Playing small ball in the big leagues

by Brenon Daly

Over the past two years, no single IT sector has put forward more highly valued IPOs than information security (infosec). Spurred by ever-increasing spending by CISOs, startups across the cybersecurity landscape are either big or getting big fast. As they graduate up to Wall Street, growth-hungry investors have lavished rich, double-digit valuations on infosec startups.

So what, then, to make of the recent IPO filing by Tufin Software Technologies? The security policy management vendor is heading to the NYSE on the back of a year where it did less than $100m in sales. And its growth rate, while a solid 30% in 2018, barely matches the pace of some of the recent infosec debutants, even as they put up more than three times more sales.

And then, there’s the crucial consideration of how – and when – Tufin generates those sales. In the current era of cloud-delivered software, Tufin sells its product in the conventional model of software licenses, plus maintenance and professional services. Further, those sales are heavily back-end-loaded, with a make-or-break Q4 providing about 34% of total revenue for the company.

It’s worth noting that all five of the other infosec providers to come public since the start of 2017 derive at least a portion of their sales from subscriptions, with the two richest valuations being given to the full cloud-based vendors. (Zscaler trades at an astronomical 34x trailing sales, while Okta garners 23x trailing sales.) Subscription revenue tends to be more predictable than lumpy sales of licenses, particularly when the average price tag of just the software – as it is in some cases at Tufin – climbs above $200,000.

That’s not to say that Tufin doesn’t have the opportunity for growth in front of it. In its prospectus, the company cites a 451 Research Voice of the Enterprise survey of 550 IT buyers and users in 2018 that shows that 83% of the respondents do not currently run any security automation and orchestration technologies at their company. Yet, encouragingly for Tufin and other vendors, more than half of the respondents (54%) plan to have it in place by 2020.

In addition to Tufin, we suspect that at least one other company will likely be paying very close attention to the upcoming IPO. Rival Skybox Security, which we understand is roughly the same size as Tufin, is thought to be tracking to an offering of its own. The difference being, as we heard it, that Skybox is targeting a debut in 2020, when it will be north of $100m in sales.

Gambling on the go

by Michael Hill

The market for online gambling acquisitions appears to be on another hot streak. After a record 2018 driven by an appetite for mobile gambling, buyers have continued to scoop up assets to bolster their mobile properties just as our data shows that mobile commerce is beginning to overtake other forms of digital commerce.

Paddy Power Betfair and 888 Holdings, both frequent shoppers in the space, have kept the party going into 2019, spending more than $175m so far on purchases of mobile gambling destinations such as Adjarabet, Jackpotjoy and BetBright. These early bets have put 2019 spending for online gambling targets on pace with 2018.

In all, investors put $6.1bn into online gambling properties in 2018, the highest-ever spending total for the sector, according to 451 Research’s M&A KnowledgeBase. The Stars Group’s $4.7bn play for Sky Betting & Gaming accounted for the bulk of last year’s total, while aligning with the trend that’s driven much of the M&A spending in this category – the push toward mobile gaming. In the case of Sky, mobile betting generated 80% of its revenue.

Of the 13 acquisitions of online gambling properties that took place in 2018, at least 11 featured targets that offer mobile applications for Android and iOS devices. According to 451 Research’s Global Digital Commerce Forecast 2018-2022, mobile app-enabled transactions are expected to surpass e-commerce transactions (i.e., transactions initiated on a laptop or desktop computer within a web browser) this year and will grow to 55% of all digital commerce transactions in 2022.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Dialing up the next round of IPOs

by Scott Denne

With its recent IPO filing, IT management software vendor PagerDuty lines up to become the first enterprise software company to come to the public markets after an extended drought. A hiccup in the equity markets last autumn followed by the government shutdown effectively closed the door for new tech offerings, but now the pipeline is beginning to fill up after a record 2018.

Last year witnessed 15 enterprise tech offerings (to be clear, the count includes only business technology offerings, not those from consumer tech startups), mostly in the front half of the year (three deals priced in the first quarter and seven in the second). And while this year’s first half isn’t likely to match that, the pace of filings is picking up. To be the first enterprise tech provider to go public this year, PagerDuty will race security vendor Tufin, which filed a week earlier, while Slack announced in early February that it had confidentially filed for a direct listing.

It’s fitting that PagerDuty could be the one to kick off a new round of enterprise IPOs because it’s almost the prototypical Silicon Valley IPO candidate. It’s growing fast and losing money, though not doing either at an unheard-of pace. In its most recently reported quarter, PagerDuty came up just shy of 50% year-over-year growth as it crossed the $100m TTM revenue mark. It posted a $43m loss, though that’s smaller as a share of its overall revenue than in earlier periods.

