Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Nordic SaaS Report 2020
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
2
1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud
3. SaaS Companies and Economic Downturns
4. SaaS Metrics 5. Public Benchmarks
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
3
Redeye Software Team
Havan Hanna [Analyst] [email protected]
With a university background in both economics and computer technology, Havan has an edge in the work as an analyst in Redeye’s technology team. What especially intrigues Havan every day is coming up with new investment ideas that will help him generate above market returns in the long run.
Fredrik Nilsson [Analyst] [email protected] Fredrik Nilsson is an equity analyst within Redeye’s technology team. He has an MSc in Finance from University of Gothenburg and has previously worked as a tech-focused equity analyst at Remium.
Kristoffer Lindström [Analyst] [email protected] Kristoffer Lindström has both a BSc and an MSc in Finance. He has previously worked as a financial advisor, stockbroker and equity analyst at Swedbank. Kristoffer started to work for Redeye in early 2014, and today works as an equity analyst covering companies in the tech sector with a prime focus on Gaming and Software.
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
4
1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud
3. SaaS Companies and Economic Downturns
4. SaaS Metrics 5. Public Benchmarks
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
5
Why invest in SaaS & the Cloud SaaS and Cloud companies provide investors the opportunity to benefit from ongoing secular growth
trend, the shift from on-premise enterprise infrastructure to the Cloud. Other trends within the SaaS
space that works in favor for investors are: Consumerization of IT, and the rise of the subscription
economy and investors craving for recurring revenue.
The BIG one: The shift to the Cloud
The big trend that shapes the Cloud industry is the
shift from on-premise software spend to Cloud. This
is a secular shift that has been ongoing for many
years; however, the transformation is still in the early
days within some verticals. The Cloud service, with
the most substantial revenue, is the application layer
(SaaS).
Global Cloud Service Revenue (bn$)
Year ‘18 ‘19 ‘20E ‘21E ‘22E
BPaaS 41.7 43.7 46.9 50.2 53.8
PaaS 26.4 32.2 39.7 48.3 58.0
SaaS 85.7 99.5 116.0 133.0 151.1
CLd. Mng & sec.
10.5 12.0 13.8 15.7 17.6
IaaS 32.4 40.3 50.0 61.3 74.1
Total 196.7 227.8 266.4 308.5 354.6
In this report we dig deeper into:
SaaS adoption rates by country and application
vertical
Cloud IT spending percentage
Projected growth rates for SaaS
Public market valuation implications
Consumerization of IT
Another trend affecting the Cloud service industry is
the consumerization of IT. That means that the
applications sued in work more resemble consumer
tech products when it comes to usability, UX and UI.
This has also led to another buying pattern within
organizations as the buy decision many times have
become decentralized where the end-user of the
product might be the one who decides which service
to use.
The rise of subscription economy
In many ways Cloud technology is the enabler of the
subscription economy, but the consumer and user
behavior fuel the rise of subscription even further.
The subscription economy is a trend both within B2C
and B2B but is extremely apparent within the
software market where a focus has shifted from
providing a product to an ongoing service.
Investors and recurring revenue
What can be better than always start with an almost
full bucket every month? Well according to investors
nothing is better than recurring revenue. The SaaS
pricing model creates:
Stability
Predictability
High margins
Lower business risk
All the above factors are the reason why investors
crave recurring revenue companies and price them
high. In the early days of SaaS many market
participants did not understand the model, with the
argument that it’s better to have the money in the
bank today than in the future. However, it has
become apparent that the Life-time-value is much
higher for the same type of service when people or
companies pay on a recurring basis over a long time-
period. If the companies have the right type of
structure on their offering there will also be
significant upsell possibilities per client, which can be
compared to selling a one-time license to use a
software with a small support fee.
Source: Gartner
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
6
Source: Redeye Research, Statista, IDC
Software overview We have gathered Cloud service market data which highlights that in many areas, the shift to the Cloud
is just in its early days, the transition will continue for many years to come.
