A to Z Software and SaaS Operational Benchmarking Series: ServiceTitan
In this series, I will go through a list of public (to be public and formerly public) software and SaaS companies, and run through a set of operational benchmarks based on publicly available data. Using public information such as SEC filings, press releases, earnings transcripts and investor presentations, I have pieced together a variety of items that are noteworthy to monitor and understand for these companies of varying scale, growth rates and profitability. Given the sheer amount of publicly available data and information circulated over the time horizon considered in this article, I may have missed item(s) worthy of consideration (so please leave me your thoughts!) and will not be adjusting all of the historical financials on a pro forma basis for M&A. I have conducted this analysis myself and it expresses my own opinions and work product, as I have no business relationship with the company mentioned in this article, nor should anyone use this article to make an investment decision. Please do your own due diligence and do not rely on this information herein.
Introduction
The next company covered in the A to Z Software and SaaS Operational Benchmarking Series is ServiceTitan.
Here is a brief business description from its recently filed S-1 as the company considers going public, ServiceTitan provides an end-to-end, cloud-based software platform that connects and manages a wide array of business workflows such as advertising, job scheduling and management, dispatching, generating estimates and invoices, payment processing and more.
The company’s cloud-based software platform offers end-to-end capabilities to manage complex workflows, connect key stakeholders and provide impactful industry best practices. ServiceTitan claims to be the operating system that powers the trades, such as plumbing, electrical, HVAC, garage door, pest control, and landscaping. Here is an image directly from the company’s S-1 depicting its platform.
ServiceTitan’s platform suite focuses on “five centers of gravity” — CRM, FSM, ERP, HCM, and FinTech. The company has over 8,000 active customers as of January 31, 2024, ranging from small family-owned contractors to large franchises with a national footprint. Based on disclosed figures as of the company’s S-1 filing, ServiceTitan boasts a strong gross dollar retention rate of over 95% (which it has maintained for each of the last 10 fiscal quarters) and a net dollar retention rate of over 110% (which it has also maintained for each of the last 10 fiscal quarters) based on the company’s disclosure.
I will walk through ServiceTitan’s key operational metrics across the company’s financial statements and key trends, and have compiled scorecards to compare the company to a variety of software / SaaS company benchmarks. This article serves as another example on how to evaluate a company’s financial and operational profile through a detailed assessment of available data and metrics. This can help business owners and investors apply similar approaches and analyses for other companies of interest.
For those who are not interested in going through the entire article and want a brief snapshot of the company’s key metrics as of its latest publicly available quarter (three months ended July 31, 2024), here is a compilation of summary charts:
Revenue Profile
ServiceTitan sells its platform to small/mid-sized businesses (i.e., small, family-owned contractors) and enterprises (i.e., large franchises with national footprints of over 500 locations and over $1 billion in annual gross transaction volume).
ServiceTitan has had strong customer growth, growing from ~6,500 active customers at the end of its January 31, 2023 fiscal year to ~8,000 active customers at the end of its January 31, 2024 fiscal year. These customers represented 95% and 96% of the company’s annualized billings as of January 31, 2023 and 2024 respectively.
The company has two primary revenue streams and monetization methods — 1) platform revenue and 2) professional services and other revenue. Over 95% of its total revenue is within its platform revenue segment, which is made up of subscription revenue and usage revenue. The company sells subscriptions of its platform within its Core and Pro products and generates typical recurring, subscription revenue from these sales. Beyond subscriptions, the company generates platform usage revenue within its FinTech products.
From a revenue mix standpoint, as of the latest LTM period ended July 31, 2024, ServiceTitan generated ~96% of its revenue from its platform revenue, of which 71% of its total revenue comes from subscription revenue and 25% of its total revenue comes from usage revenue. The remaining mix (~4%) is generated from the company’s professional services and other revenue segment.
The company is slated to go public in 2025, and filed its S-1 filing on November 18, 2024. Within the S-1, the company provided two fiscal years’ worth of financial data and 10 quarters worth of data ranging from April 30, 2022 through July 31, 2024.
Here is the view of the ServiceTitan’s quarterly revenue by type, quarterly YoY revenue growth rates by revenue type and revenue mix over time:
As depicted above, ServiceTitan generates the substantial majority of its revenue from its platform revenue, which is composed of subscription and usage revenue types. Subscriptions are sold as tiered subscriptions for its Core and Pro products that typically range from 12 to 36 months with some legacy customers on month-to-month contracts. For new customers, annual or multi-year subscription agreements are the norm and there are automatic renewals on these contracts, unless cancellations occur in advance. The company bills customers on a monthly basis in advance of services, and pricing for subscriptions are driven by features that customers adopt and are tied to the size of the customer’s business (i.e., number of field technicians or the number of end customers or the customer’s total revenue).
