Jefferies: In Software, 'All Growth Is Not Created Equal'

A new report by Jefferies focuses on the value of growth in the software space. According to analysts, “all growth is not created equal,” and the assumption that all growth is equally good for software companies could be a dangerous oversimplification.

New Subscription ACV growth

Analysts call the new subscription annual contract value (ACV) the single most important growth metric for software-as-a-service (SaaS) companies. New subscription ACV revenue is both highly recurring and highly profitable.

Jefferies sees relatively strong new subscription ACV growth at Constant Contact Inc (NASDAQ: CTCT), Demandware Inc (NYSE: DWRE), NetSuite Inc (NYSE: N) and Qualys Inc (NASDAQ: QLYS).

Analysts see relatively weak new subscription ACV growth at Cornerstone OnDemand, Inc. (NASDAQ: CSOD), Fleetmatics Group PLC (NYSE: FLTX), LogMeIn Inc (NASDAQ: LOGM), Proofpoint Inc (NASDAQ: PFPT), RealPage, Inc. (NASDAQ: RP), Salesforce.com, Inc. (NYSE: CRM) and SPS Commerce, Inc. (NASDAQ: SPSC).

Cost Of Growth

According to Jefferies, new subscription ACV is often sold at a loss for the first year, and the high associated costs represent a majority of the expenses for most software companies. Analysts note that many companies are stomaching the high costs in order to achieve long-term high-growth returns.

The Importance Of Renewals

Analysts believe that renewal profits are critical for software companies because they help sustain a company’s aggressive growth-related spending. However, despite massive spending, growth has been “modest at best” for RealPage, Salesforce, OnDemand, LogMeIn, Proofpoint and SPS.

Stock Picks

Jefferies has Buy ratings on Paycom Software Inc (NYSE: PAYC), Benefitfocus Inc (NASDAQ: BNFT), and RingCentral Inc (NYSE: RNG).

Jefferies also has a Hold rating on Workday Inc (NYSE: WDAY) and an Underperform rating on Salesforce.