Public Software as a Service (SaaS) Company Market Valuations

This excerpt is from our complimentary Q1 2011 Software Industry Equity Report which can be downloaded here:

While the median EV/Revenue valuations of on-premise software companies showed modest improvement in 1Q11, the median EV/Revenue multiple of public SaaS providers soared to 4.8x in 1Q11 from 4.2x in 4Q10 and 3.1x in 3Q10.  The 4.8x multiple marks the highest median EV/Revenue for the SEG SaaS index since 2Q08 (Figure 9).  Indeed, 20 (91%) public SaaS companies saw their 1Q11 EV/Revenue multiple increase or remain unchanged over the prior quarter, and five finished 1Q11 with a median EV/Revenue over 9.0x (Figure 11).

The dramatic rise in the median EV/Revenue multiple of public companies in the SEG SaaS Index is reversing the sharp decline in the SaaS – On Premise market valuation differential during the Great Recession.  At the close of 2007, public SaaS companies commanded a breathtaking median EV/Revenue multiple of 6.4x, in comparison to the much lower but historically high 2.7x median valuation multiple of their on-premise counterparts.  That equated to a 137% SaaS valuation premium.  The median SaaS EV/Revenue multiple for calendar year 2010 dropped to 3.6x, compared to 2.3x for on-premise software companies, narrowing the valuation differential to 57%.

However, at the close of 1Q11 the valuation premium grew to 78%. The expansion in the valuation premium is most likely attributed to the higher TTM revenue growth rate of public SaaS providers (19.6%) versus public on-premise software companies (13.5%) and investors’ perception that the resurgence of SaaS buying, particularly by SMBs, will continue (Figure 10).

2011 Software IPOs as of Q1

Given LinkedIn’s spectacular IPO today, we have posted the other software IPOs from 2011 as of the close of Q1 to provide investors with additional context.  This excerpt is from our complimentary Q1 2011 Software Industry Equity Report which can be downloaded here:

Four software companies were newly listed on major U.S. exchanges in 1Q11, a marked improvement over 1Q10’s one software IPO, but not as robust as 3Q10’s seven IPOs.  1Q11’s new public market entrants were Qihoo 360 Technology, Cornerstone OnDemand, Demand Media and Trunkbow International Holdings.  Collectively, the first quarter’s four IPOs raised $483.4 million and garnered a median 15.7x EV/Revenue multiple on their offering dates.

By the close of Q1, the four newly listed companies had a median return of -1.6%.  The best performer was Cornerstone OnDemand, returning 40.2% by the quarter’s close, as investors chose to ignore its negative operating margin in favor of an impressive TTM revenue growth of 49.1%.  Trunkbow International Holdings returned -18.6% at the close of 1Q11, with the majority of the drop coming on the last day of the quarter when its stock dropped a staggering 17.6% after the Company provided a disappointing earnings report (Figure 16).

SEG to Participate in Complimentary M&A Panel Discussion – Optimize Your Exit

Join us in the Del Mar area on Wednesday June 8, 2011 for this unique M&A discussion. Successful San Diego CEO’s, Pamela Coker and David Taylor, join two of San Diego’s leading deal makers, Jeremy Glaser and Allen Cinzori, to provide first hand insight into maximizing the odds of a successful exit.

RSVP here:

Deal activity and valuations are up sharply from a year ago. Buyers are highly motivated, have record amounts of cash, and are actively seeking product line enhancements and extensions in their pursuit of greater market share. By some accounts, we are approaching pre-2008 activity levels.  So what are you waiting for? Is it the right time for you to consider an exit? How do you know? And what really drives strategic value? Attend this free panel discussion and find out.

Wednesday, June 8, 2011
7:30 am Registration
8:00 am – 9:00 am Program

RSVP here:

Jeremy Glaser, Member, Mintz Levin
Allen Cinzori, Managing Director, Software Equity Group, LLC
David Taylor, Founder and Former CEO, CineForm, Inc. (acquired by Woodman Labs, Inc.)
Pamela Coker, Founder and Former CEO, Acucorp, Inc. (acquired by Micro Focus: LSE:MCRO)

Mintz Levin
3580 Carmel Mountain Road, Suite 300
San Diego, CA 92130


RSVP by June 6, 2011

Internet Retail Spending and Advertising

The following article is an excerpt from our Q1 2011 Software Industry Equity Report.  To download the entire complimentary report, visit our website:

Similarly, SEG considers Internet retail sales and Internet advertising spending to be two leading indicators of downstream public Internet company financial performance and M&A activity. comScore estimates that 4Q10 online retail sales reached a record of $43.4 billion, up 11% from 4Q09.  The Q4 data includes the all-important holiday shopping season, which registered its first ever billion dollar day on record. The top performing on-line retail categories were Computer Software, Consumer Electronics, Books & Magazines (ex. Digital downloads), Computers/Peripherals/PDAs and Toys & Hobbies. The strong Q4 internet sales tally marks the fifth consecutive quarter of positive year-over-year growth for the online retail industry.

