Public Software as a Service (SaaS) Financial Performance

The Great Recession and a sluggish recovery took their toll on SMBs, the market segment most responsible for the remarkable growth rates of many SaaS providers.  In response, SaaS growth rates plummeted.  After bottoming out at 13.7% in 2Q10, the SaaS median TTM revenue growth rate reversed course, inching up to 14.6% in 3Q10, ending eleven consecutive quarters of decline.  In 4Q10 the TTM median revenue growth rate of public SaaS providers was 15.1%, then climbed to 19.6% in 1Q11 and 23.3% in the second quarter.  Q2’s growth rate is the highest in seven quarters, and marks the fourth consecutive QoQ increase (Figure 11).  Impressively, six of 25 public SaaS companies achieved TTM revenue growth greater than 30% in 2Q11 (Figure 12).

Profitability did not come easily to public SaaS companies because of their subscription models and infrastructure investments.  Historically, median SaaS TTM EBITDA margins were dismal in comparison to on-premise EBITDA margins. But as SaaS revenue growth rates slowed during the Great Recession, public SaaS providers focused on improved profitability, and most succeeded in growing their bottom lines through operational improvements, reduced infrastructure spending and subscription renewals.

Predictably, SaaS EBITDA margins have eroded somewhat in the post-Recession, declining to 8.7% in 2Q11 from 10.2% in 1Q11, and the lowest in more than a year.  The decline in EBITDA margins signals a return by public SaaS companies to favoring accelerated growth over profitability.  As testament, SaaS companies spent 33.2% of revenue on Sales & Marketing in 2Q11, a notable increase over 2Q10’s 25.7% (Figure 14).  Profitability varied widely as companies shifted into growth mode at varying speeds.  Six (24%) of the twenty five public SaaS companies in our index reported negative EBITDA margins in 2Q11, whereas  two public SaaS companies exceeded 20% EBITDA margins.

Investors appear to be fully on board with this shift in operating emphasis.  At the close of 2Q11, public SaaS companies with TTM revenue growth rates above the 23.3% SaaS median were rewarded with a median 5.9x EV/Revenue multiple, compared to a median 3.8x EV/Revenue multiple for public SaaS companies with TTM revenue growth rates below the median SaaS revenue growth rate (Figure 15).

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