The valuation premium for SaaS is 5x revenue, but SaaS may be harder to scale

We recently compared the valuations of software companies with various business models.  The goal was to understand the real premium received by companies with a SaaS revenue model over others.  The three types of revenue models we looked at were SaaS, services, and hardware.  In conclusion, SaaS trades at a median of 6.16x LTM revenue, services trade at 1.1x, and hardware trades at 1.1x, so SaaS companies are earning a premium of 5x over other business models typically associated with software.  The data is below. 

 

    TTM TTM  TTM  Capital Enterprise Market       Revenue EBITDA Revenue/
SAAS Ticker Revenue EBITDA OCF Surplus Value Cap Debt Cash   Multiple Margin (D+E)
2U TWOU $177 -$22 -$4 $356 $1,460 $1,670 $0 $188   8.3x -12% $0.50
Athenahealth, Inc. ATHN $1,010 $85 $171 $522 $5,150 $5,000 $295 $134   5.1x 8% $1.24
Bazaarvoice, Inc. BV $200 -$15 $19 $419 $259 $338 $42 $95   1.3x -8% $0.43
Benefitfocus, Inc. BNFT $212 -$36 -$35 $310 $1,300 $1,230 $75 $68   6.1x -17% $0.55
Box, Inc. BOX $327 -$156 -$38 $871 $1,400 $1,490 $56 $183   4.3x -48% $0.35
BroadSoft, Inc.  BSFT $314 $38 $64 $333 $1,200 $1,250 $195 $264   3.8x 12% $0.59
Castlight Health, Inc.  CSLT $82 -$77 -$58 $426 $219 $368 $0 $121   2.7x -94% $0.19
Cornerstone OnDemand, Inc. CSOD $389 -$52 $48 $394 $2,460 $2,470 $234 $267   6.3x -13% $0.62
Cvent, Inc.  CVT $211 $8 $46 $219 $1,140 $1,360 $0 $177   5.4x 4% $0.97
Five9, Inc.  FIVN $145 -$5 -$1 $181 $713 $722 $44 $58   4.9x -4% $0.65
Fleetmatics Group PLC FLTX $311 $67 $99 $321 $2,160 $2,330 $23 $194   7.0x 22% $0.90
Hortonworks, Inc. HDP $155 -$219 -$98 $519 $298 $571 $0 $109   1.9x -141% $0.30
HubSpot, Inc. HUBS $225 -$41 $11 $323 $1,930 $2,020 $1 $117   8.6x -18% $0.69
IntraLinks Holdings, Inc. IL $285 $14 $35 $456 $524 $490 $80 $39   1.8x 5% $0.53
Jive Software, Inc. JIVE $202 -$14 -$10 $384 $205 $312 $2 $108   1.0x -7% $0.52
Lifelock LOCK $632 $35 -$38 $532 $1,390 $1,590 $0 $156   2.2x 5% $1.19
LinkedIn Corp. LNKD $3,430 $396 $1,000 $4,589 $23,730 $25,660 $1,150 $3,310   6.9x 12% $0.60
LivePerson Inc. LPSN $232 $16 $36 $287 $360 $420 $0 $52   1.6x 7% $0.81
