Subscribe to the Crunchbase Daily

Most companies would kill for similar value creation. Slack, however is in a tricky spot. After setting a $26 per-share reference price for its direct listing, and trading as high as $42, its stock has rapidly lost altitude. Indeed, Slack shares have fallen under the $25 per-share mark, reducing its worth to the previously mentioned $13 billion.

Slack, once a private market darling is now enduring a more difficult run as a public company. Its most call pushed its shares down by 15 percent before they recovered to a single-digit percentage loss. Later the firm’s equity depreciated anyway, falling from a pre-earnings $31 to this week’s sub-$25 range.

A good question is why; why is Slack’s stock falling? There appear to be a few possible reasons, including , a broader SaaS repricing, and the chance that Slack’s public market valuation simply got away from it. We’ll peek at each and relate the situation back to startups as we go.

Three Whys

To summarize our three thoughts, Slack’s public market declines could be built on the fear that Microsoft will blunt its growth profile with its competing Teams product, that software-as-a-service (SaaS) companies are seeing a broader repricing of their revenue (SaaS firms are valued at multiples of revenue instead of a multiplication of profit), or, that Slack was simply overvalued by public market investors when it first began to trade.

Microsoft

Redmond is not interested in allowing Slack to burrow its way into the productivity stack of the next corporate generation. We’ve covered Microsoft’s Teams push here at Crunchbase News for years, noting that the larger company was working hard to grow its internal communication tooling after in years past.

There’s no perfect way to gauge investor sentiment in relation to a single idea. But it is hard to see how public investors could be overly worried about Teams and Microsoft today, given recent Slack performance figures.

After reporting 58 percent revenue growth in its most recent quarter, Slack’s CFO reported the following concerning large accounts (the very market category we’d presume that Microsoft’s Teams product would do best amongst):

We remain focused on expansion within existing customers and growing our large enterprise customer base, and ended the quarter with 720 Paid Customers greater than $100,000 in annual recurring revenue, which is up 75% year-over-year.

That’s nice and healthy. Whatever impact Microsoft is having on Slack, and it must have at least some, regardless of what people keep telling me on Twitter, it doesn’t appear to be existential to growth in the short term.

For startups, the above indicates that even when an incumbent technology behemoth enters your market aggressively, there’s still space for you provided that your brand is strong. Slack is a verb; Teams is a competitor.

SaaS Repricing

Software-as-a-service companies have been repriced by the market in recent weeks, but not much. We’ve covered the slight decline in the value of SaaS revenue, noting that from a high of 11x enterprise value/revenue the market has .

But the multiple data from the cloud index just makes plain what we can see in the markets. The same index has been mostly flat over the past few quarters while the companies that make up the index have grown. That puts natural downward pressure on revenue multiples. But all the same, the slow change in the value of SaaS revenue is insufficient to explain Slack’s value changes.

For startups, the takeaway from the above is that public markets still value SaaS companies highly, at least when compared to historical norms. That’s welcome news for quickly-growing private companies that sell code instead of widgets.

Overpriced?

Let’s see if Slack is valued more richly now than before on a revenue basis, and how that may stack up to peers.

As we often do with SaaS companies we’ll use its quarterly revenue tally as the foundation of our ARR calculations. This blends some non-recurring revenue into the figure, but it’s the best that we can do in the case of Slack. What follows are the company’s revenue results for the past four quarters, and its implied ARR:

• Slack Q3 2018 revenue: $105.6 million ($422.4 million ARR)
• Slack Q4 2018 revenue: $122.0 million ($488 million ARR)
• Slack Q1 2019 revenue: $134.8 million ($539.2 million ARR)
• Slack Q2 2019 revenue: $145.0 million ($600 million ARR)

As we can see, Slack has rapidly grown its GAAP revenue, and its implied ARR.

Recall that Slack was worth about $7.1 billion in Q3 2018, and is worth about $13.2 billion today. Using the firm’s Q3 2018 and Q2 2019 ARR numbers, which valuation (loosely) provides the more attractive (lower) multiple?

