Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
Hey pone, happy new year. Good comments, as always. I would say a few things. I think BV becomes profitable in 2014, so I don't think it has losses for many years. It's just been re-investing gross profit into building out its sales team, as well as R&D. I think the sales and marketing expense growth slows down now, and you saw it in the most recent quarter. The cost structure is going to become more scaleable over time, and as incremental sales begin hitting the bottom line more, you're going to see profitability. I think 2014 is probably the right inflection point.
For many startups, it makes sense to continue re-investing in your business to take advantage of rapid top-line growth, and I think that's true for BV. On a cash flow from ops basis, BV is close to breakeven because it gets cash upfront.
In terms of the capital raises, yeah I think the VC's wanted out at a higher price, and the company wanted to raise capital at the frothy cloud valuation that the company initially received. The same thing is going on with NOW. But if NOW drops 70%, it'll reach a more reasonable valuation, and that's what has happened with BV.
As for your final paragraph on valuation, that makes sense. Our main point is that it's undervalued relative to peers, but you make a decent argument that's fairly valued relative to the stock-investing universe. It's a speculative trade, no doubt.
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
I consider it a cloud company because of articles like this: http://bit.ly/13MFSST. "Cloud" is such a nebulous term that it makes more sense to have the media define it rather than us.
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
But it's in the cloud! I'm not sure you can look at 2013 or 2014 EBITDA, it probably makes sense to look at 2016 EBITDA, put a multiple on that, and discount it to today.
But you ask a very worthwhile question. And probably the best answer involves some employment of the word 'cloud'.
ServiceNow: Disaffected Customers Mark The Peak Of Its Hype Cycle [View article]
Ravee:
Thank you for you the kind words. Those are both very good questions.
1) A quote from the CEO, Frank Slootman, during the Q3 conference call addresses your first question best, "In terms of the model, our principle source of upsell revenue comes from incremental users, right, as opposed to incremental applications." Using this definition, we think "upsells" is actually a type of organic growth (new users at an existing customer) rather than a proxy for ancillary product additions.
To the best of our knowledge, management hasn't given any real clarity behind the decline in upsells. They did mention "the ebb and flow" of the business and cited three large contracts in the quarter which contributed to a higher denominator in the calculation (upsell % = upsell revenue / total quarterly revenue). The full quote from the CFO follows, "As Frank mentioned, 20% of our annual contract value signed in the quarter came from upsells in our existing customer base. This is down from 36% last quarter, primarily due to a shift in our overall bookings mix with three new customer transactions greater than $1 million in annual contract value." - Michael Scarpelli (Q3 2012 Call)
We don't believe that management has given upsell guidance for the fourth quarter. But our intuition tells us that upsells could continue to decline as NOW reaches a point of user saturation in their existing customer base.
2) That's a great point, and we would agree that a 40% win rate is impressive versus BMC. But Wall Street's revenue projections actually demand a much more dominant win rate. The Street expects NOW to grow revenue from $239m in 2012 to $530m in 2014, suggesting about $145m of incremental revenue each year. Help Desk contracts are typically signed for ~3 year terms (NOW's prospectus cites a standard term length of 30-months). Of the contracts up for renewal, let's assume that 1/2 of those customers are seeking a complete overhaul of their Help Desk process and a replacement of their current vendor. That means about 16.7% (1/3 * 1/2) of the market is up for grabs in any given year.
Using Gartner's $1.5bn figure for the total size of the Help Desk market, our figures imply an annual incremental revenue opportunity of $250m (16.7% * $1.5bn). In order for NOW to grow by $145m a year, NOW would need a win rate of 58% vs. the entire market, not just BMC. If NOW can only beat out BMC 40% of the time, and we assume that HP, CA, Cherwell, SAManage and others reduce that 40% figure even further, then NOW won't meet the Street's revenue estimates in 2014.
And since management's upsell figure primarily measures incremental users, not ancillary products, we don't think NOW has built a substantial enough revenue stream outside of Help Desk to compensate for the lower than expected win rates.
If you are suggesting that we posted comments dated mid-2011 on HelpDeskReport and subsequently wrote this article 18 months later, you are flatly wrong. The site has both positive and negative reviews, but we've chosen the remarks with the highest peer-reviewed ratings. We did not try to game the system by giving ratings ourselves.
We've written our articles to discuss NOW's valuation in relation to shareholder's future returns, not to unilaterally disparage its business.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
We appreciate your contribution to the discussion. Those that we have spoken to in the industry seem to have a more mixed opinion on the upgrade cycle. Some experts have publicly questioned the long-term feasibility of the update sets: http://bit.ly/TfM42P
The intention of our article was not to unilaterally criticize ServiceNow's product. Instead, we wanted to point out that this is not a "one-size fits all" industry. Just like its competitors, ServiceNow has its strengths and weaknesses.
