Software Maintenance Revenue - Sacred Cow or Hamburger Meat

The current economic downturn has given rise to numerous pieces of fundamentally good analysis on software company valuations that use software maintenance payments as a basis for valuing a business. Comments like “this company sells at only 2X or 3X its maintenance revenue stream” have popped up in numerous conversations with tech investors and sell side analysts as well as in Barron’s.

Excerpt - The current economic downturn has given rise to numerous pieces of fundamentally good analysis on software company valuations that use software maintenance payments as a basis for valuing a business. Comments like “this company sells at only 2X or 3X its maintenance revenue stream” have popped up in numerous conversations with tech investors and sell side analysts as well as in Barron’s.  In better times, comments like these would send most investors to the trading desk. Make no mistake, - as analysts we are big fans of those fat recurring maintenance payments that users have little choice but to pay especially when it comes to software products that benefit from a high degree of integration into customer environment and are truly very difficult to get rid of.  The experience of the 2001-2002 tech downturn provided for many lessons, but one of the most important ones is that sacred cows like software maintenance can become hamburger meat if users feel enough budget pressure. We believe that a similar scenario may unfold in the current economic cycle, especially if the recession lasts longer than the end of 2009. Thus, a valuation based on a multiple of software maintenance, especially during the times of low or no growth needs to take a more conservative view towards software maintenance renewal rates.