Online Research: www.research-driven.com
Research: (800) 866-3272 • Trading: (800) 322-3272 • (312) 258-0660
One South Wacker Drive • Suite 3900 • Chicago, IL 60606
Important disclosures and certifications begin on page 20 of this report
Contents
SaaS stock performance chart by sector
2
Front-page commentary continued
3
SaaS financial and valuation comparisons
8
First Analysis sector-specific discussions
Human Capital Technology
11
Healthcare Analytics
13
IoT/M2M
14
Cyber Security
16
e-Commerce Optimization
17
Other SaaS
19
(Continued on page 3)
SaaS
October 2, 2017
QUARTERLY INSIGHTS
Rule of 40 a better predictor of
valuation than just revenue growth
■ The Rule of 40 was developed as a gate to determine the best
SaaS performers, and using the specific numerical result of
adding revenue growth and EBITDA margin is a better predictor
of valuation (with a correlation of 0.74) than just revenue growth
alone (correlation 0.55) for 2017 data. Twelve of our 34 SaaS
names (35.3%) with 2017 data meet the Rule of 40 criteria.
■ Our SaaS universe continued to outperform the S&P 500 in the
September quarter with a median gain of 7.9% compared to
4.0% for the market index. Performance was much more vari-
able by stock and sector than last quarter, supporting the value
of individual stock selection.
■ Using regression analysis for our SaaS universe, the 2017
correlation improves to 0.85 by weighting revenue growth at
approximately twice the EBITDA margin. This supports our view
that revenue growth is the most important factor for SaaS valu-
ations. We call this weighted formula the First Analysis Rule of
40.
Rule of 40
The Rule of 40 appears to have been popularized by noted blogger
and investor Brad Feld in a post on Feb. 3, 2015. The concept has
quickly taken off since then. Feld apparently heard about the con-
cept from another late-stage investor at a board meeting. Simply,
INTEGRATIVE PUBLIC/PRIVATE PERSPECTIVE
SaaS companies by sector
Sector coordinator: James Macdonald
Human Capital
Corey Greendale
James Macdonald
Ken Wang
312.258.7139
312.258.7124
312.258.7193
BlackLine Inc.
BL
Callidus Software Inc.
CALD
Cornerstone OnDemand Inc.
CSOD
Coupa Software Inc.
COUP
Instructure Inc.
INST
Paycom Software Inc.
PAYC
Paylocity Holding Corp.
PCTY
2U Inc.
TWOU
Ultimate Software Group Inc.
ULTI
Workday Inc.
WDAY
e-Commerce optimization
David Gearhart
Larry Berlin
312.258.7128
312.258.7187
ChannelAdvisor Corp.
ECOM
CommerceHub Inc.
CHUBA
Five9 Inc.
FIVN
HubSpot Inc.
HUBS
LivePerson Inc.
LPSN
RingCentral Inc.
RNG
salesforce.com
CRM
SPS Commerce Inc.
SPSC
Zendesk Inc.
ZEN
Other SaaS
Alteryx Inc.
AYX
Atlassian Corp. PLC
TEAM
Everbridge Inc.
EVBG
LogMeIn Inc.
LOGM
MuleSoft Inc.
MULE
New Relic Inc.
NEWR
ServiceNow Inc.
NOW
Healthcare Analytics
Frank Sparacino
312.258.7103
athenahealth Inc.
ATHN
Benefitfocus Inc.
BNFT
Castlight Health Inc.
CSLT
Medidata Solutions Inc.
MDSO
Veeva Systems Inc.
VEEV
IoT/M2M
Howard Smith
David Gearhart
312.258.7117
312.258.7128
Alarm.com Holdings Inc.
ALRM
MiX Telematics Ltd.
MIXT
Cyber Security
Howard Smith
David Vercoutere
312.258.7117
312.258.7114
Proofpoint Inc.
PFPT
Qualys Inc.
QLYS
(800) 866-3272
2
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Our SaaS universe continued to outperform the S&P 500 in the June quarter
with a median return of 7.9% compared to 4.0% for the S&P. Performance
was significantly more variable by sector in the September quarter after very
similar performance in the June quarter as shown in the chart below. The
Healthcare sector was down 7.4% in the September quarter after having
the biggest gains last quarter; it was the only sector showing a decline. The
largest gaining sectors were IoT, up 23.0%, and Cyber Security, up 13.7%.
The large Human Capital and e-Commerce sectors were up 8.4% and 11.1%,
respectively.
Individual stocks also had wide variation. CommerceHub was the larg-
est gainer, up 29.6%; First Analysis picked up coverage during the quarter.
Qualys was up 27.0%. MuleSoft was the largest decliner, down 19.6%.
Benefitfocus, athenahealth, and Veeva all declined significantly, leading to
the weak Healthcare performance. We removed Xactly from our SaaS uni-
verse after it was acquired by Vista Equity.
Commentary
Quarterly SaaS company performance
SaaS Stock Performance by Sector (equal-weighted)
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
3/31/2017
4/30/2017
5/31/2017
6/30/2017
7/31/2017
8/31/2017
9/30/2017
Human Capital
Healthcare Analytics
IoT/M2M
Cyber Security
E-Commerce Optimization
Others SaaS
Overall SaaS Group
S&P 500
Source: First Analysis, FactSet.
(800) 866-3272
3
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
the Rule of 40 is that a well performing software or SaaS company should have
revenue growth and profitability percentage that add up to over 40% (we will
refer to this calculated number as R40). So if you are growing at 40%, you should
be breakeven or better. If you are growing 50%, you can be losing 10%. Most
pundits use EBITDA margin, which is what we will use for this report, but others
prefer cash flow margin or other profitability measures.
The Rule of 40 was originally conceived for companies with over $50 million in
revenue, but Feld believes it applies to companies as small as $1 million. One
application is to decide how much to invest (or how much money to lose) in early
venture-backed companies. The calculation has also been applied to public com-
panies. Data presented by venture capitalist Tomasz Tunguz in 2015 for a group
of public SaaS companies including several original SaaS companies that have
been acquired (not our current SaaS universe, Table 1) seems to indicate it be-
comes more difficult to reach the 40% hurdle as companies are older and larger.
He notes that year 5 or 6 after founding typically represents around $50 million
in revenue for these companies and also represents the period these companies
have an R40 average close to 40%. In fact, early in their lifetime these soon-to-
be public companies were well above the 40% threshold primarily because they
were growing very quickly (often doubling or tripling each year).
We have been writing for several years that we believe revenue growth is the
most important single determinant in SaaS valuations. We also published a
report on June 30, 2015, about how profitability was becoming more important in
valuations. Our impression in the early SaaS days (~2002-08 time period) was
that SaaS companies did not want to be profitable so they would continue to be
valued on a price-to-sales ratio rather than P/E. Since both revenue growth rate
and profitability are clearly important, we decided to see if the R40 calculation
had better correlation with valuation—and it does!
In Table 2, we list our SaaS universe in order of highest 2017 R40 to lowest.
Twelve of our 34 SaaS companies (35.3%, excluding LogMeIn) are expected to
(Continued from page 1)
TABLE 1
Median R40 by Year Since Founding for SaaS Public Companies
0%
30%
60%
90%
120%
Ratio4
8
12
16
Years Since Founding
Source:
tomtunguz.com/rule-of-40, Feb. 11, 2015.
