Public Internet Company Market Valuations

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

The median EV/Revenue multiple for the 81 public companies comprising the SEG Internet Index was 3.1x in 2Q11, up slightly from 2.9x in 1Q11 and sharply higher than 2Q10’s 1.9x.  The median 2Q11 Internet company EV/EBITDA multiple was 18.0x (Figure 16).  The second quarter of 2011 marks the third consecutive quarter the SEG Internet Index median EV/Revenue multiple has exceeded the SEG Software Index median EV/Revenue multiple.  While a similar phenomenon occurred in both 2Q08 and 2Q09, we believe this differential will continue and grow for the foreseeable future, as investors continue to shift their attention from public on-premise software companies to public Internet and SaaS providers.

Chinese based Internet companies are gaining significant attention from investors.  Of the 81 public companies in our SEG Internet Index, fourteen have headquarters in China and are trading at a median 7.5x EV/Revenue (Figure 17).  That’s in stark contrast to the remaining 67 public companies in the SEG Internet Index that are trading at a median 2.4x EV/Revenue.  Given the premium applied to Chinese based companies, it’s no wonder we have seen over ten software companies from China IPO in the U.S. since the beginning of 4Q10.

Public Software as a Service (SaaS) Financial Performance

The Great Recession and a sluggish recovery took their toll on SMBs, the market segment most responsible for the remarkable growth rates of many SaaS providers.  In response, SaaS growth rates plummeted.  After bottoming out at 13.7% in 2Q10, the SaaS median TTM revenue growth rate reversed course, inching up to 14.6% in 3Q10, ending eleven consecutive quarters of decline.  In 4Q10 the TTM median revenue growth rate of public SaaS providers was 15.1%, then climbed to 19.6% in 1Q11 and 23.3% in the second quarter.  Q2’s growth rate is the highest in seven quarters, and marks the fourth consecutive QoQ increase (Figure 11).  Impressively, six of 25 public SaaS companies achieved TTM revenue growth greater than 30% in 2Q11 (Figure 12).

Profitability did not come easily to public SaaS companies because of their subscription models and infrastructure investments.  Historically, median SaaS TTM EBITDA margins were dismal in comparison to on-premise EBITDA margins. But as SaaS revenue growth rates slowed during the Great Recession, public SaaS providers focused on improved profitability, and most succeeded in growing their bottom lines through operational improvements, reduced infrastructure spending and subscription renewals.

Predictably, SaaS EBITDA margins have eroded somewhat in the post-Recession, declining to 8.7% in 2Q11 from 10.2% in 1Q11, and the lowest in more than a year.  The decline in EBITDA margins signals a return by public SaaS companies to favoring accelerated growth over profitability.  As testament, SaaS companies spent 33.2% of revenue on Sales & Marketing in 2Q11, a notable increase over 2Q10’s 25.7% (Figure 14).  Profitability varied widely as companies shifted into growth mode at varying speeds.  Six (24%) of the twenty five public SaaS companies in our index reported negative EBITDA margins in 2Q11, whereas  two public SaaS companies exceeded 20% EBITDA margins.

Investors appear to be fully on board with this shift in operating emphasis.  At the close of 2Q11, public SaaS companies with TTM revenue growth rates above the 23.3% SaaS median were rewarded with a median 5.9x EV/Revenue multiple, compared to a median 3.8x EV/Revenue multiple for public SaaS companies with TTM revenue growth rates below the median SaaS revenue growth rate (Figure 15).

Public Software as a Service (SaaS) Company Market Valuations

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

In contrast to the flat quarter-over-quarter median EV/Revenue multiples of on-premise software companies, the median valuation of public SaaS providers soared to 5.2x EV/Revenue in 2Q11 from 4.8x in 1Q11 and 4.2x in 4Q10.  The 5.2x multiple marks the highest median EV/Revenue for the SEG SaaS index since 1Q08 (Figure 11).

Five high flying companies – Cornerstone OnDemand, Netsuite, RealPage,Salesforce and SuccessFactors – finished 2Q11 with a median EV/Revenue over 9.0x (Figure 12).  Interestingly, RealPage and Salesforce were the only two companies to outperform both the SaaS median TTM revenue growth rates and EBITDA margins.  The other three high flyers, were either unprofitable (Cornerstone and SuccessFactors) or posted TTM revenue growth below the median (RightNow).  Clearly, it’s the extraordinary post-Recession growth prospects of these category leaders that’s currently driving investors, an investment rationale supported by their steady revenue growth and signs of sharply ramping market adoption of SaaS solutions.

