Software Company Valuations, 2019 Year-End Review

Updated: Jan 5

Multiple of revenue ended year at 8.6 with high of 9.9 and a low of 7.1. Average multiple expansion was 19% for the year.

The Worldlocity 100 index tracks the average market capitalization to annual revenue multiple for 100 of the largest public “pure-play” 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). The index for 2019 actually included 119 companies. The index will be updated in Q1, 2020 to add companies that have recently gone public and for which full year information is available, and to delete companies that have either been acquired or been take private.

The following chart shows the 2019 week-to-week change in the index. For 2019, the index fluctuated between a low of 7.1 and a high of 9.9, with an average of 8.7 (average of all the readings taken). The index ended the year on December 31, 2019 at 8.6. For 2018, the index fluctuated between 6.0 and 8.1, with an average of 7.2.

“Pure-play” is defined here as a company that derives all of its direct and indirect revenue from software. Direct revenue is revenue from clients paying for a license or subscription for the use of software that is designed, developed, sold, and supported by the company. Indirect revenue consists of services that result from direct revenue (i.e. clients paying for a license or subscription for access to the software). Indirect revenue includes operations, support, and professional services. Operations, which is included in subscriptions fees, includes running and providing access to the software and deploying new releases, typically via a public or private cloud. Support includes technical and application advice on the use of the software, and reporting and fixing defects. Professional services includes implementing the software, providing advice, and training and education.

The following chart shows the market cap to revenue multiple distribution of the 119 companies in the index, as of December 31, 2019. The maximum multiple is 32.5 and the minimum is 1.3 as of the end of the year. The average is 8.6 and the median is 6.9.

The following chart shows distribution of multiple changes across the 119 companies for the year 2019. The average change for the 119 companies was 19%, with a high of 178% and a low of minus 63%. 90 of the 119 companies expanded their multiple in 2019.

The 2010s were an incredible decade for software. It will be interesting to see what happens in 2020 and in the decade of the 2020s.

A copy of the 2019 Software Operational Benchmark Report (published in June, 2019) can be downloaded here.