Software Equity Group’s Complimentary June 2011 Monthly Flash Report

Our complimentary June 2011 Flash Report assesses the financial and market performance of more than 250 publicly traded software, SaaS, and Internet companies, sorted by product category.  The Report also highlights a selection of the most recent software M&A transactions.

Select Highlights:

  • Limelight, Software AG, 24 Mobile Advertising and Electronic Arts made two or more acquisitions in May 2011. Find out what companies they acquired and view over 40 other M&A transactions across the software, SaaS and Internet sectors, including acquisitions by Twitter, Symantec, Motorola, Jive Software, Millennial Media and more!
  • Public companies focused on Networking & Networking Performance once again took top honors for the highest median valuation (EV/Revenue) among the 22 product categories tracked in SEG’s Software Index, and the valuation “spread” among product categories widened.
  • Which high flying SaaS companies drove the SEG SaaS Index to a median EV/Revenue multiple of 5.5x?
  • Thanks to some recent high profile IPOs, over 25% of the 81 public companies in the SEG Internet Index had a median EV/Revenue multiple higher than 5.5x. Find out who these market darlings are.
  • There’s much more….download the report by visiting: http://www.softwareequity.com/research_flash_reports.aspx

Public Software as a Service (SaaS) Financial Performance

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

The Great Recession and a sluggish recovery took their toll on SMBs, the market segment most responsible for the growth rates of many SaaS providers during the preceding three years.  However, after bottoming out at 13.5% in 2Q10, the SaaS median TTM revenue growth rate ticked up to 15.6% in 3Q10, ending eleven consecutive quarters of SaaS growth rate decline. After inching up to 16.7% in 4Q10, the TTM median revenue growth rate of public SaaS providers jumped to 19.6% in 1Q11, the highest in six quarters (Figure 7).  Furthermore, 6 of 23 public SaaS companies achieved TTM revenue growth greater than 30% in 1Q11 (Figure 11).

Historically, the median SaaS TTM EBITDA margin had been a small fraction of the median Software Index TTM EBITDA margin, but as SaaS revenue growth rates slowed during the Great Recession, public SaaS providers focused on improving profitability, and most were reasonably successful growing their bottom lines by reaping the benefits of operational improvements, reduced infrastructure spending and subscription renewals.

Although the Great Recession appears to be behind us and SaaS growth rates are ramping nicely, SaaS companies continued to improve profitability in the first quarter.  The median TTM EBITDA margin for the SEG SaaS Index grew from 2.6% in 1Q09 to 9.5% in 1Q10 to 10.2% in 1Q11.  Nevertheless, profitability varied widely across the Public SaaS 23, with five (22%) reporting net losses, while five achieved a TTM EBITDA margin in 1Q11 virtually equal or greater than the median on-premise public software company TTM EBITDA margin (Figure 11).

Still, just two years ago, the median SEG Software Index TTM EBITDA margin was more than 450% larger than the median SEG SaaS Index TTM EBITDA margin.  As of 1Q11, the differential has shrunk to 84%, thanks to the marked improvement in SaaS company operating profits.

Although the TTM EBITDA differential between public software and public SaaS companies has shrunk from 450% to 84% in the past two years, we anticipate profitability improvement for the SaaS 23 will slow as the economic recovery gains traction and SaaS providers reinvest heavily in sales and marketing in order to gain greater SMB market share.  Investors appear to be fully on board with this likely shift in operating emphasis. At the close of 1Q11, public SaaS companies with TTM revenue growth rates above the 19.6% SaaS median were rewarded with a median 7.3x EV/Revenue multiple, compared to a median 4.1x EV/Revenue multiple for public SaaS companies with TTM revenue growth rates below the median SaaS  revenue growth rate.

SaaS M&A Transactions

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

In 1Q11, 39 SaaS companies were acquired, compared to 26 SaaS acquisitions in 4Q10 and 10 in 1Q10.  The spike in SaaS acquisitions demonstrates buyers are beginning to resonate with recent IT spending surveys which show CIOs are gaining confidence in SaaS deployed applications and are allocating a larger percentage of their IT budgets accordingly.  Indeed, SaaS acquisitions accounted for 9.9% of all software acquisitions in 1Q11, up from only 2.8% in 1Q09 (Figure 31).

Five of the SaaS companies exiting in Q1 belonged to one of the earliest and most popular SaaS categories, CRM and Marketing. The surge in CRM/Marketing SaaS deals signals another wave of consolidation in that category  as private companies offering socially enabled CRM services prove to be irresistible to larger, public players seeking to update their offering and catch a bit of the digital wave.  That may give many of the remaining SaaS based, privately held CRM and Marketing players good reason to reevaluate their exit timing assumptions.

Of the 39 SaaS acquisitions in 1Q11, three of the four reported EV/Revenue multiples were above 4.3x TTM revenue, with Davis + Henderson’s acquisition of Mortgagebot LLC posting the highest reported multiple at 6.2x.  Another notable transaction was in the aforementioned CRM space with RightNow Technologies acquiring Q-go.com for a 4.3x EV/Revenue multiple equating to a $34 million enterprise value.

Additional details on 1Q11’s SaaS M&A transactions can be found in Appendix E.