Q The Software Industry Financial Report

Transcription

1 Q The Software Industry Financial Report Software Equity Group, L.L.C El Camino Real Suite 320 San Diego, CA (858)

2 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS About Software Equity Group Leaders in Software M&A 5 Extensive Global Reach 6 Leading Market Position Software Industry Macroeconomics U.S and Global GDP 8 U.S. GDP and Unemployment 9 Global IT Spending 10 E-Commerce and Digital Advertising Spend 11 Stock Market Performance 12 Public Software Financial and Valuation Performance The SEG Software Index 14 The SEG Software Index: Financial Performance The SEG Software Index: Public Market Multiples The SEG Software Index by Product Category 19 The SEG Software Index by Product Category: Financial Performance 20 The SEG Software Index by Product Category: Public Market Multiples 21 Public SaaS Company Financial and Valuation Performance The SEG SaaS Index 23 The SEG SaaS Index: Financial Performance The SEG SaaS Index: Public Market Multiples The SEG SaaS Index by Product Category: Financial Performance 29 The SEG SaaS Index by Product Category: Public Market Multiples 30 Public Internet Company Financial and Valuation Performance The SEG Internet Index 32 The SEG Internet Index: Financial Performance The SEG Internet Index: Public Market Multiples The SEG Internet Index by Product Category 37 The SEG Internet Index by Product Category: Financial Performance 38 The SEG Internet Index by Product Category: Public Market Multiples 39 2

3 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS Software Industry M&A Market Update Software/SaaS M&A Deal Volume and Spending 41 Software M&A Exit Multiples 42 Software M&A by Ownership Structure and Size 43 Software M&A by Vertical and Horizontal Markets 44 Software M&A Deal Volume by Product Category 45 Software M&A Exit Valuations by Product Category 46 SaaS M&A Deal Volume and Exit Multiples 47 SaaS M&A by Product Category 48 SaaS M&A 2Q14 Transactions Internet M&A: Deal Volume and Exit Multiples 52 Internet M&A: By Product Category 53 Appendix SEG Software Index Key Metrics SEG Software Index Key Metrics by Product Category SEG SaaS Index Key Metrics SEG SaaS Index Key Metrics by Product Category 63 SEG Internet Index Key Metrics SEG Internet Index Key Metrics by Product Category 67 2Q14 Select Public Sellers 68 2Q14 Mega Deals 69 2Q14 Most Active Buyers 70 About Software Equity Group 71 3

4 ABOUT SOFTWARE EQUITY GROUP

5 LEADERS IN SOFTWARE M&A We Do Deals. Industry leading boutique investment bank, founded in 1992, representing public and private software and internet companies seeking: Strategic exit Growth capital Buyout Inorganic growth via acquisition Buy and sell-side mentoring Fairness opinions and valuations Sell-side client revenue range: $5-75 million Buy-side clients include private equity firms and NASDAQ, NYSE and foreign exchange listed companies Clients span virtually every software technology, product category, delivery model and vertical market Global presence providing advice and guidance to more than 2,000 private and public companies throughout US, Canada, Europe, Asia-Pacific, Africa and Israel Strong cross-functional team leveraging transaction, operating, legal and engineering experience Unparalleled software industry reputation and track record. Highly referenceable base of past clients 5

6 EXTENSIVE GLOBAL REACH Current Sell-side Representation SEG currently represents software companies in the United States, Canada, France, Germany, Australia & Saudi Arabia Recent Sell-side Representation In addition to the countries listed above, SEG has recently represented software companies in the United Kingdom, France, Netherlands, Israel, and South Africa SEG Research Distribution SEG s Quarterly and Annual Software Industry Equity Reports and Monthly Flash Reports are distributed to an opt-in list of 70,000 public software company CEOs, software entrepreneurs, private equity managing directors, VCs, high tech corporate lawyers, public accountants, etc. in 76 countries. 6

7 SOFTWARE INDUSTRY MACROECONOMICS

8 U.S. AND GLOBAL GDP Global GDP (% YoY Change) U.S. GDP (% YoY Change) The latest IMF forecast portrays a gradually improving global economy that remains susceptible to a host of economic and geopolitical downside risks. The IMF s most recent forecast predicts U.S. GDP will grow 2.2% in 2014, the same as 2013 s growth rate. Temporary setbacks, such as an unusually harsh winter, constrained GDP growth in the first quarter. According to the IMF, the U.S. economy rebounded in Q2, in part due to improved housing activity, declining unemployment and steady payroll gains. According to the IMF, global GDP is expected to inch up to 3.5% in the second half of 2014 and 3.8% in 2015, while GDP growth in developed nations is expected to grow at a median of 1.8% in 2014, a modest improvement over 2013 s 1.4%. Key growth drivers include an improving labor market, better household balance sheets, and a favorable economic climate. In emerging markets, annual GDP growth is expected to slow slightly from 2.8% in 2013 to 2.7% in 2014, but is predicted to rebound in 2015 to 2.9%. The IMF acknowledged its forecasts could be imperiled by recent geopolitical events and renewed threats of defaults and recessions among EEC member countries. Sources: Worldbank, The Economist, Council of Economic Advisors, and Statista 8

