The Software Industry                                Th S ft      I d t                                  Financial ReportS...
Unmatched Expertise.                                                                             Extraordinary ResultsOver...
Software Equity Group, L.L.C.                             Q1 2012 Software Industry Financial Report ContentsU.S. ECONOMY:...
Software Equity Group, L.L.C.APPENDIX A: 1Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ...........
Software Equity Group, L.L.C.                                                                            Investment Bankin...
Software Equity Group, L.L.C.                                                                                            I...
Software Equity Group, L.L.C.                                              Investment Banking / Mergers & AcquisitionsFigu...
Software Equity Group, L.L.C.                                                                        Investment Banking / ...
Software Equity Group, L.L.C.                                                                                          Inv...
Software Equity Group, L.L.C.                                                              Investment Banking / Mergers & ...
Software Equity Group, L.L.C.                                                                                             ...
Software Equity Group, L.L.C.                                                                                             ...
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
Q1-2012 Software Valuations
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Q1-2012 Software Valuations

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Review of Software and Internet Industry Q1 2012 Public Market, financial and M&A performance

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Q1-2012 Software Valuations

  1. 1. The Software Industry Th S ft I d t Financial ReportSoftware Equity Group, L.L.C.12220 El Camino RealSuite 320San Diego, CA 92130info@softwareequity.com(858) 509-2800
  2. 2. Unmatched Expertise. Extraordinary ResultsOverview Deal TeamSoftware Equity Group is an investment bank and M&A advisory firm serving the software and technologysectors. Founded in 1992, our firm has guided and advised companies on five continents, including Ken Benderprivately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Managing DirectorAfrica and Israel. We have represented public companies listed on the NASDAQ, NYSE, American, (858) 509-2800 ext. 222Toronto, London and Euronext exchanges. Software Equity Group also advises several of the worlds kbender@softwareequity.comleading private equity firms. We are ranked among the top ten investment banks worldwide for applicationsoftware mergers and acquisitions. R. Allen Cinzori Managing DirectorServices (858) 509-2800 ext. 226 acinzori@softwareequity.comOur value proposition is unique and compelling. We are skilled and accomplished investment bankerswith extraordinary software, internet and technology domain expertise. Our industry knowledge andexperience span virtually every software product category, technology, market and delivery model. We Dennis Clerkehave profound understanding of software company finances, operations and valuation. We monitor and Executive Vice Presidentanalyze every publicly disclosed software M&A transaction, as well as the market, economy and (858) 509-2800 ext. 233technology trends that impact these deals. We offer a full complement of M&A execution to our clients dclerke@softwareequity.comworldwide.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 Mentoring Program – providing guidance to software companies contemplating an exit to ensure (858) 509-2800 (P) they’re doing everything now to better their odds and enhance their future exit valuation ahead. (858) 509-2818 (F) www.softwareequity.comTransactionsWe’ve enjoyed serving our software clients for 20 years and have highlighted a small subset of companies we’ve assisted:
  3. 3. Software Equity Group, L.L.C. Q1 2012 Software Industry Financial Report ContentsU.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS........................................................................ 2IT SPENDING ............................................................................................................................................................ 2INTERNET RETAIL SPENDING AND ADVERTISING ............................................................................................ 3UPDATED SEG INDICES ......................................................................................................................................... 3PUBLIC SOFTWARE/SAAS/INTERNET COMPANY STOCK PERFORMANCE ................................................... 3PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE .......................................................................... 