Clouded Judgement 9.16.22

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

Q2 Earnings Season

Q2 earnings season is now behind us! I’ll come out with a more detailed summary in the next couple weeks, but the net net summary is: skinnier beats and flat guides. Below is a teaser for the longer post which shows the % companies guided Q3 above / below consensus

As you can see, the median guidance raise was only 0.1%. This is way below historical averages. Only 54% of companies raised guidance. When I look back at normal ranges, the median guidance beat is usually ~3% with ~90% of companies guiding above next quarters consensus estimates. So this quarter was a huge outlier. Time will tell if guidance was conservative, or if we do start to see fundamentals deteriorating.

CPI Print

Inflation for August came out this week, and it was much higher than expected. Core CPI was 6.3% YoY, when expectations were for 6.1%. This is a supporting data point for raising rates higher, and keeping them higher for longer. The market is now pricing in a peak 10Y at ~4.4% in March ‘23.

The median software multiple is ~25% below the long term average which make sense given the rate environment we’re currently in. The average 10Y in the period I’m using to calculate the long term average multiple was 2.3%. It’s currently 3.4%. The market still has a lot of churning in front of it. Given the CPI print this week I’m surprised the market didn’t trade down more.

Quarterly Reports Summary

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: 6.0x

• Top 5 Median: 17.5x

• 10Y: 3.4%

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: 12.3x

• Mid Growth Median: 5.9x

• Low Growth Median: 3.7x

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: 21%

• Median LTM growth rate: 30%

• Median Gross Margin: 74%

• Median Operating Margin (25%)

• Median FCF Margin: 0%

• Median Net Retention: 120%

• Median CAC Payback: 33 months

• Median S&M % Revenue: 48%

• Median R&D % Revenue: 28%

• Median G&A % Revenue: 20%

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.