9 U.S. GDP AND UNEMPLOYMENT According to February s Federal Reserve survey of 43 economists, GDP growth in the U.S. for 3Q14 is forecast to be 3.0%. For the year, expectations are the U.S. economy will grow 2.1%, as a surprisingly weak first half tempered expectations for a more robust annual growth rate in Fewer than 15% of economists surveyed by the Fed predicted the U.S. economy will grow more than 3.0% in the third quarter of However, more than 40% believe the U.S. economy will grow 3.0% or greater in The Labor Department reported the unemployment rate at the end of 3Q14 was 6.1%, a noteworthy decline from 1Q14 s 6.7%, and the lowest unemployment rate since The labor participation rate showed minimal decline, edging down slightly to 62.7% in September, a 35 year low. 9

10 GLOBAL IT SPEND Global IT Spending (% YoY Change) Global IT Spending by Category At the outset of 2014, analysts at Goldman Sachs, Gartner and elsewhere projected Global IT spending in 2014 would increase 4%, a marked improvement from the tepid 2.0% growth that has prevailed during the past two years. Revised forecasts predict average global IT spending will increase only 3.3% in 2014, citing a weak 1H 2014 and continuing economic uncertainty and geopolitical upheaval. Gartner, however, cut its forecast from 3.2% to 2.1%, citing a tougher competitive environment that is placing significant price pressure on suppliers. Forrester estimates software will account for 26% of all tech spending, leading all other categories. According to Forrester, Software s leading position is not a surprise, because it is the focal point for tech innovation today, whether that innovation takes the form of cloud computing and adoption of SaaS, PaaS, smart computing and big data, real-time predictive analytics and smart process apps, or mobile computing and mobile apps and enterprise app stores. Sources: Global IT spending chart is a blended average of Goldman Sachs, IDC, Forrester, and Gartner forecasts. IT Spending by Category chart from Forrester. 10

11 STOCK MARKET PERFORMANCE 15.0% DOW S&P NASDAQ SEG SW Index SEG SaaS SEG Internet Index 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%) (20.0%) (25.0%) (30.0%) (35.0%) Jan 2014 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014 Technology stock prices lost more ground in 3Q14, especially high-growth, SaaS based companies that have been unable to recapture pre-recession growth rates. The Nasdaq posted the best return of the three major stock indices in 3Q14, finishing up 7.6%. The S&P finished close behind, up 6.7%. Surprisingly, in an environment where investors flocked to value stocks in 2Q14, the DOW performed worst among the three major U.S. stock market indices, closing 3Q14 with a gain of only 2.8%. The SEG SaaS Index posted the greatest Q3 decline in median stock return among our six tracking indices. In early March, our SaaS Index peaked at a 9.2% gain, only to plunge dramatically in the second quarter. The SEG SaaS Index lost another 4.1% in Q3 to close 3Q14 down 14.1% for the year, making it the worst YTD performer of our three tracking indices. In addition to macro economic concerns, many were concerned SaaS valuations had grown too rich. More on SaaS median EV/Revenue multiples later in this report. The SEG Software Index, consisting largely of mature, profitable software providers slowed its descent, finishing the third quarter 4.6%, lower, compared to a decline of 8.4% in May, its lowest point for the year. 11

