SaaS Quarterly Insights

The Rule of 40 appears to have been popularized by noted blogger and investor Brad Feld in a post on Feb. 3, 2015. The concept has quickly taken off since then. Feld apparently heard about the concept from another late-stage investor at a board meeting.
About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.
R40 revenue company growth revenue growth na na na SaaS
About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.
R40 revenue company growth revenue growth na na na SaaS
Online Research: www.research-driven.com
Research: (800) 866-3272 • Trading: (800) 322-3272 • (312) 258-0660
One South Wacker Drive • Suite 3900 • Chicago, IL 60606
Important disclosures and certifications begin on page 20 of this report
Contents
SaaS stock performance chart by sector 
2
Front-page commentary continued 
3 
SaaS financial and valuation comparisons 
8
First Analysis sector-specific discussions 
Human Capital Technology  
11
Healthcare Analytics  
13
IoT/M2M  
14
Cyber Security   
16
e-Commerce Optimization 
17
Other SaaS 
19
(Continued on page 3)
SaaS
October 2, 2017
QUARTERLY INSIGHTS
Rule of 40 a better predictor of 
valuation than just revenue growth
 ■ The Rule of 40 was developed as a gate to determine the best 
SaaS performers, and using the specific numerical result of 
adding revenue growth and EBITDA margin is a better predictor 
of valuation (with a correlation of 0.74) than just revenue growth 
alone (correlation 0.55) for 2017 data. Twelve of our 34 SaaS 
names (35.3%) with 2017 data meet the Rule of 40 criteria.
 ■ Our SaaS universe continued to outperform the S&P 500 in the 
September quarter with a median gain of 7.9% compared to 
4.0% for the market index. Performance was much more vari-
able by stock and sector than last quarter, supporting the value 
of individual stock selection.
 ■ Using regression analysis for our SaaS universe, the 2017 
correlation improves to 0.85 by weighting revenue growth at 
approximately twice the EBITDA margin. This supports our view 
that revenue growth is the most important factor for SaaS valu-
ations. We call this weighted formula the First Analysis Rule of 
40.
Rule of 40
The Rule of 40 appears to have been popularized by noted blogger 
and investor Brad Feld in a post on Feb. 3, 2015. The concept has 
quickly taken off since then. Feld apparently heard about the con-
cept from another late-stage investor at a board meeting. Simply, 
INTEGRATIVE PUBLIC/PRIVATE PERSPECTIVE
SaaS companies by sector
Sector coordinator:   James Macdonald
Human Capital
Corey Greendale
James Macdonald
Ken Wang
312.258.7139
312.258.7124
312.258.7193
BlackLine Inc.
BL
Callidus Software Inc.
CALD
Cornerstone OnDemand Inc.
CSOD
Coupa Software Inc.
COUP
Instructure Inc.
INST
Paycom Software Inc.
PAYC
Paylocity Holding Corp.
PCTY
2U Inc.
TWOU
Ultimate Software Group Inc.
ULTI
Workday Inc.
WDAY
e-Commerce optimization
David Gearhart
Larry Berlin
312.258.7128
312.258.7187
ChannelAdvisor Corp.
ECOM
CommerceHub Inc.
CHUBA
Five9 Inc.
FIVN
HubSpot Inc.
HUBS
LivePerson Inc.
LPSN
RingCentral Inc.
RNG
salesforce.com
CRM
SPS Commerce Inc.
SPSC
Zendesk Inc.
ZEN
Other SaaS
Alteryx Inc.
AYX
Atlassian Corp. PLC
TEAM
Everbridge Inc.
EVBG
LogMeIn Inc.
LOGM
MuleSoft Inc.
MULE
New Relic Inc.
NEWR
ServiceNow Inc.
NOW
Healthcare Analytics
Frank Sparacino
312.258.7103
athenahealth Inc.
ATHN
Benefitfocus Inc.
BNFT
Castlight Health Inc.
CSLT
Medidata Solutions Inc.
MDSO
Veeva Systems Inc.
VEEV
IoT/M2M
Howard Smith
David Gearhart
312.258.7117
312.258.7128
Alarm.com Holdings Inc.
ALRM
MiX Telematics Ltd.
MIXT
Cyber Security
Howard Smith
David Vercoutere
312.258.7117 
312.258.7114
Proofpoint Inc.
PFPT
Qualys Inc.
QLYS
(800) 866-3272
2
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Our SaaS universe continued to outperform the S&P 500 in the June quarter 
with a median return of 7.9% compared to 4.0% for the S&P. Performance 
was significantly more variable by sector in the September quarter after very 
similar performance in the June quarter as shown in the chart below. The 
Healthcare sector was down 7.4% in the September quarter after having 
the biggest gains last quarter; it was the only sector showing a decline. The 
largest gaining sectors were IoT, up 23.0%, and Cyber Security, up 13.7%. 
The large Human Capital and e-Commerce sectors were up 8.4% and 11.1%, 
respectively.
Individual stocks also had wide variation. CommerceHub was the larg-
est gainer, up 29.6%; First Analysis picked up coverage during the quarter. 
Qualys was up 27.0%. MuleSoft was the largest decliner, down 19.6%. 
Benefitfocus, athenahealth, and Veeva all declined significantly, leading to 
the weak Healthcare performance. We removed Xactly from our SaaS uni-
verse after it was acquired by Vista Equity.
Commentary
Quarterly SaaS company performance 
SaaS Stock Performance by Sector (equal-weighted)
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
3/31/2017
4/30/2017
5/31/2017
6/30/2017
7/31/2017
8/31/2017
9/30/2017
Human Capital
Healthcare Analytics
IoT/M2M
Cyber Security
E-Commerce Optimization
Others SaaS
Overall SaaS Group
S&P 500
Source: First Analysis, FactSet.
(800) 866-3272
3
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
the Rule of 40 is that a well performing software or SaaS company should have 
revenue growth and profitability percentage that add up to over 40% (we will 
refer to this calculated number as R40). So if you are growing at 40%, you should 
be breakeven or better. If you are growing 50%, you can be losing 10%. Most 
pundits use EBITDA margin, which is what we will use for this report, but others 
prefer cash flow margin or other profitability measures.
The Rule of 40 was originally conceived for companies with over $50 million in 
revenue, but Feld believes it applies to companies as small as $1 million. One 
application is to decide how much to invest (or how much money to lose) in early 
venture-backed companies. The calculation has also been applied to public com-
panies. Data presented by venture capitalist Tomasz Tunguz in 2015 for a group 
of public SaaS companies including several original SaaS companies that have 
been acquired (not our current SaaS universe, Table 1) seems to indicate it be-
comes more difficult to reach the 40% hurdle as companies are older and larger. 
He notes that year 5 or 6 after founding typically represents around $50 million 
in revenue for these companies and also represents the period these companies 
have an R40 average close to 40%. In fact, early in their lifetime these soon-to-
be public companies were well above the 40% threshold primarily because they 
were growing very quickly (often doubling or tripling each year).
We have been writing for several years that we believe revenue growth is the 
most important single determinant in SaaS valuations. We also published a 
report on June 30, 2015, about how profitability was becoming more important in 
valuations. Our impression in the early SaaS days (~2002-08 time period) was 
that SaaS companies did not want to be profitable so they would continue to be 
valued on a price-to-sales ratio rather than P/E. Since both revenue growth rate 
and profitability are clearly important, we decided to see if the R40 calculation 
had better correlation with valuation—and it does! 
In Table 2, we list our SaaS universe in order of highest 2017 R40 to lowest. 
Twelve of our 34 SaaS companies (35.3%, excluding LogMeIn) are expected to 
(Continued from page 1)
TABLE 1
Median R40 by Year Since Founding for SaaS Public Companies
0%
30%
60%
90%
120%
Ratio4
8
12
16
Years Since Founding
Source: 
tomtunguz.com/rule-of-40, Feb. 11, 2015.
