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

Veeva Systems BUY

VEEV :

NYSE : US$37.80 
BUY  Target: US$48.00

COMPANY DESCRIPTION:

Veeva provides industry-specific, cloud-based software to the life sciences industry. The firm’s solutions include: Veeva CRM for customer relationship management; Veeva Vault, a cloud-based content management and collaboration solution; and Veeva Network for the creation and maintenance of healthcare provider and organization master data. The firm was founded in 2007 and is headquartered in Pleasanton, CA. All amounts in US$ unless otherwise

Technology — Enterprise Software — Software as a Service

GOOD FIRST STEP, A “NO DRAMA” QUARTER. STILL OUR FAVORITE MID- MAJOR GROWTH NAME. BUY.
Veeva delivered a trifecta tonight: 1) a meaningful, across the board, quarterly upside, 2) an above consensus outlook for F2015, and 3) an unexpected extension of its relationship with Salesforce through 2025. We expect continued strong fundamental execution in F2015 and beyond to enable VEEV’s revenue growth to more than offset an orderly, and likely elongated, compression in the firm’s valuation multiples. The result, in our opinion, will be a stock price that meaningfully outperforms the overall stock market. We reiterate our BUY rating.
 Excellent quarter: another solid upside. Veeva reported revenues and non-GAAP EPS of $62.8M (+58% y-o-y) and $0.07, which were respectively $5.1M and a penny ahead of our estimates. Subscription revenues grew 89% in the quarter and made up 73% of the revenue mix. Calculated billings of $76.7M were up 56% in the quarter and easily topped our $64.3M estimate. VEEV generated FCF of $15.8M, up 135% y-o-y and $7.5M better than we had forecast.
 Color from the call. Veeva added 10 new Vault customers in the quarter, including the firm’s first ever 7-figure deal with this product. The firm ended the year with 198 total customers – including 147 in CRM, 69 Vault, and 6 Network. The firm noted FQ4 revenue retention of 166%. Lastly, Veeva extended its platform partnership with CRM for an additional 10 years – at more or less the same terms from a margin perspective – which should ease investor concerns with regard to any prospective changes in this relationship.
Outlook: revenue estimates inch up, likely a conservative cut. Management provided FQ1 and F2015 revenue guidance that at mid-points were roughly $3.0 and $4.5M ahead of our respective estimates. The firm plans to continue to invest for growth, which will drive modest margin compression in F2016 – we’re forecasting a still impressive ~20% operating margin. We believe there is upside to our revised, high-end of the range forecasts.

 

Workday BUY

WDAY : NYSE : US$100.28 
BUY  Target:  $ 115

UCOMPANY 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.S$115.00

Technology — Enterprise Software — Software as a Service STRONG QUARTER AND CONTINUED INVESTMENT. BUY, TARGET TO $115.
Workday’s continued business momentum and upwardly revised outlook were strong enough to keep investors’ “eyes on the prize” – which in this case, is about becoming a multi-billion revenue cloud-based replacement of incumbent applications from Oracle, SAP and the high end accounts of the largely PE funded firms like Infor, etc. It would be too aggressive to forecast that WDAY’s share price will generate 2x the return of the stock market, but it seems reasonable that 56% compound revenue growth from C2013 to C2015E will more than offset a nearly certain degradation of the firm’s 22x forward EV/revenue multiple. We would own at least a small position in this stock. BUY.
 The track record remains perfect: another big upside. Workday reported revenues, calculated billings, and FCF of $141.9M (+74%), $203.7M (+78%) and $7.5M, which were respectively $3.9M, $29.5M, and $31.2M ahead of our estimates. Subscription revenues grew 86% in the quarter, and non- GAAP EPS loss of ($0.13) was $0.02 better than we expected.
 Color from the call. Customer momentum continues as the firm added roughly 50 customers in the quarter (bringing the total to ~600), including the second straight quarter of “double digit” Financials additions. WDAY also recently acquired Identified, a small technology tuck-in that will add predictive analytics and machine learning capabilities to the firm’s apps.
Outlook: revenues move higher on bookings strength, F2015 operating losses in the mid-teens as WDAY continues to invest for growth. We have increased our F2015 and F2016 revenue estimates by $35M and $60M respectively, which now implies 56% and 42% growth in the next two years. F2015 calculated billings growth is expect to come in at ~45%, which is up from our previous 43% estimate. We have slightly increased our assumed operating losses in F2016 and expect WDAY to be FCF positive in F2017.

