Seeking Alpha
Research analyst, IPOs
Profile| Send Message|
( followers)  

ServiceSource International LLC (NASDAQ:SREV) closed up 21.8% at $12.18 on day one of its IPO debut, after opening at $13.65. The pioneer and market leader in service revenue management, ServiceSource priced its 11.94M share IPO @ $10.00, above the range of $7.50-9.00. ServiceSource offered 8 million shares, while selling shareholders offered 3.94M (including 2.5M from executive officers and directors). At the $12.18 IPO price, ServiceSource's market capitalization is approximately $798M. The offering was led by Morgan Stanley and Deutsche Bank.

Founded in 1999, ServiceSource pioneered service revenue management, and provides a platform to enable technology companies to drive increased renewals of maintenance, support and subscription agreements. The company provides this through a combined platform of Managed Services, Cloud-based applications, and a Service Revenue Intelligence Platform, which is all wrapped in a pay-for-performance model. The company has over 100 engagements with over 55 blue-chip customers, including such names as VMware (NYSE:VMW), Adobe (NASDAQ:ADBE), NetApp (NASDAQ:NTAP), and Juniper (NYSE:JNPR).

The company uses the pay-for-performance model, and to date it has averaged an over 15% average increase in renewal rates for its customers. There is $160B annual spend on recurring maintenance support and subscription contracts. ServiceSource believes its 15% average renewal improvement rate translates to an additional $30B of lost revenue, and they exist to close that $30B gap.

For the year ended December, 31, 2010 ServiceSource's top 10 customers represented 54% of its revenue. This included Sun Microsystems (JAVA), which accounted for 13% of its revenue. However, when Oracle (NYSE:ORCL) acquired Sun Micro, Oracle terminated Sun’s contract with ServiceSource. The company points out that even with the loss of its top customer, it still grew revenue in the 4th quarter of 2010 by about 32% over the same period in 2009, with Sun accounting for only $1.7M of the $44.5M in revenue for the quarter.

The company says that it has no direct competitors, and its primary competition comes from companies providing an in-house solution. Such was the case with Oracle, and why it ended Sun Micro’s contract. ServiceSource's solution provides companies that have no in-house solution an opportunity to focus on their core products and services, while it helps maintain and expand service and maintenance contracts. As ServiceSource continues to grow the market for service revenue management, the company fully expects to see new competitors enter the market. The company believes its vast head start and complex proprietary technology gives it a solid leading foundation for the future.

The company plays in a space that has some attractive buzzwords, as in its “cloud-based applications” and the “SaaS” movement. These are offering increased importance to service revenue, which may have added to pique investors’ interest. However, the plain truth behind the story is a simple growth technology stock. ServiceSource has increased its opportunity (or bookings) under management by a 50% CAGR from $1B in 2006 to $5B in 2010. This represents the maintenance streams committed to the company by its current customers. Over the same period revenue has grown at a 35% CAGR from $45.9M to $152.9M. While the company had a negative net income in 2010 (after being profitable in the previous 2 years), this is more attributable to its increased investment in sales and administration in order to sustain its rapid growth. As can be noted by the above range pricing and over 21% gain on day one trading, there was plenty of investor demand in the ServiceSource offering, and this is a company to keep your eye on.

Disclosure: I have no positions in the stocks mentioned but may initiate a position in SREV within the next 72 hours.

Source: ServiceSource International: Investors Continue to Seek Growth Tech Companies