(800) 866-3272
4
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 2
Ranking of SaaS Companies by Rule of 40 and First Analysis Rule of 40
**=currently covered by FA
Rule of 40
First Analysis 
Rule of 40
Revenue Growth Adjusted EBITDA
EV/Sales
Company
2017e 2018e
2017e
2018e
2017e 2018e
2017e 2018e
2017e 2018e
Atlassian (TEAM)
62.4%
60.4%
65.3%
63.0%
35.6%
34.0%
26.7%
26.4%
11.6
8.6
Paycom Software (PAYC)**
59.3%
54.3%
59.8%
52.9%
30.4%
25.0%
28.9%
29.2%
10.1
8.1
ServiceNow (NOW)
59.0%
55.2%
64.1%
57.2%
37.2%
30.5%
21.8%
24.7%
9.7
7.4
Veeva Systems (VEEV)
56.9%
51.6%
53.8%
47.4%
23.8%
19.5%
33.1%
32.1%
11.5
9.6
CommerceHub (CHUBA)**
52.4%
55.4%
43.3%
46.8%
12.6%
14.8%
39.8%
40.6%
8.9
7.8
Workday (WDAY)**
49.2%
42.7%
55.4%
45.5%
33.9%
25.7%
15.3%
17.0%
9.1
7.3
Paylocity (PCTY)**
48.8%
42.6%
52.5%
43.8%
30.0%
23.2%
18.7%
19.4%
7.5
6.1
Qualys (QLYS)**
48.1%
50.0%
42.1%
43.9%
15.0%
15.9%
33.0%
34.1%
7.7
6.6
Proofpoint (PFPT)**
46.5%
41.9%
54.1%
46.8%
34.7%
28.3%
11.8%
13.6%
9.5
7.4
Salesforce.com (CRM)
45.9%
42.9%
46.5%
41.8%
23.8%
19.8%
22.0%
23.1%
6.3
5.3
Medidata Solutions (MDSO)
44.0%
43.9%
42.4%
41.4%
19.5%
18.2%
24.5%
25.7%
7.9
6.7
Ultimate Software (ULTI)
42.9%
44.1%
41.8%
42.7%
19.8%
20.0%
23.0%
24.1%
5.9
4.9
Zendesk Inc. (ZEN)
39.0%
34.8%
49.7%
43.0%
35.6%
29.7%
3.4%
5.1%
5.9
4.5
HubSpot (HUBS)
38.9%
32.4%
48.8%
38.8%
34.4%
25.8%
4.5%
6.5%
6.8
5.4
BlackLine (BL)
38.1%
31.4%
51.9%
40.4%
39.8%
29.2%
-1.7%
2.2%
9.4
7.3
RingCentral Inc. (RNG)
36.1%
31.2%
43.9%
36.6%
29.7%
23.7%
6.4%
7.5%
5.7
4.6
2U Inc. (TWOU)**
35.2%
39.8%
44.4%
49.4%
31.4% 1
34.4% 1
3.8%
5.4%
8.4
6.2
Athenahealth (ATHN)**
34.6%
36.3%
31.9%
33.2%
13.2%
13.5%
21.4%
22.7%
4.2
3.7
Alarm.com (ALRM)**
34.2%
35.0%
32.1%
31.8%
13.9% 1
12.7% 1
20.3%
22.3%
6.5
5.7
New Relic (NEWR)**
34.1%
34.7%
43.8%
40.5%
31.6%
26.1%
2.5%
8.6%
6.6
5.2
Everbridge (EVBG)
31.9%
27.1%
43.5%
35.4%
33.4%
26.0%
-1.5%
1.2%
6.3
5.0
Callidus Software (CALD)
31.2%
33.8%
33.7%
35.3%
19.4%
19.1%
11.8%
14.7%
5.6
4.7
MiX Telematics (MIXT)**
30.3%
34.7%
24.7%
28.8%
6.8%
8.5%
23.4%
26.2%
1.6
1.5
SPS Commerce (SPSC)**
28.1%
30.2%
27.7%
29.8%
13.5%
14.5%
14.6%
15.7%
3.7
3.2
Five9 (FIVN)
26.5%
26.1%
31.0%
29.1%
20.1%
17.5%
6.4%
8.6%
6.1
5.2
Alteryx (AYX)
24.0%
18.4%
46.9%
36.2%
46.3%
35.9%
-22.2%
-17.5%
7.6
5.6
MuleSoft (MULE)
23.8%
10.2%
48.7%
29.8%
49.3%
34.5%
-25.5%
-24.3%
8.3
6.2
Instructure (INST)**
18.8%
21.3%
38.3%
34.3%
38.6%
30.1%
-19.8%
-8.8%
5.9
4.5
Benefitfocus (BNFT)**
16.2%
23.5%
17.4%
25.2%
10.0%
14.3%
6.2%
9.2%
3.9
3.4
Cornerstone OnDemand (CSOD)**
15.4%
21.2%
19.4%
24.6%
13.7%
15.6%
1.7%
5.6%
4.4
3.8
ChannelAdvisor (ECOM)**
14.8%
18.3%
16.2%
19.8%
9.6%
11.3%
5.2%
6.9%
1.9
1.7
Coupa Software (COUP)**
13.6%
9.0%
31.3%
22.4%
33.4%
24.6%
-19.7%
-15.6%
7.8
6.3
Castlight Health (CSLT)**
6.3%
18.7%
24.6%
30.9%
30.7%
27.6%
-24.4%
-8.9%
3.4
2.7
LivePerson (LPSN)**
5.9%
17.7%
1.7%
16.5%
-3.4%
7.0%
9.3%
10.7%
3.3
3.1
LogMeIn (LOGM)
na
52.9%
na
45.1%
na
14.8%
35.4%
38.1%
5.5
4.8
Source: First Analysis, FactSet, company reports; EV/sales as of Sept. 25.
Notes:
1 First Analysis estimates, excluding acquisition
(800) 866-3272
5
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
meet the 40% threshold in 2017. These 12 companies are not just the smaller 
SaaS companies but include the three largest ones, salesforce.com, Workday, 
and ServiceNow.
Looking at the data for these 12 companies, the strong R40 results are supported 
by strong profitability, with the lowest adjusted EBITDA margin in the group at 
11.8% (for Proofpoint). Nine of the 12 companies have over 20% EBITDA margin 
and three of the 12 have over 30% EBITDA margin. With these profitability levels, 
we would expect many of these companies to maintain an R40 over 40% even 
when revenue growth drops below our 20% SaaS threshold. We were somewhat 
surprised that no loss-making companies in our SaaS universe are growing fast 
enough to have an R40 over 40%.
Based on consensus estimates for 2018, this entire group of companies is ex-
pected to continue to have an R40 over 40% next year. LogMeIn is also expected 
to be added to this group after the acquisition of GetGo Inc., a division of Citrix, is 
anniversaried.
Rule of 40 improves correlation with valuation
In Tables 3 and 4, we plot our traditional 2017 revenue growth versus valuation 
(EV/2017 revenue) and the new 2017 R40 versus EV/2017 revenue, respectively. 
Valuation correlates better with R40 (0.74) than with revenue growth alone (0.55). 
As noted, as the SaaS sector matures, profitability is becoming more important, 
but we still view revenue growth as the most important single driver of valuation. 
As with our work on revenue growth, we would look at companies below the 
trendline in Table 4 as mathematically undervalued. We would look closely at 
those companies with an R40 near or over 40% with lower revenue multiples 
including Ultimate Software (5.8x 2017 revenue), salesforce.com (6.4x 2017 
revenue), and Zendesk (5.8x 2017 revenue, R40 of 38.4%). 
A better measure: “First Analysis R40” 
We did a regression analysis and found the best correlation to describe current 
stock valuation (EV/revenue) was using a weighting of 65/35 for revenue growth 
and EBITDA margin for 2017 and a weighting of 69/31 for 2018. This improves 
the correlation to 0.85 for 2017 from 0.74 (see Table 5).
Based on this, we are proposing an optimized calculation we call “First Analysis 
R40,” which is 1.333X revenue growth and 0.667X EBITDA margin. Clearly, this 
helps fast-growing companies with low margins like Alteryx, which has a First 
Analysis R40 of 46.9%, up from 24.0%, and MuleSoft would increase to 48.7% 
from 23.8% for 2017. 21 of 33 companies (63.6%) in our SaaS universe would be 
over 40% under this rule.
(800) 866-3272
6
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 4
EV/'17e Sales vs. Rule of 40
LPSN
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Correlation: 0.74
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM.
TABLE 3
EV/'17e Sales vs. Revenue Growth
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Correlation: 0.55
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM, LPSN.
(800) 866-3272
7
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
TABLE 5
EV/'17e Sales vs. First Analysis Rule of 40
LPSN
CRM
RNG
ZEN
SPSC
ALRM
MIXT
ATHN
MDSO
VEEV
CSOD
ULTI
WDAY
CSLT
PCTY
PAYC
BNFT
CALD
INST
NOW
NEWR
TWOU
HUBS
ECOM
PFPT
QLYS
EVBG
TEAM
BL
COUP
FIVN
CHUBA
MULE
AYX
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Correlation: 0.85
Source: First Analysis, FactSet, company reports.
