Adaptive Insights | S-1 Breakdown
Company Overview
Adaptive Insights, a leading provider of cloud-based business planning software, filed for a $100M IPO. The company plans to trade on the NYSE under the symbol “ADIN” and Morgan Stanley is leading the transaction. There has been a flurry of SaaS/B2B IPOs this year Adaptive is now the 11th company to file. The company’s mission is to “free people to do their best work and to empower teams to better manage their business”. Adaptive’s product, the “Adaptive Insights Business Planning Cloud” enables companies to effectively forecast their business, analyze performance, share dashboards, and generate management reports. They also have a product where companies can evaluate performance vs. plan and test different modeling scenarios. The market today, and in particular mid-market companies where Adaptive has focused, lack software to help finance/FPA (financial planning and analysis) teams forecast and model their businesses. They have historically relied on Excel, which is manual and error-prone. As of April 30, 2018, Adaptive had 3,800+ customers located across 50 countries. The company was founded in 2003 under the name Visus Technology and changed their name to Adaptive Planning in 2003, and to Adaptive Insights in 2014. The company had 498 FTEs (full-time employees) as of January 31, 2018, and is based in Palo Alto, CA.
Company Milestones
Summary Metrics and GTM
Adaptive did $106.5M of total revenue in FY’18 (January 31st fiscal year end), up 30% from $81.8M in FY’17. While the company disclosed they have 3,800+ customers as of April 30th (Q1'19), they don’t disclose other GAAP financials later than Q4'18. Almost 90% of Adaptive’s revenue is subscription-based, and the company ended Q4'18 at $104.8M of implied ARR (quarterly subscription revenue * 4), up 38% YoY. The company is still losing money and had a (34)% GAAP operating margin loss in the most recent quarter. For FY’18, it was a little lower at (38)%. Their free cash flow margin improved in FY’18 to (19)%, up from (47)% in FY’17. Some other stats pulled from their S-1 below;
- The company has historically focused on selling and marketing solutions to mid-market customers and have only recently made focused investments in selling and marketing to enterprise customers, which they define as organizations with more than 2,000 employees.
- For example, for fiscal 2017 and 2018, they had 420 and 468 enterprise customers that contributed $20.1 million and $24.7 million in total revenue, or 25% and 23% of total revenue, respectively.
- The company defines the enterprise market as organizations with more than 2,000 employees, the mid-market as organizations with 250–2,000 employees, and the small and medium-sized business or SMB market as organizations with <250 employees.
- In fiscal 2018, enterprise customers accounted for 23% of total revenue, mid-market customers accounted for 43% of total revenue, and SMB customers accounted for 34% of total revenue.
- No single customer represented more than 1% of total revenue in FY 2016, 2017, or 2018, and the aggregate total revenue from the 10 largest customers was approximately 4%, 5% and 3% of total revenue in fiscal 2016, 2017 and 2018, respectively.
- The company currently derives and expect to continue to derive substantially all of their revenue from Adaptive Insights for Finance (the company recently launched a sales planning module).
- Adaptive has a global partner ecosystem, which includes over 150 software solution providers, ERP vendors, systems integrators and regional consulting firms. In FY’18 the company generated 37% of total revenue through their partner network.
- International revenue represented approximately 25% of total revenue in fiscal 2018.
- In the software vertical, 41 of the Forbes Cloud 100 companies use Adaptive.
- In FY’18, the company’s dollar-based gross retention rate was 93%. Their dollar-based net retention was 98% in FY’18 and 102% in FY’17. This number is mostly dependent on the number of seats their end-customers buy.
Adaptive sells through direct sales and through their partner network. Contracts are 1 to 3 years, with the majority being 1-year deals. They price mainly based on the number of seats, and also the market segment and the number of solutions a customer is buying. Adaptive has separate sales teams for each segment and more recently invested in a field enterprise team. The mid-market is field and inside sales, and SMB is all inside sales. Adaptive is also launching new verticals and in FY’19 and adding business services and biotechnology. The company discloses their average subscription revenue / customer, or average ACV (annual contract value), which was $27K in FY’18, up 17% from $24.1K in FY’17.