On the usage-based services in its platform revenue segment, ServiceTitan primarily generates payment processing fees from connections to third-party processors to allow customers to accept payments via credit or debit cards. Additionally, the company offers financing solutions and other forms of payment to end customers.
The company has a very stable base of recurring, platform revenue, which is over 95%, supported by 71% subscription revenue.
Beyond platform revenue, the company generates a small amount of professional services and other revenue. This primarily consists of onboarding, training, and some ongoing professional services to customers.
From an annual standpoint, here is a view of ServiceTitan’s revenue by type and growth rates, along with a view on the company’s revenue by segment type:
According to the disclosed data I was able to retrieve and review, the company has made 10 acquisitions. The company discloses data on some of these transactions within its public filings, but I have not made adjustments for any pro-forma details across the financial information I have provided in this article.
As is standard when assessing software companies, it is important to understand the impact of seasonality across its revenue and financial profile. In typical scenarios for numerous software / SaaS companies, we see a revenue skew towards the back-half of the year, especially the fourth quarter. This can be a result of numerous factors, most notably customers releasing budgeted spend (planned or excess amounts) to invest in new software purchases.
In terms of seasonality for ServiceTitan, the company explicitly mentions that it typically sees higher demand for its services and offerings in its second fiscal quarter (which ends on July 31). This is due to the fact that its customers generate more revenue and services in the summer months due to being in trade industries, which is due to hot weather driving more need for services.
This is atypical vs. typical software / SaaS businesses, which tend to have higher seasonality in the latter half of the year. Here is the view of the company’s fiscal quarters and seasonality by revenue type:
For the data I have analyzed, ServiceTitan has consistently generated growth rates between 20% and 40%, which results in the company being classified as a mid-growth company.
The below graphs and the scorecard chart summarize the company’s revenue metrics and performance history over a variety of benchmarks for typical software / SaaS companies:
Expense Profile
Before we dig into ServiceTitan’s costs and expense profile, here is a typical composition of expense categories for most software and SaaS companies:
In addition to these typical expense categorizations, the company breaks out its cost of revenues by each individual revenue stream. Thus, we are able to get a view into ServiceTitan’s cost profile into each segment, and develop a specific view of gross margin by revenue stream.
I will dive into each of the company’s expense categories as a % of revenue over time to develop an understanding of key trends. At the end of this section, I have included benchmarks to compare against as well, serving as useful rules of thumb.
Here are quarterly summaries of ServiceTitan’s expenses as a % of revenue over time:
As of its most recently disclosed period LTM ended July 31, 2024, ServiceTitan had annual revenues of ~$685M. Given its scale and growth rates, I have classified the company as a scaled, mid-growth company.
If you have followed along in this series and read about the other companies I have covered to-date, this categorization I have provided means that ServiceTitan has revenue above $100M a year, and has grown its revenue at rates between 20% and 40%.
With respect to its expense profile, ServiceTitan’s profile is still maturing and improving. The company continues to invest across all parts of its business, as evidenced by its spend across sales, marketing, product, engineering, and general & administrative functions. Its impending IPO drives required investment (i.e., increased legal and accounting expenses; increased stock-based compensation for key employees and other employees) across the business.
Nevertheless, as evidenced by the quarterly charts of its costs as a % of revenue, the company has done a good job improving its efficiency despite spending more on each of the categories versus representative software/SaaS spend benchmarks.
From a cost of revenue basis, the company has driven improvements from the mid 40% rates to the mid 30% range over time. This has driven improved gross margin rates as the cost of revenue has on a relative basis to revenue improved, but the company remains slightly suboptimal on cost of revenue ratios (and thus, gross margin). The company has seemingly given away professional services and other revenue, generating negligible revenue in this segment for a slightly increasing / steady base of costs in this segment.
ServiceTitan’s go-to-market efforts focus on new customer acquisition via a typical outbound sales team and existing customer expansion through its customer success function. While the company does not breakout its sales and marketing expense by new vs. existing sales team members, the management discussion and analysis notes that their customer success function and costs are likely in the sales and marketing line item. This may be due to the fact that the customer success team is responsible for existing customer expansions, akin to a typical account management function at an organization. The company does note that it does not pay commissions on renewals for customers with the same contract terms / details. Beyond sales compensation, the sales and marketing expenses consist of annual customer conference spend and other marketing / advertising activities to generate new customer acquisition.
