SaaS Expense Benchmarks can be greatly distorted by stock options

September 20, 2019

We often get questions from SaaS companies about GAAP versus non-GAAP expenses, and whether the benchmarks for expenses are distorted by GAAP accounting.  According to GAAP, expenses typically include charges, like stock option expense and other SaaS expense benchmarks which may be associated with acquisitions, and aren’t necessarily relevant to operational budgeting and planning.   GAAP accounting can muddy the picture when digging into your expenses to understand your resource allocations, your headcount cost and efficiency.  Stock option expense often distorts comparisons, especially with the current volatile stock market, and extraordinary market cap multiples for successful SaaS companies.  

In addition, the adoption of ASC 606 rules since 2017 have changed the accounting for sales commissions, which is a large portion of Sales expense.  Most companies track pro forma or non-GAAP expenses and then at the end of the year or reporting period, true it up based on complex stock option expense calculations.  Public SaaS companies are required to report GAAP numbers, but most also report non-GAAP numbers for high level expenses and key metrics like ARR, retention rates and other SaaS metrics that investors require to understand a company’s performance.

In the OPEXEngine benchmarking, we survey GAAP and non-GAAP expenses.  We also look at stock option expense as a separate benchmark. We see a big difference in expense for the fastest growth companies versus slower growth companies, as well as a difference between smaller, private companies and larger public companies, as would be expected.  Private SaaS companies with revenues between $30M-$100M show total stock option expense running between 1.5% and 2% of revenue. For SaaS companies with revenues between $100M and $500M, we broke out the data between companies with a Y-o-Y growth rates over 50% and companies with less than 50% growth rates.  The faster growth companies showed a more than 60% stock option expense rate of median of 11.35% over the companies with slower growth rates which had only 7% stock option expense as a % of revenue. We think the industry needs a better way to compare expenses on an apples-to-apples basis.