Public Software Company Market Valuations

…investors increased their risk appetite and bid up valuations of smaller public software companies.

This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

At the close of 1Q12, the median EV/Revenue multiple of public companies in our SEG Software Index had grown to 2.6x from 2.4x in both 4Q11 and 3Q11.  Although the first quarter’s median multiple was slightly lower than 1Q11’s 2.9x, it was 117% higher than the Great Recession low of 1.2x.  The median EV/Revenue multiple of the SEG Software Index has now been at or above 2.0x for ten consecutive quarters (Figure 7).

As the economic concerns that plagued the second half of 2011 abated in 1Q12, investors increased their risk appetite and bid up valuations of smaller public software companies (Figure 8).  As testament, in 1Q12, the median EV/Revenue multiple of SEG Software Index companies with TTM revenues between $100 million and $200 million skyrocketed to 2.7x, a 69% increase from 4Q11’s 1.6x.  However, investors continued to eschew smaller public companies.  Those with revenues under $100 million saw their median EV/Revenue decline from 1.8x in 4Q11 to 1.5x in 1Q12.

Size (i.e., annual revenue) wasn’t the only important determinant of public software company market valuation.  EBITDA margins clearly had a major factor in public software company EV/Revenue multiples, which explains the aforementioned profitability focus.  Public software companies with 40% or higher EBITDA margins were awarded with a median EV/Revenue multiple of 4.6x, whereas those with EBITDA margins below 10% were punished with a 1.5x (Figure 9).

Public Software Company Financial Performance

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.

Selected M&A Deals for the week of 5/18/2012 – 5/24/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of May 18, 2012 – May 24, 2012.  For a comprehensive analysis of software industry mergers and acquisitions and public software company financial performance you can download our research reports by visiting http://www.softwareequity.com/research_reports.aspx.  Notable transactions for the week include:

• SAP America’s acquisition of Ariba [for an Enterprise Value (EV) of $4,226.65M, implying an EV/Rev multiple of 8.42x]
•R.R. Donnelley & Sons Company’s acquisition of EDGAR Online [for an EV of $61.15M, implying an EV/Rev multiple of 1.94x]
•Hangzhou Zhongheng Electric Co.’s acquisition of Beijing Join Bright Digital Power Technology Co [for an EV of $60.26M, implying an EV/Rev multiple of 5.15x]
•BazaarVoice Inc’s acquisition of PowerReviews, Inc [for an EV of $127.77M]
•Bridgepoint Development Capital’s acquisition of BigHand [for an EV of $77.45M]
•Facebook, Inc’s acquisition of Karma Science, Inc
•EMC Corporation’s acquisition of Syncplicity, Inc
•WMS Industries Inc’s acquisition of Jadestone Group AB
•Oracle Corporation’s acquisition of Virtue, Inc
•EPAM Systems Inc’s acquisition of ThoughtCorp Systems Inc

Public Software/SaaS/Internet Company Stock Performance

…major U.S. stock market indices turned in one of the best first quarter performances in more than a decade.

 

This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

 

In the first quarter, the major U.S. stock market indices turned in one of the best first quarter performances in more than a decade.  The technology laden NASDAQ index finished Q1 up a stellar 18.7%, as investors were heartened by the strong financial performance of several high flyers such as Apple and Google.  The S&P 500 and DOW also performed admirably, ending Q1 up 12.0% and 8.1%, respectively (Figure 3). Across all three SEG tracking indices, 217 of the 258 (84%) public companies we track reported higher year-to-date (YTD) stock prices.

The SEG Software Index, consisting of 145 public on-premise software companies, closed the first quarter with a median stock price return of 18.6%. Close behind was the SEG SaaS Index, conisting of 28 public pure-play SaaS companies, which closed Q1 with a median stock return of 18.4%. A number of SaaS companies far outperformed their peers in terms of median stock return, with five superstars posting YTD stock returns exceeding 50%: Elli Mae (97.5%), Demandware (86.3%), Bazaarvoice (65.6%), Salesforce (52.3%) and Athenahealth (50.9%). Demandware and Bazaarvoice went public in the first quarter of 2012.

The SEG Internet Index, comprised of 87 publicly traded Internet companies, closed the first quarter with a 19.3% gain in median stock price, slightly outpacing SEG’s Software and SaaS Indexes and the NASDAQ. The median year-end stock return of the SEG Internet Index was buoyed, in part, by investor enthusiasm for newly public companies amid a wave of IPOs in 2011 and the first quarter of 2012 (see this issue’s IPO section for more detail). Four of Q1’s top ten stock performances were turned in by companies that went public in the last twelve months: Brightcove (73.4%), Jive Software (69.8%), LinkedIn (61.9%) and Zillow (58.3%).

 

SEG Publishes Its May 2012 Monthly Flash Report

Our complimentary May 2012 Flash Report assesses the financial and market performance of more than 250 publicly traded software, SaaS, and Internet companies, sorted by product category. The Report also highlights a selection of the most recent software M&A transactions.

Download the report by visiting: http://www.softwareequity.com/research_flash_reports.aspx

Selected M&A Deals for the Week of 5/11/2012 – 5/17/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of May 11, 2012 – May 17, 2012.  For a comprehensive analysis of software industry mergers and acquisitions and public software company financial performance you can download our research reports by visiting http://www.softwareequity.com/research_reports.aspx.  Notable transactions for the week include:

  • • DOCOMO Deutschland GmbH’s acquisition of Buongiorno SpA [for an Enterprise Value (EV) of $348.9M, implying an EV/Rev multiple of 1.16x]
  • • Yell Group’s acquisition of Moonfruit Limited [for an EV of $28.6M]
  • • HIS Inc’s acquisition of Xedar Corporation [for an EV of $28M]
  • • iCar Asia’s acquisition of http://www.mobil123.com [for an EV of $2.1M]
  • • Zynga Inc’s acquisition of Wild Needle, Inc
  • • LivePerson Inc’s acquisition of Amadesa Inc
  • • Equinix Inc’s acquisition of ancotel GmbH

Selected M&A Deals for the Week of 5/4/2012 – 5/11/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of May 4, 2012 – May 11, 2012.  For a comprehensive analysis of software industry mergers and acquisitions and public software company financial performance you can download our research reports by visiting http://www.softwareequity.com/research_reports.aspx.  Notable transactions for the week include:

•Lagardere Active SAS’s acquisition of LeGuide.com for an Enterprise Value (EV) of $76.54M, implying an EV/Rev multiple of 2.07x
•Sonda’s acquisition of Elucid Solutions for an EV of $72.71M, implying and EV/Rev multiple of 1.16x
•Formpipe Software’s acquisition of Traen, for en EV of $44.0M, implying an EV/Rev multiple of 1.4x
•Ritchie Bros acquisition of AssetNation, for an EV of $64M
•Fair Isaac Corp’s acquisition of Entiera
•Synopsys Inc’s acquisition of RSoft Design Group
•Samsung Electronics’ acquisition of mSpot Inc
•Citrix Systems’ acquisition of The Citrix XenClient Enterprise Group