Beruflich Dokumente
Kultur Dokumente
April 4, 2017 (prices as of March 31) Bhavan Suri +1 312 364 5341
Industry Report (17-030) bsuri@williamblair.com
An Update on Cloud Computing; Mostly Sunny in the Cloud Sarah Shizas +1 312 364 5486
sshizas@williamblair.com
The technology team at William Blair has followed the on-demand software in-
dustry since its infancy in the late 1990s. We publish thematic pieces periodically
on advances in cloud computing, encompassing all components of the on-demand
computing movement—including software as a service (SaaS), platform as a service
(PaaS), and infrastructure as a service (IaaS). This year, we provide an update on the
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innovation, agility, and lower total cost of ownership. Even so, there remain hurdles
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about security and privacy issues, especially when it comes to mission-critical
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later. In addition, we cover the most recent trends we are seeing in cloud computing,
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the roles of sales and marketing and customer service are converging; the grow-
ing adoption of mission-critical software applications in the cloud (i.e., enterprise
resource planning, supply chain management, and communications); and recent
trends in business intelligence and analytics.
In this year’s update, we take a deeper look at non-GAAP adjustments (e.g., stock-
based compensation), and we focus on the technology stack and why we believe
SaaS players will win out in the long run. We also touch on the M&A activity this
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growth and how valuations have trended in the past year. We also incorporate our
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and their ability to generate higher margins. Lastly, we provide an overview of the
SaaS business model, including accounting, key metrics, and our evaluation process
for SaaS companies. Similar to past reports, we highlight several private SaaS com-
panies that we recommend keeping an eye on. A list of the public SaaS companies
in our coverage is below.
6DD6&RYHUDJH
Company 7LFNHU Rating 0DUNHW&DS0
AppFolio, Inc. APPF Outperform 915.4
Atlassian Corporation Plc TEAM Outperform 7,026.4
BlackLine, Inc. BL Outperform 1,526.2
HubSpot, Inc. HUBS Outperform 2,159.9
Ooma, Inc. OOMA Outperform 182.1
RingCentral, Inc. RNG Outperform 2,155.9
salesforce.com, inc. CRM Outperform 58,667.1
Twilio Inc. TWLO Outperform 2,974.2
Upland Software, Inc. UPLD Outperform 280.2
Veeva Systems Inc. VEEV Outperform 7,560.5
Zendesk, Inc. ZEN Outperform 2,729.0
Source: William Blair Estimates
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12,000.0
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In millions
6,000.0
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Source: Gartner - Market Share Analysis: Customer Relationship Management Software, Worldwide, 2015
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transformative undertaking for organizations, retention of those customers is becoming even more
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competing on customer service to acquire new customers (via word of mouth, social media, etc.).
Growing trends in mobile, social media, advanced analytics, and the Internet of Things (IoT) are
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suspect that Freshdesk, a private customer service software provider, is growing over 100% and has
2 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
ͶͲǡͲͲͲ
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ers, including Lithium Technologies, Inc. and Sprinklr, whose offerings focus directly on managing
social media interactions. Sprinklr, a private social media management platform, focuses largely
enterprises. Sprinklr has already captured key logos such as Nike, Verizon, McDonald’s, P&G, Forbes,
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media sites (engagement, publishing/posts, responses, etc.). We believe the use of Sprinklr by such
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With the emergence of social media sites such as Facebook, Twitter, and Yelp, customers can now
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potential incremental revenue. As a result, we believe the notion of customer service is changing
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tives hold this view as well.
Many companies are beginning to replace legacy, on-premise customer service software with more
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and preferences for millennials (born 1977 to 1995) are much different than prior generations and
include more mobile and social technology. Also, the overall tolerance for waiting on the phone for
an agent or having to repeat information is dwindling quickly. And while these preferences may
be different, organizations must still serve all generations and effectively cater to each generation
through multiple communication channels including phone, email, social media, and messaging.
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ing popularity of self-service, many companies are investing in advanced analytics to improve ticket
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As customer service becomes an increasingly important aspect to businesses and agents begin
using more proactive approaches and various communication channels, the lines between what is
considered customer service and sales-and-marketing are beginning to blur. What once was a tool
for customer retention and loyalty is now a marketing strategy to acquire additional customers.
Further, tools used to proactively reach out to customers to provide service are now being used for
sales-and-marketing purposes. This is in large part because of data collected via customer interac-
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the right time, through the right communication channel—creating the most ideal opportunity to
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algorithms to recommend items a customer is likely to purchase given previous purchasing habits
or interactions with customer service agents.
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We believe organizations are beginning to realize the value in breaking down silos between different
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the entire company. Having a shared pool of information allows different departments to work more
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tomer. This integrated approach is often seen in the way companies are communicating with their
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is a powerful tool and enables companies to differentiate against competitors. This software has the
ability to know where the end-user is in a process and interact with that user via the device and/
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to chat with customer service agents if they have a question while online shopping—allowing cus-
tomers to access customer support directly and immediately within the website they are shopping
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a separate customer service web page.
Further, data analytics can be used to provide incremental information to the customer service agent
about that customer, such as the name of the customer, account number, previous customer service
interactions, what web pages the customer was visiting before reaching out to the agent etc., all of
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unnecessary and time-consuming authentication requirements (e.g., having to restate the user’s
name, issue, account number) that typically need to be repeated through more traditional methods
and reduces friction between the customer and the agent.
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into a requirement rather than a desire. Also, while the transaction appears seamless to the user,
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Twilio, a cloud communications platform, is a leader in its space because of its superior quality and
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connections and its proprietary network software, which optimizes the communications running
on its platform. Most other platform communications players in the industry are small, with less
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4 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
B2B Commerce
A large, growing market. Electronic commerce (e-commerce) has been around for some time now.
Amazon.com and eBay popularized the concept of e-commerce in the consumer world starting
in the 1990s. The business-to-consumer (B2C) e-commerce market—which in the United States,
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tive and fuel)—continues to evolve as vendors replace brick-and-mortar storefronts with online
storefronts; global e-commerce spending is projected to grow at a compound annual rate of about
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the popularity of B2C e-commerce platforms, a multitude of SaaS-based commerce platforms (e.g.,
Demandware, Shopify, Magento, and WebSphere) emerged that enabled retailers and brand owners
to design, implement, and manage their e-commerce sites. The B2C e-commerce market generated
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has focused on the concepts from the B2C market to address business needs, was forecast to be over
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Still, despite the much larger volume of sales transacted over B2B networks and strong projected
growth, there are fewer SaaS-based B2B e-commerce platforms available today.
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management to call centers to enterprise resource planning (ERP)—have transitioned from behind
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agnostic. Nearly all application categories, in our view, stand to gain from the fundamental advantages
that SaaS offers: a lack of hardware (servers, storage, networking) and IT resource requirements,
accelerated deployment times, automatic updates, and remote access from any internet-connected
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delivery model—e-commerce is one such market. In our opinion, within the B2B e-commerce mar-
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streamline ordering processes, and increase the average value per order are all reasons why we
believe an increasing number of companies will gravitate toward cloud-based e-commerce providers.
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(Dollars in millions)
1200
1000
800
600
400
200
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2015 2016 2017 2018 2019 2020
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considerable growth in both the near and long term. Forrester projects the B2B e-commerce market
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States alone, which still represents only 12.1% penetration of total B2B sales. Frost & Sullivan’s
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lion in 2020, a CAGR of 19%.
Unlike the B2C market, where e-commerce providers are replacing brick-and-mortar stores, B2B
e-commerce providers are replacing antiquated systems. These antiquated solutions typically
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required the entering of orders by employees into the ERP system) that lack automation, limited
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keting footprint – limiting the personalized marketing and customer service campaigns as well as
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mobile-friendly, integrated, lower-cost, and scalable solutions should continue in both the near
and long term as companies look to build digital storefronts to increase sales quickly while cutting
costs. Like Amazon.com in the traditional B2C e-commerce market, larger marketplace providers
have emerged in the B2B market as well, such as Alibaba. Alibaba’s international commerce mar-
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is not disclosed what percentage of this revenue is generated from the United States or any other
countries. Amazon also has Amazon Business, which focuses on B2B e-commerce, but we believe
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vendors to be successful in the B2B e-commerce space.
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water consumption, application/loan status, and medical records). We also believe there are a
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suming to get things accomplished. Further, with many government agencies under tight budgetary
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data center consolidation, decreased hardware costs, shared services).
6 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
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Cloud Benefits
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Benefits
IaaS/PaaS SaaS
Flexibility in an on-demand model x 9
Scalability or elasticity to accommodate changing demands x 9
Shifting to an operating expenditure-only model and eliminating the need for periodic
x x
capital expenditure infusions to remain technically current and out of "technical debt"
Availability or redundancy that didn't exist or was prohibitively expensive to achieve reliably x 9
Superior built-in security than what had been historically in place on-premises x x
Improved and quantifiable services levels x 9
Geographic diversity (proximity to users/customers) x 9
Rapid access to cutting-edge technology and innovation 9 x
Better end-user experiences 9 x
Cost savings/cost avoidance 9 9
*9 = may deliver; x = will deliver
Source: Gartner: Get Ready for the Inflection Point in U.S. Federal Government Cloud Adoption; January 2016
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for new IT investments/projects. With the maturity of the cloud and decreasing concerns over data
security risks, government agencies are beginning to move more applications containing sensitive
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cloud vendors devote far greater resources toward a robust security system than an individual
organization would invest.
Further, most cloud vendors that service government customers have adopted mandatory compli-
ance measures, such as FISMA, FIPS, and FedRAMP accreditations. In addition, some entities do
not want to be in the business of managing mass amounts of data, and cloud options often result
ȋ
ϐ
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ǡ
budget-constrained economies. We believe the increasing number of successful cloud adoption
cases will have a domino effect for other government entities, at the local, state, and federal level.
The main advantages of the cloud are lower up-front costs, no hardware/infrastructure costs and
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transitions to the cloud for these solutions has been slow since the process involved with switching
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sions over to the cloud at different times and could result in disruptions in critical systems during
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 7
William Blair
the transition period. Therefore, the timing of the transition will be important, and our sense is that
most companies will delay this type of decision because it will likely cause business disruptions
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60% 54%
47%
50% 41%
40% 36%
32% 31%
27% 28% 24% 25%
30% 23% 22% 21% 22%
17% 20%
20% 16% 16% 15%
7%
10%
0%
2014 2017
Source: Gartner - Survey Analysis: Buyers Reveal Cloud Application Adoption Plans Through 2017
We believe small and midsize businesses are more inclined to adopt the cloud, even for mission-
critical software solutions, because they usually do not have as large of a budget as larger enter-
prises—making cloud offerings (whose cost is usually more palatable given it is in smaller increments
spread out over a longer time frame) more attractive. While some companies may believe that
ǡǦϐ
the amount of data being passing through their database— allowing the vendor to act on common
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We also believe most SaaS companies are receptive to working with customers to make changes.
In our opinion, one of the biggest advantages is the agility cloud solutions offer to companies in
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cloud allows companies to respond to changes within their sector quickly, in turn keeping them
up-to-date and competitive. Further, many cloud applications cater to mobile functionality, allowing
organizations to access critical business information quickly through multiple mobile devices. For
ǡǡ
ǦǦ
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ing industry, recently launched a new user interface for its cloud customers, which enables key
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We believe pure-play cloud players will continue to disrupt traditional on-premises vendors for
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8 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
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made the most headway—increasing its rank from No. 44 in 2010 to No. 6 in 2015. We believe
there will continue to be M&A activity in the market as more traditional, larger players seek to add
faster-growing, cloud-based ERP businesses.
