I had a brief interview today on Bloomberg's Money Moves with Deirdre Bolton.
I had a brief interview today on Bloomberg's Money Moves with Deirdre Bolton.
A few days ago I hosted the meeting of our Internet Advisory Board. Preparing for that meeting led me to jot down my thoughts regarding the sector’s monetization opportunity.
I remain bullish on the transformative potential of the Internet in the enterprise that we view as the channel for achieving scale inexpensively and transforming every industry. Three drivers feed our bullishness:
The Internet offers a great opportunity, but also a great challenge for marketers seeking to engage consumers at a time when publishers and platforms are ceding control to users. We see this impacting two areas of focus for Trident: online advertising and marketing applications and services.
Internet advertising has arrived at an important junction that will fuel the next leg of sustained growth. Over the past 10 years we have seen the sector change dramatically. The first wave of Internet advertising growth was driven by direct-response marketing budgets particularly from industries such as auto, travel, tech, telecom, retail, and financial services.
Several structural and technology improvements particularly to display advertising are attracting additional industries but also causing untapped brand budgets sitting inside leader categories to shift. They include:
Taken together, these structural developments will lead to a rising level of confidence among brand-oriented advertisers that will increasingly view online display (in its various forms) as a more desirable complement to, and replacement for, fragmented mass media channels. Brands are allocating an increasing mix of their ad spend to online video. The budget is coming from TV broadcast and print advertising. We see industries such as CPG starting to aggressively allocate budgets to display advertising. While they spend nearly $200 billion globally offline, such advertisers continue to under-invest online.
We are particularly encouraged by projections calling for the share of agency media budgets spent through programmatic channels to increase from 15-20% today to 40-50% by 2015. Some surveys project that between 2012 and 2017 RTB-based spending in the U.S. will grow at a 56% CAGR. Mobile will be a significant driver of overall RTB growth (IDC expects mobile RTB spend in the US will reach $1B by 2015 and $3B by 2017, representing 21% of the total RTB spending).
The accelerating move of consumers and businesses to Internet, as well as the rise of the subscription economy, namely the move to sell products as services sold on a subscription basis, are causing a re-examination of the marketing applications stack. Customers have more knowledge and control over how, when, and why they engage brands. They increasingly expect a unified experience that is consistent across all of their business interactions. Consumers in particular are increasingly empowered to avoid unwanted or undesired marketing. The line between offline and online continues to disappear, and as it does, the line between product and service is also becoming blurred.
As a result of these trends and the associated data explosion traditional marketing approaches are no longer working causing CMOs to reexamine their established practices and assumptions about advertising, demand generation, retention, and loyalty. In the process of this re-examination they are starting to adopt a new class of applications that power awareness, attention, affinity, action, loyalty and optimization. While the space of these new applications today remains extremely fragmented with hundreds of startups having been funded already, large vendors have started to aggressively build, partner with or acquire the technology enabling them to create a new marketing applications stack. To the traditional infrastructure vendors, like IBM, SAP, and Oracle new cloud-based application vendors like SFDC and Adobe have been added, as well as Internet pureplays such as Google, Facebook, Twitter, Linkedin.
The combination of these factors lead us to three observations:
As I prepare to host our SaaS advisory board on Wednesday I thought that this is a good opportunity to analyze the 3Q13 of our relevant portfolio companies, and reflect on the sector in general. Despite what is typically a slow quarter for most IT and adtech companies, during 3Q13 our portfolio companies in both of these areas performed extremely well with 90% meeting plan and a 3 of them beating it. We are also seeing strong sales pipelines for 4Q13 making us optimistic that this quarter will be equally strong, if not stronger. The public SaaS companies we follow are also starting to report strong results. For the quarter most of the growth continued to come from North America. The foreign markets appear to have bottomed out providing additional optimism for additional good quarters assuming the companies maintain their focus and execution level.
The public enterprise SaaS companies we follow, e.g., Netsuite, Workday, Demandware, Marketo, ServiceNow, Splunk, Jive, Cornerstone OnDemand, have either started announcing or are expected to announce strong 3Q13 results, that are at least in-line with analyst expectations. A big event for the quarter was Veeva’s extremely successful IPO, which, along with the continued strong performance of Athena Health, and Realpage, provide proof points that vertically focused SaaS applications are another growth area for SaaS. The market is also becoming more positive on the public adtech companies driven primarily by RocketFuel’s strong IPO and Adap.tv’s acquisition by AOL for a very nice multiple. The market is also taking into consideration the potential benefits of Facebook’s exchange, starting with the companies that are already part of it. Valueclick and Millennial Media remain in the penalty box. In the case of Millennial the concern is primarily coming from Facebook’s and Google’s moves around mobile adtech. The market is now waiting for Criteo’s IPO in the next few days.
While there was no blockbuster SaaS company acquisition during the quarter, we continued to see strong M&A activity, particularly of smaller companies offering mobile applications. In addition to strategic acquirers, large private equity firms continued to aggressively invest in or acquire smaller, higher growth SaaS companies.
Some thoughts from the quarterly results and the broader market:
One final note: The subscription economy is taking hold in several industries. The SaaS model is quickly migrating to other industries, e.g., retail, publishing, manufacturing, travel. As a result there will be a need for the development of a broader software solution ecosystem that facilitates the functioning of this economy.
