restructuring mature software companies to maximize profitability

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Maximizing Profitability From Mature Software Companies in a World of Software as a ServiceGeorge Gilbert

SUMMARY: Economic model in software is still geared to growth, not maturity: operating margins can be almost doubled

Cost structures still reflect pursuit of growth thru NEW customers

Opex focus should be redirected to harvest installed base with new services

M&A activity by Oracle, private equity, industry consolidation evidence of new era

Public market transition difficult: lots of co.s ripe for restructuring

Copyright TechStrategyPartners

Market opportunity exists in much larger operations spending within IT typically captured by SaaS productsCost structure of a typical IT department by activityPercent 6 41

25 23 5

100

New developmentPotential for new license revenue

Enhance -ments

Data center Other Maintenance and and network management supportIT operations costs = 75% of total: targeted by SaaS

Total*

Source: Customer interviews

Maintenance is the most profitable revenue stream for typical mature co.Relative contribution of maintenance, licenses and services to revenues and profits Percent Share of revenues Share of operating profits

66 52 47

28

Maintenance share of profits is 1.4x its share of revenues

25

-18Professional Services Licenses Maintenance

Source: TechAlpha Partners analysis model of a typical mature company

Traditional maintenance is the source of most operating profit already: License revenue is a loss leader to sell maintenanceLicense revenue income statement Percent of total ISV revenues

25

2

4212

Operating margin for new license revenue is -16%

Revenues

Cogs

R&D

S&M

G&A

-4 Operating profit

Maintenance income statement Percent of total ISV revenues 47 3 1114 5 14

Operating margin for maintenance revenues is +30%

Revenues

Cogs

R&D

S&M

G&A

Operating profit

Source: Typical mature software company based on TechAlpha Partners analysis

License revenue from NEW customers requires 2x the S&M expense for 1/2 the revenue of EXISTING CUSTOMERSLicense revenue from NEW customers income statement Percent of total ISV revenues Operating margin for license revenue from new customers is -100%

8.33

0.67

1.33 13.86 0.66 G&A -8.19 Operating profit

Revenues

Cogs

R&D

S&M

License revenue from EXISTING customers income statement Percent of total ISV revenues 16.67 1.33 2.67 7.14 1.34 4.19 Revenues Cogs R&D S&M G&A Operating profit

Operating margin for license revenue from existing customers is +25%

Source: Typical mature software company based on conversations with SAP, Oracle

Drop Opex associated with NEW customers

Dropping NEW customer license revenue still drives strong maintenance revenue from installed baseUpside: Drop 1/3 of license revenues, add managed services, raise prices, intense focus on renewals Baseline: license revenues flat Downside: Drop 1/3 of license revenues

110

Maintenance Revenue Scenarios

100 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12

3 Year Horizon By Quarter

* Baseline scenario assumes no change in maintenance pricing, industry standard 85% renewal rate

Potential to SIGNIFICANTLY increase operating marginsPercent of total revenues; typical mature company Only harvest the installed baseHYPOTHESIS

Optimize cost to serve

Fix current renewal processes

Offer managed services (MSP) programs

8

4 1 2 35 20

Operating profit BEFORE

Offshore maint. R&D

Yield improvement

Managed services (MSP) additional revenues

Lower expense from pursuing EXISTING customers

Operating profit AFTER

Source: Tech Strategy Partners analysis;

Examples of mature co.s: S&M expense approaches total license revenuesQtly Gaap Metrics (Most recent 10Q) SSA (1/31/06 acquiredInfor/GGC 7/28/06) by

Revenue 188M 149M 59M 188M 323M 315M 413M 675M 2.4bn 209M 120M 222M 228M 46M 128M 79M 71M

Revenue Growth 6% 16% 0% (N/A merger) 15% 3% 9% 1% 22% 5% 14% 15% 22% 7% 23% 22% 7%

License Growth 7% 9% 0% (NA merger) 14% 3% 15% N/A 16% 8.5% 15% 14% 17% -6% 16% 20% 14%

License Rev% 30% 35% 32% 16% 41% 27% 38% N/A 5% 37% 42% 30% 41% 19% 50% 43% 29%

S&M% 26% 30% 31% 22% 38% 23% 33% 20% 13% 30% 33% 31% 42% 26% 46% 43% 17%

Operating Margin 8% 6% -8% 7% 10% 14% 18% 9% 13% 15% 10% 9% 17% 1% 6% 9% 9%

Market Cap Acquired 1.4bn Acquired 1.8bn Acquired 1.2bn 1.5bn 4.6bn 3.25bn 6.5bn 3.6bn 8bn 2.3bn 1.8bn 2.2bn 6bn 1bn 1.7bn 1.2bn 625M

Kronos (Acquisitionannounced 3/23 Hellman & Friedman, JMI Equity)

