SaaS Software Cloud Update – December 2016

Navidar | January 12, 2017

Public Markets

Mid- and large-cap SaaS Software Cloud stocks meaningfully underperformed in December 2016, falling 11%, below the overall SaaS group’s -1%, the NASDAQ’s +1%, and the Russell 2000’s +2%. We attribute the weakness to difficulty closing big deals among sector bellwethers (e.g., Oracle, RedHat, Splunk, and Workday), a strengthening dollar, macroeconomic uncertainty, investors rotating out of the sector, and a valuation reset with rising rates impacting DCFs. Noteworthy stock performance within our select universe of SaaS companies include:

Workday (NYSE:WDAY -22%) – we believe the stock pressure was driven by management’s early-December earnings-call commentary about enterprise deals slipping in November. WDAY cited macro political turmoil: Brexit, President-elect Trump, France, and Italy. It also mentioned a lack of acceleration in financials clients in CY2017 (the lion’s share of business remains human capital management). Shares of fellow SaaS HR/Payroll players Ultimate Software (NASDAQ:ULTI -11%) and Paylocity (NASDAQ:PCTY -9%) were also under pressure.

Amber Road (NYSE:AMBR -22%) – while the global trade management (GTM) automation/workflow software company’s stock declined 22% in December, it still ended 2016 up 78%. We suspect the recent pressure is due to investor concern about sales-cycle disruption given the Trump administration’s anticipated protectionist trade policies.

Cornerstone Ondemand (NASDAQ:CSOD +18%) – in mid-December Bloomberg reported that CSOD, the largest remaining independent talent-management provider, has been approached by potential suitors. Comparable deals include SAP – SuccessFactors (December 2011 for $3.4B) and Oracle – Taleo (February 2012 for $1.9B).

Intralinks (NYSE:IL +21%) – is being acquired by Synchronoss (NASDAQ:SNCR -21%). The $13.00 per share (~$900M) offer results in a trailing EV/Revenue multiple of 2.7x and EV/EBITDA is 39.4x. Another bidder offered $13.50, but has since rescinded. With most of the Fortune 1000 having used SaaS content collaboration for investment-banking data rooms, Synchronoss is looking to build on these enterprise relationships and better leverage its own carrier clients. The deal is expected to close in 1Q17.

Synchronoss Technologies (NASDAQ:SNCR -21%) – we believe the pressure is from Intralinks’ acquisition uncertainty, including a potential bidding war, the decision to make Intralinks’ CEO head of the combined entity, and concerns around the viability of SNCR’s core business. (NASDAQ:WEB +343%) – the SMB-focused do-it-yourself website SaaS company held a successful investor day in mid-December where it highlighted an increasing emphasis on international expansion (75% of websites are outside of US) and value-added services such as digital marketing. It also announced the acquisition of Datatec, a leading provider of web hosting, cloud servers, dedicated servers, email marketing, and domain services. This deal follows WEB’s purchase of Yodle in February 2016 for $200M.

Xactly (NASDAQ:XTLY -22%) – the SaaS incentive compensation provider announced disappointing fiscal third quarter results in early December with billings growth slowing to 20% (from the high 20%s) as two deals slipped into the fourth quarter and it lost two 7-figure ARR clients due to M&A. Also, albeit still 25.5% growth at the midpoint, management lowered calendar 2017 revenue expectations.

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