12 THE SEG SOFTWARE INDUSTRY FINANCIAL REPORT PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

13 THE SEG SOFTWARE INDEX SEG - Software: Median Metrics Measure 3Q13 4Q13 1Q14 2Q14 3Q14 EV/Revenue 3.0x 3.2x 3.2x 3.0x 2.9x EV/EBITDA 13.8x 14.7x 15.5x 14.8x 15.3x EV/Earnings 28.1x 26.9x 27.2x 26.2x 27.0x Gross Profit Margin 67.9% 67.5% 66.6% 66.5% 66.3% EBITDA Margin 17.8% 17.6% 17.3% 17.1% 16.4% Net Income Margin 8.2% 8.5% 8.6% 8.2% 8.5% TTM Revenue Growth 9.9% 8.9% 8.5% 8.2% 8.0% TTM Total Revenue ($M) $451.5 $449.8 $484.4 $532.3 $558.8 TTM EBITDA Growth 6.4% 6.7% 5.7% 5.1% 6.1% TTM Total EBITDA ($M) $82.8 $88.0 $86.5 $90.2 $100.1 Cash & Eq ($M) $153.2 $181.7 $175.6 $203.4 $189.6 Current Ratio Debt / Equity Ratio 26.5% 33.8% 34.9% 31.1% 37.7% The SEG Software Index tracks public software companies that primarily offer on-premise software under a perpetual license with annual M&S. The SEG Software Index is currently comprised of 141 public software companies*. The number of public companies comprising the SEG Software Index has declined steadily over the past ten years, as many on premise providers have migrated to a SaaS business model. Median Cash and Equivalents of the SEG Software Index grew YoY by 23.8%, despite a markedly lower median EBITDA margin and median TTM revenue growth rate. * A number of on-premise software companies are transitioning to subscription based delivery and pricing models; however their SaaS revenue contribution is insufficient for them to be deemed primarily SaaS. ** See appendix for a complete list of companies in The SEG Software Index and detailed financial and trading metrics 13

14 THE SEG SaaS INDEX PUBLIC SaaS COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

15 THE SEG SaaS INDEX SEG - SaaS: Median Metrics Measure 3Q13 4Q13 1Q14 2Q14 3Q14 EV/Revenue 6.9x 7.5x 7.6x 6.5x 6.2x EV/EBITDA 36.8x 46.8x 65.4x 51.8x 56.0x EV/Earnings 146.4x 102.7x 159.0x 89.9x 145.9x Gross Profit Margin 67.7% 67.2% 68.3% 65.8% 65.2% EBITDA Margin -5.1% -8.3% -4.0% -1.7% -2.4% Net Income Margin -12.4% -14.2% -16.5% -15.8% -14.5% TTM Revenue Growth 28.1% 28.5% 30.5% 29.3% 25.8% TTM Total Revenue ($M) $107.9 $120.4 $129.3 $132.6 $140.5 TTM EBITDA Growth 16.2% 19.8% 6.0% 16.3% 12.9% TTM Total EBITDA ($M) -$4.4 -$5.2 -$4.5 -$4.4 -$3.4 Cash & Eq ($M) $69.8 $80.1 $87.0 $92.0 $107.1 Current Ratio Debt / Equity Ratio 11.3% 13.4% 28.3% 15.9% 5.9% The SEG SaaS Index tracks public companies that primarily offer hosted, on-demand software under a subscription and/or transaction based pricing model. The SEG SaaS Index is currently comprised of 52 publicly traded, pure-play SaaS companies*. * See appendix for complete list of companies in the SEG SaaS Index 15

16 THE SEG INTERNET INDEX PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

17 THE SEG INTERNET INDEX The SEG Internet Index tracks public companies that primarily offer B2C and B2B solutions over the Internet using a wide array of pricing models. The SEG Internet Index is currently comprised of 103 public Internet companies*. * See appendix for complete list of companies in the SEG Internet Index 17

18 SOFTWARE INDUSTRY M&A MARKET UPDATE

19 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 TTM Average Deal Value (Millions) 3Q14 SOFTWARE / SAAS M&A DEAL VOLUME AND SPENDING U.S. Software Mergers & Acquisitions Activity Average On-Premise Software Deal Size $70.0 $64 $60.0 $50.0 $40.0 $42 $41 $41 $42 $36 $39 $36 $35 $40 $43 $53 $54 $30.0 $20.0 $10.0 $0.0 There were 462 software M&A transactions in 3Q14. Deal activity over the past three years has remained consistently robust. Software M&A spending totaled $39.4 billion in 3Q14, and has increased each of the past five quarters, buoyed by a plethora of mega deals (EV>500M). SAP s $7.7 billion acquisition of Concur Technologies was the largest for the quarter. In addition to SAP/Concur, Q3 featured seventeen other Onpremise/SaaS/Internet mega deals (EV > $500M), including Zillow s acquisition of Trulia ($3.1B EV, 14.8x EV/Revenue multiple); Cognizant Technology s purchase of Trizetto ($2.7B, 3.8x estimate); Microsoft s acquisition of Mojang ($2.5B); Micro Focus acquisition of The Attachmate Group ($2.3 billion, 2.5x estimate); and Thoma Bravo s acquisition of Compuware ($2.1 billion, 2.9x). Megadeals aside, most buyers continued to focus on small and mid-sized acquisitions in 3Q14, in line with our 2013 and 2014 Buyers Surveys, in response to which 72% of buyers indicated they would focus on deals ranging from $10M - $99M in The average software M&A purchase price has increased each of the past four quarters, reaching $64M in 3Q14. 19