Serena (7/31/06- Acquiredby Silverlake 3/10/06)

Lawson (11/31/06) BEA (4/30/06) Compuware (12/31/06) BMC (12/31/06) Convergys (3/31/06) Amdocs (9/30/06 Yr) Sybase (9/30/06) Tibco (8/31/06) Parametric (12/31/06) Citrix (9/30/06) Advent (9/30/06) Quest (3/31/06) Informatica (9/30/06) i2 Technologies(9/30/06)

Identifying most promising restructuring candidates

Customer loyalty

Customer due diligence: understand how secure the maintenance revenues are; ultimately be able to quantify maintenance renewal rate

Technology lifecycle

Technical due diligence: understand how much life is left in the technology; ultimately quantify the opportunity for follow-on sales into the installed base

Credibility

Credibility with management: perceived ability to forge partnership to restructure company for maximum profitability

Alternative investment theses

Restructure mature companies

Reduce S&M expense targeted at growth; increase share of wallet of existing customers through managed services; acquire new customers through mergers

Consolidate niche SAAS vendors

Create end-to-end suite vendor in the Software as a Service marketplace to challenge legacy vendors and SalesForce.com

Consolidate mid-market

A relatively under-penetrated marketplace where several mergers can help create a vendor that reaches critical mass before Oracle pursues similar acquisitions

LBO Analysis Of Company X

Transaction Assumptions & ReturnsTransaction Assumptions Aggregate Purchase Price Implied Equity Value Aggregate Value / CY07 EBITDA Equity Value / CY07 Net Income Debt / CY07 EBITDA US Treasury Note (10 yr) Sources of FundsSpread Int Rate Amount xC07 EBITDA % of Total

1,188,258 1,243,258 14.7 (173.22) 8.8 4.70%

Identifiable Asset Value Goodwill Created

1,188,258 -

Uses of FundsAmount % of Total

Debt Equity Cash on Balance Sheet Total Sources of Funds

UST+400bpp

8.7%

712,955 475,303 55,000 1,243,258

8.8 5.9 0.7 15.4

57% 38% 4% 100%

Paid to Target 1,243,258 Cash Required on Balance Sheet 0 Total Uses of Funds 1,243,258

100% 0% 100%

Returns to Equity Holders Trailing Exit EBITDA Multiple EV/Revenue 10 4.30 11 4.73 12 5.16 13 5.59 14 6.02 15 6.45 IRR at End of 2010 12% 17% 22% 26% 29% 32%

NPV 31,699 114,053 196,407 278,761 361,116 443,470

Revenue and EBITDA Comparison 2005-2010: Cut unprofitable portion of license sales and sell MSP services to installed baseStreet Estimate350,000 300,000 250,000 200,000 150,000 100,000 50,000 2005 2006 2007E 2008E 2009E 2010E Revenue EBITDA350,000 300,000 250,000 200,000 150,000 100,000 50,000 2005 2006 2007E 2008E 2009E 2010E Revenue EBITDA

TechAlpha Estimate

TechAlpha vs Street Estimate50,000

Additional revenue comes from MSP Additional EBITDA comes largely from lower opex, some from MSP

40,000 30,000 20,000 10,000 2007E 2008E 2009E 2010E Revenue EBITDA

Growth in 2010 Revenue: 10.3% EBITDA: 12.1% EBITDA Margin: 43%

Significant opportunity to cut S&M spending on unprofitable new customers new product line spared because of growth opportunity

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007E 2008E 2009E 2010E

EXISTING customers for new growth product NEW customers for new growth product EXISTING customers of mature product NEW customers for mature product

Promising growth product worthy of investment

Mature product worth harvesting: focus on existing customers

Disinvest

MSP adds 20% to revenue and 11% to operating income in 2010

120,000 100,000 80,000 60,000 40,000 20,000 2007E 2008E 2009E 2010E MSP Operating income Total operating income MSP Revenue

License and Maintenance P&L 2006: pre-restructuring license is lossleaderLicense revenue income statement Percent of total revenues

20.8

0.8

4.3

14.8

4.3

-3.5 Operating profit

Operating margin for new license revenue is -17%

Revenues

Cogs

R&D

S&M

G&A

Maintenance income statement Percent of total revenues 69.017.0 13.0 9.9 10.6 18.6

Operating margin for maintenance revenues is +27%

Revenues

Cogs

R&D

S&M

G&A

Operating profit

Source: Typical mature software company based on Tech Strategy Partners analysis

License and Maintenance P&L 2010: post-restructuring both businesses are profitableLicense revenue income statement Percent of total revenues

0.9 20.1Revenues Cogs

3.7 7.2 1.8R&D S&M G&A

Operating margin for new license revenue is +32%

6.5 Operating prof

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