(800) 866-3272
4
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 2
Ranking of SaaS Companies by Rule of 40 and First Analysis Rule of 40
**=currently covered by FA
Rule of 40
First Analysis
Rule of 40
Revenue Growth Adjusted EBITDA
EV/Sales
Company
2017e 2018e
2017e
2018e
2017e 2018e
2017e 2018e
2017e 2018e
Atlassian (TEAM)
62.4%
60.4%
65.3%
63.0%
35.6%
34.0%
26.7%
26.4%
11.6
8.6
Paycom Software (PAYC)**
59.3%
54.3%
59.8%
52.9%
30.4%
25.0%
28.9%
29.2%
10.1
8.1
ServiceNow (NOW)
59.0%
55.2%
64.1%
57.2%
37.2%
30.5%
21.8%
24.7%
9.7
7.4
Veeva Systems (VEEV)
56.9%
51.6%
53.8%
47.4%
23.8%
19.5%
33.1%
32.1%
11.5
9.6
CommerceHub (CHUBA)**
52.4%
55.4%
43.3%
46.8%
12.6%
14.8%
39.8%
40.6%
8.9
7.8
Workday (WDAY)**
49.2%
42.7%
55.4%
45.5%
33.9%
25.7%
15.3%
17.0%
9.1
7.3
Paylocity (PCTY)**
48.8%
42.6%
52.5%
43.8%
30.0%
23.2%
18.7%
19.4%
7.5
6.1
Qualys (QLYS)**
48.1%
50.0%
42.1%
43.9%
15.0%
15.9%
33.0%
34.1%
7.7
6.6
Proofpoint (PFPT)**
46.5%
41.9%
54.1%
46.8%
34.7%
28.3%
11.8%
13.6%
9.5
7.4
Salesforce.com (CRM)
45.9%
42.9%
46.5%
41.8%
23.8%
19.8%
22.0%
23.1%
6.3
5.3
Medidata Solutions (MDSO)
44.0%
43.9%
42.4%
41.4%
19.5%
18.2%
24.5%
25.7%
7.9
6.7
Ultimate Software (ULTI)
42.9%
44.1%
41.8%
42.7%
19.8%
20.0%
23.0%
24.1%
5.9
4.9
Zendesk Inc. (ZEN)
39.0%
34.8%
49.7%
43.0%
35.6%
29.7%
3.4%
5.1%
5.9
4.5
HubSpot (HUBS)
38.9%
32.4%
48.8%
38.8%
34.4%
25.8%
4.5%
6.5%
6.8
5.4
BlackLine (BL)
38.1%
31.4%
51.9%
40.4%
39.8%
29.2%
-1.7%
2.2%
9.4
7.3
RingCentral Inc. (RNG)
36.1%
31.2%
43.9%
36.6%
29.7%
23.7%
6.4%
7.5%
5.7
4.6
2U Inc. (TWOU)**
35.2%
39.8%
44.4%
49.4%
31.4% 1
34.4% 1
3.8%
5.4%
8.4
6.2
Athenahealth (ATHN)**
34.6%
36.3%
31.9%
33.2%
13.2%
13.5%
21.4%
22.7%
4.2
3.7
Alarm.com (ALRM)**
34.2%
35.0%
32.1%
31.8%
13.9% 1
12.7% 1
20.3%
22.3%
6.5
5.7
New Relic (NEWR)**
34.1%
34.7%
43.8%
40.5%
31.6%
26.1%
2.5%
8.6%
6.6
5.2
Everbridge (EVBG)
31.9%
27.1%
43.5%
35.4%
33.4%
26.0%
-1.5%
1.2%
6.3
5.0
Callidus Software (CALD)
31.2%
33.8%
33.7%
35.3%
19.4%
19.1%
11.8%
14.7%
5.6
4.7
MiX Telematics (MIXT)**
30.3%
34.7%
24.7%
28.8%
6.8%
8.5%
23.4%
26.2%
1.6
1.5
SPS Commerce (SPSC)**
28.1%
30.2%
27.7%
29.8%
13.5%
14.5%
14.6%
15.7%
3.7
3.2
Five9 (FIVN)
26.5%
26.1%
31.0%
29.1%
20.1%
17.5%
6.4%
8.6%
6.1
5.2
Alteryx (AYX)
24.0%
18.4%
46.9%
36.2%
46.3%
35.9%
-22.2%
-17.5%
7.6
5.6
MuleSoft (MULE)
23.8%
10.2%
48.7%
29.8%
49.3%
34.5%
-25.5%
-24.3%
8.3
6.2
Instructure (INST)**
18.8%
21.3%
38.3%
34.3%
38.6%
30.1%
-19.8%
-8.8%
5.9
4.5
Benefitfocus (BNFT)**
16.2%
23.5%
17.4%
25.2%
10.0%
14.3%
6.2%
9.2%
3.9
3.4
Cornerstone OnDemand (CSOD)**
15.4%
21.2%
19.4%
24.6%
13.7%
15.6%
1.7%
5.6%
4.4
3.8
ChannelAdvisor (ECOM)**
14.8%
18.3%
16.2%
19.8%
9.6%
11.3%
5.2%
6.9%
1.9
1.7
Coupa Software (COUP)**
13.6%
9.0%
31.3%
22.4%
33.4%
24.6%
-19.7%
-15.6%
7.8
6.3
Castlight Health (CSLT)**
6.3%
18.7%
24.6%
30.9%
30.7%
27.6%
-24.4%
-8.9%
3.4
2.7
LivePerson (LPSN)**
5.9%
17.7%
1.7%
16.5%
-3.4%
7.0%
9.3%
10.7%
3.3
3.1
LogMeIn (LOGM)
na
52.9%
na
45.1%
na
14.8%
35.4%
38.1%
5.5
4.8
Source: First Analysis, FactSet, company reports; EV/sales as of Sept. 25.
Notes:
1 First Analysis estimates, excluding acquisition
(800) 866-3272
5
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
meet the 40% threshold in 2017. These 12 companies are not just the smaller
SaaS companies but include the three largest ones, salesforce.com, Workday,
and ServiceNow.
Looking at the data for these 12 companies, the strong R40 results are supported
by strong profitability, with the lowest adjusted EBITDA margin in the group at
11.8% (for Proofpoint). Nine of the 12 companies have over 20% EBITDA margin
and three of the 12 have over 30% EBITDA margin. With these profitability levels,
we would expect many of these companies to maintain an R40 over 40% even
when revenue growth drops below our 20% SaaS threshold. We were somewhat
surprised that no loss-making companies in our SaaS universe are growing fast
enough to have an R40 over 40%.
Based on consensus estimates for 2018, this entire group of companies is ex-
pected to continue to have an R40 over 40% next year. LogMeIn is also expected
to be added to this group after the acquisition of GetGo Inc., a division of Citrix, is
anniversaried.
Rule of 40 improves correlation with valuation
In Tables 3 and 4, we plot our traditional 2017 revenue growth versus valuation
(EV/2017 revenue) and the new 2017 R40 versus EV/2017 revenue, respectively.
Valuation correlates better with R40 (0.74) than with revenue growth alone (0.55).
As noted, as the SaaS sector matures, profitability is becoming more important,
but we still view revenue growth as the most important single driver of valuation.
As with our work on revenue growth, we would look at companies below the
trendline in Table 4 as mathematically undervalued. We would look closely at
those companies with an R40 near or over 40% with lower revenue multiples
including Ultimate Software (5.8x 2017 revenue), salesforce.com (6.4x 2017
revenue), and Zendesk (5.8x 2017 revenue, R40 of 38.4%).
A better measure: “First Analysis R40”
We did a regression analysis and found the best correlation to describe current
stock valuation (EV/revenue) was using a weighting of 65/35 for revenue growth
and EBITDA margin for 2017 and a weighting of 69/31 for 2018. This improves
the correlation to 0.85 for 2017 from 0.74 (see Table 5).
Based on this, we are proposing an optimized calculation we call “First Analysis
R40,” which is 1.333X revenue growth and 0.667X EBITDA margin. Clearly, this
helps fast-growing companies with low margins like Alteryx, which has a First
Analysis R40 of 46.9%, up from 24.0%, and MuleSoft would increase to 48.7%
from 23.8% for 2017. 21 of 33 companies (63.6%) in our SaaS universe would be
over 40% under this rule.
(800) 866-3272
6
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 4
EV/'17e Sales vs. Rule of 40
LPSN
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Correlation: 0.74
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM.
TABLE 3
EV/'17e Sales vs. Revenue Growth
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Correlation: 0.55
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM, LPSN.
(800) 866-3272
7
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 5
EV/'17e Sales vs. First Analysis Rule of 40
LPSN
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Correlation: 0.85
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM.
