How Epicor Built a $250M Cloud Business Growing 30 to 40% a Year (Interview with CEO Steve Murphy)

Introduction and Steve Murphy's Background

Nathan Latka

00:00Hey guys, my guest today is Steve Murphy. He joined Epicor Software Corporation as CEO in October 2017, bringing over twenty years of technology industry executive management experience to the role. As CEO, he is 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 ready to take the top?

Steve Murphy

00:21Yeah. Hey, great. Thanks, Nathan. Good to be here. Look forward to spending a little time with you.

Nathan Latka

00:25You bet. Now, Epicor has quite a history here. They officially launched, what was this, like nineteen seventy something?

Epicor's History and Core Business

Steve Murphy

00:32The companies have had 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.

Nathan Latka

00:50Now, how do you explain what you do today simply? Because when you look at where you rank in Magic Quadrant to Gartner, I mean, you rank for things like CRM, supply chain management, you play in the HR tech space and the human capital management space, it used to be on prem, now you are also SaaS. How do you button all this up into a sentence to describe what you do?

What Epicor Does Today

Steve Murphy

01:06Yeah, 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.

Revenue Mix and the Cloud Transition

Nathan Latka

01:21Interesting. Now give... Providing a little color here before you joined in 2017 of Epicor, and then we'll jump in with you. You know, Epicor is a public company. In 2009, revenue is breaking 409,000,000. There was obviously an interesting breakdown of that revenue where, again, about 70,000,000 of that was licensing revenue. There was a big consulting business that I think about a $128,000,000, and then there was a maintenance contract business of a 191,000,000, and then a little

01:45hardware business for 20,000,000, 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 take me into your head when you were first reached out by the Epicor team to join in 2017. What was the thesis? What did they want you to do and what got you excited?

Steve Murphy

02:04Yeah. You know what? The big one was the products were just about well, the two two out of three cases that were cloud ready And the pivot to cloud hadn't been done yet. And for the listeners thinking about, well, what does that mean cloud? It's kind of one of these terms that'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

02:25hand and be running the warehouse or the factory with the software actually running in servers in Seattle or Bombay or 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 very

02:51successful at it. We've built that business into about a $250,000,000. 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 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

03:15of a change. And

Nathan Latka

03:18break down a little bit here, again, how you got close to the company because again, this has been through a lot of private equity hands. In 2011, Apax acquired both Epicor and Activant in a $2,000,000,000 deal, merged them together, and then ended up with KKR in 2016 and a $3,300,000,000 deal. Were you sort of an EIR at KKR and they put you in this? Like, did they find you at the same time as they bought

03:39KK, as they bought Epicor and knew you were gonna be the guy?

KKR Recruitment and Why He Took the CEO Job

Steve Murphy

03:42Yeah. You know what? They found me. And if you think about, well, when they find somebody, what are they looking for? 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

04:03I 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, 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

04:25and 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. 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

04:45business. And it has worked out as planned, which doesn't always happen. But in this case, it's happened.

Nathan Latka

04:50Rarely 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 SaaS?

SaaS vs On-Premise Bookings Shift

Steve Murphy

05:08Yeah. 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 90% on prem, 10% SaaS or less. In the most recent quarter, it was a sixty-forty split, a flip flop. So 60% SaaS, 40% on prem. So we have crossed the Rubicon. We do book more SaaS than on prem, and that did take the full four years to get to that point.

05:32And I don't think we'll ever go back. I think from this point forward, we'll always book more SaaS. There is

05:39a segment that really likes on prem. And in many cases, it could be a family business where they are good at managing assets because the biggest difference with on premise, you have a cabinet with servers in it, 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

06:01us, sixty-forty split will probably move towards

06:05eighty-twenty. 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.

Nathan Latka

06:15And 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 SaaS. So if you said you think you're about to break a billion dollars in ARR, about a third of that is going to be SaaS, where were you exactly a year ago in terms of run rate top line?

Top-Line Growth and SaaS Growth Rate

Steve Murphy

06:31Yeah, A year ago, the run rate was was about seven or eight percent lower. We've been a steady mid to high single digit top line grower because the number is big, you know, you you you're good with numbers. I am too. So the nominal amount is big enough that we've grown in that range and we'll probably go grow closer to 10%, the top line, this year.

Nathan Latka

06:49Wow.

