Public Software Company Financial Performance

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

The 144 public companies comprising the SEG Software Index grew TTM revenue a median 15.5% in 2Q12, barely surpassing the first quarter’s 14.9% (Figure 4). Still, the modestly improved revenue growth rate was impressive, given Q2’s macro-economic headwinds and lowered IT spending forecasts. Q2’s improved median growth rate follows on the heels of two consecutive quarters of declining growth.

Of the top ten software companies posting the highest TTM revenue growth in Q2, five derived all or a substantial part of their revenue from mobile software solutions. The list includes Qihoo (202% TTM revenue growth), Gree (158%), Millennial Media (117%), Zynga (65%) and Velti (63%).

But mobile proved to be a double-edged sword. Six of the ten software companies with the lowest TTM revenue growth were also mobile solution providers: Smith Micro Software (-58% TTM revenue growth), Myriad Group (-40%), Access (-32%), RealNetworks (-13%), BSQUARE (-9%) and Motricity (-7%). Unlike their top performing peers, these mobile companies are struggling to adapt legacy business models to a rapidly evolving market.

Healthcare providers were also well represented among the ten companies achieving the highest TTM revenue growth, led by Greenway Medical Technologies (45%), MedAssets (40%) and Merge Healthcare (39%). Other software providers in the top ten were recently public Splunk (83%) and Sapiens International (54%).

The second quarter’s growth rate helped drive the median TTM revenue of the SEG Software Index above $365 million (Figure 4). Indeed, Q2’s median TTM revenue is more than twice the median TTM revenue of the SEG Software Index in 2Q08.

Over this same time period, the number of public software companies has declined from 218 to 144 – further evidence that consolidation in the software sector is resulting in not only fewer, but considerably larger, publicly traded software companies (Figure 5).

Public software companies proved especially adept at maintaining their healthy EBITDA margins in the second quarter. The median EBITDA margin of the on-premise public software companies comprising our Software Index was 18.5% in Q2, down slightly from 1Q12’s 18.9% (Figure 4).

Many of the most profitable on-premise software companies are industry behemoths that have the size and market leverage to drive high margins, including Oracle (43% EBITDA margin), Microsoft (42%) and SAP (37%). But an array of smaller, mid-cap public software companies also had a keen eye on the bottom line in 2Q12, led by CheckPoint Software (56% EBITDA margin), Gree (53%) and ANSYS (48%).

Among our top ten most profitable software companies was a considerably smaller player, SolarWinds, with TTM revenue of $215 million. Benefitting from a highly unique and cost effective revenue and sales strategy, SolarWinds drove Q2 EBITDA margins to 48%.

Public software companies continued to increase cash and equivalents on their balance sheets, undoubtedly a reflection of their notable EBITDA margins. In 2Q08, the median cash and equivalents of the SEG Software Index was $72.7 million and the median EBITDA margin was only 12.8%. In 2Q12, median cash and equivalents had grown 136% to $171.2 million, and the median EBITDA margin had increased 31% over the four year period (Figure 6). The significant cash reserves and strong balance sheets of most public software companies, particularly the industry’s largest players, bode well for many small and mid-cap software company M&A targets.

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