Performance based pricing was the preferred monetization strategy of advertisers with 62% of advertising campaigns leveraging this pricing strategy.  Impression based advertising was used in 33% of all campaigns while a hybrid strategy of impression and performance based was used in 5% of all campaigns.The Interactive Advertising Bureau (IAB) reported the Internet advertising industry also registered record results for 4Q10 and 2010.   Advertising revenues for 4Q10 reached $7.5 billion, up 15% from the prior quarter and 19% from the prior year.  For all of 2010, advertising revenues reached $26 billion.  In 2010, Search and display ads continue to garner the lion’s share of advertising spend, receiving 46% and 38% of all advertising dollars respectively.  The banner ad format received 63% of all display advertising spend with rich media formats coming in a distant second at 16%.  Although growing rapidly, mobile advertising still represents a tiny fraction of total Internet advertising as reported by IAB.  In 2010, IAB estimated mobile advertising received $550 – $650 million dollars or 2.1% – 2.5% of total Internet advertising spend.

High Flying Public Software Companies as of Q1 2011

The following article is an excerpt from our Q1 2011 Software Industry Equity Report.  To download the entire complimentary report, visit our website:

While most of the listed companies comprising our three tracking indices saw improved EV/Revenue multiples year-over-year, ten public software, SaaS and Internet companies excelled at boosting their market valuations in 1Q11 (Figure 6).  Overall, these overachievers reported a TTM median revenue growth rate of 43.1% and TTM median EBITDA margin of 24.7%.

The ultimate overachiever was Youku, China’s leader in online video.  Youku’s median 1Q11 EV/Revenue multiple was 68.7x, assisted by a 286.3% surge in stock price since its 4Q10 IPO.  It’s clear investors are enamored with Youku’s remarkable YoY revenue growth of 152%, which came at the cost of a negative EBITDA margin of -17.7%.  Youku narrowly beat out Qihoo, another Chinese company, for top honors on the high flyer list.  All told, five of the ten EV/Revenue high flyers are headquartered in China: Youku, Qihoo, Baidui, Ctrip and SINA.  The other five rounding out the list include VMWare, Rovi Corporation, Cornerstone OnDemand, Mercadolibre and SuccessFactors.

Software Equity Group’s Client, Compliance Depot, Acquired by RealPage

SAN DIEGO, CA – May 5, 2011.  Software Equity Group, LLC (SEG) announced today that its client, Compliance Depot, a leading provider of subscription-based vendor risk management and compliance services to the multifamily housing industry, has been acquired by RealPage (NASDAQ: RP), a leading provider of on-demand software and services to the real estate industry.

“The acquisition of Compliance Depot is consistent with our strategy of adding new products and services to sell to the rental housing industry and once fully integrated will contribute to achieving our target operating model,” said Steve Winn, Chairman and CEO of RealPage. “Compliance Depot is the only brand name vendor risk management company in the multifamily industry. We see a tremendous opportunity to integrate the services of Compliance Depot and its 32,000+ unique vendors with RealPage’s offering.”

RealPage expects existing management of Compliance Depot will remain with the business. Based in Plano, Texas, Compliance Depot helps property owners reduce exposure to litigation, uninsured losses, compliance with federal law, the potential for fraud and abuse, as well as reputational damage caused by suppliers that are not properly credentialed to perform work for owners. Compliance Depot reports that over 45% of vendors have experienced a lapse in general liability coverage in the past two years; 31% of professional vendors have had a lapse in auto liability coverage in the past two years; and 11% of vendors have relevant derogatory information in their file. Compliance Depot protects owners from millions of dollars of potential exposure to the risk of uninsured or underinsured vendors.

Compliance Depot provides its services for an annual subscription fee, paid by each vendor for each property that is protected. Compliance Depot’s data indicates there are at least 20 vendors per property that should subscribe to Compliance Depot, which adds approximately $170 million to RealPage’s total addressable market for multifamily properties. As a result, RealPage is increasing the total addressable market for all of its products and services from $5.6 billion to $5.8 billion.

According to Dirk Wakeham, President of RealPage, “Compliance Depot is a great fit for RealPage because we can vastly expand its sales channel and capitalize on expense synergies between the businesses. Compliance Depot tracks workers compensation, general liability and automobile insurance renewal dates so we believe there is an opportunity to market additional insurance products to vendors through our LeasingDesk division, which includes a general insurance agency. We also believe that vendors will be better able to market themselves if they buy listings and advertising in our OpsMerchant and OpsAdvantage network. The exposure that vendors can receive though the network should make the Compliance Depot services more valuable to them. Combining the Compliance Depot network and Ops Supplier network will result in the largest online supplier network that includes vendor risk management and compliance in the multifamily industry, and also provides property management companies with the ability to increase the utilization of our Spend Management Systems.”