In the market for on-call management software for IT, PagerDuty is larger than its rivals VictorOps and OpsGenie, which were acquired by Splunk and Atlassian, respectively. (Subscribers to 451 Research’s M&A KnowledgeBase can view our revenue estimates for VictorOps and OpsGenie). But PagerDuty is banking on expanding into larger and more crowded markets, such as IT event intelligence and incident management, as we noted in a November report on the company. Almost all of its revenue today comes from on-call management.

Whether Wall Street ultimately decides to embrace PagerDuty for the potential of its new products or the financial results from its older offerings, the company should have little trouble pushing past the roughly $1.3bn valuation from its series D last summer. To get there, it will need to trade above 12x TTM revenue. That seems doable given Wall Street’s welcoming mood.

As we noted in our analysis of Lyft’s IPO filing , consumer confidence in the stock market sits at a 12-month high. And even though there hasn’t been an enterprise IPO to hit the public markets since SolarWinds issued shares in mid-October, those that went out last year are being generously priced. Smartsheet, for example, trades at nearly 30x revenue and sports a topline that’s about 50% larger than PagerDuty’s, with growth rates just a few percentage points higher.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

I.D. Systems keeps on trucking with telematics IoT pickup

by Mark Fontecchio

A series of tentative steps into telematics turns into a plunge as I.D. Systems prints its largest deal to date, continuing to move its business beyond trucking asset management. The $140m purchase of Pointer Telocation gets the buyer telematics systems and software for freight, automotive and insurance industries, and marks its third telematics acquisition. Still, the scale of today’s bet outweighs any previous wagers, as the addition of Pointer more than doubles I.D.’s annual revenue.

According to 451 Research’s M&A KnowledgeBase, the pickup of Pointer eclipses I.D.’s combined spending for all other tech targets by 5x. And it’s paying a premium as well. The median enterprise value multiple for fleet management and telematics transactions has been 1x trailing revenue, according to the M&A KnowledgeBase. I.D. is valuing Pointer nearly a full turn above that – continuing a rise in valuations among telematics targets.

To illustrate that, in the past three months Bridgestone bought TomTom’s telematics business for $1bn at a 6.5x multiple on trailing revenue, while Volkswagen inked a telematics deal of its own with the $121m purchase of WirelessCar from Volvo, which went off at a 2.9x multiple. According to a 451 Research Voice of the Enterprise: Internet of Things survey from last year, three-quarters of respondents in the transportation sector cited fleet tracking and telematics as an existing or future IoT use case, more than any other.

Today’s move also increases I.D. Systems’ international reach: Most of its sales are in North America, while Pointer Telocation’s revenue is concentrated in its home country of Israel as well as South America. In addition, nearly two-thirds of Pointer’s revenue is recurring, compared with less than 40% for I.D. And finally, not only does I.D. more than double its revenue with the acquisition, it also adds a profitable company compared with its own balance sheet awash in red ink. Canaccord Genuity advised I.D., while ROTH Capital Partners banked Pointer.

Low and slow is the tempo

by Brenon Daly

With most tech vendors having completed the song and dance of financial reports for last year, it’s becoming inescapably clear that a lot more changed than just the calendar when 2018 rolled into 2019. Business boomed last year, but it’s more of a whimper so far this year. That shift is having an impact on the tech M&A market, where acquirers are switching from playing offense to shoring up their defense.

Through the first three quarters of 2018, corporate confidence soared as cash flowed. Double-digit revenue increases, coupled with 20%+ expansion on the bottom line, pushed broad-market equity prices to record levels last summer. In contrast, looking ahead to this summer, earnings at most companies will likely flatline or even shrink slightly. Being stuck in place or falling behind doesn’t inspire businesses to place big, bold bets.

Overall, 451 Research’s M&A KnowledgeBase shows spending on tech deals around the globe has ticked down by more than 10% so far this year compared with the same time last year. But the change in sentiment – and the resulting strategy – comes through even more clearly when we look at the headline prints for 2018 and 2019.

Last year, when seemingly no deal was off the table, the largest tech transaction saw IBM roll the dice on Red Hat. If not a bet-the-company deal, the $33.4bn purchase is at least a make-or-break transaction for the current leadership and its (expensively acquired) reorientation of its cloud business, which it is banking on to spur growth after a protracted slide in revenue at Big Blue.