4PUBLIC SOFTWARE COMPANY MARKET VALUATIONS ................................................................................... 5PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY.......................... 6PUBLIC SOFTWARE COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY ................................... 7PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE ...................................................... 8PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS ........................................... 9PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY .... 10PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS: BY PRODUCTCATEGORY ............................................................................................................................................................ 10PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE ........................................................................... 10PUBLIC INTERNET COMPANY MARKET VALUATIONS .................................................................................... 11PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY ........................... 12PUBLIC INTERNET COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY .................................... 13INITIAL PUBLIC OFFERINGS................................................................................................................................ 14SOFTWARE/SAAS M&A DEAL VOLUME AND SPENDING ............................................................................... 15IMPORTANT CHANGE IN SOFTWARE AND SAAS M&A DATA ACCOUNTING............................................... 16SOFTWARE M&A VALUATIONS .......................................................................................................................... 16SOFTWARE M&A VALUATIONS BY EQUITY STRUCTURE............................................................................... 17SOFTWARE M&A VALUATIONS BY SIZE ........................................................................................................... 17SOFTWARE M&A BY VERTICAL AND HORIZONTAL MARKETS ..................................................................... 18M&A VALUATIONS BY SOFTWARE PRODUCT CATEGORY ............................................................................ 19SOFTWARE AS A SERVICE (SAAS) M&A DEAL VOLUME AND VALUATIONS .............................................. 20INTERNET M&A DEAL VOLUME AND VALUATIONS ......................................................................................... 22 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  4. 4. Software Equity Group, L.L.C.APPENDIX A: 1Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 24APPENDIX B: 1Q12 PUBLIC SAAS MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY 26APPENDIX C: 1Q12 PUBLIC INTERNET MARKET VALUATIONS AND STATISTICS BY PRODUCTCATEGORY ............................................................................................................................................................ 27APPENDIX D: 1Q12 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS .................. 28APPENDIX E: 1Q12 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS .............................................. 29APPENDIX F: 1Q12 MERGERS AND ACQUISITIONS, SELECT SOFTWARE INDUSTRY MEGA-DEALS ...... 31APPENDIX G: 1Q12 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS ..... 32 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  5. 5. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 1: U.S. Gross Domestic Product and Unemployment Rate10% GDP % Growth Unemployment Rate8%6% 5.0% 4.8%4% 3.6% 3.7% 3.2% 3.1% 2.7% 3.0% 2.2% 2.2% 2.6% 2.1% 2.1% 1.7% 1.8%2% 1.5% 1.3% 1.1% 1.2% 0.4%0% -0.7% -0.7%-2% -2.7%-4%-6% -5.4% -6.4%-8% 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICSWe begin with a brief synopsis of U.S. Gross An April employment report released by the U.S.Domestic Product (GDP) performance based Bureau of Labor Statistics provides more reasonupon the most recent data available. GDP is best for optimism. The U.S. unemployment ratedefined as the total market value of all final goods dropped to 8.2%, marking the third consecutiveand services produced in a country in a given quarter of improvement.year, equal to total consumer, investment andgovernment spending, plus the value of exports, IT SPENDINGminus the value of imports. SEG carefully monitors enterprise IT spendingThe Bureau of Economic Analysis (BEA) issued each quarter as a means of forecastingits first estimate of U.S. GDP for the first quarter of downstream public software company financial2012, confirming the U.S. economy has now performance and software M&A deal volume.grown, albeit modestly, for eleven consecutive Simply put, we long ago determined that healthyQuarters (Figure 1). 