Public Software as a Service (SaaS) Company Market Valuations

…there was a clear, causal relationship in 1Q12 between SaaS company market valuations and TTM revenue growth rates.

 

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 1Q12, the median EV/Revenue multiple of the 28 pure-play public SaaS providers comprising our SEG SaaS Index rose markedly to 5.1x from 4.2x in 1Q11 (Figure 12).  Four public SaaS companies had EV/Revenue multiples above 10x at the close of 1Q12:  BazaarVoice (11.0x), Cornerstone OnDemand (11.3x), Demandware (14.6x) and NetSuite (12.8x).  All but NetSuite went public within the last year.  Investors are clearly favoring growth over profitability in the current market, as three of the four SaaS providers with the highest market valuations had negative EBITDA margins; the fourth, Demandware, reported a paltry 3.8% EBITDA.

Indeed, there was a clear, causal relationship in 1Q12 between SaaS company market valuations and TTM revenue growth rates (Figure 15).  Public SaaS companies with TTM revenue growth rates between 10%-20% registered a median EV/Revenue of 2.8x, while those generating TTM revenue growth rates above 40% boasted a median EV/Revenue multiple of 7.2x.  By contrast, there was very little relationship between EBITDA margins and public SaaS company market valuations (Figure 16).  As testament, SaaS providers with negative EBITDA margins were awarded with a median EV/Revenue multiple of 11.0x, no doubt boosted by their median TTM revenue growth rate of 54.5%.

 

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