ServiceTitan IPO: S1 Breakdown
11/24/24 Benchmarks for Operators
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ServiceTitan, the software powering the trades, has filed its S-1. With a clear lead in its market, a sticky product, and a focus on tradespeople who have historically been underserved by tech, this IPO offers a lot to unpack. Let’s dive in.
What Does ServiceTitan Do?
At its core, ServiceTitan provides an end-to-end SaaS platform tailored to home and commercial service professionals—think plumbers, electricians, and HVAC specialists.
The pitch is simple: ServiceTitan helps trade businesses manage everything from dispatching and invoicing to customer relationship management, all in one sleek interface. It’s all the “stuff” a small business owner does outside the trade itself. In fact, the company positions itself as the “operating system for the trades.”
ServiceTitan is the “center of gravity” or “control point” in vertical SaaS tech stacks.
Key features include:
Automated Scheduling: Optimizing technician timesheets and dispatch routes to reduce costs and increase job volume.
Integrated Payments: Streamlined invoicing and payment collections to get cash in faster.
CRM: Keep track of customer purchases and property details.
ServiceTitan caters to a huge industry, primarily SMBs in the service trades, but the growth into larger enterprises is also underway.
Key Figures
Annual Recurring Revenue (ARR): $685M for the 12 months ended July 2024, +25% y/y
Gross Transaction Volume (GTV): $62B for the 12 months ended July 2024, +23% y/y
Net Dollar Retention Rate: +110%
Gross Dollar Retention: +95%
Gross Margin: 64%, an improvement from prior periods, and consistent with vertical SaaS comps
Net Loss: ($183M) for the 12 months ended July 2024 (Improved by 31% q/q)
Customers: ~8,000, +18% y/y
Top 10 Customers Contribution: ~10% of total revenue, indicating low customer concentration risk.
Deferred Revenue: Growth in deferred revenue highlights strong long-term contract activity and revenue visibility.
Cash Flow from Operations: ServiceTitan remains cash flow negative, underscoring its aggressive investment strategy. They are the first company in a while to IPO without any profits to speak of.
7 Key Themes
1. ServiceTitan as a Vertical SaaS Pioneer
ServiceTitan exemplifies the growing trend of vertical SaaS—software built specifically for one industry rather than a broad, horizontal approach. By tailoring its platform to the unique needs of the trades, ServiceTitan not only fills gaps left by generic tools but also creates deep customer lock-in.
2. Founders' Deep Ties to Their Customers
Co-founders Ara Mahdessian and Vahe Kuzoyan grew up helping their immigrant parents run small trades businesses, giving them an intimate understanding of the needs and pain points of their customer base.
3. Stacking Niches
ServiceTitan began with HVAC, plumbing, and electrical trades but has expanded into adjacent categories like pest control and landscaping, aided by acquisitions of Aspire Software and FieldRoutes. These moves broaden their TAM to $50B and diversify their revenue streams.
4. Down-Market Focus Is Not a Priority
ServiceTitan intentionally avoids targeting "down-market" trades businesses (fewer than five employees). Their sweet spot lies in mid-sized and enterprise trades businesses, where their tools can drive the most impact.
5. Add-On Products Drive Growth
Pro Products and FinTech Payment add-ons provide usage-based revenue streams that complement subscription fees, deepening the platform’s stickiness and revenue potential.
6. Economic Resilience Through Non-Discretionary Demand
Over 75% of trades jobs are immediate or non-discretionary, ensuring demand remains steady even in downturns. This makes ServiceTitan an attractive model in uncertain times.
7. A Technology Lifeline for the Aging Workforce
With many tradespeople retiring and younger generations reluctant to enter the field, ServiceTitan streamlines operations, attracts tech-savvy workers, and boosts efficiency for leaner teams, helping future-proof the industry.
The Product
Tradespeople spend their days interfacing with the ServiceTitan platform across the five most business-critical functions inside a trades business: CRM, Scheduling, ERP, Human Capital Management, and FinTech. By offering capabilities in all five centers of gravity, ServiceTitan captures comprehensive data insights, which position them to deliver value and maintain durable customer relationships, reflected in their 95% gross dollar retention rate. They are the “center of gravity” or “control point” in vertical SaaS tech stacks.
