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Hunting the Software Jungle: From Atlassian to Zuora

Kevin Cook

If you are a technology investor who thinks all the big gains are behind us as giants like Apple, Amazon, Microsoft, Cisco, Alphabet and Facebook become slower engines of growth, I have two words for you: think again.

And, think software.

Right now I'm tracking over 40 software companies from a dozen industries that I want to invest in and trade for the next decade. Buying and holding some of them could prove to grow my wealth just like some of those giants.

Why the big focus on software?

Here's how I explained it in my April video and article 2 Software IPOs from 2018 To Buy Now...

Why Software is Still, More Than Ever, Eating the World

In August 2011, Marc Andreeson (co-creator of the Mosaic Internet browser and co-founder of Netscape, which later sold to AOL for $4.2 billion) wrote a piece in the Wall Street Journal titled "Why Software is Eating the World." Here was his opening...

This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I’ve observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.

In short, software is eating the world.

More than 10 years after the peak of the 1990s dot-com bubble, a dozen or so new Internet companies like Facebook and Twitter are sparking controversy in Silicon Valley, due to their rapidly growing private market valuations, and even the occasional successful IPO. With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”

I, along with others, have been arguing the other side of the case. (I am co-founder and general partner of venture capital firm Andreeson-Horowitz, which has invested in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare, among others. I am also personally an investor in LinkedIn.) We believe that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.

More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

(end of excerpts from Marc Andreeson's 2011 WSJ essay)

Would that I had really understood what Marc was talking about even 5 years ago, I would be a much richer man.

But the good news is that what he's talking about, and that he has continued to successfully invest in, is still true and still powerful for wealth-creation right now.

I will try to sum up this very big idea: Since software is the brains of computing and specialized problem-solving/data manipulation, there are nearly infinite brains which can be created to run our world and all its parts.

Besides that, software code has always broken the bounds of time and space by being invisible, easily transferable, and ideal for automation. And now with cloud computing advances and hyper-speed broadband/wireless networks, software applications are more mobile and real-time than ever before.

Think about that. Meaningful hardware inventions and innovations will come and go -- from computers and cars to furniture and fashion -- but the Software possibilities are endless, just like songs, stories, and scientific experiments.

Physical things demand and consume time and space, while the software instructions that control many of them are rarely limited by time and space, and may actually seem to create more of these dimensions for us in our daily lives.

In short, Software is making companies and individuals more and more productive, at lower and lower costs. And that is what keeps driving the Technology Super Cycle of this decade.

The Subscription Economy Grew 300% Since 2012

In the video that accompanies this article, I focus on a handful of rising stars on my software radar like Zuora ZUO, Atlassian TEAM, and Veeva Systems VEEV, a software company dedicated to serving biopharma companies with cloud-based systems and tools for tracking and organizing clinical trials and other drug data.

Zuora, by their own description, creates cloud-based software on a subscription basis that enables any company in any industry to successfully launch, manage, and transform into a subscription business.

In short, Zuora builds a platform and tools that allow other enterprises to join the subscription economy.

Robert DeFrancesco over at Forbes put together a good, quick profile of ZUO last week. Here was his intro...

Zuora Champions The Expansion Of The Subscription Economy

Zuora participates in the cloud-based billing and revenue recognition market, which could be worth as much as $9 billion in 2022. The company’s software platform, a system of record for subscription management and revenue automation, is an alternative to legacy enterprise resource planning (ERP) systems, which tend to be ill-equipped to handle the dynamic nature of subscription-based business models.

Zuora continues to perform well at the enterprise level, as more than 85% of its annual recurring revenue is generated by 526 customers (up 27% year over year) with annual contract value of at least $100,000. In FY’19, Zuora signed more than 30 new deals worth $250,000+, an increase of nearly 50% from the prior year.

(end of excerpt from Forbes piece)

Wix and SaaS Accounting Jiu-Jitsu

In his article, DeFrancesco also describes an area of many subscription-based enterprises -- especially SaaS (software-as-a-service) providers -- known as Collections. This goes beyond typical accounts past-due purviews. Zuora has a product called Collect that automates the handling of recurring collections.

This is an extremely important function of any subscription model because handling the initial and recurring collections of monthly or annual fees in a smooth manner -- easy for the customer to pay in multiple ways, often automatically, without service interruption and with swift, friendly resolution of payment problems -- could be worth many millions of dollars for small and mid-sized companies.

The collections function is so important for Wix.com WIX, they break it out as a stand-alone number almost as important as their top-line revenues. I first noticed this as I did some research on the company for my recent Bear of the Day article, that based off of their Q1 earnings report, that their Collections exceeded their revenue for the quarter by 15% at $200.4 million vs $174.3 million.

And in Q1 2018, Collections were $159.7 million vs $137.8 million in revenue.

This probably means a mix of two things: (1) that even though Wix charges upfront for services, they still don't collect the majority of revenues right away due to failed credit card payments/disputes/refunds, and/or (2) collections are running several quarters ahead of new “revenue” which they don't get to book until services are rendered (on a pro-rated basis).

I'm no accounting whiz, but I think the latter category dominates here. In other words, these subscription SaaS companies like Wix are masters at collecting money up-front that they can't call revenue until services are delivered.

For instance, if they have a special deal where they charge $200 annually upfront for a basic website functionality with ecommerce services, etc., they can "collect" that full amount today but they can't book it as revenue unless incrementally or at some later point in the subscription year.

Recognized vs deferred revenue is not a new concept of course, as many industries have long-term recurring contracts and unique book-to-bill conventions. But with all the new software animals in the jungle, it looks like this type of accounting jiu-jitsu is becoming an art in the world of subscription SaaS.

Be sure to watch the video that accompanies this article to learn more about Atlassian TEAM and their SaaSy partner in all-things-productivity, Slack, which is expected to launch a direct listing of their soon-to-be-public company with the symbol WORK. Together they probably foster some powerful TEAM-WORK.

I also mention Workday WDAY in HR software and Shopify SHOP in online retail as two other great new hybrid PaaS/IaaS (platform-as-a-service/infrastructure-as-a-service) companies. I should have bought SHOP, the "lil Amazon" for small web merchants, when I stared at it near $100 and then again at $200.

And I just can't bring myself to pay more than 15X next year's projected sales of $2 billion now. So please, please convince me I'm wrong so I can just bite the bullet and own SHOP forever!

Disclosure: At the time of publication, I was long ZUO and short WIX and TEAM for the Zacks TAZR Trader portfolio.

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Shopify Inc. (SHOP) : Free Stock Analysis Report
Veeva Systems Inc. (VEEV) : Free Stock Analysis Report
Workday, Inc. (WDAY) : Free Stock Analysis Report
Atlassian Corporation PLC (TEAM) : Free Stock Analysis Report
Wix.com Ltd. (WIX) : Free Stock Analysis Report
Zuora, Inc. (ZUO) : Free Stock Analysis Report
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