Autodesk : Hold

ADSK : NASDAQ : US$54.72 
HOLD  Target: US$52.00 
 COMPANY DESCRIPTION

Autodesk is a global design software company that sells high- function, low-cost 2D and 3D computer-aided design (CAD) applications. The firm also provides visualization and simulation tools, which in conjunction with the company’s design apps, enable customers to experience their ideas early in the design process through the development and analysis of virtual prototypes. All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications BUSINESS MODEL CHANGE BEGINS. MAINTAIN HOLD FOR NOW. 
Investment thesis Autodesk generated normalized revenue growth of about 2%, and as reported revenues declined 3%, due in large part to a transition to subscription. If investors react to this transition as they have with Adobe, the stock will work. However, if the underlying fundamentals of the business do not change, Autodesk shares will eventually behave like EDA stocks, which similarly went to subscription, but underlying growth remained sluggish. We lean toward the former scenario, but for the time being, with not quite enough conviction to upgrade the stock. HOLD.
 An OK quarter: a bit of upside versus conservative forecasts. ADSK reported Q4/14 revenue and non-GAAP EPS of $587M and $0.40, which compared to our estimates of $573M and $0.35. Reported revenues were down 3% y-o-y, but when normalized for the model transition, grew 2%. Billings, which will become an increasingly important metric to watch during the transition, grew 3% in the quarter – overall, management was “pleased” with what the firm saw in its first full quarter with subscription licensing options. During Q4, ADSK signed its largest deal ever, worth more than $20M, and noted continued momentum with Suites, which were up 15% y-o-y.
 Outlook: a lot of moving parts, but 5-8% billings growth and fairly meaningful margin compression. Autodesk provided some new guidance metrics to add benchmarks against which investors will be able to measure progress while reported revenues are in flux. 5-8% billings growth is a step towards the firm’s 12% CAGR target and the addition of 150-200k net new subscribers would be roughly 9% growth. However, taking consideration for the dilution associated with Delcam as well the financial impact of ratable revenue recognition on an unchanged cost structure, near term margins will be negatively impacted. ADSK guided for non-GAAP operating margins in the range of 14-16%, which is down from the 22.5% reported in F2014. In the interim, investors will need to focus on cash flow growth, which we believe will be close to 10% in F2015.

Analog Devices

ADI : NASDAQ : US$51.23 
BUY  Target Price $ 60

COMPANY DESCRIPTION:

Analog Devices designs, manufactures and markets high- performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in industrial, communications, computer, and consumer applications .target: US$60.00

Technologies DIVERSIFICATION CONTINUES TO PAY OFF

ADI delivered a little upside for EPS last night and guided modestly better than the Street as all verticals except consumer ran ahead of expectations. With the better mix, gross margins were a positive surprise as was EPS. CQ1 guidance calls for more of the same as well as better revenue. With a dividend hike and $1b buyback in place, we believe ADI continues to offer defensive exposure to semiconductors at a time when growth for the industry remains in question. We are reiterating our BUY and increase our price target to $60 from $55.
We are increasing our estimates and price target largely on better gross margins. For CQ1, EPS is now expected to be $0.56 up from our prior estimate of $0.49, while revenues remain roughly $2.6B. EPS for C2014 is increased slightly to $2.40 from $2.39 while revenue remains roughly $2.8b. Our price target is increased to $60, or roughly 20x C2014 EPS plus $12.07 net cash per share.
Broad upside minus consumer ADI’s revenue was better than expected across its Industrial, Automotive, and Communications segments, while Consumer was weak. The most significant upside came from Communications where the company sells into wireline and wireless equipment and avoids lower margin smartphone ICs. We believe a strong capex cycle for wireless basestations could deliver revenue and earnings upside versus our revised estimates.