The dramatic rise in the median valuation of public SaaS companies is once again widening their market valuation differential with public on-premise software companies – a differential that narrowed quite significantly 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 contrast to the flat quarter-over-quarter median EV/Revenue multiples of on-premise software companies, the median valuation of public SaaS providers soared to 5.2x EV/Revenue in 2Q11 from 4.8x in 1Q11 and 4.2x in 4Q10.  The 5.2x multiple marks the highest median EV/Revenue for the SEG SaaS index since 1Q08 (Figure 11).  Five high flying companies – Cornerstone OnDemand, Netsuite, RealPage,Salesforce and SuccessFactors – finished 2Q11 with a median EV/Revenue over 9.0x (Figure 12).  Interestingly, RealPage and Salesforce were the only two companies to outperform both the SaaS median TTM revenue growth rates and EBITDA margins.  The other three high flyers, were either unprofitable (Cornerstone and SuccessFactors) or posted TTM revenue growth below the median (RightNow).  Clearly, it’s the extraordinary post-Recession growth prospects of these category leaders that’s currently driving investors, an investment rationale supported by their steady revenue growth and signs of sharply ramping market adoption of SaaS solutions.

By the close of 2Q11, however, the valuation differential of public SaaS vs. public on-premise software providers had grown to 93%, marking the third consecutive quarter the SaaS valuation premium widened (Figure 13).  Indeed, SaaS valuations outperformed the median on-premise software valuation almost across the board. Of the 25 public SaaS companies comprising the SEG SaaS Index, only Convio and SoundBite Communications posted median EV/Revenue multiples below the 2.7x median EV/Revenue of the SEG Software Index.  As long as extraordinary growth remains paramount to investors (i.e., as long as IT spending remains healthy and the economy expands), we expect the SaaS valuation premium to continue increasing.

Spotlight on Mobile M&A

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

The M&A strength of the mobile sector is particularly noteworthy this quarter, with twice as many transactions as any other software product category.  Ever since Apple and Google successfully circumvented the wireless carriers by offering app stores directly to consumers, mobile innovation and customer adoption in the space has been breathtaking.  High tech research firm Canalys recently estimated app store revenue will reach $14.1 billion in 2012, up 93% from $7.3 billion in 2011, and will soar to $36.7 billion by 2015.  The explosion of applications has created many multi-billion dollar market opportunities and has given rise to a frenzy of M&A activity that’s drawing in industry titans.

The most active mobile product category was entertainment, consisting of games, music and video services, representing 31% of all M&A transactions in the Mobile Product Category in 2Q11.  Notable transactions within the category include Electronic Arts acquisition of Firemint; Zynga’s acquisition of Sapus Media; Google’s acquisition of PushLife; and Yahoo’s acquisition of IntoNow.

Other mobile product categories accounting for more than 10% of mobile M&A transactions in Q2 include Marketing, Advertising, and Infrastructure.  The activity in Mobile Marketing and Advertising was largely driven by online companies looking to expand their reach to mobile devices, exemplified by ValueClick’s acquisition of Greystripe ($70 million, estimated 2.5x TTM revenue) which paved ValueClick’s entry into the rapidly growing $1.1 billion mobile advertising market.  Infrastructure transactions have been largely driven by the explosion of data over wireless networks, mandating more efficient pipeline control and policy rules at the carrier’s back office.  Two of the larger transactions in this product category included Amdocs acquisition of Bridgewater Systems ($126 million, 1.4x TTM revenue), and Ericcson’s acquisition of Telcordia Technologies ($1.2 billion, 1.6x TTM revenue).

Mobile Application Platforms and Mobile Application Services, which accounted for 10.4% and 6.3% of all mobile transactions respectively, are focused on enabling applications to be accessed across the fragmented mobile device and app store ecosystem.  Application Platforms seek to accomplish this with development platforms that transcend the underlying fragmentation complexity, while Application Service providers ordinarily rely upon resource intensive, manual porting.  Clearly, Application Platforms are a far more efficient approach to navigating the complexity of the mobile ecosystem, and public buyers and VCs have taken note.  A notable 2Q11 transaction in this category was Software AG’s acquisition of Metismo, with Software AG seeking to expand its leadership in the business process arena by creating a flexible and efficient “mobile office.”

Although Mobile Commerce represented less than 10% of mobile M&A transactions in the second quarter, this mobile subcategory is experiencing 86% YoY growth according to a recent IDC report, leading to some notable M&A transactions in 2Q11.  EBay continued to acquire companies that would leverage its strategy of facilitating local retail purchases via mobile, acquiring Where and Fig Card Corporation.  Along similar lines, Visa acquired Fundamo ($110 million) as it positions itself for the coming wave of mobile enabled payments.

