Q2 2025 SaaS Performance

Q2 2025 SaaS Deep Dive: Revenue Beats, DBNRR, CAC Payback, RDI Score, Margins, Valuation, SBC/Revenue, and Shareholder Dilution.

As Q2 2025 earnings season wraps up, investors and operators alike gain valuable insight into how leading SaaS companies are navigating today’s dynamic software landscape. From revenue beats to operational efficiency, product stickiness, customer acquisition dynamics, and valuation frameworks—there’s no shortage of signal in the noise.

This report examines a wide range of top SaaS names, including $CRWD, $PLTR, $AXON, $NET, $ZS, $S, $SNOW, $MDB, and $NOW, among others. Let’s explore the key metrics—Dollar-Based Net Retention Rate (DBNRR), Customer Acquisition Cost (CAC) Payback Period, Gross and Operating Margins, R&D Efficiency, Stock-Based Compensation (SBC), Dilution, and Valuation—that offer a comprehensive view into the underlying business quality and market positioning of these companies.

Revenue Forecast Outperformance

The quarter began with $PLTR leading the pack with a 7.0% revenue beat, followed closely by $VEEV at 6.9%. Other strong outperformers included $IOT at 5.0%, $SNOW at 4.9%, $DDOG at 4.6%, and $GTLB at 4.0%.
Additional SaaS players like $HUBS, $NOW, $NET, $TEAM, $ZS, $MNDY, and $CRWD posted more modest beats, ranging from 2.8% down to 1.5%. Smaller, but meaningful upside was recorded by $PANW and $CFLT at 1.0%, while $S barely edged out expectations with a 0.1% beat.

Revenue beats across the sector signal resilient demand, especially given macro pressures, but the real story lies in how companies adjusted their annual forecasts.

Changes to Annual Guidance

The most notable upward revision came from $PLTR, raising its forecast by 6.4%. Following that, $MDB, $AXON, and $DDOG increased guidance by more than 2.5%, showing confidence in sustained growth momentum.
$SNOW, $IOT, $HUBS, $VEEV, and $NET all raised guidance by more than 1%, while $NOW, $MNDY, and $S made modest adjustments in the 0.9% to 0.1% range.
Interestingly, $CFLT, $CRWD, and $GTLB chose not to revise annual outlooks, hinting at either conservative management or less visibility into future demand.

Dollar-Based Net Retention Rate (DBNRR)

Focusing on the Dollar-Based Net Retention Rate (DBNRR), this metric is crucial for SaaS companies as it reflects customer loyalty and product stickiness. It measures the revenue retained from existing customers over a specific period, accounting for upgrades, downgrades, and churn.

The median DBNRR for the SaaS companies I monitor is 120%, up from 119% in the previous quarter.

Among the highest performers, $PLTR lead with 124%, and $SNOW with 125% followed closely by $AXON at 124%, and $GTLB at 121%.

At the median level are $DDOG at 120%, and $MDB.

Just below the median, but still solid, are $IOT at 115%, $NET and $CFLT at 114%.

On the lower end, $MNDY reports 111%, though it’s worth noting that $MNDY’s DBNRR for medium and large customers is stronger at 117%.
$NET’s drop was tied to “Pool of Funds” contracts — in Q3 2024 DBNRR fell to 110%, but it has since recovered to 114%.

Expense Prioritization: R&D vs. S&M

Product-led growth companies thrive when R&D takes precedence over Sales & Marketing. Firms like $DDOG, $TEAM, and $VEEV spend more on R&D than S&M, prioritizing innovation over customer acquisition.
This strategy builds stronger product moats, improves retention, and reduces reliance on costly marketing campaigns. Over time, such companies often benefit from superior margins and more sustainable growth paths.

CAC Payback Periods

The Customer Acquisition Cost (CAC) Payback Period is a crucial metric for SaaS companies, measuring the time (in months) it takes to recover the cost of acquiring new customers.
This metric is essential for evaluating the efficiency of a company’s sales and marketing efforts. A shorter CAC Payback Period generally indicates a more effective go-to-market strategy and a product that resonates well with customers.

In Q2 2025, the companies with the least favorable CAC Payback Periods included $CFLT at 38.3 months, $S at 30.7 months, $NOW at 30.6 months (due to seasonal factors).

On the other hand, the best performers were $PANW with a payback period of 5.5 months, $PLTR at 5.6 months, $VEEV at 9.3 months, and $DDOG at 10.2 months.

The median CAC Payback Period for the SaaS companies I monitor stands at 21.6 months, down from 26.9 months in the previous quarter.

Companies performing around the median include $NET, $ZS, $IOT, $TEAM, and $HUBS.

