Epicor Software Corporation Revenue, Valuation & Funding (2021)

hey guys my guest today is steve murphy he joined epicore software corporation as ceo in october of 2017 bringing over 20 years of technology industry executive management experience to the role as ceo he's responsible for providing a long-term strategic vision for the company with a focus on customer experience and delivering innovative product services that support and drive business growth steve you're ready to take to the top hey great thanks nathan good to be here look forward to spending a little time with you you bet now epicore has quite a history here they officially launched what was this like 1970 something the company's about as old as me so it's been in business since 1971 we're almost 50 years old and we've grown a lot in the last few years but we generally have stuck to supporting manufacturing distribution warehousing things like that which has become a pretty hot business in the last few years surprisingly now how do you explain what you do today simply because when you look at where you rank in magic quantum to gartner i mean you rank for things like crm supply chain management you plan the hr tech space in the human capital management space it used to be on-prem now you're also sas how do you button all this up into a sentence to describe what you do yeah you know what i'd say is if somebody makes moves or sells a physical product it could be a vehicle it could be construction materials it could be something you buy in a hardware store the back end systems that manage all that movement and inventory that's what we tend to do interesting now give providing a little color here before you joined in 2017 of epicor and then we'll jump in with you you know epicore was a public company in 2009 revenue is breaking 409 million there was obviously an interesting breakdown of that revenue where again about 70 million of that was licensing revenue there was a big consulting business i think about 128 million bucks and then there was a maintenance contract business of 191 million and then a little hardware business for 20 million maybe for installing on-prem sort of hardware stuff you now come in obviously i imagine drastically change this revenue mix and the company has gone across many hands so taking into your head when you were first reached out by the epicore team to join in 2017 what was the thesis what did they want you to do and what got you excited yeah you know what the big one was the products were just about well the two two out of three cases they were cloud ready and the pivot to cloud hadn't been done yet and for the listeners thinking about what does that mean cloud it's kind of one of these terms it's confusing they had been designed and built in a modern architecture so that you could have nothing more than an android or an iphone in your hand and be running the warehouse or the factory with the software actually running in servers in seattle or bombay or you know somewhere else far away now having said that we hadn't done it yet four years ago we hadn't actually retooled the sales force and gone out and converted our existing base to software as a service or gotten good at selling that product into new customers and over the last four years that's been our mission and we've been um very successful at it we've built that business into about a quarter of a billion dollars we'll be about a billion dollar top line business this year and between a quarter and a third of that now is the cloud and that's been the uh it's been a lot of work but that's the transition we've worked our way through and one of the things we may talk about is it's change management in people as much as anything when it comes to transitioning a company with that big of a change and break down a little bit here how again how you got close to the company because again this has been through a lot of private equity hands in 2011 apex acquired both epicore and activate and a two billion dollar deal merged them together and then ended up with kkr in 2016 and a 3.3 billion dollar deal were you sort of an eir at kkr and they put you in this like did they find you as a at the same time as they bought kk as they bought epicor no you're gonna be the guy yeah you know what they found me and if you think about well when they find somebody what are they looking for and i think in the case of epicor they were looking for an executive that really understood manufacturing and distribution like the business i'm a process engineer i'm a mechanical engineer and about half of my career was in factories and warehouses and when i think about why kkr thought i would be a good fit they knew that i knew the products and had used the products and competed against the products and more than anything i believed in the quality of the company and the products which was what it took four years ago there was a lot of um there were many open questions about around what would be required for the company to grow and be successful and at an absolute minimum whether it's you or me or somebody else you had to look at it and say wow these are great products customers will love these products and they'll buy them if you couldn't believe that you probably wouldn't have taken the ceo job and i i knew enough to say products are in good shape they've been invested in and cared for properly we can go out and grow the business they found me i was a good fit i took a look at it and said i think i'm the right person to grow this business and it has worked out as planned which doesn't always happen but in this case it's happened rare rarely happens i might add rarely happens so steve give me a sense of how the mix has changed since 2017. again you had a big on-prem business a big maintenance contract sla oriented business you're trying to transition a lot of this to