Notes:
Excludes LOGM.
 October 2, 2017SaaS Quarterly InsightsSaaS Comparisons (Source: First Analysis, FactSet estimates)(800) 866-32728First Analysis Securities CorporationCompany
** = Currently covered by FA
2017e 
Rev ($M)
2018e Rev 
($M)
2017e/2016 
Rev. Growth
2018e/2017e 
Rev. Growth
2017e          
Gross 
Margin
2018e          
Gross 
Margin
2017e
Op. Margin
2018e         
Op. Margin
Enterprise 
Value ($M)
EV/'17e
Sales
EV/'18e
Sales
2017e EV/ 
EBITDA
2018e EV/ 
EBITDA 2017e P/E 2018e P/E
Human Capital
BlackLine Inc. (BL)
$172.1
$222.4
39.8%
29.2% 80.3% 79.9%
-5.3%
-2.4%
$1,660.2
9.6
7.5
na
na
na
na
Callidus Software Inc. (CALD)
$246.8
$293.9
19.4%
19.1% 63.7% 65.6%
9.2%
11.2%
$1,432.3
5.8
4.9
49.2
33.1
77.0
61.6
Cornerstone OnDemand, Inc. (CSOD)**
$481.2
$556.5
13.7%
15.6% 72.4% 72.8%
5.9%
9.6%
$2,245.3
4.7
4.0
273.8
72.2
104.1
54.9
Coupa Software Inc. (COUP)**
$178.4
$222.3
33.4%
24.6% 69.3% 72.6%
-14.2%
-8.1%
$1,433.3
8.0
6.4
na
na
na
na
Instructure, Inc. (INST)**
$153.7
$200.0
38.6%
30.1% 72.2% 73.4%
-25.0%
-12.9%
$938.6
6.1
4.7
na
na
na
na
Paycom Software, Inc. (PAYC)**
$429.1
$536.5
30.4%
25.0% 83.8% 83.8%
24.3%
24.2%
$4,374.1
10.2
8.2
35.2
27.9
64.6
52.1
Paylocity Holding Corp. (PCTY)**
$300.0
$369.6
30.0%
23.2% 62.6% 63.6%
10.8%
11.6%
$2,416.1
8.1
6.5
43.0
33.7
72.9
61.0
2U, Inc. (TWOU)**
$284.2
$390.1
38.0%
37.3% 82.3% 81.2%
-10.9%
-8.9%
$2,549.9
9.0
6.5
238.3
122.0
na
na
The Ultimate Software Group, Inc. (ULTI)
$936.1
$1,123.3
19.8%
20.0% 63.7% 64.6%
19.2%
20.1%
$5,705.8
6.1
5.1
26.5
21.1
53.7
43.3
Workday, Inc. (WDAY)**
$2,101.4
$2,640.4
33.9%
25.7% 73.6% 74.8%
6.9%
8.9%
$20,265.7
9.6
7.7
63.0
45.1
127.0
96.7
Average:
29.7%
25.0% 72.4% 73.2%
2.1%
5.3%
7.7
6.1
104.2
50.7
83.2
61.6
Median: 
31.9%
24.8% 72.3% 73.1%
6.4%
9.2%
8.0
6.5
49.2
33.7
74.9
58.0
Healthcare Analytics
athenahealth, Inc. (ATHN)**
$1,225.8
$1,391.5
13.2%
13.5% 63.8% 63.7%
10.6%
12.5%
$5,245.4
4.3
3.8
20.0
16.6
64.8
50.6
Benefitfocus, Inc. (BNFT)**
$256.6
$293.2
10.0%
14.3% 53.2% 54.9%
0.6%
3.7%
$1,099.2
4.3
3.7
68.7
40.6
na
420.6
Castlight Health, Inc. (CSLT)**
$132.9
$169.6
30.7%
27.6% 68.4% 70.5%
-24.0%
-9.5%
$465.4
3.5
2.7
na
na
na
na
Medidata Solutions, Inc. (MDSO)
$553.7
$654.4
19.5%
18.2% 77.3% 77.5%
11.0%
12.8%
$4,571.5
8.3
7.0
33.6
27.2
61.0
51.4
Veeva Systems Inc. (VEEV)
$673.6
$804.7
23.8%
19.5% 70.8% 71.2%
30.0%
30.6%
$7,951.3
11.8
9.9
35.7
30.8
65.6
55.9
Average:
19.4%
18.6% 66.7% 67.5%
5.6%
10.0%
6.4
5.4
39.5
28.8
63.8
144.6
Median: 
19.5%
18.2% 68.4% 70.5%
10.6%
12.5%
4.3
3.8
34.7
29.0
64.8
53.6
IoT/M2M
Alarm.com Holdings, Inc. (ALRM)**
$328.4
$379.9
25.8%
15.7% 66.9% 68.7%
17.1%
19.5%
$2,217.6
6.8
5.8
33.3
26.2
46.6
46.6
MiX Telematics Limited (MIXT)**
$123.8
$134.3
6.8%
8.5% 67.7% 68.2%
14.9%
17.2%
$204.6
1.7
1.5
7.1
5.8
17.7
13.8
Average:
16.3%
12.1% 67.3% 68.5%
16.0%
18.4%
4.2
3.7
20.2
16.0
32.1
30.2
Cyber Security
Proofpoint, Inc. (PFPT)**
$505.7
$648.7
34.7%
28.3% 76.9% 77.0%
7.4%
9.7%
$4,745.9
9.4
7.3
79.2
53.7
134.2
86.4
Qualys, Inc. (QLYS)**
$227.7
$263.9
15.0%
15.9% 78.5% 78.8%
24.1%
25.0%
$1,769.1
7.8
6.7
23.5
19.7
57.6
50.3
Average:
24.9%
22.1% 77.7% 77.9%
15.7%
17.4%
8.6
7.0
51.4
36.7
95.9
68.3
CRM/e-Commerce
ChannelAdvisor Corp. (ECOM)**
$124.1
$138.1
9.6%
11.3% 77.8% 77.6%
-0.3%
0.9%
$246.7
2.0
1.8
38.5
25.7
na
143.8
CommerceHub (CHUBA)**
$113.2
$129.9
12.6%
14.8% 79.8% 80.1%
32.9%
35.2%
$1,013.9
9.0
7.8
22.5
19.2
47.0
38.9
Five9 Inc. (FIVN)
$194.6
$228.7
20.1%
17.5% 59.9% 60.8%
1.7%
3.8%
$1,289.7
6.6
5.6
103.2
65.8
na
265.6
HubSpot, Inc. (HUBS)
$364.1
$458.1
34.4%
25.8% 80.1% 80.8%
0.4%
2.7%
$2,840.5
7.8
6.2
172.2
94.7
na
262.7
LivePerson Inc. (LPSN)
$215.2
$230.2
-3.4%
7.0% 74.2% 75.0%
3.5%
3.3%
$700.6
3.3
3.0
34.9
28.4
150.6
90.3
RingCentral, Inc. (RNG)
$492.6
$609.2
29.7%
23.7% 75.9% 76.3%
2.9%
4.3%
$3,001.8
6.1
4.9
95.9
65.6
245.6
139.2
Salesforce.com, Inc. (CRM) $10,392.3
$12,454.1
23.8%
19.8% 76.0% 76.1%
14.1%
15.6%
$66,483.5
6.4
5.3
29.1
23.1
71.3
53.7
SPS Commerce, Inc. (SPSC)**
$219.3
$251.1
13.5%
14.5% 67.8% 68.3%
11.2%
12.1%
$826.9
3.8
3.3
25.8
21.0
66.7
54.0
Zendesk, Inc. (ZEN)
$423.0
$548.8
35.6%
29.7% 73.5% 74.0%
-4.4%
-0.5%
$2,656.1
6.3
4.8
185.7
95.5
na
na
Average:
19.5%
18.2% 73.9% 74.3%
6.9%
8.6%
5.7
4.8
78.6
48.8
116.2
131.0
Median: 
20.1%
17.5% 75.9% 76.1%
2.9%
3.8%
6.3
4.9
38.5
28.4
71.3
114.8
Other SaaS
Alteryx, Inc. (AYX)
$125.5
$170.6
46.3%
35.9% 83.7% 84.4%
-14.7%
-11.7%
$1,034.9
8.2
6.1
na
na
na
na
Atlassian Corporation PLC (TEAM)
$619.9
$831.0
35.6%
34.0% 83.8% 83.8%
16.8%
17.8%
$7,387.0
11.9
8.9
44.6
33.7
97.6
79.9
Everbridge, Inc. (EVBG)
$102.5
$129.1
33.4%
26.0% 71.6% 71.8%
-7.8%
-5.3%
$691.6
6.7
5.4
na
$461.0
na
na
LogMeIn, Inc. (LOGM) $1,015.4
$1,165.5
na
14.8% 83.7% 83.3%
29.8%
32.6%
$5,656.7
5.6
4.9
15.7
12.7
27.2
22.7
MuleSoft, Inc. (MULE)
$280.2
$376.9
49.3%
34.5% 74.4% 74.6%
-17.1%
-12.5%
$2,338.0
8.3
6.2
na
na
na
na
New Relic, Inc. (NEWR)**
$346.8
$437.2
31.6%
26.1% 82.4% 82.1%
-4.3%
2.7%
$2,447.0
7.1
5.6
281.3
64.9
na
237.1
ServiceNow, Inc. (NOW) $1,907.6
$2,490.0
37.2%
30.5% 77.0% 78.1%
16.0%
19.4%
$19,475.1
10.2
7.8
46.8
31.7
100.5
65.7
Average:
38.9%
28.8% 79.5% 79.7%
2.7%
6.2%
8.3
6.4
97.1
120.8
75.1
101.3
Median: 
36.4%
30.5% 82.4% 82.1%
-4.3%
2.7%
8.2
6.1
45.7
33.7
97.6
72.8
 October 2, 2017SaaS Quarterly InsightsSaaS Comparisons (Source: First Analysis, FactSet estimates)(800) 866-32729First Analysis Securities CorporationCompany
** = Currently covered by FA
2017e 
Rev ($M)
2018e Rev. 