LifeLock

LOCK : NYSE : US$22.13 
BUY  Target: US$27.00

COMPANY DESCRIPTION:

LifeLock provides identity theft protection services for consumers as well as identity risk assessment and fraud protection services for enterprises in the United States. As of June 30, 2012, the company served approximately 2.3 million paying members and more than 250 enterprise customers. LifeLock was founded in 2005 and is headquartered in Tempe, Arizona. All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Software as a Service JUST WHAT THE DOCTOR ORDERED. BACK-END LOADED YEAR IS THE RIGHT STRATEGY
While it doesn’t happen as often as we like, last week’s preview and supposition as to what this earnings call would look like was basically dead on. The firm beat by a bit, raised full year guidance, and inched down first half profit expectations due to a ramp in sales & marketing spend. ID theft is in the news, and it makes extraordinary sense for LifeLock to further cement its position as the leading firm in this space. We liked the shares last week, and we believe they are still attractive six days later. Buy.
6 in a row: another upside quarter. LOCK reported revenues, Adj. EBITDA, and non- GAAP EPS of $102.3M (+30% y-o-y, +33% in the consumer business), $22.9M (22.3% margin), and $0.22, which were respectively $1.3M, $0.8M and a penny ahead of our estimates. FCF of $20.4M in the quarter, or $0.21 per share, easily topped our $12.6M estimate.
Customer metrics. LOCK added 246k gross new members in Q4, which is up 24% y-o-y and well above our 215k estimate; the firm ended the period with 2.99M paying members. ARPU increased 10.7% y-o-y to $10.72/month driven by continued adoption of premium products – “Ultimate” again accounted for >40% of new members in the quarter. Member retention improved for the 14th consecutive quarter to 87.8%, and cost of customer acquisition was $139, down from $173 in Q3/13 and also down slightly compared to a year ago (Q4 is LOCK’s seasonally slow advertising quarter).
Outlook: C2014 revenues move higher, but as expected, a front-end loaded marketing effort. Management guided for mid-point C2014 revenues that were $6M ahead of our estimate and imply 25%+ growth. LifeLock will spend more in 1H/14 marketing to capitalize on recent identity breach media, which will drive EBITDA into the red in Q1 – as highlighted in our preview note, we continue to believe this is the right strategy. We have increased our C2014 and C2015 revenue estimates by $11.0M and $18.5M respectively.

Aspen Technology Target Price $52

AZPN : NASDAQ : US$41.60
BUY 
Target: US$52.00

COMPANY DESCRIPTION:
Aspen provides software and services to process intensive
industries such as oil & gas, petroleum,
chemicals and pharmaceuticals. The company’s products
aid in process design, production planning, economic
evaluation and simulation across three core areas -
engineering, plant operations and supply chain management.

All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications
SAME OLD : ANOTHER VERY GOOD CASH FLOW QUARTER.
REITERATE BUY, TARGET TO $52.
AspenTech remains one of our favorite long-term GARP stocks. With over 20
years of deep technology innovation, the firm has developed a best-in-class
product within the process industry supply chain space. While we are required
to play the 90-day report card game, the real AZPN story is about the prospect
of a multi-year increase in operating margins to a level that we believe could
approach 50% within five years. This isn’t the stuff for momentum investors, but
it is certainly a good path to getting rich slowly. For those less frenetic investors,
we believe AZPN absolutely deserves a place in their portfolio.
 Another solid quarter. FQ2 LTCV grew 13.3% y-o-y (ahead of our 12.0%
estimate) to $1.75B, annual spend of $356M (+11.3% y-o-y) was slightly
ahead of our estimate, and FCF of $45.2M ($0.48 per share) grew 34%
year-over-year and was well ahead of our $36.4M estimate. For those who
track revenue and non-GAAP EPS (both non-relevant metrics during the
firm’s model transition, in our view), AZPN beat by $9.8M and $0.10.
 Business color. AZPN introduced new head of sales Chris Dartnell, who
joins the firm from Honeywell. CEO Pietri reiterated that focus remains on
increasing suite usage among the firm’s core 350 customers and to leverage
a relatively new inside sales effort to add new mid-market accounts.
 Outlook: FCF guidance moves higher again. In what has nearly become a
tradition, management increased midpoint F2014 free cash flow guidance
by ~$8M. The firm continues to expect “double digit” LTCV growth,
however our point estimate is for 12.1% growth (up from 11.5%). We have
increased our F2015 FCF per share estimate to $2.00, which implies
normalized FCF margins in the low-40% range.

ServiceNow BUY Target Price $70

This is our 200o th post !

