Public Software as a Service (SaaS) Financial Performance

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here:

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 20.5% in 1Q11 and 23.3% in the second quarter.  In 3Q11 the median TTM revenue growth rate ticked up to 24.9%, the highest in eight quarters and the fifth consecutive QoQ increase (Figure 11).  Defying the stagnant economy, eight (31%) of twenty six public SaaS companies achieved TTM revenue growth greater than 30% in 3Q11 (Figure 12).

Profitability posed more of a problem for public SaaS companies than revenue growth, mostly because of their subscription models, infrastructure investments and heavy spending on sales and marketing.  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 post-Recession, declining to a median 9.5% in 3Q11 from 10.1% in 1Q11.  The decline in the median EBITDA margin of the SEG SaaS Index signals a reprioritization by public SaaS companies on growth over profitability, as reflected by their YoY increased spending in 3Q11 on R&D, S&M and G&A as a percent of total revenue (Figure 14).

Profitability among the public SaaS providers varied widely, as they shifted into growth mode at varying speeds.  Five (19%) of the twenty six public SaaS companies in our index reported negative EBITDA margins in 3Q11, whereas three public SaaS companies exceeded 20% EBITDA margins.

Investors appear to be fully on board with this shift in operating emphasis.  At the close of 3Q11, public SaaS companies with TTM revenue growth rates above 30% were rewarded with a median 6.8x EV/Revenue multiple, compared to a median 3.5x EV/Revenue multiple for public SaaS companies with TTM revenue growth rates below 30% (Figure 15).

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