Company Overview
ServiceTitan, a venture-backed vertical software company for the trade industry, filed for an IPO. The company plans to trade on the Nasdaq under the ticker “TTAN” and Goldman Sachs is the lead banker on the IPO. If all goes according to plan, ServiceTitan should be trading in the next few weeks and will be the 3rd venture-backed software company to IPO this year, behind Rubrik and OneStream. ServiceTitan will be a barometer for the dozens of other software and tech IPOs waiting for the IPO window to open. ServiceTitan offers an end-to-end cloud-based operating system for trades such as plumbing, HVAC, roofing, pest control, garage door maintenance, landscaping, and many others. The software runs customers’ entire business vs. just specific workflows. This operating system can generate leads, schedule jobs, dispatch teams, take payments, run back-office operations, and everything in between. ServiceTitan was founded in 2007 (launched in 2012) and is run by founders Ara Mahdessian (CEO) and Vahe Kuzoyan (President). The co-founders started the company after having parents who worked in the trade industry and saw how the industry lacked modern software. Their platform is designed to address the following critical workflows within a trades business: 1) CRM (customer relationship management, including sales enablement, marketing automation, and customer service), 2) FSM (field service management, including scheduling and dispatching), 3) ERP (enterprise resource planning, including inventory), 4) HCM (human capital management, including compensation and payroll integration) and 5) FinTech (including payments and third-party consumer financing). ServiceTitan is a $772M implied ARR business growing 24% year-over-year with almost 10,000 total customers. Customers range from mom-and-pop contractors with a few employees to large franchises with national footprints of over 500 locations, and on average, an active customer (defined as a customer with >$10K annualized billings) pays ServiceTitan ~$78K per year. Given the mission-critical nature of the product, ServiceTitan has strong retention with >95% gross dollar retention and >110% net dollar retention for each of the past 10 quarters.
The company has raised almost $1.4B in equity capital from venture and crossover investors. In 2021, during the peak ZIRP (zero-interest-rate-policy) period, ServiceTitan raised $200M led by Dragoneer at a $9.5B post-money valuation, according to Pitchbook, its all-time peak valuation. Its most recent publicly announced round was a $365M Series H at a $7.6B post-money valuation in November of 2022, according to Pitchbook. ServiceTitan disclosed it raised a $34M Series H-1 combined with a $136M employee tender in July of 2023 at a blended share price of $72.50, or roughly a ~$6.7B valuation. In the November 2022 Series H, the company accepted a compounding IPO ratchet structure. We explain this structure in more detail below, but in short, it has put ServiceTitan on the clock to go public ASAP to minimize dilution impact should they trade below the hurdle price, which our valuation analysis indicates they might. ServiceTitan has three classes of common stock (Class A, B, and C). Class A shares have one vote, Class B shares 10 votes, and Class C has no votes. The co-founders Ara and Vahe will hold all Class B stock after the offering. ServiceTitan has 2,870 employees and is based in Glendale, California, with offices globally.
Financial Comparison
Before diving deeper into ServiceTitan, the following table compares ServiceTitan’s metrics to our entire public SaaS universe across the top decile and median in public SaaS today. As you can see, ServiceTitan’s metrics aren’t quite at the level of a top decile public SaaS company but is growing faster than the median company. Top decile companies trade at ~20x ARR today, whereas the median is at 6.6x ARR. We have a detailed valuation analysis near the end of this post, but it’s likely ServiceTitan trades somewhere between these two medians.
