Public software companies continued to grow cash and equivalents on their balance sheets, which is undoubtedly a by-product of their much improved EBITDA margins…
This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here: http://www.softwareequity.com/research_reports.aspx
The 145 public companies comprising the SEG Software Index grew TTM revenue a median 14.2% in the first quarter of 2012, down sharply from 4Q11’s 17.0% and the lowest in the past five quarters (Figure 4). The 1Q12 drop marks two consecutive quarters of slowing revenue growth after the 17.3% peak reached in 3Q11. Although down sharply, 1Q12’s 14.2% is a relatively solid performance historically by public software companies and marks the ninth consecutive quarter of positive TTM revenue growth. The modest decline in growth rate was entirely predictable, given the modest decline in IT spending.
Providers of mobile solutions proved to be an exception. Of the top ten software companies with the largest TTM revenue growth in 1Q12, five derive all or a substantial part of their revenue from mobile software solutions. The list includes Qihoo (191% TTM revenue growth), Gree (133%), Millennial Media (117%), Zynga (91%) and Velti (63%). Besides mobile, other SEG Software Index high flyers reporting exceptional revenue growth in 1Q12 included Merge Healthcare (66%), Allscripts Healthcare (56%), VASCO Data Security (56%) and Majesco (51%).
The first quarter’s growth rate helped drive the median TTM revenue of the SEG Software Index above $370 million for the first time ever (Figure 5). Indeed, Q1’s median TTM revenue is more than twice the median TTM revenue of the SEG Software Index in 1Q08. Over this same time period, the number of public software companies has declined from 221 to 145 – further evidence that consolidation in the software sector is resulting in not only fewer, but considerably larger, publicly traded software companies.
Public software companies were especially adept at improving their already healthy EBITDA margins. In 1Q12, the median EBITDA margin of the on-premise public software companies in our Software Index was 20.6%, up slightly from 4Q11’s 20.5% and 3Q11’s 20.4% (Figure 4). Although revenue growth rates have returned to historical norms, the steadily increasing EBITDA margins indicate a continuing emphasis on profitability brought on by plummeting growth rates during the Great Recession. Many of the most profitable companies are large software behemoths that have the scale to drive high margins, including Oracle (42% EBITDA margin), Microsoft (42%) and SAP (37%).
However, a few smaller software companies also demonstrated they could drive the bottom line. Example: SolarWinds, a small cap shooting star focused on IT management software, leveraged its unique and highly cost effective sales model to post EBITDA margins (48%) even the behemoths would envy.
Public software companies continued to grow cash and equivalents on their balance sheets, which is undoubtedly a by-product of their much improved EBITDA margins. Consider that in 1Q08, the median cash and equivalents of the SEG Software Index was $79.5 million and the median EBITDA margin was only 13.0%. In 1Q12, median cash and equivalents had grown to $146.5 million, an 85% increase over four years, and the median EBITDA margin, as noted above, was 20.6% (Figure 6). The significant cash reserves and strong balance sheets of most public software companies, particularly the industry’s largest players, bode well for many small and mid-cap software company M&A targets.