K. Liu's Week in Review
Our week began with news of QAD’s (QADA) pending sale to private equity firm Thoma Bravo for $2 billion. Full details are in our report, “Thoma Bravo to Acquire QAD for $87.50 Per Share in Cash,” but the highlights include a purchase price representing a 20% premium to the last closing price of the Class A shares and a valuation of 5.9x revenue on a TTM basis. Elsewhere in our coverage universe, CTG (CTG) appointed Katie Stein, Chief Strategy Officer and Global Business Leader of Enterprise Services at Genpact, to its Board of Directors. The appointment fills a vacancy created by the retirement of Owen Sullivan and adds a board member with significant experience in the IT Services industry and in mergers and acquisitions. Also relevant to CTG, ASGN (ASGN) agreed to divest Oxford Global Resources, which offers on-demand consulting talent for niche commercial IT, healthcare, life sciences and engineering clients, to an affiliate of H.I.G. Capital for $525 million in cash. The transaction values Oxford at TTM EV/Sales and EV/EBITDA multiples of 1.2x and 11.2x, respectively. Oxford’s business has begun to rebound from the effects of the pandemic and generates an adjusted EBITDA margin just north of 10%. We believe the deal is notable given private equity interest in the industry and serves as a signpost for where CTG’s valuation may be headed as management’s efforts to expand its margins bear fruit.
In the online education market, 2U (TWOU) made waves with its plans to acquire most of edX’s assets, including its brand, website and marketplace for $800 million in cash. edX generated close to $85 million in revenue and an operating loss of $(17.4) million during its fiscal year ended June 30, 2020. Per management, edX has since exceeded $100 million in revenue over the past twelve months. The merger brings together two leaders in digital learning that on a combined basis will reach over 50 million learners, serve over 230 universities and corporate partners and offer over 3,500 digital programs on a free-to-degree marketplace. Although additional synergies are likely to be realized over time, the immediate opportunity is an anticipated 10%-15% improvement in marketing efficiencies, equating to $40-$60 million in annual cost savings. That said, the transaction is still expected to be dilutive to adjusted EBITDA in FY ’22 by a low single-digit percentage and to be accretive the following year. 2U plans to fund the deal with cash on hand and proceeds from a new $475 million Term Loan bearing interest at a rate of LIBOR plus 5.75%.
No earnings were on the docket but Qumu (QUMU) pre-announced Q2 ’21 results short of expectations and withdrew its prior guidance for at least 20% revenue growth in FY ‘21. Management attributed the shortfall to a slower than anticipated ramp in sales productivity as well as longer than anticipates sales cycles for deals in flight. Aside from investing further in field enablement and inbound marketing initiatives, the company is also refining its selling strategy and pricing to more effectively land and expand with additional use cases. In lieu of specific revenue targets, management instead guided for SaaS recurring revenue to comprise 60% of sales by the end of next year and to reach 70% by the end of FY ’23. Near-term, Qumu will look to manage its burn rate and expects cash on the balance sheet to trough at approximately $10.0 million versus an expected $22.5 million at the end of Q2.
The final tally for Box’s (BOX) “modified Dutch Auction” tender offer has the company repurchasing over 9.2 million shares, or 5.6% of its outstanding shares, at a price of $25.75 per share for an aggregate cost of $238 million. Box plans to utilize the remaining $262 million originally allocated to the $500 million tender offer for opportunistic share repurchases. Elastic (ESTC) priced an offering of $575 million aggregate principal amount of 4.125% senior notes due 2029, the proceeds of which will be used for general corporate purposes. MongoDB (MDB) priced an upsized offering of 2.5 million shares of its Class A common stock at a price to the public of $365.00 per share, a 4.9% discount to the closing price prior to the offering. The company also plans to use the net proceeds for general corporate purposes. Lastly, Fastly (FSLY) has appointed Ron Kisling as its next Chief Financial Officer, succeeding Adriel Lares, who previously announced he would step down from the role. Mr. Kisling joins the company from Google, where he most recently served as Chief Financial Officer of Fitbit.
Mergers and Acquisitions
2U, Inc. Announces Acquisition of edX Assets
2U (TWOU) has agreed to acquire substantially all of edX’s assets for $800 million in cash.
edX generated revenues of $84.7 million and an operating loss of $(17.4) million in its fiscal year ended June 30, 2020.
