An attempt at an economic model for SaaS comps

During my 30 year tenure in IT at a very large corporation I worked on two acquisitions and one divestiture. I also worked on several projects that were not specifically M&A type activities, but placed me in a direct working relationship with consultants from firms like Accenture, PWC and others with units that specialized in these type activities. The very fact that these firms had groups that specialized in this type of activity is a testament to how frequently they occur and the direct impact on IT operations in general and s/w strategy specifically.

From my experience, I think it’s safe to say that the vast majority of M&A transactions result in the acquired firm having their entire IT stack disrupted in order to be compliant and compatible with the acquiring firm, the exceptions being Berkshire type acquisitions that pretty much don’t interfere with the operations of an acquired firm.

This is not the only reason for software subscription to likely be terminated. Companies go out of business. Companies get disenchanted with the a given s/w package as the ROI is not realized. Companies determine that there’s a better, more economical alternative. Companies at times cut costs, IT is a cost center for most companies so they often bear a disproportionate burden of these mandates. The s/w vendor fails to address bugs and other problems with their s/w. The s/w vendor fails to deliver on promised enhancements and upgrades. The s/w vendor gets acquired by a competitor which was more focused on acquiring a customer list than perpetuating a s/w package. The s/w vendor alters their business model which is viewed by a segment of their customers as detrimental to the relationship. And so forth . . .

While it is not safe to assume that once you have your SAAS application established that it can’t be replaced, it certainly is more difficult than say deciding to change hardware vendors. But that goes for any software. It is not an easy task to go from Oracle to SAP either so they usually have long legs. But M&A is probably not a high percentage activity that is going an impact on a SAAS company, plus it always doesn’t go the way you think.

I use to work for a mid-cap company using SAP and SFDC that got acquired by a much larger company. While SAP eventually sunset after a few years, the company that acquired us adopted our use of SFDC and expended the license usage 10x.

Eventually, we got spun off again and were back to a mid-cap company and lost the neg leverage with SFDC. I was talking to the global SFDC owner who wanted to consider MS CRM as it is much cheaper and seems to have matured. But the cost and mostly the effort to replace SFDC made it a non-event.

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Hey sox,
Great post.
Any thoughts on data-related SaaS like MDB or AYX - in terms of who makes the call on refreshes in a case like that?

That almost seems like it would be user-preference as the data scientists, DevOps, and programmers have to live in these tools all the time. I just imagone an uproar or revolt internally if procurement moves them off their favorite toola because they chose someone else that had a lower bid.

You have any commentary into which client contacts tend to be the key decisionmakers across differwnt SaaS companies (security, erp, app dev, data analytics, etc)?

Thanks,
Dreamer

Hi Brittlerock

Great post. Whilst I don’t want to critique what you have said as I think they are important points, I wouldn’t necessarily discount subscription models.

Subscription models pre-date SAAS. Subscription models exist outside of S/W.

As far as I can tell the strength of subscription models depend on:

  1. Level of monopolistic position of the provider
  2. Contracting strength in negotiating evergreen contractual terms from the start
  3. Ability and willingness to resource the relationships with enough sales and finance firepower to renew accounts every year or every renewal period
  4. Ability to ensure client sees and extracts value from usage of products or services subscribed to

I can observe this having worked 14 years for a healthcare informatics company (and 6 years before that as a client) that is over 65 years old, has an 80% market share and has an average client contract tenure of 20+ years.

Again SAAS doesn’t guarantee this but other factors are very important. Having said that just because a business is a SAAS model doesn’t mean they can’t achieve these kinds of results with the above ingredients to success.

Ant

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Oh and by the way this company changed hands several times went public/private/sold off/spun out/merged etc.

Hi Dreamer - I can’t really speak for anything on the database side of the house except that during my Oracle days it was almost impossible to dislodge Oracle (and for that matter SAP) where they were running the entire backend of the supply chain; just wasn’t going to happen. I think the challenge is for MDB to do the old land and expand, get in to specific pockets where they can succeed versus rip and replace.

On AYX, I am a shareholder albeit a small position. My issue with AYX is that it appears, from the demo’s I have seen, that it is much like other visualization tools out there (Splunk, Tableau, MS BI, Oracle, etc.) and that it is looking at pockets of success (similiar to Qlik’s beginnings about five or so years ago). The success in the SMB or mid-market can be fast but on the enterprise side it is more difficult since folks are engrained with certain tools, etc.

On buyers - it will be a cross of the actual users as you describe (scientists, day to day folks), will involve IT as well, but the actual “buyer” will be the business owner who gets better data to run the business. So if one tool is better than the other (based on the users) it might not be worth the internal expense of switching if the same data points are discovered.

When I look at the data providers, I try to focus on those specializing in the non-structured data patterns versus structuted data (think non-structured as text, structured as a particular field/data point). The unstructured piece is what is really cool. It can proactively identify patterns to change business practices. As example, think when you go to your local mechanic and say the car is making this and that sound, and the guy says you have an issue with your break pads. What the mechanic has done is use his brain for unstructured data points of all the clients coming in and describing it, hence he is able to fix the problem. Now put that same principle to a airline company where you can literally predict when the plane will have issues, and you can, with some confidence, say that you can save lives.

In our scenario, we used specific pilot call logs on engine malfunction, analyzed that against the field operations, and identified that they needed to service the planes on x, y, z number of hours versus the current number of hours. Real life business problems solved, not just because the end user liked how they could manipulate data in cool pictures.

I hope AYX does well and am relatively confident in it for the next year or so; after that when the low hanging fruit isn’t there, you might have some revenue shortfall. I’ll have to look at it against where Splunk, tableau, Qlik were in the first couple of years versus where they are today.

Hope that makes sense.

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I hope AYX does well and am relatively confident in it for the next year or so; after that when the low hanging fruit isn’t there, you might have some revenue shortfall. I’ll have to look at it against where Splunk, tableau, Qlik were in the first couple of years versus where they are today.

Hope that makes sense.

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It does make a lot of sense. That is why the ER’s are always so key…will the sales numbers match the hype/trends, client retention holding steady, growth thesis still intact, etc etc…

They are pricey, yet small enough that hopefully the low hanging fruit is out there for more than just another year, but we will see.

Very few companies can produce the rev growth off such a huge base like FB, GOOGL, and AMZN. Benefit of being far and away the leader in an industry. I hear users talk highly of Splunk, and stock has certainly done well, but they don’t seem to have figured out how to be profitable yet. Hopefully AYX will show a good mix of growth and FCF.

Dreamer