WaPo to keep software business, despite sale talks

The Washington Post is looking to double down on its investment in its tech publishing arm, Arc XP, despite outside sales interest valuing the company in the low nine figures, sources told Axios.

Why it matters: The company sees more long-term value in trying to grow the business than sell it now, executives told Axios.

• "I personally think that in the long run — and by long run, I mean, three, four years, not 15 years — Arc XP will be the biggest source of revenue for the Post, and certainly the most profitable source of revenue for the Post," said Shailesh Prakash, chief information officer at The Post.

By the numbers: Arc XP brings in roughly $40-$50 million in annual recurring (subscription-based) revenue (ARR), sources told Axios.

• Software as a service (SaaS) companies typically are valued between 10 to 20 times the amount of ARR. At the time when offers were presented to The Post last year, the markets were valuing SaaS companies higher than they are today.
• For now, Arc XP isn't profitable, because the company is focusing on investing in its growth. "We are not a capital-constrained company," Prakash said. "It's never a question of funding, it's always a question of, is it the right thing to do?"

Catch up quick: The Washington Post launched Arc XP in 2015, then called Arc, with the backing of owner Jeff Bezos.

• Bezos remains heavily invested in the business, and much of Arc XP's business relies on Amazon Web Services technology.

Driving the news: In addition to ARR, Arc XP has long made money charging people for professional services, or consultative fees associated with helping people set up their accounts and customize them.

• Now, it's cutting back on its professional services business in favor of pushing more aggressively into selling software licensing deals, which are more lucrative and less capital intensive.
• That pivot, which is common for young SaaS businesses, could be more profitable in the long term but has eaten at growth in the short term.
• Arc XP executives have been saying for years that they expect the business to bring in $100 million in revenue "in the next 3-5 years," but it still has yet to meet that goal, in part due to this transition out of professional services.

Details: Looking ahead, the company is making significant changes to begin growing revenue and profits faster than it has done to date.

• It's developing a much more robust sales and customer services infrastructure, as opposed to investing the vast majority of its hiring resources in engineering.
• "It really is about creating more of a velocity in revenue growth," saidArcXP president Miki King — the Post's former chief marketing officer — who was hired last year to oversee Arc XP's business pivot.
• The goal, King said, is to triple the number of customers it signs per month, which is typically around one to three new companies.
• Currently, Arc XP's technology is licensed to over 2,000 companies, up from about 1,500 a year ago. A much larger portion of those clients is outside of media and entertainment, although that remains the service's largest client base.

Be smart: King's hire was seen internally and externally as a signal that The Post wasn't interested in spinning off the business, at least not yet.

• In the months since King was hired, the company restructured its team and hired new senior leaders in revenue. Scot Gillespie, Arc XP's longtime engineering lead, exited the company amid those changes earlier this year.
• It also put into effect a new bonus structure this spring to incentivize engineers to work at The Post in an increasingly competitive talent market.

The big picture: Under King's leadership, Arc XP has also started to pivot from providing software for media publishers to selling to enterprise clients — specifically, those looking for tools to build commerce businesses.

• It recently signed AvalonBay Communities, a real estate investment trust. The Golden State Warriors, a longtime customer, has recently expanded its partnership with Arc XP to begin licensing its CMS SuiteExchange platform to other sports teams.
• Media publishers don't always provide similarly lucrative commerce opportunities, but they continue to aid the company's global expansion. Arc XP recently brought on The Irish Times and Mexico's El Financiero as customers.
• "We are completely bullish on our opportunities outside of broad media and publishing," King said. "And it will be with those brands that have the greatest opportunity for really optimizing the intersection of content and commerce."

Yes, but: These transitions haven't come without pain points.

• As Arc XP grew, smaller media publishers felt that its software was becoming too advanced for their needs, forcing Arc XP to simplify parts of its publishing product.
• Internally, The Post's engineers worried Arc XP was becoming too simplified to meet The Post's own publishing needs.
• Eventually, The Post engineers created their own version of a content management system (CMS) based on Arc XP's code that they call Spectrum to power parts of The Post's website.

Bottom line: Arc XP "is clearly the third leg" of the revenue stool that supports The Post, in addition to advertising and subscriptions, Prakash said.