ServiceMax SPAC Deal: Growth Plans for $1.4 Billion Acquisition

ServiceMax to Become Publicly Traded Through SPAC Merger

ServiceMax, a software provider specializing in solutions for the field-service sector, revealed yesterday its plans to become a publicly listed company. This will be achieved through a merger with a special purpose acquisition company, or SPAC, with the deal having an estimated value of $1.4 billion.

The move follows ServiceMax’s acquisition by GE in 2016 for $915 million, and its subsequent separation from GE in late 2018. Recently, the company secured $80 million in funding from Salesforce Ventures, a significant strategic partner.

Competitive Landscape and Market Dynamics

ServiceMax operates within the expanding field-service management industry. Its primary competitors include ServiceNow, and notably, Salesforce Service Cloud, particularly considering the recent investment from Salesforce Ventures.

Other major enterprise technology companies, such as Microsoft, SAP, and Oracle, also offer comparable products. The market’s focus extends beyond traditional field service to encompass the digitization of internal service departments like IT and Human Resources, broadening its overall reach.

Historical Context and Ownership Changes

Initially, GE acquired the company to bolster its industrial Internet of Things (IoT) strategy. The intention was to integrate ServiceMax’s software with GE’s automated machine maintenance initiatives.

However, when this strategy did not come to fruition, ServiceMax was spun out as an independent entity. It then became part of Silver Lake Partners following a transaction completed in 2019.

Financial Performance and Future Outlook

An examination of ServiceMax’s investor presentation reveals a historical pattern of moderate growth coupled with cash consumption. The company anticipates a significant shift in this trend moving forward.

Further details regarding this projected change are outlined in the investor materials. The company aims to demonstrate improved financial performance and a more sustainable business model.

Analyzing the Data

The company is presenting to potential investors a strategy centered around accelerating its growth and achieving positive free cash flow. This will be accomplished through a dual approach, encompassing both internal development and strategic acquisitions.

The merger with a blank-check company is expected to yield approximately $335 million in gross proceeds, representing a significant capital injection relative to the company’s previous funding activities.

Inorganic Growth Strategy

Regarding acquisitions, ServiceMax recently announced the acquisition of LiquidFrameworks. The purchase price is set at $145 million, funded in part by the capital raised through the SPAC transaction.

LiquidFrameworks provides ServiceMax with a mobile service platform tailored for the energy sector, enhancing the company’s mobile engineering capabilities and opening doors to a profitable industry niche.

Competitive Landscape

Expanding capabilities through acquisition appears to be a prudent strategy, particularly as ServiceMax aims to compete with established players like ServiceNow. The scale of competition is considerable.

For instance, Salesforce Service Cloud reported $1.5 billion in revenue for Q1 2022, exceeding the total valuation of the ServiceMax SPAC. Similarly, ServiceNow’s GAAP subscription revenue reached $1.23 billion, demonstrating a 30% year-over-year increase.

These figures highlight the substantial competitive pressures facing the company.

Investor Appeal

What strategy is ServiceMax employing to attract investors once its shares are publicly traded? The core proposition is outlined below.

ServiceMax's Strategy for Increased Valuation

ServiceMax operates on a fiscal year concluding in January. The company’s most recent fiscal year ended January 31, 2021. During this period, adjusted subscription revenues reached $93 million, representing a 15% increase from the prior year’s $81 million. While positive, this growth is relatively moderate compared to industry leaders.

In the same fiscal year, ServiceMax reported an adjusted subscription gross profit of $69 million, up from $56 million the previous year. This constitutes a growth of approximately 23%. Notably, the company experienced faster growth in adjusted subscription gross profit than in revenue, driven by expanding gross margins.

The focus on adjusted subscription revenue, rather than total revenue, is deliberate. The core value of ServiceMax lies within its software business. Professional services, delivered through personnel, contribute less independently. (Many software companies maintain a services division to facilitate the sale and effective utilization of their digital products, often provided at cost.) Therefore, adjusted subscription numbers are prioritized, influenced by accounting considerations related to private equity relationships, and aligned with investor focus.

While the 15% growth in the software business may not immediately impress investors, ServiceMax is committed to accelerating this rate.

 

As illustrated in the provided figures, ServiceMax anticipates an acceleration of adjusted subscription revenues in the current fiscal year (ending January 31, 2022). Furthermore, the company projects continued acceleration, increasing by 200 basis points in each subsequent fiscal year.

Examining the figures further reveals expectations for gross margin improvement. ServiceMax forecasts not only enhancement in the current fiscal year but also a consistent expansion of 200 basis points over the following two fiscal years.

These projected improvements in both growth and gross margin are fundamentally important.

A software company’s valuation is largely determined by its subscription revenue growth rate, its profit margins, and the pace of change in these two key metrics. While numerous other metrics exist, such as net-dollar retention, they ultimately contribute to overall subscription revenue growth.

ServiceMax is communicating to investors its intention to not only sustain revenue expansion but also to improve the quality of that revenue over time. This represents a significant advantage.

To understand the significance of these expansions, consider data from Bessemer, a venture capital firm. Public software companies in the lowest growth quartile are valued at approximately 8.5 times their revenues. Those with median growth are valued at around 14 times revenues. Companies in the top quartile achieve valuations of roughly 21 times revenues.

Therefore, ServiceMax’s promise of growth acceleration is a crucial element of its investor presentation.

The extent to which ServiceMax can achieve its growth targets remains to be seen. However, the company appears capable of reaching its financial goals through strategic, vertically focused acquisitions, particularly within an expanding market. It’s important to note that its recent annual revenue is considerably lower than that of its competitors, whose quarterly revenues surpass ServiceMax’s entire year – substantial acceleration is therefore essential.

Evaluating the price of ServiceMax’s SPAC deal presents a challenge. Current performance suggests one valuation, while forecasts indicate a potentially higher one. Investor enthusiasm for the shares will largely depend on their confidence in the company’s future growth prospects, perhaps more so than for companies with a more established growth history.

Silver Lake aims to realize a return on its two-year investment, and a SPAC appears to be a viable method for achieving a potentially modest profit from its 2019 transaction. However, the ultimate question is whether ServiceMax can meet its financial objectives and succeed as a public company, with all the associated demands. Only time will reveal the answer.