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1 Q1 2020 Sector Update Software Important disclosures appear at the back of this report GP Bullhound LLP is authorized and regulated by the Financial Conduct Authority GP Bullhound Inc is a member of FINRA 2 GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to category leaders. Our quarterly SaaS market report provides quantitative insights into public and private market valuations across the transaction spectrum and qualitative insights into company business models, technology and trends. We feature many of the leading SaaS companies and CEOs across interesting sub-sectors. The big topic for this report obviously is COVID-19 and how it impacts daily lives, the economy, businesses and how people work. Generally we expect most B2B software companies to be pretty resilient throughout these turbulent and extraordinary times as they are core to how businesses operate and benefit from fundamental long-term trends. Some may even see an acceleration in business and a fundamental shift in adoption (e.g. digital workforce, collaboration and video conferencing), while a few vertically focused software vendors (e.g. hospitality and retail) are likely to suffer at least in the short-term. Based in our San Francisco office, Jonathan Cantwell is the head of our software practice with over 15 years of experience and has completed over 50 transactions with public and private tech companies globally. With 15 transactions in the past 12 months, we recently raised $1B+ for our clients in new capital and exit proceeds. Several of our recent software advisory transactions and investments are showcased below: Software perspectives EXECUTIVE SUMMARY Partnerize INVESTMENT BY Accel - KKR EcoVadis INVESTMENT BY CVC Edited INVESTMENT BY Wavecrest Growth & Beringea Unomaly ACQUIRED BY Logic Monitor Assetic ACQUIRED BY Dude Solutions 3 Key sector takeaways Recent software transaction trends 1 Contents 2 Public market SaaS analysis SaaS CEO commentary Key SaaS metrics Appendix A: GP Bullhound SaaS index 3 4 5 6 Appendix B: Software public comparables by category 7 Appendix C: GP Bullhound credentials & team 8 4 Section 1 Key sector takeaways 5 GP Bullhound’s views on current trends in software KEY TRENDS COVID-19 impact on the software industry 1 2 3 4 Rise in demand and adoption of the pay-per-use model (PPU) AI/RPA acquisition and investment spree expected to accelerate 5 6 Software companies riding the wave of growth from Microsoft Azure and 365 HR technology is improving employee engagement and development with AR/VR/XR RPA opens the door for hyper-automation 6 GP Bullhound’s views on current trends in software KEY TRENDS 1 COVID-19 impact on the software industry High recurring revenue business models will survive well in the long-term: – CEOs will focus on what really matters to customers and double down efforts. – Engagement and utilization will be measured to determine the risk and combat churn. – Customer success teams will be concentrated on upcoming renewals and then expanding the current customer base. Sales forces should re-check all customer agreements to determine out-clauses and renewal dates. As a rapid focus on operating costs begins, low-value or low-usage products can expect high churn in the next three months: – Spend and usage solutions from Cleanshelf, Coupa, ServiceNow, etc. will be valuable to the operations of enterprise customers. A shift to ‘profitable growth’ will occur; important in order to function well without burning capital. Vertical software companies focused on stable and growing industries will do well (government and healthcare) versus software sold into currently challenged industries (hospitality and retail). Remote work and collaboration platforms have seen a well-deserved increase in demand and stock prices in the last few weeks – DocuSign, Microsoft Teams, Slack, and Zoom – demand is likely to come down post the COVID-19 crisis, but still remain high as a shift to a mobile economy, less transient way of life will stick for years to come. – Security and back-end infrastructure will be critical to maintain quality productivity. As was the case in 2008-2009, the large cloud players will continue to hire and be dominate given their scale – Amazon, Google, Microsoft, Salesforce, Slack, and Zoom – flight to quality benefits tech leaders. We have seen a long-term shift towards companies enabling greater workforce flexibility and leveraging tech to drive efficiencies with progress differing hugely by industry. However, companies’ sudden need to embrace remote working and technology due to COVID-19 will have a permanent impact on the workforce and their tech and software set-up and accelerate this shift across all industries. Post-COVID-19, workforces across sectors will be much more reliant on software and continue to leverage and embrace newly found efficiencies and flexibility. 