San Jose's Xactly delivers an exacting case study for our Growth Capital structure

News report: Xactly Corp. (NASDAQ:XTLY) Issues Q1 Earnings Results, Beats Estimates By $0.06 EPS

If there ever was an exacting case study for the benefits of Wellington Financial’s True Growth Capital, San Jose’s Xactly Corp. is it.

Xactly (NYSE:XTLY) provides SaaS-based solutions to manage sales compensation / incentives for employees of a company. Properly defined and administered plans can increase profits, control expenses and drive quarter-over-quarter results. For many companies, the traditional method of using excel spreadsheets is inefficient, both fraught with errors and labour intensive. Some large software companies offer sales compensation modules (such as Oracle), but they are not as detailed/tailored as this affordable on-demand sales compensation solution.

Founded in 2005, Xactly is headquartered in San Jose, California and has offices in Denver, London UK, and a development office overseas. The Company had previously raised US$75M from a number of venture capital investors, including Alloy Ventures, Bay Partners, Key Venture Partners, Polaris Venture Partners, Rembrandt Venture Partners, Outlook Venture, European Founders Fund and Bridegescale Partners. Salesforce.com was also a minor investor, as Xactly offered up by Salesforce’s own team when its clientele wanted a quota management solution. The most recent VC round was in June 2011.

Our first Xactly financing was in May 2013. A US$12M slug of non-amortizing debt that sat quietly junior to Xactly’s existing commercial bank revolving line of credit. The company was showing great growth, had supportive VCs, and definite plans to hit the public window. With the all-important 30%+ top line growth rate, and trailing annual revenue for FYE Jan/13 of US$36.6M (72% of which was SaaS, with the balance being pro serv), the company had attracted the attention of Wall Street’s bulge bracket investment banks.

The question before the Board and Management was simple: How do we finance our burn while we wait for JP Morgan’s Cristina Morgan to tell us that the IPO window is open for small cap SaaS deals?

The VCs around the table more than likely had money reserved to fund the story, naturally, but every incremental new dollar they draw from their own Limited Partners needs to have a chance of generating an Internal Rate of Return of at least 35% (generally speaking). If you’re a pension plan with an allocation to Alternatives, you understand that a VC fund needs to “support” its existing names; but you still want them to earn your targeted net return on every additional dollar they draw down. If not, the VC is actually “hurting” the potential total return of your allocation to the asset class. Both from a Return on Invested Capital standpoint as well as an IRR one.

That’s where our firm comes in.

With an all-in cost of capital in the Teens, and no amortization payments over the 5 year life of our US$12M loan, Xactly’s CFO put our financing to work to grow the business. 17 months later, when most debt funds and banks want to see their loan start to amortize, the tech IPO window still hadn’t opened. Happily, Xactly’s biv dev opportunities were no where near exhausted. But those plans required additional capital, so we led a new US$25M junior debt round with an incremental US$13M going into the business in October 2014.

For Xactly’s management and founders, the benefits of our True Growth Capital were clear. Having already raised US$75M from VCs, the incremental dilution that would have flowed from another US$25M of equity capital in the two year lead-up to the IPO would have been punative, whatever the valuation. For JP Morgan, as lead underwriter, they benefitted too for not having to worry about explaining why the equity round immediately leading up to the IPO was priced at “X/share” versus “Y/share”, and why whatever post-round valuation lift was sought was justified.

If you had a peek at the SEC S-1, you’d see that Xactly had grown its quarterly revenue to US$17.8M as of the quarter ending April 2015, the quarter immediately prior to the June 2015 NYSE IPO.

Quarterly run rate SaaS revenue had grown by ~30% over the prior twelve months, which kept the company firmly in the IPO queue. When the time came to market, the IPO calendar had produced some choppy results for the institutional buyers who play on such deals. That gave “Mr. Market” leverage, and “he” pushed the range of the proposed offering down to US$8 — but the US$60M IPO got done just the same. Our loans were paid off using part of the proceeds of the IPO, and

Yesterday, Xactly released its quarterly earnings results. The company reported ($0.09) EPS, topping the consensus estimate of ($0.15) by $0.06. Our San Jose-based Fund IV portfolio co had revenue of US$23.30 million for the quarter, compared to analysts’ expectations of US$22.08 million

Quarterly revenue was up 30.9% compared to the same quarter last year.

The stock is now up about 40% post-IPO, while the NASDAQ is off a snick. That’s fabulous performance on both an absolute and relative basis.

Everyone’s happy. And while it takes a village, Xactly is the perfect example of what can be done with our patient True Growth Capital.

MRM
(disclosure: our Fund IV owns warrants in XTLY)