The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report. A complimentary copy of the quarterly report can be downloaded here: https://softwareequity.com/research_reports.aspx
While median financial performance metrics are useful for assessing the overall health of the software industry and for comparisons to other economic sectors, a deeper analysis of these key metrics by software product category provides greater insight about the software ecosystem. By analyzing how public software companies in discrete product categories are performing, we increase our understanding of market trends, sector health, product lifecycles, M&A valuations, IT spending priorities and stock market biases.
As we’ve noted in past reports, the median EV/Revenue valuations and financial results for a particular software category can be stagnant or can fluctuate wildly each quarter. As a result, software category rankings, measured by relative median valuations and financial performance can also be consistent or volatile quarter-to-quarter. That axiom held true, once again, in 3Q11 (Figure 10). We track this data because the current median valuation of companies comprising a particular software category often weighs heavily when buyers value acquisition targets.
The SEG Software Index is comprised of 22 software product categories sorted into three broad groups, Infrastructure Software, Application Software and Other. The Infrastructure Software group is comprised primarily of utilities, tools, middleware, systems, platforms and technologies to create, integrate, optimize, deliver, monitor, store and protect enterprise applications. The Application Software group consists primarily of solutions to perform, analyze, design and manage information and data in one, or many, specific industry sectors. The Other Software group is comprised of companies that concentrate on a specific vertical or the emerging class of IT Conglomerates who span numerous product categories, such as Oracle, Microsoft, HP and IBM.
In 3Q11, public Infrastructure Software companies outpaced their Application Software counterparts in nearly all metrics tracked (Figure 10). Particularly noteworthy was the Infrastructure group’s median 2.3x EV/Revenue multiple and 18.7% TTM revenue growth in the third quarter, as compared to the Application group’s median
2.1x EV/Revenue multiple and 14.1% revenue growth rate. The Networking and Network Performance Management product category posted the highest median EV/Revenue multiple in the Infrastructure Software segment, 3.8x. Companies comprising the Networking and Network Performance Management product category continued to benefit from strong demand for WAN optimization required to deliver software rapidly over cloud- based architectures. SolarWinds recorded the highest median EV/Revenue of the group at 8.7x while F5 Networks posted the highest year-over-year revenue growth of 36.0%.
Development tools & open source achieved the highest median TTM revenue growth rates at 25.0%, led by Magic Software (45.0%), GeekNet (42.6%) and BSQUARE (35.7%). Collectively, the group is driven by unprecedented demand for software solutions and toolsets to create, power and deploy the infrastructure for mobile and cloud computing. Every product category within the infrastructure software group achieved median TTM EBITDA margins greater than 20%, led by Content/Document Management’s median TTM EBITDA margin of 26.6%.
From the standpoint of market valuation, the only category in the Infrastructure group with a median EV/Revenue multiple below the SEG Software Index median of 2.1x was Billing & Service Management, which dropped from a median EV/Revenue multiple of 1.9x in 2Q11 to 1.3x in 3Q11 after recording the worst YTD stock return (-27%) of any category in the group.
Within the Application Software segment, Business Intelligence recorded the highest median EV/Revenue multiple of 3.9x in 3Q11, down slightly from 4.2x in 2Q11. Public companies comprising the Business Intelligence category are benefitting from enterprise demand for data mining, data handling and data analytics solutions that can convert massive amounts of structured and unstructured data into intelligence that can drive both top line growth and profitability. The category leader was Qlik Technologies, boasting an impressive 7.7x median EV/Revenue multiple, and impressive TTM revenue growth (39.2%).
Other product categories with median EV/Revenue multiples of 3.0x or higher include Healthcare (3.2x) and Education & eLearning (3.0x). Healthcare software companies continue to benefit from strong market demand for improved revenue management, HIPAA compliance and the growing digitization of patient records. The Education & eLearning product category is struggling with delayed purchases due to budget cuts and regulatory uncertainty – resulting in a paltry 6.8% revenue growth rate, the second lowest among twenty two product categories. But despite these impediments, valuations and M&A activity in this category (more on this below) increased in 3Q11 due to mounting pressure on school districts to improve student and school performance with technology enabled learning.