1. The Software Industry
Th S ft I d t
Financial Report
Software Equity Group, L.L.C.
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(858) 509-2800
2. Unmatched Expertise.
Extraordinary Results
Overview Deal Team
Software Equity Group is an investment bank and M&A advisory firm serving the software and technology
sectors. Founded in 1992, our firm has guided and advised companies on five continents, including
Ken Bender
privately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Managing Director
Africa and Israel. We have represented public companies listed on the NASDAQ, NYSE, American, (858) 509-2800 ext. 222
Toronto, London and Euronext exchanges. Software Equity Group also advises several of the world's kbender@softwareequity.com
leading private equity firms. We are ranked among the top ten investment banks worldwide for application
software mergers and acquisitions.
R. Allen Cinzori
Managing Director
Services (858) 509-2800 ext. 226
acinzori@softwareequity.com
Our value proposition is unique and compelling. We are skilled and accomplished investment bankers
with extraordinary software, internet and technology domain expertise. Our industry knowledge and
experience span virtually every software product category, technology, market and delivery model. We Dennis Clerke
have profound understanding of software company finances, operations and valuation. We monitor and Executive Vice President
analyze every publicly disclosed software M&A transaction, as well as the market, economy and (858) 509-2800 ext. 233
technology trends that impact these deals. We offer a full complement of M&A execution to our clients dclerke@softwareequity.com
worldwide.
worldwide Our capabilities include:
include:.
Brad Weekes
Sell-Side Advisory Services – leveraging our extensive industry contacts, skilled professionals and Vice President
proven methodology, our practice is focused, primarily on guiding our client s wisely toward the (858) 509-2800 ext. 239
achievement of their exit objectives. bweekes@softwareequity.com
Buy-Side Advisory Services – utilizing a proven buy-side methodology, we help our clients acquire
strategically, assess insightfully, value intelligently and structure transactions to better assure their
desired outcome. Kris Beible
Director, Business Development
Management Buyouts & Recapitalization – assisting founders and owners of software and (858) 509-2800 ext. 227
technology companies to gain full or partial liquidity by facilitating capital investments by p
gy p g p q y y g p y private equity
q y kbeible@softwareequity.com
kbeible@softwareequity com
firms and other financial institutions.
Private Equity & Debt Placement – facilitating private companies with leading institutional investors
for financings that range from $5 million to $500 million. 12220 El Camino Real, Suite 320
San Diego, CA 92130
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they’re doing everything now to better their odds and enhance their future exit valuation ahead. (858) 509-2818 (F)
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Transactions
We’ve enjoyed serving our software clients for 20 years and have highlighted a small subset of companies we’ve assisted:
6. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
Figure 1: U.S. Gross Domestic Product and Unemployment Rate
10%
GDP % Growth Unemployment Rate
8%
6% 5.0%
3.6% 3.7%
4%
2.7% 3.2% 3.1% 3.0%
2.6%
2.1% 2.1% 2.2% 2.2%
1.5% 1.7% 1.8% 1.5%
2% 1.3%
1.1% 1.2%
0.4%
0%
-0.7% -0.7%
-2%
-2.7%
-4%
-5.4%
-6%
-6.4%
-8%
2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12
U.S. ECONOMY: SOFTWARE INDUSTRY IT SPENDING
MACROECONOMICS
SEG carefully monitors enterprise IT spending
We begin with a brief synopsis of U.S. Gross each quarter as a means of forecasting
Domestic Product (GDP) performance based downstream public software company financial
upon the most recent data available. GDP is best performance and software M&A deal volume.
defined as the total market value of all final goods Simply put, we long ago determined that healthy
and services produced in a country in a given IT spending drives public software companies to
year, equal to total consumer, investment and buy, not build, in response to growing market
government spending, plus the value of exports, demand. To provide some perspective, we
minus the value of imports. estimate every percentage increase/decrease in
IT spending equates to approximately $5 billion.
The Bureau of Economic Analysis (BEA) issued
its first estimate of U.S. GDP for the second Our readers will recall large enterprises cut back
quarter of 2012, indicating the U.S. economy sharply on spending for software, hardware and
continues to decelerate. After four consecutive IT services in 2009 during the economic
quarters of accelerating growth in 2011, this year downturn, when IT capital spending declined by
has been marred by sequential deceleration in Q1 more than 10%. The spending cut had an almost
and Q2 (Figure 1). The second quarter’s immediate and traumatic impact on public
lackluster growth rate of 1.5% reflected a sharp software company revenue and software M&A
decline in consumer spending, which fell from activity and valuations declined. In 2010 and
2.4% in Q1 to 1.5% in Q2, as well as the fragile 2011, enterprise customers loosened their purse
state of the U.S. and global economies. There strings and domestic IT capital spending grew 8%
was some good news for the software industry, as and 6%, respectively.
equipment and software purchases increased
7.2%, compared to Q1’s 5.4%. Reflecting the increased uncertainty in the global
economy, analysts continue to forecast tepid
A June employment report released by the U.S. worldwide IT spending forecasts for 2012.
