Venture Capitalist at Theory

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2 minute read / Nov 6, 2023 /

What's Measured is Managed : Earnings Surprise in Public Software in Q3 2023

Six quarters ago, profitability became the most important factor to public software valuations.

14 public software companies have reported earnings in this quarter so far. These companies’ earnings surprise has been prodigious.

Earnings surprise is the difference between how much the market expected in earnings compared to actuals. Positive surprise means a better result than expected.


The average earnings surprise so far is 48%. Contrast that figure to 1% revenue surprise for the same companies.

The efficiency efforts enacted by the office of the CFO have produced more net income than the market expected.

Peter Drucker once said, “What’s measured gets managed.”

The quirky thing about the market? image

There’s no correlation between the Earnings Surprise & the revenue multiple for any of these businesses. The R^2 is 0.03 - these figures are orthogonal.

Rerunning the original analysis today, the top correlate across the entire set of public companies is revenue growth once more. And twice as important as any other factor.


RG is revenue growth. NIM is net income margin. CFO is cash flow from operations divided by revenue. RGP is Revenue Growth Projected over the next 12 months. SE is sales efficiency. GM is gross margin.

The fuller quote from Drucker is “What gets measured gets managed — even when it’s pointless to measure.”

Perhaps earnings aren’t pointless to measure, but the market has changed its valuation methodology - again.

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