Clouded Judgement 3.10.23 - 2023 Guides for Consumption Software

Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!

Consumption Chart

Last week I talked a bit about consumption trends. Came across an interesting chart I wanted to share.

Growth Deceleration of Consumption Companies

So far, 2023 guides have not been pretty for consumption software companies. It sounds like most are guiding as if there’s no improvement to consumption trends coming throughout the full year. Here’s how the 4 key consumption players grew in 2022, and then projected in 2023 (some of my favorite companies):

• Snowflake: 69% in 2022, guided to 40% in 2023

• Datadog: 63% in 2022, guided to 24% in 2023

• Confluent: 51% in 2022, guided to 30% in 2023

• Mongo: 47% in 2022, guided to 16% in 2023

Generally a 20% growth deceleration YoY is good (meaning if you grew 100% one year, a 20% growth decay would imply an 80% growth rate next year, and 80% x (1-20%) = 64% growth the year after. Here’s the same data above with a 20% growth decay layered in:

• Snowflake: 69% in 2022, guided to 40% in 2023 (56% with 20% growth decay)

• Datadog: 63% in 2022, guided to 24% in 2023 (50% with 20% growth decay)

• Confluent: 51% in 2022, guided to 30% in 2023 (41% with 20% growth decay)

• Mongo: 47% in 2022, guided to 16% in 2023 (38% with 20% growth decay)

As you can see, we’re seeing significant guided growth decays for 2023. The two charts below visualize the last few years of growth with ‘23 company guides shown, as well as what implied 20% growth decay would be. What’s interesting is all of these companies (if I recall correctly) had very strong new customer adds. The challenge is existing customers ramping slower. What excites me is the strength of these platforms are reflected in new customer adds and stable gross churn. They may be more cyclical than originally anticipated, but they’re still great businesses that will rebound faster when the cycle turns.

Quarterly Reports Summary

Top 10 EV / NTM Revenue Multiples

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: 5.8x

• Top 5 Median: 11.8x

• 10Y: 3.9%

Bucketed by Growth. In the buckets below I consider high growth >30% projected NTM growth, mid growth 15%-30% and low growth <15%

• High Growth Median: 8.9x

• Mid Growth Median: 6.1x

• Low Growth Median: 3.3x

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

How correlated is growth to valuation multiple?

Growth Adjusted EV / NTM Rev

The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. The goal of this graph is to show how relatively cheap / expensive each stock is relative to their growth expectations

Operating Metrics

• Median NTM growth rate: 16%

• Median LTM growth rate: 27%

• Median Gross Margin: 75%

• Median Operating Margin (22%)

• Median FCF Margin: 2%

• Median Net Retention: 117%

• Median CAC Payback: 30 months

• Median S&M % Revenue: 45%

• Median R&D % Revenue: 27%

• Median G&A % Revenue: 19%

Comps Output

Rule of 40 shows LTM growth rate + LTM FCF Margin. 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.

This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future.