Bureau of Labor Statistics confirmed the job Goldman recently lowered its 2012 forecast of
market remains weak. After three consecutive worldwide IT spending from 4% in January to 3%.
quarters of slow but steady improvement, the U.S. Goldman attributed the reduction to lower GDP
unemployment rate remained unchanged at growth in advanced economies. Gartner also
8.2%. forecasts 3% growth in worldwide IT spending, up
from their previous estimate of 2.5% in 1Q12.
2| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
7. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
When increasing its IT forecast, Gartner pointed 1Q12, reaching $8.4 billion, a 15% year-over-year
to a stabilized outlook despite the Eurozone’s increase from 1Q11’s $7.3 billion.
debt and banking crisis, a weak US recovery, and
China’s GDP slowdown. Among Goldman, The appropriate benchmarks in this arena,
Gartner and IDC the consensus for domestic IT according to marketers and agencies, is the
spending in 2012 is 3% (Figure 2). percentage of time digitally connected consumers
spend on the Internet relative to their overall
Though IT spending will grow only modestly, media consumption, and the spending on Internet
some will fare better than most. Gartner forecasts advertising relative to total advertising spending.
enterprise spending on public cloud services will In May 2012, Mary Meeker of Kleiner Perkins
reach $109 billion in 2012, and grow to $207 showed the gap has closed dramatically: Internet
billion by 2016. consumption was 26% of total media
consumption, and Internet advertisers grabbed a
record 22% of all advertising dollars.
Figure 2: Domestic IT Spending
PUBLIC SOFTWARE/SAAS/INTERNET COMPANY
10.0% 9.0%
8.0% STOCK PERFORMANCE
6.0% 6.0%
5.0%
3.0%
Following strong growth and solid returns in the
YoY Change in IT Spending
first quarter, each of the major stock indices
0.0% retreated sharply by the close of the second
2007 2008 2009 2010 2011 2012 quarter, but managed to hold onto positive year-
‐5.0% to-date returns. The tech heavy NASDAQ index
finished Q2 with a total YTD return of 12.7%,
‐10.0%
5.9% lower than at the close of Q1. The S&P 500
-10.0% and DOW lagged behind, ending Q2 with YTD
returns of 8.3% and 5.4%, respectively (Figure 3).
‐15.0% IT Spending values calculated using an average of Goldman, Gartner and IDC estimates
Among SEG’s three tracking indices, the market
performance of public companies comprising our
INTERNET RETAIL SPENDING AND ADVERTISING SaaS Index far outshone their perpetual software
and Internet counterparts. Thanks to accelerating
In the Internet sector, we believe online retail
growth, heightened M&A activity and stellar exit
spending and Internet advertising spending each
multiples (see M&A section for details), the stock
quarter presage the financial performance and
prices of public SaaS companies posted a median
M&A activity of many public Internet companies.
28.2% year-to-date return by the close of Q2,
Buoyed by a continually growing number of
after surging 22.0% in June. Five superstars
shoppers, online retail sales continued to rise
posted YTD stock returns in excess of 50%: Ellie
17% in 1Q12 (the latest quarter for which data is
Mae (218.6%), Athenahealth (61.2%), Ariba
available) according to comScore, achieving the
(59.4%), LivePerson (51.9%) and Bazaarvoice
highest growth rate since 2007. It was the tenth
(51.7%). Ariba’s return was driven by the 19.6%
consecutive quarter of growth for online retail.
premium paid by SAP when acquiring the
Among online retail’s most popular categories in
Company in May 2012.
1Q12 were digital content and subscriptions,
computer software, consumer electronics, jewelry
After posting a 22.4% median stock return in the
and watches and events tickets, each growing by
first quarter, the highest among our three tracking
at least 17% year-over-year.
indices, the SEG Internet Index closed Q2 with the
lowest YTD stock return, 4.3%. The sharp drop
The Interactive Advertising Bureau (IAB) and
was primarily attributable to renewed economic
PricewaterhouseCoopers (PwC) reported Internet
fears, faltering on-line consumer spending, and
advertising revenues soared to record levels in
Facebook’s IPO debacle which adversely impacted
an array of high risk, highly valued Internet stocks.
3| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
8. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
Figure 3: Major Market Indices Compared to the SEG Software, Internet & SaaS Indices
DOW S&P NASDAQ SEG SaaS SEG SW Index SEG Internet Index
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
(5.0%)
Jan Feb Mar Apr May Jun
PUBLIC SOFTWARE COMPANY FINANCIAL Healthcare providers were also well represented
PERFORMANCE among the ten companies achieving the highest
TTM revenue growth, led by Greenway Medical
The 144 public companies comprising the SEG Technologies (45%), MedAssets (40%) and
Software Index grew TTM revenue a median Merge Healthcare (39%). Other software
15.5% in 2Q12, barely surpassing the first providers in the top ten were recently public
quarter’s 14.9% (Figure 4). Still, the modestly Splunk (83%) and Sapiens International (54%).