1Q12’s growth rate of 2.2% IT spending drives public software companies towas primarily driven by personal consumption, buy, not build, in response to growing marketexports, private inventory investment and demand. To provide some perspective, weresidential fixed investment. While the first estimate every percentage increase/decrease inquarter’s 2.2% growth was a significant YoY IT spending equates to approximately $5 billion.improvement from 1Q11’s 0.4% growth, it markedthe first QoQ deceleration in three quarters. The Our readers will recall large enterprises cut backslowdown was largely attributable to a decline in sharply on spending for software, hardware andprivate inventory investment and a downturn in IT services in 2009 during the economicnonresidential fixed investment. Looking forward, downturn, when IT capital spending declined byGoldman Sachs and other analysts are now more than 10%. The spending cut had an almostforecasting full year GDP growth in the range of immediate and traumatic impact on public2.5% - 3.5%, which suggests GDP growth will software company revenue and software M&Aimprove over the next three quarters. activity and valuations declined. In 2010 and 2011, enterprise customers loosened their purse strings and domestic IT capital spending grew 8% and 6% respectively. This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  6. 6. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsReflecting the uncertainty in the global economy, increase. Mobile was the fastest growing Internetanalysts are somewhat divided on worldwide IT ad category, soaring 149% over 2010’s $1 billionspending forecasts for 2012. Goldman is tally to reach $1.8 billion for the year. While notforecasting worldwide IT spending of 7%, down quite as jaw dropping, digital media ad revenuesfrom 8% in 2011, given the expectation of modest reached $1.8 billion in 2011, a 29% YoY increasedeceleration in emerging economies. Less from 2010’s compared to $1.4 billion.optimistic, Gartner is forecasting worldwide ITspending growth of 5.2%, believing that IT UPDATED SEG INDICESbudgets and spending in Europe will be weakerthan anticipated. Domestically, forecasts are SEG publishes three software industry indices –better aligned. Goldman forecasts domestic IT SEG Software, SEG SaaS, and SEG Internet –spending will grow 4.0%, while Gartner is and tracks dozens of product categoriesprojecting a 4.2% increase (Figure 2). comprising these indices. Each year, SEG reviews each company comprising each indexFigure 2: Domestic IT Spending and category to ensure they have been appropriately categorized, especially in light of 10.0% 9.0% 8.0% their prior acquisitions and adoption of new 6.0% 6.0% technologies and delivery models. This year’s 5.0% 4.1% examination was especially thorough - andYoY Change in IT Spending challenging - given the growing adoption of hybrid 0.0% delivery models and the increasing number of 2007 2008 2009 2010 2011 2012 large software companies spanning multiple ‐5.0% indexes and product categories. While admittedly both art and science, we are confident ‐10.0% our updated indices and categories provide an -10.0% exceptionally accurate portrait of today’s software, ‐15.0% IT Spending values calculated using an average of Goldman, Gartner and IDC estimates SaaS and Internet environments. PUBLIC SOFTWARE/SAAS/INTERNET COMPANY STOCK PERFORMANCEINTERNET RETAIL SPENDING AND ADVERTISING In the first quarter, the major U.S. stock marketIn the Internet sector, we believe online retail indices turned in one of the best first quarterspending and Internet advertising spending each performances in more than a decade. Thequarter presage the financial performance and technology laden NASDAQ index finished Q1 upM&A activity of many public Internet companies. a stellar 18.7%, as investors were heartened byBuoyed by a continually growing number of the strong financial performance of several highshoppers, online retail sales reached nearly $49.7 flyers such as Apple and Google. The S&P 500billion in 4Q11 (the latest quarter for which data is and DOW also performed admirably, ending Q1available) according to comScore, up 14% from up 12.0% and 8.1%, respectively (Figure 3).4Q10. It was the ninth consecutive quarter of Across all three SEG tracking indices, 217 of thegrowth for online retail. Among online retail’s 258 (84%) public companies we track reportedmost popular categories in 4Q11 were digital higher year-to-date (YTD) stock prices.content and subscriptions, jewelry and watches,consumer electronics, toys and hobbies, and The SEG Software Index, consisting of 145 publiccomputer software, each growing by at least 18% on-premise software companies, closed the firstyear-over-year. quarter with a median stock price return of 18.6%. Close behind was the SEG SaaS Index, conistingThe Interactive Advertising Bureau (IAB) and of 28 public pure-play SaaS companies, whichPricewaterhouseCoopers (PwC) reported Internet closed Q1 with a median stock return of 18.4%.advertising revenues soared to record levels in4Q11, reaching $9 billion, a 20% year-over-year This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  7. 7. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 3: Major Market Indices Compared to the SEG Software, Internet and SaaS Indices DOW S&P NASDAQ SEG SaaS SEG SW Index SEG Internet Index 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) Jan Feb MarA number of SaaS companies far outperformed PUBLIC SOFTWARE COMPANY FINANCIALtheir peers in terms of median stock return, with PERFORMANCEfive superstars posting YTD stock returnsexceeding 50%: Elli Mae (97.5%), Demandware The 145 public companies comprising the SEG(86.3%), Bazaarvoice (65.6%), Salesforce (52.3%) Software Index grew TTM revenue a medianand Athenahealth (50.9%). Demandware and 14.2% in the first quarter of 2012, down sharplyBazaarvoice went public in the first quarter of from 4Q11’s 17.0% and the lowest in the past five2012. quarters (Figure 4). The 1Q12 drop marks two consecutive quarters of slowing revenue growthThe SEG Internet Index, comprised of 87 publicly after the 17.3% peak reached in 3Q11. Althoughtraded Internet companies, closed the first quarter down sharply, 1Q12’s 14.2% is a relatively solidwith a 19.3% gain in median stock price, slightly performance historically by public softwareoutpacing SEG’s Software and SaaS Indexes and companies and marks the ninth consecutivethe NASDAQ. The median year-end stock return quarter of positive TTM revenue growth. Theof the SEG Internet Index was buoyed, in part, by modest decline in growth rate was entirelyinvestor enthusiasm for newly public companies predictable, given the modest decline in ITamid a wave of IPOs in 2011 and the first quarter spending.of 2012 (see this issue’s IPO section for moredetail). Four of Q1’s top ten stock performances Figure 4: SEG Software Index Median Metricswere turned in by companies that went public in SEG - Software: Median Metricsthe last twelve months: Brightcove (73.4%), Jive Measure 1Q11 2Q11 3Q11 4Q11 1Q12Software (69.8%), LinkedIn (61.9%) and Zillow EV/Revenue 2.9x 2.8x 2.4x 2.4x 2.6x(58.3%). EV/EBITDA 14.5x 13.5x 11.6x 12.2x 12.2x EV/Earnings 27.8x 24.8x 21.0x 20.9x 22.0x Current Ratio 2.2 2.1 2.1 2.0 2.0 Cash & Eq ($M) $137.4 $145.4 $157.5 $132.0 $146.5 Gross Profit Margin 68.8% 68.9% 67.8% 66.9% 66.4% EBITDA Margin 19.9% 19.6% 20.4% 20.5% 20.6% Net Income Margin 9.5% 10.4% 10.9% 10.9% 10.6% TTM Revenue Growth 15.9% 16.1% 17.3% 17.0% 14.2% TTM Total Revenue ($M) $324.7 $339.7 $350.5 $361.2 $370.8 TTM Total EBITDA ($M) $63.2 $58.1 $63.4 $66.0 $62.5 Debt / Equity Ratio 28.2% 22.8% 22.5% 21.6% 22.5% This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  8. 8. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsProviders of mobile solutions proved to be an Many of the most profitable companies are largeexception. Of the top ten software companies software behemoths that have the scale to drivewith the largest TTM revenue growth in 1Q12, five high margins, including Oracle (42% EBITDAderive all or a substantial part of their revenue margin), Microsoft (42%) and SAP (37%).from mobile software solutions. The list includesQihoo (191% TTM revenue growth), Gree (133%), However, a few smaller software companies alsoMillennial Media (117%), Zynga (91%) and Velti demonstrated they could drive the bottom line.(63%). Besides mobile, other SEG Software Example: SolarWinds, a small cap shooting starIndex high flyers reporting exceptional revenue focused on IT management software, leveragedgrowth in 1Q12 included Merge Healthcare (66%), its unique and highly cost effective sales model toAllscripts Healthcare (56%), VASCO Data post EBITDA margins (48%) even the behemothsSecurity (56%) and Majesco (51%). would envy.The first quarter’s growth rate helped drive the Public software companies continued to growmedian TTM revenue of the SEG Software Index cash and equivalents on their balance sheets,above $370 million for the first time ever (Figure which is undoubtedly a by-product of their much5). Indeed, Q1’s median TTM revenue is more improved EBITDA margins. Consider that inthan twice the median TTM revenue of the SEG 1Q08, the median cash and equivalents of theSoftware Index in 1Q08. Over this same time SEG Software Index was $79.5 million and theperiod, the number of public software companies median EBITDA margin was only 13.0%. Inhas declined from 221 to 145 - further evidence 1Q12, median cash and equivalents had grown tothat consolidation in the software sector is $146.5 million, an 85% increase over four years,resulting in not only fewer, but considerably and the median EBITDA margin, as noted above,larger, publicly traded software companies. was 20.6% (Figure 6). The significant cash reserves and strong balance sheets of mostFigure 5: SEG Software Index TTM Revenue vs. public software companies, particularly theCompany Count industry’s largest players, bode