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Genesys: The Best Is Yet to Come

Genesys last week announced that private equity firm Hellman & Friedman has purchased a minority interest in the company from an existing investor, Permira, and will invest approximately $900 million -- an investment that implies a valuation of approximately $3.8 billion.

The $3.8 billion valuation is pretty impressive for a firm carved out of Alcatel-Lucent at the beginning of 2012 for $1.5 billion. In four and a half years, Genesys' presumed value has risen by more than 250%.

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First, let's put the $900 million number in context. As I write this, the market cap for Interactive Intelligence, Genesys' contact center cloud competitor, is $950 million. Five9's market cap is $633 million, and NICE is purchasing inContact for about $940 million.

Given Genesys' new market valuation, H&F now owns about 24% of Genesys. Permira, along with Technology Crossover Ventures and the other original investors, continues to own a majority stake in the company.

So what drove the increase in valuation? How has Genesys performed in the past four and a half years?

On a call with industry analysts, Genesys President Tom Eggemeier declined to provide company revenue for 2015, as the private company had not previously disclosed that figure. However, he did say that on a constant currency basis the firm grew more than 8% in 2015. Genesys reported revenue of $850 million for 2014, and published reports put Genesys 2015 revenue at around $900 million (shy of the $918 million that 8% growth without currency adjustments would have meant).

At the time of its carve-out from ALU, Genesys had revenue of about $550 million for 2011, and then posted double-digit growth in 2012. A revenue increase from $550 million to $900 million in four and a half years is a nice double-digit annual growth. But let’s take a closer look.

A series of acquisitions Genesys made in the subsequent years -- 2013, 2014, and 2015 -- influenced the company's performance. In 2013 alone, Genesys acquired five companies: Utopy, Angel, Soundbite Communications, and Voran Technologia. Eight additional acquisitions followed in 2014 and 2015, most recently of SpeechStorm.

Based on some back-of-the-envelope calculations and assumptions, I estimate that the 13 acquisitions brought with them about $150 million in annual revenue. With a starting point of $550 million at the end of 2011, today’s $900 million implies organic growth of $200 million in revenue. We can then posit that Genesys organic growth averaged between 6% and 7% per year since 2011.

So why would H&F invest in Genesys versus another cloud contact center company? The competitors I mentioned above are posting significantly higher annual growth rates. "Hellman & Friedman is keen on working with Genesys as it eyes the next phase of its growth," said Tarim Wasim, H&F managing director, in a press statement.

As much as we have seen great growth in cloud contact center deployments over the past few years, in the words of a Sinatra song, "the best is yet to come."

Arguably just 10% or so of all agent seats today are supported from the cloud. If we posit that the cloud is the eventual deployment model for the estimated 10 to 15 million contact center seats globally , then millions and millions of licenses will be sold over the next five to 10 years. Even if we assume that only 50% of all agent licenses will be delivered via the cloud in that period, we're still left with millions of licenses to be sold, implemented, upgraded, and maintained.

"We pick market-leading companies to partner with. We look at hundreds of deals and only invest in a couple. We believe the notion of customer experience is increasingly important in the industry," said Deepak Advani, another H&F managing director, during an analyst call last week.

In addition, Advani noted, "We tend to hold our investments longer; we take a long term view." H&F, it seems, is betting that cloud contact center will continue to grow and that Genesys will be a major beneficiary of the shift from premises-based systems to cloud services. Marlin Partners made a similar bet on LiveOps earlier this year, and NICE is poised to do the same with inContact. The good news is there can be many winners.

Editor's Note: This is an updated version of the original post.

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