October 2, 2017SaaS Quarterly InsightsSaaS Comparisons (Source: First Analysis, FactSet estimates)(800) 866-32728First Analysis Securities CorporationCompany
** = Currently covered by FA
2017e
Rev ($M)
2018e Rev
($M)
2017e/2016
Rev. Growth
2018e/2017e
Rev. Growth
2017e
Gross
Margin
2018e
Gross
Margin
2017e
Op. Margin
2018e
Op. Margin
Enterprise
Value ($M)
EV/'17e
Sales
EV/'18e
Sales
2017e EV/
EBITDA
2018e EV/
EBITDA 2017e P/E 2018e P/E
Human Capital
BlackLine Inc. (BL)
$172.1
$222.4
39.8%
29.2% 80.3% 79.9%
-5.3%
-2.4%
$1,660.2
9.6
7.5
na
na
na
na
Callidus Software Inc. (CALD)
$246.8
$293.9
19.4%
19.1% 63.7% 65.6%
9.2%
11.2%
$1,432.3
5.8
4.9
49.2
33.1
77.0
61.6
Cornerstone OnDemand, Inc. (CSOD)**
$481.2
$556.5
13.7%
15.6% 72.4% 72.8%
5.9%
9.6%
$2,245.3
4.7
4.0
273.8
72.2
104.1
54.9
Coupa Software Inc. (COUP)**
$178.4
$222.3
33.4%
24.6% 69.3% 72.6%
-14.2%
-8.1%
$1,433.3
8.0
6.4
na
na
na
na
Instructure, Inc. (INST)**
$153.7
$200.0
38.6%
30.1% 72.2% 73.4%
-25.0%
-12.9%
$938.6
6.1
4.7
na
na
na
na
Paycom Software, Inc. (PAYC)**
$429.1
$536.5
30.4%
25.0% 83.8% 83.8%
24.3%
24.2%
$4,374.1
10.2
8.2
35.2
27.9
64.6
52.1
Paylocity Holding Corp. (PCTY)**
$300.0
$369.6
30.0%
23.2% 62.6% 63.6%
10.8%
11.6%
$2,416.1
8.1
6.5
43.0
33.7
72.9
61.0
2U, Inc. (TWOU)**
$284.2
$390.1
38.0%
37.3% 82.3% 81.2%
-10.9%
-8.9%
$2,549.9
9.0
6.5
238.3
122.0
na
na
The Ultimate Software Group, Inc. (ULTI)
$936.1
$1,123.3
19.8%
20.0% 63.7% 64.6%
19.2%
20.1%
$5,705.8
6.1
5.1
26.5
21.1
53.7
43.3
Workday, Inc. (WDAY)**
$2,101.4
$2,640.4
33.9%
25.7% 73.6% 74.8%
6.9%
8.9%
$20,265.7
9.6
7.7
63.0
45.1
127.0
96.7
Average:
29.7%
25.0% 72.4% 73.2%
2.1%
5.3%
7.7
6.1
104.2
50.7
83.2
61.6
Median:
31.9%
24.8% 72.3% 73.1%
6.4%
9.2%
8.0
6.5
49.2
33.7
74.9
58.0
Healthcare Analytics
athenahealth, Inc. (ATHN)**
$1,225.8
$1,391.5
13.2%
13.5% 63.8% 63.7%
10.6%
12.5%
$5,245.4
4.3
3.8
20.0
16.6
64.8
50.6
Benefitfocus, Inc. (BNFT)**
$256.6
$293.2
10.0%
14.3% 53.2% 54.9%
0.6%
3.7%
$1,099.2
4.3
3.7
68.7
40.6
na
420.6
Castlight Health, Inc. (CSLT)**
$132.9
$169.6
30.7%
27.6% 68.4% 70.5%
-24.0%
-9.5%
$465.4
3.5
2.7
na
na
na
na
Medidata Solutions, Inc. (MDSO)
$553.7
$654.4
19.5%
18.2% 77.3% 77.5%
11.0%
12.8%
$4,571.5
8.3
7.0
33.6
27.2
61.0
51.4
Veeva Systems Inc. (VEEV)
$673.6
$804.7
23.8%
19.5% 70.8% 71.2%
30.0%
30.6%
$7,951.3
11.8
9.9
35.7
30.8
65.6
55.9
Average:
19.4%
18.6% 66.7% 67.5%
5.6%
10.0%
6.4
5.4
39.5
28.8
63.8
144.6
Median:
19.5%
18.2% 68.4% 70.5%
10.6%
12.5%
4.3
3.8
34.7
29.0
64.8
53.6
IoT/M2M
Alarm.com Holdings, Inc. (ALRM)**
$328.4
$379.9
25.8%
15.7% 66.9% 68.7%
17.1%
19.5%
$2,217.6
6.8
5.8
33.3
26.2
46.6
46.6
MiX Telematics Limited (MIXT)**
$123.8
$134.3
6.8%
8.5% 67.7% 68.2%
14.9%
17.2%
$204.6
1.7
1.5
7.1
5.8
17.7
13.8
Average:
16.3%
12.1% 67.3% 68.5%
16.0%
18.4%
4.2
3.7
20.2
16.0
32.1
30.2
Cyber Security
Proofpoint, Inc. (PFPT)**
$505.7
$648.7
34.7%
28.3% 76.9% 77.0%
7.4%
9.7%
$4,745.9
9.4
7.3
79.2
53.7
134.2
86.4
Qualys, Inc. (QLYS)**
$227.7
$263.9
15.0%
15.9% 78.5% 78.8%
24.1%
25.0%
$1,769.1
7.8
6.7
23.5
19.7
57.6
50.3
Average:
24.9%
22.1% 77.7% 77.9%
15.7%
17.4%
8.6
7.0
51.4
36.7
95.9
68.3
CRM/e-Commerce
ChannelAdvisor Corp. (ECOM)**
$124.1
$138.1
9.6%
11.3% 77.8% 77.6%
-0.3%
0.9%
$246.7
2.0
1.8
38.5
25.7
na
143.8
CommerceHub (CHUBA)**
$113.2
$129.9
12.6%
14.8% 79.8% 80.1%
32.9%
35.2%
$1,013.9
9.0
7.8
22.5
19.2
47.0
38.9
Five9 Inc. (FIVN)
$194.6
$228.7
20.1%
17.5% 59.9% 60.8%
1.7%
3.8%
$1,289.7
6.6
5.6
103.2
65.8
na
265.6
HubSpot, Inc. (HUBS)
$364.1
$458.1
34.4%
25.8% 80.1% 80.8%
0.4%
2.7%
$2,840.5
7.8
6.2
172.2
94.7
na
262.7
LivePerson Inc. (LPSN)
$215.2
$230.2
-3.4%
7.0% 74.2% 75.0%
3.5%
3.3%
$700.6
3.3
3.0
34.9
28.4
150.6
90.3
RingCentral, Inc. (RNG)
$492.6
$609.2
29.7%
23.7% 75.9% 76.3%
2.9%
4.3%
$3,001.8
6.1
4.9
95.9
65.6
245.6
139.2
Salesforce.com, Inc. (CRM) $10,392.3
$12,454.1
23.8%
19.8% 76.0% 76.1%
14.1%
15.6%
$66,483.5
6.4
5.3
29.1
23.1
71.3
53.7
SPS Commerce, Inc. (SPSC)**
$219.3
$251.1
13.5%
14.5% 67.8% 68.3%
11.2%
12.1%
$826.9
3.8
3.3
25.8
21.0
66.7
54.0
Zendesk, Inc. (ZEN)
$423.0
$548.8
35.6%
29.7% 73.5% 74.0%
-4.4%
-0.5%
$2,656.1
6.3
4.8
185.7
95.5
na
na
Average:
19.5%
18.2% 73.9% 74.3%
6.9%
8.6%
5.7
4.8
78.6
48.8
116.2
131.0
Median:
20.1%
17.5% 75.9% 76.1%
2.9%
3.8%
6.3
4.9
38.5
28.4
71.3
114.8
Other SaaS
Alteryx, Inc. (AYX)
$125.5
$170.6
46.3%
35.9% 83.7% 84.4%
-14.7%
-11.7%
$1,034.9
8.2
6.1
na
na
na
na
Atlassian Corporation PLC (TEAM)
$619.9
$831.0
35.6%
34.0% 83.8% 83.8%
16.8%
17.8%
$7,387.0
11.9
8.9
44.6
33.7
97.6
79.9
Everbridge, Inc. (EVBG)
$102.5
$129.1
33.4%
26.0% 71.6% 71.8%
-7.8%
-5.3%
$691.6
6.7
5.4
na
$461.0
na
na
LogMeIn, Inc. (LOGM) $1,015.4
$1,165.5
na
14.8% 83.7% 83.3%
29.8%
32.6%
$5,656.7
5.6
4.9
15.7
12.7
27.2
22.7
MuleSoft, Inc. (MULE)
$280.2
$376.9
49.3%
34.5% 74.4% 74.6%
-17.1%
-12.5%
$2,338.0
8.3
6.2
na
na
na
na
New Relic, Inc. (NEWR)**
$346.8
$437.2
31.6%
26.1% 82.4% 82.1%
-4.3%
2.7%
$2,447.0
7.1
5.6
281.3
64.9
na
237.1
ServiceNow, Inc. (NOW) $1,907.6
$2,490.0
37.2%
30.5% 77.0% 78.1%
16.0%
19.4%
$19,475.1
10.2
7.8
46.8
31.7
100.5
65.7
Average:
38.9%
28.8% 79.5% 79.7%
2.7%
6.2%
8.3
6.4
97.1
120.8
75.1
101.3
Median:
36.4%
30.5% 82.4% 82.1%
-4.3%
2.7%
8.2
6.1
45.7
33.7
97.6
72.8
October 2, 2017SaaS Quarterly InsightsSaaS Comparisons (Source: First Analysis, FactSet estimates)(800) 866-32729First Analysis Securities CorporationCompany
** = Currently covered by FA
2017e
Rev ($M)
2018e Rev.
