The State of the SaaS Market: An Industry Snapshot

Cloud computing is projected by Gartner research to boom from $67 billion in 2015 to $162 billion in 2020, attaining a compound annual growth rate (CAGR) of 19%. At the same time, the public cloud services market continues its rapid evolution and expansion, up nearly 29% in the first half of 2017 according to the IDC. While the global public cloud service market is expected to skyrocket to $246.8 billion by the end of the year, the growth is unevenly spread across SaaS, PaaS and IaaS.

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While SaaS still maintains a near 70% hold over the total public cloud market, it posted the slowest year-over-year growth rate out of the three leading segments with a 23% increase in sales over last year. That being said, industry experts say the SaaS space, which raked in $63.2 billion in revenues throughout the first half of 2017, will continue to be a hot market for years to come.

“Many companies have picked the low-hanging fruit, in terms of apps that could be easily moved to the cloud, and are now evaluating the migration of their next set of larger strategic systems (i.e. ERP, supply chain applications, etc.) to a SaaS model,” said IDC analyst SaaS program VP Eric Newmark. “These projects, coupled with companies’ efforts to embrace digital transformation, will continue to fuel strong SaaS growth.”

In the third quarter, there were 593 reported software M&A transactions, which includes SaaS, on premise, mobile and internet deals, according to a report by M&A advisory services provider Software Equity Group. About 34% of those deals, or 204, were in the SaaS segment. Quarterly SaaS deals increased 4.6% from Q2, which saw 195 deals, and grew 5.7% year-over-year from Q3 2016, which posted 193. SEG forecasts SaaS M&A transactions will reach about 820 by the end of this year, reflecting a 10% increase over 2016 at 740 deals and accounting for nearly 45% of all software transactions. SEG also expects to revise Q3’s figure to above 600 transactions by next quarter’s publication, marking an industry first.

Out of all product categories, CRM and Marketing were the most active segments, comprising 20.5% of all SaaS transactions and 49 deals. The second most active product category was Analytics & Business Intelligence, which posted 21 transactions.

About a quarter of all SaaS sellers were vertically focused, down from 32% in the previous quarter. Education was the most active vertical category, making up 18% of all vertically-focused companies, while Real Estate and Financial Services tied for second, each with a 10% share of all vertical deals.

EV/Revenue multiples in the SaaS space have hovered near an all-time high for a majority of the past two years. The most recent quarter saw a TTM median revenue multiple of 4.5x, just below last quarter’s 4.6x multiple. Ecommerce Enablement Software, which includes deals such as Salesforce’s acquisition of Demandware and Futaba Corporation’s buyout of Kabuku, posted the highest TTM median EV/Revenue multiple at 5.0x.

As enterprises move away from on premise models to the cloud, on premise M&A volume continues to decline while SaaS grows. In the third quarter, the SaaS median revenue median of 4.5x reflected a near 150% premium over on premise valuations, at 1.8x.

In Q3, the private market continued to dominate, with equity backed strategic buyers making up 40.9% of all deals and acquiring more SaaS companies than their publicly traded strategic buyer counterparts. As private equity drives the SaaS buyer landscape, Thoma Bravo, Vista Equity Partners, TPG Capital and Francisco Partners were among the most active over the past 12 months.