Shares of Demandware — a provider of cloud-based e-commerce solutions used by retailers and brands — nearly tripled in the past year. Recently trading at $75.30, the stock earlier this month hit a new all-time high at $82.23 after getting a bump from a strong fourth quarter earnings report, with subscription revenue advancing 46 percent.
What it Offers
Demandware delivers a set of enterprise-class merchandising applications via its cloud platform. With the company’s solutions, customers are able to easily design, quickly implement and totally manage their own customized e-commerce sites — including websites, mobile applications and digital storefronts.
An alternative, maintaining an in-house solution behind a firewall, can be pricey and inefficient. Some of the drawbacks include a lack of scalability, the inability to fully customize and no real upgrade cycle.
Demandware, which targets potential customers with annual online sales ranging from as little as $2 million at the low end to more than $300 million, has a total addressable pool of roughly 3,500 companies in North America and 2,500 across Europe.
As of the end of 2013, Demandware had 204 customers live on its platform, a 35 percent increase from the year-ago level (and up from 184 customers at the end of the third quarter), with 820 live sites (up 42 percent year over year).
About 70 percent of Demandware’s revenue growth can be attributed to new customer additions. This rip and replace “re-platforming” is a key driver, as enterprises increasingly realize it’s often easier and cheaper to move digital commerce applications to the cloud.
Steady Revenue Growth Ahead
With a string of new customer acquisitions last year, Demandware is on track for continued strong revenue growth both this year and next. Since implementations take some time (usually six months), customers added late in 2013 that go live on the platform throughout this year will begin to meaningfully contribute to revenue in 2015. There are currently 36 customers in the implementation stage.
For 2014, the company expects subscription revenue growth of around 41 percent versus 50 percent last year. Given the record number of new customer wins last year and the fact that the average annual subscription contract value (ACV) for new customers signed in 2013 rose 30 percent to $400,000, management looks for subscription revenue growth to re-accelerate in 2015 to the 45 percent to 50 percent range.
Demandware doesn’t do the implementations itself, instead relying on an ecosystem of 50 plus systems integrators and partners, including Accenture and Sapient. There are now more than 600 certified developers trained to deploy the Demandware platform, more than double the number in 2012.
In addition to the benefits from opening new accounts, the company is now starting to get a boost from its larger installed base thanks to its unique “shared success business model.” Customers pay Demandware a percentage of their gross merchandise value (GMV) generated on the company’s platform, ranging from 1 percent at the low end (for volume accounts) to 4 percent, which provides a nice, ongoing participation revenue stream.
While US e-commerce sales are growing about 12 percent to 13 percent annually, Demandware’s installed base of customers (those on the platform for at least a year) in 2013 experienced GMV growth of 33 percent versus 2012 growth of 34 percent. In 2013, Demandware had 17 customers doing more than $100 million in GMV on its platform (including six between $200 million and $500 million) versus 14 in 2012 and seven in 2011.
As of the fourth quarter, average revenue per customer (on a trailing four-quarter basis) hit $515,000, up from $506,000 in the previous quarter and $479,000 in the year-ago period. Revenue recognized in the quarter beyond base subscriptions, considered overage fees (not included in the ACV), totaled $13.1 million or 39 percent of subscription revenue. In any given quarter, the mix of overage revenue is often a function of where customers are in their contract cycles.
At the end of 2013, contract backlog (made up of unbilled committed minimum subscriptions plus deferred revenue) stood at $348.6 million, an increase of 67 percent from the year-ago level.
The 2014 consensus estimate for total revenue of $144.2 million indicates growth of 39 percent, while the Street-high estimate of $151.5 million represents 46 percent growth. In 2013, Demandware’s total revenue rose 43 percent to $103.7 million. With Demandware’s market cap up to $2.6 billion, the stock trades at 18 times the 2014 consensus revenue estimate and 12.6 times the 2015 consensus of $205.8 million.
Competition in this segment of digital commerce is intense, with NetSuite and many of the legacy vendors involved — including Oracle, IBM and SAP. There has been some consolidation in this space (SAP in August reportedly paid as much as $1.5 billion, about 10 times revenue, for Hybris), so a buyout of Demandware is always a possibility.