($M)
2017e/2016e 
Rev. Growth
2018e/2017e 
Rev. Growth
2017e          
Gross 
Margin
2018e          
Gross 
Margin
2017e
Op. Margin
2018e         
Op. Margin
Enterprise 
Value ($M)
EV/'17e
Sales
EV/'18e
Sales
2017e EV/ 
EBITDA
2018e EV/ 
EBITDA
2017e P/E 2018e P/E
Salesforce.com, Inc. (CRM) $10,392.3
$12,454.1
23.8%
19.8% 76.0% 76.1%
14.1%
15.6%
$66,484
6.4
5.3
29.1
23.1
71.3
53.7
Workday, Inc. (WDAY)**
$2,101.4
$2,640.4
33.9%
25.7% 73.6% 74.8%
6.9%
8.9%
$20,266
9.6
7.7
63.0
45.1
127.0
96.7
ServiceNow, Inc. (NOW) $1,907.6
$2,490.0
37.2%
30.5% 77.0% 78.1%
16.0%
19.4%
$19,475
10.2
7.8
46.8
31.7
100.5
65.7
Veeva Systems Inc. (VEEV)
$673.6
$804.7
23.8%
19.5% 70.8% 71.2%
30.0%
30.6%
$7,951
11.8
9.9
35.7
30.8
65.6
55.9
Atlassian Corporation PLC (TEAM)
$619.9
$831.0
35.6%
34.0% 83.8% 83.8%
16.8%
17.8%
$7,387
11.9
8.9
44.6
33.7
97.6
79.9
The Ultimate Software Group, Inc. (ULTI)
$936.1
$1,123.3
19.8%
20.0% 63.7% 64.6%
19.2%
20.1%
$5,706
6.1
5.1
26.5
21.1
53.7
43.3
LogMeIn, Inc. (LOGM) $1,015.4
$1,165.5
na
14.8% 83.7% 83.3%
29.8%
32.6%
$5,657
5.6
4.9
15.7
12.7
27.2
22.7
athenahealth, Inc. (ATHN)**
$1,225.8
$1,391.5
13.2%
13.5% 63.8% 63.7%
10.6%
12.5%
$5,245
4.3
3.8
20.0
16.6
64.8
50.6
Proofpoint, Inc. (PFPT)**
$505.7
$648.7
34.7%
28.3% 76.9% 77.0%
7.4%
9.7%
$4,746
9.4
7.3
79.2
53.7
134.2
86.4
Medidata Solutions, Inc. (MDSO)
$553.7
$654.4
19.5%
18.2% 77.3% 77.5%
11.0%
12.8%
$4,571
8.3
7.0
33.6
27.2
61.0
51.4
Paycom Software, Inc. (PAYC)**
$429.1
$536.5
30.4%
25.0% 83.8% 83.8%
24.3%
24.2%
$4,374
10.2
8.2
35.2
27.9
64.6
52.1
RingCentral, Inc. (RNG)
$492.6
$609.2
29.7%
23.7% 75.9% 76.3%
2.9%
4.3%
$3,002
6.1
4.9
95.9
65.6
245.6
139.2
HubSpot, Inc. (HUBS)
$364.1
$458.1
34.4%
25.8% 80.1% 80.8%
0.4%
2.7%
$2,841
7.8
6.2
172.2
94.7
na
262.7
Zendesk, Inc. (ZEN)
$423.0
$548.8
35.6%
29.7% 73.5% 74.0%
-4.4%
-0.5%
$2,656
6.3
4.8
185.7
95.5
na
na
2U, Inc. (TWOU)**
$284.2
$390.1
38.0%
37.3% 82.3% 81.2%
-10.9%
-8.9%
$2,550
9.0
6.5
238.3
122.0
na
na
New Relic, Inc. (NEWR)**
$346.8
$437.2
31.6%
26.1% 82.4% 82.1%
-4.3%
2.7%
$2,447
7.1
5.6
281.3
64.9
na
237.1
Paylocity Holding Corp. (PCTY)**
$300.0
$369.6
30.0%
23.2% 62.6% 63.6%
10.8%
11.6%
$2,416
8.1
6.5
43.0
33.7
72.9
61.0
MuleSoft, Inc. (MULE)
$280.2
$376.9
49.3%
34.5% 74.4% 74.6%
-17.1%
-12.5%
$2,338
8.3
6.2
na
na
na
na
Cornerstone OnDemand, Inc. (CSOD)**
$481.2
$556.5
13.7%
15.6% 72.4% 72.8%
5.9%
9.6%
$2,245
4.7
4.0
273.8
72.2
104.1
54.9
Alarm.com Holdings, Inc. (ALRM)**
$328.4
$379.9
25.8%
15.7% 66.9% 68.7%
17.1%
19.5%
$2,218
6.8
5.8
33.3
26.2
46.6
46.6
Qualys, Inc. (QLYS)**
$227.7
$263.9
15.0%
15.9% 78.5% 78.8%
24.1%
25.0%
$1,769
7.8
6.7
23.5
19.7
57.6
50.3
BlackLine Inc. (BL)
$172.1
$222.4
39.8%
29.2% 80.3% 79.9%
-5.3%
-2.4%
$1,660
9.6
7.5
na
na
na
na
Coupa Software Inc. (COUP)**
$178.4
$222.3
33.4%
24.6% 69.3% 72.6%
-14.2%
-8.1%
$1,433
8.0
6.4
na
na
na
na
Callidus Software Inc. (CALD)
$246.8
$293.9
19.4%
19.1% 63.7% 65.6%
9.2%
11.2%
$1,432
5.8
4.9
49.2
33.1
77.0
61.6
Five9 Inc. (FIVN)
$194.6
$228.7
20.1%
17.5% 59.9% 60.8%
1.7%
3.8%
$1,290
6.6
5.6
103.2
65.8
na
265.6
Benefitfocus, Inc. (BNFT)**
$256.6
$293.2
10.0%
14.3% 53.2% 54.9%
0.6%
3.7%
$1,099
4.3
3.7
68.7
40.6
na
420.6
Alteryx, Inc. (AYX)
$125.5
$170.6
46.3%
35.9% 83.7% 84.4%
-14.7%
-11.7%
$1,035
8.2
6.1
na
na
na
na
CommerceHub (CHUBA)**
$113.2
$129.9
12.6%
14.8% 79.8% 80.1%
32.9%
35.2%
$1,014
9.0
7.8
22.5
19.2
47.0
38.9
Instructure, Inc. (INST)**
$153.7
$200.0
38.6%
30.1% 72.2% 73.4%
-25.0%
-12.9%
$939
6.1
4.7
na
na
na
na
SPS Commerce, Inc. (SPSC)**
$219.3
$251.1
13.5%
14.5% 67.8% 68.3%
11.2%
12.1%
$827
3.8
3.3
25.8
21.0
66.7
54.0
LivePerson Inc. (LPSN)
$215.2
$230.2
-3.4%
7.0% 74.2% 75.0%
3.5%
3.3%
$701
3.3
3.0
34.9
28.4
150.6
90.3
Everbridge, Inc. (EVBG)
$102.5
$129.1
33.4%
26.0% 71.6% 71.8%
-7.8%
-5.3%
$692
6.7
5.4
na
461.0
na
na
Castlight Health, Inc. (CSLT)**
$132.9
$169.6
30.7%
27.6% 68.4% 70.5%
-24.0%
-9.5%
$465
3.5
2.7
na
na
na
na
ChannelAdvisor Corp. (ECOM)**
$124.1
$138.1
9.6%
11.3% 77.8% 77.6%
-0.3%
0.9%
$247
2.0
1.8
38.5
25.7
na
143.8
MiX Telematics Limited (MIXT)**
$123.8
$134.3
6.8%
8.5% 67.7% 68.2%
14.9%
17.2%
$205
1.7
1.5
7.1
5.8
17.7
13.8
Group Average:
26.0%
22.2% 73.4% 74.0%
5.5%
8.4%
7.0
5.6
75.9
55.8
83.5
99.9
Group Median: 
29.9%
23.2% 74.2% 74.8%
6.9%
9.6%
6.8
5.6
40.8
31.7
66.7
58.4
Maximum:
49.3%
37.3% 83.8% 84.4%
32.9%
35.2%
11.9
9.9
281.3
461.0
245.6
420.6
Minimum:
-3.4%
7.0% 53.2% 54.9%
-25.0%
-12.9%
1.7
1.5
7.1
5.8
17.7
13.8
(800) 866-3272
10
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
SaaS Company Quarter Performance (Source: First Analysis)
YTD
QTR
                                                       ** = Currently covered by FA 3/31/14 Price
12/30/16 Price
06/30/17 Price
09/29/17 Price
Change
Change
Human Capital
BlackLine Inc. (BL)
$27.63
$35.74
$34.12
23.5%
-4.5%
Callidus Software Inc. (CALD)
12.52
$16.80
$24.20
$24.65
46.7%
1.9%
Cornerstone OnDemand Inc. (CSOD)**
47.87
$42.31
$35.75
$40.61
-4.0%
13.6%