Source: Company filings and CIQ as of 15-Nov-2024. Note: Implied ARR defined as quarterly total revenue multiplied by four. Free cash flow defined as cash flow from operations minus capital expenditures and capitalized software costs. Rule of 40 defined as LTM revenue growth + LTM free cash flow margin. LTM (last-twelve-months) defined as the last four reported quarters. LTM payback period shown in months. Payback period calculated as prior LTM non-GAAP sales and marketing expense divided by LTM new implied ARR multiplied by LTM non-GAAP gross margin multiplied by 12. LTM magic number calculated as LTM net new implied ARR divided by LTM non-GAAP sales and marketing expense. All financial figures are non-GAAP which adjust for items such as stock-based compensation, amortization of intangibles, and other one time and/or extraordinary expenses
Product
ServiceTitan is a cloud-based platform for trade industries, and rather than providing specific functional workflows, which is the traditional enterprise software approach, ServiceTitan targets an entire customer and covers all of their workflows in an end-to-end way, ranging from the moment someone clicks on a customer’s website, to the scheduling of the dispatched technician, to the GPS pings from the technicians’ trucks en-route to a job, down to financing decisions and payment. The company is squarely focused on trades and employs in-house industry experts such as former contractors and associate leaders to help inform their product strategy. Similarly, given the product is used all day, every day, by their end customers (and by all employees), ServiceTitan leverages this massive data asset to improve their products. It’s rare for a software solution to manage every workflow a customer needs to serve their customers, and this positions the company well to enhance the product with AI capabilities. AI features are in the early days but include an AI Document Reader, Automatic Job Summarizer, FinTech Financing Plan Optimizer, Service Demand Forecasting, and Dispatch Pro, an AI-driven dispatching and routing solution. The company does not appear to charge for these AI products separately. By utilizing the ServiceTitan platform, customers accelerate their revenue, drive operational efficiencies, deliver superior customer experiences, create a better experience for their employees i.e., ServiceTitan users, and heighten the business owners' visibility into operations. The company believes the platform drives significant ROI and sees higher GTV (gross transaction volume) growth for customers who have higher ServiceTitan utilization, measured by the “TitanAdvisor Score” that is prominently displayed on each customer’s ServiceTitan dashboard. From the three months ended March 31, 2021, through the three months ended June 30, 2024, customers in the top quartile of TitanAdvisor Scores experienced a median year-over-year GTV growth of 20%, versus customers in the bottom quartile of TitanAdvisor Scores who experienced a median year-over-year GTV growth of 8%. Hence, the “better” you use ServiceTitan, the better your business performs.
ServiceTitan has dozens of features and shared an overview of the platform's workflow.
Source: S-1
An overview of the network effects the company sees from their product usage is below.
Source: S-1
How does ServiceTitan Make Money?
ServiceTitan has two categories of revenue, which include 1) platform revenue and 2) professional services and other revenue. Most of their revenue (95% in the latest fiscal year) comes from platform revenue, which is comprised of two parts: 1) subscriptions for the platform, such as the Core and Pro products, and 2) a smaller amount from usage-based revenue (payment processing) generated from transactions i.e., their FinTech solutions. Pricing is relatively standard for a SaaS company and is based on a mix of the number of users, a mix of products, the number of end customers, and the amount of GTV (gross transaction volume) processed. More information on pricing can be found here, and the company mentions pricing is aligned with customer success. Professional services revenue represented 5% of revenue in the latest fiscal year and includes onboarding, implementation, configuration, and training. Given ServiceTitan’s end market, the company started with monthly contracts but, over the past years, has moved toward longer-term contracts (12-36 months). But even with longer contracts, it appears customers still pay monthly and not annually upfront. This market structure of customers not paying upfront can affect free cash flow margins and could be why ServiceTitan’s non-GAAP operating margins are higher than their free cash flow margins. Most SaaS companies accrue large amounts of deferred revenue from contracts paid annually in advance, but that is not the case with ServiceTitan. See the note below:
“Fees for access to the Company’s Core platform are charged based upon a per unit basis which may vary by product, primarily on a per technician per month basis, and are generally invoiced to the customer in advance on the first day of the monthly service period. Payments are generally due upon invoicing.”
Go-to-Market and Summary Metrics
ServiceTitan sells their platform in three ways: Core, Pro, and FinTech products. They land customers with the Core product, which offers a base-level functionality across all key workflows, including call tracking, scheduling, dispatching, marketing automation, etc. The Pro products are higher-tier products that include deeper functionality and are called Marketing Pro, Pricebook Pro, Dispatch Pro, and Scheduling Pro. FinTech products include payment processing and point-of-sale financing. The company mentions that reaching their end customer is difficult using traditional enterprise software sales and marketing motions. ServiceTitan uses targeted digital marketing to drive leads to their website, outbound direct marketing i.e. cold calls, and generates significant word-of-mouth referrals from existing customers and tradeshows and from their annual conference, where they most recently had 3,500 customers attend. Given ServiceTitan’s focus on the trade vertical, they have garnered massive brand awareness as the cloud-based market leader. The company has also expanded significantly from where they started. ServiceTitan began focused on plumbing and residential homes and now serves many different trades across homes, businesses, and new construction. The company sees seasonality in the 2nd quarter of each fiscal year as hot weather in the summer months increases demand for trade businesses. For new customers, contracts are either annual or multi-year subscription agreements with contract terms typically ranging from 12 to 36 months; however, some older customers are on month-to-month contracts. Sales cycles are fast and are, on average, <60 days. As of January 31, 2024, the average active customer (>$10K annualized billings) paid ~$78K/year and customers with over $100K in annualized billings represented over 50% of billings. Active Customers represent ~95% of total billings, meaning there is a long tail of many smaller ACV customers that represent the remaining 5% of billings that the company does not report on.
