SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

The Value of SaaS vs Maintenance Recurring Revenue

Posted by Bob Warfield on October 30, 2007

Oracle’s bid for BEA valued the company at 7.5x maintenance revenue.  According to Credit Suisse, past Oracle acquisitions have all fallen into the 7x to 8x range.  BEA asked for 9x. 

This made me wonder about the value of SaaS recurring revenue.  After all, if the Oracle’s of the world are primarily after nice, safe recurring revenue streams, maintenance is one thing, but it’s computed as a fraction of the license price, usually in the 15-20% range.  Why not look at companies that get 100% recurring revenue for their software?

Here is a quick look at those figures for some publicly traded SaaS companies:

SaaS Valuation

The average is 9, which is pretty close to the 7x-8x Oracle wants to pay for recurring maintenance revenues.  A small premium for growth might make sense for these younger SaaS companies.

It’s always interesting when two relatively unrelated things, in this case a multiple on maintenance revenue and a multiple on SaaS revenue, match up so well.  That’s usually telling us we’re on the right track.

2 Responses to “The Value of SaaS vs Maintenance Recurring Revenue”

  1. ajaydawar said

    The reason why on-premise big enterprise software give multiples on recurring maintenance revenue is because the basis of this revenue is a presumed locked-in customer who cannot migrate off of the software easily. Hence the risk in the maintenance revenue is little. With the SAAS model, the recurring revenue is not less risky because the customer isn’t locked in. It may be less risky due to other reasons but not because of being locked-in. Hence I think the multiple of nine is purely coincidental. SAAS companies are being valued on the basis of growth and BEA is being valued on the basis of maintenance revenue and how much more of BEA can be sold by Oracle.

  2. smoothspan said

    Ajay, the lock-in is even better for SaaS. Certainly the re-up rates for SaaS contracts are fully on par with maintenance contracts. But there is even more that favors the SaaS vendor keeping their flock:

    1. They don’t introduce upgrades that require painful and expensive migrations the way traditional Enterprise companies do. Multitenant prevents that. In fact, a key opportunity for SaaS vendors to steal customers is when that pain of upgrade becomes to great. The Enterprise companies for their part raise maintenance or stop supporting out of date versions to keep their internal costs down.

    2. The SaaS vendor has to keep re-earning the customer’s satisfaction. The classic Enterprise vendor is engaged in milking a lucrative maintenance stream as cheaply and profitably as they can.

    3. Upgrades are not just for software, hardware wears out and can be upgraded to make it more efficient. Disk space runs low as archives build up. This is all built into the cost of SaaS, but is extra cost for Enterprise on top of the maintenance fees. Don’t forget the operational costs too. The older the Enterprise version that’s kept on, the worse it gets. Pretty soon the 3rd parties quit supporting the versions the old Enterprise App must run on. IBM, BEA, and Oracle are legendary for this. That’s when you’re really stuck between a rock and a hard place. Do an expensive upgrade on your Enterprise App or run the ancillary app servers and databases unsupported. What a choice! The SaaS vendors don’t take you there.

    The SaaS model is all about recurring revenue. More recurring revenue than traditional models offer. Wall Street is well aware of that.

    Cheers!

    BW

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