This was a mostly in-line
quarter for our SaaS portfolio companies, very much along the lines of what we
have gotten used to seeing every 1Q. It
started slower than our adtech and enterprise SaaS companies would have
preferred but ultimately ended on the right note. The mid-upper enterprise market segment that makes
up the primary target of our enterprise SaaS companies, remains concerned about
the macro environment. As a result,
companies in this segment have generally been delaying significant purchases,
particularly during the first part of the quarter. In last quarter’s commentary
I had warned that 2013 application budgets might be tighter than they were in
the last couple of years. First quarter
results provided more validation to this statement. The adtech platform companies remained top
performers for the quarter, and several exceeded their board-approved
budgets. But even these companies
started slow in January and part of February.
Based
on the results announced to date by the public SaaS companies we monitor, e.g.,
Netsuite, Demandware, ServiceNow, Jive, Cornerstone OnDemand, their performance
during 1Q13 remained strong, in-line with analyst expectations. Workday is also
expected to report in-line results, based on analyst predictions. Valueclick and Millennial Media, two public
online advertising platform companies we follow, are expected to announce
results this week but analysts are already projecting strong results. Though the results are in-line we also hear
that the public public SaaS companies continue to be impacted by the global
macro environment and the decreasing IT spending.
The
IPO market didn’t produce any significant exits during 1Q13. There were a few acquisitions worth
mentioning, most notably Google’s acquisition of Channel Intelligence and
AthenaHealth’s acquisition of Epocrates.
The rest, acquisitions by Jive, Opera Software and Twitter can be
characterized as tuck in transactions in the $50M range or below.
Positive aspects of our SaaS portfolio’s performance:
Strong license revenue growth of 10-30% QoQ
for the online advertising platform companies, and 10-15% of the remaining SaaS
companies. Adtech companies are seeing
more opportunities for yearlong contracts around their platforms and fewer
campaign-based contracts, indicating that large brands are becoming comfortable
employing such platforms on an ongoing basis.
The enterprise SaaS companies saw the revenue increase coming primarily
from upsells that are due to increased penetration within their existing
customer organizations and to the sale of additional modules to these
organizations. In general, we’ve also
seen more unbundling of functionality allowing customers to start with a lower
ARR but then expand quicker to add more of each solution’s modules. The strong upsells are also indicative of the
strong ROI corporations are seeing from these solutions and their increasing
comfort in using them.
Steady renewal rates (90%+) and improvement
on the churn we had seen in the social application companies.
Sales pipelines grew well, indicating
continued interest in SaaS applications in general and online advertising
platforms. We see continued interest for solutions for the CMO and also in
data-driven solutions.
Improving environment for partnerships
between larger IT vendors and our portfolio companies. Of note, 8thbridge’s partnership with GSI (a
division of eBay) and eXelate’s partnership with IBM.
Negative aspects of our SaaS portfolio performance:
The negative macro environment, the
relatively slow growth of the US economy, the continued issues with European
economies, and the slower than expected growth in the other world economics
(Asia, Latin America), continue to create headaches for the customers and
prospects of our portfolio companies. During
the first quarter our companies faced slow January and February. Sale activity started picking up in the
latter part of February and really peaked in March, allowing many to surpass
their booking targets though revenue will be impacted negatively because of the
SaaS model.
Social enterprise solutions continue to face
headwinds as corporations continue to assess the ROI and overall utility of the
solutions they have already adopted and find shelfware and low ROI. It is interesting that neither Salesforce nor
Oracle, which during 2012 made big acquisitions in this area, continue to
promote social enterprise solutions in the way they did last year.
While the sales pipelines are expanding, the
sales process remains lengthy for the mid-upper enterprise negatively impacting
sales productivity. Our companies
continue to invest heavily in sales and marketing in anticipation of increasing
demand in their target segments.
Talent acquisition remains difficult,
particularly in the west and northeast.
As a result, our portfolio companies have to offer packages that are
higher than those planned, negatively impacting their operating margins.
We are off to an OK start. We
are still very bullish on the growth prospects of all our SaaS portfolio
companies (enterprise and adtech) and continue to look for additional
investment opportunities even in in these types when the investment conditions are
not ideal due to the terms expected by management teams.