improved revenue growth rate was impressive,
given Q2’s macro-economic headwinds and The second quarter’s growth rate helped drive the
lowered IT spending forecasts. Q2’s improved median TTM revenue of the SEG Software Index
median growth rate follows on the heels of two above $365 million (Figure 4). Indeed, Q2’s
consecutive quarters of declining growth. median TTM revenue is more than twice the
median TTM revenue of the SEG Software Index
Of the top ten software companies posting the in 2Q08.
highest TTM revenue growth in Q2, five derived
all or a substantial part of their revenue from
mobile software solutions. The list includes Qihoo Figure 4: SEG Software Index Median Metrics
(202% TTM revenue growth), Gree (158%), SEG - Software: Median Metrics
Millennial Media (117%), Zynga (65%) and Velti Measure 2Q11 3Q11 4Q11 1Q12 2Q12
(63%). EV/Revenue 2.9x 2.4x 2.5x 2.7x 2.5x
EV/EBITDA 14.1x 11.6x 12.3x 12.9x 11.5x
But mobile proved to be a double-edged sword. EV/Earnings 24.8x 21.6x 21.5x 23.0x 22.3x
Current Ratio 2.1 2.0 2.0 2.0 2.0
Six of the ten software companies with the lowest
Cash & Eq ($M) $145.4 $150.0 $132.0 $143.3 $171.2
TTM revenue growth were also mobile solution Gross Profit Margin 68.9% 68.2% 67.4% 66.4% 66.2%
providers: Smith Micro Software (-58% TTM EBITDA Margin 19.0% 19.0% 18.9% 18.9% 18.5%
revenue growth), Myriad Group (-40%), Access Net Income Margin 9.6% 10.5% 10.4% 10.0% 10.4%
(-32%), RealNetworks (-13%), BSQUARE (-9%) TTM Revenue Growth 15.2% 17.0% 16.9% 14.9% 15.5%
and Motricity (-7%). Unlike their top performing TTM Total Revenue ($M) $325.9 $344.8 $355.6 $352.4 $365.1
peers, these mobile companies are struggling to TTM Total EBITDA ($M) $52.3 $58.9 $60.8 $53.2 $58.5
adapt legacy business models to a rapidly Debt / Equity Ratio 24.7% 21.8% 21.6% 23.6% 21.7%
evolving market.
4| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
9. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
Over this same time period, the number of public Public software companies continued to increase
software companies has declined from 218 to cash and equivalents on their balance sheets,
144 - further evidence that consolidation in the undoubtedly a reflection of their notable EBITDA
software sector is resulting in not only fewer, but margins. In 2Q08, the median cash and
considerably larger, publicly traded software equivalents of the SEG Software Index was $72.7
companies (Figure 5). million and the median EBITDA margin was only
12.8%. In 2Q12, median cash and equivalents
Public software companies proved especially had grown 136% to $171.2 million, and the
adept at maintaining their healthy EBITDA median EBITDA margin had increased 31% over
margins in the second quarter. The median the four year period (Figure 6). The significant
EBITDA margin of the on-premise public software cash reserves and strong balance sheets of most
companies comprising our Software Index was public software companies, particularly the
18.5% in Q2, down slightly from 1Q12’s 18.9% industry’s largest players, bode well for many
(Figure 4). small and mid-cap software company M&A
targets.
Many of the most profitable on-premise software
companies are industry behemoths that have the Figure 6: SEG Software Historical Median
size and market leverage to drive high margins, Cash and Median EBITDA Margins
including Oracle (43% EBITDA margin), Microsoft Cash EBITDA Margin
(42%) and SAP (37%). But an array of smaller, 180 25%
160
mid-cap public software companies also had a 140 20%
Median EBITDA Margin
keen eye on the bottom line in 2Q12, led by Median Cash Balance
($ millions) 120
15%
CheckPoint Software (56% EBITDA margin), 100
Gree (53%) and ANSYS (48%). 80
10%
60
40 5%
Among our top ten most profitable software 20
companies was a considerably smaller player, 0 0%
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
SolarWinds, with TTM revenue of $215 million.
Benefitting from a highly unique and cost effective
revenue and sales strategy, SolarWinds drove Q2
EBITDA margins to 48%. PUBLIC SOFTWARE COMPANY MARKET
VALUATIONS
Figure 5: SEG Software Index TTM Revenue At the close of 2Q12, the median EV/Revenue
vs. Company Count multiple of public companies in our SEG Software
Index was 2.5x, slightly lower than 1Q12’s 2.7x.
250 $400 The median EV/Revenue multiple of the SEG
$350
Software Index has now been at or above 2.0x for
# of Public Software Companies
200 eleven consecutive quarters (Figure 7).
