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SaaS Valuation 2013: What Price is Right?

How to Value SaaS Companies?How to Value SaaS Companies?

What are the Key Valuation Drivers for SaaS?

The analysis in our latest edition of "SaaS Valuation 2013: What Price is Right?" offers practical guidelines and formulas on how to value SaaS companies. Included is a detailed analysis of what drives valuation multiples for SaaS companies.

Over the past several years, we have been continuously testing different valuation drivers for SaaS companies. Both the methodology and the results of our valuation work have garnered significant industry recognition and use. Several well-known public acquisitions in the SaaS space have confirmed our Empirical Valuation Model (EVM) that prices companies based on their core operating parameters such as revenue growth. A number of public SaaS M&A transactions of significant size have come very close (within 5%) of the values predicted by EVM. During the last 12-18 months, SaaS companies have experienced a dramatic expansion in valuation multiples and acceleration of growth on both absolute and relative basis vs. on premise software firms.  “SaaS First” for any new business initiative has become the dominant trend. Still in absolute terms, enterprise software spend far outstrips SaaS, indicating that for many business functions market adoption of SaaS remains in early stages. Publicly trading SaaS companies covered in this report represent about $16.5Bil in trailing revenue, $5Bil in deferred revenue and $142Bil in market capitalization.  Revenue growth remains the dominant SaaS valuation factor. The attached research report provides updated valuation benchmarks and revised SaaS valuation formulas.

Key Issues include:

  • How to value SaaS companies?
  • What are the correct metrics for SaaS valuations?
  • How will market adoption of SaaS impact valuation multiples?
  • What attributes separate top and bottom ranked SaaS companies?
  • Are SaaS companies over or under-valued?
  • What SaaS companies have the most efficient business model?

Key Findings:

  • SaaS companies are growing on average 2-3X faster than enterprise software companies – further widening the growth gap seen in our last report.
  • SaaS companies have seen their Deferred Revenue metrics rise while on-premise software companies have experienced a modest decline in deferred revenue indicators.
  • Profitability of enterprise software companies has held steady or improved slightly while that of SaaS companies has declined.
  • SaaS multiples have risen sharply, almost 60% since our April 2012 study.   The dramatic rise has been driven in part by an acceleration of revenue growth and market share gains by SaaS vs. traditional on premise software.
  • Enterprise software (on premise) multiples have increased modestly – reflecting modest revenue growth rates and concerns that the transition to SaaS will hurt revenues and profit margins.  Or as the legendary enterprise tech investor – Bill Janeway of Warburg Pincus recently remarked in an exclusive MGI 20 Questions Interview: “In an Enterprise Software business model, a rich customer is subsidizing a poor vendor with large upfront fees and maintenance payments.  By contrast, in a SaaS model a poor vendor is subsidizing a rich customer.”
  • Size matters – the valuation premiums enjoyed by larger capitalization companies continues to expand.
  • Revenue growth remains the critical driver to valuations – and investors appear to be more focused on short-term growth over longer term growth rates.
  • We believe that current SaaS valuation multiples are unsustainable and vulnerable to a correction.

The current 22 page  study has been expanded from prior years to include data on 122 companies made up of 42 SaaS firms and 80 enterprise software companies across all market cap categories.  Companies covered by this research note collectively represent almost $221 Billion in annual revenues and almost a trillion in market cap. Includes detailed valuation analysis of the software sector and provides numerous charts and data tables useful in determining valuations of SaaS firms.

Companies Covered in this Report:

  • Accelrys Inc
  • ACI Worldwide Inc
  • Actuate Corporation
  • Adobe Systems Inc
  • Advent Software Inc
  • Agilysys Inc.
  • Amdocs Ltd
  • American Software Inc
  • Ansys Inc
  • Aspen Technologies Inc
  • Asure Software Inc
  • Athenahealth Inc
  • Autodesk Incorporated
  • Bazaarvoice Inc
  • Blackbaud Inc
  • Bottomline Technologies Inc.
  • Brightcove Inc
  • Broadsoft Inc
  • BroadVision Inc.
  • BSQUARE Corporation
  • Ca Inc
  • Cadence Design Systems Inc
  • Callidus Software Inc
  • Cerner Corporation
  • Check Point Software
  • Citrix Systems Inc
  • Clicksoftware Technologies
  • Commvault Systems Inc
  • Compuware Corp
  • Comverse Inc
  • Concur Technologies Inc
  • Constant Contact Inc
  • Constellation Software Inc
  • Cornerstone Ondemand Inc
  • Covisint Corp
  • Daegis Inc
  • Datawatch Corporation
  • Dealertrack Technologies Inc
  • Demandware Inc
  • Descartes Systems Group (The)
  • Digital River Inc
  • E2OPEN
  • Ebix Inc
  • Egain Corp
  • Ellie Mae Inc
  • Fair Isaac Corporation
  • FireEye Inc
  • Fleetmatics
  • Fortinet Inc
  • GlobalSCAPE Inc.
  • Guidance Software Inc
  • Guidewire Software Inc
  • Healthstream Inc
  • Imperva Inc
  • Informatica Corp
  • Interactive Intelligence Inc.
  • Intralinks Holdings Inc
  • Intuit
  • Jagged Peak Inc
  • Jive Software
  • Liveperson Inc
  • Logmein Inc
  • Mam Software Group Inc
  • Manhattan Associates Inc
  • Marin Software Inc
  • Marketo Inc
  • Mattersight Corp
  • Medassets Inc
  • Medidata Solutions Inc
  • Mentor Graphics Corp
  • Merge Healthcare Inc
  • Micros System Inc
  • Microsoft Corp
  • Microstrategy Inc.
  • Model N Inc
  • Monotype Imaging Holdings Inc
  • Netscout Systems Inc.
  • Netsuite Inc
  • Nuance Communications Inc
  • Open Text Corporation
  • Oracle Corporation
  • PDFSolutions Incorporated
  • Pegasystems Inc
  • Progress Software Corp
  • Proofpoint Inc
  • Pros Holdings Inc
  • PTC Inc
  • QAD Inc
  • Qlik Technologies Inc
  • Quality Sys Inc
  • Qualys Inc
  • Rally Software Development
  • Realpage Inc
  • Red Hat Inc
  • Responsys Inc
  • RingCentral Inc
  • Rosetta Stone Inc
  • Salesforce.com Inc
  • SAP AG
  • Scientific Learning Corp
  • Sciquest Inc
  • ServiceNow Inc
  • Smith Micro Software Inc
  • Solarwinds Inc
  • Splunk Inc
  • Sps Commerce Inc
  • SS&C Technologies Holdings Inc
  • Symantec Corporation
  • Synopsys Inc
  • Tableau Software Inc
  • Telenav Inc
  • Textura Corp
  • Tibco Software Inc
  • Tyler Technologies Inc
  • Ultimate Software Group Inc.
  • Veeva Systems Inc
  • Verint Systems
  • Vmware Inc
  • Vocus Inc
  • Workday Inc
  • XRS Corp
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