($M)
2017e/2016e
Rev. Growth
2018e/2017e
Rev. Growth
2017e
Gross
Margin
2018e
Gross
Margin
2017e
Op. Margin
2018e
Op. Margin
Enterprise
Value ($M)
EV/'17e
Sales
EV/'18e
Sales
2017e EV/
EBITDA
2018e EV/
EBITDA
2017e P/E 2018e P/E
Salesforce.com, Inc. (CRM) $10,392.3
$12,454.1
23.8%
19.8% 76.0% 76.1%
14.1%
15.6%
$66,484
6.4
5.3
29.1
23.1
71.3
53.7
Workday, Inc. (WDAY)**
$2,101.4
$2,640.4
33.9%
25.7% 73.6% 74.8%
6.9%
8.9%
$20,266
9.6
7.7
63.0
45.1
127.0
96.7
ServiceNow, Inc. (NOW) $1,907.6
$2,490.0
37.2%
30.5% 77.0% 78.1%
16.0%
19.4%
$19,475
10.2
7.8
46.8
31.7
100.5
65.7
Veeva Systems Inc. (VEEV)
$673.6
$804.7
23.8%
19.5% 70.8% 71.2%
30.0%
30.6%
$7,951
11.8
9.9
35.7
30.8
65.6
55.9
Atlassian Corporation PLC (TEAM)
$619.9
$831.0
35.6%
34.0% 83.8% 83.8%
16.8%
17.8%
$7,387
11.9
8.9
44.6
33.7
97.6
79.9
The Ultimate Software Group, Inc. (ULTI)
$936.1
$1,123.3
19.8%
20.0% 63.7% 64.6%
19.2%
20.1%
$5,706
6.1
5.1
26.5
21.1
53.7
43.3
LogMeIn, Inc. (LOGM) $1,015.4
$1,165.5
na
14.8% 83.7% 83.3%
29.8%
32.6%
$5,657
5.6
4.9
15.7
12.7
27.2
22.7
athenahealth, Inc. (ATHN)**
$1,225.8
$1,391.5
13.2%
13.5% 63.8% 63.7%
10.6%
12.5%
$5,245
4.3
3.8
20.0
16.6
64.8
50.6
Proofpoint, Inc. (PFPT)**
$505.7
$648.7
34.7%
28.3% 76.9% 77.0%
7.4%
9.7%
$4,746
9.4
7.3
79.2
53.7
134.2
86.4
Medidata Solutions, Inc. (MDSO)
$553.7
$654.4
19.5%
18.2% 77.3% 77.5%
11.0%
12.8%
$4,571
8.3
7.0
33.6
27.2
61.0
51.4
Paycom Software, Inc. (PAYC)**
$429.1
$536.5
30.4%
25.0% 83.8% 83.8%
24.3%
24.2%
$4,374
10.2
8.2
35.2
27.9
64.6
52.1
RingCentral, Inc. (RNG)
$492.6
$609.2
29.7%
23.7% 75.9% 76.3%
2.9%
4.3%
$3,002
6.1
4.9
95.9
65.6
245.6
139.2
HubSpot, Inc. (HUBS)
$364.1
$458.1
34.4%
25.8% 80.1% 80.8%
0.4%
2.7%
$2,841
7.8
6.2
172.2
94.7
na
262.7
Zendesk, Inc. (ZEN)
$423.0
$548.8
35.6%
29.7% 73.5% 74.0%
-4.4%
-0.5%
$2,656
6.3
4.8
185.7
95.5
na
na
2U, Inc. (TWOU)**
$284.2
$390.1
38.0%
37.3% 82.3% 81.2%
-10.9%
-8.9%
$2,550
9.0
6.5
238.3
122.0
na
na
New Relic, Inc. (NEWR)**
$346.8
$437.2
31.6%
26.1% 82.4% 82.1%
-4.3%
2.7%
$2,447
7.1
5.6
281.3
64.9
na
237.1
Paylocity Holding Corp. (PCTY)**
$300.0
$369.6
30.0%
23.2% 62.6% 63.6%
10.8%
11.6%
$2,416
8.1
6.5
43.0
33.7
72.9
61.0
MuleSoft, Inc. (MULE)
$280.2
$376.9
49.3%
34.5% 74.4% 74.6%
-17.1%
-12.5%
$2,338
8.3
6.2
na
na
na
na
Cornerstone OnDemand, Inc. (CSOD)**
$481.2
$556.5
13.7%
15.6% 72.4% 72.8%
5.9%
9.6%
$2,245
4.7
4.0
273.8
72.2
104.1
54.9
Alarm.com Holdings, Inc. (ALRM)**
$328.4
$379.9
25.8%
15.7% 66.9% 68.7%
17.1%
19.5%
$2,218
6.8
5.8
33.3
26.2
46.6
46.6
Qualys, Inc. (QLYS)**
$227.7
$263.9
15.0%
15.9% 78.5% 78.8%
24.1%
25.0%
$1,769
7.8
6.7
23.5
19.7
57.6
50.3
BlackLine Inc. (BL)
$172.1
$222.4
39.8%
29.2% 80.3% 79.9%
-5.3%
-2.4%
$1,660
9.6
7.5
na
na
na
na
Coupa Software Inc. (COUP)**
$178.4
$222.3
33.4%
24.6% 69.3% 72.6%
-14.2%
-8.1%
$1,433
8.0
6.4
na
na
na
na
Callidus Software Inc. (CALD)
$246.8
$293.9
19.4%
19.1% 63.7% 65.6%
9.2%
11.2%
$1,432
5.8
4.9
49.2
33.1
77.0
61.6
Five9 Inc. (FIVN)
$194.6
$228.7
20.1%
17.5% 59.9% 60.8%
1.7%
3.8%
$1,290
6.6
5.6
103.2
65.8
na
265.6
Benefitfocus, Inc. (BNFT)**
$256.6
$293.2
10.0%
14.3% 53.2% 54.9%
0.6%
3.7%
$1,099
4.3
3.7
68.7
40.6
na
420.6
Alteryx, Inc. (AYX)
$125.5
$170.6
46.3%
35.9% 83.7% 84.4%
-14.7%
-11.7%
$1,035
8.2
6.1
na
na
na
na
CommerceHub (CHUBA)**
$113.2
$129.9
12.6%
14.8% 79.8% 80.1%
32.9%
35.2%
$1,014
9.0
7.8
22.5
19.2
47.0
38.9
Instructure, Inc. (INST)**
$153.7
$200.0
38.6%
30.1% 72.2% 73.4%
-25.0%
-12.9%
$939
6.1
4.7
na
na
na
na
SPS Commerce, Inc. (SPSC)**
$219.3
$251.1
13.5%
14.5% 67.8% 68.3%
11.2%
12.1%
$827
3.8
3.3
25.8
21.0
66.7
54.0
LivePerson Inc. (LPSN)
$215.2
$230.2
-3.4%
7.0% 74.2% 75.0%
3.5%
3.3%
$701
3.3
3.0
34.9
28.4
150.6
90.3
Everbridge, Inc. (EVBG)
$102.5
$129.1
33.4%
26.0% 71.6% 71.8%
-7.8%
-5.3%
$692
6.7
5.4
na
461.0
na
na
Castlight Health, Inc. (CSLT)**
$132.9
$169.6
30.7%
27.6% 68.4% 70.5%
-24.0%
-9.5%
$465
3.5
2.7
na
na
na
na
ChannelAdvisor Corp. (ECOM)**
$124.1
$138.1
9.6%
11.3% 77.8% 77.6%
-0.3%
0.9%
$247
2.0
1.8
38.5
25.7
na
143.8
MiX Telematics Limited (MIXT)**
$123.8
$134.3
6.8%
8.5% 67.7% 68.2%
14.9%
17.2%
$205
1.7
1.5
7.1
5.8
17.7
13.8
Group Average:
26.0%
22.2% 73.4% 74.0%
5.5%
8.4%
7.0
5.6
75.9
55.8
83.5
99.9
Group Median:
29.9%
23.2% 74.2% 74.8%
6.9%
9.6%
6.8
5.6
40.8
31.7
66.7
58.4
Maximum:
49.3%
37.3% 83.8% 84.4%
32.9%
35.2%
11.9
9.9
281.3
461.0
245.6
420.6
Minimum:
-3.4%
7.0% 53.2% 54.9%
-25.0%
-12.9%
1.7
1.5
7.1
5.8
17.7
13.8
(800) 866-3272
10
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
SaaS Company Quarter Performance (Source: First Analysis)
YTD
QTR
** = Currently covered by FA 3/31/14 Price
12/30/16 Price
06/30/17 Price
09/29/17 Price
Change
Change
Human Capital
BlackLine Inc. (BL)
$27.63
$35.74
$34.12
23.5%
-4.5%
Callidus Software Inc. (CALD)
12.52
$16.80
$24.20
$24.65
46.7%
1.9%
Cornerstone OnDemand Inc. (CSOD)**
47.87
$42.31
$35.75
$40.61
-4.0%
13.6%
Coupa Software Inc. (COUP)**
$25.01
$28.98
$31.15
24.6%
7.5%
Instructure, Inc. (INST)**
$19.60
$29.55
$33.15
69.1%
12.2%
Paycom Software, Inc. (PAYC)**
15.35
$45.49
$68.39
$74.96
64.8%
9.6%
Paylocity Holding Corp. (PCTY)**
24.05
$30.01
$45.18
$48.82
62.7%
8.1%
2U, Inc. (TWOU)**
13.65
$30.15
$46.92
$56.04
85.9%
19.4%
The Ultimate Software Group, Inc. (ULTI)
137
$182.35
$210.06
$189.60
4.0%
-9.7%
Workday, Inc. (WDAY)**
91.43
$66.10
$97.00
$105.39
59.4%
8.6%
Average:
43.7%
6.7%
Median:
53.1%
8.4%
Healthcare Analytics
athenahealth, Inc. (ATHN) **
160.24
$105.17
$140.55
$124.36
18.2%
-11.5%
Benefitfocus, Inc. (BNFT)**
46.97
$29.70
$36.35
$33.65
13.3%
-7.4%