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at a slower pace. We suspect organizations requiring highly customized solutions will likely remain
on-premises, while organizations with more commodity-like processes will be more inclined to move
to the cloud. In addition, given the weak manufacturing backdrop, we believe many manufacturing
companies would prefer to continue paying maintenance on older software versions instead of
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SAP
SAP
23%
25%
Other Vendors
Other Vendors 37%
42%
Oracle
Oracle
NetSuite Infor Sage
Infor
2% 6% 6%
NetSuite 5% Sage IBM, 2%
6% Microsoft
Ultimate 1% Microsoft
Ultimate 5%
Software 5%
Kronos Workday
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3% 3%
IBM, 1% Kronos, 2% Workday, 0% 2%
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1 1 0 SAP $5,373 $6,029 2%
2 2 0 Oracle $2,602 $3,073 3%
3 3 0 Sage $1,265 $1,661 6%
4 4 0 Infor $1,053 $1,529 8%
5 5 0 Microsoft $946 $1,306 7%
6 44 Ç38 Workday $37 $929 91%
7 6 È1 Kronos $503 $778 9%
8 19 Ç11 Ultimate Software $172 $516 25%
9 17 Ç8 IBM $195 $497 21%
10 26 Ç16 NetSuite $108 $488 35%
Source: Gartner: Market Snapshot: ERP Software, Worldwide, 2016
Supply chain management. Demand for supply chain management (e.g., supply chain planning, sup-
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Ȍ
ϐ
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tions. As companies mature, they become increasingly focused on ways to grow and transform their
business in areas that we believe will funnel investments in supply chain management, especially
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to manage. For this reason, an integrated system is crucial and must coordinate with all aspects of
the business to share information and collaborate both up and down the entire supply chain.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 9
William Blair
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entire supply chain process—making supply chain management applications critical for more ma-
Ǥǡ
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as part of its core offering, whereas most other cloud vendors typically treat it as an add-on offering
or more traditional on-premise vendors offer limited mobile capabilities.
We are witnessing an uptick in use of and demand for advanced analytics (e.g., predictive and pre-
scriptive analytical tools) for planning purposes and optimizing inventory streams. As an increas-
ing amount of data is collected about a company’s supply chain operations, the data can be used to
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based technologies will dominate 60% of new supply chain management (SCM) application spend by
2020 as businesses replace heavily customized and technically obsolete supply chain applications.”
The industry is ripe for replacement with many legacy, outdated systems still being used today. We
view these trends as tailwinds for SaaS-based vendors in the space, including SPS Commerce, Inc.,
The Descartes Systems Group Inc., and Amber Road.
Communications. Communications applications are also gaining traction in the cloud. The commu-
nications market is broad, encompassing telephony, messaging, web-conferencing and integrated
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shift away from premises-based systems, with telephony, messaging, and conferencing leading the
way. Replacement cycles for on-premises telephony systems, which we estimate are roughly eight
years, are stimulating transitions to the cloud. Further, replacement cycles often decrease in healthier
economies, which will accelerate the transition to the cloud in regions such as North America.
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not have maintenance requirements. While cloud adoption has been more prevalent in the SMB
market, it is gradually gaining acceptance in the enterprise market. The main pure cloud players in
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size of the market have only been reinforced by the move to hosted solutions from many traditional
on-premises players such as Cisco and Avaya.
Use of messaging applications is also growing, mainly because of a younger, mobile-centric end-user
population. While group messaging or chat sessions have been used as internal communication tools
in enterprises for some time, companies are beginning to use messaging apps and bots to facilitate
Ǥ
apps such as Facebook Messenger, Kik, WhatsApp, and WeChat, enabling one-on-one messaging
via everyday social applications.
In our opinion, messaging is a more personal form of communication because it typically provides
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being used to provide a more frictionless interaction with customers and do not require the user
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bots taking over entirely. In our opinion, companies are at an advantage by offering multiple forms
of communication because preferences vary across different user groups.
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William Blair
According to Frost & Sullivan, web-conferencing software and services are forecast to grow at a
ϐǦ
ͺǤͶΨ̈́͵ǤʹͲʹͲǤ
ǡ
single offerings including web and video conferencing capabilities at lower prices. Team collaboration
tools are disrupting older business models, and the cloud provides a quicker pace of innovation than
most incumbent solutions. Newer players in this space such as Slack and HipChat are increasing the
competition, while more-established players are also bringing their own form of cloud, collabora-
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pressure is lowering ASPs for these types of products. Most of the price points for these solutions
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offerings at no cost (e.g., there is no direct monetization of these solutions). However, we believe
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their subscription packages, providing a more robust and well-rounded product set for customers.
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4,000.0
3,500.0 3,680.8
3,000.0
2,897.5
2,500.0
Millions
2,000.0 2,223.1
1,500.0 1,674.5
1,000.0 1,216.2
905.0
500.0 715.2
0.0
2014 2015 2016 2017 2018 2019 2020
Source: Gartner
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 11
William Blair
In our past cloud reports (e.g., our April 23, 2012, report titled The Cloud Moves On), we have focused
on SaaS companies providing analytics and benchmarking capabilities around the data that they
have stored in their multitenant environments. We are now witnessing a much broader approach,
which we segment into several key buckets:
Ȉ Cloud or SaaS Vendors Providing More Sophisticated Analytics Around the Data They Hold
for Their Customers.
that SaaS companies can provide their customers with access to analytics on their own data
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panies understand where they were spending by providing a view into aggregate growth in
Ǥ
a benchmark that would allow companies to understand their rates (e.g., hotel costs) versus
Ǥ ǡ
more than just fuel and hours worked reporting to its customers; it also uses the data to help
customers optimize their routes and improve productivity. We believe that all SaaS companies
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cal functionality on their core processes. Some of these companies partner with and embed
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ȋǤǤǡ
dashboarding and analytical capabilities for its customers). In these instances, the vendors do
not allow integration of third-party data, and any further analysis is likely done by downloading
the data into a private data warehouse or analytical environment.
Ȉ SaaS Vendors Building Broader Stacks That Provide Converged Architecture. A more recent
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Ȍ-
(data outside their cloud applications) into these analytical environments, through a combina-
tion of direct-connect and third-party ETL technologies like Informatica. In effect what these
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transform, load) environment, a data warehouse to hold the data, a master data management
layer, and a reporting and visualization layer for end-users to access the data. While these
offerings are nascent and the vendor relationships somewhat untested, and will likely need
some price adjustment, we believe that salesforce.com’s Wave offering is gaining traction faster
than we originally anticipated (partly because of multicloud bundling and integration); there
are some large, named customers (e.g., Barclays, General Electric, Tyco, Verizon) and others
including a global media company and a global manufacturing enterprise that have bought
the product. While most are using Wave for analytics around the sales, service, and marketing
data stored in salesforce’s cloud, we have heard of a number of companies loading their own
internal data up to the cloud to be integrated with the sales data and analyzing the integrated
information using Wave.
Given the nascence of the offering, we remind investors that the database does not replace
a large-scale data warehouse like Teradata—and certainly the reporting and visualization is
Ȅ
ȋ
Ȍ
ͷͳͲǤǡǡ
marginalize the ETL and database vendors, in our view, as they will co-opt much of the value
Ǥ
warehouse environments, we do not believe that this shift will happen in the near term, but
rather will be a long-term evolution as enterprises become more comfortable with moving
portions of their data to the cloud. The continued adoption of mission-critical cloud systems
will accelerate this dynamic.
12 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
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very large customers (global manufacturing and global industrial companies) suggest that Domo
may be the sole player in the converged stack that is not tied to one application. The company
has the unique ability to bring in data from more than 300 data sources, leveraging a robust
connector framework, and is focused on adding self-service, automation, and “best practice”
content through the platform to give more power to the business user and relieve the burden
Ǧ
Ǥ
ǡ
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reporting, and visualization layers of its converged stack, Domo has integrated collaboration
and optimization layers into its platform, delivering a complete business management solution
as opposed to just an analytics tool. We suspect that the company could, over time, take share
ǡ
ǡǡǦǡ
ǯ
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the space given its sole focus on providing a holistic business management platform.
In many cases, cloud-based BI offerings can be pointed at any data source (e.g., Tableau) with-
out co-opting the master data management or data warehouse components. In other cases,
companies such as Birst are targeting the enterprise and, we suspect, shooting to replace the
companywide reporting and BI capabilities of vendors such as MicroStrategy. While many of
these companies will likely stay away from creating a converged stack (i.e., they will not pro-
vide ETL and enterprise data warehouse functionality), we believe they will encroach on the
data preparation markets. These vendors, in our view, are the most likely to be acquired by the
legacy vendors that offer immature cloud offerings.
Ȉ Data Warehousing Vendors. This segment has been dominated largely by Amazon’s RedShift
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SAP, and IBM, have recently introduced cloud-based offerings. In our view, following its recent
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allows for an on-demand data warehousing environment, but the ease-of-use and structured
nature of RedShift (a massively parallel columnar database architecture) are partly responsible
Ǥ ǡ
Ǧ ǡ
enterprise data warehousing will continue to transition to the cloud as more applications and
infrastructure components are deployed using this model.
Ȉ Corporate Performance Management Applications. There has also been solid traction in the
ǡ
ϐ
ϐ
and analysis (FP&A) processes such as budgeting, planning, and forecasting. SaaS players such
as Anaplan, Adaptive Planning, and Host Analytics are gaining traction at the enterprise, replac-
ǡȀǡǯǤ
Ǥ
ǯ
and Essbase still require numerous IT resources and consultants for hierarchy management and
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 13
William Blair
multiple charts of accounts—activities that should be much simpler and automated. Further,
consolidation in Essbase can take multiple hours in some cases, versus a matter of seconds or
minutes in technologies such as Anaplan.
The Internet of Things (IoT) is beginning to make its way into more organizations that are seeking
ϐ
Ǥ
ǡʹͲ
in use by 2020; however, we believe it is still early days and will take time for companies to realize
ϐ
Ǥ ǡǡ
ϐ
ǡ
or that a user made an incorrect ordering input, or a machine is on the verge of breaking—all of
ϐ
ǡ
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just recently partnered with T-Mobile for a new product called programmable wireless, which is
particularly useful for IoT use-cases because it allows users to connect wirelessly and gather data
via SIM cards—enabling companies to build communication applications using that data. We also
believe that the evolution of IoT holds much potential in CRM. Gartner estimates that by 2018, 5%
14 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
of customer service cases will be initiated by internet-connected devices (up from 0.02% in 2014).
As this connected network grows, we believe there will be increased investment in IoT, spanning
more use-cases.
Non-GAAP Adjustments
The reporting of non-GAAP results has become commonplace among public software companies over
the last decade, and has drawn the attention of investors over the last year as regulators have issued
new interpretations of the rules and regulations for non-GAAP measures in public disclosures and
ϐǤ
ǤǤ
-
ȋȌ
ϐȋǦ
Ȍǡ
certain adjustments made to non-GAAP measures that may be misleading must be removed, and
Ȁ
ϐ
Ǥ
ǡ
Ǧ
ǡ
we believe that the reporting of non-GAAP metrics will continue to draw the attention of both in-
vestors and the SEC in the future.
In the following section, we discuss the accounting for these non-GAAP adjustments, the impact
that non-GAAP adjustments have had on software company earnings, and how reported operating
metrics and valuations appear when not accounting for non-GAAP adjustments.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 15
William Blair
([KLELW
$YHUDJH6WRFN%DVHG&RPSHQVDWLRQDVD3HUFHQWDJHRI5HYHQXH
FY-5 to FY-1
0.12
0.1
0.06
Established Software Group
0.04
0.02
0
FY-5 FY-4 FY-3 FY-2 FY-1
Sources: FactSet and company filings
ϐ
individual basis to see how stock-based compensation as percentage of revenue has trended. While
some companies have consistently decreased their level of stock-based compensation relative to
ȋǤǤǡ
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stock-based compensation as a percentage of revenue increase.
