Clouded Judgement 9.13.24 - 2024 Estimates

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

2024 Estimates

Q2 earnings season is now behind us. I’ll provide a more comprehensive recap later, but for now, let’s look at how the future outlook has changed after Q2 earnings. One metric I like to examine is how much companies adjust their full-year guidance. Generally, software companies follow a beat-and-raise model in their forecasts. The “raise” part reflects how much the future outlook (i.e., the guidance) changes. When we compare full-year guidance for 2024 from the Q2 call versus the Q1 call (~3 months ago), you’ll see in the graph below that, for the most part, full-year guidance didn’t change significantly. The median full-year “raise” was only 0.3%.

Looking at Q2, the median “beat” (i.e., how much a company’s Q2 results exceeded consensus) was around 1.5%. So, while the median quarterly beat was 1.5%, the median full-year raise was only 0.3%. In absolute terms (though this is imperfect as not all companies provide full-year guidance, so I’m only analyzing those that did for the calendar year 2024), companies beat Q2 by an aggregate of $383 million but only raised full-year guidance by an aggregate of $127 million. In other words, companies were NOT fully carrying over their Q2 beat to the end of the year.

The interpretation of this could be one of several things: 1) companies are remaining conservative in their forecasts, 2) selling conditions have worsened slightly, or 3) beat-and-raise scenarios are simply becoming harder to achieve. In reality, it’s likely a combination of all three factors. It’s still really difficult to sell software. Markets are more crowded than ever, and there’s ongoing pressure to “platformize” and reduce spending on individual point solutions.

In the past (2015 - 2020), companies would typically beat a quarter by 3-4% and raise guidance for the next quarter by about 2%. However, over the last six quarters, those figures have dropped to an average quarterly beat of 1-2%, with guidance largely in line with consensus.

To summarize: A company will set full-year guidance at the beginning of the year, with some cushion built in on a quarterly basis. However, over the past six quarters, it has become evident that this cushion is non-existent. Companies are beating quarterly estimates by smaller margins and aren’t significantly raising guidance. This suggests that the initial full-year outlook wasn’t conservative but rather accurate. There’s less margin for error in software forecasting, and “beats and raises” have become harder to achieve than ever before.

Everyone is waiting for the “bounce back” in software, but these challenging buying conditions seem likely to persist. MAYBE when interest rates drop, IT budgets will get a boost. This could happen because 1) real-world companies that finance themselves with debt will see their interest expenses decrease, allowing them to allocate funds elsewhere, like IT, and 2) when rates start to drop, there are psychological effects that often lead to increased spending. I do expect these factors to have an impact, but the mindset ingrained into buyers over the past two years won’t change quickly. Rigid procurement processes have become deeply embedded and won’t disappear, regardless of where rates go.

IT budgets may expand when rates drop, but the beneficiaries of those increased budgets will not be evenly distributed. Point solutions will still struggle, competitive markets will continue to face pricing pressures, and redundant spending will still be scrutinized and eliminated. We enjoyed a zero-interest-rate/low-rate period even before COVID, which made things easier for everyone. Those times are gone, and they aren’t coming back anytime soon.

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: 5.2x

• Top 5 Median: 15.0x

• 10Y: 3.7%

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: 9.0x

• Mid Growth Median: 8.3x

• 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: 12%

• Median LTM growth rate: 17%

• Median Gross Margin: 75%

• Median Operating Margin (9%)

• Median FCF Margin: 14%

• Median Net Retention: 110%

• Median CAC Payback: 41 months

• Median S&M % Revenue: 40%

• Median R&D % Revenue: 24%

• Median G&A % Revenue: 17%

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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