As I prepare
to host our SaaS
advisory board on Wednesday I thought that this is a good opportunity to
analyze the 3Q13 of our relevant portfolio companies, and reflect on the sector
in general. Despite what is typically a
slow quarter for most IT and adtech companies, during 3Q13 our portfolio
companies in both of these areas performed extremely well with 90% meeting plan
and a 3 of them beating it. We are also
seeing strong sales pipelines for 4Q13 making us optimistic that this quarter
will be equally strong, if not stronger.
The public SaaS companies we follow are also starting to report strong
results. For the quarter most of the
growth continued to come from North America.
The foreign markets appear to have bottomed out providing additional
optimism for additional good quarters assuming the companies maintain their
focus and execution level.
enterprise SaaS companies we follow, e.g., Netsuite, Workday, Demandware,
Marketo, ServiceNow, Splunk, Jive, Cornerstone OnDemand, have either started
announcing or are expected to announce strong 3Q13 results, that are at least
in-line with analyst expectations. A big event for the quarter was Veeva’s
extremely successful IPO, which, along with the continued strong performance of
Athena Health, and Realpage, provide proof points that vertically focused SaaS
applications are another growth area for SaaS. The market is also becoming more
positive on the public adtech companies driven primarily by RocketFuel’s strong
IPO and Adap.tv’s acquisition by AOL for a very nice multiple. The market is also taking into consideration
the potential benefits of Facebook’s exchange, starting with the companies that
are already part of it. Valueclick and
Millennial Media remain in the penalty box.
In the case of Millennial the concern is primarily coming from
Facebook’s and Google’s moves around mobile adtech. The market is now waiting for Criteo’s IPO in
the next few days.
was no blockbuster SaaS company acquisition during the quarter, we continued to
see strong M&A activity, particularly of smaller companies offering mobile
applications. In addition to strategic
acquirers, large private equity firms continued to aggressively invest in or acquire
smaller, higher growth SaaS companies.
Some thoughts from the quarterly results and the broader market:
IT budgets remain stagnant regardless of what analysts have
been predicting in the beginning of the year, and for that matter every year
for the past couple of years. While the
U.S. commercial sector was better in Q3 than in Q2 and EMEA
spending appears to have bottomed, during 2013 IT budgets will not grow faster
than GDP, i.e., around 2%.
Businesses increasingly realize that they must aggressively
transition to digital/online and are turning to SaaS applications, including
analytic applications, and cloud-based platforms to achieve this goal. As a result, while IT budgets are stagnant,
budgets for SaaS applications continue to increase significantly. Business leaders view that SaaS solutions provide
them with faster time to market and superior ROI.
Enterprises, including global enterprises, are increasingly
comfortable with SaaS solutions.
On-premise software continues to lose market share to SaaS solutions.
Trident’s SaaS portfolio companies like Host
Analytics and ThisMoment are winning contracts to replace on-premise
deployment is severely behind schedule and their ROI is now being
regularly questioned. Brands using cloud-based adtech platforms are
also increasingly comfortable with longer term, subscription like
contracts. However, we need to start
differentiating between flavors of
subscription. In adtech we are not
yet seeing the guaranteed subscription revenue that software companies
drive. Instead we are seeing minimum
subscription guarantees along with some percent of the marketing spend that
goes through the adtech platform, or the promise to spend up to a specific
amount of money during particular a time period (usually 1-2 years) with a
particular vendor for a product or service.
Public and private investors remain attracted to SaaS
companies (both because of the revenue predictability they offer and because
they take advantage of the cloud’s economics). Investors continue to place a
premium on high revenue growth over profits rewarding companies whose revenue is
growing in excess of 50% YoY. The stock
performance of public SaaS and adtech companies that demonstrate revenue
predictability and offer a cloud-based platform and the valuations offered by
venture investors to private companies raising new rounds provide the best proof
of this trend.
The sales pipelines of our SaaS portfolio companies continue
to grow well, further underlying the broader demand for SaaS solutions. Inside sales groups continue to outperform
the field sales groups and drive down CAC.
Even large enterprises are now more comfortable interacting with inside
sales groups and completing a multi-channel sales process that involves phone
and the web and oftentimes very little or no support from the field
organization. As a result, our portfolio
companies are shifting more resources to inside sales and increasingly use
field sales only for very large opportunities or unique situations. In most cases we have encouraged our SaaS
companies to create hybrid sales groups rather than have distinct and separate
inside and field sales organizations. In
most of our SaaS portfolio companies we now see 3.5-4.5x coverage over the quarterly
bookings objective and 3-4 month sales cycles making plan achievement increasingly
predictable. As a result we continue to
see a strong list of sales candidates coming from on-premise software companies
who feel they can make more money working for SaaS companies.
Enterprises are consistently satisfied with the ROI they
receive from SaaS solutions. This leads
to strong renewals and upsells that contribute "negative" revenue
churn, in other words the amount being upsold to existing customers is higher
than the amount of revenue that is churning.
However, the initial ARR contracted by enterprise customer remains lower
than we would have expected, having a direct impact on CAC.
While we are very happy with the inside sales process, larger
corporations still expect more handholding through post sales services than we
would have liked. Many of these services
are now being offered for free or at a low margin by both public and private
SaaS companies in order to facilitate the sale of a subscription.
final note: The
economy is taking hold in several industries. The SaaS model is quickly migrating to other
industries, e.g., retail, publishing, manufacturing, travel. As a result there will be a need for the
development of a broader software
solution ecosystem that facilitates the functioning of this economy.