So now we get to it, the guestimation. I’ve put in some educated *cough* numbers. You can tell these figures are 100% bang on the money because they have 2 decimal places attached. Sure fire way to ensure accuracy!
The actual live spreadsheet is up on google docs, so feel free to have a play (only change the numbers in blue). If you think I’ve made mistakes (which I probably have, this is hard and I have a cold), let me know in comments, and I’ll sort it out. Also, if you want me to change any of the numbers, tell me why and we’ll let everyone fight it out.
So some comments on what I tried to do:
I assumed pretty much that Xero would hit its projections. I also decided that it should become a half-billion NZD revenue company in 7 years, mainly based on Intuit revenue for Quickbooks, although theyre not a SaaS company. I think this is optimistic, but lets see how it plays out. It may be much less than this, or take longer. But I want to get to a per-share value first (hopefully in the next blog post) and then revisit.
Other comments:
- Note that the 2014 revenue and customer numbers are about the high-end of Xeros ‘potential customers’ from Rod Drurys AGM presentation
- The breakeven point is placed at second half 2011 (more or less – the march 2011 EBIT figure is close) so assumes Xero hits their predictions exactly
- [1] Intuit have yearly revenue of around $500millionUSD from QuickBooks. Note:Intuit is not SaaS but this seems a nice figure in 7 years
- [2] The operating margin for these kinds of companies seems to end around 25% so am letting Xero max out reasonably early
| Xero | 3/31/2017 | 3/31/2016 | 3/31/2015 | 3/31/2014 | 3/31/2013 | 3/31/2012 | 3/31/2011 | 3/31/2010 | 3/31/2009 | 3/31/2008 |
| Revenue from operations [1] | $526,022 | $438,352 | $292,234 | $146,117 | $66,417 | $25,545 | $9,123 | $2,851 | $959 | $134 |
| Guesstimate – Operating revenue growth rate | 20.00% | 50.00% | 100.00% | 120.00% | 160.00% | 180.00% | 220.00% | 197.29% | 615.67% | |
| Average customers @$29 – this is just an interest number | 1,511,557 | 1,259,631 | 839,754 | 419,877 | 190,853 | 73,405 | 26,216 | 8,193 | 2,756 | 385 |
| Average customers @$40 | 1,095,879 | 913,232 | 608,822 | 304,411 | 138,369 | 53,219 | 19,007 | 5,940 | 1,998 | 279 |
| Guesstimate – operating margin [2] | 25.00% | 25.00% | 18.00% | 15.00% | 12.00% | 4.00% | -20.00% | -296.39% | -703.96% | -3,216.42% |
| EBIT | $131,505.45 | $109,587.88 | $52,602.18 | $21,917.58 | $7,970.03 | $1,021.80 | -$1,825 | -8450 | -6751 | -4310 |
| Net operating loss at beginning of year | $0.00 | $0.00 | $0.00 | -$12,343.81 | -$20,313.84 | -$21,335.64 | -$19,511.00 | -$11,061.00 | -$4,310.00 | |
| Taxable income after tax write-off | $131,505.45 | $109,587.88 | $52,602.18 | $9,573.76 | 0% | 0% | 0% | 0% | 0% | 0% |
| Tax paid | $39,452 | $32,876 | $15,781 | $2,872 | $0 | $0 | $0 | $0 | $0 | $0 |
| Effective tax rate | 30.00% | 30.00% | 30.00% | 13.10% | ||||||
| Company tax rate | 30% |
So there it is, the first table of guesses for Xero, the 500million company! Let me know what you think.
greg in wellington 
Seems bang on, I have Xero at 36,000 @ $30 customers at 31/3/2011.
There is a lag between revenues and sigups which is why your (for interest only) figure is lower.
I believe up to 2012 your figures are right on track, beyond that I don’t even think Rod can contemplate how big Xero could get.
I have 100% confidence that Rod can and has contemplated how big Xero will get! And how many cylinders he will be able to buy… 🙂
Just wait till Xero introduce powerful additional pay per use features that SaaS can provide and boxed software cant – such as benchmarking. This will increase their ARPU and customer number.
This is a really interesting point, SaaS does have a lot of ability to aggregate stuff. But… how much would a SME want to pay? Not sure I can tell…
http://www.samstewartnz.com/
Have you seen http://www.valuecruncher.com/ ? It’s another Wellington startup that has automated, to an extent, this kind of analysis across most stocks here and overseas one might be interested in. Well worth checking out if DCF analysis floats your boat.
Yes, Valuecruncher is a cool site. Im more interested in first principals however, and its hard to do a DCF for a company like Xero which hasn’t made any cash.
Hi again Greg,
Why aren’t the annual percentage revenue growths monotonic?
Did you start by guesstimating operating margin instead of guesstimating operating costs? Costs seem more fundamental, but maybe you have some reasons?
Hey Tim
Well, the operating margin seemed easier than costs. The whole estimation of costs… well… um… I just don’t really have a clue. Advertising up? Dev down? Just too far into the crystal ball for my taste!
Its easy to guesstimate operating margin, since similar firms publish theirs, so went from there. The whole process is based on Damodarans method, so I’m not just making it up!
check out Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Second Edition, University Edition for the text book.
And also his page, http://pages.stern.nyu.edu/~adamodar/ , and the webcast section for his NYU MBA class on Valuation.
Hi Greg,
Just saw the recent article about the TradeMe subsidiary of FairFax: TradeMe Profit. It is interesting to note that the A$111m in profit for the digital division in ratio to the revenue of the division, A$297m, gives an operating margin of over 37%. I would suspect that the operating margin of TradeMe without the newer digital businesses is better again. So it illustrates that some online businesses can have much higher operating margins.
Cheers,
Kelvin.
Hi Kelvin, interesting stuff. my feeling is… trademe, ebay et al are quite different propositions to something like Xero. Trademe enables something that was really quite a different proposition to anything previously, basically, a disruptive innovation.
Xero and the other SaaS providers however, do … pretty much the same as what is currently available as desktop software. So more of an incremental innovation.
So thats why I believe the margins for SaaS providers will be significantly lower than for true disruptive innovators such as google, ebay (operating margin of 33%) and trademe.
I see the comparison with Trademe a little differently. Trademe as a market is a natural network style monopoloy. Xero on the other hand will be operating in a naturally competitive (albeit sticky) market, so should have lower operating margin.
Hi Tim
I agree with this assessment, although I’m not sure trademe started out as a natural monopoly. Maybe its obvious in hindsight, or looking at the ebay model.
Xero is definitely not a trademe, and as you point out, its in a naturally competitive environment.
And… I didnt find any evidence of SaaS leading to a high-margin internet business…