SaaS Software Cloud Update – July 2017

Navidar | August 14, 2017

Public Markets and M&A Activity 

The Navidar SaaS Software Cloud index advanced 1.3% in July and 19.6% year to date, compared with the NASDAQ’s +3.4% and +17.9%, respectively, as well as the Russell 2000’s +0.3% and +5.0. Following is a summary of the company-specific issues related to selected stocks in our coverage universe that meaningfully out- or under-performed as well as relevant M&A activity.

ElliMae (NYSE: ELLI -20.6% in July) – investors are digesting a reduced growth profile (from about 25% to less than 20%) for this SaaS provider of mortgage management solutions. ELLI reported disappointing 2Q17 results on 7/27 as revenue was below expectations and management reduced full-year guidance due to lower-than-expected mortgage refinance volumes (down more than 30% this year) and a longer-than-expected ramping of enterprise clients. While we think that the company provides great value to the mortgage industry, its business is arguably overconcentrated on transactional mortgages.

LogMeIn (NASDAQ: LOGM +11.4%) – the SaaS communication and collaboration provider reported strong 2Q17 results on 7/27, outperforming on the top and bottom lines. This was the first complete quarter with GoTo, which was acquired from Citrix for $1.8B. The company benefited from early and higher-than-expected realization of cost synergies (about $90M is expected in the first year).

MuleSoft (NYSE: MULE -12.8%) the API-centric, enterprise middleware solution provider reported mixed 2Q17 results on 7/27. While revenue exceeded expectation, billings growth was a bit light (38% vs. 40%) as some deals slipped out of the quarter. When companies trade at a high valuation (7x 2018 revenue multiple), investors expect perfection. Revenue retention remains high at 116%. Its customer base increased 24% to 1,170 (39 net new adds).

Upland Software (NASDAQ: UPLD +12.1%) on 7/13 acquired Waterfall, a SaaS mobile messaging provider that will merge with UPLD’s Mobile Commons business, for $24.4M. Waterfall is expected to deliver $9M of annual revenue and $4M of EBITDA (44% margin). The deal deepens UPLD’s product suite in the retail industry. This transaction marks UPLD’s third deal in 2017 and adheres to its prudent acquisition strategy, which includes EBITDA accretion and 5-8x EBITDA valuation.

Cornerstone OnDemand (NASDAQ: CSOD +12.8%) the SaaS learning and HR provider’s stock spiked due to take-out speculation as CSOD received a letter from an activist group of investors (RGM Capital, Eminence, and Praesidium) urging it to consider strategic options. They believe that the strategy of pursuing a best-ofbreed solution limits growth potential due to the growing adoption of suite vendors that wrap talent management around payroll solutions. The activist group collectively owns 15% of the company.

Facebook (NASDAQ: FB +12.1) the social platform that connects 2B+ global users to all advertisers reported good 2Q17 results on 7/26 as users, engagement, and advertiser demand remain strong. Ad revenue grew 49% year-over-year (YOY) in constant currencies (CC) and 42% of revenue converted into free cash flow. FB continues to invest in innovation areas, such as augmented reality, virtual reality, video content, Instagram, Messenger, and Whatsapp.

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