Medallia heads toward NYSE listing

by Scott Denne

Medallia is looking to become the latest software vendor to test Wall Street’s appetite for new enterprise tech offerings as it unveils its IPO prospectus. The experience management software provider, however, lacks the growth of recent debutants and isn’t likely to come to market with the kind of extravagant multiple that many of the year’s offerings have fetched.

The customer and employee experience software developer’s sales rose 20% to $314m in its most recent fiscal year. Its topline expansion accelerated to 32% in the last quarter, yet that’s still behind the numbers put up by many other enterprise companies to enter the public markets this year. CrowdStrikePagerDutySlack and Zoom Video, for example, are all growing around or above 50% annually and boast valuations ranging from 20-70x trailing revenue.

Medallia isn’t likely to garner a price in that range when it comes public. Still, the offering will likely push its valuation well past the $2.4bn it commanded in a February fundraising. Its main competitor, Qualtrics, sold to SAP for $8bn – or 21.5x – on the eve of its own IPO. Medallia is likely to fall short of that multiple when it begins trading on the NYSE, although it could fetch a premium if it follows Qualtrics’ lead and sells the whole business.

As we’ve noted in the past, there are many potential acquirers, such as Adobe or Salesforce, of customer experience management vendors and a paucity of potential targets with Medallia’s scale. Would-be buyers may have difficultly finding other targets with the breadth of Medallia’s experience management and analytics software. Wall Street investors, on the other hand, have many options for investing in faster-growing software providers.

Slack ropes in premium valuation

by Scott Denne

An unusual route to the public markets didn’t stop Slack from capitalizing on soaring prices for new offerings. In its direct listing on the NYSE, Slack, like recent enterprise IPOs, commanded a scorching valuation, catapulting it well past what it fetched as a private company.

The workplace communications vendor’s stock quickly ran up to $41 per share, more than 3x the price of its series H round less than a year ago. The company currently trades above 50x trailing revenue, with a market cap that’s just north of $20bn. Still, that valuation falls a bit shy of fellow workplace tech provider Zoom Video, which fetches over 70x trailing revenue. Although both valuations are exorbitant, Zoom doubled revenue last quarter, while Slack rose 86%. Both are roughly the same size, but only Zoom is profitable. Slack still puts half its revenue toward sales and marketing.

Slack’s multiple matches what infosec vendor CrowdStrike garnered in its IPO last week. And PagerDuty, a firm that’s one-quarter of Slack’s size, with a topline that’s expanding at less than 50% annually, boasts a 35x multiple following its April IPO. The premium valuations for enterprise companies come as confidence in the stock market is leveling out after a turbulent end to 2018. In each of the last four months of 451 Research’s VoCUL: Consumer Spending survey, 20% or more of all respondents have claimed to be more confident in the stock market than they were 90 days ago, the highest level since last summer.

Instant gratification in CrowdStrike’s IPO

by Brenon Daly

Other recent high-flying debutants in the information security (infosec) market have had to take some time to grow into their multi-unicorn status on Wall Street. Not so for CrowdStrike. The endpoint security vendor smashed all pricing expectations on its way to creating a stunning $12bn of initial market value in its IPO.

To put that number into perspective, CrowdStrike’s valuation is roughly equivalent to the M&A spending across the entire infosec market for any given year, according to 451 Research’s M&A KnowledgeBase. Or, sticking to comparisons in the IPO market, CrowdStrike’s debut market cap is twice the initial value created in IPOs by two other recent fast-growing cloud security startups:

Okta came public in April 2017 at a valuation of $2.4bn, and now commands a $14.5bn market cap.

Zscaler came public in March 2018 at a valuation of $3.7bn, and now commands a $10bn market cap.

In its most recent fiscal year, CrowdStrike posted revenue of $250m. Revenue more than doubled last year, helped in part by an astonishingly high dollar-based retention rate of roughly 140%. Although not yet profitable, the company showed some leverage in its model by holding its net loss at the same level over the past two years, even as it doubled revenue.

