The Software Industry Financial Report

The Software Industry Financial Report

The Software Industry Financial Report Q3 2016 SEG Capital Advisors, L.L.C. 12220 El Camino Real Suite 320 San Diego, CA 92130 [email protected] (858) 509-2800 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS About Software Equity Group About SEG 5 SEG’s 2016 Transaction Announcements 6 Leaders in Software M&A 7 Public SaaS Company Financial and Valuation Performance The SEG SaaS Index 9 The SEG SaaS Index: Financial Performance 10-12 The SEG SaaS Index: Public Market Multiples 13-15 The SEG SaaS Index by Product Category: Financial Performance 16 Public Software Financial and Valuation Performance The SEG Software Index 18 The SEG Software Index: Financial Performance 19-21 The SEG Software Index: Public Market Multiples 22-23 The SEG Software Index by Product Category 24 The SEG Software Index by Product Category: Financial Performance 25-26 Public Internet Company Financial and Valuation Performance The SEG Internet Index 28 The SEG Internet Index: Financial Performance 29-31 The SEG Internet Index: Public Market Multiples 32-33 The SEG Internet Index by Product Category 34 The SEG Internet Index by Product Category: Financial Performance 35-36 SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 2 SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS SaaS/Software Industry M&A Market Update Software/SaaS M&A Deal Volume and Spending 38 SaaS M&A Deal Volume and Exit Multiples 39-41 SaaS M&A by Product Category 42 SaaS M&A 3Q16 Transactions 43-47 Software M&A Exit Multiples 48 Software M&A by Ownership Structure and Size 49 Software M&A by Vertical and Horizontal Markets 50 Software M&A Deal Volume by Product Category 51 Software M&A Exit Multiples by Product Category 52 About Software Equity Group 53 Appendix The SEG SaaS Index: Public Market Multiples (Annual) 55 The SEG SaaS Index: Financial Performance (Annual) 56 The SEG Software Index: Public Market Multiples (Annual) 57 The SEG Software Index: Financial Performance (Annual) 58 The SEG Internet Index: Public Market Multiples (Annual) 59 The SEG Internet Index: Financial Performance (Annual) 60 SEG SaaS Index Key Metrics 61-62 SEG SaaS Index Key Metrics by Product Category 63 SEG Software Index Key Metrics 64-67 SEG Software Index Key Metrics by Product Category 68-69 SEG Internet Index Key Metrics 70-72 SEG Internet Index Key Metrics by Product Category 73 3Q16 Select Public Sellers 74 3Q16 Mega Deals 75 3Q16 Most Active Buyers 76 SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 3 ABOUT SOFTWARE EQUITY GROUP SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved About SEG • Twenty-four year, exclusive focus on advisory services to B2B enterprise software companies in the lower middle Focus on market Advice • Advisory services encompass: • Strategic exit • Growth capital • Buyout Advisory • Inorganic growth via acquisition Boutiques • Fairness opinions and valuations • Board advisory services Multi- • Clients span virtually every technology, product Focus on Industry category, delivery model and financial profile Software • Global presence providing advice and guidance to more than 2,000 private and public companies throughout US, Bulge Bracket IB Boutiques Canada, Europe, Asia-Pacific, Africa and Israel Firms • Strong and highly collaborative cross-functional team leveraging transaction, operating, legal and engineering experience • Unparalleled software industry reputation, track record Multi-service and industry research • Highly referenceable base of past clients and buyers / investors Billions of dollars of lower market software deals, endless buyer and seller references, industry leading close rates, upper decile valuation results. SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 5 SEG: Highly Active with History of B2B Strategic Transactions 2016 Transaction YTD: Very Active Market Oct 2016 Jun 2016 Jun 2016 May 2016 Feb 2016 SOFTWARE EQUITY GROUP | CONFIDENTIAL 6 SEG: Leading Software Industry M&A Advisor SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 7 THE SEG SOFTWARE INDUSTRY FINANCIAL REPORT PUBLIC SaaS COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved THE SEG SaaS INDEX SEG - SaaS: Median Metrics Measure 3Q15 4Q15 1Q16 2Q16 3Q16 • The SEG SaaS Index tracks public companies that primarily offer EV/TTM Revenue 6.2x 5.8x 3.9x 4.3x 5.1x hosted, on-demand software under a subscription and/or transaction EV/NTM Revenue 4.4x 4.6x 3.4x 3.8x 