Public Software as a Service (SaaS) Financial Performance

This excerpt is from our complimentary Q2 2012 Software Industry Financial Report which can be downloaded here:

As SEG forecasted in our Q1 report, the median TTM revenue growth rate of public SaaS companies in 2Q12 exceeded 30%. The final tally of 30.3% is the highest in three years (Figure 12). The median TTM revenue growth rate of our SaaS Index constituents has now remained above 20% for six consecutive quarters. With SaaS adoption growing once again, we anticipate the median SaaS TTM revenue growth rate will remain above 30% throughout the year.

Four outperformers achieved TTM revenue growth of 46% or more in 2Q12: Bazaarvoice (64.6%), Cornerstone OnDemand (63.2%), Demandware (48.7%) and Ellie Mae (46.4%). By contrast, IntraLinks Holdings was the sole public SaaS provider who didn’t achieve double digit TTM revenue growth, registering a relatively paltry 7.3% (Figure 13).

Unsurprisingly, the growth of these SaaS companies has been driven in large part by their enhanced investment in sales and marketing, which has grown from 23% of total revenue in 2Q10, to 32% in 2Q12 (Figure 14). What is surprising is the return (measured in TTM revenue growth) of their sales and marketing investments. Since 2Q10, public SaaS company sales and marketing spends as a percent of total revenue has grown nearly 50%. Impressively, over this same time period, TTM revenue growth has grown 150%.

In 2Q12, four SaaS providers spent more than 50% of their revenues on S&M: Cornerstone OnDemand (64.2%), Salesforce (52.3%), Vocus (52.1%) and Netsuite (50.9%). Interestingly, despite spending 50% more on sales & marketing as a percent of total revenue, Netsuite and Vocus both finished 2Q12 with median TTM revenue growth below the median (24.6% and 21.0% respectively).

Along with the stellar revenue growth, public SaaS companies remain mindful of the bottom line as well. In 2Q12, the median EBITDA margin of the SEG SaaS Index was 9.9%, up 24% from 2Q11’s 8.0%. Three outperformers reported EBITDA margins above 20%: EBIX (43.6%), OpenTable (29.8%) and Medidata (20.8%). By contrast six public SaaS companies finished 2Q12 with negative EBITDA margins: Cornerstone OnDemand (-25.5%), Bazaarvoice (-19.4%), Callidus Software (-10.3%), Netsuite (-6.8%), ServiceNow (-6.7%) and ExactTarget (-2.1%). It’s clear these five companies are prioritizing revenue growth as all but Callidus, finished 2Q12 with TTM revenue growth above 43%.

The steadily improving TTM revenue growth rates and EBITDA margins of public SaaS providers are creating a force to be reckoned with, a sizable and growing group of companies with scale, a strong financial model, and strong balance sheets. The median TTM revenue for the SEG SaaS Index is now $173M, up 29% YoY; median Cash & Equivalents ended 2Q12 at $96M, up 72% YoY.

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