SaaS Software Cloud Update – May 2017

Public Markets and M&A Activity

SaaS Software Cloud stocks advanced 4.1% in May, compared with the NASDAQ’s +2.5%, the Russell 2000’s -2.1%, and the DJIA’s +0.3%. 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.

Xactly (NYSE:XTLY +35.3% in May) – the SaaS incentive compensation management provider, on 5/30, announced that it is being acquired by Vista Equity for $550M (or $15.65 per share), resulting in a 2018E EV/revenue multiple of about 4x. The price reflects a premium of about 17% to the 5/26 closing price of $13.40. We suspect that Vista will use XTLY as a platform to bolt on complementary products, similar to the strategy of its larger competitor Callidus (NASDAQ:CALD). The deal is expected to close in 3Q17.

YEXT (NYSE:YEXT -0.7%, up 34% since its 4/3/17 IPO) – the recently public “local data play” has API connections to about 100 cloud partners, such as Apple Maps, Facebook, Google, and Instagram. Its 40,000 business customers use Yext to manage the digital data for 1M locations. The average price per location per year is about $160. YEXT’s solutions simplify the process of updating location data on the Web. 2017 revenue is expected to grow 34% while posting a 10.5% free cash flow margin. We view a risk for the stock to be losing a major API partner, such as Google.

Twilio (NYSE:TWLO -26.4%) – 1Q17 results were disappointing when reported on 5/2 due to less business than expected with Uber, which contributed 12% of revenue, down from 17% in 4Q17. While it is understandable for Uber to begin sharing communications services among multiple vendors, it fuels concerns that TWLO is easy to replace, in our opinion. As a result, the company lowered 2017 guidance for revenue by $9M, to $356-362M (reflecting 28-31% growth), and adjusted operating income by $12.5M, to $26-29M (-8% margin).

Stamps.com (NASDAQ:STMP +29.9%) – reported strong 1Q17 results on 5/3. Besides exceeding expectations and raising guidance, key metrics improved due in part to a growing mix of shipping, in our opinion, which now represents more than 70% of revenue. Total revenue of $105.0M increased 28% year-over-year, operating margin of 47.6% was up 650 basis points, and monthly ARPU of $47.36 increased 16%.

Upland (NASDAQ:UPLD +11.8%) – reported good 1Q17 results on 5/11, exceeding top-line expectations. The company continues to successfully apply its disciplined acquisition and EBITDA-margin-improvement strategy. Revenue advanced 18%, to $20.8M, and adjusted EBITDA of $5.5M was at the high end of guidance. It added 156 new customers during the quarter, including seven major accounts (versus 106 and seven, respectively, last quarter).

Angie’s List (NASDAQ:ANGI +105.0%) – on 5/1 the home service online marketplace announced it is being acquired by HomeAdvisor, a subsidiary of IAC (NASDAQ:IAC), for $586M (or $8.50 per share), resulting in a 2017E revenue multiple of about 2x. The deal is expected to close in early 4Q17.

Athenahealth (NASDAQ:ATHN +36.7%) – the cloud-based electronic health record (EHR) provider’s stock strength, in our opinion, was driven by an active investor, Elliott Management, establishing a 9.2% ownership position in the stock and publicly stating that “there are numerous operational and strategic opportunities to maximize shareholder value.”

Tableau (NYSE:DATA +15.5%) – reported good 1Q17 results on 5/3 driven by progress with its business-model transition to subscriptions, which represented 26% of bookings in the quarter. Revenue was slightly below consensus although within guidance due in part to the success of its model transition.

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