On a combined basis, 2U and edX will reach over 50 million learners, serve over 230 partners and offer over 3,500 digital programs on its online education marketplace, and is expected to realize annual marketing cost efficiencies of 10%-15%.
While guidance for FY ’21 was reaffirmed, 2U expects the acquisition to be dilutive to adjusted EBITDA by a low single-digit percentage in FY ’22 and to be accretive to adjusted EBITDA the following year.
The transaction will be funded with cash on hand, including the proceeds from a recently funded $475 million senior secured term loan, which bears interest at a rate of adjusted LIBOR plus 5.75%.
2U also reaffirmed its prior Q1 ’21 guidance.
QAD Inc. to be Acquired by Thoma Bravo for $2 Billion
QAD (QADA) has agreed to be acquired by Thoma Bravo for $87.50 per share of Class A or Class B common stock in cash, representing a total equity value of $2 billion.
The purchase price represents a 20% premium to the last closing price of the Class A shares and values QADA at TTM EV/Sales and EV/EBITDA multiples of 5.9x and 56x, respectively.
Zoom Video Communications (ZM) has agreed to acquire Karlsruhe Information Technology Solutions – Kites, a startup focused on developing machine translation solutions.
Zoom plans to leverage machine translation solutions to provide multi-language translation capabilities for its users, thereby improving meeting productivity and efficiency.
Earnings Releases
Qumu Reports Preliminary Second Quarter 2021 Financial Results and Updates 2021 Business Outlook
Qumu (QUMU) pre-announced Q2 ’21 results below expectations and withdrew its prior FY ’21 revenue guidance.
The company expects Q2 revenue of $5.7-$5.9 million, below consensus of $6.6 million, and adjusted EBITDA of $(5.1)-$(4.8) million versus consensus of $(4.1) million.
Subscription ARR is expected to range from $12.0-$12.2 million versus $9.7 million a year ago and $11.9 million in Q1.
Management attributed the shortfall in results to a slower than anticipated ramp in sales productivity as well as longer than anticipated sales cycles.
To address the challenges, management has refined its selling strategy and pricing to clearly define how Qumu lands more customers and expands with additional use cases, invested further in field enablement and inbound marketing initiatives, and will be activating a channel alliance and partnership effort.
Prior guidance calling for revenue growth of at least 20% in FY ’21 was withdrawn, and management instead put forth expectations for SaaS recurring revenue to comprise 60% of revenue by the end of FY ’22 and reach 70% by FY ’23.
Cash on the balance sheet is expected to trough at approximately $10.0 million versus $22.5 million at the end of Q2.
Notable News
Box, Inc. Announces Final Results of Modified Dutch Auction Tender Offer
Box (BOX) has accepted 9,248,694 shares, or 5.6% of outstanding shares, for repurchase through its “modified Dutch Auction” tender offer at a price of $25.75 per share.
The unused portion of the $500 million allocated to the tender offer will be put towards opportunistic share repurchases.
CTG Appoints Industry Executive Katie Stein to Board of Directors
CTG (CTG) has appointed Katie Stein to its Board of Directors, filling the vacancy created by Owen Sullivan’s retirement.
Ms. Stein is Chief Strategy Officer and Global Business Leader of Enterprise Services at Genpact and brings significant experience in mergers and acquisitions to CTG’s Board.
Elastic Announces Upsizing and Pricing of $575 Million of Senior Unsecured Notes Due 2029
Elastic (ESTC) priced an offering of $575 million in aggregate principal amount of 4.125% senior notes due 2029, an increase from initial plans to offer $500 million of notes.
Net proceeds from the offering will be used for general corporate purposes.
Fastly Appoints Ron Kisling as CFO
Fastly (FSLY) has appointed Ron Kisling as Chief Financial Officer, succeeding Adriel Lares, who previously announced he would step down from the role.
Mr. Kisling joins the company from Google, where he most recently served as Chief Financial Officer of Fitbit.
MongoDB Announces Pricing of Upsized Public Offering of Class A Common Stock
MongoDB (MDB) priced an underwritten public offering of 2.5 million shares of its Class A common stock at a price to the public of $365.00 per share, a 4.9% discount to the closing price prior to disclosure of the planned offering.
The offering was upsized from initial plans to offer 2.3 million shares, and the company plans to use the estimated net proceeds of $889 million for general corporate purposes.
Disclosure(s):
K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.
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 (BOX).