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.

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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.

In with a bang, out with a whimper

by Brenon Daly

After a record pace throughout much of 2018, the enterprise tech IPO market has basically ground to a halt. And with the traditional extended holiday break for new offerings, it’s looking like the year will wrap with a two-month drought in IPOs. That’s quite a drop-off from the start of the year, when nearly two B2B tech startups were coming public each month.

Overall, our tally shows that twice as many enterprise-focused tech vendors came public in the first half of this year than the second half. (To be clear, we are counting only B2B companies that listed on the NYSE and Nasdaq. That excludes, for instance, this year’s surprisingly numerous biotech offerings as well as the handful of consumer tech startups that came to market in 2018.)

Of course, recent IPO activity has been hit hard by the fact that the broader US stock market has been hit hard. A survey by 451 Research’s Voice of the Connected User Landscape done during some of the volatile days in October showed that three times as many investors had lost confidence in the equity market since last summer as had gained confidence in it. When Wall Street feels like shaky ground, it’s hard for new offerings to find their footing.

None of that precludes new offerings next year. But to the extent that uncertainty continues to cast clouds over Wall Street in 2019, the overall climate could table IPOs for smaller, more speculative enterprise tech startups. Big names tend to be ‘bankable’ regardless of what’s happening in the broader market. (That development is also being driven by VCs, who are concentrating more money into fewer companies.)

That’s starting to play out in the related consumer technology sector. Lyft announced last week that it had put in its IPO paperwork, putting it on track for an offering in the opening months of next year. And not to be outdone, Uber is also reportedly putting its offering in place. Meanwhile, on the enterprise tech side, there’s been plenty of speculation that Palantir will exchange its long-held secrecy for a public listing in 2019.

As welcome as those new names would be, however, they won’t do much for the broader tech IPO market. No one holds out these so-called ‘decacorns’ as representative of the much bigger startup community. As anomalies, they are not going to lead other companies to market or help set a bullish tone for other tech IPOs. Instead, smaller tech vendors will be relegated to observers on Wall Street, watching on as large-cap private companies become large-cap public companies in a rather mechanical process.

Waving goodbye to Wall Street

by Brenon Daly

For software providers, Wall Street used to be a desirable location to set up shop. But now, an ever-increasing number of companies are waving goodbye to the neighborhood of public entities. Either the vendors bypass the fabled destination as they head to newer places with more privacy or, once public, they do a deal that’s the corporate equivalent of moving to the suburbs: consolidate with a larger software firm.

Already this year, the two major US stock exchanges have lost almost twice as many software companies as they have gained. According to 451 Research’s M&A KnowledgeBase, 15 publicly traded (or soon-to-be publicly traded) software providers have been acquired, compared with just eight new software listings.

Just today, the Nasdaq saw both medical software supplier athenahealth and cloud expense management specialist Apptio announce take-privates by buyout shops. And Qualtrics got picked off by SAP even before it had a chance to matriculate to the Nasdaq. (451 Research subscribers can look for our full report on SAP-Qualtrics on our site later today.)

The net reduction in publicly traded companies has erased tens of billions of dollars of market value from what had once been viewed as the place for software vendors to be, from both a marketing and financial point of view. For generations, software entrepreneurs founded and funded their businesses with a singular goal: IPO. Ringing the opening bell on the Nasdaq or NYSE was seen as a rite of passage for a company that aspired to grow out of its status as a ‘startup.’

Of course, tech vendors in general have been eschewing IPOs ever since the dot-com bust, in part due to regulatory changes on Wall Street. But the trend has accelerated in just the past half-decade as gigantic pools of private capital have, to some degree, replaced public market investors. For instance, Qualtrics managed to raise $400m from investors without an IPO. Domo raised almost twice that amount as a private company before its offering last spring.

All of that private-market capital has allowed software providers the luxury of operating behind closed doors for much longer, perhaps indefinitely. Institutional investors have accepted that new reality. Several deep-pocketed firms started putting money into the private market, which is a bit of a stretch for investors accustomed to the liquidity and transparency that comes with a public listing. But if software vendors won’t come to Wall Street, then Wall Street investors have to go to them.

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Elastic adds spring to the fall IPO market

by Scott Denne

Investors clamored for shares of Elastic in the search software vendor’s public debut on Friday as the market for tech IPOs appears ready to bounce back after a slow summer. After pricing at $36 per share, the company’s valuation nearly doubled when trading opened at $70, giving it a market cap that’s just shy of $5bn and the kind of multiple that shows an unflagging faith in growth on Wall Street.

The developer of open source search software for IT log analysis, security analytics and other applications nearly doubled its top line in its fiscal year (ending April 30) to $160m, up from $88m a year earlier, while increasing the share of subscription revenue in its mix. That trajectory propelled the company to a 26.5x trailing revenue multiple – well beyond the $1bn valuation on its last private round, a $58m series D in mid-2016.

