Tech Industry Analysis

Convio (CNVO) gets acquired by Blackbaud (BLKB) for $16/share - MGI Analyst Blog

Convio (CNVO) gets acquired by Blackbaud (BLKB) for $16/share - MGI Analyst Blog.

New Research: Is SaaS Ready for Manufacturing Solutions? - MGI Analyst Blog

New Research: Is SaaS Ready for Manufacturing Solutions? - MGI Analyst Blog.

New Research: Is Manhattan Associates an Acquisition Target?

New research report: Is Manhattan Associates an Acquisition Target? @mgiresearch #MANH

Despite the huge cash hoard sitting on software companies balance sheets, perennial predictions of a massive wave of 2011 industry consolidation have not materialized. SaaS company mergers are few and far between while enterprise software companies have been cautious to avoid any non-accretive deals. We believe that amongst several possible industry merger transactions, Manhattan Associates, a provider of supply chain execution software is now themost likely acquisition target. Among the short-list of potential acquirers are SAP, Oracle, Infor, and JDA Software as well as a few private equity firms. 

New Research: Getting the Right IT Deal - 20 Questions with Joe Galuszka

New Research: A significant amount of time, money and effort is spent in the evaluation, selection, negotiationand acquisition of technology assets. In spite of all of this effort, many companies chronically over-pay for those assetsand sign sub-optimal contractual agreements. Andrew Dailey of MGI Research recently conducted an in-depth interviewwith Joe Galuszka, a widely recognized expert in the area of IT Contract Optimization, Joe works directly with CIOs and CFOs to assist them in maximizing their negotiation leverage and achieving additional cost savings and advantageous contract terms and conditions. He has over 25 years of experience in the IT industry, and Joe’s negotiation experience spans both client buy-side and vendor sell-side engagements.

New Research - CIO Critical Success Factors: 20 Questions with Martha Heller

New Research:  - CIOs today face four major disruptive trends: cloud computing, mobile computing, social networking, and agile development. In addition to determining how to best leverage those trends for the business, CIOs are increasingly challenged with risks of security breaches, system downtime, and rising user demands for easier to use, faster to deploy IT systems to support today’s fast-moving, global business requirements. Andrew Dailey of MGI Research recently conducted an in-depth interview with Martha Heller, a well-regarded executive search consultant and Contributing Editor of CIO magazine. Based in Boston, Martha has placed CIOs and senior IT leaders at clientcompanies like Edison Learning, Key Bank, Hertz, BJ’s Wholesale Club and Providence Equity Partners, among others. Prior to executive search, Martha was the founder and Managing Director of CIO magazine’s CIO ExecutiveCouncil.

New Research - 20 Questions with CEO of CollabNet Bill Portelli

Agile is a massive change agent that is dramatically transforming timeframes, quality and economics of software development. As part of “20 Questions”- an MGI Research Interview Series with leading technology industry innovators, investors, and executives, Andrew Dailey recently conducted an in-depth interview with Bill Portelli, CEO and co-founder of CollabNet, a leading vendor of Agile tools and services. Prior to CollabNet, Bill was Senior VP and GM of Cadence Design Systems’ global consulting business. Since co-founding CollabNet with Tim O’Reilly and Brian Behlendorf (co-founder of the Apache Project), Bill has been at the forefront of collaborative software development tools for global enterprises and the SaaS delivery model.

 

New Research - 20 Questions with CEO of FinancialForce.com Jeremy Roche

In this 20 Questions interview, FinancialForce.com CEO Jeremy Roche shares his views on building financial apps in the cloud, leveraging the Force.com platform and on strategies for building a successful SaaS business.

20 Questions with Tony Leng on CIO Success in the 21st Century

In a new research report (http://bit.ly/ihyzrk) published by MGI Research, Tony Leng - a leading CIO executive recruiter with Hodge Partners, defines key success factors for CIOs and how CIOs can position themselves for top non-IT jobs within a company.

20 Questions on SaaS with Otto van der Tang, CEO of Sofon Software

New Research Report - http://bit.ly/gYeXh4 #SaaS #Cloud

Sofon is a rapidly growing SaaS and Enterprise Software provider of sales configuration - or as the company calls it guided selling solutions. In this in-depth 20 Questions session, Sofon CEO - Otto van der Tang shares his practical, "from the trenches" views on Enterprise Software and SaaS markets, Cloud Integration and Licensing Issues and the key trends that are currently impacting SaaS vendors and users. Privately held and privately funded, Sofon is a profitable, Netherlands-based vendor with numerous Fortune 500 clients in over 50 countries.

