It’s October—start of Q4 for many, or end of Q3 for some. The 2021 planning process is kicking off or already underway at most companies. Plus, most companies are currently finalizing their Q3 numbers. We took a look at a select group of SaaS companies to see how Q2 differed from Q1 2020 and any projections for how Q3 is going to look. Reviewing 2020 is a necessary basis for any planning process, as most plans build off the current year.
Let’s start with the obvious. Q1 was before most companies were heavily impacted by the coronavirus pandemic—remember January, when we all had our 2020 plans set? Then, Q2 was when most companies felt the initial real impact of economic and spending changes due to the pandemic, and everyone went remote.Q3 numbers will be coming out over the next few weeks, and it will be super interesting to see how they compare to Q2. Q3 is, for many US tech companies, when we started experiencing the “new normal.” In Q4, we are all analyzing what changes are permanent, what was temporary, and how to come out of this better positioned than before, as we set the plan for 2021.To get some initial data on how the changes are affecting SaaS performance and decision making around resource allocations, we looked at public SaaS companies and some key indicators. We filtered on the Bessemer Nasdaq SaaS Index for companies with revenues between $100M and $300M and revenue growth rates over 25%, to give us a cohort of public companies small enough to see resource allocations and trends more easily than with very large companies.
Key changes that jumped out of the data are as follows. The average EBITDA margin has improved in a trend that may continue in Q3. Q1 average EBITDA was -13.2% and improved to average -6.4% in Q2. Concurrently, the Rule of 40 for these companies improved, from an average of 24.4 in Q1 to 30.3 in Q2.
Source: OPEXEngine
OPEX Comparisons
Feeding the EBITDA improvements, in Q2, spending on most operating expenses was slightly down from Q1, as seen in the following chart for most companies.
Source: OPEXEngine
COGS
The cost of revenue for most companies was reduced in Q2, except web infrastructure, performance, and security vendors like Cloudflare.
Source: OPEXEngine
Cash Ratio
One significant change for SaaS companies between Q1 and Q2 is the cash ratio. The cash ratio reflects a company’s ability to pay its short-term obligations, like wages, and reflects liquidity. It is calculated as:
(cash + cash equivalents) / current liabilities
In Q1 2020, the cash ratio for this group of companies averaged 3.0, as it was for the same group of companies in FY 2019. In Q2, the cash ratio increased over the previous quarter by 50% and reached an average of 4.5. Our understanding, based on the American Institute of CPAs’ technical Q&A, is that PPP loans given out at this time could be treated as government grants (if a company meets the loan forgiveness criteria) on the Balance Sheet. Cash ratios may have been affected both by PPP money (increasing the numerator) and reduced payroll (decreasing the denominator) in Q2. These should even out—unless, of course, there’s another trillion-dollar stimulus package. The good news is that SaaS companies have plenty of cash to pay off their liabilities.
How will 2020 turn out?
It is too early to tell exactly how the year will turn out. Early indications, word on the street, and our quick polls that we’ve been conducting since March are that the SaaS sector has weathered the crisis pretty well and, for the most part, will likely come out of it stronger. A small percentage of companies selling into the most affected segments of the economy (travel, retail, hospitality, etc.) were badly affected. Digital work applications, web infrastructure, and security and ecommerce segments have benefited quite a bit; a large number of companies in the middle of the spectrum are growing over FY 2019, but not by quite as much as originally planned. Most companies trimmed spending a bit in sales and marketing, and were able to improve EBITDA and OPEX expense
.Employee productivity is up for the moment, as companies reduced headcount. Savings in travel and rent/facilities have been invested in other areas; we haven’t seen any significant reduction in G&A yet.
