Steve Murphy joined Epicor as Chief Executive Officer in October 2017, bringing over 20 years of technology industry executive management experience to the role. As CEO, Murphy is responsible for providing a long-term strategic vision for the company—with a focus on customer experience and delivering innovative products, services and support that drive business growth.
Nathan Latka sat down with Murphy to get his unique insights on the SaaS industry today. Some of the current statistics include:
- 4,782 total employees
- $300m Saas ARR
- 50% pure SaaS
- 596 sales reps that carry a quota
- 14,000 customers
Nathan Latka (00:00):
Hey guys. My guest today is Steve Murphy. He joined Epicor software corporation as CEO in October of 2017 bringing over 20 years of technology industry executive management experience to the role. As CEO, he’s responsible for providing a long-term strategic vision for the company with a focus on customer experience and delivering innovative product services that support and drive business growth. Steve, you ready to take us to the top?
Epicor CEO Steve Murphy (00:21):
Yeah. Hey, great. Thanks Nathan. Good to be here. I look forward to spending a little time with you.
Nathan Latka (00:25):
You bet. Now Epicor has quite a history here. They officially launched what was this like 1970 something?
Epicor CEO Steve Murphy (00:32):
The company’s about as old as me. So it’s been business since 1971. We’re almost 50 years old and we’ve grown a lot in the last few years, but we generally have stuck to supporting manufacturing, distribution, warehousing, things like that, which has become a pretty hot business in the last few years, surprisingly.
Nathan Latka (00:50):
Now, how do you explain what you do today simply. Because when you look at where you rank in magic quadrant to Gartner, I mean, you rank for things like CRM, supply chain management, you plan the HR tech space in the human capital management space. It used to be on-prem. Now you’re also SaaS. How do you button all this up into a sentence to describe what you do?
Epicor CEO Steve Murphy (01:06):
Yeah. What I’d say is if somebody makes moves or sell a physical product, it could be a vehicle, it could be construction materials, it could be something you buy in hardware store, the back-end systems that manage all of that movement and inventory. That’s what we tend to do.
Nathan Latka (01:21):
Interesting. Now, providing a little color here before you joined in 2017 of Epicor, and then we’ll jump in with you. Epicor was a public company, in 2009 revenue’s breaking 409 million. There was obviously an interesting breakdown of that revenue, where again, about 70 million of that was licensing revenue. There was a big consulting business that I think about $128 million. And then there was a maintenance contract business of 191 million and then a little hardware business for 20 million, maybe for installing on-prem sort of hardware stuff.
Nathan Latka (01:49):
You’ve now come in, obviously I imagine drastically changed this revenue mix and the company’s gone across many hands. So take me into your head, when you were first reached out by the Epicor team to join in 2017, what was the thesis? What did they want you to do and what got you excited?
Epicor CEO Steve Murphy (02:04):
Yeah. You know what the big one was the products were just about… Well, in two out of three cases, they were cloud ready. And the pivot to cloud hadn’t been done yet. And for the listeners thinking about, well, what does that mean, cloud? It’s kind of one of these terms. It’s confusing. They had been designed and built in a modern architecture so that you could have nothing more than an Android or an iPhone in your hand and be running the warehouse or the factory with the software actually running in servers in Seattle or Bombay or somewhere else, far away. Now having said that we hadn’t done it yet four years ago. We hadn’t actually retooled the sales force and gone out and converted our existing base to software as a service or gotten good at selling that product into new customers.
Epicor CEO Steve Murphy (02:46):
And over the last four years, that’s been our mission and we’ve been very successful at it. We’ve built that business into about a quarter of a billion dollars. We’ll be about a billion dollar top line business this year and between a quarter and a third of that now is the cloud. And it’s been a lot of work, but that’s the transition we’ve worked our way through. And one of the things we may talk about is it’s change management in people as much as anything, when it comes to transitioning a company with that big of a change.
