“…What do all financial models have in common…” – they are all wrong….
At the core of financial modelling is calculating future cash flows. Nobody, knows exactly what the future holds; therefore how can any model be 100% correct? If they are all wrong, are they of any use? As believers of fundamental structured corporate finance, we would like the answer to be an emphatic yes. However, how useful a model is, is highly dependent on what steps have been undertaken to reduce the potential errors in the model.
This blog is not sales pitch for financial modelling. Nor is it an avenue for outlining good modelling practises to reduce human and calculation errors. Its focus is to establish the assumptions underpinning future cash flows – improved rigour here is directly proportional to the usefulness of a financial model.
Detailed financial modelling often breaks a business operation down to its simplest components – what is being sold/delivered and for what price. It’s these future sales and customer numbers that is the focus of this post, particularly in the relation to SaaS companies.
SaaS, or Software as a Service appears to be the new exciting kid on the block, quite often speaking a completely foreign language. Who is this kid… and what is ARPU, CAC and CMR?
Here at Clare Capital we have been doing financial modelling for several New Zealand SaaS companies (both public and private), during which, we have had a bit of a crash course in the world that is SaaS and would like to pass on some of what we have learnt.
[For those that live and breathe SaaS, feel free to point out anything we misrepresent, for everyone else feel free to contact us for more information].
As a sequel to last week’s post about What is the right EV/Revenue multiple? We thought we would follow this up with the same EV/Revenue & ACMR graph – but relating to the six NZX-listed Tech companies. This also coincides with the release of Wynyard Group’s and SLI Systems’ financial statements earlier this week.
ACMR is Annualised Committed Monthly Revenue – which is the most recent monthly revenues annualised. While the size of the bubble represents the company’s overall Enterprise Value.
Chart 1 – NZ Tech companies
This is a question often asked, and is a difficult one to answer. To help visualise the relationship between Enterprise Value (EV), Revenue (ACMR) and the commonly used multiple, EV/Revenue we have created the following charts comparing online companies.
NB: ACMR = Annualised Committed Monthly Revenue, which is the most recent monthly revenues annualised.
Understanding the charts:
Along with each company’s position on the chart representing EV/Revenue multiple in relation to Revenue, the size of the bubble represents the company’s overall EV.
Chart 1 – Low to Mid range ACMR companies
Chart 2 – High ACMR companies
Print-form directories have historically been a key cornerstone part of telecommunication businesses worldwide. This is changing, and what is occurring is a perfect example of Disruptive Innovation usurping a Sustaining Business Model.
History will show that the sale of Yellow Pages to a US-based private equity firm for NZD $2.24 billion was timed to near to perfection. At the time of sale in 2007, print directories were still a cornerstone aspect of telecommunication businesses. The Yellow Pages in particular had experienced constant revenue growth prior to the sale. And it’s also not hard to understand this, most people remember getting their White and Yellow pages in the late 1990s and early 2000s – and actually using them. Supplementing this, it was before the Global Financial Crisis, a period of cheap capital, in particular for private equity firms.
Following the 70% sale of the Sensis directories business from Telstra (Australia) to a US based private equity firm, Platinum Equity for A$454 million – blog post to come later – we thought we would illustrate the significant differences between NZ’s largest directories business vs NZ’s largest online auction/e-commerce website.
The following two graphs highlights the compelling difference comparing Yellow Pages (a largely print-based business) to Trade Me (a 100% online business). The results below show the impact technology has had on each company over the course of the last seven years:
Note: the two data points (we are only showing the 2007 and 2013 numbers) for both Yellow Pages and Trade Me are from the financial years 2007 and 2013.
Clare Capital uses the Enterprise Value/2P reserves ratio to give an indication of how the market is valuing a number of New Zealand and Australian comparators in the oil and gas exploration and production industry (as at 22nd September 2016). Companies with an EV less than NZ$20 million are excluded (such as Pan Pacific Petroleum).
The graph above highlights three values of each company in the Australasian Oil & Gas (O&G) Industry:
- Enterprise Value of the O&G company / Amount of latest reported 2P reserves [vertical axis]
- Amount of latest reported 2P reserves [horizontal axis]
- Enterprise Value of the O&G company [size of the bubble]
Green colouration denotes companies with New Zealand operations, while blue colouration represents Australian only operations. The closer a company is to the horizontal axis, the ‘cheaper’ its market valuation.
Clare Capital was the financial adviser to NZX Limited on the sale of their online news business, NewsRoom to Sublime Group Limited after NZX conducted a strategic review of options for the business.
NewsRoom is a subscription-based online news service which sends unfiltered press releases, announcements and opinion material to paying subscribers. NewsRoom was established in 1996 and was acquired by NZX in 2007. It’s news feeds serve New Zealand’s top legal and accounting firms, large corporations, government departments, and parliamentary offices.
NewsRoom draws their material from three different sources; free content supplied by organisations and individuals, purchasing content from specialist providers and a designated in-house NewsRoom team creating content on key political stories. Subscribers receive their information via NewsMail (email), intranet feeds and website feeds.
We produced a Thought Piece on our take on Xero’s valuation at the beginning of October 2013, before the US$150 million capital raise and when the share price was trading at $19.00. Three months later the share price is now at $42.00.
The Executive Summary of the Thought Piece is highlighted in the bullet points below:
- Xero is a high-growth technology company and not a Ponzi scheme.
- Losses are fine as long as value is being created.
- However – from a fundamental valuation perspective Xero is a challenge. First – there are a wide range of future potential growth scenarios. Second – we don’t know when Xero will move to being cash flow positive. From patient for profit and impatient for growth – to the reverse.