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Q3 2014 Software Equity Group, L.L.C. 12220 El Camino Real Suite 320 San Diego, CA 92130 [email protected] (858) 509-2800 The Software Industry Financial Report
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Jul 14, 2018

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Page 1: The Software Industry Financial Report Q3 - Sandhillsandhill.com/.../software_industry_financial_report_3q14_sandhill.pdf · The Software Industry Financial Report. ... SOFTWARE INDUSTRY

Q3

20

14

Software Equity Group, L.L.C.

12220 El Camino Real

Suite 320

San Diego, CA 92130

[email protected]

(858) 509-2800

The Software Industry

Financial Report

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 2

About Software Equity Group

Leaders in Software M&A 5

Extensive Global Reach 6

Leading Market Position

Software Industry Macroeconomics

U.S and Global GDP 8

U.S. GDP and Unemployment 9

Global IT Spending 10

E-Commerce and Digital Advertising Spend 11

Stock Market Performance 12

Public Software Financial and Valuation Performance

The SEG Software Index 14

The SEG Software Index: Financial Performance 15-16

The SEG Software Index: Public Market Multiples 17-18

The SEG Software Index by Product Category 19

The SEG Software Index by Product Category: Financial Performance 20

The SEG Software Index by Product Category: Public Market Multiples 21

Public SaaS Company Financial and Valuation Performance

The SEG SaaS Index 23

The SEG SaaS Index: Financial Performance 24-25

The SEG SaaS Index: Public Market Multiples 26-28

The SEG SaaS Index by Product Category: Financial Performance 29

The SEG SaaS Index by Product Category: Public Market Multiples 30

Public Internet Company Financial and Valuation Performance

The SEG Internet Index 32

The SEG Internet Index: Financial Performance 33-34

The SEG Internet Index: Public Market Multiples 35-36

The SEG Internet Index by Product Category 37

The SEG Internet Index by Product Category: Financial Performance 38

The SEG Internet Index by Product Category: Public Market Multiples 39

SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 3

SOFTWARE INDUSTRY FINANCIAL REPORT CONTENTS

Software Industry M&A Market Update

Software/SaaS M&A Deal Volume and Spending 41

Software M&A Exit Multiples 42

Software M&A by Ownership Structure and Size 43

Software M&A by Vertical and Horizontal Markets 44

Software M&A Deal Volume by Product Category 45

Software M&A Exit Valuations by Product Category 46

SaaS M&A Deal Volume and Exit Multiples 47

SaaS M&A by Product Category 48

SaaS M&A 2Q14 Transactions 49-51

Internet M&A: Deal Volume and Exit Multiples 52

Internet M&A: By Product Category 53

Appendix

SEG Software Index Key Metrics 55-58

SEG Software Index Key Metrics by Product Category 59-60

SEG SaaS Index Key Metrics 61-62

SEG SaaS Index Key Metrics by Product Category 63

SEG Internet Index Key Metrics 64-66

SEG Internet Index Key Metrics by Product Category 67

2Q14 Select Public Sellers 68

2Q14 Mega Deals 69

2Q14 Most Active Buyers 70

About Software Equity Group 71

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved

ABOUT SOFTWARE EQUITY GROUP

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 5

• Industry leading boutique investment bank, founded in 1992, representing public and private software and internet companies seeking:

• Strategic exit• Growth capital• Buyout • Inorganic growth via acquisition• Buy and sell-side mentoring• Fairness opinions and valuations

• Sell-side client revenue range: $5 - 75 million

• Buy-side clients include private equity firms and NASDAQ, NYSE and foreign exchange listed companies

• Clients span virtually every software technology, product category, delivery model and vertical market

• Global presence providing advice and guidance to more than 2,000 private and public companies throughout US, Canada, Europe, Asia-Pacific, Africa and Israel

• Strong cross-functional team leveraging transaction, operating, legal and engineering experience

• Unparalleled software industry reputation and track record.

• Highly referenceable base of past clients

We Do Deals.

