On June 4, 2013 we originally alerted Premium GeoInvesting members that we were still bullish on Responsys (NASDAQ:MKTG) and that we were buying shares. We will now provide you with reasons why we are still bullish on MKTG and expect there to be some more upside to the stock’s price even though it is up handsomely from the time of our original alert.
Anyone that has followed us over the past several months learned that we have placed increased emphasis on investment opportunities in Software as a Service (SaaS) companies.
On December 18, 2012 we informed our GeoInvesting premium members that we went long Selectica (NASDAQ:SLTC) at $6.40. We published our first SaaS focused article titled, “Is Revamped SaaS Company Selectica (SLTC) Ripe for a Take Over”, on December 24, 2012. The stock now trades at $8.15, after reaching a high of $10.50 on March 5, 2013.
On January 16, 2012 we published a second SaaS themed article, “ExactTarget And E2open: 2 Intriguing SaaS Plays”, where we mentioned that ExactTarget (NYSE:ET) could be an ideal acquisition candidate. The stock was trading around $22.00 at the time of our publication. We pointed out that ET’s Enterprise Value to Sales multiple (EV/S) of 4.8 was selling well below the Eloqua (NASDAQ:ELOQ) EV/S multiple of 8 which Oracle agreed to pay in an acquisition deal announced in December 2012.
On June 4, 2013 Salesforce.com (NYSE:CRM) announced that it agreed to acquire ET for about $2.5 billion or $33.75 per share. This price tag works out to an EV/Sales multiple of… you guessed it… 8. This is Salesforce.com’s largest acquisition since its inception, and an indication of the importance of services that utilize the web as well as other mobile channels in order to attract customers. Similar to ELOQ,
“ExactTarget, Inc. provides cross-channel, interactive marketing software-as-a-service (SaaS) solutions that enable organizations to communicate with their customers through the interactive channels, including email, mobile, social media, and Websites.”
This brings us to Responsys, the company highlighted in our third SaaS article, “Responsys: Filling The Valuation Gap”, published on February 22, 2013. As was the case with our ET analysis, in our original article about Responsys we compared its low valuation (EV/S multiple of 1.8) to that of ELOQ and we expanded on why we thought that the pace of acquisition activity in the SaaS space is not expected to slow down anytime soon.
Well, not only is MKTG directly comparable to ELOQ, but ET also serves as an excellent proxy. Both ET and ELOQ mention MKTG as a competitor, while MKTG explicitly states ET as a direct competitor on page 11 of its 2012 10K. MKTG revenues are in the middle of where ELOQ and ET revenues stand:
- ELOQ 2012 Revenues were $$96 million.
- ET 2012 Revenues were $292 million.
- MKTG 2012 Revenues were $163 million.
All three of these companies provide a SaaS platform to enable customers to automate complex marketing campaigns via multiple channels such as email, social networking, and the World Wide Web. Yet, at a current E/V of around 2, MKTG is selling well below its counterparts’ take-out multiples:
- The December 2012 Eloqua (NASDAQ:ELOQ) acquisition by Oracle occurred at an EV/Sales ratio of 7.9.
- Given Salesforce.com’s acquisition of ExactTarget, ET shares are valued at an EV/Sales ratio of about 8.
Shares of MKTG are up 32% since the publication of our Seeking Alpha article and rose 8.8% in response to the ET acquisition news – and we don’t think the ride is over yet.
The acquisitions of ELOQ and ET have further confirmed our previous bullish opinion about the investment value of Responsys (MKTG). We are now more confident that MKTG will make an ideal acquisition target at a price higher than current levels.
The following reasons summarize why we are predicting that MKTG will be an ideal acquisition target:
1. MKTG’s Positive Net Profit and Cash Flow Compared to ELOQ and ET
MKTG has been profitable and cash flow positive for at least two years, a trend expected to continue through 2014. ELOQ was not profitable and was cash flow negative in 2012. ET is cash flow positive but losing money and, according to analysts, is expected to remain in the red throughout 2014. We believe that a potential suitor would be impressed that MKTG is able to maintain profitability and positive cash flows in an industry where the attainment of profitability is not common.
