Clouded Judgement 8.6.21

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

A Note on Net Retention

Anyone who follows this blog knows net retention is my favorite software metric. However, it’s very important to read the footnotes to see how each company calculates this metric to truly appreciate its value. Since it’s a Non-GAAP metric, there is no standard definition. An excellent case study on some of the different definitions is Fastly. They report both a Dollar Based Net Retention (DBNR) as well as a Net Revenue Retention (NRR). Their DBNR is 126% (looks great!) while their NRR is 93% (not so great…). The difference between their DBNR and NRR is that DBNR (as Fastly defines it) does NOT include churn. The calculation takes the revenue from a set of customers today (who are active) and compares it to that same groups revenue 1 year ago. On the other hand, NRR is inclusive of churn. Most companies do not report DBNR the way Fastly does, however it’s important to read the footnotes for each company to be sure. Here’s the definition of DBNR from Fastly:

“We calculate Dollar-Based Net Expansion Rate by dividing the revenue for a given period from customers who remained customers as of the last day of the given period (the “current” period) by the revenue from the same customers for the same period measured one year prior (the “base” period). The revenue included in the current period excludes revenue from (i) customers that churned after the end of the base period and (ii) new customers that entered into a customer agreement after the end of the base period.”

Multiple Expansion Summary

The chart below compares the NTM revenue multiples of cloud software companies from Feb ‘20 (pre Covid) to today. Companies that went public during the pandemic are left out of the chart. As you can see, many companies have experienced significant multiple expansion (driving incredible returns) over the last 16 months. To me, one of the most interesting aspects of this chart is seeing Zoom actually trade

Quarterly Reports Summary

Lots of earnings this week! ZoomInfo, Datadog, Confluent and Hubspot really stood out to me (Atlassian was the big standout last week).

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 Stats:

• Overall Median: 16.2x

• Top 5 Median: 60.9x

• 3 Month Trailing Average: 15.5x

• 1 Year Trailing Average: 15.7x

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: 33.3x

• Mid Growth Median: 14.6x

• Low Growth Median: 5.4x

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: 22%

• Median LTM growth rate: 31%

• Median Gross Margin: 74%

• Median Operating Margin (14%)

• Median FCF Margin: 9%

• Median Net Retention: 118%

• Median CAC Payback: 25 months

• Median S&M % Revenue: 44%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 18%

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.