LEADERS IN SOFTWARE M&A

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 6

SEG Research Distribution

Current Sell-side Representation

Recent Sell-side Representation

• SEG currently represents software companies in the United States, Canada, France, Germany, Australia & Saudi Arabia

• In addition to the countries listed above, SEG has recently represented software companies in the United Kingdom, France, Netherlands, Israel, and South Africa

• SEG’s Quarterly and Annual Software Industry Equity Reports and Monthly Flash Reports are distributed to an opt-in list of 70,000 public software company CEOs, software entrepreneurs, private equity managing directors, VCs, high tech corporate lawyers, public accountants, etc. in 76 countries.

EXTENSIVE GLOBAL REACH

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved

SOFTWARE INDUSTRY MACROECONOMICS

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 8

U.S. AND GLOBAL GDP

U.S. GDP (% YoY Change)Global GDP (% YoY Change)

Sources: Worldbank, The Economist, Council of Economic Advisors, and Statista

• The latest IMF forecast portrays a gradually improving global economy that remains susceptible to a host of economic and geopolitical downside risks.

• The IMF’s most recent forecast predicts U.S. GDP will grow 2.2% in 2014, the same as 2013’s growth rate. Temporary setbacks, such as an unusually harshwinter, constrained GDP growth in the first quarter. According to the IMF, the U.S. economy rebounded in Q2, in part due to improved housing activity,declining unemployment and steady payroll gains.

• According to the IMF, global GDP is expected to inch up to 3.5% in the second half of 2014 and 3.8% in 2015, while GDP growth in developed nations isexpected to grow at a median of 1.8% in 2014, a modest improvement over 2013’s 1.4%. Key growth drivers include an improving labor market, betterhousehold balance sheets, and a favorable economic climate. In emerging markets, annual GDP growth is expected to slow slightly from 2.8% in 2013 to2.7% in 2014, but is predicted to rebound in 2015 to 2.9%.

• The IMF acknowledged its forecasts could be imperiled by recent geopolitical events and renewed threats of defaults and recessions among EEC membercountries.

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U.S. GDP AND UNEMPLOYMENT

• According to February’s Federal Reserve survey of 43 economists, GDP growth in the U.S. for 3Q14 is forecast to be 3.0%. For the year, expectations arethe U.S. economy will grow 2.1%, as a surprisingly weak first half tempered expectations for a more robust annual growth rate in 2014.

• Fewer than 15% of economists surveyed by the Fed predicted the U.S. economy will grow more than 3.0% in the third quarter of 2014. However, morethan 40% believe the U.S. economy will grow 3.0% or greater in 2015.

• The Labor Department reported the unemployment rate at the end of 3Q14 was 6.1%, a noteworthy decline from 1Q14’s 6.7%, and the lowestunemployment rate since 2008. The labor participation rate showed minimal decline, edging down slightly to 62.7% in September, a 35 year low.

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 10

GLOBAL IT SPEND

Sources: Global IT spending chart is a blended average of Goldman Sachs, IDC, Forrester, and Gartner forecasts. IT Spending by Category chart from Forrester.

• At the outset of 2014, analysts at Goldman Sachs, Gartner and elsewhere projected Global IT spending in 2014 would increase 4%, a marked improvementfrom the tepid 2.0% growth that has prevailed during the past two years.

• Revised forecasts predict average global IT spending will increase only 3.3% in 2014, citing a weak 1H 2014 and continuing economic uncertainty andgeopolitical upheaval. Gartner, however, cut its forecast from 3.2% to 2.1%, citing a tougher competitive environment that is placing significant pricepressure on suppliers.

• Forrester estimates software will account for 26% of all tech spending, leading all other categories. According to Forrester, “Software’s leading position isnot a surprise, because it is the focal point for tech innovation today, whether that innovation takes the form of cloud computing and adoption of SaaS,PaaS, smart computing and big data, real-time predictive analytics and smart process apps, or mobile computing and mobile apps and enterprise appstores.”

Global IT Spending by CategoryGlobal IT Spending (% YoY Change)

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved 11

STOCK MARKET PERFORMANCE

• Technology stock prices lost more ground in 3Q14, especially high-growth, SaaS based companies that have been unable to recapture pre-recessiongrowth rates.

