SaaS Software Cloud Update – June 2017

Navidar | July 18, 2017

Public Markets and M&A Activity

SaaS Software Cloud stocks advanced 0.3% in June and 19.7% for the first half of 2017, compared with the NASDAQ’s -0.9% and +14.1%, respectively, the Russell 2000’s +3.5% and 4.7%, and the DJIA’s +1.6% and 8.0%. 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.

Oracle (NYSE: ORCL +10.5% in June) – the enterprise software and hardware titan demonstrated solid progress with its cloud transition during fiscal 4Q17 results, reported on June 22nd, driven by a string of $1B-plus SaaS company acquisitions over the past several years, including NetSuite (11/2016 for $9.3B), Datalogix (2/2015 for $1.2B), Responsys (12/2013 for $1.5B), Taleo (2/2012 for $1.9B), and RightNow (1/2012 for $1.5B). The company is adding new cloud customers, not just transitioning legacy clients as 65% of SaaS business in the quarter came from new customers and 35% from its existing base. By adding more than $2.05B in annualized recurring revenue in FY2018, we expect cloud revenue to surpass new license revenue by the end of 2018. Furthermore, ORCL reiterated its commitment to double-digit EPS growth and improving SaaS gross margin to 80% from 54% this quarter.

Alphabet (NASDAQ: GOOGL -5.8%) – the internet search conglomerate’s stock was under pressure due to a $2.7B antitrust fine by the European Union, which accused Google of manipulating search results to prioritize its own shopping comparison solution. With a $659B market cap, the dollar amount of the fine is negligible but we think it could be a precursor for additional fines in other geographies.

Okta (NASDAQ:OKTA -12.6%) – we suspect that a supply-demand imbalance related to the IPO share lockup expiration, a lofty valuation (over 9x CY2018 EV/revenue), and lack of profitability (albeit improving quickly) contributed to the stock pressure in June. This more than offset the identity management SaaS provider’s strong fiscal first quarter results, ended April and reported on 6/7, which exceeded revenue and profitability expectations. Subscription revenue grew 75%, dollar-based net retention increased three percentage points YOY to 123%, and OKTA now has 3,350 clients (up 36% YOY) including 493 (up 64% YOY) with ACV over $100,000.

Cloudera (NYSE: CLDR -22.8%) – reported disappointing results in its first report since going public and the stock unsurprisingly followed suit. While revenue and EPS were above expectations, billings fell short ($75M versus the Street mean of $81M) and contract duration declined to 18 months from 20 months.

Covisint Corporation (NASDAQ:COVS +19.5%) – announced on 6/5 that it is being acquired by Open Text (NASDAQ: OTEX) for $102.46M (or $2.45 per share), resulting in a 2017 revenue multiple of about 1.5x. The deal deepens OTEX’s IoT (internet of things), EIM (enterprise identity management), and GSX (global service exchange) solutions. It also serves to deepen the company’s presence in the auto and healthcare industries. COVS enables over 3,000 companies in various industries to identify, authenticate, and connect users, devices, and applications, supporting $4B-plus in ecommerce transactions annually. The deal is expected to close in calendar third quarter.

Tata Technologies, subsidiary of Tata Motors (NYSE:TTM -10.4%) – private-equity firm Warburg Pincus affiliate is investing $360M for a 43% stake in Tata Technologies. The Tata Motors subsidiary provides engineering, design, and product lifecycle management (PLM) solutions to manufacturers and suppliers in the automotive, aerospace, and engineering sectors.

Coupa (NASDAQ: COUP -18.0%) – the SaaS procurement provider’s stock was under pressure due to a deceleration in billings growth (to 23%) when reporting fiscal first quarter 2018 results on 6/5, though revenue and EPS exceeded consensus. Still, cumulative spend under management grew to $420B as its network now exceeds 3M suppliers and dollar-based expansion improved to 108-110% from 104-107%.

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