Clouded Judgement 5.10.24 - Software Weakness Across the Board

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

Q1 Software Earnings Are… Not Good

We’re about halfway through Q1 earnings season, and it’s not been pretty. If I had to sum up software earnings in one quote it would be the following from Yamini Rangan, the Hubspot CEO:

“Switching gears to macro. After a strong finish in Q4, we saw a return to weaker demand conditions in the first quarter, similar to what we experienced in 2023. The buyer urgency that we saw in December did not carry over into Q1. Instead, we saw a return to higher scrutiny of budgets, more decision-makers getting involved and a need for more demos and proof of concepts before signing on purchase decisions. At the top of the funnel, we saw lead flows shift away from higher quality inbound and partner-sourced leads to lower quality rep source leads. This shift plus the lower buyer urgency slowed down deal progression and, in some cases, push deals out of Q1 and into Q2.”

On top of that, we’re also starting to see some consumer weakness in the guides of companies like Shopify, Etsy, Doordash, Uber, eBay, etc. Next week we’ll get the earnings from larger retailers like Walmart and HomeDepot, so we’ll have a clearer picture on “is the consumer holding up.” For now, some the credit card companies are describing the spending environment as holding up / strong, so there’s definitely some mixed signals.

Here’s some data so far:

• 6 out of 40 (15%) saw ARR shrink from Q4 to Q1

• Of companies who gave Q2 guidance, 20 out of 37 (54%) guided BELOW Q2 consensus. This trails only Q1 ‘20 (right after Covid hit and everyone gave super conservative guidance and 60% guided below consensus) and Q4 ‘22 (the wort of the “cloud optimizations” were Q1 ‘23 which is the quarter companies were guiding to in Q4 ‘22, and 56% guided below consensus)

• Of the 33 companies to guide to the full calendar year 2024 only 5 raised full year guidance by >1% compared to full year guidance they gave last quarter (Squarespace, AppFolio, Datadog, Olo and Klaviyo). And no one raised full year guide >2%

• The median “beat” (Q1 revenue over Q1 consensus estimates) was 1.5%, which is the lowest it’s been in the last 4 years

Overall, it’s been a TOUGH quarter for software companies. In two weeks we’ll start to get the Q1 reports from companies who had April quarter ends (everyone to report so far had a March quarter end). We’ll see if anything improved in the month of April, or if it was another challenged month.

So far - you’re either tied to AI tailwinds, or it’s rough out there. And in the public universe, it’s really only been the hyperscalers who’ve benefited from AI. All 3 (AWS, Azure, GCP) saw positive reacceleration

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: 5.7x

• Top 5 Median: 15.5x

• 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: 13.2x

• Mid Growth Median: 8.1x

• Low Growth Median: 4.0x

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: 12%

• Median Net Retention: 110%

• Median CAC Payback: 45 months

• Median S&M % Revenue: 40%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 15%

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.

Sources used in this post include Bloomberg, Pitchbook and company filings

The information presented in this newsletter is the opinion of the author and does not necessarily reflect the view of any other person or entity, including Altimeter Capital Management, LP ("Altimeter").  The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance.  Altimeter is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. 

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