I've been reading through
the Q1 2007 Software Industry Equity Report.
Though the public markets
are very different from the world of software startups, I think it is helpful
for startup entrepreneurs to get a sense of how the larger market is doing. A
healthy public market for software companies can often have a positive effect on
valuations and potential M&A deals for private companies. As such, I've
found it useful to keep track of the market.
Note: SEG Software Index
is a tracking index that refers to about 263 publicly traded software
companies.
7 Signs The Software Industry Is Doing Well
1. Median
Valuation: The median enterprise valuation of the SEG Software index
ended up 2.8% after rising to a high of 5.8% and dipping to a low of
-1.4%.
2. Overall Growth:
Median trailing twelve-month revenue of companies grew 11.6% from Q1
2006 to Q1 2007. Earnings gained 7.3%. Median valuation gained
9.1%.
3. Specific
Categories: HR management and web analytics software led all other
categories where companies providing solutions for eCommerce enablement,
education and computer-based training lagged far behind.
4. SaaS Doing
Well: The SEG SaaS Index (including 10 public companies providing
Software as a Service) continued to outperform the industry with median revenue
growth of 43.5% over the same quarter last year. These companies are also
valued higher (5.3x vs. 2.4x)
5. M&A:
425 M&A Transactions were posted in Q1 2007 in the software and IT
services sector -- near identical to Q1 2006 with 426 deals. However, aggregate
spending increased by 92%. Software M&A is up 43% year-over-year. Security
software was the most active M&A category.
6. Vertical vs.
Horizontal: Median valuations for vertical software solutions providers
was 1.8x TTM (trailing twelve months) revenue whereas that for horizontal
solutions commanded 2.5x.
7. Saas Valution
Premium: Buyers today are placing an inordinately high value of
pure-play SaaS company exits based on recurring revenue streams, bookings and
profitability levels. For example, WebEx was acquired by Cisco for 8.4x
revenue.
Of course, these are some
of the "hilights" that I found interesting. The overall sense that I got was
that the software industry continues to be healthy. If you're a software
startup founder, this should be encouraging news. If you're like me and working
on a pure-play SaaS startup (my company HubSpot is in this category), the news is
particularly encouraging as buyers are valuing the recurring revenue
well).
Let me know if you have
thoughts or insights on the data. I encourage you to read the full report if
you have the time. Lots of detailed information on various sectors within the
industry and the key M&A transactions.