But most importantly to our investment thesis, a strong product does not always equal a smart stock investment, especially at these prices.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
BMC's RemedyForce customers are indeed smaller when compared to NOW's average customer, from what we've heard from the industry professionals we've spoken with. But RemedyForce is another example of increasing competition that's going to contribute to NOW's growth deceleration. We're not arguing that NOW doesn't have a commendable product, but that the current $5bn valuation is preposterous. Frankly, NOW's growth has already decelerated enough to demonstrate that it's not worth anywhere close to $30/share, and we think that the QoQ growth deceleration is only going to continue further in future quarters.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
Thanks Sen. Service-now themselves has classified their product as single-tenant, as shown on slide 13 of the linked presentation. http://slidesha.re/XdHjKB
While you are certainly right that implementation time can vary for each customer, the 6-8 month time range is ServiceNow's figure, not ours. Please see the bottom of page 38 of NOW's March 2012 S-1: "Most of our professional services engagements span six to eight months." http://1.usa.gov/W9TSjS
Separately, in our discussions with industry consultants who advise customers choosing between vendors and help them on the implementation side, we've also heard of plenty of customers experiencing 6-month implementation.
That said, we certainly expect that some customers are able to conduct an implementation at 2 or 3 months. We wrote that "Should a customer require customized functionality, as many do, it can take 6-8 months (page 38 of the initial S-1) and tens of thousands of dollars in implementation costs to get NOW's system up and running."
Although some customers can take 2-3 months, that doesn't change the fact that NOW is wildly overvalued at 20x 2012E revenue.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
Let's look at your $1bn revenue by 2015 projection.
Here are sequential quarter-over-quarter revenue growth rates over the past few quarters: 3-31-12: 21.1% q-o-q revenue growth 6-30-12: 19.7% 9-30-12: 13.3% 12-31-12E: 10.3%
As we can see, growth has been decelerating sharply, for all the reasons we discuss in our report. The most dissatisfied BMC, HP and CA customers have already switched to NOW. Some of NOW's current customers / partners are realizing that the sales pitch they'd heard initially doesn't fully match their experience: implementation takes longer than they'd expected, javascript programmers are costing them too much money, upgrading requires more programming support due to the single-tenant nature of NOW and the customized features they've added.
As a result, growth should continue to decelerate. Given that QoQ growth was 13% in Q3 and projected to be 10% in Q4, it's reasonable to assume it decelerates to 8% by end of 2013 and 6% by end of 2014 onwards. And this is a best-case upside scenario.
If you assume these growth rates, you get to $600m to $650m revenue by 2015. Let's take your 30% net, and we get $200m. The current market cap isn't $3.5bn, it's $4.9bn. There are 37m of options with an avg strike price of $4.48. At a NOW share price of $30m that's an extra 32m of shares, which equates to $950m of market cap.
So at $4.9bn market cap and $200m of net income, we're looking at a valuation of 25x 2015 P/E. Not 2012 P/E, but 2015 P/E. And at that point, NOW's growth opportunity will be much lower than today. Even CRM has never traded more than 10x revenue, and it's typically between 6x-8x, and it addresses much larger markets in the client relationship management and PaaS space. NOW services a much smaller market. It shouldn't have a market cap that's 25% of CRM's.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
I think a price of $15 would still imply a lot of growth and strong execution, but would at least approximate a more realistic bull case than the current levels.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
The financial databases are misleading investors by neglecting to include NOW's 37m options struck at an average strike price of $4.48. At the current stock price, these options add about $950m to NOW's market capitalization. This figure should be added to the market capitalization as calculated by Google Finance.
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
For many startups, it makes sense to continue re-investing in your business to take advantage of rapid top-line growth, and I think that's true for BV. On a cash flow from ops basis, BV is close to breakeven because it gets cash upfront.
In terms of the capital raises, yeah I think the VC's wanted out at a higher price, and the company wanted to raise capital at the frothy cloud valuation that the company initially received. The same thing is going on with NOW. But if NOW drops 70%, it'll reach a more reasonable valuation, and that's what has happened with BV.
As for your final paragraph on valuation, that makes sense. Our main point is that it's undervalued relative to peers, but you make a decent argument that's fairly valued relative to the stock-investing universe. It's a speculative trade, no doubt.
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
Bazaarvoice: Dramatically Cheap Relative To SaaS Enterprise Comparables [View article]
But you ask a very worthwhile question. And probably the best answer involves some employment of the word 'cloud'.
ServiceNow: Disaffected Customers Mark The Peak Of Its Hype Cycle [View article]
Thank you for you the kind words. Those are both very good questions.
1) A quote from the CEO, Frank Slootman, during the Q3 conference call addresses your first question best, "In terms of the model, our principle source of upsell revenue comes from incremental users, right, as opposed to incremental applications." Using this definition, we think "upsells" is actually a type of organic growth (new users at an existing customer) rather than a proxy for ancillary product additions.
To the best of our knowledge, management hasn't given any real clarity behind the decline in upsells. They did mention "the ebb and flow" of the business and cited three large contracts in the quarter which contributed to a higher denominator in the calculation (upsell % = upsell revenue / total quarterly revenue). The full quote from the CFO follows, "As Frank mentioned, 20% of our annual contract value signed in the quarter came from upsells in our existing customer base. This is down from 36% last quarter, primarily due to a shift in our overall bookings mix with three new customer transactions greater than $1 million in annual contract value." - Michael Scarpelli (Q3 2012 Call)
We don't believe that management has given upsell guidance for the fourth quarter. But our intuition tells us that upsells could continue to decline as NOW reaches a point of user saturation in their existing customer base.