Below are a few high-level metrics on ServiceTitan’s financial and operational performance and other relevant disclosures:
$772M of implied ARR last quarter, growing 24% YoY. The company added $91M of net new ARR in Q2. There is seasonality in Q2, hence the higher figure
In the most recent quarter, Platform Subscription revenue represented 71% of total revenue, Platform Usage Revenue (payments) represented 25% and Professional Services and Other was 4%
Non-GAAP gross margin was 70% on an LTM (last-twelve-months) basis, below the Meritech Software index median of 78%. This is unsurprising given the larger mix of payments revenue and negative professional services margins
ServiceTitan has been improving their non-GAAP operating margins over the past few quarters but is still below the public index median of 15% with a 2% LTM non-GAAP operating margin
LTM free cash flow margins were negative at (2)%, also below the index’s median of 15%
ServiceTitan is not a Rule of 40 business. The company has a 24% LTM Rule of 40, this is below the Meritech Software index median of 34%
The company discloses that dollar-based net retention has been above 110% for 10 quarters, but it has come down by seven percentage points over that period. The company calls this “normalization” and they’re likely coming off a more stabilized base of revenue for the calculation given the growth in payments revenue. Gross retention has been >95% during the past 10 quarters
ServiceTitan ended 2024 with 8,000 “active customers”, defined as customers with >$10K annualized billings. These active customers are growing 18% year-over-year
These customers represented 96% of annualized billings in 2024 and on average pay ServiceTitan $78K per year
As of 2024, over 1,000 customers have annualized billings that are >$100,000, which has doubled since 2022. These customers represent over 50% of total annualized billings
>95% of revenue in fiscal 2024 came from the United States
As of last quarter, ServiceTitan’s ARR per FTE (full-time employee) was $269K. This is below the median of the Meritech SaaS Index of $356K
ServiceTitan has $128M in cash and cash equivalents and $70M available under a credit facility. ServiceTitan has $176M in debt
In fiscal 2024, ServiceTitan customers completed ~109 million jobs and $55.7 billion of GTV was processed on the platform
ServiceTitan estimates the customers of trades businesses, which they refer to as “end customers,” spend ~$1.5 trillion annually on trades services for homes and businesses in the United States and Canada alone
During fiscal 2024, ServiceTitan customers performed jobs in zip codes representing 98.5% of the U.S. population, based on U.S. census data as of 2022
The company has 14 issued U.S. patents
Market Opportunity
The trade industry has been underserved by technology and is underpenetrated with cloud-based tooling. In the U.S. and Canada alone, end customers spend $1.5T on trade services annually, and today, ServiceTitan serves trades and end markets representing ~$650B of this $1.5T total industry spend. This $650B of spend, and the trades industry more broadly, can be broken down into two dimensions:
Type of facility: Residential (single-family homes) vs. Commercial (multi-family homes, businesses) and
Type of work: Construction aka installs vs. Service and Replace aka maintenance
ServiceTitan breaks down the individual TAMs in each of these four “quadrants” of the market as follows:
Residential service: $180B
Commercial service: $260B
Residential construction: $110B
Commercial construction: $100B
ServiceTitan’s origins and its core market today is in the $180B residential service market. These markets are highly fragmented and naturally, the lines are blurry, as end customers often perform work in multiple or all segments. ServiceTitan has been focused on expanding into the commercial market and the construction market for several years. They disclose that in their most recent quarter, over $5B of GTV (i.e., ~25% of their total GTV) comes from the commercial and construction segments, growing rapidly, up 2x YoY from the prior year. They don’t break out how much of this GTV is from commercial vs. construction.
Today, ServiceTitan captures ~1% of GTV on the platform as top-line revenue as we show in the charts below. They believe that over time they can double their total implied “take rate” to ~2%, assuming full product penetration within customers. By applying the ~2% against the $650B of serviceable industry spend, ServiceTitan believes their total revenue opportunity is ~$13B. Based on the GTV generated by customers during the 12 months ended July 31, 2024, ServiceTitan estimates they have <10% penetration in the ~$650 billion serviceable industry spend.
