1
Q4 2019
Sector
Update
Software
Important disclosures appear at the back of this report
GP Bullhound LLP is authorized and regulated by the Financial Conduct Authority
GP Bullhound Inc is a member of FINRA
2
GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to category leaders with
an emphatic focus on software globally
▪ We publish a quarterly SaaS market report to provide quantitative insights into public and private market valuations across the transaction spectrum and qualitative
insights into company business models, technology and trends
▪ We feature many of the leading SaaS companies and CEOs across interesting sub-sectors
▪ Based in our San Francisco office, Jonathan Cantwell is the head of our software practice with over 15 years of experience
▪ Completed over 50 transactions with public and private tech companies globally
▪ Raised $400m of capital for our clients over the last 12 months
▪ Several of our recent software advisory transactions and investments are showcased below:
Software perspectives
EXECUTIVE SUMMARY
UNDISCLOSED
$177M
UNDISCLOSED
$50M
Validity
Signavio
deltaDNA
Partnerize
EcoVadis
ACQUIRED BY
INVESTMENT BY
ACQUIRED BY
INVESTMENT BY
INVESTMENT BY
AppBuddy
Apax Digital
Unity
Accel - KKR
CVC
$200M
3
Key sector takeaways
Recent software transaction trends
1
Agenda
2
Public market SaaS analysis
SaaS CEO commentary
Key SaaS metrics
Appendix A: GP Bullhound SaaS index
3
4
5
6
Appendix B: software public comparables by category
7
Appendix C: GP Bullhound credentials & team
8
4
Section 1
Key sector takeaways
5
Current trends in software
KEY TRENDS
Low-code / no-code platforms are driving innovation at all levels of a business
1
2
3
4
Computer vision is going to drive new developments across several industry verticals
Edge computing begins its exponential growth as technology enables devices to
process data in real time without the latency
5
6
Late stage financing is trending down in 2H’19 and will continue to do so in 1H’20
Automated ML modeling in enterprise solutions
Scale premium and greater access to sources of financing insulates public markets
from increasing focus on profitability in the private markets
6
Current trends in software
KEY TRENDS
1
▪ Software and mobile applications have become an integral part of our everyday life, but in order to maintain that level of
relevancy applications require constant maintenance, feature-set upgrades and innovative ideas. Building applications using
traditional code and software developers have proven to be expensive and time-consuming
▪ Low-code / no-code platforms provide a beginner-friendly alternative that uses drag-&-drop tools to help users visualize code
modules; eliminating the need for traditional coding language. This allows businesses to hire less expensive talent, scale their
applications quicker with new consumer trends and reduce the length and complexity of the project lifecycle – all of which lead
to a quicker and easier deployment
▪ As 2020 progresses, expect more businesses to implement low-code / no-code platforms and the amount of developers with non-
traditional IT or software developer backgrounds to increase significantly
Low-code / no-code platforms are driving innovation at all levels of a business
2
Computer vision is going to drive new developments across several industry verticals
▪ Developments in the functionality and application of artificial intelligence (AI) are driving advancements across all sectors of
technology. One area that is gaining major traction, and will continue to do so through 2020, is computer vision. It utilizes a deep
learning algorithm that powers a neural network to decipher images and derive contextual meaning
▪ The applications of computer vision are incredibly diverse and can be incorporated across all industries, such as healthcare, retail
and transportation. It can be used to analyze medical reports and images to provide more accurate diagnoses, track customer
movement and purchases in-store and guide autonomous vehicles, respectively
▪ Throughout the upcoming year, advancements in AI and deep learning are going to push the boundaries of computer vision,
automating routine processes to make them quicker, simpler and more precise
7
Current trends in software
KEY TRENDS
3
