European ERP vendor Unit4 has a new goal — to reach a $10 billion valuation, up from the $2 billion paid by its current private equity owners in a deal signed in March and which closed last month. The ambitious goal depends partly on continued growth, but mostly on a re-valuation of the company as it completes its transition from its historic on-premise licensed software model to become a cloud company. This will allow it to benefit from the higher multiples bestowed on such businesses. As CEO Mike Ettling explains:
People may think it's aggressive. But ... if you take our five-year plan, in terms of how we grow, some acquisitions, the organic growth we've got on our cloud business — by the end of '21, we're going to be 50% cloud already — you get to a point where you've seen other successful companies like Ceridian and Duck Creek get totally revalued as a cloud company, and you just apply current cloud multiples.
That's the value we're aspiring for, but it assumes we get the business re-rated entirely as a cloud company in the next few years.
The company has come out of the blocks at the right pace, hitting its targets for the first half of 2021. Cloud bookings grew at 40% year-on-year, while EBITDAC grew 15% — where the extra 'C' stands for capitalized R&D (not 'Coronavirus' as we initially wrote). A record number of new customer names were signed in the first half, and by the end of the period a total of 44 customers had signed up for the vendor's new ERPx cloud platform. It all helps make a good impression with new investors TA Associates and Partners Group. Ettling comments:
When you have a new owner, the owners bought the business on the basis of year one predicted results. So achieving those results, or beating those results, sets the tone for the investment in a very big way in private equity land.
Alongside the transaction, Unit4 has spun out its Student Information Systems (SIS) business, which it launched in 2015 after acquiring education market specialist Three Rivers. Rebranded as Thesis, this business remains in the hands of Advent International, Unit4's previous private equity owner. Ettling says the separation has been planned since last year, as the student management business wasn't getting the attention within Unit4, whose new owners in any case want it to focus on its people-centric ERP product line. He likens its future trajectory to FinancialForce, the SaaS ERP business which separated from Unit4 in 2017, explaining:
It's very much in an early growth stage. So it needs a very different focus, a very different type of approach, very different type of skills base, to actually scale and grow that business. So the plan has been to leave it with Advent. We spun it out, and they're going to take it on a journey to grow it and scale it very similar to what they did with FinancialForce.
New signings by Unit4 in the first half reflect a resumption of spending on digitization projects in the wake of the pandemic, says Ettling. They range from an amusement park operator to a port authority, a power company to professional services, and education to local government. So far, though, all are in Europe. That's set to change later this year as the impact of new sales leadership in North America starts to take effect. Ettling says:
If I look at the second half of the year, the pipeline is 80% new names in North America. We brought on a new leader for North America in November last year and he is really now getting traction.
Beefing up the partner ecosystem
The most striking metric in the Q2 results is a doubling in the value of contracts obtained via partners. Unit4 added more than 20 new partners in 2020 and is still recruiting in North America. It has also been investing in building out processes to support them. Ettling says:
We've put structure into our partner programme, which Unit4 never had before, at all. We had lots of partners, but we never had any formal programmes, enablement structures, certification, tiering levels, all the good things you'd expect. That's now starting to bear fruit.
It took a good year to get that in place, to redo the agreements and set up all the infrastructure. We're now starting to see the benefit of that.
He points to recent M&A activity in the partner ecosystem as a sign of health — "That to me is always a healthy sign when you get corporate development activity in the partner ecosystem." Norwegian listed consulting group Arribatec has acquired long-standing UK-based Unit4 partner Integra to become the vendor's largest partner by contract value. There was also the UK merger of Agilyx Group and Myriad Consulting.
One of the main reasons for beefing up the partner ecosystem has been to ensure there's sufficient capacity to support customers moving to the new ERPx platform. As we've previously discussed, extension kits provide opportunities for partners to add their own specialist functions and apps. Ettling gives an update on progress:
We started enabling, back in December already, the partners on implementing ERPx. We now are in the phase where we're really enabling the partners around the extension kits so they can go and build apps on ERPx, and we're gearing up to the [app] marketplace launch, which is in the next six to nine months.
Even though there's a completely new architecture underpinning ERPx, many of the business functions and processes are the same ones that existing partners will be familiar with. Ettling says that will make the transition easier than other vendors may have found. He explains:
The way we've been able to take our historic product and then replumb it to make it true cloud means a lot of the functionality is still there, and a lot of the fundamental configuration is still there. The way you do customization is different because it's now all in an extension kit model, and the way you do integrations is different.
So I think the big difference with other journeys you and I have talked on lots of times is, it's not that much different in terms of the learning. They have to learn a different way to customize, a different way to do integrations. But they don't have to learn a different way to configure, and a different way to deploy, because it's the same functionality in the same engine.
A good performance by Ettling and Unit4 while setting off on this new journey backed by TA Associates. The advances in the partner ecosystem are particularly encouraging, along with the ongoing progress in signing new customers. The proof of the pudding though is still to come, as those 44+ customers continue their implementations of the new ERPx platform. We're looking forward to talking to some of them once they've completed those projects and can tell us what the impact has been.