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: http://www.softwareequity.com/research_reports.aspx
After dropping to a low of 3.1x median EV/Revenue in 3Q10, public SaaS company median EV/Revenue multiples have risen steadily, reaching a three year high of 5.2x in 2Q11 before falling to 4.5x in the third quarter (Figure 11).
The Q3 decline in market valuation was pervasive, with 24 of 26 companies in the SEG SaaS index reporting a quarter-over-quarter decline in EV/Revenue. Athenahealth and SPS Commerce were the only exceptions (Figure 12). Although Cornerstone OnDemand’s EV/Revenue multiple plummeted from 21.5 in 1Q11 to 17.3x in 2Q11, and then to 12.2x in the third quarter, it was the lone SaaS company trading above 10x median EV/Revenue at the close of Q3. Twelve SaaS companies traded at median EV/Revenue multiples of 5.0x or higher in 3Q11 compared with only six the same quarter a year earlier.
Our readers will recall that at the close of 2007, public SaaS companies commanded a breathtaking median EV/Revenue multiple of 6.4x, compared 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%.
By the close of 3Q11, however, the valuation differential of public SaaS vs. public on-premise software providers grew to 114%, marking the fourth 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 five (20%) companies – Convio, DemandTec, Elie Mae, Medidata Solutions and SoundBite Communications – posted median EV/Revenue multiples below the 2.1x median EV/Revenue of the SEG Software Index. It’s clear investors continue to resonate with SaaS’ subscription based revenue model and SaaS’ obvious appeal to the huge small/medium business market. When that market begins to recover, look for many SaaS valuations to skyrocket.