Clouded Judgement 9.8.23 - Early Q2 '23 Earnings Recap
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!
Q2 Earnings Recap Preview
We’re now through Q2 earnings season! I’ll post a much longer recap soon, but today I wanted to post the highlights. Overall, I’d describe Q2 as “Buying environment didn’t get worse, but we’re not out of the woods yet.” We saw some green shoots in AWS and a few other consumption names, and overall sentiment seemed more positive. I’ve put together a number of charts below to show how metrics from this quarter compared to prior quarters.
Starting with the cumulative net new ARR added across the software universe. This isn’t the entire set of companies I track, but a subset of ~60 (broad enough sample set to see emerging trends). It should be pretty clear from the chart how difficult Q1 was. Q2 benefited from an “easy comp” (since Q1 was so light), so we’ll see how this trend continues (or doesn’t) in Q3
Moving on to Q2 YoY revenue growth. We continued to see deceleration, but the rate of decel improved slightly from Q1.
Meanwhile, FCF margins stayed quite strong, with a median Q2 FCF margin of 12%
Sales efficiency also dramatically improved in Q2. Partly due to larger layoffs, as well as stronger bookings
And finally - net retention. Not surprising, net retention continued to fall. I’d expect this trend to continue
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: 6.2x
Top 5 Median: 15.1x
10Y: 4.3%
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: 10.9x
Mid Growth Median: 9.0x
Low Growth Median: 4.1x
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: 15%
Median LTM growth rate: 21%
Median Gross Margin: 75%
Median Operating Margin (18%)
Median FCF Margin: 6%
Median Net Retention: 114%
Median CAC Payback: 35 months
Median S&M % Revenue: 42%
Median R&D % Revenue: 27%
Median G&A % Revenue: 16%
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.
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.