In the IPO, Wall Street is valuing CrowdStrike at nearly 50 times trailing sales. That’s a heady multiple, significantly eclipsing the current mid-30x price-to-sales multiples for both Okta and Zscaler.

CrowdStrike is, however, still looking up at the current trading multiple of Zoom Video Communications. Zoom shares have tacked on roughly 50% since debuting in April, giving the profitable and fast-growing videoconferencing startup a price-to-sales multiple of nearly 70x. If CrowdStrike could replicate Zoom’s trading in the aftermarket, the infosec startup would be tracking to nearly the same astronomical trading multiple later this summer.

A quick double for Fastly

by Brenon Daly

Even as other VC-backed unicorns have stumbled recently in ‘down round’ IPOs, Fastly more than doubled its private-market valuation as it came public Friday. The CDN startup priced its offering at the top end of the expected range and then surged some 50% in aftermarket trading.

Fastly’s strong debut continued the recent bull run of enterprise tech IPOs, a sharp contrast to several high-profile consumer tech offerings that have sunk underwater. It also sets up a rather rich valuation for the company compared with its primary rival, which went public two decades ago.

With its newly issued shares changing hands on the NYSE at about $24 each, Fastly is valued at more than $2bn. That’s a significant step up in value from its final venture funding, which came last summer. Although a bit deep in the alphabet, the series F round had Fastly’s investors paying slightly more than $10 per share.

The company posted $145m in sales in 2018 and is likely to bump that up to roughly $200m this year, assuming it holds its current high-30% growth rate. That means Wall Street is valuing it at a mid-teens price-to-sales multiple, on a trailing basis. Or another way to look at it: on a relative basis, Fastly is worth three times more than CDN industry stalwart Akamai, which trades at almost 5x trailing sales.

Back to business

by Brenon Daly

After a brief but unprofitable dalliance with a popular consumer tech name, Wall Street is getting back to business. CDN startup Fastly is set to debut later this week, while business communications provider Slack and endpoint security specialist CrowdStrike have lined up expected offerings next month. All of those IPOs – which are built on more durable businesses than ride-sharing, for instance – should help put Uber‘s underwater offering in the rearview mirror.

Wall Street tends to run on a ‘what have you done for me lately?’ business. Uber’s offering didn’t do much for investors, except cost money to those who bought shares at the open. Of course, a week is a ridiculously short period to judge a company that will likely be public for years. But for now, with Uber shares still in the red, investors will shift their attention to where they can make money.

In IPOs, it’s been the offerings from tech vendors that sell to other companies that have generated returns. PagerDutystock is currently changing hands at twice where it priced its offering last month. Zoom Video Communications has also seen its shares double from their offer price, on a much larger scale. The firm has created an astonishing $19bn in market value.

Of the trio of enterprise-focused tech startups that are slated to come public soon, not one of them has figured out how to make money. But their losses are a fraction of the $3-4bn operating loss that Uber has posted in each of the past three years. When it comes to enterprise tech IPOs, companies don’t have to be profitable to be profitable bets for investors.

Uber’s Immature Public Offering

by Brenon Daly

Being mature has never been a requirement for a tech vendor to go public. But that doesn’t mean a company should be childish, either. And yet, as Uber’s trip to Wall Street shows, a consumer tech startup can still get away with treating professional investors a bit like spoiled kids treat their parents: they don’t want anyone telling them what to do, even if they haven’t quite figured out what they will be when they grow up.

Uber, of course, is the extreme example of an indulged startup. Throughout much of its 10-year history, the company basically did what it wanted, expanding its services in some cases without concern about existing rules or practices. (There’s tech disruption and then there’s legal disregard. Too often, Uber claimed the former while practicing the latter, a point the company itself made in the now-obligatory ‘Letter from our CEO’ portion of its prospectus.) It could get away with that because it had billions of dollars of outsiders’ money to fall back on.