• The Nasdaq posted the best return of the three major stock indices in 3Q14, finishing up 7.6%. The S&P finished close behind, up 6.7%. Surprisingly, in anenvironment where investors flocked to value stocks in 2Q14, the DOW performed worst among the three major U.S. stock market indices, closing 3Q14with a gain of only 2.8%.

• The SEG SaaS Index posted the greatest Q3 decline in median stock return among our six tracking indices. In early March, our SaaS Index peaked at a9.2% gain, only to plunge dramatically in the second quarter. The SEG SaaS Index lost another 4.1% in Q3 to close 3Q14 down 14.1% for the year, makingit the worst YTD performer of our three tracking indices. In addition to macro economic concerns, many were concerned SaaS valuations had grown toorich. More on SaaS median EV/Revenue multiples later in this report.

• The SEG Software Index, consisting largely of mature, profitable software providers slowed its descent, finishing the third quarter 4.6%, lower, comparedto a decline of 8.4% in May, its lowest point for the year.

(35.0%)

(30.0%)

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

Jan 2014 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014

DOW S&P NASDAQ SEG SW Index SEG SaaS SEG Internet Index

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THE SEG SOFTWARE INDUSTRY FINANCIAL REPORT

PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

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THE SEG SOFTWARE INDEX

• The SEG Software Index tracks public software companies thatprimarily offer on-premise software under a perpetual license withannual M&S.

• The SEG Software Index is currently comprised of 141 publicsoftware companies*.

• The number of public companies comprising the SEG Software Indexhas declined steadily over the past ten years, as many on premiseproviders have migrated to a SaaS business model.

• Median Cash and Equivalents of the SEG Software Index grew YoY by23.8%, despite a markedly lower median EBITDA margin and medianTTM revenue growth rate.

Measure 3Q13 4Q13 1Q14 2Q14 3Q14

EV/Revenue 3.0x 3.2x 3.2x 3.0x 2.9x

EV/EBITDA 13.8x 14.7x 15.5x 14.8x 15.3x

EV/Earnings 28.1x 26.9x 27.2x 26.2x 27.0x

Gross Profit Margin 67.9% 67.5% 66.6% 66.5% 66.3%

EBITDA Margin 17.8% 17.6% 17.3% 17.1% 16.4%

Net Income Margin 8.2% 8.5% 8.6% 8.2% 8.5%

TTM Revenue Growth 9.9% 8.9% 8.5% 8.2% 8.0%

TTM Total Revenue ($M) $451.5 $449.8 $484.4 $532.3 $558.8

TTM EBITDA Growth 6.4% 6.7% 5.7% 5.1% 6.1%

TTM Total EBITDA ($M) $82.8 $88.0 $86.5 $90.2 $100.1

Cash & Eq ($M) $153.2 $181.7 $175.6 $203.4 $189.6

Current Ratio 1.9 2.0 2.0 2.0 2.1

Debt / Equity Ratio 26.5% 33.8% 34.9% 31.1% 37.7%

SEG - Software: Median Metrics

* A number of on-premise software companies are transitioning to subscription based delivery and pricing models; however their SaaS revenue contribution is insufficient for them to be deemed primarily SaaS. ** See appendix for a complete list of companies in The SEG Software Index and detailed financial and trading metrics

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THE SEG SaaS INDEX

PUBLIC SaaS COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

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THE SEG SaaS INDEX

• The SEG SaaS Index tracks public companies that primarily offerhosted, on-demand software under a subscription and/or transactionbased pricing model.

• The SEG SaaS Index is currently comprised of 52 publicly traded,pure-play SaaS companies*.