LogMeIN, Inc. LOGM $309 $37 $91 $277 $1,940 $2,090 $45 $225   6.3x 12% $0.96
Marin Software, Inc. MRIN $108 -$8 $5 $276 $69 $100 $2 $35   0.6x -8% $0.39
Marketo, Inc. MKTO $241 -$51 -$4 $345 $1,490 $1,580 $1 $100   6.2x -21% $0.70
Medidata Solutions, Inc. MDSO $421 $52 $96 $366 $2,950 $3,110 $256 $318   7.0x 12% $0.68
MobileIron, Inc. MOBL $158 -$65 -$35 $343 $177 $311 $0 $85   1.1x -41% $0.46
NetSuite Inc. N $846 -$59 $117 $993 $8,670 $8,740 $286 $408   10.2x -7% $0.66
New Relic, Inc. NEWR $202 -$61 $10 $347 $1,610 $1,800 $0 $196   8.0x -30% $0.58
Proofpoint, Inc. PFPT $313 -$60 $57 $441 $3,090 $3,130 $356 $412   9.9x -19% $0.39
Qualys, Inc. QLYS $182 $43 $75 $223 $912 $1,110 $0 $214   5.0x 24% $0.81
RealPage, Inc. RP $514 $68 $108 $472 $2,100 $2,010 $124 $47   4.1x 13% $0.86
RingCentral, Inc. RNG $339 -$9 $19 $320 $1,560 $1,690 $17 $148   4.6x -3% $1.01
salesforce.com, Inc.  CRM $7,070 $522 $1,930 $5,706 $55,030 $54,780 $2,070 $2,030   7.8x 7% $0.91
ServiceNow, Inc. NOW $1,190 -$91 $98 $1,141 $12,020 $12,380 $491 $807   10.1x -8% $0.73
Splunk, Inc. SPLK $729 -$291 $163 $1,529 $7,290 $8,330 $0 $1,020   10.0x -40% $0.48
SPS Commerce, Inc. SPSC $176 $18 $21 $265 $986 $1,120 $0 $128   5.6x 10% $0.66
The Ultimate Software Group, Inc. ULTI $700 $66 $120 $523 $6,000 $6,150 $10 $98   8.6x 9% $1.31
Veeva Systems Inc. VEEV $439 $87 $148 $362 $4,730 $5,240 $0 $457   10.8x 20% $1.21
Wix.com Ltd. WIX $241 -$45 $27 $193 $1,440 $1,580 $0 $128   6.0x -19% $1.25
WorkDay, Inc. WDAY $1,260 -$194 $328 $2,248 $14,790 $16,370 $514 $2,080   11.7x -15% $0.46
Zendesk, Inc. ZEN $261 -$78 $15 $512 $2,680 $2,890 $0 $224   10.3x -30% $0.51
Secureworks SCWX $362 -$57 -$18 $588 $1,010 $1,140 $0 $124   2.8x -16% $0.61
Appfolio, Inc. APPF $90 -$8 -$2 $142 $583 $637 $0 $22   6.5x -9% $0.64
Atlassian Corporation TEAM $457 $9 $130 $461 $5,830 $6,260 $0 $743   12.8x 2% $0.99
Twilio TWLO $219 -$30 -$2 --- $4,700 $4,920 $0 $261   21.4x -14% ---
Instructure INST $92 -$48 -$21 $189 $602 $672 $0 $62   6.6x -52% $0.49
Mindbody, Inc MB $120 -$24 -$13 $270 $662 $1,020 $16 $88   5.5x -20% $0.42
Shopify SHOP $282 -$21 $11 $243 $2,990 $3,300 $0 $180   10.6x -7% $1.16
Xactly XTLY $81 -$17 -$7 $151 $397 $424 $15 $46   4.9x -21% $0.49
                           