▪ The edge computing market is set to grow ~10x from $1.7Bn in 2018 to $16.6Bn by 2025, making it one of the fastest growing
segments in the software space1
▪ Edge computing is particularly useful in time sensitive situations (think oil well sensors, where milliseconds can be the difference
between a major disaster and fixing an issue), Gartner predicts that by 2023 there could be more than 20 times as many smart
devices at the edge of the network as in conventional IT roles
▪ Edge computing alone has limited storage capability and still requires its centralized counterpart to maximize its full computing
capabilities. Going forward, edge computing will present a third option to the traditional private versus public cloud structures,
utilizing a combination of both centralized and decentralized data processing. Businesses can utilize the benefits of each
architecture and implement a hybrid cloud and edge computing solution to optimize their networks for efficiency and greater
scalability
Edge computing begins its exponential growth as technology enables devices to
process data in real time without the latency
4
Automated ML modeling in enterprise solutions
▪ Machine learning’s rapid adoption across all industry segments made it one of the most important areas of technological
innovation. However, building successful data models that can deliver actionable insights in any field requires significant technical
knowledge and talent that many companies can’t afford to hire. Companies like Google, IBM and Amazon understand this pain
point and are kicking off the next wave of innovation in machine learning – automated machine learning (AutoML)
▪ AutoML is essentially the process of algorithm selection, hyperparameter tuning, and modeling assessment which optimizes data
models with little to no human interaction. This increases productivity by automating repetitive tasks / processes and allows users
to deploy complex data models without having to hire expensive talent
▪
In 2020, expect more companies to leverage automated machine learning platforms to deploy dynamic and consistently
optimized models. This will expand user capabilities beyond the traditional data scientist role, making this technology available to
all levels of an enterprise
(1) Allied Market Research
8
Current trends in software
KEY TRENDS
(1) Crunchbase
5
Scale premium and greater access to sources of financing insulates public markets
from increasing focus on profitability in the private markets
6
Late stage financing is trending down in 2H’19 and will continue to do so in 1H’20
▪ Late stage VC funding is down 13%1 in Q4 year over year and demand is lower than expected for traditional equity as companies
seek to avoid down rounds by raising through traditional debt vehicles instead. Demand is also lower than expected for
convertible debt because often a return is tied to an IPO price, yet liquidity comes much later after the IPO lockup period and
thus face an increased risk
▪ A significant driver behind the decline in funding arose from a series of high-profile misses in Softbank’s Vision fund, and other
mega funds like it; which was primarily enabled by their ability to write larger checks, command higher valuations and make long
term investments that other investors find too risky. Mega fund-backed companies are separating themselves very quickly, leaving
less capital for the rest of the market; forcing other VC’s to assess their next investment carefully in order to catch the next unicorn
▪ Going into 2020 expect a similar trend in total funding amount and volume as the market corrects for the mega fund missteps,
which will in turn force companies toward alternative sources of financing
▪ We have experienced a change in attitudes on behalf of investors and buyers in the software transactions we work on.
Increasingly, profitability or a clear path to profitability are being valued much more highly than the old ‘growth at all costs’
approach. The anecdotal evidence we are receiving is that unless revenue growth is in the 70%+ category, multiples are
negatively impacted if there is no path to profitability
▪ Public market data does not reflect the same pattern though, with unprofitable companies valued more highly than profitable
