Last week we looked whether all SaaS companies benefited from the incredibly hot stock market in 2017. We found big variations in Market Cap to Revenue multiple trends. Some companies doubled their market valuation multiple during 2017, and some at the bottom of the spectrum reduced their multiple by almost half. This week we’ll look at improved revenue growth rate and Sales and Marketing expense ratios for the most highly valued companies versus the least valued ones to see how those metrics played out last year.
Interestingly, the top valued SaaS vendors (the top 20% based on Market Cap to Revenue multiple (MCR), didn’t just have improved revenue growth rates, but had the biggest increase in their revenue growth rates from FY2016 to annualized Q3 2017 numbers (the most recent reported period for most companies). Showing improvement can be as important as the absolute value of the metric itself. For example, the companies in MCR mid-range actually ended 2016 with the highest median revenue growth, but lost revenue acceleration during 2017, taking them out of the top ranks of SaaS valuations.Take a look here at the median annual revenue growth rates for 5 cohorts of SaaS companies, segmented by their MCR.
Source: OPEXEngine
It is surprising that the companies with the lowest MCR multiples had almost the same revenue growth rates as the top-rated companies – clearly some other metric was dragging them down.
All companies with better than median MCR multiples had 35% or more annualized revenue growth.
We’ll see if that minimum target for improved revenue growth maintains once final FY2017 results are in by end of February for most companies.To unpack a bit more about what’s driving the performance of these companies, we looked at their Sales and Marketing expense ratios see what levels were associated with the above revenue growth rates. Interestingly, the companies with the top 20% of MCR multiple, increased their Sales and Marketing expense ratio by roughly the same amount as they increased revenue growth rates during this period (from end FY2016 to end of Q3 2017).It looks like these highly valued companies were able to dial up improved revenue growth by increasing sales and marketing spend within acceptable ranges (generally between 40-50% for SaaS companies) – something investors clearly like to see.
The least valued SaaS companies maintained a relatively high Sales and Marketing expense ratio (close to 46%) during 2017 and while they did increase revenue growth in 2017, they lost value. We'll look in future posts at other operating metrics to see why those companies lost market value.Next week, we’ll be looking at the levels of R&D spending for each of these cohorts of SaaS companies, plus COGs spending as well.