([KLELW
6WRFN%DVHG&RPSHQVDWLRQDVD3HUFHQWDJHRI5HYHQXH
SaaS Group
FY-3 to FY-1
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
ZEN
APPF
ECOM
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16 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
([KLELW
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SaaS Group
FY-3 to FY-1
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
DSGX
ZEN
APPF
CSOD
CVT
PAYC
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DWRE
HUBS
MKTO
TWLO
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FY-3 FY-2 FY-1
([KLELW
6DD6*URXS2&)DQG)&)0DUJLQV:LWKDQG:LWKRXW6%&
FY-3 to FY-1
2SHUDWLQJ&DVK)ORZ0DUJLQ )UHH&DVK)ORZ0DUJLQ
Including6%&DVDQ$GGEDFNWR&DVK
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Average 4.4% 5.1% 8.7% -2.5% -2.4% 1.7%
Median 8.3% 7.4% 9.5% 2.9% 0.9% 4.7%
Excluding6%&DVDQ$GGEDFNWR&DVK
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Average -1.3% -3.3% -0.4% -6.9% -9.4% -6.3%
Median 2.5% -1.8% 1.5% -2.4% -4.6% -3.9%
Difference
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 17
William Blair
ϐ
-
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ϐʹͳΨ ǦͳͳͻΨǢ
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margin both decreased to 11%—a 10-percentage-point decline in the average and an 8-percentage-
point decline in the median. The group witnessed a similar percentage-point decline to its average
ϐ ǦͳȋͳͲǦ
Ǧ
7-percentage-point decline in the median).
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FY-3 to FY-1
,QFOXGLQJ6%&DVDGGEDFN ([FOXGLQJ6%&DVDGGEDFN
2&)0DUJLQ )&)0DUJLQ 2&)0DUJLQ )&)0DUJLQ 2&)'LIIHUHQFH )&)'LIIHUHQFH
7LFNHU )< )< )< )< )< )< )< )< )< )< )< )< )< )< )< )< )< )<
ALRM 8% 9% 13% 6% 5% 8% 8% 7% 11% 6% 3% 6% -1% -2% -2% -1% -2% -2%
ATHN 16% 20% 18% 9% 10% 8% 9% 12% 11% 2% 2% 1% -7% -7% -7% -7% -7% -7%
TEAM 35% 31% 28% 31% 21% 21% 30% 18% 12% 26% 8% 4% -5% -13% -17% -5% -13% -17%
CSOD 9% 13% 13% 5% 8% 8% -2% 0% 0% -7% -4% -4% -11% -13% -13% -11% -13% -13%
CVT 20% 20% 14% 10% 7% 10% 16% 17% 8% 5% 4% 4% -4% -3% -6% -4% -3% -6%
DSGX 28% 29% 29% 27% 27% 27% 26% 28% 28% 25% 26% 26% -2% -1% -1% -2% -1% -1%
FLTX 24% 31% 32% 3% 13% 18% 19% 25% 24% -1% 8% 9% -4% -6% -9% -4% -6% -9%
IL 18% 10% 11% 15% 6% 7% 14% 6% 7% 11% 2% 2% -4% -4% -4% -4% -4% -4%
LOGM 18% 33% 32% 11% 30% 26% 6% 22% 22% 0% 19% 17% -12% -11% -10% -12% -11% -10%
N 15% 13% 14% 10% 9% 6% -3% -4% -1% -8% -9% -8% -18% -17% -15% -18% -17% -15%
PAYC 22% 15% 19% 6% 5% 12% 22% 14% 18% 6% 5% 10% 0% 0% -1% 0% 0% -1%
PCTY 7% 7% 14% 0% 1% 7% 2% -1% 7% -4% -7% 0% -5% -9% -8% -5% -9% -8%
NOW 19% 20% 31% 6% 12% 23% 4% -2% 6% -9% -10% -3% -15% -23% -26% -15% -23% -26%
SQI 20% 17% 17% 13% 8% 9% 12% 11% 12% 5% 1% 3% -8% -6% -5% -8% -6% -5%
RP 18% 17% 20% 10% 8% 13% 10% 8% 12% 2% -1% 5% -8% -9% -8% -8% -9% -8%
CRM 22% 22% 24% 14% 16% 14% 9% 11% 15% 2% 6% 5% -12% -11% -9% -12% -11% -9%
TXTR -33% 3% 23% -38% -10% 8% -69% -10% 7% -74% -23% -8% -36% -13% -16% -36% -13% -16%
ULTI 18% 16% 18% 11% 8% 10% 10% 7% 5% 3% -1% -4% -8% -9% -13% -8% -9% -13%
VEEV 20% 22% 20% 19% 13% 14% 17% 17% 14% 16% 9% 8% -3% -5% -6% -3% -5% -6%
WDAY 10% 13% 22% -3% 0% 11% -3% -7% 1% -16% -20% -11% -13% -20% -22% -13% -20% -22%
Mean
Median
Sources: FactSet and company filings
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18 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
([KLELW
6DD6&RPSDQLHV:LWK!2&)0DUJLQVLQ)<
$QDO\]LQJ6%&DVDRI5(92&)DQG)&)
FY-3 to FY-1
Mean 115
Median 69
Sources: FactSet and company filings
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 19
William Blair
([KLELW
(95HYHQXH%HIRUHDQG$IWHU6%&$GGEDFN
(dollars in millions)
1 5 6
Normal Adjusted
6%&RIUHYHQXH EV 5HYHQXH EV/REV SBC Adjustment 5HYHQXH EV/REV
7LFNHU )< )< )<
APPF 1% 2% 1% 614 104 136 5.9x 4.5x 1 2 103 134 6.0x 4.6x
ALRM 1% 2% 2% 1,068 245 291 4.4x 3.7x 4 5 241 287 4.4x 3.7x
AMBR 19% 4% 10% 246 74 84 3.3x 2.9x 7 8 67 76 3.7x 3.2x
ATHN 7% 7% 7% 5,004 1,104 1,318 4.5x 3.8x 77 91 1,027 1,226 4.9x 4.1x
TEAM 5% 13% 17% 6,201 529 685 11.7x 9.1x 87 113 441 572 14.1x 10.8x
BV 9% 7% 7% 360 203 213 1.8x 1.7x 15 16 188 197 1.9x 1.8x
BNFT 1% 4% 6% 1,149 235 293 4.9x 3.9x 13 17 222 277 5.2x 4.1x
ECOM 3% 9% 12% 249 113 129 2.2x 1.9x 13 15 100 114 2.5x 2.2x
CSOD 11% 13% 13% 2,429 426 522 5.7x 4.7x 54 66 372 456 6.5x 5.3x
CVT 4% 3% 6% 1,165 233 282 5.0x 4.1x 15 18 219 264 5.3x 4.4x
DSGX 2% 1% 1% 1,530 202 223 7.6x 6.9x 2 2 200 221 7.6x 6.9x
FLTX 4% 6% 9% 2,215 344 407 6.4x 5.4x 30 35 314 372 7.1x 6.0x
HGN-TSE 1% 1% 1% 127 73 82 1.7x 1.5x 1 1 72 81 1.8x 1.6x
HUBS 4% 14% 12% 1,784 264 346 6.7x 5.2x 31 40 234 305 7.6x 5.8x
IL 4% 4% 4% 588 299 328 2.0x 1.8x 13 14 287 314 2.1x 1.9x
JIVE 24% 18% 10% 223 201 196 1.1x 1.1x 21 20 180 176 1.2x 1.3x
LPSN 7% 6% 5% 397 223 237 1.8x 1.7x 11 12 212 225 1.9x 1.8x
LOGM 12% 11% 10% 2,230 334 383 6.7x 5.8x 33 37 301 346 7.4x 6.5x
MRIN 7% 9% 14% 59 102 104 0.6x 0.6x 15 15 87 89 0.7x 0.7x
MB 1% 2% 8% 606 138 177 4.4x 3.4x 11 15 127 162 4.8x 3.7x
MIXT 0% 1% 0% 113 105 114 1.1x 1.0x 0 0 105 114 1.1x 1.0x
OOMA 0% 1% 5% 107 104 123 1.0x 0.9x 5 6 99 117 1.1x 0.9x
PAYC 0% 0% 1% 2,805 327 422 8.6x 6.7x 4 6 322 416 8.7x 6.7x
PCTY 5% 9% 8% 2,050 265 336 7.7x 6.1x 20 26 244 311 8.4x 6.6x
NOW 15% 23% 26% 12,375 1,377 1,786 9.0x 6.9x 353 458 1,024 1,328 12.1x 9.3x
RP 8% 9% 8% 1,935 570 654 3.4x 3.0x 46 53 524 600 3.7x 3.2x
RNG 5% 7% 7% 1,626 374 463 4.4x 3.5x 28 34 346 428 4.7x 3.8x
CRM 12% 11% 9% 51,579 8,176 9,929 6.3x 5.2x 728 884 7,448 9,045 6.9x 5.7x
SHOP 3% 4% 4% 5,840 367 527 15.9x 11.1x 14 20 353 507 16.5x 11.5x
SPSC 4% 4% 4% 1,033 193 229 5.3x 4.5x 8 9 185 220 5.6x 4.7x
TNGO 6% 7% 9% 295 244 na 1.2x na 21 na 223 na 1.3x na
TWLO 4% 4% 5% 4,460 256 330 17.4x 13.5x 14 18 242 312 18.4x 14.3x
ULTI 8% 9% 13% 6,082 780 954 7.8x 6.4x 104 127 676 826 9.0x 7.4x
UPLD 1% 2% 4% 182 73 77 2.5x 2.4x 3 3 70 74 2.6x 2.5x
VEEV 3% 5% 6% 5,445 516 629 10.6x 8.7x 31 37 485 591 11.2x 9.2x
WDAY 13% 20% 22% 15,899 1,524 1,997 10.4x 8.0x 328 429 1,196 1,568 13.3x 10.1x
ZEN 7% 25% 25% 2,645 310 413 8.5x 6.4x 78 104 232 309 11.4x 8.6x
$YHUDJH [ [ [ [
Median [ [ [ [
Sources: FactSet and company filings
ǡǦǦǦǦ
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we follow a similar process as with our enterprise-value-to-revenue calculation above to arrive at
ϐ
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the adjusted valuation average and median values may be deceiving given that a large amount of
companies that had valuation multiples based on the normal estimates no longer have a valuation
Ǧ
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or made the multiple greater than 300, which we do not include.
20 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
([KLELW
(9)&)%HIRUHDQG$IWHU6%&$GGEDFN
(dollars in millions)
1 5 6
Normal Adjusted
6%&RIUHYHQXH EV )UHH&DVK)ORZ (9)&) SBC Adjustment )UHH&DVK)ORZ (9)&)
7LFNHU )< )< )<
ALRM 1% 2% 2% 1,068 16 26 67.5x 41.5x 4 5 12 21 89.8x 50.7x
ATHN 7% 7% 7% 5,004 48 101 104.6x 49.4x 77 91 -29 10 NM NM
TEAM 5% 13% 17% 6,201 123 174 50.5x 35.6x 87 113 36 61 174.1x 101.4x
CSOD 11% 13% 13% 2,429 27 52 90.6x 46.6x 54 66 -27 -14 NM NM
CVT 4% 3% 6% 1,165 26 18 44.8x 63.1x 15 18 11 1 102.4x NM
DSGX 2% 1% 1% 1,530 47 53 32.5x 28.6x 2 2 45 52 33.8x 29.7x
FLTX 4% 6% 9% 2,215 66 84 33.5x 26.2x 30 35 37 49 60.6x 44.8x
LOGM 12% 11% 10% 2,230 85 101 26.2x 22.1x 33 37 53 64 42.4x 35.0x
N 18% 17% 15% 8,630 92 125 93.8x 69.0x 142 180 -50 -55 NM NM
PAYC 0% 0% 1% 2,805 44 71 63.3x 39.8x 4 6 40 65 70.2x 43.2x
PCTY 5% 9% 8% 2,050 13 21 154.8x 99.4x 20 26 -7 -5 NM NM
NOW 15% 23% 26% 12,375 329 432 37.6x 28.7x 353 458 -24 -26 NM NM
RP 8% 9% 8% 1,935 56 108 34.8x 17.9x 46 53 9 55 NM 35.4x
CRM 12% 11% 9% 51,579 1,603 1,990 32.2x 25.9x 728 884 875 1,106 58.9x 46.7x
ULTI 8% 9% 13% 6,082 67 101 90.9x 60.4x 104 127 -37 -26 NM NM
VEEV 3% 5% 6% 5,445 113 123 48.0x 44.3x 31 37 83 86 65.7x 63.6x
WDAY 13% 20% 22% 15,899 143 251 111.1x 63.4x 328 429 -185 -179 NM NM
$YHUDJH [ [ [ [
Median [ [ [ [
Sources: FactSet and company filings
Platform Companies
Ǥ
ϐ
pure-play technology platforms by signing its agreement with IBM in 1980 that allowed Microsoft
ǡǡ
ǡǦ
Ǥ
ǯϐǦ
advantage in the operating system space and its platform approach, the company is worth almost
̈́ͶͲͲǤ
share. Retail platforms like eBay and Amazon have been around for more than two decades, and the
largest retailer in the world, Amazon, has little to no inventory on hand. Social network platforms
like Facebook, LinkedIn, Twitter, Snapchat, and Instagram all began to gain relevance over the last
decade, and the largest social media platform in the world, Facebook, is the most popular media
and news provider in the world yet creates no content itself.
