Clouded Judgement 8.19.22
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!
Q2 Earnings Season Update
We’re halfway through Q2 earnings. At this point, just about every company with a June quarter end has reported. The takeaway so far is that we’re definitely seeing some weakness in software show up. The median beat was 2.3%, when historically the median beat is in the 4-5% range. Additionally, 15% of companies missed consensus revenue estimates for Q2. Historically, only ~5% of companies miss. On forward guidance - of companies that provided forward guidance, the median raise (% midpoint of guide was above consensus estimates) was only 0.1%. Historically the median guidance beat is ~2.5%. On top of this, of companies to give forward guidance 48% came in below next quarters consensus estimates. Historically, this figure is closer to 10-15%. It’s very clear that Q2s were light, and guidance was very light.
I’ve seeing a very similar dynamic in private companies. Many came in light on Q2, and are seeing weakness heading into the back half of the year. It’s nothing catastrophic, but there’s definitely cracks. Companies are clearly evaluating all of their vendor spend, and starting to cut back on non-mission critical spend. At the same time, much larger companies like Microsoft are benefiting as businesses look to consolidate spend (benefiting the larger platforms)
Below is the data for Q2 earnings so far. Next week kicks off round 2, with companies with July quarter ends starting to report. It’ll be interesting to get more data points on how the month of July, and first couple weeks of August have trended.
Top 10 EV / NTM Revenue Multiples
Top 10 Weekly Share Price Movement
Update on Multiples
SaaS businesses are valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.
Overall Median: 6.7x
Top 5 Median: 19.7x
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: 11.6x
Mid Growth Median: 6.5x
Low Growth Median: 4.0x
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
Median NTM growth rate: 22%
Median LTM growth rate: 31%
Median Gross Margin: 74%
Median Operating Margin (25%)
Median FCF Margin: 1%
Median Net Retention: 120%
Median CAC Payback: 35 months
Median S&M % Revenue: 47%
Median R&D % Revenue: 28%
Median G&A % Revenue: 20%
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.
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