Editor’s Morning Note: AppDynamics filed to go public yesterday. Now it’s up to investors to decide if the quickly-growing but deeply unprofitable company is worth its prior $1.9 billion valuation.
Filing as the year comes to a close, AppDynamics dropped its S-1 yesterday. The company’s offering is the very sort of deal that Silicon Valley needs: A venture-backed unicorn exit.
Prior to its public debut, AppDynamics had raised a total of $365 million, including two nine-figure mega rounds in 2014 and 2015. Those rounds valued the firm at $1 billion and $1.9 billion respectively.
All that means that AppDynamics matters. It matters for its own staff, founding team, and investor cadre. It also serves as a critical data point for how we understand the public markets.
Just how in-vogue are money-losing subscription software companies?
It is not clear how much money AppDynamics intends to raise. Its filing indicates a $100 million offering, which is a traditional placeholder number. The final raise will depend, as always, on both the number of shares offered and their price.
While we cannot yet scale the company’s recent performance against a proposed new valuation, there is work to do. Here are the company’s key operational results:
- Revenue, Q3 2016: $60.348 million.
- Revenue, Q3 2015: $39.258 million.
- Percent change: +53.72 percent.
This is a faster growth rate than what Box currently posts. To Box’s credit, it has a higher recurring revenue mix than AppDynamics, but a 50+ percent growth rate doesn’t seem weak.
- Revenue, first 9 months 2016: $158.427 million.
- Revenue, first 9 months 2015: $102.790.
- Percent change: +54.13 percent.
Similar thoughts here. Note the company’s third-quarter percent change is similar to its year-to-date result. The modest implication there is that the law of large numbers is bested by a strong quarter, comparing backwards two-quarters on a relative basis.
- Net loss, Q3 2016: $26.419 million.
- Net margin, Q3 2016: -43.7 percent.
- Net loss, Q3 2015: $31.501 million.
- Net margin, Q3 2015: -80.2 percent.
A falling net loss coupled with expanding revenue reduces negative margins quickly. But not completely, as you can see. AppDynamics has a credible ramp towards profitability. The question is when, which is a matter of time, which is merely cost against cash.
- Net loss, first nine 9 months 2016: $95.077 million.
- Net margin, first 9 months of 2016: -60.0 percent.
- Net loss, first 9 months 2015: $92.396 million.
- Net margin, first 9 months of 2015: -89.88 percent.
This is pretty interesting. Note how close the Q3 2015 margin result is compared to the company’s nine-month result from the same year. Now, observe the larger gap between the Q3 2016 result and its nine-month 2016 cousin.
What could have driven this ramping margin result? I think I found a clue:
AppDynamics has dramatically cut its share-based compensation expense costs over time. In fact, check that notable negative loss there in the most recent quarter. That’s a roughly $6.5 million positive swing in GAAP profit results for the firm. Almost, ahem, similar to the percent difference in the company’s most recent quarter’s improved GAAP net margin compared to its year-to-date result!
The company has a lot of cash, $141.959 million, and a modest free cash flow deficit of just $7.768 million in the first three-quarters of 2016. That’s down from the far-higher $47.429 million in negative free cash flow notched in the first nine months of 2015.
For The SaaS Kids
You know I love you.
Dollar-based net retention rate, trailing 12 months ending October 31:
- 2016: 127 percent.
- 2015: 122 percent.
Billings, nine months ended October 31:
- 2016: $236.963 million.
- 2015: $164.661 million.
Presuming a $65 million fourth quarter for the company, AppDynamics has an 8.5x revenue multiple (trailing) at its prior $1.9 billion valuation. If the company wants to go public at a higher figure, it will have to convince investors to accept a higher revenue multiple.
Given our prior work on the topic, that seems audacious, but it’s not impossible.
Does 8.5x sound high? Consider the following:
- Valuation, November 2015: $1.9 billion.
- Revenue: (Quarter ending January 31, 2016, trailing): $150.592 million.
- Revenue multiple: 12.6x.
- Valuation, June 2014: $1 billion.
- Revenue: (Quarter ending January 31, 2015, trailing): $81.865 million.
- Revenue multiple: 12.21x.
(Here, we are working with the best revenue approximates that the AppDyanmics S-1 will allow; I’m sorry we can’t get closer to perfect. Both results are conservative, in that they make the revenue multiple appear less generous than it was. The second result is likely skewed more than the first.)
Well, it’s at least a bit more conservative now.
Homework: If $1.9 billion is the wrong number for AppDynamics, what is the right figure? Best answer via DM gets a cookie or a hug.