Salesforce.com Update BUY

CRM : NYSE : US$55.71 BUY 
Target: US$65.00
WHAT THE FIRM COULD DO TO HELP THE STOCK OUTPERFORM THE MARKET.
Investment thesis
As the best-in-class cloud software firm, Salesforce remains our favorite large cap
growth stock. With more transparency (revenue run-rates of the various clouds was
a good start), the firm could see multiple expansion; however, even if this doesn’t
happen, we expect the shares to advance at least 20% over the next 12 months.
That’s a worthwhile potential return for a large cap stock. BUY.
 Another upside print. CRM reported Q2/15 revenues and non-GAAP EPS of
$1.32B and $0.13, which were respectively $29M and a penny ahead of our
estimates. Constant currency revenue growth was 37% in the quarter, and
calculated billings of $1.35B were nicely ahead of our $1.30B estimate and up
33% compared to a year ago. Total backlog (billed and unbilled) ended the
quarter at $7.35B, which is up 17% versus Q2/14. Lastly, CRM generated FCF
of $174M, or $0.27 per share, which was well ahead of our $0.18 estimate;
YTD FCF is up 90% compared to 1H/14.
 Color from the call. The firm noted an 8-figure deal (one of several) with 3M in
the quarter as well as a Salesforce1 Platform deal with Safeway. In the quarter,
sales cloud was 49% of subscription revenue, service cloud 26% (though the
fastest growing), SF1 platform 15%, and marketing cloud 10%. On the event
front, CRM will host its Connections marketing cloud conference in late
September (which could pressure a stock like MKTO as the firm makes noise on
that front), and management suggested that the firm will be introducing an
entirely new product line and category at Dreamforce in October.
 Outlook: F2015 revenues increase ~$40M, EPS inches up by a penny. This was
a classic beat and modest raise quarter. Revised guidance points to 32%
revenue growth and ~150 bps of operating margin expansion in F2015.
Interestingly, Q3/15 marks the first full quarter that CRM will have lapped the
ET acquisition, and implied billings guidance suggests healthy, 25% growth

Opower BUY

OPWR : NYSE : US$17.29

BUY 
Target: US$23.00

COMPANY DESCRIPTION:
Opower combines big data analytics and behavior science to
provide utilities around the world with cloud-based software
solutions for customer engagement, energy efficiency, and
demand response. The firm was founded in 2007, is
headquartered in Arlington, VA, and trades on the NYSE under the
ticker “OPWR”.

All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Software as a Service
FIRST STEP ON WHAT SHOULD BE A LONG RUNWAY; REITERATE BUY,
TRIMMING TARGET TO $23
Investment thesis
Opower posted a good start as a public company with greater upsides than we
expected. The firm’s growth spending should pay off in terms of a long-term
upward margin ramp beginning in early 2015. Meanwhile, in our opinion the
firm remains the definitive leader in consumer oriented energy efficiency and
energy data analytics space. The stock has the potential to deliver significant
returns over the long-run. Reiterate BUY.
 An upside out of the gate. OPWR reported total revenues and Adjusted
EBITDA of $28.6M and ($4.3), which were respectively $2.4M and $3.6M
ahead of our estimates. Revenue growth was 50% in the quarter. Calculated
billings of $34.2M were nicely ahead of our $31.6M estimate and up 17%
year-over-year versus a very difficult compare. Cash from operations was a
($2.1M) loss, which was better than our ($4.4M) estimate.
 Color from the call. Opower signed a deal with TEPCO in the quarter, which
is Japan’s largest utility (20M households) and the firm’s first major win in
the region. Sales hiring has accelerated to meet C2014 targets, and
management is pleased with the pace and early productivity of new
additions. Recurring revenue loss due to non-renewals has been <5% every
year since inception, which speaks the firm’s high level of visibility.
 Outlook: C2014 guidance well ahead of expectations. OPWR provided
guidance for the first time, setting mid-point C2014 revenue and EBITDA
targets that were respectively $5M and $2M better than our estimates. We
now expect the firm to grow revenues ~33% this year, which is up from our
pervious 27% estimate, and report EBITDA losses that are in the mid-20%’s
as a percent of sales – we believe there is still likely ups on both metrics.

