Highlights from the 2Q08 Software Equity Report

Here are some highlights from the 2Q08 Software Industry Equity Report published (for free) by the folks at the Software Equity Group, LLC who also host the Software Business 2008 conference on October 30-31, 2008 at the Marriott San Francisco.

• Aggregate US software spending increased 2.6% from 1Q08 over 4Q07 and 9.5% over 1Q07, according to the Bureau for Economic Analysis.

• Server virtualization, server consolidation, and cost-cutting topped IT's spending priorities list according to a Goldman Sachs survey. Open source (which seems oxymoronic in this context), content/knowledge management (which should be two separate items) and on-demand computing were at the bottom. This demonstrates the need for Mark Logic to remain focused on verticals where content matters as it's not yet a general IT priority.

• The SEG software index of 210 public software companies closed 1H08 down 13.5% The SEG SaaS index closed down over 25%

• Median EV/revenue was 1.8x. A major arbitrage opportunity continues to exist for large companies buying smaller ones, as the median was 2.8x for $1B+ companies and 1.2x for <$100M companies. For example, this means that a previously independent Business Objects could have bought a $50M company for $60M and then, in effect, sold that revenue to SAP for $140M.

• Growth still drives a large premium in valuation. Companies growing at 10%- (i.e., less than 10%) had a median revenue multiple of 1.2x, while those growing at 50%+ had a multiple of 2.6x

• But EBITDA margin drives an even bigger valuation premium. Companies with 10%- EBITDA margin also had a median revenue multiple of 1.2x, but those with rich 30 to 50% margins had a multiple of 5.9x
  

• Median EV/EBITDA was 13.2x
  

• Median EBITDA margin was 12.5%. Profit was unsurprisingly concentrated with the rich; the median was 23.9% for $1B+ companies and 5.4% for $100M- companies.

• Median TTM revenue was $154.1M with median TTM revenue growth of 15.5%

• Database companies continue to be worth about 2x content/document companies. Database and file management firms had a median revenue multiple of 2.8x while content/document management companies had a multiple of 1.5x.

• The IPO window remains, in effect, closed. Only 2 (ArcSight and RiskMetrics) of the 12 companies in SEG's 12/07 IPO pipeline went public, and both IPOs were in 1Q08.
  

• SEG counts 17 companies in the 2008 software IPO pipeline, with average revenues of $59M, net income of $0.4M, and average TTM revenue growth of 46%.

• SEG predicts only 8-10 software IPOs in 2008, thus predicting a 66% decline from 2007's total of 26.

• Software M&A deal volume was roughly flat at 380 deals in both 1Q and 2Q08. However, the value of those deals dropped from $25.5B in 1Q to $21.9B in 2Q08.

• Database and file management companies topped the M&A exit valuation category with a median valuation of 11.4x TTM revenues.

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