The company has done a good job of also improving its sales and marketing efficiency over time, which happens to be a functional category that is in line with a typical software/SaaS benchmark range when looking at the costs as a percentage of its total revenue.
Research and development costs are in the mid 30% range, and have remained generally consistent over time. This category has not seen as much leverage as other parts of the business / functional categories, and the company’s management expects to continue increasing its spend in this function on an absolute dollar basis over time.
Finally, the general and administrative category has generated some operating leverage for the business over time, now close to 20% of its total revenue over historical ranges in the high 20% and mid 30% rates. This may be muted for the interim as the company goes public, but seems to be an area in which the company can drive continued improvements given its historical efficiencies here.
The company disclosed a reduction in force / restructuring event of 8% of its workforce in early calendar year 2023, which drove $8.2M in restructuring charges. This certainly helped to improve the company’s efficiency profile and costs profile.
In summary, the company is still very much in investment mode across its business despite improvements to its cost and expense profile. This is evident in the table below in comparison to reference benchmarks:
The benchmarks shown above are representative of what similarly sized software and SaaS companies should attempt to attain based on my experience in the industry and working with clients. A note of caution / disclosure — these benchmarks are not applicable to every single software and SaaS company, but illustrative ranges that business owners and investors can use as rules of thumb.
Profitability Profile
Generally speaking, the three selected profit metrics that I focus on in this section are: gross profit, EBITDA and operating cash. Primary reasons on why each of these profitability metrics are important to consider for all software and SaaS businesses are detailed here:
However, limitations to the reporting provided by ServiceTitan in its S-1 prevents us from breaking out to consistent EBITDA and operating cash figures. Instead, we will rely on operating income and adjusted operating income as supplements to the gross profit profile of the company to get a better understanding of its profitability profile.
The company defines adjusted operating income as Non-GAAP operating income (loss), which adds back stock-based compensation, amortization of acquired assets, and certain non-recurring expenses, such as restructuring expenses from the company’s RIFs, losses on operating lease assets, and certain acquisition-related items.
Without further ado, let’s dig into ServiceTitan’s gross profit and gross profit margins on a quarterly and annual basis by each individual revenue stream, along with a total blended view:
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From a gross profit and margin basis, the company has been able to drive steady improvements in its platform revenue segment, which has driven total blended gross margins upwards due to the heavier mix towards that revenue stream.
However, when looking at its PS and Other gross profit and margin profile, it is noted that the business struggles to generate any meaningful margin on this revenue stream. This can be intentional by ServiceTitan to drive strong customer retention and more emphasis towards its recurring platform revenue stream. They may intentionally use professional services as a loss leader / giveaway to incentivize customers to stay on their platform and spend more dollar-for-dollar on platform (subscription and usage) revenue. This is not atypical for software/SaaS businesses that place a heavier emphasis on recurring / subscription revenue, but the company certainly has a very negative profile here that needs to improve over time as the business goes public and continues to scale and become more efficient.
On the platform gross profit side, the business has a solid profile that has trended upwards and now exceeds 70% consistently. More detail would be great in the future to better understand the subscription vs. usage gross profit dynamics that blend within the platform revenue and gross profit breakdown. It would be assumed that the subscription revenue is higher margin vs. usage revenue, as the usage cost base is largely tied to contracts and terms that ServiceTitan may have with third-party payment providers and platforms that they package and pass through / monetize to their customer base.
Regardless, the company has driven solid improvements in their overall gross profit and there is more headroom to get the company into the best-of-breed mid/high 70% gross margin range in the future.
Throughout its S-1 filing, ServiceTitan does not disclose an EBITDA figure or breakout depreciation and amortization beyond its two fiscal years. As a result, I have decided not to include calculated EBITDA in this article for the company and focused instead on its operating income and adjusted (i.e., Non-GAAP) disclosed operating income as the other profitability metrics.
Please note that I have not made any other adjustments (e.g. no add-backs for any one-time, non-recurring items like litigation, M&A expenses, etc.) to these figures beyond what the company discloses and adjusts for.
Here is a view of ServiceTitan’s calculated operating income and adjusted operating income details:
Given where the company is in its growth lifecycle and trajectory, it is not entirely surprising to see ServiceTitan as an unprofitable entity. Like the rest of its business and metrics, the company has done a fine job of slowly improving its profitability metrics.
I do not personally put much weight or stake in its adjusted operating income figures, as they add back significant operating costs from stock-based compensation to arrive at a higher number that still (barely) gets to positivity. As the company goes public and begins reporting to the street, they will face more scrutiny to their profitability profile and disclosures here, especially if their growth rates continue to slow down further.
