We all want to find those rare gems that are disrupting big markets with new solutions.
Today’s company may be one such opportunity. It’s relatively unknown and has a software platform that can address $45 billion in annual enterprise spending right now. That’s a big pond.
It’s a story about big data, digital transformation and business intelligence (BI). These are more than buzzwords. They’re what every company in the digital age needs. And this little guy can give it to them.
Cabot Small Cap Confidential 240
[premium_html_toc post_id="176553"]
THE BIG IDEA
One of the big challenges for organizations in the fast-moving digital age is to understand what’s going on in their businesses right now.
Look at Facebook (FB). For a company that specializes in harvesting detailed user data and selling targeted ads you’d think they know exactly what’s going on – but they don’t. Facebook has become a lightning rod for criticism about data collection and privacy lapses as a result.
Or what about eBay (EBAY). Over 128 million active users can buy or sell just about anything, from the town of Bridgeville, CA to Black Betsy, Shoeless Joe Jackson’s baseball bat. But internally, knowledge workers mess with static excel worksheets to try and figure out what’s going on with orders and shipments.
Different versions of the same basic data problem are playing out in companies around the world.
Data pours in from dozens, if not hundreds, of different sources. What’s the best way to collect, translate and share it in a way that makes sense, and that allows people to make big decisions, quickly, and with confidence?
Business intelligence (BI) and data analytics solutions were supposed to solve this problem years ago. Theoretically, a good BI solution should benefit any person that works with information. That’s why it represents such a big market. With an estimated 900 million knowledge workers out there IDC and Gartner say the BI market is worth $20 billion to $25 billion.
But most early BI solutions from the likes of IBM, Oracle and SAP fell short of the mark because they were hard to use or took too long for people to learn. Or they only delivered the goods when the data was outdated.
Starting in the early 2000s, through the efforts of Tableau and Qlik, and with the help of Microsoft about a decade later, power over data started to go back to the people. End users, typically data analysts or designated BI specialists, were finally able to grab data from a variety of sources, work with it and build visualizations, then share them with other people.
Still, even now, a select few individuals act as gatekeepers to powerful treasure troves of data. And everyone else is left wondering what’s going on.
This limits the potential for BI to infiltrate companies at every level and drive the performance improvements that powerful data, in the right hands at the right time, could deliver.
To bridge gaps, organizations buy solutions from a lot of different vendors. Microsoft, IBM, SAP and Oracle comprise around 50% of the BI market. Their customers also buy data warehouse management, collaboration apps, data integration solutions, and more, from other vendors.
Which brings us full circle. A lot of people, from the top brass down to front-line employees, are struggling with too many solutions that don’t play nice and which only give old data. This leads to confusion, less-than-optimal decision making, and indecisiveness at critical moments.
One small company has the solution. It looked at all the BI, data analytics and digital transformation solutions that large organizations were using and decided to build one platform to do it all.
It’s an ambitious goal that requires a lot of investment. But the upside is a disruptive cloud-based platform that unifies seven types of solutions that address over $45 billion in enterprise spending.
On this platform users can easily access all their enterprise data in real time. Perhaps most impressively, it is designed to work on a mobile device.
The company is Domo (DOMO). This is its story.
THE COMPANY
Domo (DOMO) is a $1 billion market cap company that has developed a business intelligence (BI) platform that allows every worker in an organization to access real-time data from their mobile device.
The company’s founders, which include Josh James (he founded Omniture, which was sold to Adobe and became Adobe Marketing Cloud), believe that modern, digitally connected companies will thrive if everybody within the organization can see what’s going on.
To do that, a platform needs to function like a corporate operating system. It needs to pull data from every department in the organization, plus all outside data sources, put it in one place, and make it easy to access, work with and share.
That’s what Domo did. Management says it was like building seven businesses, then linking them all together. The platform has required $395 million in R&D spending (through January 2019), and James thinks it could take $1 billion to perfect.
But perfection is an elusive goal. As it stands right now, Domo allows data across a business to be collected, stored, prepared, organized, analyzed, visualized and shared.
