How To Get Your Public SaaS Company Repriced

Morning Markets: I’m playing hooky from the work I’m supposed to be doing, so let’s talk about repricing SaaS companies. Take a walk with me.

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Pretend you are a SaaS company. And you have a pretty ok valuation. Nothing crazy, mind, you aren’t going to be worth as much dollar-for-dollar of revenue as Zoom say, or even Slack will be once it debuts. But you’re a healthy SaaS company with a brand and a publicly traded stock.

Good job, it’s hard to reach this point. Most SaaS companies fail far before, so you’re a survivor. And you are worth a few billion dollars. That makes you a success as well. There have been articles written about you. Maybe your CEO has written a book. Or been on a hundred stages.

But then something bad happens. In one day, one moment, the stock market cuts your valuation by double-digit percentage points. It’s brutal, harsh, and a surprise. Things had been going so well!

Putting our little game aside, this has actually happened three times this week. Let’s explore why. The lessons here are warning signs for startups. This is what you don’t want to do once you go public.

Box, Zuora, And Pivotal

You’ve heard of the three companies: Box, Zuora, and Pivotal.

Aaron Levie, Box’s CEO, is a famously active executive which helped make his company far better known than it otherwise might have been. And that’s not a diss, nearly no one can make enterprise productivity and file storage hot. Levie actually pulled that off during the later-quarters of his company’s pre-public life.

Zuora is a stranger cookie. The firm is a SaaS company that powers SaaS companies. And that’s jolly good, really. The firm is a veteran of its space, and while it might not be as well known outside of tech as Box and Levie, it’s a name inside of the industry.

And Pivotal is a company that helps other companies use and manage clouds. As fewer companies want to build out their own server footprint, companies like Pivotal help firms use the cloud more intelligently. At least, that’s the idea.

So, what happened to each of our companies? Here’s the scorecard of their respective share prices after their results came out:

• Zuora: -29.7 percent on May 31 2019
• Box: -14 percent on June 4, 2019 (before recovering in later trading)
• Pivotal Software: -41 percent on June 5, 2019

We’re keeping Box as an example even though it recovered somewhat quickly as the initial market response to its earnings report meets our criteria. Here’s what each company did to garner the shocks, according to contemporaneous coverage:

Silicon Valley Business Journal on Zuora’s earnings report:

The San Mateo company’s stock dropped [to] $14.72 after it said it expects revenue for 2020 to be between $268 million and $278 million — short of the $292 million expected by Wall Street analysts.

CNBC on Box’s earnings report:

Box lowered its outlook for the year, leading to a sharp drop in the stock price. Box said it expects revenue for full year fiscal 2020 of between $688 million and $692 million, well short of the average analyst estimate of $702 million, according to Refinitiv.

CNBC reporting on Pivotal Software’s earnings report:

Pivotal […] lowered its full-year revenue guidance and now expects sales of $756 million to $767 million, well below the Refinitiv consensus estimate of $803 million.

The theme is pretty simple. If you are a SaaS company that has long been valued on a hybrid of revenue quality (high-margin, recurring revenue) and growth, losing one of your two arguments in favor of your valuation is painful. To see three of these in such quick succession underscores the situation; this can happen to anyone, regardless of where they operate in the SaaS universe.

Illustration: Li-Anne Dias.