Despite the lack of profitability, it’s still generally a solid sign that the business has made changes in its cost profile to generate a path to profitability. This will be perceived as a good sign in the public markets, especially if the company is able to continue winning more market share in its large total addressable market and generate over 20–25% revenue growth on a consistent basis with almost $700 million in total revenue and scale.
Here is the company’s profitability scorecard across a variety of benchmarks:
Balance Sheet and Capex
Detailed views and analyses into a company’s balance sheet and capital spending trends can provide insight into a company’s working capital trends (e.g. is there any seasonality or nuances within accounts?) and cash flow generation (e.g. how a company bills and collects on customer contracts; what the company spends on capital outlays).
Please note that this section is generally more fulsome when a company has more disclosures, but since ServiceTitan is yet to be a public company and has only provided limited financials in their S-1 as of November 2024, we are reliant on only three balance sheet periods’ worth of data and limited cash flow / capital spending disclosures as well.
In this section, I will go into ServiceTitan’s cash and cash equivalents balance, working capital accounts (excluding cash), and capital spending trends.
The below cash and cash equivalents balance shows the company’s balance trending over time.
As the company goes public, we expect the cash and cash equivalents balance to balloon from the proceeds of the stock offering. This will be further improved as the company marches towards cash flow positivity and profitability as a public company in the future as well.
It is essential to assess a company’s working capital to understand how operating cash is generated over time. I have calculated working capital for ServiceTitan based largely on the following current asset and current liability accounts:
For a typical software and SaaS business, we would expect a relatively simple balance sheet with a few notable trends: 1) potential seasonality with accounts receivable, accounts payable, and deferred revenue in line with a company’s collection and payable cycles; and 2) negative working capital that continues to become increasingly negative over time as the company grows, sells more subscriptions, and has an increase in deferred revenue.
The below charts highlight the working capital and net working capital trends of ServiceTitan:
Here is a view of the company’s Accounts Receivable and current Deferred Revenue balances:
The company does capitalize internally software development costs on a minimal basis and possesses a relatively small and stable capital expenditure profile as well.
In its most recent disclosed fiscal year ended January 31, 2024, the company had capital expenditures of ~5% of revenue and capital expenditures + capitalized software of ~7% of revenue.
For software / SaaS businesses, capital expenditures are typically limited to investment in office space, equipment such as office items and computers and other tech-related items such as data centers, IT systems and infrastructure used for hosting.
A good benchmark / rule of thumb for the capital expenditures as a % revenue ratio is between 5% to 15% of revenue. ServiceTitan is within the range for capital spending.
Here are the views of ServiceTitan’s capital spending ratios as disclosed within its S-1:
Company-Specific KPIs and Other KPIs
ServiceTitan has yet to disclose its financial information to the public market beyond its S-1 filing, so we are faced with a varied and limited set of information.
Despite that nuance, the company still provides us with a variety of company-specific KPIs that each reflect different trends and supplementary details about the business and its performance.
These disclosed metrics vary in terms of their completeness and thoroughness, but include the following: gross transaction volume, active customer count, CAC payback, gross dollar retention rate %, and net dollar retention rate %.
Gross transaction volume (or “GTV” as the company shortens it as) represents the sum of total dollars invoiced by our customers to end customers through our platform in a given period, which is intended to be a proxy for the total revenue the company’s customers generate from their end customers. This is a good indicator of how much spend flows through the ServiceTitan platform in any given point of time, which is particularly important as the company generates usage revenue within its platform.
Here are the quarterly and LTM views of the company’s GTV metric, which highlight some solid growth:
The company discloses a net dollar retention rate that management defines as follows:
Our net dollar retention rate measures the increase in annualized billings across our existing customer base by comparing the annualized billings from the same set of customers across comparable periods. To calculate our net dollar retention rate as of a given quarter, we first calculate annualized billings from the cohort of all customers billed in the same quarter in the prior year, or the prior period annualized billings. We then calculate annualized billings from these same customers as of the current quarter, or the current period annualized billings. Current period annualized billings includes the effect of any expansion, contraction or churn over the trailing 12 months. We divide (a) current period annualized billings by (b) prior period annualized billings to arrive at the net dollar retention rate. When calculating net dollar retention rate, we do not include the billings from any customers that were acquired as the result of our acquisition of a business until the completion of the first full quarter following the one-year anniversary of the acquisition.