Now, after having piled up almost $8bn in accumulated deficit, Uber needs more money. Guided and supported by no fewer than 29 underwriters, the vendor will undoubtedly find new investors when it offers up shares to the public on Friday morning. The prevailing pricing in the IPO will likely see Uber pull in about $9bn, while the overall business will collect a valuation in the neighborhood of $90bn. Very much in character, Uber is going public like it ran a good portion of its business: on its own terms.

The arrogance that characterized Uber’s early days has certainly diminished quite a bit, but there’s still an unmistakable sense of adolescent self-assuredness at the company. As part of its self-described ‘bold mission,’ Uber sizes the current markets it serves not in the billions of dollars, but in the trillions. It amplifies that alluring vision by pointing out that it is only just starting with those opportunities, holding less than 1% share of any market in which it operates.

Uber continues that language of promise throughout the prospectus. While that vision sold early on – allowing the vendor to raise more funding than any other privately held US tech startup – the valuation inflation hasn’t left a lot of upside for it on Wall Street. (Or any at all, if it follows in the tire tracks of rival Lyft.) Private-market investors may have coddled Uber financially, but its pending IPO could serve as a tough-but-needed lesson in the painful process of growing up.

Slack set to enter a loose market

by Scott Denne

Another enterprise startup plans to test Wall Street’s seemingly insatiable appetite for business technology vendors. Slack has unveiled its prospectus for a direct listing on the NYSE, forgoing an initial public offering. Like other recent enterprise tech companies to enter the public market, Slack, though heavily funded at premium valuations, still appears to have room to trade up in its debut.

The firm’s forthcoming listing follows closely on the IPO of fellow workplace communications software developer Zoom Video. The latter company fetched an astonishing 60x trailing revenue in its first day of trading – a level it retained in the week since. Slack would need only a fraction of that multiple to leap beyond the roughly $6bn valuation it boasted in its most recent fundraising. There’s every reason to think it could.

As we noted in our coverage of Zoom’s first day, enterprise companies (those selling technology to businesses) have gotten a bullish reception in the public markets, with many of the 2018 and 2019 crop of IPOs trading above 20x revenue. To match its private company valuation, Slack, which posted $401m in revenue in its recently closed fiscal year, would need to fetch a 15x multiple. Its shares have recently traded hands in private transactions at twice that level. And given the parallels between it and Zoom, investors could carry it even further.

Both vendors are roughly equal in size (Zoom generated $330m in trailing revenue), with a similar growth rate. Slack came up just a few percentage points shy of doubling its topline, while Zoom rose a bit above that. The two companies also play in separate corners of the workplace productivity market that are both expected to garner increasing enterprise investments in the coming year. According to 451 Research’s VoCUL: Corporate Mobility and Digital Transformation, 40% and 43% of respondents plan to invest in team collaboration (Slack’s purview) and online meetings (Zoom’s specialty), respectively, over the next 12 months.

A new player in a new game

by Brenon Daly

Twenty years after the IPO of CDN giant Akamai, rival startup Fastly has announced its own plan to go public. We mention that at the open because one of the main selling points of Fastly’s pitch to Wall Street is setting itself apart from the competition. In its just-filed prospectus, Fastly uses the term ‘legacy CDNs’ more than 20 times.

The repetition isn’t meant to flatter. Eight-year-old Fastly discusses Akamai – and, to a lesser extent, Limelight Networks – in connection with the limitations of their offerings, which are meant to speed up and secure internet traffic.

Already having collected a rich, double-digit valuation in the private market, Fastly is making the economically rational effort to put some distance between itself and its discounted public-market comps. (Even with its shares near their highest level since the dot-com collapse, Akamai garners just 4.5x trailing sales, while Limelight lags far behind at not even 2x trailing sales.)

Like most other ‘new generation’ IT providers, Fastly plays up its growth rate while playing down the cost of that growth. Sales at the company rose about 40%, year over year, in 2018 to $145m. In comparison, Akamai is a single-digit percentage grower, although it is roughly 10 times larger than Fastly. Fastly also runs in the red, largely because its gross margins are just 54%, 10 percentage points lower than those at Akamai.