Steve Murphy

06:50Having said that, the... Because SaaS has been a quarter

06:53to a third, that has grown at three or four times that fast. And we've typically seen 30 to 40% growth, sometimes more in that SaaS business. And it's most of our growth. And then with the on prem, seeing it be roughly flat, it's the on prem business, the maintenance business, it isn't contracting. It isn't getting smaller, but it's almost perfectly flat at this point.

Nathan Latka

07:15Debt providers or other people that are putting valuations in the business, do you feel like they're appreciating the rapid growth of the SaaS business considering it's a little bit muddied from all the other revenue lines?

How Investors Value the SaaS Mix

Steve Murphy

07:25Yeah. 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, Dubilier & Rice was putting a price tag on us valuing us, they did appreciate it. And at this point with the numbers we're talking about, they absolutely do. But within your question, I think there's a saturation point at around one-third to one-half of your ARR. When you get to that point

07:50being 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 SaaS than 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

08:14as valuation and that is in style and probably will be at least for a while.

Nathan Latka

08:19Yeah. Well, 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 last round of VC they brought in. But when you go back and the deal you just cited with CD&R, right, I think the total deal price there was a $4,700,000,000 deal, right? Even if you only had at that point $300,000,000 in

08:41pure SaaS ARR, right? There are companies out there right now that are pure SaaS plays with less ARR getting higher valuations than 4,700,000,000 and you go, the hell is going on here? Steve, this is a more durable business, Steve has more experience. They should be getting a higher valuation. Why did CD&R only pay 4,700,000,000?

Steve Murphy

08:57Yeah. 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 in some of the bets people are willing to place. So that's one. I think the other one is there's a sense of well deserved respect for how hard it is to migrate the installed base. So you could look

09:23at an Epicor 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, understand why the valuation came out around 4.7, 4,800,000,000. Now as we demonstrate, you know, kind of the say do quotient for us is high as far as converting that installed base, which it has been, it does help with the valuation. And I think, you know, as we go through

09:45this year or a year or two from now, as those metrics, one you referred to, the ARR, you know, the percentage of it, is SaaS 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 architecture to a couple of points you made, 60, 70 type ARR. The architecture could be completely modern, and there's some of

10:06those 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, they're nowhere close to being worth what we thought. So, time will tell, but I don't despair. I think CD&R paid a fair price and I think we continue to justify a higher price as we execute.

Nathan Latka

10:32CD&R 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 4,700,000,000?

Steve Murphy

10:41Well, know, they're all pretty shrewd operators and bargain hunters. And I think that in some cases,

10:49analysts and 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 be expensive to migrate it over. And if the attitude of the investor like a CD&R is, hey, let's take a little time and look at the quality of the SaaS products. Have they really modernized them as much as they say? In our case, we have. And then some,

11:08it's interesting when you do one of these beauty contests, different people look for different things and come to different conclusions and it's capitalism in its rawest form. So I think CD&R has been a great partner and I think they're thrilled with how well we've done since they bought us. But I think we have a lot of respect for Vista. I think they probably kicked the tires and said, that's a big chore to continue to rotate over

11:30from the on prem business. And we're not sure we want to sign up for something that could take that long.

Nathan Latka

11:34There's a path I imagine where in 2022 or 2023, when some of this debt is coming due, we see Vista coming in and offering you something like $10,000,000,000 right? Are we going read that headline?

Steve Murphy

11:44Who knows? Who knows? I think you never know. But I think that the valuations that we are aware of the fact that as we dramatically increase the percentage of business at SaaS, it helps with the valuation. And there are some real things in there around net retention for SaaS. It's really high.

Nathan Latka

12:02How high is it? I mean, are you above 140 in net dollar retention? 140%?

Net Dollar Retention and SaaS Stickiness

Steve Murphy

12:06We 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 demonstrably higher than old fashioned maintenance, which is nice, right? Because cross sell, upsell, add users, we really like that. So as a guy, as a 50 year old CEO that kind of poo pooed SaaS ten years ago, I'll say that it's really sticky. And once a customer decides they like SaaS, they tend to buy

12:30more and more users and add modules over the years more than I expected.

Nathan Latka

12:35I'm gonna ask this question because you are a top 1% of CEOs 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 the show doing things like $200,000,000 secondaries. Magnifying that times a factor of 10 at what you see at Epicor. You know, the company had approximately $1,700,000,000 outstanding on a first

12:58tier loan that paid three twenty bips over LIBOR and that matured in June 2020. This was in 2019. I imagine these debt schedules fuel a lot of the M and A in a private equity world. So, can you just teach us quickly how does private equity companies like CD&R and KKR make money on a play like Epicor while also managing this debt? And how does that impact your ability as a CEO to run the

Private Equity Debt and Value Creation

Nathan Latka

13:19company?