Nathan Latka (03:17):
And breakdown a little bit here, again, how you got close to the company. Because again, this has been through a lot of private equity hands. In 2011, Apax acquired both Epicor and Activant and a $2 billion deal merged them together. It then ended up with KK&R in 2016 and a $3.3 billion deal. Were you sort of an EIR at KK&R and they put you in this did they find you at the same time as they bought KK, as they bought Epicor, and you were going to be the guy?
Epicor CEO Steve Murphy (03:42):
Yeah. You know what they found me. And if you think about, well, when they find somebody, what are they looking for? And I think in the case of Epicor, they were looking for an executive that really understood manufacturing and distribution, like the business. I’m a process engineer. I’m a mechanical engineer. And about half of my career was in factories and warehouses.
Epicor CEO Steve Murphy (03:58):
And when I think about why KK&R thought I would be a good fit, they knew that I knew the products and had used the products and competed against the products. And more than anything, I believed in the quality of the company and products. And which what four years ago, there was a lot of… There were many open questions around what would be required for the company to grow and be successful. And at an absolute minimum, whether it’s you or me or somebody else, you had to look at it and say, wow, these are great products. Customers will love these products and they’ll buy them.
Epicor CEO Steve Murphy (04:30):
If you couldn’t believe that, you probably wouldn’t have taken the CEO job. And I knew enough to say products are in good shape. They’ve been invested in and cared for properly. We can go out and grow the business. They found me, I was a good fit. I took a look at it and said, I think I’m the right person to grow this business. And it has worked out as planned, which doesn’t always happen. But in this case, it’s happened.
Nathan Latka (04:51):
Rarely happens, I might add. Rarely happens. So Steve give me a sense of how the mix has changed since 2017. Again, you had a big on-prem business, a big maintenance contract, SLA oriented business. You’re trying to transition a lot of this to the cloud, but what did the revenue mix look like in 2017? What was total top line and what percent was licensing SaaS?
Epicor CEO Steve Murphy (05:08):
Yeah. So I think the best… Two points, the best way to look at it would be four years ago in a given quarter, we would book 90% on prem, 10% SaaS or less in the most recent quarter, it was a 60/40 split, it flip flopped. So 60% SaaS, 40% on prem. So we have crossed the Rubicon. We do book more SaaS than on prem, and that did take the full four years to get to that point. And I don’t think we’ll ever go back. I think from this point forward, we’ll always book more SaaS.
Epicor CEO Steve Murphy (05:37):
There is a segment that really likes on prem. And in many cases it could be a family business where they are good at managing assets, because the biggest difference with on-prem is you have a cabinet with servers in it, you have Dell servers or whatever. And if you’re good at managing those and patching and upgrading, and you got people that have that knowhow, on-prem can be very cost efficient, but it requires that level of skill. I think that for us, 60/40 split will probably move towards 80/20. I don’t know if it’ll ever go much beyond that because I think there’ll always be a segment that likes to be, do-it-yourselfers when it comes to managing the ERP system. That’s my guess.
Nathan Latka (06:15):
And with this transition again, you also have to manage growth. I mean, people want to see growth in a business, not just changing revenue and cannibalizing on prem for SaaS. So if you’re said you think you’re about to break a billion dollars in ARR, about a third of that’s going to be SaaS, where were you exactly a year ago in terms of run rate top line?
Epicor CEO Steve Murphy (06:31):
Yeah, a year ago, the run rate was about 7% or 8% lower. So we’ve been a steady mid to high single digit top line grower. Because the number’s big, you’re good with numbers. I am too. So nominal amount’s big enough that we’ve in that range, and we’ll probably grow closer to 10% top line this year. Having said that because SaaS has been a quarter to a third, that has three or four times that fast. And we’ve typically seen 30% to 40% growth, sometimes more in that SaaS business. And it’s most of our growth. And then with the on prem, seeing it be roughly flat, the on prem business and the maintenance business. It isn’t contracting it, isn’t getting smaller, but it’s almost perfectly flat at this point.
Nathan Latka (07:15):
Are debt providers or other people that are putting valuations in the business. Do you feel like they’re appreciating the rapid growth of the SaaS business considering it’s a little bit muddied from all the other revenue lines?