Coupa Software Inc. (COUP)**
$25.01
$28.98
$31.15
24.6%
7.5%
Instructure, Inc. (INST)**
$19.60
$29.55
$33.15
69.1%
12.2%
Paycom Software, Inc. (PAYC)**
15.35
$45.49
$68.39
$74.96
64.8%
9.6%
Paylocity Holding Corp. (PCTY)**
24.05
$30.01
$45.18
$48.82
62.7%
8.1%
2U, Inc. (TWOU)**
13.65
$30.15
$46.92
$56.04
85.9%
19.4%
The Ultimate Software Group, Inc. (ULTI)
137
$182.35
$210.06
$189.60
4.0%
-9.7%
Workday, Inc. (WDAY)**
91.43
$66.10
$97.00
$105.39
59.4%
8.6%
Average:
43.7%
6.7%
Median: 
53.1%
8.4%
Healthcare Analytics
athenahealth, Inc. (ATHN) **
160.24
$105.17
$140.55
$124.36
18.2%
-11.5%
Benefitfocus, Inc. (BNFT)**
46.97
$29.70
$36.35
$33.65
13.3%
-7.4%
Castlight Health, Inc. (CSLT)**
21.22
$4.97
$4.12
$4.30
-13.5%
4.4%
Medidata Solutions, Inc. (MDSO)
54.34
$49.67
$78.20
$78.06
57.2%
-0.2%
Veeva Systems Inc. (VEEV)
26.7
$40.70
$61.32
$56.41
38.6%
-8.0%
Average:
22.8%
-4.6%
Median: 
18.2%
-7.4%
IoT/M2M
Alarm.com Holdings, Inc. (ALRM)**
$27.83
$37.63
$45.18
62.3%
20.1%
MiX Telematics Limited (MIXT)**
$6.25
$7.88
$9.92
58.7%
25.9%
Average:
60.5%
23.0%
Cyber Security
Proofpoint, Inc. (PFPT)**
37.08
$70.65
$86.83
$87.22
23.5%
0.4%
Qualys, Inc. (QLYS)**
25.43
$31.65
$40.80
$51.80
63.7%
27.0%
Average:
43.6%
13.7%
E-Commerce Optimization
ChannelAdvisor Corp. (ECOM)**
$14.30
$11.50
$11.50
-19.6%
0.0%
CommerceHub (CHUBA)**
$15.01
$17.42
$22.57
50.4%
29.6%
Five9 Inc. (FIVN)
$14.19
$21.52
$23.90
68.4%
11.1%
HubSpot (HUBS)
$46.90
$65.75
$84.05
79.2%
27.8%
LivePerson Inc. (LPSN)
12.07
$7.55
$11.00
$13.55
79.5%
23.2%
RingCentral, Inc. (RNG)
$20.60
$36.58
$41.75
102.7%
14.1%
Salesforce.com, Inc. (CRM)
57.09
$68.47
$86.57
$93.42
36.4%
7.9%
SPS Commerce, Inc. (SPSC)**
61.45
$69.89
$63.76
$56.71
-18.9%
-11.1%
Zendesk, Inc. (ZEN)
$21.20
$27.78
$29.11
37.3%
4.8%
Average:
46.2%
11.9%
Median: 
50.4%
11.1%
Other SaaS
Alteryx, Inc. (AYX)
$15.55
$19.60
$20.37
31.0%
3.9%
Atlassian Corporation PLC (TEAM)
$24.08
$35.28
$35.15
46.0%
-0.4%
Everbridge, Inc. (EVBG)
$18.45
$24.43
$26.42
43.2%
8.1%
LogMeIn, Inc. (LOGM)
44.89
$96.55
$104.95
$110.05
14.0%
4.9%
MuleSoft, Inc. (MULE)
$24.75
$25.04
$20.14
-18.6%
-19.6%
New Relic, Inc. (NEWR)**
$28.24
$43.19
$49.80
76.3%
15.3%
ServiceNow, Inc. (NOW)
59.92
$74.33
$106.51
$117.53
58.1%
10.3%
Average:
35.7%
3.2%
Median: 
43.2%
4.9%
Overall SaaS Group
Average:
40.7%
7.1%
 Median: 
46.0%
7.9%
S&P 500 Index
2,238.83
2,423.41
2,519.36
12.5%
4.0%
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Human Capital Technology
Analysts:  
Corey Greendale, James Macdonald,   
 
 
 
Ken Wang
Companies: 
BL, CALD, COUP, CSOD, INST, PAYC,   
 
 
 
PCTY, TWOU, ULTI, WDAY
Profitability becoming more important in HCT universe
Similar to our broader SaaS universe, we find the Rule of 40 (R40) serves as a 
better predictive indicator of valuation than revenue growth for our human capi-
tal technology (HCT) group. The R40 correlation is 0.63 using 2017 data, which 
compares to a correlation of 0.54 for revenue growth (also using 2017 data). 
Investors remain primarily focused on rewarding companies leveraging large 
market opportunities to power rapid top-line growth, with this focus on growth 
historically creating less of an emphasis on near-term profitability. However, 
evaluating the difference between the R40 and revenue growth correlations leads 
us to believe that for our HCT group profitability is becoming a more meaningful 
investor consideration. In the long term, as our current HCT universe constitu-
ents evolve into mature companies while successfully capturing greater share in 
their respective markets, we expect investor emphasis to continue to shift toward 
EBITDA and bottom-line profitability as well as free cash flow growth.
Within our HCT universe, four companies, Paycom, Ultimate Software, Paylocity, 
and Workday, meet the R40 criteria, and we will refer to these four companies as 
"the R40 group." We note that the R40 group’s average 2017 estimated revenue 
is $936 million compared to $249 million for the non-R40 names (we believe the 
R40 group’s larger revenue base reflects, among other factors, its average con-
stituent age of 20 years compared to 12 years for the non-R40 group and the fact 
that they have particularly large addressable markets). The R40 group’s average 
estimated adjusted EBITDA margin for 2017 is 22% compared to minus-4% for 
the non-R40 names. Finally, we note that the R40 group’s average estimated 
2017 revenue growth is 28%, which is equivalent to the average estimate for the 
non-R40 group. Accordingly, the disparity in R40 achievement between the two 
groups can be attributed to the lower average EBITDA margin for the non-R40 
group. We believe the R40 group’s higher EBITDA margin largely reflects greater 
scale efficiencies associated with the larger average revenue base of its four con-
stituents (average expected 2017 revenue for the R40 group is nearly four times 
the size of the non-R40 group’s average figure). 