well for many small and mid-cap software company M&A 250 $400 targets. $350# of Public  Software Companies  200 $300 Figure 6: SEG Software Historical Median in SEG  Software Index Median TTM Revenue 150 $250 Cash and Median EBITDA Margins ($ millions) $200 100 $150 Cash EBITDA Margin 180 25% $100 160 50 140 20% $50 Median EBITDA Margin Median Cash Balance 120 15% 0 $0 ($ millions) 100 1Q08 1Q09 1Q10 1Q11 1Q12 80 10% 60 40 5%Public software companies were especially adept 20 0 0%at improving their already healthy EBITDA 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11margins. In 1Q12, the median EBITDA margin ofthe on-premise public software companies in ourSoftware Index was 20.6%, up slightly from4Q11’s 20.5% and 3Q11’s 20.4% (Figure 4). PUBLIC SOFTWARE COMPANY MARKETAlthough revenue growth rates have returned to VALUATIONShistorical norms, the steadily increasing EBITDAmargins indicate a continuing emphasis on At the close of 1Q12, the median EV/Revenueprofitability brought on by plummeting growth multiple of public companies in our SEG Softwarerates during the Great Recession. Index had grown to 2.6x from 2.4x in both 4Q11 and 3Q11. This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  9. 9. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Although the first quarter’s median multiple was Size (i.e., annual revenue) wasn’t the only slightly lower than 1Q11’s 2.9x, it was 117% higher important determinant of public software company than the Great Recession low of 1.2x. The median market valuation. EBITDA margins clearly had a EV/Revenue multiple of the SEG Software Index major factor in public software company has now been at or above 2.0x for ten consecutive EV/Revenue multiples, which explains the quarters (Figure 7). aforementioned profitability focus. Public software companies with 40% or higher EBITDA Figure 7: SEG Software Median EV/Revenue margins were awarded with a median Multiples EV/Revenue multiple of 4.6x, whereas those with EBITDA margins below 10% were punished with 3.5x a 1.5x (Figure 9). 3.0xMedian EV/Revenue Multiple 2.5x Figure 9: 1Q12 EV/Revenue Multiple vs. 2.0x EBITDA Margin 1.5x 1.0x 5.0x 4.6x 4.5x 0.5x 4.0x 3.8x 0.0x 3.5x Median EV/Revenue 3.0x 2.7x 2.4x 2.5x 2.0x 1.5x 1.5x As the economic concerns that plagued the 1.0x second half of 2011 abated in 1Q12, investors 0.5x increased their risk appetite and bid up valuations 0.0x of smaller public software companies (Figure 8). < 10% > 10% <= 20% > 20% <= 30% > 30% <= 40% > 40% As testament, in 1Q12, the median EV/Revenue multiple of SEG Software Index companies with TTM revenues between $100 million and $200 PUBLIC SOFTWARE COMPANY FINANCIAL million skyrocketed to 2.7x, a 69% increase from PERFORMANCE: BY PRODUCT CATEGORY 4Q11’s 1.6x. However, investors continued to eschew smaller public companies. Those with Median TTM revenue in six of our SEG Software revenues under $100 million saw their median Index product categories grew 20% or more in EV/Revenue decline from 1.8x in 4Q11 to 1.5x in 1Q12 (Figure 10). Security posted an impressive 1Q12. 26% TTM revenue growth rate, the highest among the seventeen product categories we Figure 8: SEG Software Valuation by Size of track. The category was led by VASCO (55.7% Buyer TTM revenue growth), Imperva (41.4%) and Fortinet (33.5%). Business Intelligence, driven by 4.5x demand for analytics in the era of Big Data, 4.0x achieved a 24% TTM revenue growth rate. Other 3.5x hot product categories with TTM revenue growth 3.0x above 20% included Healthcare (23%), Median EV/Revenue 2.5x Networking & Network Performance Management 2.0x (21%), Vertically Focused software providers 1.5x (20%), Billing & Service Management (20%) and 1.0x Systems Management (20%). 0.5x 0.0x 1Q11 2Q11 3Q11 4Q11 1Q12 Revenue Greater Than $1 billion Revenue Between $200 million and $1 billion Revenue Between $100 million and $200 million Revenue Less Than $100 million This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  10. 10. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 10: SEG Software Index Median Metrics by Product Category SEG Softw are Index Revenue EBITDA EBITDA YTD Stock EV/Revenue EV/EBITDA Category Grow th Grow th Margin Return 1Q11 2Q11 3Q11 4Q11 1Q12 1Q11 2Q11 3Q11 4Q11 1Q12 1Q12 (TTM) 1Q12 (TTM) 1Q12 (TTM) 2012Billing & Service Management 2.0x 2.2x 1.3x 1.0x 1.3x 10.1x 8.9x 4.7x 4.2x 5.9x 19.8% 12.1% 21.8% 2.9%Business Intelligence 3.3x 3.2x 2.9x 2.4x 2.3x 37.8x 43.0x 40.3x 36.5x 39.2x 23.7% (5.3%) 8.9% 27.5%Development Platforms 2.9x 2.6x 1.8x 1.9x 2.3x 11.3x 10.7x 8.0x 9.0x 10.1x 7.7% 2.4% 22.2% 13.7%Engineering & PLM 2.5x 2.3x 1.9x 2.0x 2.6x 19.2x 16.4x 12.8x 13.4x 14.2x 13.5% 43.8% 18.5% 20.1%Enterprise Resource Planning 2.8x 2.7x 2.4x 2.8x 3.0x 11.4x 11.1x 8.7x 9.6x 10.0x 12.4% 17.0% 29.5% 13.7%Financial & Accounting 2.8x 2.7x 2.2x 2.5x 2.8x 9.6x 9.7x 8.5x 9.0x 9.7x 4.7% 14.1% 25.4% 18.6%Gaming 0.9x 1.0x 1.1x 1.2x 1.1x 