Cobalt Benchmark Report UK & US Application Software Sector: Key Company Performance Metrics May 2013
Introduction Welcome to this edition of the Cobalt benchmark report, a review of key company valuation and operating metrics in the UK and US application software sector. By reviewing sector averages, our aim is to provide a set of software industry benchmarks against which individual company performance can be measured. In particular, we look at the relationship between valuation and revenue growth expectations, its influence on the spending of companies, and the impact on short term profitability. For comparison purposes, we ve grouped companies covered in the report into one of four categories: US publicly quoted application software companies operating a pure Software as a Service model. US publicly quoted application software companies with a strong focus on one (or a small number of) vertical market(s) e.g. healthcare, financial services etc. US Horizontal US publicly quoted application software companies selling solutions across a wide range of verticals. UK Small+Mid Small and medium sized (by market capitalisation) UK publicly quoted application software companies. We ve grouped UK companies in this manner because sample sizes do not permit a breakdown into horizontal versus vertically focused companies. Metrics covered in the report include R&D spend, sales and marketing spend, revenue per employee, operating margins, revenue growth expectations and valuation multiples. We d be happy to discuss the findings of this report in more detail. Please contact: Paddy MccGwire pmccgwire@cobaltcf.com +44 (0) 20 7659 0310 Jeremy Tracey jtracey@cobaltcf.com +44 (0) 20 7659 0315
Summary: Growth versus Profitability Median Revenue Multiple 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x (2) US Horizontal UK Small + Mid Cap R&D Spend (% Revenue) 25.0% 20.0% 15.0% 10.0% 5.0% US Horizontal EBITDA Margin 25.0% 20.0% 15.0% 10.0% 5.0% (3) US Horizontal UK Small + Mid Cap 0.0x 0% 10% 20% 30% Median Forecast Annual Revenue Growth (1) 0.0% 10.0% 20.0% 30.0% 40.0% Sales & Marketing Spend (% Revenue) 0.0% 0% 10% 20% 30% Median Forecast Annual Revenue Growth (1) With higher growth expectations, SaaS companies are valued at a premium to the rest of the market. Conversely, with lower growth expectations, UK companies are valued at a discount. SaaS companies, with higher growth forecasts, are spending a higher percentage of revenue on sales and marketing. Unsurprisingly, vertically focused application software companies spend less than horizontally focused ones on customer acquisition. Higher growth companies are trading off short term profitability for growth. (1) FY13-14 (2) Trailing revenue (3) Positive EBITDA only Median Revenue Multiple Median EBITDA Multiple EBITDA Margin Revenue Per Employee ($000's) R&D Spend (% Revs) S&M Spend (% Revs) Median Forecast Revenue Growth (FY13-14) 5.6x 47.9x 10.9% 206 16.8% 38.0% 22.3% 3.5x 14.0x 22.1% 219 14.5% 21.2% 8.0% US Horizontal 2.9x 15.6x 18.8% 246 15.6% 31.8% 10.5% UK Small+Mid 1.9x 9.4x 22.6% 194 n/a n/a 7.4% Definitions: US publicly quoted application software companies operating a pure Software as a Service model. US publicly quoted application software companies with a strong focus on one (or a small number of) vertical market(s) e.g. healthcare, financial services etc. US Horizontal US publicly quoted application software companies selling solutions across a wide range of verticals. UK Small+Mid Small and medium sized (by market capitalisation) UK publicly quoted application software companies. Source: Cobalt/ S&P Capital IQ
Sector Valuation Metrics: Revenue Multiples Median Revenue Multiple (1) 8.0x 6.0x Over recent years SaaS company revenue valuation multiples have outperformed the rest of the application software sector. Median revenue multiples May 2013: 5.6x 4.0x 3.5x 2.0x US Horizontal 2.9x 0.0x 2008 2010 2011 2013 UK Small & Mid 1.9x US Horizontal UK Small + Mid Cap (1) Trailing revenue Source: Cobalt/ S&P Capital IQ
Sector Valuation Metrics: EBITDA Multiples Median EBITDA Multiple (1) 70.0x SaaS company EBITDA valuation multiples are more volatile because companies in this sector are earlier in their corporate evolution. Median EBITDA multiples May 2013: 60.0x 50.0x 47.9x 40.0x 30.0x US Horizontal 14.0x 20.0x 15.6x 10.0x 0.0x 2008 2010 2011 2013 UK Small & Mid 9.4x US Horizontal UK Small + Mid Cap (1) Trailing EBITDA Source: Cobalt/ S&P Capital IQ
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