On a recent flight from New York, I read the 2007 annual Software Industry Equity Report ($495) by the Software Equity Group. I think they do a great job with these reports and they’re a great value. I thought I’d share a few highlights here.
- Among the “high flyers” in their public equity software index, the median trailing twelve month (TTM) revenue growth was 51% and the median enterprise value (EV) / revenue ratio was about 8x.
- In 4Q07, the median EV/revenue was 2.3x, EV/EBITDA 15.2x, EBITDA margin 11.2%, and TTM revenue growth 14.4%. Put differently, while the median software company is worth only 2.3x sales, that company has only 11% EBITDA margins and is growing at only 14%.
- My favorite arbitrage in software continues to exist: the median software company with revenues $1B is valued at 3.6x sales. This means that big software companies can buy revenue from little software companies all day long and make money at it. Example: Business Objects buys Cartesis and its $125M revenues for 2.4x ($300M) and then sells that revenue to SAP for 4.5x sales, effectively $562M. How’s that for a simple explanation of consolidation in enterprise software?
- The median software as a service (SaaS) EV/revenue was 7.5x in 4Q07, with median revenue growth 42.5%, and median EBITDA margin 7.5%. These increased valuations — and more predictable revenue streams — help to explain the market’s continued enthusiasm for SaaS.
- There were 26 total software initial public offerings (IPOs) in 2007. The median offering amount was $107M, enterprise value $689M, EV/revenues 9.2x, and EV/EBITDA 37.2x.
- In the current US IPO pipeline, the median offering amount is $86M, annual revenues $56.4M, and net income -$4.8M. (This suggests to me that the current “IPO window” is set to 50/0/50 — $50M in revenue, 0 profit, and 50%+ growth.)
- In 2007, $5.1B in venture capital was raised by software companies (a 3% increase compared to the prior year).
- 408 software M&A transactions closed in 4Q07, representing $32.5B in value.