus of $(0.02).
Key metrics: added 17 new customers and 17 new properties in the quarter; serviced 274,400 rooms (+1% Y/Y) and 62,100 terminal end points (+16% Y/Y) at quarter-end; customer retention rate was over 95% in FY ‘20.
The quarter started on a high note but everything changed in March as the hospitality industry virtually shut down.
Sales during April and May have approximated 60% of the average level seen in the past four quarters at the comparable time during those quarters.
One-time concessions provided to customers and short-term declines in sales and business activity are expected to weigh on Q1 results with a lingering impact over the remainder of the year.
Q1 guidance for a 35% decline in revenue, implying approximately $25.0 million in revenue, and breakeven adjusted EBITDA was short of Street expectations for revenue of $33.5 million and adjusted EBITDA of $1.7 million.
Due to the COVID-19 pandemic, management refrained from providing FY ’21 guidance.
Intuit (INTU) reported Q3 ’20 results at the high-end of the pre-announced ranges provided on May 7, 2020.
Revenue of $3.002 billion (-8.3% Y/Y) was at the high-end of the company’s pre-announced range of $2.990-$3.000 billion. Non-GAAP operating income was $1.539 billion (51.3% margin), also near the high-end of the pre-announced range of $1.530-$1.540 billion. Non-GAAP EPS of $4.49 was consistent with the pre-announced range of $4.46-$4.49.
The extension of the IRS tax filing deadline to July 15 shifted millions of filings to later in the season, and local shelter-in-place directives negatively impacted performance beginning in mid-March, resulting in the revenue decline during the quarter.
Intuit’s data shows that the majority of higher-value customers with the most complex results and those with a balance due have yet to file, leaving the company on track heading into the last two months of the tax season.
QuickBooks Online new customer acquisition in the latter half of Q3 decelerated approximately 15 points versus the first half and retention declined two points Y/Y as many small businesses closed or scaled back their operations.
Thus far in May, Intuit has seen stabilization on a number of fronts, including charge volumes, time tracking in TSheets, new customers acquisition and retention.
Management previously withdrew its FY ’20 guidance in conjunction with the Q3 pre-announcement.
Palo Alto Networks Reports Fiscal Third Quarter 2020 Financial Results
Palo Alto Networks (PANW) reported Q3 ’20 results above expectations and guided Q4 ahead of consensus.
Revenue of $869.4 million (+19.7% Y/Y) exceeded guidance for $835.0-$850.0 million and consensus of $831.1 million. Non-GAAP operating income of $142.9 million (16.4% margin) exceeded consensus of $112.8 million. Non-GAAP EPS of $1.17 beat guidance for $0.96-$0.98 and consensus of $0.94.
Key metrics: billings of $1.015 billion (+23.5% Y/Y); next-generation security (NGS) billings remain on track to end the year at over $800 million; NGS ARR was approximately $550 million in Q3; added approximately 2,500 new customers.
Despite the impact of COVID-19-related shutdowns in the latter half of the quarter, Q3 was the second highest billings quarter in the company’s history as firewall and platform billings improved to above-market rates, Prisma Cloud had another record quarter and exceeded plan, and Cortex continued to gain recognition.
The company has launched Palo Alto Networks Financial Services LLC (PANFS), a financing company offering flexible financial solutions for Palo Alto’s products and services to enterprise customers seeking large, multi-year engagements.
The first phase of integration between Prisma Access and recently acquired CloudGenix is expected to be completed by the end of this calendar year.
Management expects the pandemic shock to last 12-18 months before customers return to a new normal and thus anticipates a bumpy ride for enterprises and the cyber security industry over the next three to nine months.
Q4 guidance for revenue of $915.0-$925.0 million and non-GAAP EPS of $1.37-$1.40 compared favorably with Street expectations for $915.9 million in revenue and $1.31 in non-GAAP EPS.
Splunk Inc. Announces Fiscal First Quarter 2021 Financial Results
Splunk (SPLK) reported mixed Q1 ’21 results and guided Q2 below Street expectations.
Revenues of $434.1 million (+2.2% Y/Y) were short of guidance for approximately $450.0 million and consensus of $442.5 million. Non-GAAP operating income of $(111.1) million (-25.6% margin) was ahead of the Street’s $(114.5) million and generally consistent with guidance for a (25.0)% margin. Non-GAAP EPS of $(0.56) beat consensus by a penny.