As noted, the average revenue growth expectations are equivalent for both 
groups, despite the R40 group growing from a significantly larger revenue base. 
We believe this dynamic may reflect the market orientation of the R40 group, with 
its constituents targeting well established markets (such as the payroll market 
for Paycom, Paylocity, and Ultimate Software and the human capital manage-
ment market for Workday) where growth is driven largely by taking share from 
entrenched competitors with less-robust technology capabilities and often high 
margins. While we believe the non-R40 companies target large and growing mar-
kets from a long-term perspective, we view many of their markets as remaining 
at a relatively early stage (such as the cloud procure-to-pay market targeted by 
Coupa), where a higher percent of sales are greenfield. Given the earlier stage of 
these markets and the companies’ high margin potential with scale, we believe it 
makes sense for them to invest heavily in R&D and sales & marketing and oper-
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
ate at low or negative margin at present in order to grow their footprint, which we 
believe generally has the potential to be substantial. 
Paylocity and 2U are compelling
From a valuation standpoint, we see Paylocity and 2U as the two most compel-
ling constituents within our HCT universe. Paylocity, whose EV/revenue multiple 
is 6.5x consensus FY2018e revenue, targets the large and established payroll 
and talent management (TM) markets, which we expect to allow the company 
to maintain annual revenue growth above 25% for the foreseeable future while 
progressing toward the 25-30%+ EBITDA margin profile achieved by payroll/TM 
peer Paycom (we model 29% EBITDA margin for Paycom in CY2017 and 30% 
in CY2018, and 19.5% in CY2017 and 19.7% in CY2018 for Paylocity), suggest-
ing sustained R40 achievement over at least the next several years. We expect 
Paylocity’s EV/revenue valuation multiple to expand to reflect its R40 achieve-
ment and view its current 6.5x 2018e EV/revenue multiple as compelling relative 
to Paycom’s 8.2x comparable EV multiple of consensus 2018 revenue. 
While 2U is not expected to meet R40 criteria in 2017 on an organic basis (the 
R40 in Table 2 largely reflects inorganic growth), our model calls for it to come 
close in 2018, with 34.4% organic revenue growth and 4.8% adjusted EBITDA 
margin. We note 2U does reach 40% for both 2017 and 2018 under the First 
Analysis Rule of 40 criteria. Further, we expect it to sustain 30%+ organic reve-
nue growth for the foreseeable future and 30%+ EBITDA margin at maturity, with 
a model that should allow it to reach R40 in the long run. We view 2U’s current 
valuation, at 6.5x 2018e revenue, as compelling given 2U’s leadership position in 
the large and expanding online program management (OPM) market. We believe 
this will allow 2U to achieve or exceed its targets of 30%+ annual revenue growth 
for the foreseeable future as well as expand EBITDA margin toward its long-term 
target level in the mid-30s range.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Healthcare Analytics
Analyst: 
 
Frank Sparacino
Companies: 
ATHN, BNFT, CSLT, MDSO, VEEV
Three healthcare names in bottom half of R40 rankings
Three of our five healthcare names, athenahealth, Benefitfocus, and Castlight 
Health, are in the bottom half of the R40 rankings. Interestingly, despite signifi-
cantly different R40 scores, the 2017 valuation (EV/sales) multiples show less 
of a differential: for example, ATHN’s 2017 R40 score of 34.6% and EV/sales 
multiple of 4.2X; BNFT’s 2017 R40 score of 16.2% and 2017 EV/sales multiple of 
3.9X; and CSLT’s R40 score of 6.3% and 2017 EV/sales multiple of 3.4X. 
Absent activist (Elliott Associates) interest first disclosed in May 2017 that drove 
ATHN’s shares more than 20% higher in a single day, ATHN’s valuation would 
most likely be in line with BNFT and CSLT despite generating more than 20% 
EBITDA margins vs. continued losses at CSLT and modest profitability at BNFT. 
We think this speaks to a number of factors including 1) a challenging healthcare 
provider environment (both hospitals and physician groups) that is clouded by 
repeated attacks on the ACA and growth in consumerism, namely the growth in 
high-deductible health plans and increasing financial exposure for Americans 
leading to different utilization choices and 2) a substantially more optimistic 
outlook across the health benefits technology landscape (cloud-based benefits 
administration, wellness incentive platforms, and benefits navigation/integration 
hub) where CSLT and BNFT operate. 
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Internet of Things / M2M
Analysts:  
Howard Smith, David Gearhart
Companies:  
ALRM, MIXT
Smart Home: Not concerned with projected drop in ALRM's R40
Alarm.com’s R40 metric has been solid for multiple years, consistently coming 
in above 40% and composed of a relatively balanced mix of top-line growth and 
profitability. However, excluding the revenue from Connect and Piper (acquired 
from Icontrol in March 2017), Alarm.com’s R40 is anticipated to fall to 34.2% in 
2017 and be about flat in 2018 (at 35.0%; see Table 2). The decline in the metric 
is from slowing organic growth expectations, primarily in the non-strategic hard-
ware line (~30% of total revenue). We are not concerned with this anticipated 
decline as a result, and we believe there is a high likelihood revenue growth will 
exceed expectations driven by the core SaaS & License revenue line, helping the 
R40 remain at levels similar to the recent past; we model 19.5% organic recurring 
revenue growth in 2017 and roughly 17% in 2018. Our confidence stems from 
Alarm.com’s tendency to exceed the high end of guidance for SaaS & License 
revenue, noting it has accomplished this for eight consecutive quarters. In ad-
dition, consensus estimates align with the guidance set by management, which 
assumes the enabling hardware business grows at modest levels (estimated 
organic growth of ~2.5% in 2017) despite being up 20-30% in each of the last two 
years, making us feel revenue guidance is conservative. 
Our Smart Home interactive security survey (published Sept. 6) gives us added 
confidence, with the large service providers (dealers) seeing mid-teens subscrib-
er growth the prior year and expecting this to continue. In addition, it appears 
Alarm.com could grow faster than this level by adding more service providers and 
becoming the primary vendor, which our survey suggests it is having good suc-
cess doing at the expense of its rivals. Alarm.com also has a number of growth 
initiatives outside North America home security, any of which could function as a 
catalyst near term and help growth exceed expectations, including international 
expansion, commercial security, the HVAC channel, and add-on modules. 
Looking at profitability, adjusted EBITDA margin is expected to rise mainly due 
to the higher-margin Icontrol assets being incorporated into the model. In our 
longer-term model, we have adjusted EBITDA margin rising to 33.5% by the end 
of our five-year horizon from 2016's 18.4%, driven by the greater mix of higher-
margin (80-85%) SaaS revenue relative to hardware and the company leveraging 
operating expenses. This, combined with Alarm.com capitalizing on its position 
to drive strong revenue growth as the broader Smart Home opportunity emerges, 
makes us believe the company will consistently have an R40 above 40%, which 
should portend strong share performance.
Fleet Telematics: MIX's R40 should continue to improve
MiX Telematics, on first glance, has a fairly pedestrian R40 metric for FY18 of 
30.3% that falls in the bottom half of the overall SaaS group (see Table 2). How-
ever, this number represents a strong improvement over FY17's 24.7%, and its 
R40 is projected to rise again in FY19 to 34.7%. The recent improvement stems 
from a diminishing of the macro headwinds (oil prices, South Africa) and other 
issues that plagued MiX over the past few years as well as the company being 
further along in its ongoing business model shift (enabling hardware bundled into 
the monthly subscription vs. being sold upfront), allowing management’s consis-
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
tently solid execution to show in the form of increasingly better metrics – which 
underlies our investment thesis and has resulted in strong year-to-date share 
performance (+58.7%). 
Earlier this year, management indicated MiX had reached an inflection point in 
terms of profitability, with adjusted EBITDA margin set to steadily expand to the 
30%+ level due to a handful of catalysts. These include a better top-line trajectory 
to leverage, the company exiting its multi-year investment cycle (which funded its 
new software platform), tight management of S&M (taking it down to 11-12% of 
revenue from the current 12-13%), continued sales of high-margin add-on mod-
ules and penetration of fully bundled plans, and international operations starting 
to reach scale. We think each of these items is credible, and combined they give 
us confidence in MiX achieving its long-term (five-year) profitability targets. 
