…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).