$300
in SEG Software Index
Median TTM Revenue
150 $250
($ millions)
Figure 7: SEG Software Median EV/Revenue
$200
Multiples
100 $150 3.5x
$100 3.0x
50
Median EV/Revenue Multiple
2.5x
$50
2.0x
0 $0
2Q08 2Q09 2Q10 2Q11 2Q12 1.5x
1.0x
0.5x
0.0x
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10. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
The second quarter’s market downturn had an PUBLIC SOFTWARE COMPANY FINANCIAL
especially adverse impact on smaller public PERFORMANCE: BY PRODUCT CATEGORY
software company valuations (Figure 8). As
testament, in 2Q12, the median EV/Revenue In the second quarter, median TTM revenue grew
multiple of SEG Software Index companies with 20% or more in four of our SEG Software Index
TTM revenues between $100 million and $200 product categories (Figure 10). Vertically focused
million plunged to 2.1x from 2.7x the prior quarter. software providers led the pack, posting a median
Only one year ago, this group achieved a median 24.2% TTM revenue growth rate. The category
EV/Revenue of 3.8x. was led by Sapiens International (54.0%), PROS
Holdings (36.1%), and EPIQ Systems (30.2%).
Figure 8: SEG Software Valuation by Size of Networking & Network Performance Management
Buyer (TTM Revenue) finished close behind, closing 2Q12 with a 22.9%
4.5x TTM revenue growth rate. Companies benefitting
4.0x from strong demand to optimize performance of
3.5x cloud infrastructure and mobile networks include
3.0x Allot Communications (37.5%), Aruba Networks
Median EV/Revenue
2.5x (36.4%), and Keynote Systems (32.7%).
2.0x
1.5x Healthcare providers (22.6%) continue to benefit
1.0x from massive regulatory changes which attempt
0.5x to deal with the skyrocketing costs of healthcare
0.0x by incentivizing healthcare providers to adopt
2Q11 3Q11 4Q11 1Q12 2Q12
Revenue Greater Than $1 billion Revenue Between $200 million and $1 billion
healthcare technology to streamline operations
Revenue Between $100 million and $200 million Revenue Less Than $100 million
and improve care. The category was led by
Greenway Medical Technologies (45.3%),
MedAssets (39.5%), Merge Healthcare (39.1%),
Size (i.e., annual revenue) wasn’t the only
Accelrys (29.9%) and Simulations Plus (28.4%).
important determinant of a public software
The other hot product category with TTM revenue
company’s EV/Revenue multiple. EBITDA
growth above 20% was Billing & Service
margins clearly played a part in Q2’s public
Management (22.3%).
software company market valuations. Public
software companies with 40% or higher EBITDA
Five software product categories posted TTM
margins were awarded with a median
revenue growth rates below 10%: Storage, Data
EV/Revenue multiple of 3.9x, nearly two times the
Management & Integration (7.7%), Financial &
2.0x multiple of those with EBITDA margins below
Accounting (7.1%), Development Platforms
10% (Figure 9).
(6.4%) and IT Conglomerates (5.3%).
Figure 9: 2Q12 EV/Revenue Multiples vs. As for the most profitable software product
EBITDA Margin categories, companies in the IT Conglomerate
4.5x
3.9x
and Vertical - Finance categories posted the
4.0x
3.4x highest median EBITDA margins in the second
3.5x
quarter, 36.9%. Among the most profitable of the
Median EV/Revenue
3.0x
2.6x
2.5x industry’s behemoths were Oracle (43% EBITDA
2.0x
2.0x 1.9x
margin), Microsoft (42%) and SAP (37%). The
1.5x Vertical – Finance category, consisting of
1.0x
software providers vertically focused on the
0.5x
finance industry, demonstrated strength from top
0.0x
< 10% > 10% > 20% > 30% > 40% to bottom, with four out of five generating EBITDA
<= 20% <= 30% <= 40%
margins above 31%. This category was led by
MSCI (45.3% EBITDA margins) and FX Alliance
(38.3 EBITDA margins).
6| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
11. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
Figure 10: SEG Software Index Median Metrics by Product Category
SEG Software Index
Revenue EBITDA EBITDA YTD Stock
EV/Revenue EV/EBITDA
Category Growth Growth Margin Return
2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q12 (TTM) 2Q12 (TTM) 2Q12 (TTM) 2012
Billing & Service Management 2.8x 1.3x 1.3x 1.3x 1.3x 7.4x 5.2x 5.6x 6.6x 6.9x 22.3% 0.3% 18.5% (1.1%)
Business Intelligence 3.2x 2.8x 2.4x 2.3x 2.5x 43.1x 39.6x 36.5x 39.3x 38.1x 19.0% 6.0% 8.7% 12.6%
Development Platforms 2.6x 1.8x 1.9x 2.3x 1.9x 10.5x 8.0x 9.0x 10.1x 9.1x 6.4% 2.9% 22.1% 14.5%
Engineering & PLM 2.4x 1.9x 2.0x 2.6x 2.3x 17.4x 12.8x 13.5x 14.3x 11.5x 13.5% 43.1% 19.9% 15.4%
Enterprise Resource Planning 3.2x 2.8x 2.8x 3.0x 2.4x 11.1x 9.1x 9.6x 10.2x 8.3x 10.1% 10.4% 29.0% 11.7%
