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Citi Research: Back Office Software Q1 2025 Earnings Wrap-Up

Key Takeaway

Investor sentiment for software has recovered, driven by better-than-expected fundamentals and macroeconomic resilience. While some sectors face headwinds, companies with healthier NT setups, attractive valuations, and underappreciated AI monetization opportunities are preferred.

Earnings Performance

• Back office software largely exceeded Q1 expectations, driven by stabilizing macro conditions, solid execution, and early signs of AI monetization.
• Companies exhibited cautious forward guidance, reflecting conservatism despite strong Q1 prints.
• Addressable segments like bookings at PEGA and others showed outsized growth expected to translate to future revenue.

Valuation Trends

• Software valuation has reset, favoring higher growth companies, though the market is likely pricing in future derisking.
• There's a positive market preference for growth vs. margins, which stands above historical averages.
• Differentiation emerged based on Rule-of-40 metrics (revenue growth + margins). Higher quality companies saw weaker multiples, while growth-focused companies attracted more investor dollars.
• Dispersion increased, suggesting deliberate investment into higher-growth assets.

New Top Picks

1. MNDY: Strong execution, risk-reward profile at 39.7x FCF for ~30% growth; conservative guidance.
2. PEGA: GenAI Blueprint executing well, expanding AI capabilities with a compelling risk-reward (14x '28 P/FCF).
3. DAY: Strong bookings momentum expected to drive revenue acceleration and FCF margin expansion.
4. SPSC: Q1 results expected to lead to re-rating; resilient business model and attractive valuation.

Downgrades & Shifts in Preference

• INTU: Upward-revamped positioning but ranks lowered due to recent strong performance and concerns about NT setup.
• BL, WK, BOX, CRM, others adjusted lower due to a mix of performance and forward guidance concerns.

Forward Outlook

• Citi remains cautious on NT sentiment in light of concerns over macro uncertainty and budget sustainability.
• The market balance appears set to support software as a relatively non-cyclical sector amid broader macro shifts.
• Recommends names with clear AI monetization strategies and favorable relative value.