2. Poison Pill
Recall that from our previous MKTG article that its Board of Directors approved a Poison Pill document on January 11, 2013 to prevent a hostile takeover by other companies. Interestingly enough, management had never undertaken this action, and it came on the heels of the ELOQ/ORCL acquisition news. This might be an indication that management thinks their company is trading at a fairly low valuation multiple and that they may have seen an imminent threat to their control of the company. See our original MKTG article for more details on this development.
Based on the most recent quarterly results, MKTG’s EV/S ratio is only 2.1 as of June 3, 2013, compared to EV/S acquisition multiples of 7.9 and 8 for ELOQ and ET, respectively. It is also worth noting that, along with MKTG, ET mentions Aprimo, Inc. as a direct competitor. Aprimo, Inc. was a publicly traded company that was acquired by Teradata Corporation on January 1, 2011 at an EV/Sales multiple of around 6. Even after the increase in MKTG shares as a reaction to the ET deal, the stock still looks cheap relative to these peers.
4. Last Man Standing
With ExactTarget (ET) and Eloqua (ELOQ) off the table, MKTG appears to be one of, if not the only publicly traded online marketing SaaS company comparable in terms of revenue that has yet to be acquired. This should only expedite the process, as potential suitors race to gobble up online marketing SaaS companies.
5. Raised Financial Guidance
In the first quarter 2013 financial results release, MKTG management raised its guidance for fiscal year 2013, stating:
“Responsys is increasing its outlook for fiscal 2013 revenue from a range of $188-$192 million to a range of $190-193 million. The Company is revising its expectation for fiscal 2013 non-GAAP net income from approximately $0.16 to $0.18 per diluted share to approximately $0.18 per diluted share. We believe we are well-positioned to deliver strong financial results throughout the rest of 2013 and beyond.“
6. Sales Growth Is Picking Up
Referencing the first quarter 2013 financial results, we can see that the growth rate of revenue in the first quarter was 27% higher compared to that of the same quarter in 2012. Revenue growth of around 20% or greater is one of the key factors that separates the elite SaaS companies from the rest of the pack. Investors may recall from our original MKTG article that shares plunged after the company announced its third quarter 2012 results that missed analyst revenue estimates. We also mentioned that, per a February 7, 2013 press release, management stated that it had appointed two new management members in order to drive revenues. It looks like efforts to maintain healthy top-line growth may be paying off, making it a more attractive acquisition target.
7. Good Business Prospect/ Acquisition Trend Is No Joke
More companies are increasing their budgets for online marketing and their demands for the services of online marketing software services. We would expect MKTG’s business to continue to grow, as the company is in a good position to capture market share in the online marketing industry.
Here is a summary of trends from our first piece on MKTG that are worth another mention:
- The pace of acquisition activity in the SaaS space is not expected to slow down anytime soon. A 2010 analysis of the merger and acquisition activity in the SaaS sector showed that, on average, targets in this sector are selling for 3 times more than the companies in other IT sectors and at premium Price to Sales multiples:
“SaaS Acquisitions Sold for More Than 7 Times Trailing 12-Month Revenue, Analysis Shows — IBM, Oracle, SAP buying SaaS companies to gain market position; according to Martinwolf M&A Advisors some of these deals will end up as bargains.”
- According to a report released by DemandGen regarding the trend of marketing automation, SaaS marketing automation companies have started to integrate their products with CRM (Customer Relation Management). Furthermore, another article from Gartner states that:
“SaaS-based CRM will see the largest global revenue growth of all categories, increasing from $3.9B in 2011 to 7.9B in 2016, achieving a 15.1% CAGR worldwide”.
- If the trend of marketing automation as noted in the DemandGen report materializes, then the marketing automation SaaS companies such as MKTG, ET and ELOQ could have a good chance of further expansion of their businesses within this industry.
Can the market really be this unaware? We are amazed at how inefficient the market can be at a time when obvious clues that offer insight into the investment value of companies are not reflected in share prices. We now have two publicly traded companies that MKTG competes with that are being acquired at an EV/S multiple of 8; It makes absolutely no sense that MKTG should sell at an EV/S multiple of 2. At the very least we believe it should trade at the average ELOQ and ET pre-acquisition EV/S multiple of around 5.
Disclosure: Long MKTG
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