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About the Author:
James Macdonald
Managing Director
James Macdonald is a managing director specializing in research and investment in software-as-a-service (SaaS) businesses and related business services. He uses his industry knowledge and expansive network to uncover promising investment opportunities and help companies navigate their strategic paths and accelerate growth. His work has been cited for excellence in the Wall Street Journal’s “Best on the Street” survey, in Forbes, and in other publications. Prior to joining First Analysis in 1997, he was a general manager at Nalco Chemical Co., where he played a key role in expanding Nalco’s service offering to include operating and leasing equipment at customer sites. This led to formation of a joint venture with U.S. Filter Co. Earlier, he was with a subsidiary of Ecolab Inc. He earned an MBA from Harvard University and a bachelor’s degree in civil engineering from Cornell University, where he also earned the university’s highest award in that discipline.
First Analysis SaaS Team
Matthew Nicklin
Managing Director
James Macdonald
Managing Director
Corey Greendale
Managing Director
Howard Smith
Managing Director
Richard Conklin
Managing Director
Andrew Walsh
Managing Director
David Gearhart
Vice President
Terry Kiwala
Vice President
First Analysis Quarterly Insights
Software as a Service
Deja Q: Pandemic effect on SaaS growth repeats in most recent quarter
January 11, 2021
  • Year-over-year revenue growth rates for our SaaS universe in the September quarter declined by 5.3 percentage points on average relative to March-quarter growth rates. This is similar to the average 5.9 percentage point decline seen in the June quarter compared to the March quarter for our current universe of SaaS companies. Since the June quarter was at the very beginning of the pandemic and included a nationwide shutdown, we were not sure whether the impact seen in the June quarter would repeat in the September quarter.
  • Variation within the group was significant with some companies' growth rates doubling or tripling while others saw year-over-year revenue declines. Those that saw substantial acceleration likely face difficult comparisons in 2021, and those that saw weakness will likely have easy comparisons. With SaaS companies often valued based on a multiple of revenue that increases with growth rate, data for the next few years will need to be normalized to estimate underlying growth potential and appropriate valuation multiples.
  • Our SaaS universe significantly outperformed the market in the December quarter, gaining an average 24.3% compared to 11.7% for the S&P 500.
  • Enterprise value multiples of revenue continued to expand in the December quarter. The average enterprise value multiple of 2021 estimated revenue increased to 17.6 from 14.9 last quarter and 11.7 the previous quarter, perhaps in part reflecting an increase in projected average 2021 revenue growth to 21.9% from 20.5% last quarter.
  • We have added five names to our SaaS universe: Asana (ASAN) and JFrog (FROG) in enterprise productivity, Snowflake (SNOW) in data visibility, Cloudflare (NET) in cybersecurity, and Simulations Plus (SLP) in healthcare. There were two announced acquisitions of companies in our universe this quarter, neither of which had participated much in the recent rally: Slack (WORK) by (CRM) and Pluralsight (PS) by Vista Equity. While Pluralsight is being purchased for approximately 8 times forward revenue, Slack's multiple is approximately 26 times, well above the previous high end of multiples seen for public company takeovers in our SaaS universe of approximately 10 times forward revenue.



September quarter mirrors June quarter with the pandemic's negative average growth impact

EV/revenue multiples continue to rise

SaaS universe outperforms in December quarter

Q4 SaaS M&A highlighted by Slack, Pluralsight, RealPage takeouts

Q4 SaaS private placements reflect pervasiveness of SaaS in enterprises

September quarter mirrors June quarter with the pandemic's negative average growth impact

In Table 1 we compare growth rates for our SaaS universe companies in the September and March quarters. This suggests the pandemic had an average negative impact of 5.3 percentage points on growth rates in the September quarter. This is very similar to the 5.9 point average negative impact in the June quarter compared to the March quarter for the same companies.

Given the pandemic has hurt actual growth for SaaS companies and given current analyst estimates for 2021 forecast 21.9% average growth versus the 31.7% actual average year-over-year growth in the September quarter, the SaaS group's strong overall stock price performance is a surprise. (Analysts expect December-quarter growth to average 21.8%, similar to the expected average full-year 2021 growth rate.) While we expect both the forward estimate sets will turn out to be conservative, one would have hoped growth would accelerate in 2021 given the easy comparisons for the average company against often pandemic-hindered 2020 results.

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