• Slack Q3 2018 implied ARR multiple: 16.9x
• Slack Q2 2019 implied ARR multiple: 22x

As you can see, Slack’s ARR multiple today is higher than it was. And both its Q3 2018 and Q2 2019 ARR multiples are far above what the Bessemer index sports. (Note: we can’t directly compare the results as we are doing ARR calculations using market cap on one side, and enterprise value/revenue on the other. But the gap is large enough to show Slack as an outlier.)

Now recall that Slack was worth far more a few months ago. That means that its ARR multiple was evenÌýhigher before. Slack’s declines, therefore, feel much more like the firm inching closer to market norms than it being repudiated by public investors. You simply cannot say that Slack is being dissed by public investors when it is still richly valued compared to its comps.

The lessons for startups in the above is that top-tier SaaS companies can command strong revenue multiples, but that they are not unlimited. No matter who you are.

Wrapping Up

Yesterday, , a managing partner at shared a chart with Crunchbase News () that detailed the premium that faster-growing SaaS companies enjoy over their more slowly-growing peers. In this context, we can add a final wrinkle to Slack’s revenue multiple declines.

It’s perfectly reasonable to say that Slack’s falling net retention rate (from 138 percent in the quarter ending April 2019 to 136 percent in the quarter ending July 2019) implies a slower future growth rate. And that is causing investors to reprice Slack downward, akin to what Richards’ chart would lead us to understand.

But Slack is still a richly-valued SaaS company putting up quick growth from a position of wealth; the company has more cash than the ferrous financial institution. So while Slack’s falling share price makes for good headlines, upon closer look the situation appears to be more return-to-senses than dramatic diss.

Illustration: .

This morning we’re back to annual recurring revenue (ARR), a metric that modern software companies love to report. It’s a forward result, a calculation of the amount of subscription revenue a startup can expect on an annualized basis. If your company did $5 million in monthly subscription revenue in July, you have $60 million of annual recurring revenue.

Subscribe to the Crunchbase Daily

The prominence of ARR makes it a critical concept to understand if you track quickly-growing private companies, and doubly so if you care about tech startups. They’re mad for the stuff. In that vein, I asked startups — tongue in cheek, mostly — to send in their ARR growth from the first half of 2019 (H1 2019) compared to the same period of 2018.

A few people did, which is fun. We’ll share those results first, and then put them into context using some public earnings results from yesterday.

Startup Results

You can still send in your H1 2019 ARR growth, as I’m accepting emails all weekend on the matter. So feel free to mail in your brag or confession to alex@crunchbase.com. We appreciate the clarity real numbers bring. Candor is good!

In that vein, here’s what was sent in:

• wrote that its “growth rate in ARR from H1 2018 to H1 2019 was 691 [percent],” which is quite good. We can presume that Uselytics didn’t have the World’s Largest revenue base at the start of 2018, but putting up nearly 700 percent growth is impressive. That’s a high watermark, frankly.
• wrote in, saying that it had “50 [percent] YOY growth rate which we just released today,” including a link to . Given that we specifically requested H1 2019 ARR growth over an H1 2018 result, we’re presuming that this metric fits the ask. Signal Vine has according to Crunchbase and is based in Virginia.

A 50 percent growth result, mind, isn’t slow. From a reasonable revenue base, that can be an impressive result. (Hold onto that number until we get to Okta’s details.)

I’d like to see more companies share more metrics, as it would help demystify the startup world some and reduce the stress that top-decile numbers can bring. Everyone in the startup world hears about the companies that are growing like hell, but fewer folks hear about startups that are merely doing well.

Now, let’s put our two startup numbers (more here, mind) into context.

Earnings Reports

Yesterday brought a raft of SaaS earnings to the public, with and and reporting, among others. Results among the ARR-creating firms were a bit mixed. Let’s get an overview of each result set, quickly.

I spoke with Okta’s co-founder and COO after the company reported its results, but before its earnings call. The company revenue growth of about 50 percent, rising sales and marketing spend, as well as minor increases to its net and operating losses.

Kerrest described the results as in-keeping with the firm’s vision for its future that it set a few years back. Okta has plenty of cash and generated around $20 million in operating cash flow in the first half of calendar 2019. And, the COO told Crunchbase News that the size of its largest 25 contracts in the second quarter of 2019 was twice as large as the same result from a year ago.

Shares of Okta are off about 6 percent this morning. Why, is the question. I’d reckon that Okta’s somewhat modest projection for sequential-quarter revenue growth is the issue.