Based on my experience with prior clients, software and SaaS companies that disclose net dollar retention rates above the 105%-110% range are impressive. For the information disclosed in its S-1 filing, ServiceTitan is consistently within the illustrative benchmark range, but only disclose that they have over 110% net dollar retention over the last ten fiscal quarters. This is also supported by their similar disclosure on their gross dollar retention rates, which exceed 95% over the last ten fiscal quarters.
On active customers, ServiceTitan says it has approximately 8,000 active customers as of January 2024, growing from 6,800 active customers in January 2023. This would mean that the company generates ~$77K average revenue per active customer as of January 2024 vs. $69K average revenue per active customer over the January 2023 period.
The company lists one CAC payback number, which is 21 months as of July 31, 2024. No other disclosures or details are provided here other than this figure and the definition of CAC payback.
Per the filing, the definition is: CAC payback period represents the customer acquisition costs for the trailing four quarters divided by the non-GAAP platform gross margin for the trailing four quarters minus the non-GAAP platform gross profit for the prior four quarters, multiplied by 12 to arrive at the CAC Payback Period in months. Customer acquisition costs include up-front sales and marketing costs to acquire the customer and costs of implementation services to complete onboarding.
With respect to other operational KPIs we typically like to assess and understand in software and SaaS companies, ServiceTitan provides its periodic stock-based compensation, full-time employee counts, average revenue per employee, and CEO compensation figures. We do not have much time periods for the latter three metrics as you will see below, but enough to get a baseline metric for each.
These additional operational KPIs and trends are shown in the graphs below:
Another key metric we like to assess is customer acquisition cost (CAC) ratio. For ServiceTitan, I have calculated its CAC ratio over time using the company’s total GAAP sales & marketing spend, its total revenue, and LTM total gross profit margin.
For reference, here are the detailed breakdowns of the calculations I have used for CAC ratio:
Here is what ServiceTitan’s CAC ratio looks like over time with and without the impact of gross margin:
For reference, a useful benchmark for software and SaaS CAC ratios is between $1 to $3. We can see that ServiceTitan has consistently been within the benchmark reference range for both versions of the calculation. The company has held generally steady, but has had a slight degradation in the ratio as growth has slowed vs. the pace of growth of its sales and marketing spend.
Finally, one final metric we assess for software and SaaS companies is the Rule of 40. The Rule of 40 represents the sum of a company’s revenue growth rate and its EBITDA margin in each period.
In the case of ServiceTitan, we do not have an EBITDA margin consistently available — instead, we use the company’s adjusted / non-GAAP operating income margin as the profitability metric in the Rule of 40.
This certainly overstates the company’s Rule of 40 metric, given that the non-GAAP operating income margin adds back stock-based compensation. However, for the sake of this illustration, I will use this metric as the baseline for the Rule of 40 and give the company the benefit of the doubt.
This metric has become commonplace (and more important in recent years) as an effective measurement of a company’s health and value, as it blends growth and profitability into one metric for business owners and investors to monitor.
Although this metric is certainly not a panacea for all financial reporting concerns, it is indeed a useful tool to convey how balanced a company is in its growth and profitability.
Here are the quarterly and annual views of ServiceTitan’s Rule of 40 metric over time:
The company has yet to hit the Rule of 40 in the disclosed periods despite using an adjusted/non-GAAP operating income margin metric. There are some limitations in this view, as the EBITDA would add-back more depreciation and amortization (thus, improving the profit margin used in the calculation), but we are also giving the company the benefit of the doubt by also using a non-GAAP margin that adds back stock-based compensation metric as noted above.
This would be a good metric to monitor over time and better understand the blend of the growth rate that persists for ServiceTitan over time and how they continue (or not…) to improve their profitability profile.
Concluding Thoughts and Summary
This detailed assessment provides useful operational benchmarks for ServiceTitan that can be used as a basis to analyze other software and SaaS companies, both public and private. Hope this helps you get a better understanding of the company as it nears its IPO and provides the public markets with more information about its differentiated and scaling business.
It will certainly be a highly anticipated IPO worth analyzing further (please do your own due diligence and do not rely on the charts, figures, and details shown here to make a decision, as these are illustrations based on the company’s filing and are not my responsibility for accuracy and are not a recommendation to buy or sell the stock).
With further compilation of these metrics and averages from other companies covered in this series I have crated, there will be an increase in the availability and precision of the operational benchmarks used as reference points. This will provide business owners and investors with incremental detail to be used in their financial planning, reporting, and analysis of companies.
To learn more about this article and gain other valuable insight into your business, please visit www.rtdinsights.com or contact me directly at rzacharia@rtdinsights.com.
Co-Founder & CEO at AccountAim
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