Updated: Dec 22, 2019
The Worldlocity 100 index tracks the average market capitalization to revenue multiple for 100+ of the largest public software companies that are traded on US exchanges (this is calculated as market capitalization divided by trailing twelve months revenue up to the most-recently reported quarter). For 2018, the index fluctuated between 6.0 and 8.1, with an average of 7.2.
As part of the index work, Worldlocity periodically produces a software report that captures various operational measures for the 100-plus companies in the index. The latest version of this report is available for download.
The key takeaways from the latest version of the report are as follows:
Software market cap leaders are growing 2.5 times faster than laggards, have net cash positions 6.2 times higher and enjoy market cap multiples 5 times higher.
Leaders generate gross margins 17% higher and use that extra margin to invest heavily in sales and marketing, research and development, and stock-based compensation.
Leaders and laggards have almost identical operating margins, indicating leaders are using their larger gross margins to invest.
There are 58 companies out of the 117 that satisfy the “Rule of 40,” defined here as 3-year CAGR% plus adjusted EBITDA% greater than 40%. These 58 companies have an average market cap / TTM revenue multiple of 9.1.
Leaders make heavy use of stock-based compensation, at 11.1% of revenue. This is 170% greater than the stock compensation of laggards.
Balance sheet health is a critical requirement for growth and for market cap multiple. Leaders had cash on hand equivalent to an incredible 93.1% of revenue, with net cash (cash minus debt) at 74% of revenue.
Outsized growth requires outsized investments in sales and marketing and research and development (R&D). Market cap leaders spent 39.3% of revenue on sales and marketing and 22.5% on R&D. Averages across the entire data set were 34.3% and 20.5%, respectively.
SaaS leadership requires a subscription / professional services revenue mix of greater than 80/20. Below that level, it is difficult to generate gross margins necessary for competitively investing in sales and marketing and R&D.
Professional services (PS) is highly dilutive to gross margin and a money-losing proposition for many software companies. Average PS gross margin is 6.9% with a median of 15.6%.
Among all reported operating variables, CAGR and net cash position are the most reliable statistical predictors of market cap multiple.