Box, in contrast, is up a point this morning after far more modest revenue growth. But in contrast to Okta, which has seen its share price appreciate in recent quarters, Box is trading at its lowest levels since late 2016. So there’s some mismatch in context for the two companies’ earnings results.

Note, however, that the faster-growing company has had better recent public market results. ARR growth is still investor catnip, even this far into the bull cycle.

The growth point was welcome to Zuora investors this quarter, with the SaaS firm’s SaaS-focused product better than expected forward revenue guidance. That boosted growth expectation sent, and recent results, sent Zuora’s equity up over 6 percent this morning.

Summing quickly since this post has gone on longer than I meant it to, startup ARR growth rates are generally faster than those of their public counterparts. But the same mechanics and tension between growth, profit, and valuation work on both sides of the public-private divide.

Perhaps each earnings season we can get a few startups to disclose some of their performance to go along with our regular, summary glance at public company results.

±õ±ô±ô³Ü²õ³Ù°ù²¹³Ù¾±´Ç²Ô:Ìý

On Nov. 28, , an enterprise-focused cloud storage and productivity company, its fiscal third quarter, 2019 earnings after the bell. The Bay Area-based company beat expectations regarding revenue ($155.9 million, versus $154.6 million anticipated), and per-share losses ($0.06 adjusted, versus $0.07 anticipated).

Follow Crunchbase News on

Shares of Box were up during the day before the report and in after-hours trading.ÌýBox also raised the top end of its forecast for its current fiscal year (2019) “to $609.2 million, from $608 million,” . And its CEO that the company is on itsÌýway to “$1 billion in revenue.”

Notably, Box isn’t alone in seeing its value appreciate. The surprisingly dynamic Bessemer Cloud Index that was recently remade into a daily ticker shows a similar rebound in cloud stocks in recent days. The Cloud Index fell into the 780s (it started at 1,000) in the middle of November, before rebounding to nearly 890 before the start of trading today. That’s quite a jump in about 10 calendar days.

So, after a somewhat dispiriting decline that matched what other stocks in the market were doing, more or less, cloud is nearly back to where it was earlier in the year. Which is to say a bullish position.

So What?

Why are we looking at a public company’s earnings report, and an index of public cloud companies? After all, we focus on private companies here at Crunchbase News. We are examining Box as it’s an important example of an SaaS startup that raised lots during the unicorn era and went public on the strength of its recurring revenue growth, rather than its profitability. The firm has since started generating cash quite often (measured quarterly) and expects to turn in non-GAAP per-share profit in the period roughly aligning with calendar Q4.

So, it makes for a good example. If Box does normal SaaS things, and the markets bid its shares down, it’s an indicator of where sentiment is heading; that impacts private companies as public comps impact private valuations.

The same principle applies to the basket of cloud stocks we mentioned before. If they fall sharply, private investors take note that public investors are revaluing the sort of company that they are putting capital into; if analogous stocks go bearish, startups grow fur.

So! All that said, let’s think about what Box is worth today, compared to its current revenue. We’ll get a workable revenue multiple out of the exercise, which we can then use as a general metric for thinking about what sort of recurring revenue modern software companies (which nearly all uses software-as-a-service as a business model, like Box) need to grow into to make their trailing valuations fit.

Cool? Great.

Box’s revenue figure doesn’t break out recurring incomes (its core products) from non-recurring services income. As such, we generally treat its revenue as a single lump when we want to calculate a recurring revenue figure. This distorts the resulting figure somewhat, but don’t let it worry you, we’re shooting for close here, not exact.

With $155.9 million in top line, our analog for Box’s annual recurring revenue figure comes to $623.6 million. Box was worth $2.57 billion before the start of trading today,Ìý. Simple division gives us a current ARR multiple of 4.12.

That’s a somewhat low multiple, compared to other companies and figures that we have seen this year. However, with Box growing just over 20 percent year-over-year in its most recent quarter, the company is likely paying a revenue-multiple tax. The faster your ARR growth, mostly, the higher your revenue multiple will be.