So far this year, however, acquisition ambitions are a little more muted. This year’s biggest deal, which is one-third smaller than the 2018 blockbuster, is a tried-and-true bit of industry consolidation: Fiserv’s $22bn pickup of First Data. Underscoring 2019’s conservative approach to dealmaking, we would note that Fiserv paid 4x trailing sales in its transaction, while IBM paid 10x trailing sales.

Of course, as Q4 2018 showed, markets can change in an instant. Companies that are riding high one day can drop hard and fast. And while no one is really talking about a recession in 2019, no one is talking about a continuation of last year’s record expansion, either. As business slows, the highly correlated M&A market is likely to follow suit.

Customer feedback becomes a monkey business

by Scott Denne

As it pursues an audacious revenue goal, SurveyMonkey has inked its first acquisition in almost three years, spending $80m for Usabilla, a developer of voice-of-the-customer (VoC) software. Although SurveyMonkey debuted on Wall Street last year sporting 6% annual growth, the company plans to triple its topline in the next three years. It’s targeting a promising market, but faces an expanding roster of larger competitors.

Amsterdam-based Usabilla enables organizations to analyze customer feedback captured on their websites, apps and emails via its embedded scripts. The offering expands SurveyMonkey’s survey-based VoC software – an expansion it needs as it aims to land enterprise-wide licenses. SurveyMonkey’s revenue from such licenses rose 80% last year and made up 12% of its overall sales.

That initial success in selling enterprise licenses prompted the company to forecast a tripling of revenue in the next three years, which would bring it to about $750m annually. Last year, SurveyMonkey grew 16%. By marching into the enterprise, it will need to fend off competitors it didn’t encounter in its first two decades as a survey platform for teams and individuals.

Most notably, SAP nabbed SurveyMonkey’s main competitor, Qualtrics, in an $8bn deal last year. At the same time, call-center software vendors NICE and Verint Systems have expanded their VoC offerings through acquisition. According to 451 Research’s M&A KnowledgeBase, the latter bought ForeSee Results in December, a transaction that built off its 2016 purchase of OpinionLab. The former picked up net-promoter-score provider Satmetrix in 2017.

Those deals follow software budgets. In 451 Research’s VoCUL: Corporate Software report, 40% of software buyers told us that ‘customer feedback/voice-of-the-customer’ was among the reasons for using customer experience software, ranking higher than the more established category of ‘marketing automation.’

Lyft gets IPO in gear

by Scott Denne

Heading toward an IPO, Lyft remains miles from profitability, and it may not be able to count on the burst of growth that drove its initial rise to get it there. In its first act, the ride-hailing service, along with its rival, Uber, disrupted an existing market (taxis). In its second act, it’s looking to build a new market by turning its network to bikes and scooters. Despite the long road to profitability, Lyft, which recently filed its S-1, could still see a warm welcome on the street.

The company finished 2018 with nearly $2.2bn in annual revenue, slightly more than double its year-earlier total and more than 5x 2016’s topline. Such growth, of course, came at a cost – it posted a $977m loss last year. Most of Lyft’s operational costs rose in tandem with revenue through 2018. While it became more disciplined with its sales and marketing spending – just a bit more than one-third of its revenue went toward sales and marketing expenses, down from more than half in 2017 – much of that goes toward incentives and refunds for drivers and riders. With Lyft still battling with Uber for both groups, it’s difficult to see that cost shrinking by much more.

Growth in its core business, while still immense, doesn’t appear to have the kind of momentum that could overcome its outstanding losses. Lyft’s expanding number of riders has decelerated. In the fourth quarter, the number of active riders using Lyft rose just 7% from the third quarter, marking the first time that sequential quarterly growth in riders dipped into the single digits. A portion of those riders (though likely a modest portion) rented bikes and scooters – a business that generated immaterial revenue for Lyft today but not immaterial costs, as the company owns those vehicles. It spent $68m on its burgeoning scooter fleet last year and another $251m to acquire bike-sharing vendor Motivate, according to 451 Research’s M&A KnowledgeBase.

Don’t expect those caution flags to keep Lyft from garnering a higher valuation in its IPO. The company last raised money over the summer with a $600m funding round that came with a $15.1bn post-money valuation. Just to match that would imply a valuation that’s 7.2x trailing revenue, a mark that should be easy to hit given Wall Street’s embrace of Silicon Valley’s most-lauded businesses. Snap, for example, still commands a 10x multiple even after losing two-thirds of its value since its debut.

Moreover, Lyft could be coming public in a welcoming environment. According to 451 Research’s VoCUL, 22% of survey respondents said they were more confident in the stock market in February than they were 90 days ago, marking the highest such reading in more than a year.

