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Don’t confuse ARR and Forward Revenues

Not all revenue multiples are equal.

99%> of the time EV/ARR multiples should be greater than EV/Forward Revenue multiples, it is therefore very important to understand the difference between the two.

In both of these multiples, the Enterprise Value (EV) remains constant, it is the measure of revenue that is changing. Annualised Recurring Revenue (ARR) is the current Monthly Recurring Revenue multiplied by 12, whereas the Forward Revenue is the total forecasted revenue for the next financial year. Assuming the company is growing, then Forward Revenue will always be higher than ARR and therefore, EV/Forward Revenue will always be lower than EV/ARR.

The relationship between EV/Forward Revenue and EV/ARR is explained by growth. The faster a company is growing the bigger the difference between EV/ARR and EV/Forward Revenue multiples.

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Evolution of SaaS Multiples

Is profitability, or, at least, a path to profitability, becoming more of a factor in valuation multiples for SaaS companies?

Recently there has been considerable coverage of how median valuation multiples have fallen for publicly listed SaaS companies and the impact that this is having on multiples employed by private companies. To add to this debate Clare Capital has analysed the annual change in Forward Revenue Multiple for 73 public SaaS companies.

From this dataset, more than 80% of the companies (60) have experienced a reduction in valuation multiple and as a group the median valuation multiple has fallen by more than a quarter for the annual period (other SaaS commentators have been highlighting even larger declines, for example, see Tomasz Tunguz‘s blog post on the decline in SaaS Valuations).

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EV & Revenue Metrics from Listed SaaS Companies

Following a few twitter conversations between our own Mark Clare, technology commentator & investor Ben Kepes, corporate finance associate Sam Stewart and Mindscape CEO JD Trask, Clare Capital charted key EV and Revenue metrics for 50 listed SaaS companies with the results below:

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Pushpay Equity Research

Below is a series of Equity Research pieces that Clare Capital has released on Pushpay as part of its mandate to produce reports on a periodic basis.

Pushpay provides mobile commerce tools that facilitate fast, secure and easy non-point of sale payments between consumers and merchants. Pushpay services three target markets: the Faith Sector; Non-Profit Organisations and Enterprises.

February 19, 2015: Clare Capital – Pushpay Holdings Limited – A SaaS play which makes donating and paying easy

April 28, 2015: Clare Capital – Pushpay Holdings Limited – Research Update

June 10, 2015: Clare Capital – Pushpay Holdings Limited – More than a pure SaaS play

July 16, 2015: Clare Capital – Pushpay Holdings Limited – $1m to $10m ACMR in less than 5 quarters

Clare Capital Research Report on Pushpay Holdings Limited (NZX:PAY)

Pushpay Holdings Limited (NZX:PAY) – A SaaS play which makes donating and paying easy

Pushpay Holdings Limited (PAY) provides mobile commerce tools facilitating easy payments between consumers and merchants. PAY services three target markets: The Faith Sector; Non-Profit Organisations and Enterprises. Currently, there is considerable focus on the US Faith Sector, with plans to further expand into other jurisdictions.

PAY operates under a Software as a Service (SaaS) business model where the customers/merchants pay a monthly recurring revenue for access and use of the centrally hosted software. This SaaS business model is beneficial to both: The Company; and the customers/merchants. The Company benefits from strong monthly recurring revenue streams and the relative ease of scalability, the customer/merchant benefits from lower up-front costs and by subscribing to a product whose up-keep remains the responsibility of those who developed it.

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The Founder’s Guide To Selling Your Company

Through our M&A experience and capital raising, we think this article hits the nail on the head in terms of how Founders should be thinking about selling their business. Moreover, it does not necessarily relate to just start-up tech companies, but provides an overview of the process for entrepreneurs if you are thinking about selling your company. It is definitely worth a read.

Clare Capital advises Environmental Offshore Services on their sale to SLR Consulting

Clare Capital was the financial adviser to Environmental Offshore Services on the sale of the business to SLR Consulting.

Environmental Offshore Services (EOS) was a Nelson-based company specialising in offshore oil and gas environmental regulatory regime consultancy. EOS was owned by founder Dan Govier. Services include:

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Disruptive Innovation

If you haven’t read Clayton Christensen’s The Innovator’s Dilemma, it’s well worth a read and is the basis for this short blog post – providing far greater detail than that presented below. Here we are simply seeding the concept of Disruptive Innovation and how we believe it applies to the SaaS business model.

In a very stylistic view there are two key types of business evolution: Sustaining Innovation – incremental improvement of an existing product or service providing better value for the customer, and Disruptive Innovation – radically different perspective on innovation providing the market with something different from what might be expected by default.

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Dashboard Reporting

Traditionally financial modelling produces a series of forecast financial statements supplemented with industry specific metrics which management and investors use to analyse future performance. This information can become quite detailed and to support ease of understanding a “Dashboard” presenting summary information is often included as a reporting tool. The concept behind the “Dashboard” is to present a concise (relatively) uncluttered overview of the model outputs to aid decision making. The dashboard often includes a simplified set of statements, metrics and charts to present time series metric information.

We would like to suggest two additional charts that help to visually explaining the financial situation and performance of your business; 1. Hotspot Charts, and 2. Visual Income Statements

[Note: the information presented in the charts below is all from a fictional SaaS company, Company X with no relationship to any actual company performance]

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S-Curves for SaaS Models

“…What do all financial models have in common…” – they are all wrong….

At the core of financial modelling is calculating future cash flows. Nobody, knows exactly what the future holds; therefore how can any model be 100% correct? If they are all wrong, are they of any use? As believers of fundamental structured corporate finance, we would like the answer to be an emphatic yes. However, how useful a model is, is highly dependent on what steps have been undertaken to reduce the potential errors in the model.

This blog is not sales pitch for financial modelling. Nor is it an avenue for outlining good modelling practises to reduce human and calculation errors. Its focus is to establish the assumptions underpinning future cash flows – improved rigour here is directly proportional to the usefulness of a financial model.

Detailed financial modelling often breaks a business operation down to its simplest components – what is being sold/delivered and for what price. It’s these future sales and customer numbers that is the focus of this post, particularly in the relation to SaaS companies.

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