Akamai Technologies BUY

AKAM : NASDAQ : US$54.53
BUY 
Target: US$68.00

COMPANY DESCRIPTION:
Akamai provides content delivery and cloud
infrastructure services for accelerating and improving the
delivery of content and applications over the Internet,
ranging from live and on-demand streaming videos to
conventional web content, to c-commerce tools. The
company is headquartered in Cambridge, Massachusetts

Telecommunications — Telecommunications
STRONG Q1/14; INCREASING ESTIMATES; REITERATE BUY
Investment recommendation
Akamai once again managed to produce yet
another quarter of above-expectations growth and margins with a
solid outlook for Q2/14. Even though the company has reiterated
its H2/14 margin guidance for 40%-42%, we note they have
consistently beat their margin forecast for the past six quarters.
Strong volume growth and reported traction in the security
business should continue to provide investors with confidence that
the company will continue to produce solid double-digit top-line
growth with improving margins.
Investment highlights
 Managing expectations – delivering results – As has been the
case with the company for the past six quarters, guidance
beyond the next quarter was once again muted with the
expectation for margins to return to 40%-42%. Q2/14 revenue
estimates call for $464-478mm with slightly lower margins.
 Volumes trends remain strong – Although we had speculated
that recent traffic trends were supported by continued Internet
video growth, the strength appeared equally strong from
software downloads as well as gaming.
 Reasonable valuation relative to history – Currently priced at
8.8x 2015E EBITDA, we find the stock to be attractively
valued, especially given accelerating growth trends

 

ePlus BUY Target Price $65

PLUS : NASDAQ : US$50.01
BUY 
Target: US$65.00 

COMPANY DESCRIPTION:
ePlus is a direct marketer and authorized reseller of IT
solutions from several large OEMs, including Cisco, HP,
VMWare, NetApp, EMC, Citrix, Apple, Dell and Microsoft.
The company offers a range of solutions focused on data
center, storage, security, cloud enablement and IT
infrastructure. Headquartered in Herndon, VA, ePlus was
established in 1990 and incorporated in 1996.

 

Technology — Hardware — Semiconductor Devices and Related
Technologies
STRONG FUNDAMENTAL GROWTH FROM CLOUD IT BUILD-OUT
Investment recommendation
We reiterate our BUY rating and $65 price target following PLUS’s 1.57
million secondary share offering. We expect PLUS shares to benefit from
the increased public float and we see potential for upside to revenue and
EPS as advanced technology solutions continue to see healthy demand
from big data, mobile device management, security and other drivers.
We are adjusting our estimates off of PLUS’s preliminary MarQ results.
Investment highlights
 PLUS completed a secondary offering of 1,573,913 shares at
$50/share with an option for the underwriters to purchase an additional
236,087 shares. PLUS will repurchase 400,000 shares at $50/share,
lowering the total shares outstanding to 7.6 million shares compared to
the prior 8 million share count.
 PLUS expects MarQ revenue to be in the range of $255 million to
$261 million compared to our prior estimate of $264 million.
Management highlighted the 8% to 10% Y/Y revenue growth was driven
by strong demand for IT products and services from their large
customers. PLUS expects EPS for the MarQ to be in the range of $1.00 to
$1.06, well above our prior $0.81 estimate.
Valuation
PLUS’s price target of $65 is approximately 12x our C2014 EPS estimate
of $4.84 plus net cash of $5.07 per share.

Q2 Holdings

QTWO : NYSE : US$13.68
BUY 
Target: US$17.00

COMPANY DESCRIPTION:
Q2 Holdings provides a cloud-based platform for
customer facing web and mobile banking solutions for
regional and community financial institutions. The
platform enables users to pay bills, check balances,
transfer funds, and deposit checks through a unified
online platform or mobile device. Q2 was founded in
2004 and is headquartered in Austin, TX.

All amounts in US$ unless otherwise noted.

