Enterprise IPOs on a roll with Adaptive Insights on deck

IPO. Venture VCJ Guest Column
Photo of IPO letters on dice letters on stacks of gold coins courtesy of KenDrysdale/iStock/Getty Image.

By Rohit Kulkarni, SharesPost

Is Adaptive Insights’ IPO next on the hit parade?

The Palo Alto company, a provider of on-demand business performance management software, recently filed for its IPO and is seeking to raise $100 million with Morgan Stanley and Merrill Lynch as lead underwriters.

The company’s software focuses on budgeting, forecasting, model-building, reporting, analysis, dashboards, currencies and languages that enable businesses to boost performance.

Adaptive has raised $176 million in private funding to date. The company’s most recent private valuation was $475 million after its June 2015 Series G funding round.

Adaptive Insights Revenue. (Source: SharesPost)
Adaptive Insights revenue and operating margin. (Source: SharesPost)

The company’s offering comes on the heels of several successful IPOs from cloud and enterprise software unicorns in the first half of 2018, including Carbon Black, Smartsheet, Pivotal, Dropbox, Zscaler, Zuora and Ceridian.

Below are observations from Adaptive’s S-1 and what they might mean for investors.

  • Revenues are growing at over 30 percent year over year. Adaptive grew its revenues to $107 million in fiscal year 2018 from $62 million in fiscal year 2016, mainly due to subscriptions. Such revenue accounted for 88 percent of overall revenue in 2018, up from 80 percent in 2016.
  • Leader in performance management. Gartner and Forrester have both consistently rated Adaptive as the leader in corporate performance management solutions. With software that offers insightful user-friendly analytics, Adaptive has positioned itself to grab a big piece of an estimated $12 billion global market.
  • Gross margins increase with shift toward subscriptions. Adaptive grew its gross margins to 74 percent last year from 63 percent in 2016 by focusing on high-margin subscriptions, instead of low-margin services. In addition, the company has been upselling its products without occurring additional sales expenses. Average subscription revenue per customer grew to $27,000 in fiscal year 2018 from $20,800 in fiscal year 2016.
  • Operating losses improve as revenues grow. Adaptive has managed to contain expenses, grow revenue and win new customers more efficiently. As a result, profit margins improved to -38 percent in 2017 from -94 percent in 2015. But as the company expands into the larger enterprise market, we expect sales and marketing costs to rise. This means Adaptive will not see profits in the foreseeable future.
  • Adaptive competes in a crowded SaaS marketplace. Adaptive faces stiff competition from up-and-coming startups, such as Anaplan, Tidemark and Host Analytics, and large incumbents such as IBM, Oracle and Salesforce. Adaptive needs to continue to innovate and expand its customer base.
  • Adaptive needs to ramp up international expansion. The company still generates about three-quarters of its revenue from the United States, even though it operates in 54 countries. Adaptive needs to aggressively expand globally, especially in markets where mid-sized customers can benefit from its planning tools and subscription model.
  • Customer growth rate is decreasing year over year. Adaptive increased its customer base by 17 percent in 2017 compared with 24 percent in 2016. We attribute the slowdown to enterprise customers waiting longer to buy software and an increasingly crowded pool of competitors. Unless the company wins more international customers, Adaptive’s new customer count will continue to slow in 2018 and 2019.
  • Adaptive needs to expand into the larger enterprise market. Adaptive gets most of its 3,500+ customers from the lower margin, mid-market segment. To expand its margins and reach profitability more quickly, the company needs to leverage its vast mid-market customer base to win over larger companies.
  • Top institutional holders own more than 75 percent of the company. We believe such large institutional ownership could stabilize trading once the company goes public. CEO Thomas Bogan owns 6.6 percent of the company. Some of the top institutional investors are ONSET Ventures (17.9 percent), Norwest Venture Partners (16.5 percent), Bessemer Venture Partners (11.7 percent) and Information Venture Partners (11.2 percent).

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

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