Large variations in SaaS adoption rates
The adoption of SaaS among businesses in Europe
varies substantially from country to country. The
Nordic countries are frontrunners in the migration
towards SaaS. All Nordic countries had a penetration
rate above 50% in 2018 – twice the EU-28 average of
26%. UK, Ireland, and Benelux have rather high
penetration rates of ~45%. DACH and southern
Europe lagged with a penetration rate around 20%.
Interestingly, the increase in penetration from 2014
to 2018 was, on average, larger in countries with high
adoption rates, widening the gap in the SaaS
penetration rate even further.
The difference in SaaS adoption among different
types of software is even greater than the regional
difference. Collaboration, Human Capital
Management (HCM), and Customer Relationship
Management (CRM) are estimated to have a SaaS
penetration of 70-80% this year. Thus, these software
segments are arguably close to reaching maturity in
terms of SaaS penetration. At the bottom, with
estimated SaaS adoption rates of below 10%, we find
operations, manufacturing, and engineering-related
software. Thus, industrial software is lagging in SaaS
adoption.
Interestingly, the increase in penetration from 2015
to 2020 is, on average, expected to be larger in
segments that had a high adoption level in 2015.
Thus, like regarding regions, the gap between early
adopters and laggards is expected to have increased
since the mid-10s.
Only 25% of IT spend heading for the Cloud
While the adoption of SaaS is significant in several
regions and segments, as mentioned before, only
25% of IT spend is currently allocated to the cloud
(SaaS and IaaS/PaaS), according to Flexera. For
comparison, 22% of IT spend is allocated to On-
premises software, suggesting that SaaS still can
gain significant market shares.
53%
22%
7%
18%
IT spend
Other On-premises software SaaS IaaS/PaaS58% 60%
49%
25% 24%
12% 12%6% 6% 2%
81%71% 69%
38% 36%
24% 24%14%
9% 5%
0%
20%
40%
60%
80%
100%
Global SaaS penetration rate 2015-2020, by application
2015 2020E
0%
10%
20%
30%
40%
50%
60%
70%
Fin
lan
d
Sw
ed
en
Den
mark
No
rway
Netherlan…
Irela
nd
UK
Belg
ium
Est
on
ia
Cze
chia
Italy
Au
stri
a
Germ
an
y
Sp
ain
Fran
ce
Gre
ece
Po
lan
d
Use of could computing services in Europe
2014 2018
Source: Redeye Research, Eurostat
Source: Redeye Research, Flexera 2020 State of Tech Spend
Survey
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
7
The numbers show a clear trend towards IT spend
moving from On-premises to cloud. ~80% of
respondents expect to increase their spend on
IaaS/PaaS and SaaS while ~50% expect to lower
their spending on On-premise software.
Solid growth trend expected to continue
While Gartner expects a slowdown from an
impressive CAGR of 33% 2015-2019 – although,
from low levels, SaaS growth is expected to remain
at healthy levels, as Gartner forecasts a 15% CAGR
2019-2022.
Given a current SaaS adoption of +60% in several
software segments and regions, SaaS has reached a
more mature state and slower – although still
substantial – overall market growth seems
reasonable. However, in many software segments
and regions, the SaaS adoption rate is modest. As
mentioned earlier, EU28 had a SaaS penetration rate
of only 26% in 2018. The growth potential going
forward is likely to vary substantially depending on
the software segment and region.
Solid operational performance results in significant premiums Companies that can combine high growth with
decent margins or vice versa are unsurprisingly
valued at high multiples, as high combined growth
and margin are indicating that the company can
grow its sales efficiently. Companies with a
combined sales growth and EBIT margin of 40% or
above are generally considered to be successful
SaaS companies. However, several other important
factors determine valuation—for example, company
size, the share of recurring revenue, and total
addressable market.
Fortnox and Admicom, among the largest companies
in our comparison with a high share of recurring
revenue and impressive operational performance, are
trading at significant premiums relative to the rest.
