Leaders Among Leaders

Transcription

1 Leaders Among Leaders The martinwolf Report on The Top 10 SaaS Companies of 2011 Based on the MW IT Index February 2012

2 About This Report The martinwolf M&A Advisors Report on The Top 10 SaaS Companies of 2011 is based on the MW IT Index, a proprietary analysis of market value for key segments in information technology. The Index uses securities that are weighted according to the market value of their outstanding shares. The Index includes 120 IT companies traded in the U.S. stock markets (NYSE, NASDAQ, and OTC) that are a composite representative sampling of enterprise values in the following categories: IT Services & Business Process Outsourcing (BPO) 52 companies, including seven in BPO IT Supply Chain Services 23 companies Software 45 companies, including 20 in Software as a Service (SaaS) The MW IT Index starts on December 31, 2007 with a value of Companies used for the MW IT Index must be traded on a U.S. stock exchange. See page 9 for the formula used to determine the MW IT Index value. For a complete copy of the MW IT Index Report for 2011, visit The 20 SaaS companies included in the Index share the following characteristics: Publicly traded with revenue of approximately $100 million, at least 70% of which is recurring revenue from the SaaS delivery model Business/enterprise customers (as opposed to consumers) Recognized leaders in their target SaaS segments The MW IT Index SaaS companies in 2011 were: CNQR Concur Technologies, Inc. N NetSuite Inc. CTCT Constant Contact, Inc. OPEN OpenTable, Inc. CNVO Convio, Inc. RP RealPage, Inc. TRAK DealerTrack Holdings, Inc. RNOW RightNow Technologies Inc.* DMAN DemandTec, Inc.* CRM Salesforce.com KNXA Kenexa Corp. SQI SciQuest, Inc. LPSN LivePerson Inc. SFSF SuccessFactors, Inc.* LOGM LogMeIn, Inc. TLEO Taleo Corp. SAAS incontact, Inc. ULTI The Ultimate Software Group, Inc. IL IntraLinks Holdings, Inc. VOCS Vocus Inc. *These companies were acquired in 2011 and will not be included in the MW IT Index in

3 Key Findings The MW IT Index showed that companies in the SaaS category were experiencing accelerated growth in 2011 that led to a 163% premium in revenue valuation multiple based on 12 months trailing revenue compared to traditional software companies. We expect this accelerated growth in the SaaS category to continue for the next 12 to 24 months at least. However, as the market matures companies are beginning to segment and specialize by industry and these factors will affect growth rates and valuations for individual companies. For example, while we expect SaaS companies generally to continue outpacing traditional software in growth and valuation multiples in 2012, we also expect companies in newer SaaS segments such as Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) to grow faster than other SaaS companies. We also expect SaaS companies with specialized solutions for industries such as HR, real estate, restaurant service and others to grow faster. Moreover, 2011 was notable because it marked a heating up of the battle for supremacy in SaaS among the largest enterprise software players, especially IBM, Oracle and SAP. The SaaS strategies of these enterprise software behemoths had already been putting pressure on the enterprise value of the de facto SaaS market leader, Salesforce.com, whose stock peaked in July 2011 at $159 per share. But the pressure on Salesforce.com increased dramatically in 4Q11 with announcements of Oracle s acquisition of RightNow Technologies, SAP s purchase of SuccessFactors and IBM s purchase of DemandTec all SaaS companies included in the MW IT Index in As of this writing, February 7, 2012, Salesforce.com s stock price was approximately $123 per share. As a result of this competition from enterprise software players, in 2012 we expect Salesforce.com to continue buying small companies to enhance its mobile, social, and cloud-computing portfolio, as it did with its purchase of Model Metrics in November Mobile and social technologies represent the future of enterprise cloud computing and through group hire or IP acquisitions, Salesforce.com will essentially outsource a portion of its R&D to accelerate its growth. While these acquisitions will shore up Salesforce.com s enterprise value somewhat, the market tends to reward organic growth over growth through acquisition. Therefore, we expect continued valuation pressure on Salesforce.com in