4.2x based pricing model. It is currently comprised of 66 publicly traded EV/TTM EBITDA 44.0x 34.6x 30.3x 38.9x 41.2x pure-play SaaS companies. EV/TTM CFO 39.6x 42.7x 25.5x 33.6x 35.6x • Three companies in SEG’s SaaS Index announced an intent to be Gross Profit Margin 64.6% 65.8% 66.3% 66.0% 66.2% acquired during the third quarter, while five new companies entered EBITDA Margin -9.1% -7.9% -6.0% -6.7% -5.4% our index due to IPO. Net Income Margin -17.0% -14.9% -16.8% -15.1% -13.2% TTM Revenue Growth 29.0% 27.2% 28.9% 29.2% 29.0% • See appendix for SEG SaaS Index public market multiples and financial performance on an annual basis. TTM Total Revenue ($M) $159.8 $171.0 $187.7 $199.8 $212.4 TTM EBITDA Growth 18.5% 29.9% 22.4% 24.2% 24.4% TTM Total EBITDA ($M) -$8.6 -$8.6 -$11.5 -$9.8 -$8.4 Cash & Eq ($M) $103.1 $110.0 $104.6 $100.6 $95.6 * See appendix for complete list of companies in the SEG SaaS Index SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 9 THE SEG SaaS INDEX: FINANCIAL PERFORMANCE Median Revenue Performance - Quarterly TTM Revenue Growth Rate Distribution TTM Total Revenue ($M) TTM Revenue Growth 25% 24% $250 35.0% $212.4 $187.7 $199.8 20% $171.0 30.0% 18% $200 17% 17% 17% $159.8 25.0% 14% $150 20.0% 12% 12% 10% 3Q15 15.0% % of Companies of % 8% $100 3Q16 10.0% TTM Total Revenue Total TTM 3% $50 Growth Revenue TTM 5.0% 2% $0 0.0% 3Q15 4Q15 1Q16 2Q16 3Q16 <= 0% > 0% > 10% > 20% > 30% > 40% > 50% <= 10% <= 20% <= 30% <= 40% <= 50% TTM Revenue Growth • The median TTM revenue growth rate of public SaaS companies in 3Q16 was 29.0%, on par with 3Q15, and roughly equivalent to the past two quarters. Median TTM revenue of public SaaS companies was $212.4 million in 3Q16, a 32.9% YOY increase when compared to 3Q15’s $159.8 million median TTM revenue figure. • Median growth rates alone do not capture the standout performances of the most successful SaaS companies. In 3Q16, 29.0% of public SaaS companies grew TTM revenue by 40% or more year over year, compared with only 10% percent of public on-premise software providers achieving growth of 40% or greater. As further testament to the widespread and ramping adoption of SaaS, these outperformers come from a variety of product categories including eCommerce, Business Intelligence / Analytics, Customer Support / Helpdesk and Human Capital Management. SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 10 THE SEG SaaS INDEX: FINANCIAL PERFORMANCE Median EBITDA Margin Performance - Quarterly TTM EBITDA Margin Distribution 61% 3Q15 4Q15 1Q16 2Q16 3Q16 53% (5.4%) 22% 3Q15 % of Companies of % 3Q16 (6.0%) (6.7%) 14% 12%14% EBITDA Margin EBITDA (7.9%) 9% (9.1%) 5% 4% 5% <= 0% > 0% > 10% > 20% > 30% <= 10% <= 20% <= 30% TTM EBITDA Margin • The median EBITDA margin for public SaaS companies was -5.4% in 3Q16 and has been generally trending toward positive territory since 4Q14. • While the majority of public SaaS companies continue to post GAAP losses (53% of our index in Q3) due to significant levels of deferred revenue, more than two thirds of public SaaS companies generated positive cash flow from operations in Q3. • Select Public SaaS companies posting negative EBITDA Margin while generating positive cash flow from operations during Q3 include: Hubspot (-18.1% EBITDA Margin, $10.6M CFO); Tableau (-11.3% EBITDA Margin, $142.2M CFO); Shopify (-7.4% EBITDA Margin, $11.3M CFO); Workday (-15.5% EBITDA Margin, $318.9M CFO); Zendesk (-29.8% EBITDA Margin, $14.7M CFO). SOFTWARE EQUITY GROUP | Q3 2016 SOFTWARE INDUSTRY FINANCIAL REPORT Copyright © SEG Capital Advisors, LLC, All Rights Reserved 11 THE SEG SaaS INDEX: FINANCIAL PERFORMANCE Median Operating Ratios Median Margin Performance S&M (% of Revenue) R&D (% of Revenue) G&A (% of Revenue) Gross Profit Margin EBITDA Margin Net Income Margin 66.3% 64.6% 65.8% 66.0% 66.2% 39.4% 38.4% 37.7% 37.8% 36.9% 18.6% 18.7% 18.7% 18.6% 18.4% 18.0% 18.3% 17.9% 17.9% 16.9% % Margin % of Revenue% of 3Q15 4Q15 1Q16 2Q16 3Q16 3Q15 4Q15 1Q16 2Q16 3Q16 -6.0% -6.7% -5.4% -9.1% -7.9% -13.2% -17.0% -14.9% -16.8% -15.1% • Public SaaS companies continue to spend heavily on sales & marketing in order to drive revenue growth and capture market share. In 3Q16, public SaaS companies invested a median 36.9% of total revenue on sales & marketing, almost double their on-premise counterparts. Sales and marketing spend as a percent of revenue has remained in the high 30% range since dipping below 40% in 3Q15.

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