SaaS Software Cloud Update – January 2017

Public Markets and M&A Activity

After falling 6% in December, mid- and large-cap SaaS Software Cloud stocks meaningfully outperformed in January 2017, increasing 11%, above the overall SaaS group’s +2%, the NASDAQ’s +4%, and the Russell 2000’s 0%. We attribute this strength to optimism heading into fourth-quarter earnings season and an overaction in December to news of sector bellwethers having difficulty closing big deals. Noteworthy stock performance and M&A activity within our select universe of SaaS software cloud companies include:

Privately-held AppDynamics – was acquired by Cisco (NYSE:CSCO +2%) for $3.7B on 1/24/17, a day before its IPO which was expected to price with a valuation around $2B. AppDynamics was widely anticipated to be the first “hot” SaaS IPO of 2017. Its solutions help enterprises (such as salesforce.com) accelerate digital transformations in both cloud and on-premise environments by actively monitoring, analyzing, and optimizing applications. The deal will fold into CSCO’s enterprise IT business unit and augment existing networking infrastructure solutions with software-based analytics. Comparatively, AppDynamic’s top competitor New Relic (NYSE:NEWR +29%) focuses on smaller companies and exclusively cloud environments. Cisco reports 4Q16 results on 2/15/17.

Castlight Health (NYSE:CSLT -37%) – we think that management changes, reduced guidance, and a large all-stock acquisition on 1/4/17 pressured the cloud-based healthcare/benefits provider’s stock. The Jiff acquisition (~$90M price, based on current CSLT price, a 4.7x forward multiple) brings a mobile platform, integration with 50-plus health solutions, and a single access point for employees. Jiff could, in our view, enable CSLT to better target the 4,000 self-insured organizations in the U.S. with more than 2,000 employees it targets. Combined, CSLT serves 240 clients, including 70 of the Fortune 500. CSLT reports 4Q16 results on 2/15/17.

Atlassian (NASDAQ:TEAM +15%) – acquired Trello for $425M (85% cash and 15% stock) on 1/9/17 and reported good calendar 4Q16 results on 1/19/17 with year-over-year (YOY) billings growth accelerating to 41%from 33% last quarter. Trello brings a fast-growing user base of 19M (up 100%-plus YOY) as well as a collaboration solution that features virtual sticky-notes and whiteboards, albeit with a small revenue base (just $4M of revenue contribution in calendar 2Q17 after writing off deferred revenue). The deal, in our view, helps Atlassian expand beyond workflow- and collaboration-tools for developers and IT departments for its 65,000 clients.

Workday (NYSE:WDAY +26%) – the stock’s strength, in our opinion, was driven by news about WDAY inking a deal with WAL-MART. Its 2M+ employees will be using WDAY for human capital management, recruiting, learning, and planning. This announcement makes up for the December sell-off in WDAY’s stock that was driven by management’s prior commentary about deals slipping out of November 2016.

Citrix (NASDAQ:CTXS +2%) – on 1/25/17 the company reported decent 4Q16 results compared with Street consensus (although core revenue year-over-year growth was anemic at just 3-4%), on 1/9/17 it acquired Unidesk, and on 2/1/17 CTXS completed the GoTo spin-off to LogMeIn (NASDAQ:LOGM +12%) for $1.8B.

Unidesk provides an application layering technology that enables companies to package, manage, and deploy Windows applications and desktops in multiple environments, such as the cloud, on-premises, and hybrid. The deal makes it easier for Citrix to help midsize companies transition to a virtual desktop infrastructure (VDI). After integration, partners and customers will be able to more securely deploy and manage apps and desktops through XenApp and XenDesktop. While deal financials were not disclosed, Unidesk had reportedly raised about $36M in funding.

As for the GoTo spin-off, which closed 2/1/17, the deal enables Citrix to focus on its virtualization, networking, and delivery products. GoTo brings a professional meeting platform with advanced features such as conference calls, webinars, and training to LogMeIn’s ad hoc meetings and collaborations solutions. It also boosts LogMeIn’s customer base to 2M.

ServiceNow (NYSE:NOW +22%) – reported strong 4Q16 results on 1/25/17 driven by 46% year-over-year (YOY) growth in billings and strength in its newer IT operations management solution (21% of new business up from 12% last quarter). Also, on 1/18/17, NOW acquired DxContinuum, which provides a machine-learning, predictive analytics solution. After integration is complete, NOW will be able to provide clients with enhanced automation and improved predictability for customer support issues, such as accurately classifying service requests then dynamically routing them to appropriate teams within IT, HR, or customer service as well as calculating associated risks. While deal financial details were not disclosed, DxContinuum had reportedly raised about $2M in funding.

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