These days it might seem to be news when a growing B2B SaaS play actually withdraws its IPO. After all, the hit parade of IPOs and private placements in the enterprise space seems unstoppable. But on Friday, a company named Globoforce Group PLC which was slated to go public, did indeed pull its IPO citing unfavorable “market conditions”. Does this turn of events indicate an end to the market’s love affair with B2B SaaS plays? Or was there an issue more specific to Globoforce? Upon closer inspection, the answer appears to be Globoforce-specific.
On the surface, Globoforce appeared to push all of the right hot buttons. It is:
- In the HCM space
- SaaS Based
- Growing 25% per year over the past three years
- Almost $160 million in revenue with positive free cash flow
- Well established with a blue chip, global client base as the prospectus stated:
As of June 30, 2013, our client base consisted of more than 80 companies, with more than 1.7 million users located in more than 140 countries using our solution in 25 languages and dialects. Representative clients include: Abbott Laboratories, Celestica Inc., CitiCorp North America, Inc., Eaton Corporation, General Electric Company, IM Flash Technologies LLC, InterContinental Hotels Group, Intuit, Inc., JetBlue Airways Corporation, LSI Corporation, Premier Farnell Corporation and Symantec Corporation.
The way things are going lately, one would expect Globoforce to have a billion dollar valuation. And Globoforce was looking only for a $350 million valuation!
Why the disconnect? It seems there is at least one really big disconnect with the revenue of the business. Though the description sounds quite “SaaSy” according to the prospectus (buzzword alert!),
We are a leading provider of a cloud-based, social recognition software solution that organizations use to engage their employees worldwide to create alignment with values and advance company goals and culture. We achieved this leadership position through our innovative technologies, our ability to deliver a comprehensive solution to large, multinational firms, and our experience operating in the social recognition industry. Our Software-as-a-Service, or SaaS, platform enables employee-to-employee recognition that is broadcast socially and made visible throughout the organization. Our clients leverage the widespread employee adoption of our social recognition solution to elevate recognition to a strategic imperative that drives business results. In addition, the interactions between employees using our social recognition solution generate data that provides our clients with deep management insights about their talent and culture. Our growth has been driven by our clients’ ability to use our social recognition solution to increase employee engagement, improve employee retention and strengthen company culture.
the actual business appears to be more like a website where employees can redeem gift cards for prizes, along with some associated workflow, social elements, and reporting. More important, much of what could have been misconstrued to be “SaaS” revenue is actually the value of the gift cards themselves. The prospectus states:
We derive our billings primarily from recognition awards processed through our solution and associated transaction fees. The majority of our revenue is recognized when our clients’ employees redeem their awards through our global e-commerce rewards network, primarily for gift cards, and we deliver the redeemed item.
For instance, of the $84 million in revenue in the first half of 2013, $75 million of this revenue was “redemption revenue” and only $9 million was solution and services revenue. The cost of the redemption revenue was $65 million (86% of revenue)–definitely not a SaaS revenue stream. The SaaS revenue is only part of the $9 million (which includes implementation). And that true SaaS part is not growing quite as fast as the redemption revenue. Bottom line: Globoforce is a small SaaS business with a nice gift card redemption business attached. Still interesting, but not what investors were apparently hoping for.
To be fair, Globoforce did not, in any way, hide this fact and do they not appear have been looking for a SaaS multiple on the total revenue. Still it may have looked like “sleight of hand” to investors. Finally, one company, GE, accounts for almost 33% of Globoforce revenue, so there is customer concentration risk as well.
It’s too early to call the end of the B2B SaaS hype based on the withdrawal of this IPO. In the end, the only real lesson in this one is that today’s investors do apparently read the prospectuses! I’m not sure that was always the case in 1999!