We love to advise companies with high levels of recurring revenue, robust renewal rates and strong potential for profit. In many cases, this describes companies that deliver solutions through a centrally hosted Software as a Service (SaaS) model. Many founders and entrepreneurs believe that a pure SaaS model is one of the best ways to quickly create value. Sometimes that’s true; sometimes it’s a solution looking for a problem.
A key SaaS characteristic is a multi-tenant architecture, in which all users and applications share a single, common infrastructure and code base. Too many people call themselves SaaS when they are really centrally located, single-tenant solutions. But we wholeheartedly agree, companies that successfully combine SaaS solutions that solve real problems plus services to ensure that the technology is properly implemented and used, can produce great results. The “services” I refer to are usually more consultative in nature, and include things like user training as well as systems implementation and integration.
According to IDC, worldwide SaaS and cloud services revenue reached nearly $50 billion in 2014 and is expected to surpass $110 billion by 2019, representing an 18%+ CAGR. While not all of that revenue is pure SaaS – much is. SaaS delivery is forecasted to outpace traditional software product delivery by more than four times, and is a major trend in nearly all functional software markets.
The SaaS model is exemplified everyday by well-known companies such as LinkedIn, Salesforce, Facebook and many others. SaaS also seems like a win-win model for many healthcare, business information, and financial software vendors and companies alike. However, when focusing on large, complex customers, providing “professional services” in conjunction with a SaaS offering can offer multiple benefits to both the customer and provider.
Workday (NYSE:WKDY), a $15 billion market cap provider of human capital resources and financial solutions to employers, has successfully combined SaaS and services. Trading at 11.4x EV/LTM revenue, analysts expect Workday to grow revenue 33% this fiscal year. With over 1,200 customers, Workday focuses on large, global employers. In FY2016, Workday generated 20% of its $1.2 billion in revenue from professional services which included deployment services, optimization services and training.
Another example is Veeva Solutions (NYSE:VEEV), a $3.5 billion market cap provider of CRM solutions to the life sciences industry. Trading at 7.6x EV/LTM revenue and 35x EV/EBITDA, analysts expect Veeva to grow revenue over 26% this fiscal year. Veeva’s clients include large pharma companies such as Eli Lilly, Merck and Novartis. In FY2016, Veeva generated 23% of revenue from “professional services and other” which included deployment planning and project management, systems environment management, technical consulting and training and more.
Services complimentary to SaaS offerings help customers maximize the value they receive for their solutions. Services allow for faster revenue recognition (vs. a SaaS contract) and greater cash up front, both of which help startups. More importantly, a strong, integrated services offering usually leads to customers successfully deploying and adopting applications, resulting in more satisfied and efficient users. Ultimately, these factors produce higher customer retention rates and deeper customer relationships, providing opportunities for cross and up selling, which are especially significant when trying to penetrate large, complex organizations such as hospitals or investment banks. So while people may not truly consider services a critical component in the SaaS equation, the right offering can drive higher revenue retention, greater cash flow and faster revenue growth. There’s a lot to like about that combination.