R&D Index (RDI Score)

The R&D Index (RDI Score) is a key metric that evaluates how efficiently SaaS companies convert their R&D investments into organic revenue growth. In a competitive landscape, innovation drives customer satisfaction, retention, and long-term expansion. Companies with higher RDI scores consistently outperform peers, delivering stronger total shareholder returns (TSR).

An RDI Score above 1.4 means a company generates more than $1.40 in revenue for every $1 spent on R&D—a hallmark of best-in-class performance. For context, the industry median is around 0.7, but among leading SaaS names, this metric often exceeds 1.3, signaling exceptional efficiency and innovation.

In Q2 2025, the top performers by RDI Score were: $PLTR with score at 3.7, $IOT at 1.8, $NET, and $MNDY at 1.7, and $ZS at 1.5.

The median RDI Score for the SaaS companies I track is 1.2, up from 1.1 in the previous quarter.

At the lower end, $TEAM posted an RDI Score of 0.7, falling at the industry median—indicating less efficient R&D investment compared to peers.

SaaS Magic Number

The SaaS Magic Number is a pivotal metric used to evaluate the efficiency of sales and marketing investments within SaaS companies.

It offers investors and managers a clear view of how effectively a company is converting its sales and marketing spend into revenue growth, which is particularly crucial for businesses that follow a subscription-based model.

In the SaaS industry, customer acquisition costs are typically high but lead to prolonged revenue streams.

Interpretation of the SaaS Magic Number

Magic Number > 0.75: Indicates high efficiency in sales and marketing efforts. Companies achieving this level are generally considered to be effectively utilizing their investments in these areas and may safely increase spending to drive growth.

Magic Number between 0.5 and 0.75: Suggests moderate efficiency. Companies in this range are seeing some return on sales and marketing spend but should explore ways to optimize these investments.

Magic Number < 0.5: Reflects poor efficiency. Companies with a magic number below 0.5 may need to reassess their sales strategies or marketing campaigns, as their investments are not translating effectively into revenue growth.

Limitations of the SaaS Magic Number

Seasonality and Sales Cycles: The metric does not account for the effects of seasonality and sales cycles.

Growth Stage Influence: The metric might be misleading for very early-stage companies or those in a rapid expansion phase, where sales and marketing spend is aggressively high.

🟢Magic Number > 0.75: $PLTR, $AXON, $VEEV, $DDOG, $SNOW, $GTLB, $MDB.

🟠Magic Number > 0.5: $NET, $PANW, $CRWD, $IOT, $ZS, $HUBS.

🔴Magic Number < 0.5: $MNDY, $S, $TEAM, $CFLT.

Margins and Profitability

Next, let's discuss margins, starting with Gross Margin non-GAAP. For $AXON, the Gross Margin is 63%, but specifically for Software & Services, it's 76%. The highest Gross Margins are seen at $MNDY and $GTLB 90%.

Regarding non-GAAP Operating Margins, the highest performers are $PLTR at 46% and $VEEV at 45%. Next, with strong operating margins, are $PANW, $NOW, and $TEAM, ranging from 30% to 24%.

Companies still in earlier growth stages include $S with 2%, and $CFLT with 6% operating margin.

It’s also worth noting that $IOT recently turned profitable on an operating margin basis in 2023, improving from -9% in Q1 2023 to 15%, showing strong progress toward sustainable profitability.

Similarly, $GTLB shifted to a positive operating margin, improving from -12% in Q1 2023 to 12%, reflecting a meaningful turnaround in operating efficiency.

For Q2 2025, the highest Free Cash Flow (FCF) margin was reported by $PLTR at 57%, followed by $PANW at 37%, $VEEV at 29%, and $TEAM at 26%.

Other strong performers included $CRWD, $ZS, $MNDY, $DDOG and $GTLB, all with FCF margins above 20%.

Notably, $PLTR posted a 57% FCF margin alongside strong revenue growth of +48% YoY.

Stock-Based Compensation and Dilution

Next, let’s examine Stock-Based Compensation (SBC) relative to company revenues.

SBC is a critical tool for SaaS companies—essential for attracting and retaining top talent while aligning employee interests with the long-term success of the business. However, it requires thoughtful management, as excessive SBC can lead to shareholder dilution and negatively impact earnings per share, both of which are key factors for investors assessing a company's financial health and long-term potential.

There are significant differences in SBC as a percentage of revenue across the industry.
For example, $SNOW and $CFLT reports one of the highest levels at 38%, followed by $S at 31%. While $SNOW may justify higher SBC through strong revenue growth, $CFLT's growth sits at 20%, and $S is growing at 22% YoY but continues to decelerate—raising concerns about the sustainability of such high compensation.

Next are $NET, $TEAM, $ZS, $CRWD, $MDB, $GTLB, $IOT, $DDOG, and $AXON, with elevated SBC levels ranging from 26% to 21%.