20 % of Deals - 3Q14 TTM SOFTWARE M&A EXIT MULTIPLES Median Exit Multiples Median EV/Revenue Exit Multiple Distribution EV/Revenue EV/EBITDA 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 18.1x 17.7x 12.9x 13.3x 11.5x 2.3x 2.3x 2.3x 2.3x 2.4x 3Q13 4Q13 1Q14 2Q14 3Q % 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 16.7% 24.0% <= 1.0x > 1.0x & <= 2.0x 29.2% > 2.0x & <= 3.0x 10.4% > 3.0x & <= 4.0x 9.4% > 4.0x & <= 5.0x TTM Revenue Exit Multiple Bins 2.1% > 5.0x & <= 6.0x 8.3% > 6.0x The median on-premise software exit multiple in 3Q14 inched up to 2.4x in 3Q14 after holding steady at a respectable 2.3x EV/Rev for the past four quarters. Historically, a median 2.4x EV/Revenue exit multiple is at the upper end of the valuation range for on-premise software companies. That quarterly median valuation was beaten only twice since 2007, in 3Q10 and 2Q11, when it climbed to 2.5x before retreating the following quarter. On a TTM basis, 40.7% of all on-premise software targets in 3Q14 were acquired for 2.0x TTM revenue or less, and 69.9% for 3.0x or less. Most targets receiving an exit multiple of 3.0x or higher belonged to currently hot software product categories that are experiencing rapid market adoption and growth, including Systems Management, Engineering & PLM, and Electronic Design Automation. Despite Q3 s many mega deals, the quarter also featured a number of smaller, but noteworthy transactions, including Sage Software s acquisition of ERP vendor Exact Software Deutschland ($22 million, 1.6x TTM revenue); and KB Advanced Technologies acquisition of upstream oil & gas software provider FEESA ($19.2 million, 4.9x TTM revenue). 20

21 # of SaaS M&A Deals SaaS M&A Deals as a % of Total Software M&A Deals SaaS M&A: DEAL VOLUME AND MEDIAN EXIT MULTIPLES SaaS M&A Volume Median SaaS EV/Revenue Exit Multiples SaaS M&A Deals SaaS as % of Software % % 20% 4.3x 4.1x 4.6x 4.0x 4.1x % 10% 20 5% 0 0% 3Q13 4Q13 1Q14 2Q14 3Q14 There were 118 SaaS M&A transactions in 3Q14, the most on record for any quarter and about 250% greater than three years ago. The median TTM EV/Revenue exit multiple of SaaS transactions was 4.1x in 3Q14, virtually the same as in three of the past four quarters. SaaS transactions in the third quarter that featured especially noteworthy exit multiples included SAP s acquisition of Concur Technologies ($7.7 billion, 11.5x TTM revenue); ServiceNow s acquisition of Neebula Systems ($100 million, 20.0x revenue estimate); and PTC s acquisition of Aexda ($170 million, 7.0x revenue estimate). The median SaaS exit multiple was 71% greater than the median on-premise software exit multiple in 3Q14 (4.1x vs 2.4x). 21

22 INTERNET M&A: DEAL VOLUME AND EXIT MULTIPLES Internet M&A Volume Median Internet EV/Revenue Exit Multiples x 1.9x 1.8x 1.7x 2.1x 195 3Q13 4Q13 1Q14 2Q14 3Q14 3Q13 4Q13 1Q14 2Q14 3Q14 After dropping sharply in the first quarter, Internet M&A deal volume increased steadily over the second and third quarters of this year. There were 241 Internet M&A transactions in the third quarter, a 12% increase from 2Q14 s 215 deals. In both 2013 and 2014, we ve witnessed a substantial decrease in M&A activity during Q1 followed by steadily increasing M&A activity during the following quarters. The first quarter has become a time to assess and digest holiday on-line spending results, discern changing trends and establish new acquisition priorities. We expect continued M&A growth in the fourth quarter. The median EV/Revenue exit multiple for Internet sellers in 3Q14 was 2.1x, a notable increase from the past four quarters. Leading 3Q14 Internet transactions included Facebook s acquisition of LiveRail ($500 million, 5.0x EV/Revenue); Rakuten s acquisition of Ebates Performance Marketing ($1 billion, 6.0x EV/Revenue); Zillow s acquisition of Trulia ($3.1 billion, 14.8x EV/Revenue); Varde Partners acquisition of Bancopopular-e ($1.3 billion). 22

23 To download the remaining portions of Software Equity Group s complimentary Software Industry Flash Report, which includes the complete list of software M&A transactions as well as detailed financial and market performance of more than 250 publicly traded software, SaaS, and Internet companies, sorted across nearly 30 product categories, visit our website: