SaaS Software Cloud Update – March 2017

Public Markets and M&A Activity

SaaS Software Cloud stocks advanced 1.2% in March and 7.7% in the first quarter, compared with the NASDAQ’s +1.5% and 9.8%, respectively, the Russell 2000’s -0.2% and 2.2%, and the DJIA’s -.07% and 4.6%. Following is a summary of the company-specific issues related to stocks that meaningfully out- or under-performed as well as relevant M&A activity.

Shopify (NYSE:SHOP +15% in March) – the stock was up 15% in March and an impressive 59% in the first quarter. We attribute the strength to recognition of SHOP’s dominant position among its digital-commerce-platform peers. The consolidation in the space with salesforce acquiring DemandWare (June 2015 for $2.8B) points to a floor valuation as well as the potential for SHOP to be pursued, in our opinion. In 2016, about 400K merchants, mostly entrepreneurial and SMBs, but increasingly larger businesses, transacted $15B-plus of gross merchandise value on the SHOP digital-commerce platform.

Veeva (NYSE:VEEV +17%) – reported strong fourth-quarter (ended January) results on 2/28 and raised expectations, fueling the stock’s strength in March. Revenue advanced 31%, to $150.2M, while billings grew 34%, to $226.7M. VEEV added 115 enterprise content management, Vault, customers (up from 84 in the year-ago quarter) and 47 CRM (up from 16). With a historical focus on life sciences, VEEV is beginning to expand into new verticals such as chemicals, CPG, and cosmetics. Its technology is built on salesforce’s platform and the relationship is growing as VEEV recently incorporated support and marketing functionality.

Tableau (NYSE:DATA -6%) – competition concerns pressured the stock, in our opinion. Large SaaS companies’ initiatives are fueling these worries. For example, salesfore.com developed “Einstein”, Workday is launching “Prism” which incorporates its Platfora acquisition (in July 2016), ServiceNow is leveraging Microsoft’s Power BI, Google is investing in Data Studio, and Amazon has AWS QuickSights. New entrants such as Domo and Birst are also gaining traction.

Intuit (NASDAQ:INTU -8%) – while Quickbooks online continues to perform well, as tax seasons winds down, there are concerns about how TurboTax numbers will come in. Stats fueling these worries include do-it-yourself e-file receipts declining year-over-year, which could be due to changes in IRS processes causing more paper filings this year, in our opinion.

Upland (NASDAQ:UPLD +32%) – reported healthy fourth-quarter results on 3/23. The company is delivering on the EBITDA-margin expansion it promised. It is now guiding to an EBITDA margin of about 29% in 2017 with a long-term target of 35%-plus. The top-line increased 10%, to $19.4M, and 2017 is guided to advance about 13%, to $82.5-86.5M. Subscription represented 88% of total, up from 84% in 2015. Also, net dollar retention improved to 95% in 2016 from 90% in 2015. UPLD added 106 new customers, including seven major accounts, and expanded its relationship with 91 clients.

Callidus Cloud (NASDAQ:CALD +13%) – we think the strength was driven by optimism for first quarter results (reporting 5/4) due in part to healthy partner relationships with big players such as SAP, salesforce.com, and Accenture as well as continued momentum after reporting strong 4Q16 results on 2/7. The SaaS sales performance management provider’s major modules include incentive compensation, CPQ (configure, price, quote), and CLM (contract lifecycle management).

Envestnet (NYSE:ENV -16%) – reported 4Q16 results on 3/23, in line with its 2/22 pre-announcement. While equity markets were strong and asset/account-growth metrics performed well, fees were lower than expected and management reduced 2017 guidance for conversions and synergies from the Yodlee acquisition (~$590 on 11/19/15). Fees are being pressured in part from a shift in its assets under management (AUM) to passive strategies from actively-managed strategies. 2017 revenue is guided to advance about 13% with adjusted EBITDA up about 15%. ENV provides digital wealth management solutions to financial advisors. It has 54K advisor clients, strong custodial relationships, and empowers the movement from commission to fee-based business as well as financial-services data analytics.

Appfolio (NASDAQ:APPF +10%) – reported strong 4Q16 results on 2/27, exceeding consensus and slightly increasing 2017 expectations. Initial 2017 revenue guidance is $136-138M, representing about 30% growth. APPF provides vertical SaaS solutions primarily to the rental property and legal verticals. It has 10K property management clients with 2.7M units and is experiencing success moving upmarket to larger SMBs.

Paylocity (NASDAQ:PCTY +10%) – strength was driven by the failed repeal of the Affordable Care Act (ACA), in our opinion. PCTY’s ACA modules represent about 8% of revenue. The company provides payroll and talent management solutions for small and midsize businesses.

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