 

SaaS vs Enterprise Software Valuations - What Price is Right

Having survived the Great Recession, the Software-as-a-Service (SaaS) business model is entering the realm of mainstream IT buyers. SaaS has become the model of choice for most new software ventures. As we predicted in late 2007, valuation multiples of public SaaS companies declined to near parity with valuation multiples of traditional enterprise software (on-premise) firms during the economic crisis of 2008 and early 2009. In the past 18 months this convergence was broken as equities of SaaS companies rocketed forward with an average appreciation of over 44% during the past 52 weeks and some firms showing triple digit percentage gains. Several SaaS firms now sport Ev/Sales multiples of 11X revenue and greater. Taking a checkpoint on the SaaS scenario for the next 52 weeks and beyond, we believe there are several key questions worth examining: 

• Are the current SaaS valuation multiples sustainable? Are SaaS companies overvalued? If so, which ones? Are any SaaS companies undervalued?
• What is the right valuation methodology for a SaaS company?
• Are enterprise software companies closing the valuation gap or are they destined to permanently trail behind?
• Will SaaS companies close the profitability gap relative to enterprise software, or is the SaaS business model inherently less efficient?
• What drives valuation of software companies (SaaS and enterprise software alike) today?

In a recent research report: "SaaS Valuation: What Price is Right?" we analyzed valuation and operating performance parameters of 103 publicly listed software companies, of which 19 can be classified as SaaS companies (and a few more would lay claim to being SaaS). We tallied the performance, operating efficiency and valuation drivers, and found some surprising results.

SaaS companies continue to hold a valuation premium to enterprise software companies. This gap has been driven by SaaS growth characteristics. However, enterprise software companies are presently closing the short-term growth gap. One could attribute this to a post-recessionary bounce or anything else, but the short term growth of enterprise software companies is now within striking distance of many SaaS firms. Despite narrowing the gap in growth, the valuation gap remains as wide as the Amazon during the rainy season. As of March 9, 2011, the average SaaS company commanded a Price/Sales multiple of 5.45, up from 3.15X in mid 2009.  In comparison, the average Price/Sales multiple for enterprise software firms rose from 2.84X to 3.97X. SaaS revenue multiples rose by 73% from mid-2009, while enterprise software multiples rose by about 43% during the same period.

The single biggest driver of valuation multiples for SaaS companies appears to be revenue growth. Company size continues to matter for SaaS companies as larger cap SaaS names outperformed their smaller rivals. Profitability, efficiency and cash flow are mostly ignored by SaaS investors, at least for now. Given the SaaS growth profile, this may be fine, - as long as markets continue looking the other way and interest rates are low. Yet, lack of efficiency is typically something that stays with companies and is often part of the corporate DNA.  To put it mildly, it will be pretty tough to change it if the economic environment sours or investor scrutiny sharpens.

Operating profitability of SaaS companies continues to lag. Given the impressive growth of SaaS firms, investor concerns, if they do exist, are seemingly taking a back seat to the argument for investing in growth and taking market share. Given the nascent nature and low adoption rates of SaaS, this idea still has legs. One could argue that SaaS companies do not become a meaningful business until they reach $500Mil in revenue and are till then, for all intents and purposes, publicly trading venture stage companies. Theory aside, history of the software industry shows time and again that delivering profitable growth is a management discipline learned at a young age. Businesses that eschew profits for maximum growth are often unable to deliver consistent profitability. Whether it is a management discipline problem or a business model flaw is difficult to determine, and beside the point for shareholders. There is no real reason why a $200 million software company cannot grow the top line 30% or more and also deliver a modest level of profitability.

In assessing all the data, it appears that relative to historical performance norms, valuation multiples for all software equities are stretched and look vulnerable in the short to mid-term, especially if Q1 2011 numbers and/or guidance come in light.  Some of the higher multiple, low MGI-score SaaS equities like SuccessFactors and others, could be particularly effected by an investor pullback.  At present, there appears to be little room for error in managing these high-growth, high multiple companies. We estimate that barring any exogenous negative events, SaaS companies have about nine to twelve months to get their act together with regard to profitabilty. In twelve months or less, we will likely see a fresh crop of social media companies with explosive growth coming public - companies like Groupon, Facebook, and Twitter. When they do, the high multiple torch and attendant investor interest will pass from SaaS names to the new investor favorites. 

For content of the full research report on SaaS Valuation, visit our website.