Castlight Health, Inc. (CSLT)**
21.22
$4.97
$4.12
$4.30
-13.5%
4.4%
Medidata Solutions, Inc. (MDSO)
54.34
$49.67
$78.20
$78.06
57.2%
-0.2%
Veeva Systems Inc. (VEEV)
26.7
$40.70
$61.32
$56.41
38.6%
-8.0%
Average:
22.8%
-4.6%
Median:
18.2%
-7.4%
IoT/M2M
Alarm.com Holdings, Inc. (ALRM)**
$27.83
$37.63
$45.18
62.3%
20.1%
MiX Telematics Limited (MIXT)**
$6.25
$7.88
$9.92
58.7%
25.9%
Average:
60.5%
23.0%
Cyber Security
Proofpoint, Inc. (PFPT)**
37.08
$70.65
$86.83
$87.22
23.5%
0.4%
Qualys, Inc. (QLYS)**
25.43
$31.65
$40.80
$51.80
63.7%
27.0%
Average:
43.6%
13.7%
E-Commerce Optimization
ChannelAdvisor Corp. (ECOM)**
$14.30
$11.50
$11.50
-19.6%
0.0%
CommerceHub (CHUBA)**
$15.01
$17.42
$22.57
50.4%
29.6%
Five9 Inc. (FIVN)
$14.19
$21.52
$23.90
68.4%
11.1%
HubSpot (HUBS)
$46.90
$65.75
$84.05
79.2%
27.8%
LivePerson Inc. (LPSN)
12.07
$7.55
$11.00
$13.55
79.5%
23.2%
RingCentral, Inc. (RNG)
$20.60
$36.58
$41.75
102.7%
14.1%
Salesforce.com, Inc. (CRM)
57.09
$68.47
$86.57
$93.42
36.4%
7.9%
SPS Commerce, Inc. (SPSC)**
61.45
$69.89
$63.76
$56.71
-18.9%
-11.1%
Zendesk, Inc. (ZEN)
$21.20
$27.78
$29.11
37.3%
4.8%
Average:
46.2%
11.9%
Median:
50.4%
11.1%
Other SaaS
Alteryx, Inc. (AYX)
$15.55
$19.60
$20.37
31.0%
3.9%
Atlassian Corporation PLC (TEAM)
$24.08
$35.28
$35.15
46.0%
-0.4%
Everbridge, Inc. (EVBG)
$18.45
$24.43
$26.42
43.2%
8.1%
LogMeIn, Inc. (LOGM)
44.89
$96.55
$104.95
$110.05
14.0%
4.9%
MuleSoft, Inc. (MULE)
$24.75
$25.04
$20.14
-18.6%
-19.6%
New Relic, Inc. (NEWR)**
$28.24
$43.19
$49.80
76.3%
15.3%
ServiceNow, Inc. (NOW)
59.92
$74.33
$106.51
$117.53
58.1%
10.3%
Average:
35.7%
3.2%
Median:
43.2%
4.9%
Overall SaaS Group
Average:
40.7%
7.1%
Median:
46.0%
7.9%
S&P 500 Index
2,238.83
2,423.41
2,519.36
12.5%
4.0%
(800) 866-3272
11
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Human Capital Technology
Analysts:
Corey Greendale, James Macdonald,



Ken Wang
Companies:
BL, CALD, COUP, CSOD, INST, PAYC,



PCTY, TWOU, ULTI, WDAY
Profitability becoming more important in HCT universe
Similar to our broader SaaS universe, we find the Rule of 40 (R40) serves as a
better predictive indicator of valuation than revenue growth for our human capi-
tal technology (HCT) group. The R40 correlation is 0.63 using 2017 data, which
compares to a correlation of 0.54 for revenue growth (also using 2017 data).
Investors remain primarily focused on rewarding companies leveraging large
market opportunities to power rapid top-line growth, with this focus on growth
historically creating less of an emphasis on near-term profitability. However,
evaluating the difference between the R40 and revenue growth correlations leads
us to believe that for our HCT group profitability is becoming a more meaningful
investor consideration. In the long term, as our current HCT universe constitu-
ents evolve into mature companies while successfully capturing greater share in
their respective markets, we expect investor emphasis to continue to shift toward
EBITDA and bottom-line profitability as well as free cash flow growth.
Within our HCT universe, four companies, Paycom, Ultimate Software, Paylocity,
and Workday, meet the R40 criteria, and we will refer to these four companies as
"the R40 group." We note that the R40 group’s average 2017 estimated revenue
is $936 million compared to $249 million for the non-R40 names (we believe the
R40 group’s larger revenue base reflects, among other factors, its average con-
stituent age of 20 years compared to 12 years for the non-R40 group and the fact
that they have particularly large addressable markets). The R40 group’s average
estimated adjusted EBITDA margin for 2017 is 22% compared to minus-4% for
the non-R40 names. Finally, we note that the R40 group’s average estimated
2017 revenue growth is 28%, which is equivalent to the average estimate for the
non-R40 group. Accordingly, the disparity in R40 achievement between the two
groups can be attributed to the lower average EBITDA margin for the non-R40
group. We believe the R40 group’s higher EBITDA margin largely reflects greater
scale efficiencies associated with the larger average revenue base of its four con-
stituents (average expected 2017 revenue for the R40 group is nearly four times
the size of the non-R40 group’s average figure).
As noted, the average revenue growth expectations are equivalent for both
groups, despite the R40 group growing from a significantly larger revenue base.
We believe this dynamic may reflect the market orientation of the R40 group, with
its constituents targeting well established markets (such as the payroll market
for Paycom, Paylocity, and Ultimate Software and the human capital manage-
ment market for Workday) where growth is driven largely by taking share from
entrenched competitors with less-robust technology capabilities and often high
margins. While we believe the non-R40 companies target large and growing mar-
kets from a long-term perspective, we view many of their markets as remaining
at a relatively early stage (such as the cloud procure-to-pay market targeted by
Coupa), where a higher percent of sales are greenfield. Given the earlier stage of
these markets and the companies’ high margin potential with scale, we believe it
makes sense for them to invest heavily in R&D and sales & marketing and oper-
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October 2, 2017
ate at low or negative margin at present in order to grow their footprint, which we
believe generally has the potential to be substantial.