The graph above is only a snapshot of the total sales
growth rate and margin, in this case, for 2019. Thus,
one-off items, affecting either EBIT or sales growth,
or reductions of service revenue, will tilt the numbers.
For example, both Formpipe and Qbank had higher
growth in recurring revenue relative to total sales
growth, as their service revenue declined in 2019.
Also, the valuation of the companies is based on
future sales growth and margins and not what
happened in 2019. However, as many companies
lack estimates and as historical sales growth in
recurring revenues has a high correlation with future
growth, we argue that the 2019 snapshot is
interesting.
86% 81%
23%
-3%
-4%
-55%-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
IaaS/PaaS SaaS On-premisessoftware
Expected Change in IT Spend
Increase Decrease
31
4859
86100
116
133
151
0
20
40
60
80
100
120
140
160
2015 2016 2017 2018 2019E 2020E 2021E 2022E
Global public cloud application services (SaaS) bn$
247
ADMCM
AGILC
CARA
FNOX
FPIP LEADD
LIME
LITI QBNKUPSALE
VIT B
0
5
10
15
20
25
-20% 0% 20% 40% 60% 80%
EV/S
ales
Sales growth + EBIT margin 2019
EV/S vs Sales Growth + EBIT margin 2019
Source: Redeye Research, Flexera 2020 State of Tech Spend
Survey
Source: Redeye Research, company reports Source: Redeye Research, Statista, Gartner
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
8
1. Introduction to the Redeye Software Team
2. Why Invest in SaaS & the Cloud
3. SaaS Companies and Economic Downturns
4. SaaS Metrics 5. Public Benchmarks
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
9
SaaS Companies and Economic Downturns As of this writing we are in the midst of the corona crisis with a lot of human suffering. The outbreak has turned into
a fully-fledged economic crisis as the virus containment measures affect business of all sorts. In this section, we
discuss SaaS and economic downturns.
Robert Smith, CEO and founder of Vista Equity
Partners famously said: "Software contracts are
better than first-lien debt”. In the coming months, this
claim will certainly be put to the test. We assume that
software contracts will at best be comparable to
first-lien debt and should by no means be immune to
economic downturns, due to the following reasons:
Software payments terms will change
significantly as fewer customers will pay cash
upfront and payment terms should lengthen,
impacting working capital. Accompanied by
growth slowdown it will have a big impact on
SaaS companies.
Bankruptcies among SMBs are already a fact
and the number is likely to increase, and this
group will not be paying their software bills. Also,
businesses that are effectively shut down (i.e.
retailers, hotels, airlines etc.) will probably not be
paying their software bills on time.
To help customers and to reduce churn
discounting will probably go up.
More broadly, software contracts will be
adjusted to reflect lower utilization rates and
fewer seats.
Usage-based models billed in arrears were
gaining ground at the expense of multi-year
subscription models billed upfront. The current
recession will accelerate this transition, which
will impact working capital and cash flow.
The overall impact (or cyclicality) will be a
multivariate output of different variables, we highlight
some of them below:
Customer size: large companies (i.e. customers)
will be much more resilient than SMBs.
Industry mix: i.e. travel-related companies are
going to be under much more pressure than
companies benefiting from working from home
such as SVOD, gaming etc.
Go to market: a company that has a true
enterprise sales motion is going to be
challenged, while those that have freemium or e-
commerce-like distribution models are going to
be advantaged. Net revenue retention has
always been one of the important software
metrics — but it will be even more critical over
the next months.
ROI: This will differ by customer, by industry and
by where each software company sits in the
“stack” for each customer and industry. We will
find out which software companies actually are
“systems of record” without which companies
cannot function.
Pricing model: It is hard to frame the impact by
pricing model but it will ultimately come down to
utilization. Seat based, transactional and
workload based pricing models should be more
cyclical — one way or another.