Median   $272 -$16 $20 $362 $1,475 $1,630 $2 $152   6.1x -8% $0.64
Average   $564 -$6 $102 $675 $4,178 $4,395 $139 $355   6.4x -12% $0.70
                           
                           
    TTM TTM  TTM  Capital Enterprise Market       Revenue EBITDA Revenue/
TECH SERVICES Ticker Revenue EBITDA OCF Surplus Value Cap Debt Cash   Multiple Margin (D+E)
Accenture CAN $32,280 $5,420 $4,020 $4,517 $67,290 $70,150 $29 $3,500   2.1x 17% $7.10
Booz Allen BAH $5,480 $509 $25 $243 $6,070 $4,630 $1,610 $180   1.1x 9% $2.96
CACI Intl CACI $3,740 $334 $243 $558 $3,940 $2,480 $1,480 $49   1.1x 9% $1.83
CGI Group GBI $8,120 $1,390 $1,050 $128 $15,970 $14,600 $1,490 $216   2.0x 17% $5.02
Ciber CBR $728 -$18 -$25 $369 $146 $97 $40 $11   0.2x -3% $1.78
Cognizant Tech CTSH $12,990 $2,590 $1,940 $453 $29,330 $33,050 $909 $4,480   2.3x 20% $9.54
Edgewater EDGW $119 $8 $6 $210 $98 $105 $5 $11   0.8x 7% $0.55
EPAM Systems EPAM $1,040 $158 $117 $303 $3,310 $3,550 $40 $281   3.2x 15% $3.03
Gartner IT $2,310 $385 $349 $819 $7,880 $7,460 $846 $445   3.4x 17% $1.39
ICF Intl ICFI $1,160 $109 $87 $280 $1,170 $854 $318 $11   1.0x 9% $1.94
Infosys INFY $9,750 $2,700 $1,970 $0 $32,460 $36,480 $0 $4,680   3.3x 28% ---
Insight Enter NSIT $5,350 $179 $79 $317 $1,220 $1,150 $243 $175   0.2x 3% $9.56
IBM IBM $80,260 $17,970 $18,600 $0 $183,120 $148,140 $45,520 $10,620   2.3x 22% $1.76
Leidos Holdings LDOS $5,240 $444 $365 $1,433 $3,570 $6,460 $1,090 $670   0.7x 8% $2.08
ManTech Holdings MANT $1,590 $122 $161 $438 $1,530 $1,540 $0 $40   1.0x 8% $3.63
Perficient PRFT $485 $59 $53 $365 $754 $715 $36 $53   1.6x 12% $1.21
Science Applic SAIC $4,520 $341 $234 $215 $4,070 $3,080 $1,060 $115   0.9x 8% $3.55
Unisys Corp UIS $2,940 $203 $124 $4,501 $428 $474 $420 $464   0.1x 7% $0.60
Virtusa Corp VRTU $671 $50 $27 $297 $755 $727 $192 $188   1.1x 7% $1.37
Wipro WIT $7,380 $7,860 $1,070 $221 $21,280 $24,000 $1,920 $4,820   2.9x 107% $3.45
                           
Median   $4,130 $338 $198 $310 $3,755 $3,315 $369 $202   1.1x 9% $2.08
Average   $9,308 $2,041 $1,525 $783 $19,220 $17,987 $2,862 $1,550   1.6x 16% $3.28
                           
