Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Yesterday after the bell, Zoom and CrowdStrike reported earnings. The two technology shops, members of the SaaS cohort of public companies that has performed so well this year, had high expectations to meet.
This column noted on Monday that both companies could help set market sentiment regarding SaaS valuations at firms thought to enjoy a strong updraft from COVID-19 and its related market disruptions. Working from home means that many companies needed new, better video conferencing abilities and more security tooling, the two things that Zoom and CrowdStrike provide.
If the pair failed to detail strong recent performance, their share prices, long rising, could have dramatically corrected.
But, in a huge boon to public SaaS companies — and, therefore, late-stage private SaaS valuations and early-stage SaaS investment — Zoom and CrowdStrike reported impressive financial gains. Notably in the case of Zoom, the improved results were sufficiently priced in that the company’s share price didn’t rise much after this disclosure, but defending huge gains was still a difficult feat.
CrowdStrike shares did rise after it reported its results.
On the heels of one of the sharpest rallies in SaaS history, let’s dig into how quickly the two firms grew and see what their new valuations and revenue multiples tell us about investor sentiment. If you are in a hurry, the short answer is that the risk-on move toward SaaS stocks doesn’t look like its about to abate. For those bullish on software companies, it’s a good week.
Great expectations
Let’s talk numbers first. Here’s how things shook out:
- Zoom: Revenue of $382.2 million, up 169% compared to the year-ago quarter, ahead of an expected $202.48 million result. The firm also beat on adjusted profit ($0.20 per share against an expectation of $0.09). And Zoom’s cash generation went berserk in the quarter, with its free cash flow result besting its preceding quarter’s revenue tally. The firm also forecasted $495 to $500 million in current-quarter revenue, indicating 239.5% to 242.9% growth (YoY).
Shares of Zoom only appreciated a little during after-hours trading after reporting those results. Investors had clearly shifted their expectations up from the official analyst calls, but it was still surprising to see the company post those figures and expectations and not rise.
Zoom had higher expectations than other SaaS companies will face when they report their next set of results (Zoom’s fiscal calendar is offset from regular quarters by a month, so it was reporting its three-month results through April; the next wave of SaaS earnings will come for companies reporting calendar Q2 results through June), but the muted reaction it receives indicates that expectations are quite high.
It’s hard to look at the market reaction to Zoom’s stellar numbers and infer that public investors are ready to give SaaS companies a pass if they have a quarter or two dinged by COVID-19.
- CrowdStrike: Revenue of $178.1 million, up 85.33% compared to the year-ago quarter, ahead of an expected $165.4 million result. The company also beat on adjusted profit (positive $0.02 instead of an expected loss of around $0.07). The company’s ARR result ($686.1 million at the end of the quarter) also beat expectations ($643.1 million).
CrowdStrike, which grew less quickly than Zoom, nevertheless got a nice 9% bump in after-hours trading.
“Why?” is a fair question. The answer is actually rather simple: Investors had priced in more growth at Zoom than they had at CrowdStrike. We can see this in the two firm’s preearnings revenue multiples. Via YCharts:
- Zoom revenue multiple (based on trailing revenue results): 84.8x
- CrowdStrike revenue multiple (based on trailing revenue results): 38.3x
Expect those to change a bit as the new earnings are digested by the stats companies, but we can easily see in the two that Zoom had a higher bar to clear than CrowdStrike.
So what?
Let’s relate this all back to other, more pedestrian SaaS stocks. The Bessemer Cloud Index notes that the current revenue multiple for companies it tracks is around 16.8x. Sadly this is a different number than the above multiples as it doesn’t take into account trailing revenues (it instead uses a company’s most recent quarter multiplied by four for the revenue part of its equation), and uses enterprise value instead of market capitalization for the numerator of its math.
Fair enough. But that means we can push the result up a bit to allow for a more direct comparison. Would the Bessemer SaaS average work out to be around 20x if we used trailing revenue instead of annualized quarterly results? If so, the average SaaS company that is public today would have around half the multiple that CrowdStrike has currently earned.
Can the other companies live up to that pressure? Half of CrowdStrike’s performance is still 40%+ growth, lots of free cash flow and some adjusted profits. The Bessemer Cloud Index medians are 31% growth and just a 6.7% free cash flow margin, as of this morning’s data.
So while we’re seeing Zoom and CrowdStrike hold onto, and extend, their recent gains in light of their impressive financial results, investor response makes other SaaS shares seem almost expensive.
For late-stage startups looking to raise money who will be valued against public comps, this is all good news; strong public valuations will help them defend and extend their private valuations. For earlier-stage SaaS businesses, the general market frenzy for SaaS shares could help drive more investment into younger companies using the business model as investors anticipate continued rich returns for equity in modern software companies.
All that and there aren’t too many more hurdles ahead of SaaS until Q2 earnings. Perhaps the cohort of public firms can stay in orbit until that next results check-in.
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