Users throughout an organization can now see what’s going on in digital infrastructure without having to go through the IT department or interact with multiple data sources. It can handle queries for hundreds of trillions of rows of data on any given day.
That power, literally in the hands of the people, gives workers the real-time information and confidence to make better decisions.
That power has attracted over 1,700 customers (447 of which are enterprise customers) through January 2019. Current customers include Uber, Telus (TU), eBay (EBAY), DHL, The Honest Company, National Geographic, Rapid7 (RPD), Comcast (CMCSA) and Danaher (DHR). Domo generates 77% of revenue from customers within the U.S.
THE PRODUCT
Domo’s platform represents the third generation of BI and is the closest solution yet to fulfilling the lofty expectations that have been circulating executive offices for over two decades. Management (and analysts) seem genuinely excited that as Domo’s sales people engage more with senior management at enterprise customers the market is seeing Domo more as a digital transformation platform, not just a BI/analytics solution.
The reason is simple: Domo’s technology puts real-time, relevant data in the hands of every employee so they can use it to make better business decisions. It was designed and built in the cloud so that users could run their business solely from mobile devices. And the platform covers seven core capabilities that customers traditionally purchase from different point solutions providers.
Here’s what the platform does:
Domo Connects to Almost Any Data Source: Domo’s live connectors (called DomoBots) make it easy for users to natively connect and synch to over 600 data sources, including Amazon AWS, Microsoft Excel, Salesforce, Oracle, Workday, Twitter, Facebook, Shopify and Box.
Massive Data Warehouse Storage: Domo’s data warehouse, Adrenaline, stores and organizes an insane amount of data and allows multiple people from one organization to instantly access data queries, at the same time.
Native Data Prep: Domo’s Fusion data transformation tool makes it easy for users to sort, clean, combine and prepare data.
Data Visualization: Domo’s Explorer analytics suite provides visualization tools that work equally well on mobile devices as on large wall monitors for interactive presentations.
Collaboration: The Buzz collaboration suite lets users chat, share files, and manage projects with multiple users on any device.
Predictive Analytics: Domo’s Mr. Roboto artificial intelligence (AI) and machine learning (ML) algorithms create alerts, detect anomalies and tell people what they should be focusing on for the biggest impact.
Partner Ecosystem: Domo’s platform permits partners to build apps on the platform so more users can benefit in the way that best suits their organization.
What Do the Bears Say?
Domo is still a young company. It was founded in Utah in 2010. Some think it was a botched IPO because the current market cap of around $1 billion is less than half of Domo’s implied valuation three years ago, based on private investments from BlackRock, Benchmark and others.
It was one of Utah’s high-flying unicorns back then. But as the IPO date approached and investors dug deeper into the financials they began to look closer at Domo’s losses, including a net loss of $183 million on revenue of $74.5 million in 2017.
The CEO, Josh James, hasn’t pulled back from statements that Domo is an expensive platform to perfect. He estimates it could take around $1 billion. He’s about 40% there. He’s also been clear that the IPO was a financing milestone that gave Domo the roughly $200 million required get to cash flow to breakeven.
Bears will point to the heavy losses Domo continues to post, and that its recent pivot to focus on larger enterprises, and less on small and mid-sized customers, might not work out. These are reasonable arguments.
But let’s consider the bull case scenario based on what Domo is doing.
What are the Bulls Saying?
The bullish case for Domo begins with the size of the potential market, which is estimated at over $20 billion if we just look at BI. But because Domo is a single, integrated platform that offers a scope of functionality that enterprises typically purchase seven solutions to get, the market could be far bigger. Industry analysts say Domo could address $45 billion in enterprise spending.
A single, cloud-based platform, that works on a mobile device, is a huge competitive advantage. The depth of the platform means Domo goes further than Business Intelligence (BI) and/or Analytics platforms. That’s what users, which increasingly include C-level executives, are starting to figure out.
There’s a lot more to the bull case, including:
New Focus on the Enterprise: Domo has begun to focus sales efforts on larger companies (+$100 million in revenue), and especially enterprise customers (+$1 billion in revenue). These accounts generate more annual contract value (ACV), higher renewal rates, and upsell potential. The shift means less focus on broad-based digital marketing and more on targeted marketing campaigns and user events. It appears to be working.
