This week the deal we are digging into is Anaplan (NYSE: $PLAN) which priced last night at $17, well above the proposed range of $13-15. It’s a good old-fashioned enterprise SaaS company at the highest end of the “enterprise performance management” segment.

Earlier this year we saw Adaptive Insights ($ADIN) get snatched from the IPO alter by Workday $WDAY just before pricing. Workday paid $1.5B for ADIN which is double their proposed IPO valuation of $700M.

Of course in this IPO market, we expect every enterprise SaaS stock to double post offering. Witness Elastic ($ESTC) last week. Valuations are stretched.

What’s “weaponized analytics?”

Anaplan has taken $300M to build a product sophisticated enough to handle the kind of large and complex planning requirements of enterprise customers in the high end of the Global 2000. These customers tend to have operations all over the world, supply chains, and large numbers of customers – examples include Coca-Cola, Walmart, and Vodaphone to name a few.

Big companies run on plans. They typically spend September and October putting together their operating plan for the next calendar year. Then they adjust that plan based on measured results throughout the year.

Every department gets involved in the process, and results are “rolled up” from the bottom and also driven by top-down objectives. Most of that two month period is making sure the top-down and bottom-up results align with a little “over assignment” at each level to provide some “cushion” for management.

The primary tools companies have used to support the process have been data and analytics and lots of Microsoft Excel. Analytics have become reasonably pervasive with market leaders that include Tableau ($DATA).

The problem with all plans, no matter how meticulous is that stuff happens. Years ago during a project with American Airlines operations, they explained that their computers worked all night long to create a perfect plan for the next day. The procedure was incredibly complicated to build because it not only had a vast number of flights but had to take into account crew schedules, maintenance schedules, compliance rules, staff limitations, hotel room availability, etc. But once the first flights took off the plan was useless thanks to mechanical problems, weather, and other events. The only way to make adjustments was via “ad-hoc” methods of trying to use simple rules to patch things on the fly as it were.

During the 1980’s and 1990’s more sophisticated systems were imagined but we were far from having a so-called “model of the enterprise” with which to make informed real-time decisions. Today we are much closer, and Anaplan is doing this today by capturing and modeling the many layers and elements of an enterprise scale business and allowing decisions to be measured regarding the real business impact in real time.

It’s as if one could take all the intelligence and analytics available around each part of the business and tie it into one system that takes all those inputs and generate a kind of “pro-forma” set of operating and financial statements for any given business plan.

Competitive Positioning

The primary competitor in the space, Adaptive Insights, almost went public this year, so we have their positioning chart from their IPO roadshow. It’s accurate and consistent with how Gartner Group sees Anaplan and the other companies in the space. At one end of the scale are simple tools like Excel which are dead simple and provide rapid time to value. However, they top out quickly and are not integrated at all. Adaptive Insights took advantage of this hole in the market with their easy-to-use offering that added abilities to do modeling, reported and analytics with integration across departments.

Anaplan requires a relatively large investment of time and money to implement and begin to see the benefits of use. But no other tool offers their level of sophisticated modeling and scalability. There are other planning tools for specific operational areas like manufacturing (SAP comes to mind) or logistics but Anaplan is unique in that it works at the enterprise level – tying together sales capacity with logistics, manufacturing, and finance.

At the core of the Anaplan solution is their proprietary “hyperblock” technology that basically compiles myriad rules and relationships together so that it becomes possible to see how changes in one area impact another without needing to gather more data. Having everything in one place also allows algorithms and the application of machine learning in ways that are more effective.

The question is how much of the market will go to a high-end provider like Anaplan versus easier-to-adopt but still fairly powerful solutions like Adaptive Insights (now Workday)? Anaplan has a land-and-expand sales model that results in very high annual contract value (ACV) over time.

Just how big is the market? Adaptive Insights put forward estimates of the “Enterprise Performance Management (EPM)” market of $4.2B sourced from IDC. Their own “bottoms-up” TAM came to $12.5B. But they go after a lower segment of the market where there are lots more customers (~460K) but the average revenue is smaller at $27K.

Anaplan trots out a sketchy $21B number based on IDC estimates but it includes “analytics” which is not really valid. The top 25 PLAN customers have an average ARR of $2.3M. Over 213 customers (~22%) are over $250K in ARR. The real market opportunity for Plan is in the Global 2000. Even in the existing customer base PLAN has on the order of $1B opportunity. If PLAN can penetrate 1/2 of the Global 2000 they can be a $5B company.

Anaplan management would suggest they could be much bigger as they expand further into different planning segments like Sales & Marketing, Finance & HR and Supply Chain.

Valuation and Stock Conclusion

Despite some recent pressure, the market for enterprise software has never been better. It’s gotten so that some of the best stocks are difficult to buy at current levels. Witness Elastic $ESTC which opened last week at $70 after pricing at $36 (versus the original range of $26-29). That makes it hard for individuals to purchase stock in the aftermarket and for institutions to have a large enough position in the name to justify keeping it in their portfolios.

Shares of $PLAN should open up strongly as well. But as shown in our IV estimate below they have less upside in our view then $ESTC. The reasons are a combination of long sales cycles and fewer customers given the highly complex nature of the software. Another way to say is it is that the “funnel” for $PLAN is much smaller. A typical customer for Anaplan needs to have at least 1000 employees before it makes sense. There is also the fact that at the lower to middle end of 100 to 1000 employee companies Adaptive Insights is a better fit. In the hands of Workday we believe they will continue to execute well and be a leader in this segment. They are unlikely to challenge Anaplan at the high end.

Our IV estimate is $25 and we wouldn’t’ be surprised to see the stock open there, limiting our interest in the near-term. But this is a high-quality company in the enterprise software space so, like many, we want to own it. The only question is the price.

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