 

GROWTH; INITIATE WITH BUY, $17 PT
Investment thesis
In our opinion, Q2 Holdings could be one of the quiet winners of the recent IPO
class. The firm sells customer-facing banking applications, competing largely
with legacy software vendors and aging custom code. Q2 signs 5+ year
subscriptions (excellent visibility), is growing revenues ~30%, but won’t likely
break even until sometime in 2017. If Q2 can articulate and demonstrate a
clear and consistent path to profitability, the stock could get re-valued into the
25%+ growth SMID cap cloud cohort, which implies a 7-9x forward revenue
multiple. As is our custom, our price target is more conservative and assumes a
modest deterioration in the EV/revenue multiple, but a 20% appreciation in the
face of 30% revenue growth. We are initiating coverage of QTWO with a BUY.
Investment highlights
 An upgrade cycle is underway. Regional and community financial
institutions (RCFIs) are increasingly becoming viable competitors to the
national mega-banks – this means that they too need online and mobile
banking functions and sleek, next-generation user interfaces. Enter Q2.
 Legacy competition. Being founded in the mid-2000s, Q2 has the
advantage of being constructed on a unified, cloud-based platform with a
mobile-first development mentality. The firm competes either with vendors
like Digital Insight (NCR) and First Data, who are attempting to morph
timeworn applications, or oftentimes in-house, custom-built code.
 Attractive micro-economics. Q2 signs 5+ year initial deals, dollar-based
retention including upsell tops 125%, and the firm crosses into profitability
after 1.8 years of a new customer relationship. This means that in the near
term at least, the faster Q2 adds clients, the more money they will lose.
 What it means for the numbers. From the firm’s roughly $65M run rate,
we expect Q2 to be a ~30% revenue grower for the next several years.
Gross margins should scale from ~40% this year to 60%+ with scale, and
Q2 should become cash flow and EBITDA profitable sometime in 2017.

Akamai Technologies

AKAM : NASDAQ : US$57.86
BUY 
Target: US$68.oo

COMPANY DESCRIPTION:
Akamai provides content delivery and cloud
infrastructure services for accelerating and improving the
delivery of content and applications over the Internet,
ranging from live and on-demand streaming videos to
conventional web content, to c-commerce tools. The
company is headquartered in Cambridge, Massachusetts

 

Telecommunications — Telecommunications
SOLID ANNUAL INVESTOR PRESENTATION – CONFIDENCE REMAINS HIGH

Investment recommendation
Akamai hosted its annual investor day on Tuesday, reiterating some of the
common themes that continue to support our long-held BUY-rated thesis.
With overall Internet traffic growth continuing to accelerate and with the
likely traction of newer lines of business like carrier services or the
security business, we believe top-line revenue growth will continue at the
mid- to high-teens range with the potential for continued margin
expansion over time. With two stellar quarters behind us at a very
controversial time for the company and with Q1/14 guidance that far
exceeded expectations, we continue to recommend the shares. With
increasing confidence in the outlook, we increase our target to $68,
representing a 12.0x EBITDA multiple and 26.0x EPS on 2015 estimates.
Investment highlights
Solid momentum likely continues – Although the company avoided talk of
the near-term trends that resulted in the recent increase in Street
estimates, we believe Akamai continues to greatly benefit from being one
of the few sources capable of terminating incremental traffic on
increasingly constrained ISP networks.
Outlook calms fears – With the recently renewed contract with its largest
customer, estimated to be 9% of revenues and growing, we remain
confident 2014 will possess significant tailwinds. However, it remains
unclear when Apple will begin to migrate any traffic to their developing
CDN network. Longer-term guidance was adjusted on Tuesday, but only
slightly.
Incremental growth drivers on tap – With the investments in the sales
force and ordering systems in 2013that continued into 2014, we expect to
begin to witness returns that could drive revenue growth and EBITDA
margins higher. However, in the near term we would expect some
incremental dilution from the integration of the recent Prolexic aquisition.