ǡȋǤǤǡǡȌǡȋǤǤǡ
LendingClub, Prosper), communication platforms (WhatsApp, Skype), real estate platforms (e.g.,
ǡȌǡȋǤǤǡǡȌ
-
ǡ
any tangible vehicles and Airbnb now the largest accommodation provider in the world without
Ǥ
can communicate and transact, and third-party systems can also connect into the ecosystem—al-
ϐ
actual products. This has enabled these companies to achieve greater market share, faster growth,
and strong operating margins.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 21
William Blair
Until about 2003, Apple was a fairly stagnant company with slow growth and negative operating
margins, but in 2003 and 2004, this began to change and Apple saw its growth greatly accelerate and
ϐ
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ǫ
([KLELW
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(dollars in millions)
250 90%
80%
What changed in 2003?
200 70%
60%
150
50%
40%
100
30%
50 20%
10%
0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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Apple’s Operating Margin
WR
0.4
0.35
0.3
0.25
What changed in 2003?
0.2
0.15
0.1
0.05
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-0.05
-0.1
Sources: FactSet and company filings
If you guessed that the iPod or iTunes was created in 2003, then you are two years too late (iPod
and iTunes were created in 2001), and if you guessed it was because of the iPhone, then you are
three years too early (the iPhone was created in 2007). So what did happen in 2003 that saw Apple
increase its revenue growth from midsingle digits to 33% in 2004, 68% in 2005, and 39% in 2006
and saw Apple’s operating margins increase from breakeven to almost 15% over the same period?
The answer: Apple created a platform by creating an ecosystem around the iPod and iTunes.
Before 2003, Apple had been following a product strategy by trying to win as many customers by
Ǣǡ
alienated it from the majority of users who were on other platforms and products. While Steve Jobs
22 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
had a penchant for creating innovative and simple-to-use products, it took the nudging of Apple’s
ǯ
Ǥϐ
and Michael Cusumano believe that this is what really marked the change in Apple from a strug-
gling product company to a platform company with great products that could now bridge out to
the broader base of users across the world, leading to the company’s outsized growth and strong
scale advantages and, ultimately, rapid improvement in operating margins. The company repli-
cated this platform approach when releasing the iPhone and iPad—creating an online app store
Ǧ
Ȅ
-
ence scale advantages.
Emerging Platforms
Platform providers continue to evolve in the software industry. As it relates to our coverage list, two
key PaaS trends continue to emerge: 1) in the infrastructure space, with providers such as Amazon
Web Services (AWS), Microsoft Azure, and Google Cloud Platform, and 2) in the application develop-
ment space, with providers such as salesforce’s Force.com platform and the Atlassian Marketplace.
([KLELW
$PD]RQ5HYHQXH*URZWKDQG2SHUDWLQJ0DUJLQV– AWS and Non-AWS
(dollars in millions)
4 4 4 4 1Q15 4 4 4 1Q16 4
AWS
Net Sales
Y/Y growth 69.0% 43.0% 43.0% 47.0% 49.4% 49.1% 81.5% 78.4% 69.4% 69.7% 63.9% 58.2%
Segment operating income $245 $77 $98 $240 $660 $265 $391 $521 $687 $1,864 $716 $863
Margin 23.3% 7.7% 8.4% 16.9% 14.2% 16.9% 21.4% 25.0% 28.6% 23.7% 27.9% 29.9%
%age of total operating income 37.5% 36.4% 52.5% 39.3% 41.2% 43.1% 40.9%
Non-AWS
Net Sales
Y/Y growth 21.0% 22.2% 19.3% 13.4% 18.2% 13.2% 16.5% 19.9% 19.5% 17.5% 25.6% 28.8%
Operating income $257 $327 ($234) $798 $1,148 $441 $684 $472 $1,063 $2,660 $944 $1,245
Margin 1.4% 1.8% -1.2% 2.9% 1.4% 2.1% 3.2% 2.0% 3.2% 2.7% 3.6% 4.5%
Sources: Company filings
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 23
William Blair
ǡ
ǡ
in the space. Despite this competition, we believe Amazon should continue to witness very high
win rates given its greater scale, geographic footprint, and industry mindshare. In our opinion, this
cost of ownership associated with data centers and servers and increase their compute workloads.
Salesforce.com – Force.com
How does Force.com differ from AWS? AWS is about the infrastructure layer (e.g., provisioning, servers,
storage, compute, analytics), and Force.com is about the front-end-facing application development
ȋǤǤǡǡ
ǡ
ǡϐ
Ȁǡ
ȀȌǤ
Within AWS, which provides IaaS, a company can choose its own operating system (e.g., Windows,
Ȍǡȋ
ǡǡǡȌǡȋǡǡ
ǡ
ǡ
SAP, Cognos), and middleware. It is up to the company to provision everything together, allowing
ϐ
Ǥ
Ǥ
ǡ
ǡ
ϐȋǤǤǡǡǡǡ
Ȍ
ǡ
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not deciding between an infrastructure provider and an application development provider. Rather,
we view salesforce’s Force.com platform as a PaaS that sits on top of Amazon’s IaaS, and abstract
away all of the infrastructure (e.g., databases, BI tools, identity/search, operating systems) that
a company would need to run an application, allowing developers to focus solely on building the
application and without having to focus any attention on the infrastructure that sits underneath it.
Therefore, we do not view them as competitive with each other.
The Force.com application development platform is the largest cloud ecosystem in the world where
independent software vendors (ISVs) can build and deploy cloud-based applications. Salesforce.
com’s platform business, which represents nearly 20% of total revenue, is its fast-growing cloud,
Ͷ͵ΨͳʹȋͳͻȌǤ
([KLELW
6DOHVIRUFHFRP3URGXFW6XEVFULSWLRQ5HYHQXHDQG*URZWK
(dollars in millions)
3URGXFW5HYHQXH
1Q16 4 4 4 4 4
Why would companies want to build on Force.com? We believe the PaaS market for application de-
velopment will continue to witness a healthy amount of growth as new SaaS vendors emerge and
companies look to quickly achieve scale. Veeva is a perfect case study of the power of using the
Force.com platform. Veeva achieved a non-GAAP operating margin of 6.7% in 2010 when generating
24 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
̈́ͳ͵Ǥʹǡ
̈́͵ͲͲ
Ǥ ǡϐ
ȋʹͲͳ͵ʹͲͳȌǡ
its revenue at a compound annual rate of 47% while maintaining its non-GAAP operating margin
close to 25%. While some of this is due to the company’s vertical focus that drives operating lever-
ǡǯ
ϐ
its decision to be built on the Force.com platform.
ʹͲǡ
ǯǡǡ
-
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vendors’ operating results based on how closely the annual-year revenue matched with Veeva
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revenue). Using this comparison, it is clear that Veeva was able to achieve scale the fastest based
on comparable revenue run-rates, and also while demonstrating the fastest growth.
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(dollars in millions)
9HHYD
Revenue $13,229 $29,129 $61,262 $129,548 $210,151 $313,222 $409,221
Growth 120% 110% 111% 62% 49% 31%
EBIT Margins 7% 17% 11% 24% 22% 28% 26%
=HQGHVN
Revenue $38,228 $72,045 $127,049 $208,768
Growth 88% 76% 64%
EBIT Margins -38% -24% -25% -12%
Concur
Revenue $56,550 $71,832 $97,146 $129,107 $215,491 $247,596 $292,936
Growth 27% 35% 33% 67% 15% 18%
EBIT Margins 5% 9% 15% 17% 19% 23% 23%
)OHHWPDWLFV
Revenue $46,057 $64,690 $92,317 $127,451 $177,350 $231,581
Growth 40% 43% 38% 39% 31%
EBIT Margins 9% 5% 15% 19% 24% 22%
7H[WXUD
Revenue $12,864 $23,964 $40,766 $62,968 $86,729
Growth 86% 70% 54% 38%
EBIT Margins -80% -58% -45% -14% 7%
+XE6SRW
Revenue $15,387 $28,553 $51,604 $77,634 $115,877 $181,944
Growth 86% 81% 50% 49% 57%
EBIT Margins -80% -69% -31% -40% -27% -14%
RingCentral
Revenue $50,222 $78,877 $114,526 $160,505 $219,887
Growth 57% 45% 40% 37%
EBIT Margins -15% -16% -26% -19% -14%
Sources: Company filings
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 25
William Blair
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(dollars in millions)
7ZLOLR
Revenue $50 $89 $167
Growth 78% 88%
Margin Expansion +14.0 bp +11.8 bp
Amazon AWS
Revenue $3,108 $4,644 $7,880
Growth 49% 70%
Margin Expansion NA +9.4 bp
Third-Party Marketplaces
SaaS vendors, such as salesforce.com and Atlassian, have also built and hosted online marketplaces
ǦǦǤ ǡ
has developed the Atlassian Marketplace, which has over 2,000 add-ons from a variety of third-party
software vendors; customers can purchase these as add-ons to their original deployment of Atlas-
ǯǤ
ʹͷΨ
ǡ
̈́ͳͷͲ
million in revenue over the last four years. In our opinion, marketplaces like this help improve the
company’s overall feature set and the “stickiness” among the customer base as customer uptake
increases and new add-ons help more and more customers receive functionality that the company
could not develop on its own.
26 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Moving away from the traditional model, there are three main types of cloud computing: infra-
structure as a service, platform as a service, and software as a service. They differ in terms of what
services are offered. Infrastructure as a service, or IaaS, basically offers the infrastructure stack up
ȋ
ǡǡϐǡ
Ȍ
Ǥ
Ǥ
IaaS are responsible for managing the applications, data, runtime, middleware, and operating sys-
tems. Platform as a service, or PaaS, allows developers to create and deploy applications, but does
Ǥ
Windows Azure, salesforce.com’s Force.com, and Twilio Inc. Users of PaaS are typically developers.
Software as a service, or SaaS, provides the entire infrastructure stack including the application
residing on top. SaaS is accessed by end-users directly through the web and alleviates the overall
software and hardware maintenance for customers.
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SaaS are essentially outsourcing a particular segment of their business to the vendor, whereas users
of on-premises software must dedicate resources to manage their own software and hardware. This
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 27
William Blair
ϐ
Ǥ ǡ
ǡ
of these layers. In the SaaS model, the end-user is indifferent to what operating system or database
the vendor is using; the end-user simply wants access to the application.
Third, we believe SaaS vendors have the most potential to succeed given the decreasing desire to
manage parts or the entire infrastructure stack. We are seeing a shift in purchasing decisions being
made by line-of-business personnel as opposed to IT staff. The line-of-business is starting to demand
ǡϐǡǡ
implementation—making best-of-breed SaaS applications with interoperability capabilities quite
attractive. Lastly, we believe pure cloud companies will win out over hosted solutions because the
ϐ
ȋ
ȌǤ ǡ
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cient for the company to support all of its customers on one instance instead of managing multiple
instances. Also, the rate of innovation is slower for hosted solutions, as mentioned above.
