Will Zuora play in Peoria?

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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CallidusCloud’s accretive acquisitions

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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In the red-hot SaaS SI market, which is the next shop looking to sell?

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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Small ball M&A paying off for salesforce.com

Contact: Brenon Daly

When it comes to M&A at salesforce.com, starting small has yielded higher returns than going big. The SaaS giant has returned to the ‘buy and build’ strategy with its latest step into a new market with Analytics Cloud. The data visualization offering, which was unveiled this week at Dreamforce, was underpinned by the acquisition of EdgeSpring back in June 2013.

The $134m price notwithstanding, EdgeSpring stands as a small deal for salesforce.com. (We profiled EdgeSpring shortly after it emerged from stealth and a half-year before it was acquired. At the time, it claimed more than 10 paying customers and about 30 employees.)

Certainly, there were bigger targets for a move into the analytics market by salesforce.com, which will do more than $5bn in revenue this fiscal year and says it has a ‘clear line of sight’ to $10bn in sales. For instance, both Qlik Technologies and Tableau Software offer their data visualization software on salesforce.com’s AppExchange. With hundreds of millions of dollars in revenue, either of those vendors would have established salesforce.com as a significant player in the data analytics market as well as moving the company closer to its goal of doubling revenue in the coming years.

However, in that regard, a purchase of either Qlik or Tableau would be comparable with salesforce.com’s reach for ExactTarget in June 2013, which serves as the basis for its Marketing Cloud. The deal was uncharacteristically large, with salesforce.com spending more on the marketing automation provider than it has in all 32 of its other acquisitions combined. More significantly, salesforce.com has struggled a bit with ExactTarget, both operationally (platform integration and cross-selling opportunities) and financially (margin deterioration).

In contrast to that big spending, salesforce.com dropped only about one one-hundredth of the price of ExactTarget on InStranet in August 2008 ($2.5bn vs. $32m). The purchase of InStranet helped establish Service Cloud, which is now the company’s second-largest business behind its core Customer Records Management offering. And salesforce.com says the customer service segment is much larger than the market for its sales software.

Those divergent deals are something to keep in mind when salesforce.com buys its way into a new market. If we had to guess, we would expect the company to next make a play for online retailing (maybe call it Commerce Cloud?). If that’s the case, we might suggest that it look past the big oaks like Demandware and focus on the seedlings that can then grow up in the salesforce.com ecosystem.

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salesforce.com goes back to CRM

Contact: Scott Denne

salesforce.com retrenches in its latest acquisition – the $390m purchase of CRM vendor RelateIQ. Unlike past acquisitions that brought salesforce.com into new territories such as marketing (Buddy Media and ExactTarget) or mobile software development (Heroku), this deal takes out a small, fast-growing rival. Part of the reason why salesforce.com is looking closer to its core business with this transaction is likely because of the limited success it’s had in buying beyond CRM (which we covered in a recent report).

Though dwarfed in size by salesforce.com, RelateIQ was growing quickly. The 100-person company had only about 20 employees a year ago and recently scaled up its fundraising by landing a $40m series C round less than a year after the general release of its product. Though certainly generating less than $10m in revenue, we understand that RelateIQ had gained traction among SMBs, particularly in financial verticals, which played no small role in the $255m post-money valuation on its last round.

While the move is at least partially defensive, we would not be surprised to see salesforce.com play this one very aggressively, possibly even giving away a free version of RelateIQ to scoop up a bigger portion of the SMB market. Or even using RelateIQ’s interface and technology to tie together marketing and sales apps across its suite.

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IBM finds a bargain in Silverpop purchase

Contact: Brenon Daly

Fittingly enough for an acquisition to bolster its Smarter Commerce portfolio, IBM appears to have smartly picked up a bargain in its purchase of marketing automation (MA) vendor Silverpop. Big Blue didn’t release terms of the deal, but reports put the transaction value at roughly $250m-300m. Assuming that’s roughly accurate, it would value Silverpop at only about half the valuation that other significant MA providers have received in recent exits.

According to our understanding, Silverpop put up about $80m in sales last year. However, several industry sources have indicated that the Atlanta-based startup was only growing at about 10-15%. Other similar-sized MA firms are vastly outstripping that rate. For instance, Marketo boosted its top line almost 70% in 2013, and we estimate that HubSpot was right in that neighborhood, too. More broadly, a recent report from 451 Research’s MarketMonitor service forecasted 22% CAGR for the overall MA industry over the next four years.

Silverpop’s sluggish growth would appear to have put pressure on its valuation, with IBM paying 3-4x trailing sales for the company. Meanwhile, rivals such as Oracle, Adobe and salesforce.com have paid multiples ranging from roughly 6-10x trailing sales. Overall, the shopping spree has topped $7bn in spending for MA vendors.