The sales team is landing more meetings with Chief Intelligence Officers (CIOs) and senior leaders, which is driving bigger deployments. Importantly, these conversations are changing how customers view Domo as a digital transformation platform, not just a BI/analytics solution. Enterprise deals drove $64.1 million in fiscal 2019 revenue, up from $35 million in 2017. With 17 new enterprise customers landed in the last quarter (including Uber), total enterprise customers are up to 447, up from 375 a year ago.
Expanded Sales Team (+30%): Prior to going public Domo reduced head count in its sales team to better size its operating structure (marketing expense was down 11% last year). Now, with a new focus on larger customers and a better trajectory to break even management has announced it will increase the sales team by 30% in 2019. While it will take some time to get these people up to speed management sees an increase in ACV this year helping to drive a big jump in renewal rates next year.
International Revenue Growing: International revenue has increased from 14% of sales in fiscal 2017 to 23% of sales in fiscal 2019. As it moves into larger companies, many with international operations, Domo sees the trend continuing.
What are Customers Saying?
Here are just a few examples of companies that love Domo:
Vivint is a smart home company that was acquired by Blackstone for $2 billion in 2012. Vivint recently expanded its relationship with Domo to give 5,000 salespeople a real-time view of how they’re tracking against sales goals using a custom-built app on the Domo platform.
The Honest Company sells consumer goods and beauty products. It used to consume data through clunky Microsoft and Google worksheets. It got Domo and can now follow what’s happening on social media, like Facebook, and react to trends quickly.
Rapid7 (RPD) is a rapid-growth security data and analytics company that had too many smart people spending too much time making recurring reports. The company got Domo, connected it with Excel and Oracle, and now everyone can collaborate and see the same numbers, in real time.
DHL is a huge logistics company. One of its divisions provides temperature-controlled logistics for the pharmaceutical and biotech industries. Patients rely on the medicine it transports, but DHL struggled to collect ambient temperature data throughout a package delivery process. It got Domo, connected it to Excel and Salesforce, and can now see temperature data in real time.
The Business Model
Domo sells its software on a subscription basis (SaaS). Fees are based on the number of users and the tier of package deployed. It uses a land-and-expand business model, which means entering enterprises within a specific division or use case, then expanding its footprint as users see the value of the platform.
Domo also focuses on maximizing the value of the customer over the life of the relationship, so renewal rates are very important as acquisition costs are higher in the first year of a contract. Domo’s net revenue retention rate has been above 100% over the last two fiscal years.
Revenue is typically lowest in the first fiscal quarter then increases throughout the year. In fiscal 2019 82% of Domo’s revenue came from subscriptions while the remaining 18% came from professional services. The company’s platform runs on Amazon Web Services (AWS) and Microsoft Azure.
The Bottom Line
Domo’s fiscal year ends on January 31. Its most recent quarterly report (Q4 fiscal 2019) was released on March 13. In Domo’s first year as a public company revenue rose 31% to $142.5 million while EPS rose 19% to -$5.15.
In Q4 fiscal 2019 revenue was up 31% to $39.4 million while EPS rose 36% to -$0.94. Gross margin improved 3.3% to 68.5% and billings were up 26% to $57.2 million, driven by a higher concentration of larger customers. Domo ended the quarter with cash and cash equivalents of $177 million.
Management gave fiscal 2020 guidance on the conference call. It sees revenue growth of around 22% to $173.5 million and adjusted EPS loss of -$4.03 (at the midpoint). In Q1 fiscal 2020 management has guided for revenue of $40.5 million and EPS loss of -$1.2 (at the midpoint).
Cash burn should drop every quarter. With $76.5 million in cash burn expected this fiscal year management believes it can get to cash flow breakeven around the end of next calendar year (2020) without raising capital. Domo had $97 million in debt at the end of January 2019.
RISK
Recently Public: Domo has only posted three quarters as a public company and investors are not all that familiar with the name. This could limit interest in the stock in the short term.
