Cloud-Based Application Acceleration Boosts Software Names

In a research note published Thursday evening, BMO Capital Markets analyst Joel Fishbein, Jr. initiated coverage on six software names with an overall Market Perform Industry rating.

“We believe that best-of-breed on-demand (or software as a service) vendors are primed to benefit from the continued shift to the on-demand delivery model, and see a multi-year “on-premises to on-demand” replacement opportunity. While still in the early stages of this transformation, we are seeing adoption accelerate as larger organizations are implementing more cloud-based applications.”

Analyst Joel Fishbein initiated coverage on ChannelAdvisor ECOM with a Market Perform rating and a $45.00 price target. Fishbein noted that net customer additions were up 90% y/y mainly due to capacity expansion in 2012 for the first three quarters of the year. The analyst commented, “Productivity has been ahead of plan, ASPs are increasing, and the company has experienced an acceleration in revenue as a result. Through 1H13, sales capacity doubled, which should lead to strong new customer bookings into 2014. We see the opportunity over time to drive incremental subscription revenue per customer by expanding the number of channels in use and gross merchandise value (GMV) running through the platform.” BMO added that near-term estimates are conservative and that the company can achieve continued acceleration of core revenue.

Fishbein initiated coverage on Demandware DWRE with a $68.00 price target and Market Perform rating. BMO noted that expanding distribution investments, larger transactions, and the new Digital Store is set up to aid in driving growth. The analyst emphasized the 2013 record year for Demandware with record large enterprise wins and average contract value of new deals at $400K, up $70K from 2012. Fishbein was quick to emphasize that the company is “well positioned as the market-leading on-demand e-commerce platform as the company's re-platform to enable multi-channel commerce.”

BMO Capital Markets further analyzed Jive Software JIVE, a market leader in the emerging social enterprise platform market. The analyst initiated coverage with a Market Perform rating and $11.00 price target. Fishbein noted that despite near-term competitive leadership, he is cautious on longer-term dynamics. The analyst specifically commented on execution challenges and a “hesitant” opportunity regarding ROI, budget, and pricing.

The analyst added, “After stumbling with new product messaging in 1H13, the company has begun to refine its go-to-market inclusive of IT. Social collaboration platforms are currently considered discretionary, and collaboration infrastructure is not currently a priority within IT organizations today, as it is a replacement of existing infrastructure, and a ROI is not immediately apparent. On a positive note, current billings appear to have stabilized, despite lower-than-expected new customer additions. We expect continued refinement, and look to evaluate traction post the seasonally stronger 4Q. We expect 2014 total billings growth of 20%.”

BMO analyst emphasized the “tailwinds” from early SaaS ERP and competition in the mid-market for NetSuite N. Fishbein initiated a $112.00 price target and Market Perform rating. The analyst reported that the number of new customers, installed base churn rate, and new customer ASPs highlighted BMO's data that subscription revenue should continue to rise.

Fishbein estimates a 17% new deal ASP increase and 7% increase in customer additions in 2015. He noted that these estimates could be conservative “in light of current 20%- plus ASP growth, enterprise sales capacity buildout, Oracle partnership, SuiteCommerce impact, OneWorld continued strong traction, overall sales capacity additions, and ramp-up of large partners. Our analysis suggests NetSuite at a minimum would need to increase its current market penetration to about 25% of SaaS ERP by FY2017E (up from about 16% today) and expand margins to close to 10% (up from 4Q13E 5.4%) over the next four years to justify its current valuation.”

The analyst initiated coverage on Tangoe TNGO with an Outperform rating and $23.00 price target. Fishbein remarked that market penetration remains low in the TEM and MDM markets and he expects the company to continue to grow. Forecasting in 2014 and further, BMO capital markets reported that Matrix CLM suite innovation, international market monetization, strong new customer growth, and increasing benefits from channel partners should drive high-teens top-line revenue growth with expanding margins.

Lastly, Joel Fishbein commented on Workday WDAY, noting the company's solid position for long-term growth. The analyst initiated coverage with a Market Perform rating and an $85.00 price target. Fishbein remarked on the HCM space penetration and the adoption of Workday's Financial Management Suite noting a 30% billings growth.

BMO wrote, “Workday has a best-of-breed ERP solution, which is disrupting the market through its on-demand model, and object-oriented architecture that over time could pull the company deeper into the data analytics market. The ERP market is by far the largest application software market, totaling $24.5 billion in 2012, and much of the growth is coming from SaaS, only 10% penetration, and augmenting and replacing on-premises applications.”