28 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
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2500 0.09
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1500
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2021 2129 2039
2000 0.04
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0 111.1 129.6 154.6455468 175.9996229 0
2012 2013 2014 2015
1. Enterprises appear to be turning the corner on security concerns. Security concerns have
been the single most powerful headwind to cloud adoption since the advent of the technology.
ǡǡ
securing their offerings, and our recent industry conversations suggest that this has not gone
Ǥ
ϐ
ϐǡ
and investments of the main vendors (i.e., Amazon, Microsoft, and Google) are likely to have
translated to better security capabilities than any enterprise could have developed in house.
While we would not go so far as to argue that security is no longer a widely held concern, we
believe the change in sentiment may be broad enough to support incremental acceleration of
the market.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 29
William Blair
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0.37
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2. SMB adoption likely to accelerate. Despite the high rate of cloud adoption worldwide, SMBs
have been slower to adopt cloud services than large enterprises. We believe this dynamic can
be attributed to the fact that smaller organizations often lack the requisite skills to make the
transition and provide continuing support. In addition, the channel partners that work with
smaller organizations tend to have a limited skill set themselves and consequently stick to the
products and deployment models for which they have achieved competency. In this case, we
believe most have promoted the private cloud model in the past because it was where they had
the most comfort. However, our recent industry conversations suggest that the rapid innovation
cadence of cloud vendors and broader availability of skills in the market have precipitated an
accelerated evolution from private cloud to public cloud preferences. This can also be seen in
ȋʹͷȌϐ
ͳʹǦʹͶǤ
ϐ
-
petition in the public cloud IaaS space drives the pace of innovation up and prices down, we
see the potential for these incentives to catalyze even higher SMB adoption rates.
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Source: Gartner
3. Prices will continue to decline. Although share leader AWS slowed the pace of price cuts in
2015, the company’s publicly stated commitment to gradually reducing prices as it achieves
greater scale and considerably more aggressive competition from Microsoft and Google sug-
gest that it will be years before the market reaches the bottom of the curve. AWS started 2016
by announcing price decreases for a handful of its services, and Microsoft quickly followed
30 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Ǥ
ǡ
ǡ
2018, which should support healthy increases in demand by lowering the barrier to adoption
for cost-sensitive organizations.
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2008 2009 2010 2011 2012 2013 2014 2015 2016
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Source: Gartner
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 31
William Blair
2016 and 2017, which will inevitably lead to further concentration of workloads. We believe the
public cloud IaaS market share picture (including compute, storage, and print) could end up look-
ʹͺǤ
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Most of the SaaS acquisitions completed this past year maintain attractive business models, but some
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believe the dip in valuations earlier in the year triggered some consolidation, and although valuations
have bounced back, we believe the M&A activity will continue, as evidenced by the span of recent
acquisitions in the past few months, which still paid healthy premiums, in our opinion, as shown
ʹͻǤǦǡ
ǯ
ǦǦ
vendors looking to access the public markets.
32 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
([KLELW
&ORXG0 $$FWLYLW\
Premium 7DNH2XW
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Acquiree Acquirer Date to Prior 5HYHQXH
Price 0 Rate
Close Multiple
Fleetmatics Verizon 8/1/16 $2.4 billion 40% 5.9x 407 18%
NetSuite Oracle 7/28/16 $9.3 billion 19% 7.6x 1,222 27%
LinkedIn Microsoft 6/13/16 $26.2 billion 47% 5.8x 4,505 20%
Demandware Salesforce 6/1/16 $2.8 billion 56% 7.5x 371 26%
SciQuest Accel-KKR 5/31/16 $509 million 34% 4.2x 121 10%
Marketo Vista Equity Partners 5/31/16 $1.79 billion 64% 5.3x 335 23%
inContact NICE Systems 5/18/16 $940 million 55% 3.6x 264 19%
Opower Oracle 5/2/16 $532 million 30% 3.3x 161 8%
Textura Oracle 4/28/16 $663 million 31% 6.2x 107 23%
Cvent Vista Equity Partners 4/18/16 $1.65 billion 69% 7.1x 233 24%
Concur SAP 9/18/14 $8.3 billion 20% 8.7x 860 24%
Responsys Oracle 12/20/13 $1.5 billion NA 6.1x 245 21%
ExactTarget Salesforce 6/4/13 $2.5 billion 50% 5.5x 458 21%
Eloqua Oracle 12/20/12 $810 million 31% 7.1x 114 22%
Ariba SAP 5/22/12 $4.3 billion 20% 7.8x 550 24%
Taleo Oracle 2/9/12 $1.9 billion 18% 5.0x 379 18%
SuccessFactors SAP 12/3/11 $3.4 billion 52% 8.1x 418 24%
RightNow Oracle 10/24/11 $1.5 billion 20% 5.6x 269 19%
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cle’s roots in the construction industry, having acquired Primavera, a provider of project portfolio
management software, in 2008,
ǯ project management capabilities and
established it more deeply in the engineering and construction industry at the time. In addition to
Primavera’s reach in the construction v
ǡ
ǯ
Ǥǡ
ǯ
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also believe this acquisition bodes well for some of the private players in the space, such as Procore
Ǧǡ
ȋǤǤǡ
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cases replacing legacy software providers (e.g. Primavera), and also illustrates the sizable market
opportunity in automating the manual processes in the construction industry.
Oracle/Opower.
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ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 33
William Blair
ʹͲͳʹ̈́ͳǤʹ
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communication products.
Oracle/NetSuite.
ǡ
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Ȁ
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ǡ̈́ͻǤ͵ǡ̈́ͳͲͻǤͲͲ
in an all-cash deal, representing about 7.6 times 2017 revenue. The purchase price represented a
19% premium to the previous closing price, but a 44% premium over its July 11 closing price, which
was before NetSuite’s take-out rumors began. Rumors had been circling for months, in large part
ǯǤ
Ǧ
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market share.
Salesforce/Quip.ǡ
ǡ
make teams more productive. We believe the acquisition bolsters the company’s entrance into the
fast-growing team productivity and collaboration space. We believe this acquisition is a positive for
(e.g., embedding communication and collaboration tools with the documents at the application
level) and also provides the company with an established document sharing collaboration tool that
ͳǤ
ǡǡ
Ǥ
ϐ
various objects within the salesforce.com system (e.g., prospect information, marketing document,
presentation, PDF) that can then be shared across those various functions to provide a seamless
customer interaction.
Vista Equity Partners/Marketo. In May, Vista Equity Partners announced the acquisition of Mar-
ǡ
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Ǥ
̈́͵ͷǤʹͷȄͶΨ
Ǥ
34 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
ʹͲͳ͵ȋ̈́ͳǤͷȌ
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ȋ̈́ʹǤͷ Ȍ ʹͲͳ͵Ȅ Ǥ
ǯ
ϐ
acquiring fast-growth SaaS companies. Marketo went public in 2013, but there was speculation
that it was shopping around for a buyer; many thought it would be Microsoft, IBM, or SAP, which
we believe might have made more sense because of its attempt to land larger enterprise customers.
ǯȋͶͲΨ
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Accel-KKR/SciQuest. ǡ
Ǧ
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15-year history of investing in midmarket software and technology-enabled services companies.
ǡ
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-
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(QWHUSULVHWR5HYHQXH0XOWLSOHV
TEAM 8.0x 6.8x 9.3x
RNG 4.4x 3.4x 5.2x
CRM 6.1x 5.3x 6.9x
HUBS 7.6x 5.4x 9.7x
VEEV 7.2x 6.0x 7.7x
ZEN 7.2x 4.6x 9.6x
APPF 5.2x 3.8x 3.9x
OOMA 0.6x 0.5x 0.2x
UPLD 1.5x 1.3x 1.6x
ALRM 2.9x 3.2x 1.3x
Mean 5.1x [ 5.5x
Source: FactSet
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 35
William Blair
ϐ
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established software companies. SaaS players typically defer revenue recognition, resulting in lower
near-term operating leverage compared with traditional license vendors that recognize the full amount
Ǥǡǡ
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because these vendors have not only the ability to disrupt, but also tremendous value in their vertical-
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itability at a quicker pace. Most SaaS companies are heavily investing in sales-and-marketing and
research-and-development (R&D) to drive accelerated growth in the future rather than incremental
ϐǤ͵ʹǡ
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SaaS vendors with slow-growing, higher-margin players. The deltas between the two groups are
most apparent in revenue growth and operating margin.
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6 0RI5HYHQXH 43% 47% 33% 39% 35% 39% 20% 17% 25% 35% 24% 15%
5 'RI5HYHQXH 12% 20% 30% 15% 13% 18% 14% 13% 14% 16% 14% 4%
Operating Margin 12% -12% -1% 10% -19% -2% 44% 30% 38% 26% 35% 37%
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36 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
ǡϐǡ
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aspect in the software industry, in our opinion. The reality is, if companies do not garner market
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company, we believe that high growth insinuates there is still a large market to be penetrated and
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capture that market share. This is why we believe high sales-and-marketing spending can be justi-
ϐǡ
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ability. Not surprisingly, companies with higher revenue growth tend to sell for higher multiples, a
33.
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smaller, these vendors can penetrate their markets quicker and gain scale, which can result in higher
ȋ͵ͶȌǤ-
tion, vertical markets tend to require heavy customization yet have to deal with constantly changing
regulatory and compliance environments—making vertical cloud applications an appealing solution
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ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 37
William Blair
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able and can result in additional products created and sold into an already established customer base,
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38 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Based on our analysis of the most up-to-date U.S. Census data and the U.S. Small Business Associa-
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tual software vendor business opportunity in the non-employer market, we point out that a healthy
number of attendees at the small-business-heavy customer conferences that we have attended over
DzdzȋǤǤǡǦϐȌǡ-
neuers have an appetite for CRM, ERP,HCM, marketing, and supply chain software solutions that are
now easily consumable and purchasable via a monthly subscription contract. In total, there are 28.7
million small businesses, which compares with the roughly 18,200 “enterprises” in the United States
with more than 500 employees—representing the large opportunity in the small-business market.
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20% spending on software based on Gartner’s breakout of roughly 16% of an SMB’s total IT budget
spent on hardware, 28% spent on IT services, 37% spent on telecommunications, and 20% spent
Ǥǡ
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hardware and in-house IT, to continue to prevail over legacy on-premise vendors. As this transition
from on-premise to cloud continues to take place, we believe that software will inevitably become
ȋǤǤǡͶͲΨǦͷͲΨȌǡǤǡ
vendors such as RingCentral, which offer a mobile-centric and largely hardware-free communica-
tions platform, should replace the large piece of IT budgets currently allocated for on-premises
hardware (e.g., servers) and desk phones for their telecommunications systems, presenting another
large opportunity for software vendors attacking the SMB space.
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ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 39
William Blair
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These companies’ easy-to-use functionality, rich feature-set, and generally lower price points increase
the stickiness of their software solutions, which has allowed these SMB-focused vendors to achieve
dollar retention rates between 95% and 100% over the past three years; we also note that these
retention rates have improved each year over the past three years, on average. Comparatively, we
analyzed the retention rates for our universe of SMB-focused SaaS companies, and compared these
ȋ
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only those companies in our universe for which information was available, and found that SMB SaaS
companies, on average, achieve similar retention rates as the remaining SaaS group. We believe this
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higher logo churn and lower dollar retention rates. In our opinion, these technologies end up being
mission-critical to SMBs’ daily operations, which is why we have seen such high retention rates for
the SMB-focused group. In addition, based on our over 1,540 conversations with small-business
owners, once a customer has chosen a particular technology, there are very few incentives to switch
as long as the vendor continues to deliver a valuable service. In contrast to most investors’ concerns
about SMBs switching due to lower pricing, our survey suggests that most SMBs would not switch
ʹͲΨǦ͵ͲΨ
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tion into core business processes.
