The median enterprise value to revenue (EV/Revenue) multiple for all public companies comprising the SEG Software Index was 2.4x in 2011, up slightly from 2010’s 2.2x, and markedly better than 2009’s 1.7x. The 2.4x median EV/Revenue multiple is the highest Software Index multiple since 2007’s 2.6x (Figure 6). The return to near pre-recession valuation levels reflects investor confidence in the near term prospects of on-premise public software companies relative to other industries and options.
On a quarterly basis, median EV/Revenue multiples of on-premise software companies rose to 2.7x in the first and second quarters, before reversing course and ending Q4 with a modestly lower 2.2x median mulitple (Figures 7 and 8).
At the end of 2010 and early 2011, when industry analysts and economic pundits were predicting a slow but steady economic recovery, smaller public software companies were viewed as well positioned for accelerated growth. As testament, in 4Q10, the median EV/Revenue multiple of SEG Software Index companies with TTM revenues between $100 million and $200 million was 3.5x, compared to only 2.6x for companies with TTM revenues greater than $1 billion. However, as economic sentiment soured in 3Q11 and 4Q11, smaller software companies, deemed too risky, were pummeled by investors. By the close of 4Q11, SEG Index companies with TTM revenues between $100 million and $200 million saw their median EV/Revenue multiple plunge to 1.9x, while the median TTM EV/Revenue of their larger peers remained relatively steady at 2.5x (Figure 9).
Size (i.e., annual revenue) wasn’t the only important determinant of public software company market valuation. We analyzed the median EV/Revenue multiples of SEG Software companies based upon their 2011 TTM revenue growth rates and EBITDA margins.
Companies that grew TTM revenue between 20% and 30% in 2011, and those that grew revenue more than 30%, were awarded median EV/Revenue multiples of 3.3x and 3.5x, respectively – significantly higher than the median 2.4x multiple of the SEG Software Index overall (Figure 10). Among the outperformers with TTM revenue growth above 30% and high median EV/Revenue multiples: Gree (101.5%, 6.8x), Qlik Technologies (42.0%, 7.1x), Ariba (38.5%, 6.1x), VMWare (34.7%, 10.2x) and F5 Networks (30.6%, 6.8x).
Similarly, highly profitable public software companies with EBITDA margins between 20% and 30%, and those with EBITDA margins greater than 30%, were awarded median EV/Revenue multiples of 2.6x and 3.7x, respectively (Figure 11). Notable examples included: CheckPoint Software (55.0% EBITDA, 8.5x EV/Rev), Gree (50.8%, 6.8x), ANSYS (49.0%, 7.7x), SolarWinds (47.4%, 10.6x), Rovi Corporation (39.8%, 5.4x) and F5 Networks (32.3%, 6.8x).
It should come as no surprise that many of these fast growing and highly valued public software companies provide enterprise solutions that addressed the top IT spending priorities in 2011: mobility, analytics, virtualization and cloud performance management.