For us, though, the biggest difference between the two companies isn’t their technology or their business models or their target customers. Instead, it’s the IPO itself. It’s hard to imagine, but Akamai went public in 1999 on just $4m in sales and a staggering $58m loss. (It was a time of ‘irrational exuberance’ after all.) In other words, at the time of Akamai’s IPO, its entire business was smaller than the revenue that’s probably generated by a single key customer at Fastly.

It’s all business on Wall Street

by Scott Denne

Amid a short burst of high-profile tech IPOs, enterprise offerings are soaring, while consumer-focused companies are getting a less-bullish reception. In their public debuts, both Zoom Video and Pinterest priced above their range and traded up from there. The former, a video-conferencing specialist, reaped a hefty valuation increase in its debut. The social networking vendor, however, stayed just above its last private funding.

To be sure, Pinterest hardly received a bearish reception. It began trading at about $24 per share, for a 25% bump, bringing it slightly up from the price of its series H round in 2017. Currently, Pinterest is valued at $13bn, or nearly 16x trailing sales. Zoom, by comparison, jumped 75% from its IPO price when it entered the Nasdaq, garnering a $16.2bn market cap, or 60x trailing sales.

The discrepancy between enterprise- and consumer-tech offerings isn’t limited to these two. Last month, Lyft made a lackluster debut – its shares now trade 20% below its initial price. A few days later, PagerDuty, an IT ops provider, jumped 60% when it hit the public markets. The comparative reliability of enterprise-tech stocks accounts for some of the discrepancy.

As we noted in our coverage of PagerDuty’s IPO, many of last year’s enterprise IPOs still trade at or near 20x revenue. And many of the past consumer unicorns have faltered – Snap’s shares have fallen more than half from its 2017 IPO and Blue Apron is practically a penny stock. Perhaps more importantly, the recent enterprise debutants left room in their cap table for a first-day bump, while consumer companies extracted all they could from private investors, at the highest price they could, before turning to the public markets. Zoom raised $160m on the way to its IPO, while Pinterest took in almost 10x that amount.

 

Big or small, Wall Street likes them all

by Brenon Daly

On the same day the NYSE gave a warm welcome to a pair of enterprise tech vendors that are both running right around a level that, historically, would be the absolute minimum for a company to go public, investors also got their first official glimpse at the financials of a consumer tech behemoth that’s 10 times the size of the debutants. When the tech IPO market can cover that broad a spread, it truly is open for business.

Start with those companies that have already seen through their offering. The relatively slight build of both PagerDuty and Tufin Software Technologies didn’t really hurt them as they stepped onto the NYSE on Thursday. That’s particularly true for PagerDuty, a subscription-based IT incident-response software provider that put up just $118m in sales last year. Tufin, which recorded just $85m in sales in 2018, is about a year behind PagerDuty, assuming it holds its roughly 30% growth rate.

Nonetheless, PagerDuty priced its offering above the expected range and soared more than 50% on its debut. As we noted in our report on the offering, investors are valuing the company at some $2.8bn, or more than 20 times last year’s sales. Having already secured its standing as a unicorn in the private market, PagerDuty is now approaching ‘tricorn’ status in the public market.

Tufin debuted at a far more muted valuation, but still created more than $600m of market value. With 34.2 million shares outstanding (on a non-diluted basis), Tufin is trading at more than 7x 2018 revenue. As we outlined in our preview of the offering, Tufin’s valuation probably has less to do with how much revenue it generates than how it generates that revenue: back-end-loaded sales in a license/maintenance model.

But both those realized offerings on Thursday were very quickly and unceremoniously overshadowed by the anticipated debut of Uber. The ride-hailing company’s planned IPO, which will be brought to market by a herd of 29 underwriters, makes the offerings of Tufin and PagerDuty seem like a series B funding. Across the board, Uber’s financials – funding, revenue, losses – are orders of magnitude larger than either of the enterprise-focused IPOs. And yet, for all the variety of the companies and their offerings, each of them can find investors ready to throw more capital their way. The bulls are running right now.

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