Paylocity and 2U are compelling
From a valuation standpoint, we see Paylocity and 2U as the two most compel-
ling constituents within our HCT universe. Paylocity, whose EV/revenue multiple
is 6.5x consensus FY2018e revenue, targets the large and established payroll
and talent management (TM) markets, which we expect to allow the company
to maintain annual revenue growth above 25% for the foreseeable future while
progressing toward the 25-30%+ EBITDA margin profile achieved by payroll/TM
peer Paycom (we model 29% EBITDA margin for Paycom in CY2017 and 30%
in CY2018, and 19.5% in CY2017 and 19.7% in CY2018 for Paylocity), suggest-
ing sustained R40 achievement over at least the next several years. We expect
Paylocity’s EV/revenue valuation multiple to expand to reflect its R40 achieve-
ment and view its current 6.5x 2018e EV/revenue multiple as compelling relative
to Paycom’s 8.2x comparable EV multiple of consensus 2018 revenue.
While 2U is not expected to meet R40 criteria in 2017 on an organic basis (the
R40 in Table 2 largely reflects inorganic growth), our model calls for it to come
close in 2018, with 34.4% organic revenue growth and 4.8% adjusted EBITDA
margin. We note 2U does reach 40% for both 2017 and 2018 under the First
Analysis Rule of 40 criteria. Further, we expect it to sustain 30%+ organic reve-
nue growth for the foreseeable future and 30%+ EBITDA margin at maturity, with
a model that should allow it to reach R40 in the long run. We view 2U’s current
valuation, at 6.5x 2018e revenue, as compelling given 2U’s leadership position in
the large and expanding online program management (OPM) market. We believe
this will allow 2U to achieve or exceed its targets of 30%+ annual revenue growth
for the foreseeable future as well as expand EBITDA margin toward its long-term
target level in the mid-30s range.
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Healthcare Analytics
Analyst:

Frank Sparacino
Companies:
ATHN, BNFT, CSLT, MDSO, VEEV
Three healthcare names in bottom half of R40 rankings
Three of our five healthcare names, athenahealth, Benefitfocus, and Castlight
Health, are in the bottom half of the R40 rankings. Interestingly, despite signifi-
cantly different R40 scores, the 2017 valuation (EV/sales) multiples show less
of a differential: for example, ATHN’s 2017 R40 score of 34.6% and EV/sales
multiple of 4.2X; BNFT’s 2017 R40 score of 16.2% and 2017 EV/sales multiple of
3.9X; and CSLT’s R40 score of 6.3% and 2017 EV/sales multiple of 3.4X.
Absent activist (Elliott Associates) interest first disclosed in May 2017 that drove
ATHN’s shares more than 20% higher in a single day, ATHN’s valuation would
most likely be in line with BNFT and CSLT despite generating more than 20%
EBITDA margins vs. continued losses at CSLT and modest profitability at BNFT.
We think this speaks to a number of factors including 1) a challenging healthcare
provider environment (both hospitals and physician groups) that is clouded by
repeated attacks on the ACA and growth in consumerism, namely the growth in
high-deductible health plans and increasing financial exposure for Americans
leading to different utilization choices and 2) a substantially more optimistic
outlook across the health benefits technology landscape (cloud-based benefits
administration, wellness incentive platforms, and benefits navigation/integration
hub) where CSLT and BNFT operate.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Internet of Things / M2M
Analysts:
Howard Smith, David Gearhart
Companies:
ALRM, MIXT
Smart Home: Not concerned with projected drop in ALRM's R40
Alarm.com’s R40 metric has been solid for multiple years, consistently coming
in above 40% and composed of a relatively balanced mix of top-line growth and
profitability. However, excluding the revenue from Connect and Piper (acquired
from Icontrol in March 2017), Alarm.com’s R40 is anticipated to fall to 34.2% in
2017 and be about flat in 2018 (at 35.0%; see Table 2). The decline in the metric
is from slowing organic growth expectations, primarily in the non-strategic hard-
ware line (~30% of total revenue). We are not concerned with this anticipated
decline as a result, and we believe there is a high likelihood revenue growth will
exceed expectations driven by the core SaaS & License revenue line, helping the
R40 remain at levels similar to the recent past; we model 19.5% organic recurring
revenue growth in 2017 and roughly 17% in 2018. Our confidence stems from
Alarm.com’s tendency to exceed the high end of guidance for SaaS & License
revenue, noting it has accomplished this for eight consecutive quarters. In ad-
dition, consensus estimates align with the guidance set by management, which
assumes the enabling hardware business grows at modest levels (estimated
organic growth of ~2.5% in 2017) despite being up 20-30% in each of the last two
years, making us feel revenue guidance is conservative.
Our Smart Home interactive security survey (published Sept. 6) gives us added
confidence, with the large service providers (dealers) seeing mid-teens subscrib-
er growth the prior year and expecting this to continue. In addition, it appears
Alarm.com could grow faster than this level by adding more service providers and
becoming the primary vendor, which our survey suggests it is having good suc-
cess doing at the expense of its rivals. Alarm.com also has a number of growth
initiatives outside North America home security, any of which could function as a
catalyst near term and help growth exceed expectations, including international
expansion, commercial security, the HVAC channel, and add-on modules.
Looking at profitability, adjusted EBITDA margin is expected to rise mainly due
to the higher-margin Icontrol assets being incorporated into the model. In our
longer-term model, we have adjusted EBITDA margin rising to 33.5% by the end
of our five-year horizon from 2016's 18.4%, driven by the greater mix of higher-
margin (80-85%) SaaS revenue relative to hardware and the company leveraging
operating expenses. This, combined with Alarm.com capitalizing on its position
to drive strong revenue growth as the broader Smart Home opportunity emerges,
makes us believe the company will consistently have an R40 above 40%, which
should portend strong share performance.
Fleet Telematics: MIX's R40 should continue to improve
MiX Telematics, on first glance, has a fairly pedestrian R40 metric for FY18 of
30.3% that falls in the bottom half of the overall SaaS group (see Table 2). How-
ever, this number represents a strong improvement over FY17's 24.7%, and its
R40 is projected to rise again in FY19 to 34.7%. The recent improvement stems
from a diminishing of the macro headwinds (oil prices, South Africa) and other
issues that plagued MiX over the past few years as well as the company being
further along in its ongoing business model shift (enabling hardware bundled into
the monthly subscription vs. being sold upfront), allowing management’s consis-
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SaaS Quarterly Insights
October 2, 2017
tently solid execution to show in the form of increasingly better metrics – which
underlies our investment thesis and has resulted in strong year-to-date share
performance (+58.7%).
Earlier this year, management indicated MiX had reached an inflection point in
terms of profitability, with adjusted EBITDA margin set to steadily expand to the
30%+ level due to a handful of catalysts. These include a better top-line trajectory
to leverage, the company exiting its multi-year investment cycle (which funded its
new software platform), tight management of S&M (taking it down to 11-12% of
revenue from the current 12-13%), continued sales of high-margin add-on mod-
ules and penetration of fully bundled plans, and international operations starting
to reach scale. We think each of these items is credible, and combined they give
us confidence in MiX achieving its long-term (five-year) profitability targets.
In terms of top-line growth, we believe high-single-digit to 10%+ growth is rea-
sonable, considering the diminished headwinds noted above and a lessening
impact from the model shift to fully bundled plans as well as international expan-
sion and the sale of add-ons. This level of revenue growth and adjusted EBITDA
margin would place MiX around 40% for its R40 metric, which should translate
into a much healthier valuation multiple than its 1.7X and 7.1X 2017e revenue
and adjusted EBITDA, respectively, noting MiX remains dramatically below the
overall SaaS group’s 7.0X and 75.9X.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Cyber Security
Analysts:
Howard Smith, David Vercoutere
Companies:
PFPT, QLYS
Security: rich valuations reflect sound R40 profiles
The rich valuation levels of Proofpoint, at an EV 9.5X 2017 revenue, and Qualys,
at 7.4X 2017e revenue, reflect their strong 2017 R40 profiles of 47% and 48%,
respectively. In addition, per current consensus estimates, their R40 measures
are expected to remain at healthy levels in 2018 at 43% and 50%, respectively.
