Empower Dispatch — Clarifying the On Demand Revenue Model

At the analyst lunch yesterday at Empower, we were treated to a level of business model and financial disclosure which was more than fair. In fact, other private vendors like Emptoris, which have a history of ticking off analysts and other vendors by somehow indirectly providing optimistic numbers to specific parties which then get repeated in public forums, should learn from Procuri's openness in sharing highly specific information to a large group. Obviously one of the points of this exercise was a basic lesson in SaaS revenue recognition 101 which basically states that the yearly revenue for a vendor is in fact a trailing indicator of the vendor’s overall financial performance since revenue is recognized over the length of a contract (e.g., a vendor would only recognize $33 of a $99 three-year deal over the first 12 months). This contrasts with the installed world where 100% of the $99 could be recognized up-front.

The implications of this are significant. For one, the Microsoft keynote pointed out on the first day of the event that VCs and other vendors are factoring this deferred revenue model into their valuation equations, offering a 6X multiple, on average, for SaaS acquisitions. Based on our research, this multiple represents at least a 2x -- perhaps even a 3x -- premium for the average non-SaaS deal in the current environment. The reason for this multiple is that acquirers and investors like the stable, deferred revenue approach of the SaaS model, despite the challenge it poses for hitting huge year-over-year growth numbers.

I believe that the drill down on the SaaS model and Procuri's numbers at the lunch was meant to assure us that the vendor is in fact doing well, which it clearly is. But in my view, there is no need to be defensive about revenue in a SaaS world. Procuri's growth -- along with that of other pure-play SaaS providers in the sector such as Iasta, Global eProcure and Ketera -- should speak for itself. I have no doubt that it's the right long-term revenue model to create sustainable shareholder value in the Spend and Supply Management worlds, despite the short-term pain it might cause in comparative valuation purposes with traditional installed vendors who might sound bigger on paper.

Jason Busch

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