8.9x 10.7x 8.3x 7.4x 6.4x 5.6% 41.0% 6.2% (1.9%)Healthcare 4.0x 3.9x 3.3x 2.9x 3.2x 18.7x 19.6x 17.7x 16.2x 15.2x 22.9% 41.5% 22.1% 18.5%IT Conglomerates 3.2x 3.0x 2.6x 2.5x 3.1x 8.6x 8.7x 8.7x 9.0x 8.2x 8.0% 15.4% 40.1% 13.7%Mobile Solutions/Content 3.4x 3.1x 1.9x 2.0x 2.5x 25.2x 23.2x 17.8x 23.3x 18.1x 10.6% (13.9%) 5.2% 22.2%Netw orking & Netw ork Performance 4.4x 4.2x 3.1x 2.7x 3.1x 25.2x 21.6x 16.1x 15.7x 16.4x 20.7% 49.6% 18.7% 18.2%Security 3.4x 3.1x 2.6x 2.8x 3.2x 16.7x 16.4x 13.3x 14.5x 13.5x 26.1% 19.0% 20.8% 21.5%Storage, Data Management & Integration 3.0x 2.6x 2.1x 2.2x 2.5x 10.7x 12.6x 9.9x 9.8x 10.3x 7.8% 15.4% 22.8% 23.4%Supply Chain Management & Logistics 2.0x 2.1x 1.8x 1.9x 1.9x 11.6x 11.6x 11.0x 11.4x 12.1x 14.9% 26.5% 20.1% 17.9%Systems Management 6.4x 7.3x 5.2x 5.5x 5.9x 19.6x 21.7x 18.7x 20.9x 22.2x 17.7% 26.2% 26.4% 35.1%Vertical - Finance 4.9x 4.6x 3.9x 3.8x 3.8x 15.3x 15.3x 13.6x 12.7x 11.6x 15.1% 16.7% 36.6% 8.4%Vertical - Other 2.4x 3.1x 2.7x 2.8x 3.2x 13.4x 15.1x 14.2x 15.7x 18.5x 20.4% 30.5% 18.4% 19.3% Median 2.9x 2.8x 2.4x 2.4x 2.6x 14.5x 13.5x 11.6x 12.2x 12.2x 14.2% 19.3% 20.6% 18.6%Given the buzz around Mobile, it’s surprising to stellar EBITDA margins of 36.6%, demonstratingsee the category finishing 1Q12 with a paltry strength from top to bottom, with every company10.6% median TTM revenue growth rate. The generating EBITDA margins above 31.5%.lackluster growth rate is largely attributable toproviders of legacy solutions to wireless carriers The product category with the lowest EBITDAthat have been adversely impacted by the likes of margin was Mobile, closing 1Q12 at 5.2%.Apple, Google and others that are beginning to Reflecting the wide ranging prospects ofdominate the mobile ecosystem. These legacy companies within this category, EBITDA marginsmobile solution providers include Smith Micro (- vary drastically from one company to another.55.7% TTM revenue growth), Access (-45.1%), Gree, an emerging provider of mobile socialMyriad Group (-35.3%), RealNetworks (-16.4%), games, finished 1Q12 with EBITDA margins ofMotricity (-8.8%), and Openwave (-1.6%). Growth 53.0%. By contrast, Smith Micro, a legacywas particularly strong among the new wave of provider of phone tools to mobile OEMs andmobile gaming and mobile advertising providers, wireless carriers, finished 1Q12 with EBITDAincluding Gree (133.0% TTM revenue growth), margins of -68.2%.Millennial Media (116.8%), and Velti (62.7%). PUBLIC SOFTWARE COMPANY MARKETFive software product categories posted TTM VALUATIONS: BY PRODUCT CATEGORYrevenue growth rates below 10%: ITConglomerates (8.0%), Storage, Data Public software companies in eight of ourManagement & Integration (7.8%), Development software product categories achieved a medianPlatforms (7.7%), Gaming (5.6%) and Financial & EV/Revenue multiple of 3.0x or higher in 1Q12.Accounting (4.7%). The Systems Management category posted a whopping EV/Revenue multiple of 5.9x, led byThe IT Conglomerate category led all other companies who are spearheading the cloudproduct categories with a median EBITDA margin revolution, namely: SolarWinds (12.9xof 40.1%. As the name implies, the category EV/Revenue), VMWare (9.9x), RedHat (7.6x) andconsists of the largest software providers in the Citrix Systems (5.9x). Over the past four quarters,world such as the aforementioned Oracle (42% EV/Revenue multiples in the SystemsEBITDA margin), Microsoft (42%) and SAP (37%). Management category have ranged from 5.2x toSoftware providers vertically focused on the 7.3x.finance industry (Vertical – Finance) also posted This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  11. 11. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsComing in a distant second, the Vertical – perennial laggard and the majority of companiesFinance category closed 1Q12 with a median in the category are struggling to reinventEV/Revenue multiple of 3.8x, no doubt bolstered themselves. A lone standout is Synchronossby the category’s strong EBITDA margins. The Technologies, which posted an EV/RevenueHealthcare category finished 1Q12 with a 3.2x multiple of 4.9x, nearly four times the productmedian EV/Revenue multiple, down from 4.0x in category median. With a TTM revenue growth1Q11 as a consequence of legislative and rate of 38%, two times higher than the categoryregulatory uncertainty. median, Synchronoss’ provides best of class solutions to service providers struggling toInterestingly, TTM revenue growth appeared to manage and synchronize the barrage of mobilehave little impact on the median EV/Revenue devices connecting to their networks.multiple of the software product category (Figure11). The product category with the highest TTM PUBLIC SOFTWARE AS A SERVICE (SAAS)revenue growth rate (Security), finished 1Q12 with FINANCIAL PERFORMANCEa median EV/Revenue multiple of 3.2x, while thecategory with the lowest TTM revenue growth rate The median TTM revenue growth rate