Since its founding over 20 years ago, our firm has been investing in enterprise applications companies. Throughout this period we have invested in every major application platform: client/server, e.g., Epicor, multi-tier Web-based, e.g., Webify, and SaaS, e.g., Host Analytics. These days, while the adoption of SaaS applications is increasing, the broad consumer adoption of smartphones and tablets, as well as of other connected specialized devices that are part of the Internet of Things, is driving corporations to accelerate their mobile enterprise application strategies. As a result, enterprises are starting to mobilize existing applications and embrace a mobile-first approach for the new applications they are licensing or developing internally. This approach is leading to the emergence of mobile as the application platform.
Previous enterprise application platforms and their associated architectures were created in order to enable the development of applications that automate complex business processes. The typical enterprise application (internally developed or third-party) tends to have a large footprint, complicated user interface reflecting its complex functionality, long release, deployment and update cycles, and expensive maintenance. SaaS applications have improved on several of these issues, e.g., release, deployment and update cycles have shrunk and maintenance costs have decreased. Based on the examples we’ve seen from the consumer world, mobile applications have completely different characteristics. They provide simple and user-centric functionality, typically automating one task, e.g., making a restaurant reservation, have clean look and feel, small footprint, monetize through new and equally simple business models, and interface with other applications and data through well-defined APIs. Because of their characteristics, security and privacy become more manageable tasks.
Mobile consumer applications are starting to influence how mobile enterprise applications are designed, implemented, deployed and used, regardless of whether their intended user is the corporation’s customer, its employee, or its partner. However, mobile enterprise applications have not yet achieved (and here) the range of functionality, sophistication and refinement of consumer applications. They tend to be straight re-implementations of their desktop counterparts. Fortunately enterprise application developers are starting to re-think how mobile software can best automate business processes while adopting the norms established by mobile consumer applications. In the process they need to make the following important decisions:
After extensive experimentation over the past 8+ years (with the advent of the smartphone), we remain in the very early stages of enterprise mobility. Mobile consumer applications have taught, and continue to teach, enterprise application developers many lessons about design, implementation, distribution and appropriate business models. As the enterprise’s move to mobility is accelerating we will see the emergence of new third-party application leaders since, at least to date, the incumbent enterprise application providers remain too attached to the design and monetization models they established 20+ years ago. In the process, in Apple, Amazon, Google, we are already seeing a new set of mobile infrastructure leaders emerge that are seriously challenging the dominance of traditional enterprise infrastructure providers such as IBM, Oracle and Microsoft. These market conditions make this an excellent time to invest in companies that develop mobile-first enterprise applications. As we did during previous application platform shifts, Trident is aggressively investing in companies that will become tomorrow’s enterprise application leaders by utilizing the mobile platform.
The second quarter of the year typically proves to be one of the strongest. This time around not only we were not disappointed but we also started seeing some strong upside for the remainder of the year. Both our enterprise SaaS and adtech platform portfolio companies performed extremely well, and a few (both from enterprise and adtech) are seeing strong enough demand that could cause them to increase their 2H13 bookings and revenue targets. As public SaaS companies are starting to report quarterly results we are starting to see similar strong performance by some of them, whereas the majority are expected to at least meet analyst expectations. The North American market fuels this growth, whereas international markets, particularly Europe, remain a concern. Also, we are seeing more activity in certain industries such as retail, parts of manufacturing, and logistics, where application budgets are holding steady and even increasing. In other industries we continue to see budgetary pressures as I had mentioned in last quarter’s commentary.
The public enterprise SaaS companies we monitor, e.g., Netsuite, Workday, Demandware, ServiceNow, Jive, Cornerstone OnDemand, have either started announcing or are expected to announce strong 2Q13 results, that are at least in-line with analyst expectations. In fact Netsuite beat analyst expectations. The public adtech companies had a rougher time during 2Q13. Tremor Video and Marin Software are two adtech companies that went public during the quarter and the market didn’t welcome them with open arms. They started trading down soon after their IPO. Similarly, Valueclick and Millennial Media continue to be scrutinized by public markets. Two other private adtech companies, Yume and Adap.tv, are expected to go public during this quarter, and a few more will file to go public before the end of the year. I believe that the companies which have either already filed to go public, or are planning to file, are of higher quality than the ones that have already gone public. As a result, I wouldn’t be surprised if their stocks perform better in the public markets than the current set of public adtech companies.
There were two acquisitions worth mentioning: Salesforce’s acquisition of ExactTarget and Adobe’s acquisition of Neolane. In addition to the size of these transactions, it is interesting to note that they allow both acquirers to strengthen their CMO suites. Another interesting SaaS transaction was the acquisition of CompuCom by TH Lee, a buyout firm. In the broader cloud category I should also mention IBM’s acquisition of SoftLayer. Large private equity firms are increasing the pace of their investments in SaaS and adtech companies, e.g., Insight Venture Partners’ investment in Brightedge. Finally, SAP acquired Hybris which derives a relatively small percentage of its revenue from a SaaS application even though the majority comes from on-premise software.
Positive aspects of our SaaS portfolio’s performance:
Negative aspects of our SaaS portfolio performance:
Under normal market conditions the second quarter tends to be better than the first and this year there was no exception. However, 2Q13 gave us more indications that this can end up being a strong year for our SaaS portfolio if the economy continues to mend and remains in its current trajectory.