Shareholders in Marketo (MKTO) are jumping to fresh highs following the release of its second quarter results.
I am surprised by the strong reaction upwards as the company is guiding for quite a rapid slowdown in revenue growth. While I think the current valuation is high, I won't initiate a short position based on the limited float in fear of a short squeeze.
Second Quarter Results
Marketo generated second quarter revenues of $22.5 million, up 62% on the year before. Revenues were up by 14% from the first quarter.
Deferred revenues rose by 81% to $30.6 million, and rose a solid 25% from the first quarter.
The company reported a GAAP net loss of $12.4 million, or $0.63 per share. Non-GAAP losses per share, which exclude $2.6 million in stock-based compensation expenses and limited impairment charges, came in at $0.49 per share. CEO Phil Fernandez commented on the developments during the quarter:
We are delighted to report outstanding revenue and customer growth in our first quarter as a public company. In the second quarter of 2013, we hit on all cylinders across the key elements of our growth strategy, and we're very satisfied with the fundamentals of our business.
Following the strong second quarter results, Marketo is upbeat on the prospects for the remainder of the year. Yet I am not impressed with the guidance.
Third quarter revenues are expected to come in between $23 and $24 million. This implies that revenues will increase by some 53% on the year before and 4% compared to the second quarter. Net losses per share are expected to come in between $0.29 and $0.31 per share.
Full year revenues are expected to come in between $89 and $91 million. This implies that fourth quarter revenues will come in around $24 million as well. Full year net losses are expected to come in between $1.71 and $1.83 per share.
Marketo ended its second quarter with $121.9 million in cash and equivalents, after receiving $85.3 million in net proceeds from the public offering.
Factoring in gains of more than 20%, shares are trading around $32 per share. This values the company at around $1.15 billion, or its operating assets just above the $1 billion mark.
As such, Marketo is valued around 11.5 times 2013's expected annual revenues. The company is still expected to report large losses.
Some Historical Perspective
Marketo went public as recent as May of this year. Shares were sold to the public at $13 per share, after the firm and its bankers set an initial price range of $11-$13 per share.
Shares rose an incredible 78% on their first opening day, ending around $23 per share. Shares extended their gains in the opening days to $25, but have seen a correction towards $18 per share halfway June. A recovery in recent weeks, and the jump following the second quarter earnings report, sent shares to fresh highs of $32 per share.
I remain a bit puzzled behind the reasons for the very strong recent price action. The company continues to see great strength in the Salesforce.com (CRM) ecosystem, and diversification in Microsoft (MSFT) dynamics, yet the outlook is not that spectacular, especially in terms of revenue growth.
Second quarter revenues were up 62% compared to last year. At the same time, while the company was successfully seeing operating leverage in research & development expenses, and selling, general and administrative expenses, net losses rose to $12.4 million. This implies that the company still loses roughly half of total revenues coming in.
Based on the outlook, third quarter revenues are expected to increase by 53% on the year before, and just 4% compared to the second quarter. A further slowdown is expected in the final quarter of the year, as revenues are expected to increase by some 42%.
One promising sign is that Marketo is guiding for narrowing losses. Second quarter losses are expected to roughly half toward $0.29-$0.31 per share.
When I took a look at the prospects for Marketo at the time of the public offering, I was rather skeptical. Yet I acknowledge that shares were no obvious short given the possibility of an acquisition and a limited float which can result in painful short squeezes. As shares have risen some 40% from their opening day closing price, I am even more skeptical based on the projected sales growth slowdown.
While it obviously becomes more difficult to grow a business as the scale increases, Marketo's current scale is really limited. Therefore I remain skeptical about the current valuation. While I certainly won't initiate a long position, I refrain from putting on a short position based on the reasons mentioned above.