the cloud but what did the revenue mix look like in 2017 what was total top line and what percent was licensing sas yeah so i think the best two points the best way to look at it would be four years ago in a given quarter we would book uh 90 on prem 10 sas or less in the most recent quarter it was a 60 40 split flip-flop so 60 sas forty percent on friends so we we have crossed the rubicon we do book more sas than on prem and that did take the full four years to get to that point and i don't think we'll ever go back i think from this point forward we'll always book more sas there is a um a segment that really likes on-prem and in many cases it could be a a family business where they are good at managing assets because the biggest difference with on-prem is you have a cabinet with servers in it you know dell servers or whatever and if you're good at managing those and patching and upgrading you got people that have that know-how on-prem can be very cost efficient but it requires that level of skill i think that for us uh 60 40 split will probably move towards um 80 20. i don't know if it'll ever go much beyond that because i think there'll always be a segment that likes to be do-it-yourselfers when it comes to managing the erp system that's my guess and with this transition again you also have to manage growth right i mean people want to see growth in a business not just changing revenue and cannibalizing on-prem for sas so if you said you think you're about to break a billion dollars an ar about you know third of that's going to be sas where were you exactly a year ago in terms of run rate top line yeah a year ago the rum rate was was about seven or eight percent lower so we've been a steady mid to high single digit top line grower because the number is big you know you you yeah you're you're good with numbers i am too so the nominal amount's big enough that we've grown in that range and we'll probably go grow closer to 10 the top line this year having said that the because sas has been a quarter to a third that has grown at three or four times that fast we've typically seen 30 to 40 growth sometimes more in that sas business and it's most of our growth and with the on-prem seeing it be roughly flat it's um the on-prem business the maintenance business it isn't contracting it isn't getting smaller but it's almost perfectly flat are debt providers or other people that are putting valuations in the business do you feel like they're appreciating the rapid growth of the sas business considering it's a little bit muddied from all the other revenue lines yeah you know it's a great question i think two years ago we were just at the point where they noticed it a year ago when clayton dublin rice was putting a price tag on us valuing us they did appreciate it at this point with the numbers we're talking about they absolutely do but there's kind of a within your question i think there's a saturation point at around third to a half of your arr when you get to that point being cloud people do have to say you're kind of a cloud business and then with the bookings number i gave you because we're booking more sas anything else it changes the valuation and it'll be interesting for people like us to see whether or not that valuation model holds up i mean there's no excel model that says you should have a different discount rate for one revenue stream versus another but people do like cloud as far as valuation and that is in style and probably will be at least for a while yeah well this is this is a little bit what i don't understand because you've got these companies like uipath and databricks which are trading at 60 to 65 x arr multiples and in terms of the last round of vc they brought in but when you go back and then the deal you just started with a cdnr right i think the total deal price there was a 4.7 billion dollar deal right even if you only had at that point 300 million bucks and pure sas arr right there are companies out there right now that are pure sas plays with less are getting higher valuations than 4.7 billion and you go what the hell is going on here steve's this is a more durable business steve has more experience they should be getting a higher valuation why did cdnr only pay 4.7 billion yeah you know it's a really good question i think there are two things going on one is when you think about how much capital right now is on the sidelines chasing growth stories you do see some frothy exuberance and some of the bets people are willing to place so that's one i think the other one is there's a there's a sense of well-deserved respect for how hard it is to migrate the installed base so you could look at an epicore and say well you've got a tremendous amount of value but unleashing it or unlocking it takes time and effort and that's true so i mean i understand why the valuation came out around 4.7 4.8 billion now as we demonstrate you know kind of the say do quotient for us it's high as far as converting that install base which it has been it does help with the valuation and i think you know as we go through this year or year or two from now as those metrics the one you refer to the arr you know the percentage of it which is sas goes higher and higher and higher you have to say okay you've got it you're there but i think that's it i think that you've got a lot of companies where the mark the architecture a couple of points you made you know 60 70 times arar the mark architecture could be completely modern and there's some of those points of resistance they just don't have in the model that gives them benefit evaluation also true that a lot of these companies won't live up to it and it'll take a year or two before people realize hey you know they're they're nowhere close to being worth what we thought so time will tell but uh i don't uh despair i think cdr paid a fair price and