7 GP Bullhound’s views on current trends in software KEY TRENDS (1) The Wall Street Journal, Enterprise-Software M&A Deals Show Slowdown, February 5, 2020 2 Even when it comes to pricing and billing, SaaS companies can no longer afford to remain static with limited pricing options and service tiers. Real, usage-based pricing is a form of billing where customers are charged based on the usage of software or service. This allows more flexibility and has become a key differentiating factor (or a straight necessity) in competitive markets as they develop. Often a subscription that uses usage-based billing has a base plan with a set monthly fee and additional charges based on each customer’s usage. Some companies also offer plans with no monthly fee, only flexible billing based on usage. Companies that have mastered this model: AWS, Digital Ocean, Mailgun, MessageBird, and WordStream. Rise in demand and adoption of the pay-per-use model (PPU) 3 Artificial Intelligence (AI) has become a component of enterprise software suites driving upward bounds of innovation in technology. The acquisition of AI talent and technology are expected to accelerate and become one of the key drivers for software deal making. Spending on AI is expected to reach $36 billion in 2020, up 44% from 2018, and grow to $79 billion by 20221. Acquirers’ focus has shifted from more exploratory AI acquisitions to looking for AI technology and acquisitions that they can leverage for their existing products and platforms, and that can deliver value-add to customers in the short- and medium-term. Access to and quickly building scale in scarce AI talent is another focus for the large software consolidators as they seek to drive innovation. Companies that have mastered this model: Google, LinkedIn, Microsoft, and Salesforce. AI/RPA acquisition and investment spree expected to accelerate 8 GP Bullhound’s views on current trends in software KEY TRENDS 4 HR technology is improving employee engagement and development with AR/VR/XR Companies are using AR/VR to more efficiently train employees, offer new ways to engage candidates, onboard talent and create a more collaborative & immersive team environment. AR/VR/XR is programmable to cater to the different learning curves of every employee and can offer personalized professional development plans for each and every employee. Existing training modules can all be digitalized, immersing employees into real-life situations. Companies are rapidly rolling out products and processes to ensure engagement during remote work. 5 RPA opens the door for hyper-automation RPA was the stepping-stone to fully automating all repetitive processes within an enterprise. Going into 2020, businesses will look to combine additional software to expand the scope of tasks that can be completed using RPA. Hyper-automation is the product of combining other technologies and software, allowing enterprises to focus on a wider spectrum of business functions that usually require varying degrees of human intervention. This usually entails combining RPA with process mining, analytics, UX/CX, ingestion engine and machine learning. RPA has moved out of tech-focused companies and into new verticals including healthcare and government. Companies that have mastered this model: Automation Anywhere, Blue Prism, Olive, and UIPath. 9 GP Bullhound’s views on current trends in software KEY TRENDS 1. Microsoft, Statista 2. Rightscale 2019 State of the Cloud Report from Flexera 6 Software companies riding the wave of growth from Microsoft Azure and 365 Cloud infrastructure providers have experienced rapid growth over the past few years as more companies embrace cloud technology, initially with AWS leading the pack. Microsoft has heavily invested in Azure, which has experienced substantial growth (2016-2019 Commercial Cloud Revenue CAGR of 54%1) and has grown its public cloud adoption from 43% in 2017 to 60% in 2019 (AWS has grown adoption from 59% to 67% in the same time period)2. Given the level of competition, cloud providers have focused on functionality and applications to deliver a more value-added proposition and avoid being commoditized. Microsoft has been particularly focused on its cloud platform