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Evangelos Simoudis: May 2013 Archives

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:

  1. 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. 
  2. Steady renewal rates (90%+) and improvement on the churn we had seen in the social application companies. 
  3. 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. 
  4. 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:

  1. 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. 
  2. 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.
  3. 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.
  4. 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.

   

 

This page is a archive of recent entries written by Evangelos Simoudis in May 2013.

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