The year ended well for our SaaS portfolio companies, and particularly well for our online marketing and advertising platform companies. While Europe remained soft, NA more than made up for it. All of online advertising platform companies exceeded their budgets, in some cases by as much as 40%. We also saw margin expansion as several of our SaaS companies were able to continue raising license prices. However, these companies continue to hire aggressively (sales, engineering, customer support) as they try to keep up with the accelerating adoption of SaaS. Based on the end of the year activity it became obvious that, as I had written, the enterprise buyers were holding back in previous quarters and, once again, flushed their budgets during 4Q. The buying activity and our interactions with solution buyers led us to conclude that 2013 is starting with strong optimism around online marketing solutions, as well as general SaaS solutions for the mid-upper enterprise. We are more circumspect about the 2013 application budgets of global enterprises where we, and investment analysts from Morgan Stanley, Piper Jaffray and other banks, continue to see very modest YoY increases. We expect 2-2.5% for the year for the global enterprise but 4-6% for the mid-upper enterprise and over 10% for online marketing and advertising solutions, in particular.
Based on the results announced to date by the public SaaS companies we monitor, e.g., Netsuite, Demandware, ServiceNow, Jive, Cornerstone OnDemand, Qualys (Trident portfolio company) their performance during 4Q12 remained strong, in-line with analyst expectations. Bazaarvoice and Brightcove less so. Valueclick and Millennial Media, two public online advertising platform companies we follow, announced strong 4Q12. The public SaaS companies continue to be impacted by the global macro environment and the decreasing IT spending. We continue to see moderating revenue growth for these companies, compared to the explosive growth we had seen in the past. Based on the announced results, I expect that for 2013 these companies, and our corresponding portfolio companies, will show consistent YoY growth in the range of 25-50%.
Overall, the number of M&A technology transactions, and the value of those transactions, during 2012 were slightly down from 2011, but cloud computing in general attracted more of the acquirers’ attention. However, 4Q12 was another active quarter for SaaS M&A. Oracle bought Eloqua, as it continues to bolster its marketing technology solutions portfolio, Synchross bought Newbay from RIM, and Citrix's acquisition of Zenprise.
In 4Q12 we invested in Fruition Partners. This is our first investment in a tech-enabled services company that has built its business around a SaaS solution, in this case ServiceNow’s solution. We were impressed by Fruition’s growth trajectory, capital efficiency, and differentiated IP that is built on top of ServiceNow’s application.
Positive aspects of our SaaS portfolio’s performance:
- Strong license revenue growth of 30% QoQ for the online advertising platform companies, and 15-20% of the remaining SaaS companies. Our portfolio companies saw contracts with higher ARR (due to broader corporate deployments) and fewer multi-year contracts (which we liked). During the quarter our companies also saw less pressure for discounts, an issue that was a concern in 3Q12. 4Q is typically the strongest quarter for the advertising platform companies, and this year was no exception. Based on our direct checks regarding advertising budgets for 2013 we are starting the year being very optimistic.
- Steady renewal rates (85-90%) with strong upsells in 15-20% (similar to last quarter) of the renewing customers, with the exception of social application companies where, as I had also written when I was reporting the 3Q12 results, we continue to see higher than expected churn (15% MRR churn) by mid-market clients.
- Sales pipelines grew well, indicating continued interest in SaaS applications in general and online advertising platforms. We see continued interest for solutions for the CMO and also in data-driven solutions.
- During the quarter our SaaS portfolio companies saw increasing interest for partnerships by large IT vendors. Many of these partnerships are driven by large enterprise customers that want to see SaaS applications, particularly social business applications, integrated into larger enterprise platforms, e.g., CRM, HRMS, eCommerce. We expect that these partnerships will start taking shape during the 1H13.
Negative aspects of our SaaS portfolio performance (none of these are new compared to what we reported in the past):
- Higher than expected revenue and customer count churn in social business application companies. We see this as the result of customers having difficulty establishing the ROI for many applications of this type. It also follows a more general, and important to follow, trend we observed during 4Q12 regarding social in the enterprise. In particular, we saw that enterprises started merging their social interaction departments/organizations, which during 2011 and 2012 operated as standalone entities, into their marketing departments, presumably to better integrate their overall marketing efforts and thus try to achieve better ROI from these efforts.
- Lead generation and nurturing remains uneven. Lead generation is becoming more effective due to the strong interest in SaaS solutions. However, nurturing these leads and converting them into sales qualified opportunities still requires too much field sales involvement.
We have been pleased with the end of the year performance of our entire SaaS portfolio and particularly our advertising and marketing platform companies. 2012 was a transformative year for many of them as they entered the growth stage of their lifecycle, aided by the overall market’s growing appetite for SaaS solutions.