To The Moon

First Look at April Quarters

Heading in to last week, software earnings have not been good. Last week, we got a first look at companies reporting with April quarter ends (so we got the benefit of one incremental month of data). Perhaps we’d see a positive shift? Unfortunately, that didn’t happen… The Workday earnings call summarized it well:

“But within the quarter, we experienced increased deal scrutiny as compared to prior quarters, and we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY '25 subscription revenue guidance. While we can't control the macro, we are focusing on what's in our control, and that is innovation, scaling our go-to-market and partner ecosystem and delivering customer value.”

In general, it’s still tough out there in software. The below chart shows the change in full year guidance from this quarter vs one quarter ago. As you can see, companies in general are not increasing their guidance (and when they are, it’s not by much). Some companies appear to be baking in a second half re-acceleration of their business, we’ll see which ones deliver!

Quarterly Reports Summary

$Wix.com(WIX)$ $Zoom(ZM)$ $Palo Alto Networks(PANW)$ $WalkMe Ltd.(WKME)$ $Snowflake(SNOW)$ $Zuora(ZUO)$ $Agora, Inc.(API)$ $Workday(WDAY)$ $Domo Inc.(DOMO)$

Guidance for Snowflake and Workday are product rev and subscription rev, respectively. They don’t guide to total revenue

Top 10 EV / NTM Revenue Multiples

$CrowdStrike Holdings, Inc.(CRWD)$ $Samsara, Inc.(IOT)$ $Palantir Technologies Inc.(PLTR)$ $Datadog(DDOG)$ $Cloudflare, Inc.(NET)$ $ServiceNow(NOW)$ $MongoDB Inc.(MDB)$ $HubSpot(HUBS)$ $GitLab, Inc.(GTLB)$

Top 10 Weekly Share Price Movement

Update on Multiples

SaaS businesses are generally valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Revenue multiples are a shorthand valuation framework. Given most software companies are not profitable, or not generating meaningful FCF, it’s the only metric to compare the entire industry against. Even a DCF is riddled with long term assumptions. The promise of SaaS is that growth in the early years leads to profits in the mature years. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.

Overall Stats:

• Overall Median: 5.7x

• Top 5 Median: 15.2x

• 10Y: 4.5%

Bucketed by Growth. In the buckets below I consider high growth >27% projected NTM growth (I had to update this, as there’s only 1 company projected to grow >30% after this quarter’s earnings), mid growth 15%-27% and low growth <15%

• High Growth Median: 10.8x

• Mid Growth Median: 7.9x

• Low Growth Median: 3.8x

EV / NTM Rev / NTM Growth

The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. So a company trading at 20x NTM revenue that is projected to grow 100% would be trading at 0.2x. The goal of this graph is to show how relatively cheap / expensive each stock is relative to their growth expectations

EV / NTM FCF

The line chart shows the median of all companies with a FCF multiple >0x and <100x. I created this subset to show companies where FCF is a relevant valuation metric.

Companies with negative NTM FCF are not listed on the chart

Scatter Plot of EV / NTM Rev Multiple vs NTM Rev Growth

How correlated is growth to valuation multiple?

Operating Metrics

• Median NTM growth rate: 13%

• Median LTM growth rate: 17%

• Median Gross Margin: 75%

• Median Operating Margin (10%)

• Median FCF Margin: 13%

• Median Net Retention: 110%

• Median CAC Payback: 45 months

• Median S&M % Revenue: 40%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 16%

Comps Output

Rule of 40 shows rev growth + FCF margin (both LTM and NTM for growth + margins). FCF calculated as Cash Flow from Operations - Capital Expenditures

GM Adjusted Payback is calculated as: (Previous Q S&M) / (Net New ARR in Q x Gross Margin) x 12 . It shows the number of months it takes for a SaaS business to payback their fully burdened CAC on a gross profit basis. Most public companies don’t report net new ARR, so I’m taking an implied ARR metric (quarterly subscription revenue x 4). Net new ARR is simply the ARR of the current quarter, minus the ARR of the previous quarter. Companies that do not disclose subscription rev have been left out of the analysis and are listed as NA.

https://cloudedjudgement.substack.com/p/clouded-judgement-52424-software