Software Industry M&A Update - November 2016 - AltQuest Group
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Transcript of Software Industry M&A Update - November 2016 - AltQuest Group
www.altquest.com
SOFTWARE INDUSTRY
M&A UPDATE November 2016
www.altquest.com
SOFTWARE INDUSTRY MACROECONOMICS
Assuming reasonably stable currency exchange rates,
Gartner projected at the outset of 2015 that worldwide IT
spending would grow at a constant currency rate of 3.7%
in 2015. That was before the significant rise in value of
the U.S. dollar against most other currencies, a
phenomenon that has had a materially adverse effect on
worldwide IT spending. In April, Gartner revised IT
spending to grow (in constant currency terms) at a rate
of 3.1% in 2015.
In U.S. dollar value terms, global IT spending is
projected to shrink 1.3% in 2015, dropping to $3.7
trillion. By 2018, spending is forecast to exceed $4.1
trillion.
Forrester estimates software will account for 27% of all
tech spending, leading all other categories. According to
Forrester, “Software’s leading position is not 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 app stores.”
E-commerce retail sales in the U.S. totaled $82.8 billion
in 4Q14 (the latest data available), up 16% YoY. The
increase marks the 21st consecutive quarter of YoY
growth, and the 17th consecutive quarter of double digit
growth. • Mobile commerce accounted for $10.7 billion,
or 12.9% of the 4Q14 E-Commerce total, according to
comScore. In addition, YoY growth in mobile commerce
has been outpacing digital E-Commerce spend for quite
some time. In 4Q14, mobile commerce grew at a pace of
28.9%, while desktop commerce expanded by 14.3%.
The digital commerce growth rate of 17% in Q4 far
exceeded the 4.4% growth in total consumer
discretionary spending, confirming that the shift to online
shopping continues unabated.
According to Forrester, U.S. digital ad revenues will total
$37.6 billion in 2019, with the most growth coming from
video advertising. Forrester predicts video advertising
on desktop devices alone will grow 14% annually until
2019, when it will contribute 55% of total desktop display
ad revenue across the Web.
TRADITIONAL SOFTWARE
The AQ Traditional Software Index tracks public
software companies that primarily offer on-premise
software under a perpetual license with annual M&S.
The AQ Traditional Software Index is currently
comprised of 110 public software companies.
The consolidation of on-premise software companies
over the past 15 years has resulted in an ecosystem of
behemoths whose growth has stalled due to much more
focused, prioritized and constrained enterprise IT
spending, and a shift toward cloud-based solutions and
subscription pricing, which has negatively impacted
revenue recognition.
.
SAAS
The AQ SaaS Index tracks public companies that
primarily offer hosted, on-demand software under a
subscription and/or transaction based pricing model.
The AQ SaaS Index is currently comprised of 39 publicly
traded, pure-play SaaS companies.
Almost two out of three (63%) public SaaS companies
are unprofitable, and nine out of ten have EBITDA
margins below the 20% median of their on-premise
software peers.
And for the time being, investors are untroubled by the
operating losses, if the strong correlation between their
EV/Revenue market multiples and TTM revenue growth
rates is any indication.
Investors should be circumspect about the GAAP
compliant P&L statements of many public SaaS
companies which seem to indicate they’re suffering
significant losses and hemorrhaging cash. In truth,
Description Metric
EV/Revenue 6.3x
EV/EBITDA 30.2x
EBITDA Margin 13.7%
Net Income Margin -1.5%
TTM Tota l Revenue ($M) $4,621.1
TTM Tota l EBITDA ($M) $1,078.0
Cash & Eq ($M) $3,245.0
Current Ratio 2.04
Debt/Equity Ratio 66.55
AQ Software: Mean Metrics
www.altquest.com
many are not only cash flow positive, but flush with
revenue from prepaid subscription fees that require
deferred recognition under GAAP.
INTERNET
The AQ Internet Index tracks public companies that
primarily offer B2C and B2B solutions over the Internet
using a wide array of pricing models.
The AQ Internet Index is currently comprised of 83
public Internet companies.
The widely disparate financial performance of the SEG
Internet Index reveals an Internet ecosystem clearly
bifurcated into “haves” and “have nots.” Virile market
adoptions, consumer fickleness, switching ease and
fierce competition handsomely continued to reward a
select few and punish others
CONTACT
AltQuest Group
Software Coverage Group
Description Metric
EV/Revenue 4.7x
EV/EBITDA 10.6x
EBITDA Margin -6.9%
Net Income Margin -17.0%
TTM Tota l Revenue ($M) $525.0
TTM Tota l EBITDA ($M) $7.6
Cash & Eq ($M) $216.8
Current Ratio 2.13
Debt/Equity Ratio 67.43
AQ SAAS: Mean Metrics
Description Metric
EV/Revenue 6.7x
EV/EBITDA 15.2x
EBITDA Margin 7.5%
Net Income Margin -6.6%
TTM Tota l Revenue ($M) $15,564.3
TTM Tota l EBITDA ($M) $4,867.8
Cash & Eq ($M) $13,420.5
Current Ratio 2.65
Debt/Equity Ratio 56.87
AQ Internet: Mean Metrics