Epicor CEO Steve Murphy (07:25):
Yeah. It’s a great question. I think two years ago, we were just at the point where they noticed it. A year ago when Clayton Dubilier & Rice was putting a price tag on us, valuing us they did appreciate it at this point with the numbers we’re talking about. They absolutely do. But there’s kind of, within your question, I think there’s a saturation point at around third to a half of your ARR. When you get to that point being cloud, people do have to say you’re kind of a cloud business.
Epicor CEO Steve Murphy (07:54):
And then with the bookings number I gave you because we’re booking more SaaS than anything else, it changes the valuation. And it will be interesting for people like us to see whether or not that valuation model holds up. I mean, there’s no Excel model that says you should have a different discount rate for one revenue stream versus another, but people do like cloud as far as valuation. And that is in style and probably will be at least for a while.
Nathan Latka (08:19):
Yeah. Well, this is a little bit what I don’t understand because you’ve got these companies like UiPath and DataBricks, which are trading at 60 to 65X ARR multiples in terms of the last round of VC they brought in. But when you go back and the deal, you just cited with a CDNR., I think the total deal price, there was a $4.7 billion deal. Even if you only had at that point $300 million in pure SaaS ARR. There are companies out there right now that are pure SaaS plays, with less ARR getting higher valuations than 4.7 billion. And you go, what the hell’s going on here? Steve’s, this is a more durable business. Steve has more experience. They should be getting a higher valuation. Why did CDNR only pay 4.7 billion?
Epicor CEO Steve Murphy (08:57):
Yeah. It’s a really good question. I think there are two things going on. One is when you think about how much capital right now is on the sidelines chasing growth stories, you do see some frothy exuberance and some of the best people are willing to place. So that’s one, I think the other one is, there’s a sense of well deserved respect for how hard it is to migrate the install base. So you could look at Epicor and say, well, you’ve got a tremendous amount of value, but unleashing it or unlocking it takes time and effort. And that’s true. So, I mean, I understand why the valuation came out around 4.7, 4.8 billion. Now, as we demonstrate, kind of the say-do quotient for us, it’s high, as far as converting that installed base. Which it has been, it does help with evaluation.
Epicor CEO Steve Murphy (09:44):
And I think as we go through this year, year or two, from now as those metrics, the one you refer to, the ARR, the percentage of it, which is SaaS goes higher and higher and higher, you have to say, okay, you’ve got it, you’re there. But I think that’s it. I think that you’ve got a lot of companies where the architecture, a couple of points you made 60, 70 times ARR. The architecture could be completely modern. And there’s some of those points of resistance they just don’t have in the model that gives them benefit evaluation. Also true that a lot of these companies won’t live up to it and it’ll take a year or two before people realize, “Hey, they’re nowhere close to being worth what we thought.” So time will tell. But I don’t despair. I think CDNR paid a fair price. And I think we continue to justify a higher price as we execute.
Nathan Latka (10:32):
CDNR is kind of a surprise buyer in this space. I mean, you’ve got ties to Austin. KK&R knows who Vista Equity is. Why didn’t Vista come in and offer more than 4.7 billion?
Epicor CEO Steve Murphy (10:41):
Well they’re all pretty shrewd operators and bargain hunters. And I think that in some cases, the analysts or the people running the valuation models look more at the point I made earlier, which is, “Hey, there’s a lot of legacy business here. It’s going to be expensive to migrate it over.”
Epicor CEO Steve Murphy (10:58):
And if the attitude of the investor like a CDNR is, “Hey, let’s take a little time and look at the quality of the SaaS products. Have they really modernized them as much as they say?” In our case we have, and then some. It’s interesting when you do one of these beauty contests, different people look for different things and come to different conclusions. And it’s capitalism at it’s rawest form. So I think CDNR has been a great partner, and I think they’re thrilled with how well we’ve done since they bought us. But I think we have a lot of respect for Vista. I think they probably kicked the tires and said, that’s a big chore to continue to rotate over from the on-prem business. And we’re not sure we want to sign it for something that could take that long.