Financial & Accounting 2.8x 2.3x 2.6x 2.8x 2.7x 10.1x 8.9x 9.2x 9.8x 9.8x 7.1% 9.5% 25.6% 15.4%
Gaming 1.0x 1.4x 1.2x 1.2x 0.9x 10.9x 9.1x 7.8x 7.1x 7.6x 14.1% 7.3% 9.2% (18.4%)
Healthcare 3.9x 3.5x 3.1x 3.6x 3.3x 19.6x 19.0x 15.5x 18.4x 15.3x 22.6% 45.7% 22.3% 2.8%
IT Conglomerates 2.6x 2.6x 2.5x 3.1x 2.9x 8.8x 8.5x 9.0x 8.2x 7.7x 5.3% 6.6% 36.9% 11.7%
Mobile Solutions/Content 3.3x 2.1x 2.2x 2.9x 2.5x 25.7x 18.2x 25.4x 19.9x 15.4x 16.2% (15.5%) 6.6% (4.9%)
Networking & Network Performance Management 4.3x 3.0x 2.9x 3.4x 2.9x 24.8x 16.9x 19.7x 20.0x 19.1x 22.9% 29.7% 17.5% (6.2%)
Security 3.1x 2.6x 2.9x 3.2x 2.9x 16.5x 13.1x 14.5x 13.0x 10.2x 19.4% 15.7% 19.7% 0.0%
Storage, Data Management & Integration 2.6x 2.1x 2.2x 2.5x 2.4x 12.7x 9.8x 9.8x 10.3x 9.4x 7.7% 10.6% 22.6% 15.8%
Supply Chain Management & Logistics 2.2x 1.9x 2.2x 2.3x 2.1x 12.0x 11.2x 11.9x 12.9x 11.3x 17.3% 36.9% 19.6% 12.9%
Systems Management 7.3x 5.0x 5.5x 5.9x 5.9x 21.7x 18.5x 20.9x 22.2x 23.0x 18.1% 21.1% 26.2% 34.0%
Vertical - Finance 4.7x 3.8x 3.9x 3.8x 3.7x 15.4x 13.3x 12.7x 11.6x 11.6x 13.1% 15.9% 36.9% 7.3%
Vertical - Other 3.1x 2.7x 2.8x 3.3x 3.0x 15.1x 14.1x 16.4x 18.5x 16.6x 24.2% 13.1% 18.0% 11.5%
Median 2.9x 2.4x 2.5x 2.7x 2.5x 14.2x 11.4x 12.3x 12.9x 11.5x 15.6% 13.4% 18.5% 9.9%
The Mobile solutions product category had the EV/Revenue multiples ranging from 5.0x to 7.3x
lowest median EBITDA margin in 2Q12, at 6.6%. over the past four quarters.
Typical of any product category undergoing rapid
market adoption and consolidation, EBITDA A distant second was the Vertical – Finance
margins varied drastically from one mobile category, which closed 2Q12 with a median
solutions provider to the next. Gree, an emerging EV/Revenue multiple of 3.7x, no doubt bolstered
provider of mobile social games, finished 2Q12 by the category’s strong EBITDA margins. The
with an EBITDA margin of 53.0%. By contrast, Healthcare category finished 2Q12 with a median
Smith Micro, a legacy provider of phone tools to EV/Revenue multiple of 3.3x.
mobile OEMs and wireless carriers, finished 2Q12
with EBITDA margins of -74.4%. Interestingly, the median EV/Revenue multiples of
most software product categories were barely
PUBLIC SOFTWARE COMPANY MARKET impacted by their TTM revenue growth rates
VALUATIONS: BY PRODUCT CATEGORY (Figure 11). Vertical-Other, the product category
with the highest TTM revenue growth rate in 2Q12
Sixteen of the seventeen product categories posted a median EV/Revenue multiple of 3.0x,
comprising the SEG Software Index saw their while IT Conglomerates, the category with the
median EV/Revenue multiples decline YoY as a lowest TTM revenue growth rate, closed 2Q12
result of the deteriorating economic climate and with a median EV/Revenue multiple of 2.9x.
market perturbation. The lone exception was the
The Billing & Service Management product
IT Conglomerates category, which managed to category experienced the largest YoY decline in
improve its median EV/Revenue multiple YoY, as market valuation. The category has been a
investors sought safer investments in the face of perennial laggard and the majority of companies
increasing uncertainty. But it’s all relative. in the category are struggling to reinvent
themselves. Even Synchronoss Technologies,
Five of our software product categories achieved which has been a category stand out over the
a median EV/Revenue multiple of 3.0x or higher past year, returned to earth and finished 2Q12
in 2Q12. The Systems Management category with median EV/Revenue multiple of 2.7x, down
posted a whopping EV/Revenue multiple of 5.9x, from 4.9x in 1Q12. Nevertheless, Synchronoss
led by companies who are spearheading the remains the category standout, providing best of
cloud revolution, namely: SolarWinds (14.4x class solutions to service providers struggling to
EV/Revenue), VMWare (9.7x), RedHat (8.5x) and manage and synchronize the barrage of mobile
Citrix Systems (5.9x). The Systems Management devices connecting to their networks.
group has been strong for well over a year with
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Figure 11: SEG Software Median EV/Revenue vs. Four outperformers achieved TTM revenue
TTM Revenue Growth growth of 46% or more in 2Q12: Bazaarvoice
(64.6%), Cornerstone OnDemand (63.2%),
7.0x
TTM Revenue has virtually no impact
on the median EV/Revenue multiple of
Demandware (48.7%) and Ellie Mae (46.4%). By
6.0x software product categories
11
contrast, IntraLinks Holdings was the sole public
SaaS provider who didn’t achieve double digit
Median EV/Revenue
5.0x
4.0x 6
TTM revenue growth, registering a relatively paltry
13
14
16 17 7.3% (Figure 13).