Large BI Competitors: Domo is going up against big money in the BI space with Microsoft, IBM and Oracle all representing formidable competitors.
Time to Cash Flow Breakeven: Management has signaled its intent to reduce cash burn to get to breakeven, which could be around the end of next year. However, Domo’s rate of growth is dependent on how much it spends (mainly on sales and marketing and R&D). And management wants to grow quickly, so there is a bit of uncertainty here.
Dilutive Secondary Offering: While quarterly losses are getting smaller Domo still has a way to go to convince skeptics that it won’t need to raise cash through a dilutive offering. While this risk will remain for several quarters and could limit the stock’s upside, at current levels an equity offering is already far less dilutive than it would have been in the months after the IPO. If Domo can continue to reduce losses and show the market the path to profitability one of the big bear arguments against the stock will fade.
Change in Go-To-Market Strategy: Domo has recently shifted its strategy to go after larger, enterprise-scale customers. This strategy has big potential, but it also carries some execution risk as the metrics that matter most (renewal rates, lifetime customer value, enterprise revenue mix, return on customer acquisition costs, etc.) will all be influenced more by each customer win/loss, at least in the near term, until the business scales up.
COMPETITION
Domo’s primary competitors provide business intelligence and business analytics software, delivered either on-premise or via the cloud. These include Microsoft (MSFT), Oracle (ORCL), International Business Machines (IBM), SAP (SAP), Salesforce.com (CRM), Infor, Inc., Tableau Software (DATA), Qlik Technologies, Looker Data Services, Sisense and Tibco Software.
THE STOCK
Trading Volume: For a company with a market cap around $1 billion DOMO is a relatively liquid stock. It trades around 960,000 shares a day, equivalent to roughly $36.5 million. Thus, our group shouldn’t move this stock. Heavy days are over 2 million shares a day, which has happened with increasing frequency (about 20 times over last six months).
Historical Price: DOMO went public at 21 on June 29, 2018, raising $202.5 million. The stock popped 30% on the first day then settled down and traded mostly between 15 and 23 for the rest of the year. The IPO lockup expiration was around Christmas but didn’t seem to have much impact on the stock. Shares took off with the market in January, rising steadily from 17.5 to 35 by the end of February. They dipped to 29.5 before the Q4 fiscal 2019 report, then jumped to a new high above 38 afterward, and climbed to 45 before cooling off. Over the last month DOMO has moved down near its 50-day line around 38 in what looks like a completely normal little pullback.
Valuation & Projected Price Target: DOMO has an enterprise value of $963 million and trades at 5.5-times forward revenue (EV/Forward Revenue). That’s a big discount to fast growth SaaS peers, many of which are trading with multiples well above 8 (and some above 10). A discount makes sense given that DOMO isn’t profitable. But that discount will shrink if management is able to execute the growth/profit plan. A price target of 55 implies the stock can trade up to an EV/Forward Revenue multiple of around 7.0. That implies roughly 40% upside over the next year. To arrive at my target EV multiple I reduced DOMO’s projected enterprise value to account for expected cash burn ($76.5 million) over the next 12 months and kept debt the same.
Buy Range (next two months): My preferred buy range, barring new information, is between 30 and 45. That range takes us down to where DOMO was prior to the Q4 fiscal 2019 report and up to where the stock peaked in mid-March.
The Next Event: We don’t yet have an earnings date yet, but management should release Q1 fiscal 2020 results (for quarter ending April 30) sometime around the beginning of June.
Domo (DOMO) Financials
Domo (DOMO) |
UPDATES ON CURRENT RECOMMENDATIONS
Due to the nature of the stocks recommended, it is to your advantage not to share these recommendations.
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
With five of our positions having reported last night I’m going to skip the intro and get right to the results, along with my quick take.
Next week will be busy as well with Everbridge (EVBG) and Codexis (CDXS) reporting Monday, Avalara (AVLR) on Tuesday, Arena Pharmaceuticals (ARNA), CareDx (CDNA) and Q2 holdings (QTWO) on Wednesday, then Repligen (RGEN) on Thursday.