Compliance Depot’s CEO and Co-Founder Lonnie Derden said, “We are extremely pleased to be part of RealPage. This presents a unique opportunity to leverage RealPage’s assets and strong brand to help grow Compliance Depot, enhance the services we offer and explore new technologies that can create an even more powerful service for vendor risk management and compliance within the rental housing industry. We look forward to working with the management team at RealPage to strengthen our industry-leading position.”

Doug Clark, Compliance Depot’s COO and Co-Founder, said, “Compliance Depot has amassed a customer base of 130 property management companies, including nine of the NMHC top 12. Our vendor compliance management services allow property managers and owners to review a vendor’s background for bankruptcy filings, liens and judgments, criminal records, collections and professional licenses.  We also utilize customizable business rules to check compliance against custom rules for vendor insurance certificates, and we track additional insured language, manage contractual terms and W-9 documents, and check Government Watch List Searches, including the Patriot Act and The Money Laundering Control Act. ”

About Software Equity Group

Software Equity Group is an investment bank and M&A advisory serving the software and technology sectors.  Founded in 1992, our firm has guided and advised companies on five continents, including privately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Africa and Israel.  We have represented public companies listed on the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. Software Equity Group also advises several of the world’s leading private equity firms. We are ranked among the top ten investment banks worldwide for application software mergers and acquisitions.

About RealPage

Located in Carrollton, Texas, a suburb of Dallas, RealPage provides on-demand (also referred to as “Software-as-a-Service” or “SaaS”) products and services to apartment communities and single family rentals across the United States. Its six on-demand product lines include OneSite® property management systems that automate the leasing, renting, management, and accounting of conventional, affordable, tax credit, student living, and military housing properties; Level One® and CrossFire® that enable owners to originate, syndicate, manage and capture leads more effectively and at less overall cost; YieldStar® asset optimization systems that enable owners and managers to optimize rents to achieve the overall highest yield, or combination of rent and occupancy, at each property; Velocity™ billing and utility management services that increase collections and reduce delinquencies; LeasingDesk® risk mitigation systems that are designed to reduce a community’s exposure to risk and liability; and OpsTechnology® spend management systems that help owners manage and control operating expenses. Supporting this family of SaaS products is a suite of shared cloud services including electronic payments, document management, decision support and learning. Through its Propertyware subsidiary, RealPage also provides software and services to single-family rentals and low density, centrally-managed multifamily housing.

About Compliance Depot

For over 5 years, Compliance Depot has been the innovator of compliance technology. We help businesses to reduce exposure to litigation, the potential for fraud and abuse, as well as reputational damage caused by supplier relationships. We help businesses to understand and interpret vendor compliance laws, as well as educate businesses and non-profit agencies about their legal requirements to address internal operations to ensure compliance with these Orders. Compliance Depot also offers our clients no-cost access to our Minority Business Enterprise Database of over 200,000 vendors, the largest known minority database of qualified vendors.

For more information: Allen Cinzori, Managing Director, Software Equity Group, 858-509-2800

Q1 2011 Software M&A Volume and Deal Spending

The following article is an excerpt from our Q1 2011 Software Industry Equity Report.  To download the entire complimentary report, visit our website:

There were 394 software M&A transactions in 1Q11 totaling $8.3 billion, compared to 421 transactions in 4Q10 aggregating $12.7 billion, and 431 transactions in 1Q10 totaling $4.6 billion (Figure 19).  Although 1Q11 deal volume ticked down slightly from 4Q10 and 1Q11, it is still well above the average deal volume in 2009 of 332.

Software deals accounted for 9.8% of all U.S. M&A activity in 1Q11, a decline from the 12.2% and 12.8% share in 4Q10 and 1Q10 respectively (Figure 20).  Software M&A accounted for 37% of all technology M&A in 2010, up from 10% in 2009 according to Goldman Sachs.

Although the aggregate quarterly deal volume declined year-over-year from 1Q10 to 1Q11, the total software M&A dollars spent nearly doubled.  The 80.4% jump in Q1’s aggregate software M&A spend was achieved despite only one mega-deal (transactions with enterprise value greater than $500 million). Infor’s announced acquisition of Lawson Software ($1.80 billion, 2.4xEV TTM revenue).

Note: Each quarter, we recast prior quarters’ software M&A activity to ensure the most accurate deal volume and spending metrics.  As such, data from prior quarters often fluctuates and may not be the same from report to report.