2) That's a great point, and we would agree that a 40% win rate is impressive versus BMC. But Wall Street's revenue projections actually demand a much more dominant win rate. The Street expects NOW to grow revenue from $239m in 2012 to $530m in 2014, suggesting about $145m of incremental revenue each year. Help Desk contracts are typically signed for ~3 year terms (NOW's prospectus cites a standard term length of 30-months). Of the contracts up for renewal, let's assume that 1/2 of those customers are seeking a complete overhaul of their Help Desk process and a replacement of their current vendor. That means about 16.7% (1/3 * 1/2) of the market is up for grabs in any given year.
Using Gartner's $1.5bn figure for the total size of the Help Desk market, our figures imply an annual incremental revenue opportunity of $250m (16.7% * $1.5bn). In order for NOW to grow by $145m a year, NOW would need a win rate of 58% vs. the entire market, not just BMC. If NOW can only beat out BMC 40% of the time, and we assume that HP, CA, Cherwell, SAManage and others reduce that 40% figure even further, then NOW won't meet the Street's revenue estimates in 2014.
And since management's upsell figure primarily measures incremental users, not ancillary products, we don't think NOW has built a substantial enough revenue stream outside of Help Desk to compensate for the lower than expected win rates.
ServiceNow: Disaffected Customers Mark The Peak Of Its Hype Cycle [View article]
Both your link and ours lead us to this page:
http://bit.ly/TMPA4K
If you are suggesting that we posted comments dated mid-2011 on HelpDeskReport and subsequently wrote this article 18 months later, you are flatly wrong. The site has both positive and negative reviews, but we've chosen the remarks with the highest peer-reviewed ratings. We did not try to game the system by giving ratings ourselves.
We've written our articles to discuss NOW's valuation in relation to shareholder's future returns, not to unilaterally disparage its business.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
http://bit.ly/TfM42P
The intention of our article was not to unilaterally criticize ServiceNow's product. Instead, we wanted to point out that this is not a "one-size fits all" industry. Just like its competitors, ServiceNow has its strengths and weaknesses.
But most importantly to our investment thesis, a strong product does not always equal a smart stock investment, especially at these prices.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
While you are certainly right that implementation time can vary for each customer, the 6-8 month time range is ServiceNow's figure, not ours. Please see the bottom of page 38 of NOW's March 2012 S-1:
"Most of our professional services engagements span six to eight months."
http://1.usa.gov/W9TSjS
Separately, in our discussions with industry consultants who advise customers choosing between vendors and help them on the implementation side, we've also heard of plenty of customers experiencing 6-month implementation.
That said, we certainly expect that some customers are able to conduct an implementation at 2 or 3 months. We wrote that "Should a customer require customized functionality, as many do, it can take 6-8 months (page 38 of the initial S-1) and tens of thousands of dollars in implementation costs to get NOW's system up and running."
Although some customers can take 2-3 months, that doesn't change the fact that NOW is wildly overvalued at 20x 2012E revenue.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
Here are sequential quarter-over-quarter revenue growth rates over the past few quarters:
3-31-12: 21.1% q-o-q revenue growth
6-30-12: 19.7%
9-30-12: 13.3%
12-31-12E: 10.3%
As we can see, growth has been decelerating sharply, for all the reasons we discuss in our report. The most dissatisfied BMC, HP and CA customers have already switched to NOW. Some of NOW's current customers / partners are realizing that the sales pitch they'd heard initially doesn't fully match their experience: implementation takes longer than they'd expected, javascript programmers are costing them too much money, upgrading requires more programming support due to the single-tenant nature of NOW and the customized features they've added.
As a result, growth should continue to decelerate. Given that QoQ growth was 13% in Q3 and projected to be 10% in Q4, it's reasonable to assume it decelerates to 8% by end of 2013 and 6% by end of 2014 onwards. And this is a best-case upside scenario.
If you assume these growth rates, you get to $600m to $650m revenue by 2015. Let's take your 30% net, and we get $200m. The current market cap isn't $3.5bn, it's $4.9bn. There are 37m of options with an avg strike price of $4.48. At a NOW share price of $30m that's an extra 32m of shares, which equates to $950m of market cap.
So at $4.9bn market cap and $200m of net income, we're looking at a valuation of 25x 2015 P/E. Not 2012 P/E, but 2015 P/E. And at that point, NOW's growth opportunity will be much lower than today. Even CRM has never traded more than 10x revenue, and it's typically between 6x-8x, and it addresses much larger markets in the client relationship management and PaaS space. NOW services a much smaller market. It shouldn't have a market cap that's 25% of CRM's.
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]
ServiceNow: Decelerating Growth, Limited Market Size Point To Large Downside [View article]