Updates
AppFolio (APPF) reported after the bell yesterday with revenue up 34.9% to $57.1 million (beating by $330K) and GAAP EPS of $0.11. AppFolio doesn’t report adjusted figures, which are always far better, so platforms like Seeking Alpha and the Associated Press don’t always get the numbers right, and often report a “miss,” which isn’t accurate. Property manager customers rose by 11.5% to 13,409 and units under management jumped to 4.08 million from 3.4 million (up 20%). Law firm customers rose by 8% to 10,485. Core solutions revenue was up 28% to $20.8 million, Value+ Services revenue was up 37% to $33.7 million (driven by electronic payments, screening and insurance services) and Other revenue, which is mostly from the WegoWise platform and Dynasty technology services (both recently required) jumped 72% to $2.57 million. AppFolio increased headcount by 43% to 1,040 employees, which is a pretty good sign that the company intends to keep growing! The company ended the quarter with $40.8 million in cash and $49.5 million in debt.
Management gave 2019 guidance for revenue of $250 million to $255 million (up 33%), which straddles consensus of $252.6 million. At the end of February management had announced a share buyback program up to $100 million, but it didn’t purchase any in the quarter ending March 31, so this has not been a driver of the stock’s performance.
In the quarter the company released AppFolio investment management, a tool that gives real estate investment managers a solution to streamline fund and syndication management. It also expanded its Property Manager Plus tier of software to better help its larger clients and will be rolling out new artificial intelligence (AI) solutions using the Dynasty acquisition.
Overall it was a good quarter but, as always, management doesn’t try to make much of a splash. The market will decide for itself what it thinks. I suspect investors will take some time to digest the report so shares will probably be a little volatile for a few days. But, overall, I think the growth story is intact. Keep Holding. HOLD.
Earnings: DONE
Arena Pharmaceuticals (ARNA) reports next Wednesday. Consensus estimates mean nothing because it’s all about the pipeline. I’ll update you once we hear the latest. Shares are down a few points over the past week but still very much in their comfort zone between 42 and 50. HOLD.
Announced Earnings Date: May 8
Avalara (AVLR) reports next Tuesday. Analysts expect revenue of $78.7 million and EPS of -$0.16. For the full year they see revenue up 22% to $332.5 million and EPS up $0.17 to -$0.05. Shares were up modestly over the past week and are rated buy into the event. BUY.
Announced Earnings Date: May 7
Bottomline Technologies (EPAY) reported yesterday and at first blush the quarter was good. Revenue was up 5.2% to $106.4 million (beating by $1.98 million) while adjusted EPS of $0.33 beat by $0.04. On a constant currency basis revenue was up 8% (remember about 25% of revenue comes from the U.K.). Bottomline landed 22 new Paymode-X customers, eight legal spend management customers and three banks, to which it sold corporate and business banking solutions.
However, shares opened down this morning. Bottomline was the last company on my list so I haven’t had a chance to review the conference call yet, and it hasn’t filed a 10Q with the SEC yet. I need both to better understand the trends, especially surrounding digital banking (should eventually grow at 15% to 20%), Brexit-related issues and spending on investments. The one thing that jumped out at me from the segment reporting data in the press release is that while subscription and transaction revenue (71% of total revenue) was up 12%, and software licenses revenue (4% of total revenue) was up 21%, services and maintenance revenue (24% of total revenue) was down 12%. I need to see what’s going on there.
Because the stock dropped this morning, much like it did back at the end of January, I’m moving to hold. I’ll update you with more information once the 10Q is out and I can review it. HOLD.
Earnings: DONE
CareDx (CDNA) is up 8% from last Thursday’s close though it’s still well off its March high near 39. This week management announced a collaboration with artificial intelligence (AI) specialist CibilTech, a French MedTech company that makes products for predictive medicine. The tie up means CareDx will hold exclusive rights to commercialize Predigraft in the U.S and become a minority equity offer in CibilTech. Predigraft is a data analysis tool that gives an early prediction of an individual’s risk of allograft rejection and transplant loss. I expect we’ll hear more about this on the earnings call next Wednesday, as well as the acquisition of OTTR, which supplies software to over 60 transplant centers in the U.S. These deals aren’t factored into guidance, yet. This morning management announced AlloMap (heart transplant) will be a contracted service with Anthem in California and affiliates in 10 other states. HOLD.