Other companies such as $MNDY, $HUBS, $PLTR, $NOW, $VEEV, and $PANW report SBC levels below 20%, which is more in line with industry norms and suggests a more balanced approach to compensation and growth.

A crucial factor for shareholders is dilution. Let’s examine the changes in the Weighted-Average Number of Common Shares (Basic) over the last quarter.

The most significant dilution occurred at $MDB, with an increase of +10.2%, followed by $CFLT at +6.8%, $PLTR at +6.0%, and $S at +5.9%—a level of dilution that raises serious concerns. Also showing elevated dilution were $GTLB at +3.9%, $HUBS, $MNDY, and $DDOG at +3.4%, $ZS, and $AXON at +3.3%, $IOT, and $PANW at +3.2%.

For high-growth companies, more reasonable levels of dilution were observed at $CRWD, and $NET, all ranging from 3.0% to 2.0%.

Companies that have kept dilution well under control include $VEEV at 1.1%, $TEAM at 1.0%, $NOW at 0.7% and $SNOW at 0.3%.

Valuations: Price/Gross Profit, Rule of 40, and PSG

Finally, let’s examine company valuations by analyzing the Price/Gross Profit (Non-GAAP) multiple relative to projected revenue growth over FY 2025.

This multiple incorporates product efficiency via gross profit margin, which is a key metric for software companies. Consistently high or improving gross margins often indicate a strong competitive position and solid market potential.

In the chart, companies with negative operating margins are marked in red, those with operating margins below 5% are in yellow, and those with operating margins above 5% are shown in green.

$PLTR trades at the highest premium, while $VEEV and $CRWD also trade at a premium, though to a lesser extent.

$MNDY, $SNOW, and $GTLB appears undervalued with operating margins above 5%.

Let’s consider the Rule of 40 as a framework for evaluating companies. The Rule of 40 is a key financial metric used to assess the performance of SaaS and other growth-oriented software companies. It balances revenue growth and profitability, offering a more holistic view of a company’s financial health. Companies that meet or exceed the 40% threshold are generally considered well-positioned, making them attractive to investors seeking a blend of growth and operating efficiency.

For this analysis, I used the non-GAAP operating margin from the most recent quarter, combined with full-year revenue growth estimates. While using quarterly operating margin can introduce some volatility due to seasonality, it also provides insight into companies that have recently achieved operating profitability.

The Rule of 40 is particularly useful for comparing companies across different growth stages and scales.

🟢 Rule of 40 Score > 40: $MNDY, $IOT, $NET, $DDOG, $VEEV, $ZS, $PANW, $PLTR

🟠 Rule of 40 Score < 40: $HUBS, $SNOW, $MDB, $CFLT

🔴 Rule of 40 Score < 25: $S

When comparing Rule of 40 to Price/Sales (P/S) ratios, $PLTR appears overvalued, while $PANW, $ZS, and $VEEV appear undervalued based on this metric.

In conclusion, let’s consider the PSG (Price/Sales/Growth) metric. The PSG metric is a valuable valuation tool for evaluating software companies, as it offers a more nuanced perspective than the traditional Price-to-Sales (P/S) ratio by incorporating the company’s growth rate.

This metric is particularly relevant in the software industry, where companies often trade at high P/S multiples driven by expectations of rapid, scalable growth.

The PSG ratio helps determine whether a high P/S valuation is justified based on a company’s actual growth trajectory.

Companies trading with a PSG ratio below the median include $S.

Companies trading around the median PSG level include $IOT, $AXON, $PANW, $ZS, $DDOG, $SNOW, $MNDY, $GTLB, $MDB, and $CFLT.

Companies trading with a PSG ratio above the median include $PLTR, $CRWD, $VEEV, $NET, $NOW, and $HUBS.

Closing Thoughts

The Q2 2025 earnings season paints a clear picture of SaaS bifurcation. Leaders like $PLTR, $VEEV, $DDOG, $RBRK and $PANW are delivering revenue beats, expanding forecasts, maintaining strong margins, and showing capital efficiency. Others, such as $S, $CFLT, and $TEAM, face longer CAC payback cycles, weaker efficiency metrics, and shareholder dilution concerns.

As investors weigh growth versus profitability, metrics like DBNRR, CAC Payback, RDI Score, and the Rule of 40 remain essential guides. The valuation landscape suggests certain companies still trade at justified premiums due to superior efficiency, while others may offer attractive entry points based on improving fundamentals.

The SaaS sector remains highly competitive, but in Q2 2025, differentiation has never been clearer.

Thank you for reading!

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Disclaimer: This earnings review is for informational purposes only and does not constitute financial, investment, or trading advice.