                           
    TTM TTM  TTM  Capital Enterprise Market       Revenue EBITDA Revenue/
HARDWARE Ticker Revenue EBITDA OCF Surplus Value Cap Debt Cash   Multiple Margin (D+E)
TiVo Corporation TIVO $508 $169 $123 $2,446 $2,490 $1,770 $1,010 $274   4.9x 33% $0.15
Motorola Solutions, Inc. MSI $5,370 $1,320 $1,000 $119 $16,220 $12,870 $5,030 $1,590   3.0x 25% $1.04
Garmin Ltd GRMN $2,900 $657 $576 $1,870 $7,910 $9,050 $0 $1,050   2.7x 23% $1.55
Apple Inc. AAPL $220,290 $73,960 $63,170 $30,106 $578,030 $586,450 $84,940 $62,620   2.6x 34% $1.91
Universal Electronics Inc. UEIC $644 $63 $43 $240 $1,020 $1,050 $43 $49   1.6x 10% $2.28
BlackBerry Limited BBRY $1,900 $301 $62 $2,448 $2,980 $3,980 $1,250 $2,230   1.6x 16% $0.51
Logitech LOGI $2,050 $203 $222 $30,148 $2,990 $3,510 $0 $440   1.5x 10% $0.07
iRobot IRBT $630 $68 $51 $146 $889 $1,070 $0 $173   1.4x 11% $4.32
Nokia Corporation NOK $19,850 $2,270 -$1,380 $680 $24,700 $32,750 $4,380 $12,580   1.2x 11% $3.92
GoPro, Inc. GPRO $1,240 -$200 -$53 $688 $1,510 $1,850 $0 $279   1.2x -16% $1.80
Koninklihke Phillips N.V. PHG $27,390 $2,620 $2,020 $3,101 $30,850 $26,810 $6,540 $2,170   1.1x 10% $2.84
Fitbit Inc FIT $2,210 $228 $213 $826 $2,480 $3,070 $0 $760   1.1x 10% $2.68
Harman International Industries HAR $6,910 $883 $447 $1,412 $6,360 $5,740 $1,400 $611   0.9x 13% $2.46
ZAGG Inc ZAGG $308 $35 $23 $92 $282 $216 $73 $9   0.9x 12% $1.87
Cannon CAJ $35,100 $5,390 $4,750 $4,789 $31,900 $31,270 $5,920 $5,370   0.9x 15% $3.28
Sony Corporation SNE $76,580 $6,310 $8,900 $19,437 $41,620 $41,230 $0 $279   0.5x 8% $3.94
Eastman Kodak Co. KODK $1,710 $264 -$21 $639 $775 $622 $676 $513   0.5x 15% $1.30
Voxx International Corporation VOXX $672 $6 $20 $295 $172 $77 $105 $9   0.3x 1% $1.68
HP Inc. HPQ $99,880 $9,210 $5,140 $1,003 $25,270 $24,840 $6,830 $5,640   0.3x 9% $12.75
LG Electronics LGLG.F $50,920 $3,260 $3,130 --- $8,670 $3,330 $8,010 $2,720   0.2x 6% ---
Toshiba TOA.F $1,100 $56 $0 --- $132 $426 $155 $446   0.1x 5% ---
InfoSonics Corp IFON $44 -$2 $2 $33 $5 $8 $0 $3   0.1x -5% $1.32
Emerson Radio MSN $33 -$2 $10 $80 -$26 $28 $0 $53   -0.8x -5% $0.41
                           
Median   $2,050 $264 $123 $826 $2,980 $3,330 $155 $513   1.1x 10% $1.87
Average   $24,271 $4,655 $3,846 $4,790 $34,227 $34,436 $5,494 $4,342   1.2x 11% $2.48

 

While the valuation multiple of a company or industry is driven by a number of factors including growth and cash flow, the revenue model/business model is one of the major drivers.  To the extent you can make your business fit into the SaaS mold, you absolutely should for valuation purposes.  That said, the data indicate SaaS businesses are harder to build:

 

-SaaS margins are awful.  SaaS companies have median EBITDA of only -$16mm for a margin of -8%.  Meanwhile, technology services companies and hardware have median EBITDA of $338mm and $264mm for margins of 9% and 10% respectively.  While the SaaS revenue model of contracted recurring revenue may be attractive, the margins of the business are truly abysmal relative to other types of software companies.  So while you may not get as much of a valuation premium for non-SaaS revenue, don’t dismiss it completely: the cash flow from a services contract can help fund the growth of your business.          

 

-SaaS companies are small.  The median revenue of the SaaS companies shown is only $272mm.  Meanwhile, the median revenue of tech services and hardware is $4.1bln and $2bln respectively.  There may be a few reasons for this: i) SaaS businesses are relatively newer as a business model, so these companies haven’t had as much time to mature; and ii) the sales cycles for SaaS businesses are longer, so it takes more time to build a large business.  

 

-SaaS companies are inefficient.  SaaS companies generate far less revenue per dollar of investment than their counterparts.  To measure this, we looked at revenue/ (debt + capital surplus).  Capital surplus is a fancy yet imperfect measurement of equity invested in the business.  The median ratio for SaaS businesses is only $0.64 per dollar of investment whereas tech services generate $2.08 per dollar of investment and hardware generates $1.87 per dollar of investment.   

 

The key-takeaways: while the SaaS premium may be larger at 5x due to the contracted recurring nature of the revenue, the margins are lower, sales cycles longer, and SaaS is less capital efficient.  The data shows that it’s harder to build a SaaS business, but you’re going to see the benefit of the hard work in the valuation.  

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