Product
The company’s main solution is called The Adaptive Insights Business Planning Cloud and enables companies to monitor, analyze, and report on financial and operational performance and more recently sales. Customers can build plans at the corporate level to individual divisions and it all rolls up into one model. While the main use cases are for finance, the company calls out a few customers using the product in other ways including route profitability analysis by a major airline, marketing contract analysis by a large consumer goods manufacturer, and store level profitability by a restaurant chain.
In 2018 the company released a product focused on sales planning and analysis (sales capacity, quota, and territory planning and analysis). The solution has a few different components;
- Data integration framework: Integration layer that automates data integration between ERP, CRM, HCM, and other systems. The company offers open APIs or customers can build connections on their own.
- Modeling, Reporting and Analytics Engine: In-memory engine for modeling, reporting, and analytics. Customers can create drag-and-drop reports without batch processing.
- User Interaction: Sheets, Dashboards and Reports, and Collaboration: The UX of the solution where users interact with the product through their Excel plug-in or through their SaaS offering. It offers Sheets, where users interact and model out plans, On-demand dashboards and reports where users create and share reports, and their OfficeConnect product integrates with Microsoft Excel, Word, and PowerPoint to enable formatted documents such as board presentations. The product also has a collaboration layer for workflow and task management.
Market Opportunity
The company cuts their market opportunity in a couple different ways. Most companies still rely on Excel and other manual processes and the company took the total amount of companies with over 100 FTEs in 2017 in North America, Europe, Asia Pacific, and Latin America from S&P, and multiplied it by their average ACV. That number came out to $12.5B.
Moreover, IDC estimates the global market for Enterprise Performance Management, or EPM, is expected to grow from $4.2B in 2018 to $5.0B by 2021 (includes on premise and SaaS). The market for SaaS EPM is smaller at $830M in 2018, but growing at a CAGR of 20% through 2021. Given Adaptive focuses on the mid-market and SMBs (almost 80% of their revenue was from these segments this past year), they will surely focus investors on the large and untapped opportunity in that market to replace Excel spreadsheets.
Competition
Corporate or Enterprise Performance Management is not a new market and there is significant competition, particularly in the enterprise. The company calls out IBM, Oracle’s Hyperion and Oracle Planning and Budgeting Cloud Service, SAP SE, Workday, Anaplan, and Host Analytics. Other smaller companies include Centage, Prophix Software, and Vena Solutions. For Adaptive’s market, Excel is still likely the primary competitor. It also wouldn’t be surprising to see their competitor, Anaplan, file publicly soon given their last round of funding and reported $1.4B valuation in late 2017.
Investors and Ownership
According to Pitchbook, the company has raised $176M to date from investors including JMI, Norwest, ONSET Ventures, Bessemer, CVP, Monitor Ventures, Information Venture Partners, Salesforce, and others. 5%+ pre-offering VC shareholders include ONSET (17.9%), Norwest (16.5%), Bessemer (11.7%), Information Venture Partners (11.2%), CVP (8.5%), JMI (6.4%) and Monitor Ventures (6.3%). The company raised their last round, a series G of $75M from JMI, Norwest, and ONSET in June of 2015 at a $400M pre-money valuation, according to Pitchbook.
NetSuite Revenue
It’s worth calling out that after Oracle acquired NetSuite Adaptive terminated their reseller partnership with NetSuite, requiring all the contracts to be direct with Adaptive. While it was probably a good channel for Adaptive, Oracle has competing products. They had a 50/50 revenue share agreement with NetSuite and when renewals came around Adaptive took all the contracts directly, resulting in a non-recurring increase of revenue. It amounts to a few million dollars but worth calling out. They stated “For fiscal 2018, renewals from these customers that previously subscribed to our solutions through NetSuite increased our subscription revenues by $2.2 million, our subscription growth rate by 3.2% and our total revenues growth rate by 2.7% relative to the growth rates that would have been obtained without the increase in the percentage of contract value recognized by us”.
