While the median EV/Revenue multiple for 3Q22 was 6.3x, down 61% year-over-year the Software Equity Group’s Q3 Public Market Update finds the silver lining in this quarter’s update.
Even as public markets continue to experience volatility, valuations for public SaaS companies have effectively been flat month-over-month since May (hovering around 6.0x EV/Revenue).
Despite the broader market decline, the financial health of businesses in the SEG SaaS Index continues to remain strong in several areas:
- Companies continue to grow larger in scale. Total median revenue reached an impressive $602 million in Q3.
- Median revenue growth has maintained a steady pace in the mid-20% range. In 3Q22, the Index boasted a healthy TTM revenue growth rate of 26.4%, up from 24.9% in 3Q21.
- The Index’s 71.3% median gross profit margin remains strong and is generally consistent with prior quarters.
Here are three highlight updates from the 2022 Q3 Report.
I) Revenue Performance
Businesses in SEG’s SaaS Index grew larger in 3Q22, with total median revenue increasing to $602 million. The Index posted a strong median TTM revenue growth rate of 26.4%, up from 24.9% in 3Q21.
However, the median growth rate has declined modestly from 1Q22’s recent peak. Also notable is a shifting distribution of revenue growth rates among companies in the Index. Many companies growing TTM revenue faster than 40% in 3Q21 have now fallen into the lower cohorts of 20-30% and 30-40% TTM revenue growth.
II) Public Market Multiples
EV/Revenue multiples have dropped significantly over the last year, declining from 16.0x in 3Q21 to 6.3x in 3Q22. Incredibly, nearly 71% of companies in the Index traded at greater than 10x in 3Q21, which was the market peak and likely the height of unsustainable irrational exuberance.
Companies trading at >10x+ EV/Revenue in 3Q22 generally outperformed on revenue growth, gross profit margin, and/or EBITDA margin.
III) Product Category Financial Performance
Communications & Collaboration, Dev Ops & IT Management, Sales & Marketing, and Security all posted median TTM revenue growth rates higher than the Index median of 26.4% in 3Q22.
Of all the product categories, Human Capital Management and BI & Analytics posted the most significant YOY increases in TTM revenue growth, increasing from 10.9% to 21.7% and 13.8% to
While no product category was safe from YoY decline in 3Q22, some held up notably better than others. Security and ERP & Supply Chain maintained the highest EV/Revenue multiples compared to other categories, primarily due to their mission-critical nature and crucial customer reliance on the product offerings.
Interestingly, the Vertically Focused product category has significantly declined in median EV/Revenue, falling 19% below the Index median.
The category’s median gross profit margin of 58.8% was considerably lower than the Index median (71.3%). This notably low gross profit margin is likely the driving factor behind this cohort’s YoY decline. It should not serve as a representation of the many vertically focused companies that post stronger gross profit margins.
Generally, vertically focused companies possess more attractive operating metrics due to the highly specialized nature of their product offering, resulting in more attractive valuation multiples.