After the bell yesterday, Box and Workday, well-known players in the SaaS space, reported their recent quarterly financial performance. The market’s reaction to the firms’ numbers was notably muted given that both companies beat investor expectations.
Indeed, the market response to Box and Workday earnings may indicate that the recent run in SaaS stocks is losing steam. For private SaaS companies, public investors could be signaling a soft ceiling for revenue multiples.
And that matters. As a number of SaaS and cloud-centric stocks have seen their fortunes dramatically recover over the last year, it has painted an increasingly rosy picture for startups working in the same space. Crunchbase News has covered the trend, specifically highlighting Box results to draw a new picture of current SaaS revenue multiples and public cloud company returns.
But the SaaS market looks a little less rosy today. Let’s quickly examine the respective results of Workday and Box to gain our footing on what’s happening.
Shares of Box are off around 1.7 percent today after the company beat revenue expectations by reporting $122.9 million in top line, ahead of estimates of $121.7 million. The firm’s adjusted earnings per share were $0.11, better than expectations of an adjusted $0.13.
Box suffered, at least some, from a mixup in its analyst expectations that led many — your humble servant included — to report that Box missed on revenue. It didn’t.
The firm’s shares recovered from after-hours lows, but remain down slightly. Why? It wasn’t billings, which came in ahead of expectations, or full-year revenue guidance, which the company “narrowed” according to MarketWatch.
Instead, it seems that the firm’s swing back to negative free cash flow, coupled with a slowing revenue growth (as a percent), was enough to drive investor pessimism. But Box shares this morning are off just 7.6 percent or so off of 52-week highs. So Box is down a smidge from recent records. Still, the firm is up nearly 50 percent from its 52-week lows.
Finally, Box’s CEO Aaron Levie stated both in the firm’s earnings call and on CNBC that his company will return to free cash flow positivity in the current and fourth quarter of its fiscal years. It seems that Box took quite a number of charges relating to its conference and international real estate in a single quarter. If Box was gently packing those expenses into a single period so as to eat all its lumps at once, the strategy appears to have worked.
That leaves us here: Box beat expectations and the cashflow result appears more blip than chronic illness. Regardless, Box shares are down. Perhaps investors are saying that, for a SaaS company with $452.8 in trailing revenue, and a most-recent YoY quarterly growth rate of 28 percent, a market cap of around $2.6 billion and a revenue multiple of 5.7 are just about correct.
That’s a good baseline for any SaaS startup.
Workday, a far larger company than Box, also beat expectations in the quarter. Here’s ZDNet’s coverage:
Non-GAAP earnings were 24 cents per share on revenue of $525.3 million, up 40.6 percent annually. Subscription revenue was $434.5 million, an increase of 42 percent from the same period last year.
Wall Street was expecting Q2 earnings of 15 cents per share on revenue of $507.4 million. Despite the earnings beat, Workday’s share slipped slightly after hours.
ZDNet also notes that Workday’s quarter was its “fourth consecutive quarter of more than 40 percent growth in subscription revenue.” The firm is deeply unprofitable on a GAAP basis.
Still, the firm managed a steep beat in revenue, subscription revenue, and non-GAAP profit. Its shares after hours are up around two percent, after dipping below flat earlier in the day. It’s a muted reaction; however, it’s a reaction that is perhaps less surprising in context.
Shares of Workday are only a few points off 52-week highs and are up more than 65 percent from 52-week lows. So the company has already enjoyed its run, and a lot of its beat was likely already priced into its value.
That fact, coupled with Box’s small fall after its own earnings beat, helps make our case that the SaaS run could be nearing a local maximum. SaaS stocks were punching bags in the early quarters of 2016. Now into the third quarter of 2017, they could be slightly overbid.
As always, public SaaS companies help set valuations down the maturity chain. (Said another way: less-mature, private SaaS companies are impacted by their post-IPO brethren.) If public SaaS companies are on a tear, it helps private SaaS companies secure prior valuations or set new ones. If public SaaS companies tank, the opposite happens.
So to see Box and Workday beat, and then largely go unch, may imply that private SaaS companies are seeing public SaaS multiples crest-out.
It might even be a good time to go public—who knows.
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