* See appendix for complete list of companies in the SEG SaaS Index

15

SEG - SaaS: Median Metrics

Measure 3Q13 4Q13 1Q14 2Q14 3Q14EV/Revenue 6.9x 7.5x 7.6x 6.5x 6.2xEV/EBITDA 36.8x 46.8x 65.4x 51.8x 56.0xEV/Earnings 146.4x 102.7x 159.0x 89.9x 145.9xGross Profit Margin 67.7% 67.2% 68.3% 65.8% 65.2%EBITDA Margin -5.1% -8.3% -4.0% -1.7% -2.4%Net Income Margin -12.4% -14.2% -16.5% -15.8% -14.5%TTM Revenue Growth 28.1% 28.5% 30.5% 29.3% 25.8%TTM Total Revenue ($M) $107.9 $120.4 $129.3 $132.6 $140.5TTM EBITDA Growth 16.2% 19.8% 6.0% 16.3% 12.9%TTM Total EBITDA ($M) -$4.4 -$5.2 -$4.5 -$4.4 -$3.4Cash & Eq ($M) $69.8 $80.1 $87.0 $92.0 $107.1Current Ratio 1.7 2.4 2.3 2.3 2.1Debt / Equity Ratio 11.3% 13.4% 28.3% 15.9% 5.9%

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THE SEG INTERNET INDEX

PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE AND MARKET MULTIPLE TRENDS

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THE SEG INTERNET INDEX

• The SEG Internet Index tracks public companies that primarily offerB2C and B2B solutions over the Internet using a wide array of pricingmodels.

• The SEG Internet Index is currently comprised of 103 public Internetcompanies*.

* See appendix for complete list of companies in the SEG Internet Index

17

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SOFTWARE INDUSTRY M&A MARKET UPDATE

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SOFTWARE EQUITY GROUP | Q3 2014 SOFTWARE INDUSTRY FINANCIAL REPORTCopyright © Software Equity Group, LLC, All Rights Reserved

Average On-Premise Software Deal SizeU.S. Software Mergers & Acquisitions Activity

• There were 462 software M&A transactions in 3Q14. Deal activity over the past three years has remained consistently robust.

• Software M&A spending totaled $39.4 billion in 3Q14, and has increased each of the past five quarters, buoyed by a plethora of mega deals (EV>500M).

• SAP’s $7.7 billion acquisition of Concur Technologies was the largest for the quarter. In addition to SAP/Concur, Q3 featured seventeen other On-premise/SaaS/Internet mega deals (EV > $500M), including Zillow’s acquisition of Trulia ($3.1B EV, 14.8x EV/Revenue multiple); Cognizant Technology’spurchase of Trizetto ($2.7B, 3.8x estimate); Microsoft’s acquisition of Mojang ($2.5B); Micro Focus’ acquisition of The Attachmate Group ($2.3 billion, 2.5xestimate); and Thoma Bravo’s acquisition of Compuware ($2.1 billion, 2.9x).

• Megadeals aside, most buyers continued to focus on small and mid-sized acquisitions in 3Q14, in line with our 2013 and 2014 Buyers Surveys, in responseto which 72% of buyers indicated they would focus on deals ranging from $10M - $99M in 2014.

• The average software M&A purchase price has increased each of the past four quarters, reaching $64M in 3Q14.

3Q14 SOFTWARE / SAAS M&A DEAL VOLUME AND SPENDING

19

$42 $41 $41 $42

$36$39

$36 $35$40

$43

$53$54

$64

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

TT

M A

ver

age

Dea

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ue

(Mil

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• The median on-premise software exit multiple in 3Q14 inched up to2.4x in 3Q14 after holding steady at a respectable 2.3x EV/Rev for thepast four quarters.

• Historically, a median 2.4x EV/Revenue exit multiple is at the upperend of the valuation range for on-premise software companies. Thatquarterly median valuation was beaten only twice since 2007, in3Q10 and 2Q11, when it climbed to 2.5x before retreating thefollowing quarter.

SOFTWARE M&A EXIT MULTIPLES

• On a TTM basis, 40.7% of all on-premise software targets in 3Q14were acquired for 2.0x TTM revenue or less, and 69.9% for 3.0x orless.

• Most targets receiving an exit multiple of 3.0x or higher belonged tocurrently “hot” software product categories that are experiencingrapid market adoption and growth, including Systems Management,Engineering & PLM, and Electronic Design Automation.