i think we uh we continue to justify a higher price as we execute cdnr is kind of a surprise buyer in this space i mean you've got ties to austin kkr knows who vista equity is why didn't vista come in and offer more than 4.7 billion well you know they're all pretty shrewd operators and bargain hunters and i think that in some cases um the the analysts or the people running the valuation models look more at the point i made earlier which is hey there's a lot of legacy business here it's going to be expensive to migrate it over and if the attitude of the investor like a cdnr is hey let's take a little time and look at the quality of the sas products have they really modernized them as much as they say in our case we have and then some it is it's interesting when you do one of these beauty contests different people look for different things and come to different conclusions and it's it's capitalism and it's raw's form so i think senior has been a great partner and i think they're thrilled with how well we've done since they bought us but i think uh you know i have a lot of respect for vista i think they probably kicked the tires and said that's a big chore you know to continue to rotate over from the on-prem business and we're not sure we want to sign up for something that could take that long there's a path i imagine where in 2022 or 2023 when some of this debt is coming do we see this to coming in and offering you something like 10 billion right are we going to read that headline who knows who knows i think you never know but i think that um the valuations that the we are aware of the fact that as we dramatically increase the percentage of business at sas it helps with the valuation and there are some real things in there around net retention for sas is it's really high how high how high is i mean are you above 140 in that dollar retention 140 we aren't that high but we're well over 100 i don't think we would share exactly what it is but i'd say it's it's uh it's demonstrably higher than old-fashioned maintenance which is nice right because cross-sell upsell ad users we really like that so as a guy you know as a 50-year-old ceo that kind of pooh-poohed sas 10 years ago i'll say that it's really sticky and once a customer decides they like sas they tend to buy more and more users and add modules over the years more than i expected i'm going to ask this question because you are a top one percent of cs in the world that can answer this you joined in 2017 the company was already in the hands of private equity there's a lot of private equity firms that are dealing with ceos i have on this show doing things like 200 million dollar secondaries magnifying that times a factor of 10 at what you see at epicore you know the company had approximately 1.7 billion outstanding on a first tier loan that paid 320 bips over libor and that matured in june of 2020 this was in 2019. i imagine these debt schedules fuel a lot of the m a in the private equity world so can you just teach us quickly how does private equity companies like cdnr and kkr make money on a play like epicore while also managing this debt and how does that impact your ability to see you and around the company yeah i think for most people would be very similar to when you go buy a house you put a down payment down maybe 20 you know four quarters of the house is debt so if the house appreciates you get all the appreciation you have to pay the bank on the appreciation so for us i think that we we really need to know that if you're a cdnr or kcr for starters is the recurring revenue stream we talked about retention rates is the recurring revenue stream as stable and profitable as we thought and can we build upon that in some some kind of a predictable fashion and if you can do that with a software company you can take on that kind of debt load nathan and be comfortable with it and then demonstrate i think here's the biggest thing demonstrate over a period of maybe a year and a half or two years six to eight quarters to the the investment community that you've got a it's kind of like a bond with the call option you've got this bond which is the recurring revenue stream that call options you have great products and you can sell more and more flip them over to fast if you're an investor and you can find an asset that fits that profile you can do really well with it but you got to do both you've got to be that predictable bond and you've got to find the growth with the call option you can do things like in the last six months and this is all you know public record we went back into the markets and we're able to refinance the first lane and do really well on it and we had earned the right to do that yeah we didn't go out and you know get a dividend or do anything self-serving we just said wow we can take this thing down by about 125 basis points when you're talking about you know two two billion plus in debt it saves a lot of money so those are some of the things that when management cooperates with the investor you can really create a lot of long-term value but you've got to have that level of cooperation and we've got with kkr a great shot and we have it with cdnr but uh you really zero down on it that that i think is part of the formula it's got to work well and i just there's a lot of people that want to do like mini versions of private equity firms themselves right they've got 100 million to play with they want to do this and i think what a lot of people miss is a lot of these private equity firms they don't actually have to grow evaluate grow revenue a ton to make money on these deals because they can get smart with how they do debt so when you talk about the refi in the first lane we find things of that nature it was reported that about 560 million bucks of the proceeds from that loan being sold by epicore was used for payout to