companies on an EV/Revenue basis 6.4x EV/Rev for profitable vs 8.7x EV/Rev for unprofitable. This is likely because there is a scale
premium applied to these much larger businesses, whereby access to financing decreases the risk of investing in an unprofitable
business, and growth implies market share advantage/gain and leadership position in the space
9
Section 2
Recent software transaction trends
10
Announce
date
Target
Buyer
Target description
Value
($m)
Implied
EV/LTM Rev
Dec-18
Digital advertising solution
that helps advertisers create,
launch and iterate
1,817
7.9x
Dec-17
Unified communication &
collaboration, identity &
access management
4,180
3.4x
Dec-13
Cloud-based accounts
receivable automation
95
16.3x
Dec-12
Database performance
management
118
‒
Dec-4
Cloud-based learning
management platform
2,000
7.6x
Nov-20
eProcurement and AP
automation solutions
‒
‒
Nov-11
Data protection platform for
businesses, including backup,
and disaster recovery
1,450
3.3x
Nov-5
Marketing campaign
orchestration and content
management platform
‒
‒
Oct-22
Platform that lets marketers
plan and buy video ad
campaigns
150
‒
Oct-22
Media communication
technology and analytics
2,645
3.5x
Oct-17
Low-code tool for easily
automating many aspects of
Jira
‒
‒
Oct-7
Customer revenue
optimization (CRO) cloud
solution for sales and the
extended revenue teams
84
3.5x
Source: Capital IQ, Pitchbook
(1) GP Bullhound client
Notable software M&A deals and private financings
Q4 2019
Mean
6.5x
Announce
date
Issuer
Lead investor
Issuer description
Capital
raised ($m)
Jan-8
AI-powered automation
platform that delivers data-
driven intelligence and
management tools
50
Dec-18
Recruitment platform that aims
to increase diversity
8.5
Dec-17
SaaS Work Management
System (WMS) manages the
entire non-employee
engagement lifecycle
35
Dec-17
AI-powered career
development platform that
matches users with
personalized opportunities
25
Dec-17
Open-source suite of
integrated business
applications
90
Dec-9
Digital adoption platform that
simplifies the user experience
90
Dec-4
customer service CRM platform
helping contact centers and
businesses reimagine service
and support
60
Nov-21
Robotic process automation
software
290
Nov-21
Process mining for business
transformation
290
Nov-21
Investment management
platform for commercial real-
estate
75
Nov-4
Back-office management
software for the salon and spa
industry
11
Oct-17
Provider of AI-powered call
tracking and conversational
analytics solutions
56
Selected M&A transactions
Selected private financings
Arena
Holdings
1
11
Source(s): Pitchbook as of December 31, 2019
Note: Data includes all “SaaS” M&A and private placement deals as defined by Pitchbook regardless of geography or
transaction size
Global software transaction trends
M&A AND PRIVATE PLACEMENT ACTIVITY BY QUARTER
Total deal volumes remain steady while deal values slightly lower
Large recovery in total number of private placement transactions
The US and Europe continue to dominate M&A deal volume
Asia PP deal volume driven by large funds raised in the region
0
100
200
300
400
500
600
$0M
$20B
$40B
$60B
$80B
$100B
$120B
M&A
Buyout
M&A deals
Buyout deals
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
U.S. & Canada
Europe
Asia
Other
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
$0M
$5B
$10B
$15B
$20B
$25B
$30B
$35B
$40B
Total capital invested
Deal count
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
U.S. & Canada
Europe
Asia
Other
12
Selected software IPOs
Source(s): Company SEC filings from Edgar, Capital IQ as of December 31, 2019
Listed in 2019 Q4
▪ Description (NYSE:BILL): Cloud-based platform purpose-built
as an end-to-end solution that automates the SMB back office
and enables customers to pay their suppliers and collect
payments from their clients, in effect acting as a system of
control for A/P and A/R
▪ Listing Date: Dec 12, 2019
▪ Offering Amount: $216m
▪ Offering Price/Share: $22.00
▪ LTM Revenue: $121.1m
▪ Enterprise Value: $2,804m
▪ EV/Rev: 23.2x
▪ % Change/IPO Price: 73.0%
▪ Selected Metrics:
– Net dollar retention 110%
– 80,000 customers +
– ~$71bn in payment volume in 2019
– 19.89m transactions processed in 2019
▪ Description (NASDAQ:SPT): Operating across major social
media networks, including Twitter, Facebook, Instagram,
