K. Liu's Week in Review
The United States Postal Service (USPS) unveiled its ten-year plan, “Delivering For America,” to achieve financial sustainability and service excellence. Consistent with postal reform efforts in recent years, much of the plan hinges upon legislative actions and regulatory changes, including the elimination of mandates requiring the USPS to prefund retiree health benefits, full integration of Postal Service-specific health plans with Medicare, and increased pricing flexibility for market dominant products i.e. traditional mail. From a revenue standpoint, the USPS continues to highlight the importance of adapting its operations to ride the coattails of e-commerce, particularly in light of ongoing declines in first class mail volumes. In this regard, the plan notes that the USPS’ package volume growth flattened prior to the pandemic and trailed the market’s 29% growth rate by ten points last year despite a surge in package volumes and revenues. To increase its relevancy in the shipping market, the Postal Service plans to expand its seven-day package delivery reach and to add same-day, next-day and 2- to 3-day options to its core package products. Key initiatives to ensure the organization can reliably and cost-effectively meet these obligations include a revamping of the Postal Service’s processing and transportation networks, providing customers with more direct access to postal distribution hubs for faster deliveries, and shifting a greater percentage of First-Class Package volumes to the ground network.
As for the impact of the plan on Stamps.com (STMP), our high-level take is that the more options available to shippers and the more competitive the market, the better the opportunity for the company to monetize shipping volumes via carrier partnerships. That said, the proposed initiatives appear to be geared towards capturing volumes from large retailers with a national presence as well as high volume shippers with a significant local consumer base, and thus have less direct bearing on the small and mid-sized merchants typically targeted by Stamps.com. Of more relevance to the stock in the near-term was the USPS’ monthly data for February, which revealed an increase of nearly 30% Y/Y in PC Postage revenue. The growth almost matched the 31% Y/Y increase in January and did not exhibit the pronounced deceleration we had anticipated given the timing of stimulus checks and inclement weather in the latter half of the month. Considering the quarter-to-date growth, any normal level of seasonality in March should enable Stamps.com to meet or exceed our forecasts for Q1.
This week also saw us increase our price targets for CTG (CTG) and QAD (QADA). For the former, we believe the financial targets set forth in management’s 2023 Vision indicate CTG’s transformation to a solutions-based business is ahead of plan. For the latter, QAD reported fiscal Q4 ’21 results ahead of expectations and also provided an updated long-term target model that raised the bar relative to the targets laid out pre-pandemic. Our reports, “2023 Vision Highlights CTG’s Accelerating Transformation; Raising Price Target to $11.00” and “Solid End to FY ’21 Paves Way for Accelerating Growth and Margin Expansion,” provide further details.
Outside of our coverage universe, rumor has it that Box (BOX) is exploring a potential sale amid pressure from Starboard Value. While we have no insight into whether a deal will ultimately be reached, we would be remiss if we failed to note that recent transactions involving private equity have been consummated at multiples above where BOX currently trades. For instance, Vista Equity’s upwardly revised offer for Pluralsight (PS) values the company at TTM and forward EV/Sales multiples of 9.9x and 8.7x, respectively, while Thoma Bravo’s pending acquisitions of RealPage (RP) and Talend (TLND) affords those companies TTM EV/Sales multiples of 9.1x and 7.3x, respectively, and forward EV/Sales multiples of 8.0x and 6.4x. Moreover, Box was one of the 14 companies highlighted in a leaked presentation of potential acquisition targets for Salesforce (CRM) back in 2016, two of which Salesforce has since acquired. In our opinion, Box could very well attract the interest of a strategic acquirer given that its enterprise cloud content management platform sits at the nexus of several significant addressable market opportunities, including collaboration, e-signature, security and workflow.
Mergers and Acquisitions
Exclusive: Box Explores Sale Amid Pressure from Starboard – Sources
Reuters reported that Box (BOX) has discussed a potential deal with interested buyers amid pressure from Starboard Value to boost value for shareholders.
Interested parties include other companies and private equity firms, although no definitive agreement has been reached.
RingCentral (RNG) has acquired the technology and engineering team at Kindite, a developer of cryptographic technologies.
The acquired technology will bring end-to-end encryption to RingCentral’s global communications platform.