Working through the M&A backlog

by Brenon Daly

After surging to start 2019, tech acquirers appear to have worked through most of the backlog of deals that built up during the volatility-plagued end of last year. According to 451 Research’s M&A KnowledgeBase, January saw spending on tech and telecom transactions around the globe jump to a three-month high.

In contrast, spending in February dropped by about 25% compared with the opening month of the year. The M&A KnowledgeBase tallied $32bn worth of deals in February, essentially matching the same month last year. If it hadn’t been for financial buyers, this month’s decline would have been much sharper.

Private equity (PE) acquirers accounted for three of this month’s four largest deals, and a whopping $23bn, or more than 70% of total M&A spending in February. That’s roughly twice their typical share of spending in the tech M&A market. Corporate buyers, which had been averaging six transactions valued at more than $1bn each month last year, put up just three billion-dollar prints in February.

Half of the PE spending came in a single landmark software deal: the $11bn take-private of Ultimate Software. In the largest-ever SaaS acquisition, Hellman & Friedman led a group that valued the human resources software vendor at 10 times trailing sales. Similarly, in this month’s fourth-largest transaction, buyout shop Thoma Bravo paid $3.7bn, or 7x trailing sales, for mortgage lending SaaS provider Ellie Mae.

As to what’s coming for the rest of the year, check out 451 Research’s 2019 Tech M&A Outlook. The 125-page report highlights the trends that we expect to shape deal flow in six key enterprise IT sectors, including application software, information security, IoT and cloud. Additionally, our comprehensive report names over 250 potential target candidates and dozens of specific acquirer-target pairings, based on the research of more than 40 of our analysts.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Webinar: Tech M&A Outlook 2019

by Brenon Daly

For a look ahead at what’s coming in the tech M&A market in 2019, join 451 Research on Tuesday, February 12 at 9:00am PST for a special webinar on what we expect to drive deals in the year ahead. (To register for the free, one-hour webinar, simply click here). Specifically, we’ll be looking at how busy tech’s big-name buyers are expected to be in 2019, along with the current trends that are shaping the VC and PE markets.

During the webinar, we’ll draw on our just-published Tech M&A Outlook 2019. The 125-page report features not only the overall trends that are expected to shape dealmaking in a half-dozen key enterprise IT markets – including software, security and the Internet of Things – but also which specific companies are likely to figure into those transactions. The Tech M&A Outlook is available to all subscribers of 451 Research’s M&A KnowledgeBase: next Tuesday’s webinar is open to everyone.

Hellman & Friedman’s Ultimate HR deal

by Scott Denne

Hellman & Friedman’s $11bn acquisition of Ultimate Software provides the ultimate case study in rising valuations for human resources (HR) software vendors. The deal marks the largest HR software purchase and fixes an 11x trailing revenue multiple on the target, a multiple that’s increasingly becoming common for such companies as private equity (PE) money floods that corner of the software market.

According to 451 Research’s M&A KnowledgeBase, each of the three previous years have witnessed more than double the typical number of HR software transactions sporting a multiple at or above 5x TTM revenue. Strategic acquirers have been more willing to pay up – Ultimate itself paid 8.8x last summer in its $300m pickup of PeopleDoc, its sixth and largest acquisition.

But most of the recent, strong valuations have come from PE shops. Today’s deal provides one data point, as do Thoma Bravo’s purchase of PEC Safety and Marlin Equity Partners’ reach for Virgin Pulse. HR software has long been a PE favorite – but it’s also attracting the interest of buyout firms that are less experienced in software as many of these businesses have a strong services component. Last year, 49% of such targets were bought by PE shops, compared with just 25% at the start of the decade. (For context, our data shows that roughly one-third of all software providers were acquired by PE firms last year.)

Hellman & Friedman, which is leading the syndicate that’s buying Ultimate Software, is neither new to software or HR. It acquired Kronos, a maker of HR software mainly used by organizations with hourly employees, back in 2007, paying 3x. That’s not to say prevailing prices have tripled or quadrupled in the time between those two transactions by the tech-focused PE shop. For one, Kronos began its transition to SaaS only a few years ago, whereas Ultimate’s revenue is overwhelmingly SaaS.

The market has changed in that time as well. When Hellman & Friedman bought Kronos, HR software – like many categories of business applications – functioned as a record-keeping and workflow tool. While that’s still true today, we find that more companies are turning to HR software and the data it contains for strategic insights. According to 451 Research’s Voice of the Enterprise: Data & Analytics, 28% of businesses run analytics on their employee behavior data, roughly the same number that analyze IT infrastructure data.