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
10
SaaS Companies During the Global Financial Crisis To understand how SaaS companies managed the last economic downturn, we analyzed 15 public SaaS
companies’ revenue growth and overall operating income for 2006 through 2011 (as of our understanding, there
were 18 public SaaS companies prior to the crisis). Lastly, worldwide software spend contracted from 20% growth
y/y in 2007 to 10%/-2% in 2008/2009. The chart below shows the quarterly revenue for 14 of the public SaaS
companies.
The chart to the left shows quarterly revenue and
revenue growth for Salesforce. Numbers for
Salesforce are presented in separate charts due to its
relative size (was an outlier then, and really, still is).
Salesforce saw its revenue growth decelerate from
44% in their January 2009 fiscal year to 21% in their
January 2010 fiscal year.
$-
$20 000
$40 000
$60 000
$80 000
$100 000
Q1-2
00
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Revenue for public SaaS companies during the global financial crisis (thousands), 2006-2011
AthenaHealth
LivePerson
The Ultimate SoftwareGroupZix
Netsuite
Concur
Constant Contact
DealerTrack
Kenexa
RightNow Technologies
Soundbite Communications
SuccessFactors
Taleo
Vocus
0%
10%
20%
30%
40%
50%
60%
$-
$100 000
$200 000
$300 000
$400 000
$500 000
$600 000
$700 000
Q1-2
006
Q3-2
006
Q1-2
007
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007
Q1-2
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008
Q1-2
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Q1-2
010
Q3-2
010
Q1-2
011
Q3-2
011
Salesforce revenue during the global financial crisis (thousands), 2006-2011
Salesforce Revenue Revenue growth, y/y
Source: SaaS Capital, Redeye Research
Source: SaaS Capital, Redeye Research
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
11
There are some interesting anecdotes to see in
terms of operating income, but it is hard to see the
overarching trends when each number is presented
separately. Instead, we highlight a chart of the
average quarterly income or loss as a percent of
revenue for the 14 companies (Salesforce excluded)
and their aggregated average annual growth rate.
The chart below shows operating income and margin
for Salesforce.
Overall, what we see is that SaaS revenue was still
growing, just more slowly, and SaaS companies were
becoming more efficient. As the third graph shows,
the median SaaS company grew 10% in 2009 even
though total software spend declined. This growth
was partly driven by the adoption of SaaS from on-
premise software. What’s even more interesting to
us, however, is the response to growth these
companies took during the recession. Though
growth slowed, these companies improved the
efficiency of their growth (defined as operating
margin), as shown in the third chart. We think that a
bigger focus on existing customers and retention
rates is part of the explanation (i.e. for every dollar of
net revenue they earned, these companies spent less
to get it). What’s more, the group maintained its
efficiency even when the market began to recover.
Any lessons to be learned? Even if our purpose in analyzing SaaS companies
from 2008 is not to make market predictions, or to
compare 2008 to today, the last crisis seems to
make one thing very clear: in a volatile market, SaaS
businesses should focus on efficiency, before
growth. Efficient growth is often a result of retention
(i.e. gross and net) and efficient customer acquisition
(i.e. CAC payback period) and management of
runway/survival (i.e. cut costs, collecting receivables
etc.). Lastly, when it comes to runway/survival: if a
SaaS business is charging its customers annually in
advance, and that business starts to shrink (i.e. faces
a wave of churn), investors must be aware that its
cash flow will go down much quicker than the P&L
will indicate as it consumes deferred revenue, which
generates no cash.
In terms of growth we think we will see revenue
growth deceleration across a broad swath of
software names over the next twelve months and
would not be surprised to see negative revenue
growth from some software companies. Also the
global financial crisis was very different than the
recession we are living through as the world did not
“stop”. Another critical difference is that software has
become a much larger percentage of GDP, which
“mathematically” should make software more
cyclical.
To conclude, at the end of the day, there is no such
thing as truly recurring revenue. Some revenue is just
more recurring than other revenue.
