SaaS Portfolio 3Q Sales Performance Analysis

We have entered the quarterly reporting season. Based on the IT companies that have already announced their quarterly results, it appears that the worse of the economic slowdown may be behind us.  Not only 3Q results are coming in on or above target, but CEOs of IT companies and analysts are more confident about the 4Q results.  Moreover, in some recently published surveys, CIOs and business unit executives stated that during the 2H09 they will start investing again around their IT initiatives, and are forecasting modest growth of their 2010 IT budget.

In this environment public SaaS companies, regardless of size, are doing particularly well and their stock performance is outperforming the broader market.  A recent report published by Saugatuck Research (see graph below) highlights that a) after several quarters of revenue declines, SaaS companies will start experiencing revenue growth again during 4Q and b) the revenue growth of SaaS vendors, even during the recent tumultuous quarters, has outpaced that of their on-premise competitors. 

Let’s now turn to the 3Q09 performance of Trident’s SaaS portfolio.  While we measure the performance of our SaaS portfolio companies using a variety of Key Performance Indicators, e.g., MRR, for the purpose of sales performance analysis we look at the following metrics:

1. Renewal rates, i.e., what percent of the customers that were supposed to renew during the quarter actually did so.
2. Upsells to existing customers, in the form of expanding the use of an existing solution (for example, adding seats), buying additional modules of a solution, or buying a new solution.
3. Sales to brand new customers.
4. Contract terms, including payment terms since they impact cash flow.   We monitor whether the customer accepts the vendor’s contract terms or whether custom contracts are created.  For example, is the customer signing a one-year or a multi-year contract?  Is the customer willing to pay for the term in one installment, two, or more?
5. Sales and marketing costs, and sales cycle.  What was the cost/lead?  What did it take to convert a lead to an opportunity and how much did it cost?  What did it take to convert the opportunity into a sale?  Did it require custom demos, lengthy and costly evaluation periods, on-site visits?
6. Sales forecast accuracy.  Was the sales force able to close the accounts it projected every month of the quarter? Were the wins as large as had been anticipated?
7. Pipeline coverage needed to achieve the monthly and quarterly targets.

Our observations were:

1. Renewal rates, taking into account churn, were achieved and after mid-August they were more predictable.  This time the customers were not waiting until the very end of the quarter before they renewed.  Moreover, renewals, by and large, didn’t require as many calls as in the recent past.  However, our portfolio companies’ assumptions on churn came on the higher end of the range.   Since the beginning of the year our companies have been assuming 15% annual churn, whereas as investors we consider 8-10% annual churn as the right target.
2. Surprisingly, upsells during the quarter were more challenging than new sales.  This is the reverse of what our companies experienced during 2Q.  We believe that unfortunately this is due to the continued layoffs in several companies, implying that application usage is not expanding.
3. Smaller companies (less than $200M in annual revenues) were making purchasing decisions faster than mid-size companies ($300-800M in annual revenues).  In fact, it also appears that there was more inbound interest from the smaller companies during the quarter.  More customers opted for longer term contracts (2- and 3-year contracts).  This is a complete reversal than what we saw during 2Q when several customers were opting for annual contracts with monthly billing.
4. For 4Q opportunities the sales executives continue to feel more comfortable with 4x pipeline coverage (i.e., the pipeline must contain qualified opportunities that are valued at 4x the quarterly sales target), same as in the 3Q.
5. Sales and marketing costs per sale continue to increase.  Companies are staying within budget by being frugal in R&D and G&A.  The former is not sustainable as our companies will need to continue investing in their products to stay ahead of the competition and attract customers from additional segments and industries.

During 3Q our SaaS companies continued to perform particularly well and are poised for start growing more aggressively during 4Q and 2010.  Based on anecdotal input we have received from corporate executives as well as the data that is being reported from broader market surveys, we expect that during 2010 the revenue of our SaaS companies will be able to grow by at least 30%.

Comments

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