3.0x 1 3
9
5 12
7
10
4
2.0x 2
15
Unsurprisingly, the growth of these SaaS
1.0x
8
companies has been driven in large part by their
0.0x enhanced investment in sales and marketing,
0% 5% 10% 15% 20% 25% 30% which has grown from 23% of total revenue in
TTM Revenue Growth
1. IT Conglomerates 12. Business Intelligence
2Q10, to 32% in 2Q12 (Figure 14). What is
7. Engineering & PLM
2.
3.
Development Platforms
Financial & Accounting
8.
9.
Gaming
Mobile Solutions/Content
13.
14.
Security
Healthcare surprising is the return (measured in TTM revenue
4. Storage, Data Management & Integration 10. Supply Chain Management & Logistics 15. Billing & Service Management
5.
6.
Enterprise Resource Planning
Vertical - Finance
11. Systems Management 16.
17.
Networking & Network Performance
Vertical - Other
growth) of their sales and marketing investments.
Since 2Q10, public SaaS company sales and
marketing spends as a percent of total revenue
PUBLIC SOFTWARE AS A SERVICE (SAAS) has grown nearly 50%. Impressively, over this
FINANCIAL PERFORMANCE same time period, TTM revenue growth has
grown 150%.
As SEG forecasted in our Q1 report, the median
TTM revenue growth rate of public SaaS In 2Q12, four SaaS providers spent more than
companies in 2Q12 exceeded 30%. The final tally 50% of their revenues on S&M: Cornerstone
of 30.3% is the highest in three years (Figure 12). OnDemand (64.2%), Salesforce (52.3%), Vocus
The median TTM revenue growth rate of our (52.1%) and Netsuite (50.9%). Interestingly,
SaaS Index constituents has now remained above despite spending 50% more on sales & marketing
20% for six consecutive quarters. With SaaS as a percent of total revenue, Netsuite and Vocus
adoption growing once again, we anticipate the both finished 2Q12 with median TTM revenue
median SaaS TTM revenue growth rate will growth below the median (24.6% and 21.0%
remain above 30% throughout the year. respectively).
Along with the stellar revenue growth, public
Figure 12: SEG SaaS Index Median Metrics SaaS companies remain mindful of the bottom
line as well. In 2Q12, the median EBITDA margin
SEG - SaaS: Median Metrics of the SEG SaaS Index was 9.9%, up 24% from
Measure 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11’s 8.0%. Three outperformers reported
EV/Revenue 5.7x 5.1x 4.4x 5.3x 5.0x
EBITDA margins above 20%: EBIX (43.6%),
EV/EBITDA 40.7x 33.8x 29.7x 33.6x 30.1x
EV/Earnings 92.0x 72.0x 82.2x 34.1x 38.1x
OpenTable (29.8%) and Medidata (20.8%). By
Current Ratio 1.7 1.9 1.8 1.7 2.2 contrast six public SaaS companies finished 2Q12
Cash & Eq ($M) $55.4 $74.4 $68.1 $78.8 $95.5 with negative EBITDA margins: Cornerstone
Gross Profit Margin 68.9% 69.8% 70.0% 70.9% 71.0% OnDemand (-25.5%), Bazaarvoice (-19.4%),
EBITDA Margin 8.0% 10.5% 9.2% 9.9% 9.9% Callidus Software (-10.3%), Netsuite (-6.8%),
Net Income Margin 0.9% 1.5% 1.8% -0.5% 0.4% ServiceNow (-6.7%) and ExactTarget (-2.1%).
TTM Revenue Growth 29.2% 27.3% 26.1% 28.4% 30.3%
It’s clear these five companies are prioritizing
TTM Total Revenue ($M) $134.3 $134.3 $160.0 $169.0 $172.7
revenue growth as all but Callidus, finished 2Q12
TTM Total EBITDA ($M) $12.7 $17.6 $20.7 $21.9 $23.7
Debt / Equity Ratio 3.9% 4.7% 3.5% 2.5% 7.1%
with TTM revenue growth above 43%.
8| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com
13. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions
Figure 13: Public SaaS Companies
SEG SaaS Index
EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin
Company Category
2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12 2Q11 3Q11 4Q11 1Q12 2Q12
Ariba, Inc. (ARBA) ERP & Supply Chain 7.5x 6.1x 6.1x 5.6x 7.1x 103.2x 85.5x 84.9x 76.5x 87.0x 14.5% 26.9% 38.5% 42.7% 36.7% 7.3% 7.1% 7.2% 7.4% 8.1%
Athenahealth, Inc. (ATHN) Vertically Focused 5.5x 6.8x 6.2x 6.9x 7.2x 37.3x 40.3x 36.2x 45.7x 48.1x 29.2% 30.5% 30.5% 32.0% 34.4% 14.8% 16.9% 17.1% 15.0% 15.1%
Bazaarvoice, Inc. (BV) Other SaaS - - - 11.0x 9.4x - - - - - 66.8% - - - 64.6% -27.9% -24.1% -20.8% -20.4% -19.4%
Callidus Software Inc. (CALD) Workforce Mgmt 2.4x 1.9x 2.2x 2.9x 2.4x - - - - - 4.5% 17.6% 19.6% 18.2% 15.4% -3.4% -3.6% -5.6% -7.0% -10.3%
Concur (CNQR) Other SaaS 7.4x 5.6x 6.4x 7.9x 8.0x 46.1x 39.5x 49.0x 68.9x 59.2x 18.6% 18.4% 19.3% 21.0% 24.0% 16.1% 14.1% 13.1% 11.4% 13.6%
Constant Contact (CTCT) Other SaaS 3.5x 2.1x 2.6x 3.4x 2.3x 53.6x 27.6x 29.1x 33.6x 21.3x 31.6% 28.2% 25.2% 23.1% 21.4% 6.6% 7.8% 9.0% 10.2% 10.9%
Cornerstone OnDemand (CSOD) Workforce Mgmt 17.1x 11.8x 11.0x 11.5x 11.7x - - - - - 55.2% 51.0% 51.9% 67.0% 63.2% -27.1% -33.7% -30.9% -24.0% -25.5%
DealerTrack (TRAK) Vertically Focused 3.1x 2.3x 3.0x 3.2x 3.1x 23.4x 15.4x 18.3x 21.1x 20.1x 16.6% 26.3% 37.9% 44.9% 39.2% 13.1% 15.2% 16.3% 15.3% 15.4%
Demandware, Inc (DWRE) Other SaaS - - - 14.6x 12.5x - - - 386.9x 553.5x - - - 54.1% 48.7% 4.8% 2.9% 1.5% 3.8% 2.3%
Ebix Inc. (EBIX) Vertically Focused 5.7x 4.2x 4.2x 5.3x 4.1x 13.4x 9.7x 9.9x 12.1x 9.3x 29.5% 27.3% 24.6% 27.8% 22.8% 42.9% 42.9% 42.8% 43.5% 43.6%
Ellie Mae (ELLI) Other SaaS 4.2x 1.6x 1.8x 2.2x 4.6x 52.3x 15.6x 21.6x 24.8x 29.8x 23.3% - 25.5% 28.4% 46.4% 8.0% 10.5% 8.6% 9.0% 15.4%
ExactTarget, Inc. (ET) CRM & Marketing - - - 7.9x 6.0x - - - - - 40.7% 40.7% - 54.5% - -5.1% -5.1% -6.0% -3.3% -2.1%
IntraLinks Holdings (IL) Other SaaS 5.9x 2.4x 1.7x 1.7x 1.3x 33.1x 15.7x 13.4x 12.5x 13.9x 34.8% 30.6% 23.8% 15.5% 7.3% 17.8% 15.6% 12.8% 13.9% 9.0%
Kenexa (KNXA) Workforce Mgmt 3.2x 2.1x 2.4x 2.4x 2.5x 54.3x 29.2x 30.2x 28.3x 29.8x 36.7% 46.9% 52.4% 44.1% 38.8% 5.9% 7.3% 7.8% 8.5% 8.5%
LivePerson (LPSN) CRM & Marketing 4.9x 4.4x 4.6x 5.3x 5.8x 23.7x 21.6x 22.8x 25.8x 30.1x 23.7% 21.9% 20.8% 21.1% 21.3% 20.6% 20.5% 20.4% 20.5% 19.2%
Medidata Solutions (MDSO) Other SaaS 2.9x 1.8x 2.0x 2.3x 3.0x 15.1x 8.2x 9.3x 11.0x 14.6x 17.4% 19.0% 17.9% 10.8% 14.5% 19.1% 21.4% 21.7% 20.4% 20.8%
Netsuite (N) ERP & Supply Chain 10.9x 9.7x 11.7x 12.9x 12.5x - - - - - 19.6% 21.1% 21.9% 22.4% 24.6% -7.1% -7.9% -7.3% -7.4% -6.8%
OpenTable, Inc. (OPEN) Other SaaS 18.5x 11.3x 6.5x 7.3x 5.9x 73.2x 39.9x 23.0x 24.1x 19.8x 50.9% 54.3% 52.3% 40.9% 30.3% 25.2% 28.2% 28.1% 30.2% 29.8%
RealPage (RP) Vertically Focused 9.2x 6.6x 7.5x 6.2x 4.9x 70.1x 50.8x 63.4x 54.5x 39.8x 36.6% 38.3% 39.8% 37.0% 34.4% 13.1% 13.0% 11.8% 11.3% 12.2%
Responsys (MKTG) CRM & Marketing 7.3x 5.2x 2.7x 3.4x 3.4x 40.7x 28.1x 14.0x 21.8x 20.3x - - 54.1% 43.4% 36.3% 18.0% 18.5% 19.0% 15.7% 16.6%
Salesforce.com (CRM) CRM & Marketing 10.3x 9.0x 7.9x 7.8x 8.2x 133.0x 152.2x 182.8x 166.2x 189.6x 29.6% 33.0% 34.6% 36.8% 37.7% 7.8% 5.9% 4.3% 4.7% 4.3%
