Valuations of European Technology Companies

Price earnings (PE) ratios have remained reasonably consistent for the past few years. The Q4 2007 PE ratio was 18.87 compared to 19.50 a year earlier. This contrasts to the price to sales (PS) ratio which has displayed greater volatility ending the year on 1.38 compared to 1.24 a year earlier. These shifts are not unexpected and reflect a return to normal valuation metrics following improvements in the profitability of the industry. Sharply increased profitability causes the PS to increase in the short term. These profit levels are now factored in to the valuation multiples.

Note – the recorded valuations include 50% of the expected contingent consideration in deals with earn-outs and apply to historic performance.

Software and IT Services valuations

The majority of HotViews readers are from the Software and IT Services world. The detailed analysis of valuations in that sector will, therefore, be of particular interest. As you can see in the chart below, "Recruitment/Resourcing" (or what I call the ITSAs) has the lowest relative valuations - at <50%>

Conversely, Software Products companies are the highest valued with PSRs of 2.57 and PEs of 23. These are closely followed by System Houses with a 'vertical' software product line and Outsourcers are the highest valued - with PSR's of 1.19/1.28 and PEs 19/19 respectively.

This,of course, demonstrates how 'quality and predictability' of earnings is still very highly valued. Most software products companies and vertical system houses have support revenues predictable for years to come and, of course, outsourcers have contracts giving revenue visability 5-10 years hence.