New Cloud-Software Firms Take Off

Dot com valuations for horizontal applications plugging the operators gaps within fortune 500 companies that are not filled by the likes of oracle and sap etc. Aivars Lode avantce

New Cloud-Software Firms Take Off

By

Spencer E. Ante Updated March 4, 2014 7:53 p.m. ET

Salesforce.com Inc. CRM +2.57% pioneered the cloud-software business and is valued at almost $40 billion. Now a second wave of more specialized online software companies is starting to take off and command rich multibillion-dollar valuations that may be hard to sustain.

The companies have unfamiliar names like Veeva SystemsInc., VEEV +5.03% Cvent Inc., CVT +0.41% and DocuSign Inc., and are tackling specific industries such as health care and hospitality or slices of the market such as marketing and project management.

WSJD is the Journal's home for tech news, analysis and product reviews.

• To Connect the World, It's Drones vs. Balloons

• New Microsoft CEO Culls Top Ranks

• Augmented Reality Is Gaining Traction

• Behind the Preplanned Oscar Selfie: Samsung's Ad Plan

"The market is large enough that you can sell into one vertical," said Bryan Schreier, a partner at Sequoia Capital, which has financed cloud software companies Dropbox Inc. and RingCentral Inc., RNG -1.81% among others. "These companies have a long way to grow."

The rise of niche providers could crimp the growth of big software makers such as Oracle Corp. ORCL +2.34% ,SAP AG SAP.XE +1.86% , Salesforce.com andInternational Business Machines Corp. IBM +1.18% , while presenting a larger threat to company-built software or programs from lower-tier players that have been slow to shift to the Internet.

"We believe there is a great white-space opportunity in delivering apps and infrastructure to specific industries and verticals," wrote Wells Fargo Securities analyst Jason Maynard in a recent report naming "industry clouds" as one of the top 10 software trends of the year.

Unlike Salesforce.com and Workday Inc., WDAY +2.62%which offer one-size-fits-all software, some of the specialized providers are profitable and have better margins since they don't have to spend as much on sales and marketing. But some customers warn of potential problems with future growth, saying smaller companies providing industry-specific software could have trouble meeting the needs of global clients.

Historically, investors shied away from financing niche players because they thought the markets were too small. But in recent years these companies have taken off as the technology has become easier to use and cheaper, broadband Internet service has become pervasive, and customers are more open to using cloud software. Their business models are also attractive to investors, requiring customers to pay a low but recurring monthly fee.

Last year, a dozen cloud software companies such as pharmaceutical software maker Veeva Systems and event-planning software maker Cvent held public offerings, posting an average return of about 50%, according to IPO investment adviser Renaissance Capital.

These companies are trading at ultra-high valuations. Veeva Systems, which is valued at more than $4 billion, trades at about 158 times expected earnings for 2015, while Cvent and its near-$2 billion market value trades at nearly 400 times expected earnings. Salesforce, meanwhile, has a multiple of around 90 times expected earnings.

Several more cloud software companies are in the IPO pipeline, including payroll processor Paylocity Corp., banking-services provider Q2 Holdings Inc. and global trading software maker Amber Road Inc. Another startup, electronic signature software company DocuSign, said Tuesday it raised $85 million in a deal that values the company at about $1.6 billion, a person familiar with the matter said.

Some of the companies are turning a profit, unlike the heavy losses from Salesforce.com and Workday, which spend roughly 40% to 50% of their revenue on sales and marketing to grab customers. The specialized cloud companies are able to spend less on marketing because it can be more targeted, and word-of-mouth recommendations travel faster in single industries, say executives.

RealPage Inc. a maker of cloud software to help manage rental properties, earned $21 million on $377 in revenue in 2013. Sales and marketing consumed about 25% of its sales.

Veeva, which sells marketing software for pharmaceutical and biotechnology companies, posted a $24 million profit on $210 million in sales in the fiscal year ended Jan. 31, according to its earnings report released Tuesday. Sales and marketing expenses accounted for only 20% of Veeva's revenue.

Seven-year-old Veeva is winning over big customers such as drug maker Mylan Inc., MYL +3.03% which last fall began a global rollout of some Veeva applications. The software will help thousands of Mylan salespeople to manage relations with their customers in a highly regulated industry, replacing manual processes, custom-built and packaged programs used all over the company with one system accessible over the Web.

Michael Smith, chief information officer of Mylan, said the company chose Veeva over programs from Oracle, SAP, Salesforce.com, and Microsoft Corp., older companies that make software for a range of industries and business tasks. He said it would take 18 to 24 months to introduce Veeva around the world, compared to four to six years for packaged software run on its own computers.

Since Veeva concentrates on life sciences, it has been able to build numerous unique features, such as giving salespeople the ability to quickly look up the drug reimbursement policies of dozens of insurers, or displaying which states prohibit nurses from receiving drug samples. "We are very close to our customers," said Veeva Systems CEO Peter Gassner.

Marty Hoski, global manager of travel and meeting operations for SAT provider Educational Testing Service, is a big fan of Cvent's software. He chose it over programs from Oracle and SignUp4, another specialized provider. Mr. Hoski said SignUp4 was "limited in what it could do" and "time, scope and cost was through the roof to get an Oracle module in place that would have had very limited functionality." SignUp4 and Oracle declined to comment.

A couple of years ago, Mr. Hoski had little control over the $40 million the company spent annually on meetings. Administrative assistants would sign pricey contracts for venues. Invites went out with typos and bad grammar. "We had no idea what they were doing," he said.

Now, using Cvent, Mr. Hoski's meeting planners can bid out a deal to its network of suppliers, execute the contract, and manage the marketing of the event all from a Web browser. The additional oversight and leverage provided by Cvent software saves the company about $8 million a year, he said, while improving the quality of the events.