Key metrics: ARR of $1.775 billion (+52% Y/Y); cloud was 44% of total software bookings; closed 81 deals in excess of $1 million in total contract value; total RPO was $1.72 billion (+44% Y/Y).
Splunk’s transition to the cloud accelerated ahead of expectations with Q1 marking the first quarter in which the sales force was fully shifted from a total contract value sales motion to a more subscription-oriented annual contract value focus.
Amidst the COVID-19 pandemic, signed contracts tended to be shorter in duration and corresponded with lower RPO growth, but growth was actually higher than seen in the past four quarters on an ACV basis.
Q2 guidance for revenue of approximately $520.0 million and a non-GAAP operating margin of (15.0)%-(10.0)%, which implies non-GAAP operating income of $(78.0)-$(52.0) million, was below consensus of $548.5 million in revenue and $(48.6) million in non-GAAP operating income.
Management withdrew its prior guidance for FY ’21 but indicated that confidence remains high in achieving the mid-40% ARR growth target contemplated for the year and generating operating cash flow consistent with last year.
Notable News
A10 Networks Enters into a Common Stock Repurchase and Option Exchange Agreement with Lee Chen
In an 8-K filing, A10 Networks (ATEN) disclosed that the company repurchased 2.2 million shares of its common stock from its founder and former President and CEO, Lee Chen, at $6.00 per share, or an aggregate purchase price of $13.2 million.
The company has also cancelled Mr. Chen’s outstanding option to purchase 282,500 shares at a price of $5.52 per share in exchange for a cash payment of $135,600.00, which was calculated using a per share price of $6.00.
As part of the agreement between the parties, Mr. Chen will not sell or transfer any A10 securities for 90 days and will vote his shares according to the recommendations of the company’s Board of Directors for a period of 180 days.
The closing price prior to the repurchase was $6.55, and Mr. Chen now holds approximately 9.9% of outstanding shares.
Fastly Prices Follow-on Public Offering
Fastly (FSLY) priced a follow-on offering of 6.0 million shares of its Class A common stock at a price to the public of $41.50 per share, representing a 6.3% premium to the close price prior to disclosure of the planned offering.
The company has also granted the underwriters a 30-day option to purchase up to 900,000 additional shares.
Five9 Announces Pricing of $650 Million Convertible Notes Offering
Five9 (FIVN) priced an offering of $650.0 million aggregate principal amount of 0.500% convertible senior notes due 2025 with an initial conversion price of $134.34, representing a 29.6% premium to the close price prior to the announced offering.
The company has also granted the initial purchasers of the notes a 13-day option to purchase up to an additional $97.5 million aggregate principal amount of the notes.
Assuming no exercise of the initial purchasers’ option, Five9 anticipates net proceeds of $633.8 million, of which $181.0 million (along with the issuance of 2,723,582 shares) will be used to repurchase or exchange $181.0 million aggregate principal amount of its outstanding 0.125% convertible senior notes due 2023; $78.7 million will be used to pay the cost of capped call transactions; and the remainder will be used for working capital and other general corporate purposes.
Model N Prices Offering of $150.0 Million of 2.625% Convertible Senior Notes Due 2025
Model N (MODN) priced an offering of $150.0 million aggregate principal amount of 2.625% convertible senior notes due 2025 with an initial conversion price of $33.33 per share, representing a 4.0% premium to the close price prior to the announcement of the planned offering.
The company has also granted the initial purchasers of the notes an option to purchase up to an additional $22.5 million aggregate principal amount of notes.
Approximately $40.0 million of the net proceeds will be used to repay all outstanding debt under Model N’s credit facility and the remainder will be used for general corporate purposes.
RealPage Prices Offerings of Common Stock and Convertible Senior Notes
RealPage (RP) priced an offering of 5,084,746 shares of its common stock at a price to the public of $59.00 per share, representing a 9.4% discount to the close price prior to the announcement of the planned offering.
The company also priced an offering of $300.0 million aggregate principal amount of 1.50% convertible senior notes due 2025 with an initial conversion price of $76.70 per share, a 17.8% premium to the close price prior to the announced offering.
RealPage has granted the underwriters a 30-day option to purchase up to an additional 762,711 shares of common stock and a 13-day option to purchase up to an additional $45.0 million of notes.
Assuming full exercise by the underwriters of their options, gross proceeds are expected to be $690.0 million, which the company plans to put towards the repayment of indebtedness outstanding under its revolving credit facility with any remaining proceeds used for general corporate purposes.
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).