We note Proofpoint has a meaningfully higher valuation on an EV-to-revenue ba-
sis (on both 2017 and 2018 consensus revenue estimates) compared to Qualys
despite its lower R40 figure in both 2017 and 2018.
Since reporting Q2 earnings in early August, Qualys' stock has risen 26%, lifting
its EV/2017e revenue to above 7X from about 5.5X earlier in the year on decent
reported performance and healthy business metrics that indicate potential for
better momentum. Despite the increase in Qualys' valuation over the past couple
months, we believe Proofpoint’s valuation remains materially ahead of Qualys'
due to Proofpoint’s substantially faster revenue growth rate. Our regression
analysis (with revenue growth and EBITDA the independent variables) suggests
the growth rate accounts for about two-thirds of the valuation, with Proofpoint’s
expected growth rates in 2017 and 2018 representing more than double the
fraction in the R40 sum compared to Qualys. In addition, we think the quality of
Proofpoint’s growth profile is more robust. The company has consistently dem-
onstrated its ability to exceed expectations driven largely by its excellent overall
execution, making it relatively more likely Proofpoint will be able grow into its
valuation. Given Proofpoint’s disciplined cost culture, this continued fast growth
should give it room for greater leverage and expand its profitability, which would
boost its R40 numbers. Hence, we think Proofpoint’s R40 numbers have solid
potential to turn out higher on both growth and profit upside. We believe these
dynamics warrant the richer valuation levels compared to Qualys, despite the
comparatively less-favorable R40 profile.
We see lesser growth upside for Qualys in 2017, though more in 2018 given the
product expansion of its cloud platform and ongoing go-to-market optimization
in engaging more strategically with enterprises. Combined with strong EBITDA
margins (it is one of only four companies in our SaaS universe with 30%-plus
EBITDA margin), we expect it will be relatively tougher for Qualys to expand
its R40 profile beyond current levels, but we note the company already boasts
strong R40 numbers.
Important disclosures and certifications
begin on page XX of this report
Analyst: Craig Nankervis
E-mail:
cnankervis@firstanalysis.com
Phone:
312-258-7129
Companies discussed in this report
Public Companies
Ticker
Price
IBM Corp.
IBM
$194.49
Intel Corp.
INTC
$21.46
Private Companies
AlertLogic
nCircle
Tenable Network Security
Rapid7
RedSeal Networks
Risk I/O
Veracode
Whitehat Security
Table of Contents:
VM Functionality Scheme
2
Deployment models
3
A look at the VM ecosystem
4
VM challenges
5
Some VM trends
5
Some ecosystem players to watch
6
Qualys Inc. Basic Report
9
Network Security
Initiate coverage
Company
Ticker
Price
Rating
Qualys Inc.
QLYS
$14.89 overweight
Network Security
October 23, 2012
Craig Nankervis · cnankervis@firstanalysis.com
Initiating Coverage:
Company
Ticker
Rating
Market Cap
Price
Qualys Inc.
QLYS
overweight
$527.1MM
$14.89
Vulnerability management:
Tablestakes for improving risk
posture
■ We map the landscape, discuss some challenges and
trends, and sketch a few private players.
■ We see Qualys's distinguishing SaaS approach gaining
increasing appeal, and as likely the preferred enterprise VM
solution architecture in coming years (p. 9).
Vulnerabilities are security holes in software, hardware, or
operating systems that provide an opening or means to potentially
attack a system. Brodly speaking, vulneraility managemnt (VM)
centers on understanding what holes exist in an IT infrastructure
and effectively addressing them before they're exploited by attack-
ers. It is automated security and compliance audit capability that
evaluates and reports on IT-asset risk given 1) the most rcent
changes to a network and 2) the latest known attack threats.
Below, we offer an industry overview as a lead-in to our Qualys
discussion. We paint the VM landscape, map VM’s role in the
broader security/compliance ecosystem, discuss some challenges
nd trends, and sketch a few interesting private plyers
Scanning for security holes:
Testing anything with an IP address
Principal VM functions are 1) scanning or testing IT assets for
known security holes and 2) work flow for post-scan reporting and
remediation management.
External-facing, perimeter assets that are typically scanned for
the latet attack vlnerabilities include organization Web sites and
partner/trading networks. Internal assets are more profuse, and
scanning encompasses most anything connected to a network:
desktops, mail servers, databases, switches, routers, applications,
perating systems, wireless access points, firewalls, and more.
Important disclosures and certifications
begin on page 34 of this report
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
e-Commerce Optimization
Analysts:
David Gearhart, Lawrence Berlin
Companies:
CHUBA, CRM, ECOM, FIVN, HUBS, LPSN,



RNG, SPSC, ZEN
High R40 for CHUBA should continue
CommerceHub’s 2017 R40 metric is anticipated to be 52.4%, which ranks it
among the top companies in the overall SaaS group (see Table 2) and helps ex-
plain its current valuation multiples; we note it had the same R40 in 2016. Its R40
is expected to rise to 55.4% in 2018, driven by an improvement in top-line growth
as the drag from Mercent falls off exiting 2017, ending the purposeful shedding of
its undesired managed services accounts, and better comps. We think Commer-
ceHub should be able to keep its R40 at or even above this level due to con-
sistent revenue growth and strong-to-improving profitability such that one could
reasonably argue the stock should hold its current valuation multiples.
Looking at growth first, we note North American online retail sales are growing at
roughly 15% annually (11% excluding Amazon) and should continue to expand
at similar rates for a while from the ongoing shift of product demand to the online
environment away from traditional brick & mortar stores, with consumers drawn
to the broader product selections, more competitive pricing, and convenience af-
forded them online. CommerceHub is benefiting from this trend, which provides it
with solid underlying growth considering the company’s transaction-based model.
The company is also driving revenue expansion from a handful of vectors, includ-
ing the addition of new retailer/supplier (brand) customers, growing penetration
of drop ship within existing accounts, connection growth within its network, and
the sale of add-on functionality; it is in the early stages of international expan-
sion, which should be additive over time as well. These items in aggregate give
us confidence in CommerceHub producing total revenue growth at least in line
with the market’s growth rate (~15%). We expect its usage-based (transaction)
revenue (70% of the total) to grow faster than the market given the above drivers
while its subscription and professional services grow slower.
In terms of profitability, CommerceHub is nearing 40% annual adjusted EBITDA
margins (37.6% in 2016) stemming from its high gross margins (77.7% in 2016)
and low-cost customer acquisition model targeting large retailers, which results
in suppliers being brought on as paying customers at negligible incremental cost.
Its adjusted EBITDA margin should rise over time (we model 40.6% and 40.9%
in 2017 and 2018, respectively) as gross margin benefits from the lower-margin
managed services revenue from Mercent being out of the mix in 2018 and be-
yond as well as CommerceHub seeing operating leverage, specifically from R&D
and G&A.
Putting the above growth trajectory and profitability profile together, we believe
we have a recipe for consistently high R40 metrics.
ECOM's R40 ranked low but growth acceleration expected
ChannelAdvisor is near the bottom of the SaaS companies in our Rule of 40
rankings. However, we have confidence in its growth acceleration as well as
its ability to expand its EBITDA margin in 2017 and beyond. In 2016 and 2017,
ChannelAdvisor altered its client mix, shedding many smaller, unprofitable (or
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October 2, 2017
barely profitable) clients and retooling its product and sales team to work with
larger clients. As a result, its number of core clients remained in the 2,900 range.
However, its average trailing-12-month revenue per core customer has begun
to step up, going from $35,753 in Q1 2016 to $41,029 in Q2 2017. We believe
a rise in the number of clients and in revenue per client will increase growth
into the mid-teens in the next couple of years. We believe the added growth will
help EBITDA margin since there is only a low variable cost tied to each marginal
revenue dollar. As a result, we believe its Rule of 40 number should improve,
although we think approaching 40% could take many years and will be highly
dependent on improved margins.
Expect SPSC's R40 to remain uninspiring near term
SPS Commerce’s R40 metric has been on a downward trajectory, going from
38.1% in 2015 to 35.5% in 2016 and is anticipated to fall even further in 2017 (to
28.1%; see Table 2) before rebounding modestly in 2018 to 30.2%. As one would
expect, its recent share performance has also been down (by 8.8% year-to-date).
