This excerpt is from our complimentary Q2 2012 Software Industry Financial Report which can be downloaded here: http://www.softwareequity.com/research_reports.aspx
In 2Q12, the median EV/Revenue multiple of the 27 pure-play public SaaS providers comprising our SEG SaaS Index fell to 5.0x, from 5.3x in 1Q12 (Figure 12). However, it wasn’t all bad news, as over 50% of public SaaS providers actually maintained or increased their EV/Revenue QoQ. Leading the pack was Ellie Mae, closing 2Q12 with a 109% QoQ jump in EV/Revenue. Ellie Mae is revolutionizing the mortgage industry with a SaaS based solution designed to address the litany of inefficiencies within the mortgage origination process. Even in the face of declining mortgage volumes, the Company has managed to accelerate revenue growth (12.3% to 46.4%) and expand EBITDA margins (6.6% to 15.4%) over the past three years.
Four public SaaS companies had EV/Revenue multiples above 10x at the close of 2Q12: ServiceNow (17.4x), Demandware (12.5x), Netsuite (12.5x) and Cornerstone OnDemand (11.7x). 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 2.3% EBITDA.
Indeed, there was a clear, causal relationship in 2Q12 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 3.5x, while those generating TTM revenue growth rates above 40% boasted a median EV/Revenue multiple of 9.4x. 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 6.0x, compared to a median EV/Revenue of 4.0x for those with EBITDA margins above 20%.