Highlights from the 2Q10 Software Industry Equity Report

It’s a been a while since I’ve done one of these posts, so I thought I’d take a minute and pull some highlights from the very useful quarterly report done by the Software Equity Group.

  • Following IT spending increases of 9% in 2007 and 6% in 2008, IT spending declined 10% in 2009
  • Goldman Sachs forecasts IT spending to increase 7% in 2010
  • Web conferencing and email top CIO SaaS adoption at 27% and 21% respectively
  • BI and data warehousing are at the bottom of CIO SaaS adoption at 1% each.  BI-as-a-service still seems to have trouble taking off; while I hear good things about Birst, one cannot forget LucidEra
  • Median enterprise value (EV) to revenue (R)  ratio of public software companies was 2.1x
  • $1B+ companies have a median EV/R ratio of 3.1x
  • <$100M companies have a median EV/R of 1.1x.  This means the size arbitrage lives on; big players can buy revenue at 1.1x and sell it at 3.1x
  • The median public software company (in the SEG Index) has an EV/R of 2.1x, EV/EBITDA of 12.8x, EBITDA margin of 16%, TTM revenue growth of 0%, and TTM revenues of $218M
  • SuccessFactors, Concur, and Salesforce are high flyers on the EV/R ratio at 7.6x, 7.5x, and 7.5x respectively
  • SaaS companies have a median EV/R of 3.4x, EV/EBITDA of 32.3x, EBITDA margins of 9.2%, and TTM revenue growth of 11%
  • SaaS companies with above-average growth had an EV/R of 4.2x while those with below-average growth were at 2.2x
  • There were 5 IPOs in 1H10:  SS&C, SPS Commerce, Convio, Broadsoft, and Motricity
  • The median offering amount was $58.7M
  • The median enterprise value was $203M
  • The median EV/R was 3.8x
  • The median EV/EBITDA was 42.5x
  • The median first-day return was 1.4%
  • 7 software companies filed S-1’s in 2Q10:  Qlik Technologies (about whom I blogged here), IntraLinks, Tangoe, RealPage, Ellie Mae, Tripwire, and AutoNavi
  • 4 of those 7 are on the SaaS model
  • The median proposed offering is $86M
  • The median annual revenues is $73M
  • The median net income is $10M
  • The median TTM revenue growth is 20%
  • This suggests a shift from the 50/50/0 IPO bar that I have previously discussed based on these reports (i.e., $50M+ in revenues, 50%+ growth, and 0% EBITDA).  These medians suggest a higher bar in terms of both revenue and profit, but a lower bar on growth.  Note that the bar is inherently a flexible concept (e.g., smaller size can be offset by higher growth) and one that most definitely changes over time.
  • There were 507 software M&A deals in 2Q10
  • Total value of the M&A deals was $17.5B, up dramatically from $4.3B in 1Q10 and $3.3B in 2Q09
  • The high dollar volume was boosted by mega-deals including SAP/Sybase ($5.4B), TPG/Vertafore ($1.4B), IBM/Sterling ($1.4B) and Allscript/Eclipsys ($1.2B)
  • The median M&A deal was done at a EV/R of 2.1x and EV/EBITDA of 12.0x
  • By category, development tools and IT asset management topped the M&A EV/R ratio at 3.5x, with healthcare in second at 2.7x, and BI/GRC at 2.6x.  ERP and messaging/communication were at the bottom with EV/R of 1.0x and 0.9x.

2 responses to “Highlights from the 2Q10 Software Industry Equity Report

  1. >>> 4 of those 7 are on the SaaS model

    Is this ratio worth noting, or is this representative of the overall ratio of SaaS companies within the larger group of software companies?

    • Piers,

      Probably both. That is, I think it might even understate the percent of companies who on some sort of recurring revenue model (e.g., subscription, term) and I think that those on SaaS or other recurring models will find it, ceteris paribus, “easier” in the public markets since they are technically less volatile. That said, it’s well known that Wall Street quickly “looks through” the reported revenue results focusing on revenue + the change deferred revenue as a proxy for bookings (i.e., orders) which are presumably as volatile at SaaS firms as they are a perpetual firms. In addition, as mentioned in a few posts, I think the IPO “bar” is lower SaaS companies than perpetual ones. E.g., a SaaS firm today might be able to go out with $50M in TTM revenues whereas for a perpetual firm, that’s probably closer to $100M.

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