Returning to our notes on Box’s public market performance, Box is trading lower than it did at the start of the year, and far under its early-summer highs. If that is attributable to its slowing growth I can’t say for sure, but I suspect it’s at least a few pieces of the puzzle. The lesson in this earnings report is that growth remains as critical to SaaS valuations as it has been; Box’s slowing growth rate’s impact wasn’t sufficiently erased by rising profitability at the company. Its value has therefore fallen in revenue-multiple terms.

And that brings me to my final point. I’ve thought about retiring Box as our regular ARR benchmark a few times, mostly because Box is now so much larger than private market SaaS companies that its maturity makes it an increasingly poor comp. But what we didn’t have, until recently, was something good to use in its place.

But the new Cloud Index probably fits the bill, even though it doesn’t provide similarly granular multiples. Still, given that it is a basket of SaaS stocks, it’s probably a healthier way to stack public sentiment against private companies.

So, I hereby commit to not covering Box’s next earnings report, at least here. It’s probably no longer sufficiently pertinent.

Illustration:

, a Utah-based software company focused on building tools for offline business, has raised . Most of it came in two rounds, a massive in May of 2017, and a from this June.

Follow Crunchbase News on

Coverage of startups focuses too much on their fundraising. That’s in part because startups mostly will not share numbers, apart from their recent round size. Most startups that raise money won’t even share their valuation, so getting revenue notes out of them is difficult.

Podium, however, is willing to share. Collating notes from a dinner last night, here’s how Podium has grown during its life: Podium was around the $12 million annual recurring revenue (ARR) mark when it raised its Series A. That’s pretty high for an A, which explains it managed to raise so much during the theoretically early-stage investment. By the end of 2017, the startup was doing around $30 million ARR.

Continuing, Podium is past the $50 million ARR mark today and expects to reach $60 million by the end of the year. Next year it wants to get to $100 million.

That strikes me as pretty quick, though I don’t know how it closely stacks up to or other companies that are sometimes touted as the fastest growing SaaS shops of all time. All the same, Podium has burned in the neighborhood of $16 million during its life (I double-checked that one with its president), which means it’s floating a huge pile of cash.

And that indicates we won’t see an IPO soon, I wouldn’t think. Why bother when things are going so quickly?

Final thought: Podium’s revenue growth implies that at least some companies that are raising in an outsized fashion aren’t totally bonkers. Though I wonder how many other Series B level companies that have similar levels of capital raised are as large. And that not every Utah-based company burns cash like .

Top Image Credit: .

Just a few months ago, software-as-a-service (SaaS) companies and other public firms that provide cloud-based products were flying high. Their stocksÌýwere sharply higher than the popular American indices, and companies in those categories enjoyed high revenue multiples.

Follow Crunchbase News on

Now, as the broader market hits turbulence into the Q3 earnings season, those same cloud companies are pulling back.

Here’s what the (now theÌýBVP Nasdaq Emerging Cloud Index), which tracks SaaS and cloud stocks’ performance over time, looked like in recent days:

Blue: Cloud Index. Red: Nasdaq Index. Green: S&P. Purple: DJIA. The chart begins in August 2013.

That’s a pretty severe drop! And, the recent downturn seems to be the largest in raw percentage terms of any we’ve seen since the 2016-era SaaS crash (that’s the point where the Cloud Index falls under the other lines about mid-way through the chart).

But while I would love to call for panic, I think what we’re seeing instead is some froth blow off the top of the SaaS market. Of course, if the broader market corrects further, we could see the SaaS market dip even more.

But certainly, everyone knew that this was going to happen at some point. If historical SaaS multiples were considered fair when they were in the low single-digits, revenue multiples as high as 10x weren’t going to last.

SaaS and cloud revenue multiples could fall by half and still be fairly valued by some historical models. Perhaps drops in individual stocks wouldn’t be that extreme, as the companies in question would grow during their declines, adding to their revenue base and thus blunting their value drop. Some.

The stock market can correct faster than any one company can grow, however.

We don’t call tops here at Crunchbase News, but we’re seeing some signs that the Never Ending Bull Market might be losing steam. For startups that depend on public-market comps to help value themselves, this is big news (more on that here).

Happy Wednesday!