strategy offering increased functionality and applications. Microsoft benefits from a comprehensive enterprise product offering, which is tightly integrated in addition to its cloud services, driving strong incentives for businesses to use its products. Software companies with strong Microsoft integration flexibility and products built on top of the Microsoft stack are benefiting from strong underlying growth from Microsoft Azure and 365, and are seeing less friction in the sales cycle. The ability to interface with existing enterprise systems helps software companies deliver a single source of truth for customers. Over the coming months, we expect more software companies to double down on their Microsoft partnership strategy, leading to more M&A around the Microsoft ecosystem. 10 Section 2 Recent software transaction trends 11 Announce Date Buyer Target Target Description Value ($m) Implied EV/LTM Rev Mar-20 Software-defined wide-area networking provider 420 ‒ Mar-20 Strategic asset management software ‒ ‒ Mar-20 Financial wellness benefit application ‒ ‒ Mar-20 Provider of cloud-based human capital management ‒ ‒ Mar-20 Provider of intelligent data management software 5,000 5.0x Feb-20 Cloud-based software intended to deliver industry- specific customer experiences 1,330 13.3x Feb-20 Cloud-based talent management applications 1,394 ‒ Feb-20 SaaS based people management software 22,000 ‒ Feb-20 ERP software for industry- specific business 13,000 ‒ Jan-20 Work communication tool with shareable videos ‒ ‒ Jan-20 Algorithmic monitoring platform ‒ ‒ Source: Capital IQ, Pitchbook Notable software M&A deals & private financings AVERAGE VALUATION MULTIPLES FOR M&A TRANSACTIONS ARE UP QUARTER OVER QUARTER 2020 Q1 Mean 9.1x Announce Date Lead Investor Issuer Issuer Description Capital Raised ($m) Mar-20 Automated chatbot-based live support platform 44 Mar-20 Hospitality management software for the hotel industry 82 Mar-20 All-in-one spend management platform 30 Mar-20 Development tool intended to design and host websites 53 Mar-20 Mobile field workforce management platform 40 Feb-20 Enterprise application platform for enterprise insurance 51 Feb-20 Restaurant management platform and cloud-based POS 400 Jan-20 Intelligence-driven marketing and sales automation services 100 Jan-20 Developer of a personalized mobile messaging platform 70 Jan-20 Human resource management and recruitment platform 75 Jan-20 Partner automation platform for business partnerships 50 Jan-20 Sustainability rating platform for global supply chains 200 Selected M&A Transactions Selected Private Financings 2019 Q4 Mean 6.5x 12 Source: Pitchbook as of March 31, 2020 Note: Data includes all ‘SaaS’ M&A and private placement deals as defined by Pitchbook regardless of geography or transaction size Global software transaction trends M&A AND PRIVATE PLACEMENT ACTIVITY REMAINS STRONG QUARTER OVER QUARTER Recovery in the total volume and value of buyout and M&A deals Total number of private placement transactions remain steady The US and Europe continue to dominate M&A deal volume Deal volume in the U.S, Canada, & Europe outpaced other regions 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% U.S. & Canada Europe Asia Other 0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 $0M $5B $10B $15B $20B $25B $30B $35B $40B Capital invested ($Bn) Volume 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% U.S. & Canada Europe Asia Other 0 100 200 300 400 500 600 $0M $20B $40B $60B $80B $100B $120B M&A Buyout M&A deals Buyout deals 13 Software IPO landscape Source: Company SEC filings from Edgar, Capital IQ as of March 31, 2020 Filed in Q1 2020 Description (NASDAQ:ZI): Provider of a leading B2B sales intelligence platform Listing Date: TBD Offering Amount: $500m proposed Offering Price/Share: TBD LTM 12/31/19 Revenue: $293.3m Selected Metrics: – Net dollar retention 109% – 14,000+ customers – >50m contact record events daily – 580+ customers >$100k ARR Description (NYSE:PCOR): A leading cloud-based construction-management software Listing Date: TBD Offering Amount: $100m proposed Offering Price/Share: TBD LTM 12/31/19 Revenue: $289.2m Selected Metrics: – Net dollar retention 117% – 1.3m+ users – 8,506 total customers – 650+ customers >$100k ARR Comparing filed & listed IPOs (YoY) Filings to look for in 2020 3 1 2 Q1 2019 Q1 2020 Filed Listed Company Overview Provides teams collaboration and workflow management software Brokerage platform that offers individuals commission-free trading Offers a cloud-based data storage and analytics service 14 Section 