4 Overall, the MW IT Index for 2011 points to continued blockbuster growth for the SaaS category in 2012, while the price decline of Salesforce.com suggests slower overall enterprise value growth for SaaS companies and especially for more established players. Not all SaaS companies are created equal In addition, because SaaS companies high growth will continue in 2012, we expect higher valuations for SaaS companies when compared to traditional software companies. But as the SaaS industry matures, we see younger companies giving established players a run for their money when it comes to growth and valuations. This is creating a new class of leaders among leaders and a distinction between companies that are the SaaSiest and companies that are merely SaaSy This has implications for 4.0 both buyers and sellers 3.2x 3.0 of SaaS companies. Buyers should expect to 2.0 pay higher prices for young SaaS companies 1.0 in hot segments and sellers can look forward - SaaSiest SaaSy to higher prices for their companies depending on which segments they serve. That s because when it comes to valuations, what a company does matters. Therefore, at this phase in the development of SaaS market, we see a natural split of the 20 SaaS leaders represented in the MW IT Index into two groups based on enterprise value: the Top 10 SaaSiest Companies and the Second 10 SaaSy Companies. 7.4x Chart 1 The Top 10 SaaSiest vs. The Second 10 SaaSy Median Enterprise Value/Last 12 months Revenue (X) 4

5 The Top 10 SaaSiest vs. The Second 10 SaaSy What is the difference between the Top 10 SaaSiest and the Second 10 SaaSy companies? First and foremost, the median enterprise value based on 12 months trailing revenue of the Top 10 SaaSiest is more than 2x the Second 10 SaaSy. (See Chart 1.) The driver of these higher valuations for the Top 10 are clear: The median growth rate of the Top 10 over the past 12 months was 20% higher than the Second 10 while gross margins for the Top 10 over the past 12 months were 5% higher. (See Charts 2 and 3.) In simple terms, the companies that can grow the fastest and most profitably will earn higher valuations and our designation of the SaaSiest. Looking ahead, we expect enterprise valuations of SaaS companies to vary even more as the industry matures. 30% 25% 20% 15% 10% 5% 0% 100% 90% 80% 70% 60% 50% 40% 30% The Top 10 SaaSiest vs. The Second 10 SaaSy Median Growth Rates (%) 27% SaaSiest 71% Chart 2 Chart 3 22% SaaSy The Top 10 SaaSiest vs. The Second 10 SaaSy Median Gross Margins (%) 65% 20% 10% 0% SaaSiest SaaSy 5

6 The Top 10 SaaSiest Companies Based on the MW IT Index of 2011, here are the Top 10 SaaSiest Companies. Ticker Company #1 N NetSuite Inc. #2 SFSF SuccessFactors, Inc. #3 OPEN OpenTable, Inc. #4 RP RealPage, Inc. #5 CRM Salesforce.com #6 CNQR Concur Technologies, Inc. #7 ULTI The Ultimate Software Group, Inc. #8 LOGM LogMeIn, Inc. #9 SQI SciQuest, Inc. #10 RNOW RightNow Technologies, Inc. 1. NetSuite Inc. Founded in 1998, NetSuite was the first to market with a SaaS-based ERP solution, beating out SAP and Oracle for the honors. Recognized by Gartner as the fastest growing top 10 financial management solution, NetSuite has considerable market momentum and from our vantage point, will be hard to beat over the next 12 to 24 months. 2. SuccessFactors, Inc. SuccessFactors is a standout leader in SaaS-based human capital management a distinction that SAP recognized in December 2011 when it announced it would purchase the company, an acquisition that was completed in January Now, SuccessFactors must integrate its many acquisitions, improve its suite of services and build its customer base to pay off for SAP. Our view is that they will do it. 6

7 3. OpenTable, Inc. OpenTable is a leading provider of free, real-time online restaurant reservations for diners and reservation and guest management solutions for restaurants. The company has more than 20,000 restaurant customers and since 1998 has seated more than 250 million diners around the world. To achieve its leadership position, OpenTable employed the time-honored razor and razorblade business model. If you ve ever purchased razors and their replacement blades, you know the model well: razors are priced inexpensively but the blades are very expensive. The OpenTable version of the model involves giving restaurants computer hardware at no cost, and then earning revenue through hardware installation fees, a monthly subscription fee and a fee for every diner seated. For its second act, OpenTable now is leveraging its millions of reservations and traffic into a marketing network, selling advertising and promotional offers for restaurant discounts. 4. RealPage, Inc. RealPage is a leading provider of SaaS-based products and services for the rental housing industry. With nearly 7,000 customers managing more than 6 million rental housing units, the company has reached critical mass in terms of customer base, revenues and margins. Having established a beachhead with its SaaS property management solution, RealPage s growth is driven by additional complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities as well as acquisitions of complementary technologies. 5. Salesforce.com Salesforce.com is the company that pioneered enterprise SaaS, and has been a key driving force in the market for the past decade. Today it is the de facto standard platform for SaaS applications for business. With superb strategic and execution skills, at this rate Salesforce.com could well become to the cloud what Microsoft has been to the PC. As the SaaS market leader with more than $2 billion in annual revenues 90% recurring from the SaaS delivery model the company is nevertheless experiencing valuation pressure as established enterprise software companies make major plays in SaaS through acquisitions. For example, since Oracle s acquisition of RightNow Technologies, and market speculation 7