of public(Financial & Accounting), closed 1Q12 with a SaaS companies in 1Q12 was 27.8%, a 10%modestly lower median EV/Revenue multiple of increase over the prior quarter (Figure 12). The2.8x. Overall, comparative market valuations median TTM revenue growth rate of our SaaSamong different software product categories did Index constituents has now remained above 20%not vary widely: three out of four categories were for five consecutive quarters. With SaaS adoptionwithin 25% of the median EV/Revenue multiple of growing once again, we anticipate the medianthe SEG Software Index. SaaS TTM revenue growth rate will surpass 30% by year end. Indeed, as of the close of 1Q12,Figure 11: SEG Software Median EV/Revenue vs. more than 40% of the public companies in theTTM Revenue Growth SEG SaaS index boasted TTM revenue growth 7.0x above 30% and not one public SaaS company 6.0x 11 reported TTM revenue growth below 10% (Figure TTM Revenue has virtually no impact 13). Median EV/Revenue 5.0x on the median EV/Revenue multiple of software product categories 10 4.0x 1 5 7 13 14 15 17 Figure 12: SEG SaaS Index Median Metrics 3.0x 6 8 4 3 9 16 SEG - SaaS: Median Metrics 2.0x 2 12 Measure 1Q11 2Q11 3Q11 4Q11 1Q12 1.0x EV/Revenue 5.6x 5.7x 4.5x 4.2x 5.1x 0.0x EV/EBITDA 39.8x 38.9x 29.4x 25.8x 31.5x 0% 5% 10% 15% 20% 25% 30% EV/Earnings 102.6x 92.1x 73.2x 67.4x 31.0x TTM Revenue Growth Current Ratio 1.6 1.7 1.9 1.8 1.7 1. Financial & Accounting 7. Engineering & PLM 12. Billing & Service Management 2. Gaming 8. Enterprise Resource Planning 13. Vertical – Other Cash & Eq ($M) $50.1 $53.3 $72.5 $66.6 $71.7 3. Development Platforms 9. Supply Chain Management & Logistics 14. Healthcare 4. 5. Storage, Data Management & Integration IT Conglomerates 10. 11. Vertical - Finance Systems Management 15. 16. Networking & Network Performance Business Intelligence Gross Profit Margin 68.3% 69.0% 70.0% 70.5% 71.1% 6. Mobile Solutions/Content 17. Security EBITDA Margin 10.1% 8.7% 9.6% 9.1% 10.1% Net Income Margin 2.8% 1.8% 1.8% 1.8% 3.4% TTM Revenue Growth 25.4% 23.7% 26.9% 25.5% 27.8%Only four product categories improved their TTM Total Revenue ($M) $121.0 $124.6 $128.8 $146.6 $154.2median EV/Revenue in 1Q12 from a year earlier: TTM Total EBITDA ($M) $14.9 $17.1 $19.4 $20.8 $21.9Engineering & PLM, ERP, Gaming and Vertical Debt / Equity Ratio 10.9% 5.0% 6.2% 5.1% 6.6%(Miscellaneous). The Vertical (Miscellaneous)product category had the highest YoY jump in Unsurprisingly, the growth of these SaaSmedian EV/Revenue, finishing 33% above 1Q11, companies has been driven in large part by theirled by insurance industry focused Guidewire enhanced investment in sales and marketing,Software (5.5x EV/Revenue), and public sector which has grown from 22% of total revenue infocused Tyler Technologies (3.7x EV/Revenue). 1Q11, to 31% in 1Q12 (Figure 14). In fact, all 28 public SaaS companies in the SEG SaaS IndexThe Billing & Service Management product increased S&M spend as a percent of totalcategory experienced the largest YoY decline in revenue.market valuation. The category has been a This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved
  12. 12. Software Equity Group, L.L.C. Investment Banking / Mergers & AcquisitionsFigure 13: Public SaaS Companies SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin Company Category 1Q11 2Q11 3Q11 4Q11 1Q12 1Q11 2Q11 3Q11 4Q11 1Q12 1Q11 2Q11 3Q11 4Q11 1Q12 1Q11 2Q11 3Q11 4Q11 1Q12Archipelago Learning, Inc. (ARCL) Vertically Focused 5.4x 4.3x 4.1x 4.2x 4.0x 18.4x 16.1x 13.1x 14.1x 13.4x 37.1% 39.7% 39.8% 32.3% 24.9% 29.4% 26.9% 31.3% 29.6% 29.9%Ariba, Inc. (ARBA) ERP & Supply Chain 7.3x 7.5x 6.2x 6.1x 5.6x 81.0x 102.9x 86.9x 85.0x 76.1x 2.3% 14.5% 26.9% 38.5% 42.7% 9.0% 7.3% 7.1% 7.2% 7.4%Athenahealth, Inc. (ATHN) Vertically Focused 5.9x 5.5x 6.7x 6.2x 6.8x 42.3x 37.3x 39.9x 36.2x 45.4x 30.2% 29.2% 30.5% 30.5% 32.0% 13.8% 14.9% 16.9% 17.1% 15.0%Bazaarvoice, Inc. (BV) Other SaaS - - - - 11.0x - - - - - 72.0% 66.8% - - - -17.8% -27.9% -24.1% -20.8% -20.4%Callidus Software Inc. (CALD) Workforce Mgmt 2.4x 2.6x 1.9x 2.2x 2.8x - - - - - -12.6% 4.5% 17.6% 19.6% 18.2% -8.5% -3.1% -3.1% -4.3% -7.0%Concur (CNQR) Other SaaS 7.9x 7.4x 5.7x 6.4x 7.8x 37.7x 44.2x 38.5x 48.4x 68.6x 19.0% 18.6% 18.4% 19.3% 21.0% 21.0% 16.8% 14.8% 13.1% 11.4%Constant Contact (CTCT) Other SaaS 4.2x 3.6x 2.2x 2.5x 3.4x 58.9x 54.5x 28.2x 27.9x 33.5x 35.0% 31.6% 28.2% 25.2% 23.1% 7.2% 6.6% 7.8% 9.0% 10.2%Convio (CNVO) CRM & Marketing 1.8x 2.2x 1.6x 1.8x 3.0x 18.2x 25.6x 18.3x 20.2x 31.5x 10.6% 9.5% 10.2% 12.2% 15.2% 10.0% 8.6% 8.7% 8.7% 9.6%Cornerstone OnDemand (CSOD) Workforce Mgmt 21.5x 17.4x 12.3x 10.6x 11.3x - - - - - 49.1% - - 51.9% 67.0% -26.1% -27.1% -33.7% -30.9% -24.0%DealerTrack (TRAK) Vertically Focused 2.7x 3.0x 2.4x 2.9x 3.2x 22.9x 23.2x 15.7x 17.7x 21.0x 8.1% 16.6% 26.3% 37.9% 44.9% 11.6% 13.1% 15.2% 16.3% 15.3%Demandware, Inc (DWRE) Other SaaS - - - - 14.6x - - - - 386.9x 71.5% - - - 