IPO Launch: Sumo Logic Proposes $281 Million U.S. IPO

IPOStreet

Sumo Logic (SUMO) intends to raise $281 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides real-time application monitoring to companies of all sizes via its log management software.

Redwood City, California-based Sumo was founded to develop log management software to enable organizations to continuously monitor and respond to their IT infrastructure in real-time.

Management is headed by president and Chief Executive Officer Mr. Ramin Sayar, who has been with the firm since December 2014 and was previously SVP and GM at VMware, a virtualization technology company.

Below is a simplified video of the firm's use of machine learning in data analytics:

Source: Sumo Logic

SUMO has created a three-part partner approach, with technology partners, system integrators & resellers and managed service providers extending the company's offering reach.

The firm provides a cloud-native platform with operational, security and business intelligence capabilities, referred to as its 'Continuous Intelligence Platform.'

Sumo has received at least $449 million from investors including Greylock, Sapphire Ventures, Accel, Institutional Venture Partners and DFJ.

SUMO provides its services to organizations of all sizes, from large enterprises to small and middle-market businesses.

The firm offers multi-tiered subscription packages for access to its platform, with pricing based on a number of factors.

Sumo pursues a 'land and expand' approach to its selling process, using a free trial to entice organizations to check the system out with no obligation.

The company has an inside sales team focused on middle-market prospects and a field sales group dedicated to larger enterprises.

Small size prospects are encouraged to use the self-serve system to trial and convert to paying customers.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, was stable at 0.5x in the most recent reporting period.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. SUMO’s most recent calculation was 1.0% as of July 31, 2020, so the firm has some ways to go in this regard.

Average Revenue per Customer has grown to $90,720, based on the most recent six month reporting period annualized.

Management says that its dollar-based net revenue retention rate ‘has fluctuated between approximately 120% and 130% for each of the past ten quarters, though our dollar-based net retention rate could decline in the short term because of the impact of the Covid-19 pandemic on our business and results of operations.’

A retention rate figure of greater than 100% indicates the firm is increasing its revenue from the same customer cohort over time, showing that it has achieved strong product market fit and sales & marketing efficiency, so Sumo is performing quite well in this regard.

According to a 2020 market research report by ResearchAndMarkets, the global log management software market is expected to grow from $1.9 billion in 2020 to $3.7 billion in 2025.

This represents a forecast CAGR of 14.1% during the period.

The main drivers for this expected growth are a growing reliance on IT infrastructure, application sprawl and complexity and the increasingly large amount of data generated by businesses.

Cloud-based offerings are expected to grow at a much higher rate of growth.

By region, North America is expected to drive technological adoption due to a desire for faster troubleshooting, security improvement and government regulation requirements.

Also, SUMO management believes the market for monitoring and response is far larger, in the tens of billions per year.

Major competitive or other industry participants include:

  • Splunk
  • Elastic
  • Datadog
  • Amazon - AWS
  • Microsoft Azure
  • Google Cloud
  • Numerous other smaller app-specific providers

Sumo’s recent financial results can be summarized as follows:

  • Strong topline revenue growth
  • Gross profit growth and high gross margin
  • Reduced operating losses and lower negative operating margin
  • Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

sumologicpl

Source: Company registration statement

As of July 31, 2020, Sumo had $98.1 million in cash and $137.5 million in total liabilities.

Free cash flow during the twelve months ended July 31, 2020, was negative ($61.5 million).

SUMO intends to sell 14.8 million shares of common stock at a midpoint price of $19.00 per share for gross proceeds of approximately $281.2 million, not including the sale of customary underwriter options.

Funds affiliated with Tiger Global Management have indicated an interest to purchase up to 10% (1.48 million shares, or $28.12 million) of the shares in the offering, a strong signal of institutional investor interest in the IPO at its present valuation.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.9 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 15.0%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, technologies, assets, or talent.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Morgan Stanley, J.P. Morgan, RBC Capital Markets, Jefferies, William Blair, Cowen, Piper Sandler and BTIG.

Commentary

SUMO seeks public capital to continue with its growth plans and potentially begin making targeted acquisitions.

The company’s financials show strong revenue growth despite the Covid-19 pandemic, but continued high operating losses and increasing cash burn.

Sales and marketing expenses as a percentage of total revenue have been dropping, a good sign that the firm is becoming more efficient as it scales.

The firm’s dollar-based net retention rate has fluctuated between 120% and 130%, extremely strong figures that are important for SaaS firm performance measurement.

Figures above 100% indicate good product market fit and a working ‘land and expand’ sales strategy.

The market opportunity for application monitoring is expected to grow substantially over the coming years, so SUMO has positive industry dynamics in its favor for the foreseeable future.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 52.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, the IPO is priced at a lower multiple than competitor Splunk; notably, SUMO is growing revenue at a faster rate and producing lower losses than Splunk, at least based on the latest published figures.

SUMO is in a sweet spot in a growing market and the IPO appears reasonably priced. With the proceeds, I expect SUMO to increase its TAM (Total Addressable Market) with selected acquisitions as it seeks to broaden its capabilities.

My opinion on the IPO is a BUY at up to $19.00 per share.

Expected IPO Pricing Date: September 16, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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