Public Software as a Service (SaaS) Financial Performance

Unsurprisingly, the growth of these SaaS companies has been driven in large part by their enhanced investment in sales and marketing…

 

This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

The median TTM revenue growth rate of public SaaS companies in 1Q12 was 27.8%, a 10% increase over the prior quarter (Figure 12).  The median TTM revenue growth rate of our SaaS Index constituents has now remained above 20% for five consecutive quarters.  With SaaS adoption growing once again, we anticipate the median SaaS TTM revenue growth rate will surpass 30% by year end.  Indeed, as of the close of 1Q12, more than 40% of the public companies in the SEG SaaS index boasted TTM revenue growth above 30% and not one public SaaS company reported TTM revenue growth below 10% (Figure 13).

Unsurprisingly, the growth of these SaaS companies has been driven in large part by their enhanced investment in sales and marketing, which has grown from  22% of total revenue in 1Q11, to 31% in 1Q12 (Figure 14).  In fact, all 28 public SaaS companies in the SEG SaaS Index increased S&M spend as a percent of total revenue. In 1Q12, four SaaS providers spent more than 50% of their revenues on S&M: Vocus (50.1%), Netsuite (50.9%), Salesforce (51.6%) and Cornerstone OnDemand (62.7%).

These sizable investments in S&M to drive growth had a predictable impact on profitability.  Of the four SaaS providers spending 50% or more of their revenues on S&M, each posted EBITDA margins of 4.6% or less.  By contrast, most public SaaS companies continued to balance revenue growth and profitability.  In 1Q12, the median EBITDA margin of the SEG SaaS Index was 10.1%, up slightly from 4Q11.  Six outperformers reported EBITDA margins above 20%: Medidata (20%), LivePerson (21%), Archipelago Learning (30%), OpenTable (30%), Zix Corporation (31%) and EBIX (43%).

The steadily improving TTM revenue growth rates and EBITDA margins of public SaaS providers are creating a force to be reckoned with, a sizable and growing group of companies with scale, a strong financial model, and strong balance sheets.  The median TTM revenue for the SEG SaaS Index is now $154M, up 27% YoY; median Cash & Equivalents ended 1Q12 at $71M, up 43% YoY.

 

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