Competition
ServiceTitan’s market has historically been underserved by technology. Today, it is mostly a “pen and paper” aka email and text market. That said, ServiceTitan faces competition on several fronts: large incumbent horizontal vendors and point solutions that require custom implementations and / or cobbling together, industry-specific legacy on-premise players, and a handful of more modern startups. Competitors listed in the S-1 include Salesforce, SAP, FieldEdge, Workwave, ServiceTrade, AccuLynx, BuildOps, HouseCall Pro, JobNimbus and Jobber. The company offers a comparison page on their website here.
IPO Ratchet, Investors and Ownership
As mentioned, ServiceTitan has a compounding IPO ratchet from the Series H in November 2022. We have not historically seen structure like this in SaaS IPOs – especially structure that may be triggered which, according to our valuation analysis below, could be. With an IPO ratchet, new investors in the round receive downside protection. If the company IPOs below the price of the round, the investor is “made whole” and receives more shares as if the original investment was made at the new lower price. If the company IPOs above the price of the round, there is no impact. In this case, the “base” hurdle price is $84.57, the price of the Series H round, and our valuation analysis indicates ServiceTitan could trade below that price at ~$70 per share. ServiceTitan’s ratchet is also “compounding.” This means that after May 22, 2024, the 18-month anniversary of the round, the hurdle price begins to grow by 11% annually, compounding quarterly. Not only does this mean the clearing valuation to avoid the ratchet gets higher over time, but that (assuming the same IPO price) the magnitude of the ratchet increases and thus, the company incurs even more dilution the longer it waits before an IPO. Today, the hurdle price is closer to $90 per share. We generally see structure like this with more mature venture-backed companies that are either growing slower and / or cannot raise private capital at the last round valuation. Companies accept this structure as a way to maintain a higher headline share price and avoid the implications of a “down round” and take less near-term dilution. You can assume that ServiceTitan made this trade because it believed it would go public before the cutoff date elapsed at a price higher than the hurdle price. Investors also wanted this to happen! It means the company is performing well and is on track with its IPO plans, but if it doesn’t happen, they are “protected.” The moment this deal was signed, ServiceTitan was on the clock. At this point, the cutoff date has elapsed and the hurdle price is growing, so ServiceTitan is incentivized to get public ASAP. With all of this said, if they IPO below the hurdle price, based on our estimates, dilution from this event would be relatively small in the 1-2% range. And if they IPO above the hurdle price, none of this matters and there is no impact. We won’t know until it prices! It’s also worth noting that ServiceTitan’s two prior rounds, the Series F and Series G, also had ratchets (not compounding) at ~$106 and ~$116 per share, respectively. When the company raised its Series H at ~$85 per share, those ratchets were triggered and investors were made whole and had no remaining ratchet on the IPO price.
ServiceTitan has raised almost $1.4B in equity capital from venture and crossover investors. Select institutional investors with ownership disclosed in the S-1 include ICONIQ (19.4%), Bessemer (11.2%), Battery (6.0%), TPG (5.2%) and Index (2.5%). The cap table also includes many other institutional investors such as Dragoneer, Thoma Bravo, Coatue, Tiger, Sequoia, T.Rowe, Durable and Mucker. President and Co-Founder Vahe Kuzoyan owns 10.3% and CEO and Co-Founder Ara Mahdessian owns 9.0%.
Source: S-1. Note: Assumes Ara Mahdessian and Vahe Kuzoyan have the same beneficially owned shares as disclosed in the S-1. This assumes they both exercise their options to each purchase ~1M shares of Class B common stock. Ownership percentages based on total Class A and Class B basic shares outstanding plus both the co-founders’ ~1M options to purchase Class B common stock.
Share Prices and Implied Returns Over Time
ServiceTitan has raised quite a few equity rounds and completed multiple tender offers. Tender offerings are sales from existing shareholders and no primary capital is issued. This enables founders, early employees, and investors to sell shares in a structured process. This is unsurprising given how long ServiceTitan has been around and their larger scale. Still, ServiceTitan’s last few equity tender prices are below their 2021 peak valuation of $119/share or a $9.5B post-money valuation. For context, later-stage investors generally target a 3x return. Most of these financings will be below that at IPO. This chart does not take into account the IPO ratchet, which we described above. We have a valuation section later in the post that dives deeper into where ServiceTitan could trade.