• Despite Q3’s many mega deals, the quarter also featured a number ofsmaller, but noteworthy transactions, including Sage Software’sacquisition of ERP vendor Exact Software Deutschland ($22 million,1.6x TTM revenue); and KB Advanced Technologies’ acquisition ofupstream oil & gas software provider FEESA ($19.2 million, 4.9x TTMrevenue).

Median EV/Revenue Exit Multiple DistributionMedian Exit Multiples

20

2.3x 2.3x 2.3x 2.3x 2.4x

11.5x12.9x 13.3x

18.1x 17.7x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

3Q13 4Q13 1Q14 2Q14 3Q14

EV/Revenue EV/EBITDA

16.7%

24.0%

29.2%

10.4% 9.4%

2.1%

8.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

<= 1.0x > 1.0x &<= 2.0x

> 2.0x &<= 3.0x

> 3.0x &<= 4.0x

> 4.0x &<= 5.0x

> 5.0x &<= 6.0x

> 6.0x

TTM Revenue Exit Multiple Bins

% o

f D

eal

s-

3Q

14

TTM

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Median SaaS EV/Revenue Exit MultiplesSaaS M&A Volume

• There were 118 SaaS M&A transactions in 3Q14, the most on record for any quarter and about 250% greater than three years ago.

• The median TTM EV/Revenue exit multiple of SaaS transactions was 4.1x in 3Q14, virtually the same as in three of the past four quarters.

• SaaS transactions in the third quarter that featured especially noteworthy exit multiples included SAP’s acquisition of Concur Technologies ($7.7 billion,11.5x TTM revenue); ServiceNow’s acquisition of Neebula Systems ($100 million, 20.0x revenue estimate); and PTC’s acquisition of Aexda ($170 million,7.0x revenue estimate).

• The median SaaS exit multiple was 71% greater than the median on-premise software exit multiple in 3Q14 (4.1x vs 2.4x).

SaaS M&A: DEAL VOLUME AND MEDIAN EXIT MULTIPLES

21

4.3x4.1x

4.6x

4.0x 4.1x

3Q13 4Q13 1Q14 2Q14 3Q14

48

68 6559

94 9486

10497 103 104 108

118

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

Sa

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SaaS M&A Deals SaaS as % of Software

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Internet M&A Volume

INTERNET M&A: DEAL VOLUME AND EXIT MULTIPLES

Median Internet EV/Revenue Exit Multiples

• After dropping sharply in the first quarter, Internet M&A deal volume increased steadily over the second and third quarters of this year.

• There were 241 Internet M&A transactions in the third quarter, a 12% increase from 2Q14’s 215 deals. In both 2013 and 2014, we’ve witnessed asubstantial decrease in M&A activity during Q1 followed by steadily increasing M&A activity during the following quarters. The first quarter has become atime to assess and digest holiday on-line spending results, discern changing trends and establish new acquisition priorities. We expect continued M&Agrowth in the fourth quarter.

• The median EV/Revenue exit multiple for Internet sellers in 3Q14 was 2.1x, a notable increase from the past four quarters.

• Leading 3Q14 Internet transactions included Facebook’s acquisition of LiveRail ($500 million, 5.0x EV/Revenue); Rakuten’s acquisition of EbatesPerformance Marketing ($1 billion, 6.0x EV/Revenue); Zillow’s acquisition of Trulia ($3.1 billion, 14.8x EV/Revenue); Varde Partners acquisition ofBancopopular-e ($1.3 billion).

22

1.9x 1.9x 1.8x 1.7x2.1x

3Q13 4Q13 1Q14 2Q14 3Q14

231

256

195

215

241

3Q13 4Q13 1Q14 2Q14 3Q14

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To download the remaining portions of Software Equity Group’s complimentary Software Industry Flash Report, which includes the

complete list of software M&A transactions as well as detailed financial and market performance of more than 250 publicly traded software, SaaS, and Internet companies, sorted across

nearly 30 product categories, visit our website: http://www.softwareequity.com/research_flash_reports.aspx