Public Software as a Service (SaaS) Company Market Valuations

Ellie Mae is revolutionizing the mortgage industry with a SaaS based solution designed to address the litany of inefficiencies endemic to mortgage origination.

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

The median market valuation (EV/Revenue multiple) of the 29 pure-play public SaaS providers comprising our SEG SaaS Index rose sharply in 3Q12, advancing to 5.8x from 4.9x in Q2 (Figure 12).  Leading the pack was Ellie Mae, closing 3Q12 with a median EV/Revenue multiple of 7.8x, up from 4.6x in 2Q12.  Ellie Mae is revolutionizing the mortgage industry with a SaaS based solution designed to address the litany of inefficiencies endemic to mortgage origination.  Despite declining mortgage applications, over the past three years Ellie Mae has ramped its TTM revenue growth from 12.3% to 67.0%, while pumping up its EBITDA margin to 20.6% from 12.6%.  Other public SaaS players whose median EV/Revenue multiples markedly improved in 3Q12 included Medidata (33.8%), Ebix (27.4%), RealPage (26.7%) and Ultimate Software Group (19.1%).

Three public SaaS companies had EV/Revenue multiples above 10x at the close of 3Q12:  Service-now.com (18.3x), Netsuite (14.1x) and Cornerstone OnDemand (12.9x).  Investors are clearly favoring growth over profitability in the current market, as all three had negative EBITDA margins.

Indeed, there was a clear, causal relationship in 3Q12 between SaaS company market valuations and TTM revenue growth rates (Figure 16).  Public SaaS companies with TTM revenue growth rates between 0%-10% registered a median EV/Revenue of 2.7x, while those generating TTM revenue growth rates above 40% boasted a median EV/Revenue multiple of 7.6x.  By contrast, there was very little relationship between EBITDA margins and public SaaS company market valuations (Figure 17).  As testament, SaaS providers with negative EBITDA margins were awarded with a median EV/Revenue multiple of 9.7x, compared to a median EV/Revenue of 5.2x for those with EBITDA margins above 30%.

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