Xero valuation part 2-1: Revenue
In part 1, we looked at a sanity check type valuation for Xero, the most exciting company on the NZ sharemarket. Xero does SaaS accounting, and their software rocks. And, world domination is the goal. I like that.
But whats a share worth?
In this part of the valuation, we need to start looking at projections. In particular, revenue projections. What is Xero going to earn in the future? Who the hell knows? Well, no-one really knows, but we will try and do a best guess exercise to find out.
The first step, particularly with fast-growing companies is: get the most recent data you can. The latest annual report came out in June 2010, and covers the period up to March 31, 2010. Which is cool. Or would be if it wasn’t bloody July! But at this point, its the best we can do. I firmly believe the next 6 month report, due I think in December, will be a crucial data-point in Xeros history, so we will revisit this valuation again then.
One of the keys for valuing startups is… pretty obviously, working out how much revenue they are going to get in. This is hard. But there are some pretty key things to keep in mind:
- What do past growth rates look like?
- Size and growth rate in target market?
- Competitive advantages
Past growth rates. The tendency is, as startup companies gobble up all the low-hanging fruit (which is probably NZ for Xero), revenue growth rates begin to tail off. And we have seen some evidence of this at Xero, where revenue from ops looks like:
|Revenue from ops||2851||959||134|
so… hmm. Ok, theres only a couple of data points, but the trend line looks unhealthy. Mark as a fail. But thats why I think the next 6 month report will be fascinating. But anyway, 200% is still nothing to sneeze at, because as revenues increase, the compounding effect of those multipliers gets big. So its not just the growth rate thats interesting, but how long Xero will be able to maintain those rates. The key for Xero is, how long before it runs out of cash?
Size and growth in target market
This one is difficult to estimate. The size of the market is enormous, since every SME needs to do its books somehow. Growth in the market? This is probably best estimated by viewing growth in Xeros competitors. MYOB is the main one that springs to mind, but unfortunately has been delisted, so details are scarce. So lets look at Intuit in the US for some growth figures. Unfortunately, Intuit is a bit of a different beast than Xero, in that it gets revenue from several different sources, including payroll and payments applications, tax, and a few other things I don’t really get. But a reasonable chunk just comes from QuickBooks, which is basically playing in the same sand pit as Xero, so I’m going with that.
|Q1 ’09||Q2 ’09||Q3 ’09||Q4 ’09||Full Year 09||Q1 ’10||Q2 ’10||Q3 ’10||Q4 ’10||Full year ’10|
|% change YOY||7%||(1%)||(9%)||(5%)||(2%)||(7%)||(3%)||16%||2%|
Hmm. So thats about as clear as mud. No idea what happened in Q4 ’10, but I think the story here is that there is not a huge amount of growth happening in the market as a whole, at least from the Quickbooks example. Maybe there are other players growing fast, but… mark that a fail.
Theres not too much doubt that Xero is the coolest piece of accounting software around, and it would be (and is) difficult for competitors to move into this space. People think that you just need to chuck up a few servers and a web-page, and its all done, but the high-volume SaaS space does not work that way. The difference between a crap piece of software and a user-friendly loved product can be very subtle. And I think Xero have done an excellent job.
So there is some competitive advantage there. But that assumes that you are in the market to ‘buy’ accounting software. Everyone who currently needs one has some form of solution to this problem, so there is a built in anti-competitive advantage for Xero, namely resistance to change. So each sale has to be earned.
So what have we learned? Well, we’ve learned that the market for accounting software is probably not booming, Xeros revenue growth is trending down with no big markets coming on board in the near future, and that, while some competitive advantage exists simply because Xero is excellent, making new sales is probably pretty hard.
Its not a great story so far for Xero. In the next section, I’ll stuff some arbitrary revenue numbers into a completely falsified spreadsheet, add a couple of decimal places to everything, and pretend the revenue projections obtained are as factual as a Oprah show. And probably start to look at operating margin. Which, while not the mostest fun you’ll ever have, is at least better than a root canal.