Clouded Judgement - 7.3.20

Every week I’ll provide updates on the latest trends in SaaS valuations, earnings announcements, and highlight any noteworthy news. Follow along to stay up to date!

Highlight of the Week - Agora IPO

Last Friday Agora started trading under the ticker API. What a first week they had! The IPO priced at $20 / share (the price shares were sold to institutional investors), and the first trade was $45 (the first trade on an exchange) - a “pop” of 125%. The stock closed yesterday at $56.49 (after a 16% gain on the day!) which represents a 25% increase to where they began trading last week, and a jaw dropping 182% gain from the IPO price. The company has very strong fundamentals with net retention of 131% and a gross margin adjusted payback of ~10 months. They’ve also benefited significantly from “Covid Tailwinds” as developers and businesses look to embed more real time communication capabilities into their applications via the Agora API.

Some of you may be wondering about the “IPO Pops” of recent IPOs and why they’re so large. On day 1 Agora popped 153%, ZoomInfo popped 62%, and Lemonade popped 139% (yes I realize Lemonade is not a SaaS business, but I’ve included them in the broader “tech” umbrella). For those of you that think this seems way too high, I’m with you! Keep an eye out next week for an article I’ll publish going deep on the actual IPO processes itself. I’ll lean on my experience as an investment banker helping take companies public, as well as my experience as a venture capitalist watching our companies go public from the other side of the table to discuss the dynamics around how price ranges are set, how the ultimate IPO price gets selected, and how demand is built during the roadshow.

Bonus Highlight of the Week - ZoomInfo’s Organic Growth Rate

Many people have been asking me how to think about ZoomInfo’s organic growth rate. If you look at their S1 you’ll see an overall growth rate that is inclusive of the DiscoverOrg acquisition. This means that revenue will appear to grow faster because it is inclusive of “acquired” revenue. ZoomInfo actually does a great job of laying out what their organic revenue growth would have been through a metric called “Allocated Combined Receipts.” From the S1: “We calculate Allocated Combined Receipts as the sum of (i) revenue, (ii) revenue recorded by acquired companies prior to our acquisitions of them, and (iii) the impact of fair value adjustments to acquired unearned revenue related to services billed by an acquired company prior to its acquisition.” Looking at the growth of these ACRs you can see that the organic LTM growth rate of ZoomInfo is 40%, a far cry from the GAAP LTM growth rate of 104% (which is not adjusted, and artificially inflated due to the acquired revenue). Hope this helps clear things up!

Top 10 EV / NTM Revenue Multiples

Top 10 Weekly Share Price Gains

Update on Multiples

SaaS businesses are valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue. In the buckets below I consider high growth >30% projected NTM growth, mid growth 15%-30% and low growth <15%

Overall Stats:

• Overall Median: 13.3x

• Top 5 Median: 40.0x

• 3 Month Trailing Average: 10.8x

• 1 Year Trailing Average: 10.4x

Bucketed by Growth:

• High Growth Median: 23.6x

• Mid Growth Median: 15.0x

• Low Growth Median: 9.1x

In the chart below it appears as if the “high growth median” has dropped recently. While this is true, it is slightly misleading. The multiples of the previous group included in high growth has actually gone up. What’s changed is that a few companies with lower multiples (Sprout Social, Wix, Q2) received updated consensus estimates that pushed them into the high growth bucket lowering the overall median of the high growth bucket. Hope this makes sense!

Operating Metrics

• Median NTM growth rate: 22%

• Median LTM growth rate: 34%

• Median Gross Margin: 73%

• Median Operating Margin (15%)

• Median Net Retention: 117%

• Median CAC Payback: 28 months

News

• MongoDB appointed Mark Porter as CTO. Porter joins MongoDB from Grab where he served as CTO. Prior to that he led many AWS database efforts including RDS, Amazon Aurora and RDS for PsotgreSQL and a few others

• Crowdstrike announced (according to an IDC study) that they are the fastest growing endpoint security vendor and doubled their market share over the last year

Comps Output

Rule of 40 shows LTM growth rate + LTM GAAP Operating Margin. Please note I’ve edited ZoomInfo’s overall growth rate to show their organic growth rate (the overall number is quite inflated due to gained revenue from acquisitions I discussed above)