SaaS Interviews with CEOs, Startups, Founders
Epicor Targets $1b Run Rate, 50% Pure SaaS. $300m SaaS ARR Today.
10 Mar 2021
Chapter 1: What is the current revenue growth rate for Epicor?
A year ago, the run rate was about 7% or 8% lower. So we've been a steady mid to high single digit top line grower. Because the number's big, you know, 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 grow closer to 10% the top line this year. You are listening to Conversations with Nathan Latka.
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If you'd like to subscribe, go to getlatka.com. There, you'll find a private RSS feed that you can add to your favorite podcast listening tool, along with other subscriber-only content. No questions asked. Hey guys, my guest today is Steve Murphy.
He joined Epicor 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 ready to take us to the top?
Hey, great. Thanks, Nathan. Good to be here. I look forward to spending a little time with you. You bet. Now, Epicor 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 companies. 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 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're also SaaS. 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 backend systems that manage all that movement and inventory, that's what we tend to do. Interesting.
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Chapter 2: How has Epicor's business model evolved since 2017?
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? 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 90% on-prem, 10% SaaS or less. In the most recent quarter, it was a 60-40 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. And I don't think we'll ever go back.
I think from this point forward, we'll always book more SaaS. There is a 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-prem is 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've 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, 60-40 split will probably move towards 80-20 split.
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 SaaS.
So if you said you think you're about to break a billion dollars in ARR, about a third of that's going to be SaaS, where were you exactly a year ago in terms of run rate, top line? Yeah. A year ago, the run rate was about 7% or 8% lower. We've been a steady mid-to-high single-digit top-line grower. Because the number is big, you're good with numbers. I am too.
The nominal amount is big enough that we've grown in that range. We'll probably grow closer to 10% the top line this year. Having said that, because SaaS 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 SaaS business And it's most of our growth.
And 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.
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 SaaS business considering it's a little bit muddied from all the other revenue lines? Yeah, it's a great question. I think two years ago, we were just at the point where they noticed it
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Chapter 3: What is the significance of SaaS revenue for Epicor's future?
there's a path I imagine where in 2022 or 2023, when some of this debt is coming due, 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 the valuations, 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. How high is it? I mean, are you above 140 net 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 demonstrably higher than old-fashioned maintenance, which is nice, right?
Because cross-sell, up-sell ad users, we really like that. So as a guy, as a 50-year-old CEO that kind of poo-pooed SaaS 10 years ago, I'll say that it's really sticky. And once a customer decides they like SaaS, 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 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 this show doing things like $200 million secondaries, magnifying that times a factor of 10 at what you see at Epicor.
You know, the company had approximately 1.7 billion outstanding on a first-year loan that paid 320 bps 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 a 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 Epicor while also managing this debt?
And how does it impact your ability as a CEO to run the company? Yeah, 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 a KKR, 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 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 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 of the call options. You have great products and you can sell more and more of them, 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've got to do both. You've got to be that predictable bond and you've got to find the growth of the call option.
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Chapter 4: How has the revenue mix changed from on-prem to SaaS?
It's a hard lesson to learn, but don't be embarrassed. Do your best. And if you fail, keep going. Guys, Steve Murphy, Epicor, previously OpenText, joined Epicor in 2017, still in the hands of KKR, ultimately a $4.7 billion deal to 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're continuing to scale that market with high, high net dollar retention rates. Steve, we'll follow along. Thanks for taking us to the top. Thanks, Nathan. It was a pleasure. All right, guys, cut. Steve, what'd you think, man? You have fun? That was great. Yeah, I think that was good.
And I appreciate you weaving the numbers in there. I'm a numbers guy too. And as we both know, most people aren't. So hopefully you got an audience that'll enjoy that. It was exciting. And for those who like the numbers, there's plenty to chew on. It's how the world works. You got to understand the game and play it. So I appreciate you coming on, being so transparent.
Please thank your team for making it really easy to book you and get this all scheduled. Hey, good stuff. All right. Take care. Bye.