Announced Earnings Date: May 8
Chefs’ Warehouse (CHEF) reported last night and the results were just fine. Revenue was up 12.1% to $357 million (beating by $8.7 million) while adjusted EPS of $0.05 missed by a penny. Management guided for fiscal year 2019 revenue to be ahead of consensus, to a range of $1.56 billion to $1.61 billion (versus $1.56 billion consensus), and for EPS to be up to $0.97 to $1.07 (versus $0.98 consensus). Despite the fine quarter, I moved the stock to sell since it’s not as aggressive a growth stock as we want in our rather full portfolio right now. Our gain was around 10%. SOLD.
Earnings: DONE
Codexis (CDXS) will report next Monday. Analysts see revenue up 4.2% to $14.6 million and EPS flat at -$0.10. For the full year revenue should be up 17% to $70.9 million while EPS should dip $0.02 to -$0.23. This week management reported it signed a multi-year agreement with Tate & Lyle for the supply and licensing of novel Codexis performance enzymes used in Tate and Lyle’s TASTEVA M Stevia Sweetener. The duo has been working on this for a while so it’s not a huge surprise, but representatives say some nutrition and bakery products are already being sold with the enzyme. We’ll get more details next week. Codexis is up modestly from last Thursday’s close. BUY.
Announced Earnings Date: May 6
Everbridge (EVBG) reports on Monday. Analysts see revenue up 38% to $42.2 million and EPS of -$0.18, down a penny from a year ago. For the full year revenue is expected to climb 33% and EPS should improve to -$0.28, from -$0.54. HOLD.
Announced Earnings Date: May 6
Goosehead Insurance (GSHD) reported a great quarter yesterday with revenue up 58.5% to $23.1 million (beating by $1.8 million) and adjusted EPS of $0.18 beating by $0.06. Total written premiums placed grew 45% to $146.9 million and policies in force grew 45% to 365,000.
Revenue from the Franchise Channel was up 66% to $11.2 million and total operating franchises grew 47% to 501. Adjusted EBITDA margin in this channel improved from 46% to 50% due to higher margin royalties on renewals (EBITDA is a measure of earnings before interest, taxes, depreciation and amortization).
Revenue from the Corporate Channel was up 52% to $12 million and corporate sales agent headcount was up 52% to 184. Adjusted EBITDA margin in this channel improved from 25% to 40% due to a higher base of renewals (that’s a very good trend).
Total adjusted EBITDA margin improved from 35% to 41%, driving adjusted EBITDA up 86% to $9.5 million. Goosehead ended the quarter with cash and equivalents of $18.4 million and outstanding debt of $48 million. Management maintained it’s 2019 outlook for revenue of $700 million to $725 million (up 33% to 41%). That’s conservative as compared to analysts, which see revenue up 42% for the year.
This was a clean beat across the board and speaks to the leverage and scalability of Goosehead’s unique insurance brokerage business model. The stock hasn’t had much direction lately, but this should help. I like it. Keeping at Buy. BUY.
Earnings: DONE
Quanterix (QTRX) is unchanged over the last week and looks comfortable trading in the 21 to 23 range. We now have an earnings date of next Thursday. When the day arrives analysts will be looking for revenue to jump 35% to $10.2 million and for EPS to dip $0.07 to -$0.40. For the full year they see revenue up 31% to $49.1 million and EPS down $0.20 to -$1.60. That said, estimates here are really a best guess since Quanterix’s sales cycle can be lumpy and with such a small revenue base the timing of deals can have a big impact. BUY.
Announced Earnings Date: May 9
Q2 Holdings (QTWO) reports next Wednesday. Consensus is for 29% revenue growth in the quarter (28% for the year) and EPS of -$0.04 ($0.14 for the year). No news. BUY.