ǡǯ
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on top of providing the sales-and-marketing engine, Infusionsoft has introduced an e-commerce
and payments platform that is now the system of record that drives the actual sales and transac-
tions for many SMBs, greatly improving the stickiness of its solutions. RingCentral’s cloud-based
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tion to a caller, or providing information about the caller to the agent), which we believe improves
Ǥ͵ͺǡʹͲͳʹ
to 2015 for the SMB-focused SaaS and overall SaaS groups.
SMB-focused software vendors also primarily use inbound sales strategies (and teams) to generate
ǡ
ǦϐǦ
team among software vendors focusing on the enterprise market. The easy-to-use and easy-to-
consume nature of these SMB-focused companies’ software, combined with their largely automated
ǡ
customer-acquisition cost than we typically witness with SaaS- and software-based companies that
are focused further upmarket. This has largely been driven by the much shorter sales cycles that SMB-
Ǥ
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ͲͷͲǡϐ
ǦǦ
Ǧ
Ǥ
40 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
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Retention Rates
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 41
William Blair
ǡǦϐǤǡǦ
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slowing over the past few years. With midsingle-digit growth (roughly 4% in 2015), the company
͵ͲͲʹΨ
ϐʹͲͳͷǤ
ǡ
ʹͲͳͷ
was able to improve its operating margin from 3% in 2014 to 29% in 2015 and generate a 26% free
ϐǤ
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of -1% in 2008, 9% in 2009, and 11% in 2010 before being acquired by Hewlett Packard Enterprise
(HPE). ArcSight’s management demonstrated that it could increase margins rather quickly without
necessarily affecting its growth, which decelerated to only 33% in 2010 from 34% in 2009.
We believe this concept can be applied to most other software companies as well. While we are not
ϐ
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of software companies can be controlled to a certain degree, and when growth slows, the focus can
ϐǤ
scale and are embedded in the business processes of large companies, replacement becomes quite
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5HYHQXH*URZWKYV$GMXVWHG2SHUDWLQJ0DUJLQ
60.0%
ZEN
HUBS
50.0%
5HYHQXH*URZWK
APPF
40.0% TEAM
VEEV
RNG
30.0% CRM ALRM
OOMA
20.0%
UPLD
10.0%
0.0%
-30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0%
$GMXVWHG(%,70DUJLQ
Sources: FactSet
42 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Revenue mixȂ
Ǥ
ϐ
Ǣ
revenue will correlate to higher gross margins and overall operating margins. Many companies are
transitioning to offer both cloud and on-premises solutions. Gross margin is typically higher in the
traditional software model (because they do not have to host the core applications and revenue
is recognized as incurred as opposed to ratably over time), but subscription gross margin should
improve as the company scales this business (SaaS gross margins at scale are roughly 75% to 80%).
Transitions from on-premises to cloud may take time and may lead to heightened volatility on a
quarterly basis (especially if license revenue is declining as a result of the shift) and will likely have
a negative impact on total revenue growth and operating margin during the transitional period.
However, we remind investors that the subscription model lends itself to increased visibility into
the business, given the recurring nature of subscription revenue, as well as more stable revenue
streams compared with lumpier, less predictable license revenue. Subscription revenue also allevi-
ates some price wars because of less pressure on sales representatives to meet quarter-end quotas,
ϐ
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Infrastructure Ȃ ϐ
Ȅ
-
Ȅϐǡ
Ǥϐ-
titenant model are that it is “one-to-many,” meaning that one, shared server is providing services
to many users. Margins improve as the number of users grows because there are few incremental
costs to service additional users.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 43
William Blair
According to Gartner, the overall cloud computing market (consisting of IaaS, PaaS, SaaS, and BPaaS)
ǤͶͲǡ
ͳͺΨʹͲͳͶʹͲͳͺǤ
This compares with the overall enterprise software market, which Gartner estimates will grow at
a compound annual rate of only 4% over the same time. In addition, SaaS and BPaaS continue to
make up the majority of cloud spending representing 34% and 44% of total cloud spending in 2015,
respectively. However, IaaS, representing 18% of cloud spending in 2015, is growing the fastest, at
a compound annual rate of 29% from 2014 to 2018, because more enterprises are moving their
infrastructure to the cloud.
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3XEOLF&ORXG)RUHFDVW
180
160
140
Billions of Dollars
120 54
49
100
45
80
41 56
60 37 47
39
40 32 7
27 6
20 5
3 4 29 36
13 17 23
0
2014 2015 2016 2017 2018
Source: Gartner - Cloud Service Providers Must Understand Deployment, Adoption and Buyer Complexity
to Leverage Cloud Revenue Opportunities
We believe this growing acceptance of the cloud demonstrates the increased maturity of the cloud
ǦϐǤ
cloud for more than just reducing IT costs. The “always available” mentality, increased innovation,
and mobile possibilities make cloud-based applications ideal for leadership teams interested in
Ǥ ǡ
ϐ
ability to focus more of their time on their actual business instead of IT functions—a concept that
is often highlighted by our industry conversations. We attended the Enterprise Connect Conference
ȋ
ϐ
Ȍ
people moving to the cloud because they indicated they were not a phone company and did not
want to worry about or devote resources to that aspect of their business; they simply wanted to
leverage a cloud-based phone system to focus their efforts on what really matters, which is driving
44 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Ǥǡ
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strategic advantages over competitors simply through the intrinsic nature of its structure, which
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Gartner –6SHQGLQJRQ3XEOLF&ORXG6DD6
60
51
Percentage of Respondents
50
40
29
30
20 17
10
0
Currently have 50%+ Will have 50%+ Will never have 50%
application spending application spending application spending
on public cloud SaaS on public cloud SaaS on public cloud SaaS
Source: Gartner - Cloud Service Providers Must Understand Deployment, Adoption and
Buyer Complexity to Leverage Cloud Revenue Opportunities
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50
44
45 42
40 37
RI5HVSRQGHQWV
34
35
29
30
25
20
15
10
5 2
0
Don't Know/NA
Workloads
Mission-Critical
Low-Value
Development/
Proof of Concept
Test Activities
Production
Workloads
Workloads
8VH&DVH
Source: Gartner - Survey Analysis: Buyers Reveal Cloud Application Adoption Plans Through 2017
While a complete transformation to the cloud may not be happening at this point, we are seeing
broader acceptance of more mission-critical cloud offerings such as CRM, payroll, and ERP, as detailed
Ǥ
ϐ
ǡ
then storage, and eventually databases. We suspect that once companies adopt the cloud, they are
ǢͶ͵ǡ
-
ȋ
ȌǤǡ
ϐ
ǡ
ǡ
move to the cloud to remain competitive, but are not comfortable moving their entire infrastructure
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 45
William Blair
yet (for reasons we detail later). Hybrid solutions can offer lower costs, increased agility, and man-
agement relief (in terms of IT staff), but their use creates a much more complicated business model
ȋǤǤǡ
ϐ
ȌǤǡ
ǡǦ
imminent as more mission-critical cloud applications are gaining general acceptance.
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$YHUDJH3XEOLFDQG3ULYDWH&ORXG8VH
1XPEHURI&ORXGV8VHG 3XEOLF&ORXGV 3ULYDWH&ORXGV 7RWDO
Applications 1.5 1.7 3.2
Experimenting 1.5 1.3 2.8
7RWDO 6
Source: RightScale 2016 State of the Cloud Report
However, there remain a few barriers that are slowing the transition to the cloud or even hindering
Ǥ
ϐ
ǡ
connectivity issues.
We believe it is imperative for SaaS providers to invest more in security than an individual company
to avoid security vulnerabilities and prevent reputational risks involved with a security breach (i.e., a
security breach for a cloud provider would affect all users and would risk losing all if its customers).
As a result, we believe most SaaS vendors spend more on security than individual companies and
ϐ
ȋ
ȌǦ
software, which has to invest more resources to enhance its security. Also, we believe there is more
risk of an “inside job” to an on-premises solution because it is easier for internal personnel to ac-
cess on-premises data. With a cloud offering, the data is managed at a different location from the
business. While we understand that companies may be reluctant to give up control over their data,
a lack of control does not necessarily translate into lack of security. In addition, cloud vendors offer
fast, thorough protection from threats that would be more challenging to manage on an in-house
system through quicker, more up-to-date security patches that can be applied to all customers si-
multaneously. Therefore, in the event of a security breach, a cloud provider has the ability to address
it quicker and limit the amount of damage. For these reasons, we argue that the cloud is actually
more secure than most in-house systems.
ǡ
ϐ
-
ments (e.g., HIPAA, FedRAMP, PCI, NIST, FISMA), which should also reduce concerns about industry-
ϐ
Ǥ
business continuity. While outages may occur, cloud providers typically have built-in redundancy
in their infrastructure, with all of the SaaS vendors in our coverage having some form of backup.
While lack of security remains a common misconception, we believe this only further emphasizes
the large market opportunity to replace on-premises solutions, especially for larger enterprises.
46 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Important Metrics
There are a number of commonly used metrics to help evaluate SaaS companies. We highlight a few
Ǥ
ǡ
because while management’s guidance on revenue and earnings is helpful, the income statement
essentially provides only historical information. To get a sense for a company’s current state or how
it will perform in the future, we recommend using these key metrics:
Billings. Billings are calculated by adding the sequential change in deferred revenue to subscrip-
tion revenue. They offer a relatively easy way to get a sense of the current tone of business as the
ϐ
Ǥǡ
ϐ
Ǥǡ
-
tion of billings does not take into account bill duration, invoice timing, and foreign currency, and
therefore can be misleading at times.
Bookings. Bookings measure the value of all business signed in a given period—both billed and
unbilled. The metric is calculated using both on- and off-balance-sheet numbers; unfortunately, not
all companies disclose bookings or provide off-balance-sheet information.
Current backlog. This calculation takes into account both invoiced and non-invoiced (on- and off-
ǦȌ
ͳʹǤ
backlog is helpful because it is the forward-looking value of how much revenue a company will
ͳʹǤ
ȋȌǤ
Bill duration. Bill duration measures the timing of invoices. Most vendors offer monthly, quarterly,
Ǥ
Ǥ
ǡ
less meaningful than a company that invoices annually, because the sequential change in deferred
revenue will be more substantial for annual invoices. Changes in bill duration are also important
to understand and can be used to adjust billings; if duration for comparable periods is provided,
Ǥ ǡǯ
ǦǦ
in a row, which investors took as a sign of a slowdown in business, but was actually due to several
larger customers shifting their billing dates and coterminous renewal contracts. As a result, the
company provided a normalized billings metric to try to give a more accurate sense of its business.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 47
William Blair
Annualized contract value (ACV). This calculation represents the one-year value of contracted revenue.
Monthly recurring revenue (MRR) and annual recurring revenue (ARR). MRR provides a com-
pany’s revenue run-rate at any point in time. ARR is simply the MRR annualized and is essentially
Ǥ
ȋ
Ȍǡȋ
Ȍǡ
Ȁ
ȋ
or canceled their subscription; this number will be negative).
Churn. Churn represents a vendor’s ability to maintain its customer base and how much the company
must grow to cover lost accounts. Churn affects operating margins and a vendor’s ability to scale
Ǥ
vendors provide either a dollar-based churn percentage or a customer-based churn amount. We
view dollar-based churn as a more reliable metric because customer attrition is largely dependent
on customer size. Most vendors with an enterprise customer base typically have lower churn than
vendors that target the SMB market, because larger organizations tend to stay in business longer
Ǥ
-
panies going out of business.
Organic revenue growth. Relevant for more acquisitive companies, organic revenue growth is rev-
ȋ
ȌǤ
how much a company relies on acquisitions for growth—a strategy that may be considered more
Ǥ ǡ ǦǦ
provides annual acquisition revenue targets. Most vendors consider acquired growth as organic
after the business has been owned for more than a year.
