I touched on it...
Typing this up quick so excuse the typos/autocorrect in any of my posts
BTW, you are asking the right questions and I like your thinking
"Many SaaS companies will have ups/downs if you look at performance with a narrow lens which is why looking at year over year might give you a better perspective as it can adjust for seasonality and other factors."
"You also may want to look at, has a company made a significant change to their product offering. If you are wondering why that matters, most potential customers will delay their purchase until the 'new version' comes out. I've posted previous examples like Day Software who's sales sunk big time while they were in transition and then exploded one complete. Then Adobe purchase them."
Not every SaaS company goes straight up. Some do. Some sit at next to zero revenues for a few years and then explode. Look at the early days of some of the giants, one I know every well as my company looked at buying them for what that is worth. I forget who said it. It was someone well known. You need a lot of luck to be successful. Being smart or having a great product isn't all it takes.
Remember on a conference call one analyst asked if there is any seasonality to the business model and the CEO said absolutely. That is part of what you are seeing and why the company is diversifying which will round out the peaks and valleys.
Direct Sales software business is a tough business to be in because the company wants to pass the cost onto their distributors and the distributors want to make money before they even invest $10. There was a great interview with another CEO I posted 6-12 months ago that described this paradox perfectly.
But keep in mind, it's a very attractive business for companies like Microsoft, Oracle, Salesforce, SAP to acquire which the latter did when they purchased Callidus Cloud in 2018 for $2.4B. Callidus had a nice suite of Direct Sales products. Maybe the only one of it's size and certainly the only public company.
It's also a very hard space for the big companies to break into as you seen with the smaller ones as it's very much relationship driven. And not just any relationship, but those Direct Sales companies only trust people that have been in the business for years that have a ton of experience.
So that would bring me to point out when doing DD. What does the company you are looking at have that no or few have? It can be something as simple as those relationships/experience and/or more.
What I'd like to do is put together a check list and then 'test' that against other companies like QTMM - Quantum that ih8aloss suggested. I think it will be much better than the old paint brush that many use. I can start it and others certainly can add to it.
SaaS investing is hot. Look at the SaaS IPO table that was in a link I shared earlier put I'll post it at the end. For every SaaS product one of the companies I consult for uses, I've looked at all their competitors. Funny to see one of the lower ones on the list that didn't win our business so no surprise they aren't going as well as the others.
To your 4 points
- Yeah, kind of. SaaS revenues will be recognized over 12 months so won't hit right away, but you still should have Q2, Q3 come into play. What you may want to consider is how fast does it take to deploy any SaaS product. Sometimes it can take a year. One vendor I am working with, they gave me a year to get to 4000 devices and I signed a discounted deal based on getting 8000. I don't ever have to get to 8000, but I did have to get to 4000 to keep the pricing. If a SaaS company is doing a deal for say 10,000 users, when will those users adopt the platform. Usually you have the 1/3, 1/3, 1/3 rule. Early adaptors, forget what the middle group is called and then stragglers, technically challenges or they call them late adopters to be nice.
- No, revenue would be spread out across all quarters
- I think all clients have a churn in Q4 within Direct Sales. Heck, there is a high churn in just sales people in general.
- Yup, that is true across the board. The company I am consulting for is doing well, but they cut investments by 50% just to be safe as there are a lot of unknowns with the pandemic. Now it's a little easier to forecast but many companies are feeling the effect of reduced budgets
Typing this up quick so excuse the typos/autocorrect in any of my posts
BTW, you are asking the right questions and I like your thinking
"Many SaaS companies will have ups/downs if you look at performance with a narrow lens which is why looking at year over year might give you a better perspective as it can adjust for seasonality and other factors."
"You also may want to look at, has a company made a significant change to their product offering. If you are wondering why that matters, most potential customers will delay their purchase until the 'new version' comes out. I've posted previous examples like Day Software who's sales sunk big time while they were in transition and then exploded one complete. Then Adobe purchase them."
Not every SaaS company goes straight up. Some do. Some sit at next to zero revenues for a few years and then explode. Look at the early days of some of the giants, one I know every well as my company looked at buying them for what that is worth. I forget who said it. It was someone well known. You need a lot of luck to be successful. Being smart or having a great product isn't all it takes.
Remember on a conference call one analyst asked if there is any seasonality to the business model and the CEO said absolutely. That is part of what you are seeing and why the company is diversifying which will round out the peaks and valleys.
Direct Sales software business is a tough business to be in because the company wants to pass the cost onto their distributors and the distributors want to make money before they even invest $10. There was a great interview with another CEO I posted 6-12 months ago that described this paradox perfectly.
But keep in mind, it's a very attractive business for companies like Microsoft, Oracle, Salesforce, SAP to acquire which the latter did when they purchased Callidus Cloud in 2018 for $2.4B. Callidus had a nice suite of Direct Sales products. Maybe the only one of it's size and certainly the only public company.
It's also a very hard space for the big companies to break into as you seen with the smaller ones as it's very much relationship driven. And not just any relationship, but those Direct Sales companies only trust people that have been in the business for years that have a ton of experience.
So that would bring me to point out when doing DD. What does the company you are looking at have that no or few have? It can be something as simple as those relationships/experience and/or more.
What I'd like to do is put together a check list and then 'test' that against other companies like QTMM - Quantum that ih8aloss suggested. I think it will be much better than the old paint brush that many use. I can start it and others certainly can add to it.
SaaS investing is hot. Look at the SaaS IPO table that was in a link I shared earlier put I'll post it at the end. For every SaaS product one of the companies I consult for uses, I've looked at all their competitors. Funny to see one of the lower ones on the list that didn't win our business so no surprise they aren't going as well as the others.
To your 4 points
- Yeah, kind of. SaaS revenues will be recognized over 12 months so won't hit right away, but you still should have Q2, Q3 come into play. What you may want to consider is how fast does it take to deploy any SaaS product. Sometimes it can take a year. One vendor I am working with, they gave me a year to get to 4000 devices and I signed a discounted deal based on getting 8000. I don't ever have to get to 8000, but I did have to get to 4000 to keep the pricing. If a SaaS company is doing a deal for say 10,000 users, when will those users adopt the platform. Usually you have the 1/3, 1/3, 1/3 rule. Early adaptors, forget what the middle group is called and then stragglers, technically challenges or they call them late adopters to be nice.
- No, revenue would be spread out across all quarters
- I think all clients have a churn in Q4 within Direct Sales. Heck, there is a high churn in just sales people in general.
- Yup, that is true across the board. The company I am consulting for is doing well, but they cut investments by 50% just to be safe as there are a lot of unknowns with the pandemic. Now it's a little easier to forecast but many companies are feeling the effect of reduced budgets
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