Public Software Company Market Valuations: By Product Category

While median financial performance metrics are useful for assessing the overall health of the software industry and for comparisons to other economic sectors, a deeper analysis of these key metrics by software product category provides greater insight about the software ecosystem.  By analyzing how public software companies in discrete product categories are performing, we enhance our understanding of market trends, sector health, product lifecycles, IT spending priorities and stock market biases. Perhaps most important, we track this data because the current median valuation of companies comprising a particular software category can weigh heavily when buyers value acquisition targets.

As we’ve noted in past reports, the median EV/Revenue multiples and financial results for a particular software category can be stagnant, or can fluctuate wildly each quarter.  As a result, software category rankings, measured by relative median valuations and financial performance, can also be consistent or volatile each quarter.  That axiom held true, once again, in 2011 (Figure 12).

The SEG Software Index is comprised of 144 public on-premise software companies sorted into 21 software product categories.  Eleven product categories achieved median EV/Revenue multiples in 4Q11 above the median SEG Software EV/Revenue of 2.2x (Figure 13).

The Networking and Network Performance Management product category posted the highest median EV/Revenue multiple, 4.5x, up 44% YoY. Companies comprising the Networking and Network Performance Management product category benefited from strong demand for WAN optimization necessary to rapidly deliver software over cloud- based architectures, and from demands by mobile service providers for solutions to manage the explosion of mobile data. SolarWinds recorded the highest median EV/Revenue of the group at 10.6x, while Allot Communications posted the highest year-over-year revenue growth of 37.5%.

Eight product categories improved their median EV/Revenue in 2011 from a year earlier (Figure 14).  The Video Game category showed signs of life in 2011, boasting the h highest YoY median EV/Revenue growth (55%) of the 21 product categories.  Yet, even after its stellar performance, Video Games finished 4Q11 with the second lowest median EV/Revenue multiple at 1.2x.  But investors are beginning to resonate with video game developers who, after missing the boat, are now launching high upside mobile and social gaming products.

Eleven product categories saw a YoY drop in their EV/Revenue multiple (Figure 12).  The EV/Revenue multiple of software companies comprising the Billing & Service Management category fell by a median 60% despite their 28.8% growth in 4Q11.

The Healthcare product category also declined in YoY median EV/Revenue.  In 4Q10, Healthcare boasted a 3.5x median market valuation, thanks to strong market demand for revenue cycle management, HIPAA compliance solutions and electronic medical records.  By the close of 4Q11, Healthcare’s median EV/Revenue multiple dropped to 2.8x due to concerns about delays in federal funding for hospitals to digitize patient records.

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