Financials and Other Metrics Outputs
Adaptive’s implied ARR grew 38% last quarter YoY, slightly faster than subscription revenue growth in FY’18. The company does not disclose quarterly customer counts or any cohort data unfortunately, but does have a few metrics that aren’t usually disclosed like “calculated lifetime value”, which was 3.8x in FY’18, an “acquisition efficiency ratio” that was 1.9x in FY’18, and a “renewal efficiency ratio”, which was 0.11 in FY’18. More on those below. Their net dollar retention rate was 98% in FY’18, while gross dollar retention was 93%, implying they likely need more levers to increase the net dollar retention number over 100%. They are moving further up market, expanding verticals, and launching new products they can upsell such as the sales planning module. Adaptive discloses only 5 quarters of historical quarterly financials, making it harder to find trends in their CAC, but looking at their CAC ratio / months to payback (implied net new ARR * gross margin / sales and marketing spend of prior quarter) they had a 42-month-payback median for the past 5 quarters, which is on the higher end as you can see here. The company has $30.1M in cash. Outputs of other financials and metrics are below;
Historical P&L & Metrics (000's)
Quarterly Subscription Revenue ($M)
Implied Ending ARR ($M)
Adaptive has added $28.9M of net new ARR over the past year and $8.4M in the last quarter.
Customers and Average Subscription Revenue / Customer
Dollar-based Net Retention Rate
GAAP OpEx as a % of Revenue and GAAP Operating Margin
Customer Lifetime Value, Acquisition Cost, and Renewal Efficiency
Adaptive doesn’t disclose cohort data but has a few other ratios, which are below. The company’s acquisition efficiency is improving while their renewal efficiency slightly.
LTV: We estimate that, for fiscal 2018, the calculated lifetime value of our customers was 3.8 times the associated cost of acquiring them. We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by dividing (x) the product of the subscription gross margin in the current year multiplied by the difference between the net new subscription revenues for the current year compared to the prior year multiplied by the inverse of the estimated dollar-based gross retention rate for the current year by (y) the average sales and marketing expense incurred in the current and preceding year.
Acquisition Efficiency Ratio: We define our acquisition efficiency ratio as (x) the average sales and marketing expense incurred in the current and preceding year to acquire new subscription revenues, divided by (y) the annual value of the subscription revenues of the contracts acquired in the current year. We have improved our acquisition efficiency ratio over time. For fiscal 2018, our acquisition efficiency ratio was 1.9, compared to 2.3 in fiscal 2017 and 2.5 in fiscal 2016.
Renewal Efficiency Ratio: We also measure our renewal efficiency ratio, which we define as (x) the average sales and marketing expense to renew customers in the current and preceding year, divided by (y) the annual value of the subscription revenues of the contracts renewed in the current year. For fiscal 2018, our renewal efficiency ratio was 0.11, compared to 0.11 in fiscal 2017 and 0.10 in fiscal 2016.
Annual Cash Flows (000's)
Quarterly P&L (000's)
2018 High-Growth SaaS ARR Comparison ($M)
I thought it would be interesting to look at Adaptive vs. the other SaaS/B2B IPOs this year with regard to their implied ARR (quarterly subscription * 4). As you can see, Adaptive is actually the smallest company to file this year but is growing at a similar median rate.
Valuation
Forward revenue and likely NTM (next-twelve-months) revenue will be the primary valuation methodology for Adaptive given the company is growing quickly and still losing money. The output below uses NTM (next-twelve-months) revenue as a proxy based on an illustrative range of revenue growth rates. There’s also an ARR multiple table based on other high-growth public software companies.
While Adaptive grew their subscription revenue almost 40% YoY in their most recent quarter, the company just passed the $100M implied ARR mark, so smaller than other companies that have gone public this year. Additionally, while Adaptive is increasing their average ACVs YoY, they still have work to do on improving their net dollar retention, which was below 100% last year. It seems they plan to do this by moving further up-market and launching new products, like their sales planning module. Moreover, their plan to profitability will be critical for the company as with any high-growth SaaS company at IPO. While they haven’t made it to unicorn status in the private markets, they may do so as a public company — congrats to the company and team.
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