The change in its R40 primarily stems from slowing top-line growth, with recurring
revenue (92% of total revenue) decelerating to the mid-teens from the low-to-mid
20s levels due to weaker net customer additions. Earlier this year, management
pulled its expectation for recurring revenue growth to return to the 20% level
sometime in 2018 because of this and despite SPSC’s consistently gaining wallet
share with its existing customers. It cited light community enablement program
activity from retailers as the cause, with these companies spending more time
working through their e-commerce strategies instead; these programs facilitate
the on-boarding of their suppliers to SPSC’s platform, making each supplier a
paying SPSC customer. We note it is possible for SPSC’s recurring revenue
growth to accelerate in the short to medium term, with the company potentially
benefiting from changes made to its sales organization in 2016 and the release
of its new platform that could hasten sales velocity. But we believe the company
needs reinvigorated community enablement program activity to drive a rebound
in net additions, thereby fostering much greater growth – something we don’t
have sufficient visibility/data points to handicap at this time. This leaves it to
improving profitability to reverse the course of the R40 metric. However, manage-
ment’s policy is to reinvest profits in excess of target levels back into the busi-
ness, which makes us believe profitability is unlikely to increase materially near
term unless management philosophy changes. In addition, we feel that should
management dial back the excess investments to improve profitability, it could
have a negative impact on near- and/or longer-term revenue growth, potentially
keeping the R40 unchanged or worse. We see the above uncertainty around
top-line growth and profitability dynamics as implying an uninspiring R40 metric
at least near term, equating to what we think will be relatively flat share perfor-
mance.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Other SaaS
Analysts:
David Vercoutere
Companies:
NEWR
Investments hold back NEWR's R40 performance in near term
As with other SaaS names, revenue growth is the primary reason for New Relic's
rich valuation/high EV-to-revenue multiple. However, despite a strong 30%-plus
growth profile, New Relic isn't expected to reach a 40% R40 level in 2017 or
2018 due to its still-modest EBITDA. We think New Relic’s ongoing transition
to capture greater market/wallet share in the enterprise market helps explain
the R40 underperformance. While we hope 30%-plus revenue growth will be
sustained and the company achieves better-than-expected enterprise traction, its
more modest profitability profile is understandable given its investments, primarily
in sales and marketing, to capitalize on the still-early enterprise opportunity. We
feel New Relic has ample opportunity to show better leverage once the enterprise
business finds greater maturity due to a more productive sales motion, which
combined with its growth opportunity should raise the company’s R40 numbers
closer to or above 40% over the mid term. Applying our proprietary First Analysis
Rule of 40 framework, New Relic exceeds the 40% threshold in both 2017 and
2018. This is understandable since our rule puts a premium on revenue growth
as the most important variable for valuation levels, explaining NEWR's rich
valuation despite falling short on the traditional R40 measure.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
IMPORTANT DISCLOSURES AND CERTIFICATIONS
ANALYST CERTIFICATION:
We, Howard Smith, David Gearhart, Ken Wang, Corey Greendale, Frank Sparacino, Lawrence Berlin, James
Macdonald and David Vercoutere, attest the views expressed in this document accurately reflect our collective
personal views about the subject securities and issuers. We further attest no part of our compensation was, is, or will
be, directly or indirectly, related to the specific recommendations or views expressed by us herein.
SPECIFIC DISCLOSURES:
2U Inc.: FASC expects to receive or intends to seek compensation for investment banking services from this
company within the three months following the publication date of this document. FASC has received compensation
for investment banking services from this company within the 12 months before the publication date of this
document, and this company was thus a client of FASC for investment banking services at that time. FASC
managed or co-managed a public offering of securities for this company within 12 months before the publication date
of this document, and this company was thus a client of FASC for investment banking services at that time.
Alarm.com Holdings Inc.: None.
athenahealth Inc. : None.
Atlassian Corp.: None.
Benefitfocus Inc.: None.
BlackLine Inc.: None.
Callidus Software Inc.: None.
Castlight Health Inc.: None.
ChannelAdvisor Corp.: None.
CommerceHub Inc.: None.
Cornerstone OnDemand Inc.: None.
Coupa Software: None.
HubSpot Inc. : None.
Instructure Inc. : None.
LivePerson Inc.: None.
MiX Telematics Ltd.: David Gearhart has a long position in the common stock of this company.
New Relic Inc.: None.
Paycom Software Inc.: None.
Paylocity Holding Corp.: None.
Proofpoint Inc.: None.
Qualys Inc.: None.
RingCentral Inc.: None.
salesforce.com inc.: None.
SPS Commerce Inc.: None.
Ultimate Software Group Inc.: None.
Veeva Systems Inc.: None.
Workday Inc.: None.
OTHER DISCLOSURES:
The compensation of the research analyst(s) principally responsible for the preparation of this document is indirectly
based on (among other factors) the general investment banking revenue of FASC. FASC considers all the
companies covered in its research reports to be potential clients.
Price, rating, and target price history for all covered companies can be accessed at www.firstanalysis.com/coverage.
You can also call 1-800-866-3272 or write: First Analysis Securities Corp., One South Wacker Drive, Suite 3900,
Chicago, IL 60606.
RATINGS DEFINITIONS*:
Overweight (O): Purchase shares to establish an overweighted position: Stock price expected to perform better than
the S&P 500 over the next 12 months.
Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in line with
SaaS Quarterly
October 2, 2017
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
the S&P 500 over the next 12 months.
Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worse than the
S&P 500 over the next 12 months.
*Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatility that
may not reflect large-holder/buyer valuations of the security.
DISTRIBUTION OF RATINGS:
The following was the distribution of ratings for companies rated by FASC as of 6/30/2017: 44% had buy
(overweight) ratings, 52% had hold/neutral (equal-weight) ratings, and 4% had sell (underweight) ratings. Also as of
6/30/2017, FASC had provided, within the prior 12 months, investment banking services to 9% of the companies
rated that had buy (overweight) ratings, 0% of the companies rated that had hold (equal-weight) ratings, and 0% of
the companies rated that had sell (underweight) ratings. For purposes of the FINRA ratings distribution disclosure
requirements, our stock ratings of overweight, equal-weight, and underweight most closely correspond to buy, hold,
and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for an explanation of the FASC rating
system.
USE OF THIS DOCUMENT:
Investors should consider this document as only a single factor in making their investment decision. Past
performance and any projections herein should not be taken as an indication or guarantee of future performance.
With the exception of information about FASC, the information contained herein was obtained from sources we
believe reliable, but we do not guarantee its accuracy. As a subscriber or prospective subscriber, you have agreed
not to provide this document in any form to any person other than employees of your immediate organization. FASC
is a broker-dealer registered with FINRA and member SIPC. It provides research to its institutional clients as a
service in connection with its other business activities. This document is provided for informational purposes only.
Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any
securities. More information is available on request from FASC 800-866-3272. Copyright 2017 First Analysis
Securities Corp.
To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued or passed
on to, persons to whom FASC is entitled to distribute this document under applicable Canadian securities laws.
To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by or on
behalf of any person to subscribe for or purchase, any shares or other securities in any of the companies mentioned
in this document, is for distribution in the UK only to persons who fall within any one or more of the categories of
persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2)
Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (SI 1996/1586).
ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has been identified
as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow (model).
DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, and amortization. EV:
Enterprise value. G&A: General and administrative (expense). OEM: Original equipment manufacturer. R&D:
Research and development (expense). SG&A: Selling, general, and administrative (expense).
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SaaS Quarterly
October 2, 2017
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Healthcare
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e-Commerce optimization
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Lawrence Berlin
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Financial technology
Lawrence Berlin
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David Gearhart
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Howard Smith
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James Macdonald
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Ken Wang
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Internet of things
Howard Smith
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Tracy Marshbanks, Ph.D.
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Joseph Munda
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Steven Schwartz
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Tracy Marshbanks, Ph.D.
tmarshbanks@firstanalysis.com
Healthcare analytics
Frank Sparacino, CFA
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Frank Sparacino, CFA
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Corey Greendale
cgreendale@firstanalysis.com
Ken Wang
kwang@firstanalysis.com
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Steven Schwartz, CFA
sschwartz@firstanalysis.com
Tracy Marshbanks, Ph.D.
tmarshbanks@firstanalysis.com
Education
Corey Greendale
cgreendale@firstanalysis.com
Ken Wang
kwang@firstanalysis.com
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James Macdonald
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Lawrence Berlin
lberlin@firstanalysis.com