ServiceTitan Round Prices over Time and Post-money Valuations ($M)
Source: S-1. Note: Round-dates and post-money valuations per Pitchbook or calculated using ServiceTitan’s S-1. Blended price calculated as the weighted average share price of the ~400K Series H-1 shares issued at $84.5712 per share and the ~1.9M tender offer shares issued at $70 per share. Post-money valuation for the Series H-1 / Tender round calculated as blended price times current fully diluted shares outstanding.
Current Select Shareholder Value at Last Round Price ($M)
The below looks at the current value of select disclosed shareholders at the blended last round price of $72.50 in July 2023. ICONIQ is the largest shareholder.
Source: S-1. Note: Blended price calculated as the weighted average share price of the ~400K Series H-1 shares issued at $84.5712 per share and the ~1.9M tender offer shares issued at $70 per share.
Growth in Perspective
The following chart shows ServiceTitan’s revenue ramp indexed to ~$400M of ARR, where ServiceTitan has their first disclosure. While ServiceTitan’s traction is less in a straight line due to their choppier payments revenue, they are growing similarly to other successful public vertical SaaS companies.
Source: Company filings and CIQ as of 15-Nov-2024. Note: Implied ARR defined as quarterly total revenue multiplied by four
Annual Non-GAAP P&L ($000’s)
Below are ServiceTitan’s annual non-GAAP P&L and key metrics.
Source: S-1. Note: Implied ARR defined as quarterly total revenue multiplied by four
Annual Key Metrics ($000s except for customers)
Below are other key operating metrics that ServiceTitan discloses only on an annual basis.
Source: S-1. Note: Implied ARR defined as quarterly total revenue multiplied by four (1) Based on ServiceTitan’s disclosure that 95% and 96% of annualized billings in FY 2023 and FY 2024, respectively, are from active customers (2) ServiceTitan disclosed >$100K annualized billing customers represented over 50% of billings. Based on this, we assume >$100K customers account for 50% of ARR
Implied ARR, Year-over-Year % Growth and Net New Implied ARR ($M)
The chart below shows implied ARR, growth, and net new ARR calculated using total revenue for simplicity and to reflect ServiceTitan’s true scale more accurately. Q2 is a seasonally strong quarter, given “air conditioning demand peaking in summer months”. A big question for ServiceTitan will be whether investors believe they can hold a durable revenue growth rate of ~25% or if it will decay.
Source: S-1. Note: Implied ARR defined as quarterly total revenue multiplied by four
Net New Implied Subscription ARR vs. Net New Implied Usage ARR ($M)
Below we break down net new ARR between Subscription and Usage revenue. Naturally, FinTech Usage revenue is particularly seasonal. Subscription revenue is still somewhat seasonal as ServiceTitan acquires more new customers and adds more seats in the summer months, but to a lesser extent than FinTech. On a pure Subscription basis, ServiceTitan is adding ~$20-45M of net new implied ARR per quarter.
Source: S-1. Note: Implied ARR defined as quarterly revenue multiplied by four
Total Revenue by Quarter ($M) and Growth Rates
Source: S-1
Revenue Contribution by Revenue Line Item
ServiceTitan’s revenue contributions have been relatively stable. The contribution from FinTech spikes slightly in the summer months.
Source: S-1
Gross Transaction Volume and Implied Take Rate ($B)
ServiceTitan discloses GTV (Gross Transaction Volume) which is their end-customers’ total revenue. Currently, customers pay ServiceTitan ~1-1.2% of their total revenue. As mentioned above, this is how the company thinks about their TAM, and it believes it can grow to ~2% over time with more products and a higher share of wallet. We also include on the chart their payments take rate, calculated as just their Usage revenue as a percentage of GTV. This is stable at 0.25%.
Source: S-1. Note: Implied usage revenue take rate calculated as platform usage revenue divided by gross transaction volume. Implied total revenue take rate calculated as total revenue divided by gross transaction volume.
Non-GAAP Gross Margins and Operating Expenses as a % of Revenue
Gross margins have increased by almost ten percentage points in the past 10 quarters, and other expense line items have come down as a percentage of revenue.
Source: S-1. All metrics are non-GAAP
Non-GAAP Platform and Professional Services Gross Margins
ServiceTitan is still running professional services gross margins at a significant loss, while Platform gross margins are increasing slightly. Implementation, onboarding and training for core systems of record, especially in a real-world complex end market, takes time.
Source: S-1. All metrics are non-GAAP
Non-GAAP and GAAP Operating Margins
Efficiency has clearly been a focus for the company and non-GAAP operating margins are now positive and continuing to rise.
Source: S-1
Sales Efficiency and Payback Periods by Quarter
We show the magic number and payback period calculated on an LTM basis (i.e., trailing last four quarters) to account for the seasonality. The median over the disclosure period is 21.4 months. The metrics are trending in the right direction over the last few quarters, though they didn’t see quite the same spike in efficiency as last summer.
Source: S-1. LTM (last-twelve-months) defined as the last four reported quarters. LTM payback period shown in months. Payback period calculated as prior LTM non-GAAP sales and marketing expense divided by LTM new implied ARR multiplied by LTM non-GAAP gross margin. LTM magic number calculated as LTM net new implied ARR divided by LTM non-GAAP sales and marketing expense.
Non-GAAP EBIT Rule of 40
ServiceTitan does not disclose free cash flow margin by quarter, so we have used non-GAAP EBIT or Operating Income as a proxy in this quarterly Rule of 40 calculation to show the general direction of the metric. Rule of 40 has been flat most of the year and bumped up in the most recent quarter driven by a spike in profitability. ServiceTitan is not yet a Rule of 40 business.
Source: S-1. Note: Non-GAAP EBIT Rule of 40 defined as YoY revenue growth + quarterly non-GAAP operating income margin
Free Cash Flow and % Free Cash Flow Margin ($M)
ServiceTitan discloses free cash flow for only some periods, and in the first half of FY’25, they were almost free cash flow breakeven.
Source: S-1
Quarterly Non-GAAP P&L Output ($000’s)
Source: S-1. Note: Implied ARR defined as quarterly revenue multiplied by four
Quarterly Non-GAAP Metrics
Source: S-1. Note: Implied transaction take rate calculated as platform usage revenue divided by gross transaction volume.
Valuation
Valuation is an art, not a science. Below we show multiple methodologies to hone in on where ServiceTitan may trade in the public markets.
Regression Implied Valuation Analysis
High-growth SaaS companies trade on multiples of revenue. As we’ve established in our bi-weekly Meritech Pulse, multiples are most highly correlated to what we call the “Meritech Rule of 40”, defined as 3x NTM revenue growth + NTM free cash flow margin. Said another way, growth has roughly three times the impact on the valuation of a public SaaS company vs. profitability (defined as free cash flow margin), and this metric appropriately captures that weighting. Today’s investors want high growth with “some” free cash flow. With this in mind, we believe the most accurate way to understand where a SaaS company might trade in the public markets is simply to plot it on the regression line comparing multiples and the Meritech Rule of 40. That’s what we’ve done below. The blue dots represent all our index's current public comps (100+ of them). The orange dot represents ServiceTitan based on illustrative assumptions for its NTM financial performance (companies do not give guidance in their S-1s):
We calculate the Meritech Rule of 40 for ServiceTitan using an illustrative NTM (next-twelve-months) revenue growth. We assumed 20% NTM revenue growth, down from 26% LTM (last-twelve-months)
We also forecast an illustrative free cash margin of 5%. On an LTM-basis, ServiceTitan has a (2)% FCF margin, but its FCF margin has been trending upwards, with a (2)% FCF margin in the first half of fiscal year 2025 versus a (26)% FCF margin in the first half of fiscal year 2024.
Again, these are illustrative assumptions since we don’t have forward projections. This results in an implied Meritech Rule of 40 for ServiceTitan of 65%. We then “plot” that figure on the regression line using the “y = mx + b” equation representing the line. This calculation implies that ServiceTitan could trade at 8.4x NTM Revenue, representing a $6.9B enterprise value.
Source: S-1, company filings, and CIQ as of 15-Nov-2024
It’s important to remember that multiples today are just proxies for long-term free cash flow generation. This means that ServiceTitan’s multiple will ultimately be determined by more than just its NTM forecast financials. Long-term forecasts depend on several qualitative factors, including market size and structure, trends, and competition. Said another way, when a company trades above or below the regression line, it gives us insight into what the market thinks about the durability of its financial profile.
