Fast growing SaaS businesses spend 42% of revenue on development

SaaS models are great due to the recurring revenue and high product margins, but one fixed cost excluded from the margin analysis is ongoing development expense.   Building out, maintaining, and upgrading a technology stack requires a constant commitment to developers and engineers, so what is an appropriate level of development or R&D expense for a SaaS business? We looked at 47 publicly traded SaaS businesses to get a sense for what bigger technology players spend.  The raw data and observations are below:

$ in MM   2015 2015 Capitalized R&D+Software/ Q1 2016
Company Ticker Revenue R&D Software Revenue Rev Growth
Hortonworks HDP $122 $67 $0 55% 206%
Splunk SPLK $405 $215 $0 53% 48%
Atlassian Corporation TEAM $320 $141 $0 44% ---
Castlight Health, Inc.  CSLT $75 $30 $3 43% 54%
MobileIron, Inc. MOBL $149 $62 $0 41% 12%
Workday WDAY $1,162 $470 $0 40% 47%
Instructure INST $73 $24 $3 38% ---
Wix.com WIX $80 $30 $0 37% 40%
Marin Software, Inc. MRIN $109 $33 $6 36% 6%
Jive Software, Inc. JIVE $180 $53 $9 34% 8%
Box, Inc. BOX $303 $103 $0 34% 40%
ZenDesk ZEN $209 $63 $5 32% 63%
Textura TXTR $87 $20 $6 31% 35%
Benefitfocus, Inc. BNFT $185 $52 $3 30% 32%
New Relic, Inc. NEWR $181 $46 $7 29% 87%
DemandWare DWRE $237 $65 $2 28% 43%
Proofpoint, Inc. PFPT $265 $74 $0 28% 36%
Medidata Solutions, Inc. MDSO $336 $92 $0 27% 15%
LinkedIn LNKD $2,990 $776 $0 26% 35%
ServiceNow, Inc. NOW $848 $217 $0 26% 46%
RealPage, Inc. RP $451 $69 $41 24% 17%
Appfolio, Inc. APPF $75 $10 $8 23% ---
Mindbody, Inc MB $101 $23 $0 23% ---
Marketo MKTO $184 $39 $1 22% 38%
Broadsoft BSFT $279 $61 $0 22% 30%
Athenahealth, Inc. ATHN $886 $94 $98 22% 22%
Cvent, Inc.  CVT $188 $22 $18 21% 40%
Xactly XTLY $76 $16 $0 21% ---
Hubspot HUBS $182 $32 $4 20% 56%
BazaarVoice BV $191 $38 $0 20% 6%
The Ultimate Software Group, Inc. ULTI $618 $94 $26 19% 25%
2U TWOU $150 $27 $2 19% 38%
Shopify SHOP $205 $40 $0 19% ---
RingCentral, Inc. RNG $296 $53 $3 19% 34%
Netsuite N $741 $136 $3 19% 33%
IntraLinks Holdings, Inc. IL $276 $26 $25 19% 7%
Qualys, Inc. QLYS $164 $29 $1 19% 23%
Five9, Inc.  FIVN $129 $23 $0 18% 33%
LivePerson Inc. LPSN $239 $39 $2 17% 6%
Cornerstone OnDemand, Inc. CSOD $340 $41 $17 17% 30%
LogMeIN, Inc. LOGM $272 $43 $2 16% 24%
Veeva Systems Inc. VEEV $409 $66 $1 16% 31%
Salesforce CRM $6,205 $946 $50 16% 32%
Secureworks SCWX $262 $32 $0 12% ---
Lifelock LOCK $587 $69 $0 12% 22%
SPS Commerce, Inc. SPSC $159 $18 $0 11% 23%
Fleetmatics Group PLC FLTX $285 $21 $5 9% 22%
             
Average   $474 $101 $7 26% 36%
Median   $237 $46 $2 22% 32%

 

-On average, 1/4th of revenue needs to go to development.  The median spend on R&D and capitalized software combined as a percent of revenue is 22%.  The average is 26%.  No matter where your SaaS business is in its lifecycle, as one founder put it to me, “managing a large and growing stack for a cloud application is damn tough” so you’re going to be spending on the stack no matter how fast you’re growing or how mature you are.     

 

-The range of spend is wide.  Hortonworks spends a whopping 55% of revenue on R&D and Fleetmatics spends as little as 9% of revenue on R&D. 

 

-Faster growing businesses are spending more on development.  There does seem to be a correlation between YOY Q1 2016 revenue growth and R&D spend as the top 10 spenders grew revenue by an average of 53% YOY (median 44%) while the bottom 10 grew revenue by an average of 25% YOY (median 24%)Note that the top 10 spenders expend an average of 42% of revenue on R&D (median 41%) while the bottom spenders average only 15% of revenue on R&D (median 16%)

 

-Smaller business spend more on development.  The top 10 spenders in the list above which are spending on average 42% of their revenue on development had average revenue of $268mm (median of $136mm).  The bottom 10 spenders which are spending on average 15% of revenue on development had average revenue of $889mm (median of $278mm). 

 

In conclusion, don’t overlook the ongoing cost of R&D/development expense for a SaaS business over the life of the business.  Faster growing and smaller businesses are likely going to have to expend a larger percent of revenue on R&D than their more mature peers.  Budget accordingly. 

 

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