Average selling price (ASP). ASPs are widely used in the industry, but should be considered in
conjunction with how big a company’s customers are (i.e., a vendor’s ASP may span a wide range if
its customer base ranges from SMBs to large enterprises). In this case, it may make sense to break out
ASPs for each customer segment. If a majority of customers are similar in size, however, the trend of
ASPs should be more meaningful. Decreasing ASPs may be indicative of increased pricing pressure.
Customer-acquisition cost (CAC). CAC is the sales-and-marketing dollars spent to book a new
customer. This metric can be calculated a number of ways depending on the amount of information
Ǥ
ǦǦ
a given period by the gross number of customers added during the same period. In general, the
ǡϐ
Ǥ
Lifetime value (LTV). LTV is the amount of net income derived from the average customer. Revenue
generated from an average customer over its life is typically calculated by multiplying a company’s
ARPU by the average life of a customer before churning (commonly calculated as the inverse of the
ȌǤ
ϐǯǤ
Then, we recommend investors subtract acquisition costs (sales and marketing) and R&D and G&A
ϐ
Ǥ
ǡ
ǡ
not include R&D and G&A costs in their LTV calculation, because these costs are not associated with
acquiring a new customer. Going one step further, many investors look at LTV/CAC; in our opinion,
an LTV/CAC ratio above 3 times is usually considered acceptable for SaaS vendors. We highlight
the importance of the accuracy of churn for this calculation. Companies that have better retention
rates (or lower churn) will likely have a better customer LTV.
Deferred commissions. Deferred commissions are payments to sales representatives and can be viewed
Ǥ
48 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Contract duration. Contract duration helps shine a light on how bookings translate into revenue.
Generally, the longer the contract duration, the better visibility there is. Still, longer-term contracts
are typically larger and therefore often get some sort of discount applied. Also, while longer-term
contracts are preferred, they are not technically irrevocable.
Product breakout. While revenue may not always be broken out by product, we believe it is im-
ǯ
Ǥ ǡ
Veeva breaks out how much of its revenue is non-CRM (e.g., Vault and Data), which is helpful to
understand the growth of those individual revenue streams and their contribution to total revenue.
Number of subscribers. The number of subscribers (or seats) is helpful to understand how much
Ǥ
ǡ
a sense of new customer adoption and how much of growth is coming from an increased user base
Ǥ
Average revenue per unit (ARPU). This calculation can be done by dividing total revenue by the
average number of customers. ARPU typically increases with increased subscribers or upgrading
Ǥ
ǦǦ
Ǥ
ȋ
users in each account) and has been growing its average revenue per customer account nicely over
the past few years as it now offers subscription plans with the option to pay for add-on offerings—
raising the price ceiling for its larger customers.
Average products used. The average number of products/modules used provides a measure of
Ǥ ǡͻΨ
Ǥ
ǯ
100 customers are using more than one cloud, and 75% of its customers are using three or more
clouds, up from 45% three years ago.
Uptime. Uptime measures the amount of time software is running and available. Service-level
agreements will often include uptime requirements.
Evaluating Companies
There are several key factors that we typically look for when evaluating SaaS companies for long-
term investments. We analyze companies from both a quantitative and qualitative perspective. The
following helps build out our investment thesis:
Total available market (TAM). To no surprise, a company with a larger TAM provides a better
long-term investment. The risk to those with a smaller TAM is that it can be penetrated at a quicker
ǡȄ
into a different market to continue growing. TAM calculations can be subjective, but there are a few
ϐ
ǤǦ
calculated by multiplying the total potential users by the ASP. For companies with a large range of
customers, the number of potential customers should be categorized by each group and multiplied
ϐ
Ǥ ǡ
buy the product will do so. As a result, we often take a discount to our estimated TAM to provide
a more realistic picture of the potential market size, because not all customers may be obtainable
ȋ Ȁ ȌǤ
Ǥ
ǡ
ǡ
Ǥ
solution, which allows vendors to sell the infrastructure layers of their application. Salesforce did
this with Force.com.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 49
William Blair
Market penetration. The level of penetration by market players will determine how much oppor-
Ǥ
ϐ
opportunities because the cloud will typically either replace an on-premises solution or disrupt an
ǡ
Ǥǡ
ǡ
is important to consider what percentage of the market has already moved to the cloud versus what
remains untapped from legacy on-premises systems. In addition, we believe vertical SaaS players
have a better chance of capturing a majority of their market share. Point solutions, once generally
accepted by top players in a niche industry, tend to cause the entire industry to adopt that solution
(the network effect). While horizontal SaaS vendors may capture 15% to 20% of a market at most,
Ǥ ǡ
has captured over 50% of the core CRM market in the life sciences industry and is growing further
from traction with its Vault offering.
Competitive moat. A company’s position in the market and how differentiated it is from other
players is crucial. The wider the competitive moat, the better. Companies can differentiate them-
selves through enhanced features and functionality, brand recognition, and/or partner and channel
Ǥǡ
Ǥ
time, clear leaders emerge, and the rest of the players are either sold or become marginalized. Given
the rapid pace of change in the technology landscape and the increasing number of regulatory and
compliance requirements, we believe cloud vendors have an inherent advantage over on-premises
software vendors to adapt to these changes quicker. Lastly, commoditized markets evolve when
products/services become undifferentiated and reduce a market’s attractiveness; most commod-
itized markets therefore compete on price alone.
Management. In our opinion, a quality management team must have an all-around strong bench
that shows integrity, collaboration, and credibility. Not surprisingly, integrity must be evident to
trust a management team. Collaboration is also key—one person cannot effectively control every
process in an organization and good leaders delegate responsibilities. Credibility is demonstrated by
providing a clear strategy for the business and delivering results that are relatively close to guidance
Ǥ
ǡ
business, especially given the nature of the SaaS business model. A common problem we see is with
management teams of companies that are transitioning to the cloud from on-premises and do not
articulate the plan or strategy effectively with investors, which can cause misunderstandings and
Ǥǡ
transparency typically correlates to higher-quality management. Management teams that hold our
-
bers. Given the constantly changing dynamics of the technology sector, a visionary leader who can
Ǥǡ
ǡ
ǡǤ
Ecosystem. Companies with a larger ecosystem of system integrators, resellers, or other indirect
channel partners tend to perform better since their partners are able to resell, recommend, or install
their applications—building a larger customer base faster than perhaps the company would have
Ǥ
ǯϐ
ǦǦ
Ǥ
Ǥ
Valuation.
ϐ
ϐȋ
ȌǤǡ
SaaS coverage list are valued on an enterprise-value-to-revenue basis. While we understand that
ǦǦǦǦǦǦ
Ǧϐ
ǡ
believe most investors are paying for growth in these SaaS-based businesses and therefore will use
50 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
ǦǦǦ
ϐ
ϐǤ
company’s multiple to our group average (the group will likely be of similar growth rates, industry
sector, business model, etc.), and we will ascertain whether the company’s discount or premium
ϐȄ
Ǥ
Acquia is a SaaS-based provider of enterprise products, services, and technical support for open-
Ǥ
ǯǡǡ
Ǥǡ
ǡ
and real-time customer engagement at the opportune moment is in great demand and growing.
The company has more than 3,500 customers globally and over 3.8 million concurrent cloud hits.
Investors include Amazon, Accolade Partners, Goldman Sachs, North Bridge Venture Partners, and
Tenaya Capital.
Adaptive Insights
www.adaptiveinsights.com
Alteryx
ǤǤ
Ǧ
Ǥ
ͳǡͲͲͲ
ǡʹͲͲǡͲͲͲ
users, and a 95%-plus renewal rate. The company’s self-service offering brings more advanced
ǦǦǤȋ-
houses, cloud applications, and spreadsheets), analyze, deploy, and share data at scale quickly. The
company has been funded by Iconiq Capital, Insight Venture Partners, Meritech Capital, Sapphire
Ventures, Thomson Reuters, and Toba Capital.
Anaplan
www.anaplan.com
ͲͲ
ǡϐ
ǡǡ
-
Ǥϐ
ǡǡ
-
ditures, operations, workforce, marketing, and supply and demand. Its platform provides a single
modeling environment for an organization with the ability to work on large models at high speed.
ǡǡƬ
ǡ
ǡǡǤ
The company has been funded by Shasta Ventures, Granite Ventures, Meritech, salesforce.com, DFJ
Growth, and Premji Invest.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 51
William Blair
Appdynamics
www.appdynamics.com
Blackline Software
www.blackline.com
ϐ
ȋǤǤǡ
ϐ
ȌǤ
Ǧϐ
ǡǦ
Ǥ
ϐ
software providers and focuses more on the processes, controls, and connections between dispa-
ϐ
Ǥ
ǡǡ
in Blackline.
BlueJeans
bluejeans.com
BlueJeans provides cloud-based video conferencing service, enabling collaboration among colleagues,
ǡǡǤ
ǯ
ǡǡ
̈́ͻǤͻͷ
per host per month and includes basic functionality such as HD video and screen sharing, computer
and dial-in audio, basic cloud recording, and email support. The company’s interoperability allows
ϐ
Ǥ
Cherwell
www.cherwell.com
Cherwell specializes in IT service management and IT platform products. Its platform enables IT
ǡ
ϐǡ
using a codeless architecture. Customer applications can be designed and built on top of the platform
ϐ
ǡ
ǡ
ǡ
and organizational compliance. Cherwell’s main products include IT service management, IT asset
management, business technology platform (allowing companies to build custom business processes
ϐȌǡȋǦ
ǡǡ
ǤȌǡ
and the company offers both license and subscription-based pricing options.
Clarabridge
www.clarabridge.com
Ǥ
ǡ
ǡ
ȋ
ǡ
ǡǡ
ǡȌ
Ǥ
ǡǡǡǡǦǤ
The company uses natural language processing and machine learning technology to analyze cus-
ǡ
Ǥ
funded by Boulder Ventures, Grotech Ventures, Harbert Growth Partners, and Intersouth Partners.
52 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
Cloudera
www.cloudera.com
Cloudera is a data platform that is built on Hadoop-based software, an open-source framework used
to store, process, and analyze data. Cloudera Enterprise includes CDH, a Cloudera manager, and
ȋ
ȌǤ
ǡ
Ǥ
ǯ
ȋͲΨ
to 75%), professional services (15% to 20%), and training (5% to 10%). The company has raised
̈́Ͳǡ
ǡ
ǡ
ǡ
Capital Partners, MSD Capital, and T. Rowe Price.
ConnectWise
www.connectwise.com
ConnectWise is a business management platform for small to midsize technology companies, inte-
grating customers’ operational functions such as process automation, help desk, customer service,
sales, marketing, project management, and analytics. The company also offers consulting, support,
and training services to supplement its offerings. The company has over 100,000 users (across 5,000
Ȍ
ϐ
ϐǤ
DataStax
ǤǤ
ͷͲͲ
ǡ
ǡ
Ǧ
Ǥ
Ȅǡ
ǡ
ǡ
Ǥ
ϐǡǡǡ
ǡǡǤ
ǡ
ǡǡǤ
̈́ͳͻͲ
million in equity; investors include Lightspeed Venture Partners, Crosslink Capital, and Meritech
Capital Partners.
DocuSign
www.docusign.com
DocuSign enables users to electronically sign, send, and manage documents. The company’s main
products are digital transaction management and e-signature. DocuSign has more than 85 million
Ǥ
ȋ̈́ͳͲȌǡ
ȋ̈́ʹͷȌǡȋ̈́ͶͲȌǡȋ̈́ͳ͵ͷȌǤ
has been funded by many investors, including Bessemer Ventures, Accel Partners, Google Ventures,
and Ignition Partners.
Domo
www.domo.com
Domo provides a self-service business cloud platform, allowing companies to analyze real-time data
across their entire business. The company focuses on BI and visualization through its interactive
Ǧ
ǦǦȋǦ
time dashboards with data associated with multiple business divisions and performance metrics).