Illustration:

To pick one example, back in February,ÌýCrunchbase News spent some time noodling on relative startup valuations using a nifty tool called annual recurring revenue to growth (ARRG). An inventionÌýof , a venture shop, the metric is an attempt to understand why startups are worth as much as they are compared to their public comps.¹

Today we’re going to take a second look the ARRG startup metric. Our goal is to better unpack its substance, flag what we missed the last time we employed it, and give ourselves a better understanding of how investors value quickly growing private companies.

Some Loose Definitions

Let’s start with some definitions and explanations. We’ll start with annual recurring revenue, better known as ARR. ARR, per , is “the amount of revenue that you expect your subscribers to pay you every year.” There are more technical definitions out there (SaaSoptics has a good one ) but Tzuo’s works. (More on Tzuo’s latest here.)

In practice, startups sometimes take theirÌýlast month’s recurring revenue and multiply it by twelve to calculate their ARR. So if your company had $100,000 in recurring revenue last month, your current ARR would work out to $1.2 million. (More on slide eight.)

Next, let’s talk about ARR multiples. Leaning on the simplest possible definition, a company’s ARR multiple is its valuation divided by its ARR. So a company worth $100 million with ARR of $10 million would have an ARR multiple of 10.

Some companies have higher ARR multiples, and some companies have lower ARR multiples. Investors are sometimes willing to pay more or less for recurring revenue depending on the company in question. Three factors contribute to how investors value recurring revenue: revenue quality, revenue cost, and revenue growth.

Revenue Quality

Revenue quality refers to the margin generated by ARR. If a company’s ARR has gross margins of 90 percent, that’s quite good. And valuable! A company with ARR gross margins of 70 percent would likely be worth less than the company with gross margins of 90 percent, all other things held equal. That’s because a company with higher gross margins will likely be more profitable in time than a company with slimmer gross margins.

Revenue Cost

Revenue cost refers to the acquisition cost of revenue. If a company has to spend $1 to generate $1 in annual recurring revenue, it is likely a better (and thus more valuable) company than a firm that has to spend $2 to generate $1 in annual recurring revenue. And a company that only has to spend $0.50 to generate $1 in annual recurring revenue is better than both of our other hypothetical firms.

Revenue Growth

The faster a company is growing the more investors are willing to pay for its revenue. That means the faster your little company is expanding its top line the greater its ARR multiple will likely be.

If your ARR grew 100 percent over the past year, that’s great, but if it grew 200 percent, that’s even better. And investors buying into your company today will, all other things held equal, be willing to pay more today for your current ARR.ÌýFaster growth now implies more ARR down the road, meaning that investors may be willing to overpay for today’s ARR, but they may be buying future ARR at a discount.

There is a tension between the three. Some companies will drive up their revenue costs to increase their revenue growth. Some companies will add new, lower quality revenue streamsÌýto drive revenue growth. But in the valuation game, comparisons between companies tend to focus less on revenue quality and revenue cost because investors are more interested in revenue growth. In less-mature companies, gross margins and customer acquisition costs can be nascent, changing, or hard to parse. Revenue, however, is reasonably clear.

And that’s why the relationship between a company’s ARR multiple and its growth pace is interesting. Their interplay impacts nearly every modern software company, startup or mature tech. This brings us to ARRG.

ARR, ARRG, Argh

Crunchbase News previously covered Bessemer’s ARRG metric. The metric discounts a company’s ARR multiple using its growth rate as a weight to help bring buoyant multiples back down to Earth.

In the current boom times, venture capitalists are paying lots for growth, which, per our prior discussion, means that they are shelling out more money for present-day ARR than they might have in the past. But ARRG can take some of the bite out of the historical comparison.

Per Bessemer, ARRG is a metric calculated in the following way:

What this means is that if your company is growing at, say, 200 percent, you can cut your current ARR multiple in half. This is an interesting way to show that not all ARR multiples are made equal. (And thus, if you are an investor, that you are perhaps not overpaying for private company shares with your LP’s money.)

Bessemer used this metric in itsÌý to show that, while private ARR multiples are dramatically higher than public ARR multiples, private market ARRG multiples are close to public market ARR multiples. This implies that startup valuations for ARR-generating companies aren’t too bonkers.

The last time we reached this point here is what Crunchbase News wrote:

The gambit at play here is that Bessemer doesn’t show theÌýpublicÌýcompany ARRG line in the example. Only comparing private ARRG to public ARR is a bit non-GAAP for my tastes.