Steve Murphy

13:19Yeah, I think for most people it would be very similar to when you go buy a house, you put a down payment down, maybe 20%, four quarters of the house is debt. So if the house appreciates, you get all the appreciation. You don't have to pay the bank on the appreciation. So for us, I think that we really need to know that if you're a CD&R or KKR for starters, is the recurring revenue stream...

13:40We talked about retention rates. Is the recurring revenue stream as stable and profitable as we thought? And can we build upon that in 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

14:01eight quarters to the investment community that you've got a it's kind of like a bond with a call option. You've got this bond, which is the recurring revenue stream. The call option is you have great products and you can sell more and more of them, flip them over and 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've got to do both. You've

14:19got 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 public record, we went back into the markets and we're able to refinance the first lien and do really well on it. And we had earned the right to do that. We didn't go out and get a dividend or do anything self serving. We just said, Wow, we

14:39can take this thing down by about 125 basis points. When you're talking about $2,000,000,000 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 it with KKR, a great shop, and we have it with CD&R. But you really zeroed in on it. That

15:03I think is part of the formula. It's got to work.

Nathan Latka

15:06Well, I just there's a lot of people that want to do like mini versions of private equity firms themselves, right? They've got a 100,000,000 to play with. They want to do this. And think what a lot of people miss is a lot of these private equity firms, they don't actually 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 refis and

15:21the first lien refi and things of that nature, mean it was reported that about $560,000,000 of the proceeds from that loan being sold by Epicor was used for payout to KKR, 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 get the equivalent of some gains from this sort of arbitrage that

15:40private equity firms are playing?

Steve Murphy

15:42Yeah. So I think that human beings, there's some consistency here. They want to be paid, right? They want to make money. One of the biggest challenges to the point you just made is when you're private, the payout may be three or four or five years apart, whereas when you're public every ninety days, you get outside the quiet period, you can trade the stock. So I keep an eye on that because I've got a group of people. We've

16:05got 4,000 employees, but a 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 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

16:26something to create liquidity and have the company's balance sheet suffer at that expense. So I 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 and income statement, what are they going 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

16:46that, 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 a variety of responsibilities where they've got to get that at some point. That's the advice

17:07I 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.

Nathan Latka

17:16Steve, as we wrap up here, 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 SPAC or an IPO and tap into this sort of very frothy SaaS valuations we're seeing right now?

IPO Readiness and SaaS Revenue Threshold

Steve Murphy

17:34Yeah, 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 SaaS cloud revenue, and we're right about there. So I'd say we're about 70% recurring. So we'll say $700,000,000 $675,000,000 is recurring, and I'd say at around $300,000,000 to $350,000,000

17:56we're clearly we've crossed the saturation point SaaS. That's that's my perspective on it.

Nathan Latka

18:01Steve, we love that man. Take us home here. What's something you wish you knew before you got into all this business stuff? What's something you wishing you when you you knew when you were 20?

Lessons Learned and Closing Advice

Steve Murphy

18:11I 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

18:20failure is not only necessary, it's by far the quickest learning mechanism there is. Don't

18:28spin on that failure. Accept it and move on. And some of the best lessons you learn will be for some tough areas. You're not the only one. So it's a hard lesson to learn, but don't be embarrassed. Do your best. And if you fail, keep going.

Nathan Latka

18:41Guys, Steve Murphy, Epicor, previously OpenText joined Epicor in 2017, still in the hands of KKR, ultimately $4,700,000,000 deal with CD&R last year, now scaling the company targeting getting up to 50% of his base being pure play SaaS revenue. Currently, 70% of total revenue is recurring, but again, just not pure play SaaS yet. They are continuing to scale that market with high, high net dollar retention rates. Steve will follow along. Thanks for taking us to

19:06the top.

Steve Murphy

19:06Yeah. Thanks, Nathan. It was a pleasure.

Nathan Latka

19:09One more thing before you go. We have a brand new show every Thursday at 1PM central. It's called Shark Tank for SaaS. 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, 1PM

19:33central. Additionally, remember these recorded founder interviews go live. We release them here on YouTube every day at 2PM 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 SaaS world, whether it's an acquisition, a big

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