Description

Event driven opportunity. Reuters reported that Zuora (ZUO) has hired Qatalyst Partners to explore a potential sale after receiving acquisition interest from potential suitors. Furthermore, Reuters reported that founder/CEO Tien Tzuo and other large shareholders may participate in the transaction. ZUO is an enterprise-grade software company whose shares currently trade at multiples substantially below those of recent comparable transactions. We see many similarities to the recent sale process of Alteryx (AYX) to private equity. We believe a sale as the most likely outcome in 3-6 months, with a potential deal price of $13-15 per share (4.5-5.5x annual recurring revenue (ARR)), or 40-60% upside from here. If no deal transpires, we see downside protection for the stock given its current low valuation and improving cash flow outlook.

Company description

ZUO provides leading software solutions for billing, collections, and revenue recognition. Its founder/CEO Tien Tzuo is best known for building Salesforce’s internal subscription billings platform during his time there and later for writing the business book “Subscribed” in 2018. The company primarily targets large enterprises that sell subscription services across multiple industries, with customers including Zoom, ABB, New York Times, and Cisco. 

Situation overview

Shares of ZUO are currently trading at depressed multiples of ~3x ARR and ~17x NTM free cash flow because of inconsistent execution and multiple quarters of disappointing results. ZUO has been written up four times in VIC as both a long and a short. Sufficed to say the stock and its founder/CEO are somewhat polarizing in the investment community. The company has long been viewed as an attractive asset for both strategic and financial acquirers given its enterprise focus, the mission criticality of its applications, and high customer retention rates. However, investors have always believed that Tzuo, with his super-voting Class B shares, is unwilling to sell. 

We believe this time is different and Tzuo is finally ready to sell the company or take it private. We think there are several factors driving Tzuo’s decision to consider a sale. First, shares of ZUO are down more than 30% from its IPO price of $14 per share in 2018. The company has experienced both execution issues and management turnover. The only constant at the company throughout its history is the tenure of its CEO. We believe Tzuo has faced constant pressure from investors. In fact, activist investor Praesidium filed a 13D in February 2023. Second, Tzuo owns 43% voting interest via Class B shares versus 7% economic interests in ZUO, but those Class B shares will automatically convert to Class A shares in April 2027. He will soon lose his super-voting power. It’s no secret what could happen next to an unpopular CEO post-conversion (see former founder/CEO Jeff Lawson’s recent exit at Twilio). Third, no one hires Qatalyst Partners to stand still. 

Why we think a sale is likely near-term: Qatalyst’s Alteryx Playbook

The most obvious answer is the publication of the Reuters article, which we believe is credible. The reporter Milana Vinn previously broke the news of potential sales of New Relic and Alteryx a few months before deals for those two companies were consummated in 2023. We think the ZUO setup mirrors the recent deal process of Alteryx, and we expect a sale could come soon. We’ve posted the initial Reuter articles on potential ZUO and AYX deals in Appendix A and B below. While we acknowledge there have been a few leaked software deals that have yet to transpire, we believe the striking similarities in the details of the two articles, along with an appealing transaction size of ~$2 billion, make a potential ZUO deal more likely.

• Both companies attracted takeover interests after valuation declined on the heels of disappointing earnings reports.
• Qatalyst Partners served as the financial advisers for both sellers.
• Both companies have founders with super-voting powers via a special class of shares. Investors had concerns whether these super-voting rights would prevent the companies from being sold.
• Both companies’ super-voting class of shares were set to convert to common shares soon.
• Reuters specifically reported the willingness of both founders and existing investors to participate in a transaction. We think the leakers intended to assuage investor concerns that no deal would be approved by founders or large investors.