Few other unicorns have galloped onto the street with quite as much glamor. This year has now seen 11 enterprise tech companies enter the public markets with valuations north of $1bn, often at heated multiples, although not quite as high as Elastic’s. Zscaler came to market with a similar 26x multiple (it trades just shy of 24x now) and Smartsheet currently commands north of 20x. Longer is the list of 2018 IPOs that trade above 10x, including DocuSign, Zuora and Tenable.

The latter firm was one of just two enterprise tech providers to go public in the third quarter – a dry spell that followed an unusual burst of activity as 10 such companies debuted in the first two quarters (almost the same number that did so in all of 2017). Judging by Elastic’s offering, the dry spell had little impact on investor appetites, setting up a favorable environment for Anaplan and SolarWinds as both look to price this month.

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Two different companies, two different exits

by Brenon Daly

Maybe Anaplan can pull off what its rival Adaptive Insights failed to do: make it to Wall Street. The two corporate performance management (CPM) vendors put in their IPO paperwork just four months apart, but the outcomes for the two companies are looking very different. While Adaptive Insights is probably more at home inside the portfolio of an existing enterprise software provider, Anaplan’s stronger financial profile makes it far more likely to go public and continue this year’s bullish run of enterprise software offerings.

By any number of measures at these two vendors, Anaplan’s financials are more in line with what public market investors want to see. (We would note that measuring financials is essentially what the software from each of these companies actually does.) Anaplan is half again as big as Adaptive Insights, and it’s increasing sales at a more rapid clip (40% growth for Anaplan, compared with 30% at Adaptive Insights.) Anaplan’s scale and trajectory put it more in line with other recent enterprise software debutants such as Pluralsight and Zuora.

The fact that Anaplan has lost roughly twice as much as Adaptive Insights in recent quarters due to comparatively rich sales and marketing spending probably won’t trouble public market investors, who have been focused on the top line of this year’s IPOs rather than the bottom line. Lingering concerns around Anaplan’s red ink will likely be eased if Wall Street looks at the company’s customer retention rate of roughly 120%, which puts it in the top segment for SaaS vendors. For comparison, Adaptive Insights renewed customer contracts each year at only about 100% of their value.

All of that points to Anaplan enjoying at least some premium valuation to its CPM rival. In its dual-track process, Adaptive Insights ended up selling to SaaS stalwart Workday for $1.6bn, or 13.6x trailing sales. That’s also roughly the current trading valuation for recent software debutant Zuora.

Although Zuora and Anaplan serve vastly different markets, they are identically sized ($109m in 1H 2018 revenue, with each putting up a majority of subscription sales combined with a bit of professional services) and share a similar growth trajectory. Putting the mid-teens price-to-sales valuation on Anaplan’s trailing sales of $168m puts the CPM provider in the neighborhood of $2.5bn market value, which would work out to roughly 10x forward sales, based on our estimates. Assuming that’s the case, Anaplan’s IPO exit could well be worth $1bn more than Adaptive Insights’ M&A exit.

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Monkeying around on Wall Street

by Brenon Daly
After closing out a busy first half of 2018 with a lackluster offering, the tech IPO market isn’t looking like it will start the second half much stronger. SurveyMonkey has publicly filed its prospectus on an offering that will test Wall Street’s appetite for money-losing companies that don’t offset the red ink with sizzling revenue growth. The company’s age (19 years old) is higher than its growth rate (currently 14%).

Founded at the tail end of the frothy years of the dot-com bubble, the online survey provider has nonetheless enjoyed a frothy valuation of its own as it collected more than $1bn in debt and equity funding. Private-market investors have put a $2bn price on the company. SurveyMonkey’s ‘double unicorn’ valuation works out to about 8x this year’s projected revenue.

However, our forecast for a quarter-billion dollars in 2018 revenue assumes the company can continue its mid-teen growth. (That may not be a given, since SurveyMonkey increased sales just 6% in 2017.) For comparison, Dropbox – a similarly heavily funded startup that, like SurveyMonkey, also relies on lots of users choosing, at some point, to pay for the service – came to market earlier this year growing 30%. And the online collaboration vendor does more sales in a single quarter than SurveyMonkey does all year.

So Wall Street will undoubtedly scrutinize SurveyMonkey’s financial performance, which shows revenue increasing at just one-half to one-quarter the pace of other software IPOs this year. And they will look even harder at the offering since investors are still underwater from the most-recent tech IPO, Domo. Like SurveyMonkey, the BI specialist had probably drawn in as much money as it could get from private-market investors, so it turned to Wall Street. That’s hardly a compelling pitch for investors.

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

A fashionable offering

by Scott Denne

Nabbing a valuation beyond its last venture round will be challenging for Farfetch, the latest consumer company to take a step toward the public markets by unveiling its IPO prospectus. As it bids to join the NYSE, Portugal’s Farfetch flaunts enviable growth and a favorable macroclimate, although its valuation will need a substantial premium above its peer group to have an up-round.

In operating an online marketplace for fashion brands and luxury boutiques, Farfetch generated $481m in trailing revenue. The company’s last venture round valued it north of $2bn, or 5x that amount – a steep hill for an e-commerce vendor, considering that such outlets rarely fetch above 2x from Wall Street. Online furniture seller Wayfair, for example, trades at about 2x – Groupon and JD.com trade below 1x.