Pinterest, LinkedIn, Google and YouTube, Sprout Social
provides organizations with a centralized platform to
effectively manage their social media efforts across
stakeholders and business functions
▪ Listing Date: Dec 13, 2019
▪ Offering Amount: $150m
▪ Offering Price/Share: $17.00
▪ LTM Revenue: $96.8m
▪ Enterprise Value: $880m
▪ EV/Rev: 9.1x
▪ % Change/IPO Price: (5.6%)
▪ Selected Metrics:
– Net dollar retention 106%
– 23,000 customers +
– 30% of revenues from non-US customers
– $109m ARR
13
Section 3
Public market SaaS analysis
14
0%
100%
200%
300%
400%
500%
600%
700%
0%
100%
200%
300%
400%
500%
600%
700%
Source: Capital IQ
Note: existing cash balances allow companies to spend over 100% of operating cash flow
1. As of 2019 Q3 2. Dollar amounts represent total cash use during the LTM period
Tech giants – Show me the money
▪R&D
▪Debt paydown
▪Capex
▪Dividends
▪Share buybacks
▪Acquisitions
$13,796
$465
$458
$4,153
$818
$69,391
$35,332
$52,346
$1,104
$4,030
$53,080
$430
LTM (1) % of operating cash flow $m (2)
LTM – Q3 2018 % of operating cash flow $m (2)
▪ Substantial uses of cash for acquisitions through 2019 Q3
‒ Workday acquired Adaptive Insights for $1.5bn in an all cash deal
‒ Microsoft bought GitHub in an all stock deal which is atypical for a company with that large of a balance sheet
‒ Adobe’s acquisition of Marketo for $4.8bn in all cash
‒ Salesforce has completed very large transactions in both Tableau and Click Software using a majority amount of equity to complete the deals
▪ Significant decrease across the board in uses of cash compared to the previous year particularly for the use of acquisitions
$15,238
$425
$389
$3,755
$483
$75,831
$30,723
$46,126
$47,971
$811
$280
$3,119
15
Source(s): Capital IQ as of 12/31/2019
Note: GP Bullhound SaaS Index constituents can be found in Appendix A
GP Bullhound SaaS index valuations
REVENUE MULTIPLE TRENDS – LAST 5 YEARS
4x
5x
6x
7x
8x
9x
10x
11x
12x
13x
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
GPB SaaS Index - EV / LTM Revenues
GPB SaaS Index - EV/ NTM Revenues
Mean: 8.7x
As of Dec. 31: 10.9x
25% > 5 yr. mean
Mean: 7.2x
As of Dec. 31: 9.1x
26% > 5 yr. mean
Current SaaS valuations remain strong against the 5-year mean
16
Investors are increasingly focused on KPIs outside of revenue
as they evaluate business models
55%
42%
37%
34% 33% 31%
28% 27%
24% 23% 23% 22%
19%
17%
14% 14% 14% 13% 11%
0%
10%
20%
30%
40%
50%
60%
134%
129%
124%
120%
119%
117%
117%
106%
105%
101%
80%
90%
100%
110%
120%
130%
140%
Slack
Pagerduty Pluralsight
Zscaler
Appian
Okta
Docusign
Zuora
Box
Hubspot
39%
31% 29%
25% 24% 21% 19% 16%
12% 9% 8%
2%
0% -1% -4% -5% -7% -9%
-56%
(80%)
(60%)
(40%)
(20%)
0%
20%
40%
60%
70.5
57.4
47.6 45.3
31.3 30.2
27.7 27.4 26.3 26.1 24.0
20.0 18.2 17.0 16.8 15.8
10.9
7.2 5.4
0
10
20
30
40
50
60
70
80
Source: CapitalIQ, SEC Filings
(1) CY19E / CY18A (2) (S&M LTM Oct. 18 / ((LTM Oct. 19 Rev. – LTM Oct. 18 Rev.) * GM%)) / 12 (3) LTM Q3 19A Operating
Cash Flow / LTM Q3 19A Revenue (4) As stated in company filings
PUBLIC SAAS METRIC BENCHMARKING
Revenue YoY growth (1)
Payback period (2)
Free cash flow margin (3)
Net dollar retention (4)
In months
17
NOW
SHOP
WDAY
SPLK
PAYC
RNG
OKTA
DOCU
WORK
CDAY
COUP
ZEN
MDB
DBX
PLAN
PCTY
HUBS
AYX
PFPT
WIX
ZS
RP
ESTC
NET
FIVN
APPF
QTWO
MDLA
NEWR
CSOD
CLDR
BOX
MIME
BL
EVBG
LPSN
TENB
EGHT
PING
PS
WK
INST
SPSC
SINCH
TWOU
YEXT
FSCT
ZUO
PD
SCWX
TLND
BNFT
MOBL BCOV
ECOM
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
2019E unlevered FCF margin2019E revenue growth
Source(s): Capital IQ as of December 31, 2019
Note: Data based on GP Bullhound SaaS Index, constituents can be found in Appendix A,
excludes outliers and companies with “N/A”
2019E growth and profitability of public SaaS companies in
GPB index
The Rule of
40% Line
RULE OF 40% – PUBLIC SAAS
18
Source(s): Capital IQ as of December 31, 2019
Note: Data based on GP Bullhound SaaS Index, constituents can be found in Appendix A,
excludes outliers and companies with “N/A”
Companies whose summed revenue growth rate and FCF
margin is greater than 40%, are valued higher by investors
than those below this 'rule of 40' line
Sub-Performers
Market-Performers
Out-Performers
RULE OF 40% – PUBLIC SAAS (CONT’D)
19
Source: Capital IQ as of December 31, 2019