In Alteryx’s proxy document, it was revealed that the company engaged Qatalyst in April 2023 to facilitate discussion with two private equity firms. On August 23, 2023, Insight Partners, a large holder of Alteryx with a board seat, contacted Qatalyst to express interest in acquiring Alteryx. On September 6, 2023, Reuters reported that Alteryx was exploring a sale. On December 18, 2023, Clearlake and Insight jointly publicly announced the acquisition of Alteryx for $48.25 per share in cash, or 60% premium to the $30.39 per share price on the last full trading day prior to the publication of the Reuters article.

We think Qatalyst is running the same playbook at ZUO.

Valuation

We believe a deal for ZUO could be valued at $13-15 per share based on 4.5-5.5x annual recurring revenue (ARR), or 40-60% upside. ZUO most recently reported ARR of $403 million, representing growth of 10%. We apply the EV/ARR multiples of three recent software transactions of similar size and growth profile (see Table 1). 

Table 1: Recent Software Transactions

Risks

ZUO does not receive an offer it deems attractive and remains independent. If no deal transpires, we see downside protection for the stock given its current low valuation and improving cash flow outlook.

Appendix A: Reuters article on Zuora on April 17, 2024

Billing software firm Zuora explores sale after takeover interest, sources say

By Milana Vinn

NEW YORK, April 17 (Reuters) - Zuora, which makes subscription management software for businesses, is exploring options that include a sale after receiving acquisition interest from potential suitors, according to people familiar with the matter.

Redwood City, California-based Zuora, tapped investment bank Qatalyst Partners to advise on discussions with potential acquirers, which include private equity firms, the sources said.

Zuora's board has formed a special committee comprising independent directors to handle the company's discussions on a deal to allow for the possibility that its CEO and founder Tien Tzuo and some other large shareholders may participate in the transaction, one of the sources said. According to recent company filings, Tzuo holds about 43% of Zuora's total voting rights through a special class of shares.

The sources cautioned that there is no certainty that any deal will materialize and asked not to be identified because the deliberations are confidential.

Zuora's shares jumped more than 15% on the news, giving it a market capitalization of about $1.5 billion. Zuora has lost more than a third of its value since the company listed its shares on the stock market, as it faced stiff competition from larger players in the industry.

Zuora and Qatalyst did not immediately respond to requests for comment.

Founded in 2007, Zuora offers billing software and other subscription management tools to enterprise customers, which include cloud computing firm Nutanix and Siemens Healthineers.

In early 2022, Zuora raised $400 million through convertible notes and warrants from buyout firm Silver Lake, which currently holds a board seat at the company. Silver Lake is considering whether it will bid for Zuora or be part of a potential deal should there be a transaction, the sources said.

Silver Lake did not immediately respond to requests for comment.

Earlier this year, Zuora said it planned to lay off about 8% of its workforce as part of a broader company-wide cost-cutting drive.

Appendix B: Reuters article on Alteryx on September 6, 2023

Business software company Alteryx explores sale

By Milana Vinn

Sept 6 (Reuters) - Alteryx Inc, a data analytics software company with a market value of $2.5 billion, has been working with an investment bank to explore a potential sale after attracting takeover interest, according to people familiar with the matter.

Fierce competition from big rivals such as Microsoft Corp and Oracle Corp, as well as setbacks in winning new business, have suppressed Alteryx's valuation and made it an acquisition target. Its shares had lost almost half their value in the last 12 months prior to news of its exploring a sale.

The Irvine, California-based company is being advised by investment bank Qatalyst Partners on its discussions with potential acquirers, which include private equity firms, the sources said.

Insight Partners, an early investor in Alteryx which has retained a 1.5% stake in the company and representation on its board of directors, has recused itself from the sale deliberations because of its interest as a potential acquirer, one of the sources said.

Alteryx co-founder and Executive Chairman Dean Stoecker, who owns 11.5% of the company but controls it through dual-class shares that give him 51% of all outstanding shares' voting power, is considering the possibility of rolling his stake in any deal, that source added.

Expressions of interest that Alteryx has received thus far have not met its valuation expectations, and the company may decide against any transaction, the sources said, requesting anonymity because the matter is confidential.

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