Public Software Company Market Valuations

The median EV/Revenue multiple of the SEG Software Index has now been at or above 2.0x for twelve consecutive quarters, but was unchanged in Q3 year-over-year.

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

At the close of 3Q12, the median market valuation of our SEG Software Index, expressed as a multiple of EV/Revenue, was 2.4x.  The median EV/Revenue multiple of the SEG Software Index has now been at or above 2.0x for twelve consecutive quarters, but was unchanged in Q3 year-over-year (Figure 7).

Surprisingly, the third quarter’s strong stock market performance did not have the same impact on smaller public software company valuations as it did in the first quarter (Figure 8).

As testament, in 3Q12, the median EV/Revenue multiple of SEG Software Index companies with TTM revenues between $100 million and $200 million was 2.0x, unchanged from the prior quarter, but notably lower than the first quarter’s median market valuation of 2.5x.

Size (i.e. annual revenue) wasn’t the only important determinant of a public software company’s EV/Revenue multiple.  EBITDA margins clearly played a part in Q3’s public software company market valuations.  Public software companies with 40% or higher EBITDA margins were awarded with a median EV/Revenue multiple of 4.4x, four times higher than the 1.1x multiple of unprofitable companies (Figure 9).  But EBITDA percentage did not always translate into higher market valuations: the median EV/Revenue multiples awarded to companies with EBITDA margins between 20-30% and those above 40% were nearly identical (4.3x vs. 4.4x).

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