ServiceNow to Acquire Intellibot to Help Businesses Automate Any Workflow
ServiceNow (NOW) has agreed to acquire Intellibot, which offers a robotic process automation platform.
Intellibot’s capabilities will be natively built into the Now Platform, enabling customers to automate repetitive tasks and more easily integrate with both modern and legacy systems.
The acquisition also supports ServiceNow’s presence in India, where the company plans to develop two new data center facilities by Q1 ’22.
Earnings Releases
Adobe Raises Annual Targets on Strong Q1 Results
Adobe (ADBE) reported Q1 ’21 results above expectations and raised its outlook for FY ’21.
Revenue of $3.905 billion (+26.3% Y/Y) exceeded guidance for $3.750 billion and consensus of $3.760 billion. Non-GAAP operating income was $1.829 billion (46.8% margin), above consensus of $1.647 billion. Non-GAAP EPS of $3.14 beat guidance for $2.78 and the Street’s $2.79.
Key metrics: added net new Digital Media ARR of $435 million, above guidance for $410 million; Digital Media ARR totaled $10.69 billion, including Creative ARR of $9.12 billion and Document Cloud ARR of $1.57 billion.
Q1 saw continued recovery in the business environment both in the U.S. and internationally, particularly with small and medium businesses.
Strong performance for Creative Cloud was driven by Adobe’s student offering, momentum in its Teams offering, growth in core categories and creative mobile applications, and rising demand for cloud services like Adobe Stock.
Creative Cloud remains a market leader across core categories like imaging, design, video and illustration, and that leadership is being expanded into emerging media types such as 3D and augmented reality.
Document Cloud performance was stellar with strong Acrobat growth across all channels and momentum for Adobe Sign.
Q2 guidance for revenue of ~$3.72 billion and non-GAAP EPS of ~$2.81 was ahead of Street expectations for revenue of $3.70 billion and non-GAAP EPS of $2.70.
Management raised its FY ’21 revenue and non-GAAP EPS guidance from ~$15.15 billion and ~$11.20, respectively, to ~$15.45 billion and ~$11.85.
Progress Announces First Quarter 2021 Financial Results
Progress (PRGS) reported Q1 ’21 results above expectations and raised its outlook for FY ‘21.
Non-GAAP revenue of $131.8 million (+15.8% Y/Y) was above guidance for $119.0-$123.0 million and consensus of $121.4 million. Non-GAAP operating income was $56.7 million (43.0% margin), above consensus of $44.7 million. Non-GAAP EPS of $0.95 beat guidance for $0.72-$0.76 and the Street’s $0.75.
Key metrics: annualized recurring revenue (ARR) of $432 million (+22% Y/Y).
OpenEdge was the single largest contributor to the upside in Q1 driven by strong execution by the direct sales team and increased strength from the company’s ISV partners.
The integration of Chef is ahead of plan, reflecting new logo wins and higher net retention than originally anticipated.
Management continues to evaluate potential deals across the entire DevOps lifecycle, spanning application development, deployment and operation.
Q2 guidance for non-GAAP revenue of $119.0-$123.0 million and non-GAAP EPS of $0.72-$0.74 fell short of Street expectations for $124.0 million in revenue and $0.78 in non-GAAP EPS.
Management raised its FY ’21 non-GAAP revenue and EPS guidance from $513.0-$521.0 million and $3.22-$3.28, respectively, to $519.0-$527.0 million and $3.38-$3.42.
Notable News
Adobe Announces Executive Retirement
Adobe’s (ADBE) CFO, John Morphy, is retiring to spend more time with friends and family and to focus on philanthropy.
The company plans to undertake a search for his successor and will evaluate both internal and external candidates.
Qualys Announces Resignation of CEO Philippe Courtot
Qualys (QLYS) announced the resignation of Philippe Courtot, Chairman of the Board and Chief Executive Officer, from his role as CEO for health reasons.
Mr. Courtot previously took a leave of absence last month for health issues unrelated to COVID-19.
Sumedh Thakar, Qualys’ President and Chief Product Officer, was named interim CEO and appointed to the Board following Mr. Courtot’s leave of absence and remains in those positions at present.
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, Inc. (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 Stamps.com (STMP).