NOW : NYSE : US$57.60
BUY 
Target: US$ 70

COMPANY DESCRIPTION:
ServiceNow is a leading provider of cloud-based services that
automate enterprise IT operations — this includes a suite of
applications built on the firm’s proprietary platform that
automates workflow and provides integration between related
business processes. ServiceNow was founded in 2004, is
headquartered in San Diego, CA and has been public since June
2012.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Infrastructure
QUITE STRONG ACROSS THE BOARD. A COMPARATIVE VALUE IN HIGH GROWTH SOFTWARE. REITERATE BUY.
ServiceNow delivered outstanding results and the firm’s outlook was
similarly strong. This jibes with our broad fundamental take on next
generation software firms’ fundamentals – which we believe is strong, and
frankly, getting stronger. Nothing is cheap in this space, but ServiceNow, is
at least relatively inexpensive, and more importantly, we believe
ServiceNow is poised to become one of a handful of major platform firms in
this software cycle alongside others like Salesforce, Workday, Atlassian and
Splunk. Reiterate BUY.
 Another upside quarter. ServiceNow reported strong Q4/13 results with
revenue of $125.2M (+67% y-o-y) and FCF of $20.0M, which were
respectively $4.2M and $11.9M ahead of our estimates. Calculated
billings of $166.2M (+70% y-o-y) were $16.0M ahead of our forecast,
and the firm ended C2013 with a booked backlog of $875M, which is
up 59% y-o-y.
 Customer metrics. Average annual revenue per customer was $230k,
up 21% y-o-y driven by larger initial deals and user growth within the
customer base. NOW added 160 net new customers in Q4, up from 122
sequentially, bringing the firm’s total to 2,060, including 20% of the
Global 2,000. Subscription revenue retention was 96% and the firm
added seven new customers with ACV >$1M, up from 3 in Q3/13.
 Outlook: 51% revenue growth in C2014E as NOW continues to invest in
the face of big opportunity. On the heels of strong year-end bookings,
management set midpoint C2014 revenue guidance roughly $33M
ahead of our estimates. The firm plans to continue to hire aggressively
(targeting ~800 heads in total, and 300 in S&M in C2014), which will
have a negative impact on near-term operating margins. We trimmed
our FCF estimates

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.

Nuance Communications BOTTOM IN GROWTH DECLINES ?

NUAN : NASDAQ : US$15.99
BUY 
Target: US$22.00

COMPANY DESCRIPTION:
Nuance is a leading provider of speech recognition, dictation and imaging solutions to both businesses and consumers. It offers these solutions to call centers, healthcare companies and desktop and mobile device manufacturers.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Infrastructure
IT’S ALWAYS DARKEST BEFORE… AN AS-EXPECTED QUARTER, PERHAPS A BOTTOM IN GROWTH DECLINES.
As cathartic as it would be to scream and downgrade NUAN shares on what we
have been telling investors would be a middling quarter, the fact is that we
strongly believe this would be a classic sell-side move – to downgrade at the
bottom. We believe NUAN will look like CTCT 12-18 months from now – which
means that epic despondency will reverse to at least reluctant admission that
the firm has value. For those investors who are able to own stocks on that
duration, we believe NUAN shares are worth retaining if not adding to as the
consensus panics.
 An in-line quarter. While slightly below our high-end of the range estimates,
Nuance’s FQ4 non-GAAP revenue and EPS of $490M and $0.30 were in-line
with consensus. Total revenues declined (9%) organically in the quarter,
which brought F2013 organic growth to (3%). Operating margins ended the
fiscal year at ~28%, which was down from nearly 36% in F2012.
 Segment performance. Revenues declined on an organic basis in each
business unit, led by a 24% decline in the mobile segment as revenues
transition towards an on-demand model and some segment headwinds
persist. In Healthcare, the firm’s largest segment, revenues declined 2%
organically as NUAN successfully signed new customers for its Clintegrity
solutions, but noted continued EMR erosion of core transcription revenue.
 Outlook: mid-single digit growth and margin compression next year.
Guidance suggest F2014 revenue growth in the ~5% range and operating margins of ~22.5%, which is down 550 bps y-o-y. On the upside, Nuance will start to report bookings as the business continue to shift towards on demand revenue lines – bookings are expected to grow ~15% in F2014.

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