ǡǯ
prebuilt content to deploy custom dashboards incorporating social and mobile capabilities. Domo
̈́ͶͷͲ
ǡ ǡ
Partners, Founders Fund, TPG, and GGV Capital.
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 53
William Blair
Dropbox, Inc.
ǤǤ
ǡϐ
ǡ
ǡ
Ǥ
ǯ
̈́ͻǤͻͻǡǡ
ǡ
ϐǤͳͷͲǡͲͲͲǡ
ϐ-
ǡ
̈́ͳͷǤ
ǡ
end-users, and mobile capabilities.
Evernote
www.evernote.com
Evernote is an information management application used to take, organize, and archive notes
ȋǤǤǡǡǡ
ǡ
ȌǤͳͲͲǡ
collaboration, scheduling, and task management functions with a suite. With more organizations
promoting bring-your-own-device and bring-your-own-app policies, Evernote helps knowledge
workers create, capture, and share information among team members. Evernote has raised more
̈́ʹͲͲ
ϐ
ǡ
Investments, L.P., Meritech Capital Partners, Morgenthaler Ventures, and Sequoia Capital.
FinancialForce
Ǥϐ
Ǥ
ǡ
ǡ
Ǧǡϐ
management, professional services automation, and human capital management offerings. Its
functionality includes general ledger, AR/AP, billing, revenue management, spend management,
ǡϐǤ
ǡ
-
Ȁϐ
ǡ
ϐ
transactions is done seamlessly. Its investors include Advent International, Technology Crossover
Ventures, Salesforce Ventures, and Unit4.
GoodData
www.gooddata.com
GoodData is a BI platform, delivering real-time analytics on sales, marketing, social, and customer
service functions. The company offers both public and private cloud through Amazon AWS and
Ǥ
ϐǡ
create custom analytics/reporting. Investors of GoodData include Andreessen Horowitz, Eight Roads
ǡ
ǡǡ
Ǥ
ICIMS
www.icims.com
ICIMS is a talent management platform, helping companies recruit, onboard, and maintain talented
workers. ICIMS serves multiple verticals and also provides workforce planning, CRM, applicant
tracking, employee data management, performance management, employee surveys, succession
ǡǦǤ
̈́ͳͲͲ
run-rate with over 3,000 customers. Susquehanna Growth Equity has invested in ICIMS.
54 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
InsideSales
www.insidesales.com
InsideSales offers sales acceleration solutions, including communications, sales motivation tech-
niques, predictive analytics, and data visualization. The company’s subscription plans include Com-
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InsideView
www.insideview.com
InsideView targets midsize to large organizations with its marketing intelligence and analytics so-
lution. Its software allows sales and marketing teams to aggregate and analyze information about
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InsideView include Emergence Capital Partners, Foundation Capital, Greenhouse Capital Partners,
Rembrandt Venture Partners, and Split Rock Partners.
Lithium Technologies
www.lithium.com
Lithium Technologies is a social management platform, helping enterprises engage, connect, and un-
derstand their customers and community. The company offers stand-alone packages for online com-
munities, social media management, and social response capabilities and provides a platform solution
and support offerings. The company has been funded by Emergence Capital Partners, Shasta Ventures,
Benchmark Capital, New Enterprise Associates, Passport Capital, and Wellington Management.
LogRhythm
logrhythm.com
LogRhythm provides log management, security information, and event management solutions—
enabling organizations to detect and automatically respond to cyber threats as well as comply with
regulatory requirements. Its products include security intelligence platform, network monitoring
and forensics, and endpoint monitoring. It also provides security and compliance solutions such as
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The company has received funding from Access Venture Partners, Adams Street Partners, Grotech
Ventures, High Country Venture, Piper Jaffray, Riverwood Capital, and Siemens.
MapR
www.mapr.com
MapR is a big-data platform, leveraging Hadoop and Spark, to provide real-time analytics for produc-
tion use-cases (e.g., quick response for fraud detection, petabyte analysis for threat detection, and
operational and analytics processing). More than 90% of revenue is cloud subscription revenue, and
its MapR Converged Data Platform is run on clusters of commodity services and available in two
editions: MapR Converged Community Edition, which is free with community forum support for
unlimited production use, and MapR Converged Enterprise Edition, which is commercially supported
and includes MapR Platform Services for high availability and disaster recovery. The company has
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ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 55
William Blair
MarkLogic
www.marklogic.com
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including data in XML format. The company offers a free Developer license, which allows developers
to integrate data and build MarkLogic-based applications (up to 1 TB of data), and its subscription-
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version of MarkLogic for enterprise customers. It also has cloud pricing options made for deploy-
ments on AWS, Azure, and Google Cloud. Investors of MarkLogic include Arrowpoint Partners,
Northgate Capital, Sequoia Capital, Tenaya Capital, and Wellington Management.
Metaswitch
www.metaswitch.com
Metaswitch is a leading network software provider serving more than 1,000 network operators and
suppliers globally. The company offers consumer and business communication solutions, network
interconnectivity, and network protocol stacks. Metaswitch also provides support services. The
company has been funded by Francisco Partners and Sequoia Capital.
MuleSoft
www.mulesoft.com
The company’s Anypoint Platform connects customers’ network of apps, data, and devices with
API-led connectivity. Its platform provides development tools to design APIs, create integration
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of support and functionality (pricing not disclosed). Investors of MuleSoft include Bay Partners, Ad-
age Capital Management, Lightspeed Venture partners, Meritech, Sands Capital, Sapphire Ventures,
and Brookside Capital.
Nintex
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customers along with over 1,000 partners. The company has been funded by TA Associates and
Updata Partners.
Octo Telematics
www.octotelematics.com
ǡǡ
analytics, actuarial capabilities, hardware, and connected user devices to help insurance companies
price risk more accurately, provide connected user features/services, and reduce processing claim
Ǥǡ
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Ǥ ǡ
ϐ
Ǥ
56 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
ON24
www.on24.com
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and analytics dashboards. The company also offers a virtual environment platform for interactive
ǤʹͶ
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ʹǡ
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Investment Fund, Merrill Lynch, and U.S. Venture Partners.
Planview
www.planview.com
Ǥ
ǯ ϐ
product, Planview Enterprise, is an end-to-end portfolio management application, enabling users
ǡ
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Ǥ
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applications/technologies through business capability mapping), and Projectplace, a project col-
ȋ
ȌǤ
Insight Venture Partners.
Plex Systems
ǤǤ
Ǧ
Ǥ
-
tion, inventory, shipping, supply chain management, quality, accounting, sales, and human resource
functions. The company offers three subscription packages: starter, core, and advanced (pricing not
ȌǤͳǡͲͲͲ
ǡͻͷΨǤ
services several manufacturing sectors, including aerospace and defense, high tech and electronics,
automotive, industrial manufacturing, food and beverage, and precision metalforming. The company
̈́ͺͷ
ǡǡǤ
Ǥ
Pluralsight
www.pluralsight.com
Pluralsight offers online educational and training courses for software developers, IT administra-
tors, and other professionals. The company has over 5,000 courses available and offers business
̈́ͶͻͻʹͳͲǡ̈́Ͷͷͳͳ
ͷͲǡ̈́ͶͷͲͷͳͳͲͲǡ̈́ͶͲͲͳͲͳʹͷͲǡ
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̈́ͳͲ
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Insight Venture Partners, and Sorenson Capital.
Procore
www.procore.com
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 57
William Blair
Ring
Ǥ
Ȁ
Ring is a free open-source communication application. The company utilizes distributed multime-
dia communication software to create its own secure network over the internet and can distribute
directory functions, authentication, and encryption across connected systems. It is available on
ǡ
ǡǡǡǤ
Spredfast
www.spredfast.com
Spredfast is a social marketing platform. The company partners with major social networks in-
cluding Facebook, Instagram, LinkedIn, Pinterest, and Twitter to help companies connect with and
acquire new customers. Its products provide tools to monitor social media accounts and use the
interactions for marketing activities. The company has been funded by several investors, including
ǡǡǡǡǡ
Lake Waterman.
Sprinklr
www.sprinklr.com/
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content management, collaboration, advocacy, and social media monitoring. Its platform provides
ǦǦ
Ǥ
̈́ʹͲͲǡǡ
ǡ
Intel Capital, Temasek Holdings, and Wellington Management.
Sumo Logic
www.sumologic.com
Sumo Logic is a log management and analytics company, providing customers with real-time ana-
Ǥ
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Ǣ
̈́ͳͷͲͳ
Ǥ
̈́ͳͷ
Ǥ
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Partners, and Sutter Hill Ventures.
Workfront
www.workfront.com
Workfront is a cloud-based enterprise work and project management solution, allowing companies
to prioritize, route, manage, and report on work projects. Its solution provides visibility into the
entire work lifecycle with the ability to track the amount of time projects take and if they are on
Ǥ
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large marketing, IT, and services companies. The company has been funded by Atlas Peak Capital,
Greenspring Associates, and Sorenson Capital.
58 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
IMPORTANT DISCLOSURES
This report is available in electronic form to registered users via R*Docs™ at www.rdocs.com or
www.williamblair.com.
ͳȌ
ϐ
personal views about any and all of the securities and companies covered by this report, and 2) no
ǡǡǡ
ǡ
ϐ
-
Ǥ
Ǥ
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intervals as deemed appropriate by the research analyst.
ǣ ̈́ʹͲǡ͵Ǥʹʹ
ƬͷͲͲǣ ̈́ʹǡ͵ʹǤʹ
ǣ ̈́ͷǡͻͳͳǤͶ
The prices of the common stock of other public companies mentioned in this report follow:
ȋȌ ̈́ʹͻǤͺͲ
̈́ͳǤ
̈́ͳͶǤͳͶ
ȋȌ ̈́ͷǤͺ
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ǡ
ǤȋȌ ̈́ͳͶǤͺͳ
ȋȌ ̈́ͶͶǤͳ
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ǤȋȌ ̈́ͺǤͷͲ
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ǤȋȌ ̈́ͶǤͷͻ
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ǤȋȌ ̈́ͳͻͷǤʹͳ
ǤȋȌ ̈́ͶͺǤͷ
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ǤȋȌ ̈́ͻʹǤͳͶ
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ǤȋȌ ̈́ͺ͵Ǥʹͺ
ǤȋȌ ̈́͵ʹǤͷ
ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 59
William Blair
ȗ
ǡϐ
companies for which William Blair has received compensation for investment banking services
within the past 12 months.
The compensation of the research analyst is based on a variety of factors, including the quality and ac-
ǡ
ǡ
ϐǡ
ǡ
ϐϐǤ
ϐ
change at any time.
ǡǡ
ǡ
short-term trade ideas, or trading strategies—to our clients, prospective clients, and our trading
Ȅ
Ǥ
ǡϐ
and/or issuers that are no longer current. Always refer to the most recent report on a company or
Ǥ
-
Ǥ
ǡ
ǡ
Ǥ
research is disseminated primarily electronically, and in some instances in printed form. Research
is simultaneously available to all clients. This research report is for our clients only. No part of this
material may be copied or duplicated in any form by any means or redistributed without the prior
written consent of William Blair & Company, L.L.C.
ϐ
Ǥ
The factual statements herein have been take from sources we believe to be reliable, but such statements
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Ǥ
Ǥ
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60 ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ
William Blair
This material is distributed in the United Kingdom and the European Economic Area (EEA) by William
Blair International, Ltd., authorized and regulated by the Financial Conduct Authority (FCA), and is only
directed at and is only made available to persons falling within articles 19, 38, 47, and 49 of the Financial
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as “relevant persons”).
“William Blair” and “R*Docs” are registered trademarks of William Blair & Company, L.L.C. Copyright
2017, William Blair & Company, L.L.C. All rights reserved.
All statements in this report attributable to Gartner represent William Blair’s interpretation of data,
research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc.,
and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication
date (and not as of the date of this report). The opinions expressed in Gartner publications are not
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ԙΪͳ͵ͳʹ͵Ͷͷ͵Ͷͳ 61
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