Announced Earnings Date: May 8
Rapid7 (RPD) reported a great quarter yesterday. Revenue was up 34.1% to $73.2 million (beating by $3.3 million) while adjusted EPS of $0.02 crushed expectations by $0.10. Annualized recurring revenue (ARR), which is the number analysts were hoping would grow by 20% a year when I recommended the stock, was up 51%. That’s huge!! With the business firing on all cylinders, management raised full-year ARR guidance to +30% and revenue growth guidance to 28% to 30% (analysts had seen 2019 revenue up 26.4% to $308.5 million). EPS guidance of $0.05 is in line with current consensus but seems very conservative given the Q1 result and boost in revenue guidance.
The message from management is that Rapid7 has “… transformed to a high growth, multi-product cloud software company on the path to long-term profitability.” That’s like a bartender saying this beer will give you a persistent buzz, but no hangover. Investors are likely to keep “drinking up” shares of RPD! The stock should react well to this report and analysts will likely raise price targets to around where the stock is trading now (they’ve been behind the curve lately). Keep Holding. HOLD.
Earnings: DONE
Repligen (RGEN) shares took flight last Friday on news the company will acquire C Technologies (an analytics company with a portfolio of spectroscopy products that are used in biopharmaceutical manufacturing) for $240 million. Repligen also pre-announced Q1 results that crushed expectations. Revenue should be up around $60.5 million, way above consensus of $53 million. EPS should be around $0.27 to $0.28, also way above consensus of $0.19. The stock went from 57 to 68.5 on the news, then Repligen announced a $175 million secondary offering priced at 64 to help fund the deal and that cooled things off a bit. Volume has stayed high (because of the secondary) and the stock closed yesterday near 65.5. Management will report official results next Thursday. Last week I said you can buy into the strength, and even with the secondary I stand by that. At the current price the secondary is far less dilutive than it would have been if announced prior to the deal and, let’s face it, the timing of the announcement was a smart decision. I expect a good report, good guidance and a bullish stance from many analysts after the event (despite relatively high valuation). BUY.
Announced Earnings Date: May 9
Upland Software (UPLD) reported a solid quarter yesterday. Revenue was up 53.4% to $48.5 million and beat by $100K while adjusted EPS of $0.53 beat by a penny. Subscription and support revenue (AKA recurring revenue) was 92.7% of the total and rose by 62% to $45 million. Adjusted EBITDA rose to 37% of revenue from 34% of revenue. This was Upland’s 19th consecutive quarter beating expectations (think they guide conservatively?).
The company added 161 customers (28 major ones), expanded 231 customer relationships (24 major ones), announced a new go-to market strategy built around product suites and announced the acquisition of PostUp after the quarter ended.
I’ve talked before about the trend of improving organic revenue growth with Upland, which is a big part of the sustainable growth story as the company becomes less reliant on acquisitions. In the quarter organic growth was 9.6%. That’s a great number given management’s conservative organic growth target is 5% (I think they want to leave plenty of room to beat).
Management reiterated the 2019 guidance it gave last week. Factoring in the acquisition management now sees 2019 revenue up $202.4 million to $206.4 million (up ~36%) and adjusted EBITDA of $73.7 million to $76.1 million. Over the last week analysts have raised estimates to line up. For the full year EPS estimates now sit at $2.12, up from $1.98 two months ago. I don’t expect a big reaction to the report given that it wasn’t overly exciting. The excitement is about consistent execution here, and we’ve already seen big jumps in early March and mid-April. Shares should digest this and continue to do well. BUY.
Earnings: DONE
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
Next Cabot Small-Cap Confidential issue is scheduled for June 7, 2019
Cabot Small-Cap Confidential is published by the Cabot Wealth Network, an independent publisher of investment advice. Neither the corporation nor its employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Copyright © 2019 - COPYING AND/OR ELECTRONIC TRANSMISSION OF THIS NEWSLETTER IS A VIOLATION OF THE U.S. COPYRIGHT LAW. For the protection of our subscribers, if copyright laws are violated by any subscriber, the subscription will be terminated.
[premium_html_footer]