In terms of top-line growth, we believe high-single-digit to 10%+ growth is rea-
sonable, considering the diminished headwinds noted above and a lessening 
impact from the model shift to fully bundled plans as well as international expan-
sion and the sale of add-ons. This level of revenue growth and adjusted EBITDA 
margin would place MiX around 40% for its R40 metric, which should translate 
into a much healthier valuation multiple than its 1.7X and 7.1X 2017e revenue 
and adjusted EBITDA, respectively, noting MiX remains dramatically below the 
overall SaaS group’s 7.0X and 75.9X.
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Cyber Security 
Analysts:  
Howard Smith, David Vercoutere
Companies: 
PFPT, QLYS
Security: rich valuations reflect sound R40 profiles
The rich valuation levels of Proofpoint, at an EV 9.5X 2017 revenue, and Qualys, 
at 7.4X 2017e revenue, reflect their strong 2017 R40 profiles of 47% and 48%, 
respectively. In addition, per current consensus estimates, their R40 measures 
are expected to remain at healthy levels in 2018 at 43% and 50%, respectively. 
We note Proofpoint has a meaningfully higher valuation on an EV-to-revenue ba-
sis (on both 2017 and 2018 consensus revenue estimates) compared to Qualys 
despite its lower R40 figure in both 2017 and 2018.
Since reporting Q2 earnings in early August, Qualys' stock has risen 26%, lifting 
its EV/2017e revenue to above 7X from about 5.5X earlier in the year on decent 
reported performance and healthy business metrics that indicate potential for 
better momentum. Despite the increase in Qualys' valuation over the past couple 
months, we believe Proofpoint’s valuation remains materially ahead of Qualys' 
due to Proofpoint’s substantially faster revenue growth rate. Our regression 
analysis (with revenue growth and EBITDA the independent variables) suggests 
the growth rate accounts for about two-thirds of the valuation, with Proofpoint’s 
expected growth rates in 2017 and 2018 representing more than double the 
fraction in the R40 sum compared to Qualys. In addition, we think the quality of 
Proofpoint’s growth profile is more robust. The company has consistently dem-
onstrated its ability to exceed expectations driven largely by its excellent overall 
execution, making it relatively more likely Proofpoint will be able grow into its 
valuation. Given Proofpoint’s disciplined cost culture, this continued fast growth 
should give it room for greater leverage and expand its profitability, which would 
boost its R40 numbers. Hence, we think Proofpoint’s R40 numbers have solid 
potential to turn out higher on both growth and profit upside. We believe these 
dynamics warrant the richer valuation levels compared to Qualys, despite the 
comparatively less-favorable R40 profile.
We see lesser growth upside for Qualys in 2017, though more in 2018 given the 
product expansion of its cloud platform and ongoing go-to-market optimization 
in engaging more strategically with enterprises. Combined with strong EBITDA 
margins (it is one of only four companies in our SaaS universe with 30%-plus 
EBITDA margin), we expect it will be relatively tougher for Qualys to expand 
its R40 profile beyond current levels, but we note the company already boasts 
strong R40 numbers.
Important disclosures and certifications 
begin on page XX of this report
Analyst: Craig Nankervis
E-mail:
cnankervis@firstanalysis.com
Phone:
312-258-7129
Companies discussed in this report
Public Companies
Ticker
Price
IBM Corp.
IBM
$194.49
Intel Corp. 
INTC
$21.46
Private Companies
AlertLogic
nCircle
Tenable Network Security
Rapid7
RedSeal Networks
Risk I/O
Veracode
Whitehat Security
Table of Contents:
VM Functionality Scheme
2
Deployment models
3
A look at the VM ecosystem
4
VM challenges
5
Some VM trends
5
Some ecosystem players to watch
6
Qualys Inc. Basic Report
9
Network Security
Initiate coverage
Company
Ticker
Price
Rating
Qualys Inc.
QLYS
$14.89 overweight
Network Security
October 23, 2012
Craig Nankervis · cnankervis@firstanalysis.com
Initiating Coverage:
Company
Ticker
Rating
Market Cap
Price
Qualys Inc.
QLYS
overweight
$527.1MM
$14.89
Vulnerability management: 
Tablestakes for improving risk 
posture
 ■ We map the landscape, discuss some challenges and 
trends, and sketch a few private players.
 ■ We see Qualys's distinguishing SaaS approach gaining 
increasing appeal, and as likely the preferred enterprise VM 
solution architecture in coming years (p. 9).  
Vulnerabilities are security holes in software, hardware, or 
operating systems that provide an opening or means to potentially 
attack a system. Brodly speaking, vulneraility managemnt (VM) 
centers on understanding what holes exist in an IT infrastructure 
and effectively addressing them before they're exploited by attack-
ers. It is automated security and compliance audit capability that 
evaluates and reports on IT-asset risk given 1) the most rcent 
changes to a network and 2) the latest known attack threats. 
Below, we offer an industry overview as a lead-in to our Qualys 
discussion. We paint the VM landscape, map VM’s role in the 
broader security/compliance ecosystem, discuss some challenges 
nd trends, and sketch a few interesting private plyers 
Scanning for security holes: 
Testing anything with an IP address
Principal VM functions are 1) scanning or testing IT assets for 
known security holes and 2) work flow for post-scan reporting and 
remediation management.
External-facing, perimeter assets that are typically scanned for 
the latet attack vlnerabilities include organization Web sites and 
partner/trading networks. Internal assets are more profuse, and 
scanning encompasses most anything connected to a network: 
desktops, mail servers, databases, switches, routers, applications, 
perating systems, wireless access points, firewalls, and more. 
Important disclosures and certifications 
begin on page 34 of this report
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
e-Commerce Optimization
Analysts:  
David Gearhart, Lawrence Berlin
Companies: 
CHUBA, CRM, ECOM, FIVN, HUBS, LPSN,  
 
 
 
RNG, SPSC, ZEN
High R40 for CHUBA should continue
CommerceHub’s 2017 R40 metric is anticipated to be 52.4%, which ranks it 
among the top companies in the overall SaaS group (see Table 2) and helps ex-
plain its current valuation multiples; we note it had the same R40 in 2016. Its R40 
is expected to rise to 55.4% in 2018, driven by an improvement in top-line growth 
as the drag from Mercent falls off exiting 2017, ending the purposeful shedding of 
its undesired managed services accounts, and better comps. We think Commer-
ceHub should be able to keep its R40 at or even above this level due to con-
sistent revenue growth and strong-to-improving profitability such that one could 
reasonably argue the stock should hold its current valuation multiples.
Looking at growth first, we note North American online retail sales are growing at 
roughly 15% annually (11% excluding Amazon) and should continue to expand 
at similar rates for a while from the ongoing shift of product demand to the online 
environment away from traditional brick & mortar stores, with consumers drawn 
to the broader product selections, more competitive pricing, and convenience af-
forded them online. CommerceHub is benefiting from this trend, which provides it 
with solid underlying growth considering the company’s transaction-based model. 
The company is also driving revenue expansion from a handful of vectors, includ-
ing the addition of new retailer/supplier (brand) customers, growing penetration 
of drop ship within existing accounts, connection growth within its network, and 
the sale of add-on functionality; it is in the early stages of international expan-
sion, which should be additive over time as well. These items in aggregate give 
us confidence in CommerceHub producing total revenue growth at least in line 
with the market’s growth rate (~15%). We expect its usage-based (transaction) 
revenue (70% of the total) to grow faster than the market given the above drivers 
while its subscription and professional services grow slower. 
In terms of profitability, CommerceHub is nearing 40% annual adjusted EBITDA 
margins (37.6% in 2016) stemming from its high gross margins (77.7% in 2016) 
and low-cost customer acquisition model targeting large retailers, which results 
in suppliers being brought on as paying customers at negligible incremental cost. 
Its adjusted EBITDA margin should rise over time (we model 40.6% and 40.9% 
in 2017 and 2018, respectively) as gross margin benefits from the lower-margin 
managed services revenue from Mercent being out of the mix in 2018 and be-
yond as well as CommerceHub seeing operating leverage, specifically from R&D 
and G&A. 
Putting the above growth trajectory and profitability profile together, we believe 
we have a recipe for consistently high R40 metrics.
ECOM's R40 ranked low but growth acceleration expected
ChannelAdvisor is near the bottom of the SaaS companies in our Rule of 40 
rankings. However, we have confidence in its growth acceleration as well as 
its ability to expand its EBITDA margin in 2017 and beyond. In 2016 and 2017, 
ChannelAdvisor altered its client mix, shedding many smaller, unprofitable (or 
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
barely profitable) clients and retooling its product and sales team to work with 
larger clients. As a result, its number of core clients remained in the 2,900 range. 