SEG Publishes Its September 2011 Monthly Flash Report


Our complimentary September 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.

The images below show a sample of the detail provided in the monthly report.  To download the complete complimentary report visit: http://www.softwareequity.com/research_flash_reports.aspx

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SaaS M&A Transactions Q2 2011

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

In 2Q11, 45 SaaS companies were acquired, compared to 39 in 1Q11 and 26 SaaS acquisitions in 4Q10.  The growing number of SaaS acquisitions is consistent with the results of our 2011 Software Company Buyer Survey, indicating SaaS providers had finally become an important target for acquirers, as well an array of recent IT spending surveys showing SaaS was gaining increased acceptance among enterprise CIOs.  As a result, SaaS acquisitions accounted for 11.3% of all software acquisitions in 2Q11, up from 9.9% in 1Q11 (Figure 37).  Just two years ago, SaaS acquisitions accounted for only 2.6% of all software M&A transactions.

The accelerating pace of SaaS acquisitions, which generally garner a higher median EV/Revenue than their on-premise counterparts, has contributed in part to the historic highs we are seeing in the SaaS median exit multiple. While the number of acquisitions has grown, SaaS exits still comprise a relatively small percentage of all software M&A activity each quarter, which is why we track the median exit value of SaaS M&A on a TTM basis.  As of 2Q11, the TTM median exit EV/Revenue for public SaaS companies was 4.2x.

Six of the SaaS companies exiting in Q2 were members of one of the earliest and most popular SaaS categories, CRM and Marketing.  Thus far in 2011, there have been eleven SaaS deals in this category, with a good number focused on socially enabled CRM solutions which are currently in high demand by buyers. That may give many of the remaining SaaS based, privately held CRM and Marketing players good reason to reevaluate their exit timing assumptions.

There were four SaaS transactions in the Storage & Systems Management category, spurred on by buyers’ continuing emphasis on cloud infrastructure and a concomitant requirement for enhanced solutions for virtualization, systems management and integration.

Of the 45 SaaS acquisitions in 2Q11, six reported EV/Revenue multiples, and all but one of these exceeded the median software EV/Revenue multiple of 2.7x.  The highest multiple was the 9.3x TTM revenue multiple paid by Fiserv for CashEdge in an effort to expand its digital footprint.  Other SaaS transactions with EV/Revenue multiples above the software median were DealerTrack’s acquisition of eCarList (6.5x TTM revenue); SuccessFactors acquisition of Plateau Systems (4.2x TTM revenue); Experian’s acquisition of Medical Present Value (4.1x TTM revenue); and SDC Software’s acquisition of SUPERAnitSpyware (3.4x TTM revenue).  Additional details on 2Q11’s SaaS M&A transactions can be found in Appendix E of our quarterly report which can be downloaded here: http://www.softwareequity.com/research_quarterly_reports.aspx

Software M&A Valuations – Q2 2011

The following article is from Software Equity Group’s 2011 Q2 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

The software industry’s benchmark median exit valuation grew to a median multiple of 2.7x TTM revenue in 2Q11 from 2.3x TTM revenue in 1Q10 (Figure 29).

Following seven consecutive quarters of sub-2x median exit multiples in 2008 and 2009, 2Q11 marked the sixth consecutive quarter the median exit multiple equaled or exceeded 2.1x TTM revenue.  The last time we observed such a phenomenon was 2Q05 to 3Q06, during which we also reported a median software M&A multiple of 2.7x TTM revenue in 3Q06.  However, unlike in ’05-’06, the current median 2.7x exit multiple includes SaaS exits, which have unquestionably pushed the median software exit valuation higher.  Excluding these SaaS deals, the median software exit multiple is 2.5x.

Lest every software entrepreneur who reads this report multiply his/her company’s TTM revenue by 2.7 to determine current fair market value, we must emphasize that the 2Q11 median exit multiple for software and SaaS deals is simply that – a median – the midpoint of a very broad range of exit valuations.  Perhaps more useful is our calculation that in 2Q11, 36.9% of M&A deals with reported EV/Revenue exit multiples had a 2.0x EV/Revenue multiple or less.  By contrast, 21.0% of M&A deals with reported EV/Revenue exit multiples had a 5.0x EV/Revenue multiple or more (Figure 30).

Since very few software transactions publicly identify a private software seller’s TTM EBITDA, we lacked sufficient data to ascertain the median EBITDA exit multiple paid in 2Q11 for private software company sellers.  We did, however, determine 2Q11’s median exit multiple for public software company sellers was 14.7x TTM EBITDA, a healthy improvement over 1Q11’s 13.9x and 4Q10’s 12.4x TTM EBITDA exit multiple (Figure 31).