Valuation, Investors, and Ownership
Major investors like Bessemer Venture Partners, ICONIQ Capital, and Tiger Global were early backers and may look to cash out.
A key determinant of IPO valuation will be how investors weigh:
Inclusion of Professional Services Revenue: I’ve written at length about PS as a necessary evil. ServiceTitan sells these at a loss. But it does support their high retention rates.
Growth Projections: If revenues grow 15% y/y from the current $680M base (a somewhat conservative projection), a 6x–8x multiple suggests a valuation between $5B–$6.5B.
Profitability Questions: A lack of near-term profitability may temper enthusiasm, especially in a tougher IPO market. Once again, they aren’t currently making (any) money.
Sales Efficiency: ServiceTitan’s S&M expenses amount to ~50% of revenue, reflecting a field-heavy motion. This indicates aggressive investment but also raises questions about efficiency and scalability. You want to see this below 35% over time.
Miscellaneous Stuff of Note
Acquisition-Driven Expansion: Purchasing Aspire and FieldRoutes extended ServiceTitan’s reach into landscaping and pest control, demonstrating their ability to grow TAM through strategic M&A. The proceeds from IPO could fuel more tuck in acquisitions to expand market size (pool cleaning, anyone?)
FinTech as a Growth Lever: FinTech solutions drive sticky, usage-based revenue but come with processing fees that weigh on margins. That said, the sheer volume of transactions up for grabs is a tasty prize.
Deferred Revenue Growth: An increase in deferred revenue highlights strong long-term contracts and revenue visibility, a positive indicator for future growth. Paired with strong retention rates, you can count on customers sticking around.
IPO Market Significance: ServiceTitan’s IPO will be a litmus test for the market’s appetite for growth-stage SaaS companies and vertical SaaS leaders in particular.
The Book Cover: ServiceTitan has filed for the ticker TTAN on the NASDAQ. Goldman Sachs secured the coveted lead left spot.
What’s Next?
Path to Profitability: Investors will look for margin improvement on the FinTech side and a narrowing of net losses while maintaining top-line growth (how long can they stay north of 20% growth for?)
Product Roadmap: Cross-sell and upsell opportunities will hinge on expanding Core and FinTech products and addressing broader customer pain points.
International Expansion: While ServiceTitan is firmly entrenched in the U.S. and Canada, expansion into international markets remains an untapped opportunity that could significantly extend their runway for growth.
My Take
Optimistic View: ServiceTitan has all the hallmarks of a vertical SaaS leader, addressing a massive, underserved market with a sticky product. Their focus on high-value trades businesses, durable TAM, and economic resilience sets them up for long-term success.
Bearish View: High acquisition costs and limited profitability remain risks. Growth could slow if penetration into adjacent markets or geographies falters. FinTech and professional services’ margin impact also raises questions about scalability.
Balanced View: ServiceTitan is a proven SaaS leader in a large, stable market. However, their success post-IPO will depend on execution in TAM expansion, margin improvement, and product innovation. Investors will watch closely to see if the story supports the valuation.
While none of this is financial advice, I’m a fan of vertical SaaS companies. I’m rooting for ServiceTitan to crush it for all the other VSaaS pioneers helping move small businesses forward. What’s not to like about that mission?
(Source: Koyfin)
TL;DR: Multiples are UP week-over-week.
Top 10 Medians:
EV / NTM Revenue = 16.6x (+0.6x w/w)
CAC Payback = 25 months
Rule of 40 = 53%
Revenue per Employee = $391K
(Data Source: Koyfin)
(Data Source: Koyfin)
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 110
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 16
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as TTM Sales and Marketing costs divided by TTM Revenue Additions, adjusted by Current Quarter’s Gross Margin %.
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
(Data Source: Koyfin)
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, cloud infrastructure, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools.
Research & Development: Product and Engineering employees, development expenses, tools.
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead.”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
Good write up. I appreciate hearing about businesses applying SaaS tooling to more traditional markets like commercial services.