Tech stocks retain their highs as the second quarter’s earnings season begins to fade into the rearview mirror, and there are still a number of companies looking to go public while the times are good. It looks like a smart move, as public investors are hungry for growth-oriented shares — which is just what tech and venture-backed companies have in spades.
The companies currently looking to go public are diverse. China-based real-estate giant KE Holdings — a hybrid listings company and digital transaction portal for housing — is looking to raise as much as $2.3 billion in a U.S. listing. Xpeng, another China-based company that builds electric vehicles, is looking to list in the U.S as well. Xpeng has the distinction of being gross-margin negative in every key time period detailed in its S-1 filing.
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And then there’s Duck Creek Technologies, a domestic tech company looking to go public on the back of growing SaaS revenues. This morning let’s quickly spin through Duck Creek’s history, peek at its financial results, calculate its expected valuation and see how its pricing fits compared to current norms.
Duck Creek is a Boston-based software company that serves the property and casualty (P&C) insurance market. Its customers include names like AIG, Geico and Progressive, along with smaller players that aren’t as well known to the American mass market.
The KE IPO will be a big affair because the company is huge and profitable with $3.86 billion in H1 2020 revenue leading to $227.5 million in net income. The Xpeng IPO will be interesting because Tesla’s strong share price has given float to a great many EV boats. But Duck Creek is a company slowly letting go of perpetual license software sales and scaling its SaaS incomes while still generating nearly half its revenues from services. It’s a company we can understand, in other words.
So let’s get under the skin of the Boston-based company that also claims low-code functionality. This will be fun.
Duck Creek by the numbers
Duck Creek has four revenue categories: subscription (SaaS), license (perpetual license software sales), maintenance and support, and professional services. In the nine months ending May 31, Duck Creek grew its SaaS and services incomes, while seeing its perpetual license and maintenance revenue fall.
That’s what we expect to see from a company shedding an old-school software model to post, in terms of results.
In the three quarters closing May 31, 2020, Duck Creek grew SaaS revenue from $39.9 million in the year-ago period to $59.4 million, rising from 32% of revenue to 39% over the same timeframe. In the same period, the company’s total revenues grew from $123.4 million to $153.4 million, a jump of around 24%. SaaS revenues grew a faster 49% over the same year-over-year period.
Duck Creek is not profitable, but it is losing less money over time. Its net income in the nine months ending May 31 2020 was -$8.5 million, an improvement from -$14.1 million in the same portion of 2019.
Before we get into the IPO itself, Duck Creek has notably low margins for its SaaS incomes, at just 58% in the three quarters ending May 31, 2020. The result is an improvement of what the company posted in the same period of 2019, namely 57.5%, give or take, but was nearly flat. That could slow the company’s impending public revenue multiple.
Duck Creek’s IPO
The Boston-based software company is targeting $19 to $21 per share, according to its latest IPO filing. Selling 15 million shares, before equity reserved for its underwriting banks, Duck Creek is looking to raise between $285 million and $315 million. It plans on using a good portion of its IPO revenues to buy back interests in its business from existing shareholders, like Accenture, RBW and Apax.
Duck Creek was bought by Accenture in 2011 before seeing 60% of its equity sold in 2016 to Apax Partners, a private equity firm. Accenture kept the other 40%.
Then, in December of 2019, another $120 million went into the company from Temasek, Insight Partners, Neuberger Berman and Dragoneer. The funds were earmarked for “continued investment into its business and to repurchase equity from certain existing investors.” In mid-2020 $230 million more was poured into the firm from prior investors along with Whale Rock Capital and Kayne Anderson Rudnick Investment Management.
Again, the capital was earmarked for “continued investment into its business growth, with a focus on extending the capabilities of the company’s SaaS solutions, and to repurchase equity from certain existing investors.”
After all of that, who will own what following the debut? IPO investors will own between 11.7% and 13.2%, depending on whether the underwriting groups exercise their option. Apax will hold 33.9% (or 33.3%) and Accenture 22.6% (22.2%).
And what will all that be worth? Discounting the underwriters’ option, the company’s 128,399,992 shares after its IPO would give it a value of $2.44 billion to $2.70 billion at $19 and $21 per share.
To understand if that price is high or low, we need to turn to its most recent results, which are, of course, COVID-19-impacted. Here’s how the company described its most recent quarter in its S-1/A filing:
During the three months ended May 31, 2020, we generated growth of 9% in total revenue, 43% in subscription revenue and 76% in SaaS ARR as compared to the comparable period in 2019. Our ability to grow revenue within our existing customer accounts has remained strong, with a SaaS Net Dollar Retention Rate of 113% for the quarter ended May 31, 2020. Additionally, we generated net cash provided by operating activities of $18.8 million and Free Cash Flow of $17.5 million for the three months ended May 31, 2020, compared to $6.9 million and $5.7 million, respectively, for the three months ended May 31, 2019. However, due to COVID-19 we delayed certain of our planned investments, primarily related to our international expansion initiatives and restricted hiring in the short-term to revenue critical roles.
I may be abnormally thick on this Monday morning, but I can’t find the company’s May 31, 2020 quarter revenue. Nor does Duck Creek provide a normal quarterly breakdown of its long-term quarterly results.
That means to understand its revenue base, we’ll need to annualize the nine-month period that ended May 31, 2020 (ew), and use that to extrapolate a (kinda) revenue multiple using a set of metrics that we don’t tend to use for such things (yuck).
- Duck Creek nine-months’ revenue for period ending May 31, 2020: $153.35 million.
- That figure, annualized: $204.5 million.
- Implies revenue multiple at its two IPO valuations: 11.9x, and 13.2x.
Those seem somewhat reasonable? Maybe a little expensive given the company’s slow aggregate revenue growth and lower-than-average SaaS gross margins?
By that logic, the company will raise its IPO range, price above the boosted interval, and quintuple on its first day’s trading. More when it does price.
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