SaaS Software Cloud Update – February 2017

Navidar | March 6, 2017

Public Markets and M&A Activity

SaaS Software Cloud stocks advanced 3% in February, compared with the DJIA’s +5%, the NASDAQ’s +4%, and the Russell 2000’s +2%. In general, there was continued strength in ecommerce, HR/payroll, banking, and customer support. And there was weakness in brick-and-mortar retail as well as perceived/actual shortcomings in end markets that the new Trump administration is focused on (e.g., healthcare and trade). With a number of companies reporting 4Q16 results this month, more than 20 stocks meaningfully under or outperformed. Following is a summary of the company-specific issues related to these stocks as well as their M&A activity.

Shopify (NYSE:SHOP +17%) – the ecommerce platform provider reported strong 4Q16 results on 2/15/17, beating and raising expectations, driven by growth in social channels, mobile traffic to merchants’ stores, price increases, and a move to variable pricing for Shopify Plus which targets enterprises. Subscription solutions advanced 63% YOY, Merchant solutions grew 108% YOY, and Payments increased to $2.2B, representing about 39% of GMV. SHOP is experiencing strength at the low-end of the market while gaining traction up market with Shopify Plus.

Q2 Holdings (NYSE:QTWO +13%) – the e-banking solutions provider that targets 13,500 regional and community banks with $50B or less of assets reported strong 4Q16 results on 2/15/17. The strength was driven in part by an improved budget environment for banks. Revenue advanced 39% YOY, to $42.2M and adjusted EBITDA was $1.3M (3.1% margin). QTWO closed two Tier 1 deals (banks with more than $5B in AUM) that typically take over a year to fully come on line, driving more than 90% visibility for 2017 revenue which was guided to advance 28% with adjusted EBITDA margins improving to about +3% from -3% in 2016. With 369 live customers and only about half of their depositors included in its base of 8.6M registered users, there is a natural lift in revenue as more users adopt e-banking. Also, management expects to generate positive free cash flow in 2017.

Zendesk (NYSE:ZEN +14%) – reported strong 4Q16 results on 2/8/17 despite announcing new leadership, a sales reorganization, and a brand rework in 2016. Billings growth accelerated to 40% from 37% the prior quarter. Zen targets the $9B+ customer support software market, which is modernizing given the evolution of customer touchpoints. Within this market, it focuses more on enterprises.

Tableau (NYSE:DATA +10%) – reported unexpectedly strong 4Q16 results on 2/2/17 with revenue advanced 24% YOY, well above consensus. There was a lot of pessimism entering the report due to disappointing 3Q16 results, new management, premium pricing, a model shift to ratable billing from perpetual (contributing to an anemic 2017 revenue growth guidance of 5%), and concerns about commoditization of data discovery and visualization technology. The strength was driven by international growth and large deals, including a multi-year contract for 50k users, 589 deals greater than $100k (up 42% YOY), and closing some deals that had slipped in 3Q16.

SPS Commerce (NASDAQ:SPSC -20%) – reported disappointing 4Q16 results on 2/7/17 and lowered 2017 revenue growth guidance to the mid-teens. While analytics and international (led by the late-2014 Leadtec acquisition) are performing well, the shift to ecommerce is continuing to cause brick-and-mortar retailers to go out of business and re-platform their technology, resulting in longer SPSC sales cycles. The company has lowered expectations in three of the past five quarters, but had been (and still is, in our opinion, outside of industry headwinds), one of the best operating public SaaS companies. SPSC is also restructuring its sales organization.

ChannelAdvisor (NYSE:ECOM -22%) – the ecommerce integration provider (that works with marketplaces such as Amazon, Google Shopping, eBay, and Walmart) reported disappointing 4Q16 results on 2/9/17 as revenue was below consensus and management lowered guidance. Constant-currency growth of 11% decelerated from last quarter’s 18% due in part to a slowdown in Amazon-related GMV growth during the holidays due to their aggressive promotions for first-party products and the weak retail environment pressured digital marketing. GMV was $8.1B in 2016, up 19% YOY.

Workiva (NYSE:WK +19%) – while 4Q16 results, reported 2/23/17, were ahead of consensus and much improved from 3Q16’s shortfall, management lowered 2017 expectations a bit. Investors are adjusting to a reduced (to 15%) growth story as WK is slowing its pace of hiring. Also, enterprise sales cycles are elongating and the company modified its sales model to an account coverage system so it can better sell non-SEC products. WK is not a one-trick pony with SEC filing as new bookings are split about even between SEC and non-SEC use cases. Plus, 480 customers use its SOX compliance solution, up from 100 customers in 1Q16. Furthermore, WK reported strong 4Q16 free cash flow, which had been an investor concern in the past.

Ellie Mae (NYSE:ELLI +16%) – the SaaS mortgage-origination provider reported surprisingly good 4Q16 results on 2/9/17 that exceeded consensus. There was a lot of pessimism entering the report because of the rising interest rate environment and the seasonal weakness of fourth-quarter mortgage originations. Revenue advanced 48% YOY, to $96.3M, with an adjusted EBITDA margin of 30.6%. 2017 growth guidance of ~21% was in line with expectations and management plans to achieve a 33.3% adjusted EBITDA margin.

AmberRoad (NYSE:AMBR -15%) – the SaaS trade management provider reported moderately disappointing 4Q16 results on 2/16/17. While 4Q16 results were mostly in-line with consensus, it lost two clients due to acquisition and correspondently lowered 2017 revenue expectations a bit, pointing to 10-14% growth. Management said that its pipeline remains strong, but there remains uncertainty around the impact on sales cycles given the Trump administration’s perceived views on trade.

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