Benefitfocus

BNFT 

NASDAQ : US$68.44 
BUY  Target: US$84.00

COMPANY DESCRIPTION: Benefitfocus sells a cloud-based benefits software platform for large employers and insurance carriers. The firm’s suite of solutions enables customers to more efficiently shop, enroll, manage, and exchange benefits information. Based in Charleston, SC, Benefitfocus was founded in 2000 and went public in September, 2013.
All amounts in US$ unless otherwise noted.
Technology — Enterprise Software — Software as a Service AN UPSIDE QUARTER; 2014 WILL BE RIGHTLY HEAVY ON INVESTMENT IN LIGHT OF OPPORTUNTIY; REITERATE BUY
A favorable mix shift towards the faster growing Employer business and an uptick in demand from Carriers around private exchanges could enable BNFT’s revenue growth rate to accelerate by a couple hundred basis points in each of the next 2-3 years. If we are correct, the natural, and eventual compression of the firm’s EV/revenue multiple of 12x 2014E will be both gradual and more than offset by high-20’s organic revenue growth. We continue to expect BNFT’s stock to advance faster than the overall stock market. Reiterate BUY.
 Preliminary Q4/13 results ahead of expectations. BNFT expects to report Q4 total revenue and Adjusted EBITDA loss of $30.3M and ($7.9M), which were respectively $1.8M and $0.4 better than our forecasts. Total revenues increased 36% y-o-y, and within the mix, Employer revenues increased 80% y-o-y and now make up 44% of revenue.
 Color on deal flow. BNFT added 14 new employer customers in the quarter, bringing the firm’s total to 393, up from 286 a year ago – we’d remind investors that the second and third quarters tend to be seasonally stronger as a result of the timing of open enrollment season. The firm saw particular strength with Carriers, adding 3 new accounts in the quarter, as those firms look to setup private exchanges. Q4 was a company record in terms of customer “go-lives.”
 C2014 investment initiatives. Management highlighted three areas of focus: (1) an increase in sales capacity to really put the foot on the gas in the hot Employer market; (2) an incremental $10M investment in their private exchange efforts for Carriers and brokers; and (3) the build out of a third-party channel for implementation services – the firm is already in discussions with multiple potential partners. The result of the initiatives will be a roughly $20M larger EBITDA loss in C2014 than we had previously forecast. As we are undoubtedly in the very early stages of this opportunity, we believe this is a logical strategy. Our C2014 and C2105 revenue estimates increase by $2.5M and $4.0MTechnology

Akamai Technologies BUY Target Price $56

AKAM : NASDAQ : US$47.68
BUY 
Target: US$56.00

COMPANY DESCRIPTION:
Akamai provides content delivery and cloud infrastructure services for accelerating and improving the delivery of content and applications over the Internet, ranging from live and on-demand streaming videos to conventional web content, to c-commerce tools. The company is headquartered in Cambridge, Massachusetts.
All amounts in US$ unless otherwise noted.

Telecommunications
ANOTHER SOLID QUARTER EXPECTED; VOLUME GROWTH TO HELP OFFSET REPRICE IMPACT
Investment recommendation
We maintain our BUY rating and $56 price target ahead of its seasonally-strong Q4 report that is also expected to be potentially impacted by the “catch up” contract repricing with its largest customer. Despite this well-articulated headwind, we continue to expect another solid quarter report as we believe the potential drag has been well reflected in investor expectations and that organic growth from favorable secular trends will more than offset the negative impact over time.
Investment highlights
 Solid CDN traffic growth expected – With the majority of the software downloads for the initial iOS7 and subsequent updates expected to have occurred in Q4/13, we expect the traffic growth for the Media Delivery Solutions business to be strong in the quarter. Combined with the continued proliferation of over-the-top video traffic growth, we believe the company will deliver another quarter with robust traffic growth of the traditional CDN business.
 Security, e-commerce continue to benefit – As the consumer holiday purchases continue to shift towards mobile and other online venues, we believe the growth in Akamai’s e-commerce business will remain strong as the company facilitates fast and secure online transactions with its massive infrastructure and optimization software. Performance & Security business will also benefit from the continued IT outsourcing trends as enterprises increasingly focus on performance and reliability in their cloud migration.
 Temporary speed bump provides opportunity – Despite investor concerns due to a large contract re-pricing, we believe Akamai remains a unique asset well positioned to benefit from multiple favorable secular trends (mobile, cloud, online video and security). As such, recent volatility creates an opportunity to accumulate its share, in our view