What might be fun would be to show the gap between private ARRG and public ARRG multiples.

And that’s where I should have done more work.

Over the weekend, self-described “SaaS enthusiast”Ìý asked us how ARRG multiples work for companies that are growing at less than 100 percent per year. My thought, at first, was that the formula should hold and that you just put in a smaller denominator (growth) than you would if the firm was growth at more than 100 percent per year.

But . If you put in a number smaller than 100 percent into the formula’s denominator, the company’s ARR multiple isÌýstretched, not shrunk. So while the ARRG metric worked well for Bessemer’s effort to show that private software companies ARRG results were similar to public market ARR marks (as the startup crew under inspection was growing at far above 100 percent), it doesn’t work for companies growing less than 100 percent annually.

We can interpret the situation in one of two ways:

1. ARRG is a funÌýway to show that companies doubling or more each year are not too overpriced, and it is not a tool designed to interact with all private companies’ valuations.
2. ARRG is designed to reprice companies both growing more and less than 100 percent yearly, bolstering the companies that are doubling and better, and dinging companies that aren’t hitting the 100 percent year-over-year growth mark.

Either way, we left too much work on the table before. That was my mistake.

I hope this was at least somewhat helpful. My key takeaway is that investors will always talk up their book; however, when they do, we need to triple check the math as things can slip by. Shoutout to GeoffÌýfor the help.

1. As we have and discussed before, it was that perhaps startups ARR multiples should fall under a public comp’s multiple. After all, their shares are illiquid, making a discount responsible. That logic is solid, but it also won’t get you any damn allocation in 2018.

Following the mixed-beat, shares in Box are sharply lower. At the time of writing, Box equity is off over 10 percent to under $22 per share. Before releasing earnings today, Box rose over 1.5 percent in regular trading, dancing around all-time highs before the closing bell.

Why the massive decline? Analysts the company to predict a $0.08, adjusted per-share loss in the next quarter, along with revenue of $144.27 million. Box, in its release, indicates that it expects revenue of $139 to $140 million, which is lower due to “the new revenue recognition standard (‘ASC 606’).” Box notes that it is “adopting […]Ìý beginning with its fiscal year 2019 using the modified retrospective transition method.”

However, the firm notes that without the change in accounting standards, it would have expected revenue of between $142 and $143 million, which would have also fallen short of expectations.

In short, Box’s decelerating revenue caught investors by surprise, and its recent flirtations with all-time highs have been set back. Certainly, the results set Box up for an easier beat in the current quarter, but it’s paying for future flexibility in lost value today.

What All That Means

Box’s missed top-line forecast matters to investors because it deprecates the implied value of future cash flows. That’s because if Box is seeing greater-than-expected slowdown in revenue growth now the firm’s revenues will grow more slowly than anticipated. And, frankly, the firm’s sequential-quarter revenue gain it has promised is lackluster.

So, down goes the value of its shares today as its future looks less promising. This is how a company can mostly beat expectations and still trip after reporting earnings.

For Dropbox, this is a material disappointment. Box is now worthÌýless than it was when Dropbox filed and has a higher revenue base. This deprecates its trailing revenue multiple, and its implied-ARR multiple, two numbers that Dropbox wants as high as they can be. Dropbox, a comparable company to Box, in many ways regardless of how much it wants to shout that it isn’t, will now have a harder time convincing Wall Street to pay the premium needed to get it to a $10 billion valuation, as Box has now effectively lowered the floor.

Mostly. At play here is that Dropbox hasn’t yet disappointed investors with slower-than-expected growth. So, if Dropbox can convince investors that the smaller multiples that they are willing to pay for Box’s future incomes don’t apply to it, given its higher base growth rate, perhaps this isn’t as bad as it looks.

At the same time, boats and tides tend to fluctuate together.

So, what is Box’s implied ARR? Given its fiscal fourth quarter top line, about $546.8 million. Every online financial data provider lists Box’s current market cap at about $3.3 billion. It isn’t instantly clear if that is inclusive of Box’s after-hours declines.

If it is, Box’s new ARR multiple is just a hair over 6x. If it isn’t, Box’s ARR multiple drops to 5.4x. That’s not good for Dropbox.