Nathan Latka (11:35):
There’s a path, I imagine where in 2022 or 2023, when some of this debt is coming due, we see Vista coming in and offering you something like 10 billion. Are we going to read that headline?
Epicor CEO Steve Murphy (11:45):
Who knows? Who knows? I think you never know. But I think that the valuations, that the… We are aware of the fact that as we dramatically increase the percentage of business at SaaS, it helps with valuation. And there are some real things in there around net retention for SaaS, it’s really high.
Nathan Latka (12:03):
How high is it? I mean, are you above 140 in net dollar retention, 140%?
Epicor CEO Steve Murphy (12:07):
We aren’t that high, but we’re well over 100. I don’t think we would share exactly what it is, but I’d say it’s demonstrably higher than old fashioned maintenance, which is nice. Because cross sell up, they’ll add users. We really like that. So as a guy, as a 50 year old CEO, that kind of poo-pooed SaaS 10 years ago, I’ll say that it’s really sticky. And once a customer decides they like SaaS, they tend to buy more and more users and add modules over the years. More than I expected.
Nathan Latka (12:35):
I’m going to ask this question because you are a top 1% of CEOs in the world that can answer this. You joined in 2017, the company was already in the hands of private equity. There’s a lot of private equity firms that are dealing with CEOs I have on those show, doing things like 200 million secondaries. Magnifying that times by a factor of 10 at what you see at Epicor. The company had approximately 1.7 billion outstanding on a first tier loan that paid three 20 BIPs over LIBOR and that matured in June of 2020. This was in 2019.
Nathan Latka (13:04):
I imagine these debt schedules fuel a lot of the M&A in the private equity world. So can you just teach us quickly, how does private equity companies like CDNR and KK&R make money on a play like Epicor while also managing this debt? And how does that impact your ability as a CEO to run the company?
Epicor CEO Steve Murphy (13:19):
Yeah, I think for most people, it would be very similar to when you go buy a house, you put a down payment down, maybe 20%, four quarters of the house is debt. So if the house appreciates, you get all the appreciation, you don’t have to pay the bank on the appreciation. So for us, I think that we really need to know that if you’re a CDNR or KK&R for starters is the recurring revenue stream. We talked about retention rates, is the recurring revenue stream as stable and profitable as we thought?
Epicor CEO Steve Murphy (13:46):
And can we build upon that in some kind of a predictable fashion? And if you can do that with a software company, you can take on that kind of debt load, Nathan, and be comfortable with it, and then demonstrate, I think here’s the biggest thing, demonstrate over a period of maybe a year and a half or two years, six to eight quarters, to the investment community that you’ve got a… It’s kind of like a bond with the call option.
Epicor CEO Steve Murphy (14:06):
You’ve got this bond, which is the recurring revenue stream. The call option is you have great products and you can sell more and more of them, and flip them over to SaaS. If you’re an investor and you can find an asset that fits that profile, you can do really well with it, but you got to do both. You’ve got to be that predictable bond, and you’ve got to find the growth with the call option.
Epicor CEO Steve Murphy (14:22):
You can do things like, in the last six months, and this is all public record we went back into the markets and we’re able to refinance the first lien and do really well on it. And we had earned the right to do that. We didn’t go out and get a dividend or do anything self-serving. We just said, wow, we can take this thing down by about 125 basis points. When you’re talking about 2 billion plus in debt, it saves a lot of money.
Epicor CEO Steve Murphy (14:47):
So those are some of the things that when management cooperates with the investor, you can really create a lot of long term value, but you’ve got to have that level of cooperation. And we’ve got that with KK&R, a great shop, and we have it with CDNR. But you really zeroed in on it that I think is part of the formula. It’s got to work.
Nathan Latka (15:06):
There’s a lot of people that want to do like mini versions of private equity firms themselves. They’ve got 100 million to play with. They want to do this. And I think what a lot of people miss is a lot of these private equity firms. They don’t actually have to grow revenue a ton to make money on these deals because they can get smart with how they do debt.