-40%
-20%
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60%
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Revenue growth rate and operating margin for public SaaS companies during the global financial crisis, 2006-2011
Average Annual Growth Rate Average EBIT margin
-5%
0%
5%
10%
15%
$(20 000)
$(10 000)
$-
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Q1-2
006
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Salesforce operating margin during the global financial crisis (thousands), 06-11
Salesforce EBIT Salesforce EBIT margin
Source: SaaS Capital, Redeye Research
Source: SaaS Capital, Redeye Research
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
12
1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud
3. SaaS Companies and Economic Downturns
4. SaaS Metrics
5. Public Benchmark
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
13
Metric Definition Calculation
MRR = Number of customers * (ARPU / Month)
Implied ARR = Actual MRR * 12
Customer Acquisition
Cost (CAC)All S&M costs for new customers. S&M / Number of new customers
Customer Lifetime Value
(CLTV)
CLTV is the net present value of the recurring profit streams of a given customer less the
acquisition cost.(ARPU * Gross margin) / Churn
Customer Acquisition
Cost Payback Period
The CAC payback period is a statement in months, of the time to fully payback sales and
marketing investment.
Total S&M costs last quarter / (New MRR added last quarter *
Gross margin)
Customer Gross/Logo
Churn
This is a percentage calculation of all customer names (“logos”) that have churned over the
measured time period.
Customers lost over time period / Customers at the beginning
of time period
Gross Dollar Retention: Looks at how much of the customer ARR are kept over the measured
time period. As such it’s always below 100%.ARR – downgrades – churn / Beginning ARR
Net Dollar Retention: As above, but including upgrades. As such it’s can be higher than 100%
(and should be for a healthy business).(ARR + upgrades – downgrades – churn) / Beginning ARR
Source: Redeye Research
Retention
MRR & Implied ARR Measurment of monthly/annual recurring revenue.
Key SaaS Metrics
SMB Midmarket Enterprise
ARR growth 40-50%+ 50-60%+ 30-50%+
Gross Retention 70-80% 80-90% 90%+
Net Retention 80-100% 90-120% 110%+
LTV/CAC 3-5x 4-6x 4-6x
CAC Payback Period 3-6 Mos 12 Mos 18-24 Mos
Gross Margin
Source: Redeye Research
50-75%+
SaaS Metrics for different customer segments
Bessemer Venture Partners Efficiency Score (< $30 million ARR)
Source: Bessemer Venture Partners
SaaS Metrics There are many metrics to use when evaluating the strength of a SaaS business. Data on CAC, retention, and churn
are crucial to look at. Public SaaS companies in the USA most often report their CAC, ARR, gross margin, and
retention rates. Sadly in the Nordic’s only one, Agillic (AGILIC:CHP) of the publicly listed companies report both their
CAC and retention rates. We hope we will see an improvement in metric disclosure. In the tables below we explain
different kinds of SaaS metrics and provide benchmarks to look at when evaluating recurring revenue business.
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
14
1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud
3. SaaS Companies and Economic Downturns
4. SaaS Metrics
5. Public Benchmark
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
15
Nordic public metrics benchmarks In this section, we present a SaaS index focused on the Nordic, named Redeye Nordic SaaS/Cloud
Index. This index consists of the largest SaaS and Cloud players in the Nordics. For these companies we
also present different valuation and operational metric benchmarks. Data from Bloomberg (2020-04-14)
Index performance
Redeye Nordic SaaS/Cloud Index (RNSC Index) consists of the largest SaaS players in the Nordics. The correlation
to the board BVP Cloud Index is high. Just like almost all companies the SaaS players have taken a hit during the
corona crisis. The RNSC index showed significant traction in the beginning of the year and was up 26% by the 20th
of February. From the high to low level on the 23rd of March the index dropped by close to 39% but has since then
rebounded. The YTD performance amounts to +5%. The EV/S (on last twelve-month basis) also dropped from a
high level of close to 11.0x to a low of 6.0x. The RNSC EV/S valuation currently stands at about 8.9x.
