Valuations Round 2: Health IT SaaS vs Health IT Non-SaaS

June 07, 2017

Last month, we blogged an analysis that compared public company valuation multiples of Enterprise (non-Health IT) SaaS with Health IT SaaS.  Our analysis uncovered that, when using growth as a variable, the two groups were nearly indistinguishable from each other. What was evident in the data is that Health IT SaaS companies aren’t growing as quickly compared to their generalist counterparts. If the set of Health IT companies were able to grow more quickly, it is likely that their valuations would become more in line with general Enterprise SaaS companies.

In the process of running our analysis, we segmented the publicly-traded Health IT universe into SaaS and non-SaaS.  Health IT is an industry with a legacy overhang of non-SaaS delivery models.  Because of the sensitivity of protected health information, SaaS delivery models, with cloud-based, multi-tenant databases, have adopted more slowly when compared with other industries that handle less sensitive data.

This month, we ran a second analysis which tested the valuation sensitivities between Health IT SaaS and Health IT non-SaaS.  Whereas growth is the primary indicator of SaaS valuation, we suspected and tested the hypothesis that profitability would be the primary driver of Health IT non-SaaS valuation.

The statistical findings between the two data sets were dramatic.  When comparing the 2017E Revenue Multiple vs Profitability for the two sets, the r-squared coefficient, which effectively describes the goodness of fit in the sample set, is much higher for Health IT non-SaaS than Health IT SaaS.  In other words, profitability is a very strong corollary to value for Health IT non-SaaS models, but not a strong corollary for Health IT SaaS models.  We admit that the analysis has several shortcomings, one of which is that there are only 8 companies in the non-SaaS sample set versus 21 in SaaS, and several companies in our non-SaaS set offer a mix of SaaS and non-SaaS products.  However, we think the findings are accurate based on our experience.

Board rooms regularly debate whether to prioritize growth or profitability.  Based on this rudimentary analysis, but more importantly, based on our experience, our takeaway is that the strategic focus may depend on the company’s software delivery model:

To maximize value, Health IT SaaS valuations benefit more from growth, whereas Health IT non-SaaS valuations benefit more from profitability.  Put another way, we believe that most Health IT non-SaaS valuation models assign more weight to EBITDA multiples, whereas SaaS valuations assign more weight to revenue multiples (which often translates to higher EBITDA multiples).  The ultimate strategic plan for maximizing value optimizes the balance between the often-conflicting goals of growth and profitability.