However, its average trailing-12-month revenue per core customer has begun 
to step up, going from $35,753 in Q1 2016 to $41,029 in Q2 2017. We believe 
a rise in the number of clients and in revenue per client will increase growth 
into the mid-teens in the next couple of years. We believe the added growth will 
help EBITDA margin since there is only a low variable cost tied to each marginal 
revenue dollar. As a result, we believe its Rule of 40 number should improve, 
although we think approaching 40% could take many years and will be highly 
dependent on improved margins. 
Expect SPSC's R40 to remain uninspiring near term
SPS Commerce’s R40 metric has been on a downward trajectory, going from 
38.1% in 2015 to 35.5% in 2016 and is anticipated to fall even further in 2017 (to 
28.1%; see Table 2) before rebounding modestly in 2018 to 30.2%. As one would 
expect, its recent share performance has also been down (by 8.8% year-to-date). 
The change in its R40 primarily stems from slowing top-line growth, with recurring 
revenue (92% of total revenue) decelerating to the mid-teens from the low-to-mid 
20s levels due to weaker net customer additions. Earlier this year, management 
pulled its expectation for recurring revenue growth to return to the 20% level 
sometime in 2018 because of this and despite SPSC’s consistently gaining wallet 
share with its existing customers. It cited light community enablement program 
activity from retailers as the cause, with these companies spending more time 
working through their e-commerce strategies instead; these programs facilitate 
the on-boarding of their suppliers to SPSC’s platform, making each supplier a 
paying SPSC customer. We note it is possible for SPSC’s recurring revenue 
growth to accelerate in the short to medium term, with the company potentially 
benefiting from changes made to its sales organization in 2016 and the release 
of its new platform that could hasten sales velocity. But we believe the company 
needs reinvigorated community enablement program activity to drive a rebound 
in net additions, thereby fostering much greater growth – something we don’t 
have sufficient visibility/data points to handicap at this time. This leaves it to 
improving profitability to reverse the course of the R40 metric. However, manage-
ment’s policy is to reinvest profits in excess of target levels back into the busi-
ness, which makes us believe profitability is unlikely to increase materially near 
term unless management philosophy changes. In addition, we feel that should 
management dial back the excess investments to improve profitability, it could 
have a negative impact on near- and/or longer-term revenue growth, potentially 
keeping the R40 unchanged or worse. We see the above uncertainty around 
top-line growth and profitability dynamics as implying an uninspiring R40 metric 
at least near term, equating to what we think will be relatively flat share perfor-
mance.   
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First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
Other SaaS
Analysts:  
David Vercoutere
Companies:  
NEWR
Investments hold back NEWR's R40 performance in near term
As with other SaaS names, revenue growth is the primary reason for New Relic's 
rich valuation/high EV-to-revenue multiple. However, despite a strong 30%-plus 
growth profile, New Relic isn't expected to reach a 40% R40 level in 2017 or 
2018 due to its still-modest EBITDA. We think New Relic’s ongoing transition 
to capture greater market/wallet share in the enterprise market helps explain 
the R40 underperformance. While we hope 30%-plus revenue growth will be 
sustained and the company achieves better-than-expected enterprise traction, its 
more modest profitability profile is understandable given its investments, primarily 
in sales and marketing, to capitalize on the still-early enterprise opportunity. We 
feel New Relic has ample opportunity to show better leverage once the enterprise 
business finds greater maturity due to a more productive sales motion, which 
combined with its growth opportunity should raise the company’s R40 numbers 
closer to or above 40% over the mid term. Applying our proprietary First Analysis 
Rule of 40 framework, New Relic exceeds the 40% threshold in both 2017 and 
2018. This is understandable since our rule puts a premium on revenue growth 
as the most important variable for valuation levels, explaining NEWR's rich 
valuation despite falling short on the traditional R40 measure.
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20
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
IMPORTANT DISCLOSURES AND CERTIFICATIONS
ANALYST CERTIFICATION:
We, Howard Smith, David Gearhart, Ken Wang, Corey Greendale, Frank Sparacino, Lawrence Berlin, James
Macdonald and David Vercoutere, attest the views expressed in this document accurately reflect our collective
personal views about the subject securities and issuers. We further attest no part of our compensation was, is, or will
be, directly or indirectly, related to the specific recommendations or views expressed by us herein.
SPECIFIC DISCLOSURES: 
2U Inc.: FASC expects to receive or intends to seek compensation for investment banking services from this
company within the three months following the publication date of this document. FASC has received compensation
for investment banking services from this company within the 12 months before the publication date of this
document, and this company was thus a client of FASC for investment banking services at that time. FASC
managed or co-managed a public offering of securities for this company within 12 months before the publication date
of this document, and this company was thus a client of FASC for investment banking services at that time. 
Alarm.com Holdings Inc.: None.
athenahealth Inc. : None.
Atlassian Corp.: None.
Benefitfocus Inc.: None.
BlackLine Inc.: None.
Callidus Software Inc.: None.
Castlight Health Inc.: None.
ChannelAdvisor Corp.: None.
CommerceHub Inc.: None.
Cornerstone OnDemand Inc.: None.
Coupa Software: None.
HubSpot Inc. : None.
Instructure Inc. : None.
LivePerson Inc.: None.
MiX Telematics Ltd.: David Gearhart has a long position in the common stock of this company. 
New Relic Inc.: None.
Paycom Software Inc.: None.
Paylocity Holding Corp.: None.
Proofpoint Inc.: None.
Qualys Inc.: None.
RingCentral Inc.: None.
salesforce.com inc.: None.
SPS Commerce Inc.: None.
Ultimate Software Group Inc.: None.
Veeva Systems Inc.: None.
Workday Inc.: None.
OTHER DISCLOSURES:
The compensation of the research analyst(s) principally responsible for the preparation of this document is indirectly
based on (among other factors) the general investment banking revenue of FASC. FASC considers all the
companies covered in its research reports to be potential clients.
Price, rating, and target price history for all covered companies can be accessed at www.firstanalysis.com/coverage.
You can also call 1-800-866-3272 or write: First Analysis Securities Corp., One South Wacker Drive, Suite 3900,
Chicago, IL 60606.
RATINGS DEFINITIONS*:
Overweight (O): Purchase shares to establish an overweighted position: Stock price expected to perform better than
the S&P 500 over the next 12 months.
Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in line with
SaaS Quarterly
October 2, 2017
(800) 866-3272
2
First Analysis Securities Corporation
(800) 866-3272
21
First Analysis Securities Corporation
SaaS Quarterly Insights
October 2, 2017
the S&P 500 over the next 12 months.
Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worse than the
S&P 500 over the next 12 months.
*Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatility that
may not reflect large-holder/buyer valuations of the security.
DISTRIBUTION OF RATINGS:
The following was the distribution of ratings for companies rated by FASC as of 6/30/2017: 44% had buy
(overweight) ratings, 52% had hold/neutral (equal-weight) ratings, and 4% had sell (underweight) ratings. Also as of
6/30/2017, FASC had provided, within the prior 12 months, investment banking services to 9% of the companies
rated that had buy (overweight) ratings, 0% of the companies rated that had hold (equal-weight) ratings, and 0% of
the companies rated that had sell (underweight) ratings. For purposes of the FINRA ratings distribution disclosure
requirements, our stock ratings of overweight, equal-weight, and underweight most closely correspond to buy, hold,
and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for an explanation of the FASC rating
system.
USE OF THIS DOCUMENT:
Investors should consider this document as only a single factor in making their investment decision. Past
performance and any projections herein should not be taken as an indication or guarantee of future performance.
With the exception of information about FASC, the information contained herein was obtained from sources we
believe reliable, but we do not guarantee its accuracy. As a subscriber or prospective subscriber, you have agreed
not to provide this document in any form to any person other than employees of your immediate organization. FASC
is a broker-dealer registered with FINRA and member SIPC. It provides research to its institutional clients as a
service in connection with its other business activities. This document is provided for informational purposes only.
Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any
securities. More information is available on request from FASC 800-866-3272. Copyright 2017 First Analysis
Securities Corp.
To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued or passed
on to, persons to whom FASC is entitled to distribute this document under applicable Canadian securities laws.
To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by or on
behalf of any person to subscribe for or purchase, any shares or other securities in any of the companies mentioned
in this document, is for distribution in the UK only to persons who fall within any one or more of the categories of
persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2)
Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (SI 1996/1586).
ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has been identified
as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow (model).
DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, and amortization. EV:
Enterprise value. G&A: General and administrative (expense). OEM: Original equipment manufacturer. R&D:
Research and development (expense). SG&A: Selling, general, and administrative (expense).
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SaaS Quarterly
October 2, 2017
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