Chessman Deal

Question 1

AST Industry Overview Checkmarx

Answer 1

• Large and growing market. Secular shift in AST market drives growth from ~3bn in 2020 to 4.5bn in 2023 with CAGR of 15%
• Converging tailwinds: 1. Growth in app-driven economy and software. IDC estimates that 80% of Fortune 500 are going to be large producers of software by 2024, 2. Adoption of DevOps, 3. Lack of security professionals drives need for automated security and developer education 4. Cost efficiencies associated with time-to-market and fixing an error earlier in the development process
• Low cyclicality in the industry. Mission critical offering with high switching costs creates protection from market downturns. AST market proved to be resilient in COVID also because of move from network based defenses
• Highly fragmented industry with top 5 holding 40% of the market
• Basis for competition: comprehensiveness of the portfolio of solutions, quality of testing, SaaS offering

Question 2

Checkmarx Investment Highlights

Answer 2

• 2.9bn market growing at 15% supported by secular shift to DevOps
• Superior product offering: broad comprehensive portfolio of products, number of coding languages supported, leader in Gartner’s MQ
• Strong differentiation from the competition due to expertise developed from establishment in 2006 and number of lines of code scanned and errors fixed
• Large diversified customer base
• Successful transition from legacy mostly on prem offering to SaaS based with supporting services
• Attractive SaaS business model and recurring revenue with high cash EBITDA margins
• Huge cross-sell and up-sell opportunity

Question 3

Checkmarx Risks

Answer 3

• Fragmented industry with large well-funded competitors such as Synopsys
• Threat of a large consolidator coming in like Microsoft / Github
• Profitability profile (but focus on growth)
• Concentration of customers in financial services
• COVID impact

Question 4

Checkmarx Financial Overview

Answer 4

• Revenue $140mm in 2019 growing at 40% in 2020 and 34% in 2019. SaaS 90%
• Gross margin 82% growing (COGS are cost of servers and customer suport)
• Op margin negative due to high investment in Sales but growing to 20% in 2024
• EBITDA margin negative in 2020 but growing to 15% by the end of the period
• Low capex investments - positive free cash flow in 2020 (FCF higher than EBITDA because of change in deferred revenue)

Question 5

Checkmarx Valuation

Answer 5

No pure play DevSecOps comps. Ping Identity (EV/Rev 6x) was instructive given similar growth and profitability but we had a few buckets:

• Core security (Ping Identity, Palo Alto Networks, Checkpoint, Splunk, Proofpoint EV/Rev 5.8x)
• Infrastructure comps (Data Dog, Dynatrace, Atlassian EV/Rev 14x)
• High growth security (Okta, Zscaler, Crowdstrike) but it was meant to be more aspirational because of growth trajectory
• Precedent trxn were pointing to about 10-11x

We suggested that this company has to trade in high single digits, up to 10x, which is where strong (but not the best in class like Okta and Zscaler) trade. Hellman ended up paying 10.5x, which was really close so TPG was frustrated