54.1% 7.5% 4.8% 2.9% 1.5% 3.8%Ebix Inc. (EBIX) Vertically Focused 7.1x 5.8x 4.3x 4.1x 5.2x 16.5x 13.0x 9.7x 9.3x 12.0x 35.3% 29.5% 27.3% 24.6% 27.8% 43.2% 44.2% 44.1% 43.9% 43.5%Ellie Mae (ELLI) Other SaaS 7.1x 5.8x 4.3x 4.1x 5.2x 16.5x 13.0x 9.7x 9.3x 12.0x 35.3% 29.5% 27.3% 24.6% 27.8% 43.2% 44.2% 44.1% 43.9% 43.5%ExactTarget, Inc. (ET) CRM & Marketing - - - - 7.9x - - - - - 40.7% 40.7% 40.7% - 54.5% -5.1% -5.1% -5.1% -6.0% -3.3%IntraLinks Holdings (IL) Other SaaS 7.3x 6.0x 2.6x 1.7x 1.7x 41.3x 37.3x 18.3x 15.5x 12.5x 31.0% 34.8% 30.6% 23.7% 15.5% 17.6% 16.1% 13.9% 11.2% 13.9%Kenexa (KNXA) Workforce Mgmt 2.8x 3.2x 2.2x 2.3x 2.4x 43.6x 40.4x 29.9x 29.4x 28.2x 24.5% 36.7% 46.9% 52.4% 44.1% 6.3% 7.9% 7.3% 7.8% 8.5%LivePerson (LPSN) CRM & Marketing 4.7x 4.8x 4.5x 4.6x 5.3x 23.7x 23.3x 21.9x 22.7x 25.8x 25.6% 23.7% 21.9% 20.8% 21.1% 19.7% 20.6% 20.5% 20.4% 20.5%Medidata Solutions (MDSO) Other SaaS 3.1x 2.8x 1.8x 2.0x 2.3x 16.1x 14.9x 8.4x 9.2x 11.1x 18.5% 17.4% 19.0% 17.9% 10.8% 19.5% 19.1% 21.4% 21.7% 20.4%Netsuite (N) ERP & Supply Chain 9.0x 10.7x 10.0x 11.5x 12.8x - - - - - 16.0% 19.6% 21.1% 21.9% 22.4% -6.9% -7.1% -7.9% -7.3% -7.4%OpenTable, Inc. (OPEN) Other SaaS 19.6x 18.7x 11.7x 6.7x 7.2x 80.7x 74.0x 41.5x 23.7x 24.0x 44.3% 50.9% 54.3% 52.3% 40.9% 24.3% 25.2% 28.2% 28.1% 30.2%RealPage (RP) Vertically Focused 9.7x 9.3x 7.2x 7.5x 6.9x 70.3x 69.6x 54.5x 62.4x 60.9x 33.6% 36.6% 38.3% 39.8% 37.0% 13.8% 13.3% 13.1% 12.0% 11.3%Responsys (MKTG) CRM & Marketing - 7.3x 5.3x 2.7x 3.4x - 40.6x 28.9x 14.1x 21.6x 41.2% - - 54.1% 43.4% 19.9% 18.0% 18.5% 19.0% 15.7%Salesforce.com (CRM) CRM & Marketing 10.5x 10.3x 9.2x 8.0x 7.7x 108.4x 132.1x 154.6x 183.3x 165.1x 26.9% 29.6% 33.0% 34.6% 36.8% 9.7% 7.8% 5.9% 4.3% 4.7%SciQuest (SQI) ERP & Supply Chain 5.6x 6.2x 5.9x 5.3x 5.0x 28.7x 34.2x 38.7x 38.1x 37.1x 17.4% 19.0% 19.7% 22.0% 25.8% 19.7% 18.2% 15.3% 14.0% 13.5%SPS Commerce (SPSC) ERP & Supply Chain 3.2x 3.3x 3.6x 4.2x 4.7x 31.4x 37.2x 47.2x 62.7x 68.5x 18.2% 19.1% 22.5% 26.7% 30.0% 10.2% 8.7% 7.6% 6.7% 6.9%The Ultimate Software Group, Inc. (ULTI) Workforce Mgmt 5.6x 5.7x 5.1x 6.2x 6.5x 67.6x 71.0x 59.5x 67.8x 65.9x 16.1% 16.5% 16.8% 17.0% 18.2% 8.3% 8.1% 8.6% 9.2% 9.9%Vocus (VOCS) CRM & Marketing 4.2x 4.3x 3.3x 2.7x 2.6x 241.2x 19818.5x 464.8x 156.4x 130.8x 14.4% 17.4% 19.1% 18.9% 18.7% 1.8% 0.0% 0.7% 1.7% 2.0%Zix Corporation (ZIXI) Other SaaS 7.4x 6.0x 5.5x 4.2x 4.6x 38.3x 24.1x 20.2x 14.5x 14.6x 25.2% 30.9% 31.5% 31.7% 15.4% 19.4% 24.7% 27.2% 29.3% 31.3% Median: 5.6x 5.7x 4.5x 4.2x 5.1x 39.8x 38.9x 29.4x 25.8x 31.5x 25.4% 23.7% 26.9% 25.5% 27.8% 10.1% 8.7% 9.6% 9.1% 10.1%In 1Q12, four SaaS providers spent more than The steadily improving TTM revenue growth rates50% of their revenues on S&M: Vocus (50.1%), and EBITDA margins of public SaaS providers areNetsuite (50.9%), Salesforce (51.6%) and creating a force to be reckoned with, a sizableCornerstone OnDemand (62.7%). and growing group of companies with scale, a strong financial model, and strong balanceThese sizable investments in S&M to drive growth sheets. The median TTM revenue for the SEGhad a predictable impact on profitability. Of the SaaS Index is now $154M, up 27% YoY; medianfour SaaS providers spending 50% or more of Cash & Equivalents ended 1Q12 at $71M, uptheir revenues on S&M, each posted EBITDA 43% YoY.margins of 4.6% or less. By contrast, most publicSaaS companies continued to balance revenue PUBLIC SOFTWARE AS A SERVICE (SAAS)growth and profitability. In 1Q12, the median COMPANY MARKET VALUATIONSEBITDA margin of the SEG SaaS Index was10.1%, up slightly from 4Q11. Six outperformers In 1Q12, the median EV/Revenue multiple of thereported EBITDA margins above 20%: Medidata 28 pure-play public SaaS providers comprising(20%), LivePerson (21%), Archipelago Learning our SEG SaaS Index rose markedly to 5.1x from(30%), OpenTable (30%), Zix Corporation (31%) 4.2x in 1Q11 (Figure 12). Four public SaaSand EBIX (43%). companies had EV/Revenue multiples above 10x at the close of 1Q12: BazaarVoice (11.0x), Cornerstone OnDemand (11.3x), Demandware Figure 14: Public SaaS Company (14.6x) and NetSuite (12.8x). All but NetSuite S&M Spend as % of Total Revenue went public within the last year. Investors are 35% 31% clearly favoring growth over profitability in the 30% current market, as three of the four SaaS S&M as a % of Total Revenue 25% providers with the highest market valuations had 22% negative EBITDA margins; the fourth, 20% Demandware, reported a paltry 3.8% EBITDA. 15% Indeed, there was a clear, causal relationship in 10% 1Q12 between SaaS company market valuations 5% and TTM revenue growth rates (Figure 15). 0% Public SaaS companies with TTM revenue growth 1Q11 1Q12 rates between 10%-20% registered a median EV/Revenue of 2.8x, while those generating TTM revenue growth rates above 40% boasted a This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved

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