Nathan Latka (15:20):
So when you talk about the refis and the first lien refi and things of that nature. I mean, it was reported that about $560 million of the proceeds from that loan being sold by Epicor was used for a payout to KK&R. So they can still make money on this. My question for you as CEO is like, when they’re recruiting and you’re coming in, how do you make sure that you and your team get the equivalent of some gains from this sort of arbitrage, the private equity firms are playing?
Epicor CEO Steve Murphy (15:42):
Yeah. So I think that human beings, there’s some consistency, you want to be paid. They want to make money. And one of the biggest challenges to the point you just made is when you’re private, the payout may be 3, 4, 5 years apart. Whereas when you’re public, every 90 days, you get outside the quiet period, you can trade the stock. So I keep an eye on that. Because I’ve got a group of people, we’ve got 4,000 employees, but 100 or so, most of what they make is in stock or a big portion of what they make is in stock. And we try to think about whether it’s a dividend, once every three or four or five years or a transaction. What’s the frequency upon which people need to get that compensation and feel right about it?
Epicor CEO Steve Murphy (16:23):
And you can’t rush it. So you can’t go, “Hey, we’re going to try to do something to create liquidity and have the company’s balance sheet suffer at that expense.” So I think it’s think with the end in mind, if you think, “Hey, within the next three or four years, we want to do something like this.” What are the metrics? How does the balance sheet and the income statement, what do they need to look like so that the banks would be thrilled to be a part of whatever we’re expecting to do.
Epicor CEO Steve Murphy (16:45):
And if you do that, then you’re fine. I think what people get in trouble is when they want to create liquidity too frequently in private equity, you can’t do it every year or every other year, maybe it’s every three years. Or if they think they can wait five to 10 years, then you lose good people. Because people, they have kids in college, they have a variety of responsibilities where they’ve got to get that at some point. That’s the advice I would give is you probably need to have a liquidity vet every three or four years, but you need to plan for that as part of your job all the time. You really need to be prepared for it.
Nathan Latka (17:16):
Steve, as we wrap up here, what percent of your base revenue, call it a billion run rate, do you think needs to be high margin, pure play cloud revenue for you to test public markets, whether it’s via SPAC or an IPO and tap into these sort of very frothy SaaS evaluations we’re seeing right now?
Epicor CEO Steve Murphy (17:34):
Yeah. So I think I actually have a pretty specific answer. I think it’s half of our recurring revenue, half or more of our recurring revenue needs to be SaaS cloud revenue. And we’re right about there. So I’d say we’re about 70% recurring. So we’ll say 700 million, 675 is recurring. And I’d say at around 300, to 350 we’re clearly we’ve crossed the saturation point SaaS. That’s my perspective on it.
Nathan Latka (18:01):
Steve, we love that, man. Take us home here. What’s something you wish you knew, before you got into all this business stuff, what’s something you wish you knew when you were 20?
Epicor CEO Steve Murphy (18:13):
As a father of a couple of a kid, who’s about 20, a couple other teenagers what I try to tell them is failure’s not only necessary. It’s by far the quickest learning mechanism there is. So don’t spin on that failure, accept it and move on. And some of the best lessons you learn will be for some tough failures. You’re not the only one. So it’s a hard lesson to learn that don’t be embarrassed, do your best. And if you fail, keep going.
Nathan Latka (18:41):
Guys, Steve Murphy, Epicor previously OpenText, joined Epicor in 2017, still in the hands of KK&R, ultimately 4.7 billion deal with CDNR. Last year now scaling the company, targeting, getting up to 50% of his base being pure play SaaS revenue. Currently, 70% of total revenue is recurring. But again, just not pure play SaaS yet. They’re continuing to scale that market with high, high net dollar retention rates. Steve we’ll follow along. Thanks for taking us to the top.
Epicor CEO Steve Murphy (19:06):
Yeah. Thanks Nathan. It was pleasure.
