SaaS Spotlight Report

As part of our first webinar of the year, a number of us here at Corum explored specific industries, their significance, and what we can expect from them in the coming year. I gave a brief presentation on Software as a Service (SaaS), what its significance has been and what it will be in the coming year. Heres a brief overview of the material covered.

M&A activity in the SaaS sector remained a strong point last year, and growth rates are projected to surpass and even double those for on-site software solutions by 2015. Thats not to say that on-site software solutions will vanish; expenditures for that are expected to remain above SaaS in 2015 and beyond.

In the biggest terms, its worth noting that SaaS is a field that everyone is trying to break into, and practically every ISB either offers SaaS or has it under development.

One of the most exciting things about SaaS is that on the public market, it is richly valued at 4.4x revenue, almost double that of comparable valuations for traditional software. The average SaaS transaction multiple in 2012 was 3.6x revenue. So you can see why were paying attention.

Its important to note that these multiples are reserved for the companies that are showing growth. Theres a very clear pattern that shows revenue multiples for publicly-traded SaaS companies correlates very directly with their year over year growth. The best examples of this are sector leaders like Salesforce.com and Concur, who brought in 25-30% year over year growth, and who were rewarded with multiples over 7x revenue!

So keep your eye on that growth rate, particularly when it comes to SaaS companies and their valuations. Even a minor drop in nominal growth could result in a serious valuation hit.

Posted by , Chairman Emeritus on 11 February 2013
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