3 Public market SaaS analysis 15 1x 2x 3x 4x 5x 6x 7x 8x 9x 10x 11x 12x 13x 14x mar-15 mar-16 mar-17 mar-18 mar-19 mar-20 GPB SaaS Index - EV / LTM Revenues GPB SaaS Index - EV/ NTM Revenues Source: Capital IQ as of March 31, 2020 Note: GP Bullhound SaaS Index constituents can be found in Appendix A (1) YTD GPB SaaS Index EV / LTM Revenues growth rate GP Bullhound SaaS index valuations REVENUE MULTIPLE TRENDS – PAST 5 YEARS Mean: 8.9x Mean: 7.3x Current SaaS valuations remain strong against the 5-year mean Mar ‘20: Multiples are down 10%(1) YTD due to the effects of COVID-19 As of March 31, the SaaS Index is trading at 9.9x trailing 12-month revenues, which is 11% greater than the 5-year average As of March 31, the SaaS Index is trading at 8.4x next 12-month revenues, which is 15% greater than the 5-year average Feb ’16: Overall market correction, global economic weakness made its way into the US causing SaaS companies to adjust their guidance Dec ‘18: Trade war with China leads to the sell-off of SaaS company stocks 16 1x 2x 3x 4x 5x 6x 7x 8x 9x 10x 11x 12x 13x 14x mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14 mar-15 mar-16 mar-17 mar-18 mar-19 mar-20 GPB SaaS Index - EV / LTM Revenues GPB SaaS Index - EV/ NTM Revenues Source: Capital IQ as of March 31, 2020 Note: GP Bullhound SaaS Index constituents can be found in Appendix A *Not all GP Bullhound SaaS Index constituents were publicly traded in 2008 GP Bullhound SaaS index valuations REVENUE MULTIPLE TRENDS – PAST 13 YEARS Mean: 8.0x Mean: 6.5x Current SaaS valuations remain strong against the 13-year mean Cloud stocks continue to be valued highly relative to the overall market and other sectors in tech; this is primarily due to strong end-market demand for software, mission critical business solutions, recurring revenue models and greenfield future opportunities for SaaS 1.9x 9.9x As of March 31, the SaaS Index is trading at 9.9x trailing 12-month revenues, which is 24% greater than the 13-year average As of March 31, the SaaS Index is trading at 8.4x next 12-month revenues, which is 29% greater than the 13-year average 17 Investors are increasingly focused on KPIs outside of revenue as they evaluate business models Source: CapitalIQ, SEC Filings (1) CY20E / CY19A (2) (S&M LTM Mar. 2020 / ((LTM Mar. 2020 Rev. – LTM Mar. 2019 Rev.) * GM%)) / 12 (3) LTM Mar. 20 Operating Cash Flow / LTM Mar. 2020 Revenue (4) As stated in company filings & earnings releases PUBLIC SAAS METRIC BENCHMARKING Revenue YoY growth (1) Payback period (2) Free cash flow margin (3) Net dollar retention (4) In months 132% 122% 120% 119% 117% 116% 115% 104% 104% 100% 80% 90% 100% 110% 120% 130% 140% Slack Pagerduty Pluralsight Okta Docusign Zscaler Appian Zuora Box Hubspot 44% 36% 32% 32% 30% 29% 29% 26% 25% 23% 23% 22% 22% 16% 14% 13% 10% 10% 9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 82,4 75,1 61,8 54,1 40,1 38,8 33,7 31,5 30,6 26,7 25,3 20,1 18,8 18,8 18,6 17,6 16,5 14,4 12,6 0 10 20 30 40 50 60 70 80 90 41% 32% 30% 25% 24% 18% 18% 16% 12% 9% 6% 1% 0% -1% -2% -3% -4% -4% -46% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 18 Source: Capital IQ as of March 31, 2020 Note: GP Bullhound SaaS Index constituents can be found in Appendix A GP Bullhound SaaS index performance INDEX VALUE 60% 70% 80% 90% 100% 110% 120% Jan-20 Feb-20 Mar-20 Index ValueGPB SaaS Index - Index Value NASDAQ Composite S&P 500 70% 80% 90% 100% 110% 120% Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Index ValueGPB SaaS Index - Index Value NASDAQ Composite S&P 500 70% 80% 90% 100% 110% 120% 130% Apr-19 Jul-19 Oct-19 Jan-20 Index ValueGPB SaaS Index - Index Value NASDAQ Composite S&P 500 L1M L3M L6M L12M Mar-20 Mar-20 65% 75% 85% 95% 105% Mar-20 Mar-20 Mar-20 Mar-20 Mar-20 Index ValueGPB SaaS Index - Index Value NASDAQ Composite S&P 500 Mar-20 Mar-20 19 0% 100% 200% 300% 400% 500% 600% 700% 800% 0% 100% 200% 300% 400% 500% 600% 700% 800% Source: Capital IQ Note: existing cash balances allow companies to spend over 100% of operating cash flow (1) As of Q1 2020 (2) Dollar amounts represent total cash use during the LTM period Tech giants – Show me the money R&D Debt paydown Capex Dividends Share buybacks Acquisitions $54,897 $1,040 $826 $9,725 $3,239 $125,914 $55,403 $67,160 $1,595 $9,256 $58,948 $167 LTM (1) % of operating cash flow $m (2) LTM – Q1 2019 % of operating cash flow $m (2) $26,724 $1,137 $416 $5,760 $1,058 $93,612 $58,711 $63,502 $50,762 $908 $142 $2,541 Substantial uses of cash for acquisitions through Q1 2020. ― Google completed four deals so far this year, including the $2.6 billion acquisition of Looker ― Salesforce closed another large transaction with the acquisition of Vlocity for $1.3 billion in an all-cash deal ― Microsoft announced the acquisition of Affirmed Networks for a speculated $1.35 billion ― Workday’s acquisition of Scout RFP for $540 million We expect companies will look to hold onto their cash until current market conditions show upside going into Q2. 