8 that Salesforce.com s growth rate may be slowing, the company has taken a valuation hit of 25-30%. 6. Concur Technologies, Inc. Concur is a leading provider of integrated travel and expense management solutions (T&E). Founded in 1993, it is one of the few companies that has migrated successfully from a legacy software provider to a cloud-based provider. Moreoever, Concur is becoming ubiquitous on mobile platforms and is the leading T&E app integrated into the Salesforce.com. 7. The Ultimate Software Group, Inc. As a leading provider of SaaS-based people management solutions, Ultimate Software is the ultimate story of a company that made the successful transition from a legacy software provider to a dominant SaaS player. The company has done especially well in the midmarket and will continue to grow as it delivers faster, better, less expensive services in the cloud. 8. LogMeIn, Inc. LogMeIn offers remote connectivity services to computers for mobile professionals and help desk and systems administrators worldwide. Founded in 2003, more than 125 million devices worldwide are connected to a LogMeIn service. On the strength of such a large base of connected devices, LogMeIn now is executing a larger strategy to expand its portfolio of web-based services aimed at customer care organizations that includes acquisitions RightNow Technologies, Inc. Oracle s $1.5 billion acquisition of RightNow, maker of SaaS-based customer service solutions, is touted by Oracle as nothing less than a linchpin in the company s goal of reinventing customer relationship management. The strategy is to integrate RightNow's 8

9 applications with Oracle technologies for e-commerce, natural language search, customer segmentation and other areas, many of which Oracle procured through acquisitions. RightNow s success and the strength of its management team, combined with Oracle s track of successfully integrating acquisitions, bodes well for the success of this pairing. 10. SciQuest, Inc. SciQuest is a leading provider of SaaS-based eprocurement software. In an evolution that is being replicated by other SaaS players in other markets, SciQuest s success is a result of focusing on perfecting solutions for specific verticals such as healthcare, higher education, the public sector and life sciences. Within its targeted verticals, SciQuest provides a compelling value proposition, taking advantage of the network effect of having supplier relationships and network in ways similar to OpenTable and RealPage. 9

10 MW IT Index Description and Formula The MW Index is a market-value-weighted index. The representation of each security in the index is proportional to its last sales price times the total number of shares outstanding, relative to the total market value of the respective index. The formula used to determine the index value is as follows: Current Market Value Index Level = Adjusted Base Period x Base Value Market Value Current Market Value After Adjustments x Previous Base Period Adjusted Period = Current Market Market Value Before Market Value Value Adjustments Adjustments for securities being added to or deleted from the index, or capitalization changes, are made periodically. Stock splits and stock dividends are likewise adjusted for during the process. In the case of cash dividends, no adjustment is made. The index starts on December 31st, 2007 with a value of The IT Services & BPO space includes 52 companies traded in the US Stock Markets (NYSE, NASDAQ, and OTC Market). The IT Supply Chain Services space includes 23 companies while the Software space includes 45 companies. 10

11 About martinwolf martinwolf is the world s leading middle market IT M&A advisory. Since 1997, the firm has completed more than 100 transactions in six countries. Its knowledge and experience with IT outsourcing and managed services combined with its disciplined approach, which includes a proprietary, proven, step-by-step work plan customized for each client, has produced one of the highest transaction completion rates in the industry. martinwolf is a member of the Merrill Lynch PS Referral Network and is an exclusive strategic partner to ICICI Bank, India s leading private bank) for acquiring U.S. IT companies. Member FINRA, SIPC. For more information, visit Contributors Marty Wolf has been involved in more than 100 IT M&A transactions during the last 15 years. In addition to his role as President of the firm, he actively manages transactions, and has been directly involved in the divestiture of five Fortune 500 divisions, and closed transactions in six countries in the IT Services, BPO, Supply Chain and Software segments Sunil Grover has more than 15 years of operational and transactional experience in the IT services industry. Prior to MW, Sunil was president of Evergreen Co., and advised CEOs at staffing, outsourced product development, ERP/CRM implementation, consumer Internet, mobile web and SaaS companies on M&A and capital financing. Sunil was also an investment banker in Morgan Stanley s Technology Group. 11