Sensitivity Valuation Analysis
For a slightly different view, below we include a simple table with various NTM growth rate assumptions and a range of NTM revenue multiples based on our public software index to imply potential enterprise values for ServiceTitan. We are using 8x NTM revenue for the mid-point of the multiple range. 8x NTM revenue implies a valuation of ~$6.6B. Using ServiceTitan’s fully diluted pre-offering share count, this implies a share price of ~$72 per share, which is 15% below the Series H price of $84.57 and essentially right at the most recent Series H-1 blended price.
Source: S-1, company filings and CIQ as of 15-Nov-2024. Note: Enterprise value ranges are illustrative
While all else equal, the market rewards growth over profitability for SaaS companies, and vertical SaaS companies can trade at premium multiples even with lower growth rates. These companies may be growing slower than horizontal application or infrastructure or security companies because they operate in more constrained TAMs, but they are also more dominant in those markets and thus have efficient GTM motions, durable growth, and high FCF margins. Examples of this include Doximity (16x), Guidewire (14x), and Veeva (11x). ServiceTitan certainly has the potential to follow a similar path and could trade above 8x, so we’ve sensitized that below. Also, the lead IPO banker will likely price the offer conservatively to ensure a “pop” when it begins trading. This analysis reflects the steady state trading price after the pop, not the IPO price. ServiceTitan is also harder one to predict given it’s the first SaaS IPO in some time.
Vertical Software Comps
Below we include a table showing the multiples and financial metrics of select currently public vertical SaaS companies, with whom ServiceTitan will be compared. On a median-based, ServiceTitan is growing a bit faster but has a lower Rule of 40 score. The median company trades at 9.4x ARR and 8.2x NTM revenue, similar to where we have pegged ServiceTitan in our valuation output.
Source: Company filings and CIQ as of 15-Nov-2024. Note: Implied ARR defined as quarterly total revenue multiplied by four. Free cash flow defined as cash flow from operations minus capital expenditures and capitalized software costs. Rule of 40 defined as LTM Revenue Growth + LTM free cash flow margin. LTM (last-twelve-months) defined as the last four reported quarters. LTM payback period shown in months. Payback period calculated as prior LTM non-GAAP sales and marketing expense divided by LTM new implied ARR multiplied by LTM non-GAAP gross margin multiplied by 12. LTM magic number calculated as LTM net new implied ARR divided by LTM non-GAAP sales and marketing expense. All financial figures are non-GAAP which adjust for items such as stock-based compensation, amortization of intangibles, and other one time and/or extraordinary expenses
Final Thoughts
ServiceTitan Positives
Dominant Market Position: It’s clear ServiceTitan is the leader in the trade industry and the first company to offer a full suite for every workflow, all in the cloud. This has enabled them to reach almost $800M of ARR while growing ~25% year-over-year. While they got their start in plumbing and residential service, they have since expanded their TAM to cover other vertical segments. ServiceTitan also has a strong reputation in the market and should continue to hold a market leadership position. While their end market isn’t the largest, winning still means billions of dollars of revenue.
Full Suite Approach: This comment builds on the first point, but since ServiceTitan is the operating system for their end customers, they own every workflow for the market. This enables best-in-class gross retention of >95%, where they are selling into many SMBs. Assuming the market believes in the market size and ServiceTitan’s ability to expand through new verticals, segments, and products, it makes investing in a durable growth story all the more believable.
Stable End Market i.e. AI Doesn’t Fix Clogged Drains: The trades industry isn’t going anywhere, and the market trends are in ServiceTitan’s favor. There are very few to no “black swan” events that could disrupt ServiceTitan’s market. If one believes in the company, the tailwinds of aging infrastructure and homes, more extreme weather, generational transition of trades company ownership, and a new generation of home and business owners who are much less “DIY” than baby boomers and will call a plumber to fix a clogged drain, the end market is an obvious one. These tailwinds mean an even greater need for a modern cloud-based solution (with AI sprinkled on) so the trades can keep up with all the demand. Lastly, this is one segment that AI is unlikely to disrupt i.e. AI will never fix that clogged drain – you need a technician powered by ServiceTitan’s cloud-based operating system to do it.