20 Section 4 SaaS CEO commentary 21 Software company CEO profile MPP Global delivers eSuite, the world’s smartest subscriber management & billing platform providing blue-chips in the Media sector with the freedom to deploy flexible business models that drive recurring revenue streams. eSuite powers next generation lifecycle management that enables the acquisition, monetization and optimization of customers. With offices throughout the Americas, Europe and Asia Pacific, MPP Global has an impressive track record of maximizing customer lifetime value. Clients include Sky, McClatchy, L’Équipe, Bonnier, Specsavers, Daily Mail, NBC Universal, ProSiebenSat.1 and Mainichi. “Why would any company want to buy hardware, license software, build data centers, configure firewalls and pay engineers to maintain it? And that is even before the company- specific information systems have been architected and integrated. MPP Global supports all the obvious reasons why SaaS is better (time, cost, convenience) with enterprise-grade subscriber management capability, but goes further with providing maximum levels of data security relating to both payment information (e.g. credit card numbers) and personal data. We allay fears relating to data loss, fines and reputational harm." Paul Johnson CEO 22 Software company CEO profile Founded by a team of engineers at Stanford University, Onfleet is a San Francisco-based B2B provider of last-mile delivery management software with a mission to make last mile delivery efficient and delightful. Onfleet powers millions of deliveries every month for thousands of businesses across 90+ countries. Its customer base ranges from food & beverage delivery services to laundry & dry cleaning, prescription pharmaceutical, and flower & retail delivery businesses. Onfleet's product includes a powerful web-based dispatch dashboard for routing, tracking, dispatching, and analytics, intuitive iOS and Android apps for drivers, automated customer notifications and real-time driver tracking, and a robust RESTful API. “Most of our clients, particularly those in the grocery, restaurant, pharmacy, and cannabis industries, have seen significantly increased demand for their services in the past few weeks. We are busy onboarding new clients as well as building contactless delivery functionality, such as contactless signatures, to better serve the needs of delivery services during this crisis. We also launched a driver job board to connect those looking for work with those businesses struggling to keep up with demand. The COVID-19 pandemic will be a major catalyst in retail's transition to local delivery, and we at Onfleet have an important role to play in supporting these businesses." Khaled Naim Co-Founder & CEO 23 Software company CEO profile Founded by two serial entrepreneurs Dan Lee and Charlie Ponsonby, Plandek provides a complete set of end-to-end metrics and predictive analytics, to improve the effectiveness of software delivery. It works by mining data from toolsets used by delivery teams (such as Jira, Git, CI/CD tools and Slack), to provide actionable insight to optimize software delivery forecasting, risk management and process improvement. Plandek is a leader globally in the field and its analytics tools are used by clients in the US, Canada and Europe to transform their software delivery continuous improvement and risk management. “As you deliver software at scale, the complexity of delivering it increases exponentially – specifically in the continuous agile delivery environment. Due to global events around COVID-19, we are seeing an increasing uncertainty on delivery expectations and great pressure on cost which makes governance, risk management, and analytics of software delivery even more important than it has ever been." Charlie Ponsonby Co-Founder & Co-CEO 24 Section 5 Key SaaS metrics 25 Key SaaS metrics DEFINITIONS & CALCULATIONS Metric Definition Calculation Normalized measurement of recurring revenue, most frequently measured with a constant value in each month of the subscription period MRR All S&M expenses for new customers. Sometimes excludes personnel management S&M costs CAC =