Yet Farfetch has several factors working in its favor. For one, there’s a complementary economic environment. According to 451 Research’s most recent VoCUL: Consumer Spending report, in each of the past six months, over 30% of consumers have said they plan to spend more in the next 90 days. And 451 Research’s forthcoming Global Unified Commerce Forecast expects more of that spending to flow online (16% CAGR through 2022) than offline (2% CAGR). (We’ll be hosting a webinar to preview that report in September, readers can sign up here.)

Also, digital retailers specializing in clothing and fashion tend to be valued higher – by both acquirers and public investors – than the broader e-commerce category. According to 451 Research’s M&A KnowledgeBase, online retailers sold in the past 48 months fetched a median 1.1x trailing revenue. In recent sales of fashion-related sites, valuations have come in higher. Younique hit 2.5x in its $600m sale to Coty last year and Farfetch’s more mature rival, YOOX Net-A-Porter, landed 1.7x in its January sale to Richemont.

On the public markets, Stitch Fix, a personalized fashion retailer that went public last year, trades just above 3x. Farfetch would likely pass that marker – its topline expanded 55% compared with 33% for Stitch Fix and it has gross margins barely above 50%, whereas Stitch Fix is closer to 40%. Still, to match its private valuation, the would-be public company would need two full turns above Stitch Fix. That may not be, well, farfetched, but it’s a stretch.

Needs and wants

Thinking big – and spending even bigger – has landed Josh James in a tough spot. That will become clear later this week, when the company that James heads, Domo, prices its IPO. But it’s even more clear when we compare the planned offering by the current company led by James with the mid-2006 offering by the previous company led by James, Omniture. Simply put, it’s the difference between a company going public because it wants to (Omniture) rather than because it needs to (Domo).

The IPO papers show that although the two companies have the same CEO, somewhere over the past dozen years, James lost fiscal rigor. The relatively parsimonious operations last decade at Omniture gave way to a lavish lifestyle at Domo, which has resulted in James having to tap Wall Street to keep the lights on. Consider this: in the final quarter before the offering, Domo is roughly twice the size of Omniture, but is losing 10 times more money, on both an operating and net basis.

Looking closer at the two prospectuses, it quickly becomes clear how Domo’s financials became so deeply stained in red compared with Omniture. Even in its early days, Omniture never really spent more than half of its revenue on sales and marketing. For the two years after its IPO, Omniture spent 44% of revenue on sales and marketing, a level that’s consistent with other hyper-growth SaaS vendors.

Domo, on the other hand, has spent more on sales and marketing than it has taken in for revenue on every single financial period it has reported. And, more to the point, the huge investment isn’t really paying off for Domo, certainly not the way it did for Omniture. Domo, which is reporting decelerating growth, posted just a 32% increase in revenue in its most recent quarter, while Omniture basically doubled revenue every year on its way to creating a $300m-revenue company just two years after its IPO.

Put it altogether, and Domo has piled up a mountainous $800m in accumulated deficit. In comparison, Omniture burned through just $35m on its way to Wall Street. In the current era of mega-fundings and ‘growth at all costs’ business plans, Omniture’s paltry deficit seems almost quaint. So, too, does the fact that just four banks took the company public, half the number listed for Domo and most other software IPOs these days.

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Growth’s rich rewards

With public market investors handing out sky-high valuations for software vendors that are coming public, the debutants are under a fair amount of pressure to start strong on Wall Street. So far in their inaugural reports as public companies, the class of 2018 has delivered. All four enterprise software providers – which are growing, on average, nearly 50% – have kept their businesses humming along as they have stepped onto the NYSE and Nasdaq.

In other words, the newly public software companies (Dropbox, Zuora, Smartsheet and DocuSign) are keeping their end of the bargain they struck with investors during their IPO to post growth that’s well above the market average. In return, Wall Street is continuing to value them at a level that’s well above the market average. Valuations for the quartet range from roughly 10-22 times trailing sales, averaging almost 18x. That’s a richer valuation than virtually any of the existing SaaS kingpins, and three or four times the public market valuations for conventional software vendors.

That run of outsized rewards for above-market growth for enterprise software IPOs appears all but certain to end when Domo comes public in a few weeks. The reason? Domo is decelerating. In its most-recent quarter (ending in April), the BI startup reported 32% growth, down from the high-40% range for both the year-ago quarter as well as the full fiscal year. The slowdown at Domo means the company is now growing at only about half the rate of the two other similarly sized enterprise software providers that have come public in 2018, Smartsheet and Zuora.

Of course, Domo faces a more existential concern than how much revenue it adds each quarter. As we noted in our full report on the planned IPO, the company has spent itself into a hole and needs the money from the offering to get out of it. At current rates, Domo has only enough cash in the bank to keep the business going for two quarters. Wall Street knows that and will price it into offering. Unlike this year’s other software debutants, Domo – with its slowing growth and dwindling treasury – will get discounted when it comes to market.

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