Thursday, October 11, 2012

ExactTarget Acquires Pardot: Great Exit for Pardot, Questionable Future for ExactTarget

ExactTarget announced its acquisition today of mid-tier marketing automation vendor Pardot, for just under $100 million ($95.5 million, to be exact). In one way, this was surprising: Pardot had seemed less interested in being purchased than others in the industry. But Pardot was also the only major marketing automation competitor without serious outside funding.  From that perspective it seems predictable that they would need access to more resources.

Looking over the published materials and listening to the investor relations conference call, it seems that ExactTarget’s motive was gaining access to Pardot’s lead nurturing and scoring capabilities. During the call, company management reported little overlap in clients: ExactTarget sells mostly to B2C enterprise marketers, while Pardot sells to small and mid-size B2B.

ExactTarget also said their relationship with Marketo, announced June 2011 and now ended, had produced little business.  No surprise there: it’s unlikely the ExactTarget sales team understood Marketo or was effectively incented to sell it.  More interesting, they said that trying to sell Marketo had shown that clients really wanted a single, integrated system for B2B and B2C. I wonder about that one: while some companies do need both, they are usually run by separate organizations with little need for tight coordination.

Once the products are integrated, ExactTarget expects their enterprise sales force to sell Pardot to large companies.  But they acknowledged that Pardot needs enterprise-class user rights and security management before that can happen. One advantage of the deal is Pardot will be able to do this with ExactTarget’s existing user rights infrastructure, saving development cost and speeding deployment. Even so, it will probably be some time before an enterprise-ready version of Pardot is available. That’s probably a good thing, since it will take time to train the ExactTarget people on the product and to find an effective price structure.

All told, I see this as a great deal for Pardot’s founders and employees, who get a very nice exit at about 9x 2012 revenue (although COO Adam Blitzer will stay on for now). Pardot clients might benefit from the company gaining additional development resources, but could also suffer as developers adjust the product to serve enterprise clients.  Service might also deteriorate if ExactTarget accelerates sales as much as they seem to expect. Pardot’s pricing (more on that in a minute) probably won’t change much: while ExactTarget could afford to fund competitive price cutting, it’s a public company and wouldn’t want to increase losses still further.

The acquisition's value to ExactTarget is less clear. They do get a strong foothold in fast-growing market and they’re probably correct that additional investment can help Pardot grow even faster. But Pardot’s revenue is just a tiny fraction of ExactTarget’s business: Pardot will take in around $11 million in 2012, vs. $280 million for ExactTarget. Even in 2013, when ExactTarget expects Pardot to yield $15-$20 million, that won’t be much more than 5% of the company total. Pardot's technology is solid but not spectacular, and equivalent products could be purchased for much less. The client base in small to mid-size businesses just doesn’t seem relevant to ExactTarget, and isn’t an obvious direction for it to move.

Back to pricing. The announcement provided a bit of new information about Pardot’s financials: specifically, $7.6 million revenue in 2011, and estimated $3 million revenue in the fourth quarter of 2012.*  Given Pardot’s growth, a $3 million fourth quarter implies $10 to $11 million for the year. This would be just under 50% growth vs. the $7.6 million 2011 figure. That’s actually a bit less than I had expected but seems plausible. It’s also in line with the announced employee count of 115, which is also lower than I had expected. 

As to pricing: figures in our VEST report showed Pardot had perhaps 600 clients in mid-2011 and a bit more than 1,000 in mid-2012.**  That comes to just over $1,000 per month in 2011 and just under $900 per month in 2012. Not a good trend. Revenue per employee is also moving in the wrong direction: the company reported 58 employees in mid-2011 and 95 in mid-2012, yielding a per employee drop from $130,000 to $115,000.  (Alternative explanation: ExactTarget is purposely being conservative in its Q4 estimate, in which case Pardot might be on track for $12 million or more in 2012.  That wouldn't change the thrust of my analysis, although it would erase the apparent decline in revenue per client and revenue per employee.)

Both figures probably reflect accelerated business growth accompanied by aggressive competitive pricing.  In itself, that's not so terrible. But both are also quite low compared with industry peers: Marketo will average about $3,000 per month per client in 2012 and even down-market HubSpot should get $600. Per employee figures are $225,000 for Marketo and $151,000 for HubSpot, which were growing at least as fast as Pardot. We know that Pardot ran a tight ship, so these figures probably don’t reflect high losses. But nor do they suggest much opportunity for profit growth, short of a radical – and highly unlikely – price increase.

This prospect doesn’t necessarily bother ExactTarget, which projected another $10-12 million loss from Pardot and iGoDigital in 2013, reaching break-even in mid-2014. The losses I can certainly see; the profits look less likely. Maybe the difference will come from enterprise sales – but even though margins are surely higher in that space today, competition is heating up and is coming from the same players – Eloqua and Marketo – who battered down mid-market prices in the past three years. If history repeats, ExactTarget may not get the lift it expects.

* What ExactTarget actually said was they expected $3-$4 million combined incremental revenue for the fourth quarter from Pardot and iGoDigital, an online targeting and personalization company whose acquisition they also announced today.  I don’t have revenue figures for iGoDigital but they had about 35% as many employees (40 vs. 115) and cost 20% as much ($21 million vs. $95 million), so I’d guess they account for at least one-quarter of the revenue total. Incidentally, iGoDigital sounds like a very interesting acquisition in its own right: it may be today’s more important story.

** See my August 12 blog post for these figures and the ones that follow. That post shows Pardot with 400 clients in mid-2011 but a closer look at my files suggests the real figure was probably around 600.


Unknown said...

Solid analysis. You mention the majority of ET's clients are B2C, did you get figures on that from a filing? If so, I'd love to hear the breakup or know more specifics to the #'s.

David Raab said...

Hi Kyle. ET mentioned being primarily B2C in the analyst phone call. I don't have specific figures.