ServiceSource International, which provides a service revenue management and renewals platform for blue-chip tech firms, raised $119 million on Thursday by offering 11.9 million shares at $10, 21% above the midpoint of the proposed $7.50 to $9 range. Insiders, including the CEO and top shareholder General Atlantic, collected 33% of deal proceeds. The stock traded as high as $14 in its first session and closed 22% above its offer price, pushing the valuation to 4x EV/2012 sales, which is well above the 2x average multiple of its managed services/outsourcing peers. Indeed, ServiceSource's early performance puts it more in-line with the basket of SaaS stocks (5x forward sales) we used in our valuation analysis for recent IPO Cornerstone OnDemand (CSOD), despite the fact that ServiceSource lacks the visibility and deferred revenues of a subscription model. Additionally, the company's near-term investments in growth make for a lofty valuation on both EBITDA and P/E (follow link below to request a sample of our full valuation analysis).
Clearly, we do not want to underestimate the company's large addressable market and its powerful value proposition for major IT vendors, whose service and support contracts represent a high-margin revenue stream. Further, ServiceSource's exposure to leading tech firms could help it capture some sector trading momentum driven by Oracle's strong earnings released on Thursday after the close. Nonetheless, we remain concerned that the company's SaaS-like valuation fails to reflect risks surrounding its concentrated revenue base (top ten customers are 54%), its heavy investments in growth (EBITDA margin fell 10 percentage points in 2010), and the uncertain impact of the cloud computing movement on traditional software and hardware maintenance streams.
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