SciQuest (SQI) ERP & Supply Chain 6.3x 5.9x 5.3x 5.0x 5.0x 34.6x 38.3x 38.0x 37.3x 41.5x 19.0% 19.7% 22.0% 25.8% 23.3% 18.2% 15.3% 14.0% 13.5% 12.1%
ServiceNow, Inc. (NOW) Other SaaS - - - - 17.4x - - - - - 124.3% 113.8% 113.8% - - -64.2% 13.7% 13.7% -2.9% -6.7%
SPS Commerce (SPSC) ERP & Supply Chain 3.3x 3.6x 4.4x 4.8x 4.9x 37.6x 47.2x 65.3x 68.7x 68.5x 19.1% 22.5% 26.7% 30.0% 31.6% 8.7% 7.6% 6.7% 6.9% 7.1%
The Ultimate Software Group, Inc. (ULTI) Workforce Mgmt 5.7x 5.1x 6.3x 6.6x 7.0x 72.2x 59.0x 68.7x 66.2x 71.3x 16.5% 16.8% 17.0% 18.2% 19.6% 7.9% 8.6% 9.2% 9.9% 9.9%
Vocus (VOCS) CRM & Marketing 4.3x 3.1x 2.8x 2.6x 3.0x - 956.7x 206.5x 130.0x 285.2x 17.4% 19.1% 18.9% 18.7% 21.0% -0.4% 0.3% 1.4% 2.0% 1.1%
Zix Corporation (ZIXI) Other SaaS 6.0x 5.4x 4.3x 4.6x 3.9x 25.0x 19.8x 14.6x 14.6x 12.5x 30.9% 31.5% 31.7% 15.4% 12.4% 24.0% 27.2% 29.3% 31.3% 31.2%
Median: 5.7x 5.1x 4.4x 5.3x 5.0x 40.7x 33.8x 29.7x 33.6x 30.1x 29.2% 27.3% 26.1% 28.4% 30.3% 8.0% 10.5% 9.2% 9.9% 9.9%
The steadily improving TTM revenue growth rates Figure 14: Public SaaS Company S&M
and EBITDA margins of public SaaS providers are Spend as % of Total Revenue
creating a force to be reckoned with, a sizable 35.0% 33% 33% 32% 35%
31%
and growing group of companies with scale, a 30.0% 28% 28% 30%
strong financial model, and strong balance
S&M as % of Total Revenue
25% 25%
TTM Revenue Growth
25.0% 23% 25%
sheets. The median TTM revenue for the SEG
20.0% 20%
SaaS Index is now $173M, up 29% YoY; median
Cash & Equivalents ended 2Q12 at $96M, up 15.0%
26.5% 27.1% 25.5% 28.4% 30.3% 15%
72% YoY. 10.0% 20.5% 10%
15.1%
5.0% 12.1% 13.0% 5%
PUBLIC SOFTWARE AS A SERVICE (SAAS) 0.0% 0%
Q2 2010
Q3 2010
Q4 2010
1Q 2011
2Q 2011
3Q 2011
4Q 2011
1Q 2012
2Q 2012
COMPANY MARKET VALUATIONS
In 2Q12, the median EV/Revenue multiple of the
27 pure-play public SaaS providers comprising ServiceNow (17.4x), Demandware (12.5x),
our SEG SaaS Index fell to 5.0x, from 5.3x in Netsuite (12.5x) and Cornerstone OnDemand
1Q12 (Figure 12). However, it wasn’t all bad (11.7x). Investors are clearly favoring growth over
news, as over 50% of public SaaS providers profitability in the current market, as three of the
actually maintained or increased their four SaaS providers with the highest market
EV/Revenue QoQ. Leading the pack was Ellie valuations had negative EBITDA margins; the
Mae, closing 2Q12 with a 109% QoQ jump in fourth, Demandware, reported a paltry 2.3%
EV/Revenue. Ellie Mae is revolutionizing the EBITDA.
mortgage industry with a SaaS based solution
designed to address the litany of inefficiencies Indeed, there was a clear, causal relationship in
within the mortgage origination process. Even in 2Q12 between SaaS company market valuations
the face of declining mortgage volumes, the and TTM revenue growth rates (Figure 15).
Company has managed to accelerate revenue Public SaaS companies with TTM revenue growth
growth (12.3% to 46.4%) and expand EBITDA rates between 10%-20% registered a median
margins (6.6% to 15.4%) over the past three EV/Revenue of 3.5x, while those generating TTM
years. revenue growth rates above 40% boasted a
median EV/Revenue multiple of 9.4x. By
Four public SaaS companies had EV/Revenue contrast, there was very little relationship between
multiples above 10x at the close of 2Q12: EBITDA margins and public SaaS company
9| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com