Select marketing automation deals

Date announced Acquirer Target Price to sales ratio Deal value
December 20, 2013 Oracle Responsys 7.7x $1.6bn
June 27, 2013 Adobe Systems Neolane 8.6x* $600m
June 4, 2013 salesforce.com ExactTarget 7.6x $2.5bn
December 20, 2012 Oracle Eloqua 9.7x $956m
April 27, 2012 Intuit Demandforce 11.4x* $423.5m
December 22, 2010 Teradata Aprimo 6.3x $525m
August 13, 2010 IBM Unica 4.4x $523m

Source: The 451 M&A KnowledgeBase *451 Research estimate

Poor ExactTarget results may extend salesforce.com’s M&A holiday

Contact: Scott Denne

Two quarters in, salesforce.com’s ExactTarget acquisition is already losing some steam. The email marketing company continues to grow, though far from the pace it had as an independent business. On salesforce.com’s earnings call Thursday night, the CRM vendor announced that ExactTarget contributed $96m in revenue, up roughly 14% from the last quarter of 2012 (‘roughly’ because salesforce.com and ExactTarget’s fiscal quarters are misaligned by a month).

In its last two independent quarters, ExactTarget averaged 40.5% year-over-year growth. In its first two quarters as a salesforce.com subsidiary, it averaged revenue growth of just 12.5%. Even salesforce.com itself, with $1.15bn in revenue last quarter, gained 25%, after backing out ExactTarget’s contribution, and 26% the previous quarter.

On a call last year announcing the acquisition, salesforce.com CEO Marc Benioff said the company would take a 12- to 18-month M&A vacation to focus on ExactTarget. For the most part, it’s lived up to that promise. It announced a $133.7m deal for EdgeSpring a few days after the ExactTarget announcement but has been mostly quiet since then – salesforce.com spent just $2.5m on acquisitions last quarter. Since integrating ExactTarget hasn’t been a day at the beach, salesforce.com’s M&A holiday may not end early.

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Oracle’s email marketing acquisition looks like spam

Contact: Scott Denne Matt Mullen

Oracle spends $1.6bn ($1.5bn net of cash acquired) on email marketing company Responsys – a hefty price tag for an asset that brings few new capabilities to the company.

Much of the technology Oracle is buying duplicates what it already has from its acquisition of Eloqua, which it bought exactly a year ago to be the centerpiece of its marketing efforts. So in that regard, this deal is essentially an expensive tuck-in. Oracle values Responsys at 7.7x TTM revenue – just a click higher than ExactTarget fetched in its sale to salesforce.com, and that transaction was meant to be the CRM vendor’s marketing centerpiece.

Further, Responsys also generates a meaningful portion – 30% – of its revenue from professional marketing services. Nixing the services business would give Responsys a straight price-to-product valuation of 11.3x sales.

The deal isn’t completely without merit, however. Responsys does give Oracle business-to-consumer marketing expertise and a functional, if not differentiated, email marketing product that it didn’t get with Eloqua. And Responsys also posted 26% year-over-year growth in the first nine months of the year, but its $194m in trailing sales is hardly enough to boost Oracle’s stagnating software revenue.

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Friends are friends, but business is business

Contact: Ben Kolada Scott Denne

Oracle is either adding depth or distance to its partnership with salesforce.com by acquiring BigMachines, yet another salesforce.com-integrated startup. The two software giants have had a difficult relationship, most visibly with salesforce.com CEO Marc Benioff being ‘uninvited’ from Oracle OpenWorld two years ago. But the companies seemed to have worked out their differences this year, announcing a nine-year product integration partnership in June. Oracle’s recent dealmaking, however, could undermine some of that reconciliation.

Terms haven’t been disclosed in Oracle’s acquisition of configure, price and quote sales automation SaaS vendor BigMachines. We estimate that the company generated $60m in trailing sales, or about twice the revenue it recorded in the year before its recapitalization by Vista Equity Partners and JMI Equity.

BigMachines is the second salesforce.com partner Oracle has purchased in the past week. On October 17, Oracle bought content marketing SaaS provider Compendium, but the stakes and price are certainly much larger for this deal (subscribers to The 451 M&A KnowledgeBase can see our estimated price and revenue for the Compendium buy here).

BigMachines integrated its price and quoting optimization software into salesforce.com’s core CRM offering in 2010 (it was also an Oracle partner) and salesforce.com became an investor in the company in 2012. (As an investor, salesforce.com almost certainly had right of first refusal on Big Machines.) Compendium – which was founded by one of the founders of ExactTarget, the marketing software company that salesforce.com picked up for $2.5bn earlier this year – integrated its content marketing software into ExactTarget’s offering as well as a rival marketing automation offering from Eloqua, which Oracle acquired a year ago.

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