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.

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