This excerpt is from our complimentary Q1 2011 Software Industry Equity Report which can be downloaded here: http://www.softwareequity.com/research_reports.aspx
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).