Public Software as a Service (SaaS) Financial Performance

Public SaaS companies grew TTM revenue by a median 27.2% growth rate in 3Q12…

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

Public SaaS companies grew TTM revenue by a median 27.2% growth rate in 3Q12, modestly lower than the prior quarter’s three year high of 30.3% (Figure 12).  The third quarter slowdown broke a streak of seven consecutive quarters of accelerating QoQ TTM revenue growth, but it’s likely just a blip. The median TTM revenue growth rate of our SaaS index has remained above 25% for five consecutive quarters, and we project it will surpass 30% by 2Q13.

Five SaaS superstars achieved TTM revenue growth of 42% or more in 3Q12: Cornerstone OnDemand (72.2%), Ellie Mae (67.0%), Bazaarvoice (62.5%), Demandware (45.0%) and Eloqua (42.3%).  The SaaS underachiever award for 3Q12 goes to IntraLinks, the only public SaaS provider that didn’t register double digit growth, advancing only 2.9% on a TTM basis (Figure 13).

Two years ago (3Q10), public SaaS providers spent a median 25% of total revenue on sales and marketing and achieved a median TTM revenue growth rate of 13%.  One year ago, SaaS providers upped their sales and marketing investment to 33% of total revenue and realized a median ROI of almost 25% TTM growth. The median sales and marketing investment, as a percent of revenue, has held steady for three of the last four quarters, as has the TTM revenue growth rate (Figure 14).  Makes you wonder if SaaS providers ramped their sales and market expense another 8 points to 41%, would they once again double their revenue growth rates, this time to better than 50%?  Possibly.

In 3Q12, four SaaS providers spent more than 50% of their revenues on S&M:  Cornerstone OnDemand (63.1%; 72% TTM rev growth), Vocus (53.3%; 29.9% rev growth), Salesforce.com (52.3%; 36.5% rev growth), and Netsuite (50.3%; 26.3% rev growth).  Although three of the four achieved TTM revenue growth above the median for public SaaS companies, the return on these additional sales and marketing dollars invested seems questionable, at least over the short term.

As for profitability, the median EBITDA margin of the SEG SaaS Index in 3Q12 was 8.4%, down from 10.5% in 3Q11.  The decline was mostly attributable to increased investment in all major functional departments. The median spend on R&D, S&M and G&A by public SaaS providers, as a percent of total revenue, aggregated 63.2% of total revenue in 3Q12, markedly greater than 45.3% in 3Q11 (Figure 15).

Four SaaS companies demonstrated impressive devotion to the bottom line in 3Q12:  Ebix (42.9% EBITDA margin), Zix Corporation (30.7%), OpenTable (28.5%) and Ellie Mae (20.6%).  By contrast, seven public SaaS companies finished 3Q12 with negative EBITDA margins: Cornerstone OnDemand (-21.3%), Bazaarvoice (-17.8%), Callidus Software (-13.6%), Service-now.com (-10.4%), Netsuite (-5.6%), Demandware (-3.5%) and ExactTarget (-0.1%).

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