Workday Target $90

WDAY : NYSE : US$73.30
BUY 
Target: US$90.00

COMPANY DESCRIPTION:
Workday provides enterprise-scale, cloud applications that deliver the core functions for global customers to manage the human capital and financial resources of an organization. Solutions include: HCM, Financial Management, Payroll, Time Tracking, Procurement, Employee Expense Management, etc. Workday was founded by the former founders of PeopleSoft in 2005 and is headquartered in Pleasanton, CA.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Software as a Service
ANOTHER EXCEPTIONALLY STRONG QUARTER, LIKELY MORE TO COME. REITERATE BUY, $90 TARGET
While high valuation momentum stocks have taken a breather this quarter as
many investors locked in good YTD performance, Workday, the company,
continues to execute quite well. The firm is a large deal shop, selling to large
firms in big chunks. Our view is that the pivot point for the business will be
several reference customer successes with financials. If that happens around
summer 2014, Workday is very likely to see a cascading list of customers switch
from Oracle and to some degree SAP and perhaps a few Microsoft customers.
With the stock valued at an eye-watering 17x 2014E revenues, Workday will
need to deliver those kind of epic results for the stock to continue working. At
this point, we expect that to happen and for WDAY shares to continue to
bulldoze doubters and short-sellers.
 The trend continues: another material upside. Workday reported revenues, calculated billings, and FCF loss of $127.9M (+76% y-o-y), $154.0M (+99%) and ($9.7M), which were respectively $10M, $21M, and $23M better than
our estimates. Subscription revenues grew 82% in the quarter, and non- GAAP EPS loss of ($0.12) was $0.05 better than we expected.
 Color from the call. Workday now has more than 550 customers worldwide, with approximately 2/3 currently live on the system. The firm added 10 new Financials customers in the quarter, which was a company record.
 Outlook: mid-point Q4 revenues ~$7M ahead of consensus. Rolling forward WDAY’s subscription revenue upside and improved outlook, we have increased our F2015 and F2016 revenue estimates by $30M and $20M respectively, which implies ~50% revenue growth next year. We continue to expect WDAY to show FCF profitability at some point in 2H/F16.

Benefitfocus

BNFT : NASDAQ : US$46.26
BUY 
Target: US$54.00

COMPANY DESCRIPTION:
Benefitfocus sells a cloud-based benefits software platform for large employers and insurance carriers. The firm’s suite of solutions enables customers to more efficiently shop, enroll, manage, and exchange benefits information. Based in Charleston, SC, Benefitfocus was founded in 2000 and went public in September, 2013.

Technology — Enterprise Software — Software as a Service
INVESTORS LIKELY TO BENEFIT FROM CONTINUED SOLID EXECUTION. BUY, INCREASING TARGET TO $54.
It was green lights across the board for BNFT in its inaugural quarterly report as a public company. Our opinion on the company is unchanged, and positive, from our initiation report published 24 days ago, in which we asserted that BNFT shares should advance almost as fast as the firm’s gradually accelerating revenue growth. More importantly in our opinion, Benefitfocus has the kind of corporate culture that positions the firm for sustained long-term growth. The last three companies we know who had this characteristic were PeopleSoft, Ultimate Software, and SPS Commerce – all three long-lived successes. While it is premature to put BNFT into that pantheon of quality companies, we strongly believe this quarter represents a good step in that direction. Reiterate BUY.
 A good start: upside revenue and EBITDA. BNFT reported revenues and Adjusted EBITDA loss of $26.3M and ($4.5M), which were respectively $1.0M and $2.8M ahead of our estimates. Total revenues increased 26% in the quarter, driven by continued momentum on the Employer side, which grew 66% y-o-y. BNFT generated operating cash flow of $3.0M in the quarter compared to our expectation for a loss of ($5.7M).
 Customer additions. BNFT added 31 new Employer customers in the quarter, bringing the firm’s total to 379, which is up 41% y-o-y. We anticipate that Q4 will be a record “go-live” quarter for Employers. BNFT’s Carrier sales focus remains on getting broader within its 37 customer base.
 Outlook: Q4 revenues inched up, C2013E losses less than expected. BNFT set mid-point Q4 revenue guidance ~$1M ahead of our estimates, which implies sequentially accelerating growth (to 28%). We have modestly increased forward estimates and expect FCF profitability in C2016.

Follow

Get every new post delivered to your Inbox.

Join 2,122 other followers