Valuation, Growth and Growth + Profit ratio
0
20
40
60
80
100
120
140
2020-01-01 2020-01-21 2020-02-10 2020-03-01 2020-03-21 2020-04-10
SaaS Index performance
BVP Emerging Cloud Index actual Redeye Nordic SaaS/ Cloud Index
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2020-01-01 2020-01-21 2020-02-10 2020-03-01 2020-03-21 2020-04-10
SaaS Index EV/S LTM
BVP Emerging Cloud Index EV/ S LTM Redeye Nordic SaaS/ Cloud Index
22.2x21.5x
10.8x
9.1x
6.9x6.1x
5.6x 5.1x4.0x 3.6x 3.5x 3.3x
2.6x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
EV/S LTM
112%
42%37% 35%
29%
19% 19% 16% 14% 12% 10%
-3%
-20%
0%
20%
40%
60%
80%
100%
120%
LTM net sales growth, %
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
16
Operational metrics
11 439
6 421
3 683
2 623
1 010 994 820 554 460 343 277 164 930
2 000
4 000
6 000
8 000
10 000
12 000
14 000
EV (mSEK)
121%
79% 74%
37%30% 26% 24% 22% 18%
8%
-12%
-83%-100%
-50%
0%
50%
100%
150%
G+P ratio. %
1 156
532
394
290
166 143 134 13176 68 52 41 28
0
200
400
600
800
1 000
1 200
1 400
LTM net sales (mSEK)
158
139
45 4437
2719
14 11 93
-13
-40
-20
0
20
40
60
80
100
120
140
160
180
LTM net add sales (mSEK)
42%
32%
18% 18%12% 12% 9% 8% 5%
-13%
-40% -41%
-99%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
LTM EBIT-m
58%
46%44%
23%19%
17% 16%14% 13%
10%7%
-4%-10%
0%
10%
20%
30%
40%
50%
60%
70%
Growth efficiency, %
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
17
1849%
1283%
438%
298% 295% 290%
117% 103%
0%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
1800%
2000%
VITB 247 QBNK CARA LEADD FNOX BIM ADMCM
CSS LTM
1351%
195%140% 132%
73% 48%7%
0%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
CARA FNOX 247 QBNK VITB LITI BIM
Marginal CSS LTM
693
329
250225 216
145 144
8259
42 3819 17
0
100
200
300
400
500
600
700
800
Current nr of employees
2.2
1.8 1.81.7 1.7 1.6 1.6
1.31.2
1.2 1.1
1.0
0.6
0.0
0.5
1.0
1.5
2.0
2.5
Net sales per emply. (LTM) (mSEK)
3.0
1.81.7
1.5 1.5 1.51.3
1.21.1 1.1 1.1
0.9
0.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
OPEX per emply. (LTM) (mSEK)
0.6
0.5 0.5
0.30.3
0.3
0.20.2 0.2
0.1
0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
CARA FNOX LITI ADMCM UPSALE 247 VITB LIME LEADD QBNK BIM
Net add in sales per emply. (LTM) (mSEK)
REDEYE Equity Research Redeye SaaS report 2020 14 April 2020
18
Glossary and calculations:
LTM – Last Twelve Months
EV/S – Enterprise Value to annual net sales
G+P ratio – Growth in percentage and EBIT margin in percentage combined.
Sales growth – Net sales growth on an annual basis, in percentage
Net add sales – Increase in net sales on an absolute basis in million SEK
EBIT-m – Earnings Before Interest and Taxes (EBIT) as a percentage of sales (margin)
Growth Efficiency – Calculated LTM OPEX by Net add in sales. Meaning the OPEX required to grow sales
CSS – Cash Conversion Score, net sales divided by Capital Employed
Marginal CSS – CSS based on the net add in sales and the increased Capital Employed during the
timeframe
19
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