ServiceTitan Further Questions / Potential Risk Factors
Financial Profile: ServiceTitan has work to do to continue to improve their unit economics while maintaining a durable top-line revenue growth rate. The company is not yet a Rule of 40 business, but is almost at $800M in ARR. And while ServiceTitan has slowed from a ~35% year-over-year revenue growth rate to ~25% over the past 10 quarters, margins have improved significantly, and the company is now non-GAAP profitable. Investors will debate if ServiceTitan can be a Rule of 40 company while continuing to grow at a healthy rate. We know that the public markets value revenue growth over free cash margin by a factor of 3:1, but ServiceTitan’s revenue growth is slowing, and they’re not yet a high-margin business. And given they want a “beat and raise” Wall Street Model, their guided forward growth rates might be in the high teens, which is not best-in-class, especially while being “only” free cash flow neutral. For this reason, they are unlikely to get a premium trading multiple today. It will be up to ServiceTitan’s performance in the public markets to show improving margins while holding (or even accelerating) revenue growth to garner a premium multiple.
Market Size: Market size can be a head fake as the best companies always make the market bigger. Today, the company believes their TAM to be $13B and that they’re only ~10% penetrated, but that assumes increasing product penetration and expansion into different segments where the workflows and competitive landscapes may be different. Creating value in the public markets is all about durable revenue growth rates, but companies need the end market to do it. ServiceTitan has strong proof points of launching and selling more products into its customer base and expanding into new segments – they will need to continue to do that to have a durable growth rate at $1.5 or $2B of ARR. We are sure the management team has been debating TAM with investors for many years and that the company’s revenue today is significantly larger than their early TAM assumptions when they got started, so they have already shown they can expand TAM.
Growth Durability: Related to the prior two points, ServiceTitan needs to show they can grow revenue at 20-25% year-over-year for multiple years while improving margins. The company has raised almost $1.4B in equity (according to liquidation preference disclosure in S-1), $249M in non-convertible preferred stock and warrants, and $180M in debt and has $129M in cash (including restricted cash) and $176M in debt; hence that implies they burned through ~$1.5B to get to where they are today. As a public company, the margin for error on margins and durable revenue growth rates will be low. It will require excellent execution to both expand the market through new products and segments i.e. top-line revenue growth, and increase their bottom-line efficiency i.e. free cash flow margins. Moreover, active customers grew 18% year-over-year in the last reported period. With 110% net dollar retention, which the company has disclosed has come down recently, structurally, it appears that it will be harder to re-accelerate revenue growth unless customer growth increases or they significantly move up ASPs or average selling price.
While it is an important and generally inevitable step along the journey for any market-leading SaaS company, all companies should have a reason to go public. There is excitement about the potential for the IPO window for private tech companies blowing open in 2025, but one must not forget we are in the midst of the “private for longer” era in venture capital. Consider companies like Databricks, Stripe, OpenAI, Figma - Databricks is reportedly raising billions in private markets, Stripe just did a massive private market tender, OpenAI just raised the largest venture capital round in history, and Figma just completed a massive tender offer as well. Why are these companies choosing to stay private and not strut through the IPO window when there would clearly be healthy public investor demand? Incentives. For these best-in-class companies there are many billions of dollars of capital available in the private markets. You can still generate liquidity for early investors and employees and increase your valuation as a currency for M&A, all the while avoiding the headache of quarterly earnings calls and talking to Wall Street analysts about improving operating margins by basis points each quarter. In short, you get many of the benefits of being a public company while maintaining the ability to run the company as you wish and invest aggressively in growth. Of course, being public amplifies these benefits of liquidity and capital markets access significantly.
As mentioned above, ServiceTitan has an IPO ratchet. Per our valuation analysis, they may trade below the hurdle price and have a “down-round IPO.” This hurdle price is now growing every quarter, so they are genuinely on the clock to go public to reduce the dilution impact, even if it is relatively small. This is likely a significant driver of ServiceTitan’s push to go public right now and not remain in the private markets longer and take advantage of the abundance of private market capital. We can assume that ServiceTitan’s ambitions were always to go public, but this ratchet structure may have unnaturally accelerated their timeline. Regardless, ServiceTitan is in the rare air of dominant market-leading SaaS companies and has the potential to create significant value in the public markets, as many of its vertical SaaS peers have done before it. And given the dearth of tech and SaaS IPOs this year, the IPO will undoubtedly be oversubscribed, and ServiceTitan should have a successful offering. Congrats to co-founders Ara and Vahe and the rest of the team on this milestone and for their important work modernizing a critical but yet underserved segment of our economy and, in the process, doing something many private market investors certainly told them was impossible – creating a multi-billion dollar public company in a market that was always “too small.”
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Meritech does not give investment advice.