kk r right so they can still make money on this my question for you as ceo is like when they're recruiting and you're coming in how do you make sure that you and your team right get the equivalent of some gains from this sort of arbitrage the private equity firms are playing yeah so i think that you know human beings uh there's some consistency or want to want to be paid right they want to make money when you're one of the biggest challenges to the point you just made is when you're private the payout may be three or five you know three four five years apart whereas when you're public every 90 days when you get outside the quiet period you can trade the stock so i keep an eye on that because i've gotten you know a group of people we've got 4 000 employees but 100 or so most of what they make is in stock or a big portion of what they make is in stock and we try to think about whether it's a dividend you know once every three or four or five years or a transaction what's the frequency upon which people need to get that compensation and feel right about it and you can't rush it so you can't go hey we're going to try to do something to create liquidity and have the the company's balance sheet suffer at that expense so i think it's thinking think with the end in mind if you think hey within the next three or four years we want to do something like this what are the metrics how does the balance sheet the income statement what do they need to look like so that the banks would be thrilled to be a part of whatever we're expecting to do and if you do that then you're fine i think where people get in trouble is when they want to create liquidity too frequently in private equity you can't do it every year or every other year maybe it's every three years or if they think they can wait five to ten years then you lose good people right because people they have kids in college they have you know a variety of responsibilities where they've got to get that at some point that's the advice i would give is you probably need to have a liquidity event every three or four years but you need to plan for that as part of your job all the time you really need to be prepared for it steve as we wrap up here what what percent of your base revenue called a billion run rate do you think needs to be high margin pure play cloud revenue for you to test public markets whether it's via a spec or an ipo and tap into this sort of very frothy sas valuations we're seeing right now yeah so i think i actually have a pretty specific answer i think it's half of our recurring revenue half or more of our recurring revenue needs to be sas cloud revenue and we're we're right about there so i'd say we're about 70 recurring so we'll say 700 million 675 is recurring and i'd say at around 300 to 350 uh we're we're clearly we've crossed the saturation point sass that's that's my perspective on it steve we love that man take us home here what's something you wishing you you before you got in all this business stuff what's something you wishing you when you you knew when you were 20 um i think as a father of a couple of a kid who's about 20 and a couple other teenagers what i try to tell them is failure um failure is not only necessary it's by far the quickest learning mechanism there is so don't um don't spin on that failure accept it and move on and some of the best lessons you'll learn will be for some tough years you're not the only one so um it's a hard lesson to learn but don't be embarrassed do your best and if you fail keep going guys steve murphy epicore previously open text joined epicore in 2017 still in the hands of kkr ultimately 4.7 billion dollar deal to cdnr last year now scaling the company targeting getting up to 50 percent of his base being currently sas revenue currently 70 of total revenue is recurring but again just not pure play sas yet they're continuing to scale that market with high high net dollar retention rates uh steve we'll follow along thanks for taking us to the top thanks nathan it was a pleasure one more thing before you go we have a brand new show every thursday at 1 pm central it's called shark tank for sas we call it deal or bust one founder comes on three hungry buyers they try and do a deal live and the founder shares back end dashboards their expenses their revenue arpu cac ltv you name it they share it and the buyers try and make a deal live it is fun to watch every thursday 1 pm central additionally remember these recorded founder interviews go live we release them here on youtube every day at 2 p.m central to make sure you don't miss any of that make sure you click the subscribe button below here on youtube the big red button and then click the little bell notification to make sure you get notifications when we do go live i wouldn't want you to miss breaking news in the sas world whether it's an acquisition a big fundraise a big sale a big profitability statement or something else i don't want you to miss it additionally if you want to take this conversation deeper and further we have by far the largest private slack community for b2b sas founders you want to get in there we've probably talked about your tool if you're running a company or your firm if you're investing you can go in there and quickly search and see what people are saying sign up for that at nathan lacka dot com forward slash slack in the meantime i'm hanging out with you here on youtube i'll be in the comments for the next 30 minutes feel free to let me know what you thought about this episode if you enjoyed it click the thumbs up we get a lot of haters that are mad at how aggressive i am on these shows but i do it so that we can all learn we have to counter those people we gotta push them away click the thumbs up below to counter them and know that i appreciate your guys support all right i'll be in the comments see ya