Note: GP Bullhound SaaS Index constituents can be found in Appendix A
GP Bullhound SaaS index performance
INDEX VALUE
90%
95%
100%
105%
110%
115%
120%
125%
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Oct-19
Nov-19
Dec-19
Index ValueGPB SaaS Index - Index Value
S&P 500
NASDAQ Composite
90%
95%
100%
105%
110%
115%
120%
125%
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Index ValueGPB SaaS Index - Index Value
S&P 500
NASDAQ Composite
70%
90%
110%
130%
150%
170%
190%
210%
Jan-18
Apr-18
Jul-18
Oct-18
Jan-19
Apr-19
Jul-19
Oct-19
Index ValueGPB SaaS Index - Index Value
S&P 500
NASDAQ Composite
L1M
L3M
L6M
L12M
Dec-19
90%
95%
100%
105%
110%
115%
120%
125%
Dec-19
Dec-19
Dec-19
Dec-19
Dec-19
Index ValueGPB SaaS Index - Index Value
S&P 500
NASDAQ Composite
Dec-19
20
Section 4
SaaS CEO commentary
21
Software company CEO profile
Beamery helps the largest enterprises solve their biggest talent challenges. Talent
teams can leverage Beamery's Talent Operating System to attract, engage, and
retain world class talent more effectively, power best in class candidate
experiences, and manage the entire journey with one platform. Founded in 2014,
the company has offices in London, Austin, and San Francisco
"Talent experience and engagement in HR has been
key as enterprises adapt to attract candidates that
are harder to connect with than ever before. These
individualized experiences are only made possible by
the rapid growth of talent operations - the team that
controls the data and manages core systems - in
much the same way as their operational counterparts
have done in sales and marketing."
Abakar Saidov
CEO
22
Software company CEO profile
Combining deep learning machine vision technology with natural language
processing, Hypatos achieves unrivaled performance in understanding
information on documents. This enables Hypatos to unlock unprecedented levels
of back office process automation – a 1.6 trillion USD market opportunity. Fortune
500 including some of the world's largest manufacturers and retailers are current
customers. Three out of Big 4 rely on Hypatos in their client engagements
"Manual document processing is costly, slow, prone-
to-errors and demotivating. Template based legacy
solutions tried to tackle this problem but they are
difficult to maintain and can not automate beyond
10-15% of the work. RPA has brought further
automation however document understanding is
necessary to automate majority of document
processing tasks. Our non-invasive deep learning
module enables enterprises to reach up to 70% no-
touch automation rates within weeks ensuring a high
ROI, low risk automation deployment.”
Dr. Uli Erxleben
CEO & Founder
23
Software company CEO profile
Lingokids is an award-winning learning platform in English for children 2 to 8 years old with
more than 12 million families registered in over 190 countries. Lingokids is based on the
Playlearning™ Method: the more children play, the more they'll learn. Lingokids
collaborates with NGOs and foundations all around the globe, such as Pies Descalzos in
Colombia, and the Queen Rania Foundation in Jordania, in order to break down language
barriers and create equal learning opportunities for children around the world
"In an age driven by screen time, many parents are
worried that technology is going to harm their
children. But it's not about technology itself, it's about
how we use it. We bet on modern educational
methods to give young kids a safety-conscious and
ad-free environment that also boosts family bonding.
That's why we launched our Playtogether activities,
which foster family quality-time and collaboration
between parents and children. Besides, education is
diversifying and we want to give toddlers and little
children the opportunity to learn lessons beyond
language, exposing them to 21st-century skills and
topics, such as creativity, caring for the environment,
critical thinking, collaboration, and empathy."
Cristobal Viedma
CEO
24
Section 5
Key SaaS metrics
25
Key SaaS metrics
DEFINITIONS & CALCULATIONS
Metric
Definition
Calculation
Normalized measurement of recurring revenue, most frequently
measured with a constant value in each month of the subscription
period
MRR
All S&M expenses for new customers. Sometimes excludes
personnel management S&M costs
CAC =